[Federal Register Volume 86, Number 234 (Thursday, December 9, 2021)]
[Rules and Regulations]
[Pages 70272-70314]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-25736]
[[Page 70271]]
Vol. 86
Thursday,
No. 234
December 9, 2021
Part III
Federal Trade Commission
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16 CFR Part 314
Standards for Safeguarding Customer Information; Final Rule
Federal Register / Vol. 86 , No. 234 / Thursday, December 9, 2021 /
Rules and Regulations
[[Page 70272]]
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FEDERAL TRADE COMMISSION
16 CFR Part 314
RIN 3084-AB35
Standards for Safeguarding Customer Information
AGENCY: Federal Trade Commission.
ACTION: Final rule.
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SUMMARY: The Federal Trade Commission (``FTC'' or ``Commission'') is
issuing a final rule (``Final Rule'') to amend the Standards for
Safeguarding Customer Information (``Safeguards Rule'' or ``Rule'').
The Final Rule contains five main modifications to the existing Rule.
First, it adds provisions designed to provide covered financial
institutions with more guidance on how to develop and implement
specific aspects of an overall information security program, such as
access controls, authentication, and encryption. Second, it adds
provisions designed to improve the accountability of financial
institutions' information security programs, such as by requiring
periodic reports to boards of directors or governing bodies. Third, it
exempts financial institutions that collect less customer information
from certain requirements. Fourth, it expands the definition of
``financial institution'' to include entities engaged in activities the
Federal Reserve Board determines to be incidental to financial
activities. This change adds ``finders''--companies that bring together
buyers and sellers of a product or service--within the scope of the
Rule. Finally, the Final Rule defines several terms and provides
related examples in the Rule itself rather than incorporates them from
the Privacy of Consumer Financial Information Rule (``Privacy Rule'').
DATES:
Effective date: This rule is effective January 10, 2022.
Applicability date: The provisions set forth in Sec. 314.5 are
applicable beginning December 9, 2022.
FOR FURTHER INFORMATION CONTACT: David Lincicum (202-326-2773),
Katherine McCarron (202-326-2333), or Robin Wetherill (202-326-2220),
Division of Privacy and Identity Protection, Bureau of Consumer
Protection, Federal Trade Commission, 600 Pennsylvania Avenue NW,
Washington, DC 20580.
SUPPLEMENTARY INFORMATION:
I. Background
Congress enacted the Gramm Leach Bliley Act (``GLB'' or ``GLBA'')
in 1999.\1\ The GLBA provides a framework for regulating the privacy
and data security practices of a broad range of financial institutions.
Among other things, the GLBA requires financial institutions to provide
customers with information about the institutions' privacy practices
and about their opt-out rights, and to implement security safeguards
for customer information.
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\1\ Pubic Law 106-102, 113 Stat. 1338 (1999).
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Subtitle A of Title V of the GLBA required the Commission and other
Federal agencies to establish standards for financial institutions
relating to administrative, technical, and physical safeguards for
certain information.\2\ Pursuant to the Act's directive, the Commission
promulgated the Safeguards Rule (16 CFR part 314) in 2002. The
Safeguards Rule became effective on May 23, 2003.
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\2\ See 15 U.S.C. 6801(b), 15 U.S.C. 6805(b)(2).
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The current Safeguards Rule requires a financial institution to
develop, implement, and maintain a comprehensive information security
program that consists of the administrative, technical, and physical
safeguards the financial institution uses to access, collect,
distribute, process, protect, store, use, transmit, dispose of, or
otherwise handle customer information.\3\ The information security
program must be written in one or more readily accessible parts.\4\ The
safeguards set forth in the program must be appropriate to the size and
complexity of the financial institution, the nature and scope of its
activities, and the sensitivity of any customer information at
issue.\5\ The safeguards must also be reasonably designed to ensure the
security and confidentiality of customer information, protect against
any anticipated threats or hazards to the security or integrity of the
information, and protect against unauthorized access to or use of such
information that could result in substantial harm or inconvenience to
any customer.\6\
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\3\ 16 CFR 314.2(c).
\4\ 16 CFR 314.3(a).
\5\ 16 CFR 314.3(a), (b).
\6\ 16 CFR 314.3(a), (b).
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In order to develop, implement, and maintain its information
security program, a financial institution must identify reasonably
foreseeable internal and external risks to the security,
confidentiality, and integrity of customer information that could
result in the unauthorized disclosure, misuse, alteration, destruction,
or other compromise of such information.\7\ The financial institution
must then design and implement safeguards to control the risks
identified through the risk assessment, and must regularly test or
otherwise monitor the effectiveness of the safeguards' key controls,
systems, and procedures.\8\ The Rule also requires the financial
institution to evaluate and adjust its information security program in
light of the results of this testing and monitoring, any material
changes in its operations or business arrangements, or any other
circumstances it knows or has reason to know may have a material impact
on its information security program.\9\ The financial institution must
also designate an employee or employees to coordinate the information
security program.\10\
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\7\ 16 CFR 314.4(b).
\8\ 16 CFR 314.4(c).
\9\ 16 CFR 314.4(e).
\10\ 16 CFR 314.4(a).
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Finally, the current Safeguards Rule requires financial
institutions to take reasonable steps to select and retain service
providers capable of maintaining appropriate safeguards for customer
information and require those service providers by contract to
implement and maintain such safeguards.\11\
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\11\ 16 CFR 314.4(d).
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II. Regulatory Review of the Safeguards Rule
On September 7, 2016, the Commission solicited comments on the
Safeguards Rule as part of its periodic review of its rules and
guides.\12\ The Commission sought comment on a number of general
issues, including the economic impact and benefits of the Rule;
possible conflicts between the Rule and state, local, or other Federal
laws or regulations; and the effect on the Rule of any technological,
economic, or other industry changes. The Commission received 28
comments from individuals and entities representing a wide range of
viewpoints.\13\ Most commenters agreed there is a continuing need for
the Rule and it benefits consumers and competition.\14\
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\12\ Safeguards Rule, Request for Comment, 81 FR 61632 (Sept. 7,
2016).
\13\ The 28 public comments received prior to March 15, 2019,
are posted at: https://www.ftc.gov/policy/public-comments/initiative-674.
\14\ See, e.g., Mortgage Bankers Association (comment 39, NPRM);
National Automobile Dealers Association (Comment 40, NPRM); Data &
Marketing Association (comment 38, NPRM); Electronic Transactions
Association (comment 24, NPRM); State Privacy & Security Coalition
(comment 26, NPRM).
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On April 4, 2019, the Commission issued a notice of proposed
rulemaking (NPRM) setting forth proposed amendments to the Safeguards
Rule (the ``Proposed Rule'').\15\ In response, the Commission received
49 comments from various interested parties
[[Page 70273]]
including industry groups, consumer groups, and individual
consumers.\16\ On July 13, 2020, the Commission held a workshop
concerning the proposed changes and conducted panels with information
security experts discussing subjects related to the Proposed Rule.\17\
The Commission received 11 comments following the workshop.\18\ After
reviewing the initial comments to the Proposed Rule, conducting the
workshop, and then reviewing the comments received following the
workshop, the Commission now issues final amendments to the Safeguards
Rule.
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\15\ FTC Notice of Proposed Rulemaking, 84 FR 13158 (April 4,
2019).
\16\ The 49 relevant public comments received on or after March
15, 2019, can be found at Regulations.gov. See FTC Seeks Comment on
Proposed Amendments to Safeguards and Privacy Rules, 16 CFR part
314, Project No. P145407, https://www.regulations.gov/docket/FTC-2019-0019/document.
\17\ See FTC, Information Security and Financial Institutions:
An FTC Workshop to Examine Safeguards Rule Tr. (July 13, 2020),
https://www.ftc.gov/system/files/documents/public_events/1567141/transcript-glb-safeguards-workshop-full.pdf [hereinafter Safeguards
Workshop Tr.].
\18\ The 11 relevant public comments relating to the subject
matter of the July 13, 2020, workshop can be found at https://www.regulations.gov/document/FTC-2020-0038-0001. This document cites
comments using the last name of the individual submitter or the name
of the organization, followed by the number based on the last two
digits of the comment ID number.
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III. Overview of Final Rule
As noted above, the Final Rule modifies the current Rule in five
primary ways. First, the Final Rule amends the current Rule to include
more detailed requirements for the development and establishment of the
information security program required under the Rule. For example,
while the current Rule requires financial institutions to undertake a
risk assessment and develop and implement safeguards to address the
identified risks, the Final Rule sets forth specific criteria for what
the risk assessment must include, and requires the risk assessment be
set forth in writing. As to particular safeguards, the Final Rule
requires that they address access controls, data inventory and
classification, encryption, secure development practices,
authentication, information disposal procedures, change management,
testing, and incident response. And while the Final Rule retains the
requirement from the current Rule that financial institutions provide
employee training and appropriate oversight of service providers, it
adds mechanisms designed to ensure such training and oversight are
effective. Although the Final Rule has more specific requirements than
the current Rule, it still provides financial institutions the
flexibility to design an information security program appropriate to
the size and complexity of the financial institution, the nature and
scope of its activities, and the sensitivity of any customer
information at issue.
Second, the Final Rule adds requirements designed to improve
accountability of financial institutions' information security
programs. For example, while the current Rule allows a financial
institution to designate one or more employees to be responsible for
the information security program, the Final Rule requires the
designation of a single Qualified Individual. The Final Rule also
requires periodic reports to boards of directors or governing bodies,
which will provide senior management with better awareness of their
financial institutions' information security programs, making it more
likely the programs will receive the required resources and be able to
protect consumer information.
Third, recognizing the impact of the additional requirements on
small businesses, the Final Rule exempts financial institutions that
collect information on fewer than 5,000 consumers from the requirements
of a written risk assessment, incident response plan, and annual
reporting to the Board of Directors.
Fourth, the Final Rule expands the definition of ``financial
institution'' to include entities engaged in activities the Federal
Reserve Board determines to be incidental to financial activities. This
change brings ``finders''--companies that bring together buyers and
sellers of a product or service--within the scope of the Rule. Finders
often collect and maintain very sensitive consumer financial
information, and this change will require them to comply with the
Safeguards Rule's requirements to protect that information. This change
will also bring the Rule into harmony with other Federal agencies'
Safeguards Rules, which include activities incidental to financial
activities in their definition of financial institution.
Finally, the Final Rule includes several definitions and related
examples, including of ``financial institution,'' in the Rule itself
rather than incorporate them from a related FTC rule, the Privacy of
Consumer Financial Information Rule, 16 CFR part 313. This will make
the rule more self-contained and will allow readers to understand its
requirements without referencing the Privacy Rule.
IV. Section-by-Section Analysis
General Comments
The Commission received 49 comments in response to the NPRM for the
Proposed Rule, from a diverse set of stakeholders, including industry
groups, individual businesses, consumer advocacy groups, academics,
information security experts, government agencies, and individual
consumers. It also hosted a workshop on the Proposed Rule, which
included approximately 20 security experts. Some of the comments simply
expressed general support \19\ or general disapproval \20\ of the
Proposed Rule. Many, however, offered detailed responses to specific
proposals in the NPRM. In general, industry groups were opposed to most
or all of the Proposed Rule, and consumer advocacy groups, academics,
and security experts were generally in favor of the amendments. The
comments and workshop record are discussed in the following Section-by-
Section analysis.
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\19\ See Encore Capital Group (comment 25, NPRM); Justine
Bykowski (comment 12, NPRM); ``Peggy from Bloomington, MN'' (comment
13, NPRM); ``Anonymous'' (comment 20, NPRM).
\20\ ``Jane Q. Citizen'' (comment 14, NPRM).
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Sec. 314.1: Purpose and Scope
The Purpose and Scope section of the current Rule generally states
the Rule implements the Gramm-Leach-Bliley Act and applies to the
handling of customer information by financial institutions over which
the FTC has jurisdiction. In its NPRM, the Commission proposed adding a
definition of ``financial institution'' modeled on the definition
included in the Commission's Privacy Rule (16 CFR part 313) and a
series of examples providing guidance on what constitutes a financial
institution under the Commission's jurisdiction. Other than expanding
the definition of ``financial institution'' as discussed below, the new
language was not meant to reflect a substantive change to the
Safeguards Rule; rather, it was meant to allow the Rule to be read on
its own, without reference to the Privacy Rule.\21\ The Commission
received no comments that addressed this section specifically, and
[[Page 70274]]
the Commission adopts the language of the Proposed Rule in the Final
Rule.\22\
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\21\ In a separate final rule, published elsewhere in this issue
of the Federal Register, the Commission is amending the Privacy Rule
to reflect changes made by the Dodd-Frank Act, limiting that rule to
certain auto dealers. Through that proceeding, the Commission is
also removing examples of financial institutions from the Privacy
Rule that are no longer covered under the rule in the wake of these
changes.
\22\ Several commenters addressed the change to the definition
of ``financial institution.'' Those comments are addressed in the
discussion of the definition of ``financial institution'' below.
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Sec. 314.2: Definitions
The Proposed Rule added a number of definitions to Sec. 314.2. The
Proposed Rule also retained paragraph (a), which states terms used in
the Safeguards Rule have the same meaning as set forth in the Privacy
Rule.
The American Council on Education (ACE) suggested all terms from
the Privacy Rule, such as ``consumer,'' ``customer,'' and ``customer
information,'' be included in the Final Rule in order to make the Final
Rule easier for regulated entities to understand.\23\ On the other
hand, HITRUST recommended no definitions from the Privacy Rule be
duplicated in the Safeguards Rule, reasoning that in the event of a
need to amend the terms, it would require the amendment of two rules
rather than one.\24\
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\23\ American Council on Education (comment 24, NPRM), at 7.
\24\ HITRUST, (comment 18, NPRM), at 2.
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The Commission is persuaded including all terms from the Privacy
Rule within the Safeguards Rule will improve clarity and ease of use.
Accordingly, the Commission has determined to delete paragraph (a),
since it is no longer necessary to state all terms in the Safeguards
Rule have the same meaning as in the Privacy Rule. It also adds the
Privacy Rule definitions of ``consumer,'' ``customer,'' ``customer
relationship,'' ``financial product or service,'' ``nonpublic personal
information,'' ``personally identifiable financial information,''
``publicly available information,'' and ``you'' to the definitions in
the Final Rule. No substantive change to these definitions is intended.
Authorized User
The Proposed Rule added a definition for the term ``authorized
user'' as paragraph (b). Proposed paragraph (b) defined an authorized
user of an information system as any employee, contractor, agent or
other person that participates in your business operations and is
authorized to access and use any of your information systems and data.
This term was used in Sec. 314.4(c)(10) of the Proposed Rule, which
required financial institutions to implement policies to monitor the
activity of ``authorized users'' and detect unauthorized access to
customer information.
The Commission received one comment on this proposed definition
from the National Automobile Dealers Association (NADA), which
suggested the term ``authorized user'' was used inconsistently and was
too vague.\25\ NADA pointed out while ``authorized user'' is a defined
term, the term ``authorized individual'' was used in proposed Sec.
313.4(c)(1) (addressing access controls for information systems) and
(c)(3) (addressing access controls for physical data). NADA also argued
the inclusion of ``other person that participates in the business
operations of an entity'' within the definition of ``authorized user''
was unclear and created ambiguity in its application.\26\
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\25\ National Automobile Dealers Association (comment 46, NPRM),
at 11-12.
\26\ National Automobile Dealers Association (comment 46, NPRM),
at 11-12.
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The Commission agrees with NADA's points, and, in response,
modifies the Final Rule in two ways. First, the Final Rule replaces the
term ``authorized individual'' with ``authorized user'' in Sec.
313.4(c)(1). As described further below, because the Final Rule
combines Sec. 313.4(c)(3) with Sec. 313.4(c)(1), there is no need to
make a corresponding change to that section.
Second, because the Commission agrees the ambiguities in the
definition of ``authorized user'' from the Proposed Rule could create
confusion, it makes several changes to the definition. It deletes the
phrase ``other person that participates in the business operations of
an entity.'' The Commission agrees this phrase was vague. The
Commission had intended it to cover any person the financial
institution allows to access information systems or data, including,
for example, ``customers'' of the financial institutions. For the
purpose of controlling authorized access and detecting unauthorized
access (which is where the definition of ``authorized user'' appears),
financial institutions should monitor anomalous patterns of usage of
their systems, not only by employees and agents, but also by customers
and other persons authorized to access systems or data. To clarify this
point, the Commission adds ``customer or other person'' to the
definition of ``authorized users.''
The Commission intends that the definition of ``authorized users''
should include anyone who the financial institution authorizes to
access an information system or data, regardless of whether that user
actually uses the data. Thus, for clarity, the Commission has deleted
the requirement that the authorized user be authorized to use the
information system or data. Finally, the definition of authorized user
should include users who can access both ``information systems and
data'' and users authorized to access either information systems or
data. Accordingly, for clarification purposes, the Commission modifies
the definition of authorized user in the Final Rule as any employee,
contractor, agent, customer or other person that is authorized to
access any of your information systems or data.
Security Event
In proposed paragraph (c), the Commission defined security event as
an event resulting in unauthorized access to, or disruption or misuse
of, an information system or information stored on such information
system. This term was used in provisions requiring financial
institutions to establish a written incident response plan designed to
respond to security events. It also appeared in the provision requiring
the coordinator of a financial institution's information security
program to provide an annual report to the financial institution's
governing body; the required report must identify all security events
that took place that year.
Commenters expressed three main concerns with this definition. The
first relates to whether the term ``security event'' should be expanded
to instances in which there is unauthorized access to, or disruption or
misuse of, information in physical form, as opposed to electronic form.
The Proposed Rule used the term ``security event'' instead of
``cybersecurity event'' to clarify that an information security program
encompasses information in both digital and physical forms and that
unauthorized access to paper files, for example, would also be a
security event under the Rule. The Money Services Round Table (MSRT),
however, noted despite the use of the more general ``security'' in the
defined term, the definition itself is limited to events involving
information systems.\27\ The Commission agrees this creates a
contradiction. Accordingly, the Final Rule includes the compromise of
customer information in physical form in the definition of ``security
event.''
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\27\ Money Services Round Table (comment 53, NPRM), at 5 n.14.
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Second, some industry groups argued a ``security event'' should
occur only when there is ``unauthorized access'' to an information
system, not in cases in which there has been a ``disruption or misuse''
of such systems (e.g., a ransomware attack).\28\ These
[[Page 70275]]
commenters argued the disruption or misuse of information systems is
not directly related to the protection of customer information and is,
therefore, outside the Commission's statutory authority.\29\ The
Commission disagrees. Requiring a financial institution to protect
against disruption and misuse of its information system is within the
Commission's authority under the GLBA, which directed the Commission to
promulgate a rule that required financial institutions to ``to protect
against any anticipated threats or hazards to the security or
integrity'' of customer information. A disruption or misuse of an
information system will be, in many cases, a threat to the
``integrity'' of customer information. In addition, disruption or
misuse may also indicate the existence of a security weakness that
could be exploited to gain unauthorized access to customer information.
For example, an event in which ransomware placed on a system is used to
encrypt customer information, rendering it useless, raises the
possibility similar software could have been used to exfiltrate
customer information. Accordingly, the Final Rule retains the inclusion
of ``misuse or disruption'' within the definition of ``security
event.''
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\28\ National Independent Automobile Dealers Association
(comment 48, NPRM), at 4; National Automobile Dealers Association
(comment 46, NPRM), at 12-13; Consumer Data Industry Association
(comment 36, NPRM), at 3-4.
\29\ National Independent Automobile Dealers Association
(comment 48, NPRM), at 4; National Automobile Dealers Association
(comment 46, NPRM), at 12-13.
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Third, several commenters suggested the definition of ``security
event'' be limited to events in which there is a risk of consumer harm
or some other negative effect.\30\ Similarly, some commenters argued
the definition should exclude events that involve encrypted information
in which the encryption key was not compromised or when there is
evidence the information accessed has not been misused.\31\ The
Commission declines to narrow the provision in this manner. It believes
a financial institution should still engage in its incident response
procedures to determine whether the event indicates a weakness that
could endanger customer information and to respond accordingly. The
financial institution can then take the appropriate steps in response.
Further, Sec. 314.4(h) of the Final Rule, which sets forth the
requirement for an incident response plan, requires the incident
response plan be designed to respond only to security events
``materially affecting the confidentiality, integrity, or availability
of customer information,'' limiting the impact of the definition of
``security event.''
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\30\ HITRUST (comment 18, NPRM), at 3; American Council on
Education (comment 24, NPRM), at 7; Mortgage Bankers Association
(comment 26, NPRM), at 4-5; Consumer Data Industry Association
(comment 36, NPRM), at 3-4; National Automobile Dealers Association
(comment 46, NPRM), at 12-13; National Independent Automobile
Dealers Association (comment 48, NPRM), at 4.
\31\ Mortgage Bankers Association (comment 48, NPRM), at 4-5;
National Automobile Dealers Association (comment 46, NPRM), at 12-
13; National Independent Automobile Dealers Association (comment 48,
NPRM) at 4; American Council on Education (comment 24, NPRM), at 7.
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Accordingly, the Final Rule defines security event as an event
resulting in unauthorized access to, or disruption or misuse of, an
information system, information stored on such information system, or
customer information held in physical form. The Proposed Rule placed
this definition as paragraph (c), out of alphabetical order. The Final
Rule adopts it as paragraph (p), placing it in alphabetical order with
the other definitions in Sec. 314.2.
Encryption
Proposed paragraph (e) defined encryption as the transformation of
data into a form that results in a low probability of assigning meaning
without the use of a protective process or key. This term was used in
proposed Sec. 314.4(c)(4), which generally required financial
institutions to encrypt customer information. This definition was
intended to define the process of encryption while not requiring any
particular technology or technique for achieving the protection
provided by encryption.
NADA argued this definition should be made more flexible by adding
an alternative so it would read ``the transformation of data into a
form that results in a low probability of assigning meaning without the
use of a protective process or key or securing information by another
method that renders the data elements unreadable or unusable''
(emphasis added).\32\ On the other hand, others argued the Proposed
Rule's definition did not sufficiently protect customer
information.\33\ For example, the Princeton University Center for
Information Technology Policy (``Princeton Center'') suggested the Rule
should be changed ``to clarify that encryption must be consistent with
current cryptographic standards and accompanied by appropriate
safeguards for cryptographic key material.'' \34\ Similarly, ACE argued
the definition should include ``the transformation of data in
accordance with industry standards.'' \35\
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\32\ National Automobile Dealers Association (comment 46, NPRM),
at 13.
\33\ American Council on Education (comment 24, NPRM), at 7;
Princeton University Center for Information Technology Policy
(comment 54, NPRM), at 4.
\34\ Princeton University Center for Information Technology
Policy (comment 54, NPRM), at 4.
\35\ American Council on Education (comment 24, NPRM), at 7.
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The Commission agrees the proposed definition should be tethered to
some technical standard, without being too prescriptive about what that
standard is. Under the proposed definition, as well as NADA's proposed
definition, financial institutions could have claimed they were
``encrypting'' data if they were aggregating it, scrambling it, or
redacting it in a way that made it possible to re-identify the data
through, for example, the application of common algorithms or programs.
The Commission does not believe this would have provided consumers with
sufficient protection. The Commission also agrees with the commenters
who stated the definition should signal that encryption should be
cryptographically based.
Accordingly, the Final Rule defines encryption as the
transformation of data into a form that results in a low probability of
assigning meaning without the use of a protective process or key,
consistent with current cryptographic standards and accompanied by
appropriate safeguards for cryptographic key material. This definition
does not require any specific process or technology to perform the
encryption but does require that whatever process is used be
sufficiently robust to prevent the deciphering of the information in
most circumstances.
Financial Institution
Incidental Activity
The Proposed Rule made one substantive change to the definition of
``financial institution'' it incorporated from the Privacy Rule. The
change was designed to include entities ``significantly engaged in
activities that are incidental to [] financial activity'' as defined by
the Bank Holding Company Act. This proposed change brought only one
activity into the definition that was not covered before: the act of
``finding'' as defined in 12 CFR 225.86(d)(1). The proposed revision to
paragraph (f) added an example of a financial institution acting as a
finder by ``bringing together one or more buyers and sellers of any
product or service for transactions that the parties themselves
negotiate and consummate.'' This example used the language set forth in
12 CFR 225.86(d)(1), which defines ``finding'' as an activity
incidental to a financial activity under the Bank Holding Company Act.
The Commission
[[Page 70276]]
adopts this proposal without modification.
The change to the definition of ``financial institution'' brings it
into harmony with other agencies' GLB rules.\36\ The change is
supported by the language of the Gramm-Leach-Bliley Act.\37\ The Act
defines a ``financial institution'' as any institution ``the business
of which is engaging in financial activities as described in section
1843(k) of title 12.'' \38\ That section, in turn, describes activities
that are financial in nature as those the Board has determined ``to be
financial in nature or incidental to such financial activity.'' \39\
The Final Rule's definition mirrors this language. The change will not
lead to a significant expansion of the Rule coverage as it expands the
definition only to include entities engaged in activity incidental to
financial activity, as determined by the Federal Reserve Board. The
Board has determined only one activity to be incidental to financial
activity--``acting as a finder.'' \40\
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\36\ See 12 CFR 1016.3(l) (defining ``financial institution''
for entities regulated by agencies other than the FTC). See also 17
CFR 248.3(n) (defining ``financial institution'' to include ``any
institution the business of which is . . . incidental to . . .
financial activities'' for Security and Exchange Commission's rule
implementing GLBA's safeguard provisions.).
\37\ 15 U.S.C. 6801 et seq.
\38\ 15 U.S.C. 6809(3).
\39\ 12 U.S.C. 1843(k).
\40\ 12 CFR 225.86.
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Several commenters who addressed this issue supported the inclusion
of activities incidental to financial activities.\41\ Other commenters
expressed concern the proposed change in the definition would expand
the Rule's coverage to businesses that should not be considered
financial institutions.\42\ They argued the definition of the term
``finder'' is too broad and companies that connect buyers and sellers
in non-financial contexts would be swept inappropriately into the
definition of ``financial institution.'' The Association of National
Advertisers argued advertising agencies could be considered ``finders''
because they play a role in connecting buyers and sellers.\43\
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\41\ Electronic Privacy Information Center (comment 55, NPRM),
at 9; Independent Community Bankers of America (comment 35, NPRM),
at 3; National Automobile Dealers Association (comment 46, NPRM), at
13-16.
\42\ Association of National Advertisers (comment, Workshop), at
4-5; internet Association (comment, Workshop), at 4-5; see also
Anonymous (comment 15, NPRM) (questioning whether any governing body
would oversee any future determinations by the Federal Reserve Board
that activities are incidental to financial activity).
\43\ Association of National Advertisers (comment 5, Workshop),
at 5.
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In response, the Commission notes the Federal Reserve Board
describes acting as a finder as ``bringing together one or more buyers
and sellers of any product or service for transactions that the parties
themselves negotiate and consummate.'' \44\ The Board sets forth
several activities within the scope of acting as a finder, such as
``[i]dentifying potential parties, making inquiries as to interest,
introducing and referring potential parties to each other, [] arranging
contacts between and meetings of interested parties'' and ``[c]onveying
between interested parties expressions of interest, bids, offers,
orders and confirmations relating to a transaction.'' \45\
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\44\ 12 CFR 225.86 (d).
\45\ 12 CFR 225.86 (d)(1)(i).
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Although this language is somewhat broad, its scope is
significantly limited in the context of the Safeguards Rule. First, the
Safeguards Rule applies only to transactions ``for personal, family, or
household purposes.'' \46\ Therefore, only finding services involving
consumer transactions will be covered. Second, the Safeguards Rule
applies only to the information of customers, which are consumers with
which a financial institution has a continuing relationship.\47\
Therefore, it will not apply to finders that have only isolated
interactions with consumers and do not receive information from other
financial institutions about those institutions' customers. This
significantly narrows the types of finders that will have obligations
under the Rule, excluding, the Commission believes, most advertising
agencies and similar businesses that generally do not have continuing
relationships with consumers who are using their services for personal
or household purposes.
---------------------------------------------------------------------------
\46\ See Final Rule 16 CFR 314.2(b)(1).
\47\ 16 CFR 314.1; Final Rule 16 CFR 314.2(c).
---------------------------------------------------------------------------
The Commission believes entities that perform finding services for
consumers with whom they have an ongoing relationship are properly
considered ``financial institutions'' for purposes of the Rule.
Accordingly, the Commission adopts the changes to the definition of
``financial institution'' as proposed.
Other Changes to Definition of ``Financial Institutions''
Other commenters suggested modifying the definition of ``financial
institution'' \48\ in different ways. The Electronic Privacy
Information Center (EPIC) argued the definition should be expanded by
treating more activities as financial activities.\49\ EPIC pointed out
information shared with social media companies, retailers, apps, and
devices generally is not covered under the Safeguards Rule. The
Commission understands the concern that many businesses fall outside
the coverage of the Safeguards Rule, despite handling sensitive
consumer information, but the Commission's authority to regulate
activity under the Safeguards and Privacy Rules is established by the
GLBA. The Rule's application is limited to financial institutions as
defined by that statute and cannot be extended beyond that
definition.\50\ The institutions discussed by EPIC, however, are still
covered by the FTC Act's prohibition against deceptive or unfair
conduct, including with respect to their use and protection of consumer
information.\51\
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\48\ National Pawnbrokers Association (comment 32, NPRM), at 5-6
(arguing that transaction-reporting vendors be included in
definition); National Consumer Law Center and others (comment 58,
NPRM), at 5 (arguing that consumer reporting agencies be included
explicitly in the definition); see also American Escrow Association
(comment, Workshop), at 2-3 (requesting that the Rule specifically
set out the duties of real estate settlement operations and other
businesses that handle but do not maintain sensitive information);
Beverly Enterprises, LLC (comment 3, NPRM), at 3-4 (requesting that
the Rule specifically set out duties related to online
notarizations); Yangxue Li (comment 5, NPRM) (asking whether Rule
would set forth specific guidelines for different industries);
Slobadon Raybolka (comment 17, NPRM) (suggesting that companies that
perform online background checks be covered by the rule); The
Clearing House (comment 49, NPRM) (suggesting a separate set of more
stringent rules for fintech companies).
\49\ Electronic Privacy Information Center (comment 55, NPRM),
at 9.
\50\ See 15 U.S.C. 6801 (requiring agencies to promulgate Rule
establishing standards for financial institutions); 15 U.S.C.
6809(3) (defining ``financial institutions'' as an ``institution the
business of which is engaging in financial activities as described''
in the Bank Holding Company Act).
\51\ In the Matter of Facebook, Inc., Docket No. C-4365 (Apr.
28, 2020); FTC v. Wyndham Worldwide Corporation, 799 F.3d 236 (3d
Cir. 2015); FTC v. D-Link Systems, Inc., Case No. 3:17-cv-00039-JD
(N.D. Cal. July 2, 2019); In the Matter of Twitter, Inc., Docket No.
C-4316 (Mar. 11, 2011).
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The National Federation of Independent Business (NFIB) argued
individuals and sole proprietors should be excluded from the definition
of ``financial institution'' because an individual cannot be an
``institution.'' \52\ When the Privacy Rule was promulgated in 2000,
commenters also suggested the definition should exclude sole
proprietors.\53\ The Commission noted there was no basis to exclude
sole proprietors and ``[w]hether or not a
[[Page 70277]]
commercial enterprise is operated by a single individual is not
determinative'' of whether the enterprise is a financial institution.
The Commission has not changed its position on this matter and declines
to make this change to the definition of ``financial institution.''
---------------------------------------------------------------------------
\52\ National Federation of Independent Business (comment 16,
NPRM), at 2-3.
\53\ Privacy Rule, Final Rule, 65 FR 33645 (May 24, 2000) at
33656.
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The Final Rule adopts this definition as proposed without change.
Information Security Program
Paragraph (i) of the Final Rule adopts the existing Rule's
paragraph (c) and does not alter the definition of ``information
security program.'' The Commission received no comments on this
definition, and accordingly, adopts the current definition in the Final
Rule.
Information System
Proposed paragraph (h) defined information system as a discrete set
of electronic information resources organized for the collection,
processing, maintenance, use, sharing, dissemination or disposition of
electronic information, as well as any specialized system such as
industrial/process controls systems, telephone switching and private
branch exchange systems, and environmental control systems. The term
``information system'' was used throughout the proposed amendments to
designate the systems that must be covered by the information security
program.
The MSRT suggested this definition was too narrow in some respects
and too broad in others.\54\ It argued the definition of ``information
system'' was too narrow because it did not include physical systems or
employees and would exclude them from some of the provisions of the
Rule. Specifically, the MSRT argued that based on this definition, the
penetration tests required by Sec. 314.4(d)(2) would not be required
to test ``potential human vulnerabilities'' such as social engineering
or phishing.\55\ The Commission does not agree. Penetration testing, as
defined by the Final Rule, is a process through which testers ``attempt
to circumvent or defeat the security features of an information
system.'' \56\ One way such security features are tested is through
social engineering and phishing.\57\ The fact that the testing involves
employees with access to the information system, rather than just the
system itself, does not exclude such tests from the definition of
``penetration testing.'' Attempted social engineering and phishing are
important parts of testing the security of information systems and
would not be excluded by this definition.
---------------------------------------------------------------------------
\54\ Money Services Round Table (comment 53, NPRM), at 5-6.
\55\ Id. at 5.
\56\ Final Rule Sec. 314.2(j).
\57\ Indeed, Workshop participant Scott Wallace noted, in
conducting penetration testing, ``the first thing [he does]'' is
generally to ``prepare for the phishing campaign.'' Remarks of Scott
Wallace, Safeguards Workshop Tr., supra note 17, at 131-32.
---------------------------------------------------------------------------
The MSRT also argued the definition was too broad, and was joined
by other commenters in this concern.\58\ These commenters shared a
concern the proposed definition would include systems that are in no
way connected to customer information and would require financial
institutions to include all systems in their possession, regardless of
their involvement with customer information. The Commission agrees the
definition should be limited to those systems that either contain
customer information or are connected to systems that contain customer
information, and adds that limitation to the Final Rule. The Rule does
not limit the definition to only those systems that contain customer
information, because a common source of data breaches is a
vulnerability in a connected system that an attacker exploits to gain
access to the company's network and move within the network to obtain
access to the system containing sensitive information.\59\ Accordingly,
the definition of information system in the Final Rule is modified to a
discrete set of electronic information resources organized for the
collection, processing, maintenance, use, sharing, dissemination or
disposition of electronic information containing customer information
or any such system connected to a system containing customer
information, as well as any specialized system such as industrial/
process controls systems, telephone switching and private branch
exchange systems, and environmental controls systems, that contains
customer information or that is connected to a system that contains
customer information.
---------------------------------------------------------------------------
\58\ Money Services Round Table (comment 53, NPRM), at 5;
Consumer Data Industry Association (comment 36, NPRM), at 4;
American Council on Education (comment 24, NPRM), at 7-8.
\59\ See Remarks of Serge Jorgensen, Safeguards Workshop Tr.,
supra note 17, at 58-59 (noting cybersecurity attacks can take
advantage of systems that are connected to the systems in which
sensitive information is stored); Remarks of Tom Dugas, Safeguards
Workshop Tr., supra note 17, at 138 (noting a vulnerability in one
system can result in the exposure of information maintained in
another system); see also Remarks of Rocio Baeza, Safeguards
Workshop Tr., supra note 17, at 106-07 (noting the heightened
importance of encryption in a context where numerous systems are
connected); Remarks of James Crifasi, Safeguards Workshop Tr., supra
note 17, at 107-08 (same).
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Multi-Factor Authentication
Proposed paragraph (i) defined multi-factor authentication as
authentication through verification of at least two of the following
types of authentication factors: Knowledge factors, such as a password;
possession factors, such as a token; or inherence factors, such as
biometric characteristics. This term was used in proposed Sec.
314.4(c)(6),\60\ which required financial institutions to implement
multi-factor authentication for individuals accessing networks that
contain customer information.
---------------------------------------------------------------------------
\60\ Section 314.4(c)(5) in the Final Rule.
---------------------------------------------------------------------------
Several commenters argued the definition should explicitly include
SMS text messages as an acceptable example of a possession factor or
otherwise to be explicitly allowed.\61\ The Proposed Rule did not
include SMS text messages as an example of a possession factor.\62\
Most commenters who addressed this issue interpreted this exclusion
from the examples as forbidding financial institutions from using SMS
text messages as a possession factor for multi-factor authentication.
