Cyberthreat concerns long-raised by securities regulators were evident in testimony today before the Senate Armed Services Committee by Director of National Intelligence James Clapper and Defense Intelligence Agency Director Vincent Stewart. In his prepared remarks, Director Clapper emphasized both the benefits and risks of technological advances and interconnected computer systems, which not only provide efficiencies but also create new vulnerabilities to cyberattacks.
Today's testimony reflects an increasing need for financial services firms to focus on cybersecurity issues and vulnerabilities. This same focus is reflected in FINRA's "2016 Regulatory and Examination Priorities Letter"1 ("FINRA's Priorities") and the SEC's Office of Compliance Inspections and Examinations' "Examination Priorities for 2016"2 (the "SEC's Priorities"), in which the Regulators continue to recognize that cyber vulnerabilities pose threats to financial services firms, the financial markets and to individual investors and which serve as a reminder of firms' obligations to protect firm and customer information and to adopt written policies and procedures to address these issues.
FINRA's Priorities again reiterate that member firms should focus on cybersecurity preparedness, stressing that the evolving nature of cyberthreats requires its members' ongoing attention. FINRA explained: "[f]irms face risks from unauthorized internal and external access to customer accounts, online trading systems and asset transfer systems, as well as in the management of their vendor relationships." FINRA addressed its evaluation process, stating that it will evaluate a firm's approach to manage cybersecurity risks, focusing on one or more of these areas: "governance, risk assessment, technical controls, incident response, vendor management, data loss prevention, and staff training." FINRA also will consider the adequacy of protecting sensitive customer information and compliance with regulatory requirements, such as Regulation S-P.
The SEC's Priorities continue to emphasize the importance of cybersecurity to protect against a "Market-Wide Risk." As a part of the SEC's ongoing focus on cybersecurity, in September 2015, the SEC's Office of Compliance Inspections and Examinations launched its second initiative to examine broker-dealers' and investment advisers' cybersecurity compliance and controls. The SEC will continue testing and assessing firms' implementation of procedures and controls to protect firm and customer information and, as shown by In the Matter of R.T. Jones Capital Management, Inc., Admin. Proc. No. 3-016827 (Sept. 22, 2015)3, will initiate enforcement actions to address firms' failures even where there is no apparent harm to customers. In R.T. Jones Capital Management, to settle SEC charges, the firm was censured and sanctioned $75,000 for failure to "adopt written policies and procedures that are reasonably designed to safeguard customer records and information," stemming from a cyberattack of the firm's webserver in which personal information was "rendered vulnerable to theft," but where there was no apparent financial harm to the customers. The SEC's Enforcement Division's Co-Chief, Marshall S. Sprung, explained: "[f]irms must adopt written policies to protect their clients' private information and they need to anticipate potential cybersecurity events and have clear procedures in place rather than waiting to react once a breach occurs."4
Cyberthreats constantly evolve as technology, capabilities and approaches change. Today's testimony, FINRA's Priorities and the SEC's Priorities remind financial services firms of the risks posed by these threats and stress that firms must remain vigilant in their efforts to anticipate and safeguard against those risks. Regulators, investors, customers – and cybercriminals – certainly will be watching.