SEC proposes new cybersecurity requirements
On March 15, a divided SEC issued several proposed amendments to the agency’s cybersecurity-related rules.
The first is a proposed rule that would implement cybersecurity requirements for participants in the securities market, including broker-dealers, clearing agencies, and major security-based swap participants, among others. (See also SEC press release and fact sheet.) Among other things, the proposed rule would require all market entities to establish, maintain, and enforce written policies and procedures that are reasonably designed to address cybersecurity risks. Market participants would also be required to review the design and effectiveness of their cybersecurity policies and procedures at least once a year, and immediately provide the SEC written electronic notice of a significant cybersecurity incident should the participant have a reasonable basis to conclude that the incident had occurred or is occurring. Certain market entities would also be required to make public disclosures addressing cybersecurity risks and significant cybersecurity incidents to improve transparency. The SEC explained that the “interconnectedness of [m]arket [e]ntities increases the risk that a significant cybersecurity incident can simultaneously impact multiple [m]arket [e]tities causing systemic harm to the U.S. securities markets.”
The second proposed rule would amend Regulation S-P to enhance the protection of customer information and provide a federal minimum standard for data breach notifications. Regulation S-P requires broker-dealers, investment companies, and registered investment advisers to implement written policies and procedures for safeguarding customer records and information. The regulation also imposes requirements for proper disposal of consumer report information, implements privacy notice and opt-out provisions, and requires covered institutions to tell customers how their financial information is used. (See also SEC press release and fact sheet.) Under the proposed rule, covered institutions would be required to adopt an incident response program to address unauthorized access or use of customer information. Covered institutions would also be required to notify customers affected by certain types of data breaches that may expose them to identity theft or other harm by providing “notice as soon as soon as practicable, but not later than 30 days after the covered institution becomes aware that an incident involving unauthorized access to or use of customer information has occurred or is reasonably likely to have occurred.” The proposed rule would also “extend the protections of the safeguards and disposal rules to both nonpublic personal information that a covered institution collects about its own customers and to nonpublic personal information that a covered institution receives about customers of other financial institutions.” Modifications to provisions related to registered transfer agents are also proposed.
Comments on both proposed rules are due 60 days after publication in the Federal Register.
Additionally, the SEC announced it has reopened the comment period on proposed cybersecurity risk management rules and amendments for registered investment advisers and funds. Under the proposed rules, advisers and funds would be required to adopt and implement written policies and procedures reasonably designed to address cybersecurity risks that could harm advisory clients and fund investors. The proposed rules also laid out additional requirements relating to the disclosure of cybersecurity risks and significant cybersecurity incidents as well as filing and recordkeeping. (Covered by InfoBytes here.) The SEC reopened the comment period for an additional 60 days.
In voting against the proposed rules, Commission Hester M. Pierce questioned, among other things, whether the amendments would create overlapping requirements for financial firms subject to state data breach laws that have customer notification provisions, some of which conflict with the SEC’s proposals. Commissioner Mark T. Uyeda also raised concerns as to how the three proposals interact with each other. He cautioned that the “lack of an integrated regulatory structure may even weaken cybersecurity protection by diverting attention to satisfy multiple overlapping regulatory regimes rather than focusing on the real threat of cyber intrusions and other malfeasance.”