New York-based financial services companies are under a new rule of law, intended to protect consumers from the repercussions of a cyberattack and one that puts boards in a front-and-center role when it comes to the company’s security.
Touted as the first law of its kind in the United States, New York enacted new cybersecurity regulations this year, outlining standards that are sure to resonate beyond the financial businesses—such as banks, insurance companies and other financial services firms—that the law targets.
How Far Does Regulation Go?
Companies regulated by the state’s Department of Financial Services (DFS) are required as of March 1, 2017, to create and maintain a cybersecurity program to protect the privacy of consumers and the safety of the state’s financial services industry.
It only applies to those that DFS oversees—in other words, only financial services organizations must comply with the regulation.
New York’s rules, DFS notes, don’t extend to nonfinancial companies. There are limited exemptions for companies with fewer than 10 employees, less than $5 million in gross annual revenue or less than $10 million in year-end total assets.
Still, the message from New York is a strong one: consumers are protected here, and financial firms will be held accountable.
Several of the regulation’s mandates outline the ways in which a company must comply, and in doing so, vastly widens the base of those culpable for a breach and the requirements of a board to pay attention to its potential vulnerability and its cybersecurity planning.
New Duty for Board Members
The idea that board members should make cybersecurity a priority has risen over the years, coming into focus with the Target data breach in 2013 that resulted in members of the board of directors being sued.
In reality, banking regulators have held boards responsible for their banks’ cybersecurity program for years, as described in the Federal Financial Institutions Examination Council’s IT Examination HandBook.
In it, the banking regulators place oversight of the development, implementation and maintenance of the IT security program in the board’s hands, and say the board must hold senior management accountable for its actions and review the overall status of the program at least annually.
This new regulation expands on that. It requires board members to ensure that there’s a framework in place at the company “for a robust cybersecurity program,” and one “that is adequately funded and staffed, overseen by qualified management, and reported on periodically to the most senior governing body of the organization.”
That means nontechnical leaders on the board must take an active role in security oversight.
For the first time, the new rules say the firm must hire a chief information security officer, or CISO, to oversee policies and ensure that they’re working effectively. The CISO would report at least annually to the board, the DFS says, and according to the regulation, that person can be employed by an affiliate or third-party provider instead of being employed by the company itself.
It’s not uncommon for companies to have much of the new regulation’s guidelines already in their processes, but it’s good to tie it to risk assessments. Lastly, as the law firm McGuireWoods notes, the new rules require penetration testing at least annually and vulnerability assessments at least quarterly. Among new provisions, institutions must track and maintain cybersecurity records for at least six years, encrypt sensitive data and report any cybersecurity event to the Department of Financial Institutions within 72 hours of becoming aware of it.
What Comes Next
Entities have varying times to comply with specific requirements, from 180 days to two years after the regulation went into effect in March. Financial companies outside of New York are likely to look at these regulations to get a sense of what’s coming for the greater industry.
To learn more about protecting your organization’s security as a member of a board, read this white paper written in conjunction with the New York Stock Exchange to improve your cybersecurity practices.