The Good and the Bad from OCIE’s Cyber Examinations and What Firms Should Do Next

August 22, 2017

The Office of Compliance Inspections and Examinations (OCIE) of the U.S. Securities and Exchange Commission (SEC) released a National Examination Program Risk Alert (Risk Alert) on August 7, 2017 regarding observations from its cybersecurity-related examinations of 75 registered broker-dealers, investment advisers and investment companies (collectively, Firms).1 This OnPoint details the National Examination Program Staff’s (Staff’s) positive and negative findings from OCIE’s 2015 Cybersecurity Examination Initiative (Cybersecurity 2 Initiative) and summarizes the elements that the Staff identified as hallmarks of “robust” policies and procedures. 

The Staff’s examinations, conducted in connection with the Cybersecurity 2 Initiative, focused on Firms’ written policies and procedures regarding cybersecurity, and specifically drilled down on the six areas of focus that OCIE had identified in its September 15, 2015 Risk Alert regarding cybersecurity:2 

  • Governance and risk assessment; 
  • Access rights and controls; 
  • Data loss prevention; 
  • Vendor management; 
  • Training; and 
  • Incident response. 

The Staff conducted the examinations between September 2015 and June 2016 and, during that time, it examined a “different population” of Firms from those that it had examined in connection with its 2014 cybersecurity initiative (Cybersecurity 1 Initiative).3 

Although the Staff found that Firms’ cybersecurity preparedness had generally improved in the time since it conducted the Cybersecurity 1 Initiative, the Staff made clear that there were still several areas in which Firms could improve their cybersecurity-related controls. The Staff also identified for Firms what it believes to be “elements of robust policies and procedures” regarding cybersecurity. 

The Staff’s Positive Observations from the Cybersecurity 2 Initiative 

The good news was that the Staff noted “an overall improvement in [F]irms’ awareness of cyber-related risks and the implementation of certain cybersecurity practices since the Cybersecurity 1 Initiative.” The Staff explained that, “[m]ost notably, all broker-dealers, all funds, and nearly all advisers” had written policies and procedures regarding cybersecurity and the protection of customer records and information. For example, “nearly all” Firms had policies and procedures that addressed regular system maintenance, cyber-related business continuity planning, and the SEC’s Regulation S-P (Reg. S-P) and Regulation S-ID. Most Firms also “maintained cybersecurity organizational charts” and detailed the cybersecurity roles and responsibilities of Firm employees. In addition, “nearly all” Firms had plans in place that addressed incidents related to unauthorized access, and the “vast majority” of Firms had such plans for denials of service and unauthorized intrusions. 

With respect to third-party service providers, the Staff found that “almost all” Firms either conducted their own risk assessments of vendors or required those vendors to provide their security reviews and certifications to the Firm. In addition, over half of the Firms examined required that their vendors update their risk assessment responses at least annually. These findings were particularly encouraging in light of the fact that, in the Cybersecurity 1 Initiative, the Staff reported that 84% of broker-dealers and a much lower percentage of investment advisers required cybersecurity risk assessments of such vendors with access to their Firms’ networks. 

From a technical standpoint, the Staff reported that “nearly all” broker-dealers and the vast majority of investment advisers and funds periodically conducted risk assessments of their critical systems, and that all Firms had a tool or system in place to monitor data losses involving personally identifiable information. In addition, “nearly all” broker-dealers conducted penetration tests and vulnerability scans on their critical systems; however, less than half of advisers and funds did so, and a number of Firms did not “fully remediate” “high risk observations” identified via those tests and scans. Similarly, although the Staff explained that “all broker-dealers and nearly all advisers and funds” conducted regular maintenance on their systems and installed software patches to address vulnerabilities, a few Firms failed to install patches that included critical security updates. The Staff also identified these shortcomings related to the remediation of known vulnerabilities as “issues” in the Risk Alert. 

Issues Observed During the Cybersecurity 2 Initiative 

But these positive findings were not all the Staff found: the Staff also identified issues that Firms should work on resolving as they seek to “assess and improve” their cybersecurity programs. The Staff explained that the majority of Firms’ written policies and procedures “appeared to have issues.” The Staff noted that some policies and procedures were “vague,” provided “only general guidance” and were “not reasonably tailored” to suit the Firms’ needs. They reported that some Firms did not actually enforce their policies and procedures, and that in some cases the policies and procedures depicted by Firms did not accurately describe their actual practices. For example, certain written policies might require annual “customer protection” reviews or the completion by employees of cybersecurity training, but, in practice, reviews were conducted either less frequently than annually or employee trainings did not occur at all. Furthermore, the Staff observed issues related to Reg. S-P violations, noting specifically that certain Firms did not properly conduct system maintenance because they failed to install security patches, timely update their operating systems or fully remediate high-risk findings they had identified when conducting penetration tests and vulnerability scans on their systems. 

