    [Senate Hearing 114-78]
    [From the U.S. Government Publishing Office]

                                                             S. Hrg. 114-78

                       GETTING IT RIGHT ON DATA SECURITY
                      AND BREACH NOTIFICATION LEGISLATION
                             IN THE 114TH CONGRESS

    =======================================================================

                                    HEARING

                                   BEFORE THE

                      SUBCOMMITTEE ON CONSUMER PROTECTION,
                           PRODUCT SAFETY, INSURANCE,
                               AND DATA SECURITY

                                     OF THE

                             COMMITTEE ON COMMERCE,
                          SCIENCE, AND TRANSPORTATION
                              UNITED STATES SENATE

                        ONE HUNDRED FOURTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                FEBRUARY 5, 2015

                                   __________

        Printed for the use of the Committee on Commerce, Science, and
                                 Transportation

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           SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                        ONE HUNDRED FOURTEENTH CONGRESS

                                 FIRST SESSION

                       JOHN THUNE, South Dakota, Chairman
    ROGER F. WICKER, Mississippi         BILL NELSON, Florida, Ranking
    ROY BLUNT, Missouri                  MARIA CANTWELL, Washington
    MARCO RUBIO, Florida                 CLAIRE McCASKILL, Missouri
    KELLY AYOTTE, New Hampshire          AMY KLOBUCHAR, Minnesota
    TED CRUZ, Texas                      RICHARD BLUMENTHAL, Connecticut
    DEB FISCHER, Nebraska                BRIAN SCHATZ, Hawaii
    JERRY MORAN, Kansas                  EDWARD MARKEY, Massachusetts
    DAN SULLIVAN, Alaska                 CORY BOOKER, New Jersey
    RON JOHNSON, Wisconsin               TOM UDALL, New Mexico
    DEAN HELLER, Nevada                  JOE MANCHIN, West Virginia
    CORY GARDNER, Colorado               GARY PETERS, Michigan
    STEVE DAINES, Montana
                  David Schwietert, Republican Staff Director
                  Nick Rossi, Republican Deputy Staff Director
                   Rebecca Seidel, Republican General Counsel
               Jason Van Beek, Republican Deputy General Counsel
                     Kim Lipsky, Democratic Staff Director
                  Chris Day, Democratic Deputy Staff Director
           Clint Odom, Democratic General Counsel and Policy Director
                                     ------

      SUBCOMMITTEE ON CONSUMER PROTECTION, PRODUCT SAFETY, INSURANCE, AND
                               DATA SECURITY \1\

    JERRY MORAN, Kansas, Chairman        RICHARD BLUMENTHAL, Connecticut,
    ROY BLUNT, Missouri                      Ranking
    TED CRUZ, Texas                      CLAIRE McCASKILL, Missouri
    DEB FISCHER, Nebraska                AMY KLOBUCHAR, Minnesota
    DEAN HELLER, Nevada                  EDWARD MARKEY, Massachusetts
    DAN SULLIVAN, Alaska                 CORY BOOKER, New Jersey
    CORY GARDNER, Colorado               TOM UDALL, New Mexico
    STEVE DAINES, Montana

        \1\ On March 3, 2015 the Committee finalized Member assignments for
    its subcommittees. The list below reflects March 3, 2015 assignments.
    When this hearing was held, on February 5, 2015, formal assignments had
    not yet been made.
                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on February 5, 2015.................................     1
    Statement of Senator Moran.......................................     1
    Statement of Senator Blumenthal..................................     3
    Statement of Senator Fischer.....................................    50
    Statement of Senator Schatz......................................    52
    Statement of Senator Blunt.......................................    54
    Statement of Senator Thune.......................................    55
    Statement of Senator Klobuchar...................................    57
    Statement of Senator Daines......................................    60

                                   Witnesses

    Cheri F. McGuire, Vice President, Global Government Affairs and
      Cybersecurity Policy, Symantec Corporation.....................     5
        Prepared statement...........................................     6
    Mallory B. Duncan, General Counsel and Senior Vice President,
      National Retail Federation.....................................    11
        Prepared statement...........................................    12
    Ravi Pendse, Ph.D., Vice President and Chief Information Officer,
      Brown University, Cisco Fellow, Professor of Practice, Computer
      Science and Engineering........................................    30
        Prepared statement...........................................    32
    Doug Johnson, Senior Vice President and Senior Advisor for Risk
      Management Policy, American Bankers Association................    34
        Prepared statement...........................................    36
    Hon. Lisa Madigan, Attorney General, State of Illinois...........    38
        Prepared statement...........................................    40
    Yael Weinman, Vice President, Global Privacy Policy and General
      Counsel, Information Technology Industry Council (ITI).........    43
        Prepared statement...........................................    45

                                    Appendix

    Stephen Orfei, General Manager, Payment Card Industry Security
      Standards Council, prepared statement..........................    65
    Response to written questions submitted by Hon. Roy Blunt to:
        Cheri F. McGuire.............................................    66
        Mallory B. Duncan............................................    67
    Response to written questions submitted to Doug Johnson by:
        Hon. Jerry Moran.............................................    68
        Hon. Roy Blunt...............................................    70
    Response to written questions submitted by Hon. Roy Blunt to:
        Yael Weinman.................................................    71

                       GETTING IT RIGHT ON DATA SECURITY
                      AND BREACH NOTIFICATION LEGISLATION
                             IN THE 114TH CONGRESS

                                  ----------

                           THURSDAY, FEBRUARY 5, 2015

                                   U.S. Senate,
          Subcommittee on Consumer Protection, Product
                  Safety, Insurance, and Data Security,
            Committee on Commerce, Science, and Transportation,
                                                        Washington, DC.
        The Subcommittee met, pursuant to notice, at 10 a.m. in
    room SR-253, Russell Senate Office Building, Hon. Jerry Moran,
    presiding.
        Present: Senators Moran [presiding], Thune, Blunt, Fischer,
    Daines, Klobuchar, Blumenthal, and Schatz.

                OPENING STATEMENT OF HON. JERRY MORAN,
                        U.S. SENATOR FROM KANSAS

        Senator Moran. As I indicated, this is the first
    subcommittee hearing I have chaired in 8 years in Congress, and
    I was nervous, apparently nervous enough not to turn on the
    microphone.
        We look forward to being educated and getting a good
    understanding. First, I want to thank my colleagues and their
    level of interest in this important topic. I would also like to
    thank, as I said, our witnesses for joining us today. Expertise
    is important to us as Members of Congress, and unfortunately,
    this is a very timely topic.
        The purpose of this hearing is in many ways somewhat
    narrow, it is to examine the merits of the Federal data
    security standard and the need for preemptive and uniform
    Federal data breach notification.
        We all know we live in a digital world where consumers have
    embraced online products and services. Kansans, my folks at
    home, they know they can make purchases, determine their credit
    score, conduct banking and examine health care plans all from a
    mobile phone, computer, or a tablet. That is true of consumers
    across the country and increasingly around the globe.
        This digital economy creates new risks. In a world where
    one bad actor can battle against a team of highly trained
    experts, we face challenges to make certain that consumers are
    protected and that businesses have the tools and incentives to
    protect their customers from harm.
        For more than a decade, Congress, the Commerce Committee in
    particular, has been contemplating issues surrounding data
    security and data breach notification.
        In 2004, the Committee held its first congressional hearing
    to examine the high profile breach of ChoicePoint, a data
    aggregation firm. This breach forced the first of many
    conversations here in Congress, and today, we continue that
    dialogue.
        Recent high profile data breaches as well as the headline
    grabbing Sony cyberattack from late last year are the latest
    examples that highlight the ongoing and serious cyber threats
    that face Americans and businesses.
        Just this morning, we woke up to news of what experts are
    calling the largest health care breach to date. This time, the
    cyber criminals were able to infiltrate the nation's second
    largest health insurer to steal names, birth dates, medical
    I.D.'s, Social Security numbers, street addresses, e-mail
    addresses, and employment information, including income data.
        These high profile breaches are the most severe of what
    have become a common occurrence in our digital society. As of
    2015, the Privacy Rights Clearinghouse has estimated more than
    4,400 breaches involving more than 932 million records that
    have been made public since 2005.
        The Verizon 2014 data breach investigation report reviewed
    more than 63,000 security incidents and found 1,367 confirmed
    data breaches in 2013. On average, that is just shy of four
    breaches every day.
        While Congress has developed sector specific data security
    requirements for both financial institutions and companies that
    handle particular types of health information, Congress has
    been unable to reach consensus on the development of national
    data security and data breach notification standards.
        As a result, states have taken on this task by developing
    their own standards and as of today, businesses are subjected
    to a patchwork of over 50 different state, district, and
    territory laws that determine how businesses must notify
    consumers in the event of a breach. In addition, 12 states have
    enacted laws regarding data security practices.
        The need for Federal action becomes clearer each day. Last
    month President Obama voiced his support for national data
    breach notification legislation with strong preemptive language
    in part because he recognizes the benefits to American
    consumers and businesses of a predictable uniform data breach
    notice.
        The President's support along with bipartisan and bicameral
    congressional interest has renewed optimism among stakeholders
    that Congress can develop a balanced and thoughtful approach
    with legislation in the near term.
        Today, we will focus our attention on some of the key
    questions and topics of this debate, including what are the
    benefits of a national data breach notification standard?
    Should Congress implement a basic data security standard, to
    whom should that standard apply, should the Federal standard
    preempt state standards?
        What should be the trigger for notification, specific
    conditions that represent a potential harm to consumers, should
    there be exemptions and safe harbors, if so, for who, in what
    circumstances? Within what time-frame should a company be
    required to notify consumers?
        Should Congress enact new or stronger penalties for
    enforcement authorities and remedies? What lessons can we learn
    from states that have implemented their own data breach
    notification standards?
        I am confident that our panel with its expertise can share
    valuable insight into those questions and others that the
    Committee members may have, and help us find the right balance
    to these issues.
        I would like to recognize the Subcommittee's Ranking
    Member, Senator Blumenthal, for him to deliver his opening
    statement, and I would indicate to Senator Blumenthal here in
    public as we have in private, that I look forward to working
    very closely with you in a very thoughtful and bipartisan way
    to see that our Subcommittee accomplishes good things for the
    country.

                 STATEMENT OF HON. RICHARD BLUMENTHAL,
                     U.S. SENATOR FROM CONNECTICUT

        Senator Blumenthal. Thank you. First of all, my thanks to
    Senator Moran for his leadership, and in a very bipartisan way,
    for reaching out to me and also convening this subcommittee on
    a critically important topic. I really look forward to his
    continued insight and very thoughtful leadership on consumer
    protection issues. I am proud to serve as the Ranking Member of
    this very important subcommittee.
        I have served on this subcommittee for two years now. It is
    critical to consumer issues that affect every day Americans. We
    have delved into the General Motors' recall and the deadly
    Takata airbags.
        Today, the issue of data breach is no less central to
    American lives, even if it seems somewhat less spectacular.
    2014 was known as the year of the data breach. The importance
    of this issue was brought home, as Senator Moran said, just
    this morning when we read about the Anthem breach, which is
    absolutely breathtaking in its scope and scale.
        It is not only breathtaking but mind-bending in its extent
    and potential impact, and it is potentially heartbreaking for
    consumers who may be affected, not only birthdays, addresses,
    e-mail and employment information, but also Social Security
    numbers and income data were taken from Anthem, and
    potentially, although the company has said there is no evidence
    of it so far, critical health information.
        This breach comes after J.P. Morgan indicated a loss of
    personal information to hackers of about 83 million households.
        Of course, in November, hackers, the United States
    Government has said, had ties to the North Korean government,
    orchestrated a disruptive attack on Sony. The Sony attack would
    be comedy, but it is literally no laughing matter to other
    businesses, including financial institutions on Wall Street,
    health insurers and others whose vital data may be taken.
        To quote the FBI Agent in New York, Leo Taddeo, who
    supervises the Cyber and Special Operations Division, ``We are
    losing ground in the battle with hackers.''
        In December 2013, we first learned about Target's data
    breach, which affected credit card information and personal
    contact information for as many as 110 million consumers.
        The point here is that these losses of data are not only
    losses to these companies; they are potentially life changing
    losses to consumers. Target, J.P. Morgan, and Anthem failed not
    only the companies, but they failed their customers and
    consumers when these data breaches occurred.
        This fact of life is more than the cost of doing business
    for these companies. It is an invasion of their privacy. It is
    an invasion of consumer privacy, potentially theft of identity
    and personal assets.
        The billions of dollars that could have been saved by
    consumers, creditors, banks, and others if companies and
    universities who were collecting sensitive data spent money and
    resources on better protecting that information is one of the
    facts that brings us here today.
        As Attorney General, I brought a number of enforcement
    cases against companies that violated Connecticut's data breach
    law. I worked with my colleagues, including Lisa Madigan, who
    is here today, and I express special appreciation to her for
    her great work in this area, and I worked with Kelly Ayotte,
    who is now a colleague.
        This issue is hardly a partisan one. In fact, it is
    distinctly bipartisan, involving stronger protections for
    sensitive consumer data, and we recognize the states as
    laboratories of democracy and the great work they have done in
    this area.
        Let me just conclude by saying I think we have a lot of
    work that needs to be done, a lot of good work that should be
    done, but one guiding principle is: first do no harm. That is
    do no harm to the state protections and state enforcers who
    every day are seeking to protect their citizens from the
    scourge and spreading problem of data theft, in order for
    consumers to trust retailers, banks, and online sales, they
    need to know their data is secure without abuse, whether they
    are shopping online or at a bricks and mortar stores.
        Consumers expect retailers collecting their sensitive
    personal information will do everything in their power to
    protect that data. That is a reasonable expectation. They have
    a right to expect better than they are now receiving from
    retailers, companies, insurers, banks, all of the institutions,
    including universities and non-profits that increasingly have
    the coin of the realm, which is data about consumers.
        Thank you, Mr. Chairman.
        Senator Moran. Thank you, Senator Blumenthal. We now will
    turn to our witnesses. With us today is Ms. Cheri F. McGuire.
    She is Vice President of Global Government Affairs and
    Cybersecurity Policy for Symantec Corporation.
        Mr. Mallory Duncan, Senior Vice President and General
    Counsel of the National Retail Federation.
        Dr. Ravi Pendse, who is the Chief Information Officer at
    Brown University, but easier for me to say Wichita State
    University, his previous employer.
        Ms. Yael Weinman, Vice President for Global Privacy and
    General Counsel, Information Technology Industry Council.
        The Honorable Lisa Madigan, the Attorney General of the
    State of Illinois, and finally, Mr. Doug Johnson, Senior Vice
    President and Senior Advisor for Risk Management Policy, Office
    of the Chief Economist of the American Bankers Association.
        Ms. McGuire, let's begin with you.

             STATEMENT OF CHERI F. McGUIRE, VICE PRESIDENT,

              GLOBAL GOVERNMENT AFFAIRS AND CYBERSECURITY

                      POLICY, SYMANTEC CORPORATION

        Ms. McGuire. Thank you so much, Chairman Moran, Ranking
    Member Blumenthal, and members of the Subcommittee. Thank you
    for the opportunity to testify today on this very important
    issue.
        As the largest security software company in the world,
    Symantec's global intelligence network is made up of millions
    of sensors that give us an unique view of the entire Internet
    threat landscape.
        As we all have seen, even as of this morning, the recent
    headlines about cyber attacks have focused mostly on data
    breaches across a spectrum of industries. These network
    intrusions that result in stolen data have deep and profound
    impacts for the individuals who must worry about and clean up
    their identities, for the organizations whose systems have been
    penetrated, and for the governments trying to establish the
    right notification policies as well as deter and apprehend the
    perpetrators.
        The magnitude of threats of personally identifiable
    information is unprecedented. Over just the past 2 years alone,
    the number of identities exposed through network breaches is
    approaching one billion. Those are just the ones we know about.
        While many assume breaches are the result of sophisticated
    malware or well-resourced state actor, the reality is much more
    troubling. According to a recent report from the Online Trust
    Alliance, 90 percent of last year's breaches could have been
    prevented if organizations implemented basic cybersecurity best
    practices.
        While the focus on data breaches and the identities put at
    risk is certainly warranted, we also must not lose sight of the
    other types of cyber attacks that are equally concerning and
    can have dangerous consequences.
        There are a wide set of tools available to the cyber
    attacker, and the incidents we see today range from basic
    confidence schemes to massive denial of service attacks to
    sophisticated and potentially destructive intrusions into
    critical infrastructure systems.
        The attackers, of course, run the gamut and include highly
    organized criminal enterprises, disgruntled employees,
    individual cyber criminals, so-called ``hacktivists,'' and
    state-sponsored groups.
        While the continuing onslaught of data breaches is well
    documented, what seems to get less attention are the causes of
    data breaches and what can be done to prevent them. Targeted
    attacks are the single largest cause, most of which rely on
    social engineering, or in simple terms, tricking people into
    doing something they would not do if fully aware of the
    consequences of their actions.
        Last year, nearly 60 percent of data breaches occurred
    through network intrusions by unauthorized users. Another major
    cause is a lack of basic computer hygiene practices. While good
    security will stop most of these attacks, which often seek to
    exploit older known vulnerabilities, many organizations do not
    have up-to-date security or patch systems, do not make full use
    of the security tools available to them, or have security
    unevenly applied throughout their enterprise.
        What can we do? Cybersecurity is about managing risk,
    assessing one's risk and developing a plan is essential. For
    organizations, there are many guidelines including, as you
    discussed yesterday, the NIST Cybersecurity Framework, the FCC
    guidelines for small businesses, the Online Trust Alliance data
    protection and breach readiness guide, and many others.
        For the individual, we provide resources for managing
    online security to our Norton customers, and the FTC and others
    have many tips available on their websites. In fact, just this
    week the SEC published best practices for individual investors
    to secure their online accounts. In short, there is no shortage
    of available resources.
        Strong security should include intrusion protection,
    reputation based security, behavioral based blocking, data
    encryption backups, and data loss prevention tools. While the
    criminals' tactics are constantly evolving, basic cyber hygiene
    is still the simplest and most cost effective first step.
        Turning to the policy landscape, Symantec supports, as you
    said, Chairman Moran, a balanced and thoughtful national
    standard for data breach notification built on three
    principles.
        First, the scope of any legislation should apply equally to
    all entities that collect, maintain, or sell significant
    numbers of records containing sensitive personal information.
    This covers both the Government and private sector.
        Second, implementing pre-breach security measures should be
    central to any legislation. New legislation should not simply
    require notifications of consumers in case of a breach, but
    should seek to minimize the likelihood of a breach in the first
    place.
        Third, encryption or other proven security measures that
    render data unreadable and unusable at rest or in transit
    should be a key element to establish the risk based threshold
    for notification. This limits the burden for both consumers and
    for the breached organizations.
        At Symantec, we are committed to improving online security
    across the globe, and we will continue to work collaboratively
    with our partners on ways to do so.
        Thank you again for the opportunity to testify today, and I
    will look forward to your questions later.
        [The prepared statement of Ms. McGuire follows:]

        Prepared Statement of Cheri F. McGuire, Vice President, Global
       Government Affairs and Cybersecurity Policy, Symantec Corporation
        Chairman Moran, Ranking Member Blumenthal, distinguished members of
    the Committee, thank you for the opportunity to testify today on behalf
    of Symantec Corporation.
        My name is Cheri McGuire and I am the Vice President for Global
    Government Affairs and Cybersecurity Policy at Symantec. I am
    responsible for Symantec's global public policy agenda and government
    engagement strategy, which includes cybersecurity, data integrity,
    critical infrastructure protection (CIP), and privacy. I lead a team of
    professionals spanning the U.S., Canada, Europe, and Asia, and
    represent the company in key policy organizations. In this capacity, I
    work extensively with industry and government organizations, and
    currently serve on the World Economic Forum Global Agenda Council on
    Cybersecurity, as well as on the boards of the Information Technology
    Industry Council, the U.S. Information Technology Office (USITO) in
    China, and the National Cyber Security Alliance. From 2010 to 2012, I
    was Chair of the Information Technology Sector Coordinating Council--
    one of 16 critical sectors identified by the President and the U.S.
    Department of Homeland Security (DHS) to partner with the government on
    CIP and cybersecurity. I am also a past board member of the IT
    Information Sharing and Analysis Center (IT-ISAC). Previously, I served
    in various positions at DHS, including as head of the National Cyber
    Security Division and U.S. Computer Emergency Readiness Team (US-CERT).
        Symantec protects much of the world's information, and is a global
    leader in security, backup and availability solutions. We are the
    largest security software company in the world, with over 32 years of
    experience developing Internet security technology and helping
    consumers, businesses and governments secure and manage their
    information and identities. Our products and services protect people's
    information and their privacy across platforms--from the smallest
    mobile device, to the enterprise data center, to cloud-based systems.
    We have established some of the most comprehensive sources of Internet
    threat data in the world through our Global Intelligence Network, which
    is comprised of millions of attack sensors recording thousands of
    events per second, and we maintain 10 Security Response Centers around
    the globe. In addition, we process billions of e-mail messages and web
    requests across our 14 global data centers. All of these resources
    allow us to capture worldwide security data that give our analysts a
    unique view of the entire Internet threat landscape.
        The hearing today not only is timely--given the recent high profile
    data breaches--but also is a critically important discussion that will
    help focus attention on what businesses can do to protect themselves
    from similar attacks and how Congress can craft effective data breach
    legislation. Symantec welcomes the opportunity to provide comments to
    the Committee as it looks at how to prevent and respond to data
    breaches.
        In my testimony today, I will discuss:

       The current cyber threat landscape;

       How breaches are happening, including the methods criminals
            are using to steal data;

