United States: Data Security In The Financial Industry: Five Key Developments To Keep An Eye On In 2016

Last Updated: February 1 2016
Article by Jenna N. Felz

According to a 2015 report on threats to the financial services sector, 41% of financial services organizations polled had experienced a data breach or failed a compliance audit in the previous year, and 57% listed preventing a data breach as their top IT priority.  Reflecting the ever-increasing awareness of threats to financial data security, 2015 also saw a number of regulatory enforcement actions and legislative efforts directed at financial institutions.  Below we outline some of the most significant developments of the past year.

  1. SEC Enforcement Action

In September 2015, the SEC reached a settlement with a St. Louis-based investment adviser on charges that it failed to establish required cybersecurity policies and procedures in advance of a breach affecting the personally identifiable information ("PII") of 100,000 individuals.

The SEC has the power to bring enforcement actions against registered financial entities that fail to meet certain cybersecurity standards. Specifically, the SEC may bring enforcement actions for violations of SEC Regulation S-P (17 CFR § 248.30(a)) (commonly referred to as the "Safeguards Rule"). Under the Safeguards Rule, all registered entities must have written policies and procedures designed to:

  • Insure the security and confidentiality of customer records and information;
  • Protect against any anticipated threats to the security of customer information; and
  • Protect against unauthorized access to or use of customer information that could result in substantial harm or inconvenience to any customer.

In this case, the investment adviser stored its clients' sensitive PII on a third party-hosted web server that was attacked by hackers. The SEC found that the investment adviser violated the Safeguards Rule by failing to:

  • adopt written policies and procedures reasonably designed to safeguard customer information;
  • conduct periodic risk assessments;
  • implement a firewall;
  • encrypt PII stored on its server; and
  • maintain a response plan for cybersecurity incidents.

Notably, there was no evidence of any harm to clients as a result of the hack. Despite the lack of harm, the SEC announced its intention to enforce the Safeguards Rule "even when there is no apparent financial harm to clients." It also cautioned financial firms to adopt written policies to protect customers' private information and to "anticipate potential cybersecurity events and have clear procedures in place rather than waiting to react once a breach occurs."

2. New York Department of Financial Services Cybersecurity Regulatory Framework Proposal

In November 2015, the New York Department of Financial Services (NYDFS) issued a letter setting forth an extensive cybersecurity regulatory framework proposal. Following its surveys of the cybersecurity programs of over 150 financial institutions in 2013 and 2014, the NYDFS announced that it is now considering new cybersecurity regulations for the industry. Under the potential new regulations, "covered entities"–financial institutions regulated by NYDFS–would be required to implement and maintain written cybersecurity policies and procedures that address:

  • information security;
  • data governance and classification;
  • access controls and identity management;
  • business continuity and disaster recovery planning and resources;
  • capacity and performance planning;
  • systems operations and availability concerns;
  • systems and network security;
  • systems and application development and quality assurance;
  • physical security and environmental controls;
  • customer data privacy;
  • vendor and third-party service provider management; and
  • incident response, including the delineation of clearly defined roles and decision making authority.

Additionally, covered financial entities would be required to implement policies and procedures to ensure the security of sensitive data held by third party service providers. At a minimum, contracts with third parties with access to sensitive customer information would need to include:

  • the use of multi-factor authentication to limit access to sensitive data and systems;
  • the use of encryption to protect sensitive data in transit and at rest;
  • notice to be provided in the event of a cybersecurity incident;
  • the indemnification of the entity in the event of a cybersecurity incident that results in loss;
  • the ability of the entity or its agents to perform cybersecurity audits of the third party vendor; and
  • representations and warranties by the third party vendor concerning information security.

Covered entities would also need to:

  • use multi-factor authentication for databases containing sensitive customer information, as well as for access to internal systems and data from an external network;
  • appoint a Chief Information Security Officer (CISO) to oversee and implement cybersecurity programs;
  • employ data privacy and security personnel;
  • conduct annual penetration testing and quarterly vulnerability assessments; and
  • immediately notify the NYDFS of any cybersecurity incident with a reasonable likelihood of materially affecting the normal operations of the entity (e.g. health, credit card information, or biometric data).

NYDFS seeks input from a variety of stakeholders, including other regulatory agencies, prior to proposing final regulations for the financial industry. It is likely that NYDFS will promulgate rules in 2016. Accordingly, covered entities should continue to assess the state of their data privacy and security infrastructures to prepare for the heightened cybersecurity standards required by NYDFS and other state regulators.

3. FINRA Report on Cybersecurity Practices

In February 2015, the Financial Industry Regulatory Authority (FINRA) issued its Report on Cybersecurity Practices.  The Report, which applies to financial advisers and broker dealers, focuses on eight key areas. According to the Report, organizations should:

  1. Create frameworks that involve senior management, incorporate the organization's risk tolerance, and allow for risk assessments that help improve the framework over time.
  2. Identify the sources of potential cybersecurity threats and prioritize the areas in most need of improvement given the organization's risk tolerance.
  3. Take specific actions to protect software and hardware that contain data, especially data subject to cybersecurity threats.
  4. Implement procedures for responding to cybersecurity incidents and define roles for individuals in charge of incident response.
  5. Take a risk-based approach to selecting, engaging, and monitoring third party service providers.
  6. Provide employees and other authorized users of the organization's systems with training appropriate to their specific responsibilities and the types of data they may access.
  7. Create and deploy an effective cyber intelligence program using all resources available to the organization.
  8. Periodically review the adequacy of an organization's cybersecurity coverage to determine if the policy aligns with threats identified by the organization's risk assessment(s) and ability to bear losses. Organizations that do not have cyber insurance should evaluate the cyber insurance market to determine if coverage is available that would enhance the organization's ability to manage the financial impact of a cybersecurity event.

