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SEC Examines Response From Financial Advisory, Brokerage Firms to Cyber Threats

An overwhelming majority of brokerage and investment advisory firms examined by the U.S. Securities and Exchange Commission (SEC) have been the subject of a cyber-attack.

An overwhelming majority of brokerage and investment advisory firms examined by the U.S. Securities and Exchange Commission (SEC) have been the subject of a cyber-attack.

In its recent ‘Cybersecurity Examination Sweep Summary‘ report, the SEC took a look at 57 registered broker-dealers and 49 registered investment advisors. Eighty-eight percent of the broker-dealers and 74 percent of the advisers stated that they have experienced cyber-attacks either directly or through one or more of their vendors.

The majority of the cyber-related incidents are related to malware and fraudulent email. In fact, more than half of the broker-dealers (54 percent) and 43 percent of the advisers reported receiving fraudulent emails seeking to transfer client funds. More than a quarter of those broker-dealers reported losses in excess of $5,000 related to these emails, with no single loss being greater than $75,000. Twenty-five percent of the broker-dealers confessing losses related to the emails said the damage was the result of employees not following their firm’s identity authentication procedures.

“Brokers and advisors, especially those who handle very wealthy clients, are used to dealing with substantial sums of money, but they’re also human beings who can be duped by a well-crafted phishing scam,” said Tim Erlin, director of IT security and risk strategy at Tripwire. “Not all of these brokerages are as big as Wells Fargo and Morgan Stanley. Small and medium financial firms are gaining visibility because criminals are walking away with meaningful sums of money. The criminals are becoming more savvy about which kinds of transactions remain under the radar, and the more success they have with these targets, the more of these businesses they go after.”

The good news is the vast majority of examined broker-dealers (93 percent) and advisers (83 percent) have adopted written information security policies, and 89 percent of the broker-dealers and 57 percent of the advisers conduct periodic audits to determine compliance with these policies. For the majority of both broker-dealers (82 percent) and the advisers (51 percent), these written policies discuss mitigating the effects of a cyber-security incident and/or outline the plan to recover from such an incident. These policies however generally did not address how firms determine whether they are responsible for client losses associated with cyber incidents.

While firms identified misconduct by employees and other authorized users of their networks as a significant concern, only a small proportion of the broker-dealers (11 percent) and the advisers (four percent) reported incidents in which insiders engaged in misconduct resulting in the misappropriation of funds, securities, sensitive client or firm information, or damage to the firms’ networks. 

The vast majority of examined firms conduct firm-wide risk assessments on a periodic basis to identify cyber-security threats, vulnerabilities and any potential impact to business. While most of the broker-dealers (93 percent) and advisers (79 percent) reported considering such risk assessments in establishing their cyber-security policies and procedures, fewer firms applied these requirements to their vendors. While 84 percent of the brokerage firms require cyber-security risk assessments of vendors with access to their firm’s networks, only 32 percent of the advisers do so.

“Cybersecurity threats know no boundaries,” said SEC Chair Mary Jo White, in a statement. “That’s why assessing the readiness of market participants and providing investors with information on how to better protect their online investment accounts from cyber threats has been and will continue to be an important focus of the SEC. Through our engagement with other government agencies as well as with the industry and educating the investing public, we can all work together to reduce the risk of cyber attacks.”

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