Menu

Expect Focus Life Insurance, June 2017

Colorado Set to Regulate Cybersecurity Practices of Broker-Dealers and Investment Advisers

Cybersecurity and Privacy   |   Financial Services Regulatory   |   Insurance   |   Life, Annuity, and Retirement Solutions   |   Technology   |   Intellectual Property   |   June 23, 2017
Download   
Share Page

On May 15, Colorado became the latest state to publish major regulations tackling cybersecurity in the financial services industry when the Colorado Division of Securities released amendments to existing division rules previously proposed in late March 2017. These new rules clarify what broker-dealers and state registered investment advisers must do to protect the security of "confidential personal information," defined as a first name or initial and a last name in combination with any one of a variety of data elements such as a Social Security number, driver’s license or identification card number, or credit card number accompanied by a password or access code information. The rules detail the factors the Division will consider when assessing whether a firm’s cybersecurity procedures are sufficient.

Substantively the rules for broker-dealers (51-4.8) and investment advisers (51-4.14(IA)) contain identical language. They require broker-dealers and investment advisers to establish and maintain written procedures "reasonably designed" to ensure cybersecurity. When assessing whether the procedures are "reasonably designed," the Commissioner will consider:

  1. the firm’s size;
  2. the firm’s relationships with third parties;
  3. the firm’s policies, procedures, and training of employees with regard to cybersecurity practices;
  4. the firm’s authentication practices;
  5. the firm’s use of electronic communications;
  6. the firm’s use of automatically locking devices with access to confidential personal information; and,
  7. the firm’s process for reporting lost or stolen devices.

Firms also are required to include cybersecurity as part of their risk assessments. Furthermore, the regulations specify that the following procedures be included within the adopted written cybersecurity policies, to the extent "reasonably possible":

  1. annual cybersecurity risk assessments;
  2. use of secure email for emails containing confidential personal information;
  3. authentication practices for access to electronic communications, databases, and media by employees;
  4. authentication procedures for client instructions received electronically; and,
  5. disclosures to clients regarding the risks of using electronic communications.

Colorado follows in the footsteps of New York and Vermont — both of which have adopted cybersecurity regulations — continuing a trend of increased proactivity by states in regulating cybersecurity absent uniform, binding federal legislation or regulations. New York’s regulations are more comprehensive than Colorado’s; however, they do not apply to investment advisers or broker-dealers because individuals not licensed or registered under New York banking, insurance, or financial regulations do not qualify as covered entities. Colorado’s regulations were modeled after Vermont’s, which apply to "securities professionals" including broker-dealers and investment advisers, but Colorado’s rules stop short of Vermont’s requirements that securities professionals maintain evidence of "adequate" cybersecurity insurance proportional to the firm’s business and provide free restoration services to victims if a cybersecurity breach occurs.

The Colorado regulations are the latest at the state level to impose mandatory cybersecurity procedures upon broker-dealers and investment advisers. The SEC and FINRA have acknowledged the importance of cybersecurity protections via their respective regulatory and examination priorities issued over the past three years, and FINRA issued an extensive report on cybersecurity practices in February 2015. However, SEC and FINRA involvement in cybersecurity has largely been in the form of general guidance. For instance, the SEC’s Division of Investment Management issued cybersecurity guidelines in April 2015 for registered investment companies and registered investment advisers. The Colorado and Vermont regulations impose mandatory requirements on state registered investment advisers. And while both FINRA and the SEC require broker-dealers to adopt written data security policies and procedures, Colorado and Vermont’s regulations go further by requiring broker-dealers to conduct annual cybersecurity risk assessments and articulating specific cybersecurity procedures to include in broker-dealers’ written cybersecurity policies.


©2019 Carlton Fields, P.A. Carlton Fields practices law in California through Carlton Fields, LLP. Carlton Fields publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information and educational purposes only, and should not be relied on as if it were advice about a particular fact situation. The distribution of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship with Carlton Fields. This publication may not be quoted or referred to in any other publication or proceeding without the prior written consent of the firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our Contact Us form via the link below. The views set forth herein are the personal views of the author and do not necessarily reflect those of the firm. This site may contain hypertext links to information created and maintained by other entities. Carlton Fields does not control or guarantee the accuracy or completeness of this outside information, nor is the inclusion of a link to be intended as an endorsement of those outside sites.

Subscribe to Publications

Disclaimer

The information on this website is presented as a service for our clients and Internet users and is not intended to be legal advice, nor should you consider it as such. Although we welcome your inquiries, please keep in mind that merely contacting us will not establish an attorney-client relationship between us. Consequently, you should not convey any confidential information to us until a formal attorney-client relationship has been established. Please remember that electronic correspondence on the internet is not secure and that you should not include sensitive or confidential information in messages. With that in mind, we look forward to hearing from you.