Cybersecurity Update: 2018 — A Year in Review

Kramer Levin Naftalis & Frankel LLP

This Update highlights key legal and policy developments in cybersecurity and privacy law that may impact important trends for 2019 and beyond. A central takeaway from 2018 is that regulators in the U.S. and abroad are increasing their scrutiny of companies’ data privacy practices and cybersecurity controls and procedures. This enhanced regulatory focus emerged in a year marked by high-profile data breaches and revealing disclosures about how large tech companies acquire, share and sell user data.

New Data Privacy and Cybersecurity Regulations

On May 25, 2018, the EU’s General Data Protection Regulation (GDPR) came into effect, ushering in a host of new requirements for many entities that process the personal data of EU residents. The GDPR expands the power of EU member states’ data protection authorities, allowing them to hand out potentially severe penalties for violations, including up to 4 percent of annual global revenue. Entities subject to the GDPR must ensure that they understand and document exactly what personal data they hold, as well as what data they process and transfer. These organizations will also have to tighten security, improve access control and tracking, and review confidentiality strategy. In addition, organizations must be prepared to respond to inquiries from EU residents ― who now have various new privacy rights under the GDPR ― including requests to provide access to and delete personal data. GDPR enforcement has already begun, as authorities in several member states have levied fines and issued warnings to organizations for alleged GDPR violations. Notably, France’s data protection regulator, CNIL, this month fined Google €50 million under the GDPR for allegedly failing to provide users with transparent information about the company’s data use policies.

Next year, a GDPR-like privacy law will go into effect in California. In June, the state passed into law the California Consumer Privacy Act of 2018 (CCPA). The legislation is designed to protect consumers by giving them new rights over personal information collected by businesses. The rights also create new responsibilities for businesses covered by the CCPA, including the right for consumers to learn what information is being collected about them. Consumers will also have the right to request that a business delete any personal information it may have collected from them and to disclose what personal information it is selling. The CCPA will come into force on Jan. 1, 2020, but businesses are encouraged to begin preparing now.

For more information about the GDPR and the CCPA, including a comparison of the two, please see two of our previous Alerts.[1]

On the cybersecurity front, the New York Department of Financial Services (NYDFS) continued to roll out regulations imposing significant requirements on covered entities, which include financial services companies and insurers doing business in New York. Beginning in August 2017, covered entities (with some exemptions for smaller companies) were obliged to meet the first wave of requirements, including implementing a cybersecurity program to protect information systems, adopting a written cybersecurity policy, designating a chief information security officer (CISO), and drafting an incident response plan. In February 2018, covered entities were required to submit their first compliance certification, and, by March, implement risk assessments and other cybersecurity program testing or monitoring, annual CISO reporting, multifactor authentication for external access to internal networks, and cybersecurity awareness training. By September, covered entities should have drafted written procedures for securing software development practices and policies to prevent users from tampering with nonpublic information. The entities also had to meet requirements for maintaining audit trails as well as encrypting and securely disposing of nonpublic information. By March 1, 2019, covered entities must develop cybersecurity policies concerning data held by third-party service providers. Going forward, covered entities will need to annually certify their compliance with the NYDFS regulation.

SEC Guidance, Enforcement Actions and Warnings

In February, the SEC released interpretive guidance regarding public companies’ disclosure of cybersecurity breaches. The guidance — which expanded upon the SEC’s prior guidance from October 2011 — stated that due to the “frequency, magnitude and cost of cybersecurity incidents,” companies should inform investors about cybersecurity risks even prior to experiencing a cyberattack. The guidance also stated that firms should implement policies and procedures for publicly disclosing breaches in a timely manner and for reporting cybersecurity information to senior management. Companies are encouraged to review their codes of ethics and insider trading policies to protect against corporate insiders profiting off of cybersecurity information. In particular, the SEC emphasized that companies facing cybersecurity incidents should be mindful of their Regulation Fair Disclosure obligations prohibiting selective disclosure.

The SEC’s interpretive guidance signaled several significant enforcement actions relating to data breaches. In 2018, the SEC charged two now-former employees of Equifax with trading on material nonpublic information relating to a 2017 data breach that exposed the personal information of 143 million Americans. In April, the SEC brought its first cyber-disclosure enforcement action against a public company when it imposed a $35 million penalty against Altaba, the successor to Yahoo. In September, Voya Financial Advisors, which suffered a breach in 2016, entered into an agreement with the SEC to pay a $1 million penalty and to re-evaluate its policies and procedures. The SEC had charged Voya with violating rules requiring investment firms to maintain a policy to safeguard confidential customer information from identify theft and to heed “red flag” warning signs of identity theft. This marked the first time that the SEC had charged a company with violating the so-called Identity Theft Red Flags Rule. Just this month, the SEC and the DOJ brought charges against Ukrainian hackers who allegedly breached the SEC’s EDGAR system in 2016, as well as several traders in California, Ukraine and Russia who allegedly profited from trading on nonpublic earnings results extracted in the hack.

