[Federal Register Volume 70, Number 83 (Monday, May 2, 2005)]
[Rules and Regulations]
[Pages 22764-22780]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-7836]



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Part II





National Credit Union Administration





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12 CFR Part 748



Security Program and Appendix B--Guidance on Response Programs for 
Unauthorized Access to Member Information and Member Notice; Final Rule

  Federal Register / Vol. 70, No. 83 / Monday, May 2, 2005 / Rules and 
Regulations  

[[Page 22764]]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 748


Security Program and Appendix B--Guidance on Response Programs 
for Unauthorized Access to Member Information and Member Notice

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: NCUA is amending its rule governing security program elements 
to require federally insured credit unions to include response programs 
to address instances of unauthorized access to member information. NCUA 
is also including guidance, in the form of Appendix B, to provide 
federally insured credit unions with direction on ways to meet the new 
regulatory requirements.

DATES: This rule is effective on June 1, 2005.

FOR FURTHER INFORMATION CONTACT: Matthew J. Biliouris, Senior 
Information Systems Officer, Office of Examination & Insurance, 
Division of Supervision, at telephone (703) 518-6394; or Ross Kendall, 
Staff Attorney, Office of General Counsel, at telephone (703) 518-6562.

SUPPLEMENTARY INFORMATION: The contents of this preamble are listed in 
the following outline:

I. Introduction
II. Overview of the Comments Received
III. Overview of the Final Guidance
IV. Section-by-Section Analysis of the Comments Received
    A. The ``Background'' Section
    B. The ``Response Program'' Section
    C. The ``Member Notice'' Section
V. Effective Date
VI. Impact of Guidance
VII. Regulatory Analysis
    A. Paperwork Reduction Act
    B. Regulatory Flexibility Act
    C. Executive Order 12866
    D. Unfunded Mandates Act of 1995

I. Introduction

    In 2001, NCUA amended 12 CFR Part 748 to fulfill a requirement in 
Section 501 of the Gramm-Leach-Bliley Act (Pub. L. 106-102) (GLBA), in 
which Congress directed both NCUA and the other Federal Financial 
Institution Examination Council (FFIEC ) agencies, including the Board 
of Governors of the Federal Reserve System, the Federal Deposit 
Insurance Corporation, the Office of the Comptroller of the Currency, 
and the Office of Thrift Supervision (collectively, the ``Banking 
Agencies'') to establish standards for financial institutions relating 
to administrative, technical, and physical safeguards to: (1) Insure 
the security and confidentiality of customer records and information; 
(2) protect against any anticipated threats or hazards to the security 
or integrity of such records; and (3) protect against unauthorized 
access to or use of such records or information that could result in 
substantial harm or inconvenience to any customer.
    Although NCUA worked with the Banking Agencies to develop the 
standards described above, the Banking Agencies issued their standards 
as guidelines under the authority of Section 39 of the Federal Deposit 
Insurance Act.
    Since Section 39 of the Federal Deposit Insurance Act does not 
apply to NCUA, the NCUA Board determined that it could best meet the 
congressional directive to prescribe standards through an amendment to 
its existing regulation governing security programs for federally 
insured credit unions and by providing guidance to credit unions, 
substantially identical to the guidelines issued by the Banking 
Agencies, in an appendix to the regulation. 12 CFR Part 748, Appendix 
A; 66 FR 8152 (January 30, 2001). The preamble to the final rule 
discusses the different regulatory framework under which the Banking 
Agencies issued their guidelines. The final regulation requires each 
federally insured credit union to establish and maintain a security 
program implementing the safeguards required by GLBA.
    Appendix A, entitled Guidelines for Safeguarding Member Information 
(Appendix A), is intended to outline industry best practices and assist 
credit unions to develop meaningful and effective security programs to 
ensure compliance with the requirements contained in the regulation. 
Among other things, Appendix A advises credit unions to: (1) Identify 
reasonably foreseeable internal and external threats that could result 
in unauthorized disclosure, misuse, alteration, or destruction of 
member information or member information systems; (2) assess the 
likelihood and potential damage of these threats, taking into 
consideration the sensitivity of member information; and (3) assess the 
sufficiency of policies, procedures, member information systems, and 
other arrangements in place to control risks.\1\
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    \1\ 12 CFR Part 748, Appendix A, Paragraph III.B.2.
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    On October 23, 2003, the NCUA Board approved a proposal to revise 
12 CFR Part 748 to include a requirement to respond to incidents of 
unauthorized access to member information. The Board invited comment on 
all aspects of the proposed Guidance. The public comment period closed 
on December 29, 2003.
    This final rule further amends Part 748 to require that every 
federally insured credit union have a security program that contains a 
provision for responding to incidents of unauthorized access to member 
information. Appendix B, entitled Guidance on Response Programs for 
Unauthorized Access to Member Information and Member Notice, is also 
provided to assist credit unions in developing and maintaining their 
response programs. Appendix B describes NCUA's expectation that every 
federally insured credit union develop a response program, including 
member notification procedures, to address unauthorized access to or 
use of member information that could result in substantial harm or 
inconvenience to a member.
    NCUA has modified the proposed Guidance to provide credit unions 
with greater flexibility to design a risk-based response program 
tailored to the size, complexity and nature of its operations, while 
continuing to highlight member notice as a key feature of a credit 
union's response program. In addition, NCUA reorganized the proposed 
Guidance for greater clarity. A more detailed discussion of the changes 
follows.

II. Overview of Comments Received

    NCUA received 15 comment letters on the proposed Guidance: Six from 
natural person credit unions, one from a corporate credit union, two 
from national credit union trade associations, five from state credit 
union leagues, and one from a service provider. In addition, the 
Banking Agencies collectively received 65 comment letters. While the 
NCUA Board carefully considered all comments on its proposed rule, to 
remain as consistent as practicable with the Banking Agencies, the 
Board has also made some changes in the final rule as a result of 
interagency discussions.
    As a general matter, commenters agreed that credit unions should 
have response programs. Indeed, many credit unions and other financial 
institutions described having such programs in place. Many comments 
received commended the NCUA and the Banking Agencies for providing 
guidance on response programs. However, the majority of industry 
commenters criticized the prescriptive nature of the proposed Guidance. 
These commenters stated that the rigid approach in the proposed 
Guidance would stifle innovation and retard the effective evolution of 
response programs.

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    Industry commenters raised concerns that the specific requirements 
in the proposed Guidance would not permit a credit union to assess 
different situations from its own business perspective, specific to its 
size, operational and system structure, and risk tolerances.
    Some industry commenters asserted that there is no need for 
regulation in this area and recommended that the NCUA and the Banking 
Agencies withdraw the proposed Guidance. Some of these commenters 
suggested, instead, that the Agencies re-issue the proposed Guidance as 
a best practices document. Other industry commenters suggested 
modifying the proposed Guidance to give credit unions greater 
discretion to determine how to respond to incidents of unauthorized 
access to or use of member information.
    Two commenters also requested that the Agencies include a 
transition period allowing adequate time for financial institutions to 
implement the final Guidance. Some commenters asked for a transition 
period only for the aspects of the final Guidance that address service 
provider arrangements.

III. Overview of Final Guidance

    The final rule requires that every federally insured credit union 
must develop and implement a response program designed to address 
incidents of unauthorized access to member information maintained by 
the credit union or its service provider. The final Guidance provides 
each credit union with greater flexibility to design a risk-based 
response program tailored to the size, complexity and nature of its 
operations.
    The final Guidance, which has been reorganized for greater clarity, 
continues to highlight member notice as a key feature of a credit 
union's response program. However, in response to the comments 
received, the final Guidance modifies the standard describing when 
notice should be given and provides for a delay at the request of law 
enforcement. It also modifies which members should be given notice, 
what a notice should contain, and how it should be delivered.
    A more detailed discussion of the final Guidance and the manner in 
which it incorporates comments NCUA and the Banking Agencies received 
follows.

IV. Section-by-Section Analysis of the Comments Received

A. The ``Background'' Section

Legal Authority
    The legal foundation for the Guidance is set forth in Part 748, 
which derives from section 501(b) of GLBA and requires that every 
credit union have a security program. Appendix A to Part 748 describes 
the elements of a security program and includes measures to protect 
member information maintained by the credit union or its service 
providers. The Guidance states that NCUA expects member notification to 
be a component of such a response program.
    One commenter questioned NCUA's and the Banking Agencies' legal 
authority to issue the Guidance. This commenter asserted that section 
501(b) of GLBA only authorizes the Agencies to establish standards 
requiring financial institutions to safeguard the confidentiality and 
integrity of customer information and to protect that information from 
unauthorized access, but does not authorize standards that would 
require a response to incidents where the security of customer 
information actually has been breached.
    The NCUA Board notes, however, that section 501(b)(3) specifically 
states that the standards to be established by the Agencies must 
include various safeguards to protect against not only ``unauthorized 
access to,'' but also, the ``use of'' customer information that could 
result in ``substantial harm or inconvenience to any customer.'' The 
NCUA Board determined that this language provides a legal basis for 
standards that include response programs to address incidents of 
unauthorized access to member information. Response programs represent 
the principal means for a credit union to protect against unauthorized 
``use'' of member information that could lead to ``substantial harm or 
inconvenience'' to the member. For example, member notification is an 
important tool that enables a member to take steps to prevent identity 
theft, such as by arranging to have a fraud alert placed in his or her 
credit file.
Scope of Guidance
    The proposed Guidance contained several cross references to 
definitions used in Appendix A. However, the NCUA Board did not 
specifically address the scope of the proposed Guidance. A number of 
commenters had questions and suggestions regarding the scope of the 
proposed Guidance and the meaning of terms used.
Entities and Information Covered
    Some commenters had questions about the entities and information 
covered by the proposed Guidance. One commenter suggested that NCUA and 
the Banking Agencies clarify that foreign offices, branches, and 
affiliates of United States banks are not subject to the final 
Guidance. Another commenter wanted the NCUA Board to clarify corporate 
credit unions' responsibilities relating to the Guidance. This 
commenter wanted to know if corporate credit unions would be expected 
to follow the same practices of that of a service provider and notify 
affected natural person credit unions.
    Some commenters recommended that the Agencies clarify that the 
final Guidance only applies to unauthorized access to sensitive 
information within the control of the financial institution. One 
commenter thought that the final Guidance should be broad and cover 
fraud committed against credit union members through the Internet, such 
as through the misuse of online corporate identities to defraud online 
banking users through fake web sites (commonly known as ``phishing''). 
Several commenters requested confirmation in the final Guidance that it 
applies to consumer accounts and not to business and other commercial 
accounts.
    For greater clarity, NCUA has revised the Background section of the 
final Guidance to state that the scope and definitions of terms used in 
the Guidance are identical to those in section 501(b) of the GLBA and 
Appendix A, which largely cross-reference definitions used in NCUA's 
Privacy Rule.\2\ Therefore, consistent with section 501(b) and Appendix 
A, this final Guidance applies to the entities enumerated in section 
505(a) of the GLBA. This final Guidance does not apply to a credit 
union's foreign offices, branches, or CUSOs. However, a credit union is 
responsible for the security of its member information, whether the 
information is maintained within or outside of the United States, and 
whether or not it relies on a CUSO to provide certain member services.
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    \2\ 12 CFR Part 716.
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    As with the guidance contained in Appendix A, natural person credit 
unions that use corporate credit unions as their ``service providers'' 
will likely look to the final Guidance in overseeing their service 
provider arrangements with those corporate credit unions. Accordingly, 
there is no exemption for corporate credit unions that provide services 
to natural person credit unions as part of normal processing business.
    The final Guidance also applies to ``member information,'' meaning 
any record containing ``nonpublic personal information'' (as that term 
is defined in section 716.3(n) of NCUA's Privacy rule) about a credit 
union's member, whether in paper, electronic, or other form, that

