FTC Complying with the Safeguards Rule

FTC updates Safeguards Rule: here’s your overview

The Federal Trade Commission (FTC) is updating a key data security rule, and the changes will place new compliance requirements on nonbank financial institutions including title, escrow and settlement agents. Among other things, the Safeguards Rule amendments finalized October 27 will require covered institutions to beef up their information security programs (ISPs). The changes are a response to widespread data breaches and attacks that have caused significant consumer harm in recent years, the FTC said.

Before surveying the changes, it may be helpful to review the state and federal compliance framework of which the Safeguards Rule is an important element.

GLBA, state law and the Safeguards Rule

The 1999 Gramm-Leach-Bliley Act (GLBA), codified as amended at 15 U.S.C. Chapter 94: Privacy, establishes basic privacy standards for “financial institutions,” including title insurers, title agents, and settlement/escrow agents. Unique in their role as third-party vendors to lenders, real estate settlement service providers also have a separate obligation to comply with the GLBA on behalf of the obligations owed by their lenders.

As long as states afford consumers the same or greater protection as GLBA, they can enact their own privacy laws, and they have all done so to different degrees and standards. Asserting their own authority, many states have privacy laws that substantially mirror GLBA, while others have their own, distinctive laws; and still others simply point to GLBA and mandate compliance with it. 

Typically, state privacy laws and the federal GLBA overlap in the following general categories of privacy protections:

  1. Disclosure Protections consisting of a privacy notice, “Opt Out” or “Disclosure Authorization” notice, and limits on what types of disclosures of Nonpublic Personal Information (NPI) may be made by a nonaffiliated third party who receives the information from a “financial institution”;
  • Security Protections consisting of a written security program, including administrative, technical and physical safeguards;
  • Security Breach Notification Requirements consisting of laws requiring a business to send out notice of any improper disclosure of NPI in its possession or control. 

The FTC’s Safeguards Rule (16 CFR Part 314) is one of the federal regulations that implements the GLBA by requiring a written security program; the FTC offers guidance on its website regarding compliance with the “Safeguards Rule.”  The rule provides “elements” in 16 CFR 314.4 to develop, implement, and maintain the Information Security Program (ISP), including risk assessment, management and control, oversight of service providers, evaluation and adjustment. 

Rule changes

On October 27, 2021, the FTC issued a news release announcing that the agency was updating the Safeguards Rule to provide better protection against breaches and cyberattacks; it includes a link to the Final Rule containing the amendments (beginning on page 123) and the proposed text of what you can expect to see upon publication in the Federal Register.   

In recent days, there have been numerous newsletters and blog articles buzzing about the final rule’s new requirements. Davis Wright Tremain LLP has a particularly good blog that summarizes the key requirements of the final rule.

There is a lot to talk about, and while the amended final rule is much more prescriptive in its approach, it is also drafted to provide flexibility and clarity. In particular there are helpful suggestions and information about alternative security options for small businesses who may qualify for limited exemptions discussed above. It also makes it clear that the ISP is intended to protect information in both its digital and physical forms. 

The final rule contains tons of commentary, including discussion regarding stakeholder input and the commission’s rationale behind its final decisions. Some noteworthy highlights, as abbreviated, are:

  • designating a single, Qualified Individual as responsible for overseeing, implementing, and enforcing the ISP;
  • base the ISP on a written risk assessment which includes specific criteria described in the amendment;
  • designing and implementing safeguards, including:
    • access controls;
    • system inventory (i.e. knowing where the data is kept, and how everything is connected);
    • encryption;
    • secure development practices for in-house developed applications, and security assessments for externally developed applications (reference applications involving customer information);
    • multi-factor authentication; 
    • disposing of customer information which hasn’t been used for two years (unless required for a legitimate business purpose);
    • periodically reviewing record retention policies to minimize unnecessary retention of information;
    • change management procedures;
    • monitoring and logging user activity;
  • biannual vulnerability testing on information systems, and additional assessments when there is an elevated risk of new vulnerabilities (e.g. when there are material changes to operations or business arrangements, and those changes will have a material impact on the ISP);
  • implementing policies and procedures – which include training, updating, and verification requirements –  and ensuring qualified personnel are available to enact the ISP;
  • overseeing service providers, requiring them by contract to implement and maintain appropriate safeguards;
  • evaluate and adjust the ISP due to circumstances which may have a material impact upon it;
  • establish a written incident response plan which addresses specific areas described in the amendment;
  • required regular reporting, in writing, by the Qualified Individual – at least annually – to the board of directors, or to a senior officer (when there is no board of directors) responsible for the ISP, concerning 1) the overall status of the ISP and its compliance with the final rule; and 2) material matters related to the ISP; and
  • exemptions for financial institutions which handle the information of fewer than 5,000 customers, from the requirements of (referring to sections of 16 CFR Part 314, as amended by the final rule):
    • 314.4(b)(1) – a written risk assessment
    • 314.4(d)(2) – continuous monitoring or annual penetration testing and biannual vulnerability assessment
    • 314.4(h) – a written incident response plan
    • 314.4(i) – an annual report by the Qualified Individual

Effective dates

The anticipated date of publication in the Federal Register is not yet known, but that date will control the effective date(s) of the amendments. The effective date is one year after the publication for the following amendment provisions (referring to sections of 16 CFR Part 314, as amended by the final rule):

  • 314.4(a) – appointment of a qualified individual
  • 314.4(b)(1) – conducting a written risk assessment
  • 314.4(c)(1)-(8) new elements of the ISP
  • 314.4(d)(2) – continuous monitoring or annual penetration testing and biannual vulnerability assessment
  • 314.4(e) – training for personnel
  • 314.4(f)(3) – periodic assessment of service providers
  • 314.4(h) – a written incident response plan
  • 314.4(i) – annual written reports from the qualified individual

The remainder of the final rule’s amendments are effective 30 days after publication in the Federal Register.

This article is for informational purposes and does not contain or convey legal advice. Any opinions, or perceived opinions, are strictly those of the authors and should not be construed as legal advice or a legal opinion. Consultation with an attorney for specific advice based upon the reader’s situation is recommended.

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