WASHINGTONG - Wall Street's top regulator came under fire about its cyber security and disclosure practices after admitting
hackers had breached its database of corporate announcements in 2016 and may
have used it for insider trading.
The breach involved Securities and Exchange Commission's
EDGAR filing system, which houses market-moving information with millions of
filings ranging from quarterly earnings to statements on acquisitions.
The SEC said on Wednesday evening it discovered last month
that cyber criminals may have used a hack detected in 2016 to make illicit
trades.
SEC Chairman Jay Clayton gave members of Congress a
"courtesy call" about the hack on Wednesday afternoon before it was
announced publicly, said Representative Bill Huizenga, chairman of the US House
subcommittee that oversees the SEC.
"It's hugely problematic and we've got to be serious
about how we protect that information as a regulator," Huizenga said. The SEC
disclosure came two weeks after credit-reporting company Equifax Inc said a
breach has exposed sensitive personal of data up to 143 million US customers,
and follows last year's cyber attack on SWIFT, the global bank messaging
system.
It is particularly embarrassing for the SEC and its new boss
Clayton, who has made tackling cyber crime one of the top enforcement
issues. "The chairman obviously recognizes the irony of the SEC
potentially serving as the unwitting tipper in an insider trading scheme,"
said John Reed Stark, president of a cyber consulting firm and a former SEC
staff member.
The SEC has said it was investigating the source of the hack
but it did not say exactly when it happened or what sort of non-public data was
retrieved. The agency said the attackers had exploited a weakness in a part of
the EDGAR system and it had "promptly" fixed it.
Most reports filed with the SEC "generally don't
contain super-sensitive information," and any insider trading would have
taken place soon after company filings were made but before they were released
to the public, said Gary LaBranche, president of National Investor Relations
Institute.
"People are shocked and disappointed," LaBranche
said. NIRI members, who work with 1,600 publicly-traded companies, will be
examining their trading reports for any unusual activity that could be tied to
disclosures, he said.
The Trump administration has prioritized protection of
federal agency networks after breaches including at the Office of Personnel
Management, Internal Revenue Service and State Department during the Obama
administration. US President Donald Trump in May signed an executive order
requiring agencies to use a specific framework to assess and manage cyber risk,
and to prepare a report within 90 days about how they implement it.
The SEC did not respond when asked about that review or
whether it triggered the disclosure, but Clayton said in his Wednesday
statement that he began reviewing the agency's cyber risk in May.
SEC Commissioners did not learn of the breach until
recently. In a statement, Republican SEC Commissioner Mike Piwowar, who for
part of 2017 also served as Acting Chairman, said he was "recently
informed for the first time that an intrusion occurred in 2016."
CYBER SLEUTHS NEEDED
Clayton will be grilled on the incident and its aftermath at
a hearing by the Senate Banking Committee on Tuesday. Banking Committee
member Senator Mark Warner said in a statement he intends to ask about SEC
thresholds for requiring companies to disclose breaches, and flagged the
connection between the SEC's disclosure and its market oversight role.
"Government and businesses need to step up their
efforts to protect our most sensitive personal and commercial
information," Warner said.
Securities industry rules require companies disclose cyber
breaches to investors and the SEC has investigated firms over whether they
should have reported incidents sooner.
"There is an element of, 'Do as we say, not as we do'
to this," said Matt Rossi, a former counsel in the SEC's enforcement
division. And the lack of details from the SEC about the breach will
likely raise questions about what other EDGAR data may have been exposed, such
as information related to ongoing financial investigations and sensitive personal
information, Rossi said.
The disclosure followed public and non-public reports that
detailed the SEC's cyber vulnerabilities as well as acknowledgement by the SEC
itself of the scope of the risks posed by cyber attacks. Former SEC chair
Mary Jo White, in office when the hack occurred, told Reuters in 2016 that
cyber security posed the biggest risk to the U.S. financial system.
The US Department of Homeland Security had detected five
"critical" cyber security weaknesses on the SEC's computers as of
Jan. 23, according to a confidential weekly report reviewed by Reuters on
Thursday. And in July, months after the breach was detected, a
congressional watchdog warned that the SEC was "at unnecessary risk of
compromise" because of deficiencies in its information systems.
The SEC shut down a specialized unit on cyber crimes as part
of a 2010 reorganization. The EDGAR system has sustained data breaches
before.
In 2015 hackers broke into EDGAR and published false
information about plans a financial firm had to purchase Avon Products,
prompting stock of the beauty products company to briefly surge. Researchers
found in 2014 that some users could see information posted to EDGAR before the
public.