Identity Theft and Pretext Calling

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 30

Docket No. 00-35

RIN 1557-AB84

FEDERAL RESERVE SYSTEM

12 CFR Parts 208, 211, 225, and 263

Docket No. R-1073

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Parts 308 and 364

RIN 3064-AC39

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Parts 568 and 570

Docket No. 2000-112

RIN 1550-AB36

Interagency Guidelines Establishing Standards for Safeguarding Customer Information and

Rescission of Year 2000 Standards for Safety and Soundness.

AGENCIES: The Office of the Comptroller of the Currency (OCC), Treasury; Board of

Governors of the Federal Reserve System (Board); Federal Deposit Insurance Corporation

(FDIC); and Office of Thrift Supervision (OTS), Treasury.

ACTION: Joint final rule.

SUMMARY: The Office of the Comptroller of the Currency, Board of Governors of the Federal

Reserve System, Federal Deposit Insurance Corporation, and Office of Thrift Supervision

(collectively, the Agencies) are publishing final Guidelines establishing standards for safeguarding

customer information that implement sections 501 and 505(b) of the Gramm-Leach-Bliley Act (the

G-L-B Act or Act).

Section 501 of the G-L-B Act requires the Agencies to establish appropriate standards for

the financial institutions subject to their respective jurisdictions relating to administrative,

technical, and physical safeguards for customer records and information. As described in the Act,

these safeguards are to: insure the security and confidentiality of customer records and

information; protect against any anticipated threats or hazards to the security or integrity of such

records; and protect against unauthorized access to or use of such records or information that could

result in substantial harm or inconvenience to any customer. The Agencies are to implement these

standards in the same manner, to the extent practicable, as standards prescribed pursuant to section

39(a) of the Federal Deposit Insurance Act (FDI Act)

hazards to the security or integrity of such

records; and protect against unauthorized access to or use of such records or information that could

result in substantial harm or inconvenience to any customer. The Agencies are to implement these

standards in the same manner, to the extent practicable, as standards prescribed pursuant to section

39(a) of the Federal Deposit Insurance Act (FDI Act). These final Guidelines implement the

requirements described above.

The Agencies previously issued guidelines establishing Year 2000 safety and soundness

standards for insured depository institutions pursuant to section 39 of the FDI Act. Since the

events for which these guidelines were issued have passed, the Agencies have concluded that the

guidelines are no longer necessary and are rescinding these guidelines.

EFFECTIVE DATE: The joint Guidelines are effective July 1, 2001. The rescission of the Year

2000 Standards for Safety and Soundness is effective [INSERT DATE 30 DAYS AFTER

PUBLICATION IN THE FEDERAL REGISTER].

FOR FURTHER INFORMATION CONTACT:

OCC:

John Carlson, Deputy Director for Bank Technology, (202) 874-5013; or Deborah Katz,

Senior Attorney, Legislative and Regulatory Activities Division, (202) 874-5090.

Board:

Heidi Richards, Assistant Director, Division of Banking Supervision and Regulation,

(202) 452-2598; Stephanie Martin, Managing Senior Counsel, Legal Division, (202) 452-3198; or

Thomas E. Scanlon, Senior Attorney, Legal Division, (202) 452-3594. For the hearing impaired

only, contact Janice Simms, Telecommunication Device for the Deaf (TDD) (202) 452-3544,

Board of Governors of the Federal Reserve System, 20th and C Streets, NW, Washington, DC

20551.

FDIC:

Thomas J. Tuzinski, Review Examiner, Division of Supervision, (202) 898-6748; Jeffrey

M. Kopchik, Senior Policy Analyst, Division of Supervision, (202) 898-3872; or Robert A.

Patrick, Counsel, Legal Division, (202) 898-3757

e Simms, Telecommunication Device for the Deaf (TDD) (202) 452-3544,

Board of Governors of the Federal Reserve System, 20th and C Streets, NW, Washington, DC

20551.

FDIC:

Thomas J. Tuzinski, Review Examiner, Division of Supervision, (202) 898-6748; Jeffrey

M. Kopchik, Senior Policy Analyst, Division of Supervision, (202) 898-3872; or Robert A.

Patrick, Counsel, Legal Division, (202) 898-3757.

OTS:

Jennifer Dickerson, Manager, Information Technology, Examination Policy, (202) 906-

5631; or Christine Harrington, Counsel, Banking and Finance, Regulations and Legislation

Division, (202) 906-7957.

SUPPLEMENTARY INFORMATION:

The contents of this preamble are listed in the following outline:

I. Background

II. Overview of Comments Received

III. Section-by-Section Analysis

IV. Regulatory Analysis

A. Paperwork Reduction Act

B. Regulatory Flexibility Act

2

C. Executive Order 12866

D. Unfunded Mandates Act of 1995

I. Background

On November 12, 1999, President Clinton signed the G-L-B Act (Pub. L. 106-102) into

law. Section 501, titled “Protection of Nonpublic Personal Information”, requires the Agencies,

the National Credit Union Administration, the Securities and Exchange Commission, and the

Federal Trade Commission to establish appropriate standards for the financial institutions subject

to their respective jurisdictions relating to the administrative, technical, and physical safeguards

for customer records and information. As stated in section 501, these safeguards are to: (1) insure

the security and confidentiality of customer records and information; (2) protect against any

anticipated threats or hazards to the security or integrity of such records; and (3) protect against

unauthorized access to or use of such records or information that would result in substantial harm

or inconvenience to any customer

mation. As stated in section 501, these safeguards are to: (1) insure

the security and confidentiality of customer records and information; (2) protect against any

anticipated threats or hazards to the security or integrity of such records; and (3) protect against

unauthorized access to or use of such records or information that would result in substantial harm

or inconvenience to any customer.

Section 505(b) of the G-L-B Act provides that these standards are to be implemented by

the Agencies in the same manner, to the extent practicable, as standards prescribed pursuant to

section 39(a) of the FDI Act.[See Footnote 1] Section 39(a) of the FDI Act authorizes the Agencies to establish

operational and managerial standards for insured depository institutions relative to, among other

things, internal controls, information systems, and internal audit systems, as well as such other

operational and managerial standards as the Agencies determine to be appropriate.[See Footnote 2]

II. Overview of Comments Received

On June 26, 2000, the Agencies published for comment the proposed Interagency

Guidelines Establishing Standards for Safeguarding Customer Information and Rescission of Year

2000 Standards for Safety and Soundness in the Federal Register (65 FR 39472). The public

comment period closed August 25, 2000. The Agencies collectively received a total of 206

Footnote 1 -- Section 39 applies only to insured depository institutions, including insured branches of

foreign banks. The Guidelines, however, will also apply to certain uninsured institutions, such as

bank holding companies, certain nonbank subsidiaries of bank holding companies and insured

depository institutions, and uninsured branches and agencies of foreign banks. See sections 501

and 505(b) of the G-L-B Act. [End of Footnote 1]

Footnote 2 -- OTS has placed its information security guidelines in appendix B to 12 CFR part 570,

with the provisions implementing section 39 of the FDI Act

s

bank holding companies, certain nonbank subsidiaries of bank holding companies and insured

depository institutions, and uninsured branches and agencies of foreign banks. See sections 501

and 505(b) of the G-L-B Act. [End of Footnote 1]

Footnote 2 -- OTS has placed its information security guidelines in appendix B to 12 CFR part 570,

with the provisions implementing section 39 of the FDI Act. At the same time, OTS has adopted a

regulatory requirement that the institutions OTS regulates comply with the proposed Guidelines.

Because information security guidelines are similar to physical security procedures, OTS has

included a provision in 12 CFR part 568, which covers primarily physical security procedures,

requiring compliance with the Guidelines in appendix B to part 570. [End of Footnote 2]

3

comments in response to the proposal, although many commenters sent copies of the same letter to

each of the Agencies. Those combined comments included 49 from banks, 7 from savings

associations, 60 from financial institution holding companies; 50 from financial institution trade

associations; 33 from other business entities; and four from state regulators. The Federal Reserve

also received comments from three Federal Reserve Banks.

The Agencies invited comment on all aspects of the proposed Guidelines, including

whether the rules should be issued as guidelines or as regulations. Commenters overwhelmingly

supported the adoption of guidelines, with many commenters offering suggestions for ways to

improve the proposed Guidelines as discussed below. Many commenters cited the benefits of

flexibility and the drawbacks of prescriptive requirements that could become rapidly outdated as a

result of changes in technology.

The Agencies also requested comments on the impact of the proposal on community banks,

recognizing that community banks operate with more limited resources than larger institutions and

may present a different risk profile

ow. Many commenters cited the benefits of

flexibility and the drawbacks of prescriptive requirements that could become rapidly outdated as a

result of changes in technology.

The Agencies also requested comments on the impact of the proposal on community banks,

recognizing that community banks operate with more limited resources than larger institutions and

may present a different risk profile. In general, community banks urged the Agencies to issue

guidelines that are not prescriptive, that do not require detailed policies or reporting by banks that

share little or no information outside the bank, and that provide flexibility in the design of an

information security program. Some community banks indicated that the Guidelines are

unnecessary because they already have information security programs in place. Others requested

clarification of the impact of the Guidelines on banks that do not share any information in the

absence of a customer’s consent.

In light of the comments received, the Agencies have decided to adopt the Guidelines, with

several changes as discussed below to respond to the commenters’ suggestions. The respective

texts of the Agencies’ Guidelines are substantively identical. In directing the Agencies to issue

standards for the protection of customer records and information, Congress provided that the

standards apply to all financial institutions, regardless of the extent to which they may disclose

information to affiliated or nonaffiliated third parties, electronically transfer data with customers

or third parties, or record data electronically. Because the requirements of the Act apply to a

broad range of financial institutions, the Agencies believe that the Guidelines must establish

appropriate standards that allow each institution the discretion to design an information security

program that suits its particular size and complexity and the nature and scope of its activities

customers

or third parties, or record data electronically. Because the requirements of the Act apply to a

broad range of financial institutions, the Agencies believe that the Guidelines must establish

appropriate standards that allow each institution the discretion to design an information security

program that suits its particular size and complexity and the nature and scope of its activities. In

many instances, financial institutions already will have information security programs that are

consistent with these Guidelines, because key components of the Guidelines were derived from

security-related supervisory guidance previously issued by the Agencies and the Federal Financial

Institutions Examination Council (FFIEC). In such situations, little or no modification to an

institution’s program will be required.

Below is a section-by-section analysis of the final Guidelines.

III. Section-by-Section Analysis

The discussion that follows applies to each Agency’s Guidelines.

4

I. Introduction

Paragraph I. of the proposal set forth the general purpose of the Guidelines, which is to

provide guidance to each financial institution in establishing and implementing administrative,

technical, and physical safeguards to protect the security, confidentiality, and integrity of customer

information. This paragraph also set forth the statutory authority for the Guidelines, including

section 39(a) of the FDI Act (12 U.S.C. 1831p-1) and sections 501 and 505(b) of the G-L-B Act

(15 U.S.C. 6801 and 6805(b) ). The Agencies received no comments on this paragraph, and have

adopted it as proposed.

I.A. Scope

Paragraph I.A. of the proposal described the scope of the Guidelines. Each Agency

defined specifically those entities within its particular scope of coverage in this paragraph of the

Guidelines.

The Agencies received no comments on the issue of which entities are covered by the

Guidelines, and have adopted paragraph I.A. as proposed.

I.B. Preservation of Existing Authority

Paragraph I.B

ope

Paragraph I.A. of the proposal described the scope of the Guidelines. Each Agency

defined specifically those entities within its particular scope of coverage in this paragraph of the

Guidelines.

The Agencies received no comments on the issue of which entities are covered by the

Guidelines, and have adopted paragraph I.A. as proposed.

I.B. Preservation of Existing Authority

Paragraph I.B. of the proposal made clear that in issuing these Guidelines none of the

Agencies is, in any way, limiting its authority to address any unsafe or unsound practice, violation

of law, unsafe or unsound condition, or other practice, including any condition or practice related

to safeguarding customer information. As noted in the preamble to the proposal, any action taken

by any Agency under section 39(a) of the FDI Act and these Guidelines may be taken

independently of, in conjunction with, or in addition to any other enforcement action available to

the Agency. The Agencies received no comments on this paragraph, and have adopted paragraph

I.B. as proposed.

I.C.1. Definitions

Paragraph I.C. set forth the definitions of various terms for purposes of the Guidelines.[See Footnote 3] It

also stated that terms used in the Guidelines have the same meanings as set forth in sections 3 and

39 of the FDI Act (12 U.S.C. 1813 and 1831p-1).

The Agencies received several comments on the proposed definitions, and have made

certain changes as discussed below. The Agencies also have reordered proposed paragraph I.C.

so that the statement concerning the reliance on sections 3 and 39(a) of the FDI Act is now in

paragraph I.C.1., with the definitions appearing in paragraphs I.C.2.a.-e. The defined terms have

been placed in alphabetical order in the final Guidelines

comments on the proposed definitions, and have made

certain changes as discussed below. The Agencies also have reordered proposed paragraph I.C.

so that the statement concerning the reliance on sections 3 and 39(a) of the FDI Act is now in

paragraph I.C.1., with the definitions appearing in paragraphs I.C.2.a.-e. The defined terms have

been placed in alphabetical order in the final Guidelines.

Footnote 3 -- In addition to the definitions discussed below, the Board’s Guidelines in 12 CFR parts

208 and 225 contain a definition of “subsidiary”, which describes the state member bank and bank

holding company subsidiaries that are subject to the Guidelines. [End of Footnote 3]

5

I.C.2.a. Board of directors

The proposal defined “board of directors” to mean, in the case of a branch or agency of a

foreign bank, the managing official in charge of the branch or agency.[See Footnote 4] The Agencies received no

comments on this proposed definition, and have adopted it without change.

I.C.2.b. Customer

The proposal defined “customer” in the same way as that term is defined in section __.3(h)

of the Agencies’ rule captioned “Privacy of Consumer Financial Information” (Privacy Rule).[See Footnote 5]

The Agencies proposed to use this definition in the Guidelines because section 501(b) refers to

safeguarding the security and confidentiality of “customer” information. Given that Congress used

the same term for both the 501(b) standards and for the sections concerning financial privacy, the

Agencies have concluded that it is appropriate to use the same definition in the Guidelines that was

adopted in the Privacy Rule.

Under the Privacy Rule, a customer is a consumer who has established a continuing

relationship with an institution under which the institution provides one or more financial products

or services to the consumer to be used primarily for personal, family or household purposes

have concluded that it is appropriate to use the same definition in the Guidelines that was

adopted in the Privacy Rule.

