United States: NYDFS Significantly Revises Cybersecurity Proposal, Burdens Remain

On December 28, 2016, the New York State Department of Financial Services (NYDFS) released a significantly revised version of its controversial, proposed cybersecurity rules, initially proposed in September of last year.  As we noted in our Client Alert at that time, the rules as originally proposed would have created one of the most comprehensive and detailed cybersecurity standards in the country, and would have created significant compliance and implementation challenges.  As a result, the original proposal generated significant industry outcry, calling into question, among other things, the original proposal's workability.  Like the original proposal, the revised proposal would apply to any person "operating under or required to operate under a license, registration, charter, certificate, permit, accreditation or similar authorization under" New York banking, insurance and financial services law, including, for example, commercial banks, foreign banks with New York State-licensed offices, mortgage brokers and servicers, small-loan lenders, and money transmitters doing business in New York.  The comment period regarding the revised proposal closes on January 27, 2017.

The revised proposal includes extensive changes that would narrow the proposal and make it less prescriptive in some respects.  While the proposal has been significantly reworked, covered financial institutions still will face challenges in putting in place the type of comprehensive cybersecurity program and security controls that would be required if the proposal is finalized as revised.  This will be particularly true for those covered financial institutions that historically have not been subject to scrutiny on their cyber practices or that do not have mature cybersecurity processes and controls in place.

Consistent with the original proposal, the revised proposal would require covered financial institutions to put in place controls designed to protect "nonpublic information" and the information systems that handle that "nonpublic information."  Nonetheless, the NYDFS has made changes that would narrow the scope of the requirements contemplated under the revised proposal:

  • The definition of "nonpublic information" relating to customers has been narrowed to include only sensitive personal information, such as name in combination with Social Security number or driver's license number and biometric data.  The original proposal would have covered any information identifiable with a customer (e.g., name and email address) and, as a result, would have imposed significant burdens to ensure protection for all types of customer information, regardless of risk.
  • The definition of "nonpublic information," however, would continue to include certain "business-related information" that, if tampered with, or accessed, used or disclosed in an unauthorized manner, would "cause a material adverse impact" to the covered financial institution.  This provision is significant.  To date, cybersecurity requirements throughout the world have been focused on information relating to individuals.  The process of identifying what business information could have a "material adverse impact" on a financial institution would undoubtedly require a unique analysis in light of its potential subjectivity.
  • Under the revised proposal, a covered financial institution would be required to tailor its cybersecurity program and certain controls based on a "risk assessment" that it would be required to conduct "periodically."  While a covered financial institution's written cybersecurity policy still would be required to address numerous security concepts and controls, the risk assessment would "inform the design of the cybersecurity program" generally.  In this respect, the NYDFS's revised proposal is more akin to the federal Gramm-Leach-Bliley Act (GLBA) approach to security that requires a financial institution to adopt a written information security program, conduct risk assessments and include specific controls in its program that are designed to safeguard against identified risks.

In addition, as we noted in our previous Client Alert, the prescriptive nature of the original proposal would have been unworkable in some respects, such as requiring a covered financial institution to encrypt all types of customer information at rest and in transit.  With this revised proposal, many of the controls that would be required would be more flexible and risk-based, although questions remain about the specific expectations of the NYDFS.

