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Financial Services Law Insights and Observations

NYDFS tells industry to tighten third-party risk management

State Issues NYDFS State Regulators Privacy/Cyber Risk & Data Security Third-Party Vendor Management Risk Management Bank Regulatory

State Issues

On April 27, NYDFS released a report warning the financial services industry to tighten third-party risk management measures, as the “next great financial crisis could come from a cyber-attack.” The report covers a December 2020 cyber-attack described as “part of a widespread, sophisticated cyber espionage campaign by Russian Foreign Intelligence Service actors” focusing on “stealth and stealing sensitive information.” According to the report, hackers installed malware into a software platform used by the government and financial services and telecommunications companies to monitor and manage the performance of their networks. This attack, NYDFS noted, is “the most visible, widespread, and intrusive information technology software supply chain attack” to date and “opened back doors into thousands of organizations, including almost 100 companies in New York’s financial services industry.” While none of NYDFS’s regulated entities’ networks were actively exploited, the regulator warned that these types of attacks highlight the financial services industry’s vulnerability to supply chain attacks. Moreover, because third-party risk management is a key part of NYDFS’s Cybersecurity Regulation, the regulator is “exploring ways to further address this critical component of cybersecurity.” Report findings highlight that, among other things, (i) the patch-management programs for many regulated entities “are immature and lack the proper ‘patching cadence’ needed to ensure timely remediation of high-risk cyber vulnerabilities,” and (ii) “supply chain” cyber-attacks are dangerous since “malware is embedded inside a legitimate product,” allowing “an attacker to access the networks of many organizations in a single stroke.”

The report provides several recommendations, including that entities should (i) include in their vendor risk-management policies and procedures “processes for due diligence and contractual protections that will ensure the company can monitor the cybersecurity practices and overall cyber hygiene of critical vendors”; (ii) adopt a “zero trust” approach and implement multiple layers of security and extra protection for sensitive information; (iii) address vulnerabilities in a timely manner through patch testing, validation processes, and deployment; and (iv) ensure their incident response plans address supply chain compromises.