United States: NYDFS Releases Revised Cybersecurity Regulations

The New York Department of Financial Services ("NYDFS") has released a revised version of its proposed cybersecurity regulations for financial services companies.

Released just four days before the original regulations were due to come into effect on Jan. 1, 2017, the revised rules maintain the overall objective and main requirements of the original proposal. Currently scheduled to come into effect March 1, 2017, the modified regulations respond to industry concerns that the original plan would have imposed strict, one-size-fits-all requirements on covered entities.

In response to these and other criticisms, the revised regulations appear to relax certain compliance burdens and give those covered a greater ability to create cybersecurity programs that best address their specific risks and threats. Significantly, many of the previously required steps are now linked to the results of a covered entity's "periodic" risk assessment, which may offer firms greater flexibility in implementing the regulations in accordance with their respective operations and cybersecurity threats. These risk assessments must occur as necessary in order to "address changes to the covered entity's information systems, nonpublic information or business operations" and result in an appropriate response to any "technological developments and evolving threats" uncovered.

The definition of nonpublic information has been clarified in the new proposal. It now includes identifying information with one or more of the following:

  1. Social Security number,
  2. driver's license number or nondriver card number,
  3. account numbers, including credit or debit card numbers,
  4. security codes, including passwords to financial accounts, or
  5. biometrics.

A third-party service provider ("TPSP") definition has also been added, clarifying that in order to qualify as a TPSP, the provider must "maintain, process, or otherwise [be] permitted access to nonpublic information" through its provision of services. Other requirements concerning TPSPs remain largely intact, although covered entities are now advised to "include relevant guidelines for due diligence and/or contractual protections" relating to a TPSP in its policies, instead of requiring "preferred provisions" to be "included in contracts with third party service providers." The "relevant guidelines" include consideration of the TPSP's policies and procedures regarding encryption and access controls, and also require notice be provided to the covered entity in case of a cybersecurity event "directly impacting" nonpublic information and information systems, as well as "representations and warranties addressing the [TPSP's] cybersecurity policies and procedures that relate to the security of the Covered Entity's Information Systems or Nonpublic Information."

Covered entities that do not qualify for one of the regulation's exemptions remain obligated to designate a qualified individual to serve as a chief information security officer ("CISO") to implement and enforce its cybersecurity assessments and policy. The CISO must report to the entity's board of directors "or an equivalent governing body" on the cybersecurity program and "material" cybersecurity risks on at least an annual basis.

Penetration testing and vulnerability assessment requirements have also been honed to provide that monitoring and testing "shall include continuous monitoring or periodic penetration testing and vulnerability assessments." Where effective continuous monitoring is not feasible, certain tests should be conducted annually or biannually.

The amended rule also relaxes audit trail requirements by allowing companies to implement systems "designed to reconstruct material financial transactions" and that "include audit trails designed to detect and respond to cybersecurity events that have a reasonable likelihood of materially harming any material part of the normal operations of the covered entity." The retention period for related data has been reduced from six to five years.

Other Changes in the Revised Requirements

Multifactor authentication requirements are now tied to circumstances in which internal networks are accessed externally, though multifactor authentication may be appropriate in other contexts, depending on each entity's risk assessment.

While covered entities were previously required to encrypt all nonpublic information, NYDFS heard concerns from the industry about the potential cost and burden. The revised regulations require covered entities to "implement controls, including encryption, to protect nonpublic information both in transit and at rest." If encryption is not feasible, other "effective alternative compensating controls" over nonpublic information are permissible, provided that they are reviewed and approved at least annually by the CISO.

The regulations concerning incident response plans remain mostly unchanged, though they now require that the plan need only address those cybersecurity events that may "materially" affect the "confidentiality, integrity or availability of the covered entity's information systems or the continuing functionality of any aspect of the covered entity's business operations."

In addition to the annual Certification of Compliance that must be submitted to the NYDFS Superintendent (now due on Feb. 15 of each year), covered entities must notify the NYDFS Superintendent no later than 72 hours after determining a cybersecurity event has occurred that either (i) must be reported to any other governmental, regulatory or supervisory body or (ii) has a "reasonable likelihood of materially harming any material part of the normal operations of the covered entity."

The revised regulations added a confidentiality provision that indicates information provided by covered entities under the regulations is subject to exemptions from disclosure under state and federal laws.

The regulations include modified exemptions that may remove some companies from obligations to comply, but the exemptions remain fairly limited. A notable revision is that small businesses with fewer than 10 employees or independent contractors (instead of covered entities with fewer than 1,000 customers per year) are now exempt from most provisions (alongside those with less than $10 million in assets or less than $5 million in gross annual revenue), though such entities must still maintain a cybersecurity program and cybersecurity policy. The regulations also exempt entities that do not "directly or indirectly operate, maintain, utilize or control any information systems," and that do not "directly or indirectly control, own, access, generate, receive or possess nonpublic information." Covered entities that qualify for exemptions must file a Notice of Exemption with the superintendent.

Finally, the revised regulations not only provide the original 180-day transition period, but also grant longer transitional periods for implementation of specific parts of the regulations.

Once effective, the updated regulations are expected to have significant influence over other jurisdictions due to New York's central role within the financial industry. They may also establish best practices and norms in New York and other states, and the federal government may follow suit with similar regimes in the near future.

Funds Talk: February 2017

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.

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