That is not the effect of this exclusion, however. The language of the
definition neither prohibits nor recommends use of SMS text messages.
Indeed, SMS text messages are not addressed at all. In some cases, use
of SMS text messages as a factor may be the best solution because of
its low cost and easy use, if its risks do not outweigh those benefits
under the circumstances.\63\ In other instances, however, the use of
SMS text messages may not be a reasonable solution, such as when
extremely sensitive information can be obtained through the access
method being controlled, or when a more secure method can be used for a
comparable price. A financial institution will need to evaluate the
balance of risks for its situation. If, however, the Commission were to
explicitly allow use of SMS text messages, this could be considered a
safe harbor that would not require the company to consider risks
associated with use of SMS text as a factor in a particular use case.
Accordingly, the Final Rule does not include SMS text
[[Page 70278]]
messages in the examples of possession factors.
---------------------------------------------------------------------------
\61\ Electronic Transactions Association (comment 27, NPRM), at
4; U.S. Chamber of Commerce (comment 33, NPRM), at 9; CTIA (comment
34, NPRM), at 7-9; Global Privacy Alliance (comment 38, NPRM), at 9;
National Automobile Dealers Association (comment 46, NPRM), at 29;
National Independent Automobile Dealers Association (comment 48,
NPRM), at 6.
\62\ See, e.g., NIST Special Publication 800-63B, Digital
Identity Guidelines, 5.1.3.3 (restricting use of verification using
the Public Switched Telephone Network (SMS or voice) as an ``out-of-
band'' factor for multi-factor authentication).
\63\ See, e.g., Remarks of Wendy Nather, Safeguards Workshop
Tr., supra note 17, at 231-32.
---------------------------------------------------------------------------
The final Rule adopts the proposed definition of ``multi-factor
authentication'' without change as paragraph (k) of this section.
Penetration Testing
Proposed paragraph (j) defined penetration testing as a test
methodology in which assessors attempt to circumvent or defeat the
security features of an information system by attempting penetration of
databases or controls from outside or inside your information systems.
This term was used in proposed Sec. 314.4(d)(2), which required
financial institutions to continually monitor the effectiveness of
their safeguards or to engage in annual penetration testing. The
Commission received no comments concerning this definition. The Final
Rule adopts the definition from the Proposed Rule as paragraph (m) of
this section.
Personally Identifiable Financial Information
To minimize cross-referencing to the Privacy Rule, as noted above,
the Commission is adding several definitions to the Final Rule. One of
these definitions is ``personally identifiable financial information,''
which is identical to the definition currently contained in the Privacy
Rule. This term is included within the ambit of ``customer
information,'' in both the existing Rule and the Final Rule.
The Princeton Center suggested expanding the definition of
``personally identifiable financial information'' from the Privacy Rule
to include ``aggregate information or blind data that does not contain
personal identifiers such as account numbers, names, or addresses.''
\64\ The Princeton Center further suggested clarifying that, for
information to not be considered ``personally identifiable financial
information,'' the financial institution must be required to
demonstrate the information is not ``reasonably linkable'' to
individuals.
---------------------------------------------------------------------------
\64\ Princeton University Center for Information Technology
Policy (comment 54, NPRM) at 9-10.
---------------------------------------------------------------------------
The Commission does not believe this amendment is necessary. The
definition of ``personally identifiable financial information'' is
already a broad one.\65\ It includes not just information associated
with types of personal information such as a name or address or account
number, but also information linked to a persistent identifier (``any
information you collect through an Internet `cookie' (an information
collecting device from a web server'')).\66\ While there may be some
merit to limiting the exception for aggregate information or blind data
to data that cannot be reasonably linkable to an individual, for
purposes of a rule that can be periodically updated to keep up with
changing technology, the current approach is more concrete and
enforceable, and less subject to differences in interpretation.
---------------------------------------------------------------------------
\65\ See 16 CFR 313.3(o)(1).
\66\ 16 CFR 313.3(o)(2)(i)(F).
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Service Provider
Proposed paragraph (k) adopted the existing Rule's definition and
does not alter the definition of ``service provider.'' The Commission
received no comments on this definition and adopts it as paragraph (q)
of the Final Rule.
Sec. 314.3: Standards for Safeguarding Customer Information
Proposed Sec. 314.3, which required financial institutions to
develop an information security program (paragraph (a)) and set forth
the objectives of the Rule (paragraph (b)), was largely identical to
the existing Rule. It changed only the requirement that ``safeguards''
be based on the elements set forth in Sec. 314.4, by replacing
``safeguards'' with ``information security program.'' The Commission
received no comments on this proposal and adopts it without change in
the Final Rule.
Sec. 314.4: Elements
Proposed Sec. 314.4 altered the current Rule's required elements
of an information security program and added several new elements.
General Comments
The Commission received many comments addressing the new elements,
both in favor of the changes and opposed to them. The comments in favor
of the changes generally argued these changes would protect consumers
by improving the data security of institutions that hold their
information.\67\ Most of the comments opposed to the proposed elements
fell into several categories, objecting: (1) The proposed changes were
too prescriptive and did not allow financial institutions sufficient
flexibility in managing their information security; (2) the proposed
amendments would be too expensive for financial institutions,
particularly smaller institutions, to adopt; and (3) some of the
requirements should not apply to all customer information but should be
limited to some subset of especially ``sensitive'' customer
information. The Commission does not agree with these comments for the
reasons discussed below, and accordingly, retains the general approach
of the Proposed Rule in the Final Rule.
---------------------------------------------------------------------------
\67\ See, e.g., New York Department of Financial Service
(comment 40, NPRM), at 1 (arguing the Proposed Rule would ``further
advance efforts to protect financial institutions and consumers from
cybercriminals.''); Princeton University Center for Information
Technology Policy (comment 54, NPRM), at 1 (stating the Proposed
Rule ``would significantly reduce data security risks for the
customers of financial institutions.''); National Consumer Law
Center and others (comment 58, NPRM), at 2 (stating requirements of
Proposed Rule are ``reasonable and common-sense measures that any
company dealing with large amounts of consumer personal information
should take.'').
---------------------------------------------------------------------------
Flexibility
Many industry groups argued the new proposed elements were too
prescriptive, lacked flexibility, would quickly become outdated, and
would force financial institutions to engage in activities that would
not enhance security.\68\ For example, the Electronics Transactions
Association argued the Proposed Rule would ``limit the ability of
industry to develop new and innovative approaches to information
security.'' \69\ Similarly, CTIA commented the Proposed Rule would
create a ``prescriptive core of requirements that covered businesses
must follow, irrespective of whether risk assessments show they are
necessary.'' \70\
---------------------------------------------------------------------------
\68\ See, e.g., HITRUST (comment 18, NPRM), at 1-2; American
Council on Education (comment 24, NPRM), at 2-4; Cristian Munarriz
(comment 21, NPRM); Electronic Transactions Association (comment 27,
NPRM), at 1-2; National Pawnbrokers Association (comment 32, NPRM),
at 3; CTIA (comment 34, NPRM), at 5; Consumer Data Industry
Association (comment 36, NPRM), at 2; Wisconsin Bankers Association
(comment 37, NPRM), at 1-2; Global Privacy Alliance (comment 38,
NPRM), at 5-6; Bank Policy Institute (comment 39, NPRM), at 2;
American Financial Services Association (comment 41, NPRM), at 4;
National Association of Dealer Counsel (comment 44, NPRM), at 1; ACA
International, (comment 45, NPRM), at 4; National Automobile Dealers
Association (comment 46, NPRM), at 11; National Independent
Automobile Dealers Association (comment 48, NPRM), at 2-3; Money
Services Round Table (comment 53, NPRM), at 1-4; Software &
Information Industry Association (comment 56, NPRM), at 1-3; Gusto
and others (comment 11, Workshop), at 2; Association of National
Advertisers (comment 5, Workshop), at 1-3; internet Association
(comment 9, Workshop), at 2-3.
\69\ Electronic Transactions Association (comment 27, NPRM), at
1-2.
\70\ CTIA (comment 34, NPRM), at 5.
---------------------------------------------------------------------------
The Commission, however, believes the elements provide sufficient
flexibility for financial institutions to adopt information security
programs suited to the size, nature, and complexity of their
organization and information systems. The elements for the information
security programs set forth in this section are high-level principles
that set forth basic issues the
[[Page 70279]]
programs must address, and do not prescribe how they will be addressed.
For example, the requirement that the information security program be
based on a risk assessment sets forth only three general items the
assessment must address: (1) Criteria for evaluating risks faced by the
financial institution; (2) criteria for assessing the security of its
information systems; and (3) how the identified risks will be
addressed. Other than meeting these basic requirements, financial
institutions are free to perform their risk assessments in whatever way
they choose, using whatever method or approach works best for them, as
long as the method identifies reasonably foreseeable risks. The other
elements are similarly flexible. The two elements that are more
prescriptive, encryption and multi-factor authentication, allow
financial institutions to adopt alternative solutions when necessary.
Comments concerning individual elements are addressed separately in the
more detailed analysis below.
Cost
Another common theme among the comments from industry groups was
the proposed information security program elements would be
prohibitively expensive, especially for smaller businesses.\71\
Commenters argued the Proposed Rule would have required financial
institutions to implement expensive changes to their systems and hire
highly-compensated professionals to do so.\72\ Industry groups were
particularly concerned about the requirement that financial
institutions designate a single qualified individual to coordinate
their information security programs, arguing this would require hiring
professionals that were both expensive, with salaries of more than
$100,000 suggested by some, and in limited supply.\73\ Overall, several
commenters argued some financial institutions would be unable to afford
to bring themselves into compliance with the Proposed Rule.\74\
---------------------------------------------------------------------------
\71\ American Council on Education (comment 24, NPRM), at 13-14;
Wisconsin Bankers Association (comment 37, NPRM), at 1-2; American
Financial Services Association (comment 41, NPRM), at 4; National
Association of Dealer Counsel (comment 44, NPRM), at 1; National
Automobile Dealers Association (comment 46, NPRM), at 11; National
Independent Automobile Dealers Association, (comment 48, NPRM), at
3; Gusto and others (comment 11, Workshop), at 2-4; National
Pawnbrokers Association (comment 3, NPRM), at 2; see also Remarks of
James Crifasi, Safeguards Workshop Tr., supra note 17, at 72-74
(describing study that found compliance would be expensive for
automobile dealers).
\72\ See, e.g., Slides Accompanying Remarks of James Crifasi,
FTC, ``NADA Cost Study: Average Cost Per U.S. Franchised
Dealership,'' Event Materials, Information Security and Financial
Institutions: An FTC Workshop to Examine Safeguards Rule (July 13,
2020) https://www.ftc.gov/system/files/documents/public_events/1567141/slides-glb-workshop.pdf (hereinafter Safeguards Workshop
Slides), at 25 (estimating an upfront cost of $293,975 per
dealership, and an recurring annual cost of $276,925); see also
Remarks of James Crifasi, Safeguards Workshop Tr., supra note 17, at
72-75; Remarks of Brian McManamon, Safeguards Workshop Tr., supra
note 17, at 78 (estimating the average annual salary of a CISO can
range from $180,000 to upwards of $400,000); Slides Accompanying
Remarks of Lee Waters, ``Estimated Costs of Proposed Changes,''
Safeguards Workshop Slides, at 26 (estimating the annual costs of a
security program to include: Multi-factor authentication, $50 for
smart card readers, and $10 each for smart cards; a CISO, either an
in-house CISO, $180,000, an in-house cybersecurity analyst, $76,000,
or an outsourced cybersecurity contractor, between $120,000 and
$240,000; penetration testing, average cost $4,800; and physical
security, $215,000 for construction, and $10,000 to $20,000 for new
or upgraded locks); see also Remarks of Lee Waters, Safeguards
Workshop Tr., supra note 17, at 75-76.
\73\ See, e.g., Slides Accompanying Remarks of Lee Waters,
``Estimated Costs of Proposed Changes,'' Safeguards Workshop Slides,
supra note 72, at 26 (estimating costs of an in-house CISO to be
$180,000 annually, and an in-house cybersecurity analyst to be
$76,000 annually; and estimating an outsourced cybersecurity
contractor would cost between $120,000 to $240,000 annually); see
also Remarks of Lee Waters, Safeguards Workshop Tr., supra note 17,
at 75-76; Remarks of Brian McManamon, Safeguards Workshop Tr., supra
note 17, at 78 (estimating that the average annual salary of a CISO
can range from $180,000 to upwards of $400,000).
\74\ See Remarks of Lee Waters, Safeguards Workshop Tr., supra
note 17, at 119-20 (noting when small businesses have to spend money
to hire third-party vendors and security experts to comply with
regulations, that affects consumer prices and small business profit
margins); Slides Accompanying Remarks of James Crifasi, ``NADA Cost
Study: Average Cost Per U.S. Franchised Dealership,'' Safeguards
Workshop Slides, supra note 72, at 25; see also Remarks of James
Crifasi, supra note 17, at 73 (noting the requirements ``start
becoming a little bit unaffordable here.'').
---------------------------------------------------------------------------
The Commission recognizes properly securing information systems can
be an expensive and technically difficult task. However, the Commission
believes the additional costs imposed by the Proposed Rule are
mitigated for several reasons and, ultimately, those costs are
justified in order to protect customer information as required by the
GLBA.\75\ First, for almost 20 years, financial institutions have been
required under the current Safeguards Rule to have information security
programs in place. The current Safeguards Rule requires financial
institutions to ``develop, implement, and maintain a comprehensive
[written] information security program . . . appropriate to [the
financial institutions'] size and complexity, the nature and scope of
[their] activities, and the sensitivity of any customer information at
issue.'' \76\ This comprehensive program must be coordinated by one or
more individuals and based on a risk assessment.\77\ As such, financial
institutions complying with the current Rule will not be required to
establish an information security program from scratch. Instead, they
can compare their existing programs to the revised Rule, and address
any gaps. The Commission believes many of the requirements set forth in
the Final Rule are so fundamental to any information security program
that the information security programs of many financial institutions
will already include them if those programs are in compliance with the
current Safeguards Rule.
---------------------------------------------------------------------------
\75\ The Small Business Administration's Office of Advocacy
commented it was concerned the FTC had not gathered sufficient data
as to either the costs or benefits of the proposed changes for small
financial institutions. Office of Advocacy, U.S. Small Business
Administration (comment 28, NPRM), at 3-4. The FTC shares the Office
of Advocacy's interest in ensuring that regulatory changes have an
evidentiary basis. Many of the questions on which the FTC sought
public comment, both in the regulatory review and in the proposed
Rule context, specifically related to the costs and benefits of
existing and proposed Rule requirements. Following the initial round
of commenting, the Commission conducted the FTC Safeguards Workshop
and solicited additional public comments with the explicit goal of
gathering additional data relating to the costs and benefits of the
proposed changes. See Public Workshop Examining Information Security
for Financial Institutions and Information Related to Changes to the
Safeguards Rule, 85 FR 13082 (Mar. 6, 2020). As detailed throughout
this document, the Commission believes there is a strong evidentiary
basis for the issuance of the final Rule.
\76\ 16 CFR 314.3.
\77\ 16 CFR 314.4.
---------------------------------------------------------------------------
Second, a number of commenters who raised concerns about the costs
imposed by the Rule believed the Proposed Rule would have required the
hiring of a highly-compensated expert to serve as a Chief Information
Security Officer (CISO).\78\ It is correct the Proposed Rule would have
modified the current requirement of designating an ``employee or
employees to coordinate your information security program'' by
requiring the designation of a single qualified individual responsible
for
[[Page 70280]]
overseeing and implementing the security program. This individual was
referred to in the Proposed Rule as a Chief Information Security
Officer or ``CISO.'' As discussed in detail below, the Final Rule does
not use this term, though the concept is the same: The person
designated to coordinate the information security program need only be
``qualified.'' No particular level of education, experience, or
certification is prescribed by the Rule. Accordingly, financial
institutions may designate any qualified individual who is appropriate
for their business. Only if the complexity or size of their information
systems require the services of an expert will the financial
institution need to hire such an individual.\79\
---------------------------------------------------------------------------
\78\ Several speakers at the Safeguards Workshop also raised
this concern. See, e.g., Slides Accompanying Remarks of James
Crifasi, ``NADA Cost Study: Average Cost Per U.S. Franchised
Dealership,'' in Safeguards Workshop Slides, supra note 72, at 25
(estimating appointing a CISO to increase program accountability
would be a one-time, up-front cost of $27,500, with a recurring
annual cost of $51,000); Remarks of James Crifasi, Safeguards
Workshop Tr., supra note 17, at 72-75; Slides Accompanying Remarks
of Lee Waters, ``Estimated Costs of Proposed Changes,'' in
Safeguards Workshop Slides, supra note 72, at 26 (estimating costs
of an in-house CISO to be $180,000 annually, and an in-house
cybersecurity analyst to be $76,000 annually; and estimating that an
outsourced cybersecurity contractor would cost between $120,000 to
$240,000 annually); Remarks of Lee Waters, Safeguards Workshop Tr.,
supra note 17, at 75-76; Remarks of Brian McManamon, Safeguards
Workshop Tr., supra note 17, at 78 (estimating that the average
annual salary of a CISO can range from $180,000 to upwards of
$400,000).
\79\ See, e.g., Remarks of Brian McManamon, Safeguards Workshop
Tr., supra note 17, at 89-90 (noting the size of a financial
institution and the amount and nature of the information it holds
factor into an appropriate information security program); see also
Slides Accompanying Remarks of Rocio Baeza, ``Models for Complying
to the Safeguards Rule Changes,'' in Safeguards Workshop Slides,
supra note 72, at 27-28 (describing three different compliance
models: In-house, outsource, and hybrid, with costs ranging from
$199 per month to more than $15,000 per month); Remarks of Rocio
Baeza, Safeguards Workshop Tr., supra note 17, at 81-83 (describing
three compliance models in more detail).
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Finally, the Commission believes while large financial institutions
may well incur substantial costs to implement complex information
security programs, there are much more affordable solutions available
for financial institutions with smaller and simpler information
systems. For example, there are very low-cost or even free
vulnerability assessment programs available: ``virtual CISO'' services
enable a third party to provide security support for many companies,
splitting the cost of information security professionals among them;
many applications and hardware have built-in encryption requirements;
\80\ and there are affordable multi-factor authentication solutions
aimed at businesses of various sizes.
---------------------------------------------------------------------------
\80\ See Remarks of Brian McManamon, Safeguards Workshop Tr.,
supra note 17, at 78 (describing virtual CISO services).
---------------------------------------------------------------------------
Considering these points, although there will undoubtedly be
expenses involved for some, or even many, financial institutions to
update their programs, the Commission believes these expenses are
justified because of the vital importance of protecting customer
information collected, maintained, and processed by financial
institutions. Congress recognized the importance of securing consumers'
sensitive financial information when it passed the GLBA, which required
the FTC to promulgate the Safeguards Rule. The importance, as well as
the difficulty, of protecting customer information has only increased
in the more than twenty years since the passage of the GLBA. The
Commission believes the amendments to the Safeguards Rule are necessary
to ensure the purposes of the GLBA are satisfied, and so consumers can
have confidence financial institutions are providing reasonable
safeguards to protect their information.
``Sensitive'' Customer Information
Several industry groups also suggested significant portions of the
Proposed Rule should not apply to all customer information, but rather
only to some subset of particularly ``sensitive'' customer information,
such as account numbers or social security numbers.\81\ These
commenters generally argued the definition of ``customer information''
is too broad, as it will include information the commenters felt is not
particularly sensitive, such as name and address, and does not justify
extensive safeguards.\82\
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\81\ See, e.g., Electronic Transactions Association (comment 27,
NPRM), at 2-4; CTIA (comment 34, NPRM), at 10; Global Privacy
Alliance (comment 38, NPRM), at 7-8; American Financial Services
Association (comment 41, NPRM), at 5; ACA International (comment 45,
NPRM), at 13; Money Services Round Table (comment 53, NPRM), at 6-7.
\82\ See, e.g., Electronic Transactions Association (comment 27,
NPRM), at 2; Global Privacy Alliance (comment 38, NPRM), at 7.
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The Commission does not agree that some portion of customer
information is not entitled to the protections required by the Final
Rule. The Safeguards Rule defines ``customer information'' as ``any
record containing nonpublic personal information'' about a customer
handled or maintained by or on behalf of a financial institution.\83\
The Final Rule defines ``nonpublic personal information'' as
``personally identifiable financial information,'' but does not include
information that is ``publicly available.'' Although this definition is
broad, the Commission believes information covered by it is rightfully
considered sensitive and should be protected accordingly. The
businesses regulated by the Safeguards Rule are not just any
businesses, but are financial institutions and are responsible for
handling and maintaining financial information that is both important
to consumers and valuable to attackers who try to obtain the
information for financial gain. Even the fact that a consumer is a
customer of a particular financial institution is generally nonpublic
and can be sensitive. For example, the revelation of a customer
relationship between a consumer and a particular type of financial
institution, such as debt collectors or payday lenders, may make those
customers' information more vulnerable to compromise by facilitating
social engineering or similar attacks. The nature of the relationship
between customers and their financial institutions makes all nonpublic
information held by the financial institution inherently sensitive and
worthy of the level of protection set forth in the Rule.
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\83\ 16 CFR 314.2(b).
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Although the Commission believes all customer information should be
safeguarded by financial institutions and declines to exclude any
portion of that information from protection under any of the provisions
of the Rule, it notes the Rule does contemplate financial institutions
will consider the sensitivity of particular information in designing
their information security programs and safeguards. The elements
required by this section are generally flexible enough to allow
financial institutions to treat various pieces of information
differently. For example, paragraph (c)(1) requires information
security programs to include safeguards that address access control of
customer information. The paragraph requires financial institutions to
develop measures to ensure only authorized users access customer
information, but does not prescribe any particular measures that must
be adopted. When designing these measures, a financial institution may
design a system in which more sensitive information is protected by
more stringent access controls. Even in the more specific provisions of
the Rule, there is flexibility to address the relative sensitivity of
information. For example, in Sec. 313.4(c)(5)'s requirement that
customer information be protected by multi-factor authentication,
financial institutions have flexibility to implement the multi-factor
authentication depending on the sensitivity of the information. The
financial institution may select factors such as SMS text messages to
access less sensitive information, but determine more sensitive
information should be protected by other, more secure, factors for
authentication.
Third-Party Standards and Frameworks
In addition, in the NPRM, the Commission asked whether the
Safeguards Rule should incorporate outside standards, such as the
National Institute of Standards and Technology (``NIST'') framework,
either as required elements of an information security program or as a
safe harbor that would
[[Page 70281]]
treat compliance with such a standard as compliance with the Safeguards
Rule. Some commenters advocated for the adoption of an outside standard
into the Safeguards Rule.\84\ Cisco Systems, Inc. suggested the
Safeguards Rule should be connected to NIST guidance, arguing this
would allow the Rule to evolve as NIST's guidance evolves.\85\ An
anonymous commenter suggested the Rule should comply with
``international standard ISO/IEC 27001.'' \86\ The National Consumer
Law Center argued certain financial institutions with particularly
sensitive customer information should be required to comply with
guidelines issued by NIST and the Federal Financial Institutions
Examination Council (FFIEC).\87\ Other commenters acknowledged the
value of outside standards but were opposed to the Rule requiring
compliance with them.\88\
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\84\ Cisco Systems, Inc. (comment 51, NPRM), at 4; National
Consumer Law Center and others (comment 58), at 2; Anonymous
(comment 2, Workshop).
\85\ Cisco Systems, Inc. (Comment 51, NPRM), at 4.
\86\ Anonymous (comment 2, Workshop). The ISO/IEC 27001 standard
is an information security standard issued by the International
Organization for Standardization. See ISO/IEC 27001 Information
Security Management, ISO, https://www.iso.org/isoiec-27001-information-security.html (last accessed 15 Dec. 2020).
\87\ National Consumer Law Center and others (comment 58, NPRM),
at 2.
\88\ HITRUST (comment 18, NPRM), at 2; see also Consumer Reports
(comment 52, NPRM), at 6-7 (discouraging the adoption of outside
standards as a safe harbor for companies).
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Some commenters suggested while compliance with outside standards
should not be required, compliance should serve as a ``safe harbor''
for compliance with the Rule.\89\ On the other hand, Consumer Reports
noted while such standards can be helpful guidance, they should not be
a safe harbor for compliance with the Rule because financial
institutions must take steps to ensure they are responding to changing
information security threats regardless of the requirements of an
outside framework.\90\
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\89\ Mortgage Bankers Association (comment 26, NPRM), at 2
(suggesting Rule be modified so financial institutions that use the
NIST Cybersecurity Framework would be in de facto compliance with
the Rule); see also National Pawnbrokers Association (comment 32,
NPRM), at 6-7 (advocating for the adoption of safe harbors for small
financial institutions without detailing what should be required to
qualify for the safe harbor).
\90\ Consumer Reports (comment 52, NPRM), at 6-7.
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The Commission declines to change the Rule to incorporate or
reference a particular security standard or framework for a variety of
reasons. First, it is not clear the more detailed frameworks would
apply well to financial institutions of various sizes and industries.
In addition, mandating companies follow a particular security standard
or framework would reduce the flexibility built into the Rule.
Similarly, the Commission declines to make compliance with an outside
standard a safe harbor for the Rule. In such a scenario, the use of
safe harbors would not greatly enhance regulatory stability or
predictability for financial institutions because the Commission would
be required to actively monitor whether those standards continued to
provide equivalent protections for Safeguards compliance and modify the
Rule if a standard became inadequate. In addition, in investigating
possible violations of the Rule, the Commission would be required to
independently verify whether the financial institution had in fact
complied with the outside framework, which would require substantial
effort and expense on the part of the Commission and the target of the
investigation.
Specific Elements
In addition to these generally applicable comments, commenters
addressed many of the individual elements set forth by this section.
These elements are discussed in more detail below.
Paragraph (a)--Designation of a Single Qualified Individual
Proposed paragraph (a) changed the current requirement that
institutions designate an ``employee or employees to coordinate your
information security program'' to instead require the financial
institution to designate ``a qualified individual responsible for
overseeing and implementing your information security program and
enforcing your information security program.'' \91\ This individual was
referenced in the Proposed Rule as a Chief Information Security Officer
or ``CISO.''
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\91\ Section 314.4(a).
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The notice of proposed rulemaking for the Proposed Rule emphasized
the use of the term ``CISO'' was for clarity in the Proposed Rule.\92\
Despite the use of the term ``CISO,'' the Proposed Rule did not require
financial institutions to actually grant that title to the designated
individual. Commenters that responded to this proposal, however,
generally assumed the person designated to coordinate and oversee a
financial institution's information security program would be required
to have the qualifications, duties, responsibilities, and accompanying
pay of a CISO as that position is generally understood in the
information security field.\93\ The position of CISO is generally
limited to large companies with fairly complex information security
systems, so the salary of this position is often very high.\94\
Accordingly, many commenters argued hiring a CISO would be
prohibitively expensive for many financial institutions.\95\
Additionally, commenters argued the hiring of such an in-demand
professional would be difficult because of a general shortage of such
professionals available for hiring.\96\
---------------------------------------------------------------------------
\92\ 84 FR 13165.
\93\ U.S. Chamber of Commerce (comment 33, NPRM), at 10;
National Automobile Dealers Association (comment 46), at 17-19;
National Independent Automobile Dealers Association (comment 48,
NPRM), at 5; ACA International (Comment 45, NPRM), at 8.
\94\ See. e.g., Brian McManamon, Safeguards Workshop Tr., supra
note 17, at 78 (estimating the average annual salary of a CISO can
range from $180,000 to upwards of $400,000).
\95\ National Automobile Dealers Association (comment 46, NPRM),
at 17-19; National Independent Automobile Dealers Association
(comment 48, NPRM), at 5; U.S. Chamber of Commerce (comment 33,
NPRM), at 10; ACA International (comment 45, NPRM), at 8.
\96\ National Automobile Dealers Association (comment 46, NPRM),
at 18-19; U.S. Chamber of Commerce (comment 33, NPRM), at 10; ACA
International (comment 45, NPRM), at 8.
---------------------------------------------------------------------------
By using the term ``CISO,'' the Commission did not intend to
require all financial institutions hire a highly qualified professional
with an extremely high salary, regardless of the financial
institutions' size or complexity. The Proposed Rule required only that
financial institutions designate a ``qualified individual'' to oversee
and enforce their information security program, without specifying any
particular level of experience, education, or compensation, or
requiring any particular duties outside of overseeing the financial
institution's information security program and other requirements
specifically set forth in the Rule.\97\ The use of the term ``CISO'' in
the Proposed Rule, however, caused confusion about the requirements of
this section. Accordingly, the Final Rule replaces the term ``CISO''
with ``Qualified Individual'' to refer to the individual designated
under this section of the Rule.
---------------------------------------------------------------------------
\97\ 84 FR 13175.
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The use of the term ``Qualified Individual'' is meant to clarify
the only requirement for this designated individual is that he or she
be qualified to oversee and enforce the financial institution's
information security program. What qualifications are necessary will
depend upon the size and complexity of a financial institution's
information system and the volume and sensitivity of the customer
information the financial institution
[[Page 70282]]
possesses or processes. The Qualified Individual of a financial
institution with a very small and simple information system will need
less training and expertise than a Qualified Individual for a financial
institution with a large, complex information system. The exact
qualifications will depend on the nature of the financial institution's
information system. Each financial institution will need to evaluate
its own information security needs and designate an individual with
appropriate qualifications to meet those needs.
The Commission believes, in many cases, financial institutions'
current coordinators, whether their own employees or third-party
contractors, may be qualified for this role.\98\ Because the current
Safeguards Rule requires financial institutions to designate an
``employee or employees to coordinate your information security
program,'' financial institutions in compliance with that Rule will
already have one or more information security coordinators. Although
the current Rule does not expressly require that these coordinators be
qualified for that position, the current Rule requires a financial
institution to maintain ``appropriate'' safeguards, regularly test
those safeguards, and evaluate and adjust the information security
program in light of that testing.\99\ In order to effectively comply
with these ongoing requirements, a financial institution's coordinator
must have some level of information security training and knowledge
and, therefore, will likely be an appropriate Qualified Individual
under the Final Rule. Accordingly, in many cases this amendment to the
Rule will not require any additional hiring expenses.
---------------------------------------------------------------------------
\98\ Remarks of James Crifasi, Safeguards Workshop Tr., supra
note 17, at 74 (stating car dealerships can rely on existing staff
for this role); Remarks of Lee Waters, Safeguards Workshop Tr.,
supra note 17, at 78-79 (stating any dealership with any IT staff at
all would have someone who could assume the role of ``qualified
individual,'' perhaps requiring some additional research or outside
help); Remarks of Rocio Baeza, Safeguards Workshop Tr., supra note
17, at 81-82 (stating companies may use an existing employee for the
role and ``for any areas where there may be skill gaps, that can be
supplemented with either certifications or some type of
education.'').
\99\ 16 CFR 314.4.
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In addition to explicitly requiring that the information security
program coordinator be qualified for the role, the Commission proposed
to require the designation of a single employee, as opposed to the
multiple coordinators allowed by the existing Rule. Some commenters
objected to this proposal on the grounds that it would interfere with
financial institutions' flexibility in organizing their information
security personnel.\100\ For example, the Consumer Data Industry
Association (``CDIA'') commented the designation of a single
coordinator would interfere with financial institutions' ability to
organize their program ``to share responsibilities among different
personnel with different strengths.'' \101\ Similarly, ACA
International argued this requirement would prevent financial
institutions from having multiple staff members share responsibilities
for information security programs.\102\
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\100\ National Independent Automobile Dealers Association
(comment 48, NPRM), at 5; Consumer Data Industry Association
(comment 36, NPRM), at 5; National Association of Dealer Counsel
(comment 44, NPRM), at 2; ACA International (comment 45, NPRM), at
7-8; Money Services Round Table (comment 53, NPRM), at 10; Gusto and
others (Comment 11, Workshop), at 2; see also Remarks of James
Crifasi, Safeguards Workshop TR, supra note 17, at 74 (stating
``when we're talking about a small and medium business [. . .] we
really need to see that `qualified individual' be a mix of folks'').
\101\ Consumer Data Industry Association (comment 36, NPRM), at
5.
\102\ ACA International (comment 45, NPRM), at 7-8. NPA raised
similar concerns. National Pawnbrokers Association (comment 3,
Workshop), at 2.
---------------------------------------------------------------------------
Other commenters argued the designation of a single individual as
the coordinator of the information security program provides no proven
benefits over the use of multiple coordinators.\103\ Similarly, NADA
argued that, while the appointment of a single qualified individual
might improve accountability, improving accountability does not improve
security.\104\ On the other hand, a group of consumer and advocacy
groups including the National Consumer Law Center (``NCLC'') argued
appointing a single individual as the coordinator of the information
security program can increase security and prevent security events
based on lack of accountability and poor coordination.\105\
---------------------------------------------------------------------------
\103\ Consumer Data Industry Association (comment 36, NPRM), at
5; National Automobile Dealers Association (comment 46, NPRM), at
19; ACA International (comment 45, NPRM), at 8.
\104\ National Automobile Dealers Association (comment 46,
NPRM), at 19.
\105\ National Consumer Law Center and others (comment 58,
NPRM), at 3 (arguing that a clear line of reporting with a single
responsible individual could have prevented the Equifax consumer
data breach).
---------------------------------------------------------------------------
The Commission retains the requirement to designate a single
qualified individual, because it believes there are clear benefits to
the designation of a single coordinator. Designating a single
coordinator to oversee an information security program clarifies lines
of reporting in enforcing the program, can avoid gaps in responsibility
in managing data security, and improve communication.\106\
---------------------------------------------------------------------------
\106\ Remarks of Adrienne Allen, Safeguards Workshop Tr., supra
note 17, at 182-84 (stating that without a single responsible
individual, information security staff ``can fall into traps of each
relying on someone else to make a hard call . . . [In a program
without a single coordinator] issues can sometimes fall through the
cracks.''); Remarks of Michele Norin, Safeguards Workshop Tr., supra
note 17, at 184-85 (``I think it's extremely important to have a
person in front of the information security program. I think that
there are so many components to understand, to manage, to keep an
eye on. I think it's difficult to do that if it's part of someone
else's job. And so I found that it's extremely helpful to have a
person in charge of that program just from a pure basic management
perspective and understanding perspective.'').
---------------------------------------------------------------------------
The Commission disagrees with the commenter who stated improved
accountability does not lead to improved security. The goal of
improving accountability is to ensure information security staff and
financial institution management give the necessary attention and
resources to information security. In addition, an individual that has
clear responsibility for the strength of a financial institution's
information security program will be accountable to improve the program
and ensure it protects customer information.\107\
---------------------------------------------------------------------------
\107\ See, e.g., Federal Trade Commission Staff Comment on the
Preliminary Draft for the NIST Privacy Framework: A Tool for
Improving Privacy through Enterprise Risk Management (Oct. 24,
2019), at 12-14 (suggesting NIST clarify that one person should be
in charge of the program). https://www.ftc.gov/system/files/documents/advocacy_documents/ftc-staff-comment-preliminary-draft-nist-privacy-framework/p205400nistprivacyframeworkcomment.pdf.
---------------------------------------------------------------------------
The major breach that occurred at national consumer reporting
agency Equifax in 2017 demonstrates the importance of clear lines of
reporting and accountability in management of information security
programs. The U.S. House Committee on Oversight and Government Reform
issued a report on the breach that identified Equifax's organization as
one of the major causes of the breach.\108\ The report indicated
Equifax's division of responsibility for information security between
two individuals that reported to two different company officers
contributed to failures of communication, oversight, and enforcement
that led to millions of consumers' data being compromised.\109\
Increasing accountability for individuals and organizations can
directly lead to improved security for customer information.
---------------------------------------------------------------------------
\108\ U.S. House, Committee on Oversight and Government Reform,
Majority Staff Report, The Equifax Data Breach, at 55-62, 115th
Congress (Dec. 2018).
\109\ Id.
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Finally, the Commission does not believe the requirement to
designate a single Qualified Individual would
[[Page 70283]]
prevent the approach of having multiple people responsible for
different aspects of the program, as some commenters asserted. While
the Qualified Individual appointed as the coordinator of the
information security program would have ultimate responsibility for
overseeing and managing the information security program, financial
institutions may still assign particular duties and responsibilities to
other staff members.\110\ A financial institution may organize its
personnel in teams or share decision making between individuals.