       Security measures to protect data and prevent breaches; and

       Key elements for data breach legislation.
    The Current Cyber Threat Landscape
        Most of the recent headlines about cyber attacks have focused on
    data breaches across the spectrum of industries, which have become an
    all too common occurrence. Breaches impact individuals whose identities
    have been stolen, the organizations with systems that have been
    penetrated, and governments that are seeking ways to set data breach
    policies and to apprehend the perpetrators. Organizations that suffered
    significant breaches over the past few years include the State of South
    Carolina, Target, Neiman Marcus, Michael's, Home Depot, and Sony, just
    to name a few.
        The theft of personally identifiable information (PII) over this
    time-frame is simply unprecedented--over just the past two years alone,
    the number of identities exposed through breaches will likely approach
    one billion. And this is just from known breaches as many go unreported
    or undetected. Recent data breaches have touched all parts of society
    and across the globe, from governments and businesses to celebrities
    and individual's households. While many assume that breaches are the
    result of sophisticated malware or a well-resourced state actor, the
    reality is much more troubling. According to a recent report from the
    Online Trust Alliance, 90 percent of last year's breaches could have
    been prevented if organizations implemented basic cybersecurity best
    practices.\1\
    ---------------------------------------------------------------------------
        \1\ https://www.otalliance.org/news-events/press-releases/ota-
    determines-over-90-data-breaches-2014-could-have-been-prevented
    ---------------------------------------------------------------------------
        In addition, the statistics from our 2014 Internet Security Threat
    Report are clear that the cyber threats we are facing on a day to day
    basis are growing. More than 550 million identities were exposed in
    2013, which was an increase of 62 percent over the prior year, and the
    top eight breaches exposed more than 10 million identities each. These
    breaches often exposed real names, birth dates and/or government ID
    numbers (e.g., social security numbers). Some records also exposed
    other highly sensitive data, such as medical records or financial
    information.
        While the focus on data breaches and the identities put at risk is
    certainly warranted, we also must not lose sight of the other types of
    cyber attacks that are equally concerning and can have dangerous
    consequences. There are a wide set of tools available to the cyber
    attacker, and the incidents we see today range from basic confidence
    schemes to massive denial of service attacks to sophisticated (and
    potentially destructive) intrusions into critical infrastructure
    systems. The economic impact can be immediate with the theft of money,
    or more long term and structural, such as through the theft of
    intellectual property. It can ruin a company or individual's reputation
    or finances, and it can impact citizens' trust in the Internet and
    their government.
        The attackers run the gamut and include highly organized criminal
    enterprises, disgruntled employees, individual cybercriminals, so-
    called ``hacktivists,'' and state-sponsored groups. The motivations
    vary--the criminals generally are looking for some type of financial
    gain, the hacktivists are seeking to promote or advance some cause, and
    the state actors can be engaged in espionage (traditional spycraft or
    economic) or infiltrating critical infrastructure systems. These lines,
    however, are not set in stone, as criminals and even state actors might
    pose as hacktivists, and criminals often offer their skills to the
    highest bidder. Attribution has always been difficult in cyberspace,
    and is further complicated by the ability of cyber actors to mask their
    motives and objectives through misdirection and obfuscation.
    How Data Breaches are Occurring
        While the continuing onslaught of data breaches is well documented,
    what is less understood is why data breaches happen and what can be
    done to prevent them. Targeted attacks remain a major cause. Some are
    direct attacks on a company's servers, where attackers search for
    unpatched vulnerabilities on websites or undefended connections to the
    Internet. But most rely on social engineering--in the simplest of
    terms, tricking people into doing something they would not do if fully
    aware of the consequences of their actions. E-mail is still a major
    attack vector and can take the form of broad mailings (``phishing'') or
    highly targeted messages (``spear phishing''). More and more we see the
    latter variety, with publicly available information used to craft an e-
    mail designed to dupe a specific victim or group of victims. The goal
    of both varieties is to get victims to open an infected file or go to a
    malicious or compromised website.
        Another major cause of breaches is a lack of basic computer hygiene
    practices. While good security will stop most of these attacks--which
    often seek to exploit older, known vulnerabilities--many organizations
    do not have up-to-date security or patched systems, do not make full
    use of the security tools available to them, or have security unevenly
    applied throughout their enterprise. Even today--despite the recent
    focus on the loss of personal information--a large segment of the
    workforce handles sensitive information on unprotected mobile devices,
    servers, desktops, and laptops.
        E-mail, web mail, and removable storage devices are another source
    of breaches. Most of us, at one time or another, have e-mailed
    something to our personal e-mail address from our office so that we can
    work on it later. If our e-mail accounts or home computers are
    compromised, or if we misplace the thumb drive we use to transport
    files, any sensitive, unencrypted data is now lost and our organization
    suffers a data breach. And of course, breaches can occur through
    outright theft, often by a fired or disgruntled employee.
        Cybercriminals are also targeting the places where we ``live and
    play'' online in order to get at sensitive personal data. Social media
    is an increasingly sinister tool for cybercriminals. It is particularly
    effective in direct attacks, as people tend to trust things that appear
    to come from a friend's social media feed. But social media is also
    widely used to conduct reconnaissance for spear phishing or other
    targeted attacks. It can provide just the kind of personal details that
    a skilled attacker can use to get a victim to let his or her guard
    down. The old cliche is true when it comes to cyber attacks: we have to
    be right 100 percent of the time in protecting ourselves, while the
    attacker only has to get it right once.
    Security Measures to Protect Data and Prevent Breaches
        Cybersecurity is about managing risk, whether at the individual or
    the organizational level. Assessing one's risk and developing a plan is
    essential. For the individual, the Federal Trade Commission's website
    is an excellent starting point for doing so.\2\ The website provides
    educational resources for how to better protect your identity and
    privacy online as well as helpful tools to help you report and recover
    if your personal information is ever stolen.
    ---------------------------------------------------------------------------
        \2\ http://www.consumer.ftc.gov/topics/privacy-identity
    ---------------------------------------------------------------------------
        For organizations of any size, the NIST Cyber Security Framework
    \3\, developed by industry and government in 2014 and in which Symantec
    was an active contributor, provides a solid structure for risk
    management. It lays out five core cybersecurity functions (Identify,
    Protect, Detect, Respond and Recover) that all organizations can use to
    plan for managing cyber events and protecting against data breaches, as
    well as useful references to international standards. As detailed
    below, good security starts with the basics and includes measures
    specific to one's needs.
    ---------------------------------------------------------------------------
        \3\ http://www.nist.gov/cyberframework/
    ---------------------------------------------------------------------------
    Basic Security Steps
        When it comes to security, it starts with the basics. Though
    criminals' tactics are continually evolving, good cyber hygiene is
    still the simplest and most cost-effective first step. Strong passwords
    remain the foundation of good security--on home and work devices, e-
    mail, social media accounts, or whatever you use to communicate (or
    really anything you log into). And these passwords must be different,
    because using a single password means that a breach of one account
    exposes all of your accounts. Using a second authentication factor
    (whether through a text message, a smart card, biometrics, or a token
    with a changing numeric password) significantly increases the security
    of a login.
        Patch management is also vital. Individuals and organizations
    should not delay installing patches, or software updates, because the
    same patch that closes a vulnerability can be a roadmap for a criminal
    to exploit and compromise any unpatched devices. The reality is that a
    large percentage of computers around the world, including some in large
    organizations, do not get patched regularly, and cybercriminals count
    on this. While so-called ``zero day exploits''--previously unknown
    critical vulnerabilities--get the most press, it is older, unpatched
    vulnerabilities that cause most systems to get compromised.
    Modern Security Software
        Poor or insufficiently deployed security can also lead to a breach,
    and a modern security suite that is being fully utilized is also
    essential. While most people still commonly refer to security software
    as ``anti-virus'' or AV, advanced security protection is much more than
    that. In the past, the same piece of malware would be delivered to
    thousands or even millions of computers. Today, cybercriminals can take
    the same malware and create unlimited unique variants that can slip
    past basic AV software. If all your security software does is check for
    signatures (or digital fingerprints) of known malware, you are by
    definition not protected against even moderately sophisticated attacks.
    Put differently, a check-the-box security program that only includes
    installation of basic AV software may give you piece of mind--but that
    is about all it will give you.
        Modern security software does much more than look for known
    malware: it monitors your system, watching for unusual Internet
    traffic, activity, or system processes that could be indicative of
    malicious activity. At Symantec we also use what we call Insight and
    SONAR, which are reputation-based and behavior-based heuristic security
    technologies. Insight is a reputation-based technology that uses our
    Global Intelligence Network to put files in context, using their age,
    frequency, location and other characteristics to expose emerging
    threats that might otherwise be missed. If a computer is trying to
    execute a file that we have never seen anywhere in the world and that
    comes from an unknown source, there is a high probability that it is
    malicious--and Insight will either warn the user or block it. SONAR is
    behavior-based protection that uses proactive local monitoring to
    identify and block suspicious processes on computers.
    Tailoring Security to the Device
        Security should also be specific to the device being protected. For
    example, modern Point of Sale (PoS) systems, which were linked to a
    number of major data breaches, are at their core just computers running
    mainstream operating systems. Because a user on such a device typically
    does not browse the web, send e-mails, or open shared drives, the
    functionally of the machine and the files that actually need to be on
    it are limited. This allows businesses to reduce the attack surface by
    locking down the system and using application control tools, as well as
    controlling which devices and applications are allowed to access the
    network. Doing so can render many strains of malware useless because
    they would not be allowed to run on the devices.
        In addition, payment card system infrastructure is highly complex
    and threats can be introduced at any number of points within the
    system. Last year we released a report, Attacks on Point of Sale
    Systems, that provides an overview of the methods that attackers may
    use to gain entry into a system.\4\ It also describes the steps that
    retailers and other organizations can use to protect PoS systems and
    mitigate the risk of an attack.
    ---------------------------------------------------------------------------
        \4\ Special Report on Attacks on Point of Sale Systems, Symantec
    Security Response (February 2014). http://www.symantec.com/content/en/
    us/enterprise/media/security_response/whitepap
    ers/attacks_on_point_of_sale_systems.pdf
    ---------------------------------------------------------------------------
    Encrypting and Monitoring Data
        Encryption also is key to protecting your most valuable data. Even
    the best security will not stop a determined attacker, and encrypting
    your sensitive data provides defense in breadth, or across many
    platforms. Good encryption ensures that any data stolen will be useless
    to virtually all cybercriminals. The bottom line in computer security
    is no different from physical security--nothing is perfect. We can make
    it hard, indeed very hard, for an attacker, but if resourced and
    persistent criminals want to compromise a particular company or site,
    with time they are probably going to find a way to do it. Good security
    means not just doing the utmost to keep them out, but also to recognize
    that you must take steps to limit any damage they can do should they
    get in.
        Data loss Prevention (DLP) tools are also important in keeping your
    most valuable data safe and securely on your system. The latest DLP
    technology allows the user to monitor, protect and manage confidential
    data wherever it is stored and used--across endpoints, mobile devices,
    networks, and storage systems. It can help stop the theft of sensitive
    data by alerting the system manager before the data is exfiltrated, or
    moved outside the system.
    Key Elements for Data Breach Legislation
        In the U.S. today, there are at least 48 state-specific data breach
    notification laws. This creates an enormous compliance burden,
    particularly for smaller companies, and does little to actually protect
    consumers. Symantec supports a national standard for data breach
    notification, built on three principles:

      1.  Data security legislation should apply equally to all. The scope
            of any legislation should include all entities that collect,
            maintain, or sell significant numbers of records containing
            sensitive personal information. Requirements should apply to
            government and the private sector equally, and should include
            educational institutions and charitable organizations as well.
            By the same token, any new legislation should consider existing
            Federal regulations that govern data breach for some sectors
            and not create duplicative, additional, or conflicting rules.

      2.  Implementing pre-breach security measures should be a part of any
            legislation. Breaches are much less costly for companies that
            are proactive in applying security. New legislation should not
            simply require notification of consumers in the event of a data
            breach, but should seek to minimize the likelihood of a breach
            by pushing organizations to take reasonable security measures
            to ensure the confidentiality and integrity of sensitive
            personal information. Numerous standards, best practices, and
            guidelines already exist to help organizations establish a
            cybersecurity program or improve an existing one.

      3.  The use of encryption or other security measures that render data
            unreadable and unusable should be a key element in establishing
            the threshold for the need for notification. Any notification
            scheme should minimize ``false positives''--notices to
            individuals who are later shown not to have been impacted by a
            breach because their data was rendered unusable before it was
            stolen. A clear reference to the ``usability'' of information
            should be considered when determining whether notification is
            required in case of a breach. Promoting the use of encryption
            as a best practice would significantly reduce the number of
            ``false positives,'' thus reducing the burden on consumers,
            businesses, and governments.
    Conclusion
        Data breaches are continuing at an unprecedented pace, putting
    consumers at risk and damaging the public's trust in the Internet.
    While we cannot prevent every cyber attack or every data breach,
    applying cybersecurity best practices and using risk management
    principles to protect data appropriately can significantly reduce the
    attack surface and the impacts we see today. Moreover, legislation
    cannot stop breaches from happening, but smart data breach legislation
    can help businesses and governments respond effectively and
    efficiently, and empower consumers with accurate and timely
    information. At Symantec, we are committed to improving online security
    and we look forward to continuing to work with government and industry
    on ways to do so. Thank you again for the opportunity to testify, and I
    will be happy to answer any questions you may have.

        Senator Moran. Exactly 5 minutes. Thank you very much. Mr.
    Duncan?

                    STATEMENT OF MALLORY B. DUNCAN,

               GENERAL COUNSEL AND SENIOR VICE PRESIDENT,

                       NATIONAL RETAIL FEDERATION

        Mr. Duncan. Chairman Moran, Ranking Member Blumenthal,
    members of the Subcommittee, thank you for this opportunity.
        Data breaches need to be correctly and forcibly addressed.
    They fundamentally affect our economy's push toward greater
    efficiency and cost effectiveness.
        By way of context, there is a long history of interception
    of private communications by individuals and by governments:
    from steaming open letters to tapping into telephone
    conversations. Today, we have super computers and the Internet.
    Together, they are creating a public network with virtually no
    boundaries, far more versatile and efficient than all the
    technology that has gone before.
        Governments entrust them with critical infrastructure,
    businesses with their most valuable intellectual property, and
    millions of people type their deepest secrets into Google, all
    the while knowing the system is vulnerable to intrusion, both
    by governments and by sophisticated bad actors.
        This interconnected technology is in many ways still in its
    infancy, having really commercially begun just a quarter
    century ago. We are still discovering its capabilities, its
    limitations and risks.
        Today, we are here to address one of the most significant
    risks to emerge--data breach. It is Congress' challenge to
    incentivize companies to manage this risk in ways that preserve
    the innovation and benefits this technology clearly offers.
        How can Congress do that? There are three essential
    elements--uniform notice, express preemption, and strong
    consensus of the laws notice. Let's recognize that data
    breaches affect everyone.
        As the Chairman referenced, in the 2014 Verizon report,
    retailers suffered their share of breaches, 11 percent.
    Government agencies incurred a slightly higher percentage.
    Hotels and restaurants combined constituted 10 percent of
    breaches, while financial institutions represent 34 percent.
        It is not because those with the most breaches have the
    weakest security. It is because bad actors are always looking
    for the biggest bang for the buck, and no single set of data
    security standards is fully protective of any industry.
        In a complex economy, each type of business is vulnerable
    to data breaches in a different way, be it theft of account
    numbers or Cloud data or intellectual property. Congress needs
    to provide incentives for companies to increase their security,
    and nothing motivates like sunlight. Requiring that every
    company have the same public notice obligations will provide
    this needed light.
        Uniform notice has two benefits. It can help individuals
    take steps to protect themselves, but equally important, the
    consequences of requiring all companies to publicly expose
    their data breaches is a powerful incentive for them to improve
    security.
        NRF members are some of the best known retail companies in
    America. Recent very public breaches and discussions on how to
    avoid them have engaged our members' most senior executives. As
    a result, our members are investing in unique and tailored
    solutions in an effort to address this ever morphing problem.
        Our nation's economy is bigger than retail. Congress needs
    to encourage disclosure and the incentive for security it
    brings across the board from all entities that handle sensitive
    information.
        Preemption. There are more than 50 jurisdictions with
    breach notice laws. Many have common elements but they are not
    the same. Some cover different datasets, require particular
    state officials to be notified, and so forth.
        Mid-sized companies struggling with the consequences of a
    breach face a morass of conflicting laws that have become
    little more than traps for the unwary. In the midst of a breach
    when a company should be focusing on securing its network and
    identifying affected customers, they instead divert their
    limited resources to paying law firms to clear them from
    regulatory ``gotchas.''
        We need an uniform preemptive Federal law. It would
    simplify the process for businesses and provide consistent
    notices for consumers nationwide, but it must be real
    preemption, otherwise the Federal law just becomes the
    52nd set of requirements that companies have to
    follow, and you will have accomplished worse than nothing.
        Finally, it would not be appropriate to preempt the states
    only to adopt the weakest law. Rather, for a Federal standard,
    you should be looking well above the median, not the most
    excessive, perhaps, but language that reflects the strong
    consensus of the state laws.
        We at NRF urge you to go further, establish the same notice
    obligations for all entities handling sensitive data. Congress
    should not permit notice holes, situations where some entities
    are exempt from reporting their known breaches. If we want
    meaningful incentives to increase security, everyone needs to
    have skin in the game.
        In closing, NRF believes that those three elements, uniform
    notice, express preemption, and a strong consensus law enforced
    by Federal authorities and the state AGs, are essential steps
    to properly and forcibly address the data breach conundrum that
    is plaguing businesses and consumers.
        Thank you.
        [The prepared statement of Mr. Duncan follows:]

      Prepared Statement of Mallory B. Duncan, General Counsel and Senior
                   Vice President, National Retail Federation
        Chairman Moran, Ranking Member Blumenthal, and members of the
    Subcommittee, on behalf of the National Retail Federation (NRF), I want
    to thank you for giving us the opportunity to testify at this hearing
    and provide you with our views on data breach notification legislation
    and protecting American's sensitive information. NRF is the world's
    largest retail trade association, representing discount and department
    stores, home goods and specialty stores, Main Street merchants,
    grocers, wholesalers, chain restaurants and Internet retailers from the
    United States and more than 45 countries. Retail is the Nation's
    largest private sector employer, supporting one in four U.S. jobs--42
    million working Americans. Contributing $2.6 trillion to annual GDP,
    retail is a daily barometer for the Nation's economy.
        Collectively, retailers spend billions of dollars safeguarding
    sensitive customer information and fighting fraud. Data security is
    something that our members strive to improve every day. Virtually all
    of the data breaches we've seen in the United States during the past
    year--from attacks on the networked systems of retailers, entertainment
    and technology companies that have been prominent in the news, to a
    reported series of attacks on our largest banks that have received less
    attention--have been perpetrated by criminals that are breaking the
    law. All of these companies are victims of these crimes and we should
    keep that in mind as we explore this topic and public policy
    initiatives relating to it.
        This issue is one that we urge the Committee to examine in a
    holistic fashion: we need to reduce fraud or other economic harm that
    may result from a data breach. That is, we should not be satisfied with
    simply determining what to do after a data breach occurs--that is, who
    to notify and how to assign liability. Instead, it's important to look
    at why such breaches occur, and what the perpetrators get out of them,
    so that we can find ways to reduce and prevent not only the breaches
    themselves, but the follow-on harm that is often the goal of these
    events. If breaches become less profitable to criminals, then they will
    dedicate fewer resources to committing them, and our goals will become
    more achievable.
        With that in mind, these comments are designed to provide some
    background on data breaches and on fraud, explain how these events
    impact all business's networked systems, discuss some of the
    technological advancements retailers have promoted that could improve
    the security of our networks, offer additional ways to achieve greater
    payment security, and suggest the elements of data breach notification
    legislation that may provide the best approach to developing a uniform,
    nationwide notification standard, based on the strong consensus of
    state laws, that applies to all businesses that handle sensitive
    personal information of consumers.
    Data Breaches in the United States
        Unfortunately, data breaches are a fact of life in the United
    States, and virtually every part of the U.S. economy and government is
    being attacked in some way. In its 2014 Data Breach Investigations
    Report, Verizon determined there were 63,347 data security incidents
    reported by industry, educational institutions, and governmental
    entities in 2013, and that 1,367 of those had confirmed data losses. Of
    those, the financial industry suffered 34 percent, public institutions
    (including governmental entities) had 12.8 percent, the retail industry
    had 10.8 percent, and hotels and restaurants combined had 10 percent.
    Figure 1 below illustrates where breaches occur.
    Where Breaches Occur (Figure 1)

        Source: 2014 Data Breach Investigations Report, Verizon \1\
    ---------------------------------------------------------------------------
        \1\ 2014 Data Breach Investigations Report by Verizon, available
    at: http://www.verizon
    enterprise.com/DBIR/2014/

