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[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]

 
   DATA SECURITY: THE DISCUSSION DRAFT OF DATA PROTECTION LEGISLATION

=======================================================================

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                COMMERCE, TRADE, AND CONSUMER PROTECTION

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 28, 2005

                               __________

                           Serial No. 109-48

                               __________

      Printed for the use of the Committee on Energy and Commerce

 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house

                               __________

                 U.S. GOVERNMENT PRINTING OFFICE

22-989PDF              WASHINGTON : 2005
_________________________________________________________________
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                    ------------------------------  

                    COMMITTEE ON ENERGY AND COMMERCE

                      JOE BARTON, Texas, Chairman

RALPH M. HALL, Texas                 JOHN D. DINGELL, Michigan
MICHAEL BILIRAKIS, Florida             Ranking Member
  Vice Chairman                      HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RICK BOUCHER, Virginia
PAUL E. GILLMOR, Ohio                EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia                 FRANK PALLONE, Jr., New Jersey
ED WHITFIELD, Kentucky               SHERROD BROWN, Ohio
CHARLIE NORWOOD, Georgia             BART GORDON, Tennessee
BARBARA CUBIN, Wyoming               BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois               ANNA G. ESHOO, California
HEATHER WILSON, New Mexico           BART STUPAK, Michigan
JOHN B. SHADEGG, Arizona             ELIOT L. ENGEL, New York
CHARLES W. ``CHIP'' PICKERING,       ALBERT R. WYNN, Maryland
Mississippi, Vice Chairman           GENE GREEN, Texas
VITO FOSSELLA, New York              TED STRICKLAND, Ohio
ROY BLUNT, Missouri                  DIANA DeGETTE, Colorado
STEVE BUYER, Indiana                 LOIS CAPPS, California
GEORGE RADANOVICH, California        MIKE DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire       TOM ALLEN, Maine
JOSEPH R. PITTS, Pennsylvania        JIM DAVIS, Florida
MARY BONO, California                JAN SCHAKOWSKY, Illinois
GREG WALDEN, Oregon                  HILDA L. SOLIS, California
LEE TERRY, Nebraska                  CHARLES A. GONZALEZ, Texas
MIKE FERGUSON, New Jersey            JAY INSLEE, Washington
MIKE ROGERS, Michigan                TAMMY BALDWIN, Wisconsin
C.L. ``BUTCH'' OTTER, Idaho          MIKE ROSS, Arkansas
SUE MYRICK, North Carolina
JOHN SULLIVAN, Oklahoma
TIM MURPHY, Pennsylvania
MICHAEL C. BURGESS, Texas
MARSHA BLACKBURN, Tennessee

                      Bud Albright, Staff Director
        David Cavicke, Deputy Staff Director and General Counsel
      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

        Subcommittee on Commerce, Trade, and Consumer Protection

                    CLIFF STEARNS, Florida, Chairman

FRED UPTON, Michigan                 JAN SCHAKOWSKY, Illinois
NATHAN DEAL, Georgia                   Ranking Member
BARBARA CUBIN, Wyoming               MIKE ROSS, Arkansas
GEORGE RADANOVICH, California        EDWARD J. MARKEY, Massachusetts
CHARLES F. BASS, New Hampshire       EDOLPHUS TOWNS, New York
JOSEPH R. PITTS, Pennsylvania        SHERROD BROWN, Ohio
MARY BONO, California                BOBBY L. RUSH, Illinois
LEE TERRY, Nebraska                  GENE GREEN, Texas
MIKE FERGUSON, New Jersey            TED STRICKLAND, Ohio
MIKE ROGERS, Michigan                DIANA DeGETTE, Colorado
C.L. ``BUTCH'' OTTER, Idaho          JIM DAVIS, Florida
SUE MYRICK, North Carolina           CHARLES A. GONZALEZ, Texas
TIM MURPHY, Pennsylvania             TAMMY BALDWIN, Wisconsin
MARSHA BLACKBURN, Tennessee          JOHN D. DINGELL, Michigan,
JOE BARTON, Texas,                     (Ex Officio)
  (Ex Officio)

                                  (ii)

                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Burton, Daniel, Vice President of Government Affairs, 
      Entrust, Inc...............................................    35
    Hintze, Michael, Senior Attorney, Microsoft Corporation......    19
    Hoofnagle, Chris, Senior Counsel and Director, Electronic 
      Privacy Information Center, West Coast Office..............    27
    Maier, Fran, Executive Director and President, TRUSTe........    13
Additional material submitted for the record:
    Retail Industry Leaders Association, statement for the record    53

