The New York Department of Financial Services (“NY DFS”) published an updated proposed Second Amendment to its Cybersecurity Regulation (23 NYCRR Part 500) in the New York State Register on June 28, 2023, updating its previous proposed Second Amendment, which was published November 9, 2022. While the language proposed is largely similar to the previous draft, which we previously summarized, NY DFS incorporated a number of changes as a result of the 60-day comment period.

Below we outline some of the key revisions to the proposed Second Amendment of NY DFS’s Cybersecurity Regulation compared to the previously issued version from November 9, 2022:

• Risk Assessment (§§ 500.01 & 500.09). NY DFS previously proposed (in the November 2022 draft) to revise the definition of “Risk Assessment,” which NY DFS has repeatedly emphasized is a core and gating requirement for compliance with the Cybersecurity Regulation, permitting covered entities to “take into account the specific circumstances of the covered entity, including but not limited to its size, staffing, governance, businesses, services, products, operations, customers, counterparties, service providers, vendors, other relations and their locations, as well as the geographies and locations of its operations and business relations.” By contrast, the newly proposed definition more formally defines the components of and inputs to the risk assessment: “Risk assessment means the process of identifying, estimating and prioritizing cybersecurity risks to organizational operations (including mission, functions, image and reputation), organizational assets, individuals, customers, consumers, other organizations and critical infrastructure resulting from the operation of an information system. Risk assessments incorporate threat and vulnerability analyses, and consider mitigations provided by security controls planned or in place.” The revised definition omits the explicit reference to tailoring and customization currently found in § 500.09.  The removal of this language and codification of the risk assessment’s general parameters suggests that although risk assessments can and should be customized to some extent, NY DFS may expect risk assessments to address a more standard set of components that as a general framework is not open to customization.
  • In addition, NY DFS removed the requirement that Class A companies (which are generally large entities with at least $20M in gross annual revenue in each of the last two fiscal years from business operations in New York, and over 2,000 employees, on average over the last two years, or over or over $1B in gross annual revenue in each of the last two fiscal years from all business operations) use external experts to conduct a risk assessment once every three years.
• Multi-factor Authentication (“MFA”) (§ 500.12). NY DFS continues to stress the importance of MFA in the newly revised draft of the proposed Second Amendment by broadening the requirement (relative to the current MFA requirements and proposed draft from November 2022) and bringing it in alignment with the FTC’s amended Safeguards Rule. In the revised language, MFA is explicitly required to “be utilized for any individual accessing any of the covered entity’s information systems,” (with limited exceptions, outlined below); NY DFS removed from § 500.12(a), (1) the pre-requisite that MFA be implemented based on the covered entity’s risk assessment, and (2) the option of implementing other effective controls, such as risk-based authentication. By doing so, NY DFS appears to strongly recommend MFA implementation across the board, despite retaining the limited exception if the CISO approves in writing a reasonably equivalent or more secure compensating controls (and such controls must be reviewed periodically, and at least annually).
  • For covered entities that fall under the limited exemption set forth in § 500.19(a), which are generally smaller covered entities (based on number of employees and/or annual revenue), MFA must at least be utilized for (1) remote access to the covered entity’s information systems, (2) remote access to third-party applications that are cloud-based, from which nonpublic information is accessible, and (3) all privileged accounts other than service accounts that prohibit interactive logins. As with all other covered entities, the CISO may approve, in writing, reasonably equivalent or more secure compensating controls, but such controls must be reviewed periodically, and at least annually.
• Incident Response Plan (“IRP”) and Business Continuity and Disaster Recovery Plan (“BCDR”) (§ 500.16). NY DFS added an additional requirement that a covered entity’s IRP include requirements to address the root cause analysis of a cybersecurity event, describing how the cybersecurity event occurred, the business impact from the cybersecurity event, and remediation steps to prevent reoccurrence. NY DFS clarified that the IRP and BCDR must be tested at least annually, and must include the ability to restore the covered entities “critical data” and information systems from backup (but NY DFS does not define “critical data”). As noted in our previous summary, the concept of BCDR is new as of the Second Amendment and not currently in effect in the existing regulation.
• Annual Certification of Compliance (§ 500.17(b)). NY DFS maintains its current requirement of an annual certification of compliance by a covered entity, but has adjusted the standard for certification from “in compliance” to a certification that the covered entity “materially complied” with the Cybersecurity Regulation during the prior calendar year.  Although NY DFS does not define material compliance, this revision should provide some flexibility for covered entities to complete the certification.  Going forward, covered entities would be presented with two options: (i) submit a written certification that it “materially complied” with the regulation (§ 500.17(b)(1)(i)(a)); or (ii) a written acknowledgment that it did not “fully comply” with the regulation (§ 500.17(b)(1)(ii)(a)), while also identifying “all sections…that the entity has not materially complied with” (§ 500.17(b)(1)(ii)(b)).  It is unclear how NY DFS intends for covered entities to parse the distinction between material compliance and a lack of full compliance, but the requirement for the covered entity to list each section with which it was not in material compliance suggests that it may expect a section-by-section analysis of material compliance for purposes of completing the certification process.
• Penalties (§ 500.20). Interestingly, NY DFS added that it would take into consideration the extent to which the covered entity’s relevant policies and procedures are consistent with nationally-recognized cybersecurity frameworks, such as NIST, in assessing the appropriate penalty for non-compliance with the Cybersecurity Regulation.  DFS maintains its proposed amendment that a “violation” is: (1) the failure to secure or prevent unauthorized access to an individual’s or entity’s NPI due to non-compliance or (2) the “material failure to comply for any 24-hour period” with any section of the regulation.

The revised proposed Second Amendment are subject to a 45-day comment period, ending August 14, 2023.

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