1 Financial Advisor Webinar Series 2009

Privacy Law & Financial Advisors

Brendon M. TavelliAssociate, Privacy & Data Security Practice Group

November 20, 2009

2 Financial Advisor Webinar Series 2009

Agenda

• The inter-relationship between privacy and data security ð can’t have privacy without security

• Brief overview of the potentially applicable legal regimes at the federal and state level

• Exposure points for financial advisors

• Recommendations to minimize privacy risks

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Privacy Law v. Data Security Law

• Privacy is the appropriate use of personal information or PII

• Privacy is impossible without security

• All the privacy promises in the world are worthless if appropriate data security measures are not in place

• Shift in legal focus from privacy disclosures (e.g., privacy policies and breach notification) to affirmative security obligations

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Domestic Privacy Law Is Sectoral

• No omnibus, across the board privacy law in the United States­ Compare -- EU and Canada take a wholistic approach to protecting

the privacy of personal information

• Privacy law in the United States is a patchwork of federal, state, and other laws, regulations and standards of conduct

• Financial services industry is no stranger to privacy regulation

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Major Financial Privacy Laws

• Fair Credit Reporting Act (FCRA)

• Fair and Accurate Credit Transactions Act (FACTA)

• Gramm-Leach-Bliley Act (GLBA)­ Privacy Rule imposes information-sharing restrictions and notice

obligations on financial institutions­ Safeguards Rule requires institutions to have a security plan to

protect the confidentiality and integrity of personal consumer information

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Federal Data Security Enforcement

• FTC is authorized to regulate unfair or deceptive acts or practices in or affecting commerce

• FTC exercises this power with respect to data security in 2 ways:­ Unfair ð inadequate data privacy and security­ Deceptive ð misrepresentations with respect to these practices

• FTC cannot impose fines under the FTC Act, but can (and does) impose rigorous data security requirements

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Exemplary Federal Enforcement Actions

• BJ’s Wholesale Club, Inc­ hackers exploited network security weakness to steal credit card data­ BJ’s must implement a comprehensive information security program

with administrative, technical, and physical safeguards­ Must obtain independent program audit every other year for 20 years

• Eli Lilly­ e-mail addresses of Prozac users inadvertently sent in “To” line­ settled FTC investigation by agreeing to implement 4-stage program

designed to protect sensitive personal information­ paid fine to state AGs and agreed to improve data security standards

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Exemplary Federal Enforcement Actions (cont’d)

• CVS Caremark Corp.­ sensitive information found in insecure trash containers outside stores­ FTC and HHS each entered into separate agreements to resolve issues

related to violations of FTC Act and HIPAA­ must implement detailed data security program + standard audits­ $2.25M penalty paid to HHS

• ChoicePoint­ personal information sold to alleged crime ring w/o proper authorization­ FTC alleged violations of Fair Credit Reporting Act­ must implement detailed data security program + standard audits­ Paid $10M civil penalty to FTC + $5M consumer redress

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Other Potentially Applicable Legal Regimes

• California Online Privacy Protection Act

• State security breach notification obligations

• State data security regulations­ Massachusetts­ Nevada­ Other

• Federal and state e-mail & telephone marketing regulations

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California Online Privacy Protection Act

• Cal. Bus. & Prof. Code § 22575

• Any person that collects “personally identifiable information” from California residents online must post an online privacy policy­ NOT dependent upon the location of the person collecting PII

• Policy must disclose what types of PII are collected online and how PII may be disclosed

• Must be posted “conspicuously”

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What is “personal information?”

• Most legal regimes in the United States apply to certain forms of “personal information” or “personally identifiable information”

• Definition of PII often varies depending on the objective of thestatute and the jurisdiction

• One common definition encompasses first name or first initial and last name in combination with one or more of the following: ­ a Social Security number­ drivers license number or government issued ID number­ account number, and/or credit or debit card information including

numbers and passwords, PINs and access codes

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State Security Breach Notice Requirements

• 45 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands require that you provide notice to individuals when the security of their unencrypted PII is compromised

• Some states include broader definitions of PII

• Notice requirements vary by jurisdiction­ Heightened thresholds to trigger notice obligation­ Content of notices­ Notice to state regulatory bodies

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Anatomy Lesson: What Does a Breach Look Like?

• Network Hacking

• Lost or Stolen Laptops

• Spyware, Phishing and Pretexting

• Insecure Media Disposal

• Hacked Card Swiping Devices

• Security Vulnerabilities On Mobile Devices

• Misdirected Mail and Faxes

• Insecure wireless networks

• Peer-to-peer software

• Breaches in Physical Security

• Botched Software Updates/Upgrades

• Human Error

• Rogue or Disgruntled Employees

• Lost or Stolen Media

• And more . . .