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is maintained by or on behalf of the institution.\3\ Consequently, the 
final Guidance applies only to information that is within the control 
of the credit union and its service providers, and would not apply to 
information directly disclosed by a member to a third party, for 
example, through a fraudulent web site.
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    \3\ See 12 CFR Part 745, Appendix A, Paragraph I.C.2.c.
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    Moreover, the final Guidance does not apply to information 
involving business or commercial accounts. Instead, the final Guidance 
applies to nonpublic personal information about a ``member'' within the 
meaning of Appendix A, namely, a consumer who obtains a financial 
product or service from a credit union to be used primarily for 
personal, family, or household purposes, and who has a continuing 
relationship with the credit union.\4\
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    \4\ See 12 CFR Part 748, Appendix A, Paragraph I.C.2.b.; 12 CFR 
Part 716.3(i).
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Effect of Other Laws
    Several commenters requested NCUA and the Banking Agencies explain 
how the final Guidance interacts with additional and possibly 
conflicting state law requirements. Most of these commenters urged that 
the final Guidance expressly preempt state law. By contrast, one 
commenter asked the Agencies to clarify that a financial institution 
must also comply with additional state law requirements. In addition, 
some commenters asked that the final Guidance provide a safe harbor 
defense against class action law suits. They suggested that the safe 
harbor should cover any credit union that takes reasonable steps that 
regulators require to protect member information, but, nonetheless, 
experiences an event beyond its control that leads to the disclosure of 
member information.
    These issues do not fall within the scope of this final Guidance. 
The extent to which section 501(b) of GLBA, Appendix A, and any related 
NCUA interpretations, such as this final Guidance, preempts state law 
is governed by Federal law, including the procedures set forth in 
section 507 of GLBA, 15 U.S.C. 6807. \5\ Moreover, there is nothing in 
Title V of the GLBA that authorizes NCUA to provide credit unions with 
a safe harbor defense. Therefore, the final Guidance does not address 
these issues.
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    \5\ Section 507 provides that state laws that are 
``inconsistent'' with the provisions of Title V, Subtitle A of the 
GLBA are preempted ``only to the extent of the inconsistency.'' 
State laws are ``not consistent'' if they offer greater protection 
than Subtitle A, as determined by the Federal Trade Commission, 
after consultation with the agency or authority with jurisdiction 
under Section 505(a) of either the person that initiated the 
complaint or that is the subject of the complaint. See 15 U.S.C. 
6807.
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Organizational Changes in the ``Background'' Section
    For the reasons described earlier, the Background section is 
adopted essentially as proposed, except that the latter part of the 
paragraph on ``Service Providers'' and the entire paragraph on 
``Response Programs'' are incorporated into the introductory discussion 
of Section II. The NCUA Board believes that the Background section is 
now clearer, as it focuses solely on the statutory and regulatory 
framework upon which the final Guidance is based. Comments and changes 
with respect to the paragraphs that were relocated are discussed in the 
next section.

B. The ``Response Program'' Section

    There are a number of differences between the discussion of 
Response Programs in the proposed and final Guidance. The introduction 
to section II of the proposed Guidance stated that a response program 
should be a key part of a credit union's information security program 
required under Part 748. It also described the importance of having a 
response program and of timely notification of members when warranted. 
Section II of the proposed Guidance contained four detailed paragraphs 
describing each of the four components that a response program should 
contain.
    The introductory language in the final Guidance now emphasizes that 
a credit union's response program should be risk-based and describes 
the components of a response program in a less prescriptive manner. 
Section II in the final Guidance specifically states that a credit 
union should implement security measures, from among the itemized list 
in Appendix A, designed to prevent unauthorized access to or use of 
member information, such as by placing access controls on member 
information systems and conducting background checks \6\ for employees 
who are authorized to access member information. It then states that 
NCUA expects every credit union to develop and implement a risk-based 
response program (another security measure enumerated in Appendix A) 
designed to address incidents of unauthorized access to member 
information that occur despite measures to prevent security breaches. 
The final Guidance also states that a response program should be a key 
part of a credit union's information security program.
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    \6\ A footnote has been added to this section to make clear that 
credit unions should also conduct background checks of employees to 
ensure that the credit union does not violate 12 U.S.C. 1785(d), 
which prohibits an institution from hiring an individual convicted 
of certain criminal offenses or who is subject to a prohibition 
order under 12 U.S.C. 1786(g).
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    This introductory paragraph is intended to make clear that, based 
upon the prevalence of identity theft in the United States,\7\ every 
credit union should have a response program to be prepared to prevent 
and address attempts to gain unauthorized access to its member 
information. The Board's expectation that each credit union will 
develop a response program is consistent with the provision in Appendix 
A calling for each credit union to design an information security 
program to control ``identified risks'' stemming from ``reasonably 
foreseeable internal and external threats.'' \8\
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    \7\ See, for example, the Federal Trade Commission's Identity 
Theft Survey Report of September 2003,'' available at http://www.ftc.gov/os/2003/09synovatereport.pdf estimating that 10 million 
Americans were victims of identify theft in 2002.
    \8\ 12 CFR Part 748, Appendix A, Paragraph III.B. and III.C.
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Service Provider Contracts
    The Background section of the proposed Guidance elaborated on the 
specific provisions that a credit union's contracts with its service 
providers should contain. The proposed Guidance stated that a credit 
union's contract with its service provider should require the service 
provider to disclose fully to the credit union information related to 
any breach in security resulting in an unauthorized intrusion into the 
credit union's member information systems maintained by the service 
provider. It stated that this disclosure would permit a credit union to 
expeditiously implement its response program.
    Several commenters on the proposed Guidance agreed that a credit 
union's contracts with its service providers should require the service 
provider to disclose fully to the credit union information related to 
any breach in security resulting in an unauthorized intrusion into the 
credit union's member information systems maintained by the service 
provider. However, many commenters suggested modifications to this 
provision.
    The discussion of this aspect of a credit union's contracts with 
its service providers is in section II of the final Guidance. It has 
been revised as follows in response to the comments received.
Timing of Service Provider Notification
    NCUA and the Banking Agencies received a number of comments 
regarding the timing of a service

[[Page 22767]]

provider's notice to a credit union. One commenter suggested requiring 
service providers to report incidents of unauthorized access to credit 
unions within 24 hours after discovery of the incident.
    In response to comments on the timing of a service provider's 
notice to a credit union, the final Guidance states that a credit 
union's contract with its service provider should require the service 
provider to take appropriate action to address incidents of 
unauthorized access to the credit union's member information, including 
notifying the credit union as soon as possible of any such incident, to 
enable the credit union to expeditiously implement its response 
program. The NCUA Board determined that requiring notice within 24 
hours of an incident may not be practicable or appropriate in every 
situation, particularly where, for example, it takes a service provider 
time to investigate a breach in security. Therefore, the final Guidance 
does not specify a number of hours or days by which the service 
provider must give notice to the credit union.
Existing Contracts With Service Providers
    Some commenters expressed concerns that they would have to rewrite 
their contracts with service providers to require the disclosure 
described in this provision. These commenters asked NCUA to grandfather 
existing contracts and to apply this provision only prospectively to 
new contracts. Many commenters also suggested that the final Guidance 
contain a transition period to permit credit unions to modify their 
existing contracts.
    The NCUA Board has decided not to grandfather existing contracts or 
to add a transition period to the final Guidance because, as stated in 
the proposed Guidance, this disclosure provision is consistent with the 
obligations in Appendix A that relate to service provider arrangements 
and with existing guidance on this topic previously issued by NCUA.\9\ 
In order to ensure the safeguarding of member information, credit 
unions that use service providers likely have already arranged to 
receive notification from the service providers when member information 
is accessed in an unauthorized manner. In light of the comments 
received, however, NCUA recognizes that there are credit unions that 
have not formally included such a disclosure requirement in their 
contracts. Where this is the case, the credit union should exercise its 
best efforts to add a disclosure requirement to its contracts and any 
new contracts should include such a provision.
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    \9\ See FFIEC Information Technology Examination Handbook, 
Outsourcing Technology Services Booklet, June 2004; NCUA Letter to 
Credit Unions No. 00-CU-11, December 2000.
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    Thus, the final Guidance adopts the discussion on service provider 
arrangements largely as proposed. To eliminate any ambiguity regarding 
the application of this section to foreign-based service providers, 
however, the final Guidance now makes clear that a covered credit union 
\10\ should be capable of addressing incidents of unauthorized access 
to member information in member information systems maintained by its 
domestic and foreign service providers.\11\
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    \10\ See footnote 5, supra.
    \11\ See e.g., FFIEC Information Technology Examination 
Handbook, Outsourcing Technology Services Booklet, June 2004.
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Components of a Response Program
    As described earlier, commenters criticized the prescriptive nature 
of proposed Section II that described the four components a response 
program should contain. The proposed Guidance instructed credit unions 
to design programs to respond to incidents of unauthorized access to 
member information by (1) assessing the situation; (2) notifying 
regulatory and law enforcement agencies; (3) containing and controlling 
the situation; and (4) taking corrective measures. The proposed 
Guidance contained detailed information about each of these four 
components.
    The introductory discussion in this section of the final Guidance 
now makes clear that, as a general matter, a credit union's response 
program should be risk-based. It applies this principle by modifying 
the discussion of a number of these components. The NCUA Board 
determined that the detailed instructions in these components of the 
proposed Guidance, especially in the ``Corrective Measures'' section, 
would not always be relevant or appropriate. Therefore, the final 
Guidance describes, through brief, bulleted points, the elements of a 
response program, giving credit unions greater discretion to address 
incidents of unauthorized access to or use of member information that 
could result in substantial harm or inconvenience to a member.
    At a minimum, a credit union's response program should contain 
procedures for (1) assessing the nature and scope of an incident, and 
identifying what member information systems and types of member 
information have been accessed or misused; (2) notifying the 
appropriate NCUA Regional Director and, in the case of state-chartered 
credit unions, its applicable state supervisory agency as soon as 
possible when the credit union becomes aware of an incident involving 
unauthorized access to or use of sensitive member information, as 
defined in the final Guidance, (3) immediately notifying law 
enforcement authorities in situations involving Federal criminal 
violations requiring immediate attention; (4) taking appropriate steps 
to contain and control the incident to prevent further unauthorized 
access to or use of member information, such as by monitoring, 
freezing, or closing affected accounts, while preserving records and 
other evidence; and (5) notifying members when warranted.

Assess the Situation

    The proposed Guidance stated that a credit union should assess the 
nature and scope of the incident and identify what member information 
systems and types of member information have been accessed or misused.
    Some commenters stated that NCUA and the Banking Agencies should 
retain this provision in the final Guidance. One commenter suggested 
that a credit union should focus its entire response program primarily 
on addressing unauthorized access to sensitive member information.
    The NCUA Board has concluded that a credit union's response program 
should begin with a risk assessment that allows a credit union to 
establish the nature of any information improperly accessed. This will 
allow the credit union to determine whether and how to respond to an 
incident. Accordingly, the NCUA Board has not changed this provision.

