United States: Cyber$ecurity: Recent Developments In The Protection Of Financial Data

As cybersecurity remains in the headlines moving into 2017, we consider recent developments in public policy concerning cybersecurity in the financial services industry.

Given the importance of financial sector infrastructure, sensitivity of financial information and the increasing use of technology in financial services, it is vital for the financial services industry to prioritize cybersecurity and privacy. (And the use of technology in financial services should not be thought of as only online banking and back-end computer systems, but also as innovations in financial services such as mobile payment applications, robo-advisers, peer-to-peer lending, distributed ledger technology, etc., collectively referred to as "fintech.")

Recent actions by regulatory authorities reflect the current focus on improving financial services cybersecurity and illustrate different forms such actions may take: new or revised regulations (by the New York DFS; FRB, OCC and FDIC; and CFTC), raising awareness (as in the FinCEN advisory) and enforcement (most recently by FINRA).

New York DFS Revises Proposed Cybersecurity Requirements on Financial Services Companies

The New York State Department of Financial Services (DFS) initially published its proposed cybersecurity regulations on September 28, 2016.1 The regulations were introduced as "first-in-the-nation" rules that would require banks, insurers and other financial services institutions to establish and maintain cybersecurity programs to protect consumers—and the financial system itself—from cyber attacks "to the fullest extent possible." The proposed regulations were subject to a 45-day notice and comment period.

The proposed regulations were criticized by financial industry groups. In a November 14, 2016 letter to DFS,2 a collection of such groups raised several issues, including: both duplication of and inconsistencies with existing laws and frameworks; lack of flexibility; and overbroad definitions of material terms. In the same letter, the financial industry groups suggested numerous changes to the proposed regulations.

On December 28, 2016, DFS published updated proposed regulations, in response to some of the comments it received.3 In the updated regulations, DFS would permit cybersecurity measures to be implemented based on risk assessments, and it substantially revised the sections on exemptions (entities with fewer than ten employees are now exempted), chief information security officers, third party service providers, encryption, cybersecurity event notifications and penetration testing. DFS also delayed the effective date of the proposed regulations, from January 1, 2017 to March 1, 2017, and provided additional time for covered entities to comply with specified provisions.

The updated proposed regulations are subject to an additional 30-day comment period, ending on January 27, 2017. Following the changes, the updated proposed regulations have received criticism as being too weak.4

Federal Financial Regulatory Agencies Propose Enhanced Cyber Risk Management Standards

On October 26, 2016, the Board of Governors of the Federal Reserve System (FRB), the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) (together, the Agencies) jointly published an advance notice of proposed rulemaking (ANPR) of Enhanced Cyber Risk Management Standards5. The Agencies' stated goal in considering these enhanced standards is to strengthen the operational resilience of large and interconnected financial entities and by doing so reduce the likely impact of a cyber event on the financial system as a whole.

In the ANPR, the Agencies take a standards-based, compartmentalized approach to establishing a cybersecurity framework, with five categories of standards, namely: (i) cyber risk governance, developing, maintaining and implementing a formal cyber risk management strategy, integrated into the overall strategic and governance structures of a covered entity; (ii) cyber risk management, integrating cyber risk management into the responsibilities of at least three independent functions within a covered entity;  (iii) internal dependency management, identifying and managing cyber risks associated with a covered entity's business assets; (iv) external dependency management, managing cyber risks associated with a covered entity's interconnections to external parties; and (v) incident response, cyber resilience and situational awareness, planning to respond to, contain and recover from cyber incidents.

Further compartmentalizing the approach, the Agencies are considering a tiered implementation, where the additional, higher standards referred to as "sector-critical standards" would apply to systems that are critical to proper functioning of the financial sector. Such "sector-critical systems" would be determined based on their interconnectedness and the importance of their role in the financial sector as a whole.

The Agencies also proposed a limited application of the enhanced standards, where each Agency would apply the standards to entities within its jurisdiction with total consolidated assets of $50 billion or more, due to the potential systemic effects of a cyber attack on such an entity. The consolidated assets are determined on an enterprise-wide basis, and the enhanced standards would also apply on an enterprise-wide basis, to all subsidiaries of a covered entity, on the understanding that each subsidiary is a point of risk to the entity as a whole. The ANPR also includes provisions to apply the enhanced standards to third-party service providers.