Moreover, the Rule does not require this be the Qualified Individual's
sole job--he or she may have other duties. The Rule requires only that
one individual assume the ultimate responsibility for overseeing and
enforcing the program.
---------------------------------------------------------------------------
\110\ See Remarks of Adrienne Allen, Safeguards Workshop Tr.,
supra note 17, at 189-90 (noting that, even where there is a single
point person, decision makers rarely operate ``in a vacuum.'').
---------------------------------------------------------------------------
Accordingly, the Final Rule requires designation of a single
Qualified Individual, as proposed, but no longer uses the term
``CISO.''
Third-Party Coordinators
The Proposed Rule stated that the Qualified Individual would not
need to be an employee of the financial institution, but could be an
employee of an affiliate or a service provider. This change was
intended to accommodate financial institutions that may prefer to
retain an outside expert, lack the resources to employ a qualified
person to oversee a program, or decide to pool resources with
affiliates to share staff to manage information security. The Proposed
Rule required, however, that to the extent a financial institution used
a service provider or affiliate, the financial institution must still:
(1) Retain responsibility for compliance with the Rule; (2) designate a
senior member of its personnel to be responsible for direction and
oversight of the Qualified Individual; and (3) require the service
provider or affiliate to maintain an information security program that
protects the financial institution in accordance with the Rule.
The Commission received one comment on this aspect of the
provision. NADA argued that, because a senior member of a financial
institution's personnel must be responsible for the oversight of a
third-party Qualified Individual, the supervising individual would need
to be an expert in information security, and the financial institution
would still be required to hire an expensive employee to supervise the
third-party Qualified Individual.\111\ The Rule, however, does not
require individuals responsible for overseeing third-party Qualified
Individuals to be information security experts themselves. The senior
personnel that oversees the third-party Qualified Individual is charged
with supervising and monitoring the third-party so the financial
institution is aware of its data security needs and the safeguards
being used to protect its information systems. This person does not
need to be qualified to coordinate the information security program him
or herself. Technical staff are frequently supervised by employees or
officers with limited technical expertise.\112\ The Rule requires only
the same responsibilities a supervisor would have in overseeing an in-
house information security coordinator of a financial institution.
Accordingly, the Commission adopts the proposed paragraph without
modification.
---------------------------------------------------------------------------
\111\ National Automobile Dealers Association (comment 46,
NPRM), at 18.
\112\ See Remarks of James Crifasi, Safeguards Workshop Tr.,
supra note 17, at 79-80 (stating that, in his work as a third-party
information security service provider, he is often overseen by
executives without technical backgrounds); see also Remarks of Rocio
Baeza, Safeguards Workshop Tr., supra note 17, at 105-06 (noting
distinction in how executives and technical staff may understand
their organizations' use of encryption); Remarks of Karthik
Rangarajan, Safeguards Workshop Tr., supra note 17, at 196
(discussing challenges inherent in discussing technical issues with
board members who lack a technical background)and at 211 (noting
organizations can successfully manage their relationships with
third-party service providers without ``becom[ing] experts'' in the
services provided).
---------------------------------------------------------------------------
Proposed Paragraph (b)
The NPRM proposed amending paragraph (b) to clarify a financial
institution must base its information security program on the findings
of its risk assessment by adding an explicit statement that financial
institutions' ``information security program [shall be based] on a risk
assessment.'' \113\ In addition, the Proposed Rule removed existing
Sec. 314.4(b)'s requirement that the risk assessment must include
consideration of specific risks \114\ because these specific risks are
set forth elsewhere in the Proposed Rule.\115\ The Commission received
no comments on this paragraph and adopts paragraph (b) as proposed.
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\113\ Proposed 16 CFR 314.4(b).
\114\ Proposed 16 CFR 314.4(b)(1), (2), and (3).
\115\ See, e.g., Proposed 16 CFR 314.4(c)(2) and (10) and (e).
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Written Risk Assessment
Paragraph (b)(1) of the Proposed Rule required the risk assessment
be written and include: (1) Criteria for the evaluation and
categorization of identified security risks or threats the financial
institution faces; (2) criteria for the assessment of the
confidentiality, integrity, and availability of the financial
institution's information systems and customer information, including
the adequacy of the existing controls in the context of the identified
risks or threats to the financial institution; and (3) requirements
describing how identified risks will be mitigated or accepted based on
the risk assessment and how the information security program will
address the financial institution's risks. Commenters raised several
concerns about the Proposed Rule's provisions on risk assessment, none
of which merit changes to the Proposed Rule.
First, some commenters objected to the level of specificity of the
Proposed Rule, with some arguing the requirements were too specific,
and others arguing the requirements were not specific enough. With
respect to the Proposed Rule being too specific, commenters such as ACA
and U.S. Chamber of Commerce argued it removed financial institutions'
flexibility in performing risk assessments.\116\ The U.S. Chamber of
Commerce contended, because the criteria are too specific, a risk
assessment performed using them would not be ``sufficiently risk
based.'' \117\ CDIA expressed concern it was unclear ``what level of
specificity is required'' in the written risk assessment and if
detailed risk assessments are required, they ``could themselves become
a roadmap for a security breach.'' \118\
---------------------------------------------------------------------------
\116\ ACA International (comment 45, NPRM), at 12; U.S. Chamber
of Commerce (comment 33, NPRM), at 10.
\117\ U.S. Chamber of Commerce (comment 33, NPRM), at 10.
\118\ Consumer Data Industry Association (comment 36, NPRM), at
5.
---------------------------------------------------------------------------
In contrast, several other commenters recommended the Rule set
forth more specific criteria for risk assessments. Inpher suggested the
Commission add a requirement that risk assessments require financial
institutions to examine ``technologies that are deployed by [financial
institutions'] information security systems, and evaluate the
feasibility'' of adopting ``privacy enhancing technologies'' that would
better address vulnerabilities and thwart threats.\119\ Inpher also
recommended the Rule require financial institutions to conduct privacy
impact assessments with ``specific guidelines to review internal data
protection standards and adherence to fair information
[[Page 70284]]
principles.'' \120\ The Princeton Center suggested the Rule require
risk assessments to include threat modeling and adopt the concept of
defense in depth.\121\ HALOCK Security Labs recommended the Rule
specifically require ``a) That risk assessments should evaluate the
likelihood of magnitudes of harm that result from threats and errors,
b) That risk assessments should explicitly estimate foreseeable harm to
consumers as well as to the covered financial institutions, c) That
risk mitigating controls are commensurate with the risks they address,
[and] d) That risk assessments estimate likelihoods and impacts using
available data.'' \122\
---------------------------------------------------------------------------
\119\ Inpher, Inc. (comment 50, NPRM), at 4.
\120\ Id.
\121\ Princeton University Center for Information Technology
Policy (comment 54, NPRM), at 2.
\122\ HALOCK Security Labs (comment 4, Workshop) at 2. See Rocio
Baeza (comment 12, Workshop) at 2-3 (suggesting a detailed list of
requirements for the risk assessment).
---------------------------------------------------------------------------
The Commission believes the Proposed Rule's provisions on risk
assessment strike the right balance between specificity and
flexibility. The amendments provide only a high-level list of criteria
the risk assessment must address. They essentially require that the
financial institution identify and evaluate risks to its systems,
evaluate the adequacy of its existing controls for addressing these
risks, and identify how these risks can be mitigated. These are core
requirements of any risk-assessment.\123\ The Rule does not require any
specific methodology or approach for performing the assessment.
Financial institutions are free to perform the risk assessment using
the method most suitable for their organization as long as that method
meets the general requirements set forth in the Rule. \124\ And while
the Commission agrees the additional requirements suggested by some
commenters may be beneficial in many, or even most, risk assessments,
it believes a more flexible requirement will better allow financial
institutions to find the risk assessment method that best fits their
organization and will better accommodate changes in recommended
approaches in the future.
---------------------------------------------------------------------------
\123\ See, e.g., Remarks of Chris Cronin, Safeguards Workshop
Tr., supra note 17, at 25 (stating that evaluating the likelihoods
and impacts of potential security risks and evaluating existing
controls is an important component of a risk assessment); Remarks of
Serge Jorgensen, Safeguards Workshop Tr., supra note 17, at 29-30
(emphasizing the importance of risk assessments as tools for
adjusting existing security measures to account for both current and
future security threats); Nat. Inst. of Sci. & Tech., U.S. Dept. of
Com., Special Publication 800-30 Rev. 1, Guide for Conducting Risk
Assessments 1 (2012) (describing the purpose of risk assessments as
the identification of and prioritization of risk in order to inform
decision making and risk response).
\124\ ACA International further argued because risk assessment
criteria are generally understood, they do not need to be included
in the Final Rule. ACA International (comment 45, NPRM). The
Commission believes it is helpful to be clear about the criteria the
risk assessment must contain, even if those criteria are commonly
understood.
---------------------------------------------------------------------------
In response to CDIA's concern about the risk assessment providing a
roadmap for bad actors, certainly, the written risk assessment will
include details about a financial institution's systems that could
assist an attacker if obtained by the attacker. Accordingly, the risk
assessment should be protected as any other sensitive information would
be. The Commission does not view this concern as a reason not to create
such a document. Indeed, the concern would apply to any written
document that provides information regarding a financial institution's
information security procedures, from a network diagram to written
security code.
Second, some commenters argued implementing the risk-assessment
provision as proposed would be too expensive and difficult for
financial institutions.\125\ For example, NADA argued the contemplated
risk assessment would be very costly because the criteria set out in
paragraph (b)(1) are ``well outside the scope of expertise of anyone
but the most sophisticated IT professionals.'' \126\ In response,
although the Commission declines to modify the provision, it addresses
NADA's concern in Sec. 314.6 by exempting financial institutions that
maintain information concerning fewer than 5,000 consumers from the
specific requirements of paragraph (b)(1), and from the requirement to
memorialize the risk assessment in writing. For those financial
institutions that do not qualify for this exemption, the Commission
believes they will be able to perform the required risk assessment in a
manner that is practical and affordable for their institution. There
are many resources available to financial institutions to aid in risk
assessment, including service providers that can assist institutions of
various sizes.\127\
---------------------------------------------------------------------------
\125\ National Association of Dealer Counsel (comment 44, NPRM),
at 3; National Automobile Dealers Association (comment 46, NPRM), at
20.
\126\ National Automobile Dealers Association (comment 46,
NPRM), at 20.
\127\ See, e.g., Slides Accompanying Remarks of Rocio Baeza, in
Safeguards Workshop Slides, supra note 72, at 27-28 (describing
three different compliance models: In-house, outsource, and hybrid,
with costs ranging from $199 per month to more than $15,000 per
month); Slides Accompanying the Remarks of Brian McManamon, ``Sample
Pricing,'' in Safeguards Workshop Slides, supra note 72, at 29
(estimating the cost of cybersecurity services based on number of
endpoints: $2K-$5K per month for 25-250 endpoints; $5K-$15K for 250-
750 endpoints; $15K-$30K for 750-1,000 endpoints; and $30K-$50K for
1,500-2,500 endpoints); see also Remarks of Brian McManamon,
Safeguards Workshop Tr., supra note 17, at 83-85.
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While acknowledging there will be some cost to conducting a risk
assessment, the Commission believes a properly conducted risk
assessment is an essential part of a financial institution's
information security program. The entire Safeguards Rule, both as it
currently exists and as amended, requires that the information security
program be based on a risk assessment. An information security program
cannot properly guard against risks to customer information if those
risks have not been identified and assessed.\128\ The Commission
believes this requirement properly emphasizes the importance of robust
risk assessments, while providing financial institutions sufficient
flexibility in performing these assessments. Finally, the Commission
notes, because the current Rule also requires that a risk assessment be
performed, financial institutions that have complied with the current
Rule have already conducted a risk assessment. And, even if that risk
assessment was not memorialized in writing, the work conducted for that
risk assessment should be useful in performing future risk assessments.
---------------------------------------------------------------------------
\128\ See Remarks of Chris Cronin, Safeguards Workshop Tr.,
supra note 17, at 48-49 (noting all information security frameworks
and guidelines are based on risk analysis).
---------------------------------------------------------------------------
Third, NADA objected to the requirement that the risk assessment
describe how each identified risk will be ``mitigated or accepted,''
arguing it is not clear when it is appropriate to ``accept a risk.''
\129\ NADA argued that documenting a decision to accept a risk would
``create a record that can be distorted and second guessed after the
fact,'' and ``context is lost when it is written and reviewed after an
incident has occurred.'' \130\ The Rule does not require a financial
institution to mitigate every risk identified, no matter how remote or
insignificant. Instead, the Rule allows a financial institution to
accept a risk, if its assessment of the risk reveals that the chance it
will produce a security event is very small, if the consequences of the
risk are minimal, or the cost of mitigating the risk far outweighs the
benefit. In those cases, the financial institution may choose to accept
the risk. A financial institution concerned that its decision to accept
a risk will later be questioned may choose to set forth whatever
context or
[[Page 70285]]
explanation it sees fit in the written assessment.
---------------------------------------------------------------------------
\129\ National Automobile Dealers Association (comment 46, NPRM)
at 20.
\130\ Id.
---------------------------------------------------------------------------
Finally, while several commenters supported the idea of conducting
``periodic'' risk assessments as required by the Proposed Rule,\131\
NADA objected it is unclear how often financial institutions need to
conduct risk assessments under this section. \132\ In order to be
effective, a risk assessment must be subject to periodic reevaluation
to adapt to changes in both financial institutions' information systems
and changes in threats to the security of those systems. The Commission
declines, however, to set forth a specific schedule for risk
assessments. The Commission believes it would not be appropriate to set
forth an inflexible schedule for periodic risk assessments because each
financial institution must set its own schedule based on the needs and
resources of its institution.
---------------------------------------------------------------------------
\131\ Inpher, Inc. (comment 50, NPRM), at 3; Global Privacy
Alliance (comment 38, NPRM), at 11.
\132\ National Automobile Dealers Association (comment 46,
NPRM), at 20.
---------------------------------------------------------------------------
The Final Rule adopts Sec. 314.4(b) as proposed.
Paragraph (c)
Proposed paragraph (c) retained the existing Rule's requirement for
financial institutions to design and implement safeguards to control
the risks identified in the risk assessment. In addition, it added more
detailed requirements for what the safeguards must address (e.g.,
access controls, data inventory, disposal, change management,
monitoring). These specific requirements represent elements of an
information security program that the Commission views as essential and
should be addressed by all financial institutions.\133\
---------------------------------------------------------------------------
\133\ NADA disagreed with the Commission's statement in the NPRM
for the Proposed Rule that ``most financial institutions already
implement'' the specific requirements in paragraph (c), stating that
many financial institutions ``do not currently implement some or all
of these measures.'' National Automobile Dealers Association
(comment 46, NPRM), at 20. The Commission continues to believe most
financial institutions institute some form of most of these
measures, such as access control, secure disposal, and monitoring
authorized users, based on its enforcement and business outreach
experience. While NADA's statement that some financial institutions
implement none of the measures may be true, this underlines the
necessity of making these elements explicit requirements under the
Rule, as these elements are necessary for a reasonable information
security program for all financial institutions. Indeed, a financial
institution that utilizes none of these elements and exercises no
access control, no secure disposal procedures, and does not monitor
users of its systems is unlikely to be in compliance with the
current Rule.
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As a preliminary matter, Global Privacy Alliance (GPA) argued all
of these elements should be made optional and financial institutions
should be required only to take these elements ``into consideration''
when designing their information security programs.\134\ While the
Commission agrees it is important that the Rule allow financial
institutions flexibility in designing their information security
programs, these elements are such important parts of information
security that each program must address them. For example, an
information security program that has no access controls or does not
contain any measures to monitor the activities of users on the systems
cannot be said to be protecting the financial institution's systems.
The Final Rule, therefore, continues to require each information
security program to contain safeguards that address these elements,
with modifications described below.
---------------------------------------------------------------------------
\134\ Global Privacy Alliance (comment 38, NPRM), at 6.
---------------------------------------------------------------------------
Access Controls
Proposed paragraph (c)(1) required financial institutions to
``place access controls on information systems, including controls to
authenticate and permit access only to authorized individuals to
protect against the unauthorized acquisition of customer information
and to periodically review such access controls.''
Commenters suggested a number of modifications to this provision.
First, GPA argued this provision should require controls on access to
information, rather than on information systems.\135\ Second, several
commenters suggested adding further safeguards to the ``access
control'' requirement. For example, the Princeton Center argued the
Rule should adopt the ``Principle of Least Privilege,'' a principle
that no user should have access greater than is necessary for
legitimate business purposes.\136\ Reynolds and Reynolds Company
(Reynolds) suggested the Rule clarify that financial institutions must
``vet, control, and monitor user access to sensitive information.''
\137\ Consumer Reports argued paragraph (c)(1) should be amended to
control access not just to authorized users, but to further limit
access to when such access is reasonably necessary.\138\ ACE argued
that any requirement for physical access control allow financial
institutions to determine which locations should have restricted
access, rather than limiting physical access to every building and
office within, say, a college campus.\139\ Finally, some commenters
argued the proposed language was too vague,\140\ particularly as it
applied to vendor-supplied services.\141\
---------------------------------------------------------------------------
\135\ Global Privacy Alliance (comment 38, NPRM), at 9-10.
\136\ Princeton University Center for Information Technology
Policy (comment 54, NPRM), at 4-5.
\137\ Reynolds and Reynolds Company (comment 7, Workshop), at 7.
\138\ Consumer Reports (comment 52, NPRM), at 7.
\139\ American Council on Education (comment 24, NPRM), at 10.
\140\ National Automobile Dealers Association (comment 46,
NPRM), at 23; National Independent Automobile Dealers Association
(comment 48, NPRM), at 5; American Council on Education (comment 24,
NPRM), at 10;
\141\ National Independent Automobile Dealers Association
(comment 48, NPRM), at 5; American Council on Education (comment 24,
NPRM), at 10.
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In response to the comments, the Commission makes a number of
changes to this provision in the Final Rule. First, the Commission
clarifies that the Rule requires access controls, not just for
information systems, but for all customer information, whether it is
housed in information systems or in physical locations. To streamline
the Rule, the Final Rule combines the separate physical access controls
requirement found in proposed paragraph (c)(3) with this paragraph.
Physical access controls will generally be most important in situations
in which sensitive customer information is kept in physical form (such
as hard-copy loan applications, or printed consumer reports). It may
also require physical restrictions to access machines that contain
customer information (e.g., locked doors and/or key card access to a
computer lab).\142\ The Commission declines to make any changes in
response to ACE's concern that every physical location will need to be
protected--as the Rule states, physical controls must be implemented to
protect unauthorized access to customer information. Where no customer
information exists, the Rule would not require physical controls.
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\142\ NIADA suggested instituting physical access controls would
cost a dealership $215,000 because each computer would need to have
its own lockable cubicle and there would need to be lockable offices
for all desks. See Remarks of Lee Waters, Safeguards Workshop Tr.,
supra note 17, at 76. As originally promulgated, the Rule already
requires financial institutions implement ``physical safeguards that
are appropriate to your size and complexity.'' 16 CFR 314.3. The
Final Rule's requirement is consistent with that longstanding
requirement. If computers have technical safeguards preventing
unauthorized users from accessing customer information, they usually
will not need to be in a lockable area, particularly if they are not
generally left unattended and are not likely to be stolen.
Similarly, desks would need to be in lockable offices only if they
contain accessible paper records. A lockable file cabinet may be a
more economical solution.
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Second, the Commission agrees with the commenters who advocated
that the Rule implement the principle of least privilege. The
Commission does not believe it is appropriate, for example, for larger
companies to give all
[[Page 70286]]
employees and service providers access to all customer information.
Such overbroad access could create additional harm in the event of an
intruder gaining access to a system by impersonating an employee or
service provider. Accordingly, the Commission clarifies this in the
Final Rule by adding a requirement that not only must a financial
institution implement access controls, but it should also restrict
access only to customer information needed to perform a specific
function.
As to the suggestion the Commission impose monitoring requirements
for access, that requirement exists in paragraph (c)(8). And as to the
suggestion the requirement is too vague as to service providers, the
Commission believes the Final Rule is clear: When a vendor accesses the
financial institution's data or information systems, the financial
institution must ensure appropriate access controls are in place.
Separately, under paragraph (f), the financial institution must
reasonably oversee the vendor's safeguards, which would necessarily
include access controls for the vendor's system.
Finally, as to the suggestion the provision is vague generally, as
discussed above, the Final Rule seeks to preserve flexibility in its
provisions, both so that financial institutions can design programs
appropriate for their systems and so that changes in technology or
security practices will not render the Rule obsolete. The Commission
believes maintaining less prescriptive requirements is the best way to
achieve the goal of flexibility and protecting customer
information.\143\
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\143\ NPA expressed concern about the effect of the Rule on
pawnbrokers who the commenter stated are required by law to allow
law enforcement access to their physical records. National
Pawnbrokers Association (comment 32, NPRM), at 7. Nothing in the
Rule conflicts with any such requirements. Law enforcement
appropriately accessing customer information under a law that
requires that access would be considered authorized use under those
circumstances.
---------------------------------------------------------------------------
Accordingly, the Commission combines paragraphs (c)(1) and (3) from
the Proposed Rule into revised paragraph (c)(1) of the Final Rule,
which requires implementing and periodically reviewing access controls
on customer information, including technical and, as appropriate,
physical controls to (1) authenticate and permit access only to
authorized users to protect against the unauthorized acquisition of
customer information and (2) limit authorized users' access only to
customer information that they need to perform their duties and
functions, or, in the case of customers, to access their own
information.\144\
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\144\ As noted above, the Commission is also changing the term
``authorized individuals'' to ``authorized users.''
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System Inventory
In the NPRM, the Commission proposed to require the financial
institution to ``[i]dentify and manage the data, personnel, devices,
systems, and facilities that enable [the financial institution] to
achieve business purposes in accordance with their relative importance
to business objectives and [the financial institution's] risk
strategy.'' \145\ This requirement was designed to ensure the financial
institution inventoried the data in its possession, inventoried the
systems on which that data is collected, stored, or transmitted, and
had a full understanding of the relevant portions of its information
systems and their relative importance.\146\ The Commission retains this
provision in the Final Rule without modification.
---------------------------------------------------------------------------
\145\ Proposed 16 CFR 314.4(c)(2).
\146\ See, e.g., Complaint at 11, FTC v. Wyndham Worldwide
Corp., No. CV 2:12-cv-01365-SPL (D. Ariz. June 26, 2012) (alleging
company failed to provide reasonable security by, among other
things, failing to inventory computers connected to its network).
---------------------------------------------------------------------------
Commenters raised two general objections to this provision. First,
some commenters argued it was too vague and that it was not clear how
such an inventory should be conducted or what systems should be
included.\147\ The Commission believes the language provides effective
guidance while still allowing a variety of approaches by financial
institutions in identifying systems involved in their businesses. This
provision requires a financial institution to identify all ``data,
personnel, devices, systems, and facilities'' that are a part of its
business and to determine their importance to the financial
institution. This inventory of systems must include all systems that
are a part of the business so the financial institution can locate all
customer information it controls, the systems connected to that
information, and how they are connected. This inventory forms the basis
of an information security program because a system cannot be protected
if the financial institution does not understand its structure or know
what data is stored in its systems.
---------------------------------------------------------------------------
\147\ National Automobile Dealers Association (comment 46,
NPRM), at 23-24; American Financial Services Association (comment
41, NPRM), at 5; American Council on Education (comment 24, NPRM),
at 10.
---------------------------------------------------------------------------
Second, ACE suggested the scope of this provision should be limited
to systems ``directly related to the privacy and security of `customer
information.' '' \148\ The Commission declines to make this change
because the purpose of this provision is to allow financial
institutions to obtain a clear picture of their systems and to identify
where customer information is kept and how it can be accessed. An
inventory must examine all systems in order to identify all systems
that contain customer information or are connected to systems that do.
If a financial institution does not first examine all systems and
instead limits the inventory to systems it considers to be directly
related to security, it could give an incomplete picture of the
financial institution's systems and could result in some customer
information or ways to connect to that information being
overlooked.\149\
---------------------------------------------------------------------------
\148\ American Council on Education (comment 24, NPRM), at 10.
\149\ Another commenter criticized proposed paragraph (c)(2)
because some financial institutions ``have no control'' over which
networks they transmit customer information. National Pawnbrokers
Association (comment 32, NPRM), at 7. Paragraph (c)(2) does not
require a financial system to identify all networks over which it
may transmit customer information. See also, infra, this document's
discussion of NPA's comments on Sec. 314.4(f) of the Final Rule,
noting financial institutions are generally not required to oversee
other entities' service providers over which they have no control.
---------------------------------------------------------------------------
The Commission adopts paragraph (c)(2) of the Proposed Rule as
final, without modifications.
Access to Physical Location
Proposed paragraph (c)(3) would have required that financial
institutions restrict access to physical locations containing customer
information only to authorized individuals. The Final Rule combines
this section with proposed paragraph (c)(1) in order to eliminate
redundancy and clarify that access controls must consider both
electronic and physical access.
Encryption
Proposed paragraph (c)(4) required financial institutions to
encrypt all customer information, both in transit over external
networks and at rest. The Proposed Rule allowed financial institutions
to use alternative means to protect customer information, subject to
review and approval by the financial institution's Qualified
Individual.
Several commenters supported the inclusion of an encryption
requirement.\150\ In fact, some suggested
[[Page 70287]]
the Proposed Rule did not go far enough in requiring encryption. Inpher
suggested the Rule should require encryption of customer information
when in use, in addition to when in transit or at rest.\151\ The
Princeton Center suggested requiring encryption of data while in
transit over internal networks, in addition to requiring it for
external networks, noting the blurring of the distinction between
internal and external networks.\152\
---------------------------------------------------------------------------
\150\ Inpher, Inc. (comment 50, NPRM), at 4; Princeton
University Center for Information Technology Policy (comment 54,
NPRM), at 3; Electronic Privacy Information Center (comment 55,
NPRM), at 8; National Consumer Law Center and others (comment 58,
NPRM), at 3.
\151\ Inpher, Inc. (comment 50, NPRM), at 4.
\152\ Princeton University Center for Information Technology
Policy (comment 54, NPRM), at 3.
---------------------------------------------------------------------------
In contrast, others argued encryption could be too expensive and
technically challenging for some financial institutions and should not
be required in all cases.\153\ Indeed, GPA argued the Rule should not
require encryption at all, financial institutions should be free to
adopt other protective measures for customer information, and the Rule
should allow financial institutions to ``determine the controls that
are most appropriate for protecting the sensitive information that they
handle.'' \154\ Similarly, some commenters argued financial
institutions should be required to encrypt customer information only
when the risk to the customer information justifies it.\155\ Others
suggested encryption in more limited circumstances, such as on systems
``to which unauthorized individuals may have access,'' \156\ for
sensitive data,\157\ or for data in transit.\158\ The Mortgage Bankers
Association argued encryption at rest is unnecessary because customer
information at rest in a financial institution's system is sufficiently
protected by controlling access to the system.\159\ Two commenters
stated guidelines issued by the Federal Financial Institutions
Examination Council (FFIEC) do not require most banks to encrypt data
at rest, unless the institution's risk assessment indicates such
encryption is necessary.\160\
---------------------------------------------------------------------------
\153\ National Pawnbrokers Association (comment 32, NPRM), at 3;
U.S. Chamber of Commerce (comment 33, NPRM), at 11; CTIA (comment
34, NPRM) at 10; Wisconsin Bankers Association (comment 37, NPRM),
at 2.
\154\ Global Privacy Alliance (comment 38, NPRM), at 7-8.
\155\ Bank Policy Institute (comment 39, NPRM), at 14; Mortgage
Bankers Association (comment 26, NPRM), at 6; Global Privacy
Alliance (comment 38, NPRM), at 7-8.
\156\ Bank Policy Institute (comment 39, NPRM), at 14.
\157\ U.S. Chamber of Commerce (comment 33, NPRM), at 11;
American Financial Services Association (comment 41, NPRM), at 5;
ACA International (comment 45, NPRM), at 13; CTIA (comment 34,
NPRM), at 10.
\158\ Mortgage Bankers Association (comment 26, NPRM), at 6;
Wisconsin Bankers Association (comment 37, NPRM), at 2; American
Financial Services Association (comment 41, NPRM), at 5; Ken
Shaurette (comment 19, NPRM), (suggesting the Commission consider
whether ``databases, applications and operating systems are prepared
to fully support full encryption without significant performance
impact or ability to continue to function.''); National Automobile
Dealers Association (comment 46, NPRM), at 25-26 (arguing the terms
``at rest'' and ``in transit'' are unclear).
\159\ Mortgage Bankers Association (comment 26, NPRM), at 6.
\160\ Wisconsin Bankers Association (comment 37, NPRM), at 2
(discussing FFIEC Information Technology Booklet); American
Financial Services Association (comment 41, NPRM), at 5 (discussing
FFIEC Cybersecurity Assessment Tool).
---------------------------------------------------------------------------
The Commission declines to modify the encryption requirement from
the Proposed Rule. As to the comments that suggest the requirement
should be relaxed, the Commission notes there are numerous free or low
cost encryption solutions available to financial institutions,
particularly for data in transit,\161\ that make encryption a feasible
solution in most situations. For data at rest, encryption is now
cheaper, more flexible, and easier than ever before.\162\ In many
cases, widely used software and hardware have built-in encryption
capabilities.\163\
---------------------------------------------------------------------------
\161\ See Remarks of Matthew Green, Safeguards Workshop Tr,
supra note 17, at 225 (noting website usage of encryption is above
80 percent; ``Let's Encrypt'' provides free TLS certificates; and
costs have gone down to the point that if a financial institution is
not using TLS encryption for data in motion, it is making an unusual
decision outside the norm); Remarks of Rocio Baeza, Safeguards
Workshop Tr., supra note 17, at 106 (``[T]he encryption of data in
transit has been standard. There's no pushback with that.''); see
also National Pawnbrokers Association (comment 3, Workshop), at 2
(``[I]n states that allow us to use technology for the receipt of
information from consumer customers and software to print our pawn
tickets and store information, we believe our members have access
through their software providers to protections that comply with the
Safeguards Rule.'').
\162\ See Remarks of Wendy Nather, Safeguards Workshop Tr.,
supra note 17, at 267 (``we have a lot more options, a lot more
technologies today than we did before that are making both of these
solutions, both encryption and MFA, easier to use, more flexible, in
some cases cheaper, and we should be encouraging their adoption
wherever possible.''); Remarks of Matthew Green, Safeguards Workshop
Tr., supra note 17, at 265-66 (``I think that we're in a great time
when we've reached the point where we can actually mandate that
encryption be used. I mean, years ago--I've been in this field for
15, you know, 20 years now, I guess. And, you know, encryption used
to be this exotic thing that was very, very difficult to use, very
expensive and not really feasible for securing information security
systems. And we've reached the point where now it is something
that's come to be and we can actually build well. So I'm really
happy about that.'').
\163\ See Remarks of Randy Marchany, Safeguards Workshop Tr.,
supra note 17, at 229-30 (noting encryption is already built into
the Microsoft Office environment and a number of Microsoft products,
such as Spreadsheets, Excel, Docs, and PowerPoint, support that
encryption feature). Other applications that have encryption built
in include database applications; app platforms iOS and Android; and
development frameworks for web applications on banking sites.
---------------------------------------------------------------------------
In response to the argument that the Rule should not require
encryption at rest because FFIEC guidelines do not require it, the
Commission notes the Safeguards Rule is very different from the
guidelines issued by the FFIEC. The depository financial institutions
regulated by the banking agencies are subject to regular examinations
by their regulator. The guidelines created by the FFIEC are designed to
be used by the examiner, as part of those examinations, to evaluate the
security of the financial institution; the examiner thus has a direct
role in regularly verifying the financial institution has taken
appropriate steps to protect its customer information. In contrast, the
Safeguards Rule regulates covered financial institutions directly and
must be usable by those entities to determine appropriate information
security without any interaction between the financial institution and
the Commission. The Commission does not have the ability to examine
each financial institution and work with that institution to ensure
their information security is appropriate. Therefore, a requirement
that institutions encrypt information by default is appropriate for the
Safeguards Rule, as the Commission believes encryption of customer
information at rest is appropriate in most cases.
Finally, while some commenters suggested eliminating the encryption
requirement for certain types of data (e.g., non-sensitive) or certain
categories of data (e.g., data at rest), the Commission notes, as
discussed in more detail above, the fact that an individual is a
customer of a financial institution alone may be sensitive. In any
event, the Rule provides financial institutions with flexibility to
adopt alternatives to encryption with the approval of the Qualified
Individual.
Similarly, the Commission declines to extend the encryption
requirement to data in use or to data transmitted over internal
networks, as some commenters suggested. The Commission does not believe
the technology that would encrypt data while in use (as opposed to in
transit or at rest) has been adopted widely enough at this time to
justify mandating its use by all financial institutions under the FTC's
jurisdiction. As to encryption of data transmitted over internal
networks, the Commission acknowledges, due to changes in network design
and the growth of cloud and mobile computing, the distinction between
internal and external networks is less clear than it once was. However,
the Commission believes requiring all financial institutions to encrypt
all communications over internal networks would be unduly burdensome at
this
[[Page 70288]]
time. There remain significant costs and technical hurdles to
encrypting transmissions on internal networks that would not be
reasonable to impose on all financial institutions, especially smaller
institutions with simpler systems that might realize less benefit from
this approach. While the Commission encourages financial institutions
to consider whether it would be appropriate for them to encrypt the
transmission of customer information over internal networks, it
declines to require this for all financial institutions.\164\
---------------------------------------------------------------------------
\164\ The Commission believes transmissions of customer
information to remote users or to cloud service providers should be
treated as external transmissions, as those transmissions are sent
out of the financial institution's systems.
---------------------------------------------------------------------------
Commenters pointed to three additional concerns about encryption,
none of which the Commission finds persuasive. First, the Bank Policy
Institute commented the encryption requirement would in fact weaken
security by blocking surveillance of the information by the financial
institution and requiring the ``broad distribution'' of encryption
keys.\165\ The Commission does not believe an encryption requirement
would weaken security. Encryption is almost universally recommended by
security experts and included in most security standards.\166\ Further,
new tools have been developed to address the issue the Bank Policy
Institute has raised. Many financial institutions have monitoring tools
on the edge of their networks to monitor data leaving the network. It
used to be the case these network monitoring tools could not see the
content of encrypted data as it left the corporate network and was
transmitted to the internet. However, there are now tools available
that can see the data as it departs the network, even if the data is
encrypted.\167\ Any marginal security costs of encryption are far
outweighed by the benefits of rendering customer information
unreadable.
---------------------------------------------------------------------------
\165\ Bank Policy Institute (comment 39, NPRM), at 13-14.
\166\ See, e.g., Payment Card Industry (PCI) Data Security
Standard Requirements and Security Assessment Procedures Version
3.2.1, PCI Security Standards Council (May 2018), https://www.pcisecuritystandards.org/document_library (last accessed 30 Nov.
2020) (Requirement 4 encrypt transmission of cardholder data across
open, public networks).
\167\ See, e.g., Encrypted Traffic Management, Broadcom Inc.,
https://www.broadcom.com/products/cyber-security/network/encrypted-traffic-management (last accessed 30 Nov. 2020); SSL Visibility, F5,
Inc., https://www.f5.com/solutions/application-security/ssl-visibility (last accessed 30 Nov. 2020).
---------------------------------------------------------------------------
Second, some commenters argued financial institutions should be
able to implement alternatives to encryption without obtaining approval
from the Qualified Individual.\168\ The New York Insurance Association
expressed concern financial institutions might feel they need to
encrypt all customer information because of the risk that the
alternative controls approved by the Qualified Individual would be
``second guessed'' in the event unencrypted data is compromised.\169\
The Commission, however, believes this concern is a core element of
information security based on risk assessment. Every aspect of an
information security program is based on the judgment of the financial
institution and its staff. The Qualified Individual's decision
concerning alternate controls, like other decisions by the financial
institution and its staff, will be subject to review in any enforcement
action to determine whether the decision was appropriate. If the
Qualified Individual is not required to make a formal decision, it is
much more likely a decision not to encrypt information will be made
even if there is no compensating control, or even made without the
Qualified Individual's knowledge.
---------------------------------------------------------------------------
\168\ Bank Policy Institute (comment 39, NPRM), at 14; New York
Insurance Association (comment 31, NPRM), at 1.
