As we previously reported, in December 2016 the New York Department of Financial Services (the “DFS”) announced that it was revising its proposed regulation that would require banks, insurance companies and other financial services institutions regulated by the DFS to adopt broad cybersecurity protections (the “Original Proposal”).
On December 28, 2016, the DFS released a revised version of the Original Proposal (the “Revised Proposal”) that incorporates greater flexibility with respect to requirements as well as delayed compliance deadlines. The Revised Proposal is subject to a final thirty-day comment period.
In the Revised Proposal, the DFS made the following major changes to the Original Proposal:
- Pushing back the effective date and compliance deadlines: The new effective date is March 1, 2017 (two months later than the Original Proposal’s previous effective date of January 1, 2017). The Revised Proposal establishes three compliance deadlines:
- For requirements not specifically addressed below, the compliance deadline is September 1, 2017.
- For the requirements in sections 500.04(b) (Chief Information Security Officer report), 500.05 (penetration testing and vulnerability assessments), 500.09 (risk assessment), 500.12 (multi-factor authentication), and 5000.14(a)(2) (cybersecurity training for personnel), the compliance deadline is March 1, 2018.
- For the requirements in sections 500.06 (audit trail), 500.08 (application security), 500.13 (limitations of data retention), 500.14(a)(1) (implementation of policies and procedures regarding monitoring), and 500.15 (encryption of nonpublic information), the compliance deadline is September 1, 2018.
- Adding limited exemptions: Covered Entities with fewer than ten employees, as well as Covered Entities that do not operate or control any Information Systems and are not required to access, receive or possess Nonpublic Information, are now exempt from certain of the Revised Proposal’s requirements. A Covered Entity that qualifies for an exemption must file a notice of exemption with the DFS.
- Customizing the required Risk Assessment to the Covered Entity: The Revised Proposal requires that the Risk Assessment: (1) be tailored to the Covered Entity’s particular risks related to cybersecurity, Information Systems and Nonpublic Information; (2) be updated as reasonably necessary to address changes to Covered Entity’s Information Systems, Nonpublic Information or business operations; (3) allow for revision of controls to respond to technological developments and evolving threats; and (4) be conducted periodically (instead of annually, as required by the Original Proposal).
- Basing many requirements on the Covered Entity’s Risk Assessment: Industry groups criticized the Original Proposal for imposing requirements that were not based on risk assessments. The Revised Proposal bases many requirements (such as those with respect to: the Cybersecurity Program, written cybersecurity policy, monitoring and testing, limitation of access privileges, third party service provider security policy, multi-factor authentication and encryption) on the Risk Assessment that is required to be conducted by the Covered Entity.
- Narrowing the requirement to notify the DFS of Cybersecurity Events: The Original Proposal required the Covered Entity to notify the DFS of any Cybersecurity Event that (a) has a reasonable likelihood of materially affecting the Covered Entity’s normal operations or (b) affects Nonpublic Information within 72 hours. The notification requirement survives in the Revised Proposal, but it is limited to Cybersecurity Events (a) of which notice is required to be provided to any supervisory body or (b) that have a reasonable likelihood of materially harming any material part of the Covered Entity’s normal operations.
- Adding flexibility to the Cybersecurity Program’s requirements: The Revised Proposal now requires that the Cybersecurity Program be designed to “protect” (rather than “ensure”) the confidentiality, integrity and availability of Information Systems. The Cybersecurity Program’s identification of cybersecurity risks is narrowed to those risks that “may threaten the security or integrity” of Nonpublic Information stored on the Covered Entity’s systems. If a Covered Entity’s Affiliate has a cybersecurity program that complies with the regulation, the Covered Entity may adopt its Affiliate’s cybersecurity program.
- Narrowing the definition of “Nonpublic Information” with respect to individuals: The Original Proposal’s definition of “Nonpublic Information” with respect to individuals was very broad, including any non-publicly available information that can be used to distinguish or trace an individual’s identity. The Revised Proposal includes a narrower definition of Nonpublic Information with respect to individuals, which aligns with the definition of “personal information” that appears in many states’ security breach notification laws.
