Privacy and Information Security: What Every New Business Needs to Know

Building Your Business

Reports of data security breaches conjure up images of anonymous computer hackers sitting in a darkened room, fingers flying over a key board in an effort to hack into a computer system to find valuable information to exploit. Not long ago, most of us considered these breaches to be infrequent and likely targeted at information much more commercially unique than the average consumer data stored by most businesses.

Data breaches have become much more commonplace over the last decade and the information being sought by the intruders is often as mundane as personal identifying information, commonly kept in many corporate databases and paper records that can be easily used for lucrative identity theft. Perhaps even more disturbing, many, if not most, data security breach incidents result not from deliberate intrusion but from carelessness, such as lost or stolen laptops and portable drives, files sent to the wrong e-mail address or mistakenly exposed to public access on the internet, or paper records simply dumped in the garbage where any passer-by can pluck them out. In response, state and federal lawmakers and various government regulatory agencies have woven an evolving, and sometimes contradictory web of laws, rules and regulations meant to protect the privacy and security of many types of personal information, from consumer financial and medical data to student records. For an early-stage company, the liability or reputation damage that arises from a data security breach could be catastrophic. It is critical that new businesses understand the regulatory compliance landscape applicable to the information they maintain, take measures to secure nonpublic personal information, and be prepared to efficiently and effectively deal with any breaches or compromises that occur.

Minimum Information Security Standards

Banks, financial advisors and healthcare providers, among others, are subject to relatively uniform regulatory standards that require certain minimum security measures be taken to protect non-public personal financial and medical information. Typically, businesses in the financial services and healthcare industries, and their service providers, must develop written policies and procedures and implement administrative, technical and physical safeguards designed to protect the security and integrity of non-public personal information. Similarly, federal law requires educational institutions to protect personally identifiable education information about students from improper disclosure.

In addition, Massachusetts and other states have adopted minimum information security standards that apply to non-public personal information. State information security standards can be stricter than federal requirements, and can apply more broadly. The Massachusetts information security standards apply to every business or other person in possession of non-public personal information of a Massachusetts resident, regardless of the industry, size or location of the business. Even businesses that do not collect personal information about their customers are subject to rules that apply to their employees.

Privacy Requirements

The area of privacy law was once primarily concerned with restrictions on the ability of the government to gather and use information about its citizens. The dawn of the information age has given rise to new concerns about how businesses gather and use information about consumers, and lawmakers have responded with various regulatory regimes meant to protect the privacy of consumers. Federal law restricts how businesses may share financial and medical information about consumers with third parties for various purposes. In addition, the Federal Trade Commission has, on more than one occasion, held businesses accountable for alleged violations of their own voluntarily adopted privacy policies. Consumers often expect businesses that interact with customers on the internet to post privacy policies on their websites. A business that does not adhere to its own privacy policy, whether deliberately or inadvertently, exposes itself to liability even if that business is not otherwise subject to legal privacy requirements.

Data Security Breach Preparedness

To date, 47 states and the District of Columbia have enacted laws that impose a duty to report known security breaches involving non-public personal information. Similar federal data security breach notice requirements apply to financial, medical and student records, among other personal information.

The reporting obligations are far from uniform. Notification requirements in some states, such as Florida and Arizona, apply only to the loss of electronic data. In Massachusetts and other states, notice requirements apply to electronic and paper records containing personal information. There are also variations related to the timing of any required notice, which government authorities must be notified, and the content of the notices.

What Every Business Should Do

Regardless of the nature or size of the business, every company should consider developing and implementing a comprehensive written information security program. Each company’s record retention and disposal policy and privacy policy should be integrated with its information security program. The company’s board of directors or highest governing body should review and approve each policy and designate a senior management official to be responsible for supervising the policy. Finally, each policy should be reviewed for compliance with applicable law and adequacy of security measures no less than annually, whenever there is a material change in the company’s business practices or IT infrastructure, and in all cases after any data security breach.

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This article was prepared by Matthew Hanaghan, a member of the Emerging Companies Group at Nutter. For more information, please contact Matt or your Nutter attorney at 617.439.2000
This article is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising. © 2017 Nutter McClennen & Fish LLP.

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