\169\ New York Insurance Association (comment 31, NPRM) at 1.
---------------------------------------------------------------------------
Third, the National Pawnbrokers Association (``NPA'') expressed
concern that if pawnbrokers are required to encrypt customer
information they may fall out of compliance with state and local
regulations concerning transaction reporting.\170\ NPA stated
pawnbrokers are often required by state or local law to report every
pawn transaction, along with nonpublic personally identifiable consumer
information, to law enforcement, and the agencies that receive this
information ``prefer to take this information electronically and in
unencrypted forms.'' \171\ The Commission believes if transmitting the
information in unencrypted form is a preference of the agencies and not
a requirement, then pawnbrokers can comply with both the Safeguards
Rule and these laws by encrypting any transmissions that include
customer information. If there are cases where a required transmission
of customer information cannot be encrypted for technical reasons, then
the pawnbroker's Qualified Individual will need to work with the law
enforcement agency to implement alternative compensating controls to
ensure the customer information remains secure during these
transmissions.\172\
---------------------------------------------------------------------------
\170\ National Pawnbrokers Association (comment 3, Workshop), at
2-3.
\171\ Id. at 2.
\172\ NADA suggested it is not clear how the encryption
requirement will apply to customer information held on a service
provider's system or on the systems of the subcontractors of the
service provider. National Automobile Dealers Association (comment
46, NPRM), at 21-22. The Commission believes the Final Rule lays out
a financial institution's obligations in this situation: It requires
customer information be encrypted unless infeasible. Section
314.4(e), in turn, requires financial institutions to require
service providers to implement and maintain appropriate safeguards
by contract and to periodically assess the continued adequacy of
those measures. A financial institution that uses a service provider
to store and process customer information must require that service
provider to encrypt that information and periodically determine
whether it continues to do so. If it is infeasible for the service
provider to meet these requirements then the financial institution's
Qualified Individual must work with the service provider to develop
compensating controls or cease doing business with the service
provider.
---------------------------------------------------------------------------
The Final Rule adopts this paragraph as paragraph (c)(3) without
revision.
Secure Development Practices
Proposed paragraph (c)(5) required financial institutions to
``[a]dopt secure development practices for in-house developed
applications utilized'' for ``transmitting, accessing, or storing
customer information.'' In this paragraph, the Commission proposed
requiring financial institutions to address the security of software
they develop to handle customer information, as distinct from the
security of their networks that contain customer information.\173\ In
addition, the Proposed Rule required ``procedures for evaluating,
assessing, or testing the security of externally developed applications
[financial institutions] utilize to transmit, access, or store customer
information.'' This provision required financial institutions to take
steps to verify that applications they use to handle customer
information are secure.\174\
---------------------------------------------------------------------------
\173\ See, e.g., Complaint, FTC v. D-Link Systems, Inc., No.
3:17-CV-00039-JD (N.D. Cal. March 20, 2017) (alleging company failed
to provide reasonable security when it failed to adequately test the
software on its devices).
\174\ See, e.g., Complaint, Lenovo, FTC No. 152-3134 (January 2,
2018) (alleging company failed to provide reasonable security by
failing to properly assess and address security risks caused by
third-party software).
---------------------------------------------------------------------------
Some commenters argued evaluating the security of externally
developed software would be too expensive or impractical for some
financial institutions,\175\ while others raised different concerns.
The American Council on Education suggested, in cases in which a
financial institution cannot obtain access to a software provider's
code or technical
[[Page 70289]]
infrastructure, then evaluating the security of its software is
infeasible.\176\ NADA further suggested in order to evaluate the
security of software, financial institutions would need to hire an
expensive IT professional.\177\
---------------------------------------------------------------------------
\175\ American Council on Education (comment 24, NPRM), at 11;
National Automobile Dealers Association (comment 46, NPRM), at 26-
27.
\176\ American Council on Education (comment 24, NPRM), at 11.
\177\ National Automobile Dealers Association (comment 46,
NPRM), at 26-27.
---------------------------------------------------------------------------
The Commission does not agree with these assertions. Evaluating the
security of software does not require access to the source code of that
software or access to the provider's infrastructure. For example, a
provider can supply the steps it took to ensure the software was
secure, whether it uses encryption to transmit information, and the
results of any testing it conducted. In addition, there are third party
services that assess software. An institution can also set up automated
searches regarding vulnerabilities, patches, and updates to software
listed on the financial institution's inventory. The exact nature of
the evaluation required will depend on the size of the financial
institution and the amount and sensitivity of customer information
associated with the software. If the software will be used to handle
large amounts of extremely sensitive information, then a more thorough
evaluation will be warranted. Likewise, the nature of the software used
will also affect the evaluation. Software that has been thoroughly
tested by third parties may need little more than a review of the test
results, while software that has not been widely used and tested will
require closer examination.
The Commission adopts proposed paragraph (c)(5) as paragraph (c)(4)
of the Final Rule.
Multi-Factor Authentication
Proposed paragraph (c)(6) required financial institutions to
``implement multi-factor authentication for any individual accessing
customer information'' or ``internal networks that contain customer
information.'' \178\ The Proposed Rule would have allowed financial
institutions to adopt a method other than multi-factor authentication
that offers reasonably equivalent or more secure access controls with
the written permission of its Qualified Individual. In the Final Rule,
the Commission retains the general requirements of proposed paragraph
(c)(6) as paragraph (c)(5), with some modifications described below.
---------------------------------------------------------------------------
\178\ Proposed 16 CFR 314.4(c)(6).
---------------------------------------------------------------------------
Although several commenters expressed support for including a
multi-factor authentication requirement in the Final Rule,\179\ others
opposed such a requirement. For example, ACE argued a blanket
requirement mandating multi-factor authentication for all institutions
of all sizes and complexities is not the best solution.\180\ The
National Independent Automobile Dealers Association (NIADA) commented
the costs of multi-factor authentication would be too high for some
financial institutions because it would need to be built into their
information systems from scratch.\181\ NIADA also argued adopting
multi-factor authentication would disrupt a financial institution's
activities as employees had to ``jump through multiple hoops to log
in.'' \182\ Cisco Systems, Inc. argued that while multi-factor
authentication is an effective safeguard, it should not be specifically
required by the Rule because, while it is currently good security
practice, in the future multi-factor authentication may become
outdated, and that allowing financial institutions to satisfy the Rule
in this way could result in inadequate protection.\183\
---------------------------------------------------------------------------
\179\ Justine Bykowski (comment 12, NPRM); Princeton University
Center for Information Technology Policy (comment 54, NPRM), at 6-7;
Electronic Privacy Information Center (comment 55, NPRM), at 8;
National Consumer Law Center and others (comment 58, NPRM), at 2;
see also Remarks of Wendy Nather, Safeguards Workshop Tr., supra
note 17, at 240-41 (discussing the security poverty line).
\180\ American Council on Education (comment 24, NPRM), at 11-
12.
\181\ National Independent Automobile Dealers Association
(comment 48, NPRM), at 6; see also Ken Shaurette (comment 19, NPRM)
(questioning whether multi-factor authentication is appropriate for
all financial institutions).
\182\ National Independent Automobile Dealers Association
(comment 48, NPRM), at 6.
\183\ Cisco Systems, Inc. (comment 51, NPRM), at 2-4.
---------------------------------------------------------------------------
Other commenters did not dispute the benefits of multi-factor
authentication generally, but argued the Rule should limit the multi-
factor authentication requirement. Some of these commenters stated the
Rule should only require multi-factor authentication when the financial
institution's risk assessment justifies it.\184\ Others argued there
should be a distinction between internal access and external access.
For example, some commenters argued the Rule should not require multi-
factor authentication when a user accesses customer information from an
internal network,\185\ because there are other controls on internal
access that make multi-factor authentication unnecessary.\186\ Another
commenter stated requiring multi-factor authentication when a customer
accesses their information from an external network could create
problems for some institutions.\187\ Finally, the Princeton Center
argued the Rule should be amended to clarify that multi-factor
authentication should be required for internal and external
networks.\188\
---------------------------------------------------------------------------
\184\ Bank Policy Institute (comment 39, NPRM), at 11-13; Global
Privacy Alliance (comment 38, NPRM), at 8.
\185\ Electronic Transactions Association (comment 27, NPRM), at
3 n.1; U.S. Chamber of Commerce (comment 33, NPRM), at 11; CTIA
(comment 34, NPRM), at 11; Global Privacy Alliance (comment 38,
NPRM), at 8; Bank Policy Institute (comment 39, NPRM), at 12;
National Automobile Dealers Association (comment 46, NPRM), at 28;
National Independent Automobile Dealers Association (comment 48,
NPRM), at 6; New York Insurance Association (comment 31, NPRM), at
1.
\186\ CTIA (comment 34, NPRM), at 11; Electronic Transactions
Association (comment 27, NPRM), at 3 n.1; U.S. Chamber of Commerce
(comment 33, NPRM), at 11.
\187\ American Council on Education (comment 24, NPRM), at 11.
\188\ Princeton University Center for Information Technology
Policy (comment 54, NPRM), at 6-7; see also Remarks of Brian
McManamon, Safeguards Workshop Tr., supra note 17, at 102 (stating
his company TECH LOCK supports requiring multi-factor authentication
for users connecting from internal networks).
---------------------------------------------------------------------------
Finally, CTIA took issue with the proposed requirement that the
Qualified Individual be permitted to approve ``reasonably equivalent or
more secure'' controls if multi-factor authentication is not feasible,
suggesting instead that Qualified Individuals be permitted to approve
``effective alternative compensating controls.'' \189\
---------------------------------------------------------------------------
\189\ CTIA (comment 34, NPRM), at 11-12; see also Electronic
Transactions Association (comment 27, NPRM) at 3 (suggesting use of
the term ``alternative compensating controls'').
---------------------------------------------------------------------------
The Commission disagrees with the commenters who stated the Rule
should not include a multi-factor authentication requirement. As to
costs, many affordable multi-factor authentication solutions are
available in the marketplace.\190\ Most financial institutions will be
able to find a solution that is both affordable and workable for their
organization. In the cases when that it is not possible, the
[[Page 70290]]
Rule allows financial institutions to adopt reasonably equivalent
controls.\191\
---------------------------------------------------------------------------
\190\ See, e.g., Slides Accompanying Remarks of Brian McManamon,
``MFA/2FA Pricing (Duo),'' in Safeguards Workshop Slides, supra note
72, at 30 (setting forth prices for multi-factor/two-factor services
from Duo, including free services for up to ten users); Remarks of
Brian McManamon, Safeguards Workshop Tr., supra note 17, at 102-03;
Slides Accompanying Remarks of Lee Waters, ``Estimated Costs of
Proposed Changes,'' in Safeguards Workshop Slides, supra note 72, at
26 estimating costs of MFA to be $50 for smartcard or fingerprint
readers, and $10 each per smartcard); Slides Accompanying Remarks of
Wendy Nather, ``Authentication Methods by Industry,'' in Safeguards
Workshop Slides, supra note 72, at 37 (chart showing the use of MFA
solutions such as Duo Push, phone call, mobile passcode, SMS
passcode, hardware token, Yubikey passcode, and U2F token in
industries such as financial services and higher education); Remarks
of Wendy Nather, Safeguards Workshop Tr., supra note 17, at 233-34.
\191\ See also Remarks of James Crifasi, Safeguards Workshop
Tr., supra note 17, at 103-04 (noting even where legacy systems do
not support multi-factor authentication, alternative measures can be
used and ``it's things that can easily be done.'')
---------------------------------------------------------------------------
As to potential disruptions requiring multi-factor authentication
may cause, the Commission notes that many organizations, both financial
institutions and otherwise, currently require employees to use multi-
factor authentication without major disruption.\192\ Many multi-factor
authentication systems are available that do not materially increase
the time it takes to log into a system as compared to the use of only a
password.\193\ In short, multi-factor authentication is an extremely
effective way to prevent unauthorized access to a financial
institution's information system,\194\ and its benefits generally
outweigh any increased time it takes to log into a system. In those
situations when the need for quick access outweighs the security
benefits of multi-factor authentication, the Rule allows the use of
reasonably equivalent controls.
---------------------------------------------------------------------------
\192\ See, e.g., Remarks of Randy Marchany, Safeguards Workshop
Tr., supra note 17, at 236-38 (describing how Virginia Tech
implemented multi-factor authentication in 2016 for its more than
156,000 users); Slides Accompanying Remarks of Wendy Nather,
``Authentication Methods by Industry,'' in Safeguards Workshop
Slides, supra note 72, at 37 demonstrating the types of multi-factor
authentication used by health care, financial services, higher
education and the Federal Government); Remarks of Wendy Nather,
Safeguards Workshop Tr., supra note 17, at 233-35.
\193\ See Remarks of Wendy Nather, Safeguards Workshop Tr.,
supra note 17, at 234 (describing how a phone call to a landline is
popular in some segments).
\194\ See, e.g., Remarks of Matthew Green, Safeguards Workshop
Tr., supra note 17, at 266 (explaining passwords are not enough of
an authentication feature but when MFA is used and deployed, the
defenders can win against attackers); id. at 239 (describing how
because smart phones have modern secure hardware processors,
biometric sensors and readers built in, increasingly consumers can
get the security they need through the devices they already have by
storing cryptographic authentication keys on the devices and then
using the phone to activate them).
---------------------------------------------------------------------------
Finally, although the Commission agrees the Rule should not lock
financial institutions into using outmoded or obsolete technologies,
the basic structure of using multiple factors to identify a user is
unlikely to be rendered obsolete in the near future. The Rule's
definition of multi-factor authentication addresses only this principle
and does not require any particular technology or technique to achieve
it. This should allow it to accommodate most changes in information
security practices. In the event of an unforeseen change to the
information security environment that would discount the value of
multi-factor authentication, the Commission will adjust the Rule
accordingly.\195\
---------------------------------------------------------------------------
\195\ The Mortgage Bankers Association expressed concern the
Proposed Rule would not allow the use of a single-sign on process,
where a user is given access to multiple applications with the use
of one set of credentials. Mortgage Bankers Association (comment 26,
NPRM), at 7. The Commission does not view the Rule as preventing
such a system, if the user has used multi-factor authentication to
access the system and the system is designed to ensure any user of a
given application has been subjected to multi-factor authentication.
---------------------------------------------------------------------------
The Commission agrees with the commenter who stated multi-factor
authentication is justified both when external users, such as
customers, and internal users, such as employees, access an information
system. Multi-factor authentication can prevent many attacks focused on
using stolen passwords from both employees and customers to access
customer information. Other common attacks on information systems, such
as social engineering or brute force password attacks, target employee
credentials and use those credentials to get access to an information
system.\196\ These attacks can usually be stopped through the use of
multi-factor authentication. Accordingly, the Final Rule requires
multi-factor authentication whenever any individual--employee, customer
or otherwise--accesses an information system. If a financial
institution determines it is not the best solution for its information
system, it may adopt reasonably equivalent controls with the approval
of the Qualified Individual.
---------------------------------------------------------------------------
\196\ See Remarks of Pablo Molina, Safeguards Workshop Tr.,
supra note 17, at 30 (mentioning ``phishing,'' or social
engineering, as a common type of cybersecurity attack); Remarks of
Lee Waters, Safeguards Workshop, supra note 17, at 91 (same);
Remarks of Michele Norin, Safeguards Workshop Tr., supra note 17, at
179 (same); see also Cyber Div., Fed. Bureau of Investigation,
Private Industry Notification No. 20200303-001, Cyber Criminals
Conduct Business Email Compromise through Exploitation of Cloud-
Based Email Services, Costing U.S. Businesses Over Two Billion
Dollars, (March 2020), https://www.ic3.gov/media/news/2020/200707-4.pdf, at 1-2, (last accessed 1 Dec. 2020) (``Between January 2014
and October 2019, the Internet Crime Complaint Center (IC3) received
complaints totaling over $2.1 billion in actual losses from
[Business Email Compromise (``BEC'')] scams targeting the largest
[cloud-based email] platforms. Losses from BEC scams overall have
increased every year since IC3 began tracking the scam in 2013 and
have been reported in all 50 states and in 177 countries.'').
---------------------------------------------------------------------------
The Commission recognizes the language of the Proposed Rule may
have created some confusion by its use of the term ``internal
networks'' to define the systems affected by the multi-factor
authentication requirement, instead of the term ``information systems''
as used other places in the Rule.\197\ In addition, the Commission
agrees with commenters that argued separating the multi-factor
authentication into two sentences created confusion.\198\ Accordingly,
the Commission modifies paragraph (c)(5) of the Final Rule, which was
proposed as paragraph (c)(6), to require financial institutions to
``[i]mplement multi-factor authentication for any individual accessing
any information system, unless your Qualified Individual has approved
in writing the use of reasonably equivalent or more secure access
controls.''
---------------------------------------------------------------------------
\197\ Consumer Data Industry Association (comment 36, NPRM), at
6-7; Cisco Systems, Inc. (comment 51, NPRM), at 3-4.
\198\ Bank Policy Institute (comment 39, NPRM), at 11.
---------------------------------------------------------------------------
Finally, the Commission declines to adopt CTIA's proposed
alternative that would allow Qualified Individuals to approve
``effective alternative compensating controls,'' even if they are not
``reasonably equivalent or more secure'' than multi-factor
authentication. Given the important role multi-factor authentication
has in access control, any alternative measure should provide at least
as much protection as multi-factor authentication.\199\
---------------------------------------------------------------------------
\199\ NADA argued, for financial institutions that have
appointed a third party to act as their information security
coordinator, this provision would require the institution to turn
over decisionmaking to someone ``with no stake in the business
outcome.'' National Automobile Dealers Association (comment 46,
NPRM), at 29-30. This concern misinterprets the role of the
Qualified Individual. Whether the Qualified Individual is inside the
company or at a third-party company, that individual will report to
and be supervised by senior management of a financial institution
(unless the Qualified Individual is the head of the financial
institution). If a Qualified Individual recommends a safeguard that
would not be practical for the business, the financial institution
is not required to adopt this safeguard but can use an alternative
adequate safeguard that will be functional. Indeed, when it comes to
third parties, the Rule specifically requires someone in the
financial institution direct and oversee the third party.
---------------------------------------------------------------------------
Audit Trails
Proposed paragraph (c)(7) required information security programs to
include audit trails designed to detect and respond to security
events.\200\ Audit trails are chronological logs that show who has
accessed an information system and what activities the user engaged in
during a given period.\201\
---------------------------------------------------------------------------
\200\ Proposed 16 CFR 314.4(c)(7).
\201\ See Information Technology Laboratory Computer Security
Resource Center, Glossary, National Institute of Standards and
Technology, https://csrc.nist.gov/glossary/term/audit-trail (last
accessed Dec. 2, 2020).
---------------------------------------------------------------------------
Some commenters supported this requirement.\202\ The Princeton
Center noted audit trails are ``crucial to designing effective security
measures
[[Page 70291]]
that allow institutions to detect and respond to security incidents.''
\203\ It also stated audit trails ``help understand who has accessed
the system and what activities the user has engaged in.'' \204\
---------------------------------------------------------------------------
\202\ Princeton University Center for Information Technology
Policy (comment 54, NPRM), at 8; Electronic Privacy Information
Center (comment 55, NPRM), at 8.
\203\ Princeton University Center for Information Technology
Policy (comment 54, NPRM), at 8.
\204\ Id.
---------------------------------------------------------------------------
Other commenters argued this requirement imposed unclear
obligations or would not improve security.\205\ For example, GPA
commented the Proposed Rule conflated the use of logs to reconstruct
past events and the active use of logs to monitor user activity.\206\
The American Financial Services Association argued adding logging
capabilities to some legacy systems would be expensive and
difficult.\207\ Another commenter argued the increased use of cloud
storage would mean that financial institutions might not have access to
any audit trails.\208\ In addition, NADA argued it did not believe
maintenance of logs would increase security but would instead create
records that could be sought by parties ``seeking to place blame'' for
breaches.\209\
---------------------------------------------------------------------------
\205\ National Automobile Dealers Association (comment 46,
NPRM), at 30-31; National Independent Automobile Dealers Association
(comment 48, NPRM), at 6; American Financial Services Association
(comment 41, NPRM), at 6; Global Privacy Alliance (comment 38,
NPRM), at 11.
\206\ Global Privacy Alliance (comment 38, NPRM), at 11.
\207\ American Financial Services Association (comment 41,
NPRM), at 6.
\208\ American Council of Education (comment 24, NPRM), at 12.
\209\ National Automobile Dealers Association (comment 46,
NPRM), at 30-31.
---------------------------------------------------------------------------
The Commission believes logging user activity is a crucial
component of information security because in the event of a security
event it allows financial institutions to understand what was accessed
and when. However, the term ``audit trails'' may have been unclear in
this context. In order to clarify that logging user activity is a part
of the user monitoring process, the Final Rule does not include
paragraph (c)(7) of the Proposed Rule and instead modifies the user
monitoring provision to include a requirement to log user
activity.\210\ By putting the ``monitoring'' and ``logging''
requirements together, the Final Rule provides greater clarity on the
comment raised by the GPA: Financial institutions are expected to use
logging to ``monitor'' active users and reconstruct past events.
---------------------------------------------------------------------------
\210\ See Final Rule, 16 CFR 314.4(c)(8).
---------------------------------------------------------------------------
Disposal Procedures
Proposed paragraph (c)(8) required financial institutions to
develop procedures for the secure disposal of customer information that
is no longer necessary for their business operations or other
legitimate business purposes.\211\ The Proposed Rule allowed the
retention of information when retaining the information is required by
law or where targeted disposal is not feasible.
---------------------------------------------------------------------------
\211\ Proposed 16 CFR 314.4(c)(8).
---------------------------------------------------------------------------
Some commenters supported the inclusion of a disposal requirement
as proposed or suggested that the disposal requirements should be
strengthened.\212\ Consumer Reports argued financial institutions
should be required to dispose of customer information when it is no
longer needed for the business purpose for which it was gathered.\213\
The Princeton Center suggested the Rule require disposal after a set
period unless the company can demonstrate a current need for the data
and that financial institutions periodically review their data
practices to minimize their data retention.\214\
---------------------------------------------------------------------------
\212\ Princeton University Center for Information Technology
Policy (comment 54, NPRM), at 8; Electronic Privacy Information
Center (comment 55, NPRM), at 8; Consumer Reports (comment 52,
NPRM), at 7.
\213\ Consumer Reports (comment 52, NPRM), at 7-8.
\214\ Princeton University Center for Information Technology
Policy (comment 54, NPRM), at 8-9.
---------------------------------------------------------------------------
Several other commenters opposed the disposal requirement as set
forth in the Proposed Rule. Some argued the requirement to dispose of
information goes beyond the Commission's authority under the GLB
Act.\215\ NADA argued the GLB Act does not ``contain[ ] any authority
to require financial institutions to delete any information'' and a
requirement to have procedures to delete information for which a
company has no legitimate business purpose would constitute a ``new
privacy regime.'' \216\ The American Financial Services Association
(AFSA) stated the requirement was too prescriptive and the Rule should
allow financial institutions to retain information as long as that
retention complies with the retention policy created by the financial
institution.\217\ AFSA further argued the proposed requirement exceeds
the Federal banking standards, pointing to the FFIEC Cybersecurity
Assessment Tool, which sets disposal of records ``according to
documented requirements and within expected time frames'' as a baseline
requirement for access and data management.\218\
---------------------------------------------------------------------------
\215\ National Automobile Dealers Association (comment 46,
NPRM), at 31; National Independent Automobile Dealers Association
(comment 48, NPRM), at 6.
\216\ National Automobile Dealers Association (comment 46,
NPRM), at 31-32.
\217\ American Financial Service Association (comment 41, NPRM),
at 6.
\218\ Cybersecurity Assessment Tool, FFIEC, https://www.ffiec.gov/pdf/cybersecurity/FFIEC_CAT_May_2017_Cybersecurity_Maturity_June2.pdf at 37 (last
visited December 3, 2020).
---------------------------------------------------------------------------
Yet other commenters suggested modifying the requirement. NADA
argued that if there was to be a disposal requirement, then it should
be modeled after the Disposal Rule, which requires businesses to
properly dispose of consumer reports, but does not have an explicit
requirement to dispose of information on any particular schedule.\219\
ACE suggested modifying the Proposed Rule to require disposal of
information only where there is no longer any ``legitimate purpose''
rather than any ``legitimate business purpose.'' \220\ It argued in
some cases a financial institution may have legitimate purposes for
retaining information that are not readily defined as ``business''
purposes, such as the retention of data by educational institutions for
institutional research or student analytics.\221\
---------------------------------------------------------------------------
\219\ National Automobile Dealers Association (comment 46,
NPRM), at 32.
\220\ American Council on Education (comment 24, NPRM), at 12.
\221\ Id.
---------------------------------------------------------------------------
The Commission believes requiring the disposal of customer
information for which the financial information has no legitimate
business purpose is within the authority granted by the GLB Act to
protect the security of customer information. The disposal of records,
both physical and digital, can result in exposure of customer
information if not performed properly.\222\ Similarly, if records are
retained when they are no longer necessary, there is a risk those
records will be subject to unauthorized access. The risk of
unauthorized access may be reasonable where the retention of data
provides some benefit. In situations where the information is no longer
needed for a legitimate business purpose, though, the risk to the
customer information becomes unreasonable because the retention is no
longer benefiting the customer or financial institution. Disposing of
unneeded customer information, therefore, is a vital part of protecting
customer information and serves the purpose of the GLB Act.\223\
---------------------------------------------------------------------------
\222\ See, e.g., Complaint, Rite Aid Corp., FTC No. 072-3121
(November 22, 2010) (alleging company failed to provide reasonable
data security when it failed to implement policies and procedures to
dispose securely of personal information).
\223\ As to the Princeton Center's suggestion financial
institutions periodically review their disposal practices (Princeton
University Center for Information Technology Policy (comment 54,
NPRM), at 8-9), the Commission believes this requirement is already
encompassed in the requirement contained in Sec. 314.4(g) to
periodically review their safeguards overall.
---------------------------------------------------------------------------
[[Page 70292]]
The Commission disagrees with commenters who suggested narrowing
the disposal requirement or doing away with it altogether. As noted
above, although no disposal requirement appears in FFIEC guidelines,
those guidelines represent a different regulatory approach and are not
an appropriate model for the Safeguards Rule.
Finally, as to setting retention periods or narrowing the
legitimate business purposes for which financial institutions may
retain customer information, the Commission recognizes financial
institutions need some flexibility. Whereas customers may want to, for
example, access and transfer older data in some circumstances, in other
circumstances, retaining such data would not be consistent with any
legitimate business purpose. The Commission believes the Princeton
Center's recommendation that companies be required to delete
information after a set period unless the information is still needed
for a legitimate business purpose properly balances the needs of
financial institutions with the need to protect customer information.
Thus, the Commission modifies proposed paragraph (c)(6) to require the
deletion of customer information two years after the last time the
information is used in connection with providing a product or service
to the customer unless the information is required for a legitimate
business purpose as paragraph (c)(6)(i) of the Final Rule. In addition,
paragraph (c)(6)(ii) of the Final Rule requires financial institutions
to periodically review their policies to minimize the unnecessary
retention of information.
Change Management
Proposed paragraph (c)(9) required financial institutions to adopt
procedures for change management.\224\ Change management procedures
govern the addition, removal, or modification of elements of an
information system.\225\ This paragraph required financial institutions
to develop procedures to assess the security of devices, networks, and
other items to be added to their information system, or the effect of
removing such items or otherwise modifying the information system. For
example, a financial institution that adds additional servers or other
machines to its information system would need to evaluate the security
of the new devices and the effect of adding them to the existing
network.
---------------------------------------------------------------------------
\224\ Proposed 16 CFR 314.4(c)(9).
\225\ See, e.g., Change Management, Rutgers OIT Information
Security Office, https://rusecure.rutgers.edu/content/change-management (last accessed 1 Dec. 2020).
---------------------------------------------------------------------------
Some commenters supported this requirement,\226\ while others
stated it was too broad and would impose unnecessary burdens on
financial institutions.\227\ In particular, NADA argued financial
institutions that have not made changes in their systems ``for some
time'' should not be required to create procedures for change
management.\228\ ACE argued including a change management requirement
is unnecessary because such a requirement is ``generally incorporated
into an organization's IT operations'' for non-security purposes and
the security considerations of those changes will be considered as part
of those procedures.\229\
---------------------------------------------------------------------------
\226\ Electronic Privacy Information Center (comment 55, NPRM),
at 8; National Consumer Law Center and others, (comment 58, NPRM) at
3.
\227\ American Council on Education (comment 24, NPRM), at 12-
13; National Automobile Dealers Association (comment 46, NPRM), at
33.
\228\ National Automobile Dealers Association (comment 46,
NPRM), at 32-33.
\229\ American Council on Education (comment 24, NPRM), at 12.
---------------------------------------------------------------------------
Alterations to an information system or network introduce
heightened risk of cybersecurity incidents; \230\ thus, it is important
to expressly require change management to be a part of an information
security program. The Commission agrees with ACE that many financial
institutions will already have change management procedures in place.
If those procedures adequately consider security issues involved in the
change, then they may satisfy this requirement.
---------------------------------------------------------------------------
\230\ See Remarks of Rocio Baeza, Safeguards Workshop Tr., supra
note 17, at 95 (``[E]very time there is a change to any of these
[network] environments, that is creating additional risk.'');
Remarks of Scott Wallace, Safeguards Workshop Tr., supra note 17, at
147-48 (giving an example of an incident in which network changes
led to the exposure of sensitive information); Remarks of Matthew
Green, Safeguards Workshop Tr., supra note 17, at 252 (noting it is
``a little dangerous'' to make ``major changes'' to an information
system at a time of heightened stress).
---------------------------------------------------------------------------
As to the comment a financial institution that has not made changes
to its environment in some time should not be required to have change
management processes, the Commission disagrees. Few information systems
can remain unchanged for a significant period of time, given the
changing technical requirements for business and security. Indeed, NADA
acknowledges financial institutions will need to ``adapt[] their
programs to keep up with changes in data security.'' \231\ For this
reason, all financial institutions must have procedures for when the
changes occur. As with all of the requirements of the Rule, though, the
exact nature of these procedures will vary depending on the size,
complexity and nature of the information system. A simple system may
have equally simple change management procedures.
---------------------------------------------------------------------------
\231\ National Automobile Dealers Association (comment 46,
NPRM), at 33 n.96.
---------------------------------------------------------------------------
The Commission adopts this proposed paragraph as paragraph (c)(7)
of the Final Rule without change.
System Monitoring
Proposed paragraph (c)(10) required financial institutions to
implement policies and procedures designed ``to monitor the activity of
authorized users and detect unauthorized access or use of, or tampering
with, customer information by such users.'' \232\ The Proposed Rule
required financial institutions to take steps to monitor those users
and their activities related to customer information in a manner
adapted to the financial institution's particular operations and needs.
---------------------------------------------------------------------------
\232\ Proposed 16 CFR 314.4(c)(10).
---------------------------------------------------------------------------
NADA stated this requirement would create unnecessary expense
because it would require financial institutions to ``continually
monitor all authorized use'' and would mean ``yet more new employees or
third-party IT consultants.'' \233\ The Commission disagrees, however,
noting that monitoring of system use can be automated.\234\ There is no
requirement a separate staff member would be required to exclusively
monitor system use.
---------------------------------------------------------------------------
\233\ National Automobile Dealer Association (comment 46, NPRM),
at 33.
\234\ See Remarks of Nicholas Weaver, Safeguards Workshop Tr.,
supra note 17, at 124-25.
---------------------------------------------------------------------------
In addition, one commenter stated monitoring the use of paper files
is impossible and should be excluded from this provision.\235\ The
Commission acknowledges monitoring of paper records is qualitatively
different than the monitoring of electronic records. This requirement
goes hand in hand with limiting access to documents, whether electronic
or paper. For example, if an institution has a file room and access to
the room is limited to particular employees (e.g., the payroll office),
the institution should have measures in place to ensure those access
controls are in fact being utilized (e.g., sign in with front desk,
logging of key card access, security camera).
---------------------------------------------------------------------------
\235\ American Financial Services Association (comment 41,
NPRM), at 6.
---------------------------------------------------------------------------
As discussed above, this paragraph is amended to also require the
logging of user activity, but is otherwise adopted as proposed as
paragraph (c)(8).
[[Page 70293]]
Proposed Paragraph (d)
Proposed paragraph (d)(1) retained the current Rule's requirement
that financial institutions ``[r]egularly test or otherwise monitor the
effectiveness of the safeguards' key controls, systems, and procedures,
including those to detect actual and attempted attacks on, or
intrusions into, information systems.''
Proposed paragraph (d)(2) provided further detail to this
requirement by stating the monitoring must take the form of either
``continuous monitoring'' or ``periodic penetration testing and
vulnerability assessments.'' The proposal explained continuous
monitoring is any system that allows real-time, ongoing monitoring of
an information system's security, including monitoring for security
threats, misconfigured systems, and other vulnerabilities.\236\ For
those who elected to engage in periodic penetration testing and
vulnerability assessment, the proposal required penetration testing at
least once annually (or more frequently if called for in the financial
institution's risk assessment) and vulnerability assessments at least
twice a year.\237\
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\236\ Financial institutions that choose the option of
continuous monitoring would also be satisfying Sec. 314.4(c)(8).
\237\ Proposed 16 CFR 314.4(d)(1) and (2).
---------------------------------------------------------------------------
Some commenters thought the proposal went too far in requiring
continuous monitoring or penetration and vulnerability testing, while
others thought the proposal did not go far enough. On one hand, ACE
argued continuous monitoring is too burdensome and difficult for some
financial institutions,\238\ particularly those with ``highly
decentralized systems,'' such as colleges and universities, which could
be required to monitor their entire system.\239\ ACE further suggested
the Rule should not prescribe any particular testing methodology or
schedule and should allow financial institutions to develop a testing
approach appropriate for the financial institution.\240\ The NPA
commented penetration and vulnerability testing would be too expensive
for small pawnbrokers with small staffs and a small customer base,
where their members would be ``likely to notice a penetration of our
records.'' \241\ One commenter stated the requirements for monitoring
and testing were ``overlapping and confusing'' and suggested the
Commission avoid confusion by including continuous monitoring,
penetration testing, vulnerability scanning, periodic risk assessment
reviews, and logging as optional components of an information security
program to be included on an as-needed basis.\242\ Some commenters
recommended the testing requirement be limited to electronic data and
exclude monitoring of physical data.\243\ The American Financial
Services Association argued the testing of physical safeguards required
by paragraph (d)(1) ``would be impossible.'' \244\ Finally, CTIA
argued, for entities that choose the approach of penetration and
vulnerability testing, these tests should be required less
regularly.\245\
---------------------------------------------------------------------------
\238\ American Council on Education (comment 24, NPRM), at 13-
14.
\239\ American Council on Education (comment 24, NPRM), at 13.
\240\ American Council on Education (comment 24, NPRM), at 14.
\241\ National Pawnbrokers Association (comment 3, Workshop), at
2.
\242\ Global Privacy Alliance (comment 38, NPRM), at 10-11.
\243\ National Independent Automobile Dealers Association
(comment 48, NPRM), at 6; American Financial Services Association
(comment 41, NPRM), at 6.
\244\ American Financial Services Association (comment 41,
NPRM), at 6.
\245\ CTIA (comment 34, NPRM) at 12-13 (arguing penetration
testing should be required only once every two years and
vulnerability testing be required only once a year).
---------------------------------------------------------------------------
On the other hand, the Princeton Center suggested, rather than
requiring either continuous monitoring or penetration testing, the Rule
should require both. It noted continuous monitoring is very effective
at detecting problems with, and threats to, ``off-the-shelf systems''
but penetration testing is better at ``for checking the interaction
between systems, proprietary systems, or subtle security issues.''
\246\ Similarly, the MSRT was concerned that the Proposed Rule
suggested annual penetration testing alone could protect financial
institutions, rather than serve as a supplement to proper
monitoring.\247\
---------------------------------------------------------------------------
\246\ Princeton University Center for Information Technology
Policy (comment 54, NPRM), at 5.
\247\ Money Services Round Table (comment 53, NPRM), at 9; see
also Gusto and others (Comment 11, Workshop), at 2 (arguing
penetration testing and vulnerability assessments both have their
weaknesses and financial institutions should develop a testing
program that it is appropriate for them).
