NFA links NFA’s supervisory requirements with its proposed requirements mandating that NFA Members have information systems security programs.
The National Futures Association (NFA) has proposed cybersecurity requirements that, if adopted, will apply to firms that are NFA Members—a category that includes brokers, swap dealers, futures commission merchants, retail forex dealers, asset managers, and other financial services firms that are registered with the Commodity Futures Trading Commission (CFTC) and members of NFA. NFA’s proposed Interpretive Notice (also referred to in this LawFlash as NFA’s “proposal”) follows guidance issued by other financial services regulators, including the US Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA). NFA’s proposal is nonetheless significant as another indication that regulators are taking cybersecurity threats seriously.
For firms that are not registered with the SEC or members of FINRA, NFA’s proposal may be the first instance in which they will be subject to prescribed cybersecurity standards. NFA states that the proposal is designed to establish general requirements, including the requirement that NFA Members have a written Information Security Systems Program (ISSP). NFA submitted the proposal to the CFTC for its review and approval, and the CFTC has 180 days from August 28 to approve it. To date, the CFTC has not solicited public comment on the proposal.
The proposal is important because it provides an interpretation of and guidance on compliance with NFA Compliance Rules 2-9, 2-36, and 2-49 (which, as discussed further below, generally require firms to diligently supervise their employees and agents in all aspects of their futures activities or their businesses). Also discussed below are the specific components of the requirement to maintain a written ISSP that the NFA would apply to firms.
Although NFA states that some preexisting practices may enable a firm to comply with NFA’s proposed requirement to have a written ISSP (for example, policies establishing safeguards to protect customer information, such as a written identity theft prevention program or risk management programs addressing operational risks), NFA explains that the proposed guidance is premised on the belief of NFA’s board of directors that firms “should have supervisory practices in place reasonably designed to diligently supervise the risks of unauthorized access to or attack of their information technology systems, and to respond appropriately should unauthorized access or attack occur.” NFA says that it intends to assist firms in developing their ISSPs and will develop an “incremental, risk-based examination approach” to evaluate a firm’s compliance with the Interpretive Notice after its adoption.
The proposed Interpretive Notice establishes a principles-based risk approach that, NFA explains, would be unique to each firm based on the firm’s size, complexity of operations, customer base, and counterparties. NFA is clear that it is not mandating a “one-size-fits-all” approach, but rather is providing firms with the flexibility to design and implement security standards, procedures, and practices appropriate for the circumstances. NFA would also allow a firm that is part of a larger organizational structure to satisfy its supervisory responsibility by participating in a consolidated entity ISSP, but the firm must ensure that such ISSP is appropriate for the firm.
NFA’s proposed cybersecurity requirements would mandate that a firm have an ISSP that is approved in writing by the firm’s CEO, CTO, or other executive-level official. NFA proposes that senior management periodically report to the firm’s board of directors or board-level committee that monitors the firm’s information security efforts. Firms would be expected to incorporate education and training relating to the ISSP for appropriate personnel (upon hiring and on an ongoing basis) and to conduct an annual review that may incorporate penetration testing of the firm’s systems using in-house staff or an independent third-party information security specialist. In developing an ISSP, NFA recommends that firms review publicly available resources published by the National Institute of Standards and Technology, among others.
Security and Risk Analysis
NFA notes that firms have a supervisory obligation to assess and prioritize risks associated with the firm’s information technology systems. According to NFA, the assessment should be completed by business unit, information technology, risk management, and internal audit personnel, as applicable. In addition to other threats, vulnerabilities, and “at risk” data (such as customer and counterparty personally identifiable information) that a firm should identify and assess when performing an assessment, NFA states that the assessment should address threats and vulnerabilities to the firm’s electronic infrastructure, including systems used to initiate, authorize, record, process, and report transactions relating to customer funds, capital compliance, risk management, and trading.
When conducting an assessment, NFA would expect a firm to incorporate past internal and external security incidents that the firm has experienced and consider known threats that have been identified by the industry, the firm’s critical third-party service providers, or other organizations. With respect to critical third-party service providers—such as cloud-based services or service providers that operate outsourced systems for the firm—NFA states that a firm should address risks posed by such service providers by performing due diligence on the service providers as part of the firm’s security and risk assessment and should avoid using service providers whose security standards are not comparable with the firm’s standards. NFA goes on to state that firms should consider incorporating measures to protect customer and firm confidential data in arrangements with critical third-party service providers and adopting procedures to restrict or terminate a service provider’s access to the firm’s systems in the event that the service provider no longer performs services for the firm.
As part of an ISSP, NFA expects a firm to estimate the severity of potential threats to the firm, perform a vulnerability analysis, and establish a framework for managing risks of cybersecurity threats to the firm. Potential threats include
Deployment of Protective Measures and Procedures to Detect Potential Threats
NFA encourages firms to share intelligence among industry peers by becoming members of data-sharing organizations such as the Financial Services Information Sharing and Analysis Center. Additionally, after conducting a threat assessment, NFA would require a firm to incorporate in its ISSP the safeguards that the firm deploys to prevent potential threats. NFA provides examples of safeguards—set out below—that a firm should incorporate in its ISSP where appropriate.
NFA’s recommended safeguards that firms should deploy to prevent or mitigate potential threats include
Response and Recovery to Threats
Finally, an ISSP should incorporate an incident response plan to manage detected security events or incidents, analyze their impact, and mitigate their threat. NFA says that firms should consider whether to form an incident response team to investigate security incidents, assess damages, and coordinate responses—both internally and externally. NFA would expect an incident response plan to include the way in which a firm will address common types of incidents, such as unauthorized access, denial of service, and malicious code. If a firm does not already have a written response plan applicable to common cybersecurity threats to which the firm is exposed, the firm should consider incorporating this type of response plan in its ISSP to satisfy NFA’s requirement.
While the CFTC has not adopted formal cybersecurity standards for brokers, swap dealers, futures commission merchants, retail forex dealers, asset managers, and other financial services firms that are registered with the CFTC, NFA has taken a proactive approach to this important topic by requiring firms to establish and maintain ISSPs. NFA members should similarly take a proactive approach and begin reviewing their current policies and practices to ensure that they will be compliant with NFA’s proposal when it becomes effective.
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 In February 2015, the SEC’s Office of Compliance Inspections and Examinations (OCIE) released a risk alert summarizing the findings and recommendations associated with OCIE’s 2014 cybersecurity initiative. FINRA’s guidance, issued on the same day as the SEC’s risk alert, outlined a risk management-based approach to addressing cybersecurity threats, but did not suggest a “one-size-fits-all” regime for its members. In April, the SEC’s Division of Investment Management followed suit, releasing a brief guidance update detailing the measures registered investment companies and registered investment advisers may consider taking to address cybersecurity risk. Morgan Lewis discussed the February releases in its February 2015 LawFlash “SEC and FINRA Publish Materials Addressing Cybersecurity.”