Laying Down the Law

Enormous legislative response focuses on mandating controls and customer disclosure

• By Guy Morgan
• Sep 01, 2006

THE legal environment for small businesses has dramatically changed over the past few years, starting with the fraudulent activities of companies, such as Enron, along with the rash of high profile information thefts at Choicepoint and Lexis-Nexis. Enormous legislative response has been focused on mandating controls and ensuring consumer disclosure to be put in place by business to protect. While directed at larger businesses, these laws directly affect all small, publicly-traded companies.

Today, even the smallest of publicly-traded companies are required to adhere to an ever-growing morass of legal requirements focused on two primary areas -- internal controls governance and information privacy.

Today, even the smallest of publicly-traded companies are required to adhere to an ever-growing morass of legal requirements focused on two primary areas -- internal controls governance and information privacy.

The focus on internal controls stems directly from the massive fraud at Enron and is part of an overall attempt to strengthen overall corporate governance. There is a growing awareness that internal controls are predominantly operational security controls.

People are more aware of information privacy because of the existence of the California law that requires companies to notify consumers when unauthorized, third parties have gained access to personal information.

Details on how much information theft is perpetrated are difficult to ascertain due to companies' reluctance to disclose information. One method used by www.privacyrights.org is to track public disclosures required by California state law. The site reports that from June 2005 to June 2006, there have been more than 170 significant breaches affecting the personal information of more than 42 million people.

Legislation
The primary information security requirements that small businesses must follow are Sarbanes-Oxley, for internal controls, and Gramm-Leach-Bliley Act, FTC, state disclosure laws and HIPAA for information privacy.

The Sarbanes-Oxley Act requires management personnel to state in annual reports how they have addressed a range of internal controls among other corporate governance issues. Sarbanes-Oxley applies to any publicly-traded company. The act is relatively non-specific about the controls required, but does address information technology activities such as change control systems, document retention policies, segregation of duties and access log controls.

GLBA protects against unauthorized access and anticipated threats or hazards to security or integrity. It applies to companies that offer financial products or services to individuals, like loans, financial or investment advice or insurance. The law requires companies to ensure the security and confidentiality of customer information, protect against security threats and protect against unauthorized access.

The Federal Trade Commission's Safeguards Rule implements the security provisions of GLBA. Companies must have in place a comprehensive security program to ensure the security and confidentiality of customer information. This applies to a wide range of businesses, including check-cashing businesses, data processors, mortgage brokers, non-bank lenders, personal property or real estate appraisers, professional tax preparers, courier services and retailers that issue credit cards to consumers.

California's Notice of Security Breach Act applies to any company with a registered agent in California or who does business with a California customer. Similar laws exist in several states, including Arkansas and Texas.

The law requires customers to be notified when unauthorized users have acquired their personal and/or financial information, thereby giving them the opportunity to take proactive steps to ensure that they do not become victims of identity theft. The law requires notification sent to affected parties upon a breach of non-encrypted data. Data is defined to be "name" plus any or all of the following: Social Security and driver license number, account number and debit or credit card information.

HIPAA requires the protection of all individually identifiable health information, as well as the confidentiality, integrity and availability of the information. HIPAA applies to any company or institution that collects or maintains identifiable health information. HIPAA defines two primary areas of security requirements -- privacy standards and safeguard standards.

Privacy standards require activities such as privacy policies and procedures, a designated a privacy official, workforce training on policies, technical safeguards and records retention. Security standards address three broad categories of activities required by the company; administrative, physical and technical services. Some activities required are integrity controls, access controls, intrusion detection and audit trails.

Proposed Regulations
Legislative action has moved into high gear at both the state and federal level. The Internet Alliance reports that more than 168 data security breach bills has been introduced in 39 states since the California law. Nineteen of the bills have been enacted. This patchwork approach sets the stage for federal legislation.

There are 10 pieces of legislation before Congress. Among them, the commerce, judiciary and the banking committees have all competing legislations in play that address some form of consumer notification after a security breach.

The Consumer Data Security and Notification Act amends GLBA to require disclosure of security breaches by financial institutions. The Data Security Act creates a national data protection and breach notification standard for retailers and government agencies to maintain strong internal safety protections. The Information Protection and Security Act requires that data brokers "ensure data accuracy and confidentiality, authenticate and track users, detect and prevent unauthorized activity and mitigate potential harm to individuals."

What's a Company to Do?
Small, publicly-traded businesses are in a tough position with fewer resources, smaller budgets and the same legal requirement. There is the fear that what is put in place today may not meet new or changing legislative requirements. Surely, the most prudent course of action is to focus on adhering to the activities defined across several laws. Closer inspection reveals that most of the legislation, in fact, does define very similar activities.

Companies should establish a framework for security activities that fosters accountability and performance monitoring. This process should focus on continuously gathering and analyzing information to identify actual threats and vulnerabilities. This process should place accountability for actions, so remediation can be tracked and measured. Finally, auditable security processes should be in place so that document controls are effective and performing as intended.

Some specific activities that should fit into this framework are a good security audit logging process, an intrusion detection and response process and auditable information security controls.