        It may be surprising to some, given recent media coverage, that
    three times more data breaches occur at financial institutions than at
    retailers. And, it should be noted, even these figures obscure the fact
    that there are far more merchants that are potential targets of
    criminals in this area, as there are one thousand times more merchants
    accepting card payments in the United States than there are financial
    institutions issuing cards and processing those payments. It is not
    surprising that the thieves focus far more often on banks, which have
    our most sensitive financial information--including not just card
    account numbers but bank account numbers, social security numbers and
    other identifying data that can be used to steal identities beyond
    completing some fraudulent transactions.
        These figures are sobering. There are far too many breaches. And,
    breaches are often difficult to detect and carried out in many cases by
    criminals with real resources behind them. Financially focused crime
    seems to most often come from organized groups in Eastern Europe rather
    than state-affiliated actors in China, but the resources are there in
    both cases. The acute pressure on consumer-serving companies, including
    those in e-commerce, as well as on our financial system, is due to the
    overriding criminal goal of financial fraud. We need to recognize that
    this is a continuous battle against determined fraudsters and be guided
    by that reality.
    Breaches Affect Everyone; Federal Legislation Should Be Similarly
            Comprehensive
        The Year of the Breach, as 2014 has been nicknamed, was replete
    with news stories about data security incidents that raised concerns
    for all American consumers and for the businesses with which they
    frequently interact. Criminals focused on U.S. businesses, including
    merchants, banks, telecom providers, cloud services providers,
    technology companies, and others. These criminals devoted substantial
    resources and expertise to breaching the most advanced data protection
    systems. Vigilance against these threats is necessary, but we need to
    focus on the underlying causes of breaches as much as we do on the
    effects of them.
        If there is anything that the recently reported data breaches have
    taught us, it is that any security gaps left unaddressed will quickly
    be exploited by criminals. For example, the failure of the payment
    cards themselves to be secured by anything more sophisticated than an
    easily-forged signature makes the card numbers particularly attractive
    to criminals and the cards themselves vulnerable to fraudulent misuse.
    Likewise, cloud services companies that do not remove data when a
    customer requests its deletion, leave sensitive information available
    in cloud storage for thieves to later break in and steal, all while the
    customer suspects it has long been deleted. Better security at the
    source of the problem is needed. The protection of Americans' sensitive
    information is not an issue on which unreasonably limiting
    comprehensiveness makes any sense.
        In fact, the safety of Americans' data is only as secure as the
    weakest link in the chain of entities that share that data for a
    multitude of purposes. For instance, when information moves across
    communications lines--for transmission or processing--or is stored in a
    ``cloud,'' it would be senseless for legislation to exempt these
    service providers, if breached, from comparable data security and
    notification obligations to those that the law would place upon any
    other entity that suffers a breach. Likewise, data breach legislation
    should not subject businesses handling the same sensitive customer data
    to different sets of rules with different penalty regimes, as such a
    regulatory scheme could lead to inconsistent public notice and
    enforcement.
        Given the breadth of these invasions, if Americans are to be
    adequately protected and informed, Federal legislation to address these
    threats must cover all of the types of entities that handle sensitive
    personal information. Exemptions for particular industry sectors not
    only ignore the scope of the problem, but create risks criminals can
    exploit. Equally important, a single Federal law applying to all
    breached entities would ensure clear, concise and consistent notices to
    all affected consumers regardless of where they live or where the
    breach occurs.
    Third-Party Exemptions
        Figure 2, below, illustrates what some legislative proposals,
    introduced in the last Congress, would require in terms of notice by
    third parties. This graphic illustrates a typical payment card
    transaction in which this Committee has jurisdiction over all of the
    entities except for the bank. In a typical card transaction, a payment
    card is swiped at a card-accepting business, such as a retail shop, and
    the information is transmitted via communications carriers to a data
    processor, which in turn processes the data and transmits it over
    communications lines to the branded card network, such as Visa or
    MasterCard, which in turn processes it and transmits it over
    communications lines to the card-issuing bank. (Typically there also is
    an acquirer bank adjacent to the processor in the system, which figure
    2 omits.) Some legislative proposals would only require the retail
    shop, in this example, to provide notice of a breach of security. The
    data processor, data transmitter or card company suffering a breach
    would qualify as a third-party whose only obligation, if breached, is
    to notify the retail shop of their breach--not affected consumers or
    the public--so that the retailer provides notice on their behalf. And
    the bank suffering a breach would be exempt from notifying consumers or
    the public under most Federal legislative proposals to date. Not only
    does this notice regime present an inaccurate picture to consumers, but
    it is fraught with possible over-notification because payment
    processors and card companies are in a one-to-many relationship with
    retailers. If the retailers must bear the burden for every other entity
    in the networked system that suffers a breach, then 100 percent of the
    notices would come from entities that suffer only 11 percent of the
    breaches. This is neither fair nor enlightened public policy.
    Notice Obligations Should Apply to All Breached Entities (Figure 2)
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        A recent example illustrates this point about the risk of over-
    notifying and confusing American consumers if this proposed third-party
    notice rule illustrated in Figure 2 is adopted. The largest payment
    card breach in history occurred at a payment processor, Heartland
    Payment Systems, which was breached in 2008 resulting in the compromise
    of over 130 million payment cards. If Heartland had only followed the
    proposed third-party notice rule in Federal legislation, rather than
    notifying the public of its breach (as it did), it would have only been
    obligated to separately notify each of the merchants that it processed
    payments for, letting them know the affected card numbers that were
    breached. Those merchants (who were not breached) would, in turn, have
    to request (and possibly pay for) the contact information for each
    cardholder through some arrangement with each affected card company or
    card-issuing bank, and then make notice to those affected customers
    and/or make ``substitute'' notice (where individualized notice cannot
    be made) by announcing the breach to the general public. If affected
    consumers shopped at a number of retailers that all used the same
    payment processor that suffered the breach (Heartland, in this
    hypothetical), the consumers could potentially receive slightly
    different notices from each store--all providing what they knew about
    the breach of the same payment processor--when none of those branded
    retail stores actually suffered the breach itself. This proposal
    creates an untenable public policy solution that neither serves
    consumers nor businesses that have secured their own networks.
        Just as merchants, such as Target, who have publicly acknowledged a
    breach have taken tremendous steps to heighten their security,
    Heartland continued to harden its systems (after notifying of its own
    breach) and now is recognized as one of the most secure platforms in
    the industry. The threat of public notice has had a multiplier effect
    on other commercial businesses.
        Indeed, Congress could go further: it could establish the same data
    breach notice obligations for all entities handling sensitive data that
    suffer a breach of security. Congress should not permit ``notice
    holes''--the situation where certain entities are exempt from reporting
    known breaches of their own systems. If we want meaningful incentives
    to increase security, everyone needs to have skin in the game.
    Financial Institution Exemptions
        Many legislative proposals last Congress, however, had ``notice
    holes,'' where consumers would not receive disclosures of breaches by
    certain entities. Perhaps the notice hole that has been left unplugged
    in most proposals is the exemption from notification standards for
    entities subject to the Gramm Leach Bliley Act (GLBA), which itself
    does not contain any statutory language that requires banks to provide
    notice of their security breaches to affected consumers or the public.
    Interpretive information security guidelines issued by Federal banking
    regulators in 2005 did not address this lack of a requirement when it
    set forth an essentially precatory standard for providing consumer
    notice in the event banks or credit unions were breached. Rather, the
    2005 interagency guidelines state that banks and credit unions
    ``should'' conduct an investigation to determine whether consumers are
    at risk due to the breach and, if they determine there is such a risk,
    they ``should'' provide consumer notification of the breach.\2\ These
    guidelines fall short of creating a notification requirement using the
    language of ``shall,'' an imperative command used in proposed breach
    notification legislation for entities that would be subject to Federal
    Trade Commission enforcement. Instead, banks and credit unions are left
    to make their own determinations about when and whether to inform
    consumers of a data breach.
    ---------------------------------------------------------------------------
        \2\ Interagency Guidance on Response Programs for Unauthorized
    Access to Customer Information and Customer Notice, 70 Fed. Reg. 15736
    (Mar. 29, 2005) promulgating 12 C.F.R. Part 30, app. B, Supplement A
    (OCC); 12 C.F.R. Part 208, app. D-2, Supplement A and Part 225, app. F,
    Supplement A (Board); 12 C.F.R. Part 364, app. B, Supplement A (FDIC);
    and 12 C.F.R. Part 570, app. B, Supplement A (OTS), accessible at:
    https://www.fdic.gov/news/news/financial/2005/fil2705.html.
    ---------------------------------------------------------------------------
        Several accounts in 2014 of breaches at the largest U.S. banks
    demonstrate the lack of any notice requirement under the interagency
    guidelines. It was reported in news media last Fall that as many as one
    dozen financial institutions were targeted as part of the same cyber-
    attack scheme.\3\ It is not clear to what extent customers of many of
    those institutions had their data compromised, nor to our knowledge
    have the identities of all of the affected institutions been made
    public The lack of transparency and dearth of information regarding
    these incidents reflects the fact that banks are not subject to the
    same requirements to notify affected customers of their own breaches of
    security as other businesses are required now under 47 state laws and
    would be required under most proposed Federal legislation, despite the
    fact that financial institutions hold Americans' most sensitive
    financial information. A number of the more seasoned and robust state
    laws, such as California's breach notification law, have not exempted
    financial institutions from their state's breach notification law
    because they recognize that banks are not subject to any Federal
    requirement that says they ``shall'' notify customers in the event of a
    breach of security.
    ---------------------------------------------------------------------------
        \3\ ``JP Morgan Hackers Said to Probe 13 Financial Firms,''
    Bloomberg (Oct. 9, 2014).
    ---------------------------------------------------------------------------
    Service Provider Exemptions
        Another notice hole that has remained unplugged in legislative
    proposals for many years is the service provider breach exemption,
    similar to the bank breach exemption, that would permit an entity
    providing data transmission or storage services to avoid providing
    consumer or public notice when it is aware of a breach of its data
    system. Other businesses, such as retailers, are required to provide
    notice even if they don't have the contact information for the affected
    consumers. The service provider exemption would, however, permit no
    notice at all to be made, not even to the FTC or law enforcement for a
    known breach of security affecting sensitive personal information.
    Surely Congress should not pass a disclosure law that provides a free
    pass for known breaches of security to certain service providers simply
    because they have successfully had such an exemption inserted into some
    past legislative proposals. Allowing this type of hole in notice
    requirements does not make sense. Just because a telecommunications
    provider, cloud data service, payment processor or other company
    provides a service to another business does not mean it should not have
    to provide notice of its data breaches. With an exemption for service
    providers like these, there is real risk that the public won't get
    information it needs and/or that other businesses will have to plug the
    gap and take the attendant cost and blame for someone else's data
    breach. And, of course, such a scheme would not create the incentives
    for service providers to improve their data security systems.
    General Principle for Notification
        With respect to establishing a national standard for individual
    notice in the event of a breach of security at an entity handling
    sensitive personal information, the only principle that makes sense is
    that these breached entities should be obligated to notify affected
    individuals or make public notice when they discover breaches of their
    own systems. Just as the Federal Trade Commission (FTC) expects there
    to be reasonable data security standards employed by each business that
    handles sensitive personal information, a Federal breach notification
    bill should apply notification standards that ``follow the data'' and
    apply to any entity in a networked system that suffers a breach of
    security when sensitive data is in its custody. With respect to those
    who have called upon the entity that is ``closest to the consumer'' to
    provide the notice, we would suggest that the one-to-many relationships
    that exist in the payment card system and elsewhere will ultimately
    risk having multiple entities all notify about the same breach--someone
    else's breach. This is not the type of transparent disclosure policy
    that Congress has typically sought. An effort to promote relevant
    notices should not obscure transparency as to where a breakdown in the
    system has occurred. Indeed, a public notice obligation on all entities
    handling sensitive data would create significant incentives for every
    business that operates in our networked economy to invest in reasonable
    data security to protect the sensitive data in its custody. By
    contrast, a Federal law that permits ``notice holes'' in a networked
    system of businesses handling the same sensitive personal information--
    requiring notice of some sectors, while leaving others largely exempt--
    will unfairly burden the former and unnecessarily betray the public's
    trust.
    More than 50 U.S. Jurisdictions Have Notice Laws; Congress Should Step
            in Now to Establish a Nationwide, Uniform Standard to Benefit
            Both Consumers and Businesses
        For more than a decade, the U.S. federalist system has enabled
    every state to develop its own set of disclosure standards for
    companies suffering a breach of data security and, to date, 47 states
    and 4 other Federal jurisdictions (including the District of Columbia
    and Puerto Rico) have enacted varying data breach notification laws.
    Many of the states have somewhat similar elements in their breach
    disclosure laws, including definitions of covered entities and covered
    data, notification triggers, timeliness of notification, provision
    specifying the manner and method of notification, and enforcement by
    state attorneys general. But they do not all include the same
    requirements, as some cover distinctly different types of data sets,
    some require that particular state officials be notified, and a few
    have time constraints (although the vast majority of state laws only
    require notice ``without unreasonable delay'' or a similar phrase.)
        Over the past ten years, businesses such as retailers, to whom all
    the state and Federal territory disclosure laws have applied, have met
    the burden of providing notice, even when they did not initially have
    sufficient information to notify affected individuals, through
    standardized substitute notification procedures in each state law.
    However, with an increasingly unwieldy and conflicting patchwork of
    disclosure laws covering more than 50 U.S. jurisdictions, it is time
    for Congress to acknowledge that the experimentation in legislation
    that is at the state level that defines our federalist system has
    reached its breaking point, and it is time for Congress to the step in
    to create a national, uniform standard for data moving in interstate
    commerce in order to ensure uniformity of a Federal act's standards and
    the consistency of their application across jurisdictions.
        For years, NRF has called on Congress to enact a preemptive Federal
    breach notification law that is modeled upon the strong consensus of
    existing laws in nearly every state, the District of Columbia, Puerto
    Rico and other Federal jurisdictions. A single, uniform national
    standard for notification of consumers affected by a breach of
    sensitive data would provide simplicity, clarity and certainty to both
    businesses and consumers alike. Importantly, a single Federal law would
    permit companies victimized by a criminal hacking to devote greater
    attention in responding to such an attack to securing their networks,
    determining the scope of affected data, and identifying the and
    customers to be notified, rather than diverting limited time and
    resources to a legal team attempting to reconcile a patchwork of
    conflicting disclosure standards in over 50 jurisdictions. In sum,
    passing a Federal breach notification law is a common-sense step that
    Congress should take now to ensure reasonable and timely notice to
    consumers while providing clear compliance standards for businesses.
        Preemption of state laws and common laws that create differing
    disclosure standards is never easy, and there is a long history of
    Supreme Court and other Federal courts ruling that, even when Congress
    expresses an intent to preempt state laws, limiting the scope of the
    preemption will not result in preemption. All it will accomplish is to
    add yet another law, this time federal, to the state statutes and
    common laws already in effect, resulting in the continuation of a
    confusing tapestry of state law requirements and enforcement regimes. A
    Federal act that leaves this in place would undermine the very purpose
    and effectiveness of the Federal legislation in the first place.
        In order to establish a uniform standard, preemptive Federal
    legislation is necessary. But that does not mean (as some have
    contended) that the Federal standard must or should be ``weaker'' than
    the state laws it would replace. On the contrary, in return for
    preemption, the Federal law should reflect a strong consensus of the
    many state laws. Some have called for a more robust notification
    standard at the Federal level than exists at the state level. Without
    adding unnecessary bells and whistles, NRF believes that Congress can
    create a stronger breach notification law by removing the exemptions
    and closing the types of ``notice holes'' that exist in several state
    laws, thereby establishing a breach notification standard that applies
    to all businesses--as this Committee has done in previous consumer
    protection legislation that is now Federal law. This approach would
    enable members that are concerned about preempting state laws to do so
    with confidence that they have created a more transparent and better
    notification regime for consumers and businesses alike. It is a way
    this Committee and Congress can work to enact a law with both robust
    protection and preemption.
        We urge you, therefore, in pursuing enactment of Federal breach
    notification legislation, to adopt a framework that applies to all
    entities handling sensitive personal information in order to truly
    establish uniform, nationwide standards that lead to clear, concise and
    consistent notices to all affected consumers whenever or wherever a
    breach occurs. When disclosure standards apply to all businesses that
    handle sensitive data, it will create the kind of security-maximizing
    effect that Congress wishes to achieve.
    Multi-Tiered Set of Data Security Standards Applicable to Retailers
        Theoretically, security is like defense. One could spend all one's
    money on defense and still not be 100 percent protected. In the real
    world it is even more difficult.
    Federal and State Data Security Standards
        Data security standards vary depending on the nature of an entity's
    business and where it operates. Over the past half-century, the United
    States has essentially taken a sector-specific approach to data privacy
    (including data security) requirements, and our current legal framework
    reflects this. For example, credit reporting agencies, financial
    institutions, and health care providers, just to name a few regulated
    sectors, have specific data security standards that flow from laws
    enacted by Congress, such as the Fair Credit Reporting Act (FCRA), the
    Gramm-Leach-Bliley Act (GLBA), and the Health Insurance Portability and
    Accountability Act (HIPAA), respectively. Those operating in other
    industry sectors that are subject to the jurisdiction of the Federal
    Trade Commission (FTC) must abide by the standards of care enforced by
    the FTC under Section 5 of the FTC Act, which give the Commission
    broad, discretionary authority to prosecute ``unfair or deceptive acts
    or practices'' (often referred to as their ``UDAP'' authority). On top
    of this Federal statutory and regulatory framework, states have
    regulated businesses' data security practices across a variety of
    industry sectors and enforced consumer protection laws through their
    state consumer protection agencies and/or their attorneys general.
        Legal exposure for data security failures is dependent on the
    Federal or state laws to which a business may be subject and is alleged
    to violate. The FTC, for example, has been very active in bringing over
    50 actions against a range of companies nationwide that are not
    otherwise subject to a sector-specific Federal data security law (e.g.,
    GLBA, HIPAA, etc.). For example, under its Section 5 UDAP authority,
    the FTC has brought enforcement actions against entities that the
    Commission believes fall short in providing ``reasonable'' data
    security for personal information. Nearly all of these companies have
    settled with the FTC, paid fines for their alleged violations
    (sometimes to the extent of millions of dollars), and agreed to raise
    their security standards and undergo extensive audits of their
    practices over the next several decades to ensure that their data
    security standards are in line with the FTC's order.
    Effect of Imposing GLBA-Like Standards with FTC Enforcement
        Providing the FTC, however, with the authority to enforce
    discretionary data security standards like those in the GLBA guidelines
    would dramatically expand FTC authority. Banking regulators take an
    audit/examination approach to regulating companies and work with them
    through an iterative process to help the institution come into
    compliance where it may be lacking without the threat of severe
    penalties. The FTC, by contrast, takes an enforcement approach, which
    under a GLBA guidelines standard, would require a post-hoc
    determination of a company's compliance with an amorphous standard in a
    world where the technological threat vectors are ever-changing. In an
    enforcement approach, entities are either guilty or not, and more often
    guilty by the mere fact of a breach; unlike with GLBA guidelines,
    companies regulated by the FTC are not able to get several bites at the
    apple working with regulators until they know they are in compliance
    with the regulator's vision for the rule. Companies regulated by the
    FTC would have to guess at what will satisfy the agency and, if their
    security is breached, the strong enforcement presumption would be that
    the company failed to meet the standard.
        The different enforcement regimes between financial institutions
    and entities subject to the FTC's jurisdiction is also evident in the
    manner and frequency with which fines are assessed and civil penalties
    imposed for non-compliance with a purported data security standard.
    Banks are rarely (if ever) fined by their regulators for data security
    weaknesses. But, as noted, commercial companies have been fined
    repeatedly by the FTC. Providing an agency like the FTC, with an
    enforcement approach, a set of standards with significant room for
    interpretation is likely to lead to punitive actions that are different
    in kind and effect on entities within the FTC's jurisdiction than the
    way the standards would be utilized by banking regulators in an
    examination. A punitive approach to companies already victimized by a
    crime would not be appropriate nor constructive in light of the fact
    that the FTC itself has testified before this Committee that no
    system--even the most protected one money can buy--is ever 100 percent
    secure.
    Improving Payment Card Security
        Using the best data security technology and practices available
    still does not guarantee that a business can avoid suffering a data
    security breach. Therefore, raising security standards alone may not be
    the most efficient or effective means of preventing potential harm to
    consumers. With respect to payment card numbers, for example, it is
    possible that no matter how much security is applied by a business
    storing these numbers, the numbers may be stolen from a business's
    database in a highly sophisticated security breach that can evade even
    state-of-the-art system security measures. Because of these risks, it
    makes sense for industry to do more than just apply increased network
    or database security measures. One sensible proposal is to minimize the
    storage by businesses of the full set of unredacted and unencrypted
    payment card numbers necessary to complete a transaction--a data
    protection principle known as ``data minimization.'' Another method to
    help prevent downstream fraud from stolen card numbers is to require
    more data or numbers (such as a 4-digit PIN) from a consumer than
    simply the numbers that appear on a card to authorize and complete
    payment card transactions.
        For example, a decade ago, the National Retail Federation asked the
    branded card networks and banks to lift the requirement that retailers
    store full payment card numbers for all transactions. Retailers have
    also pushed to phase-out signature-authentication for cards and,
    instead, use a more secure authentication method for credit and debit
    card transactions, such as the PIN-based authentication that banks
    require for accessing bank accounts through ATM machines. PINs can
    provide an extra layer of security against downstream fraud even if the
    card numbers (which the card companies already emboss on the outside of
    a card) are stolen in a breach. In PIN-based transactions, for example,
    the stored 20-digits from the card would, alone, be insufficient to
    conduct a fraudulent transaction in a store without the 4-digit PIN
    known to the consumer and not present on the card itself. These
    business practice improvements are easier and quicker to implement than
    any new Federal data security law, and they hold the promise of being
    more effective at preventing the kind of financial harm that could
    impact consumers as companies suffer data security breaches affecting
    payment cards in the future.
        On October 17, 2014, the President signed an executive order
    initiating the BuySecure Initiative for government payment cards.\4\
    The order provided, among other things, that payment cards issued to
    government employees would include PIN and chip technology and that
    government equipment to handle and process transactions would be
    upgraded to allow acceptance of PIN and chip. These are common-sense
    actions that recognize that while it may not be possible to ensure
    there is never another data security breach, it is still possible to
    minimize the harms that can come from those breaches--and reduce the
    incentives from criminals to try to steal some data in the first place.
    ---------------------------------------------------------------------------
        \4\ Executive Order--Improving the Security of Consumer Financial
    Transactions, The White House, October 17, 2014. Accessible at: http://
    www.whitehouse.gov/the-press-office/2014/10/17/executive-order-
    improving-security-consumer-financial-transactions
    ---------------------------------------------------------------------------
    PCI-DSS Standards
        When it comes to protecting payment card data, however, retailers
    are essentially at the mercy of the dominant credit card companies. The
    credit card networks--Visa, MasterCard, American Express, Discover and
    JCB--are responsible for an organization known as the PCI (which stands
    for ``Payment Card Industry'') Data Security Council. PCI establishes
    data security standards (PCI-DSS) for payment cards. While well-
    intentioned in concept, these standards have not worked quite as well
    in practice. They have been inconsistently applied, and their avowed
    purpose has been significantly altered.
        PCI has, in critical respects over time, pushed card security costs
    onto merchants even when other decisions might have more effectively
    reduced fraud--or done so at lower cost. For example, retailers have
    long been required by PCI to encrypt the payment card information that
    they have. While that is appropriate, PCI has not required financial
    institutions to be able to accept that data in encrypted form. That
    means the data often has to be de-encrypted at some point in the
    process in order for transactions to be processed.
        Similarly, merchants are expected to annually demonstrate PCI
    compliance to the card networks, often at considerable expense, in
    order to benefit from a promise that the merchants would be relieved of
    certain fraud inherent in the payment system, which PCI is supposed to
    prevent. However, certification by the networks as PCI Compliant
    apparently has not been able to adequately contain the growing fraud
    and retailers report that the ``promise'' increasingly has been
    abrogated or ignored. Unfortunately, as card security expert Avivah
    Litan of Gartner Research wrote recently, ``The PCI (Payment Card
    Industry) security standard has largely been a failure when you
    consider its initial purpose and history.'' \5\
    ---------------------------------------------------------------------------
        \5\ ``How PCI Failed Target and U.S. Consumers,'' by Avivah Litan,
    Gartner Blog Network, Jan. 20, 2014, available at http://
    blogs.gartner.com/avivah-litan/2014/01/20/how-pci-failed-target-and-u-
    s-consumers/.
    ---------------------------------------------------------------------------
        Retailers have spent billions of dollars on card security measures
    and upgrades to comply with PCI card security requirements, but it
    hasn't made them immune to data breaches and fraud. The card networks
    have made those decisions for merchants and the increases in fraud
    demonstrate that their decisions have not been as effective as they
    should have been.
    Improving Technology Solutions to Better Protect Consumers in Payment
            Transactions
    PIN-Authentication of Cardholders
        There are technologies available that could reduce fraud. An
    overhaul of the fraud-prone cards that are currently used in the U.S.
    market is long overdue. As I noted, requiring the use of a PIN is one
    way to reduce fraud. Doing so takes a vulnerable piece of data (the
    card number) and makes it so that it cannot be used on its own. This
    ought to happen not only in the brick-and-mortar environment in which a
    physical card is used but also in the online environment in which the
    physical card does not have to be used. Many U.S. companies, for
    example, are exploring the use of a PIN for online purchases. This may
    help directly with the 90 percent of U.S. fraud which occurs online. It
    is not happenstance that automated teller machines (ATMs) require the
    entry of a PIN before dispensing cash. Using the same payment cards for
    purchases should be just as secure as using them at ATMs.
    End-to-End Encryption
        Another technological solution that could help deter and prevent
    data breaches and fraud is encryption. Merchants are already required
    by PCI standards to encrypt cardholder data but, not everyone in the
    payments chain is required to be able to accept data in encrypted form.
    That means that data may need to be de-encrypted at some points in the
    process. Experts have called for a change to require ``end-to-end'' (or
    point-to-point) encryption which is simply a way to describe requiring
    everyone in the payment-handling chain to accept, hold and transmit the
    data in encrypted form.
        According to the September 2009 issue of the Nilson Report ``most
    recent cyberattacks have involved intercepting data in transit from the
    point of sale to the merchant or acquirer's host, or from that host to
    the payments network.'' The reason this often occurs is that ``data
    must be decrypted before being forwarded to a processor or acquirer
    because Visa, MasterCard, American Express, and Discover networks can't
    accept encrypted data at this time.'' \6\
    ---------------------------------------------------------------------------
        \6\ The Nilson Report, Issue 934, Sept. 2009 at 7.
    ---------------------------------------------------------------------------
        Keeping sensitive data encrypted throughout the payments chain
    would go a long way to convincing fraudsters that the data is not worth
    stealing in the first place--at least, not unless they were prepared to
    go through the arduous task of trying to de-encrypt the data which
    would be necessary in order to make use of it. Likewise, using PIN-
    authentication of cardholders now would offer some additional
    protection against fraud should this decrypted payment data be
    intercepted by a criminal during its transmission ``in the clear.''
    Tokenization and Mobile Payments
        Tokenization is another variant that could be helpful. Tokenization
    is a system in which sensitive payment card information (such as the
    account number) is replaced with another piece of data (the ``token'').
    Sensitive payment data could be replaced with a token to represent each
    specific transaction. Then, if a data breach occurred and the token
    data were stolen, it could not be used in any other transactions
    because it was unique to the transaction in question. This technology
    has been available in the payment card space since at least 2005.\7\
    Still, tokenization is not a panacea, and it is important that
    whichever form is adopted be an open standard so that a small number of
    networks not obtain a competitive advantage, by design, over other
    payment platforms.
    ---------------------------------------------------------------------------
        \7\ For information on Shift4's 2005 launch of tokenization in the
    payment card space see http://www.internetretailer.com/2005/10/13/
    shift4-launches-security-tool-that-lets-merchants-re-use-credit.
    ---------------------------------------------------------------------------
        In addition, in some configurations, mobile payments offer the
    promise of greater security as well. In the mobile setting, consumers
    won't need to have a physical card--and they certainly won't replicate
    the security problem of physical cards by embossing their account
    numbers on the outside of their mobile phones. It should be easy for
    consumers to enter a PIN or password to use payment technology with
    their smart phones. Consumers are already used to accessing their
    phones and a variety of services on them through passwords. Indeed, if
    we are looking to leapfrog the already aging current technologies,
    mobile-driven payments may be the answer.
        Indeed, as much improved as they are, the proposed chips to be
    slowly rolled out on U.S. payment cards are essentially dumb computers.
    Their dynamism makes them significantly more advanced than magstripes,
    but their sophistication pales in comparison with the common
    smartphone. Smartphones contain computing powers that could easily
    enable comparatively state-of-the-art fraud protection technologies. In
    fact, ``the new iPhones sold over the weekend of their release in
    September 2014 contained 25 times more computing power than the whole
    world had at its disposal in 1995.'' \8\ Smart phones soon may be
    nearly ubiquitous, and if their payment platforms are open and
    competitive, they will only get better.
    ---------------------------------------------------------------------------
        \8\ ``The Future of Work: There's an app for that,'' The Economist
    (Jan. 3, 2015).
    ---------------------------------------------------------------------------
        The dominant card networks have not made all of the technological
    improvements suggested above to make the cards issued in the United
    States more resistant to fraud, despite the availability of the
    technology and their adoption of it in many other developed countries
    of the world, including Canada, the United Kingdom, and most countries
    of Western Europe.
        In this section, we have merely described some of the solutions
    available, but the United States isn't using any of them the way that
    it should be. While everyone in the payments space has a responsibility
    to do what they can to protect against fraud and data theft, the card
    networks have arranged the establishment of the data security
    requirements and yet, in light of the threats, there is much left to be
    desired.
    Legislative Solutions Beyond Breach Notification
        In addition to the marketplace and technological solutions
    suggested above, NRF also supports a range of legislative solutions
    that we believe would help improve the security of our networked
    systems, ensure better law enforcement tools to address criminal
    intrusions, and standardize and streamline the notification process so
    that consumers may be treated equally across the Nation when it comes
    to notification of data security breaches.
    Legislation Protecting Consumers' Debit Cards to the Same Extent as
            Credit Cards
        From many consumers' perspective, payment cards are payment cards.
    As has been often noted, consumers would be surprised to learn that
    their legal rights, when using a debit card--i.e., their own money--are
    significantly less than when using other forms of payment, such as a
    credit card. It would be appropriate if policy makers took steps to
    ensure that consumers' reasonable expectations were fulfilled, and they
    received at least the same level of legal protection when using their
    debit cards as they do when paying with credit.
        NRF strongly supports legislation like S. 2200, the ``Consumer
    Debit Card Protection Act,'' cosponsored by Senators Warner and Kirk
    last Congress. S. 2200 was a bipartisan solution that would immediately
    provide liability protection for consumers from debit card fraud to the
    same extent that they are currently protected from credit card fraud.
    This is a long overdue correction in the law and one important and
    productive step Congress could take immediately to protect consumers
    that use debit cards for payment transactions.
    Legislation Protecting Businesses that Voluntarily Share Cyber-Threat
            Information
        In addition, NRF supports the passage by Congress of legislation
    like H.R. 624, the ``Cyber Intelligence Sharing and Protection Act,''
    cosponsored last Congress by Congressmen Rogers and Ruppersberger, and
    which passed the House of Representatives with bipartisan support. This
    legislation would protect and create incentives for private entities in
    the commercial sector to lawfully share information about cyber-threats
    with other private entities and the Federal government in real-time.
    This would help companies better defend their own networks from cyber-
    attacks detected elsewhere by other business.
    Legislation Aiding Law Enforcement Investigation and Prosecution of
            Breaches
        We also support legislation that would provide more tools to law
    enforcement to ensure that unauthorized network intrusions and other
    criminal data security breaches are thoroughly investigated and
    prosecuted, and that the criminals that breach our systems to commit
    fraud with our customers' information are swiftly brought to justice.
    Conclusion
        In summary, a Federal breach notification law should contain three
    essential elements:

      1.  Uniform Notice: Breached entities should be obligated to notify
            affected individuals or make public notice when they discover
            breaches of their own systems. A Federal law that permits
            ``notice holes'' in a networked system of businesses handling
            the same sensitive personal information--requiring notice of
            some sectors, while leaving others largely exempt--will
            unfairly burden the former and unnecessarily betray the
            public's trust.