---------------------------------------------------------------------------
The Commission agrees with commenters who pointed out the
difficulty of applying certain testing requirements to physical
safeguards. Although the general testing requirement set forth in
paragraph (d)(1) should apply to physical safeguards (e.g., testing
effectiveness of physical locks), the continuous monitoring,
vulnerability assessment, and penetration testing in paragraph (d)(2)
is not relevant to information in physical form. Accordingly, the final
version of paragraph (d)(2) is limited to safeguards on information
systems.
The Commission also agrees biannual vulnerability testing may not
be sufficient to detect new threats. Thus, given the relative ease with
which vulnerability assessments can be performed, it modifies the Final
Rule to require financial institutions to perform assessments when
there is an elevated risk of new vulnerabilities having been introduced
into their information systems, in addition to the required biannual
assessments.
Beyond these modifications, the Commission believes the proposal
struck the right balance between flexibility and protection of customer
information, and adopts the proposed provision as final. For commenters
concerned about costs of testing and continuous monitoring, the
Commission notes the Rule requires one, not both. Although many
financial institutions may choose to use both, the Commission agrees
the costs of requiring both for all financial institutions may not be
justified. \248\ As to arguments that the testing required by the Rule
is too frequent and will therefore be too costly, the Commission does
not agree vulnerability assessments will be costly. Indeed, there are
resources for free and automated vulnerability assessments.\249\ And
although the Commission acknowledges penetration testing can be a
somewhat lengthy and costly process for large or complex systems,\250\
a longer period between penetration tests will leave information
systems vulnerable to attacks that exploit weaknesses normally revealed
by penetration testing.
---------------------------------------------------------------------------
\248\ The Commission believes a system for continuous monitoring
will include some form of vulnerability assessment as part of
monitoring the information system.
\249\ Remarks of Frederick Lee, Safeguards Workshop Tr., supra
note 17, at 139-40.
\250\ See id. at 129-30 (noting the cost of a penetration test
can increase significantly depending on the complexity of the system
to be tested and the scope of the test).
---------------------------------------------------------------------------
Two other portions of the Final Rule should help financial
institutions concerned about the costs of monitoring and testing.
First, because the Commission is limiting the definition of
``information system'' in the Final Rule, financial institutions will
be able to limit this provision's application by segmenting their
network and conducting monitoring or testing only of systems that
contain customer information or that are connected to such systems.
Second, this requirement does not apply to those institutions that
[[Page 70294]]
maintain records on fewer than 5,000 individuals. Accordingly, for
example, it should not apply to businesses small enough for staff to
personally know a majority of customers.
Finally, the Commission does not believe the testing requirements
are duplicative of other provisions of the Final Rule. The provision
relating to additional risk assessments, Sec. 314.4(b)(2), requires a
financial institution to reevaluate its risks and to determine if
safeguards should be modified or added--it does not require testing to
detect threats and technical vulnerabilities in the existing system.
Section 313.4(c)(8)'s requirement that financial institutions monitor
users' activity in an information system is focused on one aspect of
information security--detecting and preventing unauthorized access and
use of the system. The requirement of this paragraph, on the other
hand, is focused on testing the overall effectiveness of a financial
institution's safeguards. It is broader than paragraph (c)(8)'s
requirement and is necessary to ensure financial institutions test the
strength of their safeguards as a whole.
Accordingly, the Final Rule requires financial institutions to
perform vulnerability assessments at least once every six months and,
additionally, whenever there are material changes to their operations
or business arrangements and whenever there are circumstances they know
or have reason to know may have a material impact on their information
security program.
Proposed Paragraph (e)
Proposed paragraph (e) set forth a requirement that financial
institutions implement policies and procedures ``to ensure that
personnel are able to enact [the financial institution's] information
security program.'' This requirement included four components: (1)
General employee training; (2) use of qualified information security
personnel; (3) specific training for information security personnel;
and (4) verification that security personnel are taking steps to
maintain current knowledge on security issues.
General Employee Training
Proposed paragraph (e)(1) required financial institutions to
provide their personnel with ``security awareness training that is
updated to reflect risks identified by the risk assessment.'' \251\
---------------------------------------------------------------------------
\251\ Proposed 16 CFR 314.4(e)(1).
---------------------------------------------------------------------------
While one commenter specifically supported the inclusion of this
training requirement,\252\ the U.S. Chamber of Commerce argued the Rule
should not have any specific training requirements at all.\253\ NADA
stated the requirement that the training be ``updated to reflect risks
identified by the risk assessment'' will require companies to develop
individualized training programs to suit their financial institution
and that such a process would be expensive and unnecessary because
``general security awareness'' is generally enough for most financial
institutions.\254\
---------------------------------------------------------------------------
\252\ Electronic Privacy Information Center (comment 55, NPRM),
at 8.
\253\ U.S. Chamber of Commerce (comment 33, NPRM), at 12; see
also American Financial Services Association (comment 41, NPRM), at
6 (stating the Commission should acknowledge that a training program
for a small financial institution will be different than a program
for a larger program).
\254\ National Automobile Dealers Association (comment 46,
NPRM), at 34.
---------------------------------------------------------------------------
Given the current Rule includes a similar training requirement and
training remains a vital part of effective information security, the
Commission declines to eliminate it. The Commission believes the Final
Rule's training requirement retains the same flexibility as the
existing Rule and allows financial institutions to adopt a training
program appropriate to their organization.
The Commission disagrees with NADA's concern the requirement to
update training programs would be too expensive. Without a requirement
that the training program be updated based on an assessment of risks,
employees may be subject to the same training year after year, which
might reflect obsolete threats, as opposed to addressing current ones.
The Commission interprets this provision to require only that the
training program be updated as necessary based on changes in the
financial institution's risk assessment. The provision also gives
financial institutions the flexibility to use programs provided by a
third party, if that program is appropriate for the financial
institution. In order to clarify updates are required only when needed
by changes in the financial institution or new security threats,
though, the Final Rule states training programs need to be updated only
``as necessary.''
Information Security Personnel
Proposed paragraph (e)(2) required financial institutions to
``[u]tiliz[e] qualified information security personnel,'' employed
either by them or by affiliates or service providers, ``sufficient to
manage [their] information security risks and to perform or oversee the
information security program.'' \255\ This proposed provision was
designed to ensure information security personnel used by financial
institutions are qualified for their positions and information security
programs are sufficiently staffed.
---------------------------------------------------------------------------
\255\ Proposed 16 CFR 314.4(e)(2).
---------------------------------------------------------------------------
Some commenters argued this provision was too vague because it does
not define what personnel are necessary and what ``qualified''
means.\256\ NADA argued hiring additional staff to meet this
requirement could be prohibitively expensive.\257\
---------------------------------------------------------------------------
\256\ National Automobile Dealers Association (comment 46,
NPRM), at 35; National Independent Automobile Dealers Association
(comment 48, NPRM), at 7.
\257\ National Automobile Dealers Association (comment 46,
NPRM), at 35.
---------------------------------------------------------------------------
As discussed in relation to the appointment of a ``Qualified
Individual,'' the Commission believes a more specific definition of
``qualified'' would not be appropriate because each financial
institution has different needs and different levels of training,
experience, and expertise will be appropriate for the information
security staff of each institution. The term ``qualified'' conveys only
that staff must have the abilities and expertise to perform the duties
required by the information security program.\258\ The Commission
declines to include a more prescriptive set of qualification
requirements in the Final Rule.\259\
---------------------------------------------------------------------------
\258\ NADA also asks whether this provision would require
financial institutions to hire more personnel if they do not have
enough qualified staff. Id. The Final Rule does require the hiring
of additional personnel if existing personnel are not enough to
maintain the financial institution's information security program.
\259\ One commenter, on the other hand, approved of the decision
not to define ``qualified'' in the Proposed Rule, but argued the
requirement in its totality was unclear because it did not set forth
``how the Commission would hold covered entities accountable.''
American Council on Education (comment 24, NPRM) at 14. The
Commission believes the term ``qualified'' provides a clear enough
requirement to allow a financial institution's compliance to be
evaluated.
---------------------------------------------------------------------------
As to the concern about expense, the Commission acknowledges hiring
employees or retaining third parties to maintain financial
institutions' information security programs can be a substantial
expense. But the expense is necessary to effectuate Congressional
intent that financial institutions implement reasonable safeguards to
protect customer information. The Rule requires only that a financial
institution have personnel ``sufficient'' to manage its risk and to
maintain its information security program. A financial institution is
required only to have the staff necessary to maintain its information
security. An information security program that is not properly
maintained cannot offer the protection it is designed to provide. A
financial institution that
[[Page 70295]]
does not comply with this requirement, by definition, has insufficient
staffing, and thus, cannot reasonably protect customer information.
Although the expense is necessary, the level of expense is
mitigated by several factors. First, existing financial institutions
should already have information security personnel (either in the form
of employees or third-party service providers) qualified to perform the
duties necessary to maintain reasonable security in order to comply
with the requirements of the current Rule. Depending on the skills of
those employees, additional staffing may not be necessary to meet the
demands of the Final Rule. Second, the required staffing will vary
greatly based on the size and complexity of the information system. A
financial institution with an extremely simple system may not require
even a single full time employee. Finally, the Rule allows the use of
service providers to meet this requirement. This can significantly
reduce costs as services exist to share the expense of qualified
personnel and offer information security support at significantly less
than the cost of employing a single qualified employee.\260\ The
Commission continues to believe utilizing qualified and sufficient
information security personnel is a vital part of any information
security program and accordingly, adopts proposed paragraph (e)(2) in
the Final Rule without modification.
---------------------------------------------------------------------------
\260\ See, e.g., Slides Accompanying Remarks of Rocio Baeza,
``Models for Complying to the Safeguards Rule Changes,'' in
Safeguards Workshop Slides, supra note 72, at 27-28 (describing
three different compliance models: In-house, outsource, and hybrid,
with costs ranging from $199 per month to more than $15,000 per
month); see also remarks of Rocio Baeza, Safeguards Workshop Tr.,
supra note 17, at 81-83; slides Accompanying Remarks of Brian
McManamon, ``Sample Pricing,'' in Safeguards Workshop Slides, supra
note 72, at 29 (estimating the cost of cybersecurity services based
on number of endpoints); Remarks of Brian McManamon, Safeguards
Workshop Tr., supra note 17, at 83-85.
---------------------------------------------------------------------------
Training of Security Personnel
The Proposed Rule also required financial institutions to
``[p]rovid[e] information security personnel with security updates and
training sufficient to address relevant security risks.'' \261\ This is
separate from paragraph (e)(1)'s requirement to train all personnel
generally.
---------------------------------------------------------------------------
\261\ Proposed 16 CFR 314.4(e)(3).
---------------------------------------------------------------------------
Some commenters argued providing ongoing training could be too
costly for some financial institutions.\262\ The Commission disagrees.
Maintaining awareness of emerging threats and vulnerabilities is a
critical aspect of information security. In order to perform their
duties, security personnel must be educated on the changing nature of
threats to the information systems they maintain. There are resources
that will allow smaller institutions to meet this requirement at little
or no cost, such as published security updates, online courses, and
educational publications.\263\ For financial institutions that utilize
service providers to meet information security needs, the service
provider is likely to include assurances that provided personnel will
be trained in current security practices. The Commission views the use
of such a service provider as meeting this requirement, as the
financial institution is ``providing'' the service as part of the price
it pays to the service provider. Thus, the Final Rule adopts paragraph
(e)(3) as proposed.\264\
---------------------------------------------------------------------------
\262\ National Automobile Dealers Association (comment 46,
NPRM), at 35.
\263\ See, e.g., Federal Trade Commission, Cybersecurity for
Small Business, https://www.ftc.gov/tips-advice/business-center/small-businesses/cybersecurity (last accessed 1 Dec. 2020); Remarks
of Kiersten Todt, Safeguards Workshop Tr. at 86-88 (describing the
resources of the Cyber Readiness Institute).
\264\ The Clearing House suggested the Rule should require
background checks on employees. The Clearing House (Comment 49,
NPRM) at 19.
---------------------------------------------------------------------------
Verification of Current Knowledge
Proposed paragraph (e)(4) required financial institutions to
``[v]erify[ ] that key information security personnel take steps to
maintain current knowledge of changing information security threats and
countermeasures.'' \265\ This requirement was intended to complement
the proposed requirement regarding ongoing training of data security
personnel, by requiring verification such training has taken place.
---------------------------------------------------------------------------
\265\ Proposed 16 CFR 314.4(e)(4).
---------------------------------------------------------------------------
NADA argued this requirement should not apply to smaller financial
institutions, stating the examples set forth in the Proposed Rule would
be difficult for some smaller financial institutions to perform.\266\
The examples provided with the Proposed Rule were that a financial
institution could: (1) Offer incentives or funds for key personnel to
undertake continuing education that addresses recent developments, (2)
include a requirement to stay abreast of security research as part of
their performance metrics, or (3) conduct an annual assessment of key
personnel's knowledge of threats related to their information system.
The Commission believes smaller financial institutions can take
advantage of any of these methods, particularly ``requiring key
personnel to undertake continuing education'' as part of that
personnel's duties. If they outsource responsibility for data security
to service providers, they can simply include these requirements in
their contracts.
---------------------------------------------------------------------------
\266\ National Automobile Dealers Association (comment 46,
NPRM), at 35-36.
---------------------------------------------------------------------------
The Commission believes the rapidly changing nature of information
security mandates this requirement, in order that information security
leadership can properly supervise the information security program.
Accordingly, the Final Rule adopts proposed paragraph (e)(4) without
change.
Proposed Paragraph (f)
Proposed paragraphs (f)(1) and (2) retained the current Rule's
requirement, found in existing paragraphs (d)(1) and (2), to oversee
service providers, and added a paragraph (f)(3), requiring financial
institutions also periodically assess service providers ``based on the
risk they present and the continued adequacy of their safeguards.''
\267\ The current Rule expressly requires an assessment of service
providers' safeguards only at the onboarding stage; proposed paragraph
(f)(3) required financial institutions to monitor their service
providers on an ongoing basis to ensure they are maintaining adequate
safeguards to protect customer information they possess or access.\268\
---------------------------------------------------------------------------
\267\ Proposed 16 CFR 314.4(g).
\268\ The Clearing House wrote in support of this element of the
Proposed Rule, noting it would bring the Safeguards Rule's
provisions relating to service provider oversight into better
alignment with security guidelines for banks. The Clearing House
(comment 49, NPRM), at 14.
---------------------------------------------------------------------------
Several commenters argued it would be costly and difficult for some
financial institutions to periodically assess their service
providers.\269\ These commenters were particularly concerned with
smaller financial institutions' ability to ``monitor'' larger service
providers.\270\ The Internet Association commented the requirement to
periodically assess service providers would be too onerous for the
service providers themselves, arguing the requirement would place
``service providers under constant surveillance by their financial
institution clients.'' \271\ HITRUST suggested the Rule should state
the periodic assessment requirement may be satisfied by requiring
service providers to obtain and maintain information
[[Page 70296]]
security certifications provided by third parties and based on proper
information security frameworks.\272\ In contrast, Consumer Reports
took issue with the Rule requiring only ``assessment'' of service
providers, and argued financial institutions should be required to
monitor their service providers for compliance.\273\ Yet other
commenters expressed confusion over the term ``service provider,''
asking whether it would cover national consumer reporting agencies that
smaller financial institutions would be hard-pressed to assess.\274\
---------------------------------------------------------------------------
\269\ National Automobile Dealers Association (comment 46,
NPRM), at 37; National Independent Automobile Dealers Association
(comment 48, NPRM), at 7; see also Wangyang Shen (comment 3, Privacy
Rule) (noting difficulty of supervising cloud services).
\270\ National Automobile Dealers Association (comment 46,
NPRM), at 22; National Association of Dealer Counsel (comment 44,
NPRM), at 3.
\271\ Internet Association (comment 9, Workshop), at 3-4.
\272\ HITRUST (comment 18, NPRM), at 3-4.
\273\ Consumer Reports (comment 52, NPRM) at 7.
\274\ American Financial Services Association (comment 41,
NPRM), at 7.
---------------------------------------------------------------------------
The Commission retains the service provider oversight requirement
from proposed paragraph (f) without modification. Some high profile
breaches have been caused by service providers' security failures,\275\
and the Commission views the regular assessment of the security risks
of service providers as an important part of maintaining the strength
of a financial institution's safeguards.
---------------------------------------------------------------------------
\275\ For example, in 2013, attackers were reportedly able to
use stolen credentials obtained from a third-party service provider
to access a customer service database maintained by national
retailer Target Corporation, resulting in the theft of information
relating to 41 million customer payment card accounts. Kevin McCoy,
Target to pay $18.5M for 2013 data breach that affected 41 million
consumers, USA Today, May 23, 2017, https://www.usatoday.com/story/money/2017/05/23/target-pay-185m-2013-data-breach-affected-consumers/102063932/.
---------------------------------------------------------------------------
The Commission disagrees with the commenters who expressed concerns
this provision, and particularly the assessment requirement, would
impose undue costs on financial institutions. The Rule would require
financial institutions only to assess the risks service providers
present and evaluate whether they continue to provide the safeguards
required by contract, which need not include extensive investigation of
a service provider's systems. In the case of large service providers,
this oversight may consist of reviewing public reports of insecure
practices, changes in the services provided, or security failures in
the services provided. In other circumstances, such as where a large
company hires a vendor to secure sensitive customer information,
certifications, reports, or even third-party audits may be appropriate.
The exact steps required depend both on the size and complexity of the
financial institution and the nature of the services provided by the
service provider. For this reason, the Commission declines to adopt the
suggestion to allow a financial institution to accept an information
security certification from the service provider to satisfy the service
provider oversight requirement. The fact that a company maintains an
information security certification may be a significant part of
assessing the adequacy of a service provider's safeguards, but the
Commission declines to prescribe a one-size-fits all approach, given
the variation in size and complexity of financial institutions and
their service providers.
To avoid imposing undue costs on financial institutions, the
Commission declines to require ongoing monitoring, rather than periodic
assessment, as recommended by Consumer Reports. The Commission believes
periodic assessment strikes the right balance between protecting
consumers and imposing undue costs on financial institutions. The
Commission acknowledges financial institutions may have limited
bargaining power in obtaining services from large service providers and
limited ability to demand access to a service provider's systems. In
those cases, any sort of hands-on assessment of the provider's systems
may not be possible.
As to the concern the assessment requirement will impose undue
burdens on the service providers themselves, the Commission does not
believe this concern justifies a modification to the proposed
requirement. First, the Rule does not require ``constant surveillance''
by financial institutions--they are required only to ``periodically
assess'' the risks presented by service providers. Second, as discussed
above, the supervision of service providers is a vitally important
aspect of information security, and while there may be some burdens on
the service providers associated with being supervised, these are
necessary burdens. A financial institution must be sure a service
provider is protecting the information of its customers, and any
expenses this involves are a necessary part of fulfilling this duty.
Finally, as to concerns about potential ambiguities in the
definition of service provider, the amendments preserve the definition
in the current Rule. Thus, entities subject to this requirement under
the Final Rule will remain the same as under the existing Rule and may
include consumer reporting agencies. As discussed above, even larger
service providers such as national CRAs can be subjected to some form
of review by financial institutions.\276\
---------------------------------------------------------------------------
\276\ The National Pawnbrokers Association expressed concern
they cannot control vendors of local law enforcement agencies to
whom they are required to provide customer information. National
Pawnbrokers Association (comment 32, NPRM), at 2. However, the Rule
does not require financial institutions oversee service providers
employed by other entities over which they have no control.
---------------------------------------------------------------------------
The Commission adopts proposed paragraph (f) in the Final Rule
without modification.
Proposed Paragraph (g)
Paragraph (g) of the Proposed Rule retained the language of
existing paragraph (e) in the current Rule, which requires financial
institutions to evaluate and adjust their information security programs
in light of the result of testing required by this section, material
changes to their operations or business arrangements, or any other
circumstances they know or have reason to know may have a material
impact on their information security program. The Commission received
no comments on this paragraph and adopts the language of the Proposed
Rule.
Proposed Paragraph (h)
Proposed paragraph (h) required financial institutions to establish
written incident response plans that addressed (1) the goals of the
plan; (2) the internal processes for responding to a security event;
(3) the definition of clear roles, responsibilities and levels of
decision-making authority; (4) external and internal communications and
information sharing; (5) identification of requirements for the
remediation of any identified weaknesses in information systems and
associated controls; (6) documentation and reporting regarding security
events and related incident response activities; and (7) the evaluation
and revision as necessary of the incident response plan following a
security event.
Several commenters supported the proposal to require an incident
response plan.\277\ The Credit Union National Association observed an
incident response plan ``helps ensure that an entity is prepared in
case of an incident by planning how it will respond and what is
required for the response.'' \278\ Consumer Reports noted a rapid
response to a security event can limit damage caused by the event.\279\
The
[[Page 70297]]
Princeton Center commented ``a written incident response plan is an
essential component of a good security system.'' \280\ HITRUST
commented incident response plans can help organizations ``to better
allocate limited resources.'' \281\ The South Carolina Department of
Consumer Affairs suggested the provision go further by requiring the
incident response plan include a process for notifying senior
information security personnel of the event.\282\
---------------------------------------------------------------------------
\277\ Consumer Reports (comment 52, NPRM), at 6; Princeton
University Center for Information Technology Policy (comment 54,
NPRM), at 7; Electronic Privacy Information Center (comment 55,
NPRM), at 8; Credit Union National Association (comment 30, NPRM),
at 2; Heartland Credit Union Association (comment 42, NPRM), at 2;
National Association of Federally-Insured Credit Unions (comment 43,
NPRM), at 1; HITRUST (comment 18, NPRM), at 2.
\278\ Credit Union National Association (comment 30, NPRM), at
2.
\279\ Consumer Reports (comment 52, NPRM), at 6.
\280\ Princeton University Center for Information Technology
Policy (comment 54, NPRM), at 7.
\281\ HITRUST (comment 18, NPRM), at 2.
\282\ South Carolina Department of Consumer Affairs (comment 47,
NPRM), at 2.
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Other commenters opposed requiring an incident response plan or
objected to particular aspects of the requirement. Some commenters
suggested requiring financial institutions to have incident response
plans is outside the Commission's authority under the GLB Act.\283\
NADA argued the requirement for an incident response plan was overbroad
in light of the broad definition of security event,\284\ and the
requirement was vague as to what the plan should include.\285\
---------------------------------------------------------------------------
\283\ National Automobile Dealer Association (comment 46, NPRM),
at 38; National Independent Automobile Dealers Association (comment
48, NPRM), at 7.
\284\ National Automobile Dealer Association (comment 46, NPRM),
at 38.
\285\ National Automobile Dealer Association (comment 46, NPRM),
at 12, 38-39. NPA also asked for greater detail on what constitutes
an ``incident.'' National Pawnbroker Association (comment 32, NPRM),
at 4.
---------------------------------------------------------------------------
Other commenters argued the requirement was too burdensome. ACE
argued ``the range of security events that might occur and their
potential impacts on institutional capacity to recover'' make
establishing an incident response plan that will allow an institution
to ``respond to, and recover from, any security event materially
affecting . . . customer information'' impossible.\286\ The Mortgage
Bankers Association (``MBA'') suggested ``institutions of smaller sizes
may not necessarily be capable of addressing all seven of the proposed
goals.'' \287\ Further, the MBA argued an incident response plan
requirement had ``the potential to cripple small businesses under the
pressure of repeatedly checking the boxes for potentially harmless
events.'' \288\
---------------------------------------------------------------------------
\286\ American Council on Education (comment 24, NPRM), at 15.
\287\ Mortgage Bankers Association (comment 26, NPRM), at 4.
\288\ Mortgage Bankers Association (comment 26, NPRM), at 4.
---------------------------------------------------------------------------
Finally, some commenters raised questions about what it means for
customer information to be in a financial institution's ``possession''
for purposes of the incident response plan requirement. ACE argued the
requirement does not adequately account for customer information held
in cloud storage operated by third parties, asserting such information
is not technically within the financial institution's possession.\289\
ACE suggested the provision should apply to customer information for
which the financial institution is responsible, instead.\290\
Relatedly, the NPA expressed concern pawnbrokers might be subject to
liability under the Proposed Rule when law enforcement agencies or
their third-party vendors make public disclosures of customer
information pawnbrokers are obligated to report.\291\
---------------------------------------------------------------------------
\289\ American Council on Education (comment 24, NPRM), at 15.
\290\ Id.
\291\ National Pawnbroker Association (comment 32, NPRM), at 4.
---------------------------------------------------------------------------
The Commission retains the requirement for financial institution to
develop and implement an incident response plan, with one modification
described below. The Commission believes the creation of an incident
response plan is directly related to safeguarding customer information
and is within its authority under the GLBA. The requirement to create
an incident response plan focuses on preparing financial institutions
to respond promptly and appropriately to security events, and
mitigating any weaknesses in their information systems in the process.
By responding quickly and promptly mitigating weaknesses, financial
institutions can stop ongoing or future compromise of customer
information.\292\ A well-organized response to a security event can
limit the number of consumers affected by an outside attacker by
promptly identifying the attack and taking steps to stop the attack.
---------------------------------------------------------------------------
\292\ See Remarks of Serge Jorgenson, Safeguards Workshop Tr.,
supra note 17, at 52 (observing a prompt response to an incident can
prevent a ``threat actor running around in my environment for days,
months, years, and able to access anything they want.'').
---------------------------------------------------------------------------
The Commission disagrees with the commenters who stated this
requirement was too burdensome. The Final Rule requires incident
response plans address ``security event[s] materially affecting the
confidentiality, integrity, or availability of customer information in
[a financial institution's] control.'' Significantly, the plan must
address events that ``materially'' affect customer information. Thus,
the required incident response plan does not require a plan to address
every security event that may occur. The plan need not include minute
details or all possible scenarios. Instead, the Rule requires the plan
to establish a system--for example, by laying out clear lines of
responsibility, systems for information sharing, and methods for
evaluating possible solutions--that will facilitate a financial
institution's response to security events regardless of the nature of
the event. A detailed approach may be appropriate for some financial
institutions, such as those with especially complicated systems or
personnel hierarchies, but the Rule is designed to give financial
institutions the flexibility needed to develop plans that best suit
their needs.\293\
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\293\ Although the Commission agrees with the South Carolina
Department of Consumer Affairs that notification of senior personnel
is valuable, the requirement that the plan address ``the definition
of clear roles, responsibilities and levels of decision-making
authority'' will almost always result in communication of decision-
making to senior personnel authorized to make decisions about the
security response. Coupled with the requirement the Qualified
Individual report to the board or equivalent body on material events
affecting security, the Commission does not see the need to make
this change.
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Moreover, the Commission believes the requirement is clear as to
what an incident response plan should include. The seven listed
requirements for the incident response plans provide sufficient
guidance to financial institutions designing incident response plans
while giving them flexibility to design a plan suited to their
organization. In addition, there are many resources for designing
incident response plans available for financial institutions, as well
as service providers that can assist with the design process.\294\
Individual institutions can determine the exact details of the plans.
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\294\ See, e.g., FTC, Data Breach Response: A Guide for Business
(2019), www.ftc.gov/tips-advice/business-center/guidance/data-breach-response-guide-business; NIST, Guide for Cybersecurity Event
Recovery (2016), nvlpubs.nist.gov/nistpubs/SpecialPublications/NIST.SP.800-184.pdf; Orion Cassetto, Incident Response Plan 101: How
to Build One, Templates and Examples, Exabeam: Information Security
Blog (November 21, 2018), www.exabeam.com/incident-response/incident-response-plan/ (last visited December 2, 2020).
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To address questions about whether information is in the financial
institution's ``possession,'' the Commission is revising paragraph (h)
of the Final Rule to require financial institutions develop incident
response plans ``designed to promptly respond to, and recover from, any
security event materially affecting . . . customer information in your
control.'' (emphasis added) Replacing the term ``possession'' with
``control'' resolves the questions raised by ACE and the NPA regarding
[[Page 70298]]
whether financial institutions must plan for security events affecting
data that has been transferred to various kinds of third parties. Where
a financial institution has voluntarily opted to store its customer
information in the cloud, to whatever extent the information is no
longer in the ``possession'' of the financial institution, it is
certainly within the institution's ``control.'' By contrast, customer
information that has been obtained by a third party such as a law
enforcement agency, over whom a financial institution has no authority
and of whose actions the financial institution has no knowledge, cannot
fairly be said to be in the financial institution's control.
Consequently, the financial institution need not account for possible
disclosures of that information by the third party.\295\
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\295\ NADA further argued the incident response plan constitutes
a de facto consumer notification requirement. National Automobile
Dealer Association (comment 46, NPRM), at 39. Financial institutions
have an independent obligation to perform notification as required
by state law, whether or not they have an incident response plan in
place. The fact that the Rule requires a plan that sets forth
procedures for satisfying that requirement does not impose any
independent notification requirement on the financial institution.
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Notification of Security Events to the Commission
The Commission also requested comment on whether the Rule should
require financial institutions to report security events to the
Commission. Several commenters supported this requirement.\296\ The
Princeton University Center for Information Technology Policy noted
such a reporting requirement would ``provide the Commission with
valuable information about the scope of the problem and the
effectiveness of security measures across different entities'' and
``help the Commission coordinate responses to shared threats.'' \297\
The National Association of Federally-Insured Credit Unions argued
requiring financial institutions to report security events to the
Commission would provide an ``appropriate incentive for covered
financial companies to disclose information to consumers and relevant
regulatory bodies.'' \298\ NAFCU also suggested notification
requirements are important because they ``ensure independent assessment
of whether a security incident represents a threat to consumer
privacy.'' \299\
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\296\ Consumer Reports (comment 52, NPRM), at 6; Princeton
University Center for Information Technology Policy (comment 54,
NPRM), at 7; Credit Union National Association (comment 30, NPRM),
at 2; Heartland Credit Union Association (comment 42, NPRM), at 2;
National Association of Federally-Insured Credit Unions (comment 43,
NPRM), at 1-2.
\297\ Princeton University Center for Information Technology
Policy (comment 54, NPRM), at 7.
\298\ National Association of Federally-Insured Credit Unions
(comment 43, NPRM), at 1.
\299\ National Association of Federally-Insured Credit Unions
(comment 43, NPRM), at 1-2.
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Other commenters opposed the inclusion of a reporting
requirement.\300\ ACE argued such a requirement ``would simply add
another layer on top of an already crowded list of federal and state
law enforcement contacts and state breach reporting requirements.''
\301\ ACE also suggested any notification requirement should be limited
to a more restricted definition of ``security event'' than the
definition in the Proposed Rule, so financial institutions would only
be required to report incidents that could lead to consumer harm.\302\
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\300\ National Independent Automobile Dealers Association
(comment 48, NPRM), at 7; American Council on Education (comment 24,
NPRM), at 15.
\301\ American Council on Education (comment 24, NPRM), at 15.
\302\ Id.
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The Commission agrees with commenters that stated a requirement
financial institutions report security events to the Commission would
have many benefits, including allowing the Commission to identify
emerging threats and assisting the Commission's enforcement of the
Rule. In addition, such a requirement would be unlikely to create a
significant burden on financial institutions because a security event
that leads to notification to the Commission is very likely to create
breach notification obligations under various state laws, and the
financial institution will thus already be engaged in notifying
consumers and state regulators. The addition of a notification to the
FTC would not require any significant additional preparation or effort.
However, because the notice of proposed rulemaking did not set forth a
detailed proposal for a notification requirement, the Final Rule does
not include such a requirement. Instead, the Commission is issuing a
supplemental notice of proposed rulemaking (SNPRM) that proposes adding
a requirement financial institutions notify the Commission of detected
security events under certain circumstances.\303\
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\303\ Standards for Safeguarding Customer Information, SNPRM,
published elsewhere in this issue of the Federal Register.
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Proposed Paragraph (i)
Proposed paragraph (i) required a financial institution's CISO to
``report in writing, at least annually, to [the financial
institution's] board of directors or equivalent governing body''
regarding the following information: (1) The overall status of the
information security program and financial institution's compliance
with the Safeguards Rule; and (2) material matters related to the
information security program, addressing issues such as risk
assessment, risk management and control decisions, service provider
arrangements, results of testing, security events or violations and
management's responses thereto, and recommendations for changes in the
information security program.\304\ For financial institutions that did
not have a board of directors or equivalent, the proposal required the
CISO to make the report to a senior officer responsible for the
financial institution's information security program.
---------------------------------------------------------------------------
\304\ Proposed 16 CFR 314.4(i).
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One commenter supported this requirement.\305\ Additionally,
several workshop participants emphasized the value of communication
between information security leaders and corporate boards or their
equivalent. For example, workshop participant Michele Norin stated it
is ``important'' for the topic of information security to be discussed
at the level of the board or senior leadership regularly, and at least
once per year.\306\ Participant Adrienne Allen agreed annual reporting
made sense as a requirement, but noted for some financial institutions,
particularly those with an online presence, even more frequent
communication could be beneficial.\307\
---------------------------------------------------------------------------
\305\ Rocio Baeza (comment 12, Workshop), at 3-8 (supporting
requirement and providing sample report form and compliance
questionnaire); see also The Clearing House (comment 49, NPRM), at
15-16 (arguing that Rule should require more involvement from Board
and senior management).
\306\ Remarks of Michele Norin, Safeguards Workshop Tr., supra
note 17, at 194.
\307\ Remarks of Adrienne Allen, Safeguards Workshop Tr., supra
note 17, at 199-200.
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ACE argued the Proposed Rule created too much emphasis on a single
annual report and should instead focus on regular reporting to the
Board or equivalent.\308\ It also expressed concern the report required
by the Proposed Rule would be too detailed and would not allow the
Board to see ``the forest for the trees,'' \309\ the requirements for
the report were too prescriptive, and the requirements focused too much
on compliance rather than security.\310\ Similarly, NADA argued the
report would not improve security but would instead create
``unnecessary liability exposure for the board/leadership of the
entity.'' \311\ HITRUST suggested
[[Page 70299]]
Qualified Individuals should be able to meet this reporting requirement
by submitting a report from an information security certification
program to the Board or equivalent body.\312\
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\308\ American Council on Education (comment 24, NPRM), at 16.
\309\ Id.
\310\ Id.
\311\ National Automobile Dealer Association (comment 46, NPRM),
at 41. NADA also argued the reports by third-party Qualified
Individuals might not include useful information and were ``more
likely to be filled with platitudes and/or efforts to `upsell' the
dealership on additional CISO services.'' Id. at 42. NADA provided
no support for this claim. The Commission notes such a report would
not meet the requirements of this provision, and the financial
institution would be justified in terminating their relationship
with that provider or, at least, demanding a revised report that did
meet those requirements.
\312\ HITRUST (comment 18, NPRM), at 4.
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The Commission adopts the proposal as final, with one modification
discussed below. This provision is intended to ensure the governing
body of the financial institution is engaged with and informed about
the state of the financial institution's information security program.
Likewise, this will create accountability for the Qualified Individual
by requiring him or her to set forth the status of the information
security program for the governing body.\313\ This will help financial
institutions to ensure their information security programs are being
maintained appropriately and given the necessary resources. Written
reports will create a record of decisions made and the information upon
which they were based, which may aid future decision-making.\314\
Management involvement in information security programs can improve the
strength of those programs and help to reduce breaches.\315\
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\313\ See Remarks of Karthik Rangarajan, Safeguards Workshop
Tr., supra note 17, at (``If quarter over quarter, year over year,
this watermark isn't reducing, then board of directors should be
able to challenge us and say maybe you're not mapping your risks
correctly, or vice versa if it's reducing but we're seeing more
incidents, we're seeing potential breaches, things like that, then
the board of directors should be able to say maybe you don't have
the right risk quantification framework or the right risk management
framework.'').
\314\ Workshop participants Adrienne Allen, Karthik Rangarajan,
and Michele Norin each emphasized this point. See Safeguards
Workshop Tr., supra note 17, pp. 201-09.
\315\ See Juhee Kwon Jackie Rees Ulmer, & Tawei Wang, The
Association Between Top Management Involvement and Compensation and
Information Security Breaches, Journal of Information Systems,
Spring 2013, at 219-236 (``. . . the involvement of an IT executive
decreases the probability of information security breach reports by
about 35 percent . . .''); Julia L. Higgs, Robert E. Pinsker, Thomas
Joseph Smith, & George Young, The Relationship Between Board-Level
Technology Committees and Reported Security Breaches, Journal of
Information Systems, Fall 2016, at 79-98 (``[A]s a technology
committee becomes more established, its firm is not as likely to be
breached. To obtain further evidence on the perceived value of a
technology committee, this study uses a returns analysis and finds
that the presence of a technology committee mitigates the negative
abnormal stock returns arising from external breaches.'').
