The Securities and Exchange Commission (SEC) has sanctioned eight financial services firms for cybersecurity failures that resulted in email account takeovers exposing the personal information of thousands of customers and clients at each firm. 

The eight firms, which have agreed to settle the charges, are Cetera Advisor Networks LLC, Cetera Investment Services LLC, Cetera Financial Specialists LLC, Cetera Advisors LLC, and Cetera Investment Advisers LLC (collectively, the Cetera Entities); Cambridge Investment Research Inc. and Cambridge Investment Research Advisors Inc. (collectively, Cambridge); and KMS Financial Services Inc. (KMS). All were Commission-registered as broker-dealers, investment advisory firms, or both.

Sounil Yu, Chief Information Security Officer at JupiterOne, a Morrisville, North Carolina-based provider of cyber asset management and governance solutions, says, “The SEC actions show that they are accelerating the use of their enforcement powers to penalize those who are being lackadaisical in their cybersecurity posture. Commensurate with the increasing number of attacks and the ease by which certain security controls (e.g., 2FA) could have thwarted such attacks, the SEC penalties signal their patience and tolerance for inadequate cybersecurity controls are wearing thin. Companies should expect greater regulatory scrutiny from the SEC (and other regulatory bodies, such as the NYSDFS) and should be proactive in developing a robust cybersecurity risk management program to mitigate the threat of substantial monetary penalties from regulators.”

According to the SEC’s order against the Cetera Entities, between November 2017 and June 2020, cloud-based email accounts of over 60 Cetera Entities’ personnel were taken over by unauthorized third parties, resulting in the exposure of personally identifying information (PII) of at least 4,388 customers and clients. None of the taken-over accounts were protected in a manner consistent with the Cetera Entities’ policies. The SEC’s order also finds that Cetera Advisors LLC and Cetera Investment Advisers LLC sent breach notifications to the firms’ clients that included misleading language suggesting that the notifications were issued much sooner than they were after discovering the incidents.

Between January 2018 and July 2021, cloud-based email accounts of over 121 Cambridge representatives were taken over by unauthorized third parties, resulting in the PII exposure of at least 2,177 Cambridge customers and clients. Although Cambridge discovered the first email account takeover in January 2018, the SEC says the firm failed to adopt and implement firm-wide enhanced security measures for cloud-based email accounts of its representatives until 2021, resulting in the exposure and potential exposure of additional customers and client records and information.

Between September 2018 and December 2019, the cloud-based email accounts of 15 KMS financial advisers or their assistants were taken over by unauthorized third parties, resulting in the PII exposure of approximately 4,900 KMS customers and clients. The SEC found that KMS failed to adopt written policies and procedures requiring additional firm-wide security measures until May 2020 and did not fully implement those extra security measures until August 2020, placing other customer and client records and information at risk.

Pravin Kothari, Executive Vice President of SASE Products at Lookout, a San Francisco, Calif.-based endpoint-to-cloud security company, says, “This situation serves as a wake-up call for organizations to implement security controls across all SaaS and cloud apps. As more businesses migrate to cloud-based apps and email, the crown jewels of personal and corporate data are more challenging to monitor and protect. Many organizations don’t realize that security in the cloud is a shared responsibility between the provider and the customer. To avoid liability for every attack that takes place within their SaaS or IaaS apps, these platforms provide native security only up to a certain level. Misconfigurations, insider threats, and API abuse are all examples of issues that customers are responsible for. “ 

According to the SEC, each of the firms violated Rule 30(a) of Regulation S-P, also known as the Safeguards Rule, designed to protect confidential customer information. The SEC’s order against the Cetera Entities also finds that Cetera Advisors LLC and Cetera Investment Advisers LLC violated Section 206(4) of the Advisers Act and Rule 206(4)-7 in connection with their breach notifications to clients.

Without admitting or denying the SEC’s findings, each firm agreed to cease and desist from future violations of the charged provisions, be censured, and pay the penalty. The Cetera Entities will pay a $300,000 penalty, Cambridge will pay a $250,000 penalty, and KMS will pay a $200,000 penalty.

Kothari says, “With the rise of hacking and exposures in the SaaS and cloud apps, organizations need to focus on cloud security and data protection unconventionally. Migration to cloud-based applications and email presents many unique challenges in protecting your data and your client data and has given rise to a new generation of Cloud Data Protection solutions, especially with seamless rights management (EDRM) and such capabilities.

 “Organizations must be aware of the growing risk with their data in the cloud and always protect personal identifiable information (PII) and protected health information (PHI). With the growing number of regulations on data privacy of individuals, such as GDPR , PCI DSS, HIPAA and CCPA, exposing such data opens the organization to breaches, reputational damage as well as stiff penalties. Financial services have additional regulations for client data protection such as GLBA, SEC, FFIEC.”