                                 (iii)

   DATA SECURITY: THE DISCUSSION DRAFT OF DATA PROTECTION LEGISLATION

                              ----------                              

                        THURSDAY, JULY 28, 2005

              House of Representatives,    
              Committee on Energy and Commerce,    
                       Subcommittee on Commerce, Trade,    
                                   and Consumer Protection,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:07 a.m., in 
room 2123, Rayburn House Office Building, Hon. Cliff Stearns 
(chairman) presiding.
    Members present: Representatives Stearns, Pitts, Terry, 
Blackburn, Barton (ex officio), Towns, Green, Gonzalez, and 
Baldwin.
    Staff present: David Cavicke, general counsel; Chris Leahy, 
policy coordinator; Shannon Jacquot, counsel; Will Carty, 
professional staff; Billy Harvard, clerk; Chad Grant, clerk; 
Kevin Schweers, communications director; Terry Lane, deputy 
communications director; Consuela Washington, senior minority 
counsel; Jessica McNiece, minority research assistant; and 
Edith Holleman, minority counsel.
    Mr. Stearns. Good morning. I would like to thank, first of 
all, the witnesses for coming before us today and to offer 
their comments and suggestions and helping us to craft a better 
bill and a workable data protection bill that will greatly 
improve the protection and security for all consumers and their 
data.
    Data security breaches are an alarming trend that seems to 
be increasing hand in hand with the cases of identity theft and 
financial fraud in the United States. Identity theft and 
financial fraud represents the fastest growing criminal 
enterprise in the United States. As we learned from the Federal 
Trade Commission in several previous hearings, a recent survey 
showed that almost 10 million people in the United States 
discovered that they were involved in some sort of identity 
theft. That figure translates into almost $50 billion in losses 
for businesses and of course $5 billion for consumers.
    Consumer data breaches and related identity theft crimes 
threaten not only the financial and personal security of every 
consumer in the United States, but also have the potential to 
disrupt and impede commercial activity in every sector of our 
economy.
    Now, not surprisingly, there are now indications that 
consumer confidence in Internet-based and electronic 
transactions is starting to wane as reports mount about 
breaches potentially affecting millions of Americans.
    Regardless of statistics and trends, I would bet that a 
significant percentage of us in the committee room today have 
been touched personally by this problem. I also believe that we 
can not rely solely on law enforcement and existing law for 
protection against breaches and related criminal activity in 
this area.
    The Congress, and this committee in particular, is charged 
with the responsibility to ensure that the entities possessing 
and dealing in sensitive consumer data keep the doors locked 
and the alarm on. We intend to live up to that responsibility. 
The health of our modern network system of commerce demands 
this and all consumers deserve this.
    Data, especially personal data, is the currency of the 
digital world. Given the sheer scope and interconnectivity of 
our fast-moving commercial environment, one simple mistake or 
oversight can leave all of us vulnerable to the lone criminal 
with the ability to victimize millions in an instant. 
Unfortunately, the crooks have discovered a lucrative new 
enterprise exploiting such vulnerabilities. And it is up to us 
to shut them down before they destroy the integrity of the 
data-driven commercial system that so many of us rely on.
    I believe consumers, businesses, and other important 
stakeholders must be empowered with adequate information to 
assess data security risk and provide sufficient incentives to 
encourage the most appropriate means, technical or otherwise, 
to enhance data security.
    My colleagues, at the most basic level, our bill would 
create a uniform national data breach notification regime based 
on risk of potential harm from identity theft. The bill also 
incorporates a number of provisions related to my earlier 
privacy bill that are intended to provide security guidelines 
for entities that keep personal data. I believe that once these 
practices are embraced, renewed consumer confidence in e-
commerce and its multitude of applications will lead to even 
better data security in the marketplace. We need to promote the 
notion that security sells.
    Specifically, our bill contains three major elements. The 
first major element of the bill directs the Federal Trade 
Commission to develop rules for data security, including 
requirements that entities in possession of personal data have 
a security policy, have someone designated as responsible for 
that policy, and have a process for taking preventive and 
corrective action to ensure that policy is as robust as 
required.
    Two, the second main element of the bill relates to the 
special case of information brokers, which are defined in the 
