Reed Smith Client Alerts

Authors: Therese Craparo

The New York Department of Financial Services (DFS) has proposed new rules that would require covered financial institutions to establish and maintain cybersecurity programs designed to protect customers, the financial institution and the financial industry from cyber threats. The proposed DFS rules purport to establish minimum standards that are not “overly prescriptive so that cybersecurity programs can match the relevant risks and keep pace with technological advances,” and many of the requirements are consistent with existing guidelines from financial regulators or industry best practices. However, implementation of these proposed “minimum standards” – including requirements to establish a written cybersecurity program, implement data remediation/minimization, have the board of directors or senior officers certify compliance, and report attempts (successful or not) to gain unauthorized access to information systems – may be more complex than it appears. Reed Smith provides an overview of what financial institutions should be considering when preparing for compliance with these new regulations.

On September 13, 2016, New York Gov. Cuomo announced new proposed cybersecurity regulations by the Department of Financial Services (“DFS”) that would require covered financial institutions to establish and maintain a cybersecurity program designed to protect consumers and New York state’s financial services industry from cyber threats. Impacted financial institutions include banks, insurance companies, and other institutions regulated by DFS; small institutions are excluded from some of the requirements.

The Proposed Rules purport to establish minimum standards that are not “overly prescriptive so that cybersecurity programs can match the relevant risks and keep pace with technological advances.” However, while many elements of the Rules are consistent with existing federal regulatory guidance and best practices, the Rules do go beyond existing guidance and practices in some respects that may cause financial institutions to start thinking differently about cybersecurity.

Covered entities should be giving the Proposed Rules immediate consideration—the notice and public comment period ends November 12, 2016, and the Rules go into effect January 1, 2017, with a 180-day transition period.

Organizational Governance

The Board of Directors and senior management must actively participate in the cybersecurity program, and the role of the Chief Information Security Officer (CISO) is expanded.

  • Covered entities must designate a qualified CISO who is responsible for compliance with the Proposed Rules and must oversee all third-party vendors with access to information covered by the Proposed Rules.
  • Covered entities must have a cybersecurity policy (described below) that is reviewed by the board of directors and approved by a senior officer at least annually.
  • The CISO must submit a detailed cybersecurity report to the board of directors at least bi-annually, with a broad assessment of the cybersecurity program, including an assessment of the program’s effectiveness, description of exceptions to cybersecurity policies, identification of cyber risks, steps proposed to address inadequacies, and a summary of material cyber events that affected the covered entity during the timeframe covered by the report.

Cybersecurity Program

While the Proposed Rules do not proscribe a full set of detailed security controls, they do specify in detail the topics that need to be addressed by covered entities, and outline many of the practices that need to be accounted for in cybersecurity policies and procedures. In particular, covered entities must maintain the following:

  • A cybersecurity program that implements five core cybersecurity functions, including: identify risks, protect information systems, detect security events, and respond and recover from such events. These functions appear to be modeled after the National Institute of Standards and Technology (NIST) Framework for Improving Critical Infrastructure Cybersecurity.
  • Written cybersecurity policy that addresses 14 topics identified by the Proposed Rules, including data governance and classification, and customer data privacy. A number of other topics on the periphery of security are also covered, such as business continuity, capacity and performance planning, and systems operations and availability concerns.
  • Application security program for secure development of custom applications, and assessing/testing externally developed applications
  • Third-party information security program for ensuring adequate practices by third parties with access to Nonpublic Information. The program must include due diligence and periodic assessments conducted at least annually. Contractual obligations must include representations and warranties, security requirements, and audit rights, many of which are enumerated in the Proposed Rules.
  • A risk assessment and penetration test must be performed annually, with a vulnerability assessment conducted quarterly.
  • Covered entities must retain cybersecurity personnel (or qualified third parties) to fulfill the Proposed Rules, and ensure they receive regular training and stay aware of evolving threats and security practices.
  • Incident Response Plan must address in writing: an internal process for responding to an event; roles, responsibilities and authority; external and internal communications and information sharing; remediation of information systems; documentation and reporting of events; and review and revision of the response plan after an event.
  • Regular cybersecurity awareness training for all personnel.

Information Governance

Perhaps the most interesting aspect of the Proposed Rules is the incorporation of data governance and data management as fundamental components of the prescribed cybersecurity program. While traditional cybersecurity programs typically do include risk assessments, threat detection, penetration testing, education, and the like, data governance has not typically fallen within the purview of such programs.

  • Information Oversight: Many financial institutions manage data governance through records and information management or compliance departments. The Proposed Rules, however, appear to task the CISO with responsibility for data governance.
  • Scope of Information: The Rules apply to “Nonpublic Information,” which is defined to include personally identifiable information, personal health information, personal financial information, as well as any business information that could have a material adverse impact on the covered entity’s business, operations or security if tampered with or disclosed in an unauthorized manner.
  • Information Protection: Given the broad definition of Nonpublic Information, covered entities currently focusing on the protection of personal information or information typically considered highly confidential, like intellectual property, may need to broaden their practices to address such business information in a number of respects.
    • Access to Nonpublic Information must be limited to those with a need to know, with access privileges reviewed periodically.
    • Use of Nonpublic Information by authorized users must be monitored, with means of detecting unauthorized access, use, or tampering of such information by users.
    • Covered entities must maintain “audit trail” systems that retain data necessary to reconstruct all financial transactions for a period of six years. Steps must be taken to protect audit data from destruction or tampering.
    • All Nonpublic Information must be encrypted both in transit and at rest.
    • Multi-factor authentication is required in a number of scenarios.
  • Data Minimization: Covered entities will need to implement practices for the “timely destruction” of individuals’ personal information when “no longer necessary for the provision of the products or services for which such information was provided” except where retention is legally required.

Increased Government Oversight

  • Covered entities must certify compliance with the Proposed Rules in writing to the state superintendent every January 15, and maintain for examination all records, schedules and data supporting the certification, for five years. The certification would require the signature of the chairperson of the board of directors or a senior officer of the entity.
  • The state superintendent must be notified within 72 hours of any cybersecurity event that has a reasonable likelihood of materially affecting the normal operation of the covered entity, or that affects Nonpublic Information.
  • The CISO’s bi-annual cybersecurity report to the Board of Directors must be made available to the state superintendent upon request.


The Proposed Rules, in many respects, codify existing cybersecurity guidance and best practices; however, certain aspects of the Proposed Rules appear to more closely integrate cybersecurity with data governance than is typical for many cybersecurity programs. In addition, it remains to be seen whether the Proposed Rules are harbingers of similar regulations in other states.

As noted above, the comment period ends November 12, and the Proposed Rules go into effect soon after, with full compliance mandated by mid-2017. Financial institutions subject to DFS oversight are advised to start reviewing their existing cybersecurity programs, and to start planning now for compliance.


Client Alert 2016-266