In October, the SEC published a rare 21(a) report, pursuant to the Securities Exchange Act of 1934 (Exchange Act), warning that public companies victimized by cyber fraud could face enforcement action for failing to maintain sufficient internal accounting controls. The SEC cited Sections 13(b)(2)(B)(i) and (iii) of the Exchange Act that require most issuers to maintain internal accounting controls sufficient to provide reasonable assurances that transactions are executed with, and that access to company assets is permitted only with, “management’s general and specific authorization.” The 21(a) report cited FBI data estimating that relatively simple scams known as business email compromises caused more than $5 billion in losses since 2013. These scams involved criminals sending spoof emails from purported issuer executives to finance personnel, as well as criminals sending payment request emails from hacked vendor emails to issuer finance personnel. The report outlined SEC investigations of nine issuers across several business sectors that fell victim to these scams. According to the SEC, personnel at each of these issuers failed to follow internal protocols. These failures included disregarding or misinterpreting established procedures for authorizing payment requests, approving outgoing wires, and verifying vendor data changes. While the SEC opted not to pursue enforcement actions against these companies, the report served as a warning to all issuers that they should regularly reassess all aspects of their internal controls and training for preventing and addressing cyber scams.

For more information about the SEC’s guidance and 21(a) report, please see two of our previous Alerts.[2]

High-Profile Criminal Cases

The long-running dispute between Microsoft and the U.S. government over a 2014 warrant for emails stored on a foreign server came to an end in April. After hearing arguments on whether the Stored Communications Act (SCA) has extraterritorial reach, the U.S. Supreme Court dismissed the case as moot following the passage of the Clarifying Lawful Overseas Use of Data Act (CLOUD Act). A panel of the U.S. Court of Appeals for the Second Circuit had held in 2016 that the SCA lacked extraterritorial reach, thus preventing the U.S. government from seizing a Microsoft customer’s emails stored on a server in Ireland pursuant to an SCA warrant. The CLOUD Act updated U.S. data privacy and government surveillance laws to better reflect current technology and practices, specifically with respect to cloud computing. The law requires, with some exceptions, that when electronic communications and remote computing service providers operating in the U.S. are served with court orders, warrants or subpoenas under the SCA, those providers must relinquish data in their possession or control regardless of where the data is stored. The CLOUD Act also creates a framework to allow the U.S. government to enter into so-called executive agreements with other countries in order to facilitate requests for data. The law sets forth a process for service providers to challenge requests from U.S. enforcement agencies made pursuant to executive agreements. To date, no executive agreements have been reached.

For more information about the Microsoft case and the CLOUD Act, please see four of our previous Alerts.[3]

In June, the Supreme Court ruled in Carpenter v. United States that a criminal defendant’s Fourth Amendment rights were violated when the government obtained a court order requiring his wireless carriers to produce cell site location information for his mobile phone without probable cause. In his opinion, Chief Justice Roberts warned that the ruling was a narrow one that left the existing precedent undisturbed and would not require a warrant for records held by a third party in most cases. However, the decision is a departure from traditional third-party doctrine and could lead to new opportunities for criminal defendants to challenge a third party’s disclosure of sensitive information to the government.

Suspected State-Sponsored Hacking

Continuing a trend from recent years, actors suspected to be working at the behest of foreign governments allegedly carried out several major cybersecurity thefts in 2018.

In March, the U.S. government charged nine Iranian individuals with stealing a trove of intellectual property and other data from over 300 American and foreign universities, at least five U.S. federal and state agencies, as well as various private companies and nongovernmental organizations. The hackers allegedly worked for an Iranian company with ties to Iran’s Islamic Revolutionary Guard Corps and other government entities. Much of the stolen data was acquired through customized spear-phishing emails sent to over 100,000 university professors. The stolen data is valued at an estimated $3.4 billion.

