NASAA Releases 2018 Investment Adviser Annual Report


Recently, the North American Securities Administrators Association ("NASAA")released its 2018 Investment Adviser Annual Report which is its first ever "annual report identifying the contours of the state-registered investment adviser population and the related regulatory activities of state securities regulators." While the report highlights the previously released top registered investment adviser ("RIA") regulatory compliance deficiencies by category, it also provides a wealth of valuable data about the total number and characteristics of both state and federally-registered RIA firms. In addition, the report summarizes the work of the various NASAA project groups including cybersecurity and technology, operations, regulatory policy and review, resources and publications, and training.

Of particular note is that 25% of examined firms were deficient in cybersecurity compliance practices.  This is likely understated as well considering this being the first time examined and the relative immaturity of examiners in this area.

Download Our Free RIA Cybersecurity Compliance Checklist

General Data Protection Regulation Affects Investment Advisors with EU Clientele

The European Union (“EU”) recently enacted the General Data Protection Regulation (“GDPR”) which will take effect in May 2018. The GDPR is a sweeping regulatory regime designed to protect the personal data of EU residents (i.e. natural persons residing in the EU) and to give them control over their personal information. Although the regulations were enacted in the EU, any entity around the world that processes the personal data of EU residents is subject to the GDPR. In other words, any investment advisor with clients in the EU must comply with the GDPR.

Penalties for violating the GDPR can be quite punitive, with fines up to €20 million or four percent (4%) of an entity’s annual worldwide revenues. Given the wide reach and potential consequences of non-compliance, it is important that investment advisors with EU clients be aware of the GDPR’s requirements and have proper programs in place to adequately safeguard the data that falls within its ambit.

U.S. federal and state law requires businesses to safeguard the personal data of their clients. Under the Gramm-Leach Bliley Act, financial institutions must adopt security measures to safeguard client information (as with the GDPR, this requirement applies to clients who are natural persons). Pursuant to the Gramm-Leach Bliley Act, the SEC released Regulation S-P, which sets forth the privacy policies that an SEC registered investment advisor must adopt to adequately protect the non-public information of its clients (investment advisors not registered with the SEC must comply with the Safeguards Rule promulgated by the FTC). Such policies include: the adoption of written policies and procedures, the identification of potential risks that could compromise confidential information and the periodic assessment of compliance procedures to ensure that adequate protections are in place. While the requirements of Regulation S-P will likely overlap with some of the provisions of GDPR, the GDPR will also impose additional requirements on investment advisors with respect to their EU clients.

Rather than providing a checklist of action items deemed to be adequate safeguards of personal data, the GDPR identifies a set of principles including data security, accountability, lawfulness, purpose limitation and data minimization. Given the general nature of the principles, the method of compliance with the GDPR is open to interpretation. EU Member States are currently adopting laws and regulations that implement the GDPR principles.

Although the GDPR does not provide much specific guidance for compliance, particularly for investment advisors outside of the EU, investment advisors can take concrete steps right now to better prepare themselves. These steps include the following:

  • One of the key components of the GDPR is that EU individuals must provide their affirmative consent for their personal data to be used. Obtaining such individuals’ general permission to use their personal data will not be sufficient; rather, these clients must consent to the specific intended uses. Subscription agreements may need to be updated to ensure that client consent is given in the appropriate manner with representations that adequately specify the potential use of client data (e.g., to satisfy KYC obligations).
  • All personal data of clients must be accurate and up-to-date. Investment advisors should take an inventory of their client data and update it as necessary to ensure that all information is current and correct. While it remains unclear how frequently such an inventory will be required under the GDPR, a good starting point is for investment advisors to review such information in the course of their next regularly scheduled compliance review.
  • Investment advisors should ensure that their service providers are aware of the GDPR and that they are taking the appropriate steps to implement the Regulation. The GDPR requires that personal data may be processed only within the parameters of clear instructions with respect to such data. Contracts with third party service providers may need to be amended to reflect the new requirements.  MORE

NASAA Releases Snapshot of State Advisor Landscape, Including Top Exam Infractions

At public policy event, NASAA President Joe Borg shares his views on cyber, crypto currencies, fintech, and other hot topics

The North American Securities Administrators Association released its  first annual report Monday, providing a snapshot of state-registered investment advisors, their top exam deficiencies — including cybersecurity-related infractions — and the priorities of state securities regulators.

As it stands now, there are 17,688 state registered advisors, the report says — 44 more than last year — with 78% of state-registered advisors being part of shops with one to two people.

The top five states with the most state-registered advisors are California, 2,998; Texas, 1,279; Florida, 1,099; New York, 876; and Illinois, 778.

The top five exam-deficiency categories for advisors last year, according to the report, were books and records, 64.6%; registration, 54.3%; contracts, 45.4%; fees, 27.2%; and custody, 27.2%.

The report states that cyber-infractions “made its debut as a deficiency category and came in a close sixth place,” with state securities examiners reporting almost 700 cybersecurity-related deficiencies during 1,200 examinations of state-registered investment advisors in 2017.

The top five infractions were: no or inadequate cybersecurity insurance, no testing for potential cybersecurity vulnerabilities, inadequate procedures with securing or limiting access to devices, failure to retain an IT or technology consultant, and inadequate procedures related to hardware/software upgrades.

Joe Borg, NASAA president and Alabama Securities Commissioner, explained at NASAA’s public policy event in Washington Monday that cyber is “always going to be a big issue for regulators.”

Robert Cohen, head of the Securities and Exchange Commission’s Cyber Unit (created last fall with 30 employees in five offices), said at the event that the unit is focused on three key areas: digital assets, trading-related cyber issues and cybersecurity.

The regulatory group sees “more and more trading misconduct having cyber issues in it, and often that conduct is coming from overseas,” Cohen explained. As for cybersecurity reviews, these involve “controls at financial institutions that the SEC regulates and also cybersecurity issues at public companies,” he said.

NASAA’s Cybersecurity and Technology Project group created a cybersecurity checklist for advisors last year. The self-assessment lets small firms identify, respond and recover from cybersecurity weaknesses; it mirrors the National Institute of Standards and Technology (NIST) framework.

According to its report, NASAA’s Cybersecurity and Technology Project Group will “continue to monitor the industry in the area of cybersecurity, develop and reassess practices and procedures.”

Crypto Currencies

The “idea of digital currency is probably here to stay,” Borg said, adding that “regulation always follows technology.” Blockchain “certainly is here to stay,” he continued.

“I think the crypto currencies, possibly down the road, backed by U.S. government control [and] proper IDs, might have some space,” he explained; Initial Coin Offerings could serve as a way to raise funds, “assuming you comply with the securities laws, the commodities law and the money transmitter laws.

At some point, Borg surmised, “there’s going to be some regulation that says ‘here’s the path forward.’”

Borg added: “I do think that digital currencies are here to stay, I just can’t say it’s the ones that are here now.”

Fintech as a disruptor is really “an evolution,” he said, stating that state securities regulators will be performing “basically the same jobs we’ve done with new tools” in a decade.

NASAA’s Project Group, in collaboration with the Operations Project Group, is now working to develop new tools for examiners that provide information for better assessment of unethical business practices, fiduciary duty and advertising, the report notes.

The Project Group also conducted extensive research into investment advisor policies and procedures, including the need for more guidance regarding supervision, compliance, ethics and cybersecurity.

Another priority for state securities regulators this year, according to Borg, is voicing their opinions on the Securities and Exchange Commission’s new conduct standards — namely Regulation Best Interest, which “is a good first start,” but “has a long way to go.”

Borg and state securities regulators will also be watching H.R.5037, the Securities Fraud Act of 2018, which he told The New York Times ”is going to put investors at not only a disadvantage, but deep in harm’s way.”  MORE


Is the cybersecurity threat real?

Most of us have heard the news and seen the headlines about yet another cybersecurity or data hacking incident. 

Some of us may even have been affected directly, either working in a company that has been a target, or having had our own data hacked and made public.