The comment period for the ANPR has been extended to February 17, 2017.6

FinCEN Issues Advisory on Cyber Crime and Bank Secrecy Act Obligations, Seeking Technical Details in Reports of Suspicious Activity

On October 25, 2016, the Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) issued an Advisory to Financial Institutions on Cyber Events and Cyber-Enabled Crime (the Advisory), to advise financial institutions on how their obligations under the Bank Secrecy Act (BSA) relate to cyber events and cyber-enabled crime.[7] Under the BSA,8 financial institutions are obligated to assist the US government in the detection and prevention of money laundering, including by submitting Suspicious Activity Reports (SARs) to report suspicious transactions or series of transactions conducted or attempted that involve $5,000 or more in funds or other assets. FinCEN makes clear that the Advisory does not change current BSA requirements, SAR requirements or reporting obligations to other regulators. Rather, the Advisory discusses proper reporting of cyber events and other means of aggregating information about cyber events. (For these purposes, "cyber event" is defined as an attempt to compromise or gain unauthorized access to electronic systems, services or information.)

As the Advisory makes clear, if a financial institution knows or suspects, or has reason to suspect, that a cyber event was intended to conduct, facilitate or affect a transaction or series of transactions, it should be considered an attempt to conduct a suspicious transaction or series of transactions. Such cyber events are reportable as suspicious activity, but to determine whether it is obligated to report a cyber event, a financial institution should consider all available information, including the nature of the cyber event and its targets, as well as the value of funds or assets involved. As examples of cyber events that trigger mandatory SAR reporting, the Advisory describes a malware intrusion that is suspected to involve at least $5,000 in assets, a hack that exposes sensitive customer information, and a DDoS attack that is used to prevent the detection of an unauthorized wire transfer. In each case, financial institutions should file a SAR detailing the cyber event, even if no actual transactions may have occurred.

In addition, when filing a SAR, financial institutions should include all cyber-related information. Most financial transactions occur over electronic systems, and details such as IP address and timestamps, device identifiers, virtual wallet information, methods or other technical characteristics can be useful in investigations and in connecting related events.

As the Advisory makes clear, there is a great deal of value in sharing cyber-related information, which can be used to track criminals, identify victims and trace funds. Cyber-related information can also be used in aggregate form, as when FinCEN used BSA reporting from more than twenty financial institutions to investigate an internet company facilitating numerous types of crime with digital currency services.

FinCEN encourages information sharing within financial institutions, by collaboration between BSA/anti-money laundering units, cybersecurity units, fraud prevention teams and other units affected by cyber events. Such collaborations can reveal new patterns of suspicious behaviors, identify otherwise unknown bad actors and generally provide a clearer picture of risks and exposure to the financial institution.

FinCEN also encourages information sharing between financial institutions, under the safe harbor provided by Section 314(b) of the USA PATRIOT Act.9 After notifying FinCEN and satisfying certain requirements, financial institutions may, under a safe harbor from liability, share information with each other, including cyber-related information, for the purposes of identifying and reporting money-laundering and terrorist activities. According to FinCEN, sharing information about cyber events across institutions may reveal suspicious or illegal activities that would not be detected by any single financial institution.

CFTC Issues Final Rules on System Safeguards

Citing the "well-documented increase" and expansion of cyber threats and the resulting need to enhance cybersecurity testing, the Commodity Futures Trading Commission (CFTC) adopted amendments to its system safeguard rules, in order to enhance and clarify cybersecurity requirements (the Final Rules), effective September 19, 2016.10 Rather than requiring security measures to protect financial data, these Final Rules require certain cybersecurity testing to be performed at all derivatives clearing organizations, designated contract markets, swap execution facilities and swap data repositories.

The Final Rules set forth several required types of testing, namely: (i) vulnerability testing, to identify discoverable information and other vulnerabilities in systems; (ii) penetration testing, attempts to penetrate automated systems to identify and exploit vulnerabilities, may be launched internally or externally; (iii) controls testing, to determine whether controls are correctly implemented and operational (where "controls" refers to safeguards and security measures to protect automated systems); (iv) security incident response plan testing, to determine the effectiveness of the security incident response plan and identify deficiencies and improvements; and (v) enterprise technology risk assessments, to conduct a written assessment of threats and vulnerabilities and to prioritize risks.

Under the Final Rules, these tests must be performed periodically, subject to minimum testing frequencies for specified types of cybersecurity testing. In addition, reports on testing protocols and results must be communicated to covered entities' senior management and board of directors. Any vulnerabilities or deficiencies discovered through the required testing must be documented, along with analyses of risks posed by such vulnerabilities or deficiencies and the determination of whether to address or accept those risks.

