Financial Regulatory Forum

Cybersecurity and the board: avoiding personal liability — Part III of III: Policies and procedures

By Steven L. Caponi, Thomson Reuters Accelus contributing author

NEW YORK, Aug. 8 (Thomson Reuters Accelus) - In the previous two installments of this series (Part I and Part II), we discussed the fiduciary obligation of officers/directors to proactively address cyber security and the legal basis for holding them personally liable if they fail to do so. This third and final article explores the more difficult task of deciding which best practices directors should consider adopting. Because each enterprise faces unique challenges, this process requires that directors understand their company’s cyber security risk profile and the options available for mitigating the risk.

When deciding which policies or procedures to adopt, boards should consider how their decisions will be viewed after an incident occurs. Following a loss or serious data breach, the various interested parties – stockholders, regulators, customers, politicians, media, and courts – will seek to assign blame. This chorus of finger pointers will inevitably be looking through the distorted lens of hindsight. Directors will not be accorded the benefit of the doubt, the presumption of good faith will be thrown out the window, and a conscientious cost-benefit analysis will be characterized as a deliberate decision to sacrifice data security on the altar of corporate profits. (more…)

Cybersecurity and the board of directors: avoiding personal liability — Part II of III

By Steven L. Caponi, Compliance Complete contributing author

NEW YORK, Aug. 6 (Thomson Reuters Accelus) - The first article in this three-part series discussed how legal principles governing directors’ fiduciary duties may be applied to cybersecurity and the risks posed by cyber attacks. To summarize, Delaware’s corporate law places an affirmative obligation on fiduciaries to keep informed of serious risks facing the enterprise. The failure to exercise appropriate oversight in the face of known risks constitutes a breach of the duty of loyalty, a breach that cannot be exculpated under 8 Del. C. §102(b)(7).

In Part II of this series, we explore the “red flags” placing directors on notice of their obligation to proactively manage cyber security risks, and that expose a complacent board to costly litigation and the specter of personal liability. When evaluating whether a particular issue warrants board consideration, directors and officers should look at the nature of the risk, its potential impact on the company, and the extent to which the risk is foreseeable.  (more…)

Cybersecurity and the board of directors: avoiding personal liability – Part I of III

By Steven L. Caponi, Contributing author for Compliance Complete

NEW YORK, July 25 (Thomson Reuters Accelus) - The likelihood of a cybersecurity breach hitting one’s company in the near future is as certain as will be the resulting drop in shareholder value, finger pointing, fines, regulatory headaches and civil litigation alleging the board was asleep at the wheel in the face of a known danger. In a letter to the Chairman of the Securities and Exchange Commission from five U.S. senators, including Commerce committee Chairman Jay Rockefeller, the Senators noted:

“Every day, malicious actors attack and disrupt computer networks to steal valuable trade secrets, intellectual property, and financial and confidential information, causing significant damage to the United States Government, our citizens, our business, and our country.”  (more…)

Cybersecurity in Canada: Finance industry, government seek ways to share data

By Daniel Seleanu, Compliance Complete

TORONTO/NEW YORK, July 18 (Thomson Reuters Accelus) - More cooperation with government intelligence agencies would improve the Canadian financial industry’s cyber security capabilities, regulatory and industry experts told Thomson Reuters. Financial institutions have deployed defences, but face considerable threat from cyber-criminals intent on committing fraud, stealing sensitive information, and disrupting their networks.

To mitigate those risks, security and financial experts have called for an enhanced information-sharing system that would allow firms to provide detailed cyber-attack statistics to the government in exchange for intelligence on emergent threats and mitigation strategies. To date, attempts to establish such a system have had little result.  (more…)

U.S. regulators’ Basel III rules package signals intent to maintain momentum in big-bank reforms

By Bora Yagiz

NEW YORK, July 17 (Thomson Reuters Accelus) - In a move considered to be the most complete overhaul of U.S. bank capital standards since Basel I in 1988, three U.S. banking regulators (the Federal Reserve Board, Office of Comptroller of the Currency, and Federal Deposit Insurance Corporation) have finalized the three Basel III-related notices of proposed rulemaking (NPRs) from 2012 on capital rules.

