Alston & Bird Consumer Finance Blog

Cybersecurity

NYDFS Reports Major Cybersecurity Settlement

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In early March, the New York Department of Financial Services (NYDFS) announced a settlement involving a $1.5M penalty and mandatory remediation in response to a mortgage lender’s alleged failure to report a cyber breach, and other alleged cybersecurity failures. This enforcement action marks the second public enforcement action under 23 NYCRR Part 500 (the “Cybersecurity Regulation”) (see our post on the prior action here).

It is noteworthy that the settlement follows a routine safety and soundness exam by the regulator which included a review of security issues under the Cybersecurity Regulation.  This settlement provides an example of both the alleged failure to have reported a security incident and the potential that any such failure will later be detected by the NYDFS in routine examinations.

The consent order noted two major cybersecurity failings on the part of the licensee, Residential Mortgage Services, Inc. (“Residential Mortgage”), according to the NYDFS:

  • Failure to Adequately Investigate and Respond to a Cybersecurity Event. The consent order recounts a successful phishing attack that resulted in a “cyber intruder” accessing an employee’s email account. Residential Mortgage’s IT staff determined that improper access had occurred and quickly took steps to prevent further unauthorized access. However, the consent order faults Residential Mortgage for failing to conduct any further investigation to determine (1) whether the compromised inbox “contained private consumer data,” (2) “which consumers were impacted,” and then (3) “apply the applicable state notice requirements triggered by the breach.” The consent order notes that, following the NYDFS’s examination and investigation of the Cybersecurity Event, Residential Mortgage did determine that it was obligated to notify individuals under various state laws based on a review of all data elements “that could have been accessed” during the intrusion. According to the consent order, Residential Mortgage subsequently made notifications to individuals as required by those laws.
  • Lack of “Comprehensive Cybersecurity Risk Assessment.” The consent order states that Residential Mortgage “was missing a comprehensive cybersecurity risk assessment.” Such risk assessments are required under the Cybersecurity Regulation to periodically evaluate vulnerabilities and inform operation of the cybersecurity program.

In addition to assessing a $1.5M civil penalty, the settlement provisions require Residential Mortgage to make the following submissions to the NYDFS within 90 days:

  • “a comprehensive written Cybersecurity Incident Response Plan;”
  • a comprehensive risk assessment;
  • “Policies, procedures and controls” relating to monitoring user activity and detecting unauthorized access or use of personal or confidential information; and
  • “Cybersecurity awareness training for all personnel, updated to reflect risks identified by Residential Mortgage in its Cybersecurity Risk Assessment.”

Residential Mortgage also agreed to “fully cooperate” with the NYDFS “regarding all terms of this Consent Order,” and the NYDFS reserved all rights to take further action in the event of noncompliance. The consent order notes Residential Mortgage’s “commendable cooperation” with the investigation and remediation efforts, including “devoting significant financial and other resources to enhance its cybersecurity program.”

SHIELD Act Overhauls New York’s Data Breach Notification Framework

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On October 23, 2019, New York’s new breach notification provisions came into effect, a result of New York’s passage of the Stop Hacks and Improve Electronic Data Security Act (SHIELD Act) in July. That Act overhauled New York’s data privacy framework, expanding the list of data elements that are considered “private information” while growing the types of incidents and covered entities that may trigger New York’s notification requirement. The SHIELD Act also imposes a new legal obligation for owners and licensors of private data to comply with the Act’s “reasonable security requirement.” Some regulated businesses, like those in the healthcare and financial industries, will be deemed compliant with the SHIELD Act’s reasonable security requirement if they already comply with laws like HIPAA or the GLBA. In an attempt to mitigate its potential burdens on smaller operations, the SHIELD Act explicitly defines small businesses, for whom the Act’s “reasonable security requirement” will be assessed with regard to factors like a business’s “size and complexity.”

The SHIELD Act’s breach notification provisions went into effect on October 23, 2019, while the new data security requirement goes into effect on March 21, 2020.

The Act’s main provisions are described below.