Notify Regulatory and Law Enforcement Agencies

    The proposed Guidance provided that a credit union should promptly 
notify NCUA when it becomes aware of an incident involving unauthorized 
access to or use of member information that could result in substantial 
harm or inconvenience to members. To clarify its expectations, the NCUA 
Board has amended the bullet point addressing notification of the 
regulator to include notification of the appropriate NCUA Regional 
Director, as well as any applicable state supervisory agency in the 
case of state-chartered credit unions.
    In addition, the proposed Guidance stated that a credit union 
should file a Suspicious Activity Report (SAR), if required, in 
accordance with 12 CFR

[[Page 22768]]

Part 748 and various NCUA issuances.\12\ The proposed Guidance stated 
that, consistent with the NCUA's SAR regulation, in situations 
involving Federal criminal violations requiring immediate attention, 
the credit union immediately should notify, by telephone, the 
appropriate law enforcement authorities and its primary regulator, in 
addition to filing a timely SAR. For the sake of clarity, the final 
Guidance discusses notice to regulators and notice to law enforcement 
in two separate, bulleted items.
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    \12\ See 12 CFR Part 748.1(c); NCUA Letter to Credit Unions No. 
04-CU-03, Suspicious Activity Reports, March 2004; NCUA Regulatory 
Alert No. 04-RA-01, The Suspicious Activity Report (SAR) Activity 
Review--Trends, Tips, & Issues, Issue 6, November 2003, February 
2004.
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Standard for Notice to Regulators
    The provision regarding notice to regulators in the proposed 
Guidance prompted numerous comments. Many commenters suggested that 
NCUA adopt a narrow standard for notifying regulators. These commenters 
were concerned that notice to regulators, provided under the 
circumstances described in the proposed Guidance, would be unduly 
burdensome for credit unions, service providers, and regulators, alike.
    Some of these commenters suggested that NCUA adopt the same 
standard for notifying regulators and members. These commenters 
recommended that notification occur when a credit union becomes aware 
of an incident involving unauthorized access to or use of ``sensitive 
member information,'' a defined term in the proposed Guidance that 
specified a subset of member information deemed by NCUA as most likely 
to be misused.
    Other commenters recommended that the Agencies narrow this 
provision so that a credit union will inform a regulator only in 
connection with an incident that poses a significant risk of 
substantial harm to a significant number of its members, or only in a 
situation where substantial harm to members has occurred or is likely 
to occur, instead of when it could occur.
    Other commenters who advocated the adoption of a narrower standard 
asked NCUA to take the position that filing an SAR constitutes 
sufficient notice and that notification of other regulatory and law 
enforcement agencies is at the sole discretion of the credit union. One 
commenter stated that it is difficult to imagine any scenario that 
would trigger the response program without requiring a SAR filing. Some 
commenters asserted that if NCUA believes a lower threshold is 
advisable for security breaches, it should amend Part 748.
    By contrast, some commenters recommended that the standard for 
notification of regulators remain broad. One commenter advocated that 
any event that triggers an internal investigation by the credit union 
should require notice to the appropriate regulator. Another commenter 
similarly suggested that notification of all security events to federal 
regulators is critical, not only those involving unauthorized access to 
or use of member information that could result in substantial harm or 
inconvenience to its members.
    The NCUA Board has concluded that the standard for notification to 
regulators should provide an early warning to allow NCUA or applicable 
state supervisory agency to assess the effectiveness of a credit 
union's response plan, and, where appropriate, to direct that notice be 
given to members if the credit union has not already done so. Thus, the 
standard in the final Guidance states that a credit union should notify 
its primary regulator as soon as possible if the credit union becomes 
aware of an incident involving unauthorized access to or use of 
``sensitive member information.''
    ``Sensitive member information'' is defined in section III of the 
final Guidance and means a member's name, address, or telephone number, 
in conjunction with the member's social security number, driver's 
license number, account number, credit or debit card number, or a 
personal identification number or password that would permit access to 
the member's account. ``Sensitive member information'' also includes 
any combination of components of member information that would allow 
someone to log onto or access the member's account, such as user name 
and password or password and account number.
    This standard is narrower than that in the proposed Guidance 
because a credit union will need to notify NCUA when, and only if, it 
becomes aware of an incident involving ``sensitive member 
information.'' Therefore, under the final Guidance, there will be fewer 
occasions when a credit union should need to notify NCUA. However, 
under this standard, a credit union will need to notify NCUA at the 
time that the credit union initiates its investigation to determine the 
likelihood that the information has been or will be misused, so that 
NCUA will be able to take appropriate action, if necessary.
Notice to Regulators by Service Providers
    Commenters on the proposed Guidance questioned whether a credit 
union or its service provider should give notice to a regulator when a 
security incident involves an unauthorized intrusion into the credit 
union's member information systems maintained by the service provider. 
One commenter noted that if a security event occurs at a large service 
provider, regulators could receive thousands of notices from 
institutions relating to the same event. The commenter suggested that 
if a service provider is examined by one of the Agencies the most 
efficient means of providing regulatory notice of such a security event 
would be to allow the servicer to notify its primary Agency contact. 
The primary Agency contact then could disseminate the information to 
the other regulatory agencies as appropriate.
    The NCUA Board believes it is the responsibility of the credit 
union and not the service provider to notify NCUA. Therefore, the final 
Guidance states that a credit union should notify NCUA as soon as 
possible when the credit union becomes aware of an incident involving 
unauthorized access to or use of sensitive member information. 
Nonetheless, a security incident at a service provider could have an 
impact on multiple financial institutions that are supervised by 
different Federal regulators. Therefore, in the interest of efficiency 
and burden reduction, the last paragraph in section II of the final 
Guidance makes clear that a credit union may authorize or contract with 
its service provider to notify the NCUA on the credit union's behalf 
when a security incident involves an unauthorized intrusion into the 
credit union's member information systems maintained by the service 
provider.
Notice to Law Enforcement
    Some commenters took issue with the provision in the proposed 
Guidance regarding notification of law enforcement by telephone. One 
interagency commenter asked the Banking Agencies to clarify how 
notification of law enforcement by telephone would work since in many 
cases it is unclear what telephone number should be used. This 
commenter maintained that size and sophistication of law enforcement 
authorities may differ from state to state and this requirement may 
create confusion and unwarranted action by the law enforcement 
authority.
    The final Guidance adopts this provision as proposed. The NCUA

[[Page 22769]]

Board notes that the provision stating that a credit union should 
notify law enforcement by telephone in situations involving federal 
criminal violations requiring immediate attention is consistent with 
Part 748.

Contain and Control the Situation

    The proposed Guidance stated that the credit union should take 
measures to contain and control a security incident to prevent further 
unauthorized access to or use of member information while preserving 
records and other evidence.\13\ It also stated that, depending upon the 
particular facts and circumstances of the incident, measures in 
connection with computer intrusions could include: (1) Shutting down 
applications or third party connections; (2) reconfiguring firewalls in 
cases of unauthorized electronic intrusion; (3) ensuring that all known 
vulnerabilities in the credit union's computer systems have been 
addressed; (4) changing computer access codes; (5) modifying physical 
access controls; and (6) placing additional controls on service 
provider arrangements.
---------------------------------------------------------------------------

    \13\ See FFIEC Information Security Booklet, December. 2002, pp. 
68-74, avaialble at http://www.ffiec.gov/ffiecinfobase.html_pages/it_01.html#infosec.
---------------------------------------------------------------------------

    Few comments were received on this section. One interagency 
commenter suggested that the Banking Agencies adopt this section 
unchanged in the final Guidance. Another commenter had questions about 
the meaning of the phrase ``known vulnerabilities.'' Commenters did, 
however, note the overlap between proposed section II.C and the 
corrective measures in proposed section II.D, described as ``flagging 
accounts'' and ``securing accounts.''
    NCUA and the Banking Agencies agree that some sections in the 
proposed Guidance overlapped. Therefore, the NCUA Board modified this 
section by incorporating concepts from the proposed Corrective Measures 
component, and removing the more specific examples in this section, 
including the terms that confused commenters. This section in the final 
Guidance gives a credit union greater discretion to determine the 
measures it will take to contain and control a security incident. It 
states that credit unions should take appropriate steps to contain and 
control the incident to prevent further unauthorized access to or use 
of member information, such as, by monitoring, freezing, or closing 
affected accounts, while preserving records and other evidence.
Preserving Evidence
    One interagency commenter stated that the final Guidance should 
require financial institutions, as part of the response process, to 
have an effective computer forensics capability in order to investigate 
and mitigate computer security incidents as discussed in principle 
fourteen of the Basel Committee's ``Risk Management for Electronic 
Banking'' \14\ and the International Organization for Standardization's 
ISO 17799.\15\
---------------------------------------------------------------------------

    \14\ http://www.bis.org/publ/bcbs35.htm.
    \15\ http://www.iso.org/iso/en/prods-services/popstds/informationsecurity.html.
---------------------------------------------------------------------------

    The NCUA Board notes that the final Guidance addresses not only 
computer security incidents, but also all other incidents of 
unauthorized access to member information. Thus, the Board thinks it is 
not appropriate to include more detail about steps a credit union 
should take to investigate and mitigate computer security incidents. 
However, the NCUA Board believes that credit unions should be mindful 
of industry standards when investigating an incident. Therefore, the 
final Guidance contains a reference to forensics by generally noting 
that a credit union should take appropriate steps to contain and 
control an incident, while preserving records and other evidence.

Corrective Measures

    The proposed Guidance stated that once a credit union understands 
the scope of the incident and has taken steps to contain and control 
the situation, it should take measures to address and mitigate the harm 
to individual members. It then described three corrective measures that 
a credit union should include as a part of its response program in 
order to effectively address and mitigate harm to individual members: 
(1) Flagging accounts; (2) securing accounts; and (3) notifying 
members. The NCUA Board removed the first two corrective measures for 
the reasons that follow.

Flagging and Securing Accounts

    The first corrective measure in the proposed Guidance directed 
credit unions to ``flag accounts.'' It stated that a credit union 
should immediately begin identifying and monitoring the accounts of 
those members whose information may have been accessed or misused. It 
also stated that a credit union should provide staff with instructions 
regarding the recording and reporting of any unusual activity, and if 
indicated given the facts of a particular incident, implement controls 
to prevent the unauthorized withdrawal or transfer of funds from member 
accounts.
    The second corrective measure directed credit unions to ``secure 
accounts.'' The proposed Guidance stated that when a share draft, 
savings, or other member account number, debit or credit card account 
number, personal identification number (PIN), password, or other unique 
identifier has been accessed or misused, the credit union should secure 
the account and all other accounts and services that can be accessed 
using the same account number or name and password combination. The 
proposed Guidance stated that accounts should be secured until such 
time as the credit union and the member agree on a course of action.
    Commenters were critical of these proposed measures. Several 
commenters asserted that the final Guidance should not prescribe 
responses to security incidents with this level of detail. Other 
commenters recommended that if NCUA chooses to retain references to 
``flagging'' or ``securing'' accounts, it should include the words 
``where appropriate'' in order to give credit unions the flexibility to 
choose the most effective solutions to problems.
    Commenters also stated that the decision to flag accounts, the 
nature of the flag, and the duration of the flag, should be left to an 
individual credit union's risk-based procedures developed under 
Appendix A. These commenters asked NCUA to recognize that regular, 
ongoing fraud prevention and detection methods employed by a credit 
union may be sufficient.
    Commenters representing small credit unions stated that they do not 
have the technology or other resources to monitor individual accounts. 
They stated that the financial impact of having to monitor accounts for 
unusual activity would be enormous, as each credit union would have to 
purchase expensive technology, hire more personnel, or both. These 
commenters asked NCUA to provide credit unions with the flexibility to 
close an account if the credit union detects unusual activity.
    With respect to ``securing accounts,'' several commenters stated 
that if ``secure'' means close or freeze, either is extreme and would 
have significant adverse consequences for members. Other commenters 
stated that the requirement that the credit union and the member 
``agree on a course of action'' is unrealistic, unworkable and should 
be eliminated. Some commenters explained that if a member is traveling 
and the credit union cannot contact the member to obtain the member's 
consent, freezing or closing a

[[Page 22770]]

member's account could strand the member with no means of taking care 
of expenses. They stated that, in the typical case, the credit union 
would monitor such an account for suspicious transactions.
    As described earlier, the NCUA Board is adopting an approach in the 
final Guidance that is more flexible and risk-based than that in the 
proposed Guidance. The final Guidance incorporates the general concepts 
described in the first two corrective measures into the brief bullets 
describing components of a response program enumerated in section II.C. 
Therefore, the first and second corrective measures no longer appear in 
the Guidance.

Member Notice and Assistance

    The third corrective measure in the proposed Guidance is titled 
``Member Notice and Assistance.'' This proposed measure stated that a 
credit union should notify and offer assistance to members whose 
information was the subject of an incident of unauthorized access or 
use under the circumstances described in section III of the proposed 
Guidance. The proposed Guidance also described which members should be 
notified. In addition, this corrective measure contained provisions 
discussing delivery and contents of the member notice.
    The final Guidance now states that a credit union's response 
program should contain procedures for notifying members when warranted. 
For clarity's sake, the discussion of which members should be notified, 
and the delivery and contents of member notice, is now in new section 
III, titled ``Member Notice.'' Comments and changes with respect to the 
paragraphs that were relocated are discussed under the section titled 
``Member Notice'' that follows.
Responsibility for Notice to Members
    Some commenters were confused by the discussion in the proposed 
Guidance stating that a credit union's contract with its service 
provider should require the service provider to disclose fully to the 
credit union information related to any breach in security resulting in 
an unauthorized intrusion into the credit union's member information 
systems maintained by the service provider. Commenters stated that this 
provision appears to create an obligation for both credit unions and 
their service providers to provide notice of security incidents to the 
credit union's members. These commenters recommended that the service 
provider notify its credit union customer so that the credit union can 
provide appropriate notice to its members. Thus, members would avoid 
receiving multiple notices relating to a single security incident.
    Other commenters asserted that a credit union should not have to 
notify its members if an incident has occurred because of the 
negligence of its service provider. These commenters recommended that 
in this situation, the service provider should be responsible for 
providing notice to the credit union's members.
    As discussed above in connection with notice to regulators, the 
NCUA Board believes that it is the responsibility of the credit union, 
and not of the service provider, to notify the credit union's members 
in connection with an unauthorized intrusion into a credit union's 
member information systems maintained by the service provider. The 
responsibility to notify members remains with the credit union whether 
the incident is inadvertent or due to the service provider's 
negligence. The NCUA Board notes that the costs of providing notice to 
the credit union's members as a result of negligence on the part of the 
service provider may be addressed in the credit union's contract with 
its service provider.
    The last paragraph in section II of the final Guidance, therefore, 
states that it is the responsibility of the credit union to notify the 
credit union's members. It also states that the credit union may 
authorize or contract with its service provider to notify members on 
the credit union's behalf when a security incident involves an 
unauthorized intrusion into the credit union's member information 
systems maintained by the service provider.