draft as ``companies whose primary business is to compile and 
sell consumer data to third parties''. The bill requires these 
entities to submit their security policy to the Federal Trade 
Commission for audit and approval on an annual basis. In 
addition, any information broker is required to provide those 
who ask a free report of what information the entity holds on 
that individual.
    And last, the last element establishes a national uniform 
standard for consumer notification when there is a security 
breach. A security breach is defined using a risk-based 
standard that relates to the probability that the security 
breach results in a reasonable basis to conclude that identity 
theft may occur. The bill requires timely notification, both 
electronic and through the mail, of consumers affected.
    There are also a number of provisions relating to 
substitute notices in cases where there is a requirement of 
unduly burdensome to a business given its financial conditions.
    I look forward to the comments on our draft bill and would 
like to emphasize that the committee intends to develop this 
legislation through a bipartisan and open process that allows 
for constructive debate and discussion. We will solicit at 
least one or more rounds of comments and work hard to continue 
to refine the bill to best achieve effectiveness with this 
balance.
    So I look forward to our testimony by our witnesses today 
and working together with them on this important piece of 
legislation.
    [The prepared statement of Hon. Clifford Stearns follows;]
Prepared Statement of Hon. Clifford Stearns, Chairman, Subcommittee on 
                Commerce, Trade, and Consumer Protection
    Good morning. I first would like to thank the witnesses before us 
today as well as all who have offered comments and suggestions 
assisting our important work in crafting a robust and workable data 
protection bill that will improve greatly the protection and security 
of consumer data.
    Data security breaches are an alarming trend that seems to be 
increasing hand-in-hand with the cases of identity theft and financial 
fraud in the United States. Identity theft and financial fraud 
represent the fastest growing criminal enterprise in America. As we 
learned from the Federal Trade Commission in several previous hearings, 
a recent survey showed that almost 10 million people in the United 
States discovered that they are involved in some sort of identity 
theft. That figure translates into almost $50 billion in losses for 
business and $5 billion for consumers. Consumer data breaches and 
related identity theft crimes threaten not only the financial and 
personal security of every consumer in America but also have the 
potential to disrupt and impede commercial activity in every sector of 
the U.S. economy. Not surprisingly, there are now indications that 
consumer confidence in Internet-based and other electronic transactions 
is starting to wane as reports mount about breaches potentially 
affecting millions.
    Regardless of statistics and trends, I'd bet that a significant 
percentage of us in the committee room today have been touched 
personally by this menace. I also believe that we cannot rely solely on 
law enforcement and existing law for protection against breaches and 
related criminal activity in this area. The Congress and this great 
Committee, in particular, are charged with the responsibility to ensure 
that the entities possessing and dealing in sensitive consumer data 
keep the doors locked and the alarm on. We intend to live up to that 
responsibility. The health of our modern networked system of commerce 
demands this, and all consumers deserve this. Data, especially personal 
data, is the currency of the digital world. Given the sheer scope and 
interconnectivity of our fast-moving commercial environment, one simple 
mistake or oversight can leave all of us vulnerable to the lone 
criminal with the ability to victimize millions in an instant. 
Unfortunately, the crooks have discovered a lucrative new enterprise 
exploiting such vulnerabilities, and it's up to us to shut them down 
before they destroy the integrity of the data-driven commercial system 
that so many rely on.
    I believe consumers, business, and other important stakeholders 
must be empowered with adequate information to assess data security 
risk and provided sufficient incentive to encourage the most 
appropriate means, technical or otherwise, to enhance data security. At 
the most basic level, our bill will create a uniform, national data 
breach notification regime based on risk of potential harm from 
identity theft. The bill also incorporates a number of provisions 
related to my earlier privacy bill that are intended to provide 
security guidelines for entities that keep personal data. I believe 
that once these practices are embraced, renewed consumer confidence in 
e-commerce and its multitude of applications will lead to even better 
data security in the marketplace. We need to promote the notion that 
SECURITY SELLS.
    Specifically, our bill contains three major elements:

