Regulatory Landscape
In April 2015, the Securities and Exchange Commission (“SEC’s”) Division of Investment Management issued a guidance update, identifying cybersecurity as a critical issue. Several regulators are in fact focusing on cybersecurity. The SEC guidance update clarified the Staff’s view that the following measures need to be undertaken by investment advisers:
1 – Conduct periodic assessments of, among other things:
- the technology systems that the firm uses,
- the system’s vulnerability to cybersecurity risks,
- security controls and processes in place, and
- the governance structure for the management of cyber risk
2 – Create a strategy that is designed to prevent, detect and respond to cybersecurity threats by way of:
- controlling access to various systems and data via management of user credentials, authentication and authorization methods, firewalls and/or perimeter defenses, tiered access to sensitive information and network resources, network segregation, and system hardening;
- data encryption;
- protecting against the loss or exfiltration of sensitive data by restricting the use of removable storage media and deploying software that monitors technology systems for unauthorized intrusions, the loss or exfiltration of sensitive data, or other unusual events;
- data backup and retrieval; and
- the development of an incident response plan.
3 – Implement the cybersecurity “defense” strategy through written policies and procedures and training which would serve to reasonably prevent, detect and respond to any such threats.
The SEC made cybersecurity a significant point of interest for 2015 through their examination priorities and guidance released to the public. That same year, we outlined a variety of best practices that investment advisers and investment companies can incorporate into their current policies and procedures to be prepared in the event of a security breach.
On September 15, 2015, the Office of Compliance Inspections and Examinations (“OCIE”) issued a Risk Alert relating to cybersecurity. In 2016, the SEC’s OCIE stated that cybersecurity would continue to be a focus area in exams, continuing the efforts OCIE initiated back in 2014 as per their cybersecurity initiative.
Although a summary of previous exam findings has been shared by the SEC, many investment advisers remain significantly behind implementing a cybersecurity program that meets regulator expectations. Case in point, the SEC brought an enforcement action against a St. Louis investment adviser for failing to implement cyber policies and procedures in advance of a breach of personally identifiable information (“PII”) involving approximately 100,000 individuals. Again this year, the SEC took action where there was a breach related to PII.
Finally, in June 2016, the SEC proposed a rule requiring investment advisers to adopt business continuity and transition plans to address significant disruption in the adviser’s operations as a result of cyber breaches and other causes. In addition to the proposed rule, SEC staff issued related guidance addressing business continuity planning for registered investment companies, including the oversight of the operational capabilities of key fund service providers.
Where are we with respect to cybersecurity, and what have we done to address those concerns?
In a recent survey of CCOs conducted by DLA Piper (DLA Piper’s 2016 Compliance & Risk Report: CCOs Under Scrutiny), the biggest risks facing firms today that were identified were data breach and cybersecurity.
Hopefully in response to these concerns, CCOs and investment advisers have taken note of the cybersecurity regulatory developments and increased scrutiny over the past few years and have implemented strong information technology and cybersecurity policies and procedures. The policies and procedures should, at a minimum, address active risk assessments conducted by the firm’s IT, compliance staff or a consultant to understand the firm’s susceptibility to cyber threats. Additionally, procedures related to data loss prevention, access rights, vendor management and ongoing training are essential to a strong cybersecurity program. All of these elements should be detailed in a dedicated cybersecurity policy with procedures that are regularly reviewed, tested and refined. Moreover, firms should have cybersecurity committees in place that oversee risk assessments and all cybersecurity processes. Ideally, the committee would include diversified representation from IT, compliance, operations and executive management. The current regulatory scrutiny of cybersecurity is clear. Be sure that you firm is not falling short.
SEC3 is standing by to help regulated firms take stock of the cybersecurity regulatory landscape, assess the strength of their cybersecurity compliance program and make up-to-date recommendations to help enhance policies and procedures, as well as implementation and testing.
SEC Compliance Consultants, Inc. (“SEC3”) is a recognized industry leader in providing independent regulatory compliance services to the investment management and securities industries.