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The Commission disagrees with the commenters who stated the
reporting requirement would be too prescriptive. In fact, the language
only requires reporting of (1) the overall status of the information
security program and its compliance with this Rule; and (2) material
matters related to the information security program. The language
includes examples of what material matters might include, such as risk
assessments and security events, but does not require all of them be
included. The financial institution and the Qualified Individual will
be responsible for determining what is material for their organization.
The Commission does not believe these requirements call for overly
detailed reports.\316\
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\316\ Indeed, workshop participants discussed a variety of
strategies for meaningful communication between security personnel
and senior leadership. Participants noted the proper content, style,
and cadence of reporting (beyond the minimum annual report) will
vary depending on, among other things, the type of financial
institution in question and the level of familiarity of leadership
with the relevant technical issues. See Safeguards Workshop Tr.,
supra note 17, at 194-200.
---------------------------------------------------------------------------
Although the Commission agrees a certification report from a
Qualified Individual could be a part of the annual report and may cover
many material matters, it may not suffice in all cases; thus, the
Commission declines to include such a one-size-fits-all requirement.
As to the suggestion to require ``regular'' reporting, the
Commission agrees more regular reporting may be the best approach for
many financial institutions. To this end, the Commission modifies the
requirement in the final rule to say ``regularly, and at least
annually.'' \317\ Beyond this modification, the Final Rule adopts
proposed paragraph (i) as proposed.
---------------------------------------------------------------------------
\317\ NADA argued reports required by this provision would be
expensive because the Proposed Rule stated they would need to be
prepared by a ``CISO,'' which NADA takes to mean a highly
compensated expert of the type retained by the most sophisticated
large institutions. National Automobile Dealer Association (comment
46, NPRM), at 41. As discussed above, however, the Rule does not
require all financial institutions to retain such an expert.
Instead, the report will be made by the Qualified Individual, whose
expertise and compensation will vary according to the size and
complexity of a financial institution's information system.
---------------------------------------------------------------------------
Board Certification
The Commission specifically sought comment on whether the Board or
equivalent should be required to certify the contents of the report.
The two commenters who addressed this question stated they should
not.\318\ ACE noted ``governing boards generally will not have the
knowledge and expertise to independently certify'' the technical
aspects of the report and certification might require the employment of
outside auditors.\319\ The Commission agrees senior management of
financial institutions will often lack the technical expertise to
personally attest to its validity. In addition, the primary purpose of
the required report is to encourage communication between information
security personnel and senior management, not to show compliance with
the Rule. Requiring the governing board to certify the contents of the
report would likely transform the report into a compliance document and
might reduce its efficacy as a communication between the Qualified
Individual and the Board. Accordingly, the Commission declines to adopt
this requirement in the Final Rule.
---------------------------------------------------------------------------
\318\ National Automobile Dealer Association (comment 46, NPRM),
at 41 n.126; American Council on Education (comment 24, NPRM), at
16.
\319\ American Council on Education (comment 24, NPRM), at 16.
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Sec. 314.5: Effective Date
The Proposed Rule set a new effective date for some portions of the
Rule. Proposed Sec. 314.5 provided certain elements of the information
security program would not be required until six months after the
publication of a final rule, rather than immediately upon publication.
The paragraphs that would have a delayed effective date were: Sec.
314.4(a), related to the appointment of a Qualified Individual; Sec.
314.4(b)(1), relating to conducting a written risk assessment; Sec.
314.4(c)(1) through (8), setting forth the new elements of the
information security program; Sec. 314.4(d)(2), requiring continuous
monitoring or annual penetration testing and biannual vulnerability
assessment; Sec. 314.4(e), requiring training for personnel; Sec.
314.4(f)(3), requiring periodic assessment of service providers; Sec.
314.4(h), requiring a written incident response plan; and Sec.
314.4(i), requiring annual written reports from the Qualified
Individual. All other requirements under the Safeguards Rule would
remain in effect during this six-month period. These remaining
requirements largely mirrored the requirements of the existing Rule.
All commenters that addressed this provision noted the difficulty
of complying with some of the provisions of the Proposed Rule, and
argued financial institutions should be given more time to comply with
them. ACE suggested financial institutions be given one year to create
a plan for compliance and two years to come into actual
compliance.\320\ AFSA suggested compliance not be required for two
[[Page 70300]]
years.\321\ ACA International requested the effective date be one year
after publication of the Rule.\322\
---------------------------------------------------------------------------
\320\ American Council on Education (comment 24, NPRM), at 4-5.
\321\ American Financial Services Association (comment 41,
NPRM), at 7.
\322\ ACA International (comment 45, NPRM), at 10-11.
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The Commission agrees some financial institutions may need longer
to modify their information security programs to comply with the new
requirements in the Final Rule, especially given the current pandemic
and the strains it is placing on businesses. Accordingly, the Final
Rule extends the effective date for these enumerated provisions to one
year after the publication of this document.
Proposed Sec. 314.6: Exceptions
Proposed Sec. 314.6 exempted financial institutions that maintain
customer information concerning fewer than five thousand consumers from
certain requirements of the Proposed Rule, namely Sec. 314.4(b)(1),
requiring a written risk assessment; Sec. 314.4(d)(2), requiring
continuous monitoring or annual penetration testing and biannual
vulnerability assessment; Sec. 314.4(h), requiring a written incident
response plan; and Sec. 314.4(i), requiring an annual written report
by the CISO (as revised, the Qualified Individual).\323\ This proposed
section was designed to reduce the burden on smaller financial
institutions.
---------------------------------------------------------------------------
\323\ Proposed 16 CFR 314.6.
---------------------------------------------------------------------------
The Commission sought comment on whether it was appropriate to
include such an exemption, whether the specific exemptions were
appropriate, whether the use of the number of customers concerning whom
the financial institution retains customer information is the most
effective way to determine which financial institutions should be
exempted and, if so, whether five thousand customers was an appropriate
number. After reviewing the comments received, the Commission retains
the exemption for financial institutions with fewer than 5,000
customers as proposed.
Several commenters supported the inclusion of an exemption for
small financial institutions. Consumer Reports supported the exemption
as proposed.\324\ NPA supported the decision to base this exemption on
the number of customers whose information the financial institution
maintains, but questioned how the number of customers would be
determined.\325\ NPA asked whether the number of customers would be
counted on an annual basis or include all records the financial
institution maintains. It also asked if each transaction with a
customer would be counted separately.\326\
---------------------------------------------------------------------------
\324\ Consumer Reports (comment 52, NPRM), at 6; see also Credit
Union National Association (comment 30, NPRM), at 2 (noting the
exemption will be helpful for smaller businesses, but suggesting
other changes to the Proposed Rule so the exemption is not
required).
\325\ National Pawnbrokers Association (comment 32, NPRM), at 6.
\326\ Id.; see also National Independent Automobile Dealers
Association (comment 48, NPRM), at 3.
---------------------------------------------------------------------------
Some commenters argued the number of customers whose records a
financial institution maintains was the wrong measure by which to
assess whether the exemption should apply. For example, commenters
suggested the Rule should take into account businesses with revenue
beneath a certain threshold,\327\ the number of students enrolled at
covered educational institutions,\328\ or the number of individuals
employed by the financial institution.\329\
---------------------------------------------------------------------------
\327\ ACA International (comment 45, NPRM), at 11-12.
\328\ American Council on Education (comment 24, NPRM), at 5.
\329\ Ahmed Aly (comment 22, NPRM).
---------------------------------------------------------------------------
Additionally, some commenters argued the threshold for application
of the exemption should be higher. ACA International suggested the
exemption should apply to all financial institutions maintaining
records concerning fewer than 10,000 customers.\330\ AFSA suggested a
50,000 customer threshold.\331\ NADA \332\ and NIADA \333\ argued the
threshold should be raised to 100,000 customers. Without proposing a
specific alternative, NPA expressed concern the 5,000-customer
threshold may be too low, noting pawnbrokers who accept firearms as
collateral are required to keep customer records related to certain
transactions for twenty years.\334\
---------------------------------------------------------------------------
\330\ ACA International (comment 45, NPRM), at 11-12.
\331\ American Financial Services Association (comment 41,
NPRM), at 3-4.
\332\ National Automobile Dealers Association (comment 46,
NPRM), at 43-44. NADA also suggested information about customers for
which the nonpublic information has been removed should not be
counted to the total. If the information is anonymized or otherwise
transformed so it is no longer reasonably linkable to a customer,
that information will not count towards the exemption. NADA's
example of retaining only ``name, phone number, address, and VIN of
the vehicle they own,'' would still count as customer information
under the Rule.
\333\ National Independent Automobile Dealers Association
(comment 48, NPRM), at 3.
\334\ National Pawnbrokers Association (comment 32, NPRM), at 6.
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As to the substance of the exemption, some commenters felt it did
not go far enough to relieve the burden of the rule for small financial
institutions. ACA International proposed eligible financial
institutions should also be exempt from the requirement to designate a
single qualified individual to oversee their information security
programs.\335\ The National Federation of Independent Business argued
businesses with 15 or fewer employees should be exempted from the Rule
entirely and instead held only to a requirement to take ``commercially
reasonable steps'' to safeguard customer information.\336\ The Small
Business Administration Office of Advocacy suggested, in the absence of
additional information regarding the impact of the proposed changes on
small businesses, the Rule should ``maintain the status quo'' for small
entities as defined by the Small Business Administration's size
standards.\337\
---------------------------------------------------------------------------
\335\ ACA International (comment 45, NPRM), at 12.
\336\ National Federation of Independent Business (comment 16,
NPRM), at 4.
\337\ Small Business Administration Office of Advocacy (comment
28, NPRM), at 6.
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On the other hand, other commenters opposed the inclusion of any
exemption. The Independent Community Bankers of America noted the
Federal Financial Institutions Examination Council Interagency
Guidelines Establishing Standards for Safeguarding Customer Information
(``FFIEC Guidelines''), which detail how depository institutions are
required to protect customer information, include no exemption for
smaller institutions and suggested the Rule should also have no
exemption and apply equally to all financial institutions.\338\
---------------------------------------------------------------------------
\338\ Independent Community Bankers of America (comment 35,
NPRM), at 4; see also American Escrow (comment 6, Workshop), at 3
(arguing even small companies may need to comply with all portions
of the Rule to maintain consumer confidence); see also Caiting Wang
(Comment 6, Privacy) (suggesting exempted provisions should be
optional for smaller businesses, or the Commission create a fund to
enable small businesses to comply with these provisions).
---------------------------------------------------------------------------
Under the existing Rule, there is no exception for smaller
entities. Still, the Commission continues to believe it is appropriate
to exempt small businesses from some of the revised Rule's
requirements. Although the FFIEC Guidelines do not exempt small
businesses from its requirements, the FFIEC Guidelines regulate only
depository financial institutions subject to an entirely different
regulatory regime, including supervision by their regulatory agencies.
While the provisions from which eligible financial institutions are
exempt have significant benefits for the security of customer
information and other sensitive data,\339\
[[Page 70301]]
those provisions may be less necessary in situations where the overall
volume of retained data is low. This is true in part because the
potential for cumulative consumer harm is less where fewer consumers'
information may be exposed as the result of a security incident.\340\
---------------------------------------------------------------------------
\339\ See, e.g., Remarks of Brian McManamon, Safeguards Workshop
Tr., supra note 17, at 85 (noting continuous monitoring allows
organizations to detect and quickly respond to threats); Remarks of
Frederick Lee, Safeguards Workshop Tr., supra note 17, at 126-28
(Frederick Lee) (discussing benefits of penetration testing);
Remarks of Tom Dugas, Safeguards Workshop Tr., supra note 17, at 143
(noting the importance of vulnerability scans); Remarks of Michele
Norin, Safeguards Workshop Tr., supra note 17, 194-95 (asserting
annual reporting by the Qualified Individual to an organization's
board or equivalent is beneficial); Remarks of Adrienne Allen,
Safeguards Workshop Tr., supra note 17, at 201.
\340\ See Remarks of James Crifasi, Safeguards Workshop Tr.,
supra note 17, at 91-92 (noting companies that control large amounts
of consumer data should in most instances implement the full range
of data security safeguards, whereas small businesses with less data
may need to focus on cybersecurity basics); see also Remarks of Lee
Waters, Safeguards Workshop Tr., supra note 17, at 91 (``[T]he
amount of data [that a business holds] would definitely have an
influence on whether a business is even going to be attacked.'');
Remarks of Rocio Baeza, Safeguards Workshop Tr., supra note 17, at
94 (citing the volume of consumer records held by an organization as
an important factor in assessing cybersecurity risk).
---------------------------------------------------------------------------
For similar reasons, the Commission finds the number of individuals
concerning whom a financial institution maintains customer information
is the appropriate measure of whether the exemption should apply to a
particular financial institution. The application of the exemption
should take into account both the potential burden of compliance to
financial institutions and the risk to consumers when standards are
relaxed--in other words, the purpose of the exemption is to avoid
imposing undue burden while assuring customer information is subject to
necessary protections. Even a very small financial institution,
depending on its business model, may retain very large quantities of
sensitive customer information.\341\ Adequate security is necessary to
protect such information, which may constitute an attractive target for
bad actors such as identity thieves; the value of the target is
correlated with the volume of information maintained.\342\ While a
business's revenue or number of employees may provide a measure of the
burden of compliance for that business, these figures do not capture
consumer risk. By contrast, the number of individuals about whom a
financial institution maintains customer information is a proxy for the
level of security necessary in light of both the risk of attack and the
potential consumer harm should a security incident occur.\343\ In
addition, basing the exemption on the number of individuals concerning
whom a financial institution maintains customer information provides an
incentive to financial institutions to reduce the amount of information
they retain. A financial institution may choose to dispose of
information so it holds information on few enough consumers to qualify
for exemption.\344\
---------------------------------------------------------------------------
\341\ See, e.g., Remarks of James Crifasi, Safeguards Workshop
Tr., supra note 17, at 91-92 (noting small businesses with an
enormous amount of consumer records need to follow all of the
safeguards and ``can't get away with just doing the basics''); see
also ACA International (comment 45, NPRM) at 11 (``Many small
financial institutions, including a number of ACA members, have
objectively limited operations in terms of number of employees and
revenues, but handle large volumes of consumer account data for each
of their clients on whose behalf they are collecting debts.'').
\342\ See. e.g., Remarks of Rocio Baeza, Safeguards Workshop
Tr., supra note 17, at 94 (opining ``the better indicators for
cybersecurity risk are going to be two things: The volume of
consumer records that a financial institution holds and also the
rate of change.''); Remarks of Lee Waters, Safeguards Workshop Tr.,
supra note 17, at 91 (noting the amount of data a company holds
influences whether it is going to be attacked).
\343\ See Remarks of Brian McManamon, Safeguards Workshop Tr.,
supra note 17, at 89-90 (noting the size of a financial institution
and the amount and nature of the information it holds factor into an
appropriate information security program).
\344\ The Commission understands this provision to count all
individual consumers about which a financial institution maintains
customer information, including both current and former customers.
The exemption counts consumers rather than transactions so a
financial institution that had 100 transactions with a single
customer would count only a single consumer.
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The Final Rule adopts this section as proposed. The Commission
continues to believe the cutoff for financial institutions maintaining
information concerning 5,000 consumers appropriately balances the need
for security with the burdens on smaller businesses. The requirements
to which exempted financial institutions would still be required to
adhere are tailored to balance the importance of adequately securing
customer information against the need to limit financial burdens for
small businesses. Many of these requirements were already in force as
part of the existing Rule--for example, covered financial institutions
were already required to design and implement a written information
security program, conduct risk assessments, perform an initial
assessment of their service providers, and designate one or more
employees to oversee information security. For reasons discussed
elsewhere in this document, the new requirements that apply to exempted
financial institutions, such as the requirement to designate a single
qualified individual to oversee information security rather than one or
more individuals, will ensure financial institutions of all sizes
continue to adequately protect customer information in an environment
of increasing cybersecurity risk, while avoiding the imposition of
undue burden.
IV. Paperwork Reduction Act
The Paperwork Reduction Act (``PRA''), 44 U.S.C. 35, requires
Federal agencies to seek and obtain Office of Management and Budget
(OMB) approval before undertaking a collection of information directed
to ten or more persons.\345\ A ``collection of information'' occurs
when ten or more persons are asked to report, provide, disclose, or
record information in response to ``identical questions.'' \346\
Applying these standards, neither the Safeguards Rule nor the
amendments constitute a ``collection of information.'' \347\ The Rule
calls upon affected financial institutions to develop or strengthen
their information security programs in order to provide reasonable
safeguards. Under the Rule, each financial institution's safeguards
will vary according to its size and complexity, the nature and scope of
its activities, and the sensitivity of the information involved. For
example, a financial institution with numerous employees would develop
and implement employee training and management procedures beyond those
that would be appropriate or reasonable for a sole proprietorship, such
as an individual tax preparer or mortgage broker. Similarly, a
financial institution that shares customer information with numerous
service providers would need to take steps to ensure such information
remains protected, while a financial institution with no service
providers would not need to address this issue. Thus, although each
financial institution must summarize its compliance efforts in one or
more written documents, the discretionary balancing of factors and
circumstances the Rule allows--including the myriad operational
differences among businesses it contemplated--does not require entities
to answer ``identical questions'' and therefore does not trigger the
PRA's requirements.
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\345\ 44 U.S.C. 3502(3)(A)(i).
\346\ See 44 U.S.C. 3502(3)(A).
\347\ See Standards for Safeguarding Customer Information, 67 FR
36484, 36491 (May 23, 2002).
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The amendments to the Rule do not change this analysis because they
retain the existing Rule's process-based approach, allowing financial
institutions to tailor their programs to reflect the financial
institutions' size, complexity, and operations, and to the
[[Page 70302]]
sensitivity and amount of customer information they collect. For
example, amended Sec. 314.4(b) would require a written risk
assessment, but each risk assessment will reflect the particular
structure and operation of the financial institution and, though each
assessment must include certain criteria, these are only general
guidelines and do not consist of ``identical questions.'' Similarly,
amended Sec. 314.4(h), which requires a written incident response
plan, is only an extension of the preexisting requirement of a written
information security plan and would necessarily vary significantly
based on factors such as the financial institution's internal
procedures, which officials within the financial institution have
decision-making authority, how the financial institution communicates
internally and externally, and the structure of the financial
institution's information systems. Likewise, the proposed requirement
for Qualified Individuals to produce annual reports under proposed
Sec. 314.4(i) does not consist of answers to identical questions, as
the content of these reports would vary considerably between financial
institutions and Qualified Individuals are given flexibility in
deciding what to include in the reports. Finally, the modification of
the definition of ``financial institution'' to include ``activities
incidental to financial activities'' and therefore bring finders under
the scope of the Rule do not constitute a ``collection of
information,'' and therefore do not trigger the PRA's requirements.
V. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA), as amended by the Small
Business Regulatory Enforcement Fairness Act of 1996, requires an
agency to either provide an Initial Regulatory Flexibility Analysis
(IRFA) with a proposed Rule, or certify that the proposed Rule will not
have a significant impact on a substantial number of small
entities.\348\ The Commission published an Initial Regulatory
Flexibility Analysis in order to inquire into the impact of the
Proposed Rule on small entities. In response, the Commission received
comments that argued the revision to the Safeguards Rule would be
unduly burdensome for smaller financial institutions. The discussion
below summarizes these comments and the Commission's response to them.
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\348\ 5 U.S.C. 603 et seq.
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1. Description of the Reason for Agency Action
The Commission issues these amendments to clarify the Safeguards
Rule by including a definition of ``financial institution'' and related
examples in the Safeguards Rule rather than incorporating them from the
Privacy Rule by reference. The amendments also expand the definition of
``financial institution'' in the Rule to include entities engaged in
activities incidental to financial activities. This change would bring
``finders'' within the scope of the Rule. This change harmonizes the
Rule with other agencies' rules and requires finders that collect
consumers' sensitive financial information to comply with the
Safeguards Rule's process-based approach to protect that data.
In addition, the amendments modify the Safeguards Rule to include
more detailed requirements for the information security program
required by the Rule.
2. Issues Raised by Comments in Response to the IRFA
As stated above, the Commission received several comments that
argued the revised Safeguards Rule would impose unduly heavy burdens on
smaller businesses. The Small Business Administration's Office of
Advocacy commented it was concerned the FTC had not gathered sufficient
data as to either the costs or benefits of the proposed changes for
small financial institutions. The FTC shares the Office of Advocacy's
interest in ensuring regulatory changes have an evidentiary basis. Many
of the questions on which the FTC sought public comment, both in the
regulatory review and in the proposed rule context, specifically
related to the costs and benefits of existing and proposed Rule
requirements. Following the initial round of commenting, the Commission
conducted the FTC Safeguards Workshop and solicited additional public
comments with the explicit goal of gathering additional data relating
to the costs and benefits of the proposed changes.\349\ As detailed
throughout this document, the Commission believes there is a strong
evidentiary basis for the issuance of the Final Rule.
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\349\ See Public Workshop Examining Information Security for
Financial Institutions and Information Related to Changes to the
Safeguards Rule, 85 FR 13082 (Mar. 6, 2020).
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The Office of Advocacy also argued the Proposed Rule's requirements
were unduly prescriptive and should not be enacted as they apply to
small businesses until the Commission can ``ascertain the quantitative
impact on small entities.'' \350\ The Office of Advocacy, along with
other commenters, argued the amendments taken together would create a
large burden on smaller financial institutions. In particular,
commenters pointed to the requirements that financial institutions
appoint a chief information security officer, customer information be
encrypted, financial institutions utilize multi-factor authentication,
and financial institutions regularly update training programs. These
comments and the Commission's response are discussed at length above.
Most commenters did not provide any specific estimates of these
expenses, but two commenters did provide a summary of their expected
expenses.
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\350\ Small Business Administration Office of Advocacy (comment
28, NPRM), at 6.
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As discussed in the document, the Commission believes any burden
imposed by the revised Rule is substantially mitigated by the fact the
Rule continues to be process-based, flexible, and based on the
financial institution's size and complexity. In addition, the
amendments exempt institutions that maintain information on fewer than
5,000 consumers from certain requirements that require additional
written product and might pose a greater burden on smaller entities.
The Commission believes most of the entities covered by the exemption
will be small businesses. Finally, the Commission believes all
financial institutions, including small businesses, that comply with
the current Safeguards Rule will already be in compliance with most of
the new provisions of the revised Rule as part of their current
information security program.
In addition, in response to the comments concerned about the burden
of the amendments, the Commission extended the effective date from six
months after the publication of the Final Rule to one year after the
publication to allow financial institutions additional time to come
into compliance with the revised Rule. In addition, in response to
comments that argued hiring a chief information security officer would
be prohibitively expensive for small financial institutions, the
Commission amended the rule to clarify such an employee was not
required for all financial institutions. The Final Rule is modified to
clarify a financial institution need only appoint an individual who is
qualified to coordinate its information security program, and those
qualifications will vary based on the complexity of the program and
size and nature of the
[[Page 70303]]
financial institution. The Commission also clarified employee training
programs need to be updated only as necessary, to respond to a comment
regular updating would be difficult for smaller financial institutions.
3. Estimate of Number of Small Entities to Which the Amendments Will
Apply
As previously discussed in the IRFA, determining a precise estimate
of the number of small entities \351\--including newly covered entities
under the modified definition of financial institution--is not readily
feasible. Financial institutions already covered by the Rule as
originally promulgated include lenders, financial advisors, loan
brokers and servicers, collection agencies, financial advisors, tax
preparers, and real estate settlement services, to the extent they have
``customer information'' within the meaning of the Rule. Finders are
also covered under the Final Rule. However, it is not known whether any
finders are small entities, and if so, how many there are. The
Commission requested comment and information on the number of
``finders'' that would be covered by the Rule's modified definition of
``financial institution,'' and how many of those finders, if any, are
small entities. The Commission received no comments that addressed this
question.
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\351\ The U.S. Small Business Administration Table of Small
Business Size Standards Matched to North American Industry
Classification System Codes (``NAICS'') are generally expressed in
either millions of dollars or number of employees. A size standard
is the largest a business can be and still qualify as a small
business for Federal Government programs. For the most part, size
standards are the annual receipts or the average employment of a
firm. Depending on the nature of the financial services an
institution provides, the size standard varies. By way of example,
mortgage and nonmortgage loan brokers (NAICS code 522310) are
classified as small if their annual receipts are $8.0 million or
less. Consumer lending institutions (NAICS code 522291) are
classified as small if their annual receipts are $41.5 million or
less. Commercial banking and savings institutions (NAICS codes
522110 and 522120) are classified as small if their assets are $600
million or less. Assets are determined by averaging the assets
reported on businesses' four quarterly financial statements for the
preceding year. The 2019 Table of Small Business Size Standards is
available at https://www.sba.gov/sites/default/files/2019-08/SBA%20Table%20of%20Size%20Standards_Effective%20Aug%2019%2C%202019_Rev.pdf.
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4. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
The Rule does not impose any reporting or any specific
recordkeeping requirements as discussed earlier. See supra Section IV
(Paperwork Reduction Act). With regard to other compliance
requirements, the addition of definitions and examples from the Privacy
Rule is not expected to have an impact on covered financial
institutions, including those that may be small entities. (The
preceding section of this analysis discusses classes of covered
financial institutions that may qualify as small entities.) The
addition of ``finders'' to the definition of financial institutions
imposes the obligations of the Rule on entities that engage in
``finding'' activity and also collect customer information.
The addition of more detailed requirements may require some
financial institutions to perform additional risk assessments or
monitoring, or to create additional safeguards as set forth in the
Proposed Rule. These obligations may require institutions to retain
employees or third-party service providers with skills in information
security, but, as discussed above, the Commission believes most
financial institutions will have already complied with many parts of
the Rule as part of their information security programs required under
the existing Rule. There may be additional related compliance costs
(e.g., legal, new equipment or systems, modifications to policies or
procedures), but, as discussed above, the Commission believes these are
limited by several factors, including the flexibility of the Rule, the
existing safeguards in place to comply with the existing Rule, and the
exemption for financial institutions that maintain less consumer
information.
Although two commenters provided summaries of the expected expenses
for some financial institutions to comply with the Rule, those
estimates did not provide sufficient detail to fully evaluate whether
they were accurate or representative of other financial institutions
and appeared to be based, at least in part, on a misunderstanding of
the requirement to appoint a Qualified Individual. The Commission
believes, for most smaller financial institutions, there are very low-
cost solutions for any additional duties imposed by the Final Rule.
This view is supported by the comments of several experts at the
Safeguards Rule Workshop.\352\
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\352\ See, e.g., Remarks of Brian McManamon, Safeguards Workshop
Tr., supra note 17, at 78 (describing virtual CISO services);
Matthew Green, Safeguards Workshop Tr., supra note 17, at 225
(noting website usage of encryption for data in motion is above 80
percent; ``Let's Encrypt'' provides free TLS certificates; and costs
have gone down to the point that if a financial institution is not
using TLS encryption for data in motion, it is making an unusual
decision outside the norm); Rocio Baeza, Safeguards Workshop Tr.,
supra note 17, at 106 (``[T]he encryption of data in transit has
been standard. There's no pushback with that.''); Slides
Accompanying the Remarks of Lee Waters, ``Information Security
Programs and Smaller Businesses,'' in Safeguards Workshop Slides,
supra note 72, at 26 (``Estimated Costs of Proposed Changes,''
estimating costs of multi-factor authentication to be $50 for
smartcard or fingerprint readers, and $10 each per smartcard);
Slides Accompanying Remarks of Wendy Nather, Safeguards Workshop
Slides, supra note 72, at 37 (chart showing the use of multi-factor
authentication solutions such as Duo Push, phone call, mobile
passcode, SMS passcode, hardware token, Yubikey passcode, and U2F
token in industries such as financial services and higher
education).
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The Commission believes the protection of consumers' financial
information is of the utmost importance and the cost of the safeguards
required to provide that protection is justified and necessary. The
Commission carefully balanced the cost of these requirements with the
need to protect consumer information and has made every effort to
ensure the Final Rule retains flexibility so financial institutions can
tailor information security programs to the size and complexity of the
financial institution, the nature and scope of its activities, and the
sensitivity of any customer information at issue.
5. Description of Steps Taken To Minimize Significant Economic Impact,
if Any, on Small Entities, Including Alternatives
The standards in the Final Rule allow a small financial institution
to develop an information security program appropriate to its size and
complexity, the nature and scope of its activities, and the sensitivity
of any customer information at issue. The amendments include certain
design standards (e.g., a company must implement encryption,
authentication, and incident response) in the Rule, in addition to the
performance standards (reasonable security) the Rule currently uses. As
discussed, while these design standards may introduce some additional
burden, the Commission believes many financial institutions' existing
information security programs already meet most of these requirements.
In addition, the requirements in the Final Rule, like those in the
existing Rule, are designed to allow financial institutions flexibility
in how and whether they should be implemented. For example, the
requirement encryption be used to protect customer information in
transit and at rest may be met with effective alternative compensating
controls if encryption is infeasible for a given financial institution.
In addition, the amendments exempt financial institutions that
maintain relatively small amounts of customer information from certain
requirements of the Final Rule. The exemptions would apply to financial
institutions that maintain customer information
[[Page 70304]]
concerning fewer than ten thousand consumers. The Commission believes
exempted financial institutions are generally, but not exclusively,
small entities. Such financial institutions are not required to perform
a written risk assessment, conduct continuous monitoring or annual
penetration testing and biannual vulnerability assessment, prepare a
written incident response plan, or prepare an annual written report by
the Qualified Individual. These exemptions are intended to reduce the
burden on smaller financial institutions. The Commission believes the
obligations subject to these exemptions are the ones most likely to
cause undue burden on smaller financial institutions.
Exempted financial institutions will still need to conduct risk
assessments, design and implement a written information security
program with the required elements, utilize qualified information
security personnel and train employees, monitor activity of authorized
users, oversee service providers, and evaluate and adjust their
information security program. These are core obligations under the Rule
any financial institution that collects customer information must meet,
regardless of size.
The Commission considered allowing compliance with a third-party
data security standard, such as the NIST framework, to act as a safe
harbor for compliance with the Rule. The Commission, however,
determined any reduction of burden created by allowing such safe
harbors is offset by issues they would cause. For example, such safe
harbors would require the Commission to monitor the third-party
standard or standards to determine whether they continued to align with
the Safeguards Rule. In addition, the Commission would still have to
investigate a company's compliance with the outside standard in any
enforcement action. The Commission also does not agree compliance with
an outside standard is likely to be less burdensome than complying with
the Safeguards Rule itself.
VI. Other Matters
Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.),
the Office of Information and Regulatory Affairs designated this rule
as not a ``major rule,'' as defined by 5 U.S.C. 804(2).
List of Subjects in 16 CFR Part 314
Consumer protection, Credit, Data protection, Privacy, Trade
practices.
For the reasons stated above, the Federal Trade Commission amends
16 CFR part 314 as follows:
PART 314--STANDARDS FOR SAFEGUARDING CUSTOMER INFORMATION
0
1. The authority citation for part 314 continues to read as follows:
Authority: 15 U.S.C. 6801(b), 6805(b)(2).
0
2. In Sec. 314.1, revise paragraph (b) to read as follows:
Sec. 314.1 Purpose and scope.
* * * * *
(b) Scope. This part applies to the handling of customer
information by all financial institutions over which the Federal Trade
Commission (``FTC'' or ``Commission'') has jurisdiction. Namely, this
part applies to those ``financial institutions'' over which the
Commission has rulemaking authority pursuant to section 501(b) of the
Gramm-Leach-Bliley Act. An entity is a ``financial institution'' if its
business is engaging in an activity that is financial in nature or
incidental to such financial activities as described in section 4(k) of
the Bank Holding Company Act of 1956, 12 U.S.C. 1843(k), which
incorporates activities enumerated by the Federal Reserve Board in 12
CFR 225.28 and 225.86. The ``financial institutions'' subject to the
Commission's enforcement authority are those that are not otherwise
subject to the enforcement authority of another regulator under section
505 of the Gramm-Leach-Bliley Act, 15 U.S.C. 6805. More specifically,
those entities include, but are not limited to, mortgage lenders, ``pay
day'' lenders, finance companies, mortgage brokers, account servicers,
check cashers, wire transferors, travel agencies operated in connection
with financial services, collection agencies, credit counselors and
other financial advisors, tax preparation firms, non-federally insured
credit unions, investment advisors that are not required to register
with the Securities and Exchange Commission, and entities acting as
finders. They are referred to in this part as ``You.'' This part
applies to all customer information in your possession, regardless of
whether such information pertains to individuals with whom you have a
customer relationship, or pertains to the customers of other financial
institutions that have provided such information to you.
0
3. Revise Sec. 314.2 to read as follows:
Sec. 314.2 Definitions.
(a) Authorized user means any employee, contractor, agent,
customer, or other person that is authorized to access any of your
information systems or data.
(b)(1) Consumer means an individual who obtains or has obtained a
financial product or service from you that is to be used primarily for
personal, family, or household purposes, or that individual's legal
representative.
(2) For example:
(i) An individual who applies to you for credit for personal,
family, or household purposes is a consumer of a financial service,
regardless of whether the credit is extended.
(ii) An individual who provides nonpublic personal information to
you in order to obtain a determination about whether he or she may
qualify for a loan to be used primarily for personal, family, or
household purposes is a consumer of a financial service, regardless of
whether the loan is extended.
(iii) An individual who provides nonpublic personal information to
you in connection with obtaining or seeking to obtain financial,
investment, or economic advisory services is a consumer, regardless of
whether you establish a continuing advisory relationship.
(iv) If you hold ownership or servicing rights to an individual's
loan that is used primarily for personal, family, or household
purposes, the individual is your consumer, even if you hold those
rights in conjunction with one or more other institutions. (The
individual is also a consumer with respect to the other financial
institutions involved.) An individual who has a loan in which you have
ownership or servicing rights is your consumer, even if you, or another
institution with those rights, hire an agent to collect on the loan.
(v) An individual who is a consumer of another financial
institution is not your consumer solely because you act as agent for,
or provide processing or other services to, that financial institution.
(vi) An individual is not your consumer solely because he or she
has designated you as trustee for a trust.
(vii) An individual is not your consumer solely because he or she
is a beneficiary of a trust for which you are a trustee.
(viii) An individual is not your consumer solely because he or she
is a participant or a beneficiary of an employee benefit plan that you
sponsor or for which you act as a trustee or fiduciary.
(c) Customer means a consumer who has a customer relationship with
you.
(d) Customer information means any record containing nonpublic
personal information about a customer of a financial institution,
whether in paper, electronic, or other form, that is handled
[[Page 70305]]
or maintained by or on behalf of you or your affiliates.
(e)(1) Customer relationship means a continuing relationship
between a consumer and you under which you provide one or more
financial products or services to the consumer that are to be used
primarily for personal, family, or household purposes.
(2) For example:
(i) Continuing relationship. A consumer has a continuing
relationship with you if the consumer:
(A) Has a credit or investment account with you;
(B) Obtains a loan from you;
(C) Purchases an insurance product from you;
(D) Holds an investment product through you, such as when you act
as a custodian for securities or for assets in an Individual Retirement
Arrangement;
(E) Enters into an agreement or understanding with you whereby you
undertake to arrange or broker a home mortgage loan, or credit to
purchase a vehicle, for the consumer;
(F) Enters into a lease of personal property on a non-operating
basis with you;
(G) Obtains financial, investment, or economic advisory services
from you for a fee;
(H) Becomes your client for the purpose of obtaining tax
preparation or credit counseling services from you;
(I) Obtains career counseling while seeking employment with a
financial institution or the finance, accounting, or audit department
of any company (or while employed by such a financial institution or
department of any company);
(J) Is obligated on an account that you purchase from another
financial institution, regardless of whether the account is in default
when purchased, unless you do not locate the consumer or attempt to
collect any amount from the consumer on the account;
(K) Obtains real estate settlement services from you; or
(L) Has a loan for which you own the servicing rights.
