The SEC recently agreed to a $1,000,000 settlement of an enforcement action against Morgan Stanley for its failure to have sufficient data security policies and procedures to protect customer data. The settlement was significant for its amount. The true noteworthiness here, however, lies not in the end result but the implications of how it was reached: (1) the “reasonableness” of a company’s data security safeguards shall be judged in hindsight, and (2) almost any data breach could give rise to liability. The SEC has left no room for error in making sure that your cybersecurity procedures and controls actually and always work.
Morgan Stanley maintained personally identifiable information collected from its brokerage and investment advisory services customers on two internal company portals. Between 2011 and 2014, an employee unlawfully downloaded and transferred confidential data for approximately 730,000 accounts from the portals to his own personal data storage device/website. It is unclear whether the transfer of information was for the employee’s personal convenience or a more nefarious purpose. Soon thereafter, however, the employee suffered a cyberattack on his personal storage device, leading to portions of the data being posted to at least three publicly available Internet sites. Morgan Stanley discovered the information leak through a routine Internet sweep, they immediately confronted the employee, and voluntarily brought the matter to law enforcement’s attention.
The employee who transferred the information to his personal device was criminally convicted for violating the Computer Fraud and Abuse Act by exceeding his access to a computer, he was sentenced to 36 months probation, and ordered to pay $600,000 in restitution. He also entered into a consent order with the SEC barring him from association with any broker, dealer, and investment adviser for five years.
Morgan Stanley entered into a consent order with the SEC pursuant to which Morgan Stanley agreed to pay a $1,000,000 fine, but did not admit or deny the findings in the order.
SIDE NOTE TO COMPLIANCE OFFICERS READING THIS BLOG POST – if ever you need a way to deter your employees from sending corporate information to their personal devices or email accounts, tell them about this case.
What Does The Law Require?
Federal security laws (Rule 30(a) of Regulation S-P – the “Safeguards Rule”) require registered broker-dealers and investment advisers to adopt written policies and procedures reasonably designed to:
- Insure the security and confidentiality of customer records and information;
- Protect against any anticipated threats or hazards to the security or integrity of customer records and information; and
- Protect against unauthorized access to or use of customer records or information that could result in substantial harm or inconvenience to any customer.
Here, the SEC based Morgan Stanley’s liability on the fact that Morgan Stanley:
failed to ensure the reasonable design and proper operation of its policies and procedures in safeguarding confidential customer data. In particular, the authorization modules were ineffective in limiting access with respect to one report available through one of the portals and absent with respect to a couple of the reports available through the portals. Moreover, Morgan Stanley failed to conduct any auditing or testing of the authorization modules for the portals at any point since their creation, and that testing would likely have revealed the deficiencies in the modules. Finally, Morgan Stanley did not monitor user activity in the portals to identify any unusual or suspicious patterns.
In other words, the authorization modules did not work in this instance, nor was there auditing to test and possibly identify the problem, nor had Morgan Stanley invested in sophisticated monitoring applications that would have identified that the employee was engaging in suspicious activity.
Why Should Companies Worry?
The most concerning part of the Morgan Stanley consent order is this paragraph, which describes some robust safeguards Morgan Stanley had implemented before the incident occurred:
MSSB [Morgan Stanley] adopted certain policies and restrictions with respect to employees’ access to and handling of confidential customer data available through the Portals. MSSB had written policies, including its Code of Conduct, that prohibited employees from accessing confidential information other than what employees had been authorized to access in order to perform their responsibilities. In addition, MSSB designed and installed authorization modules that, if properly implemented, should have permitted each employee to run reports via the Portals only with respect to the data for customers whom that employee supported. These modules required FAs [Financial Advisors] and CSAs [Client Service Associates] to input numbers associated with the user’s branch and FA or FA group number. MSSB’s systems then should have permitted the user to access data only with respect to those customers whose data the user was properly entitled to view. Finally, MSSB installed and maintained technology controls that, among other things, restricted employees from copying data onto removable storage devices and from accessing certain categories of websites.
Lesson learned: it doesn’t matter how robustly designed your policies and procedures may be, if they don’t actually work as designed then you could be liable under the Safeguards Rule.
The standard applied by the SEC in this enforcement action is higher than a “reasonableness” standard. It is easy, after the fact, to find a weakness that could have been exploited. Indeed, it is unusual if you cannot identify such a vulnerability after the fact. If a criminal or departing employee is set on unlawfully accessing sensitive information he can likely do so no matter what hurdles you place in his way. A company should not be held liable for failing to stop every data incident. Some may argue that a company like Morgan Stanley must be held to a higher standard because of the known threats to the financial services industry and the potentially significant consequences to consumers of a financial services company suffering a data breach. Nevertheless, the law as written requires policies and procedures that are only “reasonably designed” to protect sensitive information; the law does not require that these policies and procedures be perfectly designed nor that they be effective 100% of the time, nor could it.
Hindsight is 20/20 and regulators would be hard pressed to find any organization that could show their policies and procedures are always followed. Could audits and testing have detected the fact that Morgan Stanley’s authorization module was not preventing the type of unauthorized access and transfer of sensitive information in this case? Possibly, depending on the depth of the audit and foresight of the auditors. But little benefit appears to have inured to Morgan Stanley for the fact it actually had an authorization module, data security training for its employees, policies and restrictions regarding employee access of information, controls that prevented the copying of data onto removable storage devices, and the fact that it voluntarily brought this matter to law enforcement’s attention.
Is there a risk now that the SEC’s interpretation of “reasonableness” will be applied similarly by state Attorneys General, the Health and Human Services’ Office of Civil Rights, the Federal Trade Commission, or other regulators? All of this reminds us that the definition of reasonableness in the context of data security is subjective, and that subjectivity is a risk that companies must address.
There are some important practical takeaways for companies from this settlement: (1) perform a risk assessment to determine how your organization could suffer from a similar risk (employee transferring corporate information to a personal device); (2) implement an authorization module and other policies and procedures to limit access (and identify unauthorized access) to sensitive information to those who have a legitimate business need; and (3) make sure you audit and test these controls so ensure that they actually work. Additionally, CISOs, compliance officers, and in house counsel would be well served to ensure that the story of this enforcement action becomes part of their organization’s data security training as part of the onboarding and annual training process.
DISCLAIMER: The opinions expressed here represent those of Al Saikali and not those of Shook, Hardy & Bacon, LLP or its clients. Similarly, the opinions expressed by those providing comments are theirs alone, and do not reflect the opinions of Al Saikali, Shook, Hardy & Bacon, or its clients. All of the data and information provided on this site is for informational purposes only. It is not legal advice nor should it be relied on as legal advice.