      2.  Express Preemption of State Law: A single, uniform national
            standard for notification of consumers affected by a breach of
            sensitive data would provide simplicity, clarity and certainty
            to both businesses and consumers alike. Passing a Federal
            breach notification law is a common-sense step that Congress
            should take now to ensure reasonable and timely notice to
            consumers while providing clear compliance standards for
            businesses.

      3.  Reflect the Strong Consensus of State Laws: A national standard
            should reflect the strong consensus of state law provisions.
            NRF believes that Congress can create a stronger breach
            notification law by removing the exemptions and closing the
            types of ``notice holes'' that exist in several state laws,
            thereby establishing a breach notification standard that
            applies to all businesses, similar to the comprehensive
            approach this Committee has taken in previous consumer
            protection legislation that is now Federal law.
                                    Appendix
    What Retailers Want You To Know About Data Security \9\
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        \9\ Slides Available at: http://www.slideshare.net/
    NationalRetailFederation/thingsto-know-data
    security?ref=https://nrf.com/media/press-releases/retailers-reiterate-
    support-federal-data-breach-notification-standard
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

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                                     ______

        Senator Moran. Thank you, Mr. Duncan.
        Dr. Pendse?

       STATEMENT OF RAVI PENDSE, Ph.D., VICE PRESIDENT AND CHIEF
    INFORMATION OFFICER, BROWN UNIVERSITY, CISCO FELLOW, PROFESSOR
             OF PRACTICE, COMPUTER SCIENCE AND ENGINEERING

        Dr. Pendse. Good morning, Chairman Moran, Ranking Member
    Blumenthal, and distinguished members of the Committee and my
    eminent panelists here. Thank you so much for the opportunity
    to testify today about the data breach and notification
    legislation. It is truly an honor.
        I want to commend you for investing your valuable time to
    discuss this important area of cyber infrastructure and
    protection. As younger citizens get online in schools
    leveraging the power of the Internet to learn and create
    knowledge, your work on this legislation will be critical to
    protect our youth.
        As the amount of data continues to increase exponentially,
    primarily driven by our mobile and highly connected lifestyle,
    your work on this legislation will be critical to protect our
    ``netizens.''
        As Internet connected devices on the ``Internet of Things''
    increase in number from 10 billion to a projected 50 billion by
    2020, impacting our economy by as much as $19 trillion,
    according to many experts, your work on this legislation will a
    critical catalyst to empower connected innovation and wealth
    generation.
        As connected robots and 3D printing fundamentally change
    how we manufacture goods and manage our supply chain, your work
    on this legislation will be critical to supporting next
    generation innovation and our leadership in the world. We are
    truly looking at some exciting times.
        My name is Ravi Pendse. I have the privilege and honor to
    serve as Vice President and Chief Information Officer at Brown
    University. I am a Brown University Cisco Fellow and a senior
    member of IEEE. I am also a faculty member in both computer
    science and engineering.
        My area of expertise and research is in ``Internet of
    Things,'' cybersecurity, and aviation network security. I take
    great pride in admitting that I am a nerd.
        The Privacy Rights Clearinghouse, as the Chairman pointed
    out, has reported there have been over 932 million records
    compromised in over 4,000 plus breaches since 2005.
        Just yesterday, as was mentioned, Anthem reported a very
    large breach, and that breach may impact people in this room
    since many Federal employees, as I understand, are covered by
    some of the programs Anthem offers.
        We as individuals, organizations, and the Nation must
    continue to focus in this area for the protection of our
    consumers and national security.
        Currently, 47 states, including Rhode Island, where Brown
    is located, the District of Columbia, Guam, Puerto Rico, and
    the Virgin Islands, have enacted data breach legislation. While
    there are similarities between these state laws, no two are
    exactly alike.
        As a university with students from all 50 states, we are
    impacted by all of them. Maintaining the necessary standards
    for each state is challenging and very difficult. This can
    create a barrier for small innovative organizations lacking the
    expertise to address the specifics of state laws. In my view,
    this type of burden will stifle innovation.
        Breach notification is a national issue, so I would
    encourage you to consider a single national legislation. In my
    view, such legislation should clearly define the rules and
    actions that are required in the case of a breach. It should
    identify the methods, speed, delivery, and content of
    notifications.
        A hard time limit for breach notification may be
    unattainable for small organizations, non-profits, and
    educational institutions. A tiered approach based upon the size
    and designation of an organization would make compliance
    possible for all.
        It should also encourage organizations that collect data to
    be cognizant about the use of such data. Consumers, especially
    the young ones, appear to be happy to give away their data and
    their privacy to services, including social media sites, for
    the sake of convenience.
        All acts should clearly define expectations of security for
    organizations collecting and storing personally identifiable
    data. Given the highly publicized breaches that have been
    mentioned, it is apparent that more work is needed. No matter
    what the size of the company, certain expectations of security
    should be defined when data is collected and stored.
        Most importantly, it should provide incentives to establish
    education to better combat breaches, so preventive actions are
    necessary. It is important for us to develop cybersecurity
    expertise within the U.S. Our national security cannot be
    offshored.
        In conclusion, I applaud your efforts and appreciate the
    opportunity for this dialogue. I have more details in my
    written testimony. I stand by to assist you in any way I can.
    Cybersecurity and cybersecurity education is critical. Our
    national security cannot be offshored.
        Thank you.
        [The prepared statement of Dr. Pendse follows:]

      Prepared Statement of Ravi Pendse, Ph.D., Vice President and Chief
       Information Officer, Brown University, Cisco Fellow, Professor of
                   Practice, Computer Science and Engineering
    Executive Summary
        With an ever-increasing collection of databases, the impact of
    ``big data'' on privacy, and the monetary value of personal data used
    for identity and financial theft, today's America is in need of sound
    and achievable legislation around data security, privacy, and the
    notification of consumers after a data breach. Such legislation would
    benefit all U.S. citizens as well as the organizations collecting and
    protecting their data.
        National legislation governing data breaches will have many
    advantages over existing state laws and reduce the burden that these
    dissimilar state laws place on complying organizations. While it's
    necessary for us to pursue centralized standards, it's important to
    produce legislation that accommodates organizations of all sizes. In
    addition to laws regarding data breaches, we should create incentives
    for proactive measures to reduce the likelihood of breaches, one of the
    most important being the development of a trained cybersecurity
    workforce through education and training.
    Introduction
        Good morning Chairman Moran, Ranking Member Blumenthal, and
    distinguished Members of the Committee. Thank you so much for the
    opportunity to testify today about the data breach and notification
    legislation, it is truly an honor.
        I want to commend you for investing your valuable time to discuss
    this important area of cyberinfrastructure and protection. As younger
    citizens get online in schools leveraging the power of the Internet to
    learn and create knowledge, your work on this legislation will be
    critical to protect our youth. As the amount of data continues to
    increase exponentially, primarily driven by our mobile and highly
    connected lifestyle, your work on this legislation will be critical to
    protect our netizens. As internet-connected devices on the ``Internet
    of Things'' increase in number from 10 billion to a projected 50
    billion by 2020, impacting our economy by as much as $19 trillion, your
    work on this legislation will be a critical catalyst to empower
    connected innovation and wealth generation. As connected robots and 3-D
    printing fundamentally change how we manufacture goods and manage our
    supply chain, your work on this legislation will be critical to
    supporting next-generation innovation and our leadership in the world.
        My name is Ravi Pendse. I have the privilege and honor to serve as
    the Vice President and Chief Information Officer at Brown University. I
    am a Brown University Cisco Fellow and a senior member of IEEE. I am
    also a faculty member in both Computer Science and Engineering. My area
    of expertise and research is in the ``Internet of Things'',
    cybersecurity, and aviation network security; I also teach classes in
    these fields. Currently, I am teaching a class called ``Internet of
    Everything'' so your work on this legislation is critical to many young
    people I interact with each day who I know will change our world for
    the better.
        Thank you again for the opportunity to provide written and verbal
    testimony relative to a uniform Federal law concerning the definition,
    protection, and notification of the personally identifiable information
    of consumers. This is a necessary and extremely relevant topic in our
    hyper-connected world. The Privacy Rights Clearinghouse reports that
    there have been over 932,700,000 records compromised in over 4,450 U.S.
    breaches since April 2005. Countless high-profile security breaches
    have appeared in the news in the last year. My university witnesses an
    average of 30,000 attempted attacks each day.
        As long as there is a black market for the sale of personal and
    financial data, and these breaches are attainable, the attacks will
    continue. At the same time, we are living a mobile and highly connected
    lifestyle, American children are getting online at a younger age, and
    ten billion of our household devices are connected to the Internet.
    This ubiquity of connectivity makes sound security principles and
    postures a necessity. We, as individuals, enterprises, and a nation,
    must continue to focus on this area for the protection of our consumers
    and national security.
    Background
        Security breach notification laws have been written in most U.S.
    states since 2002. The first such law, California SB 1386, became the
    de facto standard for all states nationwide. Since then, other states
    have been more descriptive in their remedies, making each, in effect, a
    standard as they appear.
        Forty-seven states (including Rhode Island, where Brown is
    located), the District of Columbia, Guam, Puerto Rico, and the Virgin
    Islands have enacted legislation requiring private or government
    entities to notify individuals of security breaches involving
    personally identifiable information. Many of these state security
    breach laws have provisions regarding which entities must comply with
    the law; how ``personal information'' is defined (such as name combined
    with Social Security number or driver's license number); what
    constitutes a breach; how, when, and to whom a notice must be sent; and
    which situations are exempt (such as a breach of encrypted
    information). No two are exactly alike.
        As a university with students from 49 states, we are impacted by
    them all. Maintaining the necessary standards for each state has been
    not only onerous, but also difficult to completely and legally address.
    This can create a barrier for small, innovative organizations lacking
    the expertise or legal team to address the specifics of state laws.
        Breach notification is a national issue, and the definition of
    entities, timing, and requirements should not be left to the individual
    states. Of course, the state Attorney General would have the ability to
    protect the citizens of their jurisdiction and make claims as such.
    Having one standard for this conduct would be beneficial to those who
    protect the information and respond when a security incident occurs.
    Recommendations for Cybersecurity Breach Legislation
        A single national legislation governing data breaches should be
    established to replace disparate state laws. This legislation should .

      1.  . . . define the rules and actions that are required in the case
            of a breach, including the method, speed, delivery, and content
            of notifications.

      2.  . . . adjust for the size, nature, and scope of both the breach
            and the organization. For example, a hard time limit for breach
            notification may be unattainable for small organizations,
            nonprofits, and educational institutions without skills in deep
            forensics and data science. A tiered approach based upon the
            severity of the breach and size and designation of the
            organization would make compliance achievable to all.

      3.  . . . be compliant with current national legislation (such as
            HIPAA, GLBA, and HITECH) and prevent the possibility of
            conflict with other Federal laws.

      4.  . . . mandate that organizations disclose what happens to
            customer data. Consumers appear to be happy to give away their
            data (and their privacy) to services including social media
            sites for the sake of convenience. A requirement to inform
            consumers how their data and information will be used is a
            relevant response to this changing landscape of data exchange.

      5.  . . . define expectations of security for organizations
            collecting and storing personally identifiable data. Given the
            highly publicized breaches that have occurred in the past
            twelve to eighteen months, it is apparent that even many larger
            enterprises do not provide necessary security. No matter what
            the size of the company, certain expectations of security
            should be defined when data is collected and stored.

      6.  . . . create incentives for the formation of industry forums such
            as the Financial Services Information Sharing and Analysis
            Center (FS-ISAC). Such forums provide an opportunity to share
            threats and approaches within an industry.

      7.  . . . consider compliance with the accepted framework by the
            National Institute of Standards and Technology (NIST), or any
            framework that meets or exceeds the NIST standards, in order to
            establish the baseline against which to audit.

      8.  . . . most importantly, provide measures or incentives that
            establish education to better combat breaches. It is important
            for us to develop cybersecurity expertise within the U.S.; our
            national security cannot be offshored. Cisco's 2014 Security
            Report estimated a global shortage of more than a million
            security professionals. While efforts like the National
            Initiative for Cybersecurity Education (NICE) have attempted to
            address this shortage, the numbers and expertise of available
            professionals are still lacking. Cybersecurity programs should
            be encouraged both in K-12 and higher education. A K-12 program
            would prepare students to protect themselves as well as join
            the workforce. Incentives for the expansion of certified
            cybersecurity programs in higher education, including emerging
            graduate programs, could make a more immediate impact on the
            size of the workforce. Similar to the Teach for America
            program, we could create a conduit for trained security
            graduates to enter the workforce by establishing a loan
            forgiveness program dependent upon a designated amount of years
            in the profession.
    Conclusion
        We must continue to work on multiple fronts to mitigate the impact
    of data breaches. Legislation that sets national standards will provide
    clarity for organizations and balanced protections for all U.S.
    citizens. As this is a global problem, we must continue to leverage and
    maximize resources whenever possible to understand and detect
    persistent threats.
        I would be supportive of an effort to create a single, national law
    around data security and breaches; a national law will remove the undue
    burden of complying with forty-seven disparate state laws. However, we
    must be careful to avoid a ``one size fits all'' model that could be
    impossible to attain for small organizations, nonprofits, and
    education. Established tiers of responsibility and compliance levels
    may better serve all, while legislating a single set of standards that
    can be embraced and addressed successfully.
        In addition to reactive legislation around the handling of data
    breaches, we need to be proactive. I strongly recommend incentives for
    proactive measures to reduce the likelihood of breaches, one of the
    most important being educational initiatives to develop a trained
    cybersecurity workforce. From additional Americans with forensics
    expertise to an engaged and educated nation of consumers, we should
    remember that people provide one of the most critical lines of defense.

        Senator Moran. Doctor, thank you. Good to see you again.
    Mr. Johnson?

      STATEMENT OF DOUG JOHNSON, SENIOR VICE PRESIDENT AND SENIOR
         ADVISOR FOR RISK MANAGEMENT POLICY, AMERICAN BANKERS
                              ASSOCIATION

        Mr. Johnson. Yes, good morning, Chairman Moran, Ranking
    Member Blumenthal, members of the Subcommittee. My name is Doug
    Johnson, Senior Vice President at the American Bankers
    Association. I currently lead the Association's physical and
    cybersecurity business, Continuity and resiliency policy
    efforts at the Association.
        ABA shares the concerns of Congress about protecting
    consumers in this increasingly sophisticated world of
    electronic commerce and recordkeeping. It is clear consumers
    enjoy the efficiency and convenience of conducting transactions
    electronically.
        Notwithstanding these recent breaches, our payment system
    remains strong and functional, and it is absolutely mandatory
    that we maintain that trust in the system so that it remains
    essentially a system that our customers can continue to trust.
        While the majority of the transactions are conducted
    safely, occasional breaches will occur and will continue to
    occur. Consumers have the right to swift, accurate, and
    effective notification of these breaches. They also have a
    right to trust that whenever they conduct business
    electronically the business is doing everything it can to
    prevent that the breach is occurring in the first place.
        Mr. Duncan mentioned the Verizon study, international
    sample of private companies and police stations around the
    world. Other organizations, such as the Identity Theft Resource
    Center, noted that United States' businesses reported over 30
    percent of the reported breaches for 2014, while financial
    institutions represented 6 percent.
        While our numbers may differ and we do believe the United
    States' numbers are more appropriate to cite, I believe that
    our intent frankly is the same, and our intent is to ensure
    that we are protecting customer data, and I think that is
    essentially both of our goals.
        The banking industry supports effective cybersecurity
    policy and will continue to work with Congress to achieve that
    goal. Banks are acknowledged leaders in defending against cyber
    threats. Therefore, from the financial services' perspective,
    it is critical that legislation takes a balanced approach that
    builds upon but does not duplicate or undermine what is already
    in place and effective for the financial sector.
        There are three key points that must be considered with
    regard to data protection standards. First, as others have
    noted, we do need a national data standard, a data breach
    standard. Consumer electronic payments are not confined by
    borders between states. As such, a national standard for data
    security and breach notification is of paramount importance.
        Currently, 46 states, three U.S. territories, and the
    District of Columbia have enacted laws governing data security
    in some fashion. Although some of these laws are similar, many
    have inconsistent and conflicting standards, forcing businesses
    to comply with multiple regulations and leaving many consumers
    without proper recourse or protection.
        Inconsistent state laws and regulations should be preempted
    in favor of strong Federal data protection and notification
    requirements.
        Second, any Federal data protection and notification
    requirement must recognize existing national data protection
    and notification requirements. Some industries, including
    financial services, are already required to by law to develop
    and maintain robust internal protections. They are also
    required to protect consumer financial information and notify
    customers when a breach occurs within their systems that would
    put customers at risk.
        We believe the extensive breach reporting requirements
    currently in place for banks provide an effective basis for any
    national data breach reporting requirement for businesses
    generally.
        Finally, there must be a strong national data protection
    requirement associated with any data breach law. All parties
    must share the responsibility and cost for protecting
    consumers. The cost of the data breach should ultimately be
    borne by the entity that incurs the breach.
        To limit such breaches, any comprehensive data breach
    requirement must have strong data protection requirements
    applicable to any party with access to important consumer
    financial information.
        Thank you, and I will be happy to answer any questions you
    may have.
        [The prepared statement of Mr. Johnson follows:]

     Prepared Statement of Doug Johnson, Senior Vice President and Senior
        Advisor for Risk Management Policy, American Bankers Association
        Chairman Moran, Ranking Member Blumenthal, my name is Doug Johnson,
    Senior Vice President, payments and cybersecurity policy, of the
    American Bankers Association. In that capacity, I currently lead the
    association's physical and cybersecurity, business continuity and
    resiliency policy and fraud deterrence efforts on behalf of our
    membership. I appreciate the opportunity to be here to represent the
    ABA and discuss the importance of instituting a uniform Federal data
    breach law in place of disparate state laws. The ABA is the voice of
    the Nation's $15 trillion banking industry, which is composed of small,
    regional and large banks that together employ more than 2 million
    people, safeguard $11 trillion in deposits and extend over $8 trillion
    in loans.
        As the 114th Congress engages in public debate on the important
    issue of data security, we share your concerns about protecting
    consumers in this increasingly sophisticated world of electronic
    commerce and record keeping. It is clear that consumers enjoy the
    efficiency and convenience of conducting transactions electronically.
    Notwithstanding these recent breaches, our payment system remains
    strong and functional. No security breach seems to stop the $3 trillion
    that Americans spend safely and securely each year with their credit
    and debit cards. And with good reason: Customers can use these cards
    confidently because their banks protect them from losses by investing
    in technology to detect and prevent fraud, reissuing cards and
    absorbing fraud costs. While the vast majority of these transactions
    are conducted safely, occasional breaches will continue to occur.
    Consumers have a right to swift, accurate, and effective notification
    of such breaches. They also have a right to trust that, wherever they
    transact business electronically, the business is doing everything it
    can to prevent that breach from occurring in the first place.
        The banking industry supports effective cyber security policy and
    will continue to work with Congress to achieve that goal. Banks are
    acknowledged leaders in defending against cyber threats. Therefore,
    from the financial services perspective it is critical that legislation
    takes a balanced approach that builds upon--but does not duplicate or
    undermine--what is already in place and highly effective in the
    financial sector.
        In my testimony I will focus on three main points:

       The value of a national data breach standard. Consumers'
            electronic payments are not confined by borders between states.
            As such, a national standard for data security and breach
            notification is of paramount importance.

       The importance of recognizing existing Federal breach
            requirements. Any Federal data protection and notification
            requirement must recognize existing national data protection
            and notification requirements.

       The need for strong national data protection requirements.
            All parties must share the responsibility, and the costs, for
            protecting consumers. The costs of a data breach should
            ultimately be borne by the entity that incurs the breach. To
            limit such breaches, any comprehensive data breach requirement
            must have strong data protection requirements applicable to any
            party with access to important consumer financial information.
    I. The Value of a National Data Breach Standard
        Our existing national payments system serves hundreds of millions
    of consumers, retailers, banks, and the economy well. It only stands to
    reason that such a system functions most effectively when it is
    governed by a consistent national data breach policy.
        Currently, 46 states, three U.S. territories, and the District of
    Columbia have enacted laws governing data security in some fashion,
    such as standards for data breach notification and for the safeguarding
    of consumer information. Although some of these laws are similar, many
    have inconsistent and conflicting standards, forcing businesses to
    comply with multiple regulations and leaving many consumers without
    proper recourse and protection. Inconsistent state laws and regulations
    should be preempted in favor of strong Federal data protection and
    notification requirements. In the event of a breach, the public should
    be informed where it occurred as soon as reasonably possible to allow
    consumers to protect themselves from fraud.
        Given the mobile nature of our Nation's citizens, it is clear that
    the existing patchwork of state data breach laws are unduly complicated
    for consumers as well as businesses. For instance, consider a couple
    residing in a northern state who winter in a southern one and have
    their credit card data compromised at a merchant in a third state. In
    this instance, the couple wants to be alerted that their financial data
    has been compromised and that they are protected. Determining where the
    couple may or may not reside and which state laws may or may not apply
    unduly complicates the simple need to protect the couple from financial
    harm. It also diverts resources at the merchant and the bank toward
    determining how to comply with a myriad of laws as opposed to fixing
    the problem.
        We believe that the following set of principles should serve as a
    guide when drafting legislation to provide stronger protection for
    consumer financial information:

      1.  Inconsistent state laws and regulations should be preempted in
            favor of strong Federal data protection and notification
            standards.

      2.  Strong national data protection and consumer notification
            standards with effective enforcement provisions must be part of
            any comprehensive data security regime, applicable to any party
            with access to important consumer financial information.

      3.  Requirements for industries that are already subject to robust
            data protection and notification requirements must be
            recognized.

      4.  In the event of a breach, the public should be informed where it
            occurred as soon as reasonably possible to allow consumers to
            protect themselves from fraud. The business with the most
            direct financial relationship with affected consumers should be
            able to inform their customers and members about information
            regarding the breach, including the entity at which the breach
            occurred.

      5.  The costs of a data breach should ultimately be borne by the
            entity that incurs the breach.
    II. The Importance of Recognizing Existing Federal Breach Requirements
        As we enact a national data breach requirement, some industries--
    including the financial industry--are already required by law to
    develop and maintain robust internal protections to combat and address
    criminal attacks, and are required to protect consumer financial
    information and notify consumers when a breach occurs within their
    systems that will put their customers at risk.
        Title V of the Gramm-Leach-Bliley Act (GLBA) requires banks to
    implement a ``risk-based'' response program to address instances of
    unauthorized access to customer information systems. At a minimum, a
    response program must:

      1.  Assess the nature and scope of any security incident and identify
            what customer information systems and customer information may
            have been accessed or misused;

      2.  Notify the institution's primary Federal regulator ``as soon as
            possible'' about any threats ``to sensitive customer
            information.''

      3.  Notify appropriate law enforcement authorities and file
            Suspicious Activity Reports in situations involving Federal
            criminal violations requiring immediate attention;

      4.  Take appropriate steps to contain the incident to prevent further
            unauthorized access to or use of customer information, and

      5.  Notify customers ``as soon as possible'' if it is determined that
            misuse of customer information has occurred or is reasonably
            possible.

