Office of Compliance Inspections and Examinations Summarizes Observations on Industry Practices and Identifies Continuing Areas of Weakness 


On August 7, 2017, the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a risk alert (Risk Alert) summarizing the findings of recent examinations conducted as part of its 2015 Cybersecurity 2 Initiative.1 Between September 2015 and June 2016, OCIE examined 75 financial firms registered with the SEC (including broker-dealers, investment advisers and investment companies) to assess industry practices and issues associated with the firms’ cybersecurity preparedness. These examinations built upon prior cybersecurity examinations, particularly OCIE’s 2014 Cybersecurity 1 Initiative. In general, OCIE staff observed increased cybersecurity preparedness but also identified areas where compliance and oversight could be improved. The Risk Alert summarizes the staff’s observations from the examinations and highlights certain issues observed as well as certain policies and procedures that the staff believes may be effective. Cybersecurity remains a top compliance risk for financial firms, and OCIE has indicated that it will continue to examine cybersecurity procedures and controls. While OCIE noted overall improvement in cybersecurity preparedness since the 2014 Cybersecurity 1 Initiative, it also identified several continuing areas of weakness. Specifically, the Risk Alert notes that firms may need to exert greater effort to ensure that their policies are being enforced. Given the attention that OCIE has devoted to cybersecurity compliance among financial firms in light of the growing cyberrelated threats, financial firms should consider whether the vulnerabilities identified in the Risk Alert—or -2- OCIE Issues Risk Alert Following Recent Cybersecurity Examinations of Financial Firms August 11, 2017 other cybersecurity issues—may need to be addressed in order to update or strengthen their cybersecurity risk management systems.


The staff noted an overall improvement in awareness of cyber-related risks and the implementation of certain cybersecurity practices since the 2014 examinations, most notably, that all broker-dealers, all funds and nearly all advisers examined maintained cybersecurity-related written policies and procedures addressing the protection of records and information. Nonetheless, the staff observed issues with the information protection policies and procedures or their implementation at a majority of the firms. Examples cited included (i) policies and procedures that were not reasonably tailored and provided employees only vague or over-generalized guidance and (ii) firms that did not appear to adhere to or enforce policies and procedures or where actual practice often differed from written policies and procedures. For instance, OCIE observed ongoing reviews being conducted less frequently than policies required and a lack of follow-up when employees failed to complete their cybersecurity training.

In the Risk Alert, the SEC also highlighted system maintenance inadequacies that may lead to noncompliance with Regulation S-P, emphasizing the importance of establishing and maintaining operational safeguards to protect customer records and information. OCIE observed, for example, problematic practices such as failures to install software patches to address security vulnerabilities, use of outdated operating systems that were incompatible with new security patches and delays in remediating high-risk findings from penetration tests or vulnerability scans.

The Risk Alert, however, also listed certain elements that were included in the policies and procedures of firms that the staff believed had implemented robust cybersecurity controls. These elements include: (1) maintaining a complete inventory of data, information and vendors; (2) providing detailed cybersecurity-related instructions; (3) maintaining prescriptive schedules and procedures for testing data integrity and vulnerabilities; (4) establishing and enforcing data access controls; (5) requiring periodic information security training for employees and ensuring completion of training; and (6) involving senior management in vetting cybersecurity policies. The SEC encouraged firms to consider these elements, as well as the Division of Investment Management’s 2015 guidance on cybersecurity preparedness,2 in ongoing evaluation and implementation of cybersecurity measures.