In April 2015, staff of the US Securities and Exchange Commission’s (SEC’s) Division of Investment Management (IM Staff) released a guidance update highlighting a number of measures that registered investment companies and registered investment advisers should consider in addressing cybersecurity risks.1 The IM Staff issued the guidance update after: it held discussions with advisers’ senior management and with investment company boards;2 the  SEC’s Office of Compliance, Inspections and Examinations (OCIE) and the Financial Industry Regulatory Authority (FINRA) conducted cybersecurity sweep examinations on advisers and broker-dealers;3 and the SEC hosted a cybersecurity roundtable.4 In the guidance update, the IM Staff provided the following non- exclusive5 set of recommended measures:

  • conduct periodic assessments;
  • create a cybersecurity strategy; and
  • implement the strategy through written policies and procedures, and employee training.


The IM Staff recommended that investment companies and advisers periodically assess: (i) the nature, sensitivity and location of the information that is collected, processed or stored, and the technology systems used to do  so; (ii) internal and external cybersecurity threats to, and vulnerabilities of, the information and systems; (iii) cybersecurity controls that have already been established; (iv) the potential impact of a cybersecurity incident; and (v) the adequacy of their governance framework for the management of cybersecurity risks.

The IM Staff believes that an effective periodic assessment would help identify threats and vulnerabilities, so as to better evaluate and mitigate cybersecurity risks. As part of this assessment, investment companies and advisers that are affiliated with other entities that share common networks should consider conducting an assessment of the entire corporate network. While not specifically mentioned in the guidance update, investment companies and advisers should include third-party service providers with access  to their IT systems in their periodic assessments  to better understand the potential risks.


The IM Staff recommended that investment companies and advisers develop a strategy for the purpose of preventing, detecting and reacting to cybersecurity threats by:

  • controlling access to data and systems;6
  • using encryption technologies;7
  • restricting the use of removable storage media and monitoring technology systems for intrusions, data loss or export, or other unusual events;
  • implementing data backup and retrieval processes; and
  • developing an incident response plan.8

The IM Staff believes that routine testing of the strategy could enhance its effectiveness. The IM Staff also recommended that investment companies and advisers stay up-to-date on new and continuing cyber threats by gathering information from outside resources.9


The IM Staff suggested that investment companies and advisers implement the strategy by developing and instituting written policies and procedures, as well as a training program, that provide guidance to officers and employees concerning relevant cybersecurity threats and the measures used by the investment company or adviser to prevent, detect and respond to them.10

The IM Staff recommended that each firm tailor its policies and procedures to its particular circumstances, including the nature and scope of the firm’s business, and that the policies and procedures provide for appropriate planning and rapid response to a cyber attack to mitigate damage.

Additionally, in the IM Staff’s view, investment companies and advisers should consider their compliance obligations under the federal securities laws when assessing their ability to prevent, detect and respond to cyber attacks. The IM Staff noted that compliance risks associated with cyber threats could be mitigated through the adoption and implementation of polices and procedures that are reasonably designed to prevent violations of the federal securities laws.11 The IM Staff stated that, for example, investment companies and advisers’ compliance programs could address cybersecurity risks as they relate to:

  • identity theft and data protection;12
  • fraud by insiders;13
  • business continuity plans;14
  • shareholder transaction processing for investment companies, as required by 1940 Act Section 22(e) and Rule 22c-1 thereunder;15 and
  • ongoing management of assets in a manner consistent with the investment company or adviser’s representations to investors or advisory clients and/or their contractual obligations to investors or advisory clients.

The IM Staff also stated that investment companies and advisers should monitor their ongoing compliance with their cybersecurity policies and procedures.

Importantly, the IM Staff acknowledged that it is not possible for an investment company or adviser to anticipate and prevent every cyber attack. However, the IM staff believes that appropriate cybersecurity and response planning could not only help investment companies and advisers mitigate the impact of cyber attacks on the firms as well as investment company investors and advisory clients, but also would assist investment companies and advisers in complying with the federal securities laws.


The IM Staff suggested that investment companies and advisers assess whether protective cybersecurity measures are in place at their relevant service providers and review their service provider contracts for appropriate provisions regarding technology issues and cybersecurity and cyber attack responsibilities. The IM Staff’s latter suggestion follows after OCIE’s observation, during its cybersecurity sweep examination, that few examined advisers incorporated cybersecurity provisions into their contracts with vendors and business partners.16

The IM Staff also recommended that investment companies and advisers assess the cybersecurity risk posed by service providers with access to their IT systems. For example, investment companies and advisers should review contracts with vendors from a cybersecurity risk management perspective.17 While the guidance update does not identify any specific contractual

protections, these would typically include representations and undertakings with respect to the protection of customer information, audit rights to verify information security and immediate notification in the event of actual or suspected unauthorized access to customer information.

In addition, the IM Staff suggested that investment companies and advisers educate their clients about reducing their exposure to cybersecurity risks associated with their accounts.18

The IM Staff further suggested that investment companies and advisers consider obtaining cybersecurity insurance. This recommendation follows after OCIE observed that few of the advisers examined during the cybersecurity sweep examination maintained cybersecurity insurance.19