Nathan D. Taylor and Adam J. Fleisher
Banking + Financial Services and Financial Services
With one eye on the New York Department of Financial Services (“NYDFS”) cybersecurity rules and the other on two of its own Commissioners who dissented, the Federal Trade Commission (“FTC”) has proposed a sweeping overhaul to its Gramm–Leach–Bliley Act (“GLBA”) data security standards for financial institutions subject to its authority (“Safeguards Rule”). Specifically, on March 5, 2018, the FTC released a draft notice of proposed rulemaking (the “Proposed Rule”) to amend substantially the Safeguards Rule. The Safeguards Rules has long been a hallmark of a reasonable approach to regulating data security, utilizing a risk–based framework and approach that is technology–neutral and that does not create a one–size–fits–all standard. This historical approach is premised on a financial institution maintaining an information security program, performing periodic risk assessments and including within the program administrative, physical and technical safeguards designed to protect against the identified risks. With the Proposed Rule, however, the FTC appears to be heading to the opposite end of the spectrum and would impose detailed and prescriptive security requirements, including broad obligations regarding the use of encryption and multi–factor authentication.
The FTC commentary accompanying the Proposed Rule asserts that the proposed changes are “informed by the FTC’s almost 20 years of enforcement experience.” Nonetheless, many of the specific requirements that would be imposed by the Proposed Rule track, almost verbatim, the controversial cybersecurity regulations promulgated by the NYDFS at the end of 2016 and that have just recently taken full effect (“NYDFS Cyber Rules”). Given the depth and breadth of the FTC’s experience with information security issues, both under the GLBA and the FTC Act, as well as its role as the country’s most prominent and active enforcer regarding data security matters, it is striking to see the FTC rely so heavily on a rule issued by a state agency, particularly one that was significantly criticized for not being well thought out and for including unworkable and inflexible standards.
While the FTC states that it “does not believe that the proposed new requirements would require an overhaul of existing compliance programs,” if adopted in its current form, the Proposed Rule would in fact impose substantial compliance costs and challenges for covered financial institutions. Without any meaningful indication that the Safeguards Rule is “broken” or not working as intended, the FTC’s proposal appears inconsistent with the current administration’s emphasis on regulatory relief and deregulation. Regardless, the FTC is likely to receive significant critique on the Proposed Rule, including the fact that the Proposed Rule would disincentivize covered financial institutions from approaching the complex issue of security in a thoughtful, risk–based and risk–targeted manner.
The following provides an overview of key aspects of the Proposed Rule. Comments on the Proposed Rule will be due 60 days after the Proposed Rule is published in the Federal Register.
Proposed Security Requirements
The Proposed Rule contemplates a number of changes to the Safeguards Rule. The most significant changes relate to the new prescriptive, security controls that the FTC would mandate that a covered financial institution include in its information security program.
The Proposed Rule would preserve the foundational obligation under the Safeguards Rule for a financial institution to develop, implement and maintain an information security program that includes administrative, technical and physical safeguards to protect “customer information.” Nonetheless, in a dramatic departure from the current risk–based approach, the Proposed Rule would mandate that a financial institution include a number of specific technical and administrative controls within its program, including controls required by the NYDFS Cyber Rules. Furthermore, while the proposed amendments still include the proviso that the information security program be based on a risk assessment and that safeguards be designed and implemented to control identified risks, the drafting is far from clear as to whether the specific enumerated controls must be deployed based on the risk assessment, similar to the NYDFS approach, or whether the controls are required irrespective of the risk assessment.
Because of the breadth of many of the specific technical requirements, the issue of whether the specific controls must be adopted based on a risk assessment (as opposed to mandated generally) will be a critical issue. In particular, borrowing from the NYDFS Cyber Rules, the Proposed Rule would require that an information security program address, among many others, the following controls:
In addition to the various technical controls that would be required by the Proposed Rule, the Proposed Rule also includes a number of specific administrative and assessment obligations, including training of personnel, oversight of vendors (consistent with the Safeguards Rule) and annual penetration tests and biannual vulnerability assessments (from the NYDFS Cyber Rules). The Proposed Rule also would require covered financial institutions to establish a written incident response plan addressing, among other things, internal processes for responding to security events and documentation and reporting regarding security events. Of note, however, is that the FTC did not propose to include an express breach notification obligation for incidents involving customer information, notwithstanding the fact that the federal banking agencies have had in place such obligations for more than 15 years under their own GLBA security rules. In the context of such a dramatic overhaul of the Safeguards Rule, this seems like an odd, even if potentially welcome, omission.
Similarly, unlike the NYDFS Cyber Rules, the Proposed Rule does not include an obligation to certify compliance with the Rule periodically to the FTC. Instead the FTC takes a different page from the NYDFS Cyber Rules and would require that a financial institution’s chief information security officer report at least annually, in writing, to the board of directors or equivalent governing body of the financial institution. The Proposed Rule states that the report must include, among other things, “[m]aterial matters related to the information security program, addressing issues such as . . . security events or violations and management’s response thereto.” In the Supplementary Information accompanying the Proposed Rule, however, the FTC states that the annual report “must identify all security events that took place that year.” A “security event” is defined broadly to include “an event resulting in unauthorized access to, or disruption or misuse of, an information system or information stored on such information system.” Given that the FTC has indicated that “all” security events must be reported to the board and the fact that a “security event” includes any unauthorized access to information systems, as well as the fact that the definition of information systems is not limited to systems that handle customer information (let alone sensitive customer information), these provisions could be read together to require extensive reporting to governance committees of immaterial matters that go well beyond what they would be able to meaningfully digest.
As noted above, two FTC Commissioners, Commissioner Phillips and Commissioner Wilson, issued a dissenting statement in connection with the FTC releasing the Proposed Rule. This dissent deserves attention, particularly because it cuts to the heart of many of the issues associated with the FTC’s proposal, several of which we have already highlighted.
In particular, the dissenting Commissioners cited four concerns with the Proposed Rule:
Given the breadth of the Proposed Rule as drafted, as well as the potential compliance and implementation challenges it would raise if adopted in its current form, financial institutions subject to the authority of the FTC with respect to GLBA data security will need to consider whether to make their voices heard during the comment period and, if so, to ensure that they convey the potential implications of this rulemaking for their businesses. It may be that, much like the evolution of the NYDFS Cyber Rule, which went through some fits and starts, the FTC may refine the concepts included in the Proposed Rule further before issuing a final rule. Regardless, this is an issue that financial institutions should closely monitor to see how it develops. In fact, given the FTC’s more general authority under the FTC Act, non–financial institutions should also monitor this rulemaking for signals related to whether this is the FTC’s new “norm” or expectations for the marketplace generally.
 16 C.F.R. pt. 314.
 23 N.Y.Comp. Codes. R & Regs. pt. 500. For more information on the NYDFS Cyber Rules, please refer to our various alerts regarding the Rules, including “One of a Kind: NYDFS Cyber Rule Finalized, Effective March 1, 2017” and “New York Cybersecurity Regulations: What Do They Mean and When Do They Mean it By?”
 The specific requirements of the Proposed Rule would not take effect until six months after the final rule is issued.
 See Start with Security: A Guide for Business (Lessons Learned from FTC Cases), available at: https://www.ftc.gov/system/files/documents/plain-language/pdf0205-startwithsecurity.pdf.
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