Companies including Equifax and Uber have been the high-profile victims of data breaches, while even public sector organisations, such as the NHS have fallen victim to hacking.

But is the cybersecurity threat real?

Surely, these companies simply were not prepared enough for such incidents and had not invested in the right systems. 

But perhaps what this shows is that if it can happen to large companies and corporates, then the chances are it can affect a business of any size, including small financial planning firms.

Data loss

“The threat is real, and an attack should be considered to be inevitable at some point; only the extent, the seriousness of the disruption, and the reputational risk are variables,” warns Mark Ehlinger, head of regulatory and professionalism services at Focus Solutions.

Figures from the Financial Conduct Authority (FCA) show reported data hacking attacks against financial services companies quadrupled in the past year, according to RSM.

RSM obtained the figures from a Freedom of Information request and reported them in February 2018.

It reveals incidents of loss of data resulting from hacking rose from four in 2016 to 17 in 2017 and there were also two separate incidents of ‘data leakage’ reported to the regulator.

The retail banking sector suffered the highest number of reported attacks at 17 last year, followed by retail lenders at 16 and investment management firms, also at 16 and there were a further 11 incidents reported to the FCA by insurance firms.



Source: FCA/RSM

Steve Snaith, technology risk assurance partner at RSM says: “We have previously raised concerns that there is likely to be significant under-reporting of cyber attacks by regulated financial services firms. Nevertheless, these new numbers do reveal some important trends.

“The jump in incidents of data loss resulting from hacking attacks should be particularly concerning to the financial services sector, given we are just months away from the new GDPR regime coming into force.”

Where any data is held, a cybersecurity threat is real, Steve Casey, marketing director at Square Health notes, and that includes financial adviser firms.

“A financial planning firm could hold all types of data, including possibly medical data in the form of a copy of an application form, so an obvious example would be to steal this data and then publish this on the web,” he explains.

If adviser and financial planner firms are not concerned about the threat, then they should be and GDPR is the perfect opportunity to demonstrate they are doing something about it.

Jon Szehofner, observes that risk managers are worried about cybersecurity and for good reason.  MORE

Complacency Is Weakest Cybersecurity Link: Dalbar/ThinkAdvisor Study

The State of Authentication in Financial Services report highlights what advisors need to ask partner institutions in order to best protect client data and assets from potential cyber vulnerabilities.

Despite the increasing fear Americans have of personal and financial information being stolen, most financial-services firms have been complacent on updating or implementing state of the art — or even basic — cybersecurity technology, according to a recent study by Dalbar/ThinkAdvisor, “The State of Authentication in Financial Services.”

The most significant finding of the research is “generally how passive people are about the subject,” says Lou Harvey, president and CEO of Dalbar, a Boston-based independent financial-services market research firm.

“The more we’ve examined, the bigger the shock it is as [cybercrime] keeps growing. Look at the number of incidents,” he explained in an interview. “Think about the last day you didn’tsee a news item about cybertheft. I imagined everyone would be up in arms with [cybersecurity], but they were not, and that certainly caught my attention.”

The survey of broker-dealers, sponsored by ThinkAdvisor, Dalbar and 15 financial-service firms, aimed to identify the greatest deficiencies in cybersecurity authentication and to “create a roadmap to improving protection,” Harvey says.

The research revealed that 74% of firms have the same practices they’ve had for the past five years, and only a “paltry” 4% are planning to adopt new practices, Harvey says, adding that he did not anticipate these results.

“No one wants to make a big ado about the threat,” he explained. “When something goes wrong or issues arise [it’s] outside of the financial-services [industry], so it doesn’t grab the attention it should.”

“Unless it happens to a firm or an advisor, it happens in the outside world. There’s a huge difference with someone who has come face-to-face with cybertheft, as opposed to a vast majority who have not,” Harvey explained. “Those who have had accounts opened or money withdrawn are passionate about the issue, but that has not translated to a general concern.”

Most firms have run across the phishing of their accounts, but nothing in a big way, like 10,000 accounts being affected. “Until someone like Julian Assange gets out of playing with the government and starts playing with money,”  firms likely will not move to make changes, Harvey says.

More Key Findings

The most widely used authentication practices within the industry are procedures for failed logins (66.1%), while the termination of sessions after a period of inactivity is used by 60.4%, according to the study.

In addition, 57.3% of firms have the ability to cancel, replace and communicate about a password if an account has been compromised.

The best-fortified businesses are retirement service providers, which take advantage of 30.1% of authentication practices, followed by investment providers (29.7%) and life & annuity providers (28.7%).

Key points of access by bad actors include websites (at 34.3%), followed by mobile devices (28.7%), interactive voice response (22.9%), phone centers (21.6%) and electric statements (24.7%).

Phone centers that employs humans thwarts thieves, since an account or other change must go through a real representative and not just a computer, which Harvey refers to as a “picket fence” defense. The “stone wall” defense is an aggregation of all defenses stacked together, he says, not just one or two.

Financial advisors should be very concerned about the cyber defense of their broker-dealers and other institutions that hold client assets, such as investment firms, insurance companies and record-keepers, Harvey points out.

“Advisors have a role in all of this. The advisor is going to be called to account if something in fact goes wrong. If a client turns assets over to an advisor, the advisor puts them somewhere, and they get [stolen], the client will blame the institution, but doesn’t the advisor have complicity for having it [at that broker-dealer or other firm] in the first place?” he asked.

His answer is “yes.” Advisors generally believe that client assets are safe thanks to the diversification of their investments, “but are you [diversifying the] institutions you use [for cyber defense]?” the Dalbar executive inquired.

Other Research

According to a recent study by the American Institute of CPAs, eight in 10 Americans are concerned about the ability of businesses to safeguard their financial and personal information, and three in five say they or an immediate family member have been the victim of some scheme to defraud them, ranging from a letter or phone call from someone impersonating an IRS agent to someone opening a line of credit in their name.

In late March, New York Attorney General Eric T. Schneiderman released a report stating that there were 1,583 data breaches reported in New York State in 2017, exposing the personal data of 9.2 million New Yorkers — four times the number impacted in 2016.

To prevent the loss of investor assets, advisors need to question their BDs about to their cybersecurity practices. “It should be a part of every RFP,” the Dalbar chief explained.

Though many firms have been hacked for clients’ personal information, it will take a major financial loss to move the bar. “It seems to me that once we have an ugly scandal with money lost as opposed to personal information [being taken], this will get people’s attention,” said Harvey.


The key findings of the Dalbar/ThinkAdvisor survey on how firms use certain authentication practices are listed below; a mark (X) in the Usual Practices column means more than a-third of respondents use the practice and therefore it is considered usual.

IDAuthentication PracticeNumber Responding% in UseUsual Practice

1Username/Password for identification  294 54.1%X

2Confirmation process for changing username/password/email  29447.6%X

3PIN for authentication  29419.7%

4SSN for identification or authentication  23830.7%

5Two Factor Authentication – a process that involves both: Factor 1 – information that the user knows (like account number) and – Factor 2 – something that they have (such as a token) or a separate channel (such as email or text message)  28225.5%

6Multi-tiered authorization (i.e. Tier 1- Account info; Tier 2- Personal data/transactions)  22833.8%X

7Personal security questions  28241.8%X

8Separate on-file medium for authentication (phone/email/etc.)  28236.2%X

9Voice ID  2829.6%

10Fingerprint  17615.9%

11Facial Recognition  1763.4%

12Other biometric (please specify)  2260.0%

13Patterns in login history to alert for possible risk   7828.2%

14Detection of change to flag possible risk (Device/IP address/etc.)  17634.7%X

15Challenge-response test such as Captcha  2269.7%

16Changes in volume mix of activity  22423.2%

17Same IP address in activities in other accounts  12020.0%

18Terminate session after timed period of inactivity22459.4%X

193rd party user management/authentication solutions28022.5%

203rd party fraud prevention solutions  28030.7%

21Procedure for undelivered email  28038.6%X

22Procedure for undelivered standard mail  28051.8%X

23Procedure when there are no logins for an extended time  22419.6%

24Procedure for multiple failed logins  22463.8%X

25Temporary password for immediate access  22441.1%X

26Ability to cancel, replace and communicate password if account is compromised  28056.4%X

27Password expiration after a period of time or set number of uses  22423.2%

28Multiple source verification for transactions (i.e. advisor and client)  22627.0%

29Restrictions on transactions that could be used for fraudulent purposes (address/registration change, etc.)  22653.1%X

30Limit access for high profile accounts   28022.5%  MORE

Top 2017 NASAA RIA Compliance Deficiencies: Cybersecurity

Last October, the North American Securities Administrators Association ("NASAA") released its 2017 Investment Adviser Coordinated Examinations Report. The biannual report is a must read for registered investment adviser ("RIA") firms. As RIA compliance consultants, we recommend that the Chief Compliance Officer ("CCO") of all investment advisory firms review the regulatory exam summary report to determine if any compliance changes need to be implemented at their firm.

