FINRA Video Series Highlights Broker-Dealers' Common Cybersecurity Deficiencies

Alerts / August 2, 2017

In a series of three video programs published on the FINRA website in recent weeks,[1] FINRA provided guidance on common deficiencies it has been seeing in its cybersecurity examinations of member firms, and recommended a number of measures to address these issues. Firms should heed these warnings both so that they are prepared for when FINRA (or SEC or state) examiners come calling and, perhaps more importantly, so that they are as protected as they reasonably can be from the variety of cyberattacks facing the financial industry.[2]


Both FINRA and the Securities and Exchange Commission began their intense focus on cybersecurity in 2014. In January 2014, FINRA began a sweep examination of cyber practices at a cross-section of firms,[3] leading to the issuance in February 2015 of its thorough “Report on Cybersecurity Practices.”[4] For its part, the SEC sponsored a Cybersecurity Roundtable in March 2014, and the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a series of Risk Alerts announcing the launch of its cybersecurity initiative in April 2014,[5] publishing summary observations of its findings in February 2015[6] and providing additional guidance in September 2015.[7]

Throughout this period, FINRA and the SEC have followed a two-pronged approach, attempting to educate and guide firms toward enhancing their cybersecurity programs, while bringing enforcement actions generally only in cases of systemic or egregious breakdowns.[8] Enforcement cases often include a charge that the firm violated Rule 30 of Regulation S-P. That rule provides that every broker and dealer “must adopt written policies and procedures that address administrative, technical, and physical safeguards for the protection of customer records and information. These written policies and procedures must be reasonably designed to (1) insure the security and confidentiality of customer records and information; (2) protect against any anticipated threats or hazards to the security or integrity of customer records and information; and (3) protect against unauthorized access to or use of customer records or information that could result in substantial harm or inconvenience to any customer.”

In furtherance of its cyber education efforts, FINRA in July issued a series of video presentations identifying a number of key areas it focuses on in its cybersecurity examinations, common deficiencies it has found and best practices firms should consider adopting. The videos were structured as conversations between Chip Jones, the head of FINRA’s Member Relations and Education Department, and Dave Kelley, the Surveillance Director for FINRA’s Kansas City District Office (they were joined on the first video by Susan Axelrod, Executive Vice President of FINRA’s Office of Regulatory Operations).

Cybersecurity program structure and governance

FINRA has long focused on issues of cyber governance, including the importance of engagement on cybersecurity issues by senior management. In the video series, FINRA stated that the firms that do the best job at cybersecurity are those that have involvement from the top of the organization. FINRA recommended that firms designate a single individual to be directly responsible for the firm’s cybersecurity program. That person, FINRA advised, should have ongoing dialogue with top management about developments in the area and how the firm is addressing them, and about any need for additional resources in this area.

The video series also recommended that firms, especially small firms, review and use the lengthy “Small Firm Cybersecurity Checklist” spreadsheet as a tool for helping them navigate the process and identify key areas of concern.[9]

Data encryption and transfer controls

Practices that one day are considered suggested “best practices” frequently over time morph into mandatory minimum standards. For instance, a cybersecurity program that today does not provide for encryption of key files would likely be deemed deficient for that reason alone. In May 2015, FINRA fined a broker-dealer $225,000 under a Letter of Acceptance, Waiver and Consent (AWC) arising from a 2014 incident in which an employee of the broker-dealer had inadvertently left an unencrypted laptop in a restroom and it was lost. FINRA found that the firm had recognized in 2009 the need to encrypt laptops, but failed to adopt policies requiring encryption and failed to provide adequate funding to enable the encryption. In addition to violating Reg S-P, FINRA found that the firm had violated FINRA’s supervision rule, Rule 3010, based on the firm’s failure to establish a system that required and provided for the protection of customer data using “appropriate technological precautions.”

In the video series, FINRA made clear that the need for encryption goes well beyond laptops. Rather, firms should ensure that data is encrypted wherever it resides, including on the firm’s server and vendors’ servers. Further, data needs to be encrypted when in transit, such as when it is being transmitted between the firm and a vendor, and within the firm (such as between the home office and a branch). According to FINRA’s Kelley, “This is a new area that a lot of firms haven’t gotten to yet,” but “it’s something we feel is really important, that firms need to think about and put in place.”

On the subject of removable media, FINRA said it routinely asks firms whether their policies and practices allow representatives to download data to devices such as jump drives or writeable CDs. FINRA said it likes to see controls around such practices in order to help prevent unauthorized data transfers, whether intentional or accidental.

