March 1, 2017 marks the effective date of the New York State Department of Financial Services (NYDFS) Cybersecurity Requirements for Financial Services Companies (the Rules). We previously reported on these emerging standards during their comment period. This update provides practical guidance and commentary relating to the first 180 day transition period.
Who is Covered?
The regulation is expected to impact a large number of businesses, to include those directly supervised by the NYDFS and many of their third party service providers and third party application providers. Whether or not a company is headquartered in New York, the Rules apply to all entities subject to the authority of NYDFS under New York banking, insurance and financial services law ("Covered Entities"). Some entities are exempt from parts of the Rule (including many smaller companies, although even they have compliance and filing requirements), and some insurance and reinsurance entities that are subject to other New York regulations may be exempt from this Rule entirely. These regulations will not apply to national banks and federal branches of foreign banks but will apply to New York-licensed lenders and branches of foreign banks. Covered companies will also need to consider the application of any federal cybersecurity guidelines.
What Do Senior Executives and the Board Need to Know?
It may seem like the distant future, but every year (starting on February 15, 2018) either the Chairperson of the Board of Directors or a Senior Officer will be required to sign a statement that the Chairperson or Officer has reviewed all the applicable documents about their company (and about their vendors) that are necessary to certify that the Covered Entity complied with the Rules during the prior year. Of course, to make that representation, the company actually needs to have met the Rule's requirements over the prior year. That's why leadership is required now, together with internal or external advice in the areas of cybersecurity, insurance, and legal compliance.
Requirements for the First Compliance Period
The Rules are divided into 16 discrete sections, seven of which must be completed within the next 180 days (the others have start dates of one year, 18 months, or two years). For purposes of this newsflash, we will start with the first compliance period. To be sure, the reason behind some of the longer transition periods is not simply a matter of pacing; some of them require longer periods of time to effectuate. As a result, it would be a mistake to wait too long before assessing those requirements as well. Still, it's important to start somewhere, so let's address the initial transition period.
By August 28, 2017, Covered Entities must meet the following requirements:
- Cybersecurity Program (and Documentation). Develop and maintain a cybersecurity program designed to protect the confidentiality, integrity and availability of the Covered Entity's information systems. This program must be based on the entity's Risk Assessment which, according to the Rules, is not due for a year. Significantly, all documentation and information relevant to the program must be made available to the superintendent upon request.
- Cybersecurity Policy and Incident Response Plan. Develop and maintain a written cybersecurity policy and incident response plan. The policy also must be based on the Risk Assessment.
- CISO. Designate a qualified individual for overseeing and implementing the cybersecurity program and enforcing cybersecurity policy. The person does not need a CISO title, and a third party can be used.
- Continuously Trained Cybersecurity Personnel. Use qualified personnel (including third party service providers) that maintain sufficient current knowledge and training to manage changing cybersecurity threats and countermeasures.
- Limit Access Privileges. Also to be based on the Risk Assessment, companies are expected to limit user access privileges, and to periodically review those privileges.
- Notice of Cybersecurity Events to the Superintendent. Beginning August 28, 2017, Covered Entities must start notifying the NYDFS no later than 72 hours after it determines an act or attempt, successful or unsuccessful, was made to gain unauthorized access to, disrupt or misuse an "Information System" (separately defined) or the information stored on it, if the event (a) requires notice to a government body, self-regulatory agency or any other supervisory body, or (b) has a "reasonable likelihood of materially harming any material part of the normal operation" of the Covered Entity.
- Risk Assessment. Although not formally required under the Rule until March 1, 2018, until NYDFS provides further guidance, Covered Entities would be well advised at a minimum to conduct a limited risk assessment as it relates to the development and implementation of a cybersecurity program, cybersecurity policies, and access privilege restrictions, specific to the company's systems, services, and data.
Will Firms be Allowed Discretion in Their Risk Decisions?
The NYDFS requires covered financial services firms to conduct a periodic risk assessment that is "sufficient to inform the design of the cybersecurity program," which must be accompanied by documentation that describes "how identified risks are mitigated or accepted based on the risk assessment."
Yet, within its Assessment of Public Comments, the NYDFS expressly stated that the required risk assessment "is not intended to permit a cost-benefit analysis of acceptable losses where an institution is faced with cybersecurity risks." That statement may prove quite controversial, as it defies the conventional wisdom behind enterprise risk management. For example, in its well-regarded Cybersecurity Framework, the National Institute of Standards & Technology specifically points to cost effectiveness as a proper component of cybersecurity risk management: "The resulting Framework, created through collaboration between government and the private sector, uses a common language to address and manage cybersecurity risk in a cost-effective way based on business needs without placing additional regulatory requirements on businesses."
In short, the NYDFS states that covered entities can accept some risks, but fails to set out what standards it will use to determine whether those decisions are reasonable or, to similarly effect, how it will decide what cybersecurity measures it will deem as having been feasible within a specific business model and risk context. Covered companies probably do not need to be reminded that the Superintendent has the authority to take remedial action against any covered company not complying with the Rules.
Fortunately, the NYDFS has demonstrated its receptiveness to considering public comment, and indeed a number of valuable changes were made between the initially proposed regulation and the current version. As such, entities that are covered under the Rules would be well-served to continue to provide comments throughout and beyond the two-year phased transition period.
 See Ernest (Ernie) T. Patrikis et. al, New York's New Cybersecurity Rules: What Is Required?, White & Case Technology Newsflash, (October 16, 2016); Arlene Hahn and Brandon Freeman, New York Regulators Propose Stricter Cybersecurity Rules, White & Case Technology Newsflash, (September 23, 2016).
 New York Department of Financial Services Website, Who We Supervise, dfs.ny.gov/about/whowesupervise.htm (last modified Feb. 1, 2017).
 N.Y. Codes, R. & Regs. tit.23, §500.09(a) (NYCRR).
 23 NYCRR §500.09(b)(3).
 Assessment of Public Comments for New Part 500 to 23 NYCRR, New York State Department of Financial Services (February 2017), dfs.ny.gov/legal/regulations/proposed/rp500apc.pdf.
 Framework for Improving Critical Infrastructure Cybersecurity, National Institute of Standards and Technology, v. 1.1, p. 1 (February 12, 2014), nist.gov/sites/default/files/documents/cyberframework/cybersecurity-framework-021214.pdf.
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