        A critical component of the GLBA guidelines is customer
    notification. When a covered financial institution becomes aware of a
    material breach of ``sensitive customer information,'' it must conduct
    a reasonable investigation to determine whether the information has
    been or can be misused. If it determines that misuse of the information
    ``has occurred or is reasonably possible,'' it must notify affected
    customers ``as soon as possible.''
        Under GLBA, sensitive customer information includes the customer's
    name, address or telephone number in conjunction with the customer's
    Social Security number, driver's license number, credit card, debit
    card or other account number or personal identification number.
    Sensitive customer information also includes any combination of
    components of customer information that would allow someone to log onto
    or access the customer's account, such as user name and password.
        A covered financial institution must also provide a clear and
    conspicuous notice. The notice must describe the incident in general
    terms and the type of customer information affected. It must also
    generally describe the institution's actions to protect the information
    from further unauthorized access and include a telephone number. The
    notice also must remind customers to remain vigilant over the next 12
    to 24 months and to promptly report incidents of suspected identity
    theft to the institution.
        Where appropriate, the notice also must include:

      1.  Recommendation to review account statements immediately and
            report suspicious activity;

      2.  Description of fraud alerts and how to place them;

      3.  Recommendation that the customer periodically obtain credit
            reports and have fraudulent information removed;

      4.  Explanation of how to receive a free credit report; and

      5.  Information about the FTC's identity theft guidance for
            consumers.

        We believe the extensive breach reporting requirements currently in
    place for banks provide an effective basis for any national data breach
    reporting requirement for businesses generally.
    III. The Need for Strong National Data Protection Requirements
        Any legislation focused on creating a national standard for breach
    notification should also include a complementary national data security
    standard for covered entities. If Congress does not address data
    security standards now it misses the opportunity to instill a greater
    overall level of data security protections for consumers.
        Every business must share in the responsibility to protect
    consumers. With that responsibility should come the requirement for
    that business, whether it be a bank, merchant, third party processor or
    other entity, to bear the costs for any breach they incur.
        To limit the potential for data breaches in the first place, any
    comprehensive national data breach requirement should be enacted in
    tandem with strong data protection requirements applicable to any party
    with access to important consumer financial information. Limiting the
    potential for such breaches through strong data protection is the
    first, essential, line of defense in our efforts to maintain customer
    trust and confidence in the payments system
        Effective data protection requirements are scalable. For instance,
    bank regulations, through GLBA, recognize that the level of risk to
    customer data varies significantly across banks. Large banks require
    continual, on-site examination personnel, while community-based
    institutions are subject to periodic information security examinations.
        Data security is also an ongoing process as opposed to the state or
    condition of controls at a point in time. As opposed to proscribing
    specific technological security requirements, GLBA and the associated
    bank regulatory requirements are risk and governance-based. Bank
    security programs are required to have ``strong board and senior
    management level support, integration of security activities and
    controls throughout the organization's business processes, and clear
    accountability for carrying out security responsibilities.'' \1\
    ---------------------------------------------------------------------------
        \1\ Federal Financial Institution Examination Council IT Handbook,
    available at http://ithandbook.ffiec.gov/it-booklets/information-
    security/introduction/overview.aspx
    ---------------------------------------------------------------------------
    IV. The Path Forward
        The legal, regulatory, examination and enforcement regime regarding
    banks ensures that banks robustly protect American's personal financial
    information. We believe that this regime provides an appropriate,
    scalable model for other businesses entrusted with sensitive customer
    financial and other information.

        Senator Moran. Attorney General Madigan, welcome.

      STATEMENT OF HON. LISA MADIGAN, ATTORNEY GENERAL, STATE OF
                                ILLINOIS

        Ms. Madigan. Thank you, Chairman Moran, Ranking Member
    Blumenthal, and members of the Subcommittee. I appreciate
    having an opportunity to testify today.
        Data security is one of the biggest challenges that we face
    as a nation. It is an ongoing struggle for all Americans and
    the companies, non-profits, and government agencies that hold
    our personal information.
        While last year's massive data breaches reawakened many in
    the public, breaches are not a new problem. Because of that, 10
    years ago, I joined 43 other Attorneys General, including at
    the time Attorneys General Blumenthal and Ayotte, in a
    bipartisan call for a strong, meaningful national breach
    notification law, and for over a decade, my office has helped
    people clean up identity theft damage and investigated major
    breaches.
        In 2005, I drafted Illinois' breach notification law to
    ensure consumers are told when their personal financial
    information is compromised, and in 2006, I created an identity
    theft unit and hotline to help consumers restore their credit
    when their information was obtained and used without their
    authorization. So far, we have helped over 37,000 people remove
    over $27 million worth of fraudulent charges from their credit.
        At this point, Americans realize that it is not a matter of
    if but when they will be a victim of some form of identity
    theft. The question now is what we do to best assist them to
    prevent data breaches and reduce identity theft.
        First, I want you to recognize that for the most part, we
    already have data breach notification in this country. As you
    are aware, 47 states have laws requiring companies to notify
    people when their personal financial information is
    compromised. Many states are working to pass their second or
    third update to their laws in response to the constant threats
    that are revealed by the almost 4,500 publicly known breaches
    that have affected over 900 million records since 2005. In this
    environment, Americans need and expect more transparency of
    data breaches, not less. Last year, I held over 25 roundtables
    on data breaches throughout Illinois with nearly 1,000
    residents, including local government officials, law
    enforcement, small business owners, religious leaders, senior
    citizens, heads of social service agencies, as well as regular
    consumers.
        Here is what they told me. First, they are concerned by the
    increasing number of breaches and when their information is
    stolen, they want to know. Second, they want to know what they
    can do to protect themselves from identity theft. And third,
    they want to know whether entities are doing enough to prevent
    breaches and protect their information.
        A weak national law that restricts what most state laws
    have long provided will not meet Americans' increasing
    expectation that they be told when their information has been
    stolen. Instead, any definition of ``protected personal
    information'' should be broad and include the growing types of
    sensitive information that entities are collecting from
    individuals, and the FTC should be able to update the
    definition in response to new threats.
        In terms of whether entities are doing enough to protect
    people's data, unfortunately, as you have already heard from
    Ms. McGuire and I can tell you from my office's investigations,
    it has been revealed that entities too often fail to take basic
    data security precautions.
        We have found numerous instances where entities allowed
    sensitive personal data to be maintained unencrypted, failed to
    install security patches for known software vulnerabilities,
    collected sensitive data that was not needed, retained data
    longer than necessary, and failed to protect against
    compromised log-in credentials.
        Congress should include a provision that requires entities
    holding sensitive information to take reasonable steps to
    protect that information.
        Next, an entity who suffers a breach should not be
    conducting a self-serving harm analysis to determine whether
    consumers get notified about a data breach. Imagine if a
    landlord learned that a renter's home was robbed and that
    landlord had the opportunity to decide whether the stolen items
    were significant enough to let the renter know about the
    robbery. This is what you will allow when data is stolen with
    the so-called ``harm analysis.''
        Further, Congress should designate a Federal entity to
    investigate when massive data breaches that affect millions of
    Americans, similar to how the NTSB can investigate accidents.
        Finally, I know that Congress will consider preempting
    states' breach notification laws. As a state official, I oppose
    Federal legislation that limits our ability at the state level
    to respond to and to safeguard our residents.
        If Congress does preempt the states, the preemption
    provision must be narrow. The law should preserve the states'
    ability to use their own consumer protection laws and Congress
    should give the states the right to enforce the Federal law.
        I will be happy to answer any questions that you have.
        [The prepared statement of Ms. Madigan follows:]

          Prepared Statement of Hon. Lisa Madigan, Attorney General,
                               State of Illinois
    Introduction
        Chairman Moran, Ranking Member Blumenthal, and members of the
    Subcommittee, thank you for giving me the opportunity to speak with
    you. Data security is one of the biggest challenges we face in the
    United States today. It is an ongoing struggle for companies, non-
    profits, government agencies, and consumers.
        While last year's massive data breaches were a national turning
    point for public awareness, this is not a new problem. For over a
    decade, my office has been investigating major data breaches and
    helping consumers respond to identity theft.\1\
    ---------------------------------------------------------------------------
        \1\ Since 2006, identity theft and data breaches have either been
    the most common complaint, or the second most common complaint,
    received in the Illinois Attorney General's office. Only complaints
    related to debt have had a higher total.
    ---------------------------------------------------------------------------
        In 2005, we passed a data breach notification law in Illinois to
    ensure consumers are notified when an entity suffers a breach of their
    sensitive personal information. And in 2006, I created an Identity
    Theft Unit and Hotline to help consumers restore their credit when
    their information was used without their authorization. So far, we have
    helped remove over $27 million worth of fraudulent charges for over
    37,000 Illinois residents.\2\
    ---------------------------------------------------------------------------
        \2\ In 2014, the Illinois Attorney General's office received 2,618
    complaints regarding identity theft and helped return over $918,000 to
    consumers who suffered identity theft.
    ---------------------------------------------------------------------------
        At this point, everyone knows it is not a question of if they will
    be a victim of some form of identity theft, but when. Because at every
    hour of every day, any entity that maintains a database of sensitive
    information could be under attack.
        The economic impacts have been, and will continue to be, enormous.
    Everyone agrees that we need to do something. Everyone wants to prevent
    data breaches. And everyone wants to prevent identity theft. The
    question is--how do we best do this?
        I have long supported the push for a national law on data breach
    notification. In 2005, I joined forty-three other state attorneys
    general to call for a national law on breach notification,\3\ so I am
    heartened that Congress looks poised to pass a law. But simply passing
    a law that replicates state laws will do very little to protect
    consumers that is not already being done.
    ---------------------------------------------------------------------------
        \3\ Letter to Congressional Leaders from the National Association
    of Attorneys General (NAAG) (Oct. 27, 2005).
    ---------------------------------------------------------------------------
        Congress must move beyond a debate about data breach notification.
    For the most part, we already have data breach notification in this
    country. Forty-seven states have passed laws requiring companies to
    notify consumers when they suffer data breaches. Many states have
    either passed, or are working to pass, a second or third-generation
    version of their laws.
    II. The Need for Transparency
        We need more transparency on data breaches and data security, not
    less. We should not hide from the fact that our data can be
    compromised, and we should not hide data breaches when they occur. I
    have recently heard an argument that consumers are experiencing data
    breach fatigue, and that additional notification may be counter-
    productive. I strongly disagree.
        In my experience, consumers may be fatigued over data breaches, but
    they are not asking to be less informed about them.
        Last year, I held over twenty-five roundtables on data breaches
    throughout Illinois, with nearly 1,000 Illinois residents from all
    walks of life--law enforcement officials, small business owners,
    consumers, and senior citizens.
        Here is what they told me. When their information is stolen, they
    want to know. They also want to know what they can do to protect
    themselves from identity theft and data breaches. And they want to know
    whether entities are doing enough to protect their information and
    prevent breaches.
        Unfortunately, my office's investigations have revealed that
    entities have repeatedly failed to take basic data security
    precautions. We have found instances where entities:

       allowed sensitive personal data to be maintained
            unencrypted;

       failed to install security patches for known software
            vulnerabilities;

       collected sensitive data that was not needed;

       retained data longer than necessary; and

       failed to protect against compromised login credentials.

        Understanding where data security failures occur is what leads to
    data security fixes. Without transparency, data breaches and their
    causes will remain hidden. Notification also allows consumers to take
    steps to protect themselves following the aftermath of a breach. This
    transparency is not possible without laws mandating it.
    III. Information that Triggers Notification
        Therefore, Congress should pass a data breach notification law that
    covers the growing amount of sensitive personal information that
    entities are collecting. Any definition of protected ``personal
    information'' should be broad, and the Federal Trade Commission should
    be given the power to update the definition as needed. It is not just
    stolen social security numbers or stolen credit card numbers that
    consumers have to worry about now.
        When I first worked to pass a law in Illinois on this issue nearly
    a decade ago, we were focused solely on protecting consumers against
    identity theft and fraud.\4\ In the intervening ten years, the Internet
    has grown more than we imagined possible. This growth has been great
    for our economy and it has made our lives easier. But it has also made
    individuals more vulnerable to data breaches because more entities are
    collecting increasingly specific data about them. Any law designed to
    protect consumers should reflect this fact.
    ---------------------------------------------------------------------------
        \4\ Illinois Personal Information Protection Act, 815 ILCS 530/1
    et. seq. The Illinois Personal Information Protection Act requires
    notification to Illinois consumers in the event of a data breach. A
    breach is the unauthorized acquisition of computerized data that
    compromises the security, confidentiality, or integrity of ``personal
    information.'' Currently, ``personal information'' is defined as an
    individual's first name (or first initial) and last name combined with
    any of the following: social security number; driver's license or state
    identification card number; or account number or credit or debit card
    number, or an account number or credit card number in combination with
    any required security code, access code, or password that would permit
    access to an individual's financial account.
    ---------------------------------------------------------------------------
        Congress should seek to pass legislation that ensures notification
    of breaches related to pieces of information that can do us any kind of
    harm, whether that is financial harm or reputational harm. For example,
    this kind of data includes:

       login credentials for online accounts;

       medical information shared on the Internet that is outside
            the scope of the Health Information Technology for Economic and
            Clinical Health (HITECH) Act;\5\
    ---------------------------------------------------------------------------
        \5\ Title XIII of the American Recovery and Reinvestment Act of
    2009, Pub. L. 111-5.

    ---------------------------------------------------------------------------
       biometric data; and

       geolocation information.

        The recent attack on Sony was a lesson for all of us. Reputational
    harm can be far worse than financial harm. It can hurt companies, and
    it can destroy lives. In Illinois, I will be seeking to update our law
    to protect the type of data about individuals that entities are
    regularly collecting, and I encourage the Subcommittee to do the same.
    IV. A ``Harm Analysis'' Hurts Consumers
        Next, an entity should not be conducting a ``harm analysis'' to
    determine whether it should notify consumers about a data breach. If an
    entity holds our sensitive information and loses it, most people want
    to know. The very loss of sensitive personal information should be
    viewed as harmful generally, and it is nearly impossible to truly
    determine what specific harm may or may not occur following a breach.
        Imagine if a landlord learned that a renter's home was robbed and
    that landlord had the opportunity to decide whether the stolen items
    were significant enough to let the renter know about the robbery. We
    are considering allowing this for stolen data with a so-called ``harm
    analysis.'' It will not lead to better data security, only fewer breach
    notifications.
    V. Federal Role in Data Security
        Finally, data breach notification alone, no matter how expansive,
    will not be enough to secure our data. Congress also needs to ensure
    entities holding sensitive information are taking reasonable steps to
    protect that information. To do that, it should require companies to
    implement reasonable security standards and it should give the Federal
    Trade Commission the authority to promulgate regulations as needed.
        Congress should also focus its attention on the current authority
    of the Federal government to investigate massive data breaches that
    affect millions of Americans. When such breaches occur, the Federal
    government should have the general authority to investigate in the same
    manner the National Transportation Safety Board (NTSB) can investigate
    accidents. Currently, the Federal government has no such authority.
    Federal law enforcement agencies can conduct a criminal investigation
    to determine who was responsible for an attack, and the Federal
    government, through the Federal Trade Commission and other agencies,
    can conduct an investigation to determine whether the entity's data
    security practices were adequate. However, no Federal agency is tasked
    with simply uncovering what happened in massive data breaches,
    regardless of whether an entity's data security practices were
    adequate.
        If a Federal agency had this authority, that Federal agency would
    develop much-needed expertise in data security. It could issue reports
    about data breaches so that the private sector would better understand
    what vulnerabilities led to breaches. Our country would also have a
    much better sense of the general state of our data security.
    VI. Role of the States
        I understand that Congress will consider preempting states on data
    breach notification laws. As a state official, I oppose any Federal
    legislation that limits our ability at the state level to protect our
    residents. In 2005, along with forty-three other state attorneys
    general, I wrote to Congress to caution against broad preemption.\6\ In
    the letter, we wrote:
    ---------------------------------------------------------------------------
        \6\ Letter to Congressional Leaders from the National Association
    of Attorneys General (NAAG) (Oct. 27, 2005).

            Preemption interferes with state legislatures' democratic role
            as laboratories of innovation. The states have been able to
            respond more quickly to concerns about privacy and identity
            theft involving personal information, and have enacted laws in
            these areas years before the Federal government. Indeed,
            Congress would not be considering the issues of security breach
            notification and security freeze if it were not for earlier
            enactment of laws in these areas by innovative states.\7\
    ---------------------------------------------------------------------------
        \7\ Id.

        In the decade since we wrote that letter, it has become clear that
    preemption would have been a mistake for consumers.
        Additionally, a narrow view of preemption has been adopted in other
    Federal data security laws. The Gramm-Leach-Bliley Act (GLBA), which
    established data security standards for financial institutions, only
    preempts those state laws that are inconsistent with Federal law and
    ``then only to the extent of the inconsistency.'' \8\
    ---------------------------------------------------------------------------
        \8\ 15 U.S.C. Sec. 6807(a).
    ---------------------------------------------------------------------------
        Similarly, in 2009, Congress took a narrow approach to preemption
    in the breach notification provisions in the Health Information
    Technology for Economic and Clinical Health (HITECH) Act.\9\ That law
    imposes the HIPAA preemption standard, which only preempts contrary
    provisions of state law.\10\ For those laws that protect the privacy of
    individually identifiable health information, the HIPAA Security Rule
    goes even further, to save any state law that is more stringent than
    the HIPAA protections.\11\ Together, these provisions illustrate a
    reasonable and workable approach to preemption. If Congress does
    preempt the states, for the benefit of consumers:
    ---------------------------------------------------------------------------
        \9\ Title XIII of the American Recovery and Reinvestment Act of
    2009, Pub. L. 111-5.
        \10\ 42 U.S.C. Sec. 1320(d-7).
        \11\ 45 C.F.R. Sec. 160.203.

       the law should be a ``floor'' with a narrow preemption
    ---------------------------------------------------------------------------
            provision;

       the law should preserve a state's ability to use its
            consumer protection laws to investigate data security
            practices; and

       states should have the right to enforce the Federal law.
    VII. Conclusion
        The roundtables on data security that I convened throughout
    Illinois last year showed me that data breach notification is working.
    Consumers are well aware of data breaches generally. But one challenge
    is making sure the affected consumers learn about the right breaches.
        Understandably, in certain circumstances, state laws allow
    companies to comply with notification requirements by notifying the
    media.\12\ Bills being considered in Congress allow similar
    notification exceptions. But the most often comment I received during
    these roundtables was that consumers did not know where to go to learn
    about breaches. It has become clear to me that it is not enough to
    require companies to notify the media.
    ---------------------------------------------------------------------------
        \12\ See, e.g., Illinois Personal Information Protection Act, 815
    ILCS 530/10(c).
    ---------------------------------------------------------------------------
        As a result, in Illinois, I am proposing a requirement that
    companies also notify my office when they suffer a breach. Fifteen
    states already require entities to notify their Attorney General in the
    event of a breach.\13\ If given that authority, I intend to create a
    website that will enable Illinois residents to see all the breaches
    that have occurred in Illinois.
    ---------------------------------------------------------------------------
        \13\ Cal. Civ. Code 1798.29(e); Conn. Ch. 669 Sec. 36a-7041b(b)(2);
    Fla. Stat. Sec. 501.171(3); Ind. Code Art. 24-4.9-3-1(c); Iowa Senate
    File 2259 (to be codified at 715C.2.8); LA Admin. Code Title 16
    Sec. 701; Maine Stat. Tit. 10 Sec. 1348(5).; Md. Comm. Code Sec. 14-
    3504(h); Mass. Gen. Law Ch. 93H Sec. 3(a); Mo. Stat. Sec. 407.1500(8);
    N.H. Ch. 359-C:20(b); N.Y. Sec. 899-aa(8)(a); N.C. Gen. Stat. Sec. 75-
    65(e1); Vt. Stat. Ann. Tit. 9 Sec. 2435(b)(3); Va. Code Sec. 18.2-
    186.6(E).
    ---------------------------------------------------------------------------
        Such a website is only possible at the state level because we can
    include information about national breaches, as well as those that are
    local or regional. I believe such a service would greatly benefit
    Illinois residents, and I do not believe they would want Congress to
    prevent my office from offering it, or the other work we are doing on
    data security and data breaches.
        I am happy to answer any questions you have.
        Thank you.

        Senator Moran. Thank you very much. Ms. Weinman?

       STATEMENT OF YAEL WEINMAN, VICE PRESIDENT, GLOBAL PRIVACY
      POLICY AND GENERAL COUNSEL, INFORMATION TECHNOLOGY INDUSTRY
                             COUNCIL (ITI)

        Ms. Weinman. Thank you, Chairman Moran, Ranking Member
    Blumenthal, and Senators of the Subcommittee, for the
    opportunity to testify today.
        My name is Yael Weinman, and I am the Vice President for
    Global Privacy Policy and the General Counsel at the
    Information Technology Industry Council, known as ITI.
        Prior to joining ITI in 2013, I spent more than 10 years at
    the Federal Trade Commission, most recently as an attorney
    advisor to Commissioner Julie Brill. I began my career at the
    FTC in the Enforcement Division, ensuring that companies
    subject to FTC data security consent orders were in fact
    complying.
        The 59 technology companies that ITI represents are leaders
    and innovators in the information and communications technology
    sector.
        When consumer information is breached, individuals may be
    at risk of identity theft or other financial harm. Year after
    year, identity theft tops the list as the number one complaint
    reported to the FTC.
        Consumers can take steps to protect themselves from
    identity theft or other financial harm following a data breach.
    Federal breach notification legislation would put consumers in
    the best possible position to protect themselves.
        I take this opportunity to outline three important
    principles in connection with Federal data breach notification
    legislation. First is preemption. A Federal breach notification
    framework that preempts the existing state and territory breach
    notification laws provides an opportunity to streamline the
    notification process.
        Complying with 51 laws (47 states, three territories, and
    one district), each one with its own unique provisions, is
    complex, and it slows down the notification process to
    consumers while an organization addresses the nuances in each
    of these 51 laws.
        Complying with 51 different laws also results in notices
    across the country that are inconsistent and thus confusing to
    consumers. A Federal breach notification law without state
    preemption would merely add to the mosaic, resulting in a total
    of 52 different frameworks.
        The second principle is the timing of consumer
    notifications. An inflexible mandate that would require
    organizations to notify consumers of a data breach within a
    prescribed time-frame is counterproductive. Following a breach,
    there is much to be done. Vulnerabilities must be identified
    and remedied. The scope of the breach must be determined.
    Cooperation with law enforcement is imperative, and impacted
    consumers must be notified. Premature notification could
    subject organizations to further attack if they have not yet
    been able to secure their systems, further jeopardizing
    sensitive personal information.
        Premature notification might interfere with law
    enforcement's efforts to identify the intruders. The hackers
    might cover their tracks more aggressively upon learning that
    the breach had been discovered.
        Notification to consumers before an organization has
    identified the full scope of the breach could yield to
    providing inaccurate and incomplete information.
        Organizations have every incentive to notify impacted
    consumers in a timely manner, but a strict deadline does not
    afford the necessary flexibility.
        The third principle is determining which consumers should
    be notified. Notifying individuals that their information has
    been compromised enables them to take protective measures. It
    is not productive, however, if all data breaches result in
    notifications.
        If inundated with notices, consumers would be unable to
    determine which ones warrant action. Notifications should be
    made to consumers if they are at a significant risk of identity
    theft or financial harm.
        A number of factors would be considered in making that
    determination, including the nature of the breached information
    as well as whether that information was unreadable. Unreadable
    information would not warrant a notification. Upon receiving a
    notice, individuals can then take steps to help avoid being
    financially damaged.
        The three principles I have outlined today are included in
    the full set of principles that ITI has developed in connection
    with Federal data breach legislation, and I respectfully
    request that these be submitted for the record.
        2014 has been referred to as ``the year of the data
    breach,'' and I think many of us would like to see 2015 as the
    ``year of Federal data breach notification legislation.''
        I would be happy to answer any questions. Thank you.
        [The prepared statement of Ms. Weinman follows:]