Expanding the Types of Incidents and Entities Covered Under Breach Notification:

The SHIELD Act expands the pool of incidents which trigger mandatory notification to data subjects.  Prior to the SHIELD Act, New York required individual notifications only when certain private information was acquired by an unauthorized individual. Under the SHIELD Act, New York now requires individual notifications where such information is either accessed OR acquired. In deciding whether such information has been unlawfully accessed under the statute, the Act directs businesses to consider whether there exist any “indications that the information was viewed, communicated with, used, or altered by a person without valid authorization or by an unauthorized person.”  So now under the SHIELD Act, if an unauthorized entity merely views information and does not download or copy it, New York requires individual notifications.

The SHIELD Act also expands which entities may be required to make disclosures under New York’s notification requirement. Previously, New York required notifications only from those entities which conducted business in New York and owned or licensed the PI of New York residents.  Under the SHIELD Act, New York’s notification requirement applies more broadly to any business which owns or licenses the private information of New York residents, regardless of whether it conducts business in state.
Expanding the Definition of Private Information

Not only does the SHIELD Act expand the types of breaches which may trigger notifications, it further expands New York’s definition of private information (“PI”) by incorporating biometric data and broadening the circumstances in which financial data is considered PI.  The Act defines biometric data as that which is “generated by electronic measurements of an individual’s unique physical characteristics,” such as fingerprints, voice prints, and retina or iris images.  And while account numbers and credit/debit card numbers were previously only considered PI in combination with security codes and passwords that permitted access to financial accounts, now under the SHIELD Act, such information is considered PI under any circumstances where it could be exploited to gain access to an individual’s financial accounts, even when security codes and passwords remain secure.

Under the SHIELD Act, New York now joins those states that protect online account usernames and e-mail addresses when stored in combination with passwords or security questions that could provide access to online accounts.  The Act does not require usernames and e-mail addresses to be paired with other personal information, beyond that needed to access an online account, to constitute PI.

Clarification of Substitute Notice by E-mail:

Prior to the passage of the SHIELD Act, New York more broadly permitted notification by e-mail when the notifying business had access to the e-mail addresses of all affected data subjects. The SHIELD Act, however, creates a new exception where notice by e-mail is no longer permissible when the breached information includes the data subject’s e-mail address in combination with a password or security question and answer.  This provision appears aimed at preventing businesses from notifying by e-mail when the notification itself may be sent to a compromised account.

Breach Notification Content Requirements and Exemptions:

The SHIELD Act expands the required content of notifications by requiring a business to include the telephone numbers and websites of the relevant state and federal agencies responsible for providing breach response and identity theft services.

On the other hand, the Act also carves out new exceptions in the case of inadvertent disclosures or where notification may already be required under another statute. The SHIELD Act exempts businesses from New York’s breach notification requirement if information was disclosed inadvertently by persons authorized to access the information and the business reasonably determines that such exposure will not likely result in the misuse of information or other financial or emotional harm to the data subject.  Such determinations, however, must be documented in writing and maintained by the disclosing company for at least five years.  If the disclosure affects more than five hundred New York residents, a business availing itself of this exemption must provide the written determination of non-harmfulness to the New York Attorney General within ten days of making the determination.

The Act further exempts certain businesses from making additional notifications where they are already required to notify under other federal or state laws.  Under the SHIELD Act, no further notice is required if notice of a breach is made under any of the following:

1)      Title V of the Gramm-Leach-Bliley Act (GLBA)
2)      the Health Insurance Portability and Accountability Act (HIPAA) or Health Information Technology for Economic and Clinical Health Act (HITECH);
3)      New York Department of Financial Services’ Cybersecurity Requirements for Financial Services Companies (23 NYCRR 500), or;
4)      any other security rule or regulation administered by any official department, division, commission, or agency of the federal or New York state governments.

Reporting HIPAA and HITECH Breaches to the State Attorney General:

Any covered entity required to provide notification of a breach to the Secretary of Health and Human Services under HIPAA or HITECH must also notify the New York Attorney General within five business days of notifying HHS.  Thus, while the SHIELD Act exempts HIPAA and HITECH regulated companies from re-notifying affected individuals, it nevertheless requires an additional notification to the state Attorney General.

Creation of the Reasonable Security Requirement:

Effective March 21, 2020, the SHIELD ACT imposes a new “reasonable security requirement” on every covered owner or licensor of New York residents’ private information. The SHIELD Act requires businesses to develop and maintain reasonable administrative, technological, and physical safeguards to ensure the integrity of private information.

