Bank failures prompt SEC Chief Gary Gensler's pledge to investigate

There was a strong emphasis on identifying and punishing misconduct related to last week's failures of Silicon Valley Bank and Signature Bank, according to the nation's top securities watchdog on Wednesday.

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“It is not uncommon for tremors that start in one corner of the financial system to ripple outward into the broader economy in times past,” as Chairman Gary Gensler of the Securities and Exchange Commission pointed out at an agency meeting held on Wednesday. “Whenever something like this happens, the American public - the innocent bystander to the highways of finance - is inevitably hurt as a result."

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During the 2008 financial crisis, 8 million Americans lost their jobs, while millions more lost their homes. “Thus, I believe the SEC has a responsibility to protect financial stability."

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The SPDR S&P Regional Banking Sector ETF KRE, -1.08% has come under significant pressure since March 8 as a result of the failures of SVB SIVB and Signature SBNY, -22.87%. This is apparent from a more than 20% decline in the SPDR S&P Regional Banking Sector ETF KRE, -1.08% since that date.

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During the opening remarks of the meeting on Wednesday, Gensler spoke of the new set of rules that would govern how broker-dealers and investment advisers would handle customer data in the event of a cyber security breach. It is Gensler's belief that these new rules will help strengthen the financial system's resilience in the event of a cybersecurity breach.

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As part of one proposal, financial companies would be required to adopt written policies and procedures laying out the steps they would take in the event that their customer data was compromised, as well as how and when they would notify their customers.

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The proposal would amend Regulation S-P, which was adopted in 2000, and would serve as a minimum federal standard for the notification of data breaches, which is already a state requirement, as many states already require that such disclosures be made.

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“Despite the fact that under the current rule, covered firms have to notify their customers about how they use their financial information, these firms are not required to notify their customers about security breaches,” Gensler said in a statement. “It seems to me that the gap needs to be closed.”

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Following the rule's publication in the Federal Register, the public has 60 days to comment on the proposed rule. The SEC commissioners voted Wednesday in favor of the proposal.

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There are also new rules proposed by the commission that require broker-dealers, clearing agencies, exchanges, and other market participants to develop, maintain, and enforce policies and procedures that address cybersecurity risks.

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“The idea of knowing that these entities have in place protections fit for a digital age would be beneficial to investors, issuers, and market participants alike,” according to Gensler. “If this proposal is adopted, it would have a tremendous impact on promoting the accomplishment of all parts of our mission, particularly that of investor protection and orderly markets.”