Cybersecurity Regulation for Covered Entities, their CPA’s, IT Consultants and other Third Party Service Providers
The DFS released a letter this week outlining expected cybersecurity regulation requirements for the financial institutions it regulates — which include, among other entities, state-chartered banks, insurance companies, and mortgage brokers, originators and service providers [such as CPA firms and IT Consultants] — and seeking collaboration with other regulators on such matters. The proposal is aimed at “increasing cyber security defenses” within the financial sector by requiring mandatory quarterly audits, multifactor authentication, and comprehensive written policies and procedures, as well as imposing more stringent requirements for cyber incident notification and the management of third-party service providers. The letter does not formally propose or introduce regulatory text or commence any public review-and-comment period.
The DFS’s November 9 letter, addressed to eighteen other federal and state regulators and standard-setting bodies, and also disseminated publicly by the DFS, is intended to “spark additional dialogue, collaboration and, ultimately, regulatory convergence among our agencies on new, strong cyber security standards for financial institutions.” Among the addressees were the U.S. Securities and Exchange Commission, the Federal Reserve Board of Governors, the U.S. Department of the Treasury, the National Association of Insurance Commissioners and the U.S. Consumer Financial Protection Bureau. Referring to a “demonstrated need for robust regulatory action in the cyber security space,” the DFS stated its intent to coordinate with other federal and state agencies to develop a comprehensive cybersecurity framework.
In highlighting the need for regulatory action, the DFS pointed to research it has conducted in recent years, including several surveys of banking organizations and insurers regarding their cybersecurity practices. The findings from these surveys led the DFS to expand its information technology examination procedures, which included conducting risk assessments of financial institutions. In its proposal, the DFS stressed that its findings raised concerns about regulated companies’ susceptibility to cyber-attacks — particularly since these institutions often rely heavily on third-party service providers for critical banking and insurance functions. As the DFS noted, “A company may have the most sophisticated cyber security protections in the industry, but if its third-party service providers have weak systems or controls, those protections will be ineffective.”
While noting that its proposal is not intended to be exhaustive and “may be subject to further revision,” the DFS set forth the following expected cybersecurity regulation requirements:
Covered entities would be required to implement and maintain written cybersecurity policies and procedures addressing twelve specified areas, including data governance and classification, customer data privacy, vendor and third-party management, and incident response. Covered entities would also have to ensure that these policies and procedures cover third-party service providers, as well as any applications utilized by the entities.
- Management of Third-Party Service Providers: Covered entities would be required to implement and maintain policies and procedures to ensure the security of sensitive data accessible to third-party service providers, including requiring “minimum preferred terms” in service contracts that call for
- (1) the use of multi-factor authentication to limit access to sensitive data and systems;
- (2) the use of encryption to protect sensitive data in transit and at rest;
- (3) notice to be provided in the event of a cyber security incident;
- (4) the indemnification of the entity in the event of a cyber security incident that results in loss;
- (5) the ability of the entity or its agents to perform cyber security audits of the third party vendor; and
- (6) representations and warranties by the third party vendors concerning information security.the use of encryption, the ability to conduct vendor audits, third-party representations, and warranties and indemnification of the entity in the event of a cybersecurity incident that results in loss.
- Designated CISO: Covered entities would be required to designate a chief information security officer (“CISO”) to oversee and implement cybersecurity policies and procedures. The CISO would also be required to submit an annual report to the DFS, reviewed by the company’s Board of Directors, assessing the cybersecurity program and risks.
- Cybersecurity Personnel and Training: Covered entities would be required to employ qualified personnel capable of managing the company’s cybersecurity risks and would need to provide mandatory training to such personnel. The use of third parties to meet these requirements is permitted.
- Quarterly and Annual Audits: Covered entities would be required to conduct annual penetration testing and quarterly vulnerability assessments, in addition to maintaining an audit trail system. The audit trail system must log privileged user access to critical systems, protect log data and the integrity of hardware from alteration or tampering, and log system “events,” such as access and alterations made to the audit trail.
- Cyber Incident Notification: Covered entities would be required to immediately notify the DFS of any cyber incident that has a “reasonable likelihood of materially affecting the normal operation of the entity,” including any cyber incident that (i) involves the notification of the company’s Board of Directors; (ii) triggers other notification provisions under New York law; or (iii) compromises private information, nonpublic personal health information, payment card information or any biometric data.
The DFS invited feedback from the eighteen addressees on its regulatory proposal, emphasizing that cybersecurity is “a global concern that affects every industry at all levels.” In the coming weeks and months, we expect other federal and state regulators to weigh in on the DFS proposal. In addition to existing DFS regulations concerning cybersecurity and customer privacy, it is important to note that many of the agencies addressed in this letter have already themselves issued cybersecurity regulations and guidance. It is not clear from the November 9 letter how, if at all, new cybersecurity requirements will be integrated with existing regulations, or whether such regulations will themselves be subject to amendment. The broad list of recipients of the letter only highlights the number and breadth of government regulators focused on cybersecurity concerns within the financial sector.
The clear message here is very clear for third party service providers. New York City is the financial heart of the United States. This proposal is going to gain traction, so its only a matter of time. aBIZinaBOX is substantially compliant with these requirements today through:
- The deployment of Okta Enterprise MFA SSO and MDM throughout our practice.
- The use of Apple MDM for iOS devices and Google MDM for Android and Chrome devices.
- Membership in AICPA PCPS, CAQ and participation in the National Systems Review Process for Peer Review.
- Active participation in FINCEN, FINRA, and FTSE compliance programs
- Membership in the organizations that support European Securities and Markets Authority (ESMA),European Systemic Risk Board (ESRB) and Alternative Investment Fund Managers Directive (AIFMD) including the ICAEW.
If you are a CPA firm you should have a peer review [even if TAX or Virtual Financial Services Provider Only], and a SOC Attest Engagement if you are a Virtual Financial Services Provider only. [We are hopeful that existing regulations will be modified to make these requirements mandatory under NASBA state licensing requirements and Circular 230.
If you are a consumer of third party services, ASK YOUR PROVIDER FIRM TO CERTIFY AND PROVIDE PROOF OF COMPLIANCE with all of these requirements.
Ask any vendor of software to produce the relevant attest reports for review, and UNDER NO CIRCUMSTANCES UTILIZE ANY SaaS software that hasn’t had the attest engagement performed.
Original Document Source: New York Department of Financial Services (“the DFS”) Letter