(ii) No continuing relationship. A consumer does not, however, have
a continuing relationship with you if:
(A) The consumer obtains a financial product or service from you
only in isolated transactions, such as using your ATM to withdraw cash
from an account at another financial institution; purchasing a money
order from you; cashing a check with you; or making a wire transfer
through you;
(B) You sell the consumer's loan and do not retain the rights to
service that loan;
(C) You sell the consumer airline tickets, travel insurance, or
traveler's checks in isolated transactions;
(D) The consumer obtains one-time personal or real property
appraisal services from you; or
(E) The consumer purchases checks for a personal checking account
from you.
(f) Encryption means the transformation of data into a form that
results in a low probability of assigning meaning without the use of a
protective process or key, consistent with current cryptographic
standards and accompanied by appropriate safeguards for cryptographic
key material.
(g)(1) Financial product or service means any product or service
that a financial holding company could offer by engaging in a financial
activity under section 4(k) of the Bank Holding Company Act of 1956 (12
U.S.C. 1843(k)).
(2) Financial service includes your evaluation or brokerage of
information that you collect in connection with a request or an
application from a consumer for a financial product or service.
(h)(1) Financial institution means any institution the business of
which is engaging in an activity that is financial in nature or
incidental to such financial activities as described in section 4(k) of
the Bank Holding Company Act of 1956, 12 U.S.C. 1843(k). An institution
that is significantly engaged in financial activities, or significantly
engaged in activities incidental to such financial activities, is a
financial institution.
(2) Examples of financial institutions are as follows:
(i) A retailer that extends credit by issuing its own credit card
directly to consumers is a financial institution because extending
credit is a financial activity listed in 12 CFR 225.28(b)(1) and
referenced in section 4(k)(4)(F) of the Bank Holding Company Act of
1956 (12 U.S.C. 1843(k)(4)(F)), and issuing that extension of credit
through a proprietary credit card demonstrates that a retailer is
significantly engaged in extending credit.
(ii) An automobile dealership that, as a usual part of its
business, leases automobiles on a nonoperating basis for longer than 90
days is a financial institution with respect to its leasing business
because leasing personal property on a nonoperating basis where the
initial term of the lease is at least 90 days is a financial activity
listed in 12 CFR 225.28(b)(3) and referenced in section 4(k)(4)(F) of
the Bank Holding Company Act, 12 U.S.C. 1843(k)(4)(F).
(iii) A personal property or real estate appraiser is a financial
institution because real and personal property appraisal is a financial
activity listed in 12 CFR 225.28(b)(2)(i) and referenced in section
4(k)(4)(F) of the Bank Holding Company Act, 12 U.S.C. 1843(k)(4)(F).
(iv) A career counselor that specializes in providing career
counseling services to individuals currently employed by or recently
displaced from a financial organization, individuals who are seeking
employment with a financial organization, or individuals who are
currently employed by or seeking placement with the finance, accounting
or audit departments of any company is a financial institution because
such career counseling activities are financial activities listed in 12
CFR 225.28(b)(9)(iii) and referenced in section 4(k)(4)(F) of the Bank
Holding Company Act, 12 U.S.C. 1843(k)(4)(F).
(v) A business that prints and sells checks for consumers, either
as its sole business or as one of its product lines, is a financial
institution because printing and selling checks is a financial activity
that is listed in 12 CFR 225.28(b)(10)(ii) and referenced in section
4(k)(4)(F) of the Bank Holding Company Act, 12 U.S.C. 1843(k)(4)(F).
(vi) A business that regularly wires money to and from consumers is
a financial institution because transferring money is a financial
activity referenced in section 4(k)(4)(A) of the Bank Holding Company
Act, 12 U.S.C. 1843(k)(4)(A), and regularly providing that service
demonstrates that the business is significantly engaged in that
activity.
(vii) A check cashing business is a financial institution because
cashing a check is exchanging money, which is a financial activity
listed in section 4(k)(4)(A) of the Bank Holding Company Act, 12 U.S.C.
1843(k)(4)(A).
(viii) An accountant or other tax preparation service that is in
the business of completing income tax returns is a financial
institution because tax preparation services is a financial activity
listed in 12 CFR 225.28(b)(6)(vi) and referenced in section 4(k)(4)(G)
of the Bank Holding Company Act, 12 U.S.C. 1843(k)(4)(G).
(ix) A business that operates a travel agency in connection with
financial services is a financial institution because operating a
travel agency in connection with financial services is a financial
activity listed in 12 CFR 225.86(b)(2) and referenced in section
4(k)(4)(G) of the Bank Holding Company Act, 12 U.S.C. 1843(k)(4)(G).
(x) An entity that provides real estate settlement services is a
financial institution because providing real estate settlement services
is a financial activity
[[Page 70306]]
listed in 12 CFR 225.28(b)(2)(viii) and referenced in section
4(k)(4)(F) of the Bank Holding Company Act, 12 U.S.C. 1843(k)(4)(F).
(xi) A mortgage broker is a financial institution because brokering
loans is a financial activity listed in 12 CFR 225.28(b)(1) and
referenced in section 4(k)(4)(F) of the Bank Holding Company Act, 12
U.S.C. 1843(k)(4)(F).
(xii) An investment advisory company and a credit counseling
service are each financial institutions because providing financial and
investment advisory services are financial activities referenced in
section 4(k)(4)(C) of the Bank Holding Company Act, 12 U.S.C.
1843(k)(4)(C).
(xiii) A company acting as a finder in bringing together one or
more buyers and sellers of any product or service for transactions that
the parties themselves negotiate and consummate is a financial
institution because acting as a finder is an activity that is financial
in nature or incidental to a financial activity listed in 12 CFR
225.86(d)(1).
(3) Financial institution does not include:
(i) Any person or entity with respect to any financial activity
that is subject to the jurisdiction of the Commodity Futures Trading
Commission under the Commodity Exchange Act (7 U.S.C. 1 et seq.);
(ii) The Federal Agricultural Mortgage Corporation or any entity
chartered and operating under the Farm Credit Act of 1971 (12 U.S.C.
2001 et seq.);
(iii) Institutions chartered by Congress specifically to engage in
securitizations, secondary market sales (including sales of servicing
rights) or similar transactions related to a transaction of a consumer,
as long as such institutions do not sell or transfer nonpublic personal
information to a nonaffiliated third party other than as permitted by
Sec. Sec. 313.14 and 313.15; or
(iv) Entities that engage in financial activities but that are not
significantly engaged in those financial activities, and entities that
engage in activities incidental to financial activities but that are
not significantly engaged in activities incidental to financial
activities.
(4) Examples of entities that are not significantly engaged in
financial activities are as follows:
(i) A retailer is not a financial institution if its only means of
extending credit are occasional ``lay away'' and deferred payment plans
or accepting payment by means of credit cards issued by others.
(ii) A retailer is not a financial institution merely because it
accepts payment in the form of cash, checks, or credit cards that it
did not issue.
(iii) A merchant is not a financial institution merely because it
allows an individual to ``run a tab.''
(iv) A grocery store is not a financial institution merely because
it allows individuals to whom it sells groceries to cash a check, or
write a check for a higher amount than the grocery purchase and obtain
cash in return.
(i) Information security program means the administrative,
technical, or physical safeguards you use to access, collect,
distribute, process, protect, store, use, transmit, dispose of, or
otherwise handle customer information.
(j) Information system means a discrete set of electronic
information resources organized for the collection, processing,
maintenance, use, sharing, dissemination or disposition of electronic
information containing customer information or connected to a system
containing customer information, as well as any specialized system such
as industrial/process controls systems, telephone switching and private
branch exchange systems, and environmental controls systems that
contains customer information or that is connected to a system that
contains customer information.
(k) Multi-factor authentication means authentication through
verification of at least two of the following types of authentication
factors:
(1) Knowledge factors, such as a password;
(2) Possession factors, such as a token; or
(3) Inherence factors, such as biometric characteristics.
(l)(1) Nonpublic personal information means:
(i) Personally identifiable financial information; and
(ii) Any list, description, or other grouping of consumers (and
publicly available information pertaining to them) that is derived
using any personally identifiable financial information that is not
publicly available.
(2) Nonpublic personal information does not include:
(i) Publicly available information, except as included on a list
described in paragraph (l)(1)(ii) of this section; or
(ii) Any list, description, or other grouping of consumers (and
publicly available information pertaining to them) that is derived
without using any personally identifiable financial information that is
not publicly available.
(3) For example:
(i) Nonpublic personal information includes any list of
individuals' names and street addresses that is derived in whole or in
part using personally identifiable financial information (that is not
publicly available), such as account numbers.
(ii) Nonpublic personal information does not include any list of
individuals' names and addresses that contains only publicly available
information, is not derived, in whole or in part, using personally
identifiable financial information that is not publicly available, and
is not disclosed in a manner that indicates that any of the individuals
on the list is a consumer of a financial institution.
(m) Penetration testing means a test methodology in which assessors
attempt to circumvent or defeat the security features of an information
system by attempting penetration of databases or controls from outside
or inside your information systems.
(n)(1) Personally identifiable financial information means any
information:
(i) A consumer provides to you to obtain a financial product or
service from you;
(ii) About a consumer resulting from any transaction involving a
financial product or service between you and a consumer; or
(iii) You otherwise obtain about a consumer in connection with
providing a financial product or service to that consumer.
(2) For example:
(i) Information included. Personally identifiable financial
information includes:
(A) Information a consumer provides to you on an application to
obtain a loan, credit card, or other financial product or service;
(B) Account balance information, payment history, overdraft
history, and credit or debit card purchase information;
(C) The fact that an individual is or has been one of your
customers or has obtained a financial product or service from you;
(D) Any information about your consumer if it is disclosed in a
manner that indicates that the individual is or has been your consumer;
(E) Any information that a consumer provides to you or that you or
your agent otherwise obtain in connection with collecting on, or
servicing, a credit account;
(F) Any information you collect through an internet ``cookie'' (an
information collecting device from a web server); and
(G) Information from a consumer report.
(ii) Information not included. Personally identifiable financial
information does not include:
[[Page 70307]]
(A) A list of names and addresses of customers of an entity that is
not a financial institution; and
(B) Information that does not identify a consumer, such as
aggregate information or blind data that does not contain personal
identifiers such as account numbers, names, or addresses.
(o)(1) Publicly available information means any information that
you have a reasonable basis to believe is lawfully made available to
the general public from:
(i) Federal, State, or local government records;
(ii) Widely distributed media; or
(iii) Disclosures to the general public that are required to be
made by Federal, State, or local law.
(2) You have a reasonable basis to believe that information is
lawfully made available to the general public if you have taken steps
to determine:
(i) That the information is of the type that is available to the
general public; and
(ii) Whether an individual can direct that the information not be
made available to the general public and, if so, that your consumer has
not done so.
(3) For example:
(i) Government records. Publicly available information in
government records includes information in government real estate
records and security interest filings.
(ii) Widely distributed media. Publicly available information from
widely distributed media includes information from a telephone book, a
television or radio program, a newspaper, or a website that is
available to the general public on an unrestricted basis. A website is
not restricted merely because an internet service provider or a site
operator requires a fee or a password, so long as access is available
to the general public.
(iii) Reasonable basis. (A) You have a reasonable basis to believe
that mortgage information is lawfully made available to the general
public if you have determined that the information is of the type
included on the public record in the jurisdiction where the mortgage
would be recorded.
(B) You have a reasonable basis to believe that an individual's
telephone number is lawfully made available to the general public if
you have located the telephone number in the telephone book or the
consumer has informed you that the telephone number is not unlisted.
(p) Security event means an event resulting in unauthorized access
to, or disruption or misuse of, an information system, information
stored on such information system, or customer information held in
physical form.
(q) Service provider means any person or entity that receives,
maintains, processes, or otherwise is permitted access to customer
information through its provision of services directly to a financial
institution that is subject to this part.
(r) You includes each ``financial institution'' (but excludes any
``other person'') over which the Commission has enforcement
jurisdiction pursuant to section 505(a)(7) of the Gramm-Leach-Bliley
Act.
0
4. In Sec. 314.3, revise paragraph (a) to read as follows:
Sec. 314.3 Standards for safeguarding customer information.
(a) Information security program. You shall develop, implement, and
maintain a comprehensive information security program that is written
in one or more readily accessible parts and contains administrative,
technical, and physical safeguards that are appropriate to your size
and complexity, the nature and scope of your activities, and the
sensitivity of any customer information at issue. The information
security program shall include the elements set forth in Sec. 314.4
and shall be reasonably designed to achieve the objectives of this
part, as set forth in paragraph (b) of this section.
* * * * *
0
5. Revise Sec. 314.4 to read as follows:
Sec. 314.4 Elements.
In order to develop, implement, and maintain your information
security program, you shall:
(a) Designate a qualified individual responsible for overseeing and
implementing your information security program and enforcing your
information security program (for purposes of this part, ``Qualified
Individual''). The Qualified Individual may be employed by you, an
affiliate, or a service provider. To the extent the requirement in this
paragraph (a) is met using a service provider or an affiliate, you
shall:
(1) Retain responsibility for compliance with this part;
(2) Designate a senior member of your personnel responsible for
direction and oversight of the Qualified Individual; and
(3) Require the service provider or affiliate to maintain an
information security program that protects you in accordance with the
requirements of this part.
(b) Base your information security program on a risk assessment
that identifies reasonably foreseeable internal and external risks to
the security, confidentiality, and integrity of customer information
that could result in the unauthorized disclosure, misuse, alteration,
destruction, or other compromise of such information, and assesses the
sufficiency of any safeguards in place to control these risks.
(1) The risk assessment shall be written and shall include:
(i) Criteria for the evaluation and categorization of identified
security risks or threats you face;
(ii) Criteria for the assessment of the confidentiality, integrity,
and availability of your information systems and customer information,
including the adequacy of the existing controls in the context of the
identified risks or threats you face; and
(iii) Requirements describing how identified risks will be
mitigated or accepted based on the risk assessment and how the
information security program will address the risks.
(2) You shall periodically perform additional risk assessments that
reexamine the reasonably foreseeable internal and external risks to the
security, confidentiality, and integrity of customer information that
could result in the unauthorized disclosure, misuse, alteration,
destruction, or other compromise of such information, and reassess the
sufficiency of any safeguards in place to control these risks.
(c) Design and implement safeguards to control the risks you
identity through risk assessment, including by:
(1) Implementing and periodically reviewing access controls,
including technical and, as appropriate, physical controls to:
(i) Authenticate and permit access only to authorized users to
protect against the unauthorized acquisition of customer information;
and
(ii) Limit authorized users' access only to customer information
that they need to perform their duties and functions, or, in the case
of customers, to access their own information;
(2) Identify and manage the data, personnel, devices, systems, and
facilities that enable you to achieve business purposes in accordance
with their relative importance to business objectives and your risk
strategy;
(3) Protect by encryption all customer information held or
transmitted by you both in transit over external networks and at rest.
To the extent you determine that encryption of customer information,
either in transit over external networks or at rest, is infeasible, you
may instead secure such customer information using effective
[[Page 70308]]
alternative compensating controls reviewed and approved by your
Qualified Individual;
(4) Adopt secure development practices for in-house developed
applications utilized by you for transmitting, accessing, or storing
customer information and procedures for evaluating, assessing, or
testing the security of externally developed applications you utilize
to transmit, access, or store customer information;
(5) Implement multi-factor authentication for any individual
accessing any information system, unless your Qualified Individual has
approved in writing the use of reasonably equivalent or more secure
access controls;
(6)(i) Develop, implement, and maintain procedures for the secure
disposal of customer information in any format no later than two years
after the last date the information is used in connection with the
provision of a product or service to the customer to which it relates,
unless such information is necessary for business operations or for
other legitimate business purposes, is otherwise required to be
retained by law or regulation, or where targeted disposal is not
reasonably feasible due to the manner in which the information is
maintained; and
(ii) Periodically review your data retention policy to minimize the
unnecessary retention of data;
(7) Adopt procedures for change management; and
(8) Implement policies, procedures, and controls designed to
monitor and log the activity of authorized users and detect
unauthorized access or use of, or tampering with, customer information
by such users.
(d)(1) Regularly test or otherwise monitor the effectiveness of the
safeguards' key controls, systems, and procedures, including those to
detect actual and attempted attacks on, or intrusions into, information
systems.
(2) For information systems, the monitoring and testing shall
include continuous monitoring or periodic penetration testing and
vulnerability assessments. Absent effective continuous monitoring or
other systems to detect, on an ongoing basis, changes in information
systems that may create vulnerabilities, you shall conduct:
(i) Annual penetration testing of your information systems
determined each given year based on relevant identified risks in
accordance with the risk assessment; and
(ii) Vulnerability assessments, including any systemic scans or
reviews of information systems reasonably designed to identify publicly
known security vulnerabilities in your information systems based on the
risk assessment, at least every six months; and whenever there are
material changes to your operations or business arrangements; and
whenever there are circumstances you know or have reason to know may
have a material impact on your information security program.
(e) Implement policies and procedures to ensure that personnel are
able to enact your information security program by:
(1) Providing your personnel with security awareness training that
is updated as necessary to reflect risks identified by the risk
assessment;
(2) Utilizing qualified information security personnel employed by
you or an affiliate or service provider sufficient to manage your
information security risks and to perform or oversee the information
security program;
(3) Providing information security personnel with security updates
and training sufficient to address relevant security risks; and
(4) Verifying that key information security personnel take steps to
maintain current knowledge of changing information security threats and
countermeasures.
(f) Oversee service providers, by:
(1) Taking reasonable steps to select and retain service providers
that are capable of maintaining appropriate safeguards for the customer
information at issue;
(2) Requiring your service providers by contract to implement and
maintain such safeguards; and
(3) Periodically assessing your service providers based on the risk
they present and the continued adequacy of their safeguards.
(g) Evaluate and adjust your information security program in light
of the results of the testing and monitoring required by paragraph (d)
of this section; any material changes to your operations or business
arrangements; the results of risk assessments performed under paragraph
(b)(2) of this section; or any other circumstances that you know or
have reason to know may have a material impact on your information
security program.
(h) Establish a written incident response plan designed to promptly
respond to, and recover from, any security event materially affecting
the confidentiality, integrity, or availability of customer information
in your control. Such incident response plan shall address the
following areas:
(1) The goals of the incident response plan;
(2) The internal processes for responding to a security event;
(3) The definition of clear roles, responsibilities, and levels of
decision-making authority;
(4) External and internal communications and information sharing;
(5) Identification of requirements for the remediation of any
identified weaknesses in information systems and associated controls;
(6) Documentation and reporting regarding security events and
related incident response activities; and
(7) The evaluation and revision as necessary of the incident
response plan following a security event.
(i) Require your Qualified Individual to report in writing,
regularly and at least annually, to your board of directors or
equivalent governing body. If no such board of directors or equivalent
governing body exists, such report shall be timely presented to a
senior officer responsible for your information security program. The
report shall include the following information:
(1) The overall status of the information security program and your
compliance with this part; and
(2) Material matters related to the information security program,
addressing issues such as risk assessment, risk management and control
decisions, service provider arrangements, results of testing, security
events or violations and management's responses thereto, and
recommendations for changes in the information security program.
0
6. Revise Sec. 314.5 to read as follows:
Sec. 314.5 Effective date.
Section 314.4(a), (b)(1), (c)(1) through (8), (d)(2), (e), (f)(3),
(h), and (i) are effective as of December 9, 2022.
0
7. Add Sec. 314.6 to read as follows:
Sec. 314.6 Exceptions.
Section 314.4(b)(1), (d)(2), (h), and (i) do not apply to financial
institutions that maintain customer information concerning fewer than
five thousand consumers.
By direction of the Commission, Commissioners Phillips and
Wilson dissenting.
April Tabor,
Secretary.
Note: The following appendix will not appear in the Code of
Federal Regulations.
[[Page 70309]]
Appendix--Statements Issued on October 27, 2021
Statement of Chair Lina M. Khan Joined by Commissioner Rebecca Kelly
Slaughter Regarding Regulatory Review of the Safeguards Rule
Today the FTC is significantly strengthening the Safeguards
Rule,\1\ first promulgated by the FTC twenty years ago pursuant to a
Congressional directive to protect personal information that is
stored by financial institutions. This revamping--the first time in
the Rule's history--is sorely needed. In the twenty years since the
Rule was first issued, the complexity of information security has
increased drastically, the use of computer networks in every aspect
of life has expanded exponentially, and, most notably, an unending
chain of damaging data breaches caused by inadequate security have
cost Americans heavily.\2\ The amendments adopted today require
financial institutions to develop information security programs that
can meet the challenges of today's security environment.
---------------------------------------------------------------------------
\1\ 16 CFR part 314. Pursuant to the Gramm Leach Bliley Act
(``GLB'' or ``GLBA''), Public Law 106-102, 113 Stat. 1338 (1999)
(codified as amended in scattered sections of 12 and 15 U.S.C.), the
Commission promulgated the Safeguards Rule in 2001.
\2\ See, e.g., 2020 Internet Crime Report, Fed. Bur.
Investigations,at 20 (Mar. 2021) (reporting consumer loss of over
$128 million resulting from corporate data breaches to those who
filed complaints in 2020 alone); Int'l Bus. Mach, Cost of a Data
Breach, at 4 (2021) (estimating that the average cost of single data
breach has risen to $4.24 million).
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For Americans, the harms stemming from the types of security
vulnerabilities that this Rule addresses are all too real. Victims
of breaches have their most sensitive information exposed, making
them more vulnerable to identity theft, phishing attacks, and other
forms of fraud.\3\ In 2018, almost 10 percent of Americans suffered
some form of identity theft, costing many of them hundreds of
dollars and dozens of hours of time, an experience that many
describe as distressing.\4\ For some, the cost is much higher, with
victims losing tens of thousands of dollars.\5\
---------------------------------------------------------------------------
\3\ 2013 Identity Fraud Report: Data Breaches Becoming a
Treasure Trove for Fraudsters, Javelin Strategy, at 1 (Feb. 2013)
(reporting that 1 in 4 recipients of a data breach notification
become victims of identity theft); Michelle Singletary, Your online
profile may help identity thieves, Washington Post (Feb. 28, 2012),
https://www.washingtonpost.com/business/economy/michelle-singletary-your-online-profile-may-help-identity-thieves/2012/02/28/gIQAXFjygR_story.html (reporting that recipients of data breach
letters are 9.5% more likely to suffer identity theft).
\4\ See Erika Harrell, Victims of Identity Theft, 2018, U.S.
Dep't of Just., at 1 (Apr. 2021), https://bjs.ojp.gov/content/pub/pdf/vit18.pdf.
\5\ See 2021 Consumer Aftermath Report, Identity Theft Resource
Center (2021), at 6 (finding that in a study of 427 identity crime
victims, 21% of them suffered losses of over $20,000).
---------------------------------------------------------------------------
The Rule amendments the FTC is issuing today are strongly
supported by the evidence in the record.\6\ The evidence gathered
from information security experts, industry associations, and
consumer groups--those with hands-on experience in the area and
knowledge of the field--decisively show that the amendments are
necessary. Of course, all of this information supplements the
experience that Commission staff has obtained over twenty years of
enforcing the Rule, and gained through investigations of companies'
data security practices under the FTC's deception and unfairness
authority.
---------------------------------------------------------------------------
\6\ The Commission first sought public comments on the proposed
amendments in April 2019. See Privacy of Consumer Financial
Information Rule Under the Gramm-Leach-Bliley Act, 84 FR 13150;
Standards for Safeguarding Customer Information, 84 FR 13158 (April
4, 2019). The agency received almost 50 comments from consumer
groups, industry associations, and data security experts. See FTC
Seeks Comment on Proposed Amendments to Safeguards and Privacy
Rules, 16 CFR part 314, Project No. P145407, (FTC-2019-0019) (``2019
Safeguards and Privacy NPRM ''), https://www.regulations.gov/docket/FTC-2019-0019/document. Further, the Commission conducted a workshop
discussing the proposed amendments with information security
professionals and experts, including IT staff from financial
institutions covered by the Safeguards Rule. See Transcript,
Information Security and Financial Institutions: An FTC Workshop to
Examine Safeguards Rule, Fed. Trade Comm'n (July 13, 2020)
(``Safeguards Workshop''), https://www.ftc.gov/system/files/documents/public_events/1567141/transcript-glb-safeguards-workshop-full.pdf. Connected with the workshop, the Commission sought and
received another round of public comments on the amendments. The
eleven relevant public comments relating to the subject matter of
the July 13, 2020, workshop can be found here: Postponement of
Public Workshop Related to Proposed Changes to the Safeguards Rule,
85 FR 23354 (FTC-2020-0038) (Apr. 27, 2020) (``Workshop Comment
Docket''), https://www.regulations.gov/document/FTC-2020-0038-0001.
---------------------------------------------------------------------------
The dissent's conclusion that these amendments are unnecessary
is belied by both the reality of rampant data security breaches as
well as the robust evidentiary record. The recent history of major
data breaches affecting millions of consumers shows that more needs
to be done to protect consumers' sensitive information. Despite the
increasing sophistication of cyberattacks, many businesses continue
to offer inadequate security.\7\ In particular, the massive Equifax
breach, which the FTC alleged was caused by inadequate data security
that could have been easily corrected by the company, is a glaring
example of how a financial institution's lax security practices can
have devastating consequences for Americans.\8\ The dissent's
suggestion that our current framework is sufficient falls flat in
the face of such a stark example of the harm that can arise from
avoidable lax security practices by covered financial institutions.
Moreover, the dissent's complaint that the rule is also informed by
evidence arising from breaches and practices occurring in other
types of industries misses the mark. Not only is there substantial
evidence in the rulemaking record clearly illustrating security
lapses of financial institutions that are covered by the Rule,\9\
but the implication that we shouldn't use our broader knowledge of
common security pitfalls is unwise.
---------------------------------------------------------------------------
\7\ See, e.g., Electronic Privacy Information Center, Comment
Letter No. 55 on 2019 Safeguards and Privacy NPRM (FTC-2019-0019),
at 3 (Aug. 1, 2019) (citing dramatic increase in data breaches at
financial services firms affecting millions of consumers), https://www.regulations.gov/comment/FTC-2019-0019-0055; Consumer Reports,
Comment Letter No. 52 on 2019 Safeguards and Privacy NPRM (FTC-2019-
0019) (Aug. 2, 2019), https://www.regulations.gov/comment/FTC-2019-0019-0052 (noting several high profile data breaches at financial
institutions as evidence for the need for stronger regulation);
Inpher, Inc., Comment Letter No. 50 on 2019 Safeguards and Privacy
NPRM (FTC-2019-0019), at 1 (Aug. 1, 2019), https://www.regulations.gov/comment/FTC-2019-0019-0050 (pointing to major
breaches at financial institutions as evidence for the need of
stronger security regulations); Independent Community Bankers of
America, Comment Letter No. 35 on 2019 Safeguards and Privacy NPRM
(FTC-2019-0019) (Aug. 2, 2019), https://www.regulations.gov/comment/FTC-2019-0019-0035 (noting that FTC-regulated financial institutions
are subject to less stringent security requirements than those
regulated by banking agencies, even though many handle the same
types of information as those financial institutions); National
Consumer Law Center et al., Comment Letter No. 58 on 2019 Safeguards
and Privacy NPRM (FTC-2019-0019) (Aug. 2, 2019), https://www.regulations.gov/document/FTC-2019-0019-0058 (arguing that the
recent Equifax breach showed the need for strengthening the
Safeguards Rule); Cisco Systems, Inc., Comment Letter No. 51 on 2019
Safeguards and Privacy NPRM (FTC-2019-0019) (Aug. 2, 2019), https://www.regulations.gov/document/FTC-2019-0019-0051 (noting that
sophisticated hacking techniques used in state sponsored attacks are
likely to be adopted by ``more garden variety, less sophisticated
hackers.''); Safeguards Workshop, at 24-26 (July 13, 2020) (remarks
of Chris Cronin) (stating that many companies do not conduct
complete or adequate risk assessments). Id. at 38-39 (remarks of
Serge Jorgensen) (noting that businesses' understanding of the need
for security has improved, but that they continue to struggle to
implement controls across business units). Id. at 39-41 (remarks of
Chris Cronin) (stating that, ``as a rule,'' businesses of all sizes
are ``behind'' on cybersecurity, attributing this in part to
consultants whose advice about reasonable security is motivated by a
desire to ``make the clients happy''). Id. at 43 (remarks of Pablo
Molina) (citing ``the mounting losses that come from cybercrime'' as
evidence that many businesses are ``falling behind''
cybercriminals). Id. at 114 (remarks of Brian McManamon) (noting
that ``the proposed changes are the minimum necessary to have an
effective security program in place.''). Id. at 44 (remarks of Sam
Rubin) (noting that, in his experience, companies make significant
investments in technical security measures but that investment in
personnel to oversee and use those measures is ``a huge shortcoming
that I'm seeing in the field.''); The Clearing House Association
LLC, Comment Letter No. 49 on 2019 Safeguards and Privacy NPRM (FTC-
2019-0019), at 7-9 (Aug. 2, 2019), https://www.regulations.gov/comment/FTC-2019-0019-0049 (citing a 2018 study by the Center for
Financial Inclusion that showed widespread data security failures
among financial technology companies around the globe).
\8\ Press Release, Fed. Trade Comm'n, Equifax to Pay $575
Million as Part of Settlement with FTC, CFPB, and States Related to
2017 Data Breach, (July 22, 2019), https://www.ftc.gov/news-events/press-releases/2019/07/equifax-pay-575-million-part-settlement-ftc-cfpb-states-related.
\9\ See infra, note 7.
---------------------------------------------------------------------------
The record evidence also shows that the amendment's requirements
track bedrock principles of data security and represent proven
elements of effective data security programs that reduce the risk of
breaches.\10\
[[Page 70310]]
The amended Rule requires that financial institutions' information
security plans address such core concepts as controlling who is
accessing their system,\11\ understanding their system,\12\
monitoring what users do in their system,\13\ and protecting the
information contained in their system.\14\ More particularly, it
also requires encryption of customer information and the use of
multifactor authentication. Adopting these practices will reduce the
chances of a breach occurring.
---------------------------------------------------------------------------
\10\ See, e.g., for Single Qualified Individual Requirement:
National Consumer Law Center et al., supra note 7, at 3 (arguing
that a clear line of reporting with a single responsible individual
could have prevented the Equifax consumer data breach); Safeguards
Workshop, at 182-84 (remarks of Adrienne Allen) (stating that
without a single responsible individual, information security staff
``can fall into traps of each relying on someone else to make a hard
call . . . [In a program without a single coordinator] issues can
sometimes fall through the cracks.''). Id. at 184-85 (remarks of
Michele Norin) (``I think it's extremely important to have a person
in front of the information security program. I think that there are
so many components to understand, to manage, to keep an eye on. I
think it's difficult to do that if it's part of someone else's job.
And so I found that it's extremely helpful to have a person in
charge of that program just from a pure basic management perspective
and understanding perspective.''); Risk Assessment Requirement: Id.
at 25 (remarks of Chris Cronin) (stating that evaluating the
likelihoods and impacts of potential security risks and evaluating
existing controls is an important component of a risk assessment).
Id. at 29-30 (remarks of Serge Jorgensen) (emphasizing the
importance of risk assessments as tools for adjusting existing
security measures to account for both current and future security
threats); Encryption Requirement: Princeton University Center for
Information Technology Policy, Comment Letter No. 54 on 2019
Safeguards and Privacy NPRM (FTC-2019-0019), at 3 (Aug. 2, 2019),
https://www.regulations.gov/document/FTC-2019-0019-0054 (noting the
effectiveness of encryption); Inpher, Inc., supra note 7, at 4;
Safeguards Workshop, at 225 (remarks of Matthew Green) (noting
website usage of encryption is above 80 percent; ``Let's Encrypt''
provides free TLS certificates; and costs have gone down to the
point that if a financial institution is not using TLS encryption
for data in motion, it is making an unusual decision outside the
norm). Id. at 106 (remarks of Rocio Baeza) (``[T]he encryption of
data in transit has been standard. There's no pushback with
that.''); Multifactor Authentication Requirement: Princeton
University Center for Information Technology Policy, supra note 10,
at 6-7; Electronic Privacy Information Center, supra, note 7, at 8;
National Consumer Law Center et al., supra note 7, at 2; Safeguards
Workshop, at 102 (remarks of Brian McManamon) (stating that his
company TECH LOCK supports requiring multi-factor authentication for
users connecting from internal networks). Id. at 266 (remarks of
Matthew Green) (explaining that passwords are not enough of an
authentication feature but when MFA is used and deployed, the
defenders can win against attackers). Id. at 239 (describing how
because smart phones have modern secure hardware processors,
biometric sensors and readers built in, increasingly consumers can
get the security they need through the devices they already have by
storing cryptographic authentication keys on the devices and then
using the phone to activate them); Incident Response Plan: Credit
Union National Association, Comment Letter No. 30 on 2019 Safeguards
and Privacy NPRM (FTC-2019-0019), at 2 (Aug. 1, 2019), https://www.regulations.gov/document/FTC-2019-0019-0030 (noting that that an
incident response plan ``helps ensure that an entity is prepared in
case of an incident by planning how it will respond and what is
required for the response.''). Consumer Reports, supra note 7, at 6
(observing that ``a written incident response plan is an essential
component of a good security system.''); HITRUST, Comment Letter No.
18 on 2019 Safeguards and Privacy NPRM (FTC-2019-0019), at 2 (July
1, 2019), https://www.regulations.gov/document/FTC-2019-0019-0018
(commenting that incident response plans can help organizations ``to
better allocate limited resources.). Safeguards Workshop, at 52
(remarks of Serge Jorgenson) (observing that a prompt response to an
incident can prevent a ``threat actor running around in my
environment for days, months, years, and able to access anything
they want.''); Board Reporting Requirement: Workshop participants
Adrienne Allen, Karthik Rangarajan, and Michele Norin each
emphasized that such reporting can aid decision making. See
Safeguards Workshop, at 201-09; see also Rocio Baeza, Comment Letter
No. 12 on Workshop Comment Docket (FTC-2020-0038), at 3-8 (Aug. 12,
2020), https://www.regulations.gov/comment/FTC-2020-0038-0012
(supporting requirement and providing sample report form and
compliance questionnaire); Juhee Kwon et al., The Association
Between Top Management Involvement and Compensation and Information
Security Breaches, J. L. Info. Sys., at 219-236 (2013) (``. . . the
involvement of an IT executive decreases the probability of
information security breach reports by about 35 percent . . .'');
Julia L. Higgs et al., The Relationship Between Board-Level
Technology Committees and Reported Security Breaches, J. L. Info.
Sys., at 79-98 (2016) (``[A]s a technology committee becomes more
established, its firm is not as likely to be breached. To obtain
further evidence on the perceived value of a technology committee,
this study uses a returns analysis and finds that the presence of a
technology committee mitigates the negative abnormal stock returns
arising from external breaches.'').
\11\ 16 CFR 314.4(c)(1).
\12\ 16 CFR 314.4(c)(2).
\13\ 16 CFR 314.4(c)(8).
\14\ 16 CFR 314.4(c)(3) and 314.4(c)(5).
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In fact, it is likely that the massive breach at Equifax could
have been prevented or mitigated by adopting practices required by
these amendments. For example, the Commission's complaint alleged
that the vulnerability that led to the breach was not detected for
four months because Equifax's automated vulnerability scanner was
not configured to scan all of the networks in the system, something
that could have been prevented if Equifax had performed an adequate
inventory of its system as required by Sec. 314.4(c)(2) of the
amended Rule.\15\ Equifax allegedly did not encrypt the data of 145
million consumers as required by Sec. 314.4(c)(3) of the amended
Rule; such encryption might have prevented the intruders from
misusing individuals' sensitive information, even if they were able
to obtain it.\16\ In addition, the complaint charged that Equifax
did not adequately monitor activity on its network, which allowed
intruders to access and use their network undetected for months;
such monitoring will be required by Sec. 314.4(c)(8).\17\ Finally,
and perhaps most importantly, Equifax split authority over its
information security program between two people, which caused
failures of communications and oversight.\18\ Indeed, the U.S. House
Committee on Oversight and Government identified Equifax's
organization as one of the major causes of the breach.\19\
Appointing a single Qualified Individual as the coordinator of
Equifax's information security system, as required by Sec. 314.4(a)
of the amended Rule, could have helped prevent or limit the scope of
one of the largest breaches in American history. By implementing the
measures required in the amended Rule, financial institutions will
prevent or mitigate many future breaches, protecting consumers and
their information.
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\15\ Compl. for Permanent Injunction & Other Relief., FTC v.