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State Data Security Regulations

• Some states require businesses to use “reasonable procedures and practices” to protect PII

• Some states impose obligations to properly dispose of records containing PII­ Required or recommended disposal methods include shredding,

erasing, or otherwise rendering unreadable­ Businesses may “outsource” disposal, but generally must monitor for

compliance

• Massachusetts and Nevada are leading the charge by requiring businesses to take specific, affirmative steps to protect PII

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Massachusetts Data Security Regulations

• 201 C.M.R. § 17.00 enacted in September 2008

• Regulations harshly criticized by the business community and others as unworkable and unduly burdensome

• Revised twice and compliance deadlines extended

• Any person that owns or licenses personal information about a Massachusetts resident must comply by March 1, 2010

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Massachusetts Data Security Regulations

• Must develop, implement and maintain a comprehensive, written information security program that includes administrative, technical, and physical safeguards

• Flexible ð program may be tailored to the organization­ Size, scope and type of business­ Available resources­ Amount of stored data­ Security / confidentiality needs for consumer and employee data

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201 C.M.R. § 17.00: Specific Requirements

• Massachusetts data security regulations are flexible, but written information security programs must include certain components:­ Designating one or more “responsible” employees ­ Identifying and assessing reasonably foreseeable risks­ Security policies for employees regarding handling PII­ Disciplinary measures for program violations­ Access restrictions­ Service-provider oversight­ Program monitoring and updating to ensure continued effectiveness­ Documenting breach response

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201 C.M.R. § 17.00: Specific Requirements (cont’d)

• Massachusetts regulations require persons that own or license PII to implement computer system security measures:­ Secure user authentication protocols­ Access restrictions (e.g., need-to-know access)­ Encryption (in transit and stored on portable devices)­ “Reasonable” monitoring of systems for unauthorized access­ Up-to-date firewalls, patches, antivirus software­ Employee training on proper use of systems and importance of PII

security

• CAVEAT: computer system security measures must be implemented “to the extent technically feasible”

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201 C.M.R. § 17.04: Encryption

• “Encrypted” means “the transformation of data into a form in which meaning cannot be assigned without the use of a confidential process or key”­ OCABR abandoned specific encryption technology

• Records and files that contain PII which are transmitted wirelessly and/or across public networks must be encrypted

• PII stored on laptops or other portable devices must be encrypted

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Nev. Rev. Stat. § 603A: Encryption

• Nev. Rev. Stat. § 597.970 prohibits electronic transmission of PII outside secure system (other than a fax) unless encrypted

• S.B. 227 amends § 597.970 to require encryption of all PII leaving the “logical or physical controls of the data collector,” including electronic data on a “data storage device”­ Data storage device = computers, cell phones, magnetic tape,

computer drives, and the medium itself

• S.B. 227 requires use of encryption technology that has been adopted by an established standards setting body and proper management and safeguards of cryptographic keys

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Nev. Rev. Stat. § 603A: Encryption (cont’d)

• Safe harbor ð data collector not liable for a breach if compliant with encryption law and no gross negligence or intentional misconduct

• Some questions remain­ Who can enforce?­ Is there a private right of action?­ What does it mean to be “doing business in this State”

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Federal and State Marketing Regulations

• CAN-SPAM Act­ E-mail Communications

• Telemarketing regulations­ Telephone solicitations

• Behavioral Targeting Guidelines

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Advisor Exposure Points

• Customer Relationship Management (“CRM”) databases­ Strong access restrictions­ Minimize collection and storage of sensitive PII­ Train employees on proper access and use

• Portable electronic devices­ Encrypt devices that store PII­ Implement physical security policies

• Hard copy documents­ Some breach notification laws apply­ Disposal rules may apply

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Advisor Exposure Points (cont’d)

• Client communications­ What types of PII should be included in transmissions (e.g., redact PII

in performance reports)­ Compliance with federal and state marketing restrictions

• Externally-facing policies on privacy and data security­ Do you have a policy?­ Do you know what it says?­ Does your policy accurately reflect your practices?

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Recommendations: 6 Simple Steps

• Step 1: Take ownership ð avoid a tragedy of the commons

• Step 2: Identify what you have ð ask the questions!

• Step 3: Identify the appropriate level(s) of security

• Step 4: Document your program

• Step 5: Communicate your program to affected individuals

• Step 6: Manage your program ð provide oversight, update

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Thank You!

http://privacylaw.proskauer.com/

Brendon M. Tavelli

btavelli@proskauer.com202.416.6896