In this week's installment of our break-down of the new 2017 report, we focus on one of NASAA's most common RIA regulatory compliance deficiency categories: cybersecurity. Of the 1,227 investment advisory firms examined in 2017, 23.4% of all firms examined with regulatory assets under management ("AUM") had at least one cybersecurity-related regulatory deficiency. In total, there were 590 cybersecurity-related items noted across all firms which were audited.

In addition to NASAA releasing its 2017 Investment Adviser Coordinated Exam Report, the organization also released a detailed information security checklist for RIA firms. The checklist is designed to "help state-registered investment advisers identify, protect, and detect cybersecurity vulnerabilities; and to respond to and recover from cyber events" and can be accessed here. Given that 2017 was the first official year cybersecurity-related deficiencies were noted, we do not have year over year data for a comparison. 

In 2017, the top 5 cybersecurity-related deficiencies were:

  1. No or inadequate cybersecurity insurance (15.8%)
  2. No testing of cybersecurity vulnerability (11%)
  3. Procedures: Securing / limiting access to devices (7.3%)
  4. No IT or technology specialist / consultant (7.1%)
  5. Procedures: Hardware / software updates, upgrades. etc (6.3%)

Given this is the first year cybersecurity-related deficiencies have made NASAA's lnvestment Adviser Coordinated Exam Report,  it's evident that investment advisory firms need to take a step back and ensure they are meeting the requirements to stay in compliance with the relevant state or federal regulatory requirements. NASAA recommends RIA firms implement information security policies, procedures and measures. With increased cyber threats, we encourage all CCO's to remain vigilant. As RIA compliance consultants, we recommend that the Chief Compliance Officer ("CCO") of all investment advisory firms review this checklist to determine if new practices should be implemented or existing practices changed as it relates to the firm's information security program.

It’s 2018: Do you know where your client data is?

No financial technology innovation has saved advisors more time than when custodians began transmitting data files to firms.

Prior to this change, client data was updated by taking statements and keying them into the portfolio accounting system. At the end of each quarter, statements were stacked thick and the data entry sprint began so that client reporting and billing could be completed.

Today, these data files circulate through systems that are in many cases developed and hosted by third party fintech companies. Fintechs have been able to take this data and provide additional value and ease of use for firms that seemed hardly imaginable just a couple of decades ago. But that convenience has given rise to new concerns about data security and control.

Last fall I had the opportunity to moderate the Tiburon CEO Consumer Panel. The No. 1 concern brought up by the consumers on the panel was data security. Beyond the concerns of a hacker getting access to passwords, they worried about outright theft due to a security breach. As a result, the consumers complicated their lives by doing business with multiple security firms to help mitigate the risk.

Despite this concern, one detail that clients and advisors alike may overlook is the contractual relationship that exists between custodians, fintechs, advisors, and the client regarding data.

When the advisor asks the custodian to share their data with a third party vendor, is the advisor holding the custodian harmless against breaches that may arise? And, what happens when an advisor authorizes a third party to share the data with, well, another third party? Each of these relationships can be viewed very differently, and as a result the ultimate responsibility for data security may be defined in the small print and not well known.

Knowing where your data ends up is a big deal, not just to your clients but also to your firm, since you may be the one left being asked to make the client whole.

What can be done about it? Let’s start by looking at what data is being shared. In most cases, that means files that include a client’s name, address, account number, social security number or tax ID, their date of birth and the account value. Essentially, any and all personally identifiable information utilized to safeguard accounts. The keys to the kingdom, so to speak.

Without the sharing of this information, we would go back to the dark ages of manually keying in data. One could argue that in most cases, third party software providers may not need many of these data elements, but in many cases they do. What can be done about it, and what things can we look for to help ensure that client data is protected? Certainly asking your vendors some questions about security information will help begin to put you at ease:

  1. Do you encrypt the data at rest in your database?
  2. Do you have encrypt the data during transit?
  3. How do you safeguard my data from employee theft?
  4. Do you offer multifactor authentication for logins?
  5. Do you have a code scan done to look for vulnerabilities?
  6. Are you sharing my client data with any third parties (developers, consultants, etc.)
  7. What do you do to safeguard my client data on your development and test platforms?
  8. Do you have an SSAE 16 / SOC Type 1 and 2 report that I can review, and how often is this done?
  9. Do you have an ISO 27001 Certification?
  10. What other third parties do you bring in to audit the security measures you are taking with my client data?
  11. Will any of my data be exposed outside of the United States? 

If you are thinking that some of the above may not be critically important, imagine telling your client after their funds were stolen that your firm exposed their personally identifiable information to someone outside the country where little if any recourse is available.

If tracking down white collar crime here in our own country is difficult, it’s worse elsewhere. Yes, firms can easily add an extra 20% to their bottom line by offshoring data-related tasks, but how will your client feel about someone in another country having access to their account number, social security, date of birth, and other identifiers without the appropriate security protocols in place?

The current evolution of advisor technology is exciting, but I have significant concerns about where client data is ending up, as well as the general lack of awareness about responsibilities.

If nothing else, please spend some time to understand your contractual agreements as they relate to client data, what the third party vendors that you work with are doing to safeguard it, where your data resides and who specifically has access to it.  MORE

Eric Clarke is CEO and founder of Orion Advisor Services.

You’ve Been Hacked! What Do You Say?

Over the past few months Advisor Armor has seen a dramatic increase in email hacks including those associated with key-logging.  We want to remind all that those are hacks and an investigation is required to assess impact and required responses.

Getting hacked is not only expensive in remediation costs and reputational damage. Now public corporations could also face regulatory penalties if they don’t explain the breach the right way and quickly.

US compliance managers, legal counsel and IT managers of public firms need to devise a strategy for who tells whom, what and when about the breach, says the Securities and Exchange Commission. The US regulatory agency has just updated its 2011 guidance on how public firms notify investors about actual and attempted cybersecurity breaches, as well as how to slam the door on potential insider trading before the breach is made public.

The SEC’s guidance comes in the wake of a series of highly publicized delays in data breach disclosures and suspiciously timed trading. Yahoo, for one, waited until 2016 to disclose data breaches in 2013 and 2014. C-level executives at Equifax made undisclosed stock divestitures totaling over US$1.8 million last year before news of its data breach was made public.

Public firms have been singled out by the SEC for disclosure guidance and trading prohibitions. Although the regulatory agency requires registered investment advisers (RIAs) to create cybersecurity programs to prevent data breaches, it has not come up with detailed disclosure guidelines. Neither has the Financial Industry Regulatory Authority for broker-dealers. However, RIAs and broker-dealers are expected to inform clients affected by cybersecurity breaches of the incidents to fulfill their legal obligations to disclose conflicts of interest. Those which are also public must also follow the new SEC guideline.

“The guidance shouldn’t severely impact how firms already behave since they should already be disclosing breaches to the public as soon as they are known and not allowing insiders to trade on non-public information,” says Jeremy Wittkop, chief technology officer for InteliSecure, a Denver-based security data protection firm. “The guidance simply clarifies how companies are expected to behave.”