Under the Privacy Rule, a customer is a consumer who has established a continuing

relationship with an institution under which the institution provides one or more financial products

or services to the consumer to be used primarily for personal, family or household purposes.

“Customer” does not include a business, nor does it include a consumer who has not established an

ongoing relationship with a financial institution (e.g., an individual who merely uses an

institution’s ATM or applies for a loan). See sections __.3(h) and (i) of the Privacy Rule. The

Agencies solicited comment on whether the definition of “customer” should be broadened to

provide a common information security program for all types of records under the control of a

financial institution.

The Agencies received many comments on this definition, almost all of which agreed with

the proposed definition. Although a few commenters indicated they would apply the same security

program to both business and consumer records, the vast majority of commenters supported the use

of the same definition of “customer” in the Guidelines as is used in the Privacy Rule. They

observed that the use of the term “customer” in section 501 of the G-L-B Act, when read in the

context of the definitions of “consumer” and “customer relationship” in section 509, reflects the

Congressional intent to distinguish between certain kinds of consumers for the information security

standards and the other privacy provisions established under subtitle A of Title V.

Footnote 4 -- The OTS version of the Guidelines does not include this definition because OTS does

not regulate foreign institutions. Paragraph I of the OTS Guidelines has been renumbered

accordingly. [End of Footnote 4]

Footnote 5 -- See 65 FR 35162 (June 1, 2000)

inds of consumers for the information security

standards and the other privacy provisions established under subtitle A of Title V.

Footnote 4 -- The OTS version of the Guidelines does not include this definition because OTS does

not regulate foreign institutions. Paragraph I of the OTS Guidelines has been renumbered

accordingly. [End of Footnote 4]

Footnote 5 -- See 65 FR 35162 (June 1, 2000). Citations to the interagency Privacy Rule in this

preamble are to sections only, leaving blank the citations to the part numbers used by each agency. [End of Footnote 5

6

The Agencies have concluded that the definition of “customer” used in the Guidelines

should be consistent with the definition established in section __.3(h) of the Privacy Rule. The

Agencies believe, therefore, that the most reasonable interpretation of the applicable provisions of

subtitle A of Title V of the Act is that a financial institution is obligated to protect the security and

confidentiality of the nonpublic personal information of its consumers with whom it has a customer

relationship. As a practical manner, a financial institution may also design or implement its

information security program in a manner that encompasses the records and information of its other

consumers and its business clients.[See Footnote 6]

I.C.2.c. Customer information

The proposal defined “customer information” as any records containing nonpublic personal

information, as defined in section __.3(n) of the Privacy Rule, about a customer. This included

records, data, files, or other information in paper, electronic, or other form that are maintained by

any service provider on behalf of an institution. Although section 501(b) of the G-L-B Act refers

to the protection of both customer “records” and “information”, for the sake of simplicity, the

proposed Guidelines used the term “customer information” to encompass both information and

records.

The Agencies received several comments on this definition

ronic, or other form that are maintained by

any service provider on behalf of an institution. Although section 501(b) of the G-L-B Act refers

to the protection of both customer “records” and “information”, for the sake of simplicity, the

proposed Guidelines used the term “customer information” to encompass both information and

records.

The Agencies received several comments on this definition. The commenters suggested

that the proposed definition was too broad because it included files “containing” nonpublic

personal information. The Agencies believe, however, that a financial institution’s security

program must apply to files that contain nonpublic personal information in order to adequately

protect the customer’s information. In deciding what level of protection is appropriate, a financial

institution may consider the fact that a given file contains very little nonpublic personal

information, but that fact would not render the file entirely beyond the scope of the Guidelines.

Accordingly, the Agencies have adopted a definition of “customer record” that is substantively the

Footnote 6 -- The Agencies recognize that “customer” is defined more broadly under Subtitle B of

Title V of the Act, which, in general, makes it unlawful for any person to obtain or attempt to

obtain customer information of a financial institution by making false, fictitious, or fraudulent

statements. For the purposes of that subtitle, the term “customer” means “any person (or

authorized representative of a person) to whom the financial institution provides a product or

service, including that of acting as a fiduciary.” (See section 527(1) of the Act.) In light of the

statutory mandate to “prescribe such revisions to such regulations and guidelines as may be

necessary to ensure that such financial institutions have policies, procedures, and controls in place

to prevent the unauthorized disclosure of customer financial information” (section 525), the

Agencies considered modifying these Guidelines to cover other customers,

527(1) of the Act.) In light of the

statutory mandate to “prescribe such revisions to such regulations and guidelines as may be

necessary to ensure that such financial institutions have policies, procedures, and controls in place

to prevent the unauthorized disclosure of customer financial information” (section 525), the

Agencies considered modifying these Guidelines to cover other customers, namely, business

entities and individuals who obtain financial products and services for purposes other than

personal, family, or household purposes. The Agencies have concluded, however, that defining

“customer” to accommodate the range of objectives set forth in Title V of the Act is unnecessary.

Instead, the Agencies have included a new paragraph III.C.1.a, described below, and plan to issue

guidance and other revisions to the applicable regulations, as may be necessary, to satisfy the

requirements of section 525 of the Act. [End of Footnote 6]

7

same as the proposed definition. The Agencies have, however, deleted the reference to “data,

files, or other information” from the final Guidelines, since each is included in the term “records”

and also is covered by the reference to “paper, electronic, or other form”.

I.C.2.d. Customer information system

The proposal defined “customer information system” to be electronic or physical methods

used to access, collect, store, use, transmit, or protect customer information. The Agencies

received a few comments on this definition, mostly from commenters who stated that it is too

broad. The Agencies believe that the definition needs to be sufficiently broad to protect all

customer information, wherever the information is located within a financial institution and

however it is used

ods

used to access, collect, store, use, transmit, or protect customer information. The Agencies

received a few comments on this definition, mostly from commenters who stated that it is too

broad. The Agencies believe that the definition needs to be sufficiently broad to protect all

customer information, wherever the information is located within a financial institution and

however it is used. Nevertheless, the broad scope of the definition of “customer information

system” should not result in an undue burden because, in other important respects, the Guidelines

allow a high degree of flexibility for each institution to design a security program that suits its

circumstances.

For these reasons, the Agencies have adopted the definition of “customer information

system” largely as proposed. However, the phrase “electronic or physical” in the proposal has

been deleted because each is included in the term “any methods”. The Agencies also have added a

specific reference to records disposal in the definition of “customer information system.” This is

consistent with the proposal’s inclusion of access controls in the list of items a financial institution

is to consider when establishing security policies and procedures (see discussion of paragraph

III.C.1.a., below), given that inadequate disposal of records may result in identity theft or other

misuse of customer information. Under the final Guidelines, a financial institution’s responsibility

to safeguard customer information continues through the disposal process.

I.C.2.e. Service provider

The proposal defined a “service provider” as any person or entity that maintains or

processes customer information for a financial institution, or is otherwise granted access to

customer information through its provision of services to an institution. One commenter urged the

Agencies to modify this definition so that it would not include a financial institution’s attorneys,

accountants, and appraisers

osal defined a “service provider” as any person or entity that maintains or

processes customer information for a financial institution, or is otherwise granted access to

customer information through its provision of services to an institution. One commenter urged the

Agencies to modify this definition so that it would not include a financial institution’s attorneys,

accountants, and appraisers. Others suggested deleting the phrase “or is otherwise granted access

to customer information through its provision of services to an institution”.

The Agencies believe that the Act requires each financial institution to adopt a

comprehensive information security program that is designed to protect against unauthorized

access to or use of customers’ nonpublic personal information. Disclosing information to a person

or entity that provides services to a financial institution creates additional risks to the security and

confidentiality of the information disclosed. In order to protect against these risks, a financial

institution must take appropriate steps to protect information that it provides to a service provider,

regardless of who the service provider is or how the service provider obtains access. The fact

that an entity obtains access to customer information through, for instance, providing professional

services does not obviate the need for the financial institution to take appropriate steps to protect

the information. Accordingly, the Agencies have determined that, in general, the term “service

8

regardless of who the service provider is or how the service provider obtains access. The fact

that an entity obtains access to customer information through, for instance, providing professional

services does not obviate the need for the financial institution to take appropriate steps to protect

the information. Accordingly, the Agencies have determined that, in general, the term “service

8

provider” should be broadly defined to encompass a variety of individuals or companies that

provide services to the institution.

This does not mean, however, that a financial institution’s methods for overseeing its

service provider arrangements will be the same for every provider. As explained in the

discussion of paragraph III.D., a financial institution’s oversight responsibilities will be shaped by

the institution’s analysis of the risks posed by a given service provider. If a service provider is

subject to a code of conduct that imposes a duty to protect customer information consistent with the

objectives of these Guidelines, a financial institution may take that duty into account when deciding

what level of oversight it should provide.

Moreover, a financial institution will be responsible under the final Guidelines for

overseeing its service provider arrangements only when the service is provided directly to the

financial institution. The Agencies clarified this point by amending the definition of “service

provider” in the final Guidelines to state that it applies only to a person or entity that maintains,

processes, or otherwise is permitted access to customer information through its provision of

services directly to the financial institution. Thus, for instance, a payment intermediary involved

in the collection of a check but that has no correspondent relationship with a financial institution

would not be considered a service provider of that financial institution under this rule. By

contrast, a financial institution’s correspondent bank would be considered its service provider

ion of

services directly to the financial institution. Thus, for instance, a payment intermediary involved

in the collection of a check but that has no correspondent relationship with a financial institution

would not be considered a service provider of that financial institution under this rule. By

contrast, a financial institution’s correspondent bank would be considered its service provider.

Nevertheless, the financial institution may take into account the fact that the correspondent bank is

itself a financial institution that is subject to security standards under section 501(b) when it

determines the appropriate level of oversight for that service provider.[See Footnote 7]

In situations where a service provider hires a subservicer,[See Footnote 8] the subservicer would not be a

“service provider” under the final Guidelines. The Agencies recognize that it would be

inappropriate to impose obligations on a financial institution to select and monitor subservicers in

situations where the financial institution has no contractual relationship with that person or entity.

When conducting due diligence in selecting its service providers (see discussion of paragraph

III.D., below), however, a financial institution must determine that the service provider has

adequate controls to ensure that the subservicer will protect the customer information in a way that

meets the objectives of these Guidelines.

II. Standards for Safeguarding Customer Information

Footnote 7 -- Similarly, in the case of a service provider that is not subject to these Guidelines but is

subject to standards adopted by its primary regulator under section 501(b) of the G-L-B Act, a

financial institution may take that fact into consideration when deciding what level of oversight is

appropriate for that service provider

es.

II. Standards for Safeguarding Customer Information

Footnote 7 -- Similarly, in the case of a service provider that is not subject to these Guidelines but is

subject to standards adopted by its primary regulator under section 501(b) of the G-L-B Act, a

financial institution may take that fact into consideration when deciding what level of oversight is

appropriate for that service provider. [End of Footnote 7]

Footnote 8 -- The term “subservicer” means any person who has access to an institution’s customer

information through its provision of services to the service provider and is not limited to mortgage

subservicers. [End of Footnote 8]

9

II.A. Information Security Program

The proposed Guidelines described the Agencies’ expectations for the creation,

implementation, and maintenance of a comprehensive information security program. As noted in

the proposal, this program must include administrative, technical, and physical safeguards

appropriate to the size and complexity of the institution and the nature and scope of its activities.

Several commenters representing large and complex organizations were concerned that the

term “comprehensive information security program” required a single and uniform document that

must apply to all component parts of the organization. In response, the Agencies note that a

program that includes administrative, technical, and physical safeguards will, in many instances,

be composed of more than one document. Moreover, use of this term does not require that all

parts of an organization implement a uniform program. However, the Agencies will expect an

institution to coordinate all the elements of its information security program. Where the elements

of the program are dispersed throughout the institution, management should be aware of these

elements and their locations

osed of more than one document. Moreover, use of this term does not require that all

parts of an organization implement a uniform program. However, the Agencies will expect an

institution to coordinate all the elements of its information security program. Where the elements

of the program are dispersed throughout the institution, management should be aware of these

elements and their locations. If they are not maintained on a consolidated basis, management

should have an ability to retrieve the current documents from those responsible for the overall

coordination and ongoing evaluation of the program.

The Board received comment on its proposal to revise the appendix to Regulation Y

regarding the provision that would require a bank holding company to ensure that each of its

subsidiaries is subject to a comprehensive information security program.[See Footnote 9] This comment urged the

Board to eliminate that provision and argued, in part, that the requirement assumes that a bank

holding company has the power to impose such controls upon its subsidiary companies.

These commenters recommended, instead, that the standards should be limited to customer

information in the possession or control of the bank holding company.

Under the Bank Holding Company Act of 1956 and the Board’s Regulation Y, a subsidiary

is presumed to be controlled directly or indirectly by the holding company. 12 U.S.C. 1841(d); 12

CFR 225.2(o). Moreover, the Board believes that a bank holding company is ultimately

responsible for ensuring that its subsidiaries comply with the standards set forth under these

Guidelines. The Board recognizes, however, that a bank holding company may satisfy its

obligations under section 501 of the GLB Act through a variety of measures, such as by including

a subsidiary within the scope of its information security program or by causing the subsidiary to

implement a separate information security program in accordance with these Guidelines.

II.B

set forth under these

Guidelines. The Board recognizes, however, that a bank holding company may satisfy its

obligations under section 501 of the GLB Act through a variety of measures, such as by including

a subsidiary within the scope of its information security program or by causing the subsidiary to

implement a separate information security program in accordance with these Guidelines.

II.B. Objectives

Footnote 9 -- The appendix provided that the proposed Guidelines would be applicable to customer

information maintained by or on behalf of bank holding companies and their nonbank subsidiaries

or affiliates (except brokers, dealers, persons providing insurance, investment companies, and

investment advisors) for which the Board has supervisory authority. See 65 FR 39484 (June 26,

2000). [End of Footnote 9]

10

Paragraph II.B. of the proposed Guidelines described the objectives that each financial

institution’s information security program should be designed to achieve. These objectives

tracked the objectives as stated in section 501(b)(1)-(3), adding only that the security program is

to protect against unauthorized access that could risk the safety and soundness of the institution.

The Agencies requested comment on whether there are additional or alternative objectives that

should be included in the Guidelines.

