cybersecurity regulations first introduced by the New York State Department of Financial Services (“NYDFS”) in September 2016 and taking effect in their final form on March 1 represent the dawn of a new era of cybersecurity regulation.
Formally titled “Cybersecurity Requirements for Financial Services Companies” (the “NY Regulations”), these rules are the first foray by a state into the realm of cybersecurity regulation. (The full NY Regulations can be found here and a NYDFS summary here.) They leave behind the tried but not-particularly-true approaches of voluntary risk evaluation (e.g., the NIST Cybersecurity Framework) and post-breach remedial action (such as those regularly required by the Federal Trade Commission) and instead create a comprehensive system, based on periodic mandated risk assessment, designed to result in robust cybersecurity systems capable of preventing cyber incidents, rather than merely evaluating cyber maturity or reacting to data security breaches.
Who must comply with the Regulations?
The reach of the Regulations appears to be extraordinarily broad, as might be expected for regulators in “the financial capital of the world.” They apply to “Covered Entities,” defined as “any Person operating under or required to operate under a license, registration, charter, certificate, permit, accreditation or similar authorization [from the NYDFS] under the Banking Law, the Insurance Law or the Financial Services Law,” but exempt certain very small Entities—those with (1) fewer than 10 employees or independent contractors; (2) less than $5 million in gross annual revenue each of the past three fiscal years; or (3) less than $10 million in it and its affiliates’ GAAP year-end total assets. (Note that these small concerns are still considered “Covered Entities.” and so still must comply with certain portions of the NY Regulations.) It is important to read and consider that definition carefully—it covers a much larger universe than one may expect. Besides banks and other obvious financial institutions, the NYDFS also regulates insurance companies, including health insurers, mortgage lenders, mortgage brokers and any other businesses covered by any of the New York Banking, Insurance or Financial Services Laws. And, because the touchstone of the Regulations is authorization from the NYDFS, the Regulations, by their terms, apply to national and international concerns with headquarters and even substantially all operations, outside of New York, so long as they are operating within the State of New York, under NYDFS authorization and do not fall within the de minimis exceptions provided in the Regulations.
When do the Regulations take effect?
The Regulations become effective March 1, 2017 and, with certain exceptions, are subject to a 180-day transition period. Covered Entities must file their first annual certifications with the NYDFS no later than February 15, 2018.
What do the Regulations require?
The Regulations are intended to create an expansive, integrated, risk-based system to ensure that regulated entities develop and maintain robust cybersecurity capabilities and, therefore, are able to properly safeguard sensitive nonpublic information in their possession. Not surprisingly, with such a lofty goal, they have a large number of largely interconnected “moving parts,” which must fit, and work, together seamlessly. The following are some of the most critical elements of the Regulations.
- Cybersecurity Program. Each Covered Entity must develop, implement and maintain a Cybersecurity Program, based on its Risk Assessment (discussed below), that performs these core functions:
- Identify and assess internal and external cyber risks to the security or integrity of information stored on the Entity’s information systems;
- Create infrastructure and implement policies and procedures to prevent unauthorized access to the Entity’s information systems and use of nonpublic information on such systems;
- Detect cybersecurity events, respond to such events to mitigate adverse effects and recover and restore normal operations and services; and
- Meet regulatory reporting obligations.
- Cybersecurity Policy. Each Covered Entity must adopt a written Cybersecurity Policy, made up of policies and procedures for the protection of its information systems and of nonpublic information stored on those systems. The Cybersecurity Policy must be based on the Entity’s Risk Assessment (discussed below), approved by a senior officer (as defined) or the Entity’s board of directors and must address the following areas to the extent applicable:
- Information security;
- Data governance and classification;
- Asset inventory and device management;
- Access controls and identity management;
- Business continuity and disaster recovery planning and resources;
- Systems operations and availability concerns;
- Systems and network security;
- Systems and network monitoring;
- Systems and application development and quality assurance;
- Physical security and environmental controls;
- Customer data privacy;
- Vendor and third-party service provider management;
- Risk assessment; and
- Incident response.