C. The ``Member Notice'' Section

    Section III of the proposed Guidance described the standard for 
providing notice to members and defined the term ``sensitive member 
information'' used in that standard. This section also gave examples of 
circumstances when a credit union should give notice and when NCUA does 
not expect a credit union to give notice. It also discussed contents of 
the notice and proper delivery.
    Section III of the final Guidance contains a more comprehensive 
discussion of member notice. It describes the standard for providing 
notice to members and defines both the terms ``sensitive member 
information'' and ``affected members.'' It also discusses the contents 
of the notice and proper delivery.
Standard for Providing Notice
    A key feature of the proposed Guidance was the description of when 
a credit union should provide member notice. The proposed Guidance 
stated that a credit union should notify affected members whenever it 
becomes aware of unauthorized access to ``sensitive member 
information'' unless the credit union, after an appropriate 
investigation, reasonably concludes that misuse of the information is 
unlikely to occur and takes appropriate steps to safeguard the 
interests of affected members, including by monitoring affected 
members' accounts for unusual or suspicious activity.
    The NCUA Board proposed this standard as a way to strike a balance 
between notification to members every time the mere possibility of 
misuse of member information arises from unauthorized access and a 
situation where the credit union knows with certainty that information 
is being misused. However, the Board specifically requested comment on 
whether this is the appropriate standard and invited commenters to 
offer alternative thresholds for member notification.
    Some commenters stated that the proposed standard was reasonable 
and sufficiently flexible. However, many commenters recommended that 
the Board provide credit unions with greater discretion to determine 
when a credit union should notify its members. Some of these commenters 
asserted that a credit union should not have to give notice unless the 
credit union believes it ``to be reasonably likely,'' or if 
circumstances indicated ``a significant risk'' that the information 
will be misused.
    Commenters maintained that because the proposed standard states 
that a credit union should give notice when fraud or identity theft is 
merely possible, notification under these circumstances would 
needlessly alarm members where little likelihood of harm exists. 
Commenters claimed that, eventually, frequent notices in non-
threatening situations will be perceived by members as routine and 
commonplace, and therefore reduce their effectiveness.
    The NCUA Board believes that articulating as part of the Guidance a 
standard that sets forth when notice to members is warranted is both 
helpful and appropriate. However, the Board agrees with commenters and 
is concerned that the proposed threshold inappropriately required 
credit unions to prove a negative proposition, namely, that misuse of 
the information accessed

[[Page 22771]]

is unlikely to occur. In addition, the Board does not want members of 
credit unions to receive notices that would not be useful to them. 
Therefore, the NCUA Board has revised the standard for members 
notification.
    The final Guidance provides that when a credit union becomes aware 
of an incident of unauthorized access to sensitive member information, 
the credit union should conduct a reasonable investigation to determine 
promptly the likelihood that the information has been or will be 
misused. If the credit union determines that misuse of the information 
has occurred or is reasonably possible, it should notify affected 
members as soon as possible.
    An investigation is an integral part of the standard in the final 
Guidance. A credit union should not forego conducting an investigation 
to avoid reaching a conclusion that member information has been or will 
be misused and cannot unreasonably limit the scope of the 
investigation. However, the NCUA Board acknowledges that a full-scale 
investigation may not be necessary in all cases, such as where the 
facts readily indicate that information will or will not be misused.
Monitoring for Suspicious Activity
    The proposed Guidance stated that a credit union need not notify 
members if it reasonably concludes that misuse of the information is 
unlikely to occur and takes appropriate steps to safeguard the 
interests of affected members, including by monitoring affected 
members' accounts for unusual or suspicious activity. A number of 
comments addressed the standard in the proposed Guidance on monitoring 
affected members' accounts for unusual or suspicious activity.
    Some commenters stated that the final Guidance should grant credit 
unions the discretion to monitor the affected member accounts for a 
period of time and to the extent warranted by the particular 
circumstances. Some commenters suggested that monitoring occur during 
the investigation. One commenter noted that a credit union's 
investigation may reveal that monitoring is unnecessary. One commenter 
noted that monitoring the member's accounts at the credit union may not 
protect the member, because unauthorized access to member information 
may result in identity theft beyond the accounts held at the specific 
credit union.
    The NCUA Board agrees that under certain circumstances, monitoring 
may be unnecessary, for example when, on the basis of a reasonable 
investigation, a credit union determines that information was not 
misused. The Board also agrees that the monitoring element may not 
protect the member. Indeed, an identity thief with unauthorized access 
to certain sensitive member information likely will open accounts at 
other financial institutions in the member's name.
    Accordingly, the Board concludes that monitoring under the 
circumstances described in the standard for notice would be burdensome 
for credit unions without a commensurate benefit to members. For these 
reasons, the Board has removed the reference to monitoring in the final 
Guidance.
Timing of Notice
    The proposed Guidance did not include specific language on the 
timing of notice to members, and NCUA and the Banking Agencies received 
many comments on this issue. Some commenters requested clarification of 
the time frame for member notice. One commenter recommended that NCUA 
adopt the approach in the proposed Guidance because it does not set 
forth any circumstances that may delay notification of the affected 
members. Another commenter maintained that, in light of a member's need 
to act expeditiously against identity theft, an outside limit of 48 
hours after the credit union learns of the breach is a reasonable and 
timely requirement for notice to members. Many commenters, however, 
recommended that NCUA make clear that a credit union may take the time 
it reasonably needs to conduct an investigation to assess the risk 
resulting from a security incident.
    The NCUA Board has responded to these various comments on the 
timing of notice by providing that a credit union notify an affected 
member ``as soon as possible'' after concluding that misuse of the 
member's information has occurred, or is reasonably possible. As the 
scope and timing of a credit union's investigation is dictated by the 
facts and circumstances of a particular case, the Board has not 
designated a specific number of hours or days by which credit unions 
should provide notice to members. The Board believes that doing so may 
inhibit a credit union's ability to investigate adequately a particular 
incident or may result in notice that is not timely.
Delay for Law Enforcement Investigation
    The proposed Guidance did not address delay of notice to members 
while a law enforcement investigation is conducted. Many commenters 
recommended permitting a credit union to delay notification to members 
to avoid compromising a law enforcement investigation. These commenters 
noted that the California Database Protection Act of 2003 (CDPA) 
requires notification of California residents whose unencrypted 
personal information was, or is reasonably believed to have been, 
acquired by an unauthorized person.\16\ However, the CDPA permits a 
delay in notification if a law enforcement agency determines that the 
notification will impede a criminal investigation.\17\ Another 
commenter suggested that a credit union should not have to obtain a 
formal determination from a law enforcement agency before it is able to 
delay notice.
---------------------------------------------------------------------------

    \16\ The CDPA, also known as CA S.B. 1386, amended the 
Information Practices Act of 1977, California Civil Code, section 
1798.82.
    \17\ See California Civil Code, section 1798.29(c).
---------------------------------------------------------------------------

    The NCUA Board agrees that it is appropriate to delay member notice 
if such notice will jeopardize a law enforcement investigation. 
However, to ensure that such a delay is necessary and justifiable, the 
final Guidance states that member notice may be delayed if an 
appropriate law enforcement agency determines that notification will 
interfere with a criminal investigation and provides the credit union 
with a written request for the delay.\18\
---------------------------------------------------------------------------

    \18\ This includes circumstances when a credit union confirms 
that an oral request for delay from law enforcement will be followed 
by a written request.
---------------------------------------------------------------------------

    The NCUA Board is concerned that a delay of notification for a law 
enforcement investigation could interfere with the ability of members 
to protect themselves from identity theft and other misuse of their 
sensitive information. Thus, the final Guidance also provides that a 
credit union should notify its members as soon as notification will no 
longer interfere with the investigation and should maintain contact 
with the law enforcement agency that has requested a delay, in order to 
learn, in a timely manner, when member notice will no longer interfere 
with the investigation.

Sensitive Member Information

Scope of Standard
    The Banking Agencies received many comments on the limitation of 
notice in the proposed Guidance to incidents involving unauthorized 
access to sensitive customer information. The NCUA Board invited 
comment on whether to modify the proposed standard for notice to apply 
to other circumstances that compel a credit union to conclude that 
unauthorized access to information, other than sensitive member 
information, likely

[[Page 22772]]

will result in substantial harm or inconvenience to the affected 
members.
    Most commenters recommended that the standard remain as proposed 
rather than covering other types of information. One interagency 
commenter suggested that the Agencies continue to allow a financial 
institution the discretion to notify affected customers in any other 
extraordinary circumstances that compel it to conclude that 
unauthorized access to information other than sensitive customer 
information likely will result in substantial harm or inconvenience to 
those affected. However, the commenter did not provide any examples of 
such extraordinary circumstances.
    The NCUA Board continues to believe that the rationale for limiting 
the standard to sensitive member information expressed in the proposed 
Guidance is correct. The proposed Guidance explained that, in 
accordance with Appendix A, a credit union must protect against 
unauthorized access to or use of member information that could result 
in substantial harm or inconvenience to a member. Substantial harm or 
inconvenience is most likely to result from improper access to 
sensitive member information because this type of information is easily 
misused, as in the commission of identity theft.
    The NCUA Board has not identified any other circumstances that 
should prompt member notice and continues to believe that it is not 
likely that a member will suffer substantial harm or inconvenience from 
unauthorized access to other types of information. Therefore, the 
standard in the final Guidance continues to be limited to unauthorized 
access to sensitive member information. Of course, a credit union still 
may send notices to members in any additional circumstances that it 
determines are appropriate.
Definition of Sensitive Member Information
    NCUA received many comments on the proposed definition of 
``sensitive member information'' in the proposed Guidance. The first 
part of the proposed definition stated that ``sensitive member 
information'' is a member's social security number, personal 
identification number (PIN), password or account number, in conjunction 
with a personal identifier such as the member's name, address, or 
telephone number. The second part of the proposed definition stated 
that ``sensitive member information'' includes any combination of 
components of member information that allow someone to log onto or 
access another person's account, such as user name and password.
    Some commenters agreed with this definition of ``sensitive member 
information.'' They said that it was sound, workable, and sufficiently 
detailed. However, many commenters proposed additions, exclusions, or 
alternative definitions.
Additional Elements
    Some commenters suggested that NCUA add various data elements to 
the definition of sensitive member information, including: A driver's 
license number or number of other government-issued identification, 
mother's maiden name, and date of birth. One commenter suggested 
inclusion of other information that credit unions maintain in their 
member information systems such as a member's account balance, account 
activity, purchase history, and investment information. The commenter 
noted that misuse of this information in combination with a personal 
identifier can just as easily result in substantial harm or 
inconvenience to a member.
    The NCUA Board has added to the first part of the definition 
several more specific components, such as driver's license number and 
debit and credit card numbers, because this information is commonly 
sought by identity thieves. However, the Board determined that the 
second part of the definition would cover the remaining suggestions. 
For example, where date of birth or mother's maiden name are used as 
passwords, under the final Guidance they will be considered components 
of member information that allow someone to log onto or access another 
person's account. Therefore, these specific elements have not been 
added to the definition.
Exclusions
    Commenters also asserted that the proposed definition of sensitive 
member information is too broad and proposed various exclusions. For 
example, some commenters asked NCUA to exclude publicly available 
information, and also suggested that the final Guidance apply only to 
account numbers for transaction accounts or other accounts from which 
withdrawals or transfers can be initiated. These commenters explained 
that access to a mortgage account number (which may also be a public 
record) does not permit withdrawal of additional funds or otherwise 
damage the member. Other commenters requested that NCUA exclude 
encrypted information. Some of these commenters noted that only 
unencrypted information is covered by the CDPA.\19\
---------------------------------------------------------------------------

