Security Scramble

Financial companies up against deadline

Y2K provided the scare of 1999. For financial institutions, the worrisome acronym today is GLB.

Short for the federal banking law known as the Gramm-Leach-Bliley Financial Services Modernization Act, GLB, like Y2K, comes with a deadline. By July 1, all financial entities in the country are supposed to have policies and infrastructure in place to assure the privacy and security of consumer-related information. A growing portion of that data is now gathered and transmitted via the Internet.

The GLB concept is laudable. Security and privacy are valuable commodities. But many institutions are not ready -- and wont be ready -- to meet the looming deadline for security. Although no statistics are available, anecdotal evidence from security analysts, lawyers and consultants suggests that hundreds, perhaps thousands, of companies either arent aware of the GLB or are waiting to see if, and how, the feds enforce it.

Dean Harvey, a partner in the Austin, Texas, office of law firm Vinson & Elkins, said the entities that understand GLB "are afraid because theyre not ready. Those that dont understand it are afraid because they dont know where to begin."

Further complicating the GLB readiness issue: the vast number of entities affected. Banks, credit unions, credit-card issuers, insurance companies, mortgage companies, money transmitters, tax preparers, financial planners -- any entity that uses personally identifiable information about a consumers finances -- must comply with GLB.

Busloads of companies fit that description. The U.S. is home to about 10,000 commercial banks and 11,000 credit unions. Add in a few thousand representatives from each of the other sectors, as well as vendors that provide information services to those entities, and it appears regulators will be kept exceedingly busy.

Responsibility for policing the statute will be spread among an alphabet soup of agencies, including the FDIC, FRS, FTC, NCUA, OCC, OTS and SEC. For those keeping score at home, thats the Federal Deposit Insurance Corporation, Federal Reserve System, Federal Trade Commission, National Credit Union Administration, Office of the Comptroller of the Currency, Office of Thrift Supervision, and Securities and Exchange Commission.

Some regulators are not convinced there will be a problem. "We are not aware that our credit unions are having trouble complying with the Act," said Brian Olexy, a spokesman at the NCUA.

John Byrne, senior counsel at the American Bankers Association, a trade group, goes further, saying that much of the talk about problems related to the GLB is hype generated by security firms and consultants that "want us to hire them."

Banks are taking care of security because their business depends on it, Byrne said. Over the past few years, a few banks have made mistakes regarding privacy and security, and those mistakes, "hurt their reputations," he said. "If thats not an incentive, I dont know what is."

Signed into law in late 1999, the GLB is named for its principal sponsors: U.S. Sen. Phil Gramm, R-Texas; U.S. Rep. Jim Leach, R-Iowa; and former U.S. Rep. Thomas Bliley, R-Va. Their bill removed the Depression-era regulations that prohibited mergers between banks, insurance companies, brokerage firms and other financial institutions.

The measure also included broadly written language regarding privacy and security. The privacy disclosure aspect has pushed financial entities into a snail-mail frenzy. By July 1, a billion or more privacy policy notices will be mailed to consumers. Each entity must tell its clients about its privacy policies, with whom their financial information is shared, how security is maintained and how consumers can limit or "opt out" of a companys information sharing plans.

But licking stamps on disclosure forms is far easier than keeping up with the ever-changing digital security business. GLB requires financial entities to perform six tasks: create a written policy that is approved and overseen by the board of directors; employ generally accepted security practices; perform a risk assessment; respond to changes in the security landscape, such as new viruses; perform regular security tests; and, perhaps most troublesome, get written assurance from third-party vendors that they have security procedures and policies in place.

Out of Control

Its that last provision that concerns Byrne. "Thats the hardest part, because we dont control it," he said. For example, if a bank uses a third-party vendor to process its checks, the vendor must assure the bank in writing that it has adequate security measures in place. But the bank has no way to be certain of that.

Bruce Schneier, Counterpane Internet Securitys co-founder and chief technical officer, takes a dim view of GLB readiness. "I dont think anybodys prepared," said Schneier, who authored Secrets and Lies: Digital Security in a Networked World, which was released last year. "Itd be odd if they were," he added. "We dont know the ramifications. We dont know what it means. We dont know how regulators are going to respond."

Interviews with regulators at the FTC appear to confirm Schneiers concern. The FTC will oversee GLB compliance for loan brokers, payday lenders and similar nonbank entities. But the agency doesnt know exactly how many businesses its responsible for, nor does it have an overall enforcement strategy.

Peggy Twohig, the FTCs assistant director for financial practices, said the agency will check on the businesses, but added that its "fair to say" their investigations are "going to be less comprehensive" than those done by other agencies, such as the FDIC.

Ellen Zimiles, a partner at KPMGs forensics and litigation services practice, said companies were "jaded by Y2K." The lights stayed on and no one died. Those facts are leading many companies to discount the GLBs importance. The only thing that will change that is regulation. "Until some fines or enforcement happens, companies covered by this law are not going to take action," she said.