Cybersecurity, Data Breaches Continue to Make Headlines

Financial Services Law

Cybersecurity continues to make headlines in the financial services industry, from the recent announcement that the Securities and Exchange Commission (SEC) was targeted by hackers to final approval of the settlement in a class action brought by financial institutions against Home Depot after a major data breach at the national retailer.

What happened

Demonstrating that data breaches can happen to any entity, SEC Chairman Jay Clayton revealed that hackers hit the agency in 2016 when an intrusion occurred in the agency’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. “Specifically, a software vulnerability in the test filing component of the Commission’s EDGAR system, which was patched promptly after discovery, was exploited and resulted in access to nonpublic information,” Clayton said.

While the SEC initially stated that the intrusion did not result in unauthorized access to personally identifiable information, jeopardize the operations of the Commission or result in systemic risk, it acknowledged the breach “may have provided the basis for illicit gain through trading” by providing access to nonpublic information. The agency later said the ongoing investigation found that the names, birth dates and Social Security numbers of two individuals were obtained.

The incident was shared as part of the SEC’s announcement of multiple cybersecurity initiatives. “Cybersecurity is critical to the operations of our markets and the risks are significant and, in many cases, systemic,” Clayton said in a statement. “We must also recognize—in both the public and private sectors, including the SEC—that there will be intrusions, and that a key component of cyber risk management is resilience and recovery.”

To that end, the agency expanded its Enforcement Division’s efforts to address cybersecurity issues with the creation of a Cyber Unit focused on market manipulation schemes involving false information spread through electronic and social media, hacking to obtain material nonpublic information, violations involving distributed ledger technology and initial coin offerings, misconduct through the use of the dark web, intrusions into retail brokerage accounts, and cyber-related threats to trading platforms and other critical market infrastructure.

In addition, the SEC launched a Retail Strategy Task Force, which will “develop proactive, targeted initiatives to identify misconduct impacting retail investors,” leveraging the agency’s history of cases involving fraud targeting retail investors ranging from the sale of unsuitable structured products to microcap pump-and-dump schemes.

A few days later, Clayton testified before the U.S. Senate Committee on Banking, Housing and Urban Affairs, where he faced criticism about the agency’s handling of the data breach, especially the delay in making it public. Clayton told lawmakers that he plans to tap into a $50 million reserve fund established under the Dodd-Frank Wall Street Reform and Consumer Protection Act to improve the agency’s cybersecurity practices and intends to ask Congress for more money to improve the SEC’s defenses.

The aftermath of Home Depot’s 2014 data breach may finally be coming to an end after a federal court judge in Georgia granted final approval to the $27.25 million settlement in a suit brought by financial institutions.

Hackers placed malware on the retailer’s self-checkout kiosks, leading to a major breach of consumer names, payment card numbers, expiration dates and security codes. Banks and credit unions responded with more than 25 class actions filed nationwide, charging the company with shoddy security measures.

The deal provides $25 million to cover the losses of the financial institutions, with class members set to receive a “fixed payment award” estimated to be $2 per compromised card without having to prove their losses and regardless of whether they have already received compensation from another source. Those that submit proof of losses and compensation already received are eligible for an additional “documented damages award” of up to 60 percent of their uncompensated losses from the data breach. These awards will be paid from the fund after payment of all fixed payment awards and reduced on a pro rata basis if not enough money remains.

Another $2.25 million was included in the fund for sponsored entities whose claims were released by their sponsor in connection with a Mastercard program, with payments of $2 per compromised card.

Home Depot promised to implement new data security measures, such as designing and implementing reasonable safeguards to manage the risks identified in its data security risk assessments, establishing a vendor program with annual security assessments and adopting an industry-recognized security control framework for information security.

Finding the agreement “fair, reasonable and adequate,” U.S. District Court Judge Thomas W. Thrash Jr. granted final approval of the deal. He also signed off on counsel fees of $15.3 million, down from the $18 million requested by the lawyers, but triple the $5.6 million advocated for by the defendant, to be paid separately from the settlement fund.

To read about the SEC’s new initiatives, click here.

To read the order in In re: The Home Depot, Inc., Customer Data Security Breach Litigation, click here.

Why it matters

The SEC initiatives are the most recent effort by the agency to address cybersecurity, both internally and for covered entities, including a Risk Alert issued earlier this year and the hiring of additional staff and outside technology consultants to aid in the agency’s protection of the security of its network, systems and data. The Home Depot settlement provides a reminder about the costs to companies and financial institutions of a data breach—in that case, north of $42 million.