United States: Broker-Dealer And Investment Adviser Agrees To Settle SEC Enforcement Action Arising From A Data Security Incident

The U.S. Securities and Exchange Commission (SEC) recently announced a consent order settling an enforcement action brought by the SEC against Voya Financial Advisors Inc. (VFA) in connection with a data security incident that occurred in 2016. VFA is a registered broker-dealer and investment adviser with the SEC. The order memorializes the SEC's agreement to accept $1 million in settlement of the charges alleging that VFA violated both the SEC's "Safeguards Rule" and "Identify Theft Red Flags Rule." This was the SEC's first enforcement action under the Identity Theft Red Flags Rule.

As background, over a six-day period in April 2016, fraudsters impersonating VFA independent registered representatives called VFA's support line and requested a reset of three representatives' passwords to VFA's web portal used to access VFA customer information. VFA reset the passwords, provided temporary passwords over the phone for all three representatives and provided the representatives' user names to the fraudsters for two of the impersonated representatives. Within three hours of the first fraudulent reset request, one of the actual representatives called VFA to report that he just received an email notifying him that his password was reset and that he had not requested this action. In response, VFA began to implement containment measures, but the actors were still able to obtain credentials to log in to the portal and access personally identifiable information (PII) for more than 5,600 customers. The actors were also able to set up new VFA customer accounts in VFA's web portal. The investigation that ensued found that there were no unauthorized transfers of funds or securities by the actors (or known cases of identity theft). VFA had also previously been subject to a similar attack between January and March of the same year, where fraudsters utilized some of the same phone numbers and techniques impersonating representatives as in the April 2016 event. Additionally, one of the representatives targeted in the April 2016 event was targeted in this previous incident.

Even though VFA had policies and procedures in place for the protection of customer information and no known cases of fraud occurred as a result of the compromise, the SEC brought an enforcement action against VFA alleging that it violated (1) the Regulation S-P Safeguards Rule because its written policies and procedures were not reasonably designed to protect customer records and information, and were not appropriately extended to its independent representatives; and (2) the Identity Theft Red Flags Rules by failing to review and update its written Identity Theft Prevention Program since 2009.

Alleged Violations of the Safeguards Rule

The SEC alleged VFA's policies and procedures were not reasonably designed to protect customer records and information under the "Safeguards Rule." Under the Safeguards Rule, broker-dealers and investment advisers are required to ensure security of customer information, protect against threats to the security of the customer information and protect against unauthorized access to customer information. See 30(a) of Regulation S-P (17 C.F.R. § 248.30(a)). The SEC alleged that while the VFA had several policies and procedures in place at the corporate level to prevent an incident from occurring, those policies and procedures were not reasonably designed and/or failed to apply to the independent representatives. Among the deficiencies cited by the SEC were the following:

  1. The independent representatives could have concurrent sessions on the portal.
  2. VFA did not apply a 15-minute session time-out to the portal (as it did for its own corporate employees).
  3. Allowing VFA telephone support to provide temporary passwords rendered multifactor authentication ineffective.
  4. Independent representatives' computers were supposed to be scanned three times a year to ensure they had antivirus, encryption and software updates, but representatives often did not click the link sent by VFA IT Department to run the scans, and VFA conducted no review or follow-ups on these failures.
  5. VFA kept a list of phone numbers suspected of having been used in connection with prior fraudulent activity at VFA, but there was no policy or procedure that required customer call centers to use the list when responding to requests for password resets.
  6. VFA did not provide notice to a customer when profiles were created or when contact information was changed in VFA customers' profiles, which included personal and account information.

Alleged Violations of Identity Theft Red Flags Rule

The SEC also claimed that VFA violated the Identity Theft Red Flags Rule. Under that rule, registered entities are required to develop and implement a written program for recognizing certain practices that are indicators, or "red flags," of identity theft and periodically update the program to reflect changes in risks to customers from identity theft. See Regulation S-ID (17 C.F.R. § 248.201). Although VFA adopted an ID Theft Prevention Program in 2009, the SEC asserted that VFA violated the Identity Theft Red Flags Rule because it had not updated the program since that time nor adequately trained employees to utilize it. For example, the SEC claimed that although VFA's policies required disabling of potentially compromised accounts, IT staff were not adequately trained to implement the policies because they did not know disabling the accounts would not terminate an intruder's current session. Additionally, the SEC claimed that VFA had previously been subject to a similar security incident involving fraudulent phone calls impersonating some of the same representatives who were targeted in the April attack, and VFA did not effectively have procedures in place to notify response teams or flag those phone numbers for future attacks. The SEC asserted that these and other factors showed an inherent weakness in VFA's cybersecurity and Identify Theft Prevention Program in handling security incidents.

Settlement Terms

In addition to the $1 million penalty, the agreement included the censure of VFA and an order requiring VFA to retain an independent security compliance consultant to perform an assessment of VFA's policies and procedures. The consultant will be charged with reviewing the current VFA security environment and providing recommendations deemed necessary to bring VFA's policies and procedures into compliance with the SEC requirements. Following those recommendations, VFA is required to accept and implement all such recommendations.


The SEC's enforcement action against VFA marks a significant shift in the SEC's approach to cybersecurity, which began several years ago with the SEC's Office of Compliance Inspections and Examinations' (OCIE) initiative to assess cybersecurity risks and preparedness in the securities industry. Following annual examinations, the OCIE published its findings to build awareness of the steps that companies and firms within the securities industry should be taking to prevent data security incidents and minimize risk. In addition, the SEC's Division of Investment Management, which regulates investment advisers and investment companies, issued guidance in 2015 on measures to consider in addressing cybersecurity. The Voya consent order shows that the SEC has moved from building awareness and issuing guidance to participants on cybersecurity preparedness to bringing enforcement actions against firms that, in the SEC's view, have not developed and maintained adequate policies and procedures to protect customer data.

The Voya order also shows that firms can no longer simply have written policies and procedures to satisfy their obligations under the Safeguards Rule and Identity Theft Red Flags Rule. Firms must continually review and update their policies in order to confront and respond to the rapidly evolving cyberthreat landscape, as well as enforce such policies and procedures at both the corporate and branch-office levels. The SEC expects firms to learn from past incidents and incorporate their findings to prevent future incidents. The Voya order also shows that enforcement actions will be brought even in the absence of any harm to a customer.

Because the Safeguards Rule and the Identity Theft Red Flags Rule do not provide prescriptive requirements for "reasonably designed" policies and procedures, SEC enforcement actions provide critical insight into what is expected (similar to how the Federal Trade Commission's enforcement actions under Section 5 of the FTC Act are closely followed to decipher what is expected for "reasonable" cybersecurity practices).

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.

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