United States: FINRA Issues Recommendations And Best Practices To Address Common Cybersecurity Risks For Broker-Dealer Firms

The Financial Industry Regulatory Authority (FINRA) has issued its "Report on Selected Cybersecurity Practices – 2018" to provide further guidance to broker-dealer firms in developing and improving their cybersecurity programs. The report piggybacks on FINRA's 2015 "Report on Cybersecurity Practices" by identifying five common cybersecurity risks and outlining recommended practices addressing these risks:

  • Branch controls
  • Phishing attacks
  • Insider threats
  • Penetration testing
  • Mobile devices

The five issues were identified based on FINRA's annual Risk Control Assessment Survey of high-level, mid-level and low-level revenue firms. The report particularly highlights the need to tailor a cybersecurity program to a firm's business model and how these recommendations and practices may be implemented by small firms.

Branch Controls

The first topic identified by FINRA for improvement is cybersecurity controls at branch locations. While a firm's headquarters may have a robust cybersecurity program, branch locations frequently fall behind due to branch autonomy, piecemeal guidance and lack of dedicated security personnel. The report recommends establishing Written Supervisory Procedures (WSPs) specific to branch locations in order to provide comprehensive guidance to the branches on mandatory security controls, notifications about problems, recommended security settings and vendors, designation of a branch employee with responsibility for the cybersecurity controls, regular training, and attestation of compliance with the WSPs. It is further recommended that firms take inventory of branch assets, which allows them to know the scope of protection needed. This includes inventories of hardware, software, types of information retained by the branch, physical security, lost or stolen assets, and the way in which old assets are disposed.

The asset inventory should then be used to conduct a cybersecurity risk assessment at each branch in order to identify critical assets, determine which threats are most significant to the branch and then determine what type of technical controls should be implemented. FINRA recommends identity and access controls for registered representatives and other staff specific to their roles, their customers and the type of data they utilize. Technical controls should include practices such as minimum password and encryption requirements, multi-factor authentication, prohibiting storage outside the protected network, and updated anti-virus, anti-malware and operating systems.

Once such controls are in place, the firm should implement a branch review program to ensure that branches are complying with the program and are as secure as the home office. A review program should evaluate each branch's cybersecurity risks, the effectiveness of and compliance with the cybersecurity program, and the support available to the branch. FINRA recommends developing a framework to assess risks and risk levels at each branch and conducting risk-based audits using the framework to ensure the risks of each individual branch are considered. In order for branches to properly implement an appropriate cybersecurity program, they must have access to competent support personnel with sufficient cybersecurity expertise. A firm should implement automated ways to monitor and verify the branch controls in place and have policies imposing consequences for violations of the firm standards. Lastly, if it is determined that a branch's cybersecurity program is deficient, there should be follow-up evaluations to ensure that the deficiencies have been corrected. FINRA's recommendations and attention to branch cybersecurity reinforce the importance of a consistent cybersecurity program but acknowledge that a one-size-fits-all program may overlook the unique risks each branch may face.

Phishing Attacks

The next topic FINRA highlights is phishing (also call social engineering), which continues to be the most common cybersecurity concern for firms. This is because a phishing attack's success hinges on a recipient's response. Phishing emails have become increasingly sophisticated and may be veiled as a legitimate email presenting a legitimate concern. Phishing emails have evolved from poorly written mass emails to customized emails directed at specific targets such as system administrators or CEOs (commonly called "spear-phishing" or "whaling"). The purpose of a phishing event is to convince the recipient to provide PII, open a malicious link or attachment, or initiate a payment. FINRA compiled a useful chart outlining various ways to evaluate whether a communication is a phishing attempt, including discrepancies in the sender's email address; additional unknown recipients; unexpected timing, tone and urgency of the content; and unexpected attachments.

The report aptly explains that training is key to protecting against phishing threats. Employees must be trained to recognize a phishing attempt, counseled not to open or respond, and advised how to report the threat to network security personnel. In addition to training, it is recommended that a firm implement email scanning and filtering to block phishing attempts, controls to require confirmation of transaction requests, and procedures for reporting phishing to the local FBI and cybersecurity information-sharing organizations.

