The recent announcement of President Barack Obama's Cybersecurity National Action Plan, with programs aimed at improving the security of public and private data,[1] is a reminder that cybersecurity—including identifying, defending against, recovering from, and notifying others about cyber attacks—is having its moment.

With the world becoming ever more connected, the number of cyber attacks, and the level of sophistication of those attacks, continues to increase. The goals of cyber attackers are evolving from traditional criminal activities to attacks aimed at disrupting major infrastructure and economic activity, and the financial sector is a particularly appealing target.[2] Significantly, the impact of an attack is not isolated to the target entity—it can affect partners, vendors, customers, consumers, even entire markets. As such, the growing recognition of the threat and the urgency to act by regulatory agencies, Congress, and the president himself is hardly surprising. Using a variety of tools and methods at its disposal, the federal government is putting ever more emphasis on cybersecurity as a core national priority.

While it would be impractical to review all federal cybersecurity activity over the last year, certain actions, and the trends they indicate, are of particular interest and relevance to the financial services sector.[3]

Cyber-Related Sanctions List

In April 2015, the president issued an executive order titled "Blocking the Property of Persons Engaging in Significant Malicious Cyber-Enabled Activities."[4] A first of its kind, the executive order imposes sanctions on foreign persons who engage in significant cyber attacks against U.S. interests and was issued as part of a comprehensive, "whole-of-government strategy" to address cyber threats to the U.S.[5]

In particular, the order was designed to combat cyber threats to both national security and U.S. economic interests, including attacks on critical infrastructure, attacks on computers and computer networks, and attacks that misappropriate funds or private personal or commercial information (such as credit card data or trade secrets) for commercial advantage or gain.[6] The key is that the activities must pose a "significant threat" to "national security, foreign policy, or economic health or financial stability" in order to be sanctionable.[7] In other words, the presidential action focuses on the "most significant cyber threats we face,"[8] the "worst of the worst," with the intention to use this tool in a targeted manner only against extraordinary threats beyond the reach of other diplomatic and law enforcement means.[9]

This order was followed in December 2015 by the Office of Foreign Assets Control's ("OFAC") first set of regulations pursuant to this rule, the Cyber-Related Sanctions Regulations.[10] These initial regulations extend OFAC's existing sanctions regime to persons pursuing malicious cyber-enabled activities of the sort identified in the order. Specifically, when a person is designated on OFAC's Specially Designated Nationals and Blocked Persons ("SDN") list, that person's property and interests in property that are in the United States or are in the possession or control of a U.S. person must be blocked.[11] This includes money, deposits, debts, stocks, bonds, mortgages, and any number of other financial instruments that may be held or received by a U.S. financial institution.[12] Even when funds or credit owned by a person on the SDN list are just passing through a U.S. financial institution as part of a transaction, that institution must block that property in an account at the institution.[13] Simply put, with limited exceptions, when property of a blocked person is found at a U.S. financial institution, it must be put into a blocked account and left alone unless OFAC authorizes otherwise. As a practical effect, U.S. financial institutions, like other U.S. persons, generally cannot receive blocked property as payment for any business transaction with a blocked person or an entity owned by such a person.[14]

By issuing this order and these rules, the executive branch appears to recognize that the threat is broader than that typically posed by other criminal activity, and the challenge in combating it is often more than traditional law enforcement is equipped to handle, even as the executive branch increases efforts on that front as well.[15] Compliance with OFAC's sanctions programs may impose a short-term burden on financial institutions, but these sanctions ultimately can serve to protect such institutions as well, for example, by limiting the resources of would-be attackers, providing a further incentive to ensure that procedures to handle blocked property are implemented appropriately.

Cybersecurity for the Securities Industry

Also in April 2015, the Securities & Exchange Commission ("SEC") released cybersecurity guidance for investment companies and investment advisors.[16] Though the SEC recognized that preventing every cyber attack is impossible, the guidance (while not mandatory) highlights certain ways in which firms should think about cyber risk in order to mitigate the impact of cyber attacks, particularly as they relate to compliance with federal securities laws.[17] The SEC suggests conducting regular cybersecurity assessments that will allow a firm to "better prioritize and mitigate risk."[18] These assessments may allow the firm to understand what data it collects, the threats and vulnerabilities it faces, the impact of a breach, the existing controls in place to protect against threats, and the effectiveness of the firm's governance structure in managing cybersecurity risks.[19] The guidance encourages firms to create a strategy "designed to prevent, detect and respond to cybersecurity threats" that would include data access controls, encryption, monitoring for intrusions and data loss, data backup procedures, and development of an incident response plan.[20] According to the SEC, such strategies should be implemented using written policies and procedures and training so that employees understand the potential threats and the measures used to counter such threats.[21] The SEC also cautioned firms to pay attention to the cybersecurity measures of third-party services providers.