Also in March, the Trump administration accused hackers believed to be linked to Russian intelligence agencies of orchestrating a series of cyberattacks targeting American and European nuclear power plants, water and electric systems, as well as aviation and critical manufacturing facilities. Since at least 2011, Russian hackers are believed to have breached numerous power, energy, oil, gas pipeline and industrial targets. By spring 2017, Russian hackers are believed to have had conducted intensive surveillance of and gained the capacity to compromise certain infrastructure facilities. Additionally, this past spring, the U.S., U.K. and Australian governments accused Russian state-sponsored hackers of targeting computer networks around the world ― including via equipment such as routers, switches and firewalls ― in an effort to conduct espionage and steal intellectual property.

In November, Marriott disclosed that the personal data of as many as 500 million guests of Starwood-branded properties had been exposed as a result of an intrusion that apparently began in 2014. The exposed data included passport and credit card numbers as well as information on where and with whom guests had traveled. The U.S. government has reportedly tied the breach to hackers working for China’s Ministry of State Security. The Chinese government is also widely believed to have orchestrated the 2014 breaches of the U.S. Office of Personnel Management and several health care institutions, including Anthem. These cyberattacks are thought to be part of the Chinese government’s ongoing efforts to assemble a massive database of Americans’ data for counterintelligence purposes.

Facebook and Google Face Scrutiny Over Data Privacy Practices

The data privacy practices of two of the world’s largest tech companies, Facebook and Google, were in the spotlight throughout 2018. Going forward, companies’ use of customer data will face continued scrutiny from U.S. and foreign regulators, particularly in light of the GDPR and the forthcoming CCPA.

Data privacy issues at Facebook drew near-constant attention in 2018. In March, The New York Times reported that the 2016 Trump presidential campaign had acquired access to data from at least 87 million Facebook users via Cambridge Analytica, a political data firm. In 2014, a psychology professor provided to Cambridge Analytica data gleaned from a personality survey and app offered to Facebook users. Cambridge Analytica used this data, which included data from friends of the survey participants who had never taken the survey, in connection with the designing of targeted advertising and other campaign activities. In December, Facebook’s data practices again came under scrutiny when a New York Times investigation reported that Facebook shared various types of data with large tech companies, including Netflix, Spotify, Amazon and Bing, without acquiring explicit user consent. According to the report, some of the companies had been permitted to access users’ private messages.

In October, Google disclosed that a security bug had exposed to outside developers the account information of roughly 500,000 users of the company’s Google+ service. In December, Google announced that a separate Google+ vulnerability impacted over 50 million users’ data. In light of these data security issues, Google announced plans to shutter the service in April 2019.


 

[1] The California Consumer Privacy Act of 2018: Summary and Comparison to GDPR

https://www.kramerlevin.com/en/perspectives-search/the-california-consumer-privacy-act-of-2018-summary-and-comparison-to-gdpr.html

The Final Race to GDPR: Are You on the Right Track?

https://www.kramerlevin.com/en/perspectives-search/the-final-race-to-gdpr-are-you-on-the-right-track.html

[2] SEC Report Warns of Potential Internal Controls Enforcement Actions Against Cyber Fraud Victims

https://www.kramerlevin.com/en/perspectives-search/sec-report-warns-of-potential-internal-controls-enforcement-actions-against-cyber-fraud-victims.html

SEC Report Highlights Financial Firms’ Cybersecurity Improvements and Shortcomings

https://www.kramerlevin.com/en/perspectives-search/sec-report-highlights-financial-firms-cybersecurity-improvements-and-shortcomings.html

[3] Supreme Court to Rule on Application of Stored Communications Act to Data Stored Overseas

https://www.kramerlevin.com/en/perspectives-search/supreme-court-to-rule-on-application-of-stored-communications-act-to-data-stored-overseas.html

Second Circuit Denies En Banc Rehearing of Stored Communications Act Decision in Microsoft Case

https://www.kramerlevin.com/en/perspectives-search/second-circuit-denies-en-banc-rehearing-of-stored-communications-act-decision-in-microsoft-case1.html

Second Circuit Rules That the U.S. Government Cannot Use a Search Warrant to Access Overseas Data

https://www.kramerlevin.com/en/perspectives-search/second-circuit-rules-that-the-us-government-cannot-use-a-search-warrant-to-access-overseas-data.html

Privacy, Data Protection and Cybersecurity Alert: Microsoft Appeals Decision Requiring It to Provide E-mail Content Stored Overseas in Response to Search Warrant

https://www.kramerlevin.com/en/perspectives-search/privacy-data-protection-and-cybersecurity-alert-microsoft-appeals-decision-requiring-it-to-provide-e-mail-content-stored-overseas-in-response-to-search-warrant.html

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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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