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On December 22, the FTC announced the final approval of a settlement with a mortgage industry data analytics firm (defendant) for allegedly failing to develop, implement, and maintain a comprehensive information security program and ensure third-party vendors are capable of implementing and maintaining appropriate safeguards for customer information in violation of the Gramm-Leach Bliley Act’s Safeguards Rule. As previously covered by InfoBytes, in December 2020, the FTC alleged that a vendor hired by the defendant stored the unencrypted contents of mortgage documents on a cloud-based server without any protections to block unauthorized access, such as requiring a password. According to the FTC, because the vendor did not implement and maintain appropriate safeguards to protect customer information, the cloud-based server containing the data was improperly accessed approximately 52 times. The FTC claimed, among other things, that the defendant failed to adequately vet its third-party vendors and never took formal steps to evaluate whether the vendors could reasonably protect the sensitive information. Moreover, the defendant’s contracts allegedly did not require vendors to implement appropriate safeguards, nor did the defendant conduct risk assessments of its vendors.
The settlement requires the defendant to, among other things, implement a comprehensive data security program and undergo biennial assessments conducted by a third party on the effectiveness of its program. Additionally, the defendant must report any future data breaches to the FTC no later than 10 days after it provides notice to any federal, state, or local government entity.
FTC Commissioner Rebecca Kelly Slaughter provided a lone dissenting statement.
On October 27, the FTC announced a final rule updating the Safeguards Rule to strengthen data security protections for consumer financial information following widespread data breaches and cyberattacks. The final rule follows a 2019 notice of proposed rulemaking (covered by InfoBytes here) and makes the following modifications to the existing rule:
- Adds specific criteria financial institutions must undertake when conducting a risk assessment and implementing an information security program, including provisions related to access controls, data inventory and classification, authentication, encryption, disposal procedures, and incident response, among others. The final rule also adds measures to ensure employee training and service provider oversight are effective.
- Requires financial institutions to designate a single qualified individual to oversee the information security program. Periodic reports must also be made to an institution’s board of directors or governing bodies.
- Provides an exemption from requirements related to written risk assessments, incident response plans, and annual reporting to the board of directors, for financial institutions that collect information on fewer than 5,000 consumers.
- Expands the definition of “financial institution” to include “entities engaged in activities that the Federal Reserve Board determines to be incidental to financial activities.” Included in the definition are “finders” (i.e. companies that bring together buyers and sellers of products or services that fall within the scope of the Safeguards Rule).
- Adds several definitions and related examples into the Safeguards Rule itself instead of incorporating them through a reference from a related FTC rule.
Provisions of the final rule under Section 314.5 are effective one year after the date of publication in the Federal Register. The remainder of the provisions are effective 30 days following publication.
Additionally, the FTC issued a supplemental notice of proposed rulemaking seeking comments on a proposal to further amend the Safeguards Rule to require financial institutions to report security events to the Commission where a determination has been made that consumer information has been misused, or is reasonably likely to be misused, in an event affecting at least 1,000 consumers. Comments are due 60 days after publication in the Federal Register.
The FTC also announced a final rule adopting largely technical changes to its authority under the Privacy of Consumer Financial Information Rule (Privacy Rule) under the Gramm-Leach-Bliley Act, which requires financial institutions to inform consumers about their information-sharing practices and allow consumers the ability to opt out of having their information shared with certain third parties. The Privacy Rule is amended to revise the rule’s scope, modify the definitions of “financial institution” and “federal functional regulator,” and update requirements pertaining to annual customer privacy notices. The FTC noted that these changes align the Privacy Rule with changes made under Dodd-Frank and the FAST Act.
On August 30, the SEC announced sanctions against eight firms in three actions for alleged failures in their cybersecurity policies and procedures that resulted in email account takeovers of employee email accounts, which exposed the personal information of thousands of customers and clients at each firm. Each order finds that the firms violated Regulation 30(a) of the Safeguards Rule, “which requires every broker-dealer and every investment adviser registered with the Commission to adopt written policies and procedures that are reasonably designed to safeguard customer records and information.” According to the SEC’s first order against a California-based investment firm, from November 2017 to June 2020, cloud-based email accounts of more than 60 of the firm’s entities' personnel were taken over by unauthorized third parties, which resulted in the exposure of personally identifying information (PII) of over 4,388 customers and clients. According to the order, none of these accounts were protected by multi-factor authentication (MFA), even though the firm’s policies required use of MFA since 2018 “wherever possible.” This failure resulted in sending breach notifications to clients that included misleading template language, which suggested that the notifications were issued much sooner than they actually were after discovery of the incidents. The order, which the company consented to without admitting or denying the findings, imposes a civil money penalty of $300,000, and provides that the company must cease and desist from committing or causing any future violations of the Safeguards Rule.
According to the SEC’s second order against an Iowa-based investment firm, from January 2018 to July 2021, cloud-based email accounts of over 121 of the firm’s representatives were taken over by unauthorized third parties, which resulted in the PII exposure of at least 2,177 customers and clients. The order finds that though the firm discovered the first email account takeover in January 2018, it failed to adopt written policies and procedures for cloud-based email accounts reasonably designed to protect customer records and information, such as the use of MFA. The order, which the company consented to without admitting or denying the findings, imposes a civil money penalty of $250,000, and provides that the company must cease and desist from committing or causing any future violations of the Safeguards Rule.
According to the SEC's third order against a Washington-based investment firm, from September 2018 to December 2019, cloud-based email accounts of 15 of the firm’s financial advisers or their assistants were taken over by unauthorized third parties, which resulted in the PII exposure of approximately 4,900 customers and clients. The order also finds that the firm “failed to adopt written policies and procedures requiring additional firm-wide security measures for all [of the firm’s] email users until May 2020, and did not fully implement those measures until August 2020,” which placed additional customer and client records and information at risk. The policies recommended, but did not require, the use of MFA for accessing sensitive data. The order, which the company consented to without admitting or denying the findings, imposes a civil money penalty of $200,000, and provides that the company must cease and desist from committing or causing any future violations of the Safeguards Rule.
Mortgage broker allegedly violated federal laws by posting customers’ personal information on website
On January 7, the FTC announced a proposed settlement with a California mortgage broker and his company to resolve alleged violations of the FTC Act, FCRA, Regulation P, and the Safeguards Rule. According to a complaint filed by the DOJ on behalf of the FTC, the defendants published the personal information of customers who posted negative reviews on a public website, including customers’ “sources of income, debt-to-income ratios, credit history, taxes, family relationships, and health.” The alleged posts containing negative financial information violated the defendants’ responsibilities under Regulation P (Privacy of Consumer Financial Information) as the required privacy disclosure provided to the customers stated that the defendants would not share personal information with any third party. Regulation P also “prohibits financial institutions from disclosing to any nonaffiliated third party any nonpublic personal information about a customer unless it has provided the customer with an opt-out notice, . . . a reasonable opportunity to opt out of the disclosure, and the customer has not opted out.” In this instance, customers were not given the opportunity to opt out of disclosure of their personal financial information in response to online consumer reviews, the complaint asserts. In addition, the complaint alleges that the defendants also violated the FTC Act by causing unfair or deceptive acts or practices that “deprived consumers of the ability to control whether and to whom they disclosed sensitive information.” The defendants also allegedly violated the FCRA by using consumer reports for impermissible purposes, and the FTC’s Safeguards Rule by failing to implement or maintain an adequate information security program. Under the terms of the proposed settlement, the defendants will pay a $120,000 civil penalty and are prohibited from (i) misrepresenting their privacy and data security practices; (ii) using consumer reports for anything other than a permissible purpose; (iii) not providing required privacy notices; and (iv) improperly disclosing nonpublic personal information to third parties. Among other things, the company is also prohibited from transferring, selling, sharing, collecting, maintaining, or storing nonpublic personal information unless it implements a comprehensive information security program; and must obtain independent third-party assessments of its information security program every two years.