    \19\ See California Civil Code, 1798.29(a).
---------------------------------------------------------------------------

    The final Guidance does not adopt any of the proposed exclusions. 
The NCUA Board believes it would be inappropriate to exclude publicly 
available information from the definition of sensitive member 
information, where publicly available information is otherwise covered 
by the definition of ``member information.'' \20\ So for instance, 
while a personal identifier, i.e., name, address, or phone number, may 
be publicly available, it is sensitive member information when linked 
with particular nonpublic information such as a credit card account 
number. However, where the definition of ``member information'' does 
not cover publicly available information, sensitive member information 
also would not cover publicly available information. For instance, 
where an individual's name or address is linked with a mortgage loan 
account number that is in the public record, and therefore, would not 
be considered ``member information,'' \21\ it also would not be 
considered sensitive member information for purposes of the final 
Guidance.
---------------------------------------------------------------------------

    \20\ See 12 CFR Part 748, Appendix A, Paragraph I.C.2.c.
    \21\ See 12 CFR Sec.  716.3(p)(3)(i).
---------------------------------------------------------------------------

    In addition, access to a member's personal information and account 
number, whether or not it is an account from which withdrawals or 
transfers can be initiated, may permit an identity thief to access 
other accounts from which withdrawals can be made. Thus, the NCUA Board 
has determined that the definition of account number should not be 
limited as suggested by commenters. The Board also believes that a 
blanket exclusion for all encrypted information is not appropriate, 
because there are many levels of encryption, some of which do not 
effectively protect member information.
Alternative Definitions
    Most alternative definitions suggested by commenters resembled the 
definition of ``personal information'' under the CDPA.\22\ Under the 
CDPA, ``personal information'' includes a resident of California's name 
together with an account number, or credit or debit card

[[Page 22773]]

number only if the information accessed also includes any required 
security code, access code, or password that would permit access to an 
individual's financial account. Therefore, some commenters asked that 
the final Guidance clarify that a name and an account number, together, 
is not sensitive member information unless these elements are combined 
with other information that permits access to a member's financial 
account.
---------------------------------------------------------------------------

    \22\ Under the California law requiring notice, ``personal 
information'' means an individual's first name or first initial and 
last name in combination with any one or more of the following data 
elements, when either the name or the data elements are not 
encrypted: (1) Social security number; (2) driver's license number 
or California Identification Card number; (3) Account number, credit 
or debit card number, in combination with any required security code 
access code, or password that would permit access to an individual's 
financial account.
---------------------------------------------------------------------------

    The NCUA Board concluded that it would be helpful if credit unions 
could more easily compare and contrast the definition of ``personal 
information'' under the CDPA with the definition of ``sensitive 
information'' under the final Guidance. Therefore, the elements in the 
definition of sensitive information in the final Guidance are re-
ordered and the Board added the elements discussed earlier.
    The final Guidance states that sensitive member information means a 
member's name, address, or telephone number, in conjunction with the 
member's social security number, driver's license number, account 
number, credit or debit card number, or a personal identification 
number or password that would permit access to the member's account. 
The final Guidance also states that sensitive member information 
includes any combination of components of member information that would 
allow someone to log onto or access the member's account, such as user 
name and password or a password and account number.
    Consistent with the Banking Agencies, the NCUA Board declines to 
adopt the CDPA standard for several reasons. First, for example, under 
the CDPA, personal information includes a person's name in combination 
with other data elements. By contrast, the final Guidance treats 
address and telephone number in the same manner as a member's name, 
because reverse directories may permit an address or telephone number 
to be traced back to an individual member.
    In addition, under the CDPA, ``personal information'' includes name 
together with an account number, or credit or debit card number only if 
the information accessed also includes any required security code, 
access code, or password that would permit access to an individual's 
financial account. The NCUA Board notes that a name and account number, 
alone, is sufficient to create fraudulent checks, or to direct the 
unauthorized debit of a member's account even without an access 
code.\23\ Further, a name and credit card number may permit 
unauthorized access to a member's account. Therefore, the final 
Guidance continues to define a member's name and account number, or 
credit or debit card number as sensitive member information.
---------------------------------------------------------------------------

    \23\ See, e.g., Griff Witte, Bogus Charges, Unknowingly Paid: 
FTC Accuses 2 of Raiding 90,000 Bank Accounts in Card Fraud, 
Washington Post, May 29, 2004, at E1 (list of names with associated 
checking account numbers used by bogus company to debit bank 
accounts without customer authorization).
---------------------------------------------------------------------------

Affected Customers

    The NCUA Board also reviewed many interagency comments on the 
definition of ``affected members'' in the proposed Guidance. Section 
II.D.3 of the proposed Guidance provided that if the credit union could 
determine from its logs or other data precisely which members' 
information was accessed or misused, it may restrict its notification 
to those individuals. However, if the credit union cannot identify 
precisely which members were affected, it should notify each member in 
any group likely to have been affected, such as each member whose 
information is stored in the group of files in question.
    Commenters were concerned that this provision in the proposed 
Guidance was overly broad. These commenters stated that providing 
notice to all members in groups likely to be affected would result in 
many notices that are not helpful. The commenters suggested that the 
final Guidance narrow the standard for notifying members to only those 
members whose information has been or is likely to be misused.
    The discussion of ``affected members'' has been relocated and is 
separately set forth following the definition of ``sensitive member 
information'' in the final Guidance. The discussion of ``affected 
members'' in the final Guidance states that if a credit union, based 
upon its investigation, can determine from its logs or other data 
precisely which member's information has been improperly accessed,\24\ 
it may notify only those members with respect to whom the credit union 
determines that misuse of their information has occurred or is 
reasonably possible. However, the final Guidance further notes that 
there may be situations where the credit union determines that a group 
of files has been accessed improperly, but is unable to identify which 
specific member's information has been accessed. If the circumstances 
of the unauthorized access lead the credit union to determine that 
misuse of the information contained in the group of files is reasonably 
possible, it should notify all members in the group. In this way, the 
final Guidance reduces the number of notices that should be sent.
---------------------------------------------------------------------------

    \24\ NCUA notes that system logs may permit a credit union to 
determine precisely which members' data has been improperly 
accessed. See, e.g., FFIEC Information Security Booklet, page 64, 
available at http://www.ffiec.gov/ffiecinfobase.html_pages/it_01.html#infosec.
---------------------------------------------------------------------------

Examples

    The proposed Guidance described several examples of when a credit 
union should give notice and when NCUA does not expect a credit union 
to give notice.
    NCUA received a number of comments on the examples. Some commenters 
thought the examples were helpful and suggested that NCUA add more. 
Other commenters criticized the examples as too broad. Many commenters 
suggested numerous ways to modify and clarify the examples.
    Since the examples in the proposed Guidance led to interpretive 
questions, rather than interpretive clarity, the NCUA Board concluded 
that it is not particularly helpful to offer examples of when notice is 
and is not expected. In addition, the Board believes that the standard 
for notice itself has been clarified and examples are no longer 
necessary. Therefore, there are no examples in the final Guidance.

Content of Member Notice

    NCUA received many comments on the discussion of the content of 
member notice located in section II.D.3.b of the proposed Guidance. The 
proposed Guidance stated that a notice should describe the incident in 
general terms and the member's information that was the subject of 
unauthorized access or use. It stated that the notice should also 
include a number that members can call for further information and 
assistance, remind members of the need to remain vigilant over the next 
12 to 24 months, and recommend that members promptly report incidents 
of suspected identity theft. The proposed Guidance described several 
``key elements'' that a notice should contain. It also provided a 
number of ``optional elements'' namely, examples of additional 
assistance that financial institutions have offered.
    Some commenters agreed that the proposed Guidance sufficiently 
addressed most of the key elements necessary for an effective notice. 
However, many commenters requested greater discretion to determine the 
content of the notices that credit unions provide to members. 
Commenters suggested that NCUA make clear that the various items 
suggested for inclusion in any member notice are

[[Page 22774]]

suggestions, and that not every item is mandatory in every notice.
    Some commenters took issue with the enumerated items in the 
proposed Guidance identified as key elements that a notice should 
contain. For example, many commenters asserted that members should not 
necessarily be encouraged to place fraud alerts with credit bureaus in 
every circumstance. Some of these commenters noted that not all 
situations will warrant having a fraud alert posted to the member's 
credit file, especially if the credit union took appropriate action to 
render the information accessed worthless. According to these 
commenters, the consequences of a fraud alert, such as increased 
obstacles to obtaining credit, may outweigh any benefit. Some 
commenters also noted that a proliferation of fraud alerts not related 
to actual fraud would dilute the effectiveness of the alerts.
    Other commenters criticized the optional elements in the proposed 
Guidance. For instance, some commenters stated that a notice should not 
inform the member about subscription services that provide notification 
to the member when there is a request for the member's credit report, 
or offer to subscribe the member to this service, free of charge, for a 
period of time. These commenters asserted that member notices should 
not be converted into a marketing opportunity for subscription services 
provided by consumer credit bureaus. They stated that offering the 
service may mislead the member into believing that these expensive 
services are essential. If the service is offered free of charge, a 
credit union's choice of service could be interpreted as an endorsement 
for a specific company and its product.
    As a result of the Fair and Accurate Credit Transactions Act of 
2003, Public Law 108-159, 117 Stat. 1985-86 (the FACT Act), many of the 
descriptions of ``key elements'' and ``optional elements'' in the 
proposed Guidance, and comments on these elements, have been 
superceded. For example, the frequency and circumstances under which a 
member may obtain a credit report free-of-charge have changed.
    The final Guidance continues to specify that a notice should 
describe the incident in general terms and the member's information 
that was the subject of unauthorized access or use. It also continues 
to state that the notice should include a telephone number that members 
can call for further information and assistance, remind members of the 
need to remain vigilant over the next 12 to 24 months, and recommend 
that members promptly report incidents of suspected identity theft. In 
addition, the final Guidance also states that the notice should 
generally describe what the credit union has done to protect the 
members' information from further unauthorized access.
    However, the final Guidance no longer distinguishes between certain 
other ``key'' items that the notice should contain and those that are 
``optional.'' The NCUA Board added greater flexibility to this section 
to accommodate any new protections afforded to consumers that flow from 
the FACT Act. Instead of distinguishing between items that the notice 
should contain and those that are optional, a credit union may now 
select those items that are appropriate under the circumstances, and 
that are compatible with the FACT Act. Of course, credit unions may 
incorporate additional information that is not mentioned in the final 
Guidance, where appropriate.
Coordination With Credit Reporting Agencies
    A trade association representing credit reporting agencies 
commented that its members are extremely concerned about their ability 
to comply with all of the duties (triggered under the FACT Act) that 
result from notices financial institutions send to their customers. 
This commenter strongly recommended that until a financial institution 
has contacted each nationwide consumer reporting agency to coordinate 
the timing, content, and staging of notices as well as the placement of 
fraud alerts, as necessary, a financial institution should refrain from 
issuing notices suggesting that customers contact nationwide consumer 
reporting agencies.
    The commenter also stated that a financial institution that 
includes such suggestions in a notice to its customers should work with 
the credit reporting agencies to purchase the services the financial 
institution believes are necessary to protect its customers. The 
commenter stated that the costs of serving the millions of consumers it 
projects will receive notices under the proposed Guidance cannot be 
borne solely by the nationwide consumer reporting agencies.
    The commenter also noted that the State of California has provided 
clear guidance in connection with its law requiring notice and also 
suggested that coordination with consumer reporting agencies is vital 
to ensure that a consumer can in fact request a file disclosure in a 
timely manner. This commenter stated that similar guidance at the 
federal level is essential.
    The NCUA Board believes that the final Guidance addresses this 
commenter's concerns in several ways. First, for the reasons described 
earlier, the standard for member notice in the final Guidance likely 
will result in credit unions sending fewer notices. Second, the final 
Guidance does not require credit unions to send notices suggesting that 
consumers contact the nationwide consumer reporting agencies, in every 
case. Credit unions can use their discretion to determine whether such 
information should be included in a notice.
    It is clear, however, that member notice may prompt more consumer 
contacts with consumer reporting agencies, as predicted by the 
commenter. Therefore, the final Guidance encourages a credit union that 
includes in its notice contact information for nationwide consumer 
reporting agencies to notify the consumer reporting agencies in 
advance, prior to sending large numbers of such notices. In this way, 
the reporting agencies will be on notice that they may have to 
accommodate additional requests for the placement of fraud alerts, 
where necessary.
Model Notice
    Some commenters stated that if mandatory elements are included in 
the final Guidance, NCUA should develop a model notice that 
incorporates all the mandated elements yet allows credit unions to 
incorporate additional information where appropriate. Given the 
flexibility that credit unions now have to craft a notice tailored to 
the circumstances of a particular incident, the NCUA Board believes 
that any single model notice will be of little use. Therefore, the 
final Guidance does not contain a model notice.
Other Changes Regarding the Content of a Notice
    The general discussion of the content of a notice in the final 
Guidance states that credit unions should give member notice in a 
``clear and conspicuous manner.'' In addition, the final Guidance 
adopts a commenter's suggestion that credit unions should generally 
describe what the credit union has done to protect a member's 
information from further unauthorized access so that a member can make 
decisions regarding the credit union's member service. This addition 
allows a member to take measures to protect his or her accounts that 
are not redundant or in conflict with the credit union's actions.
    The final Guidance also states that notice should include a 
telephone