Collectively, the rules raise capital ratios, expand the base of assets for risk-based capital calculations, make changes to the methodology for calculation of credit risk weightings for banking and trading book assets and put emphasis on a stricter definition of capital, especially with regards to common equity Tier 1 (CET1) capital, the highest quality of equity. Higher quality of equity is perceived to provide a better safety net for the financial system in economic downturns, but this safety comes with a higher cost of business for the banks. Simply put, money kept as capital is not invested.  (more…)

CORRECTED: Bank regulators globally add AML to safety and soundness issues

By Nick Paraskeva, for Compliance Complete

NEW YORK, July 8 (Thomson Reuters Accelus) - Bank regulators around the globe are increasingly focusing on anti-money laundering (AML) and operational risks as part of their role in overseeing institutional safety and soundness. This follows huge enforcement fines imposed on systemically important banks by regulators and justice ministries. It also reflects a concern that any attendant hit on a bank’s reputation could affect its ability to obtain short-term funding or trade other than on a fully-secured basis.

The Basel Committee on Banking Supervision last week proposed standards on money laundering risks, which require banks to include AML within their firm-wide risk management process. “Basel’s commitment to AML is fully aligned with its mandate to strengthen the regulation, supervision and practices of banks worldwide, with the purpose of enhancing financial stability,” the committee stated on issuing the proposal for consultation. (more…)

COLUMN: When cheating lands brokers on the street

By Suzanne Barlyn, Reuters

NEW YORK, July 5 (Thomson Reuters Accelus) - One would think that aspiring financial professionals would have learned not to cheat on tests long before setting their sights on Wall Street, but not everyone got that memo.

Every year, some would-be brokers kill their careers by cheating on licensing exams, according to a review of the Financial Industry Regulatory Authority’s disciplinary database. There aren’t very many of them – a handful every year that are not a significant percentage of the 185,000 licensing tests administered by FINRA annually. But their flameouts are colorful.  (more…)

Compliance Insight: UK regulators gain more power over overseas firms and individuals

By Jane Walshe, Compliance Complete

LONDON/NEW YORK, July 3 (Thomson Reuters Accelus) - The new regulatory structure that came in to being on April 1, 2013 introduced changes not just to the form of regulation, but also to its substance, including extensive new powers over unauthorised parent undertakings with operations on UK soil.  (more…)

Federal judge approves HSBC deferred prosecution agreement

By Brett Wolf, Compliance Complete

NEW YORK, July 3 (Thomson Reuters Accelus) - A U.S. federal judge has approved the Deferred Prosecution Agreement in which British banking giant HSBC will pay $1.9 billion to regulators and the Justice Department for operating with anti-money laundering weaknesses that among other things allowed drug cartels to launder hundreds of millions of dollars. (more…)

Retraction of global correspondent banking networks challenges financial-crime risk management

By Kim R. Manchester, Contributing author for Compliance Complete

NEW YORK, July 2 (Thomson Reuters Accelus) - Global correspondent banks have faced numerous challenges since the onset of the financial crisis in 2008, including heavy scrutiny by regulators on money-laundering and terrorism-financing defenses, shrinking transaction volumes, slashed profit margins and risk parameters that defy rational measurement. A Financial Times report on how global correspondent banks are clawing back the reach of their correspondent banking network operations and trimming respondent banks from their client lists comes as no surprise to the casual observer of international banking.

For the financial intelligence community, this retraction by global correspondent banks will blur their insight into international money laundering and terrorism financing networks and hamper efforts to disrupt organised crime and terrorist groups. For financial institutions, the retraction of networks will create new challenges in financial crime risk management, with painful and expensive consequences if compliance programs are not tailored to meet money laundering and terrorist financing threats within correspondent banking. (more…)

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