      Prepared Statement of Yael Weinman, Vice President, Global Privacy
      Policy and General Counsel, Information Technology Industry Council
                                     (ITI)
        Chairman Moran, Ranking Member Blumenthal, and Senators of the
    Subcommittee, thank you for the opportunity to testify today. My name
    is Yael Weinman and I am the Vice President for Global Privacy Policy
    and the General Counsel at the Information Technology Industry Council,
    also known as ITI. Prior to joining ITI, I spent more than 10 years as
    an attorney at the Federal Trade Commission, most recently as an
    Attorney Advisor to Commissioner Julie Brill.
        ITI is the global voice of the technology sector. The 59 companies
    ITI represents--the majority of whom are based in the United States--
    are leaders and innovators in the information and communications
    technology (ICT) sector, including in hardware, software, and services.
    Our companies are at the forefront developing the technologies to
    protect our networks. When a data breach occurs, however, we want a
    streamlined process that helps guide how consumers are informed in
    cases when there is a significant risk of identity theft or financial
    harm resulting from the breach of personally identifiable information.
    In my testimony today, I will focus on several of the critical elements
    necessary to be considered by Congress in developing a Federal
    legislative framework for data breach notification in the United
    States.
    ``Year of the Breach''
        We have all heard 2014 referred to as ``the year of the breach,''
    but the reality is that data breaches did not just come on the scene
    last year--they surfaced quite some time ago. While companies and
    financial institutions spend tremendous resources to defend their
    infrastructures and protect their customers' information, it is an
    ongoing virtual arms race. Organizations race to keep up with hackers
    while the criminals scheme to stay one step ahead. Unfortunately, it is
    no longer a matter of if, but a matter of when, a criminal hacker will
    target an organization. And when certain information about individuals
    is exposed, those consumers may be at a significant risk of identity
    theft or other financial harm. Year after year, identify theft is the
    number one category of fraud reported to the Federal Trade
    Commission.\1\ I would expect that when the 2014 statistics are
    released, identity theft will continue to top the list.
    ---------------------------------------------------------------------------
        \1\ See Federal Trade Commission, Consumer Sentinel Network Data
    Book for January--December 2013 (February 2014) available at http://
    www.ftc.gov/system/files/documents/reports/consumer-sentinel-network-
    data-book-january-december-2013/sentinel-cy2013.pdf; and Federal Trade
    Commission, Consumer Sentinel Network Data Book for January--December
    2012 (February 2013) available at http://www.ftc.gov/sites/default/
    files/documents/reports/consumer-sentinel-network-data-book-january/
    sentinel-cy2012.pdf.
    ---------------------------------------------------------------------------
    51 Different Breach Notification Requirements
        As a result of this troubling landscape, over the years, state
    legislatures across the country enacted data breach notification
    regimes. Currently, there are 51 such regimes--47 states and four U.S.
    territories.\2\ Consumers across the country have received
    notifications pursuant to these laws. I have received more than one
    such notice myself, and I imagine some of you may have as well.
    ---------------------------------------------------------------------------
        \2\ The District of Columbia, Guam, Puerto Rico, and the U.S.
    Virgin Islands each adopted a data breach notification law. New Mexico,
    South Dakota, and Alabama have not yet enacted breach notification
    laws.
    ---------------------------------------------------------------------------
        The current scope of legal obligations in the United States
    following a data breach is complex. Each of the 51 state and territory
    breach notification laws varies by some degree, and some directly
    conflict with one another. For example, Kansas requires that
    notification to consumers ``must be made in the most expedient time
    possible and without unreasonable delay, consistent with the legitimate
    needs of law enforcement and consistent with any measures necessary to
    determine the scope of the breach and to restore the reasonable
    integrity of the computerized data system.'' \3\ Connecticut's
    notification requirement to consumers is similar, but not identical. It
    requires notification to ``be made without unreasonable delay, subject
    to [a law enforcement request for delay] and the completion of an
    investigation . . . to determine the nature and scope of the incident,
    to identify individuals affected, or to restore the reasonable
    integrity of the data system.'' \4\ Florida, however, mandates a strict
    timeline and requires that notification be made to consumers no later
    than 30 days unless law enforcement requests a delay, regardless of the
    status of the forensic investigation into the scope of the breach.\5\
    ---------------------------------------------------------------------------
        \3\ Kan. Stat. Sec. 50-7a02(a).
        \4\ Conn. Gen Stat. Sec. 36a-701b(b).
        \5\ Fla. Stat. Sec. 501.171.
    ---------------------------------------------------------------------------
        The complexities, however, are not limited to the timeline for
    notification. There are other significant variances among these state
    and territory laws, including what circumstances give rise to a
    notification requirement, how notifications should be effectuated, and
    what information should be included in notifications.
    A Way Forward: A Single Uniform Data Breach Notification Standard
        Federal data breach notification legislation offers the opportunity
    to develop a single uniform standard. ITI is currently updating a set
    of principles that we believe should be reflected in any Federal data
    breach legislation you consider. I will be happy to share those with
    you upon their completion, which I expect to be very soon. Outlined
    below are several of these key policy recommendations.
    Consumer Notification
        Notifying individuals that their information has been compromised
    is an important step that then enables them to take protective
    measures. Notification to consumers, however, is not productive if all
    data breaches result in notifications. If that were the case, consumers
    would not be able to distinguish between notices and determine which
    ones warrant them to take action. Notification should be made to
    consumers if an organization has determined that there is a significant
    risk of identity theft or financial harm. Upon receipt of such a
    notice, consumers can then implement measures to help avoid being
    financially damaged.
        The process of determining whether there is a significant risk of
    identity theft or financial harm will include the examination of a
    number of factors, including the nature of the information exposed and
    whether it identifies an individual. Accordingly, efforts to define
    ``sensitive personally identifiable information'' in legislation should
    be carefully considered to ensure that over-notification does not ensue
    as a result of an overly broad definition that includes information,
    which, if exposed, does not in fact pose a threat of identity theft or
    financial harm. Determining whether there is a significant risk of
    identity theft or financial harm may also turn on factors such as
    whether the information exposed was unreadable. If data is unreadable,
    its exposure will not result in a risk of financial harm, and therefore
    notification would not be appropriate.
        Consumers will be best served if they are notified not about every
    data breach, but about those that can cause real financial harm so that
    they can take precautionary actions only when they are in fact
    necessary. These actions can often involve expensive and inconvenient
    measures and should only be borne by consumers when there is a
    significant risk of identity theft or financial harm.
    Timing of Notification
        Mandating that companies notify consumers of a data breach within a
    prescribed time-frame is counterproductive. Recognizing the
    sophistication of today's hackers, and the challenging nature of the
    forensic investigation that ensues following the discovery of a breach,
    Federal legislation must provide a realistic, flexible, and workable
    time-frame for consumer notification. Companies must be afforded
    sufficient time to remedy vulnerabilities, determine the scope and
    extent of any data breach, and cooperate with law enforcement. In
    certain instances, law enforcement agencies urge organizations to delay
    consumer notification so that suspected hackers are not alerted and
    driven off the grid. Sufficient flexibility in the timing of
    notification allows law enforcement to effectively pursue hackers, and
    ensures that consumers are neither notified with incomplete or
    inaccurate information nor notified unnecessarily.
    Federal Preemption
        A Federal law that preempts the current patchwork of 51 different
    state laws would provide considerable benefits. A Federal data breach
    notification requirement without Federal preemption would accomplish
    nothing other than adding a 52nd law to this patchwork. Federal
    preemption ensures that consumers will receive consistent
    notifications, and thus they will be more easily understood. For
    organizations, it will streamline the notification process, enabling
    organizations to redirect resources currently being devoted to comply
    with 51 different notification laws. Such resources can be better
    utilized following a data breach, which requires a myriad of important
    steps, including investigating the breach, determining its scope,
    remedying vulnerabilities, and cooperating with law enforcement. One
    uniform framework allows organizations to make consistent
    determinations about who should be notified, when those individuals
    should be notified, and what information should be included in the
    notification.
    No Private Right of Action
        We urge you to avoid legislation that includes a private right of
    action for violations of a data breach notification regime. The best
    way to protect consumers is not to empower the plaintiff's bar to
    pursue actions that are ultimately only tangential to consumer injury.
    Appropriate government enforcement for violations of data breach
    notification legislation is the proper remedy.
    2015: The Year of Federal Data Breach Notification Legislation
        A Federal data breach notification law that preempts the current
    regime would be an important step forward for 2015--the year after the
    ``year of the breach.'' At ITI, we hope that 2015 is the ``year of a
    Federal data breach notification law.'' Thank you again for the
    opportunity to share our thoughts on a Federal data breach notification
    regime, and I am happy to answer any questions you may have.

        Senator Moran. Thank you very much, and thank all of our
    witnesses. Attorney General Madigan, you seem to be in the
    minority, at least in this panel, on the issue of preemption.
        How do you respond to the concern that has been raised
    particularly by Mr. Duncan or Ms. Weinman about 51/52 different
    sets of standards across the country? Is there a way to preempt
    state law but then continue to have states involved in the
    enforcement of that new standard?
        Ms. Madigan. Sure. Senator, to answer your second question
    first, of course, there is--and it happens frequently--at the
    Federal level, where you will set a national standard but still
    allow State Attorneys General to enforce the law.
        Obviously, if that is what happens, that is one of our most
    important concerns because there will be instances where there
    are significant data breaches--they may be smaller, They may be
    confined to one or only a few states--and it will not be a
    circumstance where the FTC, for instance, they are the ones
    with the enforcement authority, will look into it.
        In part, it is the same situation we have in terms of
    different jurisdictions at a State level versus a Federal
    level, even for criminal matters. Some of the U.S. Attorneys
    Offices have thresholds. It has to be a big enough matter. But
    we still need and want the ability, as I said, to respond to
    and to safeguard our own residents.
        In terms of the concern, and I do appreciate having as many
    as 51 different laws that organizations have to comply with in
    terms of notification, I would say two things. One, to some
    extent the concern is overblown, in a very real sense. As
    somebody mentioned, it is a lawyer that sits down and
    determines what the notice has got to be and then produces a
    notice that can be used across the country.
        That certainly happened in terms of the Target breach. I
    remember getting that notification, and there are some
    different provisions depending on the state, but it is not
    impossible to do. It does not take such an enormous amount of
    time that the other issues that need to be contended with
    during the breach are ignored.
        Two, it is not an overall necessity, but I do think it is
    imperative. And I think everybody agrees that if you set a
    national standard, it cannot be a weak one. It has to be a
    higher one than some of the first generation state notification
    laws because we are seeing an increasing number of breaches
    with an increasing amount of sensitive information that is
    being breached.
        You are going to have to start to look into biometric data
    and things that really, during the first generation, very few
    if any states were concerned about.
        Senator Moran. Thank you very much. Is there any
    indication, and this is a question for any of the panelists,
    that from state to state, depending upon the law, that law or
    the effectiveness of that law has a consequence such that there
    are fewer hackers?
        Is there any suggestion that a state law discourages
    hacking from taking place in that state? In other words, is it
    effective as a prevention measure, and is there any suggestion
    that a state law has increased the standards of businesses who
    operate in those states?
        Is there a different level of compliance and is there a
    different level of desire to attack in a certain state because
    of state laws? Mr. Duncan?
        Mr. Duncan. Senator, as I mentioned in my testimony, the
    very nature of this problem is that it is interstate. If you
    imagine a situation with a small startup, they instantly have
    connectivity throughout the entire United States if they are
    selling merchandise. It is the fact of notice regardless of
    which state it occurs in that drives the interest in trying to
    have greater standards. It is not really a state issue. This is
    a national problem.
        Senator Moran. We often think of the states as
    laboratories, and I assume if we develop a national standard
    that we will look at states to see what standards are there,
    what makes sense.
        I just wanted to make certain there was no suggestion that
    a particular state has found a way to prevent or discourage
    this kind of behavior. I think at least your answer, Mr.
    Duncan, is no.
        Mr. Johnson?
        Mr. Johnson. Yes, sir. I would echo that the answer is no.
    I think what it does is it points to the need to have really a
    data security standard that is attentive to any data breach
    standard. If you do not have both pieces, you really do not
    have the ability to raise the bar from a security standpoint,
    because I do not believe that a breach notification in and of
    itself motivates businesses to essentially raise the
    cybersecurity bar.
        Senator Moran. Thank you, Mr. Johnson. Let me ask you
    before my time expires, is there any developing insurance
    coverage market for data breach? Your banks have a standard in
    place today. Is there insurance that covers the consequences of
    a data breach?
        Mr. Johnson. Yes, there is. It is a maturing market. We
    actually have a captive insurance company that offers some of
    those policies as well. I think it is a market that needs
    further refinement.
        We as an industry are looking at that very carefully in a
    number of different fashions, and in fact working with Treasury
    and with the Administration generally to try to figure out ways
    to improve the market and try to build insurance as a private
    incentive as opposed to building public incentives toward
    greater cybersecurity.
        Senator Moran. Thank you. Senator Blumenthal?
        Senator Blumenthal. Thanks, Mr. Chairman. Ms. Madigan,
    again, thank you for being here. I want to follow up on a
    couple of questions that the Chairman asked.
        You make the point that preemption has sometimes been
    narrow in our laws. In fact, that concept of narrow protection
    is that there should be preemption only if state laws are
    inconsistent with Federal law and then only to the extent of
    the inconsistency. That is a quote from one of those statutes.
        In Gramm-Leach-Bliley, in the Health Information Technology
    for Economic and Clinical Health Act, also known as HITECH,
    that principle of narrow preemption has been adopted.
        Has the experience been with that narrow approach to
    preemption that there are these horrible inconsistencies or
    confusion that our witnesses seem to raise as a specter of
    avoiding preemption?
        Ms. Madigan. No, Senator. The concern from the state level,
    as you are aware, is that it took--let's assume Congress will
    pass something this year--it took 10 years for Congress to pass
    a breach notification law, if you pass it now.
        To the extent that there are new threats out there or,
    again, threats that specifically target a group of people,
    consumers in our state, we need to be able to respond. Or, if
    there is a rapidly changing area, again, we want to be able to
    respond.
        I think that is the real concern. We have not seen
    significant problems where states retain enforcement authority
    of a Federal law and/or the preemption is narrow. In fact, I
    think it works best that way because, again, Federal resources
    tend to go to larger issues whereas state resources go to some
    of the smaller issues.
        Senator Blumenthal. Mr. Duncan, I am troubled by the
    failure of retailers to take responsible steps to protect their
    consumers. In fact, some of them, I am told, have actually
    blocked some of the new technology that could have been
    available. I do not want to call any out, but I am happy to
    name them if you wish.
        I am disturbed that these major retailers have in fact
    moved to block innovations by disabling their contact list
    transaction terminals that they offered as a feature to
    consumers for many years. Mobile payment technologies like
    Apple Pay and Google Wallet, efforts are underway, but they
    still have not been deployed as they should be.
        Are you not disappointed that retailers have not done more
    to protect their consumers?
        Mr. Duncan. It is not a matter of disappointment in terms
    of what retailers have done in the past. I can tell you that I
    have sat in the Board meetings of the National Retail
    Federation, and I have heard the CEOs of some of the best known
    companies in this country talk long and seriously about the
    steps they have to take to address this very serious problem.
        Senator Blumenthal. I am sure they have talked about it.
    Why have they not done anything about it?
        Mr. Duncan. They are also adopting new technologies. This
    is a very complicated issue to address because there are so
    many ways, as has been pointed out, that the bad actors can get
    in, so you have to develop very particularized systems that
    will effectively block that, and they are adopting those.
        Senator Blumenthal. Why are the retailers disabling their
    terminals, for example?
        Mr. Duncan. There are some technologies that either are
    unproven, are extraordinarily expensive, or take control of the
    company's operations away from the company and into someone
    else's. Each company has to make its own decision on that
    element, but that is completely separate from a decision about
    how you secure the data in your files.
        Senator Blumenthal. You know, I am struck that you have
    recommended to the panel that there be preemption, not only of
    state statutory law but also common law. That is a pretty broad
    preemption, is it not?
        Mr. Duncan. The fact is if you do not have preemption that
    is strong and across the board, then ultimately, experience has
    shown us, that the courts will strike down the preemption and
    the proliferation of conflicting laws will reemerge. We have to
    have a very strong law and it has to be an uniform law if it is
    to be effective.
        Senator Blumenthal. That principle of preemption, is that
    not virtually unprecedented?
        Mr. Duncan. No, I do not think so.
        Senator Blumenthal. Where else has it been adopted?
        Mr. Duncan. Well, let's look at what has happened with the
    telemarketing sales rule that the FTC enforces. There
    essentially the same kind of approach was taken. All power was
    placed essentially on the rule with the FTC. You do not see
    individual actions under that rule or you do not see----
        Senator Blumenthal. My time is expired.
        Mr. Duncan. State Attorneys General actions under that
    rule, which we would support.
        Senator Blumenthal. My time has expired. I would suggest
    that that approach to preemption is broader than this committee
    should consider, and a more narrow view of preemption such as
    Attorney General Madigan has suggested, if there is to be any
    preemption at all, is one that is more appropriate.
        Thank you, Mr. Chairman.
        Senator Moran. Thank you, Senator Blumenthal. Senator
    Fischer?

                    STATEMENT OF HON. DEB FISCHER,
                       U.S. SENATOR FROM NEBRASKA

        Senator Fischer. Thank you, Mr. Chairman. My thanks to you
    and the Ranking Member for holding this very timely hearing
    today.
        Ms. McGuire, as you know, numerous reports have linked
    nation state actors to cyber attacks. Additionally, some of the
    same countries implicated in these reports may require U.S. IT
    companies to turn over intellectual property, including
    operating software source code, in exchange for market access.
        Are you concerned that such information in the hands of
    what we could call an ``irresponsible actor'' could pose
    additional cybersecurity risks?
        Ms. McGuire. Thank you for the question. We are concerned
    about having to turn over any of our intellectual property to
    any country. We believe that is an infringement on our
    ownership of our intellectual property that we have clearly
    spent extensive resources to develop, and that we should be
    allowed to protect it accordingly.
        Certainly, if it is passed to a third party or a second
    party, then it does expose us to potential additional
    vulnerabilities. In short, we believe that we should not have
    to share our intellectual property.
        Senator Fischer. There are instances, I believe, where
    companies are being pressured by foreign governments to share
    that property. Do you know how prevalent that is?
        Ms. McGuire. There are some new requirements, actually some
    not so new requirements, in some countries. I cannot tell you
    how prevalent it is, but we are certainly seeing a growth in
    those kinds of requests from many different countries around
    the world.
        Senator Fischer. How dangerous is that if we continue to
    see growth in that, that companies do that for increase in
    market access, for example? How dangerous is that to other
    companies here in our country when that property is shared,
    would it not put your security and other companies' security at
    risk?
        Ms. McGuire. It potentially could put other organizations
    at risk. I am not sure I can quantify how much, but any time
    you have to provide the source code to another party, it can
    provide additional openings for risk.
        Senator Fischer. Also, our Federal data protection
    framework, it is largely based on who is collecting that
    information rather than tailoring enforcement based on what is
    being collected. Would it not be better for consumers and
    businesses alike if we would apply a more uniform regime for
    all entities so that enforcement is based on the sensitivity of
    the information that is being collected?
        Ms. McGuire. Yes, that is our view, that it should be a
    risk-based application and threshold for what type of data
    potentially is breached.
        Senator Fischer. For all the witnesses, if I could just ask
    a couple of yes or no questions here. Do you support a Federal
    data breach notification standard that is consistent for all
    consumers? Ms. McGuire, if you want to start.
        Ms. McGuire. Yes.
        Mr. Duncan. Absolutely.
        Dr. Pendse. Yes.
        Mr. Johnson. Yes.
        Ms. Madigan. Yes, if it is strong and meaningful.
        Ms. Weinman. I will be the outlier and ask for further
    clarification of the question. When you say ``consumers,'' are
    you referring to which particular type of data? Is that your
    question, whether you do not want to distinguish between types
    of data?
        I think to a certain extent the sectoral approach that we
    have here in the United States has worked to a large extent
    with regard to financial data and health data.
        Since the desire is to get Federal breach notification
    legislation across the finish line in 2015, anything that could
    potentially slow that down is something we should carefully
    consider.
        Senator Fischer. Do you think it would be easier to get
    something across the finish line if exceptions are made or
    targeting made on what type of data is collected?
        Ms. Weinman. I think it would make it easier to get it
    across the finish line if entities that are already subject to
    data breach notification requirements in specialized areas--if
    those remain intact.
        Mr. Duncan. Senator Fischer, with all due respect, a
    sectoral specific approach or exceptions are anathema to the
    kind of incentives we are going to need in order to have
    effective protection for consumers, at least in the view of the
    National Retail Federation.
        Senator Fischer. So, we have disagreement. I am over my
    time, so thank you very much.
        Senator Moran. Senator Schatz?

                    STATEMENT OF HON. BRIAN SCHATZ,
                        U.S. SENATOR FROM HAWAII

        Senator Schatz. Thank you. Ms. Weinman, you and others have
    talked about the balance to strike in terms of over-
    notification. I think we all recognize we do not want to be
    inundating consumers and others with notification of breaches
    if they are not significant enough, and it would become
    meaningless.
        My question is who determines whether there is this
    ``significant risk'' of identity theft? Do you figure that gets
    enshrined in the statute? Is that for Attorneys General to
    determine? Is it the courts? Individual companies?
        I think that is one of the key issues here. We can all
    agree in principle that we do not want to be over notifying,
    but where that responsibility and authority resides is really
    key.
        Ms. Weinman. Thank you. I am glad that we can all agree in
    principle that over notification is not something that would be
    desirable. I think an organization that holds the data and has
    a sense of what information has been compromised, and the
    extent to which it had been compromised, would be in the best
    position to make that determination.
        Senator Schatz. What standard would they be held to? Would
    it be under the law or just their own judgment about whether
    this was going to be harmful to their consumers? Or does this
    all get refereed in court? That is the question, is it not?
        Ms. Weinman. Well, I think the level of risk would be
    something that would be codified in a statute like significant
    risk of identity theft or financial harm. I do think that would
    be in the letter of the law.
        Senator Schatz. Ms. McGuire, you were talking about a risk-
    based analysis. I would like you to elaborate there.
        Ms. McGuire. So, along the same lines of what kind of data
    has been breached and what the risk is to the consumer or the
    organizations that also might have been part of that, but as I
    stated in my statement, we believe that a component of that
    statute needs to be that the data has been either rendered
    unreadable or unusable via encryption or other technologies so
    that in fact if the data has been accessed, it is meaningless
    to the perpetrator. That is a key component----
        Senator Schatz. That is your bright line?
        Ms. McGuire. Of the statute; yes.
        Senator Schatz. Attorney General Madigan, maybe take half a
    minute to elaborate on that, and I have another question for
    you as well.
        Ms. Madigan. I do not think there is any such thing as over
    notification going on at this point. Notification keeps
    consumers alert to the possibility of I.D. theft and they
    should be protecting themselves.
        It certainly depends on what other information these
    criminals may have access to in terms of what they could be
    using; information that we would deem individually not to pose
    any risk to them, but could potentially if it is combined with
    other information. There is no over notification going on at
    this point.
        Senator Schatz. I agree with you there may not be over-
    notification but we do not want to create a scenario where I am
    getting e-mails two or three times a week and I do not know
    what to panic about and what to ignore. I think that is the
    balance to strike.
        I agree that we are not there in reality.
        Ms. Madigan. At all.
        Senator Schatz. If you could again articulate what would
    constitute a sufficiently strong standard to kind of satisfy
    your concerns. I respect the California law and some other
    statutes are pretty good marks to make. I see a few heads
    nodding, I see a few heads shaking.
        Ms. Madigan. Do not scare them.
        Senator Schatz. That is fine. I would like to hear what you
    think would suffice in terms of being worth a tradeoff in terms
    of preempting state laws.
        Ms. Madigan. I think a strategy that I have heard talked
    about here is that you really should look at the state laws
    that are out there, California probably at this point being one
    of the high marks. But I should say it is not just California.
    Again, this is a bipartisan issue: Texas, Florida, Indiana,
    have some of the most progressive notification laws in the
    country.
        You need to look and see what the changes have been from
    the first generation of them, such as Illinois, where we said
    it is going to be your first name or your first initial and
    your last name along with unencrypted Social Security number,
    driver's license number, credit or debit card number, and now
    we are moving to biometric data, as I said, and e-mail
    addresses with log-in passwords.
        As it changes, you really need to look and see what is the
    high water mark and make sure that really is your floor.
        Senator Schatz. Mr. Johnson, I will let you have the last
    word on this. What would suffice as a strong enough standard
    that we would all feel comfortable preempting the 50 odd state
    laws that we would be looking at?
        Mr. Johnson. Gramm-Leach-Bliley.
        Senator Schatz. I'm sorry, one more time.
        Mr. Johnson. Gramm-Leach-Bliley, the Federal law. I think
    what we are doing at the Federal level has a standard
    associated with when a company makes a valuation, such as your
    concern in terms of who has the responsibility to make the
    determination as to when to notify of substantial harm.
        I think also the financial services companies even if a
    breach is not occurring at the financial services company has a
    lot of experience in terms of dealing with those breaches as
    well, and they look at Gramm-Leach-Bliley from that
    perspective. I think that is what I would look to.
        Senator Schatz. Thank you.
        Senator Moran. Senator Blunt?

