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U.S. Securities and Exchange Commission Issues Risk Alert Regarding Safeguarding Customer Records and Information Stored on Cloud-Based Platforms

On May 23, 2019, the United States Securities and Exchange Commission (“SEC”)’s Office of Compliance Inspections and Examinations (“OCIE”) issued a Risk Alert entitled “Safeguarding Customer Records and Information in Network Storage – Use of Third Party Security Features” (the “Risk Alert”). The Risk Alert highlights the risks associated with the storage of customer records and information by broker-dealers and investment advisors on cloud-based storage platforms.

According to the Risk Alert, OCIE identified three principal risk factors associated with cloud-based storage of customer records and information:

  • Misconfigured Network Storage Solutions – Firms fail to properly utilize or configure the security settings in their cloud-based storage platforms to protect against unauthorized access.

  • Inadequate Oversight of Vendor-Provided Network Storage Solutions – Firms fail to ensure that security settings on cloud-based storage platforms provided by third-party vendors are configured in accordance with the firms’ internal policies and procedures.

  • Insufficient Data Classification Policies and Procedures – Firms fail to adequately identify the types of customer data stored on cloud-based storage platforms, leading to lapses in security configurations.

In order to more effectively manage the risks associated with cloud-based storage of customer records and information, the Risk Alert suggests various “effective practices” that broker-dealers and investment advisors should employ, including: implementing targeted policies and procedures to ensure ongoing monitoring of cloud-based platforms; setting and ensuring the implementation of effective security configurations for cloud-based platforms; and actively managing third-party vendors to ensure that customer records and information are secure.

The Risk Alert also notes that failure to protect customer records and information stored on cloud-based platforms could raise compliance issues under the Safeguards Rule of Regulation S-P and the Identity Theft Red Flags Rule of Regulation S-ID. These rules require broker-dealers and investment advisors registered with the SEC to adopt policies and procedures to protect customer records and information and to detect and prevent identity theft, and they have recently provided a basis for the SEC to levy significant financial penalties against broker-dealers and investment advisors.

The Risk Alert is the latest reminder of the significant emphasis the SEC places upon safeguarding customer records and information from cyber-enabled threats. Broker-dealers and investment advisors should review their policies and procedures relating to cloud-based storage of customer records and information and determine whether any modifications are necessary. In addition, broker-dealers and investment advisors should closely monitor third-party cloud storage vendors to ensure that the security features employed by the vendor are sufficient to meet applicable regulatory requirements.

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About this Author

Peter Baldwin, Securities lawyer, Drinker Biddle

Peter W. Baldwin, a former federal prosecutor, defends clients facing white-collar criminal and internal investigations, securities enforcement actions, cybersecurity issues, and other complex civil and criminal litigation matters. Prior to joining Drinker Biddle, Pete spent over eight years as an Assistant United States Attorney in the U.S. Attorney’s Offices for the Eastern District of New York and Central District of California. In this role, he supervised all aspects of criminal investigation and prosecution, first as a member of the Major Frauds Section in the Central...

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