 The first major element of the draft bill directs the Federal Trade 
        Commission to develop rules for data security, including 
        requirements that entities in possession of personal data have 
        a security policy, have someone designated as responsible for 
        that policy, and have a process for taking preventive and 
        corrective action to ensure that policy is as robust as needed.
 The second main element of the bill relates to the special case of 
        ``information brokers'', which are defined in the draft as 
        companies whose primary business is to compile and sell 
        consumer data to third parties. The bill requires these 
        entities to submit their security policy to the Federal Trade 
        Commission for audit and approval on an annual basis. In 
        addition, any information broker is required to provide those 
        who ask a free report on what information the entity holds on 
        that individual.
 The last element establishes a national, uniform standard for 
        consumer notification when there is a security breach. A 
        security breach is defined using a risk-based standard that 
        relates to the probability that the security breach results in 
        ``a reasonable basis to conclude'' that identity theft may 
        occur. The bill requires timely notification, both electronic 
        and through the mail, of consumers affected. There also are a 
        number of provisions relating to substitute notice in cases 
        where this requirement may be unduly burdensome to a business 
        given its financial condition.
    I look forward to the comments on our draft bill and would like to 
emphasize that the Committee intends to develop the legislation through 
a bipartisan and open process that allows for constructive debate and 
discussion. We will solicit at least one more round of comments and 
will work hard to continue to refine the bill to best achieve 
effectiveness with balance. I look forward to the testimony of our 
witnesses and to working together on this very important piece of 
legislation. Thank you.