- Clarifying the Chief Information Security Officer’s employment: The Original Proposal required that Covered Entities designate a Chief Information Security Officer (“CISO”) responsible for implementing, overseeing and enforcing the cybersecurity program and policy, which is open to the interpretation that the CISO must be an employee of the Covered Entity. The Revised Proposal clarifies that the CISO “may be employed by the Covered Entity, one of its Affiliates or a Third Party Service Provider.”
- Adding flexibility to the encryption requirements: The Original Proposal required Covered Entities to meet the requirement to encrypt all Nonpublic Information held or transmitted by the Covered Entity within five years. Under the Revised Proposal, to the extent a Covered Entity determines that encryption of Nonpublic Information in transit over external networks or at rest is not feasible, the Covered Entity may use “effective alternative compensating controls” that are approved by the CISO and reviewed by the CISO annually.
- Easing the requirements for the Covered Entities’ relationships with Third Party Service Providers: The Revised Proposal defines “Third Party Service Provider” as an entity that (1) is not an Affiliate of the Covered Entity, (2) provides services to the Covered Entity and (3) has access to Nonpublic Information through its provision of services to the Covered Entity. The Revised Proposal makes the requirement to conduct a periodic assessment of Third Party Service Providers based on the risk they present. While the Original Proposal required Covered Entities to establish preferred provisions to be included in contracts with such service providers, the Revised Proposal requires Covered Entities to establish “relevant guidelines for due diligence and/or contractual protections.” The Third Party Service Providers’ requirement to notify Covered Entities of Cybersecurity Events is narrowed to those Cybersecurity Events that directly impact the Covered Entity’s Information Systems of Non-Public Information held by the Third Party Service Provider. Regarding provisions in contracts between Covered Entities and Third Party Service Providers, the Revised Proposal allows for broader representations and warranties – those “addressing the Third Party Service Provider’s cybersecurity policies and procedures” – rather than the Original Proposal’s language specifying representations and warranties from service providers that the service is free of viruses, trap doors and other mechanisms that would impair security. The Revised Proposal also eliminates the requirement to establish preferred contract provisions regarding the Covered Entity’s right to perform cybersecurity audits of service providers.
- Relaxing the penetration testing and vulnerability assessment requirements: The Original Proposal required Covered Entities to conduct penetration testing annually and vulnerability assessments quarterly. The Revised Proposal requires the cybersecurity program to incorporate “monitoring and testing, developed in accordance with risk assessments” including continuous monitoring or periodic penetration testing and vulnerability assessments. Under the Revised Proposal, if there are not effective continuous monitoring or other systems to detect changes that may indicate vulnerabilities, then the Covered Entity is required to conduct penetration testing annually and vulnerability assessments quarterly.
- Easing the audit trail requirements: The Original Proposal required Covered Entities to implement audit trail systems for nearly every financial transaction and retain such data for six years. The Revised Proposal requires Covered Entities to (1) maintain systems that, to the extent applicable and based on the Covered Entity’s risk assessment, include audit trails designed to detect and response to Cybersecurity Events that “have a reasonable likelihood or materially harming any material part” of the Covered Entity’s normal operations and (2) retain such records for five years.
The following components of the Original Proposal have not been modified in the Revised Proposal:
- The definitions of “Cybersecurity Event” (which was criticized as being so broad as to cover any event, successful or unsuccessful, that may involve an attempt to access information without authorization) and “Information System” (which could cover any firm information system) have not been modified. However, in some places where the term “Cybersecurity Event” is used, the DFS added limiting language such as “material,” “materially affecting the confidentiality, integrity or availability of the Covered Entity’s Information Systems,” or “that have a reasonable likelihood or materially harming any material part” of the Covered Entity’s normal operations.
- The annual certification form required to be submitted to the DFS by the Covered Entity still lacks a mechanism to report areas that are not in complete compliance at the time of certification, but will be prioritized for compliance going forward.
We will continue to monitor and report on developments concerning the Revised Proposal.