The Agencies received several comments on this proposed paragraph, most of which

objected to language that, in the commenters’ view, required compliance with objectives that were

impossible to meet. Many commenters stated, for instance, that no information security program

can ensure that there will be no problems with the security or confidentiality of customer

information. Others criticized the objective that required protection against any anticipated threat

or hazard

objected to language that, in the commenters’ view, required compliance with objectives that were

impossible to meet. Many commenters stated, for instance, that no information security program

can ensure that there will be no problems with the security or confidentiality of customer

information. Others criticized the objective that required protection against any anticipated threat

or hazard. A few commenters questioned the objective of protecting against unauthorized access

that could result in inconvenience to a customer, while others objected to the addition of the safety

and soundness standard noted above.

The Agencies do not believe the statute mandates a standard of absolute liability for a

financial institution that experiences a security breach. Thus, the Agencies have clarified these

objectives by stating that each security program is to be designed to accomplish the objectives

stated. With the one exception discussed below, the Agencies have otherwise left unchanged the

statement of the objectives, given that these objectives are identical to those set out in the statute.

In response to comments that objected to the addition of the safety and soundness standard,

the Agencies have deleted that reference in order to make the statement of objectives identical to

the objectives identified in the statute. The Agencies believe that risks to the safety and soundness

of a financial institution may be addressed through other supervisory or regulatory means, making

it unnecessary to expand the statement of objectives in this rulemaking.

Some commenters asked for clarification of a financial institution’s responsibilities when a

customer authorizes a third party to access that customer’s information. For purposes of the

Guidelines, access to or use of customer information is not “unauthorized” access if it is done with

the customer’s consent

eans, making

it unnecessary to expand the statement of objectives in this rulemaking.

Some commenters asked for clarification of a financial institution’s responsibilities when a

customer authorizes a third party to access that customer’s information. For purposes of the

Guidelines, access to or use of customer information is not “unauthorized” access if it is done with

the customer’s consent. When a customer gives consent to a third party to access or use that

customer’s information, such as by providing the third party with an account number, PIN, or

password, the Guidelines do not require the financial institution to prevent such access or monitor

the use or redisclosure of the customer’s information by the third party. Finally, unauthorized

access does not mean disclosure pursuant to one of the exceptions in the Privacy Rule.

III. Develop and Implement Information Security Program

III.A. Involve the Board of Directors

Paragraph III.A. of the proposal described the involvement of the board and management in

the development and implementation of an information security program. As explained in the

proposal, the board’s responsibilities are to: (1) approve the institution’s written information

security policy and program; and (2) oversee efforts to develop, implement, and maintain an

11

effective information security program, including reviewing reports from management. The

proposal also laid out management’s responsibilities for developing, implementing, and

maintaining the security program.

The Agencies received a number of comments regarding the requirement of board approval

of the information security program. Some commenters stated that each financial institution should

be allowed to decide for itself whether to obtain board approval of its program. Others suggested

that approval by either a board committee or at the holding company level might be appropriate

security program.

The Agencies received a number of comments regarding the requirement of board approval

of the information security program. Some commenters stated that each financial institution should

be allowed to decide for itself whether to obtain board approval of its program. Others suggested

that approval by either a board committee or at the holding company level might be appropriate.

Still others suggested modifying the Guidelines to require only that the board approve the initial

information security program and delegate subsequent review and approval of the program to

either a committee or an individual.

The Agencies believe that a financial institution’s overall information security program is

critical to the safety and soundness of the institution. Therefore, the final Guidelines continue to

place responsibility on an institution’s board to approve and exercise general oversight over the

program. However, the Guidelines allow the entire board of a financial institution, or an

appropriate committee of the board to approve the institution’s written security program. In

addition, the Guidelines permit the board to assign specific implementation responsibilities to a

committee or an individual.

One commenter suggested that the Guidelines be revised to provide that if a holding

company develops, approves, and oversees the information security program that applies to its

bank and nonbank subsidiaries, there should be no separate requirement for each subsidiary to do

the same thing, as long as those subsidiaries agree to abide by the holding company’s security

program. The Agencies agree that subsidiaries within a holding company can use the security

program developed at the holding company level

and oversees the information security program that applies to its

bank and nonbank subsidiaries, there should be no separate requirement for each subsidiary to do

the same thing, as long as those subsidiaries agree to abide by the holding company’s security

program. The Agencies agree that subsidiaries within a holding company can use the security

program developed at the holding company level. However, if subsidiary institutions choose to

use a security program developed at the holding company level, the board of directors or an

appropriate committee at each subsidiary institution must conduct an independent review to ensure

that the program is suitable and complies with the requirements prescribed by the subsidiary’s

primary regulator. See 12 U.S.C. 505. Once the subsidiary institution’s board, or a committee

thereof, has approved the security program, it must oversee the institution’s efforts to implement

and maintain an effective program.

The Agencies also received comments suggesting that use of the term “oversee” conveyed

the notion that a board is expected to be involved in day-to-day monitoring of the development,

implementation, and maintenance of an information security program. The Agencies’ use of the

term “oversee” is meant to convey a board’s conventional supervisory responsibilities. Day-to-

day monitoring of any aspect of an information security program is a management responsibility.

The final Guidelines reflect this by providing that the board must oversee the institution’s

information security program but may assign specific responsibility for its implementation.

The Agencies invited comment on whether the Guidelines should require that the board

designate a Corporate Information Security Officer or other responsible individual who would

have the authority, subject to the board’s approval, to develop and administer the institution’s

information security program

information security program but may assign specific responsibility for its implementation.

The Agencies invited comment on whether the Guidelines should require that the board

designate a Corporate Information Security Officer or other responsible individual who would

have the authority, subject to the board’s approval, to develop and administer the institution’s

information security program. The Agencies received a number of comments suggesting that the

Agencies should not require the creation of a new position for this purpose. Some financial

12

institutions also stated that hiring one or more additional staff for this purpose would impose a

significant burden. The Agencies believe that a financial institution will not need to create a new

position with a specific title for this purpose, as long as the institution has adequate staff in light of

the risks to its customer information. Regardless of whether new staff are added, the lines of

authority and responsibility for development, implementation, and administration of a financial

institution’s information security program need to be well defined and clearly articulated.[See Footnote 10]

The proposal identified three responsibilities of management in the development of an

information security program. They were to: (1) evaluate the impact on a financial institution’s

security program of changing business arrangements and changes to customer information systems;

nancial

institution’s information security program need to be well defined and clearly articulated.[See Footnote 10]

The proposal identified three responsibilities of management in the development of an

information security program. They were to: (1) evaluate the impact on a financial institution’s

security program of changing business arrangements and changes to customer information systems;

(2) document compliance with these Guidelines; and (3) keep the board informed of the overall

status of the institution’s information security program. A few commenters objected to the

Agencies assigning specific tasks to management. These commenters did not object to the tasks

per se, but suggested that the Agencies allow an institution’s board and management to decide who

within the institution is to carry out the tasks.

The Agencies agree that a financial institution is in the best position to determine who

should be assigned specific roles in implementing the institution’s security program. Accordingly,

the Agencies have deleted the separate provision assigning specific roles to management. The

responsibilities that were contained in this provision are now included in other paragraphs of the

Guidelines.

III.B. Assess Risk

Paragraph III.B. of the proposal described the risk assessment process to be used in the

development of the information security program. Under the proposal, a financial institution was

to identify and assess the risks to customer information. As part of that assessment, the institution

was to determine the sensitivity of the information and the threats to the institution’s systems. The

institution also was to assess the sufficiency of its policies, procedures, systems, and other

arrangements in place to control risk. Finally, the institution was to monitor, evaluate, and adjust

its risk assessment in light of changes in areas identified in the proposal

sment, the institution

was to determine the sensitivity of the information and the threats to the institution’s systems. The

institution also was to assess the sufficiency of its policies, procedures, systems, and other

arrangements in place to control risk. Finally, the institution was to monitor, evaluate, and adjust

its risk assessment in light of changes in areas identified in the proposal.

The Agencies received several comments on these provisions, most of which focused on

the requirement that financial institutions do a sensitivity analysis. One commenter noted that

“customer information” is defined to mean “nonpublic personal information” as defined in the

G-L-B Act, and that the G-L-B Act provides the same level of coverage for all nonpublic personal

information. The commenter stated that it is therefore unclear how the level of sensitivity would

affect an institution’s obligations with respect to the security of this information.

While the Agencies agree that all customer information requires protection, the Agencies

Footnote 10 -- The Agencies note that other regulations already require a financial institution to

designate a security officer for different purposes. See 12 CFR 21.2; 12 CFR 208.61(b). [End of Footnote 10]

13

believe that requiring all institutions to afford the same degree of protection to all customer

information may be unnecessarily burdensome in many cases. Accordingly, the final Guidelines

continue to state that institutions should take into consideration the sensitivity of customer

information. Disclosure of certain information (such as account numbers or access codes) might

be particularly harmful to customers if the disclosure is not authorized. Individuals who try to

breach the institution’s security systems may be likely to target this type of information

e final Guidelines

continue to state that institutions should take into consideration the sensitivity of customer

information. Disclosure of certain information (such as account numbers or access codes) might

be particularly harmful to customers if the disclosure is not authorized. Individuals who try to

breach the institution’s security systems may be likely to target this type of information. When such

information is housed on systems that are accessible through public telecommunications networks,

it may require more and different protections, such as encryption, than if it were located in a

locked file drawer. To provide flexibility to respond to these different security needs in the way

most appropriate, the Guidelines confer upon institutions the discretion to determine the levels of

protection necessary for different categories of information. Institutions may treat all customer

information the same, provided that the level of protection is adequate for all the information.

Other commenters suggested that the risk assessment requirement be tied to reasonably

foreseeable risks. The Agencies agree that the security program should be focused on reasonably

foreseeable risks and have amended the final Guidelines accordingly.

The final Guidelines make several other changes to this paragraph to improve the order of

the Guidelines and to eliminate provisions that were redundant in light of responsibilities outlined

elsewhere. For instance, while the proposal stated that the risk assessment function included the

need to monitor for relevant changes to technology, sensitivity of customer information, and threats

to information security and make adjustments as needed, that function has been incorporated into

the discussion of managing and controlling risk in paragraphs III.C.3. and III.E

sibilities outlined

elsewhere. For instance, while the proposal stated that the risk assessment function included the

need to monitor for relevant changes to technology, sensitivity of customer information, and threats

to information security and make adjustments as needed, that function has been incorporated into

the discussion of managing and controlling risk in paragraphs III.C.3. and III.E.

Thus, under the Guidelines as adopted, a financial institution should identify the reasonably

foreseeable internal and external threats that could result in unauthorized disclosure, misuse,

alteration, or destruction of customer information or customer information systems. Next, the risk

assessment should consider the potential damage that a compromise of customer information from

an identified threat would have on the customer information, taking into consideration the

sensitivity of the information to be protected in assessing the potential damage. Finally, a financial

institution should conduct an assessment of the sufficiency of existing policies, procedures,

customer information systems, and other arrangements intended to control the risks it has

identified.

III.C. Manage and Control Risk

Paragraph III.C. describes the steps an institution should take to manage and the control

risks identified in paragraph III.B.

Establish policies and procedures (III.C.1.) . Paragraph III.C.1 of the proposal described

the elements of a comprehensive risk management plan designed to control identified risks and to

achieve the overall objective of ensuring the security and confidentiality of customer information.

It identified eleven factors an institution should consider in evaluating the adequacy of its policies

and procedures to effectively manage these risks.

14

ragraph III.C.1 of the proposal described

the elements of a comprehensive risk management plan designed to control identified risks and to

achieve the overall objective of ensuring the security and confidentiality of customer information.

It identified eleven factors an institution should consider in evaluating the adequacy of its policies

and procedures to effectively manage these risks.

14

The Agencies received a large number of comments on this paragraph. Most of the

comments were based on a perception that every institution would have to adopt every security

measure listed in proposed III.C.1.a.-k. as part of the institution’s policies and procedures. In

particular, a number of commenters were concerned that the proposed Guidelines would require

the encryption of all customer data.

The Agencies did not intend for the security measures listed in paragraph III.C.1. to be seen

as mandatory for all financial institutions and for all data. Rather, the Agencies intended only that

an institution would consider whether the protections listed were appropriate for the institution’s

particular circumstances, and, if so, adopt those identified as appropriate. The Agencies continue

to believe that these elements may be adapted by institutions of varying sizes, scope of operations,

and risk management structures. Consistent with that approach, the manner of implementing a

particular element may vary from institution to institution. For example, while a financial

institution that offers Internet-based transaction accounts may conclude that encryption is

appropriate, a different institution that processes all data internally and does not have a

transactional web site may consider other kinds of access restrictions that are adequate to maintain

the confidentiality of customer information. To underscore this point, the final Guidelines have

been amended to state that each financial institution must consider whether the security elements

discussed in paragraphs III.C.1.a.-h

titution that processes all data internally and does not have a

transactional web site may consider other kinds of access restrictions that are adequate to maintain

the confidentiality of customer information. To underscore this point, the final Guidelines have

been amended to state that each financial institution must consider whether the security elements

discussed in paragraphs III.C.1.a.-h. are appropriate for the institution and, if so, adopt those

elements an institution concludes are appropriate.

The Agencies invited comment on the degree of detail that should be included in the

Guidelines regarding the risk management program, including which elements should be specified

in the Guidelines, and any other components of a risk management program that should be listed.

With the exception of those commenters who thought some or all of the elements of the risk

management program were intended to be mandatory for all financial institutions, the comments

supported the level of detail conveyed in the proposed Guidelines. The Agencies have adopted

the provision regarding management and control of risks with the changes discussed below.

Comments addressing proposed security measures that have been adopted without change also are

discussed below.

Access rights. The Agencies received a number of comments suggesting that the reference

to “access rights to customer information” in paragraph III.C.1.a. of the proposal could be

interpreted to mean providing customers with a right of access to financial information. The

reference was intended to refer to limitations on employee access to customer financial

information, not to customer access to financial information. However, this element has been

deleted since limitations on employee access are covered adequately in other parts of paragraph

III.C.1. (See discussion of “access controls” in paragraph III.C.1.a. of the final Guidelines,

below.)

Access controls. Paragraph III.C.1.b

d to refer to limitations on employee access to customer financial

information, not to customer access to financial information. However, this element has been

deleted since limitations on employee access are covered adequately in other parts of paragraph

III.C.1. (See discussion of “access controls” in paragraph III.C.1.a. of the final Guidelines,

below.)

