Laws at the federal and state levels are altering the landscape for sharing and protecting sensitive customer information, just as widely publicized breaches at companies like Bank of America, ChoicePoint, DSW Shoe Warehouse, and LexisNexis have focused attention on the problem of ID theft.
Several states, including Arkansas, Georgia, Montana, and North Dakota, have implemented ID-theft laws patterned after a law in California, and many other states have legislation pending. Observers say a national ID-theft-protection bill also is likely to be enacted.
In March several federal agencies--the Federal Reserve System, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, and the Office of Thrift Supervision--jointly issued the Interagency Guidance on Response Programs for Unauthorized Access to Customer Information and Customer Notice. The guidelines state that financial institutions should implement a response program to address security breaches involving customer information, including procedures to notify customers about incidents of unauthorized access to customer information that could result in substantial harm or inconvenience to the customer.
The guidelines also provide that when a financial institution becomes aware of an incident of unauthorized access to sensitive customer information, it should conduct a reasonable investigation to determine whether the information has been or will be misused.
The interagency guidelines apply only to financial institutions or businesses that are regulated by the agencies that issued them. Morgan Stanley's Discover Card division, for example, is covered, while its broker-dealer business isn't, said Howard Lipper, executive director of the technology, intellectual property, and E-commerce group at Morgan Stanley. Lipper spoke at an information security session hosted by law firm Steptoe & Johnson in New York on Friday.
The Securities and Exchange Commission, however, is likely to adopt the guidelines verbatim, Lipper said. Brokerage firms are likely to "face some very tough questions on information security practices during their next audit."
The Federal Trade Commission is likely to adopt many provisions of the interagency guidelines as it seeks to extend data-privacy protection across all industries. "The FTC wants to be the traffic cop on information security, but the problem is a traffic cop can't be everywhere," said Emily Hancock, an attorney in Steptoe & Johnson's Washington office. She noted that California and Arkansas are the only states so far to have adopted provisions requiring both notification of breaches and "reasonable security" to prevent breaches.
A patchwork of state and federal laws, each with different standards of notification, could raise the compliance costs without providing corresponding increases in data security, said Mark MacCarthy, senior VP of public policy at Visa U.S.A. "Simply passing a new bill isn't going to make these things go away." He suggested that market forces, such as the impact on a company's reputation, would compel companies to adopt tighter security procedures.