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  • SEC proposes new cybersecurity requirements

    Agency Rule-Making & Guidance

    On March 15, a divided SEC issued several proposed amendments to the agency’s cybersecurity-related rules.

    The first is a proposed rule that would implement cybersecurity requirements for participants in the securities market, including broker-dealers, clearing agencies, and major security-based swap participants, among others. (See also SEC press release and fact sheet.) Among other things, the proposed rule would require all market entities to establish, maintain, and enforce written policies and procedures that are reasonably designed to address cybersecurity risks. Market participants would also be required to review the design and effectiveness of their cybersecurity policies and procedures at least once a year, and immediately provide the SEC written electronic notice of a significant cybersecurity incident should the participant have a reasonable basis to conclude that the incident had occurred or is occurring. Certain market entities would also be required to make public disclosures addressing cybersecurity risks and significant cybersecurity incidents to improve transparency. The SEC explained that the “interconnectedness of [m]arket [e]ntities increases the risk that a significant cybersecurity incident can simultaneously impact multiple [m]arket [e]tities causing systemic harm to the U.S. securities markets.”

    The second proposed rule would amend Regulation S-P to enhance the protection of customer information and provide a federal minimum standard for data breach notifications. Regulation S-P requires broker-dealers, investment companies, and registered investment advisers to implement written policies and procedures for safeguarding customer records and information. The regulation also imposes requirements for proper disposal of consumer report information, implements privacy notice and opt-out provisions, and requires covered institutions to tell customers how their financial information is used. (See also SEC press release and fact sheet.) Under the proposed rule, covered institutions would be required to adopt an incident response program to address unauthorized access or use of customer information. Covered institutions would also be required to notify customers affected by certain types of data breaches that may expose them to identity theft or other harm by providing “notice as soon as soon as practicable, but not later than 30 days after the covered institution becomes aware that an incident involving unauthorized access to or use of customer information has occurred or is reasonably likely to have occurred.” The proposed rule would also “extend the protections of the safeguards and disposal rules to both nonpublic personal information that a covered institution collects about its own customers and to nonpublic personal information that a covered institution receives about customers of other financial institutions.” Modifications to provisions related to registered transfer agents are also proposed.

    Comments on both proposed rules are due 60 days after publication in the Federal Register.

    Additionally, the SEC announced it has reopened the comment period on proposed cybersecurity risk management rules and amendments for registered investment advisers and funds. Under the proposed rules, advisers and funds would be required to adopt and implement written policies and procedures reasonably designed to address cybersecurity risks that could harm advisory clients and fund investors. The proposed rules also laid out additional requirements relating to the disclosure of cybersecurity risks and significant cybersecurity incidents as well as filing and recordkeeping. (Covered by InfoBytes here.) The SEC reopened the comment period for an additional 60 days.

    In voting against the proposed rules, Commission Hester M. Pierce questioned, among other things, whether the amendments would create overlapping requirements for financial firms subject to state data breach laws that have customer notification provisions, some of which conflict with the SEC’s proposals. Commissioner Mark T. Uyeda also raised concerns as to how the three proposals interact with each other. He cautioned that the “lack of an integrated regulatory structure may even weaken cybersecurity protection by diverting attention to satisfy multiple overlapping regulatory regimes rather than focusing on the real threat of cyber intrusions and other malfeasance.”

    Agency Rule-Making & Guidance Securities Privacy, Cyber Risk & Data Security SEC Data Breach Consumer Protection

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  • Software company to pay $3 million to SEC for misleading disclosures about ransomware attack

    Securities

    On March 9, the SEC charged a South Carolina-based donor data management software company with allegedly making materially misleading disclosures about a 2020 ransomware attack. According to the SEC’s cease-and-desist order, the company issued statements that the ransomware attack did not affect donor bank account information or social security numbers. It was later revealed that the attacker had accessed and exfiltrated the unencrypted sensitive information. However, the SEC maintained that due to the company’s alleged failure to maintain disclosure controls and procedures, employees did not inform senior management responsible for public disclosures. As a result, the company’s quarterly report filed with the SEC allegedly omitted material information about the scope of the attack and “misleadingly characterized the risk of exfiltration of such sensitive donor information as hypothetical,” the SEC said. The company did not admit or deny the SEC’s findings, but agreed to pay a $3 million civil penalty and said it would cease and desist from committing violations of the Securities Act of 1933 and the Securities Exchange Act of 1934.

    Securities SEC Enforcement Privacy, Cyber Risk & Data Security Ransomware Securities Act Securities Exchange Act

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  • Design firm to settle False Claims Act allegations related to cybersecurity failures

    Privacy, Cyber Risk & Data Security

    On March 14, the DOJ announced a $293,771 settlement with a design company to resolve alleged False Claims Act (FCA) violations related to failures in its cybersecurity practices. According to the DOJ, the company failed to secure personal information on a federally-funded Florida children’s health insurance website that was created, hosted, and maintained by the company. “Government contractors responsible for handling personal information must ensure that such information is appropriately protected,” Principal Deputy Assistant Attorney General Brian M. Boynton, head of the Justice Department’s Civil Division, said in the announcement. “We will use the [FCA] to hold accountable companies and their management when they knowingly fail to comply with their cybersecurity obligations and put sensitive information at risk.” In this case, the Florida entity (which receives federal Medicaid funds, as well as state funds to provide children’s health insurance programs) contracted with the design company for the provision of a hosting environment that complied with HIPPA’s personal information protection requirements. The company also agreed to adapt, modify, and create code on the webserver to support the secure communication of data. However, between January 1, 2014, and Dec. 14, 2020, the company allegedly failed to provide secure hosting of applicants’ personal information and failed to implement necessary updates. In December 2020, the website experienced a data breach that potentially exposed more than 500,000 applicants’ personal identifying information and other data. In response to the data breach and the company’s cybersecurity failure, the Florida entity shut down the website’s application portal.

    Privacy, Cyber Risk & Data Security Federal Issues DOJ False Claims Act / FIRREA Enforcement Data Breach

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  • District Court approves $1.75 million data breach settlement

    Privacy, Cyber Risk & Data Security

    On March 3, the U.S. District Court for the Central District of California granted final approval of a $1.75 million class action settlement resolving allegations related to a 2020 data breach that compromised nearly 100,000 individuals’ personally identifiable information, including financial information, social security numbers, health records, and other personal data. The affected individuals are students, parents, and guardians who were enrolled in a system used to manage student data in a California school district. According to class members, by failing to adequately safeguard users’ login credentials and by failing to timely notify individuals of the breach, the company violated, among other things, California’s unfair competition law, the California Customer Records Act, and the California Consumer Privacy Act.

    Under the terms of the settlement, the company is required to pay a non-reversionary settlement amount of $1.75 million, which will be used to compensate class members and pay for attorney fees and costs, service awards, and administrative expenses. Additionally, as outlined in the motion for preliminary approval of the class action settlement, class members are eligible to submit claims for “ordinary losses” (capped at $1,000 per person), as well as “extraordinary losses” (capped at $10,000 per person). Ordinary losses include expenses such as bank fees, long distance phone charges, certain cell phone charges, postage, gasoline for local travel, “[f]ees for additional credit reports, credit monitoring, or other identity theft insurance products,” and up to 40 hours of time, at $25/hour, for at least one full hour used to deal with the data breach. Extraordinary losses are described as those “arising from financial fraud or identity theft” where the “loss is an actual, documented, and unreimbursed monetary loss” and is “fairly traceable to the data breach” and not already covered by another reimbursement category. Class members must also show that they made “reasonable efforts to avoid, or seek reimbursement for, the loss.” All class members will be offered 12 months of credit monitoring and identity theft protection at no cost, and the company will implement “information security enhancements” to prevent future occurrences.

    Privacy, Cyber Risk & Data Security Courts Settlement Data Breach Class Action State Issues California CCPA

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  • HHS releases health care cybersecurity guide

    Privacy, Cyber Risk & Data Security

    On March 8, the Department of Health and Human Services (HHS) released a cybersecurity implementation guide to assist public and private health care sectors prevent cybersecurity incidents. The Cybersecurity Framework Implementation Guide was developed jointly with the Administration for Strategic Preparedness and Response and the Health Sector Coordinating Council Cybersecurity Working Group. Substantial contributions to the guide were also provided by the National Institute for Standards and Technology (NIST) and other federal agencies. HHS explained that the guide is intended to help health care organizations implement the 2018 NIST Framework for Improving Critical Infrastructure Cybersecurity using their existing security measures, stating that the guide should be used to assess current cybersecurity practices and risks and identify gaps for remediation. Among other things, the guide (i) outlines risk management principles and best practices; (ii) provides common language for addressing and managing cyber risk; (iii) lays out a structure for applying cyber risk management; and (iv) identifies “effective standards, guidelines, and practices to manage cybersecurity risk cost-effectively based on business needs.”

    Privacy, Cyber Risk & Data Security Agency Rule-Making & Guidance Federal Issues Department of Health and Human Services NIST

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  • District Court says EFTA applies to cryptocurrency

    Courts

    On February 22, the U.S. District Court for the Southern District of New York partially granted a cryptocurrency exchange’s motion to dismiss allegations that its inadequate security practices allowed unauthorized users to drain customers’ cryptocurrency savings. Plaintiffs claimed the exchange and its former CEO (collectively, “defendants”) failed to correctly implement a two-factor authentication system for their accounts and misrepresented the scope of the exchange’s security protocols and responsiveness. Plaintiffs filed a putative class action alleging violations of the EFTA and New York General Business Law, along with claims of negligence, negligent misrepresentation, breach of contract, breach of warranty, and unjust enrichment. The defendants moved to dismiss, in part, by arguing that the EFTA claim failed because cryptocurrency does not constitute “funds” under the statute. The court denied the motion as to the plaintiffs’ EFTA claim, stating that the EFTA does not define the term “funds.” According to the court, the ordinary meaning of “cryptocurrency” is “a digital form of liquid, monetary assets” that can be used to pay for things or “used as a medium of exchange that is subsequently converted to currency to pay for things.” In allowing the claim to proceed, the court referred to a final rule issued by the CFPB in 2016, in which the agency, according to the court’s opinion, “expressly stated that it was taking no position with respect to the application of existing statutes, like the EFTA, to virtual currencies and services.” In the final rule, the Bureau stated that it “continues to analyze the nature of products or services tied to virtual currencies.” The court dismissed all of the remaining claims, citing various pleading deficiencies, and finding, among other things, that the “deceptive acts or practices” claim under New York law failed because plaintiffs did not identify specific deceptive statements the defendants made or deceptive omissions for which the defendants were responsible.

    Courts Digital Assets EFTA Cryptocurrency Class Action Privacy, Cyber Risk & Data Security State Issues New York CFPB Virtual Currency Fintech

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  • House committees move forward on data privacy

    Privacy, Cyber Risk & Data Security

    On March 1, the House Subcommittee on Innovation, Data, and Commerce, a subcommittee of the House Energy and Commerce Committee, held a hearing entitled “Promoting U.S. Innovation and Individual Liberty through a National Standard for Data Privacy” to continue discussions on the need for comprehensive federal privacy legislation. House Energy and Commerce Committee Chair Cathy McMorris Rodgers (R-WA) delivered opening remarks, commenting that discussions during the hearing will build upon the bipartisan American Data Privacy and Protection Act (ADPPA), which advanced through the committee last July by a vote of 53-2. As previously covered by InfoBytes, the ADPPA (see H.R. 8152) was sent to the House floor during the last Congressional session, but never came up for a full chamber vote. The bill has not been reintroduced yet.

    A subcommittee memo highlighted that absent a comprehensive federal standard, “there are insufficient limits to what types of data companies may collect, process, and transfer.” The subcommittee flagged the data broker industry as an example of where there are limited restrictions or oversight to prevent the creation of consumer profiles that link sensitive data to individuals. Other areas of importance noted by the subcommittee relate to data security protections, data minimization requirements, digital advertising, and privacy enhancing technologies. The subcommittee heard from witnesses who agreed that a comprehensive privacy framework would benefit consumers.