- Monitoring, Penetration and Vulnerability Testing. The Cybersecurity Program for each Covered Entity (other than those exempt under the de minimis standard) must include a program of ongoing monitoring and testing, developed in accordance with the Entity’s Risk Assessment (discussed below), to assess the effectiveness of the Entity’s Cybersecurity Program. This monitoring and testing regime must include either (1) continuous monitoring or (2) periodic penetration testing (in which the assessors “attempt to circumvent or defeat the security features of an information system”) and vulnerability assessments. In the absence of continuous monitoring, penetration testing must be performed at least annually, to identify vulnerabilities of the Covered Entity’s network security systems and vulnerability testing, including systematic scans or reviews of information systems to identify known vulnerabilities, must be undertaken at least twice annually.
- Risk Assessment. Each Covered Entity must undertake a periodic Risk Assessment to reassess the cybersecurity risks inherent in its business operations, including its information systems and the nonpublic information it collects and stores. Compliance with a number of other requirements is, under the Regulations, explicitly dependent on the Risk Assessments. These requirements include the Cybersecurity Program, Cybersecurity Policy, Penetration Testing and Vulnerability Assessment and Third-Party Service Provider Security Policy (all discussed herein), as well as Multi-Factor Authentication, Encryption of Non-Public Information and Training and Monitoring. While the original proposal for the Regulations called for the Risk Assessment to be performed annually, the final Regulations remove the “annual” requirement. Instead, the Regulations indicate that the Risk Assessment must be “sufficient to inform the design” of the required Cybersecurity Program. In other words, Covered Entities must undertake Risk Assessments with sufficient frequency to ensure that other provisions of their Cybersecurity Plans remain in compliance with the Regulations.
Other notable requirements under the Regulations include:
- Chief Information Security Officer. Each Covered Entity (other than those exempt under the de minimis standard) must designate a Chief Information Security Officer (CISO) responsible for overseeing and implementing the institution’s Cybersecurity Program and enforcing its Cybersecurity Policy. The CISO must report to the Entity’s Board of Directors, at least twice annually, on a list of prescribed matters.
- Third-Party Service Provider Security Policy. Each Covered Entity must have in place policies and procedures designed to ensure the security of information systems and nonpublic information accessible to, or held by, third parties.
- Reporting Requirements. Covered Entities are required to report to the DFS as follows:
- Within 72 hours after a determination that a “Cybersecurity Event” has occurred. A Cybersecurity Event is an event “that has a reasonable likelihood of materially harming any material part of the normal operation(s) of the Covered Entity.”
- No later than February 15 of each year, each Covered Entity must certify that it is in compliance with the requirements of the Regulations.
Each Cybersecurity Program also must include:
- Implementation and maintenance of an audit trail system to reconstruct transactions and log access privileges;
- Limitations and periodic reviews of access privileges;
- Written application security procedures, guidelines and standards that are reviewed and updated by the CISO at least annually;
- Employment and training of cybersecurity personnel;
- Multi-factor authentication for individuals accessing internal systems who have privileged access or to support functions including remote access;
- Timely destruction of nonpublic information that is no longer necessary;
- Monitoring of authorized users and cybersecurity awareness training for all personnel;
- Encryption of all nonpublic information held or transmitted; and
- Written incident response plan to respond to, and recover from, any cybersecurity event.
What should a Covered Entity do now?
It is clear that the Regulations are here to stay and that compliance will require many Covered Entities to act fast to develop and implement or revise and upgrade their processes and procedures. And, with an initial phase-in period of only six months, they had better act fast. The key is finding a trusted cybersecurity advisor without fail. While law firms and accounting firms may wish to fill this need, the fact is that only genuine cybersecurity advisor can best address many of the requirements.
As noted above, the foundation of the Regulations’ is the Risk Assessment. Everything from the Cybersecurity Program, Cybersecurity Policy, Penetration Testing and Vulnerability Assessment and Third-Party Service Provider Security Policy, to Multi-Factor Authentication and Encryption of Non-Public Information Policies and Training and Monitoring requirements are dependent on the Risk Assessment’s results. So the logical—and necessary—first step is for the Entity to undergo a thorough, state-of-the-art and unassailable Risk Assessment.
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