Still public firms shouldn’t take the SEC’s guidance lightly. Although guidance doesn’t have the force of law, the regulatory agency could now fine a public firm for misleading investors about its cybersecurity practices or a data breach.

Telling investors a breach has occurred is the easy part. Explaining the impact of such a breach will be far harder to do, because the SEC considers cybersecurity breaches to be part of investment risk. Investors have a right to promptly know how severe the financial damage really was and the likelihood a firm might be hacked in the future. Public firms must also take steps to prevent investors from being harmed by C-level executives using insider information to trade in the firm’s shares.

“Compliance managers, legal counsel and crisis management experts will need to work quickly on what they want to tell investors because they can’t wait until they have investigated the cybersecurity breach, written platform code to patch up the hole and quantified the potential losses,” says Spencer Feldman, a partner with in the corporate and securities practice of law firm Olshan Frome Wolosky in New York. “The SEC said notification must be timely after a breach was uncovered.”

Public firms will also have to think twice about keeping information about “minor” breeches confidential. Although the SEC’s guidance allows public firms to limit their disclosures to “material” breaches, the SEC’s definition of that word isn’t always based on generally accepted accounting principles.

“The SEC isn’t defining materiality based on the amount of the financial loss involved in a particular incident, but on whether a reasonable investor would view omitted information about an incident as important in making an investment decision or whether the omitted information would have significantly altered the total mix of information to investors,” says Matthew Rossi, a partner specializing in securities litigation and data privacy with the law firm of Mayer Brown in Washington, D.C. “Security incidents are now considered material, because they can impact the value of a company’s stock.”

Once a data breach is uncovered, says Feldman, a public firm must warn all of its C-level executives and employees from trading in any of the company’s shares without the express consent of its chief compliance officer until investors are notified.

The Right Story

Multiple professionals are likely to be involved in communmications after a breach. Compliance managers should have already drafted the procedures on who is notified and when. while the legal counsel handles the disclosure language. Public relations professionals specializing in crisis management might be recruited to craft the press releases and train C-level executives for breach-related media interviews.

The first disclosure will likely be the filing of a Form 8-K with the SEC, which is used to promptly report current events that may be of interest to investors. Drafting this document and a press release can easily take up to take several days after the breach is discovered even if the full extent of the damage isn’t known. Further information must be disclosed as the investigation of the incident is underway.

The dissemination of information to the public also requires managing the message within the company. Public firms should have documented policy, in advance, of a step-by-step process for IT and cybersecurity managers  to notify chief compliance officers, legal counsel, chief executive officers, chief operating officers and boards of directors. C-level executives can’t be kept in the dark for too long.

How much should the public firm disclose to investors? “For the Form 8-K document, disclosing at least the bare minimum of material information is likely the best approach because the extent of the financial loss won’t be known,” says Saleemah Ahamed, a managing principal at Adherence LLC, a New York regulatory compliance firm. What’s the bare minimum? “A data breach has occurred and the firm is doing its best to mitigate the financial loss to its investors and customers,” says Ahamed.”Consumer-based companies could even say they are offering customers credit checks for free.”

What then? The quarterly Form 10-Q and annual Form 10-K reports are next in line to include a more detailed discussion of just what occurred, including specifics on the the financial impact. The dollars-and-cents figure must include expenses for investigations, remediation of the breach, litigation and revenues losses. Of course, the public firm can’t quantify reputational harm, but must include mention of that fact. “Public firms must also explain the possibility that a breach could take place in the future and which assets — data– are at risk of being stolen,” says Rossi.

When it comes to explaining how critical data will be protected from a cybersecurity attack, the SEC is allowing some discretion. “Firms won’t be required to spill the beans about every precautionary step they are taking because that would give hackers too much information,” says Rossi.

What if a public firm has never experienced a cybersecurity breach, or at least is not aware of it? The good news is that the firm won’t be in the hotseat from investors, customers and regulators on how much information to disclose. The bad news is it will still have to devise language to explain the future possibility of a cybersecurity breach and whether they have purchased cybersecurity insurance. The firm must also admit that such insurance may not cover all financial losses to investors.

Although the SEC’s guidance focuses on what to do after a cybersecurity breach has taken place, Wittkop recommends that firms review their entire cybersecurity program before they’re faced with a breach. “They must ensure that they have sufficient incidence report procedures to investigate potential breeches quickly, to confirm or deny them, as well as reporting breaches within the timeframes established by the guidance,” he says.


Data Breaches: A Major Risk for Financial Professionals

Dealing with cyber threats and staying compliant with government and industry requirements are now inherent risks of doing business for financial professionals. While some insurance and financial services professionals have awakened to this reality, most have significant work to do to protect themselves and their clients.

In today’s digital age, maintaining a formalized information-security plan and staying compliant with federal, state and industry data breach regulations have not only become essential management practices, but possibly a matter of survival, as well.  Here’s why.

Financial industry targeted

The financial industry is highly targeted by cyber criminals because of the valuable personal, financial and health-related information handled on a daily basis, and because brokers and agents are often the most vulnerable and least prepared to prevent or respond to cyber-attacks.

The industry has been rocked over the last two years by an onslaught of data breaches, resulting in well over 100 million Americans’ personal, financial and healthcare data being exposed.  Making things worse, criminals are looking to access larger businesses and their data by targeting insurance, brokerage, financial, legal, and accounting firms.

This is putting increased pressure on the industry to not only meet new client expectations for data privacy, but to also comply with government and industry standards for protecting confidential information.

Regardless of the types of products you provide, your clients expect you to keep their personal and confidential information private and secure.  Business clients in particular are becoming increasingly concerned about security risks with their third-party service providers, and are starting to require agents and brokers to answer lengthy security questionnaires about their cybersecurity and risk-management practices before doing business.

If you haven’t already begun receiving information-security assessments from key clients, including the requirement to sign an information-security agreement, be assured that this is the future of building and maintaining client relationships.

It’s ironic that after years of worrying about “differentiation” and what makes one broker or advisor better than the other, gaining and keeping clients may boil down to a measurable distinction between the firms that might get hacked and the firms that might not.

Brokers and agents who are serious about their business are now taking this expectation seriously, including obtaining security and compliance certifications based on regulatory and industry standards.  Some brokers are now starting to promote this type of security certification in marketing materials and client pitches as a competitive differentiator.

Regulatory requirements

In addition to client expectations for better security, personally identifiable information (PII), such as Social Security Number, date of birth, financial and insurance information, medical information, and other confidential data must be properly protected under various federal and state laws.

Well-known examples of federal laws include HIPAA-HITECH and GLBA that require insurance and financial-services firms to implement safeguards to protect confidential information they handle in the normal course of business in the health-benefits or financial-services markets.  These include insurance and financial-services brokers, as well as agents and producers.

In addition, 47 states have enacted laws that require all businesses to protect the PII of consumers and businesses within the state.  Brokers, advisors and agents in these states, or those who have customers in these states, must comply with the respective state laws or face civil and/or criminal penalties.

Some states have enacted rigorous laws, such as Colorado, California, and New York, where the Department of Financial Services recently implemented new cybersecurity regulation requiring banks, insurance companies, licensed financial professionals and others to establish and maintain a cybersecurity program to protect consumers.  This law applies even to those who do business within the state.

Financial industry standards

Since 2005, SEC and FINRA have required broker-dealers, investment advisers and other financial firms to protect confidential customer information from unauthorized release to unaffiliated third parties (S-P Safeguard Rule 30 (a)).  This includes the adoption of a formalized information-security plan with written policies and procedures for protecting client information.

In light of the increasing number of data breaches in the financial- services industry, it’s not surprising that SEC and FINRA have recently stepped up efforts to enforce fines and penalties on firms whose security controls are lacking.

Additionally, NAIC has consistently advocated for better information security standards for the industry.  In the coming months, NAIC is set to finalize a comprehensive Model Law that establishes the exclusive industry standards for data security and breach response.  This will apply to all insurance licensees, including not just insurers, but agents, brokers and other parties.

