New York Department of Financial Services To Begin Cybersecurity Examinations of Financial Institutions

by Ballard Spahr LLP

On May 6, New York Governor Andrew Cuomo announced that the New York Department of Financial Services (DFS) will soon begin examining financial institutions for their cybersecurity preparedness. Governor Cuomo stated that, “Targeted cybersecurity assessments for banks will better safeguard financial institutions from attacks and secure personal bank records from being breached.” DFS has yet to release details about the timing and content of the assessments, but all financial institutions should consider the extent to which their own cybersecurity preparedness is sufficiently tailored to respond to the risks presented by the increasing frequency and sophistication of cyberattacks.

The announcement was accompanied by the release of a report capturing the results of a DFS survey about the challenges posed by cybersecurity threats at the 154 banks that DFS regulates. Financial institutions should carefully consider the findings of the report as a benchmark against their own cybersecurity programs.

The report identified “key pillars” for any information security framework:

(1) A written information security policy
(2) Security awareness education and employee training
(3) Risk management of cyber-risk, inclusive of identification of key risks and trends
(4) Information security audits
(5) Incident monitoring and reporting

Additional key components of an information security framework identified by the report include compliance audits of third parties that handle personal data of customers and employees, membership in an information-sharing organization, a designated communications officer responsible for responding to inquiries in the event of a cybersecurity breach, and a communications plan for addressing stakeholders affected in the event of a cybersecurity breach.

The report also detailed the use of some security technologies currently in place at New York banks, including anti-virus software, spyware and malware detection, firewalls, server-based access control lists, intrusion detection tools, intrusion prevention systems, vulnerability scanning tools, encryption for data in transit, encrypted files, smart cards, one-time password tokes, two-factor authentication processes, public key infrastructure systems, the use of biometrics, and penetration testing.

Several observations are made in the report about cybersecurity programs that may signal areas of focus for future cybersecurity assessments by DFS. 

  • Budget: The report shows that most institutions (77%) expect an increase within the next year to their budgets for information security and cybersecurity management. Regardless of the size of the budget, financial institutions should be prepared to demonstrate to DFS that an appropriate amount has been allocated to cybersecurity.
  • Governance: The report observes that certain divisions and employees that could strengthen cybersecurity governance are notably absent from most financial institutions’ current structure: general counsels, public information/communications, and corporate insurance.
  • Reporting: The report concludes that there is widespread lack of information security reporting being conducted. The report calls for periodic security updates to be provided to all levels of managements, including the Board of Directors.
  • Breaches: The report found that most institutions, irrespective of size, experienced intrusions or attempted intrusions over the past three years. Based on the findings in the report, DFS may be considering looking more closely at monetary losses resulting from cyber breaches and whether financial institutions are adequately and timely informing law enforcement and regulators about a breach, as well as appropriately notifying consumers and/or investors or only doing so when they are directly affected. Moreover, they may be looking at what proactive steps financial institutions are taking in response to a breach to ensure that they ascertain what caused the breach and prevent it from occurring again. The steps they may be looking for are internal investigations, and appropriately implementing the conclusions of any such investigation.
  • Information Sharing: The report recommends that all financial institutions become members of Financial Services Information Sharing and Analysis Center, which can provide timely notifications and authoritative information about protecting critical systems and assets from the latest cybersecurity threats.
  • Vendor Oversight: The report states that, “To the extent that institutions do not have adequate insight into the sufficiency of the processes and controls of their third-party service providers, this may represent an area in need of heightened due diligence and monitoring. Cyber security and data protection requirements should be incorporated into institutions’ third-party contracts from the outset.”

DFS Superintendent Benjamin Lawsky commented that, “Hackers spend day and night trying to think up new ways to steal consumers’ personal information and disrupt our nation’s financial markets, and it’s more important than ever that we rise to meet that challenge.” Recognizing that some companies may have limited resources, the report notes that, “the amount of money spent on a cyber program is by no means the best reflection of its strength.” The report emphasizes instead that companies should be designing cyber programs that can be updated regularly to identify and respond to risks. Whether a large depository institution or a smaller financial institution, every company should devote sufficient time and resources to develop its cybersecurity program.

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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