Alston & Bird Consumer Finance Blog


NY DFS Releases Revised Proposed Second Amendment of its Cybersecurity Regulation

The New York Department of Financial Services (“NY DFS”) published an updated proposed Second Amendment to its Cybersecurity Regulation (23 NYCRR Part 500) in the New York State Register on June 28, 2023, updating its previous proposed Second Amendment, which was published November 9, 2022. While the language proposed is largely similar to the previous draft, which we previously summarized, NY DFS incorporated a number of changes as a result of the 60-day comment period.

Below we outline some of the key revisions to the proposed Second Amendment of NY DFS’s Cybersecurity Regulation compared to the previously issued version from November 9, 2022:

  • Risk Assessment (§§ 500.01 & 500.09). NY DFS previously proposed (in the November 2022 draft) to revise the definition of “Risk Assessment,” which NY DFS has repeatedly emphasized is a core and gating requirement for compliance with the Cybersecurity Regulation, permitting covered entities to “take into account the specific circumstances of the covered entity, including but not limited to its size, staffing, governance, businesses, services, products, operations, customers, counterparties, service providers, vendors, other relations and their locations, as well as the geographies and locations of its operations and business relations.” By contrast, the newly proposed definition more formally defines the components of and inputs to the risk assessment: “Risk assessment means the process of identifying, estimating and prioritizing cybersecurity risks to organizational operations (including mission, functions, image and reputation), organizational assets, individuals, customers, consumers, other organizations and critical infrastructure resulting from the operation of an information system. Risk assessments incorporate threat and vulnerability analyses, and consider mitigations provided by security controls planned or in place.” The revised definition omits the explicit reference to tailoring and customization currently found in § 500.09.  The removal of this language and codification of the risk assessment’s general parameters suggests that although risk assessments can and should be customized to some extent, NY DFS may expect risk assessments to address a more standard set of components that as a general framework is not open to customization.
    • In addition, NY DFS removed the requirement that Class A companies (which are generally large entities with at least $20M in gross annual revenue in each of the last two fiscal years from business operations in New York, and over 2,000 employees, on average over the last two years, or over or over $1B in gross annual revenue in each of the last two fiscal years from all business operations) use external experts to conduct a risk assessment once every three years.
  • Multi-factor Authentication (“MFA”) (§ 500.12). NY DFS continues to stress the importance of MFA in the newly revised draft of the proposed Second Amendment by broadening the requirement (relative to the current MFA requirements and proposed draft from November 2022) and bringing it in alignment with the FTC’s amended Safeguards Rule. In the revised language, MFA is explicitly required to “be utilized for any individual accessing any of the covered entity’s information systems,” (with limited exceptions, outlined below); NY DFS removed from § 500.12(a), (1) the pre-requisite that MFA be implemented based on the covered entity’s risk assessment, and (2) the option of implementing other effective controls, such as risk-based authentication. By doing so, NY DFS appears to strongly recommend MFA implementation across the board, despite retaining the limited exception if the CISO approves in writing a reasonably equivalent or more secure compensating controls (and such controls must be reviewed periodically, and at least annually).
    • For covered entities that fall under the limited exemption set forth in § 500.19(a), which are generally smaller covered entities (based on number of employees and/or annual revenue), MFA must at least be utilized for (1) remote access to the covered entity’s information systems, (2) remote access to third-party applications that are cloud-based, from which nonpublic information is accessible, and (3) all privileged accounts other than service accounts that prohibit interactive logins. As with all other covered entities, the CISO may approve, in writing, reasonably equivalent or more secure compensating controls, but such controls must be reviewed periodically, and at least annually.
  • Incident Response Plan (“IRP”) and Business Continuity and Disaster Recovery Plan (“BCDR”) (§ 500.16). NY DFS added an additional requirement that a covered entity’s IRP include requirements to address the root cause analysis of a cybersecurity event, describing how the cybersecurity event occurred, the business impact from the cybersecurity event, and remediation steps to prevent reoccurrence. NY DFS clarified that the IRP and BCDR must be tested at least annually, and must include the ability to restore the covered entities “critical data” and information systems from backup (but NY DFS does not define “critical data”). As noted in our previous summary, the concept of BCDR is new as of the Second Amendment and not currently in effect in the existing regulation.
  • Annual Certification of Compliance (§ 500.17(b)). NY DFS maintains its current requirement of an annual certification of compliance by a covered entity, but has adjusted the standard for certification from “in compliance” to a certification that the covered entity “materially complied” with the Cybersecurity Regulation during the prior calendar year.  Although NY DFS does not define material compliance, this revision should provide some flexibility for covered entities to complete the certification.  Going forward, covered entities would be presented with two options: (i) submit a written certification that it “materially complied” with the regulation (§ 500.17(b)(1)(i)(a)); or (ii) a written acknowledgment that it did not “fully comply” with the regulation (§ 500.17(b)(1)(ii)(a)), while also identifying “all sections…that the entity has not materially complied with” (§ 500.17(b)(1)(ii)(b)).  It is unclear how NY DFS intends for covered entities to parse the distinction between material compliance and a lack of full compliance, but the requirement for the covered entity to list each section with which it was not in material compliance suggests that it may expect a section-by-section analysis of material compliance for purposes of completing the certification process.
  • Penalties (§ 500.20). Interestingly, NY DFS added that it would take into consideration the extent to which the covered entity’s relevant policies and procedures are consistent with nationally-recognized cybersecurity frameworks, such as NIST, in assessing the appropriate penalty for non-compliance with the Cybersecurity Regulation.  DFS maintains its proposed amendment that a “violation” is: (1) the failure to secure or prevent unauthorized access to an individual’s or entity’s NPI due to non-compliance or (2) the “material failure to comply for any 24-hour period” with any section of the regulation.

The revised proposed Second Amendment are subject to a 45-day comment period, ending August 14, 2023.

Alston & Bird Expands Privacy and Cybersecurity Capabilities with Former FTC Veteran

Alston & Bird has expanded its privacy and cybersecurity litigation practice in Washington, D.C. with partner, Kathleen Benway. Benway, a former U.S. Federal Trade Commission (FTC) chief of staff, brings exceptional experience at the FTC, FCC, and in the Senate with consumer protection law and policy, especially in privacy and data security. She arrives from Wilkinson Barker Knauer LLP.

Benway has more than 12 years of service at the FTC, including most recently as chief of staff for the agency’s Bureau of Consumer Protection (BCP). While at the FTC, Benway served as chief of staff to three former directors of the agency’s BCP, where she managed day-to-day operations, represented the bureau in interactions with FTC commissioners, and assisted with congressional relations.

Benway also held a number of other positions at the FTC. In addition to serving as attorney advisor to former FTC Commissioner Julie Brill and counsel to the director of the BCP, she led investigations and litigated enforcement actions as a senior attorney in the bureau’s Privacy and Identity Protection Division and Marketing Practices Division. Additionally, she served two details as counsel to the Senate Committee on Commerce, Science, and Transportation, where she assisted in investigations and advised senators, staff, and other stakeholders on proposed legislation and policy issues within the FTC’s jurisdiction.

Benway also served at the U.S. Federal Communications Commission, where she was assistant chief of the Enforcement Bureau.

The addition of Benway represents the latest expansion of Alston & Bird’s Privacy & Cybersecurity Litigation practice. She follows Wim Nauwelaerts, who joined as partner in the firm’s Brussels office in October, and Amy Mushahwar, who joined as partner in Washington, D.C. in April.

To read the full press release, click here.

SHIELD Act Overhauls New York’s Data Breach Notification Framework

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.

Alston & Bird Details 21 Potentially Significant Impacts from Draft CCPA Regulations

Late last week, the California Attorney General published much-anticipated proposed Regulations under the California Consumer Privacy Act (“CCPA”). The Regulations are extensive and contain a number of potentially material business impacts.

To help companies work through the Regulations, Alston & Bird’s Privacy & Data Security team published a client advisory outlining “21 Potentially Significant Business Impacts” from the proposed CCPA Regulations. View the full advisory here.

This advisory tackles a number of issues likely of interest to companies attempting to get ready for CCPA, including:

  • Why posting a CCPA privacy policy on your website may not be enough to satisfy your CCPA notice obligations – instead you may need additional “just in time” notices at every specific point where you collect data (or lose the right to collect it);
  • Why you may hear discussions about a potential return of Do Not Track in the online context, this time as a “Do Not Sell My Info” request;
  • Why brick-and-mortar interactions with consumers may require companies to facilitate “offline” CCPA rights requests; and
  • Why companies that take a position as vendor or service provider may need to examine any aspect of their business that involves pooling customer data for regulatory risk.

Alston & Bird is closely following the development of the CCPA and its Regulations. For more information, contact Jim HarveyDavid KeatingAmy MushahwarKaren Sanzaro, or Daniel Felz.

California Releases Proposed CCPA Regulations

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.