NAIC’s model law requires all licensed persons and organizations to create a comprehensive, written, information-security program that details the administrative, physical and technical safeguards for protecting personal information, including a breach response plan.  It would also require owners and boards of directors to approve and oversee implementation of the program and compliance with the law.  The model cybersecurity standards are aimed at encouraging state insurance regulators to incorporate these elements into their regulatory framework.

Cybersecurity and Compliance Best Practices

The development, implementation and ongoing management of your information security plan should follow the standards and best practices outlined in federal, state and industry requirements.

Here’s a checklist to use as a starting point:

  1. Management commitment, creating a culture of security
  2. Conducting regular security risk and compliance assessments
  3. Creating and maintaining information security policies and procedures
  4. Implementing necessary cybersecurity technology and defenses
  5. Conducting regular security vulnerability assessments
  6. Providing security awareness training for all personnel
  7. Managing third-party service provider/vendor risks
  8. Having a breach incident response plan
  9. Obtaining appropriate cyber-liability insurance
  10. Getting third-party compliance certifications

Failure to implement and maintain these essential practices can cost you business and can significantly reduce your legal defensibility in the event of a data breach incident.

Remember that cybersecurity and compliance are not something you “set and forget.” They constitute an ongoing process that must be tested, maintained and updated.

On the road to compliance

Data breaches have created a new business-management responsibility to properly protect confidential information. The first step is to assess where you stand today.  Where are your current vulnerabilities?  What regulatory, legal and industry requirements are you not adequately following or failing to address?

You may have to admit that you are not an expert in cybersecurity or data-breach compliance and may not be qualified to handle this alone.  Your IT staff or a tech-savvy friend may be able to help some, but this is not just an IT issue.  If you do not have the inside expertise in cybersecurity and compliance management, get outside help.  You may want to consider outside experts anyway, as they likely have more experience and a broader array of tools and resources.

Cyber Incident & Breach Trends Report

Review and analysis of 2017 cyber incidents, trends and key issues to address

This year marks the Online Trust Alliance’s tenth annual publication related to cyber incidents and breach readiness. Now an initiative of the Internet Society, OTA reviews cyber incident and breach events to extract key learnings and provide guidance to help organizations of all sizes around the world raise the bar on trust through enhanced data protection and increased defense against evolving threats. This Cyber Incident & Breach Trends Report builds on last year’s expanded recognition of threats beyond just data breaches to include ransomware, business email compromise (BEC), distributed denial-of-service (DDoS) attacks and connected device vulnerability. MORE


Cybersecurity: Guidance through 2018 Priorities and Recent Exam Findings

The Financial Industry Regulatory Authority (FINRA) is ramping up on their commitment to assist the industry in its cybersecurity compliance efforts. Recent guidance to the industry from FINRA includes:

  1. an Examination Findings Report, detailing observations from recent broker-dealer examinations with the goal of assisting broker-dealers in enhancing their compliance programs and better anticipating potential areas of concern (FINRA included compliance areas to highlight based on the frequency of deficiencies and the potential impact on investors and markets); and
  2. the 2018 Regulatory and Examination Priorities, in which, notably, FINRA instructed firms to review the priorities in conjunction with the Examination Findings Report.

FINRA called out cybersecurity, in its Examination Findings Report, as one of the “principal operational risks facing broker-dealers.” While acknowledging the increased threats today, FINRA noted that firms have generally increased their focus on cybersecurity issues and some firms examined are at the forefront of developing “cutting-edge cybersecurity programs.”

FINRA detailed areas in which they observed in the examinations that firms’ cybersecurity programs were either effective or deficient. Reviewing the positives and negatives provides valuable information for firms looking to shore up their cybersecurity programs.

Examples of Effective Practices Include:

  • Escalation Protocols: Have an escalation process that ensures appropriate level at the firm is apprised of issues to ensure attention and resolution.
  • Plans to Resolve Issues: Implement detailed resolution steps and time frames for completion.
  • Routine Risk Assessments: Conduct regular risk assessments, including vulnerability and penetration tests.
  • Routine Training: Conduct training for firm employees, including training tailored to different functions, in addition to generic cross-firm training.
  • Branch Office Reviews: Include cybersecurity focused branch exams to assess risks and identify issues.
  • Additional Practices: Implement security information and event management practices, use system usage analytics, and adopt data loss prevention tools.

Examples of Deficient Practices Include:

  • Failure to Follow Access Management Steps:
    • Not immediately terminating access of departing employees.
    • Failing to have processes to monitor or supervise “privileged users” to identify unusual activity (e.g., assigning extra access rights, unauthorized work outside business hours, or logging in from different geographical locations at or about the same time).
  • Infrequent or No Risk Assessments:
    • No formal risk assessment practices.
    • Unable to identify critical assets or potential risks.
  • Informal Processes for or Lack of Vendor Management:
    • Failed to have formal processes to assess vendor’s cybersecurity preparedness;
    • Failed to include required notification of breaches involving customer information in vendor contracts.
  • Noncompliant Branch Offices:
    • Failed to manage passwords.
    • Failed to implement security patches and software updates.
    • Failed to update anti-virus software.
    • Lacked control of employee use of removable storage devices.
    • Use of unencrypted data and devices.
    • Failed to report incidents.
  • Segregation of Duties:
    • Failed to segregate duties for requesting, implementing, and approving cyber-security rules and systems changes.
  • Data Loss Prevention:
    • Lack of rules to ensure all customer sensitive information is covered.
    • Permitted or failed to block large file transfers to outside or untrusted recipients.
    • Failed to implement formal change-management processes for data loss prevention systems changes.

FINRA’s 2018 Examination and Regulatory Priorities also include cybersecurity as a priority area. In addition to the areas noted above, which FINRA also calls out in the Priority Letter, FINRA noted two additional themes. One, they will evaluate the effectiveness of firms’ cybersecurity programs in protecting sensitive information. Two, FINRA also reminds firms that they need policies and procedures to determine when a Suspicious Activity Report should be filed regarding a cybersecurity event. (See, FinCEN’s Advisory to Financial Institutions on Cyber-Events and Cyber-Enabled Crime, Oct. 25, 2016.)


FINRA reminds firms that, while exam deficiencies must be addressed, firms often benefit from “proactively” remediating issues before the exam is completed. Acting proactively strengthens firms’ programs and enhances regulatory protections. Our observation, as outside counsel, is that when firms take proactive steps to get ahead of issues, it demonstrates to the regulators that the firm has a commitment to a strong compliance program and, in the right circumstances, may have a material impact on how FINRA decides to resolve an issue.

The information FINRA provides in the Examination Report and Priorities Letter provide roadmaps to enhancing overall compliance, supervisory, and risk management programs. With regard to the focus on cybersecurity, by using this resource, firms can effectively prepare for examinations and potentially prevent program gaps and avoiding cybersecurity incidents.  MORE

3 Types of Cyberattacks and How to Avoid Them: FINRA Conference

One key reminder: Many attacks are due to human error

Protecting against cyberattacks requires both high-tech and low-tech efforts by financial firms, according to presentations at the 2018 FINRA Cybersecurity conference in New York on Thursday.

First advisory firms need to answer four key questions, according to retired FBI agent Jeff Lanza, who was the keynote speaker:

  • Where are your assets?
  • What at your firm is subject to attack?
  • Can you detect an attack in real time?
  • Is cybersecurity a focus for your firm at the board level?

“If you can’t answer all four questions you’re not doing enough to fight hackers,” said Lanza, a former computer systems analyst before he was recruited by the FBI.  MORE

SEC’s 2018 Exam Priorities Reflect Continued Focus on Cybersecurity

Tuesday, February 13, 2018

Annually, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (“OCIE”) publishes its examination priorities for the new year.  Recently, OCIE announced five priorities that will inform its examinations moving in to 2018.