[[Page 22775]]

number that members can call for further information and assistance. 
The NCUA Board added a new footnote to this text, which explains that 
the credit union should ensure that it has reasonable policies and 
procedures in place, including trained personnel, to respond 
appropriately to member inquiries and requests for assistance.

Delivery of Customer Notice

    NCUA received numerous suggestions regarding the delivery of member 
notice located in section II.D.3.a of the proposed Guidance. The 
proposed Guidance stated that member notice should be timely, clear, 
and conspicuous, and delivered in any manner that will ensure that the 
member is likely to receive it. The proposed Guidance provided several 
examples of proper delivery and stated that a credit union may choose 
to contact all members affected by telephone or by mail, or for those 
members who conduct transactions electronically, using electronic 
notice.
    One interagency commenter representing a large bank trade 
association agreed that this was a correct standard. However, many 
other commenters recommended that if it costs an institution more than 
$250,000 to provide notice to customers, if the affected class of 
persons to be notified exceeds 500,000, or if an incident warrants 
large distributions of notices, the final Guidance should permit 
various forms of mass distribution of information, such as by postings 
on an Internet web page and in national or regional media outlets. 
Commenters explained that the CDPA contains such a provision.\25\
---------------------------------------------------------------------------

    \25\ See CAL. CIV. CODE Sec.  1798.82(g)(3) (West 2005).
---------------------------------------------------------------------------

    One commenter suggested that a credit union should only provide 
notice in response to inquiries. By contrast, other commenters stated 
that the final Guidance should make clear that general notice on a web 
site is inadequate and that credit unions should provide individual 
notice to members.
    The NCUA Board determined that the provision in the proposed 
Guidance that notice be delivered in a ``timely, clear, and 
conspicuous'' manner already appears elsewhere in the Guidance and is 
unnecessary here.
    The NCUA Board has decided not to include a provision in the final 
Guidance that permits notice through a posting on the web or through 
the media in order to provide notice to a specific number of members or 
where the cost of notice to individual members would exceed a specific 
dollar amount. The Board believes that the thresholds suggested by 
commenters would not be appropriate in every case, especially in 
connection with incidents involving smaller institutions. Therefore, 
the final Guidance states that member notice should be delivered in any 
manner that is designed to ensure that a member can reasonably be 
expected to receive it. This standard places the responsibility on the 
credit union to select a method to deliver notice that is designed to 
ensure that a member is likely to receive notice.
    The final Guidance also provides examples of proper delivery, 
noting that a credit union may choose to contact all members affected 
by telephone or by mail, or by electronic mail for those members for 
whom it has a valid e-mail address and who have agreed to receive 
electronic communications from the credit union. Some commenters 
questioned the effect of other laws on the proposed Guidance. A few 
commenters noted that electronic notice should conform to the 
requirements of the Electronic Signatures in Global and National 
Commerce Act (E-Sign Act), 15 U.S.C. 7001 et seq. The final Guidance 
does not discuss a credit union's obligations under the E-Sign Act. The 
NCUA Board notes that the final Guidance specifically contemplates that 
a credit union may give notice electronically or by telephone. There is 
no requirement that notice be provided in writing. Therefore, the final 
Guidance does not trigger any consent requirements under the E-Sign 
Act.\26\
---------------------------------------------------------------------------

    \26\ Under the E-Sign Act, if a statute, regulation, or other 
rule of law requires that information be provided or made available 
to a consumer in writing, certain procedures apply. See 15 U.S.C. 
7001(c).
---------------------------------------------------------------------------

    Still other commenters requested clarification that a telephone 
call made to a member for purposes of complying with the final Guidance 
is for ``emergency purposes'' under the Telephone Consumer Protection 
Act, 47 U.S.C. 227 (TCPA). These commenters noted that this is 
important because under the TCPA and its implementing regulation,\27\ 
it is unlawful to initiate a telephone call to any residential phone 
line using an artificial or prerecorded voice to deliver a message, 
without the prior express consent of the called party, unless such call 
is for ``emergency purposes.''
---------------------------------------------------------------------------

    \27\ 47 CFR 64.1200.
---------------------------------------------------------------------------

    The final Guidance does not address the TCPA, because the TCPA is 
interpreted by the Federal Communications Commission (FCC), and the FCC 
has not yet taken a position on this issue.\28\
---------------------------------------------------------------------------

    \28\ NCUA notes, however, that the TCPA and its implementing 
regulations generally exempt calls made to any person with whom the 
caller has an established business relationship at the time the call 
is made. See, e.g., 47 CFR 64.1200(a)(1)(iv). Thus, the TCPA would 
not appear to prohibit a credit union's telephone calls to its own 
members. In addition, the FCC's regulations state that the phrase 
for ``emergency purposes'' means calls made necessary in any 
situation affecting the health and safety of consumers. 47 CFR 
64.1200(f)(2). See also FCC Report and Order adopting rules and 
regulations implementing the TCPA, October 16, 1992, available at 
http://www.fcc.gov/cgb/donotcall/, paragraph 51 (calls from utilites 
to notify customers of service outages, and to warn customers of 
discontinuance of service are included within the exemption for 
emergencies). Credit unions will give members notice under the final 
Guidance for a public safety purpose, namely, to permit their 
members to protect themselves where their sensitive information is 
likely to be misused, example, to facilitate identity theft. 
Therefore, the NCUA Board believes that the exemption for emergency 
purposes likely would include member notice that is provided by 
telephone using an artificial or prerecorded voice message call.
---------------------------------------------------------------------------

V. Effective date

    Many commenters suggested that NCUA include a transition period to 
allow adequate time for credit unions to implement the final Guidance. 
In accordance with applicable federal law, the final amendment to Part 
748 is effective thirty days after publication in the Federal Register.
    In addition, given the comments received, the NCUA Board recognizes 
that not every credit union currently has a response program that is 
consistent with the final Guidance. The Board expects these credit 
unions to implement the final Guidance as soon as possible. However, 
the Board appreciates that some credit unions may need additional time 
to develop new compliance procedures, modify systems, and train staff 
in order to implement an adequate response program. The NCUA Board will 
take into account the good faith efforts made by each credit union to 
develop a response program that is consistent with the final Guidance, 
together with all other relevant circumstances, when examining the 
adequacy of a credit union's information security program.

VII. Impact of Guidance

    The NCUA Board invited comment on the potential burden associated 
with the member notice provisions for credit unions implementing the 
proposed Guidance. The Board also asked for information about the 
anticipated burden that may arise from the questions posed by members 
who receive the notices. In addition, the proposed Guidance asked 
whether NCUA should consider how the burden

[[Page 22776]]

may vary depending upon the size and complexity of a credit union. The 
Board also asked for information about the amount of burden, if any, 
the proposed Guidance would impose on service providers.
    Although many commenters representing credit unions stated that 
they already have a response program in place, they also noted that 
NCUA had underestimated the burden that would be imposed on credit 
unions and their members by the proposed Guidance. Some commenters 
stated that the proposed Guidance would require greater time, 
expenditure, and documentation for audit and compliance purposes. Other 
commenters stated that the costs of providing notice and requiring a 
sufficient number of appropriately trained employees to be available to 
answer member inquiries and provide assistance could be substantial. 
Other commenters stated that the Agencies failed to adequately consider 
the burden to members and customers who begin to receive numerous 
notices of ``unauthorized access'' to their data. They stated that the 
stress to members of having to change account numbers, change 
passwords, and monitor their credit reports would be enormous and could 
be unnecessary because the standard in the proposed Guidance would 
require notice when information subject to unauthorized access might 
be, but would not necessarily be, misused.
    Some commenters maintained that the proposed Guidance would be 
especially burdensome for small credit unions, which one commenter 
asserted are the lowest risk targets. These commenters stated that the 
most burdensome elements of the proposed Guidance would be creating a 
general policy, establishing procedures and training staff. They added 
that developing and implementing new procedures for determining when, 
where and how to provide notice and procedures for monitoring accounts 
would also be burdensome.
    Finally, a trade association commenter stated that the notice 
requirements in the proposed Guidance would impose a large burden on 
the nationwide consumer reporting agencies, over which they have no 
control and from which they have no means of recouping costs.
    The NCUA Board has addressed the burdens identified by commenters 
as follows. First, the Board eliminated many of the more prescriptive 
elements of the response program described in the proposed Guidance. 
The final Guidance states that a credit union's response program should 
be risk-based. It lists a number of components that the program should 
contain.
    Second, final Guidance does not detail the steps that a credit 
union should take to contain and control a security incident to prevent 
further unauthorized access to or use of member information. It also 
does not state that a credit union should secure all accounts that can 
be accessed using the same account number or name and password 
combination until such time as the credit union and the member can 
agree on a course of action. Instead, the final Guidance leaves such 
measures to the discretion of the credit union and gives examples of 
the steps that a credit union should consider, such as monitoring, 
freezing, or closing affected accounts. Thus, under the final Guidance 
a small credit union may choose to close an affected account, rather 
than monitoring the account, an element of the proposed Guidance that 
smaller credit unions identified as potentially very costly.
    Third, though the final Guidance still states that notification to 
regulators should be a part of a credit union's response program, it 
states that notice should only be given when the credit union becomes 
aware of an incident of unauthorized access to or use of ``sensitive'' 
member information. This standard should result in fewer instances of 
notice to the regulators than under the proposed Guidance. The final 
Guidance also makes clear that when the security incident involves a 
service provider, the credit union may authorize the service provider 
to notify the credit union's regulator.
    Fourth, the standard of notice to members also has been modified to 
be less burdensome to credit unions and their members. The NCUA Board 
believes that under this new standard, members will be less likely to 
be alarmed needlessly, and credit unions will no longer be asked to 
prove a negative--namely, that misuse of information is unlikely to 
occur. In addition, the Board also has provided credit unions with 
greater discretion to determine what should be contained in a notice to 
members.
    The NCUA Board does not believe that there is a basis for exempting 
small credit unions from the Guidance. For example, many small credit 
unions outsource functions to large service providers that have been 
the target of those seeking to misuse member information. Therefore, 
the Board believes that all credit unions should prepare member 
response programs including member notification procedures that can be 
used in the event the credit union determines that misuse of its 
information about a member has occurred or is reasonably possible. 
However, as noted above, the Board recognizes that within the framework 
of the Guidance, a credit union's program will vary depending on the 
size and complexity of the credit union and the nature and scope of its 
activities.
    Finally, to address comments relating to the potential burden on 
the nationwide consumer reporting agencies, as noted previously, the 
Guidance no longer suggests that member notice always include advice to 
contact the nationwide consumer reporting agencies. The NCUA Board 
recognizes that not all security breaches warrant such contacts. For 
example, the Board recognizes that it may not always be in the best 
interest of a consumer to have a fraud alert placed in the consumer's 
file because the fraud alert may have an adverse impact on the 
consumer's ability to obtain credit.

