Cybersecurity

New York Institutions: Exemption from Cybersecurity Regulations Sought by Bond Granted in Final Regulations Issued by Department of Financial Services

February 22, 2017

Last month, Bond, Schoeneck & King  sought  an exemption from cybersecurity regulations proposed by the New York State Department of Financial Services (DFS) for colleges, universities and other charitable organizations that would have been covered under the regulations solely because they operate charitable gift annuity programs.  Joined by the Commission on Independent Colleges and Universities, Bond submitted a letter to DFS urging adoption of the exemption noting, among other reasons, that the proposed regulations, designed for large financial institutions such as banks, would impose an exceptional financial and administrative burden on institutions and organizations unrelated to their mission, size, resources or operations. Moreover, as set forth in the letter, these organizations are already covered by other cybersecurity laws and regulations.

We are pleased to report that the Final Regulations, issued by DFS on February 16, 2017, granted this exemption. As a result, hundreds of institutions, ranging from some of the largest universities, museums, social service and religious organizations in the State to smaller social service and advocacy organizations, are exempt and need not comply with the regulations.

New York Institutions: Department of Financial Services Cybersecurity Regulations Likely to Impose Significant Obligations on Many Colleges and Universities

January 9, 2017

By Philip J. Zaccheo

Following a public comment period, the New York State Department of Financial Services (“DFS”) has published a modified version of new regulations, previously issued on September 13, 2016, aimed at creating higher cybersecurity standards within the banking, insurance and financial services industries.  The regulations go into effect on March 1, 2017 with phased implementation thereafter, and will likely require significant capital expenditures and operational changes by colleges and universities covered by the regulations.  The public comment period for the proposed modified regulations will be open until January 27, 2017. Colleges and universities must already comply with a panoply of laws, regulations and standards relating to data security:  the Gramm-Leach-Bliley Act, the United States Department of Education guidance applicable to student loan information, the Red Flags Rule, PCI standards for credit card information, and, for some institutions, the Health Insurance Portability and Accountability Act.  The DFS proposed cybersecurity regulations would impose operational requirements and expenditures that are far more burdensome than these existing obligations in many respects, including but not limited to standards for: penetration testing and vulnerability assessments, audit trails, cybersecurity personnel, due diligence, risk assessment, and contracting with third parties, use of multi-factor authentication and annual certification of compliance by the board of directors.  For information on the specific requirements of the proposed cybersecurity regulations, please review our Client Information Memoranda dated September 16, 2016 and January 5, 2017. The new cybersecurity regulations apply to “Covered Entities”, which are defined broadly as “any Person operating under or required to operate under a license, registration, charter, certificate, permit, accreditation or similar authorization under the banking law, the insurance law or the financial services law.”  Among the 3,800 entities regulated by DFS is a subset of institutions and organizations that are engaged in bona fide charitable, religious, missionary, educational or philanthropic activities and are permitted under N.Y. Insurance Law § 1110 to issue charitable gift annuities to donors.  Therefore, unless the new regulations are further modified, such entities (including many colleges and universities) will be required to comply. (To determine if your entity is supervised by DFS, you can perform a search here.) Certain covered entities are exempt from a subset of the new cybersecurity regulations.  Exempt entities include those with fewer than 10 employees, less than $5 million gross annual revenue for three years, or less than $10 million in year-end total assets.  Additional exemptions exist for covered entities that do not operate, maintain, utilize or control any Information Systems and do not control, own, access, generate, receive or possess Nonpublic Information as those terms are defined by the regulations.  Covered entities that qualify for exemptions must file a “Notice of Exemption” with DFS affirming the basis for the exemption.  Unfortunately, due to their size, few colleges and universities will qualify for exemption. It is not immediately clear that DFS intended to include entities regulated solely under Insurance Law § 1110 as covered entities alongside traditional insurance companies.  In fact, according to the Report on Cyber Security in the Insurance Sector, which was conducted as part of the regulation drafting process, DFS surveyed 21 health insurers, 12 property and casualty insurance providers, and 10 life insurance providers, but no colleges, universities, or charitable or religious organizations.  Statements made by the Superintendent of Department of Financial Services, Maria T. Vullo, and Governor Andrew Cuomo in connection with the announcement of the regulations make no mention of not-for-profit organizations or higher education institutions as targets of the regulations. Notwithstanding the apparent primary focus of the regulations, in connection with its reissuance of the regulations on December 28, DFS acknowledged that many of the comments it received concerned the broad definition of “Covered Entity”, but that it opted not to amend that definition at this time.  Institutions issued permits under N.Y. Insurance Law § 1110 to issue charitable gift annuities may wish to submit public comments about the impact of the regulations during the current public comment period, but should proceed on the assumption that the regulations will apply unless and until DFS provides definitive guidance to the contrary.