OCIE is committed to “promoting compliance, preventing fraud, identifying and monitoring risk, and informing policy.” In support of these “pillars,” OCIE intends to focus on:

  1. Issues of importance to retail investors, such as fee disclosures, mutual funds, and exchange-traded funds;

  2. Entities that are critical to the proper functioning of capital markets, such as clearing agencies and national securities exchanges;

  3. Oversight of the Financial Industry Regulatory Authority (FINRA) and the Municipal Securities Rulemaking Board (MSRB);

  4. Cybersecurity; and

  5. Anti-money laundering programs.

The emphasis on cybersecurity is not new.  As early as 2014, OCIE highlighted its commitment to monitoring cybersecurity practices of regulated entities when it launched a series of examinations to identify cybersecurity risks and assess cybersecurity preparedness in the securities industry.  In 2015 and 2017, the SEC released the results of its first two cybersecurity examination sweeps.  Prior examination priorities also included the SEC’s commitment to “examine for cybersecurity compliance procedures and controls, including testing the implementation of those procedures and controls at broker-dealers and investment advisers.”

In this year’s announcement, OCIE noted that the scope and severity of risks related to data breaches and cyber attacks have increased and that such attacks can affect not only the targeted firms, but unsuspecting investors and market participants as well.  In evaluating firms’ cybersecurity programs and potential enforcement referrals, the agency intends to emphasize governance and risk assessment, access rights and controls, data loss prevention, vendor management, training, and incident response.

As noted in a recent post, cybersecurity continues to be a top priority for the SEC’s Division of Enforcement as well.  Indeed, in 2017 the Enforcement Division created a new specialized “Cyber Unit” dedicated to investigating violations related to cybersecurity intrusions and breakdowns.  And the SEC’s Chairman, Jay Clayton, has made clear in public remarks that he is personally focused on the issue.  Unfortunately, these public statements provide little specific guidance as to what cybersecurity measures will be deemed adequate.  Whether specifically subject to OCIE’s examination authority or not, however, organizations should be mindful that the SEC’s spotlight on cybersecurity is likely to intensify and approach their own risk assessments, budget, resources, and compliance priorities accordingly.   MORE


INTRODUCTION This document presents OCIE’s 2018 examination priorities.1 In general, the priorities reflect certain practices, products, and services that OCIE believes may present potentially heightened risk to investors and/or the integrity of the U.S. capital markets.


Our 2018 priorities are organized around five themes:

1. Matters of importance to retail investors, including seniors and those saving for retirement;

2. Compliance and risks in critical market infrastructure;

3. Financial Industry Regulatory Authority (FINRA) and Municipal Securities Rulemaking Board (MSRB);

4. Cybersecurity; and

5. Anti-Money laundering programs.

CYBERSECURITY: Cybersecurity protection is critical to the operation of our markets. The scope and severity of risks that cyber threats present have increased dramatically. The impact of a successful cyber attack may have consequences that extend beyond the firm compromised to other market participants and retail investors, who may not be well informed of these risks and consequences. We are focused on working with firms to identify and manage cybersecurity risks and to encourage market participants to actively and effectively engage in this effort. We will continue to prioritize cybersecurity in each of our examination programs. Our examinations have and will continue to focus on, among other things, governance and risk assessment, access rights and controls, data loss prevention, vendor management, training, and incident response.  MORE


Cybersecurity Compliance for Financial Institutions

The New York Department of Financial Services has adopted detailed cybersecurity regulations for financial institutions.  (Here).  The NYDFS has filled a vacuum created by the failure of the federal government to act in this important area.  Congress has failed to enact any specific requirements; the federal government continues to rely on voluntary efforts and recommended standards.  As long as this vacuum continues, state regulators and even foreign governments will push cybersecurity and data privacy requirements on global businesses.

The cybersecurity regulations apply to bank and trust companies, credit unions, life and health insurance companies, mortgage bankers, money transmitters, investment companies and sales finance companies.

The primary requirements of the regulations require covered entities to:

  • Adopt a cybersecurity program, including appropriate policies and procedures based on a risk assessment to identify threats and protect against cyberattacks;
  • Conduct a periodic risk assessment that includes criteria to evaluate and categorize cyber risks and evaluate the adequacy of existing controls to mitigate such risks;
  • Secure board review and approval of the company’s cybersecurity program, including policies and procedures;
  • Designate a chief information security officer (CISO) to maintain the cybersecurity program and compliance with the regulations. The CISO has to report annually to the board of directors on its cybersecurity risks;
  • Encrypt all nonpublic information in transit and at rest;
  • Implement multi-factor or risk-based authentication to access nonpublic information;
  • Implement a third-party risk management system for vendors, suppliers and other outside businesses;
  • Maintain a log of all business activities so that financial transactions can be audited;
  • Requires the board of directors to certify annually that the company is in compliance with the cybersecurity regulations;
  • Provide training awareness programs that are updated each year based on an annual risk assessment;
  • Notify the NYDFS within 72 hours of any cybersecurity event that has a “reasonable likelihood of materially harming any normal operation of the entity”; and
  • Maintain an incident response plan that provides procedures for responding to a cyber event, responsibilities of each official, and communications and remediation requirements.

The NYDFS has specified that a company’s cybersecurity written policy or policies address the following areas: (a) information security; (b) data governance and classifications; (c) asset inventory and device management; (d) access controls and identity management; (e) business continuity and disaster recovery planning and resources; (f) systems operations and availability concerns; (g) systems and network security; (h) systems and network monitoring; (i) systems and application development and quality assurance; (j) physical security and environmental concerns; (k) customer data privacy; (l) Vendor and Third Party Service Provider management; (m) risk assessment; and (n) incident response.

The NYDFS regulations require covered entities to provide multi-factor authentication for external access to the company’s internal network unless the CISO certifies that a less burdensome alternative is reasonably secure (or more secure) than a multi-factor authenticated system.

Covered entities have to encrypt nonpublic information in transit or at rest.  For legacy systems, encryption of systems at rest will be difficult.  Companies have to undertake a careful assessment of their existing systems in order to determine where nonpublic information may be stored.

The company’s cybersecurity program has to include guidelines for protecting internal software development program.  Companies also have to develop security tests for applications developed by third party vendors and suppliers.  Such a requirement can be burdensome for financial companies that rely on external vendors for a number of internal processes.

Data Privacy Day: Top 10 for 2018

In honor of Data Privacy Day, we provide the “Top 10 for 2018.” While the list is by no means exhaustive, it provides key issues organizations should consider in 2018.

5. Ransomware and Phishing Attacks Continue

Ransomware. Ransomware erupted into a billion-dollar industry in 2016. Attacks increased in 2017 by up to 250-percent, according to some estimates, and damage costs estimated to top $5 billion. Forecasters anticipate these numbers to continue to rise in the coming years. Ransomware attacks are becoming more widespread — infiltrating companies globally and across multiple sectors. At the start of 2017, ransom payouts averaged approximately $15,000. Over the last few months, demands of $250,000 to $500,000 became a weekly occurrence, according to Kivu Consulting and Navigant Consulting, a third-party specialist that facilitates cryptocurrency payments and investigates perpetrators.

Accordingly to McAfee:

The profitability of traditional ransomware campaigns will continue to decline as vendor defenses, user education, and industry strategies improve to counter them. Attackers will adjust to target less traditional, more profitable ransomware targets, including high net-worth individuals, connected devices, and businesses.

The 2017 “WannaCry” ransomware attack brought ransomware international attention. On May 12, 2017, some hospitals in the UK’s National Health Service reported being locked out of their computer systems until they complied with ransomware demands. The attack on 300,000 computers across 150 countries exploited a vulnerability in Microsoft’s file-sharing mechanism. Microsoft discovered the vulnerability and issued a patch weeks before, but companies affected had not installed the patch in time. The White House concluded that North Korea was responsible for the WannaCry attack. This is even more worrisome, as, unlike other cybercriminals, nation-states have economic and political backing.

In addition, while many organizations trust and rely on cloud service providers to store their data, believing, in part, that the providers can better safeguard their data, Computer Weekly recently reportedthe Massachusetts Institute of Technology’s prediction that cloud services may turn out to be ransomware’s favorite targets in 2018. For these reasons, organizations should continue to develop and refine their plans to be prepared to effectively respond to an attack.

