United States: SEC Poised To Ramp Up Cybersecurity Enforcement

On October 16, 2018, the Securities and Exchange Commission (SEC) issued an investigative report signaling its intent to use sections 13(b)(2)(B)(i) and (iii) of the Securities Exchange Act of 1934 (the "Exchange Act") to pursue enforcement actions against public companies that fail to tailor their internal controls to evolving cyber threats and technology.

Relying on the Exchange Act, the SEC could bring an enforcement action even in the absence of a security incident or unauthorized access to information.

The SEC's approach creates a new avenue and new risk of enforcement arising from a much broader category of cyber incidents – namely those that cause companies financial loss or disruption of accounting systems, even when the incidents do not touch personal or business information. Today, regulators routinely investigate companies in connection with data breaches that result in unauthorized access to personal information (e.g., under the Gramm-Leach-Bliley Act, Health Information Portability and Accountability Act (HIPAA), or state breach notification laws) or business information (e.g., under the New York Department of Financial Services cybersecurity regulations). Relying on the Exchange Act, the SEC could theoretically bring these actions even in the absence of a security incident altogether. However, the SEC's past practice suggests that it would be unlikely to do so unless the safeguards are utterly lacking and there are other egregious circumstances to justify such an enforcement action.

The SEC has identified public companies' failure to detect and mitigate effects of cyber fraud as a significant compliance issue warranting robust enforcement.

The SEC's announcement reflects an escalation of its cyber enforcement efforts. The report articulates the SEC's new strategy to enforce the Exchange Act's internal control provisions against public companies that fail to adjust their controls to account for the pervasive use of digital technology that has increased the risk of cyber fraud. Until now, the SEC has used these provisions primarily to prosecute companies that fail to put financial systems and controls in place to prevent accounting and disclosure fraud and Foreign Corrupt Practices Act violations. The provisions of the Exchange Act at issue – sections 13(b)(2)(B)(i) and (iii) – require public companies to "devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization," and that "(iii) access to assets is permitted only in accordance with management's general or specific authorization."

The SEC's new approach was prompted by its examination of nine public companies that suffered significant cyber fraud that resulted from both sophisticated stealth attacks as well incidents the companies could have easily detected. The SEC found that each of the companies had (a) inadequate internal controls, including controls to detect and prevent cyber fraud, and (b) inadequate employee training on the requirements of controls already in place, and that these inadequacies caused or contributed to the cyber fraud. The SEC concluded that the companies' inability to detect and stop the attacks presents a significant compliance issue.

The SEC has expressed significant concern that companies failed to detect and mitigate effects of even unsophisticated cyber fraud schemes.

The report identifies two cyber fraud schemes that leverage compromised emails: spoofed executive accounts and hacked vendor accounts.

In the first scheme, perpetrators "spoofed" a company executive's email account (using an email address that looked similar to the executive's legitimate email account) to send an email to the company's mid-level finance personnel directing them to transfer funds from the company to a foreign account. The spoofed emails often described a purported time-sensitive foreign transaction, the need for secrecy from other company employees, and a request for a transaction typically beyond the recipient's scope of responsibilities. Some emails referred to the company's or a transaction counterparty's outside lawyers, but the contact details connected company personnel with the perpetrators. The SEC determined that this scheme – which was technically unsophisticated and relatively easy to identify – nevertheless defrauded companies out of substantial revenues. Indeed, one company suffered over $45 million in losses as a result.

In the second, more sophisticated scheme, perpetrators hacked into a target company's third-party vendor's email account and inserted illegitimate requests for payment (and payment processing details) into otherwise legitimate transaction requests submitted to the company. To tailor the scheme to each company, the perpetrators communicated with company personnel responsible for procuring goods from the vendor to learn about actual purchase orders and invoices. Since the perpetrators used the vendor's email account, the fraudulent payment requests mirrored legitimate requests, which made it difficult for the compromised company to identify the scheme. Often, companies did not learn of the fraud until the vendors sought overdue payments.

The SEC has found that companies fell victim to cyber fraud because their controls failed to keep up with changes in technology.

The report concludes that the companies' failure to adapt their general systems of internal controls to keep up with changes in technology and new cyber threats caused the companies' failure to detect and mitigate the effects of these cyber incidents. Furthermore, in several of these cases, personnel (including two chief accounting officers) did not understand or follow the controls that the companies already had in place. The SEC clearly designed its investigative report – signaling its intention to prosecute companies that fail to implement adequate cyber controls – to motivate public companies to remedy this systemic issue.

Although the SEC chose not to pursue enforcement actions against the companies identified in the report — and clarified that not all victims of cyber fraud have necessarily violated the internal control requirements — the SEC's prior practice strongly suggests the report was intended as a warning and that enforcement is likely to follow. The SEC considers proper internal controls necessary to minimize cyber fraud and comply with the Exchange Act.


Public companies should review and update their relevant controls and train personnel to help protect against cyber fraud and mitigate the risk of SEC enforcement.

The report makes clear that public companies should create and maintain an appropriate system of internal controls designed to detect and mitigate the effects of cybersecurity incidents. The controls should be based on a company-specific assessment of the company's transaction and vendor processes. Companies should continuously reassess these controls as cyber risks emerge and ensure they are comprehensive and take into account a holistic review of the risks a company faces.

The SEC offers a non-exhaustive list of controls it deems relevant to mitigating cyber threats: employee training, payment authorization procedures, verification requirements for vendor information changes, account reconciliation procedures, and outgoing payment notification processes. Although companies may already have such controls in place, they must review and augment the controls to verify that they are responsive to emerging cyber threats. Companies must also train employees to understand and follow the controls they have in place. The SEC put a special emphasis on implementing controls that mitigate the effects of human error, a factor common in many security incidents. For example, IBM's 2018 security threats report found that inadvertent actors, such as employees, present a constant security threat to companies, and in its 2017 data breach report, the New York Attorney General's Office found that human error caused 25% of data breaches reported to the office. As a result, controls for limiting human error (e.g., mock emails or "phish tests" and data handling procedures to prevent information leakage with respect to vendor relationships) are critical to mitigating cyber risks.

As companies reassess their internal controls in the context of evolving cyber risks, they may initially focus on insuring that the controls reflect some of the basic building blocks:

  • Clear and direct delineations of responsibility for cyber incidents to specific compliance personnel;
  • Straightforward cyber-threat escalation channels articulated to the entire firm;
  • Clear supervisory responsibilities and controls delegated among senior staff including business/division leaders, compliance managers, and in-house counsel;
  • Collection and preservation of attendance records for employee training, including records of follow-up attempts for delinquent employees;
  • Roll-out plans to update employees on new cybersecurity threats (including periodic emails or downloadable videos whereby the company tracks readership and viewership for key employees);
  • Periodic and regular updates to relevant written policies and procedures addressing cyber risk, including written supervisory procedures (WSPs) and supervisory control policies and procedures (SCPs);
  • Systematic surveillance, follow-up, and testing of breaches/issues/control systems, including understanding new technologies and new trends in cyber fraud;
  • Understanding the cyber-risk profiles and controls at third-party vendors, particularly those that handle the company's sensitive, confidential, or financial information; and
  • Potentially consulting with outside experts to assist with additional internal assessments and/or managing cybersecurity programs and controls.

Following an initial assessment and remediation, companies should undertake a more in-depth review to align the controls with emerging cyber threats and implement a periodic or continuous review process designed to maintain the controls' responsiveness to technological change.

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