On March 5, the FTC released proposed amendments to two rules that protect the privacy and security of customer data held by financial institutions. The agency seeks comments on proposed changes to the Safeguards Rule and the Privacy Rule under the Gramm-Leach-Bliley Act. The Safeguards Rule requires financial institutions to develop, implement, and maintain comprehensive information security programs, whereas the Privacy Rule requires financial institutions to notify customers about information-sharing practices, as well as enable customers to opt out of sharing their information with certain third parties. The FTC’s proposed amendments to the Safeguards Rule would, among other things, add more detailed requirements for financial institutions, including mandatory encryption of customer data and the use of multi-factor authentication to prevent unauthorized access to customer information. The proposed amendments to the Privacy Rule would change the rule to account for statutory changes in the Dodd-Frank Act, which gave the majority of the FTC’s rulemaking authority for the Privacy Rule to the CFPB with the exception of certain motor vehicle dealers. The agency plans to remove examples of financial institutions that do not apply to motor vehicle dealers, as well as clarify when annual customer privacy notices must be provided. In addition, the FTC proposes to expand the definition of “financial institution” in both rules to include “finders,” which include persons or entities that charge a fee to introduce consumers to a lender.
On October 17, as part of its fall 2018 rulemaking agenda, the FTC announced that it plans to review potential updates to federal privacy rules on how banks protect consumer data. The planned recommendation—scheduled to be presented to FTC commissioners at the end of November—will incorporate recommendations by staff and the public on changing the Gramm-Leach-Bliley Act Safeguard Rules (the Rule) given the potential conflict between the Rule and state, local, or other federal laws or regulations. As previously covered by InfoBytes, the FTC requested comments on the Rule in 2016, seeking feedback on several specific questions relating to the Rule’s economic impact and benefits, potential conflicts, and how technological, economic, or other industry changes will affect the Rule.
Among other things, the FTC’s regulatory agenda will also address (i) 2016 amendments to the Telemarking Sales Rule; (ii) the periodic review of identity theft rules; (iii) issues related to the privacy of consumer financial information concerning vehicle disclosures; and (iv) credit monitoring for active duty military as required by the Economic Growth, Regulatory Relief, and Consumer Protection Act.
FTC Announces Settlement with Operator of Online Tax Preparation Service Over Privacy and Security Allegations
On August 29, the FTC issued a press release announcing a settlement with the operator of a Georgia-based online tax preparation service to resolve allegations that the company failed to implement adequate security procedures to protect client information in violation of several federal privacy and security rules, including the Federal Trade Commission Act and the Gramm-Leach-Bliley Act’s Privacy Rule (Regulation P) and Safeguards Rule. In its complaint, the FTC alleged that the company violated the Safeguards Rule, which requires financial institutions under FTC jurisdiction toprotect customer information by developing, implementing, and maintaining a comprehensive information security program that satisfies certain requirements. The complaint alleged that, because the company failed to implement these requirements and did not have in place adequate risk-based authentication measures, hackers were able to conduct a “list validation attack” between October 2015 and December 2015, which gave them full access to nearly 9,000 customer accounts. Hackers then used the acquired information to engage in tax identity theft. In addition, the FTC alleges that the company failed to notify customers of the list validation attack or alterations until a user called in January 2016 to report suspicious activity, and failed to delivery privacy notices to customers as required by the Privacy Rule.
Under the terms of the decision and order, the company, among other things, is required for 10 years to obtain biennial independent third-party assessments to address the effectiveness of the company’s security programs and safeguard measures to “certify that [the company’s] security program(s) is operating with sufficient effectiveness to provide reasonable assurance that the security, confidentiality, and integrity of personal information is protected and has operated throughout the reporting period.”
The agreement with the FTC will be subject to public comment for 30 days through September 29, at which point the FTC will decide whether to make the proposed consent order final.
- Buckley Webcast: Fifth Circuit muddles CFPB’s plans to use in-house judges in enforcement proceedings
- Steven vonBerg to discuss “Regulatory plenary” at the Information Management Network’s Non-QM Forum
- Jeffrey P. Naimon to discuss “Understanding the ESG impact on compliance” at the ABA’s Regulatory Compliance Conference