Access controls. Paragraph III.C.1.b. of the proposed Guidelines required a financial

institution to consider appropriate access controls when establishing its information security

policies and procedures. These controls were intended to address unauthorized access to an

institution’s customer information by anyone, whether or not employed by the institution.

15

The Agencies believe that this element sufficiently addresses the concept of unauthorized

access, regardless of who is attempting to obtain access. This would cover, for instance, attempts

through pretext calling to gather information about a financial institution’s customers.[See Footnote 11] The

Agencies have amended the final Guidelines to refer specifically to pretext calling in new

III.C.1.a. The Agencies do not intend for the final Guidelines to require a financial institution to

provide its customers with access to information the institution has gathered. Instead, the

provision in the final Guidelines addressing access is limited solely to the issue of preventing

unauthorized access to customer information.

The Agencies have deleted the reference in the proposed paragraph III.C.1.b. to providing

access to authorized companies. This change was made partly in response to commenters who

objected to what they perceived to be an inappropriate expansion of the scope of the Guidelines to

include company records and partly in recognition of the fact that access to records would be

obtained, in any case, only through requests by individuals

nce in the proposed paragraph III.C.1.b. to providing

access to authorized companies. This change was made partly in response to commenters who

objected to what they perceived to be an inappropriate expansion of the scope of the Guidelines to

include company records and partly in recognition of the fact that access to records would be

obtained, in any case, only through requests by individuals. The final Guidelines require an

institution to consider the need for access controls in light of the institution’s various customer

information systems and adopt such controls as appropriate.

Dual control procedures. Paragraph III.C.1.f. of the proposed Guidelines stated that

financial institutions should consider dual control procedures, segregation of duties, and employee

background checks for employees with responsibility for, or access to, customer information.

Most of the comments on this paragraph focused on dual control procedures, which refers to a

security technique that uses two or more separate persons, operating together to protect sensitive

information. Both persons are equally responsible for protecting the information and neither can

access the information alone.

According to one commenter, dual controls are part of normal audit procedures and did not

need to be restated. Other commenters suggested that dual control procedures are not always

necessary, implying that these procedures are not the norm. The Agencies recognize that dual-

control procedures are not necessary for all activities, but might be appropriate for higher-risk

activities. Given that the Guidelines state only that dual control procedures should be considered

by a financial institution and adopted only if appropriate for the institution, the Agencies have

retained a reference to dual control procedures in the items to be considered (paragraph III.C.1.e).

Oversight of servicers. Paragraph III.C.1.g. of the proposal was deleted

propriate for higher-risk

activities. Given that the Guidelines state only that dual control procedures should be considered

by a financial institution and adopted only if appropriate for the institution, the Agencies have

retained a reference to dual control procedures in the items to be considered (paragraph III.C.1.e).

Oversight of servicers. Paragraph III.C.1.g. of the proposal was deleted. Instead, the final

Guidelines consolidate the provisions related to service providers in paragraph III.D.

Physical hazards and technical failures. The paragraphs of the proposed Guidelines

addressing protection against destruction due to physical hazards and technological failures

(paragraphs III.C.1.j. and k., respectively, of the proposal) have been consolidated in paragraph

III.C.1.h. of the final Guidelines. The Agencies believe that this change improves clarity and

recognizes that disaster recovery from environmental and technological failures often involve the

Footnote 11 -- Pretext calling is a fraudulent means of obtaining an individual’s personal information

by persons posing as bank customers. [End of Footnote 11]

16

same considerations.

Training (III.C.2.). Paragraph III.C.2. of the proposed Guidelines provided that an

institution’s information security program should include a training component designed to train

employees to recognize, respond to, and report unauthorized attempts to obtain customer

information. The Agencies received several comments suggesting that this provision directed staff

of financial institutions to report suspected attempts to obtain customer information to law

enforcement agencies rather than to the management of the financial institution. The Agencies did

not intend that result, and note that nothing in the Guidelines alters other applicable requirements

and procedures for reporting suspicious activities

omments suggesting that this provision directed staff

of financial institutions to report suspected attempts to obtain customer information to law

enforcement agencies rather than to the management of the financial institution. The Agencies did

not intend that result, and note that nothing in the Guidelines alters other applicable requirements

and procedures for reporting suspicious activities. For purposes of these Guidelines, the Agencies

believe that, as part of a training program, staff should be made aware both of federal reporting

requirements and an institution’s procedures for reporting suspicious activities, including attempts

to obtain access to customer information without proper authority.

The final Guidelines amend the provision governing training to state that a financial

institution’s information security program should include a training component designed to

implement the institution’s information security policies and procedures. The Agencies believe

that the appropriate focus for the training should be on compliance with the institution’s security

program generally and not just on the limited aspects identified in proposed III.C.2. The

provisions governing reporting have been moved to paragraph III.C.1.g., which addresses

response programs in general.

Testing (III.C.3.). Paragraph III.C.3. of the proposed Guidelines provided that an

information security program should include regular testing of key controls, systems, and

procedures. The proposal provided that the frequency and nature of the testing should be

determined by the risk assessment and adjusted as necessary to reflect changes in both internal and

external conditions. The proposal also provided that the tests are to be conducted, where

appropriate, by independent third parties or staff independent of those that develop or maintain the

security program. Finally, the proposal stated that test results are to be reviewed by independent

third parties or staff independent of those that conducted the test

o reflect changes in both internal and

external conditions. The proposal also provided that the tests are to be conducted, where

appropriate, by independent third parties or staff independent of those that develop or maintain the

security program. Finally, the proposal stated that test results are to be reviewed by independent

third parties or staff independent of those that conducted the test. The Agencies requested

comment on whether specific types of security tests, such as penetration tests or intrusion detection

tests, should be required.

The most frequent comment regarding testing of key controls was that the Agencies should

not require specific tests. Commenters noted that because technology changes rapidly, the tests

specified in the Guidelines will become obsolete and other tests will become the standard.

Consequently, according to these commenters, the Guidelines should identify areas where testing

may be appropriate without requiring a financial institution to implement a specific test or testing

procedure. Several commenters noted that periodic testing of information security controls is a

sound idea and is an appropriate standard for inclusion in these Guidelines.

The Agencies believe that a variety of tests may be used to ensure the controls, systems,

and procedures of the information security program work properly and also recognize that such

tests will progressively change over time. The Agencies believe that the particular tests that may

be applied should be left to the discretion of management rather than specified in advance in these

17

delines.

The Agencies believe that a variety of tests may be used to ensure the controls, systems,

and procedures of the information security program work properly and also recognize that such

tests will progressively change over time. The Agencies believe that the particular tests that may

be applied should be left to the discretion of management rather than specified in advance in these

17

Guidelines. Accordingly, the final Guidelines do not require a financial institution to apply

specific tests to evaluate the key control systems of its information security program.

The Agencies also invited comment regarding the appropriate degree of independence that

should be specified in the Guidelines in connection with the testing of information security systems

and the review of test results. The proposal asked whether the tests or reviews of tests be

conducted by persons who are not employees of the financial institution. The proposal also asked

whether employees may conduct the testing or may review test results, and what measures, if any,

are appropriate to assure their independence.

Some commenters interpreted the proposal as requiring three separate teams of people to

provide sufficient independence to control testing: one team to operate the system; a second team

to test the system; and a third team to review test results. This approach, they argued, would be

too burdensome and expensive to implement. The Agencies believe that the critical need for

independence is between those who operate the systems and those who either test them or review

the test results. Therefore, the final Guidelines now require that tests should be conducted or

reviewed by persons who are independent of those who operate the systems, including the

management of those systems.

Whether a financial institution should use third parties to either conduct tests or review

their results depends upon a number of factors

ems and those who either test them or review

the test results. Therefore, the final Guidelines now require that tests should be conducted or

reviewed by persons who are independent of those who operate the systems, including the

management of those systems.

Whether a financial institution should use third parties to either conduct tests or review

their results depends upon a number of factors. Some financial institutions may have the capability

to thoroughly test certain systems in-house and review the test results but will need the assistance

of third party testers to assess other systems. For example, an institution’s internal audit

department may be sufficiently trained and independent for the purposes of testing certain key

controls and providing test results to decision makers independent of system managers. Some

testing may be conducted by third parties in connection with the actual installation or modification

of a particular program. In each instance, management needs to weigh the benefits of testing and

test review by third parties against its own resources in this area, both in terms of expense and

reliability.

Ongoing adjustment of program. Paragraph III.C.4. of the proposal required an institution

to monitor, evaluate and adjust, as appropriate, the information security program in light of any

relevant changes in technology, the sensitivity of its customer information, and internal or external

threats to information security. This provision was previously located in the paragraph titled

“Manage and Control Risk”. While there were no comments on this provision, the Agencies

wanted to highlight this concept and clarify that this provision is applicable to an institutions’s

entire information security program. Therefore, this provision is now separately identified as new

paragraph III.E. of the final Guidelines, discussed below.

III.D. Oversee Service Provider Arrangements

The Agencies’ proposal addressed service providers in two provisions

provision, the Agencies

wanted to highlight this concept and clarify that this provision is applicable to an institutions’s

entire information security program. Therefore, this provision is now separately identified as new

paragraph III.E. of the final Guidelines, discussed below.

III.D. Oversee Service Provider Arrangements

The Agencies’ proposal addressed service providers in two provisions. The Agencies

provided that an institution should consider contract provisions and oversight mechanisms to

protect the security of customer information maintained or processed by service providers as one

of the proposed elements to be considered in establishing risk management policies and

18

procedures (proposed paragraph III.C.1.g.). Additionally, proposed paragraph III.D. provided

that, when an institution uses an outsourcing arrangement, the institution would continue to be

responsible for safeguarding customer information that it gives to the service provider. That

proposed paragraph also provided that the institution must use due diligence in managing and

monitoring the outsourcing arrangement to confirm that its service providers would protect

customer information consistent with the Guidelines.

The Agencies requested comment on the appropriate treatment of outsourcing

arrangements, such as whether industry best practices are available regarding effective monitoring

of service provider security precautions, whether service providers accommodate requests for

specific contract provisions regarding information security, and, to the extent that service

providers do not accommodate these requests, whether financial institutions implement effective

information security programs. The Agencies also requested comment on whether institutions

would find it helpful if the Guidelines contained specific contract provisions requiring service

provider performance standards in connection with the security of customer information

o the extent that service

providers do not accommodate these requests, whether financial institutions implement effective

information security programs. The Agencies also requested comment on whether institutions

would find it helpful if the Guidelines contained specific contract provisions requiring service

provider performance standards in connection with the security of customer information.

The Agencies received one example of best practices, but the commenter did not

recommend that they be included in the Guidelines. While some commenters suggested that the

Guidelines include best practices, other commenters stated that, given the various types of

financial institutions, there could be a variety of best industry practices. Another commenter stated

that best practices could become minimum requirements that result in inappropriate burdens. The

Agencies recognize that information security practices are likely to evolve rapidly, and thus

believe that it is inappropriate to include best practices in the final Guidelines.

Commenters were mixed as to whether service providers are receptive to contract

modifications to protect customer information. Commenters were uniform, however, in stating that

an institution’s obligation to monitor service providers should not include on-site audits by the

institution or its agent. The commenters stated that, in addition to the expense for financial

institutions, the procedure would place an inordinate burden on many service providers that

process customer information for multiple institutions. Several commenters noted that the service

providers often contract for audits of their systems and that institutions should be able to rely upon

those testing procedures. Some commenters recommended that an institution’s responsibility for

information given to service providers require only that the institution enter into appropriate

contractual arrangements

ormation for multiple institutions. Several commenters noted that the service

providers often contract for audits of their systems and that institutions should be able to rely upon

those testing procedures. Some commenters recommended that an institution’s responsibility for

information given to service providers require only that the institution enter into appropriate

contractual arrangements. However, commenters also indicated that requiring specific contract

provisions would not be consistent with the development of flexible Guidelines and recommended

against the inclusion of specific provisions.

The Agencies believe that financial institutions should enter into appropriate contracts, but

also believe that these contracts, alone, are not sufficient. Therefore, the final Guidelines, in

paragraph III.D., include provisions relating to selecting, contracting with, and monitoring service

providers.

The final Guidelines require that an institution exercise appropriate due diligence in the

selection of service providers. Due diligence should include a review of the measures taken by a

19

service provider to protect customer information. As previously noted in the discussion of

“service provider”, it also should include a review of the controls the service provider has in

place to ensure that any subservicer used by the service provider will be able to meet the

objectives of these Guidelines.

The final Guidelines also require that a financial institution have a contract with each of its

service providers that requires each provider to implement appropriate measures designed to meet

the objectives of these Guidelines (as stated in paragraph II.B.). This provision does not require a

service provider to have a security program in place that complies with each paragraph of these

Guidelines

final Guidelines also require that a financial institution have a contract with each of its

service providers that requires each provider to implement appropriate measures designed to meet

the objectives of these Guidelines (as stated in paragraph II.B.). This provision does not require a

service provider to have a security program in place that complies with each paragraph of these

Guidelines. Instead, by stating that a service provider’s security measures need only achieve the

objectives of these Guidelines, the Guidelines provide flexibility for a service provider’s

information security measures to differ from the program that a financial institution implements.

The Agencies have provided a two-year transition period during which institutions may bring their

outsourcing contracts into compliance. (See discussion of paragraph III.F.) The Agencies have

not included model contract language, given our belief that the precise terms of service contracts

are best left to the parties involved.

Each financial institution must also exercise an appropriate level of oversight over each of

its service providers to confirm that the service provider is implementing the provider’s security

measures. The Agencies have amended the Guidelines as proposed to include greater flexibility

with regard to the monitoring of service providers. A financial institution need only monitor its

outsourcing arrangements if such oversight is indicated by an institution’s own risk assessment.

The Agencies recognize that not all outsourcing arrangements will need to be monitored or

monitored in the same fashion. Some service providers will be financial institutions that are

directly subject to these Guidelines or other standards promulgated by their primary regulator

under section 501(b). Other service providers may already be subject to legal and professional

standards that require them to safeguard the institution’s customer information

nts will need to be monitored or

monitored in the same fashion. Some service providers will be financial institutions that are

directly subject to these Guidelines or other standards promulgated by their primary regulator

under section 501(b). Other service providers may already be subject to legal and professional

standards that require them to safeguard the institution’s customer information. Therefore, the final

Guidelines permit an institution to do a risk assessment taking these factors into account and

determine for themselves which service providers will need to be monitored.

Even where monitoring is warranted, the Guidelines do not require on-site inspections.