VIII. Regulatory Procedures

Paperwork Reduction Act

    Certain provisions of the final Guidance contain ``collection of 
information'' requirements as defined in the Paperwork Reduction Act of 
1995 (44 U.S.C. 3501 et seq.) (PRA). An agency may not conduct or 
sponsor, and a respondent is not required to respond to, an information 
collection unless it displays a currently valid Office of Management 
and Budget (OMB) control number.
    The NCUA Board requested comment on a proposed information 
collection as part of the notice requesting comment on the proposed 
Guidance. An analysis of the comments related to paperwork burden and 
commenters' recommendations is provided below. The NCUA submitted its 
proposed information collection to OMB for review and approval and the 
collections have been approved.
    The NCUA Board has reconsidered the burden estimates published in 
the Proposed Guidance in light of the comments received asserting that 
the paperwork burden associated with the information collection were 
underestimated, and in light of measures taken to reduce burden in this 
final Guidance. The Board agreed to increase the estimate for the time 
it will take a credit union to develop notices and determine which 
members should be notified. However, revisions incorporated into the 
final Guidance will result in the preparation and issuance of fewer 
notices than was originally estimated. Therefore, the net change in 
burden is due to the rounding of numbers. A discussion of the

[[Page 22777]]

comments received follows the revised estimates.
New Estimates
    Number of Respondents: 9,014.
    Estimated Time per Response:

Developing Notices: 24 hours x 9,014 = 216,336 hours.
Notifying Customers: 29 hours x 153 = 4,437 hours.

    Total Estimated Annual Burden = 220,773 hours .
Discussion of Comments
    The information collection in the proposed Guidance stated that 
credit unions should: (1) Develop notices to members; and (2) determine 
which members should receive the notices and send the notices to 
members. The NCUA Board and the Banking Agencies received various 
comments regarding the burden estimates, including the estimated time 
per response and the number of recordkeepers involved.
    Some commenters stated that the burden estimates of twenty hours to 
develop and produce notices and three days to determine which members 
should receive notice in the proposed Guidance were too low. These 
commenters stated that the Guidance should include language indicating 
that a credit union be given as much time as necessary to determine the 
scope of an incident and examine which members may be affected. One of 
these commenters stated that ten business days, as recommended by the 
California Department of Consumer Affairs Office of Privacy Protection, 
should provide a credit union with a known safe harbor to complete the 
steps described lest regulated entities be subject to inconsistent 
notification deadlines from the same incident.
    These commenters misunderstood the meaning of PRA burden estimates. 
PRA burden estimates are judgments by the NCUA regarding the length of 
time that it would take credit unions to comply with information 
collection requirements. These estimates do not impose a deadline upon 
credit unions to complete a requirement within a specific period of 
time.
    The final Guidance states that a credit union should notify members 
``as soon as possible'' after an investigation leads it to conclude 
that misuse of member information has occurred or is reasonably 
possible. It also states that notification may be delayed at the 
written request of law enforcement.
    The cost of disclosing information is considered part of the burden 
of an information collection. 5 CFR 1320.3(b)(1)(ix). Many commenters 
stated that the Agencies had underestimated the cost associated with 
disclosing security incidents to members pursuant to the proposed 
Guidance. However, these commenters did not distinguish between the 
usual and customary costs of doing business and the costs of the 
disclosures associated with the information collection in the proposed 
Guidance.
    For example, one commenter stated that the Agencies' estimate did 
not include $0.60 per member for a one-page letter, envelope, and first 
class postage; the customer service time, handling the enormous number 
of calls from customers who receive notice; or the costs associated 
with closing or reopening accounts, printing new checks or embossing 
new cards. This commenter stated that printing and mailing costs, 
alone, for one notice to its customer database, at current postal 
rates, would be at least $500,000.
    Some of the costs mentioned in this comment are non-labor costs 
associated with providing disclosures. Both NCUA and the Banking 
Agencies assumed that non-labor costs associated with the disclosures 
would be negligible, because institutions already have in place well-
developed systems for providing disclosures to their customers. This 
comment and any other comments received regarding the Agencies' 
assumptions about non-labor costs will be taken into account in any 
future estimate of the burden for this collection.
    Other costs mentioned in this comment, such as the cost of customer 
service time, printing checks, and embossing cards, are costs that the 
institution would incur regardless of the implementation of the final 
Guidance. These costs are not associated with an information 
collection, and, therefore, have not been factored into the NCUA 
Board's cost estimates.
    In addition, the estimates in this comment are based on the 
assumption that notice should always be provided by mail. However, the 
final Guidance states that credit unions should deliver member notice 
in any manner designed to ensure that a member can reasonably be 
expected to receive it, such as by telephone, mail, or electronically 
for those members for whom it has a valid e-mail address and who have 
agreed to receive communications electronically. The NCUA Board assumes 
that given this flexibility, credit unions may not necessarily choose 
to mail notices in every case, but may choose less expensive methods of 
delivery that ensure members will reasonably be expected to receive 
notice.
    Another commenter concerned about the burdens imposed on consumer 
reporting agencies provided an example of a security breach involving a 
single company from which identifying information was stolen from about 
500,000 military families. Among other things, the company's notice to 
its customers advised them to contact the nationwide consumer reporting 
agencies. The commenter stated that the nationwide consumer reporting 
agencies spent approximately $1.5 million per company, handling 
approximately 365,000 inquiries from the company's customers.
    The final Guidance contains a number of changes that will diminish 
the costs identified by these commenters. First, the standard for 
notification in the final Guidance likely will result in fewer notices. 
In addition, the final Guidance no longer states that all notices 
should advise members to contact the nationwide consumer reporting 
agencies. Therefore, the NCUA Board estimates do not factor in the 
costs to the reporting agencies.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601-612) (RFA) requires an 
agency to prepare a final regulatory flexibility analysis whenever the 
agency promulgates a final rule that may have a significant economic 
impact on a substantial number of small entities. As required by the 
RFA, the NCUA Board prepared and published an initial regulatory 
flexibility analysis at the time it issued the proposed rule amending 
Sec.  748.0 and the proposed guidance in the form of Appendix B. This 
section contains the Board's final regulatory flexibility analysis.
A. Need for and Objectives of the Rule
    As more fully discussed in the preamble to the final rule, section 
501 of GLBA requires NCUA to publish standards for federally insured 
credit unions relating to their security programs to: (1) Insure the 
security and confidentiality of customer records and information; (2) 
protect against any anticipated threats or hazards to the security or 
integrity of such records; and (3) protect against unauthorized access 
to or use of such records or information that could result in 
substantial harm or inconvenience to any customer. The final rule 
establishes that federally insured credit unions must include a 
response program as an element of their security program, and the final 
Guidance describes the features that a response program should contain 
to ensure that breaches of security do not

[[Page 22778]]

result in harm or inconvenience to members.
B. Summary of Issues Raised by Public Comment
    The NCUA Board received no public comment specifically responding 
to the initial regulatory flexibility analysis contained in the 
proposed rule. All federally insured credit unions, regardless of size, 
are subject to GLBA and the rule. The Board believes the changes in the 
final Guidance, including the standard for determining when to provide 
notice to members and the increased emphasis on risk-based factors, 
make the final Guidance easier for smaller credit unions to use. For 
example, smaller credit unions that offer a relatively less 
sophisticated array of products and services present a relatively lower 
level of risk of security breach affecting member information. For 
these credit unions, the final Guidance contemplates a relatively less 
comprehensive response program, commensurate with the relatively lower 
level of risk. Another example of flexibility benefiting smaller 
institutions relates to service providers. The final Guidance 
contemplates that, where a service provider maintains member 
information, a credit union may delegate authority to that service 
provider to notify members affected by a security breach on its behalf. 
The Board believes this flexibility is of particular benefit to smaller 
credit unions, which typically use service providers and may not have 
the resources to provide timely and effective notice themselves.
C. Consideration of Alternatives
    All federally insured credit unions are already required by GLBA 
and existing regulation to develop and implement a security program. 
Development of an effective program involves: Assessing risks to member 
information; establishing policies, procedures, and training to control 
risks; testing the program's effectiveness; and managing and monitoring 
service providers. The NCUA Board believes establishing an information 
security program is a sound business practice for all credit unions and 
is already addressed by existing supervisory procedures. The final rule 
requires that security programs include a provision for appropriate 
responses to incidents involving a breach of information integrity. 
Consistent with the position taken by the Banking Agencies, the Board 
views this as a fundamental element of any information security 
program. Members of smaller credit unions are entitled to expect their 
personal financial information will be protected and that their credit 
union will respond appropriately and effectively to any breach of 
security. Ultimately, there is no alternative to requiring that all 
credit unions include an effective response program as an element of 
their security programs.
    Nevertheless, the Board specifically solicited comment in the 
proposed rule on any significant alternatives, consistent with GLBA, 
that would minimize the impact on small credit unions. As more fully 
discussed in the preamble to the final rule and in the preceding 
section of this analysis, the final Guidance provides substantial 
flexibility so that any credit union, regardless of size, may adopt an 
information security program tailored to its individual needs.

Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests. In 
adherence to fundamental federalism principles, NCUA, an independent 
regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies 
with the executive order. The final rule would not have substantial 
direct effects on the states, on the connection between the national 
government and the states, or on the distribution of power and 
responsibilities among the various levels of government. NCUA has 
determined that this final rule does not constitute a policy that has 
federalism implications for purposes of the executive order.

The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families

    The NCUA has determined that this final rule would not affect 
family well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, 1999, Public Law 105-277, 112 
Stat. 2681 (1998).

Agency Regulatory Goal

    NCUA's goal is to promulgate clear and understandable regulations 
that impose minimal regulatory burden. We invite your comments on 
whether the final rule is understandable and minimally intrusive.

List of Subjects in 12 CFR Part 748

    Credit unions, Crime, Currency, Reporting and recordkeeping 
requirements and Security measures.

    By the National Credit Union Administration Board on April 14, 
2005.
Mary F. Rupp,
Secretary of the Board.


0
For reasons set forth in the preamble, the NCUA Board proposes to amend 
12 CFR 748 as follows:

PART 748--SECURITY PROGRAM, REPORT OF CRIME AND CATASTROPHIC ACT 
AND BANK SECRECY ACT COMPLIANCE

0
1.The authority citation for part 748 reads as follows:

    Authority: 12 U.S.C. 1766(a), 1786(Q); 15 U.S.C. 6801 and 
6805(b); 31 U.S.C. 5311 and 5318.


0
2.In Sec.  748.0 revise paragraph (b) to read as follows:


Sec.  748.0  Security program.

* * * * * *
    (b) The security program will be designed to:
    (1) Protect each credit union office from robberies, burglaries, 
larcenies, and embezzlement;
    (2) Ensure the security and confidentiality of member records, 
protect against the anticipated threats or hazards to the security or 
integrity of such records, and protect against unauthorized access to 
or use of such records that could result in substantial harm or serious 
inconvenience to a member;
    (3) Respond to incidents of unauthorized access to or use of member 
information that could result in substantial harm or serious 
inconvenience to a member;
    (4) Assist in the identification of persons who commit or attempt 
such actions and crimes, and
    (5) Prevent destruction of vital records, as defined in 12 CFR part 
749.

