With each official Sony update there comes greater security, thus stopping users 'pimping' there PSPs and preventing the use of illegal downloads.
So before you can install custom firmware (CF) you'll need to downgrade, that is unless you don't already have firmware version 1.0 or 1.5.
There is, no matter how small, a chance of bricking your PSP rendering it useless untill unbricked.
If you don't want this risk I do believe that the newer Sony firmware updates give you the option to customize your XMB (Cross Media Bar) which is the menu (Settings, Photo, Music etc. etc.) you come to on startup or after pressing the 'Home' button.
As far as security goes, I wouldn't know how to password protect your PSP on its turning on. When the PSP is just turned off rather than shutdown its pretty much just paused, and I dont think you'd be able to get it to ask for a password say, if you were in the middle of a game when you turned on.
Though I'm not sure.
Also, should someone steal your PSP how would you get it back? So is it worth adding passwords that can be erased on format when you can't actually get your system back?
Hope this helps,
Oz,