    Mr. Stearns. And with that, the distinguished member from 
New York, Ranking Member Towns.
    Thank you.
    Mr. Towns. Thank you very much, Mr. Chairman.
    Let me begin by first thanking you for holding this 
hearing. And I would like to ask to place the 43 stakeholders' 
comments in the record.
    Mr. Stearns. By unanimous consent, so ordered.
    [The list of industry comments follow:]
           data security discussion draft--industry comments
1. American Bankers Association; 2. Business Software Alliance; 3. 
Center for Democracy and Technology; 4. Consumers Union; 5. Cyber 
Security Industry Alliance; 6. Direct Marketing Association; 7. Dun & 
Bradstreet; 8. eBay Inc.; 9. Electronic Privacy Information Center; 10. 
Entrust Inc.; 11. Experian; 12. Federal Reserve Board; 13. Federal 
Trade Commission; 14. Financial Services Roundtable; 15. First Data 
Corporation; 16. GC Services Limited Partnership ; 17. ID Analytics; 
18. IdTheftAwareness--``The Real Danny Lents''; 19. Internet Commerce 
Coalition; 20. Internet Security Alliance; 21. Intersections Inc.; 22. 
MIB Group, Inc.; 23. Microsoft Corporation; 24. National Association 
for Information Destruction, Inc.; 25. National Automobile Dealers 
Association; 26. National Business Coalition; 27. National Council of 
Investigation & Security Services, Inc.; 28. Peter Kiewit Institute; 29 
The Progress & Freedom Foundation; 30. Reed Elsevier Inc.; 31. Retail 
Industry Leaders Association; 32. Software & Information Industry 
Association; 33. Prof. Daniel J. Solove/George Washington Univ. Law 
School; 34. TALX; 35. Time Warner Inc.; 36. TRUSTe; 37. US Oncology, 
Inc.; 38. U.S. PIRG; 39. Viacom; 40. VISA U.S.A.; 41. Vontu Inc.; 42. 
Wexler & Walker PPA; and 43. Yahoo! Inc.

