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Colorado and Vermont Adopt Cybersecurity Rules Covering Broker-Dealers and Investment Advisers

State financial regulators in Colorado and Vermont recently adopted cybersecurity rules that apply to broker-dealers and investment advisers regulated by those states as well as certain other “securities professionals” in Vermont.

The broad definition of “securities professional” in Vermont’s regulation (“any person providing investment-related services in Vermont”) could include entities that do not generally consider themselves to be regulated by Vermont’s financial regulator.

Colorado’s and Vermont’s cybersecurity rules require covered entities to implement certain practices including: authentication practices for employee access (which could include multi-factor or two-factor authentication), procedures for authenticating client instructions received via electronic communication, and an annual cybersecurity risk assessment. Notably, Vermont’s regulation also requires that covered entities maintain cybersecurity insurance and provide identity restoration services in the event of a breach.

Colorado

The Colorado Department of Regulatory Agencies, Division of Securities, adopted cybersecurity rules[1], effective July 15, 2017, applicable to broker-dealers and investment advisers regulated by the Colorado Division of Securities (the “Colorado Regulation”).

Under the Colorado Regulation, such broker-dealers and investment advisers must:

  • (1) Establish and maintain written procedures “reasonably designed to ensure cybersecurity,”[2] which to the extent reasonably possible, must provide for:

    • An annual assessment of the potential risks and vulnerabilities to the confidentiality, integrity and availability of Confidential Personal Information[3];

    • Use of secure email for email containing Confidential Personal Information, including use of encryption and digital signatures;

    • Authentication practices for employee access to electronic communications, databases and media;

    • Procedures for authenticating client instructions received via electronic communication; and

    • Disclosure to clients of the risks of using electronic communications; and

  • (2) Include cybersecurity as part of their annual risk assessments.

Vermont

The Vermont Department of Financial Regulation, Securities Division, adopted cybersecurity rules[4] (the “Vermont Regulation”), effective May 1, 2017, that apply to “securities professionals.” The Vermont Regulation defines

  • “securities professional” as “any person providing investment-related services in Vermont, including: broker-dealers, agents, investment advisers, investment adviser representatives, solicitors, and third-party portals,” and

  • “investment-related” as “pertaining to securities, commodities, banking, insurance, or real estate (including, but not limited to, acting as or being associated with a broker-dealer, investment company, investment adviser, government securities broker or dealer, municipal securities dealer, bank, savings and loan association, entity or person required to be registered under the [federal Commodity Exchange Act] or fiduciary).”[5]

Under the Vermont Regulation, securities professionals are required to:

  • (1) Establish and maintain written procedures “reasonably designed[6] to ensure cybersecurity,” which is defined as “the protection of investor and firm information from compromise” through the use of electronic digital media. To the extent reasonably possible, such procedures must provide for:

    • An annual cybersecurity risk assessment;

    • The use of secure email, including use of encryption and digital signatures;

    • Authentication practices for employee access to electronic communications, databases and media;

    • Procedures for authenticating client instructions received via electronic communications; and

    • Disclosure to clients of the risks of using electronic communications;

  • (2) Include cybersecurity as part of its risk assessment;

  • (3) Maintain evidence of adequate insurance for the risk of cyber security [sic] breach[7]; and

  • (4) Provide identity restoration services at no cost to consumers “in the occurrence of breach in the cyber security [sic] of consumer nonpublic personal information.”

Growing Trend of State Financial Regulators Addressing Cybersecurity Risks

News of recent breaches and security incidents have illustrated how financial services firms and institutions face heightened cybersecurity risks. The Federal Bureau of Investigation reported that, between January 2015 and December 2016, there was a 2,370% increase in identified exposed losses attributed to sophisticated scams targeting businesses that regularly perform wire transfer payments. The risk of fraudulent wire transfers may have prompted the inclusion of “procedures for authenticating client instructions received via electronic communication” in both the Colorado and Vermont Regulations.

The Colorado and Vermont Regulations are part of a growing trend of state financial regulators imposing requirements on financial services firms and institutions in an effort to address cybersecurity risks. The New York Department of Financial Services’ recently adopted cybersecurity regulation (the “New York Regulation”), which came into effect in March 2017, covers a different set of financial institutions (banks, insurance companies and certain financial services institutions) than the Colorado and Vermont Regulations. For more information on the New York Regulation, please see our November 2016December 2016January 2017March 2017 and April 2017 blog posts.


[1] 3 Colo. Code Regs. §§ 704-1:51-4.8, 704-1:51-4.14.

[2] In determining whether the procedures are reasonably designed, the following factors may be considered: the firm’s size; the firm’s relationships with third parties; the firm’s policies, procedures, and training of employees with regard to cybersecurity practices; the firm’s authentication practices; the firm’s use of electronic communications, the firm’s use of automatically locking devices with access to Confidential Personal Information; and the firm’s process for reporting lost or stolen devices. 3 Colo. Code Regs. §§ 704-1:51-4.8(A), 704-1:51-4.14(A).

[3] “Confidential Personal Information” is defined as a person’s first name or first initial and last name in combination with at least one of the following data elements: Social Security number; driver’s license number or identification card number; account number or credit or debit card number, in combination with any required security code, access code, security questions or other authentication information that would permit access to an online account; individual’s digitized or other electronic signatures; or user name, unique identifier or electronic mail address in combination with a password, access code, security questions or other authentication information that would permit access to an online account. 3 Colo. Code Regs. § 704-1:51-2.1(B).

[4] 4-4 Vt. Code R. § 8:8-4.

[5] 4-4 Vt. Code R. § 8:1-2(ll).

[6] In determining whether the procedures are reasonably designed, the following factors may be considered: the firm’s size; the firm’s relationships with third parties; the firm’s policies, procedures, and training of employees with regard to cybersecurity practices; the firm’s authentication practices; the firm’s use of electronic communications, the firm’s use of automatically locking devices used to conduct the firm’s electronic security; and the firm’s process for reporting lost or stolen devices. 4-4 Vt. Code R. § 8:8-4(a).

[7] Insurance will be deemed adequate if the insurance is proportional to: (1) the firm’s size; (2) the firm’s organizational structure; (3) the scope of the firm’s business activities; (4) the number and location of the offices; (5) the nature and complexity of products and services offered; (6) the firm’s volume of business; (7) the number of investment adviser representatives assigned to a location; and (8) the specification of the office as a non-branch location. 4-4 Vt. Code R. § 8:8-4(d).

© 2019 Proskauer Rose LLP.

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About this Author

Tiffany Quach, associate, corporate department, business law, proskauer, New York, Privacy Law, IP, technology
Associate

Tiffany Quach is an associate in the Corporate Department. Her practice focuses on intellectual property, technology, privacy and data security, marketing and advertising across a range of industries, including media, communications, life sciences, financial services, retail, fashion, entertainment and sports. She has represented clients including Altice USA, Harry Winston, the Juilliard School and ZocDoc in relation to intellectual property and privacy and data security matters.

She contributes to Proskauer’s Privacy Law blog and maintains the...

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