Best Practices Identified During the Cybersecurity 2 Initiative 

The Staff identified certain elements that were included in certain Firms’ “robust” policies and procedures and that serve as examples of best practices for Firms to consider. The elements of these robust policies and procedures included: 

  • Maintaining a complete “inventory of data, information and vendors;” 
  • Delineating “detailed cybersecurity-related instructions” – for example, with respect to “access rights,” this could include tracking requests for access and having policies and procedures specific to the modification of certain access rights (such as when a new employee comes on board, a position is terminated or an employee’s role changes); 
  • Maintaining “prescriptive schedules and processes for testing data integrity and vulnerabilities,” such as by testing a patch before deploying it Firm-wide and analyzing the risks related to and the effectiveness of the patch; 
  • Establishing and enforcing “controls to access data and systems,” through, for example, acceptable use policies and policies that require third-party vendors to log their network activities; 
  • Requiring mandatory employee training at the time of hire and on a periodic basis thereafter; and 
  • The vetting and approval of the cybersecurity policies and procedures by senior management. 

The Staff encouraged Firms to review the enforcement actions brought against Firms for violations of the Safeguards Rule of Reg. S-P as an additional source for guidance regarding the Staff’s expectations.4 

Takeaways from Staff’s Findings of Firms “At Risk” Regarding Cyber-Readiness 

Despite the observed overall improvement in Firms’ awareness of cyber-related risks, the Staff’s findings demonstrate that a number of Firms have some way to go in order to achieve cyber-readiness. The specific shortcomings that the Staff identified involve elements that should be considered basic components of an effective cybersecurity program, meaning that the absence of those components in Firms’ policies and procedures may expose those Firms to increased cybersecurity risks. 

For example, when a Firm’s policies and procedures are “not reasonably tailored” or a Firm relies on “form-of” policies, the Firm runs a risk of having a shell policy that provides little direction and does not encourage those responsible for the policy to effectively protect the Firm’s customer information or systems. Similarly, a Firm’s failure to “say what you do and do what you say” increases the likelihood that a policy exists only on paper, which can lead a Firm to take ad hoc approaches to cyber threats that are both inconsistent and ineffective, and can also lead a Firm to violate its compliance policies and procedures. 

As recent hacks have reminded companies, the failure to remedy and patch known system vulnerabilities may make a Firm a “sitting duck” target for hackers who seek to exploit those vulnerabilities, exposing customer information to theft and leaving the affected Firm without an argument that it could not have reasonably prevented the breach. In these situations, an affected Firm may be exposed not only to increased cybersecurity risks but also to regulatory risks, given the Staff’s expectation that registrants have in place and actually implement tailored cybersecurity policies that adequately protect their systems. 


The improvements Firms have made since the Cybersecurity 1 Initiative are important and have not gone unnoticed by SEC Staff. Nevertheless, the “issues” and shortcomings identified by the Staff in the Cybersecurity 2 Initiative should not be taken lightly, as the deficiencies identified amount to key components of a basic cybersecurity program. 

All Firms – even those who have done so recently – should take a careful look at the written policies and procedures they have in place, and at how they implement their cyber controls in practice, to ensure that they do in fact have a tailored cybersecurity program that is actually implemented and works effectively to remediate known vulnerabilities and threats. Once a Firm is comfortable that it has those basic elements in place, it should look for ways in which it can further improve its processes and controls related to cybersecurity and, at the Staff’s suggestion, should use the examples of “robust” controls and findings from the Staff enforcement actions under Reg. S-P as a guide. The Staff’s summary shows that many Firms have more work to do in this space and that the Staff remains focused on what it has described as “one of the top compliance risks for financial [F]irms.”


1) Observations from Cybersecurity Examinations.
2) For further information regarding the Cybersecurity 2 Initiative and OCIE’s September 15, 2015 Risk Alert, please see Dechert OnPoint, SEC Cybersecurity Examinations and Enforcement: What Broker-Dealers and Investment Advisers Need to Know.
3) The Cybersecurity 1 Initiative was announced on April 15, 2014 and the Staff summarized the examination findings in a February 3, 2015 Risk Alert. For further information regarding the Cybersecurity 1 Initiative and the related findings, please see the following Dechert OnPoints: SEC Staff to Conduct Broker-Dealer and Investment Adviser Examinations Focused on Cybersecurity and The Evolving U.S. Cybersecurity Landscape: What Firms Want to Know.
4) Please see In re Morgan Stanley Smith Barney LLC, Exchange Act Release No. 78021, Advisers Act Release No. 4415 (June 8, 2016); In re R.T. Jones Capital Equities Management Inc., Advisers Act Release No. 4204 (September 22, 2015); and In re Craig Scott Capital LLC, Exchange Act Release No. 77595 (April 12, 2016) for further information.

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