Assessing the privacy and cybersecurity practices of third-party service providers is critical not only for employee personal information, but also for confidential and personal information pertaining to an organization’s business and its clients, customers, patients, students, etc. The Federal Trade Commission (FTC) announced a settlement on December 15 with a financial institution that it claimed failed to oversee the data security practices of one of its third-party service providers as required under the  Gramm-Leach Bliley Act’s Safeguards Rule.

The Safeguards Rule requires financial institutions to develop, implement, and maintain a comprehensive information security program. As part of that program, financial institutions must oversee their third-party vendors, by ensuring they are capable of implementing and maintaining appropriate safeguards for customer information, and requiring them to do so by contract. The FTC alleged the financial institution in this case failed to do this.

Oversight of vendors is a critical part of any comprehensive data security program, particularly where those vendors can put sensitive consumer data at risk,” said Andrew Smith, Director of the FTC’s Bureau of Consumer Protection. “If you’re a financial company, vendor oversight is not just a good idea, it’s the law.”

In this case, the FTC alleges the financial institution’s vendor, which performed text recognition scanning on mortgage documents, stored the contents of the documents on a cloud-based server in plain text, without any protections to block unauthorized access, such as requiring a password or encrypting the information. And, according to the FTC, the financial institution (i) failed to adequately vet the vendor at issue and other vendors; (ii) did not have safeguard requirements in all vendor contracts; and (iii) did not conduct risk assessments of all of its third-party vendors, as required under the Safeguards Rule. Unfortunately, the complaint claims the server was accessed dozens of times and the documents on the server contained sensitive information about mortgage holders and others, such as names, dates of birth, Social Security numbers, loan information, credit and debit account numbers, drivers’ license numbers, or credit files.

It is important to note that similar statutory and regulatory requirements exist at the state level and at the federal level outside of the financial services industry. Here are some examples:

  • Under HIPAA, covered entities that work with certain third parties, known as business associates, must enter into “business associate agreements” setting out extensive contractual obligations on the business associate for privacy and security, which also apply directly to the business associate.
  • The New York Stop Hacks and Improve Electronic Data Security Act (SHIELD Act) requires “[a]ny person or business which owns or licenses computerized data which includes private information” of a resident of New York to “select[] service providers capable of maintaining appropriate safeguards, and require[] those safeguards by contract.”
  • Businesses subject to the data security regulations in Massachusetts, 201 CMR 17.00, must oversee service providers by (i) taking reasonable steps to select and retain those that are capable of maintaining appropriate security measures to protect such personal information consistent with the Massachusetts regulations and any applicable federal regulations, and (ii) requiring such service providers by contract to implement and maintain such appropriate security measures.
  • Several other states have similar requirements, including California, Colorado, Oregon, and Rhode Island.

The FTC’s proposed settlement requires the financial institution to, among other things:

  • undergo biennial assessments of the effectiveness of its data security program by an independent organization, which the FTC has authority to approve.
  • have a senior company executive annually certify the institution is complying with the final FTC order.
  • report any future data breaches to the FTC within 10 days of notifying other federal or state government agencies.

We discussed here some steps organizations could take to assess their third-party service providers’ capabilities concerning privacy and data security. Of course, these are not the only steps that an organization might include in a vendor management program. Those steps would be a function of the organization’s own risk assessment of the nature and extent of the sharing and processing of sensitive data it engages in with third-party service providers. Of course, at a minimum, any organization should be sure the master services agreement with the vendor includes a requirement that reasonable safeguards concerning personal information be maintained by the vendor. Regardless of the actual steps taken to address this risk, organizations should be regularly assessing the privacy and cybersecurity risks presented by third-party service providers and how to address them. And, remember that as many such organizations are themselves service providers, they too may find themselves under increased scrutiny in this regard.