Access to firm systems and data, by both insiders and outsiders

Access issues arise with respect to both firm representatives and outsiders such as vendors. For example, in the video series, FINRA recommended that firms limit access within the firm to representatives on an as-needed basis. (FINRA’s February 2015 “Report on Cybersecurity Practices” recommended that firms adopt a “Policy of Least Privilege,” meaning that individuals within the firm should be granted only those entitlements necessary to accomplish their identified business objectives.) Firms should also have a process to monitor access to and use of data by system administrators or others with privileged access to systems and data. Further, in what FINRA suggested is a common pitfall, firms must have a process to review and revise employees’ access upon job changes within the firm, and to terminate access upon an individual’s termination from the firm. Highlighting the importance of this issue, Kelley said that, if an examination revealed that a firm had no adequate system to review access rights upon termination of employment, “that would be a situation where we would write them up with an exception.”

As for access to firm data and systems from outside the firm’s network – for instance, by a representative using remote access or by an outsider such as a vendor – Kelley said that FINRA feels strongly that reliance on usernames and passwords is not sufficient. Instead, firms should require multifactor authentication for access to firm systems from outside the organization. As for the passwords themselves, FINRA said it is important that passwords be sufficiently long (eight or more characters) and complex (with a combination of character types), and that firms require passwords to be changed periodically. Firms may wish to consult FINRA’s March 2017 investor bulletin, “7 Tips for Creating a Better Password.”[10]

Vendor management

Vendor management is a critical component of any cybersecurity program. As FINRA discussed both in the video series and in its February 2015 report, effective vendor management requires focusing on different time periods in the vendor relationship. First, before signing up with a vendor, the firm should verify the controls the vendor has in place to protect the firm’s data, and the firm should incorporate that information into its contract with the vendor. Second, on an ongoing basis throughout the firm’s relationship with the vendor, the firm should work with the vendor to verify that those controls are actually in place and are working.

The video series in particular suggested that firms ask to see any attestations as to the vendor’s controls by its independent auditor, such as an SSAE 16 (Statement on Standards for Attestation Engagements) report. Finally, the video recommended that firms take steps to ensure data security even after termination of a vendor relationship, such as seeking to verify that the vendor no longer has the firm’s data.

Cybersecurity controls at branch offices

The video series said that data security at branches is one of the bigger issues facing firms, especially those that use the independent contractor model. (Notably, the independent broker-dealer model provides no insulation from a firm’s supervisory responsibility over its independent branches. As the SEC states in its “Guide to Broker-Dealer Registration” on its website, “Broker-dealers must supervise the securities activities of their [associated persons] regardless of whether they are considered ‘employees’ or ‘independent contractors’ as defined under state law.”)[11]

As with vendors, the video series said that firms should work to ensure security both at the outset of their relationships with their independent branches and as the relationships continue. In particular, firms should ensure that representatives at new branches are trained as to the risks they face and what the firm will expect of them. Ideally, the video said, firms would require representatives to sign an attestation as to the training they have received and the cybersecurity processes and standards they agree to adhere to. Further, firms need to monitor cybersecurity at the branches on an ongoing basis, such as by incorporating the issue into the firm’s regular branch inspections. The video also suggested that firms consider installing software on computers at the branches that would allow the home office to detect such things as encryption and up-to-date patching and virus protection. Finally, firms should ensure that representatives at branch locations receive cybersecurity and data security training at least annually, and should consider additional measures, such as periodic instructive emails from the firm’s compliance department.


As FINRA has noted over the years, many firms have well-established and robust cybersecurity programs. For even this category of firms, the recent FINRA video series provides a handy recitation, or reminder, of some key issues and recommended best practices. Firms with a less robust cyber defense program would be well advised to pay close attention to the videos and the other guidance FINRA has issued in recent years, to help them get their programs up to speed and capable of providing the systems and data protection the firm needs.

If you have any questions about this alert, please contact Marc D. Powers at or +1.212.589.4216, Andrew W. Reich at or +1.212.589.4222, or any member of BakerHostetler's Securities Litigation and Regulatory Enforcement team.

Authorship credit: Andrew W. Reich

[2] See, for example, Baker Hostetler’s May 19, 2017, Executive
Alert, “SEC Cybersecurity Risk Alert Urges Firms to Protect Against Ransomware,”
[8] See, for example,

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