United States: The SEC Charges Investment Adviser With Violating Regulation S-P By Failing To Adopt Cybersecurity Policies And Procedures

Last Updated: October 1 2015
Article by Daniel Marx and Catherine M. Anderson

In recent years, the SEC has been focused on cybersecurity. It has issued risk alerts, conducted examinations and provided guidance about what the agency sees as widespread weaknesses in many policies and procedures to protect against cyberthreats. The SEC has now taken the next step: a few days ago, the SEC brought its first-ever enforcement action for a violation of Regulation S-P, 17 C.F.R. § 248.30(a) – known as the "Safeguards Rule" – against an investment adviser that was itself the victim of a security breach in which hackers stole customer information. See In re Matter of R.T. Jones Capital Management Equities, Inc., AP No. 3-16827 (Sept. 22, 2015). This recent action makes clear that advisers cannot afford to wait until after a potential data breach to deal with cybersecurity.

Cybersecurity Examination Activity

By way of recap, in March 2014, the SEC hosted a Cybersecurity Roundtable that addressed cybersecurity, the challenges that it raises for market participants, and how these issues might be addressed. Shortly thereafter, in April 2014, the Office of Compliance Inspections and Examinations issued a Risk Alert regarding an initiative to assess cybersecurity preparedness and threats in the securities industry. That initiative included examinations of a sample of SEC-registered investment advisers and broker-dealers.

In February 2015, the SEC released its report of observations from these examinations. That report reflected some serious concerns: for example, the SEC found that most advisers had adopted cybersecurity policies and procedures, but only about half of them periodically audited compliance, even though three-quarters reported suffering cyberattacks. It also found that fewer than one-quarter of the examined advisers had considered cybersecurity as it relates to third-party vendors. In April 2015, based largely on the same report, the Investment Management Division released additional cybersecurity guidance.

Earlier this month, the Office of Investor Education and Advocacy issued an alert titled, "Identity Theft, Data Breaches and Your Investment Accounts." The OCIE also issued yet another Risk Alert; this latest initiative features a second round of examinations with a focus on more testing of cybersecurity policies and procedures to assess implementation of firms' controls.

Further information on these initiatives can be found in our previous Foley Advisers:

First-of-its-kind Enforcement Action

The continued focus on cybersecurity at the SEC has now expanded to include enforcement. On September 22, 2015, the Enforcement Division announced a novel case arising from a violation of Regulation S-P, which requires investment advisers, investment companies, and broker-dealers to adopt written policies and procedures that are "reasonably designed" to protect customer records and information. The SEC charged a St. Louis-based investment adviser, R.T. Jones Capital Equities Management, Inc., with failing to establish required cybersecurity policies and procedures in advance of a data breach that compromised the personally identifiable information ("PII") of approximately 100,000 individuals, including thousands of the firm's clients.

To settle the matter, the SEC and R.T. Jones agreed to the following sanctions: the SEC issued a cease-and-desist order and censured the firm, and R.T. Jones agreed to pay a civil monetary penalty of $75,000. Notably, prior to the enforcement action, R.T. Jones had already taken a number of remedial steps, including adopting written policies and procedures, appointing an information security manager, encrypting PII on its internal network, installing new firewalls and logging systems, and retaining an independent cybersecurity firm to provide reports and advice. In its order, the SEC acknowledged these efforts.

The SEC brought this enforcement action against R.T. Jones despite the fact that the firm has not received any indications that any of its clients had suffered financial harm as a result of the cyberattack. That decision was likely intended to send an important signal. Commenting on the case, Marshall Sprung, Co-Chief of the Enforcement Division's Asset Management Unit, emphasized the importance of enforcing the Safeguards Rule, given the "increasing barrage of cyberattacks on financial firms." Cybersecurity is an enforcement priority, said Sprung, "even in cases like this one when there is no apparent financial harm to clients." In other words, the SEC wants advisers to be proactive, not reactive, when it comes to cyberthreats.

Next Steps for Advisers and the SEC

The recent enforcement action offers investment advisers important lessons about what they need to do to comply with the Safeguards Rule and ensure adequate cybersecurity. It would be a mistake to dismiss R.T. Jones as an "outlier" because, as the SEC press release notes, the firm "failed to establish any written policies and procedures" to address cybersecurity.

Firms that have already adopted written policies and procedures regarding cybersecurity should, at a minimum, ensure that they have taken the following steps:

  • review policies and procedures to ensure that they are reasonably designed to safeguard client information in light of evolving threats from hackers,
  • conduct periodic risk assessments,
  • implement firewalls,
  • encrypt PII stored on its servers, and
  • maintain an appropriate response plan for responding to cybersecurity incidents and mitigating any damage.

Of course, it goes without saying that if a firm has not yet adopted any written policies and procedures, it should immediately do so.

The action against R.T. Jones also offers hints about what the SEC might do next, particularly on the enforcement front. First, the Safeguards Rule requires written policies and procedures that are "reasonably designed" to prevent damaging cyberattacks. Simply having some written guidance on cybersecurity will not suffice. Firms must take approaches that are appropriately tailored to their business models, operational practices and the particular cyberthreats that they face. Firms must also adapt as their circumstances change (e.g., the types of customer information that they collect).

Moreover, the Safeguards Rule broadly protects customer information, not only account information or financial data. R.T. Jones, for example, ran afoul of the rule by exposing to hacking certain "personal identifiable information" – known as PII – including names, dates of birth and social security numbers. It did "not control or maintain client accounts or client account information." Firms should not assume, therefore, that they face no risk under the Safeguards Rule if they possess only limited customer PII as opposed to account information. Similarly, Regulation S-P is about information, not assets. R.T. Jones did not, as the SEC order recognized, have custody of client assets. It would also be a mistake for firms to conflate complying with the Custody Rule (or not falling under it, like R.T. Jones) with satisfying the Safeguards Rule.

Finally, one thing that this recent action makes clear is that, according to the SEC, "no harm, no foul" is not a defense to charges that a firm failed to protect customer information. As noted above, the SEC acknowledged that R.T. Jones has "not learned any information indicating that any client had suffered any financial harm as a result of the cyberattack," and the SEC itself pointed to no such harm. Nevertheless, the SEC brought an enforcement action, issued a cease-and-desist order, censured R.T. Jones and imposed a penalty of $75,000. This case shows that potential liability under the Safeguards Rule does not turn on the intent of the adviser or the harm to its investors.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions