Cyber Security

Into the Breach

State and federal regulators are increasingly looking at cyber defenses, not just breaches.
By: | June 2, 2014

Think of it as a seatbelt check for cyber security.

Just as police set up checkpoints to audit compliance with seatbelt laws and other rules of the road, state and federal regulators appear increasingly likely to gauge whether companies are following the rules of data protection.

“It’s a logical move, unfortunately, because of Target and all of the other breaches that have occurred, and even breaches within federal agencies,” said Jerry Irvine, CIO of Prescient Solutions, an IT outsourcing company in Schaumburg, Ill. He serves on a public-private task force on cyber security.

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To date, regulators mostly have been reactive, according to cyber security specialists. After a data breach, companies are expected to notify consumers, and to conduct forensic reviews to determine what happened.

The approach also has included an emphasis on disclosure to investors and other stakeholders. In 2011, the U.S. Securities and Exchange Commission issued guidance calling on public companies to discuss cyber risks and incidents in their regulatory filings.

Recently, however, the focus has broadened to include a closer look at cyber defenses, regardless of whether they have been penetrated. The closer look doesn’t necessarily require new laws, experts said.

In May, the New York State Department of Financial Services said it would beef up assessments of cyber security among state-chartered banks. “The revised procedures are intended to take a holistic view of an institution’s cyber readiness and will be tailored to reflect each institution’s unique risk profile,” according to the department.

The SEC, meanwhile, announced this year that it would examine handling of cyber risks by registered broker-dealers and registered investment advisers.

“I think they’re going to be holding more people’s feet to the fire,” said Bob Parisi, managing director and cyber practice leader for Marsh. “But I think it will be through the application of existing regulations and standards.”

No new rules were introduced in the SEC’s 2011 guidance, Parisi noted. But the document prompted action nonetheless. “We saw an absolute spike in companies reporting risks on annual reports and SEC filings,” he said.

It’s not just public companies and financial services in the crosshairs. All companies are likely to face greater scrutiny.

The approach will vary by industry, said Tom Reagan, large risk underwriter for breach response at Beazley, a specialty carrier. “But it does seem clear that regulators do have the bit between their teeth, and they are determined to reach their goal: protection and safeguarding of consumer and corporate information in the U.S. That’s a good goal.”

One sign of increased scrutiny is a rising volume of breaches first identified by law enforcement, rather than the targets, Reagan said, citing anecdotal evidence from Beazley clients. The calls result, in part, from a 2013 executive order from President Obama asking for greater sharing of information with private entities.

“Law enforcement is taking that to heart,” Reagan said.

Regulators also are digging deeper via post-breach audits, he said. Even when the breach seems small, they want to ensure the damage isn’t worse than initially reported.

“They’re pulling on that thread to see where it goes,” Reagan said, noting that regulators are relying on existing authority to do so.

In one case involving the Health Insurance Portability and Accountability Act, or HIPAA, an investigation by the Department of Health and Human Services found that a breach initially described as affecting seven people had actually affected 1,581. The department also found wider noncompliance with HIPAA’s privacy, security and breach notification rules.

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The organization under investigation, Skagit County, Wash., agreed in March to pay $215,000 and work with regulators to strengthen HIPAA compliance, according to the HHS. The breach took place in Skagit’s public health department.

As law and practice continue to evolve in the United States, companies also need to pay attention to developments overseas, said Ken Goldstein, vice president and worldwide cyber security manager for Chubb Group of Insurance Cos.

In many countries, the laws are less stringent, though that is changing.

But even if a company suffers a breach in a country with no rules requiring customer notification, a company’s reputation could still suffer, Goldstein said.

It’s not just regulators who are watching.

“Do you really want to be the company that gets outed by some kind of online expert who’s in the know about breaches, or do you want to make a voluntary notification?” Goldstein said.

Joel Berg is a freelance writer and adjunct writing teacher based in York, Pa. He has covered business and regulatory issues. He can be reached at [email protected]

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The R&I Editorial Team can be reached at [email protected]