United States: State Updates On Cybersecurity Regulations: New York DFS Issues FAQs On Its Cybersecurity Regulations And Colorado Adopts Rules Applicable To Broker-Dealers And Investment Advisors

Last Updated: August 9 2017
Article by Laurie A. Kamaiko and Carol J. Gerner

New York and Colorado have continued to take the lead in cybersecurity requirements for regulated financial institutions.

The New York Department of Financial Services (DFS), which issued the first state cybersecurity regulation directed at its regulated financial institutions, 23 NYCRR Part 500, recently updated its "Frequently Asked Questions Regarding 23 NYCRR Part 500" on July 31, 2017, to assist entities covered by the regulation in their compliance. It has also announced a new online portal for secure transmission of all notifications required under this new regulation.

Meanwhile Colorado's Division of Securities adopted the new cybersecurity rules it had proposed earlier this year applicable to broker-dealers purchasing securities in Colorado and investment advisors who do business in the state.

For background, see our May 3, 2017, article, " Other States Start to Follow New York Lead on Cybersecurity of Regulated Entities," in which we addressed the recently enacted New York State Department of Financial Services cybersecurity regulation and the then-proposed Colorado regulations targeted at financial advisers.

New York FAQs

The New York DFS Regulations that went into effect March 1, 2017, (with transition periods) were designed to "promote the protection of customer information and information technology systems or regulated entities." The regulated "Covered Entities" were defined to mean any "Person" operating under or required to operate under a license, registration charter, certificate, permit, accreditation or similar authorization under the Banking Law, the Insurance Law or the Financial Services Law of New York.

On July 31, 2017, the DFS issued its updated "Frequently Asked Questions Regarding 23 NYCRR Part 500," which provides its answers to 18 frequently asked questions concerning the regulations. The FAQs provide insight into how the DFS interprets the regulations and the extent to which it will defer to the "appropriate judgment" of the Covered Entities on certain issues, including the circumstances under which an "unsuccessful attack" constitutes a "Cybersecurity Event" that meets the reporting requirements of the regulations.

It is noteworthy that the FAQs state that the DFS "trusts" that Covered Entities will exercise appropriate judgment in these situations and does not intend to "penalize" Covered Entities for the exercise of honest, good faith judgment. They also address a wide variety of issues, including that an entity can be both a Covered Entity and a Third Party Service Provider, and the impact of a Covered Entity's relationship with its Affiliates in complying with the regulations. The New York DFS is adamant that the Covered Entity will be responsible for complying with the regulations regardless of its adoption of its Affiliate's cybersecurity program or utilization of an Affiliate's CISO. The Covered Entity remains charged with annually certifying its compliance with the regulations.

The following are some of the other issues that are addressed in the FAQs (here is a full list of the FAQs):

The circumstances under which a Covered Entity must submit notice to DFS of a Cybersecurity Event:

The Department recognizes that Covered Entities are subject to many daily attempts to gain unauthorized access to their Information Systems and the information stored on them, and most are unsuccessful and will not be reportable, such as those of a routine nature. However, it also notes some unsuccessful attacks will be reportable if "in the considered judgment of the Covered Entity" it is "sufficiently serious to raise a concern." Thus, while the DFS states it trusts that Covered Entities will exercise "appropriate judgment" as to "which unsuccessful attacks must be reported" and it "does not intend to penalize Covered Entities for the exercise of honest, good faith judgment," a Covered Entity cannot automatically consider an unsuccessful attempt to not be reportable. (See FAQ 1.)

A reportable cybersecurity event is one that is described as fitting into at least one of the following categories:

  • The Cybersecurity Event impacts the Covered Entity and notice of it is required to be provided to any government body, self-regulatory agency or any other supervisory body; or
  • The Cybersecurity Event has a reasonable likelihood of materially harming any material part of the normal operation(s) of the Covered Entity.

In addition, a Covered Entity is required to give notice to DFS when the Covered Entity is required to give notice to affected consumers under other laws and regulations. The DFS noted in response to an FAQ regarding whether notice must be given to the Department when a Cybersecurity Event involved harm to consumers, that if a notice is required under New York's information security breach and notification law (General Business Law Section 899-aa), then that Cybersecurity Event must also be reported to the Department. (FAQ 5.)

A reportable Cybersecurity Event is to be reported as promptly as possible, but in no event later than 72 days "from a determination that a reportable Cybersecurity Event has occurred." (FAQ 15.) The circumstances under which a Covered Entity must address the cybersecurity issues of its subsidiaries and affiliates are as follows:

When a subsidiary or other affiliate of a Covered Entity presents risks to the Covered Entity's Information Systems or the Nonpublic Information stored on those Information Systems, those risks must be evaluated and addressed in the Covered Entities Risk Assessment, cybersecurity program and cybersecurity polices. (FAQ 3.)

The circumstances under which a Covered Entity that qualifies for a limited exemption must still comply with the regulations are as follows:

The DFS notes that the exemptions are limited in scope (see 23 NYCRR Part 500.19), and even entities that qualify for those exemptions are only exempt from complying with certain provisions of the regulation. They must still comply with the sections listed in the exemptions that apply to covered entities. (FAQ 4.)

To provide a secure route for submission of such notices to DFS, as well as for submission of required certificates of compliance by the Covered Entities of their other obligations under the new Regulation, DFS has also announced a new online portal.

It is important for those subject to these New York regulators to monitor the FAQs published by DFS. The FAQs provide guidance into the DFS's interpretation and enforcement of its newly adopted regulation.

New Colorado Regulation

The Colorado Division of Securities has now also adopted new cybersecurity rules, which are applicable to broker-dealers purchasing securities in Colorado and investment advisors who do business in the state. New Colorado Regulation (see page 45; 51-4.8)

The Colorado regulations are less onerous and narrower in application than the New York Regulation. They are limited to broker-dealers purchasing securities in the state and investment advisors doing business in Colorado. For those entities, the Colorado rules require cybersecurity procedures to protect "Confidential Personal Information." Publicly available information is not considered Confidential Personal Information. They only require that broker-dealers and investment advisors "establish and maintain written procedures 'reasonably' designed to ensure cybersecurity. While the Colorado Division of Securities may consider a variety of factors in determining what is reasonable, the cybersecurity procedures must include: (a) annual risk assessment that does not have to be conducted by third-parties; (b) secure email, including encryption and digital signatures for emails containing Confidential Personal Information; (c) authentication of client's email instructions and employee access to electronic communication; and (d) disclosure to clients of the risks of utilization of electronic communication. The required annual risk assessment does not have to be conducted using an independent third party.

Unlike New York's regulations, Colorado's rules do not have requirements for third party vendors. In addition, the final rules adopted in Colorado deleted the breach notification requirement to the Department that was in the initial proposed rules. Thus, overall it is less burdensome, and less costly, than the New York regulation. Entities subject to them are still, of course, subject to federal financial regulation and oversight, such as that provided by the SEC.

It remains to be seen whether other states will enact their own cybersecurity regulations, and if so, which entities will be subject to such regulation.

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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