SEC Issues Risk Alert with Cybersecurity Sweep Examinations Summary

On February 3, 2015, the SEC released their long-awaited Risk Alert reviewing the results of OCIE’s cybersecurity sweep examinations in 2014 that followed their April 2014 Risk Alert on cybersecurity issues. OCIE’s sweep examinations covered 57 registered broker-dealers and 49 registered investment advisers with respect to cybersecurity practices at those firms.

The Staff performed these examinations to better understand how broker-dealers and advisers address the legal, regulatory, and compliance issues associated with cybersecurity and to assess the examined firms’ vulnerability to cyber-attacks.


The examined firms varied in size and types of clients and services, and were selected to provide data from a cross-section of the financial services industry. On the RIA side, approximately 36.7% of advisers examined had less than $400 million in Assets Under Management (AUM), 26.5% managed $401-900 million AUM and 36.7% managed $900 or more million. The largest percentage (67.3%) of those examined were retail or individuals, followed by private funds (14.3%). Diversified/institutional, pension and Registered Investment Companies encompassed the remaining 32.7% of client type. Most of those advisers (67%) examined were also found to have custody.

On the broker dealer side, of the 57 examined firms, approximately 28% have 501-2000 registered representatives, followed by 22.8% having 51-200 registered reps. The rest of the population was comprised of those firms with 0-50, 201-500 and 2001-5000+ registered representatives. With respect to category and peer group, the examined firms included a large portion of retail brokerage (37%).

During their examinations, the Staff collected and analyzed information relating to the firms’ practices for: identifying risks related to cybersecurity; establishing cybersecurity governance, including policies, procedures, and oversight processes; protecting firm networks and information; identifying and addressing risks associated with remote access to client information and funds transfer requests; identifying and addressing risks associated with vendors and other third parties; and detecting unauthorized activity.

In addition to reviewing firm documents, the staff interviewed key personnel to discuss the firms’ business and operations; detection and impact of cyber-attacks; preparedness for cyber-attacks; training and policies relevant to cybersecurity; and protocol for reporting cyber breaches.

The examinations did not include reviews of technical sufficiency of the firms’ programs.

Summarized below are the main examination findings:

  • 93% of broker-dealers and 83% of advisers have adopted written information security policies.
  • 89% of the broker-dealers and 57% of the advisers conduct periodic audits to determine compliance with these information security policies and procedures.
  • Written policies and procedures generally do not address how firms determine whether they are responsible for client losses associated with cyber incidents.
  • 88% of broker-dealers and 53% of advisers are utilizing external standards and other resources to model their information security architecture and processes. The Staff specifically identified the following: National Institute of Standards and Technology (“NIST”), the International Organization for Standardization (“ISO”), and the Federal Financial Institutions Examination Council (“FFIEC”).
  • The vast majority of examined firms (93% of broker-dealers and 79% of advisers) conduct periodic risk assessments, on a firm-wide basis, to identify cybersecurity threats, vulnerabilities, and potential business consequences.
  • Fewer firms apply these requirements to their vendors. Nevertheless, 84% of broker-dealers and 32% of the advisers require cybersecurity risk assessments of vendors with access to their firms’ networks.
  • Most of the examined firms reported that they have been the subject of a cyber-related incident. The majority of the cyber-related incidents were related to malware and fraudulent emails.
  • Many examined firms identify best practices through information-sharing networks.
  • The vast majority of examined firms report conducting firm-wide inventorying, cataloguing, or mapping of their technology resources. The Staff noted that firms typically performed this for physical devices and systems; software platforms and applications; network resources, connections, and data flows; connections to firm networks from external sources; hardware, data, and software; and logging capabilities and practices.
  • The examined firms’ cybersecurity risk policies relating to vendors and business partners revealed varying findings. For example, broker-dealers were much more likely to incorporate requirements relating to cybersecurity risk into their contracts with vendors and business partners (72%) than advisers (24%).
  • 82% of broker-dealers and 51% of advisers have written business continuity plans that address the impact of cyber-attacks or intrusions.
  • Almost all the examined broker-dealers (98%) and advisers (91%) make use of encryption in some form.
  • Many examined firms provide their clients with suggestions for protecting their sensitive information.
  • The designation of a Chief Information Security Officer (“CISO”) varied by the examined firms’ business model.
  • Cybersecurity insurance was not typically carried by the examined firms. While just over half of the broker-dealers maintain insurance for cybersecurity incidents (58%), only 21% of the advisers maintain insurance that covers losses and expenses attributable to cybersecurity incidents.

As recently indicated in OCIE’s 2015 examination priorities, the Staff will continue to focus on firms’ cybersecurity compliance and controls. Accordingly, firms would be well advised to see whether their cyber-related practices, policies and controls are consistent with current market practices (e.g., most firms have adopted written information security policies). Failing to do so, or not making improvements that would address cyber threats and risks, will expose such firms to deficiency findings by the Staff.

SEC3 can assist your firm in assessing and improving your cybersecurity policies and controls. For further information, please contact your regular SEC3 representative or contact us at info@seccc.com.