Instead, the Guidelines state that this monitoring can be accomplished, for example, through the

periodic review of the service provider’s associated audits, summaries of test results, or

equivalent measures of the service provider. The Agencies expect that institutions will arrange,

when appropriate, through contracts or otherwise, to receive copies of audits and test result

information sufficient to assure the institution that the service provider implements information

security measures that are consistent with its contract provisions regarding the security of customer

information. The American Institute of Certified Public Accountants Statement of Auditing

Standards No. 70, captioned “Reports on the Processing of Transactions by Service

Organizations” (SAS 70 report), is one commonly used external audit tool for service providers.

Information contained in an SAS 70 report may enable an institution to assess whether its service

provider has information security measures that are consistent with representations made to the

institution during the service provider selection process.

III.E. Adjust the Program

20

ions by Service

Organizations” (SAS 70 report), is one commonly used external audit tool for service providers.

Information contained in an SAS 70 report may enable an institution to assess whether its service

provider has information security measures that are consistent with representations made to the

institution during the service provider selection process.

III.E. Adjust the Program

20

Paragraphs III.B.3 and III.C.4. of the proposed Guidelines both addressed a financial

institution’s obligations when circumstances change. Both paragraph III.B.3. (which set forth

management’s responsibilities with respect to its risk assessment) and paragraph III.C.4. (which

focused on the adequacy of an institution’s information security program) identified the possible

need for changes to an institution’s program in light of relevant changes to technology, the

sensitivity of customer information, and internal or external threats to the information security.

The Agencies received no comments objecting to the statements in these paragraphs of the

need to adjust a financial institution’s program as circumstances change. While the Agencies have

not changed the substance of these provisions in the final Guidelines, we have, however, made a

stylistic change to simplify the Guidelines. The final Guidelines combine, in paragraph III.E., the

provisions previously stated separately. Consistent with the proposal, this paragraph provides that

each financial institution must monitor, evaluate, and adjust its information security program in

light of relevant changes in technology, the sensitivity of its customer information, internal or

external threats to information, and the institution’s own changing business arrangements

II.E., the

provisions previously stated separately. Consistent with the proposal, this paragraph provides that

each financial institution must monitor, evaluate, and adjust its information security program in

light of relevant changes in technology, the sensitivity of its customer information, internal or

external threats to information, and the institution’s own changing business arrangements. This

would include an analysis of risks to customer information posed by new technology (and any

needed program adjustments) before a financial institution adopts the technology in order to

determine whether a security program remains adequate in light of the new risks presented.[See Footnote 12]

III.F. Report to the board.

Paragraph III.A.2.c. of the proposal set out management’s responsibilities for reporting to

its board of directors. As previously discussed, the final Guidelines have removed specific

requirements for management, but instead allow a financial institution to determine who within the

organization should carry out a given responsibility. The board reporting requirement thus has

been amended to require that a financial institution report to its board, and that this report be at

least annual. Paragraph III.F. of the final Guidelines sets out this requirement.

The Agencies invited comment regarding the appropriate frequency of reports to the board,

including whether reports should be monthly, quarterly, or annually. The Agencies received a

number of comments recommending that no specific frequency be mandated by the Guidelines and

that each financial institution be permitted to establish its own reporting period

Guidelines sets out this requirement.

The Agencies invited comment regarding the appropriate frequency of reports to the board,

including whether reports should be monthly, quarterly, or annually. The Agencies received a

number of comments recommending that no specific frequency be mandated by the Guidelines and

that each financial institution be permitted to establish its own reporting period. Several

Footnote 12 -- For additional information concerning how a financial institution should identify,

measure, monitor, and control risks associated with the use of technology, see OCC Bulletin 98-3

concerning technology risk management, which may be obtained on the Internet at

http://www.occ.treas.gov/ftp/bulletin/98-3.txt.; Federal Reserve SR Letter 98-9 on Assessment of

Information Technology in the Risk-Focused Frameworks for the Supervision of Community Banks

and Large Complex Banking Organizations, April 20, 1998,

http://www.federalreserve.gov/boarddocs/SRLETTERS/1998/SR9809.HTM; FDIC FIL 99-68

concerning risk assessment tools and practices for information security systems at

http://www.fdic.gov/news/news/financial/1999/fil9968.html.; OTS’s CEO Letter 70, Statement

on Retail On-Line Personal Computer Banking, (June 23, 1997), available at

http://www.ots.treas.gov/docs/25070.pdf. [End of Footnote 12]

21

commenters stated that if a reporting period is required, then it should be not less than annually

unless some material event triggers the need for an interim report.

The Agencies expect that in all cases, management will provide its board (or the

appropriate board committee) a written report on the information security program consistent with

the Guidelines at least annually. Management of financial institutions with more complex

information systems may find it necessary to provide information to the board (or a committee) on

a more frequent basis

report.

The Agencies expect that in all cases, management will provide its board (or the

appropriate board committee) a written report on the information security program consistent with

the Guidelines at least annually. Management of financial institutions with more complex

information systems may find it necessary to provide information to the board (or a committee) on

a more frequent basis. Similarly, more frequent reporting will be appropriate whenever a material

event affecting the system occurs or a material modification is made to the system. The Agencies

expect that the content of these reports will vary for each financial institution, depending upon the

nature and scope of its activities as well as the different circumstances that it will confront as it

implements and maintains its program.

III.G. Implement the Standards

Paragraph III.E. of the proposal described the timing requirements for the implementation

of these standards. It provided that each financial institution is to take appropriate steps to fully

implement an information security program pursuant to these Guidelines by July 1, 2001.

The Agencies received several comments suggesting that the proposed effective date be

extended for a period of 12 to 18 months because financial institutions are currently involved in

efforts to meet the requirements of the final Privacy Rule by the compliance deadline, July 1, 2001.

The Agencies believe that the dates for full compliance with these Guidelines and the Privacy Rule

should coincide. Financial institutions are required, as part of their initial privacy notices, to

disclose their policies and practices with respect to protecting the confidentiality and security of

nonpublic personal information. See §___.6(a)(8)

y Rule by the compliance deadline, July 1, 2001.

The Agencies believe that the dates for full compliance with these Guidelines and the Privacy Rule

should coincide. Financial institutions are required, as part of their initial privacy notices, to

disclose their policies and practices with respect to protecting the confidentiality and security of

nonpublic personal information. See §___.6(a)(8). Each Agency has provided in the appendix to

its Privacy Rule that a financial institution may satisfy this disclosure requirement by advising its

customers that the institution maintains physical, electronic, and procedural safeguards that comply

with federal standards to guard customers’ nonpublic personal information. See appendix A-7.

The Agencies believe that this disclosure will be meaningful only if the final Guidelines are

effective when the disclosure is made. If the effective date of these Guidelines is extended beyond

July 1, 2001, then a financial institution may be placed in the position of providing an initial notice

regarding confidentiality and security and thereafter amending the privacy policy to accurately

refer to the federal standards once they became effective. For these reasons, the Agencies have

retained July 1, 2001, as the effective date for these Guidelines.

However, the Agencies have included a transition rule for contracts with service

providers. The transition rule, which parallels a similar provision in the Privacy Rule, provides a

two-year period for grandfathering existing contracts. Thus a contract entered into on or before the

date that is 30 days after publication of the final Guidelines in the Federal Register satisfies the

provisions of this part until July 1, 2003, even if the contract does not include provisions

delineating the servicer’s duties and responsibilities to protect customer information described in

paragraph III.D.

22

grandfathering existing contracts. Thus a contract entered into on or before the

date that is 30 days after publication of the final Guidelines in the Federal Register satisfies the

provisions of this part until July 1, 2003, even if the contract does not include provisions

delineating the servicer’s duties and responsibilities to protect customer information described in

paragraph III.D.

22

Location of Guidelines. These guidelines have been published as an appendix to each

Agency’s Standards for Safety and Soundness. For the OCC, those regulations appear at 12 CFR

part 30; for the Board, at 12 CFR part 208; for the FDIC, at 12 CFR part 364; and for the OTS, at

12 CFR part 570. The Board also is amending 12 CFR parts 211 and 225 to apply the Guidelines

to other institutions that it supervises.

The Agencies will apply the rules already in place to require the submission of a

compliance plan in appropriate circumstances. For the OCC, those regulations appear at 12 CFR

part 30; for the Board at 12 CFR part 263; for the FDIC at 12 CFR part 308, subpart R; and for the

OTS at 12 CFR part 570. The final rules make conforming changes to the regulatory text of these

parts.

Rescission of Year 2000 Standards for Safety and Soundness. The Agencies previously

issued guidelines establishing Year 2000 safety and soundness standards for insured depository

institutions pursuant to section 39 of the FDI Act. Because the events for which these standards

were issued have passed, the Agencies have concluded that the guidelines are no longer necessary

and proposed to rescind the standards as part of this rulemaking. The Agencies requested

comment on the whether rescission of these standards is appropriate. Those commenters

responding to this request were unanimous in recommending the rescission of the Year 2000

Standards, and the Agencies have rescinded these standards

the Agencies have concluded that the guidelines are no longer necessary

and proposed to rescind the standards as part of this rulemaking. The Agencies requested

comment on the whether rescission of these standards is appropriate. Those commenters

responding to this request were unanimous in recommending the rescission of the Year 2000

Standards, and the Agencies have rescinded these standards. These standards appeared for the

OCC at 12 CFR part 30, appendix B and C; for the Board at 12 CFR part 208, appendix D-2; for

the FDIC at 12 CFR part 364, appendix B; and for the OTS at 12 CFR part 570, appendix B.

Accordingly, the Agencies hereby rescind the Year 2000 Standards for Safety and Soundness,

effective thirty (30) days after the publication date of this notice of the joint final rule.

IV. Regulatory Analysis

A. Paperwork Reduction Act

The Agencies have determined that this rule does not involve a collection of information

pursuant to the provisions of the Paperwork Reduction Act (44 U.S.C. 3501 et seq.).

B. Regulatory Flexibility Act

OCC: Under the Regulatory Flexibility Act (RFA), the OCC must either provide a Final

Regulatory Flexibility Analysis (FRFA) with these final Guidelines or certify that the final

Guidelines “will not, if promulgated”, have a significant economic impact on a substantial number

of small entities.[See Footnote 13] The OCC has evaluated the effects of these Guidelines on small entities and is

providing the following FRFA.

Footnote 13 -- The RFA defines the term “small entity” in 5 U.S.C. 601 by reference to a definition

published by the Small Business Administration (SBA). The SBA has defined a “small entity” for

banking purposes as a national or commercial bank, or savings institution with less than $100

million in assets. See 13 CFR 121.201. [End of Footnote 13]

23

ties and is

providing the following FRFA.

Footnote 13 -- The RFA defines the term “small entity” in 5 U.S.C. 601 by reference to a definition

published by the Small Business Administration (SBA). The SBA has defined a “small entity” for

banking purposes as a national or commercial bank, or savings institution with less than $100

million in assets. See 13 CFR 121.201. [End of Footnote 13]

23

Although the OCC specifically sought comment on the costs to small entities of

establishing and operating information security programs, no commenters provided specific cost

information. Instead, commenters confirmed the OCC’s conclusion that most if not all institutions

already have information security programs in place, because the standards reflect good business

practices and existing OCC and FFIEC guidance. Some comments indicated, however, that

institutions will have to formalize or enhance their information security programs. Accordingly,

the OCC considered certifying, under section 605(b) of the RFA, that these Guidelines will not

have a significant economic impact on a substantial number of small entities. However, given that

the guidance previously issued by the OCC and the FFIEC is not completely identical to the

Guidelines being adopted in this rulemaking, the Guidelines are likely to have some impact on all

affected institutions. While the OCC believes that this impact will not be substantial in the case of

most small entities, we nevertheless have prepared the following FRFA.

1. Reasons for Final Action

The OCC is issuing these Guidelines under section 501(b) of the G-L-B Act

etely identical to the

Guidelines being adopted in this rulemaking, the Guidelines are likely to have some impact on all

affected institutions. While the OCC believes that this impact will not be substantial in the case of

most small entities, we nevertheless have prepared the following FRFA.

1. Reasons for Final Action

The OCC is issuing these Guidelines under section 501(b) of the G-L-B Act. Section

501(b) requires the OCC to publish standards for financial institutions subject to its jurisdiction

relating to administrative, technical and physical standards to: (1) insure the security and

confidentiality of customer records and information; (2) protect against any anticipated threats or

hazards to the security or integrity of such records; and (3) protect against unauthorized access to

or use of such records or information which could result in substantial harm or inconvenience to

any customer.

2. Objectives of and Legal Basis for Final Action

The objectives of the Guidelines are described in the Supplementary Information section

above. The legal bases for the Guidelines are: 12 U.S.C. 93a, 1818, 1831p-1, and 3102(b) and 15

USC 6801 and 6805(b)(1).

3. Small Entities to Which the Rule Will Apply

The OCC’s final Guidelines will apply to approximately 2300 institutions, including

national banks, federal branches and federal agencies of foreign banks, and certain subsidiaries of

such entities. The OCC estimates that approximately 1125 of these institutions are small

institutions with assets less than $ 100 million.

4. Projected Reporting, Recordkeeping, and Other Compliance Requirements; Skills Required

The Guidelines do not require any reports to the OCC, however, they require all covered

institutions to develop and implement a written information security program comprised of several

elements. Institutions must assess the risks to their customer information and adopt appropriate

measures to control those risks

cted Reporting, Recordkeeping, and Other Compliance Requirements; Skills Required

The Guidelines do not require any reports to the OCC, however, they require all covered

institutions to develop and implement a written information security program comprised of several

elements. Institutions must assess the risks to their customer information and adopt appropriate

measures to control those risks. Institutions must then test these security measures and adjust their

information security programs in light of any relevant changes. In addition, institutions must use

appropriate due diligence in selecting service providers, and require service providers, by

contract, to implement appropriate security measures. The Guidelines also require institutions to

24

monitor their service providers, where appropriate, to confirm they have met their contractual

obligations. Finally, the Guidelines require the board of directors or an appropriate committee of

the board of each institution to approve the institution’s information security program and to

oversee its implementation. To facilitate board oversight, the institution must provide to the board

or to the board committee a report, at least annually, describing the overall status of the

institution’s information security program and the institution’s compliance with the Guidelines.