0
3. Add Appendix B to read as follows:

Appendix B to Part 748--Guidance on Response Programs for Unauthorized 
Access to Member Information and Member Notice

I. Background

    This Guidance in the form of Appendix B to NCUA's Security 
Program, Report of Crime and Catastrophic Act and Bank Secrecy Act 
Compliance regulation,\29\ interprets section 501(b) of the Gramm-
Leach-Bliley Act (``GLBA'') and describes response programs, 
including member notification procedures, that a federally insured 
credit union should develop and implement to address unauthorized 
access to or use of member information that could result in 
substantial harm or inconvenience to a member. The scope of, and 
definitions of terms used in,

[[Page 22779]]

this Guidance are identical to those of Appendix A to Part 748 
(Appendix A). For example, the term ``member information'' is the 
same term used in Appendix A, and means any record containing 
nonpublic personal information about a member, whether in paper, 
electronic, or other form, maintained by or on behalf of the credit 
union.
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    \29\ 12 CFR Part 748.
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A. Security Guidelines

    Section 501(b) of the GLBA required the NCUA to establish 
appropriate standards for credit unions subject to its jurisdiction 
that include administrative, technical, and physical safeguards to 
protect the security and confidentiality of member information. 
Accordingly, the NCUA amended Part 748 of its rules to require 
credit unions to develop appropriate security programs, and issued 
Appendix A, reflecting its expectation that every federally insured 
credit union would develop an information security program designed 
to:
    1. Ensure the security and confidentiality of member 
information;
    2. Protect against any anticipated threats or hazards to the 
security or integrity of such information; and
    3. Protect against unauthorized access to or use of such 
information that could result in substantial harm or inconvenience 
to any member.

B. Risk Assessment and Controls

    1. Appendix A directs every credit union to assess the following 
risks, among others, when developing its information security 
program:
    a. Reasonably foreseeable internal and external threats that 
could result in unauthorized disclosure, misuse, alteration, or 
destruction of member information or member information systems;
    b. The likelihood and potential damage of threats, taking into 
consideration the sensitivity of member information; and
    c. The sufficiency of policies, procedures, member information 
systems, and other arrangements in place to control risks.\30\
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    \30\ See 12 CFR Part 748, Appendix A, Paragraph III.B.
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    2. Following the assessment of these risks, Appendix A directs a 
credit union to design a program to address the identified risks. 
The particular security measures a credit union should adopt will 
depend upon the risks presented by the complexity and scope of its 
business. At a minimum, the credit union should consider the 
specific security measures enumerated in Appendix A,\31\ and adopt 
those that are appropriate for the credit union, including:
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    \31\ See Appendix A, paragraph III.C.
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    a. Access controls on member information systems, including 
controls to authenticate and permit access only to authorized 
individuals and controls to prevent employees from providing member 
information to unauthorized individuals who may seek to obtain this 
information through fraudulent means;
    b. Background checks for employees with responsibilities for 
access to member information; and
    c. Response programs that specify actions to be taken when the 
credit union suspects or detects that unauthorized individuals have 
gained access to member information systems, including appropriate 
reports to regulatory and law enforcement agencies.\32\
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    \32\ See Appendix A, Paragraph III.C.
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C. Service Providers

    Appendix A advises every credit union to require its service 
providers by contract to implement appropriate measures designed to 
protect against unauthorized access to or use of member information 
that could result in substantial harm or inconvenience to any 
member.\33\
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    \33\ See Appendix A, Paragraph III.B. and III.D. Further, the 
NCUA notes that, in addition to contractual obligations to a credit 
union, a service provider may be required to implement its own 
comprehensive information security program in accordance with the 
Safeguards Rule promulgated by the Federal Trade Commission 
(ldquo;FTC''), 12 CFR Part 314.
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II. Response Program

    i. Millions of Americans, throughout the country, have been 
victims of identity theft.\34\ Identity thieves misuse personal 
information they obtain from a number of sources, including credit 
unions, to perpetrate identity theft. Therefore, credit unions 
should take preventative measures to safeguard member information 
against such attempts to gain unauthorized access to the 
information. For example, credit unions should place access controls 
on member information systems and conduct background checks for 
employees who are authorized to access member information.\35\ 
However, every credit union should also develop and implement a 
risk-based response program to address incidents of unauthorized 
access to member information in member information systems that 
occur nonetheless.\36\ A response program should be a key part of a 
credit union's information security program.\37\ The program should 
be appropriate to the size and complexity of the credit union and 
the nature and scope of its activities.
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    \34\ The FTC estimates that nearly 10 million Americans 
discovered they were victims of some form of identify theft in 2002. 
See The Federal Trade Commission, Identity Theft Survey Report, 
(September 2003), available at http://www.ftc.gov/os/2003/09synovatereport.pdf.
    \35\ Credit unions should also conduct background checks of 
employees to ensure that the credit union does not violate 12 U.S.C. 
1785(d), which prohibits a credit union from hiring an individual 
convicted of certain criminal offenses or who is subject to a 
prohibition order under 12 U.S.C. 1786(g).
    \36\ Under 12 CFR Part 748, Appendix A, a credit union's member 
information systems consists of all of the methods used to access, 
collect, store, use, transmit, protect, or dispose of member 
information, including the systems maintained by its service 
providers. See 12 CFR Part 748, Appendix A, Paragraph I.C.2.d.
    \37\ See FFIEC Information Technology Examination Handbook, 
Information Security Booklet, (December, 2002), available at http://www.ffiec.gov/ffiecinfobase/html_pages/it_01.htm1#infosec, for 
additional guidance on preventing, detecting, and responding to 
intrusions into financial institution computer systems.
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    ii. In addition, each credit union should be able to address 
incidents of unauthorized access to member information in member 
information systems maintained by its domestic and foreign service 
providers. Therefore, consistent with the obligations in this 
Guidance that relate to these arrangements, and with existing 
guidance on this topic issued by the NCUA,\38\ a credit union's 
contract with its service provider should require the service 
provider to take appropriate actions to address incidents of 
unauthorized access to or use of the credit union's member 
information, including notification of the credit union as soon as 
possible of any such incident, to enable the institution to 
expeditiously implement its response program.
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    \38\ See FFIEC Information Technology Examination Handbook, 
Outsourcing Technology Services Booklet, (June 2004), available at 
http://www.ffiec.gov/ffiecinfobase/html_pages/it_01.htm1#outscouring for additional guidance on managing outsourced 
relationships.
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A. Components of a Response Program

    1. At a minimum, a credit union's response program should 
contain procedures for the following:
    a. Assessing the nature and scope of an incident, and 
identifying what member information systems and types of member 
information have been accessed or misused;
    b. Notifying the appropriate NCUA Regional Director, and, in the 
case of state-chartered credit unions, its applicable state 
supervisory authority, as soon as possible when the credit union 
becomes aware of an incident involving unauthorized access to or use 
of sensitive member information as defined below.
    c. Consistent with the NCUA's Suspicious Activity Report 
(``SAR'') regulations,\39\ notifying appropriate law enforcement 
authorities, in addition to filing a timely SAR in situations 
involving Federal criminal violations requiring immediate attention, 
such as when a reportable violation is ongoing;
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    \39\ A credit union's obligation to file a SAR is set out in the 
NCUA's SAR regulations and guidance. See 12 CFR Part 748.1(c); NCUA 
Letter to Credit Unions No. 04-CU-03, Suspiciouis Activity Reports, 
March 2004; NCUA Regulatory Alert No. 04-RA-01, The Suspicious 
Activity Report (SAR) Activity Review--Trends, Tips, & Isues, Issue 
6, November 2003, February 2004.
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    d. Taking appropriate steps to contain and control the incident 
to prevent further unauthorized access to or use of member 
information, for example, by monitoring, freezing, or closing 
affected accounts, while preserving records and other evidence; \40\ 
and
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    \40\ See FFIEC Information Technology Examination Handbook, 
Information Security Booklet, (December 2002), pp. 68-74.
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    e. Notifying members when warranted.
    2. Where an incident of unauthorized access to member 
information involves member information systems maintained by a 
credit union's service providers, it is the responsibility of the 
credit union to notify the credit union's members and regulator. 
However, a credit union may authorize or contract with its service 
provider to notify the credit union's members or regulators on its 
behalf.

III. Member Notice

    i. Credit unions have an affirmative duty to protect their 
members' information against

[[Page 22780]]

unauthorized access or use. Notifying members of a security incident 
involving the unauthorized access or use of the member's information 
in accordance with the standard set forth below is a key part of 
that duty.
    ii. Timely notification of members is important to manage a 
credit union's reputation risk. Effective notice also may reduce a 
credit union's legal risk, assist in maintaining good member 
relations, and enable the credit union's members to take steps to 
protect themselves against the consequences of identity theft. When 
member notification is warranted, a credit union may not forgo 
notifying its customers of an incident because the credit union 
believes that it may be potentially embarrassed or inconvenienced by 
doing so.

A. Standard for Providing Notice

    When a credit union becomes aware of an incident of unauthorized 
access to sensitive member information, the credit union should 
conduct a reasonable investigation to promptly determine the 
likelihood that the information has been or will be misused. If the 
credit union determines that misuse of its information about a 
member has occurred or is reasonably possible, it should notify the 
affected member as soon as possible. Member notice may be delayed if 
an appropriate law enforcement agency determines that notification 
will interfere with a criminal investigation and provides the credit 
union with a written request for the delay. However, the credit 
union should notify its members as soon as notification will no 
longer interfere with the investigation.

1. Sensitive Member Information

    Under Part 748.0, a credit union must protect against 
unauthorized access to or use of member information that could 
result in substantial harm or inconvenience to any member. 
Substantial harm or inconvenience is most likely to result from 
improper access to sensitive member information because this type of 
information is most likely to be misused, as in the commission of 
identity theft.
    For purposes of this Guidance, sensitive member information 
means a member's name, address, or telephone number, in conjunction 
with the member's social security number, driver's license number, 
account number, credit or debit card number, or a personal 
identification number or password that would permit access to the 
member's account. Sensitive member information also includes any 
combination of components of member information that would allow 
someone to log onto or access the member's account, such as user 
name and password or password and account number.

2. Affected Members

    If a credit union, based upon its investigation, can determine 
from its logs or other data precisely which members' information has 
been improperly accessed, it may limit notification to those members 
with regard to whom the credit union determines that misuse of their 
information has occurred or is reasonably possible. However, there 
may be situations where the credit union determines that a group of 
files has been accessed improperly, but is unable to identify which 
specific member's information has been accessed. If the 
circumstances of the unauthorized access lead the credit union to 
determine that misuse of the information is reasonably possible, it 
should notify all members in the group.

B. Content of Member Notice

    1. Member notice should be given in a clear and conspicuous 
manner. The notice should describe the incident in general terms and 
the type of member information that was the subject of unauthorized 
access or use. It also should generally describe what the credit 
union has done to protect the members' information from further 
unauthorized access. In addition, it should include a telephone 
number that members can call for further information and 
assistance.\41\ The notice also should remind members of the need to 
remain vigilant over the next twelve to twenty-four months, and to 
promptly report incidents of suspected identity theft to the credit 
union. The notice should include the following additional items, 
when appropriate:
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    \41\ The credit union should, therefore, ensure that it has 
reasonable policies and procedures in place, including trained 
personnel, to respond appropriately to member inquiries and requests 
for assistance.
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    a. A recommendation that the member review account statements 
and immediately report any suspicious activity to the credit union;
    b. A description of fraud alerts and an explanation of how the 
member may place a fraud alert in the member's consumer reports to 
put the member's creditors on notice that the member may be a victim 
of fraud;
    c. A recommendation that the member periodically obtain credit 
reports from each nationwide credit reporting agency and have 
information relating to fraudulent transactions deleted;
    d. An explanation of how the member may obtain a credit report 
free of charge; and
    e. Information about the availability of the FTC's online 
guidance regarding steps a consumer can take to protect against 
identity theft. The notice should encourage the member to report any 
incidents of identity theft to the FTC, and should provide the FTC's 
Web site address and toll-free telephone number that members may use 
to obtain the identity theft guidance and report suspected incidents 
of identity theft.\42\
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    \42\ Currently, the FTC Web site for the ID Theft brochure and 
the FTC Hotline phone number are http://www.ftc.gov/idtheft and 1-
877-IDTHEFT. The credit union may also refer members to any 
materials developed pursuant to section 15(1)(b) of the FACT Act 
(educational materials developed by the FTC to teach the public how 
to prevent identity theft).
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    2. NCUA encourages credit unions to notify the nationwide 
consumer reporting agencies prior to sending notices to a large 
number of members that include contact information for the reporting 
agencies.

C. Delivery of Member Notice

    Member notice should be delivered in any manner designed to 
ensure that a member can reasonably be expected to receive it. For 
example, the credit union may choose to contact all members affected 
by telephone or by mail, or by electronic mail for those members for 
whom it has a valid e-mail address and who have agreed to receive 
communications electronically.

[FR Doc. 05-7836 Filed 4-29-05; 8:45 am]
BILLING CODE 7535-01-P