Reasonable administrative safeguards include:

(1) Designating one or more employees to coordinate security; (2) Identifying reasonably foreseeable internal and external risks; (3) Assessing the sufficiency of the safeguards in place to control identified risks; (4) Training and managing employees in the security program practices and procedures; (5) Selecting service providers capable of maintaining safeguards, and requiring those safeguards by contract; (6)Adjusting the security program to account for business changes or other new circumstances.

Reasonable technical safeguards include:

(1) Assessing in network and software design risks; (2) Assessing risks in information processing, transmission, and storage; (3) Detecting, preventing, and responding to attacks or system safeguards; (4) Regular testing and monitoring of key controls, systems, and procedures.

Reasonable physical safeguards include:

(1) Assessing the risks of information storage and disposal; (2) Detecting, preventing, and responding to intrusions; (3) Protecting against unauthorized access or use of private information during data collection, transportation, and destruction; (4) Disposing of private information within a “reasonable amount of time after it is no longer needed for business purposes by erasing electronic media so that the information cannot be read or reconstructed.”

Applying the Reasonable Security Requirement to Small Businesses:

The SHIELD Act makes special provision for small businesses, presumably to avoid overly burdening them. Under the statute, a small business is defined as any business with “(I) fewer than fifty employees; (II) less than three million dollars in gross annual revenue in each of the last three fiscal years; or (III) less than five million dollars in year-end total assets.”  While small businesses are still subject to the reasonable security requirement, their safeguards need only be “appropriate for the size and complexity of the small business, the nature and scope of the small business’s activities, and the sensitivity of the personal information” the small business collects about consumers.

Implications of the SHIELD Act’s Security Requirement for Compliant Regulated Entities:

Just like businesses may be exempted from the SHIELD Act’s notification requirements if they comply with another statute, businesses may also be deemed to be in compliance with the SHIELD Act’s reasonable security requirement if they are already subject to and in compliance with the following data security requirements:

1)      Title V of the GLBA;
2)      HIPAA or HITECH;
3)      23 NYCRR 500, or;
4)      Any other security rule or regulation administered by any official department, division, commission, or agency of the federal or New York state governments.

Penalties for Noncompliance:

The SHIELD Act increases the penalties for noncompliance with New York’s notification requirements. Previously, businesses faced a fine of the greater of $5,000 or $10 dollars per instance of failed notification, so long as the latter did not exceed $150,000.  Now, penalties may grow as large as $20 per incident with a maximum limit of $250,000.

The Act also lengthens the time in which legal actions for failure to notify may commence from two years to three years. This time is measured from either the date on which the New York Attorney General became aware of the violation, or the date a business sends notice to the New York Attorney General, whichever is first. Regardless, in no case may an action be brought “after six years from the discovery of the breach by the company unless the company took steps to hide the breach.”

The SHIELD Act empowers the New York Attorney General to sue both for injunctions and civil penalties when businesses fail to comply with the Act’s reasonable security requirements. It explicitly excludes, however, any private right of action under the reasonable security requirement provisions.

California Releases Proposed CCPA Regulations

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California Attorney General Xavier Becerra released yesterday a Notice of Proposed Rulemaking Action and Proposed Regulations for the California Consumer Privacy Act. The Attorney General will hold four public hearings to address these regulations on December 2, 3, 4, and 5, 2019. The written comment period will then end on December 6, 2019. These regulations are intended to operationalize the CCPA and provide clarity to assist in the implementation of the law. The CCPA requires the Attorney General to adopt initial regulations on or before July 1, 2020.

The proposed regulations provide specific guidance regarding various CCPA provisions, including: (1) notices businesses must provide to consumers under the CCPA; (2) practices for handling consumer requests made pursuant to the CCPA; (3) practices for verifying the identity of the consumer making those requests; (4) practices regarding the personal information of minors; and (5) practices for the offering of financial incentives.

We will follow up with a more detailed discussion of the draft regulations in a separate blog post.

The CCPA Could Reset Data Breach Litigation Risks

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A&B Abstract:

While much has been written about the California Consumer Privacy Act (CCPA), the focus has primarily been on the new rights it affords California consumers to have access to and control use of their data and opt out of many transfers to third parties. While this is a sea change in data privacy legislation in the United States, perhaps the greatest risk to businesses covered by the CCPA is that the CCPA creates a private right of action – with substantial statutory damages – for data breaches. This change will likely reset litigation risks in California in the post-data-breach context and may have significant implications for data breach litigation across the country.

Overview of the CCPA Breach Provisions

The CCPA will do two significant things for the first time in the world of data breach litigation. First, it will give consumers the ability to sue businesses when their “nonencrypted or nonredacted personal information … is subject to an unauthorized access and exfiltration, theft, or disclosure as a result of the business’s violation of the duty to implement and maintain reasonable security procedures and practices appropriate to the nature of the information.” This private right of action comes into play when the statutory trigger has been met and the incident is a result of the business’s failure to implement and maintain “reasonable security procedures and practices.” This reasonable security requirement essentially codifies negligence claims found in much of today’s post-breach litigation. Second, the CCPA is the first U.S. law to provide for statutory damages in connection with data security incidents, including penalties of $100 to $750 per incident, actual damages, and injunctive relief.

There are two aspects of this portion of the CCPA that provide some hope to breached entities. The definition of personal information used for the private right of action provision of the CCPA is the narrower definition of personal information set forth in the  current California data breach notification law, Section 1798.81.5, rather than the now famously broad definition of personal information under the CCPA (information that “identifies, relates to, describes, is capable of being associated with, or could reasonably be linked, directly or indirectly, with a particular consumer or household.”) The statute also requires both access and exfiltration, theft, or disclosure, which is a more exacting standard than those state breach notification laws that only require unauthorized access to personal data.

Damages: Amount & Factors for Consideration by a Court

The CCPA authorizes courts to award statutory damages in such action of between $100 and $750 “per consumer per incident” or to award actual damages, whichever is greater. Id. § 1798.150(a)(1)(A). The statute directs courts to consider a number of factors in assessing the amount of statutory damages to award, “including, but not limited to, the nature and seriousness of the misconduct, the number of violations, the persistence of the misconduct, the length of time over which the misconduct occurred, the willfulness of
the defendant’s misconduct, and the defendant’s assets, liabilities, and net worth.” Id. § 1798.150(a)(2).[1] These statutory damages are substantial. Moreover, the mere existence of statutory damages will provide data breach plaintiffs with a new argument for standing (which otherwise can be problematic).

First, the statute purports to allow consumers to sue even when they have not suffered any damages as a result of the breach. This is in stark contrast to the most common data breach claims that consumers bring against victims of data breaches today. Those suits are typically based on negligence and/or breach of implied contract theories, both of which require plaintiffs to prove actual damages as an element of their claims. This risk is particularly acute in litigation brought by consumers following the theft of payment card
data, where actual damages are often lacking and are difficult to quantify since payment cards are often canceled and reissued after a data breach and financial institutions are generally required to reimburse consumers for unauthorized charges.

Plaintiffs who attempt to allege a violation of the CCPA will still be constrained – at least in federal court – by the constitutional requirement that they suffer a legally cognizable injury-in-fact in order to have standing to sue. This requirement has been difficult to satisfy for plaintiffs in data breach class actions. Moreover, because the U.S. Supreme Court has held that the mere violation of a statute alone is insufficient to confer Article III standing when it is otherwise lacking, the existence of a private-right-of-action provision in the CCPA does not automatically grant plaintiffs the right to bring a claim in federal court. Courts will ultimately need to address the intersection between the CCPA’s private-right-of-action provision and Article III standing requirements, and this will be an evolving area of the law that companies should pay close attention to over the next several years.

Second, the amount of statutory damages under the CCPA increases the potential overall exposure companies could face in data breach litigation. The statutory damages, which range from $100 to $750 per incident, can add up very quickly, particularly if a large number of records are impacted by the breach.

