Cybersecurity Requirements Proposed for New York Financial Companies

by Snell & Wilmer
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The New York Department of Financial Services has proposed new cybersecurity regulations “designed to promote the protection of customer information as well as the information technology systems of regulated entities [financial institutions].” These are the first proposed state-enacted financial institution regulations of their kind in the country, and the complete set can be accessed here.  Key highlights include the following:

What businesses and organizations will be covered? The rules would cover any person “operating under or required to operate under a license, registration, charter, certificate, permit, accreditation or similar authorization under the banking law, the insurance law or the financial services law.” This means large and small banks, insurance companies, New York-licensed lenders, and mortgage companies. There is only a limited exemption (entities with fewer than 1000 customers in the last three years, less than $5 million gross annual revenue, plus less than $10 million total assets).

What type of cybersecurity program and plans will be required? The rules would require a mandatory cybersecurity program and that it be in writing. Among the requirements, companies must have a program that identifies internal and external cyber risks; uses defensive infrastructure to protect information system and nonpublic information; detects “cybersecurity events” (defined below); responds and recovers from cybersecurity events; and fulfills regulatory reporting obligations. The rules would require companies to ensure secure development practices for apps that they develop themselves.

Covered entities must designate a Chief Information Security Officer who is responsible for overseeing and implementing the program and reviewing and reporting on it to the company’s governing body. Mandatory and regular cybersecurity education and training will be required for employees. The rules give a call to action to covered entities that have not already done so to “move swiftly and urgently to adopt a cybersecurity program.”

What systems must be protected?  The rules cover information systems containing electronic data. That includes resources for the collection, processing, maintenance, use, sharing, dissemination or disposition of electronic information. The rules also go further to cover environmental systems (such as HVAC systems), which have in recent years been a favorite of hackers. Also included are industrial/process controls systems and telephone systems.

What data must be encrypted? New York’s proposed rules tell covered entities to encrypt all nonpublic information, meaning “all electronic information that is not publicly available.” The regulation gives a broad definition of what this would include. Examples include business-related information that would cause a material adverse impact if disclosed or used, or information the regulated entity received about a person in connection with providing a financial product or service. It includes information linkable to a person including social security number, date and place of birth, mother’s maiden name, biometric records, medical, educational, financial, occupational or employment information, password or other authentication factor.

Data would need to be encrypted whether at rest or in transit. Data “at rest” means data stored locally.  Data “in transit” means data sent from one computer to another.  Massachusetts already requires encryption of data in transit and many companies may already have encryption for data in transit. Encryption of data at rest, however, may be a new requirement for some.

There is a phase-in of the encryption requirement. If the rules take effect as planned, financial institutions would have until January 1, 2018 (one year from the effective date) to encrypt all nonpublic data in transit. Financial institutions would have until January 1, 2022 to encrypt all nonpublic data at rest.

What kind of data breach notification will be required? The rules require notification of the superintendent of any “cybersecurity event”, which defined to be broader than a data breach. Such an event is one “that has a reasonable likelihood of materially affecting the normal operation of the Covered Entity or that affects Nonpublic Information.” Such an event can also include “the actual or potential unauthorized tampering with, or access to or use of, Nonpublic Information.” Thus note that even “potential” access to such information triggers notification. Notification must be made within 72 hours and as promptly as possible.

What must a covered entity do to certify compliance? Every year by January 15, a covered entity must submit to the New York Superintendent of Financial Services, a certification that it is in compliance with the rules. A specific form is prescribed in the rule. The Board of Directors or a named senior officer certify that they have reviewed the documents and opinions necessary to do so. The company must maintain its supporting documentation and data for five years. The rules caution, “senior management must take this issue seriously and be responsible for the organization’s cybersecurity program and file an annual certification confirming compliance with these regulations.”

What are the potential implications of these proposed regulations?  As California has done in other aspects of privacy and data security, New York’s rules could evolve into part of the standard for reasonableness in data security in the financial sector. Under the Gramm-Leach-Bliley Act, Congress requires financial institutions to have a data security program that is consistent with what’s reasonable in that industry. If New York’s proposed rules take effect and become the de facto standard, potentially all U.S. financial institutions could be required to adhere to them.

The proposal is open to comments for 45 days, until November 12. The proposed rules are set to go into effect on January 1, 2017.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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