    One of the witnesses commented in prepared remarks that preemption is key, calling the current patchwork of state laws confusing and costly to businesses and consumers. “Consumers need a strong and consistent law to protect them across jurisdictions and market sectors, and to clarify what privacy rights they should expect and demand as they navigate the marketplace,” the witness said. The witness also stated that the FTC is currently relying on outdated law, noting that while Section 5 of the FTC Act is frequently used, “virtually all of the FTC’s privacy and data security cases are settlements. That means that many of the legal theories advanced, as well as the remedies obtained, have never been tested in court.”

    In advance of the hearing, the California governor, the California attorney general, and the California Privacy Protection Agency sent a joint letter opposing preemption language contained in H.R. 8152. “[B]y prohibiting states from adopting, maintaining, enforcing, or continuing in effect any law covered by the legislation, [the ADPPA] would eliminate existing protections for residents in California and sister states,” the letter warned. The letter asked Congress “to set the floor and not the ceiling in any federal privacy law” and “allow states to provide additional protections in response to changing technology and data privacy protection practices.”

    Separately, at the end of February, Chairman of the House Financial Services Committee, Patrick McHenry (R-NC) introduced the Data Privacy Act of 2023 (see H.R. 1165). The bill moved out of committee by a 26-21 vote, and now goes to the full House for consideration. Among other things, the bill would modernize the Gramm-Leach-Bliley Act to better align the statute with the evolving technological landscape. The bill would also ensure consumers understand how their data is being collected and used and grant consumers power to opt-out of the collection of their data and request that their data be deleted at any time. Additional provisions are intended to protect against the misuse or overuse of consumers’ personal data and impose disclosure requirements relating to data collection methods, how data is used and who it is shared with, data retention policies, and informed choice. The bill is designed to provide consistency across the country to reduce compliance burdens, McHenry said.

    Privacy, Cyber Risk & Data Security Federal Issues Federal Legislation House Energy and Commerce Committee House Financial Services Committee Gramm-Leach-Bliley State Issues CPPA Consumer Protection

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  • 4th Circuit remands privacy suit to state court

    Privacy, Cyber Risk & Data Security

    On February 21, the U.S. Court of Appeals for the Fourth Circuit held that a proposed class action over website login procedures belongs in state court. Plaintiff alleged that after a nonparty credit reporting agency experienced a data breach, it used the defendant subsidiary’s website to inform customers whether their personal data had been compromised. Because the defendant’s website required the plaintiff to enter six digits of his Social Security number to access the information, the plaintiff alleged violations of South Carolina’s Financial Identity Fraud and Identity Theft Protection Act and the state’s common-law right to privacy. Under the state statute, companies are prohibited from requiring consumers to use six digits or more of their Social Security number to access a website unless a password, a unique personal identification number, or another form of authentication is also required. According to the plaintiff, the defendant’s website did not include this requirement.

    The defendant moved the case to federal court under the Class Action Fairness Act and requested that the case be dismissed. Plaintiff filed an amended complaint in federal court, as well as a motion asking the district court to first determine whether it had subject matter jurisdiction, given the U.S. Supreme Court’s ruling in TransUnion LLC v. Ramirez, which clarified the type of concrete injury necessary to establish Article III standing (covered by InfoBytes here). Although the district court held that the plaintiff had alleged “an intangible concrete harm in the manner of an invasion of privacy,” which it said was enough to give it subject-matter jurisdiction “at this early stage of the case,” it dismissed the case after determining the plaintiff had not plausibly stated a claim. 

    In reversing and remanding the action, the 4th Circuit found that the plaintiff alleged only a bare statutory violation and had not pled a concrete injury sufficient to confer Article III standing in federal court. The appellate court vacated the district court’s decision to dismiss the case and ordered the district court to remand the case to state court. The 4th Circuit took the position that an intangible harm, such as a plaintiff “enduring a statutory violation” is insufficient to confer standing unless there is a separate harm “or a materially increased risk of another harm” associated with the violation. “[Plaintiff] hasn’t alleged—even in a speculative or conclusory fashion—that entering six digits of his SSN on [defendant’s] website has somehow raised his risk of identity theft,” the 4th Circuit said. In conclusion, the 4th Circuit wrote: “We offer no opinion about whether the alleged facts state a claim under the Act. Absent Article III jurisdiction, that’s a question for [plaintiff] to take up in state court.”

    Privacy, Cyber Risk & Data Security Courts State Issues Class Action Data Breach Credit Reporting Agency Consumer Protection Appellate Fourth Circuit

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  • FTC orders refunds over compromised health data

    Federal Issues

    On March 2, the FTC filed a complaint against an online counseling service alleging the respondent violated the FTC Act by monetizing consumers’ sensitive health data for targeted advertising purposes. As part of the process to sign up for the respondent’s counseling services, consumers are required to provide sensitive mental health information, as well as other personal information. Consumers are promised that their personal health data will not be used or disclosed except for limited purposes, such as for counseling services. However, the FTC claimed the respondent used and revealed consumers’ sensitive health data to third parties for advertising purposes. According to the FTC, the respondent failed to maintain sufficient policies or procedures to protect the sensitive information and did not obtain consumers’ affirmative express consent before disclosing the health data. The respondent also allegedly failed to limit how third parties could use the health data and denied reports that it revealed consumers’ sensitive information.

    Under the terms of the proposed consent order, the respondent will be required to pay $7.8 million in partial refunds to affected users and will be banned from disclosing health information to certain third parties for re-targeting advertising purposes. This will be the first FTC action returning funds to consumers whose health data was compromised. The respondent will also be prohibited from misrepresenting its sharing practices and must also (i) obtain users’ affirmative express consent before disclosing personal information to certain third parties for any purpose; (ii) implement a comprehensive privacy program with strong safeguards to protect users’ data; (iii) instruct third parties to delete shared personal data; and (iv) implement a data retention schedule imposing limits on how long personal data can be retained.

    Federal Issues FTC Enforcement Advertisement Privacy, Cyber Risk & Data Security Consumer Protection UDAP FTC Act Unfair Deceptive

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  • Biden administration releases National Cybersecurity Strategy

    Privacy, Cyber Risk & Data Security

    On March 2, the Biden administration announced the release of its National Cybersecurity Strategy (Strategy) in a continued effort to provide a safe and secure digital ecosystem for Americans. The Strategy, which expands on other steps taken by the administration in this space (covered by InfoBytes here), focuses on several key pillars for building and enhancing collaboration, including:

    • Defending critical infrastructure. The Strategy will expand the use of minimum cybersecurity requirements in critical sectors, harmonize regulations to reduce compliance burdens, ensure public-private collaboration is able to defend critical infrastructure and essential services, and defend and modernize federal networks and incident response policies.
    • Disrupting and dismantling threat actors. Under the Strategy, tools will be strategically employed to disrupt adversaries, and the private sector will be used to disrupt activities. Ransomware threats will also be addressed through a comprehensive federal approach “in lockstep” with international partners.
    • Shaping market forces to drive security and resilience. In an effort “to reduce risk and shift the consequences of poor cybersecurity away from the most vulnerable,” the Strategy proposes to (i) promote privacy and security of personal data; (ii) “[shift] liability for software products and services to promote secure development practices”; and (iii) ensure investments in new infrastructure are supported by federal grant programs.
    • Investing in a resilient future. The Strategy promotes coordinated, collaborative actions for reducing systemic technical vulnerabilities across the digital ecosystem and improving resiliency against transnational digital repression. The Strategy also prioritizes cybersecurity research and development for emerging technologies, including postquantum encryption, digital identity solutions, and clean energy infrastructure, and stresses the importance of developing a diverse, robust national cyber workforce.
    • Forging international partnerships to pursue shared goals. The Strategy intends to leverage international coalitions and partnerships to counter threats to the digital ecosystem through the use of joint preparedness, response, and cost imposition, which will enable partners to better defend themselves against cyber threats. The U.S. will also work with international partners to create secure, reliable global information and communications technology supply chains and operational technology products and services.

    While “next-generation technologies are reaching maturity at an accelerating pace, creating new pathways for innovation while increasing digital interdependencies,” the announcement warned that state and non-state actors are developing and executing campaigns that threaten the digital ecosystem. The Biden administration’s Strategy aims to address those threats.

    Privacy, Cyber Risk & Data Security Federal Issues Biden Of Interest to Non-US Persons Fintech

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