Colorado joins New York in requiring data security standards for financial sector

Inaction at federal level spurs states to close window on inadequate oversight of critical sectors, third parties

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Com­ing on the heels of New York state’s trail­blaz­ing cyber­se­cu­ri­ty rules for finan­cial ser­vices, Col­orado is the lat­est state to take a cyber­se­cu­ri­ty stance for one of its crit­i­cal-infra­struc­ture sectors.

In June, the Col­orado Divi­sion of Secu­ri­ties released its final rules requir­ing deal­er-bro­kers and invest­ment advis­ers to estab­lish and main­tain writ­ten pro­ce­dures for cyber­se­cu­ri­ty. While less pre­scrip­tive than New York’s, they are designed to achieve the same results—making cyber­se­cu­ri­ty a pri­or­i­ty for cov­ered entities.

David M. Stauss, Bal­lard Spah LLP partner

At the end of the day, it gets to the same place, which is think­ing about cyber­se­cu­ri­ty and pri­va­cy and tak­ing affir­ma­tive steps to address that,” says David M. Stauss, a part­ner in Bal­lard Spah LLP’s Pri­va­cy and Data Secu­ri­ty Group.

Relat­ed arti­cle: Despite revi­sion, New York’s cyber­se­cu­ri­ty rules have teeth

The new Col­orado code requires deal­er-bro­kers and invest­ment advis­ers to imple­ment “rea­son­ably designed” pro­ce­dures based on cri­te­ria such as the firm’s size, rela­tion­ships with third par­ties, process for report­ing lost or stolen devices, cyber­se­cu­ri­ty poli­cies, and employ­ee train­ing. The require­ments are sim­i­lar to what Vermont’s Depart­ment of Finan­cial Reg­u­la­tion imple­ment­ed last year.

Cov­ered Col­orado enti­ties must include cyber­se­cu­ri­ty as part of their risk assess­ments and “to the extent it’s rea­son­ably pos­si­ble,” adopt prac­tices such as secure email for con­fi­den­tial, per­son­al infor­ma­tion; annu­al risk assess­ments; and authen­ti­ca­tion prac­tices for employ­ee access to elec­tron­ic data and communications.

Man­ag­ing third-par­ty risk

Notably, both Col­orado and New York are hom­ing in on rela­tion­ships with third par­ties. It’s an indi­ca­tion that reg­u­la­tors are catch­ing up with trends in the cyber­se­cu­ri­ty industry—considering that cyber­se­cu­ri­ty prac­ti­tion­ers have been increas­ing­ly empha­siz­ing the grow­ing risks relat­ed to ven­dors, busi­ness asso­ciates and oth­er third parties.

One chief dif­fer­ence in Colorado’s reg­u­la­tions is the absence of a des­ig­nat­ed chief secu­ri­ty infor­ma­tion offi­cer. The New York Depart­ment of Finan­cial Ser­vices’ rule—which applies to banks, insur­ers and oth­er finan­cial services—requires cov­ered enti­ties to des­ig­nate a CISO to over­see and imple­ment a cyber­se­cu­ri­ty pro­gram and to enforce policies.

Even though it’s not men­tioned (by Col­orado), if you’re putting togeth­er a respon­si­ble infor­ma­tion secu­ri­ty plan, address­ing who the CISO is should be a part of that,” says Steve Fier­gang, gen­er­al coun­sel for cyber­se­cu­ri­ty and risk man­age­ment com­pa­ny Lay­er 8 Secu­ri­ty.

Colorado’s move may be a sign that states will try to make up for gaps in rule­mak­ing at the fed­er­al lev­el. Ana­lysts expect oth­er states and state admin­is­tra­tive agen­cies to do the same.

Paving path for oth­er states

It’s com­mon for states to put their neck out in a par­tic­u­lar field to test the reg­u­la­tions, and that serves as a mod­el for oth­er states,” says Peter Z. Stock­burg­er, senior man­ag­ing asso­ciate at glob­al legal prac­tice Den­tons.

One exam­ple of how this could play out is data breach noti­fi­ca­tion laws. In 2002, Cal­i­for­nia was the first to enact one, and now only two states, Alaba­ma and South Dako­ta, don’t have their own ver­sions. Ear­li­er this year, New Mex­i­co was the lat­est state to add data breach noti­fi­ca­tion require­ments, fol­low­ing sev­er­al failed attempts in the past few years.

There’s a larg­er move­ment by states to “try to get their hands around the cyber­se­cu­ri­ty issue,” and it makes sense that they are start­ing out with crit­i­cal sec­tors like finan­cial, Stock­burg­er says.

Reg­u­la­tors look at what are the most vul­ner­a­ble indus­tries, what indus­tries would have the biggest impact on soci­ety,” he says. “That’s where you’re see­ing reg­u­la­to­ry activ­i­ty because if there’s a major attack on those indus­tries, it would have a big setback.”

Rules solid­i­fy understanding

Steve Fier­gang, Lay­er 8 Secu­ri­ty gen­er­al counsel

For their part, finan­cial advis­ers shouldn’t be too sur­prised about these devel­op­ments. Fier­gang says that many of his company’s clients in this ver­ti­cal under­stand the impor­tance of data pro­tec­tion and pro­ce­dures like encrypt­ed emails. Reg­u­la­tions are serv­ing to take that under­stand­ing to the next level.

Hav­ing the right pro­gram in place and test­ing the con­trols … is a big step from just under­stand­ing the idea,” he says.

As was the case with data breach noti­fi­ca­tion, one dri­ver for state action is the inac­tion at the fed­er­al lev­el. The Secu­ri­ties and Exchange Com­mis­sion, for exam­ple, issued guid­ance last year for cybersecurity—but, just like the cyber­se­cu­ri­ty guid­ance of the Food and Drug Admin­is­tra­tion for med­ical device man­u­fac­tur­ers, it’s not a mandate.

This (Col­orado and New York rules) is dif­fer­ent because it’s not option­al,” Stauss says. “I expect that more states and state reg­u­la­to­ry agen­cies will imple­ment some form of cyber­se­cu­ri­ty rules, par­tic­u­lar­ly giv­en that the fed­er­al gov­ern­ment has not shown a will­ing­ness to take the lead on this issue.”

Regard­less of what states may fol­low suit, Fier­gang says it’s time for all enti­ties reg­is­tered with the SEC to take notice.

The resilien­cy that comes with it (strong cyber­se­cu­ri­ty pos­ture) will not only pro­tect their clients and their rep­u­ta­tion,” he says, “but pro­tects the entire industry.”

More sto­ries about cyber­se­cu­ri­ty regulations:
New York finan­cial reg­u­la­tions could sig­nal cyber­se­cu­ri­ty sea change nationwide
Fed­er­al data breach law should be approached with caution
U.S. com­pa­nies could see tighter data-pro­tec­tion rules if Europe adopts new laws


Posted in Featured Story, Regulations