Insider Threats

FINRA explains that insider threats remain a cybersecurity concern because of malicious behavior and mistakes. An insider may be an employee, a consultant, an intern, or even a third-party vendor or subcontractor that has been given access to the firm's systems. FINRA's recommendations focus on employee training and technical controls. Protecting against insider threats starts with senior executives and management demonstrating personal compliance and being subject to the same consequences as other employees for violating the policy. FINRA also encourages firms to designate someone in authority as the person responsible for managing the insider threat controls, monitoring behavior of potentially malicious insiders, and providing timely notifications when an employee's position changes or the person is no longer employed by the firm. While human error poses a big risk for phishing and lost devices, an appropriately trained employee who understands the cybersecurity protocols helps a firm stay protected and can help identify suspicious behavior, which may prevent malicious actions of other employees.

For further protection against insider threats, FINRA encourages use of technical controls with the intention that an insider has access only to the information that person needs and must have appropriate passwords for access. This can be done through technical controls such as identity access management (IAM), user entitlements and limited privileged user controls. Security information and event management (SIEM) tools and user and entity behavioral analytic (UEBA) tools are useful for aggregating and collecting logs from different aspects of the network security and tracking potential risks. Data loss prevention (DLP) programs help detect and mitigate threats. A DLP program can identify sensitive data and block transmission of that data with protocols set up by the firm. FINRA advises that these tools should be used in connection with training to avoid mistakes and recognize suspicious behavior.

Penetration Testing

The fourth issue identified by FINRA is not a threat but rather a recommended test. Penetration (pen) testing simulates an attack to determine the effectiveness of network security and identify any vulnerabilities that need to be addressed. FINRA encourages firms to determine the frequency and depth of pen tests needed based on a risk assessment of the sensitivity and accessibility of stored data. While firms with strong cybersecurity programs conduct pen tests at least annually, FINRA recommends also conducting pen tests after key events, such as significant changes to the firm's applications or systems infrastructure. FINRA noted that pen tests are generally conducted by outside vendors, which makes it important to screen the vendors and potentially alternate between vendors for a more rounded view of strengths and weaknesses. The contractual agreements with these vendors should address each detail of testing and confidentiality. FINRA noted that conducting a pen test is not enough – it is important to review and understand the results of pen tests in order to improve cybersecurity programs.

Mobile Devices

Finally, FINRA reminds broker-dealers that the use of mobile devices by both firm personnel and customers creates increasing opportunities for attacks. Mobile devices are used to access firm networks, conduct trading and transactions, receive alerts, and monitor accounts. In addition to normal network concerns, mobile devices are exposed to additional risks such as cloning and rerouting calls and messages. FINRA recommends implementing different controls for those working for the firm (employees, contractors and consultants) and customers.

The most effective mobile device practices for those within the firm are written "bring your own device" standards and limiting the information available via a mobile device. FINRA recommends prohibiting use of a personal device unless the device meets minimum security requirements that are reviewed and set in place by technology support staff including encryption, passwords, time-out locks, and standards for remotely wiping the device if it is lost or stolen.

The general gist of the practices to implement for customers is to provide ample warning of the risks of and restrictions for access. Firms should inform customers of the risks of using mobile devices to access and store personal and financial data and the risks of "jailbreaking" their devices. Further, access to any sensitive data should only be through an application set up with password requirements and multi-factor authentication.


The FINRA report is a reminder that firms must constantly be evaluating and improving the cybersecurity programs they currently have in place at both the home office as well as in branch offices. Branch office supervision of cybersecurity risks is especially important for firms with decentralized business models. Cybersecurity programs should constantly be evolving to identify and address new risks that are specific to the firm and each branch office. While the practices recommended by FINRA do not create any new legal requirements, they should be viewed as guidance as to what FINRA expects firms to be doing in order to maintain a complete and effective cybersecurity program.

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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