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BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C.  20551
DIVISION OF BANKING
SUPERVISION AND REGULATION

SR 97-32 (SUP)
December 4, 1997
TO THE OFFICER IN CHARGE OF SUPERVISION AND APPROPRIATE
    SUPERVISION AND EXAMINATION PERSONNEL AT EACH FEDERAL
    RESERVE BANK AND TO DOMESTIC AND FOREIGN BANKING
    ORGANIZATIONS SUPERVISED BY THE FEDERAL RESERVE
SUBJECT: Sound Practices Guidance for Information Security for Networks
                        Growth in the use of computer networks has heightened the interest of
supervisors and managers of banking organizations in the quality and integrity of information
security systems. The Federal Reserve System recognizes that effective and reliable
information security policies and procedures are essential to maintaining public trust and
confidence in our banking and financial system. Thus, it has a vital interest in encouraging
banking organizations to take appropriate precautions as they increasingly provide services
and information in electronic form and especially in the open environment of the Internet.
Adverse financial, operational, reputational, and legal consequences can result from
ineffectively managing the security of these networks and computers. Active board and
management oversight are needed to ensure that risks are adequately assessed, that spending
on information security is appropriate to reduce the risks, and that a comprehensive
information security program is in place to provide protection.
                        In 1996, the Federal Reserve Bank of New York formed a team to benchmark
sound information security policies and practices. The team interviewed a cross-section of
Second District financial services institutions as well as security firms, service providers,
common carriers, CPA firms, and other industry-related organizations. In addition, thirteen
selected institutions were interviewed by teams from the Federal Reserve Banks of Chicago
and San Francisco to validate the team's initial findings. The results are contained in the
attached paper entitled "Sound Practices Guidance for Information Security for Networks."
This SR letter and the sound practices paper should be distributed to appropriate examination
personnel, and to the chief executive officer of each domestic and foreign banking
organization supervised by the Federal Reserve.
                        The guidance presented in the paper does not constitute a regulation and
should not be interpreted as such. Rather, the paper outlines the types of prudent and
effective measures that financial services institutions have implemented, are in the process of
implementing, or plan to implement to protect information and ensure its integrity,
availability, and confidentiality. The key points made in the paper are:

A strong information security program is essential. A strong
comprehensive information security program establishes the necessary
structure and accountability to manage risks, and fosters awareness
throughout the organization that information security is an important
cultural value. A strong information security program includes active
board and management oversight, policies and procedures, measurement
and monitoring systems and ongoing internal controls. Boards of directors
and senior management are responsible for ensuring that spending on
information security is appropriate to the magnitude and nature of the
risks.
Internal network security issues need special attention. The vulnerabilities
of internal networks may be less obvious to banking organizations than
networks connected to the Internet, yet these internal systems are
vulnerable to a wide variety of intrusion tactics. Internal attacks are
potentially the most damaging because an institution's personnel, which
can include consultants as well as employees, may have authorized access
to critical computing resources.
Confidential information needs to be encrypted. The confidentiality of
data transmitted over public networks is vulnerable to risks in addition to
those identified for internal networks. "Dedicated" or "leased" lines may
provide an inappropriate sense of security. These lines use the
infrastructure of public networks and therefore are vulnerable to the same
attacks as the public networks themselves.
Internet connections need to be carefully constructed. An institution's
Internet site is exposed to worldwide attack. As more products and
services are offered via the Internet, the opportunities for attack increase.
The greatest risk is associated with sites that have a path to the institution's
internal network, thereby providing unauthorized individuals with a link,
however convoluted, to attack internal networks and gain access to an
institution's information assets.
The backgrounds of employees in especially sensitive positions need to be
checked. Information technology personnel such as systems
administrators, telecommunications support staff, systems programmers
and others may have access to sensitive information, detailed knowledge
about security methods and procedures, or both. Therefore, it is important
to subject them to rigorous background checks.
Management must decide on benefits and costs. Protecting networks to
minimize financial, operational, reputational, and legal risks can require
the dedication of significant resources. Senior management is responsible
for evaluating the costs and benefits of alternative security measures and
deciding the best allocation of the institution's resources.
                        Although there are risks associated with private local and wide area networks
and the Internet, they can be managed by a comprehensive information security program.
Institutions should view sound practices in the context of their own needs and budgets and
implement those that are appropriate.
                        Questions on the Federal Reserve Board's supervisory approach to
information security matters may be addressed to Mr. Michael G. Martinson, Deputy

Associate Director, Federal Reserve Board (202-452-3640). Questions on the contents of the
paper may be addressed to Mr. George R. Juncker, Vice President (212-720- 6491), or its
principal authors, Mr. Robert W. Dabbs, Assistant Vice President (212-720- 5937), and Mr.
Joseph L. Galati, II, Examining Officer (212-720-7946), at the Federal Reserve Bank of New
York.

Richard Spillenkothen
Director
ATTACHMENT TRANSMITTED ELECTRONICALLY BELOW

Suggested Transmittal Letter
to the Chief Executive Officer or General Manager of
Each Bank Holding Company, State Member Bank,
U.S. Branch and Agency of a Foreign Bank, and Edge Corporation
Subject:  Sound Practices for Information Security for Networks
Dear ____________________:
                        The enclosed letter from the Federal Reserve Board's Division of Banking
Supervision and Regulation and the accompanying paper, prepared by supervision staff of
the Federal Reserve Bank of New York, contain important information on sound information
security practices to address risks associated with computer networks. A version of this
paper was distributed at a security conference sponsored by the Federal Reserve Bank of
New York on September 24, 1997. Presentation materials from the conference are available
at the Bank's web site at www.newyorkfed.org/pihome/news/speeches.
                        The guidance presented in the paper does not constitute a regulation and
should not be interpreted as such. However, the paper outlines the types of prudent and
effective measures that financial services institutions have implemented, are in the process of
implementing, or plan to implement to protect information and ensure its integrity,
availability, and confidentiality. In this connection, the paper may provide insights and
assistance in designing an effective information security program and secure automation
systems.
                        It is suggested that the letter and the paper be distributed within your
organization to senior management and others with responsibility for network security.
                        Should you or your staff have any questions regarding this topic, please
contact ______________ at this Reserve Bank, or the contacts identified in the Board's letter.
Enclosures

Sound Practices Guidance for Information Security for Networks (146 KB PDF)
SR letters | 1997
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