Because the information security program described above reflects existing supervisory

guidance, the OCC believes that most institutions already have the expertise to develop,

implement, and maintain the program. However, if they have not already done so, institutions will

have to retain the services of someone capable of assessing threats to the institution’s customer

information. Institutions that lack an adequate information security program also will have to have

personnel capable of developing, implementing and testing security measures to address these

threats

implement, and maintain the program. However, if they have not already done so, institutions will

have to retain the services of someone capable of assessing threats to the institution’s customer

information. Institutions that lack an adequate information security program also will have to have

personnel capable of developing, implementing and testing security measures to address these

threats. Institutions that use service providers may require legal skills to draft appropriate

language for contracts with service providers.

5. Public Comment and Significant Alternatives

The OCC did not receive any public comment on its initial regulatory flexibility analysis,

although it did receive comments on the proposed Guidelines, and on the impact of the Guidelines

on small entities in particular. The comments received by the OCC and the other Agencies are

discussed at length in the supplementary information above. While some commenters suggested

that the OCC exempt small institutions altogether, the OCC has no authority under the statute to do

so. The discussion below reviews the changes adopted in the final Guidelines that will minimize

the economic impact of the Guidelines on all businesses.

The OCC carefully considered comments from small entities that encouraged the Agencies

to issue guidelines that are not overly prescriptive, that provide flexibility in the design of an

information security program, but that still provide small entities with some guidance. After

considering these comments, the OCC determined that it is appropriate to issue the standards as

Guidelines that allow each institution the discretion to design an information security program that

suits its particular size and complexity and the nature and scope of its activities. The OCC

considered issuing broader Guidelines that would only identify objectives to be achieved while

leaving it up to each institution to decide what steps it should take to ensure that it meets these

objectives

delines that allow each institution the discretion to design an information security program that

suits its particular size and complexity and the nature and scope of its activities. The OCC

considered issuing broader Guidelines that would only identify objectives to be achieved while

leaving it up to each institution to decide what steps it should take to ensure that it meets these

objectives. However, the OCC concluded that such broad guidance ultimately would be less

helpful than would be guidelines that combine the flexibility sought by commenters with

meaningful guidance on factors that an institution should consider and steps that the institution

should take. The OCC also considered the utility of more prescriptive guidelines, but rejected that

approach out of concern that it likely would be more burdensome, could interfere with innovation,

and could impose requirements that would be inappropriate in a given situation. While the

Guidelines are not overly detailed, they provide guidance by establishing the process an institution

will need to follow in order to protect its customer information and by identifying security

measures that are likely to have the greatest applicability to national banks in general.

25

Most commenters supported the use of the more narrow definition of “customer” in the

Guidelines as is used in the Privacy Rule rather than a broad definition that would apply to all

records under the control of a financial institution. Commenters maintained that two different

definitions would be confusing and also inconsistent with the use of the term “customer” in section

501 of the G-L-B Act. The OCC considered using the broader definition, but determined that

information security could be addressed more broadly through other vehicles

definition that would apply to all

records under the control of a financial institution. Commenters maintained that two different

definitions would be confusing and also inconsistent with the use of the term “customer” in section

501 of the G-L-B Act. The OCC considered using the broader definition, but determined that

information security could be addressed more broadly through other vehicles. For the sake of

consistency, the final Guidelines adopt the narrower definition and apply only to records of

consumers who have established a continuing relationship with an institution under which the

institution provides one or more financial products or services to the consumer to be used

primarily for personal, family or household purposes, the definition used in the Privacy Rule.

Many commenters criticized the list of proposed objectives for each financial institution’s

information security program which generally reflected the statutory objectives in section 501(b).

According to these comments, the objectives were stated in a manner that made them absolute,

unachievable, and therefore burdensome. The final Guidelines have been drafted to clarify these

objectives by stating that each security program is to be “designed” to accomplish the objectives

stated.

Commenters wanted board involvement in the development and implementation of an

information security program left to the discretion of the financial institution. Commenters also

asked the OCC to clarify that the board may delegate to a committee responsibility for involvement

in the institution’s security program. While the final Guidelines as drafted continue to place

responsibility on an institution’s board to approve and exercise general oversight over the

program, they now clarify that a committee of the board may approve the institution’s written

security program. In addition, the Guidelines permit the board to assign specific implementation

responsibilities to a committee or an individual

program. While the final Guidelines as drafted continue to place

responsibility on an institution’s board to approve and exercise general oversight over the

program, they now clarify that a committee of the board may approve the institution’s written

security program. In addition, the Guidelines permit the board to assign specific implementation

responsibilities to a committee or an individual.

The OCC considered requiring an institution to designate a Corporate Security Officer.

However, the agency agreed with commenters that a financial institution is in the best position to

determine who should be assigned specific roles in implementing the institution’s security

program. Therefore, the Guidelines do not include this requirement.

The proposal identifying various security measures that an institution should consider in

evaluating the adequacy of its policies and procedures was criticized by many commenters. These

commenters misinterpreted the list of measures and believed each measure to be mandatory. Small

entities commented that these measures were overly comprehensive and burdensome. As

discussed previously in the preamble, the OCC did not intend to suggest that every institution must

adopt every one of the measures. To highlight the OCC’s intention that an institution must

determine for itself which measures will be appropriate for its own risk profile, the final

Guidelines now clearly state that each financial institution must consider whether the security

elements listed are appropriate for the institution and, if so, adopt those elements an institution

concludes are appropriate.

Commenters noted that testing could be burdensome and costly, especially for small

entities. The OCC considered mandating specific tests, but determined that with changes in

technology, such tests could become obsolete. Therefore, the final Guidelines permit management

26

nts listed are appropriate for the institution and, if so, adopt those elements an institution

concludes are appropriate.

Commenters noted that testing could be burdensome and costly, especially for small

entities. The OCC considered mandating specific tests, but determined that with changes in

technology, such tests could become obsolete. Therefore, the final Guidelines permit management

26

to exercise its discretion to determine the frequency and types of tests that need to be conducted.

The OCC considered required testing or the review of tests to be conducted by outside auditors.

The OCC determined that these duties could be performed effectively by an institution’s own staff,

if staff selected is sufficiently independent. Therefore, the Guidelines permit financial institutions

to determine for themselves whether to use third parties to either conduct tests or review their

results or to use staff independent of those that develop or maintain the institution’s security

program.

Many commenters objected to provisions in the proposal requiring institutions to monitor

their service providers. Commenters asserted that it would be burdensome to require them to

monitor the activities of their service providers and that information security of service providers

should be handled through contractual arrangements. The final Guidelines include greater

flexibility with regard to the monitoring of service providers than was provided in the proposal.

The final Guidelines recognize that some service providers will be financial institutions that are

directly subject to these Guidelines or other standards promulgated under section 501(b) and that

other service providers may already be subject to legal and professional standards that require

them to safeguard the institution’s customer information. Therefore, the final Guidelines permit an

institution to do a risk assessment taking these factors into account and to determine for themselves

which service providers will need to be monitored

ndards promulgated under section 501(b) and that

other service providers may already be subject to legal and professional standards that require

them to safeguard the institution’s customer information. Therefore, the final Guidelines permit an

institution to do a risk assessment taking these factors into account and to determine for themselves

which service providers will need to be monitored. Where monitoring is warranted, the

Guidelines now specify that monitoring can be accomplished, for example, through the periodic

review of the service provider’s associated audits, summaries of test results, or equivalent

measures of the service provider.

In addition, after considering the comments about contracts with service providers and the

effective date of the Guidelines, the OCC also adopted a transition rule, similar to a provision in

the Privacy Rule, that grandfathers existing contracts for a two-year period.

One commenter requested that smaller community banks be given additional time to

comply with the Guidelines because having to comply with the new Privacy Rule and these

Guidelines will put a strain on the resources of smaller banks. The OCC considered this request

but did not change the effective date of the Guidelines given the importance of safeguarding

customer information. In addition, most institutions already have information security programs in

place, and the OCC has addressed this concern by adding flexibility to the final Guidelines in a

variety of other areas as described above.

Board: The Regulatory Flexibility Act (5 U.S.C. 604) requires an agency to publish a final

regulatory flexibility analysis when promulgating a final rule that was subject to notice and

comment.

Need for and objectives of Guidelines. As discussed above, these Guidelines implement

section 501 of the GLB Act

ing flexibility to the final Guidelines in a

variety of other areas as described above.

Board: The Regulatory Flexibility Act (5 U.S.C. 604) requires an agency to publish a final

regulatory flexibility analysis when promulgating a final rule that was subject to notice and

comment.

Need for and objectives of Guidelines. As discussed above, these Guidelines implement

section 501 of the GLB Act. The objective of the Guidelines is to establish standards for financial

institutions that are subject to the Board’s jurisdiction to protect the security and confidentiality of

their customers’ information. In particular, the Guidelines require those financial institutions to

implement a comprehensive written information security program that includes:

27

(1) Assessing the reasonably foreseeable internal and external threats that could result in

unauthorized disclosure, misuse, alteration, or destruction of customer information;

(2) Adopting security measures that the financial institution concludes are appropriate for

it; and

(3) Overseeing its arrangements with its service provider(s).

Comments on the initial regulatory flexibility analysis. Although few commenters

addressed the initial regulatory flexibility analysis specifically, many commenters addressed the

regulatory burdens that were discussed in that analysis. Several commenters noted that certain

aspects of the proposal may tax the comparatively limited resources of small institutions, yet few

commenters quantified the potential costs of compliance. The comments received by the Board

and the other Agencies were discussed in the supplementary information above. Those comments

that are closely related to regulatory burden are highlighted below:

The Board requested comment on the scope of the term “customer” for purposes of the

Guidelines

mited resources of small institutions, yet few

commenters quantified the potential costs of compliance. The comments received by the Board

and the other Agencies were discussed in the supplementary information above. Those comments

that are closely related to regulatory burden are highlighted below:

The Board requested comment on the scope of the term “customer” for purposes of the

Guidelines. Many commenters opposed expanding the proposed scope of the Guidelines to apply

to information about business customers and consumers who have not established continuing

relationships with the financial institution. The commenters stated that an expanded scope would

impose higher costs of developing an information security program and would be inconsistent with

the use of the term “customer” in section 501 of the GLB Act and the Agencies’ Privacy Rule. As

explained in the supplementary information above, the Board has defined “customer” in the final

Guidelines in the same way as that term is defined in section __.3(h) of the Agencies’ Privacy

Rule.

Many commenters urged the Board to reduce the level of detail about the kinds of measures

that would be required to implement an information security program under the proposed

Guidelines. Commenters argued, for instance, that requiring particular testing procedures of

security systems would make the standards too onerous for those institutions for which other kinds

of tests and audits would be more suitable. In a similar vein, some commenters proposed that the

Board should issue examples that would illustrate the kinds of security measures that, if adopted,

would constitute compliance with the Guidelines.

The Board believes that many commenters may have misinterpreted the intent of the

original proposal regarding the particular safeguards that would be expected

s and audits would be more suitable. In a similar vein, some commenters proposed that the

Board should issue examples that would illustrate the kinds of security measures that, if adopted,

would constitute compliance with the Guidelines.

The Board believes that many commenters may have misinterpreted the intent of the

original proposal regarding the particular safeguards that would be expected. The provision that

requires each financial institution to consider a variety of security measures has been redrafted in

an effort to clarify that the institution must determine for itself which measures will be appropriate

to its own risk profile. Although an institution is required to consider each of the security

measures listed in paragraph III.C.1., it is not obligated to incorporate any particular security

measures or particular testing procedures into its information security program. Rather, the

institution may adopt those measures and use those tests that it concludes are appropriate. The

Board is mindful that institutions’ operations will vary in their complexity and scope of activities

and present different risk profiles to their customer information. Accordingly, the Board has not

established definitive security measures that, if adopted, would constitute compliance with the

28

Guidelines.

The Board asked for comments on several issues related to the appropriate security

standards pertaining to an institution’s arrangements with its service providers. As discussed

above, many comments addressed these issues and, notably, objected to a provision that would

require an institution to monitor its service providers through on-site audits. Several commenters

noted that the service providers often contract for audits of their systems and argued that an

institution should be able to rely upon those testing procedures

nts with its service providers. As discussed

above, many comments addressed these issues and, notably, objected to a provision that would

require an institution to monitor its service providers through on-site audits. Several commenters

noted that the service providers often contract for audits of their systems and argued that an

institution should be able to rely upon those testing procedures. Commenters also recommended

that an institution’s responsibility for information given to service providers require only that the

institution enter into appropriate contractual arrangements. The Board has modified the Guidelines

to clarify an institution’s responsibilities with respect to service providers. The Board has not

designed a standard that would require a financial institution to conduct an on-site audit of its

service provider’s security program. Instead, the Board adopted a standard that requires an

institution to monitor its service provider to confirm that it has satisfied its contractual obligations,

depending upon the institution’s risk assessment. In the course of conducting its risk assessment

and determining which service providers will need to be monitored, an institution may take into

account the fact that some of its service providers may be financial institutions that are directly

subject to these Guidelines or other standards promulgated by their primary regulator under section

501(b). Furthermore, after considering the comments about contracts with service providers and

the effective date of the Guidelines, the Board also adopted a transition rule, which parallels a

similar provision in the Privacy Rule, that provides a two-year period for grandfathering existing

contracts.

Many commenters addressed the burdens that would be imposed by the proposal due to the

effective date and urged the Board to extend the proposed July 1, 2001, effective date for period

ranging from one to two years

uidelines, the Board also adopted a transition rule, which parallels a

similar provision in the Privacy Rule, that provides a two-year period for grandfathering existing

contracts.

Many commenters addressed the burdens that would be imposed by the proposal due to the

effective date and urged the Board to extend the proposed July 1, 2001, effective date for period

ranging from one to two years. Most of these commenters argued that complying with the proposed

Guidelines by July 1, 2001, would place a considerable burden on their businesses, particularly

because the Guidelines would mandate changes to computer software, employee training, and

compliance systems. As discussed above, the Board believes that the dates for full compliance

with these Guidelines and the Privacy Rule should coincide. Financial institutions are required, as

part of their initial privacy notices, to describe their policies and practices with respect to

protecting the confidentiality and security of nonpublic personal information (12 CFR 216.6). The

Board believes that if the effective date of these Guidelines is extended beyond July 1, 2001, then

a financial institution may be placed in the position of providing an initial notice regarding

confidentiality and security and thereafter amending the privacy policy to accurately refer to the

federal standards once they became effective. Accordingly, the Board has adopted the proposed

effective date of July 1, 2001.

Institutions covered. The Board’s final Guidelines will apply to approximately 9,500

institutions, including state member banks, bank holding companies and certain of their nonbank

subsidiaries or affiliates, state uninsured branches and agencies of foreign banks, commercial

lending companies owned or controlled by foreign banks, and Edge and Agreement corporations.

The Board estimates that over 4,500 of the institutions are small institutions with assets less than

$100 million.

New compliance requirements. The final Guidelines contain new compliance

29

their nonbank

subsidiaries or affiliates, state uninsured branches and agencies of foreign banks, commercial

lending companies owned or controlled by foreign banks, and Edge and Agreement corporations.

The Board estimates that over 4,500 of the institutions are small institutions with assets less than

$100 million.

New compliance requirements. The final Guidelines contain new compliance

29

requirements for all covered institutions, many of which are contained in existing supervisory

guidance and examination procedures. Nonetheless, each must develop and implement a written

information security program. As part of that program, institutions will be required to assess the

reasonably foreseeable risks, taking into account the sensitivity of customer information, and

assess the sufficiency of policies and procedures in place to control those risks. Institutions that

use third party service providers to process customer information must exercise appropriate due

diligence in selecting them, require them by contract to implement appropriate measures designed

to meet the objectives of these Guidelines, and depending upon the institution’s risk assessment,

monitor them to confirm that they have satisfied their contractual obligations. As part of its

compliance measures, an institution may need to train its employees or hire individuals with

professional skills suitable to implementing the policies and procedures of its information security

program, such as those skills necessary to test or review tests of its security measures. Some

institutions may already have programs that meet these requirements, but others may not.

Minimizing impact on small institutions. The Board believes the requirements of the Act

and these Guidelines may create additional burden for some small institutions. The Guidelines

apply to all covered institutions, regardless of size

skills necessary to test or review tests of its security measures. Some

institutions may already have programs that meet these requirements, but others may not.

Minimizing impact on small institutions. The Board believes the requirements of the Act

and these Guidelines may create additional burden for some small institutions. The Guidelines

apply to all covered institutions, regardless of size. The Act does not provide the Board with the

authority to exempt a small institution from the requirement of implementing administrative,

technical, and physical safeguards to protect the security and confidentiality of customer

information. Although the Board could develop different guidelines depending on the size and

complexity of a financial institution, the Board believes that differing treatment would not be

appropriate, given that one of the stated purposes of the Act is to protect the confidentiality and

security of customers’ nonpublic personal information.

The Board believes that the compliance burden is minimized for small institutions because

the Guidelines expressly allow institutions to develop security measures that are “appropriate to

the size and complexity of the [institution]”. The Guidelines do not mandate any particular

policies, procedures, or security measures for any institution other than general requirements, such

as to “train staff” or “monitor its service providers to confirm that they have satisfied their

[contractual] obligations”. The Board believes that the final Guidelines vest a small institution

with a broad degree of discretion to design and implement an information security program that

suits its own organizational structure and risk profile.

FDIC: The Regulatory Flexibility Act (5 U.S.C

uch

as to “train staff” or “monitor its service providers to confirm that they have satisfied their

[contractual] obligations”. The Board believes that the final Guidelines vest a small institution

with a broad degree of discretion to design and implement an information security program that

suits its own organizational structure and risk profile.

FDIC: The Regulatory Flexibility Act (5 U.S.C. 601-612) (RFA) requires, subject to

certain exceptions, that federal agencies prepare an initial regulatory flexibility analysis (IRFA)

with a proposed rule and a final regulatory flexibility analysis (FRFA) with a final rule, unless the

agency certifies that the rule will not have a significant economic impact on a substantial number

of small entities.[See Footnote 14] At the time of issuance of the proposed Guidelines, the FDIC could not make

Footnote 14 -- The RFA defines the term Asmall entity@ in 5 U.S.C. 601 by reference to definitions published by

the Small Business Administration (SBA). The SBA has defined a Asmall entity@ for banking

purposes as a national or commercial bank, or savings institution with less than $100 million in assets. See 13 CFR 12

30

such a determination for certification. Therefore, the FDIC issued an IRFA pursuant to section 603

of the RFA. After reviewing the comments submitted in response to the proposed Guidelines, the

FDIC believes that it does not have sufficient information to determine whether the final

Guidelines would have a significant economic impact on a substantial number of small entities.

Hence, pursuant to section 604 of the RFA, the FDIC provides the following FRFA.

This FRFA incorporates the FDIC=s initial findings, as set forth in the IRFA; addresses the

comments submitted in response to the IRFA; and describes the steps the FDIC has taken in the

final rule to minimize the impact on small entities, consistent with the objectives of the Gramm-

Leach-Bliley Act (G-L-B Act)

s.

Hence, pursuant to section 604 of the RFA, the FDIC provides the following FRFA.

This FRFA incorporates the FDIC=s initial findings, as set forth in the IRFA; addresses the

comments submitted in response to the IRFA; and describes the steps the FDIC has taken in the

final rule to minimize the impact on small entities, consistent with the objectives of the Gramm-

Leach-Bliley Act (G-L-B Act). Also, in accordance with section 212 of the Small Business

Regulatory Enforcement Fairness Act of 1996 (Public Law 104-121), in the near future the FDIC

will issue a compliance guide to assist small entities in complying with these Guidelines..

Small Entities to Which the Guidelines Will Apply

The final Guidelines will apply to all FDIC-insured state-nonmember banks, regardless of

size, including those with assets of under $100 million. As of September 2000, there were 3,331

small banks out of a total of 5,130 FDIC-insured state-nonmember banks with assets of under $100

million. Title V, Subtitle A, of the GLBA does not provide either an exception for small banks or

statutory authority upon which the FDIC could provide such an exception in the Guidelines.

Statement of the Need and Objectives of the Rule

The final Guidelines implement the provisions of Title V, Subtitle A, Section 501 of the

GLBA addressing standards for safeguarding customer information. Section 501 requires the

Agencies to publish standards for financial institutions relating to administrative, technical, and

physical standards to:

Insure the security and confidentiality of customer records and information.

Protect against any anticipated threats or hazards to the security or integrity of such

records.

Protect against unauthorized access to or use of such records or information, which

could result in substantial harm or inconvenience to any customer

ions relating to administrative, technical, and

physical standards to:

Insure the security and confidentiality of customer records and information.

Protect against any anticipated threats or hazards to the security or integrity of such

records.

Protect against unauthorized access to or use of such records or information, which

could result in substantial harm or inconvenience to any customer.

The final Guidelines do not represent any change in the policies of the FDIC; rather they implement

the G-L-B Act requirement to provide appropriate standards relating to the security and

confidentiality of customer records.

Summary of Significant Issues Raised by the Public Comments; Description of Steps the Agency

Has Taken in Response to the Comments to Minimize the Significant Economic Impact on Small

Entities.

31

In the IRFA, the FDIC specifically requested information on whether small entities would

be required to amend their operations in order to comply with the final Guidelines and the costs

for such compliance. The FDIC also requested comment or information on the costs of establishing

information security programs. The FDIC also sought comment on any significant alternatives,

consistent with the G-L-B Act that would minimize the impact on small entities. The FDIC

received a total of 63 comment letters. However, none of the comment letters specifically

addressed the initial regulatory flexibility act section of the proposed Guidelines. Instead, many

commenters, representing banks of various sizes, addressed the regulatory burdens in connection

with their discussion of specific Guideline provisions.

The FDIC has sought to minimize the burden on all businesses, including small entities, in

promulgating this final Guidelines. The statute does not authorize the FDIC to create exemptions

from the G-L-B Act based on an institution=s asset size

commenters, representing banks of various sizes, addressed the regulatory burdens in connection

with their discussion of specific Guideline provisions.

The FDIC has sought to minimize the burden on all businesses, including small entities, in

promulgating this final Guidelines. The statute does not authorize the FDIC to create exemptions

from the G-L-B Act based on an institution=s asset size. However, the FDIC carefully considered

comments regarding alternatives designed to minimize the economic and overall burden of

complying with the final Guidelines. The discussion below reviews some of the significant

changes adopted in the final Guidelines to accomplish this purpose.

1. Issue the Rule as Guidelines or Regulations.

The FDIC sought comment on whether to issue the rule as Guidelines or as regulations. All

the comment letters stated that the rule should be issued in the form of Guidelines. Some

community banks stated that the Guidelines were unnecessary because they already have

information security programs in place but would prefer Guidelines to regulations. The

commentary supported the use of Guidelines because guidelines typically provide more flexibility

than regulations. Since technology changes rapidly, Guidelines would allow institutions to adapt

to a changing environment more quickly than regulations, which may become outdated. The FDIC

has issued these standards as Guidelines. The final Guidelines establish standards that will allow

each institution the flexibility to design an information security program to accommodate its

particular level of complexity and scope of activities.

2. Definition of Customer.

In the proposed Guidelines, the FDIC defined Acustomer@ in the same manner as in the

Privacy Rule. A Acustomer@ is defined as a consumer who has established a continuing

relationship with an institution under which the institution provides one or more financial products

or services to the consumer to be used primarily for personal, family, or household purposes

ies.

2. Definition of Customer.

In the proposed Guidelines, the FDIC defined Acustomer@ in the same manner as in the

Privacy Rule. A Acustomer@ is defined as a consumer who has established a continuing

relationship with an institution under which the institution provides one or more financial products

or services to the consumer to be used primarily for personal, family, or household purposes. This

definition does not include a business or a consumer who does not have an ongoing relationship

with a financial institution. Almost all of the comments received by the FDIC agreed with the

proposed definition and agreed that the definition should not be expanded to provide a common

information security program for all types of records under the control of a financial institution.

The Guidelines will apply only to consumer record as defined by the Privacy Rule, not business

records. This will allow for a consistent interpretation of the term "customer" between the

Guidelines and the Privacy Rule.

3. Involvement of the Bank=s Board of Directors.

32

The FDIC sought comment on how frequently management should report to the board of

directors concerning the bank=s information security program. Most of the comment letters stated

that the final Guidelines should not dictate how frequently the bank reports to the board of

directors and that the bank should have discretion in this regard. The comment letters clearly

conveyed a preference to not have a reporting requirement. However, if there was to be one,

commenters suggested that it be annual. The Agencies have amended the Guidelines to require that

a bank report at least annually to its board of directors. However, more frequent reporting will be

necessary if a material event affecting the information security system occurs or if material

modifications are made to the system.

4. Designation of Corporate Information Security Officer

o be one,

commenters suggested that it be annual. The Agencies have amended the Guidelines to require that

a bank report at least annually to its board of directors. However, more frequent reporting will be

necessary if a material event affecting the information security system occurs or if material

modifications are made to the system.

4. Designation of Corporate Information Security Officer.

The Agencies considered whether the Guidelines should require that the bank=s board of

directors designate a ACorporate Information Security Officer@ with the responsibility to develop

and administer the bank=s information security program. Most of the comment letters requested that

this requirement not be adopted because adding a new personnel position would be financially

burdensome. The FDIC agrees that a new position with a specific title is not necessary. The final

Guidelines do, however, require that the authority for the development, implementation, and

administration of the bank=s information security program be clearly expressed although not

assigned to a particular individual.

5. Managing and Controlling Risk.

Many comments focused on the eleven factors in the proposed Guidelines that banks should

consider when evaluating the adequacy of their information security programs. The Agencies did

not intend to mandate the security measures listed in section III.C. of the proposed Guidelines for

all banks and all data. Instead the Agencies believe the security measures should be followed as

appropriate for each bank=s particular circumstances. Some concern was expressed that the

proposed Guidelines required encryption of all customer information. The FDIC believes that a

bank that has Internet-based transaction accounts or a transactional Web site may decide that

encryption is appropriate, but a bank that processes all data internally may need different access

restrictions. While a bank is to consider each element in section III.C

. Some concern was expressed that the

proposed Guidelines required encryption of all customer information. The FDIC believes that a

bank that has Internet-based transaction accounts or a transactional Web site may decide that

encryption is appropriate, but a bank that processes all data internally may need different access

restrictions. While a bank is to consider each element in section III.C. in the design of its

information security program, this is less burdensome than a requirement to include each element

listed that section.

The proposed Guidelines provided that institutions train employees to recognize, respond

to, and report suspicious attempts to obtain customer information directly to law enforcement

agencies and regulatory agencies. Some comment letters stated that suspicious activity should be

reported to management, not directly to law enforcement agencies and regulatory agencies. The

FDIC believes employees should be made aware of federal reporting requirements and an

institutions procedures for reporting suspicious activity. However, the Guidelines have been

amended to allow financial institutions to decide who is to file a report to law enforcement

agencies, consistent with other applicable regulations.

33

A significant number of comments stated that the FDIC should not require specific tests to

ensure the security and confidentiality of customer information. Some comments stated that

periodic testing is appropriate. The final Guidelines do not specify particular tests but provide that

management should decide on the appropriate testing. Also, the final Guidelines require tests to be

conducted or reviewed by people independent of those who operate the systems. Further, banks

must review their service provider=s security program to determine that it is consistent with the

Guidelines. However, the final Guidelines do not require on-site inspections.

6. Effective Date

The effective date for the final Guidelines is July 1, 2001

. Also, the final Guidelines require tests to be

conducted or reviewed by people independent of those who operate the systems. Further, banks

must review their service provider=s security program to determine that it is consistent with the

Guidelines. However, the final Guidelines do not require on-site inspections.

6. Effective Date

The effective date for the final Guidelines is July 1, 2001. As discussed in the section-by-

section analysis, many of the comment letters urged the FDIC to extend the effective date of the

Guidelines, particularly since this is the effective date for complying with the Privacy Rule.

Several of the comments suggested the proposed effective date be extended for 12 to 18 months.

However, the FDIC believes that the effective date for the Guidelines and the Privacy Rule should

coincide. The Privacy Rule requires a financial institution to disclose to its customers that the bank

maintains physical, electronic, and procedural safeguards to protect customers= nonpublic personal

information. Appendix A of the Privacy Rule provides that this disclosure may refer to these

federal guidelines. This is only meaningful if the final Guidelines for safeguarding customer

information are effective when the disclosure is made. The Guidelines do provide a transition rule

for contracts with service providers C essentially allowing a two-year compliance period for

service provider contracts. A contract entered into on or before July 1, 2001, satisfies the

provisions of this part until July 1, 2003, even if the contract does not include provisions

delineating the servicer=s duties and responsibilities to protect customer information described in

section III.D. This additional time will allow financial institutions to make all necessary changes

to service provider contracts and to comply with this segment of the Guidelines

1, 2001, satisfies the

provisions of this part until July 1, 2003, even if the contract does not include provisions

delineating the servicer=s duties and responsibilities to protect customer information described in

section III.D. This additional time will allow financial institutions to make all necessary changes

to service provider contracts and to comply with this segment of the Guidelines.