In addition, on September 15, 2015, the SEC additionally announced its 2015 Cybersecurity Examination Initiative, outlining factors for consideration in its second cybersecurity examination sweep.[22] This initiative is designed to assess the cybersecurity preparedness of securities firms, including the ability to protect customer data and the implementation of basic controls.[23] Specifically, the SEC plans to look at governance and risk assessment, access rights and controls, data loss prevention, vendor management, training, and incident response.

Only a few days after issuing this alert on the new examination initiative, and in many ways underscoring the April 2015 guidance, the SEC announced a settlement with investment advisor R.T. Jones Capital Equities Management ("R.T. Jones"), for failing to have in place cybersecurity policies and procedures "reasonably designed" to protect the personal information of clients and nonclients in its possession. The settlement alleged that this failure was a violation of Rule 30(a) of Regulation S-P (17 C.F.R. § 248.30(a)), known as the "Safeguards Rule,"[24] and represents resolution of the first SEC enforcement action of its kind. Notably, though a breach did occur, the settlement does not indicate that there was any actual harm to those whose information was potentially exposed; indeed, it does not appear that R.T. Jones was even able to definitively identify whether personal information was revealed.[25] As revealed in the settlement, the simple fact that the firm did not use sufficient care and rendered personal information "vulnerable" was a sufficient basis for the SEC to bring an enforcement action.[26]

Taken together, these activities, among others, demonstrate the SEC's focus on cybersecurity and data protection as priorities for the foreseeable future. As such, the failure to implement appropriate policies and procedures may leave firms at risk for both cyber attacks and regulatory action.

FFIEC Cybersecurity Assessment Tool

In June 2015, the Federal Financial Institutions Examination Council ("FFIEC") released its long-awaited Cybersecurity Assessment Tool ("CAT").[27] This tool provides a process through which financial institutions, using a "repeatable and measurable process," can "identify their risks and determine their cybersecurity preparedness," in terms of detecting, defending against, and recovering from risk.[28] Specifically, the CAT guides financial companies through an evaluation of their "inherent" cyber risks (looking at the type and seriousness of cybersecurity risks) as well as their cybersecurity "maturity" level (the controls and risk management practices in place to mitigate risk).[29] By comparing risks and maturity levels, and by ensuring that such an assessment has board-level oversight, the CAT provides a process that helps companies identify gaps, set priorities for investment and improvement, and align risks with controls on an ongoing basis.

As with the SEC's cyber guidance, though no firm is strictly required to implement the CAT, or having implemented it, to adjust either risk or maturity,[30] the FFIEC clearly expects financial institutions to regularly assess cyber risks and cyber protections in place to determine whether they are properly aligned.

The Limits of FTC Authority

In August 2015, the Third Circuit Court of Appeals ruled on Wyndham Worldwide's challenge to the Federal Trade Commission's ("FTC") authority in regulating data security.[31] The FTC originally sued Wyndham for failing to adequately protect customer data that was disclosed in a series of breaches, arguing that Wyndham's conduct constituted unfair and deceptive practices under the FTC's "Section 5" authority.[32] The district court ruled in favor of the FTC on Wyndham's motion to dismiss.[33] On appeal, the Third Circuit upheld the use of the FTC's "unfairness" authority to regulate cybersecurity practices and further found that Wyndham had fair notice that its data protection practices could be deemed unfair.[34]

After the Third Circuit's ruling, the FTC settled with Wyndham, requiring Wyndham to implement a comprehensive cybersecurity program and subjecting the company to 20 years of audits.[35] The Third Circuit's decision may further embolden the FTC and other agencies to use their existing authority in future cybersecurity matters where financial companies fall short in protecting systems and data.

CFTC Proposed Testing Rules

In mid-December of 2015, the Commodity Futures Trading Commission ("CFTC") proposed rules governing the testing of cybersecurity capabilities of certain regulated entities.[36] These rules call for five specific types of cybersecurity testing and would require board-level involvement in reviewing testing results.[37]

Importantly, the CFTC does not view these rules as being particularly new or radical, but rather formally requiring best practices in cybersecurity that it believes many regulated entities should already be following.[38] Firms should expect that the CFTC will be looking at cybersecurity implementation to ensure that regulated entities are taking appropriate action to protect their systems and the broader market.

