Latest FINRA Examination Findings Reveal That Firms Have Made Progress with Cyber Security, but Problems Remain

Cyber security remains “one of the principal operational risks facing broker-dealers,” according to FINRA’s 2017 Examination Findings Report, and while progress has been made, many broker-dealer firms still have work to do to protect themselves against hackers.

Firms More Aware of Cyber Security Risks

FINRA noted a significant uptick in firms’ awareness of cyber security risks, noting a substantial increase in “attention to cybersecurity challenges over the past two years, including at the executive management level.” Most of the firms FINRA examined had already established or were in the process of establishing risk management programs to address security issues. FINRA noted that firms with the most effective cyber security programs tended to have:
• Strong, risk-based governance structures and processes
• Conducted regular risk assessments and followed up to address areas of concern
• Conducted regular vulnerability and penetration tests
• Conducted regular employee cyber security training
• Conducted comprehensive cyber security reviews of any branch offices

But Better Risk Management and Data Governance Needed

FINRA noted that the quality of firms’ cyber risk management programs varied widely, not only from firm to firm but also within the same organization. By far, the biggest security vulnerability was firms’ own people; the most common threats observed in 2016 and 2017 were all rooted in social engineering: phishing and spearphishing schemes, ransomware (which usually begins with a phishing email), and fraudulent third-party wires (again, usually involving phishing schemes).

The agency highlighted a number of frequent problem areas:

• Access Management – Some firms didn’t adhere to basic procedures such as terminating system access for former employees and monitoring systems for anomalies, such as logins from unusual locations or privileged users granting themselves additional, unwarranted system privileges.
• Risk Assessments – Despite the importance of regular risk assessments, some firms still aren’t doing them; even worse, the firms “could not effectively identify their critical assets and the potential risks to those assets.”
• Vendor Management – Third-party vendor hacks are a serious problem, but some broker-dealers are still not properly vetting their business associates’ cyber security preparedness or sufficiently documenting vendors’ responsibilities in service level agreements.
• Branch Offices – Branch offices tended to have less robust cyber security than home offices; FINRA noted problems with password management, software updates, removable storage device security, data encryption, and reporting incidents.
• Segregation of Duties – Some small and medium-sized firms are not properly segregating responsibilities for cybersecurity rules and systems changes; for example, at some firms, network engineers are performing cyber security functions without any supervision from cyber security experts.
• Data Loss Prevention – Many firms need stronger DLP protocols, such as applying the same rules that currently protect clients’ Social Security Numbers to other sensitive data, such as account numbers.

Since cyber attacks represent such a serious threat to the U.S. and global financial systems, both FINRA and the SEC have indicated that cyber security will be of high priority throughout 2018. Firms that run afoul of SEC and FINRA standards – or, worse yet, suffer a breach – can face millions of dollars in fines. The good news is that a data-centric, integrated risk management approach to cyber security will head off all of the problem areas FINRA discusses in its report.

Author's Bio: 

Michael Peters is the CEO of Lazarus Alliance, Inc., the Proactive Cyber Security™ firm, and Continuum GRC. He has served as an independent information security consultant, executive, researcher, and author. He is an internationally recognized and awarded security expert with years of IT and business leadership experience and many previous executive leadership positions.

He has contributed significantly to curriculum development for graduate degree programs in information security, advanced technology, cyberspace law, and privacy, and to industry standard professional certifications. He has been featured in many publications and broadcast media outlets as the “Go-to Guy” for executive leadership, information security, cyberspace law, and governance.