Last updated March 30, 2022.
Currently, financial institutions are required to report a cyber event to their primary federal regulator under very specific circumstances. This requirement dates back to GLBA, Appendix B to Part 364 and states that FI incident response plans (IRP’s) should contain procedures for: “Notifying its primary Federal regulator as soon as possible when the institution becomes aware of an incident involving unauthorized access to or use of sensitive customer information…”. Customer notification guidance is very similar. Institutions should provide notice to their customers as soon as possible: “If the institution determines that misuse of its information about a customer has occurred or is reasonably possible.” (It’s important to note here that a strict interpretation of “…access to or use of…” would generally not include a denial of access (DDoS) type of attack, or a ransomware attack that locks files in place. We strongly suggest modifying the definition of “misuse” in your incident response plan to say “…access to, denial of access to, or unauthorized use of…”.) However, with the issuance of the final rule (officially called “Computer-Security Incident Notification Requirements for Banking Organizations and Their Bank Service Providers”) institutions will have additional considerations that will require changes to your policies and procedures.
Late in 2020 the FDIC issued a joint statement press release with the OCC and the Federal Reserve announcing the proposed changes. As is the case for all new regulations, they were first published in the Federal Register, which started the clock on a 90-day comment period, which ended on April 12 of 2021. (We took an early look at this back in July.)
The new rule was approved on November 2021 by the OCC, Federal Reserve, and FDIC1 collectively, with a proposed effective date of April 1, 2022, and a compliance date of May 1, 2022. Simply put, it will require “…a banking organization to provide its primary federal regulator with prompt notification of any “computer-security incident” that rises to the level of a “notification incident.”
To fully understand the requirements and new expectations of this rule, there are actually three terms we need to understand; a computer security incident, a notification incident, and “materiality”.
Keys to Understanding the New Rule
A computer-security incident could be anything from a non-malicious hardware or software failure or the unintentional actions of an employee, to something malicious and possibly criminal in nature. The new rule defines computer security incidents as those that result in actual or potential harm to the confidentiality, integrity, or availability of an information system or the information the system processes, stores, or transmits.
A notification incident is defined as a significant computer-security incident that has materially disrupted or degraded, or is reasonably likely to materially disrupt or degrade, a banking organization’s:
- Ability to carry out banking operations, activities, or processes, or deliver banking products and services to a material portion of its customer base, in the ordinary course of business
- Business line(s), including associated operations, services, functions, and support, that upon failure would result in a material loss of revenue, profit, or franchise value; or
- Operations, including associated services, functions and support, as applicable, the failure or discontinuance of which would pose a threat to the financial stability of the United States.
The third term that needs to be understood is “materiality“. This term is used 97 times in the full 80 page press release, so it is clearly something the regulators expect you to understand and establish; for example, what is a “material portion of your customer base”, or “material loss of revenue”, or a “material disruption” of your operations? Unfortunately the regulation does not provide a universal definition of materiality beyond agreeing that it should be evaluated on an enterprise-wide basis. Essentially, each banking organization should evaluate whether the impact is material to their organization as a whole. This would seem to suggest that these material threshold levels would need to be defined ahead of time, perhaps as a function of establishing Board-approved risk appetite levels or perhaps it could be tied to the business impact analysis? Future clarification may be necessary on the best approach to establishing the determination of materiality in your organization, but since the term is at the centerpiece of the rule, and initiation of the 36 hour threshold for notification doesn’t begin until it has been established, we can definitely expect materiality to be a part of the discussion in the event of regulator scrutiny in this area.
Any event that meets the criteria of a notification incident would require regulator notification “as soon as possible”, and no later than 36 hours after you’ve determined that a notification event has occurred. It’s important to understand that the 36 hour clock does not start until there has been a determination that the incident has been classified as a notification event, which only happens after you’ve determined you’ve experienced a computer-security incident.
The Safe Systems Compliance Team has created a detailed decisioning flowchart to assist with your understanding of this new rule. Click here for a copy of the flowchart.
Notification can be provided to the “…appropriate agency supervisory office, or other designated point of contact, through email, telephone, or other similar method that the agency may prescribe.” No specific information is required in the notification other than that a notification incident has occurred. The final rule also does not prescribe any specific form or template that must be used, and there are no recordkeeping requirements beyond what may be in place if a Suspicious Activity Report (SAR) is filed in connection with the incident. The agencies have all issued additional “point-of-contact” guidance:
For FDIC institutions:
Notification can be made to your case manager (your primary contact for all supervisory-related matters), to any member of an FDIC examination team if the event occurs during an examination, or if our primary contact is unavailable, you may notify the FDIC by email at: email@example.com.
For OCC Institutions:
Notification may be done by emailing or calling the OCC supervisory office. Communication may also be made via the BankNet website, or by contacting the BankNet Help Desk via email (BankNet@occ.treas.gov) or phone (800) 641-5925.
For Federal Reserve Institutions:
Notification may be made by communicating with any of the Federal Reserve supervisory contacts or the central point of contact at the Board either by email to firstname.lastname@example.org or by telephone to (866) 364-0096
One final note, we’ve received indications that at least some State Banking regulators will require concurrent notification of any incident that rises to the level of a notification incident. Check with your State regulators on if (and how) they plan to coordinate with this new rule.
Third-party Notification Rules
In addition to FI notification changes, there will also be new expectations for third-party service providers, like core providers and significant technology service providers (as defined in the BSCA). Basically, it would require a service-provider to “…notify at least one bank-designated point of contact at affected banking organization customers immediately after experiencing a computer-security incident that it believes in good faith could disrupt, degrade, or impair services provided subject to the BSCA for four or more hours.”
Furthermore, if you are notified by a third-party that an event has occurred, and the event has or is likely to result in your customers being unable to access their accounts (i.e. it rises to the level of a notification incident), you would also be required to report to your regulator. However, it’s important to note here that not all third-party notification incidents will also be considered bank regulator notification incidents. It is also significant that the agencies will most likely not cite your organization because a bank service provider fails to comply with its notification requirement, so you will likely not be faulted if a third-party fails to notify you.
There will undoubtedly be clarification on the specifics of rule implementation as we digest feedback from regulatory reviews next year, and we’ll keep you posted as we know more. In the meantime, aside from having internal discussions about what constitutes “materiality” in your organization, the new rules will likely also require some modifications to your Incident Response Plan (IRP), and possibly to key vendor contracts. For FDIC institutions, the “as soon as possible” regulator notification provisions of FIL-27-2005 already in your IRP will have to be amended. For all critical vendors, ensure that contracts contain verbiage committing them to the 4 hour outage criteria for notification, and that you’ve identified a contact person or persons within your organization to receive the alert.