Third, the prospect of an award of statutory damages has significant class certification implications if the plaintiffs bring a claim for a violation of the CCPA. Defendants have argued in past data breach cases that individualized damages issues are a significant hurdle to trying the plaintiffs’ claims classwide. While the existence of individualized damages issues alone is generally not sufficient to defeat a motion for class certification, it can be part of a powerful argument that predominance is lacking. Thus, in CCPA litigation, defendants will likely have to place a greater emphasis on other defenses to class certification, including case-specific issues that predominate over issues common to the putative class.

Reasonable Security Standard

The CCPA’s private right of action allows for damages when (1) a company experienced a security incident or data breach; and (2) the company failed to maintain reasonable security practices and procedures. This begs the question of what constitutes “reasonable security.” While a detailed discussion of this topic is beyond the scope of this article, potential defendants under the statute should address this issue in their CCPA implementation programs.

In considering this issue, note that California’s former attorney general, Senator Kamala Harris, provided quite clear guidance on what she considered reasonable security. In February 2016, the attorney general’s office released the California Data Breach Report, which analyzed breaches from 2012 to 2015 and provided guidance on what businesses could consider reasonable security. The guidance focuses on the 20 controls in the Center for Internet Security’s (CIS) Critical Security Controls (previously known as the SANS Top 20).  According to Attorney General Harris, these controls “identify a minimum level of information security that all organizations that collect or maintain personal information should meet. The failure to implement all the Controls that apply to an organization’s environment constitutes a lack of reasonable security.” While Attorney General Harris’s guidance does not have the force of law, it is hard to ignore this guidance for purposes of analyzing these provisions of the CCPA.

Of course, there are a number of other third-party protocols similar to the CIS Controls that one might also assert constitute “reasonable security.” These include the National Institute of Standards and Technology Cybersecurity Framework (NIST), which is now well established and in its latest revision has over 900 individual security measures, the Control Objectives for Information and Related Technologies (COBIT) created by ISACA, and the International Organization for Standardization (ISO) ISO/IEC 27000:2018 standards, and many others.[2]

The FTC has also been active in establishing at least what does not constitute reasonable security in its eyes. There have been a number of FTC enforcement actions against companies involving security issues, including In the Matter of Accretive Health Inc., Docket No. C-4432; In the Matter of Uber Technologies Inc., Docket No. C-4662; In the Matter of DSW Inc., Docket No. C-4157; In the Matter of the TJX Companies Inc., Docket No. C-4227; In the Matter of Goal Financial LLC, Docket No. C-4216; and In the Matter of Twitter Inc., Docket No. C-4316. Of course, there has also been significant litigation in this area somewhat expanding (FTC v. Wyndham Worldwide Corporation, 799 F. 3d 236 (3d Cir. 2015)) and contracting (LABMD Inc. v. FTC, 894 F.3d 1221 (11th Cir. 2018)) the FTC’s oversight in this area.

Companies subject to existing regulatory regimes have for some time dealt with security standards such as the Health Insurance Portability and Accountability Act (HIPAA) Security Rule, 45 C.F.R. §§ 160, 164(a), 164(c), and the Gramm–Leach–Bliley (GLB) Safeguards Rule, 15 U.S.C. 6801(b), 6805(b)(2) (among others, although data subject to HIPAA and GLB is currently excepted from application of the CCPA). In the wake of the CCPA, however, companies that have not previously been subject to express regulation of their security practices should now affirmatively consider whether their security programs will allow them to comfortably assert that they have met their “reasonable security” obligation under the CCPA.

National Litigation Implications

Because it includes an express private right of action and authorizes courts to award statutory penalties, the CCPA will substantially increase litigation risk and exposure for companies that are subject to a data breach. The impact will be most strongly felt when claims are brought by (or on behalf of a class of) California residents or against a company that is organized or maintains its principal place of business in California, where the argument for the application of California law will be the strongest. See Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 821 (1985) (holding that due process is violated when a court attempts to apply the law of one state with “little or no relationship” to the transaction “in order to satisfy the procedural requirement that there be a ‘common question of law’”). Nevertheless, the CCPA could have broader implications for data breach litigation nationwide.

First, it could incentivize plaintiffs to file more data breach class actions in California, though plaintiffs will be constrained in their ability to do so by the Supreme Court’s decision in Bristol-Meyers Squibb Co. v. Superior Court, 137 S. Ct. 827 (2017), which holds that state courts generally cannot exercise personal jurisdiction over an out-of-state defendant for claims brought by nonresident plaintiffs.

Second, plaintiffs’ lawyers are also likely to try to effectively expand the scope of the CCPA’s private-right-of-action provision by attempting to bring suit or violations of the CCPA under California’s Unfair Competition Law, Cal. Bus. & Prof. Code § 17200. That statute prohibits plaintiffs from engaging in “any unlawful, unfair or fraudulent business act or practice,” and allows plaintiffs to “borrow[] violations of other laws and treat[] them as unlawful practices that the unfair competition law makes independently actionable.” Cel-Tech Communications Inc. v. Los Angeles Cellular Telephone Co., 20 Cal. 4th 163, 180 (1999). Plaintiffs are likely to try to argue that any violation of the CCPA, regardless of whether it falls within the private-right-of-action provision, is actionable under the Unfair Competition Law. While this has not yet been litigated, companies will have a strong argument that plaintiffs should not be able to evade the narrow scope of the private-right-of-action provision in this manner. The CCPA’s private-right-of-action
provision expressly states that nothing in the CCPA “shall be interpreted to serve as the basis for a private right of action under any other law.” Cal. Civ. Code § 1798.150(c). By including this provision in the law, it stands to reason that the legislature expressly intended to exempt the CCPA from the reach of the Unfair Competition Law. Nevertheless, companies should carefully monitor litigation in this area, as a court ruling to the contrary could dramatically increase the litigation risk posed by the CCPA. See also
Robert D. Phillips, Jr. & Gillian H. Clow, An Update on the California Consumer Privacy Act and Its Private Right of Action, available at https://www.alston.com/en/insights/publications/2018/09/california-consumerprivacy-act.

[1] In order to bring a private right of action under the CCPA, the consumer is required to first “provide[] a business 30 days’ written notice identifying the specific provisions of this title the consumer alleges have been or are being violated.” Cal. Civ. Code § 1798.150(b).

[2] A few other states have included similar reasonableness standards in their breach notification statutes (although these statutes do not include corresponding private rights of action). For example, Indiana, I.C. Sec. 24-4.9-3-3.5 (c) (states that “a data base owner shall implement and maintain reasonable procedures, including taking any appropriate corrective action, to protect and safeguard from unlawful use or disclosure any personal information of Indiana residents collected or maintained by the data base owner.”

New York DFS Unveils Two New Divisions Focused on Consumer Protection, Financial Enforcement and Cybersecurity

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New York State’s Department of Financial Services (DFS) recently unveiled two new divisions with broad enforcement authority focused on consumer protection, financial enforcement, and cybersecurity.  Financial service providers should take note as New York and other states continue to shore up their enforcement capabilities.

Consumer Protection & Financial Enforcement

DFS’ highly touted Consumer Protection and Financial Enforcement (“CPFE”) division was launched on April 29, 2019.  The CPFE’s debut marks the latest DFS action to solidify the Department’s position as “a leader in financial services regulation.”

Heralded by acting Superintendent Linda Lacewell as a “powerhouse”, the CPFE is tasked with broad responsibility, specifically: (1) protecting and educating consumers; (2) combating consumer fraud; (3) ensuring that DFS-regulated entities serve the public in compliance with state and federal law; (4) developing investigative leads and intelligence in the banking, insurance, and financial services arenas, with a particular focus on cybersecurity events; and (5) developing and directing supervisory, regulatory and enforcement policy regarding financial crimes.

The Department created its new mega group by merging its enforcement operation with the division which conducts DFS’ civil and criminal investigations (formerly known as the Financial Frauds and Consumer Protection or “FFCP”).  The CPFE’s creation follows DFS’ pronouncement last year that it was prepared to step in to “fill voids” in areas where consumer and market protections are rolled back on the federal level.  The announcement also follows the news that the Consumer Finance Protection Bureau (“CFPB”) will adjust its focus from enforcement to “preventing harm”.  The Bureau’s shift in approach was announced by Kathleen L. Kraninger during her first policy address as the CFPB’s new Director on April 17, 2019.  Director Kraninger expressed the “hope that our emphasis on prevention will mean that we need our enforcement tool less often.”

The CPFE division will be headed by Katherine A. Lemire, who is expected to draw upon her decade of prosecutorial experience at the federal (Assistant United States Attorney in the Southern District of New York) and state (Assistant District Attorney in the New York County District Attorney’s Office) levels.  During her time in the Manhattan U.S. Attorney’s office, Ms. Lemire’s work included the prosecution of disgraced political donor Norman Hsu – sentenced to over 24 years in prison – and the corruption conviction of City Council Member Miguel Martinez.  Referred to by the NY Daily News as a “legal Howitzer,” Ms. Lemire also served as special counsel to then-NYPD Commissioner Raymond Kelly.

Upon entering the private sector, Ms. Lemire founded an international compliance and investigative services firm.  As part of a 2017 roundtable discussion on “How to Conduct Internal Investigations Efficiently and Effectively,” the new CPFE head shared the following insights on effectively working with government investigators to “narrow the scope” of subpoena requests in order to minimize client costs and business disruption:

Remember that prosecutors are people too … they can be reasonable. If confronted with a very broad subpoena seeking, for example, a large swath of documents over the course of years, it may make sense to call the prosecutor and find out whether you may narrow the scope of responsive documents. Often, prosecutors will provide specifics regarding the target of the investigation, and work with you to produce documents in a time-efficient manner. Prosecutors typically have investigative priorities, and if you can provide a proposed schedule for document/materials production, they will often work with you so that they can get what they need the most in a rapid fashion. Relatedly, you may be able to spare yourself producing materials that are not within the actual scope of materials needed. While they are the “expert” in the investigation, you are the “expert” in your business — prosecutors may be asking for materials they do not actually need, and with some education from you, you may be able to narrow the scope of the investigation.

The unveiling of its new “mini CFPB” marks yet another recent DFS milestone, highlights of which include over three billion dollars in fines imposed as a result of investigations into foreign exchange trade rigging, and the issuance of “whistleblower” guidance to all DFS-regulated entities.  The whistleblower guidance is especially significant in light of the Department’s position that “a robust whistleblowing program is an essential element of a comprehensive compliance program for regulated financial service companies”.  And, while not intended to provide a “one size fits all” model, the guidance sets forth ten “important principles and practices” of an “effective whistleblowing program”:

  • Whistleblower reporting channels are independent, well-publicized, easy to access, and consistent;
  • Strong protections to guard whistleblower anonymity;
  • Procedures to identify and manage potential conflicts of interest;
  • Adequate staff training on how to receive and act upon whistleblower complaints, as well as manage investigations, referrals and escalations;
  • Procedures to investigate allegations of wrongdoing;
  • Procedures to ensure valid complaints are followed-up appropriately;
  • Protections against whistleblower retaliation;
  • Confidential process;
  • Appropriate internal and external oversight of the whistleblowing function; and
  • Culture of top-down support for the whistleblowing function.

Cybersecurity

On May 22, 2019 the Department launched a new Cybersecurity division, advertised as the “first of its kind at a banking or insurance regulator” which will focus on “protecting consumers and industries from cyber threats.”  The emergence of DFS’ new Cybersecurity division follows the Department’s signature enactment, its 2018 cybersecurity law (23 NYCRR 500) upon which the FTC has “primarily based” its latest proposed information security program requirements.  The new division’s emergence “builds upon DFS’ nation-leading efforts to protect consumers and financial markers from cyberattacks” and also follows the March 1, 2019 deadline by which all DFS-regulated institutions were required to submit comprehensive risk-based cybersecurity programs for protecting consumer’s private data.

Justin Herring will head the new Cybersecurity division, joining DFS from the New Jersey U.S. Attorney’s Office where he served as Chief of the Cyber Crimes Unit and also worked as a member of the U.S. Attorney’s Economic Crimes Unit.  The DFS signaled its intention to continue its efforts to combat cybercrime by “hiring additional experts as necessary,” in addition to utilizing and developing its personnel’s existing subject-matter expertise.

According to the DFS’ announcement, the role of the new Cybersecurity division will be to “enforce the Department’s cybersecurity regulations, advise on cybersecurity examinations, issue guidance on DFS’ cybersecurity regulations, and conduct cyber-related investigations in coordination with the Consumer Protection and Enforcement Division.”