Any business worth their salt has read the cyber landscape of the last few years and shored up their digital defenses to protect against attacks. The practice of cybersecurity protection, however, is soon to transition from a best practice into a requirement after the U.S. Securities and Exchange Commission (SEC) recently proposed a comprehensive set of cybersecurity requirements that could have far-reaching implications for businesses across the financial sector.
These new rules encompass three key areas that we’ll go into greater detail below: the Cybersecurity Risk Management Rule, Regulation Systems Compliance and Integrity (SCI) Amendments, and Regulation S-P Amendments. This blog provides a description of each key area, the potential impact on financial institutions, and potential enforcement risks businesses should be aware of when adopting these new policies.
The frequency and severity of cybersecurity attacks increases by the day. Although the SEC’s proposed requirements may seem daunting, they’re ultimately in the best interest of every institution. Afterall the cost of implementing and maintaining these changes will be dwarfed by the financial loss, not to mention the reputational damage, that results from a cyberattack.
Read more below to stay up-to-speed and thoughtfully prepare for these regulatory changes to ensure the security and stability of your everyday operations.
The Cybersecurity Risk Management Rule
The Cybersecurity Risk Management Rule is the meat and potatoes of the SEC’s proposed requirements. It’s ultimate goal is to establish a comprehensive cybersecurity framework for Market Entities and Covered Entities, including national securities exchanges and associations, registered and exempt clearing agencies, and SEC-registered entities that exceed certain thresholds such as broker-dealers, investment advisers, and investment companies.
The Risk Management Rule includes detailed guidelines designed to establish, maintain, and enforce policies and procedures to proactively address cybersecurity risks. Every year businesses would be required to review and assess policies and procedures, update and incorporate any changes in cybersecurity risks, and prepare a detailed report of their cybersecurity infrastructure.
The recipe for this report is comprised of a long list of detailed ingredients including:
- Periodic risk assessments
- Controls to minimize user-related risks and prevent unauthorized access
- Monitoring of information systems, including detailed oversight of any service providers
- Measures to detect, mitigate, and remediate threats and vulnerabilities
One of the biggest points to note is that businesses would need to create detailed action plans that explain how their business is equipped to detect, respond to, and recover from any cybersecurity incidents, along with detailed documentation for each step.
The goal is to bolster proactive cybersecurity efforts to avoid attacks altogether. In the event, however, that an entity does unfortunately fall victim to an attack, the Risk Management Rule also outlines reactive measures. This includes specific guidelines for notification and reporting that would require written notice to the SEC within 48 hours of an attack that includes information about the incident, the business’ response, and a plan for recovery.
As far as public disclosures, the Rule would require affected entities to fill our a specific form that covers cybersecurity risks, as well as any significant cybersecurity incidents that have occurred during the current or previous calendar years. Lastly, record-keeping has been more deeply defined and requires that businesses should preserve all records related to cybersecurity compliance.
Regulation SCI and Regulation S-P Amendments
In addition to all of the new requirements detailed in the Cybersecurity Risk Management Rule, the SEC has also proposed amendments to two existing regulations in an effort to expand their scope: Regulation Systems Compliance and Integrity (aka Reg SCI) and Regulation S-P.
Regulation SCI currently focuses on self-regulatory organizations, large alternative trading systems, plan processors, and certain clearing agencies. The proposed amendments intend to extend the rule to include registered broker-dealers that exceed specific asset or activity thresholds, registered security-based swap data repositories, and exempt clearing agencies.
In line with the Risk Management Rule outlined above, the Reg-SCI amendments would introduce new requirements that seek to further bolster cybersecurity defenses, like oversight of third-party providers, expanded business continuity plans, comprehensive disaster recovery plans, detailed measures for preventing unauthorized access, increased frequency of penetration testing, and additional reporting requirements to the Commission.
On the other hand, the SEC’s proposed amendments to Regulation S-P (also known as the “Safeguards Rule”), requires brokers, dealers, investment companies, and investment advisers to adopt written policies and procedures to safeguard customer records and information. They also introduce new requirements such as an incident response program that detects, responds to, and recovers from unauthorized access or use of customer information.
In the event of a data breach involving sensitive customer information, affected entities would be required to notify their affected customers. The scope of information covered by the Safeguards Rule would also be expanded to include all customer information, and the rule would be extended to transfer agents registered with the SEC or another appropriate regulatory agency. Finally, covered institutions would need to maintain written records that document their compliance with the safeguards and disposal rules.
These proposed amendments to existing regulations, as well as the introduction of the Cybersecurity Risk Management Rule, indicate a significant expansion in the SEC's management of cybersecurity and system integrity.
Impact of the SEC’s Proposed Rules
If these amendments go into effect, they would represent a significant expansion of the SEC’s oversight the cybersecurity and system integrity of regulated entities.
Existing regulations tend to focus on specific risks, such as protecting customer information under Regulation S-P or preventing identity theft under Regulation S-ID. They also target specific market, generally larger-scale participants, like the entities covered by Regulation SCI. The new rules, however, which introduces SEC-mandated incident response requirements, aim to dictate more comprehensive cybersecurity programs that cover a wider range of market participants.
The shorter story is that there is a far greater level of detail required than ever before. These amendments introduce numerous new terms and concepts that organizations will need to learn and adopt. They also impose standardized notices and disclosures via new forms that will need to be filed with the commission.
The first thought most c-suite execs will have when reviewing the over 1,200 total pages of new guidance and explanation is that all of these proposals will – to put it bluntly – cost more money. The SEC, however, aims to assuage these fears by detailing how cost estimates are likely significantly lower than expected, with only $14,531.54 per Covered Entity in average internal costs and $3,472 per Covered Entity in external costs. Compared to the financial and reputational cost of a cybersecurity attack, that’s a great deal!
Overall, covered entities should expect a far greater scrutiny of overall cybersecurity health and practices, and for the the SEC to more frequently enforce cases involving policy and procedure requirements. While these new amendments would require more upfront work and costs for organizations to better bolster their cyber defenses, those efforts will ultimately help prevent far costlier cybersecurity attacks, and costly enforcement cases from the SEC if not in good standing.
Conclusion
In short, these proposed cybersecurity rules are a significant expansion of the SEC’s regulatory oversight and has the potential to impact a broad range of market participants. As these rules introduce more stringent requirements and standards for managing cybersecurity risks, businesses must stay informed and be prepared to act in order to stay in compliance with the SEC.
By partnering with an experienced cybersecurity provider like Derive, businesses can ensure they are well-equipped to navigate the complex landscape of evolving regulations by implementing robust, tailored security measures that meet the unique needs of their organization.
Don't leave your cybersecurity to chance. Reach out to Derive today to learn more about how our team of experts can help improve your cybersecurity practices and better protect your business from ever-evolving cyber threats.
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