On September 13, 2016, New York Governor Andrew Cuomo announced that the New York Department of Financial Services (the “DFS”) proposed a regulation that would require banks, insurance companies, and other financial services institutions regulated by the DFS to establish and maintain a cybersecurity program (the “Proposal”). If the Proposal is adopted, New York would be the first state to mandate such cybersecurity requirements by law.
The Proposal would require any individual, partnership, corporation, association or other entity operating under a license, registration, charter, certificate, permit, accreditation or similar authorization under New York banking, insurance or financial services laws (a “Covered Entity”) to:
- Establish a cybersecurity program designed to ensure the security of information systems and nonpublic information on such systems;
- Adopt a written cybersecurity policy;
- Designate a Chief Information Security Officer responsible for implementing, overseeing and enforcing the cybersecurity program and policy; and
- Comply with notice and reporting requirements.
If adopted, the Proposal will go into effect on January 1, 2017, and Covered Entities would have 180 days from the effective date to comply with the requirements.
Summary of the Proposal’s Requirements
Cybersecurity Program: A Covered Entity must establish and maintain a cybersecurity program that is designed to perform the following core functions:
- Identify internal and external cyber risks;
- Use defensive infrastructure to protect its information systems and nonpublic information stored on such systems;
- Detect, respond to and recover from unauthorized access (and attempts to gain unauthorized access) to its information systems; and
- Fulfill all regulatory reporting obligations.
The program must include:
- Annual penetration testing and quarterly vulnerability assessments;
- Audit trail systems;
- Limitations to access privileges;
- Written procedures regarding in-house developed applications;
- Annual risk assessment;
- Personnel training and monitoring;
- Multi-factor authentication;
- Limitations on data retention;
- Encryption of nonpublic information; and
- A written incident response plan.
Cybersecurity Policy: A Covered Entity must implement and maintain a written cybersecurity policy that describes procedures for protecting its information systems and nonpublic information stored on such systems, including: information and systems security, access controls, disaster recovery plans, customer data privacy, risk assessment, vendor and third-party service provider management and incident response. The policy must be reviewed at least annually by the Covered Entity’s board of directors and approved by a senior officer.
Chief Information Security Officer and Personnel: A Covered Entity must designate a Chief Information Security Officer (“CISO”) who is responsible for overseeing and implementing the cybersecurity program and enforcing the cybersecurity policy. The CISO must report to the board at least bi-annually. A Covered Entity must also employ cybersecurity personnel sufficient to manage its cybersecurity risks and to perform the core cybersecurity functions.
Reports and Notice to the DFS Superintendent: A Covered Entity must report to the DFS within 72 hours any attempt to gain unauthorized access to its information systems that affects nonpublic Information, or is reasonably likely to have a material effect on the Covered Entity’s normal operations. A Covered Entity must also submit annual reports to the DFS Superintendent certifying its compliance with the Proposal.
Private Funds and Their Managers Appear Not to Be Covered by the Proposal
We believe that private funds and their managers do not fall into the Proposal’s definition of “Covered Entities” and thus are not included in the Proposal’s scope. Additionally, we believe that private funds and their managers do not fall into any of the categories of institutions supervised by the DFS (as listed on the DFS’ website).
There is an argument that investment advisers that register or notice file with the State of New York pursuant to the New York Investment Advisory Act (NYIAA) (New York Code of Rules and Regulations, Title 13, Part 11) fall into the Proposal’s definition of “Covered Entity” and are thus covered by the Proposal. However, we believe that such investment advisers are not covered by the Proposal because (1) the DFS Superintendent does not supervise financial services regulated by other New York state public authorities, and investment advisers are regulated by the Investment Protection Bureau of the Department of Law pursuant to NYIAA; and (2) since the NYIAA is part of the New York Code of Rules and Regulations and not the statutory law, the NYIAA is likely not considered to be “similar authorization under New York banking, insurance or financial services laws.”
The Proposal is subject to a 45-day notice and public comment period following the September 28, 2016 publication in the New York State register before its final issuance. We will continue to monitor and report on developments concerning the Proposal.
 Covered Entities with (1) fewer than 1,000 customers in each of the last three calendar years, (2) less than $5 million in gross revenue in each of the last three fiscal years, and (3) less than $10 million in year-end assets are exempted from some, but not all, requirements of the Proposal.
 The Proposal defines “Covered Entity” 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.” Since some investment advisers register or notice file in New York pursuant to NYIAA, there is an argument such an investment adviser is operating under or required to operate under “similar authorization.”
 The Proposal was made by the DFS Superintendent pursuant to her authority granted by Sections 102, 201, 202, 301, 302 and 408 of the Financial Services Law. Section 201 states, “the superintendent shall supervise the business of, and the persons providing, financial products and services.” N.Y. Fin. Serv. § 201. The definition of “financial product or service” excludes a financial product or service “regulated for the purpose of consumer or investor protection by any other state agency, state department or state public authority.” N.Y. Fin. Serv. § 104. Since the Investment Protection Bureau of the Department of Law is responsible for the administration of the New York Investment Advisory Act and regulating investment advisers, the DFS Superintendent likely does not have the authority to promulgate a regulation of investment advisers.