FINRA has urged financial advisers and broker dealers to consider these principles as they develop or enhance their cybersecurity programs.  While the guidance does not create any new legal or regulatory requirements, FINRA will assess the adequacy of firms' cybersecurity programs in light of the risks they face.

4. New European Union Data Privacy and Security Regulations

2015 was a landmark year for data protection and privacy in Europe, with the approval of two new major regulations.


The first is the General Data Protection Regulation (GDPR), which is expected to replace the existing Data Protection Directive 95/46/EC.  After years of development and negotiation, the European Council and Parliament reached an agreement on the text of the GDPR in December 2015.  It is expected to be formally adopted this spring and come into effect two years after its adoption.  The GDPR will impose new obligations on companies in the areas of data subject consent, data anonymization, breach notification, trans-border data transfers, and appointment of data protection officers, to name a few.

Financial institutions should be aware of certain key provisions of the recently approved draft:

  • The law applies to any controller or processor of EU citizen data, regardless of where the controller or processor is located. (Under the 1995 Directive, only controllers were directly liable.)
  • EU Data Protection Authorities have been given new powers, including the ability to fine organizations up to 4% of their global turnover for violations of the new GDPR provisions.
  • In the event of a data breach creating risk to the "rights and freedoms" of EU citizens, notification must be made to the relevant data protection authorities within 72 hours of discovery of the breach.
  • Personal data of EU data subjects should only be collected for "specified, explicit and legitimate purposes and not further processed in a way incompatible with those purposes."
  • Processing of EU citizens' data will only be lawful if the processing is done in accordance with one of the following 6 grounds: (1) with explicit consent of the data subject, (2) to perform a contract, (3) to comply with a legal obligation, (4) to protect the vital interests of the data subject, (5) to perform a task in the public interest, or (6) where "necessary for the purposes of the legitimate interests pursued by the controller or by a third party, except where such interests are overridden by the interests or fundamental rights and freedoms of the data subject, which require protection of personal data, in particular where the data subject is a child."
  • A data subject's consent will be invalid if the controller requires consent for the provision of a service where the processing of personal data is not necessary to the actual performance of the service or contract.
  • Data controllers must provide any information they hold about an EU citizen free of charge and within one month of request.
  • EU citizens have a "right to erasure," which requires data controllers to delete personal data if: (1) the data are no longer necessary in relation to the purposes for which they were collected or processed; (2) the data subject withdraws consent on which the processing was based and there is no other legal ground for processing the data; or (3) the data were unlawfully processed, among other grounds.

The 200 page text of the GDPR includes many other provisions, and financial institutions should closely monitor it as it moves towards formal adoption this spring.

NIS Directive

European authorities also agreed on the text of another major data security initiative, the Network Information Security (NIS) Directive.  After more than two years of negotiation, the European Council reached an informal agreement with the Parliament, and the text was approved by European Member States in December 2015.  The text must now be formally approved by the European Council and Parliament, which is expected this spring.  The Member States will then have 21 months to implement the NIS Directive.

The NIS Directive applies to operators of "essential services" in "critical sectors," which the NIS Directive defines as (a) "essential for the maintenance of critical societal and/or economic activities," (b) dependent on network and information systems and (c) would produce "significant disruptive effects" in the event of a breach on the provision of its service.  Banks and financial market infrastructures fall under the purview of the NIS Directive.

The NIS Directive would require banks and financial market infrastructures–as operators of essential services in critical sectors–to implement "state of the art" network and information security systems appropriate to each organization's risks.  It also would require these entities to report to the appropriate data protection authority "without undue delay" any security incident to its systems that would create a "significant impact" on the continuity of its services.  The significance of an incident would be determined by "(a) the number of users affected by the disruption of the essential service; (b) the duration of the incident; [and] (c) the geographical spread with regard to the area affected by the incident."  Member States are expected to provide more detail regarding definitions of these key terms when they pass country-specific legislation in accordance with the NIS Directive.

  1. EMV Credit Card Payment Standard

EMV refers to a smart-chip technology for payment cards that creates a dynamic authentication code for each transaction.  Its main benefit is the prevention of counterfeit card-present fraud (from a card-swipe in a store).  If someone steals the data contained in the magnetic stripe of a payment card, that person can embed the stolen data in a different magnetic stripe, and create a counterfeit card to fraudulently use in an in-store purchase.  The embedded EMV chip, however, creates a dynamic authorization code for each transaction that cannot be replicated, and therefore helps prevent fraudulent in-store purchases.  The new EMV card system does not apply to e-commerce transactions, as the chip may only be read by a physical terminal.

Being ready to accept EMV transactions involves purchasing EMV-enabled terminals and obtaining certifications of the devices and payment applications through the merchant's acquiring bank for each card network.  While EMV card acceptance is not required, as of October 1, 2015, any merchant that cannot accept EMV cards faces the liability for chargebacks for card-present counterfeit fraud losses.  Additionally, merchants that are EMV-compliant will enjoy a safe harbor from post-breach liability if the merchant meets certain criteria under certain card network programs.

What does this mean for credit card issuers?  Prior to October 1, 2015, issuers were primarily responsible for card-present counterfeit fraud losses.  Now, merchants that are not EMV-compliant will be responsible for all card-present counterfeit fraud losses.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.