Compliance dates for the Final Rules range from March 18, 2017 to September 19, 2017 (180 days to 1 year from the effective date), varying according to the type of entity.

FINRA Enforcement Action: 12 Firms Fined $14.4 Million for Cybersecurity Deficiencies

As proposed rules and regulations continue to be considered, we can expect agencies' focus on cybersecurity to also result in enforcement actions. One recent enforcement action in the financial industry may be notable for its scope and for the specificity of the rule enforced.

On December 21, 2016, the Financial Industry Regulatory Authority (FINRA) announced that it had fined 12 firms a total of $14.4 million for alleged violations of federal securities laws and rules.11 According to FINRA's findings, each of the firms allegedly failed to store electronic brokerage records or electronic communications in the "write once, read many" (WORM) format as required under the Exchange Act and related federal rules. The WORM format prevents alteration or destruction of electronic records, and as such it ensures that electronic financial records remain accurate and durable over time. Keeping records in the WORM format also better protects those records against hacking efforts. FINRA asserted that, by failing to use the WORM format, these firms left millions or in some cases hundreds of millions of financial records vulnerable to attack or other misconduct.

Echoing the present emphasis on cybersecurity, FINRA Executive Vice President and Chief of Enforcement noted that the agency's actions stem from its "focus on ensuring that firms maintain accurate, complete and adequately protected electronic records," and that "the integrity of these records is critical to the investor protection function."

Footnotes

1 See DFS Press Release, Governor Cuomo Announces Proposal of First-in-the-Nation Cybersecurity Regulation to Protect Consumers and Financial Institutions (Sep. 13, 2016), available at http://www.dfs.ny.gov/about/press/pr1609131.htm.

2 Available at http://www.aba.com/Advocacy/commentletters/Documents/SIFMA-NY-DFS-Proposed-Cyber-Requirements.pdf.

3 See DFS Press Release, DFS Issues Updated Proposed Cybersecurity Regulation Protecting Consumers and Financial Institutions (Dec. 28, 2016), available at http://www.dfs.ny.gov/about/press/pr1612281.htm See also Proposed 23 NYCRR 500, Cybersecurity Requirements for Financial Services Companies, available at http://www.dfs.ny.gov/legal/regulations/proposed/rp500t.pdf.

4 See, e.g., Kevin Dugan, New York lightens cybersecurity steps for banks despite surge in hacking (New York Post, Dec. 28, 2016), available at http://nypost.com/2016/12/28/new-york-lightens-cybersecurity-steps-for-banks-despite-surge-in-hackings/.

5 Available at https://www.federalreserve.gov/newsevents/press/bcreg/bcreg20161019a1.pdf

6 Comments on the ANPR may be viewed at https://www.federalreserve.gov/apps/foia/ViewComments.aspx?doc_id=R-1550&doc_ver=1,

https://www.regulations.gov/docket?D=OCC-2016-0016 and

https://www.fdic.gov/regulations/laws/federal/2016/2016_enhanced_cyber_risk_3064-AE45.html

7 Available at https://www.fincen.gov/sites/default/files/advisory/2016-10-25/Cyber%20Threats%20Advisory%20-%20FINAL%20508_2.pdf. See also FinCEN, Frequently Asked Questions (FAQs) regarding the Reporting of Cyber Events, Cyber-Enabled Crime, and Cyber-Related Information through Suspicious Activity Reports (SARs) (Oct. 25, 2016), available at https://www.fincen.gov/sites/default/files/shared/FAQ_Cyber_Threats_508_FINAL.PDF

8 31 USC § 5311 et seq.

9 See also 31 CFR § 1010.540.

10 See CFTC, Fact Sheet – Final Rules on Systems Safeguards Testing Requirements (Sep. 8, 2016), available at http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/syssafeguard_factsheet090816.pdf The Final Rules may be found at 17 CFR Parts 37, 38, 39 & 49.

11 See FINRA News Release,  FINRA Fines 12 Firms a Total of $14.4 Million for Failing to Protect Records from Alteration (Dec. 21, 2016), available at https://www.finra.org/newsroom/2016/finra-fines-12-firms-total-144-million-failing-protect-records-alteration.

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.

Authors
 
In association with
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
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.

Disclaimer

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.

Registration

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.

Cookies

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.

Links

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.

Mail-A-Friend

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.

Security

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.