Cybersecurity Information Sharing Act

Also in mid-December, Congress passed and the president signed into law the Cybersecurity Information Sharing Act ("CISA"), which had been debated in one form or another since 2013.[39] CISA promotes the sharing of cyber threat information between private businesses and the government in order to better detect and defend against cyber attacks, in large part by offering liability protections to private entities.[40] On February 16, 2016, the Department of Homeland Security ("DHS") issued guidance on information sharing as required by CISA, providing additional detail on the processes for sharing information between the government and the private sector.[41] These processes, and the protections they provide, are designed to allow for more robust sharing of threat information to and from the government, with the goal of leading to better detection of and protection from cyber threats.[42]

Cybersecurity National Action Plan

The focus on cybersecurity was emphasized in the president's February 2016 Cybersecurity National Action Plan. While much of the $19 billion proposed under the plan is unlikely to survive the budget process, the dramatic 35 percent increase over prior year cybersecurity spending is a reflection of the growing significance of cybersecurity in the national security and economic policy discussion.[43]

The plan puts a particular emphasis on protecting not only governmental systems but private sector systems as well, and on encouraging public-private coordination, as reflected by the following:

  • The mandate of the Commission on Enhancing National Cybersecurity;[44]
  • The creation of a National Center for Cybersecurity Resilience, to allow companies to test security in a "contained environment";[45] and
  • The directive to DHS to double the number of cybersecurity advisors to assist the private sector in assessing cybersecurity readiness and in implementing best practices.[46]

The administration is further promising a spring release of a policy for "national cyber incident coordination" and a methodology for "evaluating cyber incidents" that it says will allow for better public-private communication and response to cyber threats.[47]

CFPB Enforcement Action

On March 2, 2016, the Consumer Financial Protection Bureau ("CFPB") asserted its interest in cybersecurity in a settlement with Dwolla, an online payments system.[48] According to the CFPB's consent order, Dwolla promoted its services as safe and secure, and made specific representations that its data protection program was compliant with—and even exceeded— industry standards, that personal data was encrypted, and that mobile applications were secure.[49]

In fact, according to the CFPB, these claims were untrue. In the consent order, the CFPB alleged that Dwolla's procedures failed to meet industry standards, left personal data unencrypted, and allowed applications to be released without testing their security.[50] Moreover, in language mirroring that used by the FTC in Wyndham,[51] the CFPB's consent order more generally found that Dwolla, despite promises of safety and security, "failed to employ reasonable and appropriate measures to protect data obtained from consumers from unauthorized access," including appropriate policies governing the collection and storage of personal information, adequate risk assessments, and adequate employee training on data security.[52] Notably, the CFPB did not allege that a breach had actually taken place; the fact that Dwolla put customer data at risk was sufficient.

That the CFPB is now active in regulating cybersecurity should come as no surprise, particularly after the FTC and SEC actions. Indeed, Dwolla's deceptive statements simplified the CFPB's task, as the Bureau did not have to argue that certain security protocols are necessary in every case, only that Dwolla's stated policies fell short of both its general and specific affirmative representations about security. That said, the CFPB, like the FTC before it, appears to be making clear its view that, for a company like Dwolla, the deficiencies identified mean that the cybersecurity program is not reasonable and appropriate.[53]

Conclusions and Lessons

So what does this all mean? In looking at these actions, three connected themes emerge.

  1. The Future of Federal Cybersecurity Activity. The breadth of agencies and entities involved in cybersecurity demonstrates that it is not a partisan issue likely to go away over the next election cycle. Though the president's particular agenda may not be fully implemented, cybersecurity has risen in prominence as the federal government more fully appreciates the threats to security and economic life. As the threat landscape continues to evolve, companies, and particularly those in such critical infrastructure industries like financial services, can expect more rules governing data protection practices and the continued attention of supervisory and enforcement authorities.
  2. Public-Private Coordination. The government appears to believe that a public-private partnership is the only feasible path forward in cybersecurity. Information sharing is a critical piece of the comprehensive puzzle that also includes law enforcement efforts, government identification and encouragement of best practices, and private sector risk assessment and cybersecurity implementation.

Financial services firms, as lynchpins of national economic health, have the opportunity to be at the center of this emerging partnership. Firms should weigh the risks and costs of broad information sharing, and partnering with federal agencies against the apparent rewards. In this context, those rewards may include an ability to help shape federal cyber policy as it develops to limit the regulatory burden while also enabling an industry-driven system of robust and thoughtful protections and policies.

  1. Best Practices and Existing Law. Though regulators have been hesitant to mandate specific cybersecurity practices,[54] recognizing that every firm has its own particular situation and appropriate methodology, they are of one voice in pushing firms to conduct risk assessments to evaluate their current cybersecurity situations and to implement appropriate practices to defend against, mitigate, and respond to cyber attacks. The rules and guidance from regulators can be taken as warnings of regulatory expectations. In cases where a firm fails to meet agency expectations, particularly in the event of preventable cybersecurity incidents, regulators may be increasingly willing to deploy existing legal authority to bring supervisory and enforcement actions, and to test the bounds of their authorities even as the parameters of that authority continue to evolve.

Moreover, aside from the regulators themselves, partners and corporate customers, as well as consumers, may increasingly demand a robust cybersecurity framework before sharing data and exposing their systems to another entity, lest they open themselves to unnecessary risk. By treating cybersecurity as an enterprise-wide risk management issue, thoughtfully implementing best practices, and working where possible with regulators, firms can protect their systems, create a more secure business climate, and mitigate the operational, reputational, legal, regulatory, and financial risk imposed by cyber threats.