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Photo of Joseph J. Lazzarotti Joseph J. Lazzarotti

Joseph J. Lazzarotti is a principal in the Berkeley Heights, New Jersey, office of Jackson Lewis P.C. He founded and currently co-leads the firm’s Privacy, Data and Cybersecurity practice group, edits the firm’s Privacy Blog, and is a Certified Information Privacy Professional (CIPP)…

Joseph J. Lazzarotti is a principal in the Berkeley Heights, New Jersey, office of Jackson Lewis P.C. He founded and currently co-leads the firm’s Privacy, Data and Cybersecurity practice group, edits the firm’s Privacy Blog, and is a Certified Information Privacy Professional (CIPP) with the International Association of Privacy Professionals. Trained as an employee benefits lawyer, focused on compliance, Joe also is a member of the firm’s Employee Benefits practice group.

In short, his practice focuses on the matrix of laws governing the privacy, security, and management of data, as well as the impact and regulation of social media. He also counsels companies on compliance, fiduciary, taxation, and administrative matters with respect to employee benefit plans.

Privacy and cybersecurity experience – Joe counsels multinational, national and regional companies in all industries on the broad array of laws, regulations, best practices, and preventive safeguards. The following are examples of areas of focus in his practice:

  • Advising health care providers, business associates, and group health plan sponsors concerning HIPAA/HITECH compliance, including risk assessments, policies and procedures, incident response plan development, vendor assessment and management programs, and training.
  • Coached hundreds of companies through the investigation, remediation, notification, and overall response to data breaches of all kinds – PHI, PII, payment card, etc.
  • Helping organizations address questions about the application, implementation, and overall compliance with European Union’s General Data Protection Regulation (GDPR) and, in particular, its implications in the U.S., together with preparing for the California Consumer Privacy Act.
  • Working with organizations to develop and implement video, audio, and data-driven monitoring and surveillance programs. For instance, in the transportation and related industries, Joe has worked with numerous clients on fleet management programs involving the use of telematics, dash-cams, event data recorders (EDR), and related technologies. He also has advised many clients in the use of biometrics including with regard to consent, data security, and retention issues under BIPA and other laws.
  • Assisting clients with growing state data security mandates to safeguard personal information, including steering clients through detailed risk assessments and converting those assessments into practical “best practice” risk management solutions, including written information security programs (WISPs). Related work includes compliance advice concerning FTC Act, Regulation S-P, GLBA, and New York Reg. 500.
  • Advising clients about best practices for electronic communications, including in social media, as well as when communicating under a “bring your own device” (BYOD) or “company owned personally enabled device” (COPE) environment.
  • Conducting various levels of privacy and data security training for executives and employees
  • Supports organizations through mergers, acquisitions, and reorganizations with regard to the handling of employee and customer data, and the safeguarding of that data during the transaction.
  • Representing organizations in matters involving inquiries into privacy and data security compliance before federal and state agencies including the HHS Office of Civil Rights, Federal Trade Commission, and various state Attorneys General.

Benefits counseling experience – Joe’s work in the benefits counseling area covers many areas of employee benefits law. Below are some examples of that work:

  • As part of the Firm’s Health Care Reform Team, he advises employers and plan sponsors regarding the establishment, administration and operation of fully insured and self-funded health and welfare plans to comply with ERISA, IRC, ACA/PPACA, HIPAA, COBRA, ADA, GINA, and other related laws.
  • Guiding clients through the selection of plan service providers, along with negotiating service agreements with vendors to address plan compliance and operations, while leveraging data security experience to ensure plan data is safeguarded.
  • Counsels plan sponsors on day-to-day compliance and administrative issues affecting plans.
  • Assists in the design and drafting of benefit plan documents, including severance and fringe benefit plans.
  • Advises plan sponsors concerning employee benefit plan operation, administration and correcting errors in operation.

Joe speaks and writes regularly on current employee benefits and data privacy and cybersecurity topics and his work has been published in leading business and legal journals and media outlets, such as The Washington Post, Inside Counsel, Bloomberg, The National Law Journal, Financial Times, Business Insurance, HR Magazine and NPR, as well as the ABA Journal, The American Lawyer, Law360, Bender’s Labor and Employment Bulletin, the Australian Privacy Law Bulletin and the Privacy, and Data Security Law Journal.

Joe served as a judicial law clerk for the Honorable Laura Denvir Stith on the Missouri Court of Appeals.