Summary of the Agency Assessment of Issues Raised in Public Comments

Most of the comment letters did not discuss actual compliance costs for implementing the

provisions of the Guidelines. Some commenters stated that their bank has an established

information security program and that information security is a customary business practice. The

new compliance and reporting requirements will create additional costs for some institutions.

These costs include: (1) training staff; (2) monitoring outsourcing agreements; (3) performing

due diligence before contracting with a service provider; (4) testing security systems; and (5)

adjusting security programs due to technology changes. The comments did

not provide data from which the FDIC could quantify the cost of implementing the requirements of

the GLBA. The compliance costs will vary among institutions.

Description/Estimate of Small Entities To Which the Guidelines Will Apply

The Guidelines will apply to approximately 3,300 FDIC insured State nonmember banks

that are small entities (assets less than $100 million) as defined in the RFA.

34

provide data from which the FDIC could quantify the cost of implementing the requirements of

the GLBA. The compliance costs will vary among institutions.

Description/Estimate of Small Entities To Which the Guidelines Will Apply

The Guidelines will apply to approximately 3,300 FDIC insured State nonmember banks

that are small entities (assets less than $100 million) as defined in the RFA.

34

Description of Projected Reporting, Record-Keeping, and Other Compliance Requirements

The final Guidelines contain standards for the protection of customer records and

information that apply to all FDIC-insured state-nonmember banks. Institutions will be required to

report annually to the bank=s board of directors concerning the bank=s information security

program. Institutions will need to develop a training program that is designed to implement the

institution=s information security policies and procedures. An institution=s information security

system will be tested to ensure the controls and procedures of the program work properly.

However, the final Guidelines do not specify what particular tests the bank should undertake. The

final Guidelines state that the tests are to be conducted or reviewed by persons who are

independent of those who operate the systems. Institutions will have to exercise due diligence in

the selection of service providers to ensure that the bank=s customer information will be protected

consistent with these Guidelines. And institutions will have to monitor these service provider

arrangements to confirm that the institution=s customer information is protected, which may be

accomplished by reviewing service provider audits and summaries of test results. Also,

institutions will need to adjust their security program as technology changes

=s customer information will be protected

consistent with these Guidelines. And institutions will have to monitor these service provider

arrangements to confirm that the institution=s customer information is protected, which may be

accomplished by reviewing service provider audits and summaries of test results. Also,

institutions will need to adjust their security program as technology changes.

The types of professional skills within the institution necessary to prepare the report to the

board would include an understanding of the institution's information security program, a level of

technical knowledge of the hardware and software systems to evaluate test results recommending

substantial modifications; and the ability to evaluate and report on the institution's steps to oversee

service provider arrangements.

OTS: The Regulatory Flexibility Act (RFA),[See Footnote 15] requires OTS to prepare a final regulatory

flexibility analysis with these final Guidelines unless the agency certifies that the rule will not

have a significant economic impact on a substantial number of small entities. OTS has evaluated

the effects these Guidelines will have on small entities. In issuing proposed Guidelines, OTS

specifically sought comment on the costs of establishing and operating information security

programs, but no commenters provided specific cost information. Institutions cannot yet know

how they will implement their information security programs and therefore have difficulty

quantifying the associated costs. The Director of OTS considered certifying, under section 605(b)

of the RFA, that these guidelines will not have a significant economic impact on a substantial

number of small entities. However, because OTS cannot quantify the impact the Guidelines will

have on small entities, and in the interests of thoroughness, OTS does not certify that the

Guidelines will not have a significant economic impact on a substantial number of small entities

der section 605(b)

of the RFA, that these guidelines will not have a significant economic impact on a substantial

number of small entities. However, because OTS cannot quantify the impact the Guidelines will

have on small entities, and in the interests of thoroughness, OTS does not certify that the

Guidelines will not have a significant economic impact on a substantial number of small entities.

Instead, OTS has prepared the following final regulatory flexibility analysis.

A. Reasons for Final Action

OTS issues these Guidelines pursuant to section 501 of the G-L-B Act. As described in

this preamble and in the notice of proposed action, section 501 requires OTS to publish standards

Footnote 15 -- 5 U.S.C. 604(a). [End of Footnote 15]

35

for the thrift industry relating to administrative, technical, and physical safeguards to: (1) insure the

security and confidentiality of customer records and information; (2) protect against any

anticipated threats or hazards to the security or integrity of such records, and

(3) protect against unauthorized access to or use of such records or information which could result

in the substantial harm or inconvenience to any customer.

B. Objectives of and Legal Basis for Final Action

The objectives of the Guidelines are described in the Supplementary Information section

above. The legal bases for the final action are: section 501 of the G-L-B Act; section 39 of the

FDI Act; and sections 2, 4, and 5 of the Home Owners’ Loan Act (12 U.S.C. 1462, 1463, and

1464).

C. Description of Entities to Which Final Action Will Apply

These Guidelines will apply to all savings associations whose deposits are FDIC insured,

and subsidiaries of such savings associations, except subsidiaries that are brokers, dealers,

persons providing insurance, investment companies, and investment advisers.[See Footnote 16]

D. Projected Reporting, Recordkeeping, and Other Compliance Requirements; Skills

Required.

The Guidelines do not require any reports to OTS

l apply to all savings associations whose deposits are FDIC insured,

and subsidiaries of such savings associations, except subsidiaries that are brokers, dealers,

persons providing insurance, investment companies, and investment advisers.[See Footnote 16]

D. Projected Reporting, Recordkeeping, and Other Compliance Requirements; Skills

Required.

The Guidelines do not require any reports to OTS. As discussed more fully above, they do

require institutions to have a written information security program, and to make an appropriate

report to the board of directors, or a board committee, at least annually. The Guidelines require

institutions to establish an information security program, if they do not already have one. The

Guidelines require institutions to assess the risks to their customer security and to adopt

appropriate measures to control those risks. Institutions must also test the key controls,

commensurate with the risks. Institutions must use appropriate due diligence in selecting outside

service providers, and require service providers, by contract, to implement appropriate security

measures. Finally, where appropriate, the Guidelines require institutions to monitor their service

providers.

Professional skills, such as skills of computer hardware and software, will be necessary to

assess information security needs, and to design and implement an information security program.

The particular skills needed will be commensurate with the nature of each institution’s system, i.e.

more skills will be needed in institutions with sophisticated and extensive computerization. As a

result, small entities with less extensive computerization are likely to have less burdensome

compliance needs than large entities. Institutions that use outside service providers may require

legal skills to draft appropriate language for contracts with service providers.

Footnote 16 -- For purposes of the Regulatory Flexibility Act, a small savings association is one with less than $100

million in assets

l entities with less extensive computerization are likely to have less burdensome

compliance needs than large entities. Institutions that use outside service providers may require

legal skills to draft appropriate language for contracts with service providers.

Footnote 16 -- For purposes of the Regulatory Flexibility Act, a small savings association is one with less than $100

million in assets. 13 CFR 121.201 (Division H). There are approximately 487 such small savings

associations, approximately 97 of which have subsidiaries. [End of Footnote 16]

36

E. Public Comment and Significant Alternatives

OTS did not receive any public comment on its initial regulatory flexibility analysis,

although it did receive comments on the proposal in general, and on the Guidelines’ impact on

small entities in particular. OTS addresses these below.

OTS has considered publishing standards using only the broad language in section 501(b)

of the G-L-B Act, as supported by one commenter. The Agencies rejected this alternative in favor

of more comprehensive Guidelines. Using only the general statutory language would permit

institutions maximum flexibility in implementing information security protections and would not

put institutions at a competitive disadvantage with respect to institutions not subject to the same

security standards. However, using the statutory language alone would not provide enough

guidance to institutions about what risks need to be addressed or what types of protections are

appropriate. Small institutions in particular may need guidance in this area. One trade association

that represents community banks commented that institutions need guidance to determine what level

of information security the Agencies will look for, and that community banks in particular need

guidance in this area. OTS believes that the alternative it chose, more comprehensive standards,

provides helpful guidance without sacrificing flexibility

ed guidance in this area. One trade association

that represents community banks commented that institutions need guidance to determine what level

of information security the Agencies will look for, and that community banks in particular need

guidance in this area. OTS believes that the alternative it chose, more comprehensive standards,

provides helpful guidance without sacrificing flexibility.

OTS has also considered the alternative of defining “service provider” more narrowly than

in the proposed Guidelines to reduce regulatory burden. The Guidelines require a financial

institution to take appropriate steps to protect customer information provided to a service

provider. Due to limited resources, small institutions may need to outsource a disproportionately

larger number of functions than large institutions outsource, and accordingly have a greater need

for service providers. Thus, the burdens associated with service providers may fall more heavily

on small institutions than on large institutions. But the risks to information security do not

necessarily vary depending on a service provider’s identity. Rather, they vary depending on the

type and volume of information to which a service provider has access, the safeguards it has in

place, and what the service provider does with the information. Basing the requirements as to

service providers on a service provider’s identity would not necessarily focus protections on

areas of risk. For this reason, the final Guidelines focus the protections regarding service

providers on the risks involved rather than on the service provider’s identity. This approach

should provide the necessary protections without unnecessary burden on small institutions.

OTS reviewed the alternative of requiring an institution’s board of directors to designate a

Corporate Information Security Officer who would have authority, with approval by the board, to

develop and administer the institution’s information security program

the service provider’s identity. This approach

should provide the necessary protections without unnecessary burden on small institutions.

OTS reviewed the alternative of requiring an institution’s board of directors to designate a

Corporate Information Security Officer who would have authority, with approval by the board, to

develop and administer the institution’s information security program. However, ultimately, the

agencies rejected the idea of having financial institutions create a new position to fulfill this

purpose. Instead, the Guidelines allow financial institutions the flexibility to determine who

should be assigned specific roles in implementing the institution’s security program. As a result,

small institutions will be relieved of a potential burden.

The final Guidelines incorporate new provisions not in the proposed Guidelines designed

to add flexibility to assist all institutions, large and small. For example, the final Guidelines,

unlike the proposal, do not specify particular tasks for management. Instead, the final Guidelines

allow each institution the flexibility to decide for itself the most efficient allocation of its

personnel. Similarly, the final Guidelines allow institutions to delegate board duties to board

37

committees. Additionally, in the final guidelines the Agencies removed the requirement that

information security programs “shall . . . ensure” the security and confidentiality of customer

information. Instead, the guidelines say the program “shall be designed to . . . ensure” the security

and confidentiality of customer information. The final Guidelines further incorporate more

flexibility than the proposal concerning testing systems. The proposal required third parties of

staff independent of those who maintain the program to test it, and required third parties or staff

independent of the testers to review test results

e program “shall be designed to . . . ensure” the security

and confidentiality of customer information. The final Guidelines further incorporate more

flexibility than the proposal concerning testing systems. The proposal required third parties of

staff independent of those who maintain the program to test it, and required third parties or staff

independent of the testers to review test results. To add flexibility, the final Guidelines more

simply require staff or third parties independent of those who develop or maintain the programs to

conduct or review the tests. These changes should serve to reduce the burden of the Guidelines.

B. Executive Order 12866

The Comptroller of the Currency and the Office of Thrift Supervision have determined that

this rule does not constitute a "significant regulatory action" for the purposes of Executive Order

12866. The OCC and OTS are issuing the Guidelines in accordance with the requirements of

Sections 501 and 505(b) of the G-L-B Act and not under their own authority. Even absent the

requirements of the G-L-B Act, if the OCC and OTS had issued the rule under their own authority,

the rule would not constitute a “significant regulatory action” for purposes of Executive Order

12866.

The standards established by the Guidelines are very flexible and allow each institution the

discretion to have an information security program that suits its particular size , complexity and the

nature and scope of its activities. Further, the standards reflect good business practices and

guidance previously issued by the OCC, OTS, and the FFIEC. Accordingly, most if not all

institutions already have information security programs in place that are consistent with the

Guidelines. In such cases, little or no modification to an institution’s program will be required.

C. Unfunded Mandates Act of 1995

Section 202 of the Unfunded Mandates Reform Act of 1995, 2 U.S.C

ss practices and

guidance previously issued by the OCC, OTS, and the FFIEC. Accordingly, most if not all

institutions already have information security programs in place that are consistent with the

Guidelines. In such cases, little or no modification to an institution’s program will be required.

C. Unfunded Mandates Act of 1995

Section 202 of the Unfunded Mandates Reform Act of 1995, 2 U.S.C. 1532 (Unfunded

Mandates Act), requires that an agency prepare a budgetary impact statement before promulgating

any rule likely to result in a federal mandate that may result in the expenditure by state, local, and

tribal governments, in the aggregate, or by the private sector, of $100 million or more in any one

year. If a budgetary impact statement is required, section 205 of the Unfunded Mandates Act also

requires the agency to identify and consider a reasonable number of regulatory alternatives before

promulgating the rule. However, an agency is not required to assess the effects of its regulatory

actions on the private sector to the extent that such regulations incorporate requirements

specifically set forth in law. 2 U.S.C. 1531.

The OCC and OTS believe that most institutions already have established an information

security program because it is a sound business practice that also has been addressed in existing

supervisory guidance. Therefore, the OCC and OTS have determined that the Guidelines will not

result in expenditures by state, local, and tribal governments, in the aggregate, or by the private

sector, of $100 million or more in any one year. Accordingly, the OCC and OTS have not

38

information

security program because it is a sound business practice that also has been addressed in existing

supervisory guidance. Therefore, the OCC and OTS have determined that the Guidelines will not

result in expenditures by state, local, and tribal governments, in the aggregate, or by the private

sector, of $100 million or more in any one year. Accordingly, the OCC and OTS have not

38

prepared a budgetary impact statement or specifically addressed the regulatory alternatives

considered.

List of Subjects

12 CFR Part 30

Banks, banking, Consumer protection, National banks, Privacy, Reporting and

recordkeeping requirements.

12 CFR Part 208

Banks, banking, Consumer protection, Federal Reserve System, Foreign banking, Holding

companies, Information, Privacy, Reporting and recordkeeping requirements.

12 CFR Part 211

Exports, Federal Reserve System, Foreign banking, Holding companies, Investments,

Privacy, Reporting and recordkeeping requirements.

12 CFR Part 225

Administrative practice and procedure, Banks, banking, Federal Reserve System, Holding

companies, Privacy, Reporting and recordkeep

This text is long and has been trimmed here. Open the source document for the complete record.