    Mr. Towns. Since we last met, the privacy of our 
constituencies have been compromised further, and their worries 
have increased tenfold. I was encouraged by the feedback that 
we received at our previous hearings. But there is much more 
work that needs to be done.
    The discussion draft that was recently circulated includes 
important requirements relating to information security 
programs and security breach notices, but recent security 
breaches have revealed that consumers also care about the lack 
of transparency as to how companies are using and to whom they 
are disclosing their personal information.
    I was pleased to see that the draft includes a trigger for 
notification purposes. Chairman Stearns and Ranking Member 
Schakowsky and the rest of my colleagues would agree that this 
issue has haunted us for too long. It seems as though a new 
data security breach happens bimonthly, resulting in destroyed 
bank accounts and financial headaches.
    As we begin to depend on technology more than ever, we must 
put our citizens' privacy at the top of our priority list. I 
hope the FTC is ready to help to stem the tide of identity 
theft and end the financial destruction that has plagued our 
constituents and web users worldwide.
    I look forward, Mr. Chairman, to working with you and the 
members of this committee to stem this very serious problem, 
because the more I travel back and forth into my District on 
the plane and wherever, you hear these horrible stories. I 
think the time has come to put an end to it.
    On that note, I yield back.
    [The prepared statement of Hon. Edolphus Towns follows:]
Prepared Statement of Hon. Ed Towns, a Representative in Congress from 
                         the State of New York
    Thank you Mr. Chairman for holding this important hearing. Since we 
last met, the privacy of our constituents have been compromised further 
and their worries have increased ten-fold. I was encouraged by the 
feedback that we received in our previous hearings, but there is much 
more work to be done.
    The Discussion Draft that was recently circulated includes 
important requirements relating to information security programs and 
security breach notices. But recent security breaches have revealed 
that consumers also care about the lack of transparency as to how 
companies are using and to whom they are disclosing their personal 
information in the first place. I was pleased to see that the draft 
includes a ``trigger'' for notification purposes. No one likes to be 
inundated with dozens and dozens of risk-related notices, and I agree 
that warnings should only be sent when there are severe breaches 
capable of significant consumer burden.
    I think that Chairman Stearns, Ranking Member Schakowsky and the 
rest of my colleagues would agree that this issue has haunted us for 
too long. It seems as though a new data security breach happens bi-
monthly, resulting in destroyed bank accounts and financial headaches.
    As we begin to depend on technology more than ever before, we must 
put our citizens' privacy at the top of the priority list. In July 
18th's Wall Street Journal, Bill Hancock, Chief Security Officer of 
Savis, Inc., a major internet service provider, is quoted as saying, 
``What people can do on computer networks and what they can find has 
increased ten-fold from a few years ago.'' He went on to state that 
``Evil intent is easier than ever.''
    I hope the FTC is ready to help to stem the tide of identity theft 
and end the financial destruction that has plagued our constituents and 
web users worldwide. I look forward to monitoring the positive 
developments that are sure to stem from our committee draft.
    Thank you.

    Mr. Stearns. I thank my colleague.
    The gentleman, Mr. Pitts, is recognized.
    [No response.]
    Mr. Stearns. The gentleman waives.
    Mr. Gonzalez.
    Mr. Gonzalez. Thank you very much, Mr. Chairman.
    Again, I commend your continuous efforts. You have been on 
this issue for some time, and I appreciate you calling this 
particular hearing. I will be brief, but I will also request 
that my written statement be submitted in its entirety by 
unanimous consent.
    Mr. Stearns. With the record's consent, so ordered.
    Mr. Gonzalez. I guess what we are trying to find out today, 
and I appreciate the presence of the witnesses. Many times I 
feel that you all come here and give us the benefit of your 
knowledge and experience, and then you feel that maybe we are 
not listening, but the truth is, we have a record, we have your 
statements, and we do make reference to them as we proceed with 
this piece of legislation.
    My only observation is that we deal with this in a 
realistic framework and that is what is happening out there, 
what is it possible that you bring to this. We need your 
suggestions and recommendations. And that our policies will 
affect the abilities that technology give us today, we can't go 
out there and impose on what is going on out there in commerce 
and such, conditions that could never be met, technologically 
or otherwise. But I think that there can be certain compromises 
that still address the chief concerns as expressed by my 
constituents when we have town hall meetings.
    The greatest attendance that I have had in any town hall 
meeting, I guess second to Social Security, has been ID theft. 
It is out there. It is tremendous. And working together, 
hopefully we will come up again with a feasible, viable answer. 
The problem with technology, and I have said this before about 
technology, I guess it is the old proverbial key that opens the 
gates to paradise, but it is the same key that can open the 
gates to hell. And so somehow, we avoid that and do the best 
that we can.
    And again, thank you very much for your participation, and 
I yield back.
    [The prepared statement of Hon. Charles A. Gonzalez 
follows:]
  Prepared Statement of Hon. Charles A. Gonzalez, a Representative in 
                    Congress from the State of Texas
    Mr. Chairman, thank you for holding today's hearing on the 
discussion draft data protection bill that this subcommittee is 
developing. I would particularly like to thank both the majority and 
minority staff for their work on this. I know that they have been 
called upon in recent days and weeks to put many hours into other 
legislative items related to the Energy and Commerce Committee, so I 
especially appreciate their attention to this legislation. This 
discussion draft provides us with an excellent starting point for 
addressing the rash of data breaches that have been threatening the 
privacy and financial standing of consumers across America. I look 
forward to working with you, Mr. Chairman, the Ranking Member, and 
other members of this subcommittee to further build on the draft before 
us today.
    The problem of data security, and the risk of identity theft that 
it carries, is a serious concern to people. I know that in my own 
district in San Antonio, public attention is strong. I held a town hall 
meeting in my district in May, which brought together the Federal Trade 
Commission and federal and local law enforcement. The turnout from the 
public was impressive. And despite being in an auditorium without air-
conditioning for over two hours, almost the entire audience stayed to 
the very end and asked many questions. The bottom line is that people 
want assurances that their private information is handled securely and 
that breaches in data security are handled swiftly and effectively.
    As we move forward with this legislation, I hope that we can have 
an end-product that adheres, as much as realistically possible, to the 
principle of ``don't collect it if you can't protect it.'' In other 
words, companies and organizations should not be collecting personal 
information from individuals if they are not going to be able to 
reasonably ensure the security of that information.
    In addition to the provisions already in the discussion draft, I 
would like to also consider several related issues. First: how we deal 
with paper records. ``Dumpster diving'' is a prevalent practice in 
which identity thieves go through dumpsters to find documents with 
individuals' personal information. San Antonio local law enforcement 
has cited this practice as one of the most prevalent forms of identity 
theft. We should explore the feasibility of including provisions in 
this bill to require companies to shred or otherwise destroy documents 
with individuals' personal information before throwing them away.
    Second, the draft bill gives the individual the right to get a free 
report on what data the information broker companies hold on that 
individual. If individuals feel the information in the broker's 
database is inaccurate, they should be able to add supplementary 
information to their file to clarify the existing information.
    Third. Under the draft bill's data breach notification 
requirements, a ``substitute notice'' system is established for 
companies that cannot afford to send a letter to every individual 
affected by a breach, or if they do not have complete addresses for 
those individuals. Substitute notification consists of the company 
alerting the media and posting a message on their website. We may want 
to consider whether the bill should also require that these companies 
notify the FTC and that the FTC maintain a central public website 
listing all data breaches, along with information for consumers on how 
to contact those companies and determine if their own personal data was 
compromised. I know that private websites with a similar intent have 
been established, but it may strengthen consumers' confidence to have 
such a function permanently and reliably carried out by the FTC.
    Finally, as I represent a district with a sizable population of 
Spanish-speakers, I would like to explore how we can ensure that these 
consumers and other language minorities, who are heavily targeted by 
companies for their business, are able to access notices sent to 
consumers about data breaches. We need to ensure that these notices are 
available in a language that these consumers can understand.
    Thank you Mr. Chairman. I look forward to hearing from our 
witnesses today, and to working with you on this subject.