                     STATEMENT OF HON. ROY BLUNT,
                       U.S. SENATOR FROM MISSOURI

        Senator Blunt. Thank you, Chairman. Thank you for having
    this hearing. We had a similar hearing in this committee last
    March, and at that time all the panelists were for a single,
    consistent national standard.
        Attorney General Madigan, I often tend to be in favor of
    the underdog, but I seldom would imagine you would be the
    underdog on this issue. You might be in terms of where other
    people are tending to wind up.
        I think a lot of the questions I would ask have already
    been asked on the topic of preemption. We will just see where
    that goes. The President and the Attorney General have both
    taken a position, and both agree with the need for preemption.
        Senator Carper and I introduced a bill last year, and we
    are working on a bill again this year. Our bill covers a lot of
    ground regarding data security and breach notification, but one
    of the things we have not done in our legislation is establish
    an arbitrary timeframe.
        There is an argument about whether there should be a
    specific timeframe established in the law as opposed to
    established by circumstances. So far I have stayed on the side
    that we need to have some flexibility in timeframes, but I am
    not absolutely sure I understand, or the Committee understands,
    all of the reasons why.
        I did notice in the Anthem data breach this week, they sent
    a general notice, and then I heard Mr. Schatz say basically he
    was becoming the victim of breach fatigue by being constantly
    notified that he could be in a group whose information may have
    been breached.
        I have not yet looked at legislation with the idea that we
    need an arbitrary deadline, but I have a couple of questions
    for whoever wants to answer, starting with you, Ms. Weinman.
        The question would be what would you perceive in terms of
    how a deadline should be established or the criteria for what
    would be a reasonable response, and your view on whether an
    arbitrary deadline is something that should be included in a
    data breach notification.
        Ms. Weinman. Thank you. I think an arbitrary deadline, a
    specific timeframe, is not useful in that it sets an objective
    standard. Each data breach incident is different. Each incident
    requires special consideration to address vulnerabilities, and
    to cooperate with law enforcement. Some breaches will require
    cooperating with many different types of law enforcement.
        I do not think a specific deadline is useful. That being
    said, a number of the states have deadlines that do not involve
    specific days, and I think that is the right approach to give
    sufficient flexibility.
        Senator Blunt. Is there any sort of guidelines you would
    look at as to whether or not a response was appropriate, and
    made in an appropriate timeframe? What would be a triggering
    factor of whether the response was appropriately quick or not?
        Ms. Weinman. I think the buzz words that we hear a lot is
    ``without unreasonable delay,'' that type of construct, I
    think, works well in this situation. In examining whether the
    notification was done without unreasonable delay, you would
    look at what the company had done up until that point when it
    decided to make that notification.
        Had they dotted all the i's and crossed all the t's and
    closed the patches, cooperated with law enforcement, listened
    to law enforcement if law enforcement asked them to in fact
    delay notification, which is in fact sometimes the case.
        Senator Blunt. I am down to a minute. Anybody that feels a
    guideline should be specific? Anybody want to respond to that?
        Ms. McGuire. I do not, and I agree with Ms. Weinman that
    there should be a standard for reasonable notification, but I
    think it is important to recognize that there are different
    types of breaches. There is a difference between losing a
    laptop that has a lot of data on it and a network that has been
    penetrated. That may require very different responses and very
    different investigation and time lines. I think that is an
    important criteria to consider.
        Dr. Pendse. I would agree with my colleagues here, there
    ought to be some flexibility there because smaller
    organizations are simply not going to have the types of
    resources that bigger organizations can bring to bear, so some
    flexibility would be very much essential.
        Senator Blunt. Anybody? I think I am out of time. I am not
    a lawyer but it does sound like--my one concern about
    ``reasonable response'' is it sounds like time in court to me
    for someone to try to determine whether the response was
    reasonable or not.
        I am out of time. Chairman, thank you for the time.
        Senator Moran. Thank you, Senator Blunt. We are honored to
    be joined by Chairman Thune, and I recognize him now.

                     STATEMENT OF HON. JOHN THUNE,
                     U.S. SENATOR FROM SOUTH DAKOTA

        The Chairman. Thank you, Mr. Chairman. I thank you and
    Senator Blumenthal for holding this hearing and focusing a
    light on this issue. It is an issue that is important to our
    country and something that Congress has been trying to fix for
    over a decade, and hopefully this will be the year when we
    finally find the path forward that enables us to put in place a
    workable solution that protects consumers and addresses this
    very important issue, which again we are reading about today,
    millions of Americans impacted by yet another data breach.
        I want to ask, and Senator Blunt mentioned this, because I
    think the question has been asked many times but perhaps not
    everyone has answered it, Ms. Weinman, I am just curious
    because you have extensive experience in this area having
    worked at the FTC prior to your current position with ITI,
    could you give us your sort of explanation of why you think a
    single Federal law is so preferable for both businesses and
    consumers?
        Ms. Weinman. Thank you. I have a chart with me that is 19
    pages long that goes through the variances of the different
    state laws. That reason alone, I think, lends itself to having
    one Federal breach notification standard to enable companies to
    act quickly and provide the required notice. I think it is both
    business-friendly but more importantly consumer-friendly.
        The Chairman. Mr. Duncan, your testimony today highlighted
    the need for Congress to enact a preemptive Federal data breach
    notification law. I agree that doing so would provide a great
    deal of clarity for companies, including the retailers and
    merchants that you count as your members.
        It also would provide needed consistency, I think, for
    consumers. That is an issue as I said before Congress has dealt
    with in the past. There has been various legislative proposals
    that have called not only for uniform notification procedures
    but also for uniform Federal data security standards.
        I appreciate your observations about some of the risks of
    FTC enforcement, but since that enforcement can already occur,
    would not retailers benefit from a Federal law saying that
    reasonable data security measures must take into account the
    size and scope of the organization and the sensitivity of the
    data collected?
        Mr. Duncan. Thank you, Senator Thune. The FTC effectively
    has a reasonableness standard either under exception or under
    unfairness right now.
        Once you begin putting a lot of different factors into that
    standard, then you essentially set up a situation where was it
    reasonable as to (a), as to (b), as to (c), as to (d). If a
    medium-sized company cannot check the box on every single one
    of those factors, then they are likely to be in very bad shape.
        That kind of standard works better when you are developing
    guidance. That is a big distinction between the GLB standards
    that Mr. Johnson has talked about, and a uniform national
    standard.
        If you have an examiner sitting next to you, and you--can
    in an iterative process--work through each of those various
    elements, that may work. If you are trying to set one standard
    for every type of commerce and every type of business in the
    country, then having multiple components to that is going to
    make it impossible with any certainty for the average American
    company to respond to.
        The Chairman. Could NRF support any type of security
    requirement?
        Mr. Duncan. Sure, if there is a standard comparable to that
    the FTC is currently enforcing, which is a reasonable security
    standard, and if that is coupled with the very, very robust
    notice requirements that we have testified in favor of, that
    would work.
        The Chairman. I have a question for Attorney General
    Madigan. Ms. McGuire in her testimony suggests that any
    notification standard should minimize notifying individuals
    about breaches in which their personal information was rendered
    unusable before it was stolen.
        Ms. Weinman suggests that the exposure of unreadable data
    will not result in risk, therefore, notice would not be
    appropriate.
        I am wondering what your thoughts are on the wisdom of
    including the usability reference in breach notice legislation
    and then perhaps how the Illinois state law approaches that
    issue.
        Ms. Madigan. It is the right thing to do. I agree with both
    of them on that front. Under Illinois' law, if the information
    is encrypted, you do not get notification of the breach. What
    we need to look to, because we have seen this in some of the
    breaches taking place, is encrypted information that has been
    compromised and the encryption key has also been stolen.
        In those circumstances, when you can unencrypt, then there
    should be notice. If it is encrypted--if it is unusable,
    unreadable--notification does not need to take place under
    Illinois law.
        The Chairman. Great. Mr. Chairman, thank you.
        Senator Moran. Mr. Chairman, thank you. Senator Klobuchar?

                   STATEMENT OF HON. AMY KLOBUCHAR,
                      U.S. SENATOR FROM MINNESOTA

        Senator Klobuchar. Thank you very much, Mr. Chairman. Thank
    you for holding this important hearing. I apologize for being
    late. We had a Judiciary markup. It was very exciting. Now I am
    here on a topic that is near and dear to our hearts in
    Minnesota.
        As you know, one of our major retailers experienced a
    breach, and I think there is not a day that goes by that we do
    not hear about another cyber attack in local communities or on
    the national scene or even on the international scene.
        In fact, last night the media reported that Anthem, the
    nation's second largest health insurer, was breached, and as
    many as 80 million customers could have had their account
    information, including names, birth dates, addresses, Social
    Security numbers stolen.
        These cyber attacks are increasing in scope. I was a
    sponsor of some of the bills that were out there in the last
    Congress. I hope, given that we have already had hearings this
    Congress, and I appreciate Senator Thune's leadership--I am one
    of the few senators that are on both the Judiciary Committee
    and the Commerce Committee--that we can move ahead in this area
    of cybersecurity.
        My first question actually was about what I just raised,
    and I know it was in the news. Attorney General Madigan,
    welcome. I have worked with you in the past and appreciate your
    good work.
        With this disclosure, it is important to discuss what is
    and what is not covered under the Health Insurance Portability
    and Accountability Act or HIPAA. To your knowledge, would the
    information impacted in the Anthem breach be covered by HIPAA?
        Ms. Madigan. What I have heard so far is that they claimed
    medical information was not breached, so it probably falls
    under the various state breach notification laws to determine
    if the ``personal information'' definition is met at the
    various states. I think it remains to be seen what the total
    extent of that breach is.
        Senator Klobuchar. I know. I do not think we know yet. In
    your experience when something like this happens, not this
    exact case, how are the agencies coordinating with the
    Attorneys General, whether it is the Department of Health and
    Human Services, or the FTC, to enforce these consumer
    protections, and do you think there is more that can be done
    there when it comes to coordination?
        Ms. Madigan. Well, we have certainly had a very good
    working relationship with the FTC because we obviously have
    similar jurisdiction over consumer matters. We probably do not
    have as much interaction with the other entities that are
    dealing with some of the health information, but in Illinois,
    the way our breach notification law works, if that type of
    information is taken, we want the ability to be able to make
    sure people are notified. And obviously, coordination, I think,
    helps everybody, particularly when we all have limited
    resources.
        At the end of the day, our concern is all the same, right?
    We are trying to protect individuals from any sort of identity
    theft and financial damage that could occur because of it. We
    are always looking to cooperate, whether it is at the state
    level or at the state and Federal level.
        Senator Klobuchar. OK. Mr. Duncan, I am going to focus on
    the retail issues, since we are proud to have Target and Best
    Buy in the State of Minnesota, two great companies.
        Last year, many of my colleagues and the media had talked
    about the need to move to chip-and-PIN technology, similar to
    what we are seeing in Europe, Canada, and elsewhere, and
    following the push for the change, the industry made a
    voluntary commitment, as you know, to switch over to chip-and-
    PIN cards and readers by the end of October 2015, which is this
    year.
        That is an important timeline, I think, for consumers. We
    learned from the Home Depot data breach that impacted both
    Canadians and Americans that cards from Canada were actually
    less valuable on the black market than American cards because
    they had chip-and-PIN technology. We tended to be a target
    because we had not improved that technology, despite the work
    of companies like Target who had early on tried to, but as we
    know, it is not universal across the country.
        Mr. Duncan, what percentage of your members have already
    adopted chip-and-PIN payment technology and have the necessary
    technology to read cards at points of sale?
        Mr. Duncan. This is a quickly changing number. I have data
    from several months ago, in which case it was in excess of a
    quarter of the Nation's retail terminals were already outfitted
    for chip-and-PIN.
        The concern that many of our members have is that the
    investment in PIN-and-chip technology is extraordinarily
    expensive. It will cost between $25 and $30 billion to re-
    terminalize the entire country.
        It is worth it if you get improvement in fraud reduction.
    Unfortunately, many of the banks, not all, but many of the
    banks are not issuing pin and chip cards. They are only issuing
    chip and signature cards. As you know, a signature is a
    virtually worthless security device.
        Retailers are being asked to spend tens of billions of
    dollars for security that is going to be illusory.
        Senator Klobuchar. I know just talking to Target and Best
    Buy that they are pretty committed to getting to this October
    deadline, which is great. When you are talking about the 25
    percent, those are just ones that have not done it yet but you
    expect a higher percentage to be there by October?
        Mr. Duncan. Lots of companies--it takes a huge effort to
    re-terminalize a large operation, an interconnected operation.
    We expect a significant portion of the industry to be there,
    not 100 percent. It is impossible to do that in 10 months.
        Senator Klobuchar. Your point is it is very important to
    have the full technology with the chip-and-PIN and----
        Mr. Duncan. If we are going to spend the money to reduce
    fraud, let's reduce fraud. Let's do PIN-and-chip.
        Senator Klobuchar. Any comments from anyone else about
    this? Mr. Johnson? Thank you, Mr. Duncan.
        Mr. Johnson. Thanks for the opportunity, Senator. I think
    one of the things when we have this conversation that we forget
    sometimes is the fact that the card market is really two
    different markets to some degree. It is the debit card market
    as well as the credit card market. Debit cards have PINs. You
    essentially have more than 50 percent of the card environment
    already that is PIN enabled.
        What we have learned from the credit side is the fact that
    both at the retail side as well as our customer behavior, in
    the credit environment, our customers prefer to use the
    signature. If they want to be protected by a PIN, they can use
    their debit cards. They have an effective choice to be able to
    really accomplish that.
        Senator Klobuchar. I think what Mr. Duncan said is that you
    get more protection, and certainly the situation that we saw
    with Home Depot where the Canadian cards were less valuable
    because they had that full technology, I can imagine everyone
    would like to see. It is just that if we know one technology
    protects better, it seems we would not just want it for debit
    cards.
        Sometimes, I just know from having a bunch of cards in my
    purse, I do not really think through what kind of card it is,
    if it is signature or not.
        Mr. Johnson. I think that the most important thing here is
    to really work toward getting rid of static numbers. What we
    have in the environment right now are credit card numbers and
    PINs that are static numbers that make us vulnerable.
        To the extent that we have developed technologies such as
    tokenization, where numbers are meaningless, if someone was to
    breach Target and capture all the numbers that were associated
    with those transactions, or any retailer, the numbers would be
    meaningless because they would only work for that one
    transaction.
        I think that is really what we need to be working toward,
    making those numbers absolutely worthless to the criminal, and
    that is what is really going to protect the customer at the end
    of the day.
        Senator Klobuchar. Very good. The last thing, just for the
    good of my hometown, Target did fix the breach and everyone can
    go shopping there. Thank you.
        Senator Moran. Thank you. Senator Daines. Let me first say
    that a vote is scheduled at 11:30. I want to make sure that
    Senator Daines gets an opportunity to question. We intended to
    take a second round, but that may not be possible based on the
    voting schedule. Senator Daines?

                    STATEMENT OF HON. STEVE DAINES,
                       U.S. SENATOR FROM MONTANA

        Senator Daines. Thank you, Mr. Chairman. This morning, 80
    million Anthem health insurance customers woke up to learn
    their personal identifiable information could have been stolen.
    In fact, we just received this over the fax machine, a notice
    from Anthem that says ``To our Members,'' and I am just quoting
    from the letter which was sent out to their members, and it
    could be 80 million members.
        ``These attackers gained unauthorized access to Anthem's IT
    system and have obtained personal information from our current
    and former members, such as their names, their birthdays, their
    medical I.D.'s, Social Security numbers, street addresses, e-
    mail addresses, and employment information, including income
    data.''
        Last year in the House I offered an amendment that would
    strengthen victim notification requirements. I am eager to work
    with the chairman on strengthening these requirements again in
    future legislation.
        I have a question for anyone on the panel here this morning
    in light of there has been a lot of discussion about past
    breaches and now we have this most recent significant and most
    serious breach.
        What is an appropriate notification time period, like for
    these 80 million customers, and we still do not know for sure
    when this occurred, but we are hearing it might have been last
    week, but for these 80 million customers that are waking up
    this morning to hear and learn their PII could have been
    stolen.
        Ms. Madigan. Senator, I would respond this way. It sounds
    unusual and helpful that Anthem has actually notified people,
    even if we do not know the full extent of the breach, as
    quickly as they have.
        We are aware of situations where there are retailers who
    have waited months and months, some maybe as long as six
    months, to notify people, which is clearly too long to notify.
        We have had some extensive discussion about whether there
    should be a 30-day hard deadline, should it be more flexible. I
    can tell you at the state level, while there are some that have
    timeframes, we have been very reasonable, basically saying to
    do this as expeditiously as possible.
        When we look into whether that has taken place, we
    determine when did the breach take place, when did the company
    know about it, did they have time to put in place a response to
    secure their system, and obviously, any exceptions, if they
    need to continue to work with law enforcement.
        A flexible deadline would be a good one, but it cannot be
    that there is such a flexible deadline that you never have to
    notify or that you can wait for months, because your goal is to
    let people know that their information is out there and they
    may be a victim of some form of financial fraud or identity
    theft.
        Senator Daines. Prior to coming up on the Hill, I spent 28
    years in business, in fact, half of that time at Procter &
    Gamble. We prided ourselves on good customer service. The other
    half of that time as part of a technology startup, a Cloud
    competing company that we took public. In fact, Oracle acquired
    us a couple of years ago, built a world class Cloud competing
    company.
        I was the Vice President of Customer Service working with
    literally millions of end users and thousands of customers. We
    sold a B to C customer service Cloud-based solution.
        When I was running Customer Service and looking after
    customers and we had a problem, our policy was we notified our
    customers as soon as we were aware of the problem, maybe not
    always understanding the magnitude of it. We believed we owed
    it to our customers to get back to them.
        I frankly am surprised to think we might be thinking in
    terms of 30 days. I think frankly that is unacceptable and that
    the customers, the consumers in this country, should be served
    better than that, and particularly when we are dealing with
    PII, recognizing we may not know the scope of the problem at
    the time, but at least the customers ought to know there is a
    problem and we are working quickly here to try to resolve that.
        I would be happy if there are any other comments from the
    panel.
        Mr. Duncan. Senator, we would support the kind of a notice
    regime that is contained within the Illinois law. It is less
    important as to what the number of days are attached to it, as
    long as you provide the time for law enforcement, for example.
        They may not want to notify because they want to set a trap
    for the people who have invaded it and have a way of catching
    them, taking them off the street. You have to allow for that.
        You clearly want to clean up the holes so that the people
    cannot come back inside. Once you have taken care of that, 30
    days, 10 days, whatever, 40 days, it does not matter, just a
    reasonable time period.
        I will say to the specific point that was made a moment
    ago, one of our members had a breach which they initially
    interpreted to be a million card data's that had been released.
    Once they examined it, it turned out there were only 35,000.
        The idea that you would have given notices to 965,000 more
    people unnecessarily is a pretty serious problem. You have to
    get it right. There is no easy answer here.
        Dr. Pendse. If I may comment, in terms of customer service,
    I agree with you that quick notification is very important but
    on the other hand a serious situation such as my other
    panelists have pointed out, some flexibility is necessary.
        One of the biggest detriments to any organization is loss
    of trust. As we noticed, Anthem has been very quick at reaching
    out to people and hopefully they will learn from past
    challenges and also from other well publicized breaches that
    have occurred.
        Loss of trust is a very big detriment and in the current
    environment, in an Internet enabled information gathering
    session, people have to quickly respond.
        Senator Daines. I would hope to continue to work on this
    issue of trying to establish what we think would be without
    unreasonable delay and trying to perhaps put better guardrails
    on that. I think it is probably in the eyes of the beholder
    sometimes.
        With my experience of years of working in a Cloud-based
    competing company, I just believe it is better to err on the
    side of the consumer and their protection. I fully understand
    the fact you can create maybe a bigger problem by notifying
    everybody without understanding what really has happened.
        I think as we lean one way or the other on this, I would
    just urge us to lean toward a quicker response, defining that.
    I think it is kind of better safe than sorry, particularly
    looking at this notification that went out, this is Social
    Security numbers, this is personal income data, this is perhaps
    private medical records. This is very, very serious.
        I think the consumer has the right to know about that
    sooner than perhaps waiting a week as we try to walk the fine
    line here of law enforcement and not creating a mountain out of
    a mole hill.
        I will tell you what, I think we should be trying to make
    this tighter. I had 2 days with an amendment I offered, and I
    hope we can work on something here that we can actually define.
        Senator Moran. Senator Daines, thank you very much. The
    bell has rung indicating votes. We will conclude this meeting
    momentarily.
        I am not going to ask any additional questions, but Dr.
    Pendse, I would be glad to have you visit with my staff. You
    know Kansas well. What small businesses should we be worried
    about? What innovators may be deterred from greater innovation
    as a result of this kind of legislation? I would welcome your
    input.
        Dr. Pendse. Absolutely.
        Senator Moran. I would be interested in hearing from any of
    the witnesses about Gramm-Leach-Bliley and its potential being
    used as a standard.
        I would like to know with the bankers, if there is
    information that banks have that could be breached that is not
    covered by Gramm-Leach-Bliley, and also the same kind of
    question related to HIPAA, where in those two arenas, health
    care and financial services, is there something we ought to be
    considering, a standard, or a starting point as we look at
    broader breach opportunities, or is that just a bad idea.
        Senator Blumenthal, anything to add?
        Senator Blumenthal. Yes, I agree with you that Gramm-Leach-
    Bliley offers a potential model here. Mr. Johnson, I am quoting
    from your testimony, ``The extensive breach reporting
    requirements currently in place for banks provide an effective
    basis for any national data breach reporting requirement for
    businesses generally.''
        I gather that you support the preemption model that is
    contained in Gramm-Leach-Bliley.
        Mr. Johnson. That is correct.
        Senator Blumenthal. Because I think that may provide some
    common ground here. I invite the witnesses--I apologize, my
    time expired before, Mr. Duncan, you may have been able to
    provide a full answer to my question, so I would invite you to
    supplement your answer in writing if you wish, because I value
    your further comments.
        Thank you, Mr. Chairman.
        Mr. Duncan. If I may, Senator Blumenthal, I would emphasize
    the fact that Gramm-Leach-Bliley is essentially guidance. It is
    precatory language. It says you should, you ought to, something
    like that. That differs quite a bit from the state laws that
    have a mandate and a requirement.
        We would favor a mandate and a requirement rather than
    something that is merely precatory.
        Senator Blumenthal. I was referring really to the
    preemption model there.
        Senator Moran. Senator Klobuchar had exceeded her time at
    the earlier opportunity.
        Senator Klobuchar. Oh, new kid on the block.
        [Laughter.]
        Senator Moran. Senator Blunt, any concluding comments?
        Senator Blunt. In the great tradition of Senators, that is
    what we are expected to do. I think actually Senator Daines has
    followed up on the question that I had, but I want to ask one
    more time.
        Mr. Duncan a couple of different times has established a
    matrix of what might go into a reasonable standard. Is there
    anyone on the panel who is concerned about the Congress
    pursuing, as we look at this issue, a reasonable standard sort
    of along the lines that have been outlined as opposed to a
    specific notification period?
        Ms. Madigan. Are we talking about timeframe?
        Senator Blunt. We are. Nobody is proposing that we should
    include a specific timeframe in any law that we require
    notification in.
        Ms. Madigan. Senator, what I can tell you is the reasonable
    timeframe such as what Illinois has, we have seen it abused.
    The idea is that you would put in a specific deadline: within
    the most expedient time, but in no circumstances less than, put
    some sort of a line there. Or, as I said, it could be 6 months,
    at which point your information is long gone. It has long been
    purchased on the black market, and who knows what has been done
    with it or what damage has been done to you.
        You need to have further discussions about how do you try
    to better define what the time line is going to be for
    notification.
        Senator Blunt. Anyone else?
        [No response.]
        Senator Blunt. Thank you.
        Senator Moran. Thank you, Senator Blunt. To be bipartisan
    in my admonition, Senator Daines also exceeded his time
    allotment. I also note that Senator Klobuchar was very
    effective in putting me in my place by saying something like
    ``the new kid on the block.''
        Senator Klobuchar. Yes.
        [Laughter.]
        Senator Moran. We are delighted you all were here. We
    appreciate the information that was conveyed to us.
        The hearing record will remain open for two weeks. During
    that time, Senators are asked to submit any questions for the
    record.
        Upon receipt of those questions, the witnesses are
    requested to respond to the Committee as soon as possible.
        I thank the witnesses again for their testimony, and I
    conclude this hearing. We are adjourned. Thank you.
        [Whereupon, at 11:39 a.m., the hearing was adjourned.]