Phishing Attacks. HR professionals can expect constant, surreptitious attacks from hackers seeking employee tax information, particularly Forms W-2, in January and February. Watch for spearfishing emails targeting HR and payroll personnel likely to have access to this information and who are apt to respond to requests from management for that information. Of course, the emails are not from management, but are artfully disguised as such. The results of successful attacks are that fraudulent tax returns are filed in employees’ names and employers must provide breach notifications to affected employees and, possibly, state agencies. Trust but verify. Employees should be advised to trust the source, but call to confirm the request verbally.

Phishing attacks also have spiked in the healthcare industry. Malware easily can be distributed with a link or infected attachment and delivered to healthcare employees by email. Hackers then can access a healthcare provider’s database containing hundreds, if not thousands, of patient records.

6. Insider Threats

Ransomware, phishing, and other cyberattacks by external hackers often are the main focus of a cybersecurity plan. However, malicious insiders, such as disgruntled employees, with access to areas of the employer’s system external hackers cannot easily reach often result in the most costly data breaches.

Examples of situations in which internal threats can arise include:

  1. An employee leaving a company and taking customer, patient, or client data that includes personal information. The information is used by the former employee or the former employee’s new company to solicit business from those individuals (see our blog post, Healthcare Worker Gives New Employer Patient Records, Old Employer Pays $15,000 to NY Attorney General for HIPAA Violation);
  2. Fearing of losing his or her job, an employee removes files with personal information about customers, patients, or clients in preparation for challenging the termination and related litigation; and
  3. A former employee hacks the payroll system to inflate his pay, accesses proprietary files, and hijacks the company website (see our blog post, Company Awarded Damages after Former Employee Hacks Its Systems and Hijacks Its Website).

More innocent, but equally concerning, are threats such as inadvertent loss of credentials due to clicking spam links with malicious viruses attached, losing a laptop, unknowingly bringing an infected device to work, sending sensitive files to the wrong address, and the like.

According to a 2017 Insider Threat Report by ipswitch, 53 percent of companies estimate remediation costs of at least $100,000, with 12 percent of companies estimating a cost of more than $1 million. The same report suggests that 74 percent of security breaches originate from within the extended global enterprise, including a current or former employee, contractor, or business partner with access to company data.

7. Privacy and Data Breach Class Actions

In May 2016, the U.S. Supreme Court held in Spokeo v. Robins that plaintiffs must allege a tangible or intangible concrete injury to establish Article III standing to sue. This confused the lower courts. How are they to apply this standard in a range of data breach and statutory privacy class actions (such as under the Telephone Consumer Protection Act, Fair and Accurate Credit Transaction Act, and Video Privacy Protection Act)? Different standards have developed and, even within the same circuit, separate panels have reached conflicting conclusions. For example, paying for data security protections he did not receive was sufficient to confer standing on a customer, a panel in the U.S. Court of Appeals for the Eighth Circuit had ruled. However, a separate Eighth Circuit panel ruled the threat of future identity theft from a data breach was insufficient for standing.

The company in Spokeo has re-petitioned the U.S. Supreme Court to review the panel decision finding standing in its case. If the Court provides clarity on this issue in 2018, organizations can better navigate class action suits following a data breach or a statutory privacy violation.

8. Data Breach Readiness

In 2017, a surge of massive data breaches affected more than one-half of the U.S. population. Cyberthreats in the coming year are expected to affect even more people, as hackers develop new attack methods (while IT departments charged with protecting a company’s sensitive information try to keep up). Many hope that advanced machine learning and artificial intelligence technologies can help organizations become better at detecting and remediating attacks. However, hackers also have access to these tools, and they will use them to strengthen their attacks to overcome organizations’ defenses. The battle will continue.

Companies of all sizes and in all industries are expanding their cybersecurity programs and incident response plans. It is important for cybersecurity programs to be flexible, improving and evolving with the shifting tactics of hackers.

9. Increased Data Privacy and Security Legislation

Following massive data breaches in 2017, data privacy and security legislative proposals were introduced at the federal and state level. Senate Democrats introduced the Consumer Privacy Protection Act of 2017, geared toward protecting Americans’ personal information against cyberattacks and ensuring timely notification and protection when data is breached. Subsequently, three Democratic Senators introduced the Data Security and Breach Notification Act, which would require companies to report a breach within 30 days of becoming aware of it and any person may face a penalty of up to five years in prison for concealing a breach.

New York Attorney General Eric T. Schneiderman proposed the SHIELD Act, which would heighten data security requirements for companies and better protect New York residents from data breaches of their personal information. Similar legislation have been proposed in Ohio and Vermont and are being contemplated in other states. State data breach notification laws also continue to develop. Maryland amended its Personal Information Protection Act to expand the definition of personal information, modify the definition of security breach, and provide a 45-day timeframe for notification, among other changes. New Mexico enacted the Data Breach Notification Act, becoming the 48th state with a data breach notification law.

10. Vendor Management

Virtually all businesses interact with third-party vendors for a variety of reasons that involve all kinds of confidential company information. Increasingly, to derive efficiencies and control costs, vendors are linked directly to their customers’ information systems. Cloud service providers, benefits brokers, medical billing services, debt collection companies, consultants, accountants, law firms, staffing services, shredding/data destruction services, cleaning service providers, and other businesses utilize third-party vendors to provide an array of services. In the course of providing their services, vendors, like their clients, use technologies and devices (such as mobile devices, wireless networks, and flash drives) that pose risks to information they handle. Moreover, there may be legal obligations associated with a company’s use of vendors, such as requirements in third-party service provider contracts.

In certain states (including California, Illinois, Maryland, Massachusetts, Nevada, Oregon, and Texas), companies must obtain a written agreement with all third-party vendors handling personal information of state residents in order to provide services to the company. Similar requirements exist elsewhere. For instance, HIPAA imposes expansive requirements for any “business associate” or “subcontractor” that handles protected health information. The Payment Card Industry (PCI) standards have similar requirements, and law firms in many states (e.g., Maine, Missouri, New Jersey, New York, Oregon, Vermont, and Wisconsin) are subject to specific state ethical mandates to have written assurances from vendors handling client data. Finally, a company that must adhere to the looming EU GDPR will have to reassess its relationship with any third-party vendor that processes personal data. Vendor management should be part of an overall strategy to safeguard company and personal information.

Bonus: Be Vigilant and Watch for Changes

Organizations constantly should be assessing their privacy and data security risks and implementing policies and procedures to protect the personal information and data they maintain. This is particularly important as the law and industry guidance change and evolve to keep up with technological advancements. Organizations need to be vigilant to remain compliant and competitive.  MORE

The SEC’s New Year’s Resolutions: Retail Investors and Cybersecurity

2018 arrived in the wake of big changes at the U.S. Securities and Exchange Commission (“the SEC”). Jay Clayton was sworn in as Chairman of the Commission in May, naming Steve Peikin and Stephanie Avakian as Co-Directors of the Enforcement Division (the “Division”) in June. As many do for the start of a new year, they have evaluated the Division’s priorities and promised a new focus. According to a speech by Ms. Avakian late last year, we can expect the Division to direct its resources and attention to two priorities going forward: the protection of retail investors and cybersecurity.

Cybersecurity Threats

The Division also anticipates that the increasing number and impact of cyber-related issues will bring cybersecurity to the forefront of its priorities. In late 2017, the SEC announced the formation of a new Cyber Unit to deal with the increasingly complex nature of cyber threats from foreign and domestic actors, such as traders in stolen market-moving information, market manipulators, and state-sponsored hackers. Ms. Avakian described these threats as “so serious” as to require a dedicated group of personnel and resources devoted to their pursuit.

According to Ms. Avakian’s speech, the Cyber Unit, with the help of the SEC’s Office of Compliance, Inspections and Examinations, will focus on three main enforcement areas:

(i) hacking to access information, access brokerage accounts, or disseminate false information;

(ii) failures by investment advisers and broker dealers to reasonably safeguard information and system integrity; and

(iii) failures by public companies to timely disclose material cyber risks and incidents.


While the Division no doubt will continue to bring cases in other bread-and-butter areas, like financial reporting and insider trading, it is clear that the protection of “Main Street” investors and cybersecurity will be at the top of the Division’s priorities list in 2018. Compliance professionals and others in the securities industry will want to keep those priorities in mind as they evaluate their own risks, policies, and procedures in the year ahead.  MORE

More Compliance Issues to Come

Financial advice firms face a growing list of compliance chores in 2018, including spillover effects of the Department of Labor’s now-delayed fiduciary rule, cybersecurity issues, advisor exam changes and tighter scrutiny of bad brokers, according to ThinkAdvisor.


Despite the 18-month delay the DOL put in place last year, the provisions of the rule purporting to require retirement account advisors to put clients’ interests first will still weigh on advisors’ time and resources, George Michael Gerstein, counsel with Stradley, Ronon Stevens & Young, tells the publication.

He says the DOL is likely to unveil a revised proposal this year, according to ThinkAdvisor. On the other hand, the delay of the final compliance date from Jan. 1, 2018 to July 2019 means the SEC could roll out its own version of a best-interest standard, Brian Hamburger, head of regulatory consulting firm MarketCounsel, tells the publication.

The SEC is likely to propose its fiduciary rule this year as well, David Tittsworth, counsel at Ropes & Gray and former CEO of the Investment Adviser Association, tells ThinkAdvisor. But SEC Chairman Jay Clayton said in October the SEC would not “supplant” the DOL’s rule, the publication writes. And varying standards from the SEC, the DOL and the states will cause “confusion and inefficient allocation of capital,” according to Gerstein.

Meanwhile, cybersecurity is now “a business imperative,” Tittsworth tells ThinkAdvisor. Cybersecurity is also one of the top priorities for Clayton, Tittsworth says, adding that one concern advice firms have is whether the SEC will bring enforcement actions against firms it deems haven’t taken appropriate steps to protect themselves against data breaches. 

The other objective topping Clayton’s list is cracking down on brokers with disciplinary records, according to the publication. Brad Bennett, a partner at Baker Botts and former head of Finra’s enforcement unit, suggests both advisors and broker-dealers watch the SEC’s Retail Strategy Task Force, ThinkAdvisor writes.  MORE

Advisers Are Apparently Ignoring Cybersecurity Threats

Only 27% of RIAs surveyed by TD Ameritrade suggest that “cybersecurity issues,” even when very broadly defined, are likely to impact client portfolios during 2018; experts suggest this is just wishful thinking.

TD Ameritrade this week provided a fresh cut of data from its 2018 RIA Sentiment Survey, in which independent registered investment advisers (RIAs) look ahead to 2018.

Likely surprising to few, the GOP tax cut plan is the top item expected to impact client sentiments and portfolios in the next year, say independent registered investment advisers (RIAs) polled by TD Ameritrade. Survey results suggest advisers are also “closely watching earnings and interest rates.”

The strong majority (70%) of RIAs expect to see economic growth in the U.S. and abroad this year, while roughly half are bullish on equities. According to the survey data, RIAs expect “financials, materials and industrials” to perform better in 2018, which is somewhat at odds with what various asset managers have projected.

“Their own optimism aside, RIAs say that money in retirement, taxes and estate planning also top clients’ biggest concerns,” TD Ameritrade reports. “To keep up 2017’s momentum, RIAs will look to marketing, not merger and acquisition activity.”

More than three-quarters of RIAs say firm assets will rise in 2018; nearly half expect assets to grow faster than 2017. That will be a pretty impressive feat, as RIAs ended 2017 with revenue growth averaging 15%, TD Ameritrade finds, and with full-service brokerage firms supplying a third of their new clients.

“Though M&A is not in the cards for most, RIAs who are considering it want to acquire or add to their firms, versus merge or sell. … RIAs say they will spend more on marketing in 2018, as they consider it the most important way to drive growth,” the research shows.

Turning to client satisfaction, RIAs say tech investments in 2018 will focus on improving client experience, a top strategic priority for many RIAs. “Regulations and lack of client awareness” are seen as the biggest threats to RIA growth, and only 1% are “extremely concerned” about the threat of robo-advisers.

Lack of concern on cybersecurity 

One finding that could be of note for PLANADVISER readers shows only 27% of RIAs surveyed by TD Ameritrade suggest that “cybersecurity issues,” even when very broadly defined, are likely to impact client portfolios during 2018. This lack of concern and action on cybersecurity challenges probably represents wishful thinking and potentially dangerous complacency on the part of RIAs, attorneys and other experts have warned.  

Indeed, on September 25, 2017, the Division of Enforcement at the Securities and Exchange Commission (SEC) announced the creation of a new cybersecurity unit. As pointed out by David Kaleda, principal in the fiduciary responsibility practice group at Groom Law Group, in Washington, D.C., the cyber unit is explicitly tasked with addressing concerns raised by the increasing use of technology by investors and advisers, as well as the growing risk of general market manipulation and other investor harm.

“The cyber unit will comprise SEC staff with expertise and experience in cyber issues,” he confirms. “Clearly, the creation of the dedicated unit signals that the SEC has a growing appreciation of the potential risks associated with cyber issues. Its concerns rightly include the use of technology to gain an unlawful market advantage, e.g., hacking to access material, nonpublic information, hacking of accounts in order to conduct manipulative trading, and disseminating false information through electronic publication; the failure by registrants to adequately secure customer data and ensure system integrity; and the failure by a public company to disclose, or adequately disclose, cybersecurity incidents that occur at the company.”

Advisers may just be surprised by how much they find themselves talking about and responding to cybersecurity issues during 2018, given the low concern measured on this point by TD Ameritrade.  

Full survey results can be downloaded here.

The Big Hack Attack

Rob is an advisor in Cincinnati at a firm with some half a billion in assets. He’s always thought his cybersecurity was pretty good and figured his firm would be a fairly unappealing target for thieves and hackers.

Still, he decided to go one step further and get a penetration test—paying professional good-guy hackers to try to break into his company’s systems and test his weak spots.

He felt confident. He had a brother who worked in IT security at a big company and felt he knew the risks pretty well. So he paid a security firm to have people camp out inside the back of his office; indeed they had trouble breaking into his computers.

But he wasn’t thinking about his copy machine and scanner, which might have high-value information like tax returns or investment statements. Like many other machines, copiers have default administrative passwords—easy hurdles for people who manage to get into the facility, with, say, the cleaning crews.

“Both of [the devices] could have been loaded with software to copy data or scans to an outside location,” Rob says. “What I’m going to do is inject this malware into any device, and every time something is scanned, it’s going to go to the person who has scanned it, but a copy of it is also going to me [the bad guy].”

Now that he’s bulked up his protection, he asked not to be identified by his full name for this article.

Cyber criminals have become increasingly sophisticated, and all financial services firms are ripe targets for frauds. In 2016, the FBI’s Internet Crime Complaint Center received almost 300,000 complaints for almost $1.3 billion in losses. According to the IBM X-Force Threat Intelligence Index, the financial services sector was attacked more than any other industry that year. The most pervasive scams involve phishing, ransomware, malware and denial-of-service attacks.

Diane Pearson of Legend Financial Advisors in Pittsburgh, says her IT person once told her that someone was trying to break through the firm’s firewall every night. Pearson knows of somebody at another firm who lost her job after succumbing to a phishing e-mail, wiring $50,000 from a client to a fraudster.

The scams don’t have to be terribly sophisticated. The biggest vulnerabilities of financial companies, say security experts, are perhaps not surprisingly their employees. Naïve staffers are most at risk of opening phishing e-mails that allow fraudsters to download malicious software into their machines, taking over their computers and breaking into networks.

The biggest risk is that a hacker will capture an employee’s credentials and then log in externally to third-party vendors, says Benjamin Gordon, the manager of advisory services at Rook Security in Carmel, Ind. “Employees just aren’t educated enough on security, to be perfectly blunt. It doesn’t matter what technology you have in place, what IT team you have in place. If somebody clicks on a malicious link, it’s a problem.”  MORE