  • Instead of requiring that all "nonpublic information" be encrypted in transit and at rest (which would have been particularly challenging due to the breadth of the original definition of "nonpublic information"), under the revised proposal, a covered financial institution would be required, based on its risk assessment, to "implement controls, including encryption," to protect "nonpublic information" in transit and at rest.  The revised regulations, however, are not entirely clear as to whether encryption is a mandate and whether compensating controls can only be adopted as an alternative when encryption is "infeasible."  Nonetheless, by narrowing the definition of "nonpublic information" to focus on sensitive customer information, the encryption requirement would be more in line with other encryption mandates, such as those under Massachusetts and Nevada law.  It should be noted again, however, that the regulations would apply not only to the protection of information about individuals, but also to sensitive business information.  As a result, if adopted as proposed, the regulations would create the country's first encryption requirement for sensitive business information that does not relate to individuals.
  • The requirements relating to multifactor authentication have been narrowed and simplified.  Based on its risk assessment, a covered financial institution would be required to "use effective controls, which may include" multifactor and risk-based authentication, to protect against unauthorized access to "nonpublic information" or information systems.  Unlike the original proposal, the only express mandate for multifactor authentication would be for access to "internal networks from an external network" (unless the entity's CISO has approved the use of equivalent or more secure controls).  It is not clear, however, if the NYDFS contemplates this requirement applying to employee remote access, customer access to online accounts or both.
  • The logging and audit trail requirements would be far less extensive than originally proposed, although the exact contours of the new requirements remain unclear.  For example, a covered financial institution would be required to "securely maintain systems that, to the extent applicable and based on [the institution's] risk assessment" are "designed to reconstruct material financial transactions sufficient to support normal operations and obligations" of the institution.  Covered financial institutions also would be required to "include audit trails" designed to detect and respond to material cybersecurity events.
  • The requirements relating to service providers have been modified in two noteworthy ways.  First, the NYDFS has added a definition of "Third-Party Service Provider":  an entity that is not an affiliate of the entity and that provides services to the covered entity and that "maintains, processes or otherwise is permitted to access Nonpublic Information through its provision of services" to the covered financial institution (the latter aspect of the definition being based on the GLBA definition).  Second, the revised proposal would provide that a covered financial institution's policies and procedures for its service provider relationships should be risk-based.  The parameters of these policies and procedures are largely unchanged, as they still contemplate required minimum cybersecurity practices for service providers and due diligence processes to evaluate such practices.  Nonetheless, covered financial institutions would have greater flexibility to take a risk-based approach with respect to their service provider relationships.  It should also be noted that the new proposal does not include several of the contractual provisions from the original proposal that may have been challenging to implement.  Specifically, under the new proposal, a covered financial institution would not be required to have service provider contract provisions requiring credit monitoring for service provider breaches or representations and warranties that the service provider's services are free of, for example, viruses and trap doors.
  • The breach reporting requirements have been modified to eliminate the requirement to report any "cybersecurity event" to the NYDFS within 72 hours.  The revised regulations, however, would require covered financial institutions to provide notice within 72 hours of any event where a covered financial institution is required to provide notice to any other government entity or where the event would "have a reasonable likelihood of materially harming any material part of the" financial institution's "normal operation(s)."  While narrower in scope, a 72-hour time period for reporting would be among the shortest time periods contemplated in law.

The NYDFS also added several new provisions, including a provision that would require that "[a]ll documentation and information relevant to the Covered Entity's cybersecurity program . . . be made available to [the NYDFS] upon request."  This provision apparently is intended to reinforce examination authority on these issues.  It should be noted that the NYDFS also has proposed adding a confidentiality provision affirming that information provided under these regulations would be exempt from disclosure consistent with the exemptions under existing applicable laws, such as New York banking law.

Finally, the NYDFS retained the board of directors annual certification of compliance provision in its original form.  Nonetheless, the revised proposal would provide additional time to comply with many of the proposal's requirements.  If adopted as proposed, the revised regulations would become effective on March 1, 2017, with the first annual certification of compliance due on February 15, 2018.  And, while it begins 180 days from the effective date, the phased compliance period extends as follows:  (1) one year from the effective date for certain requirements, including penetration testing, the risk assessment, multifactor authentication and general cybersecurity awareness training; (2) 18 months from the effective date for certain requirements, including the audit trail, application security, data retention practices and monitoring authorized user activity to detect unauthorized access; and (3) two years for the requirements relating to third-party service providers.  The extended compliance dates are a positive change.  One potential issue, however, is how covered entities will reconcile the one-year compliance date for the risk assessment with the 180-day compliance date for obligations, such as the written cybersecurity program, that must be informed by the risk assessment.

The revised regulations are subject to a 30-day comment period that began on December 28, the date the proposal was published in the New York State Register.  At the end of this comment period, the NYDFS is expected to publish final regulations.  As the NYDFS noted in the press release accompanying the revised regulations, it will "focus its final review on any new comments that were not previously raised in the original comment process."  Nonetheless, in light of the likely implementation of these complex rules, financial institutions that would be covered should consider both their compliance position and whether to submit comments.

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.

© Morrison & Foerster LLP. All rights reserved

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.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions