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California Security Law Background

The state passes a tough law regarding public disclosure of security breaches after a hacker breaks in to a state employee database.

Beginning July 1, a new California law, SB 1386, goes into effect requiring any company that does business in the state to report security breaches that involve personally identifiable financial information. Here's an roundup of the genesis of the law, information on how companies will be required to disclose security breach information, and a look at a similar federal law on the way.

In April 2002, a hacker accessed computers run by the California payroll department. The system held the Social Security numbers, names, and salary information of more than 260,000 state employees. It reportedly took two months before these employees became aware that a hacker might have illegally accessed sensitive information. As a result of this incident, California lawmakers passed SB 1386 to give Californians a heads up in the event that they could become identity-theft victims as a result of their personal financial data being accessed without authorization.

Since most midsize and large companies are likely to have customers who live in California, the law could become a de facto national standard.

Companies that suffer a security breach covered by SB 1386 have several options for informing affected Californians of the breach. They can contact customers with a written notice or an electronic notice, as long as the electronic notice is consistent with federal law surrounding electronic records and signatures. However, the notices can be sent via E-mail or a "conspicuous" posting on the breached company's Web site if the company can demonstrate that the cost of providing written notice would exceed $250,000, that the number of affected Californians exceeds 500,000, or that the breached organization doesn't have adequate electronic contact information. Major statewide media can also be used as a form of notice.

The purpose of the law is to help consumers by giving them quick notice of security breaches that involve their information and to better fight identity fraud. The reasoning behind the law, lawyers say, is that people who are quickly notified that their financial information was accessed without authorization can better prepare for potential trouble by monitoring their credit reports, changing banking pass codes, and having their credit files placed on a fraud watch.

Federal laws in development also will affect the way many companies must handle unauthorized access to certain forms of customer information, says March Rasch, the former head of the U.S. Justice Department's computer-crimes unit and current senior VP and head of cyberlaw at managed security services firm Solutionary Inc. A bill in the U.S. House of Representatives called the Identity Theft Consumer Notification Act would, if passed, require financial institutions to promptly notify and assist customers whose personal information is breached. It would also require financial institutions to reimburse consumers for losses related to the compromise, including fees to obtain, investigate, and correct their credit reports, Rasch says.

Identity theft is a big problem across the country. The Los Angeles County Sheriff's Department alone reported that the 1,932 identity-theft cases it received in the year 2000 represented a 108% increase over the previous year's caseload, according to the California bill. Nationally, experts say identity theft is growing at a rate of more than 100% annually. Gartner VP and research director Avivah Litan says 7% of online adult consumers surveyed by the research firm in September reported being victimized by credit-card fraud, and 1% reported having their identities stolen.

The full text of SB 1386 Senate bill is available here.

Return to main story, California's New Rules Of Disclosure

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