Equifax, Inc., No. 1:19-mi-99999-UNA (N.D. Ga. July 22, 2019) ] 17.
\16\ Id. ] 22.E.
\17\ Id. ] 22.F.
\18\ While the dissent questions the requirements in the Rule
regarding elevating security issues to the top levels of the
corporate structure, research supports these requirements. Boards
are becoming increasingly involved in cybersecurity governance, as
demonstrated by surveys of practitioners and the growth of
literature aimed at educating board members on cybersecurity. Some
studies suggest that Board attention to data security decisions can
dramatically improve data safeguarding. For example, one study found
a 35% decrease in the probability of information security breaches
when companies include the Chief Information Security Officer (or
equivalent) in the top management team and the CISO has access to
the board. See Juhee Kwon et al., supra note 10. see also Safeguards
Workshop, at 201-09.
\19\ U.S. H. Rep. Comm. on Oversight and Gov. Reform, Majority
Staff Report on The Equifax Data Breach, 115th Cong., at 55-62 (Dec.
2018).
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There is also no support for the dissent's notion that the
amendments eliminate financial institutions' flexibility in a way
that will hurt smaller businesses. The amendments require that
information security programs address certain aspects of security,
but do not prescribe any particular method for doing so.
Specifically, the amended Rule requires that the information
security program address areas such as access control, change
management, information disposal, and monitoring user activity, but
it does not require that financial institutions take any particular
action in those areas. In fact, the Rule recognizes the concerns of
small businesses and adopts appropriate flexibilities. Section 314.6
of the revised Rule exempts financial institutions that maintain
information concerning fewer than 5,000 consumers from certain
requirements. In addition, financial institutions with smaller and
simpler systems may determine that minimal procedures are required
in those areas, and they retain flexibility under these amendments
to follow that route. Moreover, the record contains significant
evidence that there are free and low-cost solutions for smaller
businesses with more modest data security needs.\20\
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\20\ See, e.g., Safeguards Workshop, at 267 (remarks of Wendy
Nather) (``we have a lot more options, a lot more technologies today
than we did before that are making both of these solutions, both
encryption and MFA, easier to use, more flexible, in some cases
cheaper, and we should be encouraging their adoption wherever
possible.''). Id. at 265-66 (remarks of Matthew Green) (``I think
that we're in a great time when we've reached the point where we can
actually mandate that encryption be used. . . . And we've reached
the point where now it is something that's come to be and we can
actually build well.''). Id. at 229-30 (remarks of Randy Marchany)
(noting that encryption is already built into the Microsoft Office
environment and that a number of Microsoft products, such as
Spreadsheets, Excel, Docs, and PowerPoint, support that encryption
feature). Id. at 225. Id. at 106 (Remarks of Rocio Baeza) (``[T]he
encryption of data in transit has been standard. There's no pushback
with that.''). Id. at 74 (remarks of James Crifasi) (stating that
car dealerships can rely on existing staff for the role of Qualified
Individual). Id. at 78-79 (remarks of Lee Waters) (stating that any
dealership with any IT staff at all would have someone who could
assume the role of ``qualified individual,'' perhaps requiring some
additional research or outside help). Id. at 81-82 (remarks of Rocio
Baeza) (stating that companies may use an existing employee for the
role and ``for any areas where there may be skill gaps, that can be
supplemented with either certifications or some type of
education.''). Id. at 89-90 (remarks of Brian McManamon) (noting
that the size of a financial institution and the amount and nature
of the information that it holds factor into an appropriate
information security program); Presentation Slides, Inf. Security &
Fin. Inst.: An FTC Workshop of GLB Safeguards, at 27-28 (July 13,
2020) (slides Accompanying remarks of Rocio Baeza, ``Models for
Complying to the Safeguards Rule Changes) (``Safeguards Workshop
Presentation Slides'') https://www.ftc.gov/system/files/documents/public_events/1567141/slides-glb-workshop.pdf (describing three
different compliance models: In-house, outsource, and hybrid, with
costs ranging from $199 per month to more than $15,000 per month).
Safeguards Workshop, at 81-83 (remarks of Rocio Baeza) (describing
three compliance models in more detail); Safeguards Workshop
Presentation Slides, at 29 (remarks of Brian McManamon, ``Sample
Pricing'') (estimating the cost of cybersecurity services based on
number of endpoints). Id. at 83-85.
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[[Page 70311]]
We believe that these amendments represent a much-needed step
forward in protecting Americans' data security. Given growing
recognition that the requirements captured in the Rule represent
best practices, some financial institutions seem to have already
taken appropriate steps to protect customers' data and meet the
requirements set out in the amended Rule. It is important, though,
to require those that lag behind to strengthen their security and
prevent future breaches before they occur, rather than in the wake
of a devastating breach after the damage has already been done.
Joint Statement of Commissioners Noah Joshua Phillips and Christine S.
Wilson in the Matter of the Final Rule Amending the Gramm-Leach-Bliley
Act's Safeguards Rule
In 1999, Congress passed the Gramm-Leach-Bliley Act, which
charged the Federal Trade Commission (the ``Commission'') with
promulgating and enforcing a regulation to ensure that financial
firms take care to safeguard the information they collect from
consumers.\1\ The Safeguards Rule \2\ has established more data
security obligations for consumer financial data than for data
collected by non-financial firms, a gap that underlies our view--
shared by our colleagues--that congressional data security
legislation is warranted.
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\1\ Public Law 106-102, 113 Stat. 1338 (1999). Notably, even as
it transferred authority for other consumer financial regulation to
the Consumer Financial Protection Bureau in the Dodd-Frank Act,
Congress left this rulemaking authority with the Commission, a vote
of confidence in our approach. 15 U.S.C. 6804(a)(1).
\2\ 16 CFR part 314.
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One hallmark of the Safeguards Rule is its recognition that, in
a world of continuously evolving threats and standards, a one-size-
fits-all approach to data security may not work. Under Democratic
and Republic leadership, the Commission has repeatedly emphasized
this principle.\3\ We have traditionally eschewed an overly
prescriptive approach, both to data security in general and to the
Safeguards Rule itself.\4\ The FTC has never demanded ``perfect''
security because the Commission has recognized that data security is
neither cost- nor consequence-free, and often requires tradeoffs.\5\
At the same time, during our tenure, the Commission has continued to
enforce data security standards vigorously, including those embodied
in the Safeguards Rule.\6\
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\3\ See, e.g., Federal Trade Commission, Statement Marking the
FTC's 50th Data Security Settlement, at 1 (Jan. 31, 2014), https://www.ftc.gov/system/files/documents/cases/140131gmrstatement.pdf
(``FTC Data Security Statement'') (``Through its settlements,
testimony, and public statements, the Commission has made clear that
it does not require perfect security; reasonable and appropriate
security is a continuous process of assessing and addressing risks;
there is no one-size-fits-all data security program; and the mere
fact that a breach occurred does not mean that a company has
violated the law.''); see also Prepared Statement of the Federal
Trade Commission: Before the Committee on Homeland Security and
Governmental Affairs Permanent Subcommittee on Investigations, 116
Cong. 3 (2019) (statement of Andrew Smith, Director, Bureau of
Consumer Protection) (``[t]here is no one-size-fits-all data
security program . . .''), https://www.ftc.gov/system/files/documents/public_statements/1466607/commission_testimony_re_data_security_senate_03072019.pdf. Federal
Trade Commission, Stick with Security: A Business Blog Series (Oct.
2017), https://www.ftc.gov/news-events/blogs/business-blog/2017/10/stick-security-ftc-resources-your-business.
\4\ FTC Notice of Proposed Rulemaking, 84 FR 13158 (Apr. 4,
2019), https://www.federalregister.gov/documents/2019/04/04/2019-04981/standards-for-safeguarding-customer-information (``The
Commission continues to believe that a flexible, non-prescriptive
Rule enables covered organizations to use it to respond to the
changing landscape of security threats, to allow for innovation in
security practices, and to accommodate technological changes and
advances.'').
\5\ Under the FTC's unfairness authority, the Commission brings
cases when companies under its jurisdiction fail to employ
``reasonable'' security. FTC Data Security Statement, supra note 3
(``The touchstone of the Commission's approach to data security is
reasonableness: a company's data security measures must be
reasonable and appropriate in light of the sensitivity and volume of
consumer information it holds, the size and complexity of its
business, and the cost of available tools to improve security and
reduce vulnerabilities.'').
\6\ See, e.g., In the matter of Ascension Data & Analytics, LLC,
FTC File No. 1923126 (2020), https://www.ftc.gov/enforcement/cases-proceedings/192-3126/ascension-data-analytics-llc-matter; U.S. v.
Mortgage Solutions FCS, Inc., Civ. Action No. 4:20-cv-110 (N.D. Cal
2020), https://www.ftc.gov/enforcement/cases-proceedings/182-3199/mortgage-solutions-fcs-inc; FTC v. Equifax, Inc., Civ. Action No.
1:19-cv-03297-TWT (N.D. Ga. 2019), https://www.ftc.gov/enforcement/cases-proceedings/172-3203/equifax-inc.
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In March 2019, the Commission approved a Notice of Proposed
Rulemaking (``NPRM'') proposing additional requirements to the
Safeguards Rule. While we recognize the value in regularly reviewing
our rules and updating them as needed, we dissented then because the
proposal lacked data demonstrating the need for and efficacy of the
proposed amendments.\7\
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\7\ Dissenting Statement of Commissioner Noah Joshua Phillips
and Commissioner Christine S. Wilson, Review of Safeguards Rule
(Mar. 5, 2019), https://www.ftc.gov/system/files/documents/public_statements/1466705/reg_review_of_safeguards_rule_cmr_phillips_wilson_dissent.pdf; See,
e.g., Noah Joshua Phillips (@FTCPhillips), Twitter (Mar. 5, 2019,
3:08 p.m.), https://twitter.com/FTCPhillips/status/1103024596247289867 (``A reexamination of the Rule may indeed be
appropriate and necessary; but, before we borrow from other existing
schemes, we must first understand whether the existing Rule is
inadequate for its purpose and whether the data supports the
efficacy of the alternatives.''); Christine S. Wilson, Remarks at
NAD 2020, One Step Forward, Two Steps Back: Sound Policy on Consumer
Protection Fundamentals 7-8 (Oct. 5, 2020), https://www.ftc.gov/system/files/documents/public_statements/1581434/wilson_remarks_at_nad_100520.pdf.
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We appreciate Staff's diligent work on this rule and many of the
modifications made to the original proposal. The Federal Register
Notice does a commendable job of presenting the full panoply of
comments that the Commission received. The FTC is at its best when
it seeks input from experts, industry, and consumer groups; this
rulemaking process reflects a commitment to that approach. But the
comment period did not produce data demonstrating that the previous
iteration of the rule was inadequate, or that the costs and
consequences of the new prescriptive obligations will translate into
actual consumer safeguards. That was our concern, and the comments
did not allay it.
In fact, as several commenters observed, the new prescriptive
requirements could weaken data security by diverting finite
resources towards a check-the-box compliance exercise and away from
risk management tailored to address the unique security needs of
individual financial institutions. It is ironic that the revisions
mandate a risk assessment and then order firms to prioritize
specified precautions ahead of the risks and needs counseled by that
assessment. The revisions also impose intrusive corporate governance
obligations wholly unsupported by record evidence of prevalent
failures at the senior managerial level.
For these reasons, which we explain more fully below, we
dissent.
The Record Fails To Provide a Basis for the New Requirements
We expressed concern in March 2019 that some of the proposals in
the NPRM tracked issues that arose in cases involving firms not
covered by the Safeguards Rule. That is, those failures occurred at
companies to which the Safeguards Rule did not apply. And heightened
obligations imposed in a settlement context, when a company has
engaged in risky and allegedly illegal behavior, may not be
appropriate for all market participants. We did not see evidence
that covered firms had a systematic problem--i.e., that the Rule was
not
[[Page 70312]]
working.\8\ The Commission can--and does-- promote best practices
and reasonable care requirements through speeches, guidance,
reports, and the like, to help financial firms evaluate whether they
are taking proper precautions.\9\ But new rules that set concrete
standards for all companies, regardless of risk, require more
justification. Such rules make companies liable for penalties, and
could focus efforts on compliance to address penalty deterrence
rather than risk.
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\8\ Commenters on the proposed rules reflected these same
concerns. See, e.g, CTIA (comment 34, NPRM) at 4, https://www.regulations.gov/comment/FTC/2019-0019-0034 (observing that most
examples cited in the NPRM are from non-financial firms and arguing
that the FTC's action in Equifax demonstrated that the agency is
able to use to the current framework effectively); Global Privacy
Alliance (comment 38, NPRM) at 4, https://www.regulations.gov/comment/FTC/2019-0019-0038 (the changes to the rules started not
from FTC experience but rather from state laws); Electronic
Transactions Association (comment 27, NPRM), https://www.regulations.gov/comment/FTC/2019-0019-0027 (the current rule is
effective and there are no harms that warrant these changes);
National Automobile Dealers Association (comment 46, NPRM) at 6,
https://www.regulations.gov/comment/FTC/2019-0019-0046 (``[N]ew
requirements for all financial institutions should not be based on
unrelated enforcement actions that may not be generally applicable
to all financial institutions subject to the Rule.'').
\9\ Federal Trade Commission, Data Security, https://www.ftc.gov/datasecurity.
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Dozens of commenters have shared their views on the Safeguards
proposal, and FTC Staff held a workshop to evaluate the need to
change the Rule. While there is no shortage of opinions as to the
need and benefits of the proposed changes (nor is there a shortage
of opinions critiquing the new requirements), this process failed to
provide evidence of market failure or other systemic problems \10\
necessitating the proposed changes for firms already governed by the
requirements of the Rule. In fact, one commenter that generally
supported the rule changes noted that it was not clear that the new
rules would have prevented the alleged lapses that led to the
Equifax breach, the largest Safeguards case on record.\11\
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\10\ One study cited by commenters pointed toward widespread
problems among fintech firms ``including misuse of cryptography, use
of weak cryptography, and excessive permission requirements.'' The
Clearing House Association LLC (comment 49, NPRM) at 7-9, https://www.regulations.gov/comment/FTC/2019-0019-0049 (citing a 2018 study
by the Center for Financial Inclusion, https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2018/09/CFI43-CFI_Online_Security-Final-2018.09.12.pdf). This study
included firms from around the world and did not indicate that this
limited set of issues arose in U.S. firms covered by the Safeguards
Rule. See also National Automobile Dealers Association (comment 46,
NPRM) at 46, https://www.regulations.gov/comment/FTC/2019-0019-0046
(``These requirements have largely not been proven to be necessary
or effective.''). Participants at the FTC's July 2020 Workshop
generally agreed that companies could invest more in security, but
the fact of under-investment does not mean that these changes to the
Safeguards Rule constitute the best course of action. FTC,
Information Security and Financial Institutions: An FTC Workshop to
Examine Safeguards Rule Tr. at 23-70 (July 13, 2020), https://www.ftc.gov/system/files/documents/public_events/1567141/transcript-glb-safeguards-workshop-full.pdf (``Safeguards Workshop'').
\11\ Consumer Reports (comment 52, NPRM), https://www.regulations.gov/comment/FTC/2019-0019-0052 at 2. Not all the
commenters agreed with this perspective, and some felt that these
rules would have prevented the Equifax breach. See National Consumer
Law Center and others (comment 58, NPRM), https://www.regulations.gov/comment/FTC/2019-0019-0058. Chair Khan and
Commissioner Slaughter focus on the Equifax breach to justify the
adoption of prescriptive and complex data security measures,
measures that match the sophistication and complexity of the
consumer financial data managed by one of the largest credit
bureaus. But even assuming the new rules would have prevented it,
one (albeit) high-profile breach, without more, should not be
extrapolated to an entire industry with diverse business models
housing varied consumer financial data. Reasonable safeguards for a
company like Equifax, based on its size and complexity, the nature
and scope of its activities, and the sensitivity of the information
involved, would likely outpace procedures that would be appropriate
or reasonable for a sole proprietorship or small business.
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That these proposals may constitute best practices appropriate
to certain firms or situations does not justify imposing them on
every firm and in every situation.\12\ The FTC historically has been
appropriately cautious in mandating specific security practices, and
we see no sound basis in the rulemaking record to change that
approach.\13\
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\12\ While the Final Rule is based on proposals from New York
State Department of Financial Services (``NYDFS''), the FTC imposes
its requirements much more broadly than the NYDFS Cybersecurity
Requirements for Financial Services Companies, 23 NYCRR Pt. 500. The
NYDFS requirements exempt a much larger cross-section of
organizations from the most onerous, prescriptive, and expensive
provisions in their rule. 23 NYCRR Sec. 500.19. Nor do the
exceptions in the Final Rule, while helpful, suffice.
\13\ Unfortunately, this is not the first time this Commission
has emphasized what we can do over what we should do. See, e.g.,
Joint Statement of Commissioners Noah Joshua Phillips and Christine
S. Wilson, In the matter of Resident Home LLC, Commission File No.
2023179 (Oct. 7, 2021), https://www.ftc.gov/system/files/documents/public_statements/1597270/resident_home_dissenting_statement_wilson_and_phillips_final_0.pdf;
Joint Statement of Commissioners Noah Joshua Phillips and Christine
S. Wilson, U.S. v. iSpring Water Systems, LLC, Commission File No.
C4611 (Apr. 12, 2019), https://www.ftc.gov/system/files/documents/public_statements/1513499/ispring_water_systems_llc_c4611_modified_joint_statement_of_commissioners_phillips_and_wilson_4-12.pdf.
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The Revised Safeguards Rule Is Premature
In our 2019 statement, we expressed concern that the proposals
in the NPRM were premature. They are based in large part on the New
York Department of Financial Service data security rules,\14\
adopted in 2016. At the same time, Congress and the Executive Branch
were evaluating new privacy and data security legislation that may
overlap with the proposed amendments.\15\
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\14\ Cybersecurity Requirements for Financial Services
Companies, 23 NYCRR Pt. 500 (2016).
\15\ See Consumer Data Industry Association (comment 36, NPRM)
at 2, https://www.regulations.gov/document?D=FTC-2019-0019-0036
(noting that the NY rule is too recent and Congress is debating new
legislation that should be left to Congress to resolve); National
Automobile Dealers Association (comment 46, NPRM) at 46, https://www.regulations.gov/comment/FTC-2019-0019-0046 (The new rules ``are
premature as they are based on untested and new standards in a
rapidly changing environment, and in a context where federal debate
is ongoing.''); New York Insurance Association (comment 31, NPRM),
https://www.regulations.gov/comment/FTC-2019-0019-0031 (it is
premature to adopt these rules without the benefit of the state's
experience).
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Since our original statement, we have been provided with no
additional information on the impact and efficacy of the NYDFS
rules.\16\ Without this critical input, we do not believe adopting
wholesale the NYDFS approach is the prudent course.\17\ We would
have been better served by monitoring the efficacy, costs and
unintended consequences of the NYDFS rules during this ramp-up
period. Imposing similar rules on far more firms across a broader
array of industries makes even less sense.
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\16\ We appreciate the time and resources the NYDFS invested in
commenting on our proposed rule. Though the NYDFS does say that its
rules have ``enhanced cybersecurity protection across the financial
industry and fostered an environment in which the threat of a cyber
attack is taken seriously at all levels of New York's financial
services firms,'' it offers no supporting data. New York State
Department of Financial Services (comment 40, NPRM), https://www.regulations.gov/comment/FTC-2019-0019-0040.
\17\ As several commenters pointed out, the NYDFS rules are more
nuanced that the amendments introduced today. For instance, under
the NYDFS regulations, certain additional requirements only apply to
a category of sensitive data, a limitation not carried through to
the Safeguards Rule. See, e.g., U.S. Chamber of Commerce (comment
33, NPRM), https://www.regulations.gov/comment/FTC-2019-0019-0033;
CTIA (comment 34, NPRM), https://www.regulations.gov/comment/FTC/2019-0019-0034; Electronic Transactions Association (comment 27,
NPRM), https://www.regulations.gov/comment/FTC/2019-0019-0027. These
distinctions only raise more questions and concerns about basing our
regulations on the New York rules.
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Congress, with the encouragement of the Commission, has
continued to consider legislative initiatives in this area.
Throughout 2019, 2020 and 2021, we saw the release of several draft
bills addressing data security, as well as privacy.\18\ And other
developments, such as data security requirements of the General Data
Protection Regulation \19\ and new cybersecurity incidents \20\
ensure that
[[Page 70313]]
these issues will continue to draw congressional attention. The
decisions about tradeoffs in this space are complex and significant
for consumers, business, and government; intrusive mandates are best
left to the people's representatives rather than to the vagaries of
the administrative rulemaking process.\21\
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\18\ See, e.g., Fourth Amendment is Not for Sale Act, S. 1265,
117th Cong. (2021); Data Care Act of 2021, S. 919, 117th Cong.
(2021); Data Protection Act of 2021, S. 2134, 117th Cong. (2021);
SAFE DATA Act, S. 2499, 117th Cong. (2021); Consumer Online Privacy
Rights Act, S. 2968, 116th Cong. (2019). See also, California
Privacy Rights Act of 2020, Cal. Civ. Code Sec. 1798.100 et seq.;
Virginia Consumer Data Protection Act, Va. Code Sec. 59.1-575 et
seq.; and Colorado Privacy Act, 2021 Colo. ALS 483, 2021 Colo. Ch.
483, 2021 Colo. SB. 190.
\19\ Council Directive 2016/679, art. 32 2016 O.J. (L119).
\20\ See, e.g., Joseph Menn and Christopher Bing, Hackers of
SolarWinds stole data on U.S. sanctions policy, intelligence probes,
Reuters (Oct. 8, 2021), https://www.reuters.com/world/us/hackers-solarwinds-breach-stole-data-us-sanctions-policy-intelligence-probes-2021-10-07/; Stephanie Kelly and Jessica Resnick-ault, One
password allowed hackers to disrupt Colonial Pipeline, CEO tells
senators, Reuters (June 8, 2021), https://www.reuters.com/business/colonial-pipeline-ceo-tells-senate-cyber-defenses-were-compromised-ahead-hack-2021-06-08; Carly Page, The Accellion data breach
continues to get messier, TechCrunch (July 8, 2021), https://techcrunch.com/2021/07/08/the-accellion-data-breach-continues-to-get-messier/; Peter Valdes-Dapena, Volkswagen hack: 3 million
customers have had their information stolen, CNN (June 11, 2021),
https://www.cnn.com/2021/06/11/cars/vw-audi-hack-customer-information/index.html.
\21\ Sen. Roger Wicker, Rep. Cathy McMorris Rodgers, & Noah
Phillips, FTC must leave privacy legislating to Congress, Wash.
Examiner (Sept. 29, 2021), https://www.washingtonexaminer.com/opinion/op-eds/ftc-must-leave-privacy-legislating-to-congress.
Substance aside, businesses and consumers need confidence to plan
around new rules. As the recent--and perhaps future--debate about
net neutrality rules has demonstrated, agency rules are subject to
disruptive swings that undermine such confidence.
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The Revised Rules Inhibit Flexibility and Impose Substantial Costs
The Safeguards Rule originally drafted and evaluated by the
Commission embraced a flexible approach, emphasizing protections
targeted to a company's size and risk profile.\22\ As we wrote in
2019, these new rules move us away from that approach; that loss of
flexibility will impose costs without necessarily improving
safeguards for consumer data, which should be the point of this
exercise.
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\22\ The Commission itself acknowledges the importance of
flexibility in issuing the Final Rule. See, e.g., Final Rule at 27
(``The Commission, however, believes that the elements provide
sufficient flexibilityfor financial institutions to adopt
information security programs suited to the size, nature, and
complexity of their organization and information systems.'')
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Commenters and the Commission itself have noted that there are
financial impacts to these new requirements.\23\ The Small Business
Administration's Office of Advocacy stated its belief that the
Commission itself does not appear to understand fully the economic
impact of the proposed changes to the Safeguards Rule.\24\
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\23\ See Final Rule; American Council on Education (comment 24,
NPRM) at 13-14, https://www.regulations.gov/comment/FTC-2019-0019-0024; Wisconsin Bankers Association (comment 37, NPRM) at 1-2,
https://www.regulations.gov/comment/FTC-2019-0019-0037; American
Financial Services Association (comment 41, NPRM) at 4, https://www.regulations.gov/comment/FTC-2019-0019-0041; National Association
of Dealer Counsel (comment 44, NPRM) at 1, https://www.regulations.gov/comment/FTC-2019-0019-0044; National Automobile
Dealers Association (comment 46, NPRM) at 11, https://www.regulations.gov/comment/FTC-2019-0019-0046; National Independent
Automobile Dealers Association, (comment 48, NPRM) at 3, https://www.regulations.gov/comment/FTC-2019-0019-0048; Gusto and others
(comment 11, Workshop) at 2-4, https://www.regulations.gov/comment/FTC-2019-0019-0011; National Pawnbrokers Association (comment 3,
NPRM) at 2, https://www.regulations.gov/comment/FTC-2019-0019-0032;
See also Remarks of James Crifasi, Safeguards Workshop, supra note
10, Tr. at 72-74, https://www.ftc.gov/system/files/documents/public_events/1567141/transcript-glb-safeguards-workshop-full.pdf
(study showing that compliance costs are unaffordable for small
businesses).
\24\ Small Business Administration Office of Advocacy (comment
28, NPRM) at 3-4, https://www.regulations.gov/comment/FTC-2019-0019-0028 (``An agency cannot consider alternatives that minimize any
significant economic impact if the agency does not know what the
economic impact of the proposed action is.'').
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The burden of these new rules may also reduce competition and
innovation, as smaller firms less able to absorb the financial costs
cede ground to larger firms better equipped to handle new regulatory
mandates.\25\
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\25\ See CTIA (comment 34, NPRM), https://www.regulations.gov/comment/FTC-2019-0019-0034 (noting the need for more study on the
costs to competition); U.S. Chamber of Commerce (comment 33, NPRM)
at 4, https://www.regulations.gov/comment/FTC-2019-0019-0033 (``Some
private organizations can absorb the added costs, while others
cannot.''). See also Christine S. Wilson, Remarks at the Future of
Privacy Forum, A Defining Moment for Privacy: The Time is Ripe for
Federal Privacy Legislation 13 (Feb. 6, 2020), https://www.ftc.gov/system/files/documents/public_statements/1566337/commissioner_wilson_privacy_forum_speech_02-06-2020.pdf
(``Importantly, the legislative framework should also consider
competition. Regulations, by their nature, will impact markets and
competition. GDPR may have lessons to teach us in this regard.
Research indicates that GDPR may have decreased venture capital
investment and entrenched dominant players in the digital
advertising market.''); Noah Joshua Phillips, Prepared Remarks at
internet Governance Forum USA, Keep It: Maintaining Competition in
the Privacy Debate (July 27, 2018), https://www.ftc.gov/system/files/documents/public_statements/1395934/phillips_-_internet_governance_forum_7-27-18.pdf (discussing the competition
impacts of new privacy rules).
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Security itself may also suffer. A series of specific rules can
incentivize companies to move from a thoughtful assessment of risk
and precautions to a check-the-box exercise to ensure that they are
complying with regulatory mandates--in other words, from a focus on
real security to an emphasis on rule compliance.\26\ One commenter
cited data demonstrating that when security personnel are busy with
compliance and regulatory response, they have less time to focus on
a firm's actual security needs.\27\ Further, without the flexibility
to prioritize, finite resources may be diverted to areas of lower
risk but higher regulatory scrutiny; \28\ commenters noted the irony
of mandating a risk assessment and then ordering firms to prioritize
specified precautions ahead of the risks and needs counseled by that
assessment.\29\ And potentially innovative security practices that
address changing threats and needs may be discouraged.\30\ As
[[Page 70314]]
one commenter noted, ``[e]ven today's best practices will be
overtaken by future changes in both technology and the capabilities
of threat actors,'' \31\ and these proscriptive rules lose the
``self-modernizing'' nature of flexible requirements,\32\ locking in
place the primacy of current practices.\33\
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\26\ See U.S. Chamber of Commerce (comment 33, NPRM), https://www.regulations.gov/comment/FTC-2019-0019-0033; Consumer Data
Industry Association (comment 36, NPRM), https://www.regulations.gov/comment/FTC-2019-0019-0036; Global Privacy
Alliance (comment 38, NPRM), https://www.regulations.gov/comment/FTC/2019-0019-0038. While some parts of the rule, such as encryption
requirements, allow security officials to make a written
determination that a different precaution is appropriate, it seems
unlikely that any individual security official will risk liability
to make such a determination and the specific requirements here will
likely become the default rule. American Council on Education
(comment 24, NPRM) at 12, https://www.regulations.gov/comment/FTC-2019-0019-0024 (``In the absence of a clear delineation by the
Commission of what alternatives an institutional information
security executive might approve that the Commission considers
reasonably equivalent, and assurance that they are reasonably
applicable in our contexts, that pressure release valve in the
requirement seems unlikely to release much pressure.''); Software
Information & Industry Association (comment 29, NPRM) at 3, https://www.regulations.gov/comment/FTC-2019-0019-0056 (``The mere threat of
a per se law violation will chill these approvals except in the most
ironclad circumstances, thereby potentially thwarting
industry[hyphen]wide adoption of new and better security
standards.''); New York Insurance Association (comment 31, NPRM),
https://www.regulations.gov/comment/FTC-2019-0019-0031 (``This runs
the risk that companies might feel compelled to encrypt all consumer
data regardless of whether the CISO's compensating controls would be
second guessed in the event a company were to lose unencrypted
customer information.''); Mortgage Bankers Association (comment 26,
NPRM) at 4, https://www.regulations.gov/comment/FTC-2019-0019-0026
(noting the obligation to prepare an incident response plan had
``the potential to cripple small businesses under the pressure of
repeatedly checking the boxes for potential harmless events.'').
\27\ Bank Policy Institute (comment 39, NPRM) at 6, https://www.regulations.gov/comment/FTC-2019-0019-0039 (``When the sector
surveyed its information security teams in late 2016, CISOs reported
that approximately 40% of their cyber team's time was spent on
compliance related matters, not on cybersecurity. Due to one
framework issuance, in particular, the reconciliation process
delayed one firm's implementation of a security event monitoring
tool intended to better detect and respond to cyber-attacks by 3-6
months. With respect to another issuance, another firm stated that
91 internal meetings were held to determine how that issuance
aligned with its program and in gathering data for eventual
regulatory requests.'').
\28\ See U.S. Chamber of Commerce (comment 33, NPRM) at 4,
https://www.regulations.gov/comment/FTC-2019-0019-0033 (``the
proposed requirements would increasingly divert company resources
toward compliance and away from risk management activities that are
tailored to businesses' unique security needs.''); Software
Information & Industry Association (comment 29, NPRM) at 3, https://www.regulations.gov/comment/FTC-2019-0019-0056 (``The effect of a
prescriptive approach in this enforcement structure is to place
companies in the position of forced compliance with potentially
unnecessary or inapplicable requirements without the appropriate
process for these covered entities to explain to a supervisory
authority why it is unnecessary.''); American Financial Services
Association (comment 41, NPRM), https://www.regulations.gov/comment/FTC-2019-0019-0041. In some cases, asking too much of small
businesses for whom all this is a substantial undertaking may lead
them to fail at even the basic protections. Safeguards Workshop,
supra note 10, Tr. at 118-19 (July 13, 2020), https://www.ftc.gov/system/files/documents/public_events/1567141/transcript-glb-safeguards-workshop-full.pdf.
\29\ See Bank Policy Institute (comment 39, NPRM), https://www.regulations.gov/comment/FTC-2019-0019-0039; Money Services Round
Table (comment 53, NPRM), https://www.regulations.gov/comment/FTC-2019-0019-0053.
\30\ See Consumer Data Industry Association (comment 36, NPRM)
at 7-8, https://www.regulations.gov/comment/FTC-2019-0019-0036
(minimization requirement can impact innovative uses more broadly).
\31\ See Cisco Systems Inc. (comment 51, NPRM) at 3, https://www.regulations.gov/comment/FTC-2019-0019-0051 (noting also in the
context of multi-factor authentication that there will come a time
when it is no longer the ``appropriate baseline'' and ``covered
entities could find themselves in full compliance with the rule as
long as they use access control technology no less protective than
MFA as defined in the Proposed Amendments.'').
\32\ National Automobile Dealers Association (comment 46, NPRM),
https://www.regulations.gov/comment/FTC-2019-0019-0046.
\33\ See CTIA (comment 34, NPRM) at 3-5, https://www.regulations.gov/comment/FTC-2019-0019-0034 (flexibility in the
rule allowed it to keep up with evolving threats, whereas new rule
could limit innovation); HITRUST Alliance (comment 18, NPRM),
https://www.regulations.gov/comment/FTC-2019-0019-0018 (expressing
concern about creating outdated requirements); The American
Financial Services Association (comment 41, NPRM), https://www.regulations.gov/comment/FTC-2019-0019-0041.
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The reduction in flexibility and imposition of these costs must
be justified by a significant reduction in risk or some other
substantial consumer benefit. But the record provides scant support
for these tradeoffs. Or as one commenter put it:
[A]s with many of these requirements, we do not take issue with
the notion that there is merit to this step [requiring monitoring],
and that many financial institutions will implement some version of
this control. However, by making this an explicit, stand-alone
requirement, the Commission is enshrining costs and efforts that
will be extensive and will likely not be needed in all
circumstances.\34\
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\34\ National Automobile Dealers Association (comment 46, NPRM)
https://www.regulations.gov/comment/FTC-2019-0019-0046 (arguing that
the Commission needs additional study into the costs and benefits);
See also Consumer Data Industry Association (comment 36, NPRM),
https://www.regulations.gov/comment/FTC-2019-0019-0036 (benefits of
new rule not justified by tradeoffs).
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The Rules Involve the FTC in the Internal Governance Decisions of
Covered Firms
The specifics of the proposals also raise issues, as we
expressed in 2019, with regard to mandating the appropriate level of
board engagement,\35\ hiring and training requirements,\36\ and
program accountability structures.\37\ We wrote then, and remain
concerned now, that the Commission is substituting its own judgement
about governance decisions for those of private companies covered by
this Rule.
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\35\ American Council on Education (comment 24, NPRM) at 16,
https://www.regulations.gov/comment/FTC-2019-0019-0024; National
Automobile Dealers Association (comment 46, NPRM) at 41, https://www.regulations.gov/comment/FTC-2019-0019-0046.
\36\ U.S. Chamber of Commerce (comment 33, NPRM) at 12, https://www.regulations.gov/comment/FTC-2019-0019-0033; National Automobile
Dealers Association (comment 46, NPRM) at 34-36, https://www.regulations.gov/comment/FTC-2019-0019-0046.
\37\ See Final Rule. See also American Council on Education
(comment 24, NPRM) at 14, https://www.regulations.gov/comment/FTC-2019-0019-0024 (critiquing the intrusion on personnel practices).
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In certain extraordinary cases involving clear evidence of
management failure, we have imposed prescriptive governance
obligations on respondents.\38\ Those rare and egregious instances
cannot justify a similar approach in a broad rulemaking absent a
real record of widespread corporate mismanagement or failure at the
senior management level.
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\38\ U.S. v. Facebook, Inc., Civ. Action No. 19-cv-2184 (D.D.C.
July 24, 2019), https://www.ftc.gov/enforcement/cases-proceedings/092-3184/facebook-inc.
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The Commission has elected to proceed with most of these
governance requirements, forcing the hand of management and shifting
their priorities to avoid the risk of regulatory action,\39\ without
clear evidence of their need or efficacy.
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\39\ These governance rules may not even promote security. See
Consumer Data Industry Association (comment 36, NPRM), https://www.regulations.gov/comment/FTC-2019-0019-0036 (arguing that the
annual reporting will become a checkbox exercise).
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Conclusion
Regularly reviewing our rules to ensure that they address the
current environment is an important part of the FTC's regular
process. But rules have far-reaching and frequently unintended
impacts in the real world; when imposing additional legal
obligations in the rulemaking context, we must do so with great
care. The amended Safeguards Rule replaces a rule that has worked
well for 20 years, a rule that took a principle-based approach in
order to provide financial institutions flexibility to determine the
appropriate and realistic security safeguards for their
organizations. The record before us at best fails to convince that
the changes are necessary and at worst raises concern about the
substantial costs and risks in imposing these amendments.
Accordingly, we dissent.
[FR Doc. 2021-25736 Filed 12-8-21; 8:45 am]
BILLING CODE 6750-01-P