United States: Morgan Lewis Urges NYDFS To Modify Proposed Cybersecurity Rules

Last Updated: November 21 2016
Article by Charles Horn, Mark Krotoski and Sarah V. Riddell

The New York Department of Financial Services has issued proposed "first-in-the-nation" cybersecurity rules that could place a heavy compliance burden on affected financial companies; Morgan Lewis submitted a comment letter urging that several of the proposals be modified.

On September 13, the New York State Department of Financial Services (NYDFS) issued proposed cybersecurity rules that would require banks, insurers, and other NYDFS-regulated financial services companies to adhere to stringent cybersecurity requirements mandating firms to, among other things, test their systems, establish plans to respond to cybersecurity events, and annually certify compliance with the cybersecurity requirements, among other mandates (Proposed Rules). The NYDFS described the Proposed Rules as "a new first-in-the-nation regulation."1

Comments on the proposed rule were due by November 14. Morgan Lewis submitted a comment letter as summarized below. 


The Proposed Rules would apply to all firms subject to NYDFS oversight (Covered Entities), irrespective of whether such Covered Entities already adhere to other cybersecurity regulations imposed at the federal or state level. Although the Proposed Rules provide a limited exemption for "small" Covered Entities, in our view, the exemption does not provide meaningful relief because it is too narrow and imposes many of the same substantive requirements on small Covered Entities that are ostensibly "exempt" as it does on other Covered Entities.

We previously wrote about the Proposed Rules (see our September 2016 LawFlash, " NYDFS: 'First-in-the-Nation' Cybersecurity Proposal") and noted that the Proposed Rules would, among other things, require Covered Entities to do the following:

  • Establish and maintain a cybersecurity program designed to perform specified "core cybersecurity functions" (such as detect and recover from a "Cybersecurity Event," defined as any act or attempt, successful or unsuccessful, to gain unauthorized access to, disrupt or misuse an Information System2 or information stored on such Information System).3
  • Implement and maintain a cybersecurity policy that addresses 14 areas enumerated in the Proposed Rules and that is reviewed by the board of directors and approved by a senior officer at least annually.4
  • Designate a Chief Information Security Officer (CISO) who must develop a bi-annual report that covers areas identified in the Proposed Rules and submit the report to the board of directors.5
  • Perform penetration testing and vulnerability assessments, implement and maintain audit trail systems, limit access privileges, ensure the use of secure development practices for in-house developed applications, conduct annual risk assessments, train cybersecurity personnel, encrypt nonpublic information, and establish a written incident response plan.6
  • Implement written policies and procedures that cover third parties doing business with the Covered Entity that have access to Information Systems and nonpublic information, and establish minimum cybersecurity practices that each third party must satisfy.7
  • Report to the NYDFS within 72 hours of becoming aware of a Cybersecurity Event that has a reasonable likelihood of materially affecting the normal operation of the Covered Entity or that affects nonpublic information.8
  • On an annual basis, submit to the NYDFS a compliance certification and keep all records, schedules, and data supporting this certificate for a period of five years.9


Having assisted clients in all phases of their cybersecurity needs and issues—including on cybersecurity risk assessments and prevention measures, responding to cybersecurity incidents, and developing cybersecurity policies and programs—and because a large number of our clients fall within the scope of the Proposed Rules, we have submitted a comment letter to the NYDFS.

In our comment letter, we urged the NYDFS to reconsider several of its proposals. Our recommendations are summarized below:

  • Introduce a more flexible framework that fosters effective cybersecurity by allowing covered firms to tailor their cybersecurity efforts to specific cyber risks confronting the firm. Current government approaches to cybersecurity recognize the need for a firm to tailor its cybersecurity program to its business practices and level of cyber risk by providing a principles-based approach. The NYDFS should similarly adopt a principles-based approach, which has been demonstrated to be effective, and should harmonize other cybersecurity standards that will better promote effective cybersecurity with lower costs of compliance.  
  • Assure that any reporting requirement be tied to meaningful circumstances connected with the cyber incident and conform to any existing reporting requirements. The NYDFS should clarify various aspects of the reporting requirement, which, as drafted, may discourage firms from reporting cyber incidents to law enforcement and also discourage the reporting of cyber threats. In addition, the reporting trigger is too broad and will unnecessarily mandate the reporting of insignificant incidents, and should instead be based on meaningful cybersecurity incidents.
  • Eliminate the annual compliance certification. The certification requirement exposes a financial institution's board of directors or senior officer to liability without actually enhancing cybersecurity practices. Because compliance with the Proposed Rules would be required without the certification, the certification requirement does not add value and should be eliminated.
  • Allow a financial institution to rely on a substituted compliance program.  Covered Entities are already subject to cybersecurity oversight by federal and other state regulatory agencies. Where a Covered Entity complies with one cybersecurity regime, it should be permitted to comply with the NYDFS regime pursuant to a substituted compliance program that is substantively comparable to NYDFS requirements.
  • Eliminate the requirement that a Covered Entity have a CISO. The Proposed Rules should not mandate a specific officer-level position to oversee cybersecurity. As a matter of corporate or firm governance, a Covered Entity itself is in the best position to determine how to manage cybersecurity risk.
  • Harmonize NYDFS rules and efforts with federal regulatory agencies. The NYDFS should strive to reduce inconsistent rules and streamline its regime with other existing or proposed federal and state regimes.
  • Expand the proposed exemption for small Covered Entities. As proposed, the exemption for small Covered Entities still requires small Covered Entities to comply with the majority of the requirements. The NYDFS should expand the exemption and provide meaningful relief to small Covered Entities.


The Proposed Rules, unless modified, will become effective on January 1, 2017, with a 180-day grace period for compliance. Thus, Covered Entities would be required to have a cybersecurity program in place and be in compliance with other requirements by June 30, 2017 (Compliance Date). To the extent that the NYDFS retains an annual compliance certification requirement, Covered Entities would begin filing the annual compliance certification on January 15, 2018.

Covered Entities should monitor NYDFS announcements for the final rules and ensure that they are ready for the Compliance Date, which means that Covered Entities should start taking steps necessary to comply with the fundamental requirements that the NYDFS likely will adopt in some fashion.


1 See Press Release; Governor Cuomo Announces Proposal of First-in-the-Nation Cybersecurity Regulation to Protect Consumers and Financial Institutions (Sept. 13, 2016); see also New York State Department of Financial Services Proposed 23 NYCRR 500, Cybersecurity Requirements for Financial Services Companies.

2 The Proposed Rules define "Information System" as "a discrete set of electronic information resources organized for the collection, processing, maintenance, use, sharing, dissemination, or disposition of electronic information, as well as any specialized system such as industrial/process controls systems, telephone switching and private branch exchange systems, and environmental control systems." See Proposed Rule 500.01(e).

3 See Proposed Rules 500.01(d); 500.02.

4 Proposed Rule 500.03(a) mandates that cybersecurity policies address (1) information security; (2) data governance and classification; (3) access controls and identity management; (4) business continuity and disaster recovery planning and resources; (5) capacity and performance planning; (6) systems operations and availability concerns; (7) systems and network security; (8) systems and network monitoring; (9) systems and application development and quality assurance; (10) physical security and environmental controls; (11) customer data privacy; (12) vendor and third-party service provider management; (13) risk assessment; and (14) incident response.

5 See Proposed Rule 500.04.

6 See Proposed Rules 500.05-10, 15-16.

7 See Proposed Rule 500.11.

8 See Proposed Rule 500.17(a).

9 See Proposed Rule 500.17(b).

This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.

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