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Advisors Beware: Single Data Breach 'Can Bring Down' a Practice

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WASHINGTON -- In the face of a range of cyber threats that are increasing both in volume and sophistication, investment advisors need to shore up their digital defenses, taking steps to elevate security as a business priority and share more information about attacks with relevant authorities.

That was the message of industry leaders, compliance experts and government officials who gathered at the SEC on Wednesday for a day-long cybersecurity roundtable to discuss the evolving threats to various sectors of the financial services industry.

For investment advisors with a small pool of clients, the threat of a cyber attack that could compromise investors' personal identifying information is especially acute, according to John Reed Stark, managing director of Stroz Friedberg, an IT security company that helps firms in areas like incident response and digital forensics.


"I think the risk to IAs in particular is kind of scary because one data breach can bring down an IA, I think, very quickly because of the kind of notifications and the kind of relationships they have with their clients," Stark says. "There's really a direct correlation as opposed to a retail data breach where you may still shop there afterwards. But if your money is in custody with someone and they're handling your wealth and suddenly it's at risk, you might feel differently."

The potential for a cyber attack to bring down a practice suggests that firms can no longer afford simply to relegate security to the IT department. Several participants at the SEC event emphasized the importance of setting a tone from the top, arguing that business leaders need to stress that security is the responsibility of everyone in the firm. As part of that effort, advisors should establish training programs to promote safe computing and educate staff about red flags that could signal that a client's identity has been compromised.

"Probably 10 years ago maybe this was viewed by some as an IT problem, that this was something that was a central focus of your IT department. But for asset managers today and broker-dealers and fund complexes, this has to be a central business imperative," says Mark Manley, deputy general counsel and chief compliance officer at AllianceBernstein.

Several speakers also stressed the importance of sharing information about attacks and emerging threats with regulators and through outfits such as the Financial Services Information Sharing and Analysis Center. At the same time, some industry officials suggested that lawmakers and regulators should enact safe harbor provisions to shield firms that do report information about a breach from legal liabilities.

The SEC and FINRA have both indicated that cybersecurity will be a focus of their examinations of advisors and broker-dealers this year. FINRA has been conducting sweeps to gather information on the threats facing brokers under its purview as it contemplates new guidance or directives to help registered firms address vulnerabilities. That process is still "very, very preliminary," according to FINRA Executive Vice President Daniel Sibears, who says that brokers have been reporting an array of challenges, including operational risks such as system failure, insider threats and hackers conducting phishing or denial-of-service attacks.


The SEC, in conjunction with the Commodity Futures Trading Commission, last year finalized regulations that require covered entities, including certain advisors, to have in place programs to screen for identity theft.

The red flags regulation aims to address one of the most common threats to advisors working with individual investors in a wealth management practice that draws on a combination of technical tradecraft and social engineering. Increasingly, advisors are fielding phone calls from fraudsters who have gained access to someone's identity, often through a phishing email, and try to pass themselves off as a client asking for a wire transfer to an offshore account, or some similar con.

"It's the account takeover that is the number one risk, and that seems to have grown a lot in frequency over the last year or two," says David Tittsworth, executive director of the Investment Adviser Association.

SEC Commissioner Luis Aguilar is hoping that Wednesday's roundtable will help build momentum within the SEC for advancing cybersecurity policy. "With appropriate haste," Aguilar says, the SEC should "consider what additional steps the commission should take to address cyber threats." As a first move, Aguilar is calling for the formation of a cybersecurity task force that would include officials from each SEC division who would meet regularly and advise the commissioners and senior staffers as they contemplate potential new regulations.

The SEC is also seeking input from the industry in the form of comment letters that can be submitted either via email or an online form.


The SEC's work on cybersecurity comes amid an increasing focus on the issue from the White House. Though officials credit the financial sector for generally having developed more advanced cyber defenses than others, it was one of 16 industries the Department of Homeland Security has designated as providers of critical infrastructure, which have become the focal point for the administration's cybersecurity efforts.

"The financial services industry is probably one of the most advanced in terms of thinking about cybersecurity, and there's a reason for that, and that is financial service firms over the years have become technology firms," says Cyrus Amir-Mokri, the Treasury Department's assistant secretary for financial institutions.

But they have also become targets. Of the critical infrastructure industries, financial services is perhaps the most frequently targeted, followed by the energy sector, according to Larry Zelvin, director of the National Cybersecurity and Communications Integration Center at the Department of Homeland Security.

"Finance probably wins the cybersecurity threat award," Zelvin says. "You are a massive target."

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