                                A P P E N D I X

      Prepared Statement of Stephen Orfei, General Manager, Payment Card
                      Industry Security Standards Council
        The Payment Card Industry Security Standards Council (PCI Council)
    thanks you for this opportunity to offer our insights toward national
    legislation on data security and breach notification.
        The PCI Council is an open global forum that is responsible for the
    development, management, education, and awareness of the PCI security
    standards, including the Data Security Standard (PCI DSS), Payment
    Application Data Security Standard (PA-DSS), and PIN Transaction
    Security (PTS) requirements. Founded in 2006, the PCI Council has 700
    participating organizations representing merchants, banks, processors,
    and vendors worldwide. Our mission of helping all stakeholders in the
    payment card industry prevent breaches involving sensitive payment data
    is led by the multi-industry leadership organization that exists to
    keep the payment system safe. With our global collaboration of security
    stakeholders, the PCI Council has created and maintains robust data
    security standards designed to prevent breaches and keep consumers'
    data safe. As part of these efforts, our organization regularly engages
    stakeholders with certification programs, training courses and best
    practice guidelines to help them meet new threats and improve
    continuous processes required for securing payment card data.
        Because PCI is the global forum for managing PCI security
    standards, we are uniquely qualified to address the need for a security
    standard in national data breach and notification legislation.
        The complexity of computer, networking and electronic payment
    technology offers tremendous opportunity for consumers, but also
    creates an attractive opportunity for criminals to exploit
    vulnerabilities in software and hardware. As we have seen in the recent
    past, errors in system configurations, weak passwords, malicious
    actions by insiders, or simple mistakes by anyone connected to
    sensitive payment card data can lead to infiltration of networks that
    lead to data breaches. At the PCI Council, we believe security results
    from the right combination of people, processes and technology. There
    is no silver bullet to protecting data, but instead it takes a multi-
    layered approach to prevent breaches. Technical standards are but the
    first step toward achieving data security.
        We believe the Committee is correct in addressing the important
    need for data security. The good news is that many security standards
    already exist, are widely implemented at least on a partial basis, and
    undergo regular enhancement to meet evolving threats. For example, the
    National Institute of Standards and Technology's (NIST) Special
    Publication 800-53 and other related standards are crucial for Federal
    data security. The International Standard Organization's ISO 27000
    family of security standards are used globally. The PCI Council's
    portfolio of security standards for the global payment industry is
    another example. The PCI DSS is our overarching data security standard,
    collaboratively built on 12 principles that cover everything from
    implanting strong access control, monitoring and testing networks, to
    having an information security policy. All of these standards mentioned
    share many common elements.
        We urge the Committee to avoid recreating the wheel or conflicting
    with existing security standards, and instead leverage the invaluable
    work that is already used by organizations as practical frameworks for
    data security.
        It is true that despite the existence of security standards,
    criminals have successfully breached some databases and stolen
    sensitive data. But in the majority of cases, forensic investigations
    show breaches are preventable--and result from improper implementation
    of security standards. For example, in recent prominent retail
    breaches, attackers used a relatively simple technique of inserting
    malware onto vulnerable back-office computers, which then infiltrated
    points-of-sale to steal payment card data. Breaches like these could
    have been prevented by following prescriptions of security standards--
    such as frequently scanning internal systems for out-of-date,
    unprotected software and correcting those configurations. Cases like
    these also illustrate why the PCI Council urges deployment and vigilant
    ongoing monitoring of a wide range of best practice security
    technologies used as ``defense in depth'' to backstop protection
    against unpredictable threats.
        With the ever evolving vectors of attack, businesses cannot assume
    that passing a compliance evaluation at a point in the past will
    protect their data in the future. Attackers are persistent and their
    threats continue to evolve. Businesses must take prudent and reasonable
    steps to keep their data security protocols up to date. This is true
    whatever standard is used.
        The PCI Council is deeply committed to helping payment card
    industry stakeholders meet evolving threats and vigilantly defend
    payment card data. As an example, the PCI Council welcomes the North
    American payment industry's migration to ``EMV Chip'' technology, and
    recognizes that transactions companies have been working towards the
    adoption of EMV since 2011. The presence of an identifying integrated
    circuit chip in each payment card will significantly reduce fraud in
    card-present transactions. Based on global experience with EMV, we know
    that after the U.S. transitions to this technology, fraud will migrate
    to the card-not-present environment such as online or over the phone.
    Accordingly, the best defense for protecting payment card data is a
    multi-layered combination of EMV Chip and new technologies that take
    sensitive account data out of harm's way, coupled with implementing PCI
    standards.
        The new technologies, including encryption and tokenization, are
    intended to ``devalue'' stolen payment card data throughout the payment
    system by scrambling the sensitive data and making it unusable to a
    data thief. Making systemic changes like these take time and investment
    while technologies are in their infancy, however, so until then,
    organizations that store, transmit or process payment card data must be
    vigilant 24/7 in monitoring their implementations of PCI standards.
        The Committee's work will help bolster our stakeholders' vigilance
    by having the Federal government facilitate sharing security
    information with the private sector. We are encouraged by the
    possibility of other deterrents to data breaches such as increasing
    penalties for cybercrimes, and negotiating cybercrime treaties with key
    foreign nations.
        The PCI Council welcomes the opportunity to work with the Committee
    and Congress as it considers emerging data security, breach
    notification, cybersecurity and privacy legislation.
                                     ______

         Response to Written Questions Submitted by Hon. Roy Blunt to
                                Cheri F. McGuire
        Question 1. Today, there are 51 different laws dealing with breach
    notification, and another 12 dealing with security requirements--with
    even more states considering new laws, or changing their existing laws.
        Given this trend, do you think Federal data breach legislation
    should include a clear national standard for both data security and
    breach notification?
        Answer. Yes. A clear national standard would provide clarity for
    consumers, businesses, and advocacy groups. In the current environment,
    organizations have to comply with myriad and sometimes conflicting
    standards. This adds cost and complexity for the organizations, and can
    lead to confusion among consumers because they can receive multiple--
    but different--notifications after a breach. This serves no one's
    interest. A Federal standard should apply equally to the private sector
    and the government--it should cover all entities that collect,
    maintain, or sell significant numbers of records containing sensitive
    personal information. It should also seek to minimize the likelihood of
    a breach by pushing organizations to take reasonable security measures
    to ensure the confidentiality and integrity of sensitive personal
    information. This would also lower the cost of an event as studies have
    shown that breaches are less costly for companies that were proactive
    in applying security. Finally, any notification scheme should recognize
    that state-of-the-art encryption renders data unreadable, which in turn
    will minimize ``false positives''- notices to individuals who are later
    shown not to have been impacted by a breach because their data was
    rendered unusable before it was stolen.

        Question 2. Do you think the 51 different breach notification laws
    create confusion for consumers--especially for those who move, travel
    frequently, or live in an area where they shop and work across state
    lines?
        Answer. Yes. As noted above, existing standards can proscribe
    different forms of notices and require notification in different
    situations. As a result, a consumer could receive multiple, different
    breach notices from one company, or hear conflicting reports as to
    whether a breach actually happened because the standard was met in one
    state but not in another. Breaches and risk of identity and credit card
    theft are confusing enough as it is; no one is served by conflicting
    rules and laws that send mixed messages to potential victims.
                                     ______

         Response to Written Questions Submitted by Hon. Roy Blunt to
                               Mallory B. Duncan
        Question 1. Today, there are 51 different laws dealing with breach
    notification, and another 12 dealing with security requirements--with
    even more states considering new laws, or changing their existing laws.
        Given this trend, do you think Federal data breach legislation
    should include a clear national standard for both data security and
    breach notification?
        Answer. The Federal Trade Commission (FTC) enforces a general
    reasonableness standard with respect to data security within the
    confines of the existing ``unfair'' and ``deceptive'' prongs of Section
    5 of the FTC Act. The commission's unfair and deceptive standards have
    worked for commercial law enforcement because they are broad enough to
    encompass an array of businesses and practices, and because they are
    implemented through the commission's consent decree authority--which
    allows for the clarification of requirements over time, without unduly
    penalizing businesses exposed to novel or developing requirements.
        If section 5 were amended to include a comparably broad requirement
    to maintain ``reasonable data security,'' without more, and were
    coupled with existing cease and desist enforcement authority, it would
    have a similarly positive effect of advancing data security without
    exposing them to penalties for unanticipated, evolving risks. If this
    were also coupled with the very robust notice requirements that we have
    testified in favor of, that would be something that might work well.
        Conversely, if the legislation were to establish a multi-factor
    data security standard--similar in nature to the Gramm-Leach-Bliley Act
    (GLBA) data security guidelines--for businesses which are subject to
    FTC jurisdiction, this would exponentially increase the likelihood of
    the businesses being found at fault for a data breach despite having
    overall reasonable data security standards, because the FTC would
    potentially only need to find unreasonableness as to any one of the
    factors in order to claim a violation of the Act.
        As the FTC has found previously, a multi-factor test is appropriate
    under GLBA guidelines for more sophisticated entities such as financial
    institutions because they routinely have much broader sets of the most
    sensitive personal and financial customer information in digitized
    form, which presents security risks and vulnerabilities not evident in
    most unregulated commercial businesses with much narrower data sets
    that typically contain less sensitive customer information.
    Additionally, financial institutions are subject to an examination
    process in which they work with bank examiners to develop a security
    plan that is in compliance with their guidance.
        As discussed in detail in my written testimony, the FTC does not
    have staff or processes capable of providing this guidance process to
    every business under its jurisdiction, and entities subject to its
    jurisdiction may only become aware of the possibility of being in non-
    compliance with an FTC-enforced standard when they are under
    investigation. Under its broad jurisdiction, FTC enforcement of a
    multi-factor test would apply to every non-financial institution in the
    country, including not only retailers, but hotels, bars and
    restaurants, theaters, auto dealers, gas stations, grocery and
    convenience stores, fast-food eateries, airlines and others in the
    travel industry, hospitals and doctors, dentists, veterinarians, hair
    salons, gyms, dry cleaners, plumbers and taxi drivers. These businesses
    do not have the staff to determine up-front whether they could survive
    a mult-factor test. Virtually every unregulated business in the U.S.
    economy that provides goods or services to American consumers. Imposing
    Banking regulatory standards on these unregulated businesses, to be
    enforced by the FTC in a non-examination process, would be an
    unprecedented expansion of FTC authority comparable to what the
    commission attempted to accomplish with its ``red flags'' rule, before
    congress was forced to intervene.

        Question 2. Do you think the 51 different breach notification laws
    create confusion for consumers--especially for those who move, travel
    frequently, or live in an area where they shop and work across state
    lines?
        Answer. Yes. We have reached the point where these laws not only
    require different notification standards, but many suffer from a flawed
    rule that leads to over-notification. Specifically, the third-party
    entity rules in state breach laws do not require those entities to
    provide notification to affected consumers when they are breached. As
    further explained in my written testimony, to have an effective breach
    law, these ``notice holes'' must be closed. This is a position that the
    retail industry has successfully conveyed to, and favorably recognized,
    by certain State AGs. For example, a payment processor who works with
    multiple merchants could, under many state laws, fulfill its
    obligations by requiring dozens of merchants to bear the burden of
    providing varying notices to the same consumers for the processor's
    single breach. Such a rule does not provide effective notice to
    consumers; rather, it results in likely over-notification and confusion
    as consumers receive multiple and differing notices about the same
    breach from entities that did not suffer the breach.
        The most effective and timely consumer notice would result from a
    nationwide standard that requires all breached entities--including all
    breached third-party entities--to provide public notice, either
    directly to the affected consumers or via a substitute notification
    procedure where they make the breach publicly known through widely
    distributed media and other acceptable means. Some flexibility should
    be provided to respect contractual arrangements between third-party
    contractors and those that hire them regarding the most effective
    notice, but the general rule should clearly place the burden for
    requiring notice and any potential liability for the breach on the
    breached entity.
        This threat of making public disclosure has proven to be a powerful
    incentive to companies to improve their data security standards. A
    Federal bill that preempts state laws has the opportunity to close the
    problematic notice holes that exist in state laws for third-party
    entities and provide not only more robust notification--leading to
    greater consumer protection and awareness of data breaches that may
    cause financial harm--but also create ``skin in the game'' for all
    entities so that they place greater emphasis on, and investment in,
    improving data security for the most sensitive data.
                                     ______

        Response to Written Questions Submitted by Hon. Jerry Moran to
                                  Doug Johnson
        Question 1. During the hearing, a statement was made saying that
    ``three times more data breaches occur at financial institutions than
    at retailers'' citing a report by Verizon. Will you please share your
    analysis of this data provided in the referenced Verizon report?
        Answer. The Identity Theft Resource Center has compiled a list of
    all publicly reported breaches in the United States and shows that
    banks accounted for only 5.5 percent of all breaches in 2014. Other
    businesses accounted for 33 percent. Retailer groups continue to cite
    the Verizon report on data breach statistics as a way to distract
    policymakers regarding the primary focus of data security breaches, but
    the inconvenient truth is that this Verizon report is based on an
    international sample of breaches as opposed to an actual compilation of
    all publicly reported breaches in the United States.

        Question 2. In some of the testimony, it was stated that one cause
    of the major breaches at Target and Home Depot, and perhaps similar
    breaches, was an ``easily forged signature.'' From your perspective,
    what other causes have you identified as contributors to these
    breaches?
        Answer. Forged signatures were not a cause in the Target, Home
    Depot, or any similar breach. The major cause of these breaches were
    the insecure point of sale systems used by these retailers. Bank
    customer credit and debit card numbers would not have been breached if
    these systems had not been vulnerable to POS malware. The card numbers
    also would not have been breached if Target had properly segregated its
    POS system from an invoicing system that Fazio Mechanical Services, a
    vendor to Target, had access to. When Fazio Mechanical was compromised
    with malicious software it gave the criminals a direct tunnel to
    Target's POS system, which allowed the criminals to install additional
    malicious software on that system.

        Question 3. As lawmakers consider a national data breach
    notification standard, it has been suggested that some industries
    should have an exception because they are governed by other breach
    laws. What are the pros and cons of creating an exemption for financial
    institutions? Is it possible that a Gramm-Leach-Bliley Act exemption
    would create ``notice holes'' where consumers would not receive notices
    of breaches at banks and other financial institutions?
        Answer. A Gramm-Leach-Bliley Act (GLBA) exemption from a national
    breach notification standard, rather than creating a ``notice hole,''
    is appropriate in that we recommend any national standard imposed on
    other industries should be consistent with GLBA.
        As we enact a national data breach requirement, some industries--
    including the financial industry--are already required by law to
    develop and maintain robust internal protections to combat and address
    criminal attacks, and are required to protect consumer financial
    information and notify consumers when a breach occurs within their
    systems that will put their customers at risk.
        Title V of GLBA requires banks to implement a ``risk-based''
    response program to address instances of unauthorized access to
    customer information systems. At a minimum, a response program must:

      1.  Assess the nature and scope of any security incident and identify
            what customer information systems and customer information may
            have been accessed or misused;

      2.  Notify the institution's primary Federal regulator ``as soon as
            possible'' about any threats ``to sensitive customer
            information.''

      3.  Notify appropriate law enforcement authorities and file
            Suspicious Activity Reports in situations involving Federal
            criminal violations requiring immediate attention;

      4.  Take appropriate steps to contain the incident to prevent further
            unauthorized access to or use of customer information, and

      5.  Notify customers ``as soon as possible'' if it is determined that
            misuse of customer information has occurred or is reasonably
            possible.

        A critical component of the GLBA guidelines is customer
    notification. When a covered financial institution becomes aware of a
    material breach of ``sensitive customer information,'' it must conduct
    a reasonable investigation to determine whether the information has
    been or can be misused. If it determines that misuse of the information
    ``has occurred or is reasonably possible,'' it must notify affected
    customers ``as soon as possible.''
        Under GLBA, sensitive customer information includes the customer's
    name, address or telephone number in conjunction with the customer's
    Social Security number, driver's license number, credit card, debit
    card or other account number or personal identification number.
    Sensitive customer information also includes any combination of
    components of customer information that would allow someone to log onto
    or access the customer's account, such as user name and password.
        A covered financial institution must also provide a clear and
    conspicuous notice. The notice must describe the incident in general
    terms and the type of customer information affected. It must also
    generally describe the institution's actions to protect the information
    from further unauthorized access and include a telephone number. The
    notice also must remind customers to remain vigilant over the next 12
    to 24 months and to promptly report incidents of suspected identity
    theft to the institution.
        Where appropriate, the notice also must include:

      1.  Recommendation to review account statements immediately and
            report suspicious activity;

      2.  Description of fraud alerts and how to place them;

      3.  Recommendation that the customer periodically obtain credit
            reports and have fraudulent information removed;

      4.  Explanation of how to receive a free credit report; and

      5.  Information about the FTC's identity theft guidance for
            consumers.

        In summary, rather than creating a notice hole, we believe the
    extensive breach reporting requirements currently in place for banks
    provide an effective basis for any national data breach reporting
    requirement for businesses generally.

        Question 4. Do you think requiring the use of PINs on payment
    transactions is the best solution for addressing the data breach
    problem? What aspects of the increased use of PIN technology would be
    helpful in preventing future data breaches? In your estimation, are
    there drawbacks to increasing PIN use? Please share any additional
    insight on the use of PIN technology that you feel may be useful to the
    Committee as it explores data breach prevention. Also, please comment
    on new and emerging payment technologies and potential security
    advantages or vulnerabilities.
        Answer. The fact is that attackers are becoming increasingly adept
    at defeating cybersecurity practices and mitigating measures points to
    the need for industry to develop and deploy enhanced measures on an
    ongoing basis with greater speed. Rather than adopting static number
    PIN technology, we intend to focus on taking static numbers out of the
    payment system entirely.
        Eliminating the use of static numbers altogether for debit and
    credit card purchases is a very important next step in protecting our
    payment system and the consumers that use it. Finding ways to keep
    consumers from having to remember static numbers, letters or symbols in
    order to authenticate themselves when conducting a financial or other
    sensitive transaction was a primary focus at the recent White House
    Summit on Cybersecurity and Consumer Protection. For instance:

       Ajay Banga, President and CEO, MasterCard: ``What I have
            learned from my consumer customers is that they want two clear
            things aside from safety and security--one is to stop making me
            remember things to prove I am who I am. Because there are too
            many things to remember.''

       Richard Davis, Chairman and CEO, U.S. Bank: ``Our job is
            really a lot of financial literacy to help people understand
            how to protect themselves better . . . not putting a piece of
            tape on the back of your debit card or credit card and writing
            your PIN on it.''

       Chuck Scharf, CEO, Visa: We can talk all we want about
            methods of authentication . . . but the fact is if card numbers
            are flying around even though there is zero liability it's not
            something the consumer wants to go through . . . We are working
            with people across the payment ecosystem to figure out where we
            can get rid of those account numbers, so if there is a
            compromise, which there always will be because the bad guys are
            steps ahead as hard as we all try, the compromise does not have
            the effect it has today.''

        These comments point to the fact that payment security is a dynamic
    challenge that requires a like response, and that there is no single
    solution that will eliminate payment fraud. Locking in any static
    technology provides a roadmap to attackers, telling them where to focus
    their attacks. Tokenization replaces sensitive consumer account
    information at the register or online with a random ``token,''
    rendering any static information associated with the transaction
    useless to criminals, and thus shows great promise.
                                     ______

         Response to Written Questions Submitted by Hon. Roy Blunt to
                                  Doug Johnson
        Question 1. Today, there are 51 different laws dealing with breach
    notification, and another 12 dealing with security requirements--with
    even more states considering new laws, or changing their existing laws.
        Given this trend, do you think Federal data breach legislation
    should include a clear national standard for both data security and
    breach notification?
        Answer. Although some of these laws are similar, many have
    inconsistent and conflicting standards, forcing businesses to comply
    with multiple regulations and leaving many consumers without proper
    recourse and protections. Inconsistent state laws and regulations
    should be preempted in favor of strong Federal data protection and
    notification requirements. In the event of a breach, the public should
    be informed where it occurred as soon as reasonably possible to allow
    consumers to protect themselves from fraud.
        We believe that the following set of principles should serve as a
    guide when drafting legislation to provide stronger protection for
    consumer financial information:

      1.  Inconsistent state laws and regulations should be preempted in
            favor of strong Federal data protection and notification
            standards.

      2.  Strong national data protection and consumer notification
            standards with effective enforcement provisions must be part of
            any comprehensive data security regime, applicable to any party
            with access to important consumer financial information.

      3.  Requirements for industries that are already subject to robust
            data protection and notification requirements must be
            recognized.

      4.  In the event of a breach, the public should be informed where it
            occurred as soon as reasonably possible to allow consumers to
            protect themselves from fraud. The business with the most
            direct financial relationship with affected consumers should be
            able to inform their customers and members about information
            regarding the breach, including the entity at which the breach
            occurred.

      5.  The costs of a data breach should ultimately be borne by the
            entity that incurs the breach.

        Our existing national payments system serves hundreds of millions
    of consumers, retailers, banks, and the economy well. It only stands to
    reason that such a system functions most effectively when it is
    governed by a consistent national data breach policy.

        Question 2. Do you feel the standards and guidance under Gramm-
    Leach-Bliley provide necessary security, but with flexibility for
    organizations of different size and complexity? If so, can you
    elaborate why?
        Answer. Effective data protection requirements are scalable. For
    instance, bank regulations, through GLBA, recognize that the level of
    risk to customer data varies significantly across banks. Large banks
    require continual, on-site examination personnel, while community-based
    institutions are subject to periodic information security examinations.
        Data security is also an ongoing process as opposed to the state or
    condition of controls at a point in time.
        As opposed to proscribing specific technological security
    requirements, GLBA and the associated bank regulatory requirements are
    risk and governance-based. Bank security programs are required to have
    ``strong board and senior management level support, integration of
    security activities and controls throughout the organization's business
    processes, and clear accountability for carrying out security
    responsibilities.''

        Question 3. Hackers seem to be getting more sophisticated by the
    day, and I imagine we expect even more attacks and perhaps more
    successful ones in the future. If that is the case doesn't it make
    sense to do everything possible to protect consumer personal and
    financial data? Do you think Federal data security standards applicable
    to all players in the payments process would help and if so why?
        Answer. Any legislation focused on creating a national standard for
    breach notification should also include a complementary national data
    security standard for covered entities. If Congress does not address
    data security standards now it misses the opportunity to instill a
    greater overall level of data security protections for consumers.
        Because the payment system is by definition a network, every
    business within that network must share in the responsibility to
    protect consumers and should have to abide by a data security standard.
    With that responsibility should also come the requirement for that
    business, whether it be a bank, merchant, third party processor or
    other entity, to bear the costs for any breach they incur.

        Question 4. A number of states have enacted data protection and
    consumer notification laws. However, I also understand that these
    provisions can vary from state to state. Is your industry currently
    covered by any Federal law that requires consumer financial and
    personal data to be protected? Are there other industries that are not
    covered by Federal data protection and consumer notification standards?
        Answer. Yes, Title V of GLBA requires banks to implement a ``risk-
    based'' response program to address instances of unauthorized access to
    customer information systems. At a minimum, a response program must:

      1.  Assess the nature and scope of any security incident and identify
            what customer information systems and customer information may
            have been accessed or misused;

      2.  Notify the institution's primary Federal regulator ``as soon as
            possible'' about any threats ``to sensitive customer
            information.''

      3.  Notify appropriate law enforcement authorities and file
            Suspicious Activity Reports in situations involving Federal
            criminal violations requiring immediate attention;

      4.  Take appropriate steps to contain the incident to prevent further
            unauthorized access to or use of customer information, and

      5.  Notify customers ``as soon as possible'' if it is determined that
            misuse of customer information has occurred or is reasonably
            possible.

        As already noted, the GLBA also contains a set of scalable data
    security standards. The retail industry currently does not currently
    have a similar set of Federal requirements. The legal, regulatory,
    examination and enforcement regime regarding banks ensures that banks
    robustly protect American's personal financial information. We believe
    that this regime provides an appropriate, scalable model for other
    businesses entrusted with sensitive customer financial and other
    information.
                                     ______

         Response to Written Questions Submitted by Hon. Roy Blunt to
                                  Yael Weinman
        Question 1. Today, there are 51 different laws dealing with breach
    notification, and another 12 dealing with security requirements--with
    even more states considering new laws, or changing their existing laws.
        Given this trend, do you think Federal data breach legislation
    should include a clear national standard for both data security and
    breach notification?
        Answer. ITI supports a breach notification bill that preempts state
    notification requirements consistent with our breach notification
    principles (previously submitted for the record and attached hereto).
    It is critically necessary to replace the existing 51 state and
    territory notification laws with one national framework. While ITI does
    not seek a national data security requirement in such a bill, we would
    not oppose a bill that includes a reasonable and technology-neutral
    data security requirement that is appropriate to a company's size and
    complexity, the nature and scope of its activities, and the sensitivity
    of the data held, and that preempts existing and future state data
    security requirements.

        Question 2. Do you think the 51 different breach notification laws
    create confusion for consumers--especially for those who move, travel
    frequently, or live in an area where they shop and work across state
    lines?
        Answer. Consistency in notices would reduce consumer confusion that
    may result from the variances of the method of data breach
    notifications, the content of such notifications, and the circumstances
    of such notification. In addition, consistency would also reduce
    confusion for businesses--particularly smaller e-commerce businesses--
    as to how and when to notify their customers who reside in different
    states, each requiring a different type or content for notification and
    under differing circumstances.

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