By Yin Wilczek
May 1 --The recent alert by the Securities and Exchange Commission's Office of Compliance Inspections and Examinations on financial firms' preparedness signals a “paradigm shift” in the way the commission views cybersecurity, panelists said May 1 during a webcast.
Historically, the SEC focused on broker-dealers and investment advisers' protection of customer data and information, said John Reed Stark, managing director of the digital risk management firm Stroz Friedberg, and a former chief of the SEC Enforcement Division's Office of Internet Enforcement.
Now, the SEC looks “at cybersecurity as: if you're a regulated entity and you don't have cybersecurity, that represents a threat to the global marketplace,” Stark said.
Stark was a participant in a Securities Docket webcast on cybersecurity.
Co-panelist Bradley Bondi, a Washington-based partner at Cadwalader, Wickersham & Taft LLP, also warned that registrants cannot “gain too much” comfort from looking at the SEC's prior enforcement actions under Regulations S-P and S-ID.
“It is a whole new world,” Bondi said. These cases “provide an interesting insight into what the staff has done in the past, but it's really a bit of uncharted territory” going forward as to how the SEC will police cybersecurity preparedness.
Reg S-P requires broker-dealers and investment advisers to implement policies and procedures reasonably designed to prevent unauthorized access. Reg S-ID requires registrants to set up programs that identify, detect and respond to identity theft “red flags.”
Cybersecurity is now a top regulatory concern in the wake of several high-profile incidents, including one at Target Corp. (29 CCW 105, 4/2/14). The SEC recently hosted a roundtable to discuss cybersecurity issues (29 CCW 61, 2/19/14).
The panel also was asked how firms experiencing a data breach can show in court or to regulators that they had a reasonable framework in place.
Stark observed that regulatory and judicial scrutiny of cyber preparedness usually revolves around how a company or firm reacts to a breach.
If firms show they consistently review and update their policies and systems, train their employees, allocate sufficient resources to cybersecurity and show a very “methodical response” to data incidents, that generally would constitute a reasonable response, Stark said.
Meanwhile, Shelley Parratt, deputy director of the Securities and Exchange Commission's Division of Corporation Finance, in a speech at Northwestern University School of Law said May 1 that inadequate explanation of cybersecurity preparedness and risks remains a key deficiency in corporate disclosure documents filed with the commission.
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