SEC warns cybersecurity is biggest threat to financial system

Comes as regulator introduces new crowdfunding rules

The chair of the US Securities and Exchange Commission (SEC), Mary Jo White, has warned that the biggest risk the financial system faces is cybersecurity.

Speaking at the Financial Regulation Summit in Washington DC, White warned the industry that their policies and procedures were not up to scratch and without them they faced the same fate as the Bangladeshi bank that recently lost $81m through a cyber attack.

"What we found, as a general matter so far, is a lot of preparedness, a lot of awareness but also their policies and procedures are not tailored to their particular risks," she told the conference, according to Reuters. "As we go out there now, we are pointing that out."

The SEC is "very pro-active" in assessing how open those acting in the financial sector are to a cyberattack, she said, adding: "we can't do enough in this sector."

White also warned that the SEC was looking at companies that are using non-standard accounting methods to report their earnings. She noted that companies are increasingly using non-Generally Accepted Accounting Principles (GAAP) to report their figures – an approach which enables them to keep what can be very large expenses out of public reporting.

Companies are supposed to meet certain criteria if they choose to publish non-GAAP figures, and the SEC is starting to dig into whether they are being followed. Non-GAAP "is not supposed to supplant GAAP and obviously not obscure GAAP," she said.

The speech, as well as recent SEC actions against people caught short-selling ahead of an initial public offering (IPO), is just the latest in a number of recent warnings that White has placed against the tech sector.

Unicorns or cons?

Last month she visited Silicon Valley and was openly critical of the billion-dollar valuations of many startup companies.

The sheer number of so-called "unicorns" was "a topic of concern," she noted, adding: "Beyond the hype and the headlines, our collective challenge is to look past the eye-popping valuations and carefully examine the implications of this trend for investors, including employees of these companies, who are typically paid, in part, in stock and options."

She also warned that the SEC was closely watching "fintech" – startups targeting the financial markets – name-checking in particular blockchain, automated investment advice and marketplace lending.

Just one month later, the CEO of the largest marketplace lending company in the country, Lending Club, was fired after an internal investigation revealed poor business practices and dubious policies, including the fact that the company had sold $22m in loans to an investor, none of which met the specific criteria he had set.

Crowdfunding

White's warning also comes as the SEC put in place new federal crowdfunding rules which will make it easier for small businesses to raise capital. On Monday – the first day that the rules came into effect – the SEC received 17 applications for "Form C offerings" and the next day another 10.

Previously, small companies were not able to offer investors a share in their profits, leading to them offering products or more intangible things like meet-ups or mementos. In the eyes of the law they were simply "contributing."

The new rules allow for securities-based crowdfunding, giving companies a number of new options to raise money. But they will require companies to go through SEC-registered intermediaries and will come with limits – $1m per year and $10,000 per investor.

The rules have been eagerly anticipated by startups and small companies for several years. The irony, of course, is that the driver was in many cases the booming tech sector, and that market has slowed down dramatically in the new year with many expecting an end to the boom and maybe even a bust.

It's not known whether the new crowdfunding rules will help revive the many startups across the country – but particularly in and around Silicon Valley – who are struggling to find funding through VC routes, or whether the rules will just sit on the books awaiting the next tech boom. ®