    Mr. Stearns. The gentleman yields back.
    The gentlelady from Tennessee is recognized.
    Ms. Blackburn. Thank you, Mr. Chairman.
    I want to thank the chairman for holding this hearing and 
for the witnesses for taking your time and being here with us 
today.
    Many constituents in my District have expressed to me their 
concerns about identity theft, and we recently held a workshop, 
an identity theft workshop, in our District. It was 
enlightening. It was well attended. And it was something that 
we gained some information from, so we are looking forward to 
hearing what you have to say. And as this committee examines 
steps to prevent identity theft, we must ensure that companies 
and individuals are not burdened with unnecessary regulations, 
but that they have opportunities for privacy protection.
    Congress should focus on reasonable security measures that 
will protect personal information and provide enforcement 
mechanisms to penalize companies that readily buy and sell 
information on us to unscrupulous entities who will exploit our 
identities for their personal gain.
    Today, this committee looks at draft legislation on data 
security, which I believe is a good step, a good first step, in 
addressing the problem. I commend Chairman Barton and our 
subcommittee chairman for their efforts on this issue.
    And again, I thank you. We look forward to hearing your 
input. Thank you.
    Mr. Stearns. Thank you.
    The gentlelady from Wisconsin.
    Ms. Baldwin. Thank you, Mr. Chairman.
    I am also pleased that we are having this hearing today, 
Mr. Chairman, and our witnesses.
    This is an increasingly important question how we protect 
our sensitive personal information from theft and abuse. And 
the statistics are staggering. The 10 million Americans who 
were affected by identity theft in the year 2004, it is pretty 
staggering. Access to the right data bases and the touch of a 
button or two allows access to vast amounts of information 
about a person, things like date of birth, Social Security 
number, credit rating, debts, loans, insurance claims, magazine 
subscriptions, even DNA.
    American consumers deserve to have their personal 
information protected. And I am pleased that our subcommittee 
will act soon to address this. And I also agree that the 
discussion draft before us is a good first step.
    But as we consider next steps, changes, modifications, 
there are a number of issues that we need to address and 
questions we will need to answer, questions such as should we 
preempt State laws, and if so, how broad a preemption is 
appropriate. When should consumers be notified of data breaches 
and who decides? Should the FTC maintain public notices, public 
information about data breaches? Do we need to reach beyond our 
committee's jurisdiction to adequately address this problem? 
Should we exempt encrypted data? What role should States have 
in prevention and enforcement?
    So today, I hope our witnesses will articulate ways in 
which we can protect consumers from identity theft and misuse 
of their personal data and hopefully help us explore the 
answers to those questions.
    Thank you, Mr. Chairman, I yield back.
    Mr. Stearns. I thank the gentlelady.
    Mr. Green, the gentleman from Texas.
    Mr. Green. Thank you, Mr. Chairman. I would like to thank 
both you and our ranking member for taking lead on this issue 
and holding this important hearing.
    I would like to welcome our witnesses and thank you for 
your cooperation and being here and sharing your knowledge and 
experience. It is imperative for us when we begin drafting 
legislation to combat identity theft and data theft that we 
have the experience from the business community, so we make 
sure we pass legislation that really will do the job and again 
still allow us to enjoy the benefits of what we do.
    The committee has held four hearings since the fall of 
2004, and we have had a lot of discussions on passing a bill on 
data security, and I believe the bill, as drafted, is a good 
start.
    I want to bring up a couple of issues, though, I have some 
concern on. The preemption issue, special attention to that 
provision. Currently, several States have stronger policies 
when it comes to data security that we are proposing, and we 
are proposing, furthermore, 18 States that have passed breach 
notification laws, all of them, including my home State of 
Texas, offer an encryption safe harbor.
    And I believe you should look at issues such as encryption 
and mask data to serve as a second form of defense. It is 
frustrating, because in March we heard testimony from Choice 
Point and Lexus Nexus, because both of these companies had a 
recent experience of breach in their security, and at that 
time, Lexus Nexus had almost 32,000 people affected. Well, then 
a few weeks later, we really found out it was 300,000 that may 
have been affected by the breach in security. And identity 
theft is the No. 1 crime in our country. In fact, it is getting 
worse all of the time.
    In our District, we have done identity theft workshops for 
our constituents, but you know, it is a very small group. We 
have to do something more for the mass of people who have that 
fear. And these workshops, even those only work when credit-
reporting agencies and financial institutions and data brokers 
do their job to make sure information doesn't fall into the 
wrong hands. We are all a number now, and most often, it is our 
Social Security number, and every financial institution uses 
that number, including when I had to rent a U-Haul truck, Mr. 
Chairman, they wanted my Social Security number. And I said, 
``Why?'' And they said, ``Well, we just require it.'' And I 
said, ``Well, I don't want to rent the truck.'' And they said I 
didn't have to. And that is what I suggest to my constituents. 
If it doesn't have anything to do with taxes or payroll, then 
just say no, or credit. And you can do that. But I still like 
to get the credit to use some other identifying number. And I 
know a lot of States are working on that.
    Our current systems of laws addressing the problem are 
piece meal. We have the Fair Credit Reporting Act. We have the 
Federal Trade Commission that addresses unfair and deceptive 
practices. We have separate laws and driver's license data. So 
what we need to do, Mr. Chairman, I am glad you are taking the 
lead in putting this together. And I would hope we would still 
look at empowering the States and just an example, when 
Congresswoman Heather Wilson and I worked on the stand for so 
many years, we ended up the compromises that we wanted uniform 
standards around the country, but we also still empowered the 
State Attorney Generals to be able to do their job as consumer 
representatives, but they had to use Federal law to do it. And 
as long as we pass a strong law and still empower the States in 
addition to whatever the FTC or whatever agency we give this 
authority to.
    But I look forward to participating and working on not only 
the hearing today but also in the drafting of legislation.
    Thank you.
    Mr. Stearns. I thank the gentleman. And I thank him for 
considering ways to do this in a bipartisan fashion.
    I don't think there are any more members, so let me 
welcome----
    Mr. Towns. Mr. Chairman, will you yield for one moment?
    Mr. Stearns. Yes. Yes.
    Mr. Towns. I ask unanimous consent that we place the 
statement of Ranking Member Jan Schakowsky in the record. She 
has a family emergency.
    Mr. Stearns. I heard that, and I am sorry to hear that. So 
with unanimous consent, so ordered. I appreciate you doing 
that.
    [Additional statements submitted for the record follow:]
 Prepared Statement of Hon. Joe Barton, Chairman, Committee on Energy 
                              and Commerce
    Thank you, Chairman Stearns, for holding this hearing today and for 
your good leadership on data security issues. Millions of records in 
other people's computers define and describe our lives. The recent rash 
of security breaches has made us keenly aware of just how vulnerable 
our records are to release through inept data security practices or, 
worse, intentional theft. Past hearings at this Subcommittee have 
explored those breaches and exposed the gaps in protection. Today, the 
Committee puts forth a bipartisan draft that aims to fill the gaps in 
protection. I want to thank Chairman Stearns, Ranking Member Schakowsky 
of the subcommittee, Ranking Member Dingell of the full committee, and 
all of the staffs for their work on this bipartisan discussion draft.
    I am pleased with the careful consideration this Committee is 
giving to this important issue. Our goal is to work with industry and 
consumer groups in developing this legislation to encourage a culture 
of strong data security. Data security has not been the priority it 
ought to be and must become. I hope that the testimony we receive here 
today will help us to perfect the draft bill.
    There are two critical components to the draft bill:

 One, a legal requirement for establishing and implementing 
        information security practices; and
 Two, notification requirements in the event of a security breach.
    In mandating information security policies, we hope to strike the 
right balance between ensuring real protection for consumers without 
halting the evolution of technology and best practices. We would be 
remiss not to mandate robust security for personal information, but 
we'll do it in a way that allows companies to implement the security 
measures most effective for the types of information they maintain.
    I would like to point out that the draft bill does not yet include 
guidelines for what companies must include in their information 
security policies. I believe guidelines similar to those of the FTC's 
Gramm-Leach-Bliley Safeguards Rule are a good place to start. I request 
that our panel of experts provide the Committee with some guidance on 
this issue. Over the August recess, we will be perfecting the draft and 
readying it for introduction, and your guidance will be an important 
part of that preparation.
    We have also been careful in crafting the notification requirements 
of the bill. While consumers ought to be notified when a breach of 
their information puts them at risk for identity theft, they should not 
be showered with warnings when there is no risk. The notification 
requirement of the bill has a trigger to avoid both ``over-
notification'' and ``under-notification''. The bill provides that 
notice should be prompt and meaningful so that consumers can best 
shield themselves from identity theft.
    The draft bill also places additional requirements on information 
brokers, those who trade in non-customer data. Because the normal 
market incentives for protecting customer information are absent or 
diminished with this business model, the draft imposes federally 
supervised security audit requirements for these entities.
    I plan to move data security legislation though this Committee in 
September, and I hope that we can get a bill signed into law this 
Congress. I would also like to mention that I support Congressman Clay 
Shaw's bill protecting individual Social Security numbers. I will do my 
part to quickly move the portions of the bill that are within our 
Committee's jurisdiction, once we get a referral of the bill.
    I thank the witnesses for participating in the hearing today and 
look forward to your testimony on the draft legislation. Thank you Mr. 
Chairman, I yield back the balance of my time.
                                 ______
                                 
Prepared Statement of Hon. Jan Schakowsky, a Representative in Congress 
                       from the State of Illinois
    Thank you, Chairman Stearns, for holding today's hearing on our 
draft legislation to address the recent spate of security breaches of 
personal information. I would also like to thank Chairman Barton and 
Ranking Member Dingell for working with us to protect consumers' 
personal information where current business practices and data security 
laws have failed to do so. The time has come for us to ensure that 
personally-identifiable information is protected and that consumers are 
notified when their information has been compromised.
    In the last five months alone, over 50 million consumers have had 
their personal information lost, stolen, hacked into, exposed online, 
or sold by corrupt insiders--and through no fault of their own. 
Personal information is being collected, transferred, and sold 
everyday. Consumers are told that if they want to rent an apartment, 
buy a pair of shoes, or contribute to a university, they have to 
divulge their name, address, Social Security number, credit card 
number, mother's maiden name--and more--just to do so.
    So many consumers are willing to provide the key facts of their 
lives because they believe that since they are dealing with a well-
known retailer, their alma mater, or an established bank, their 
personal information will be treated as just that--personal--and that 
it will be secure. Until recently, most people had no idea that the 
teenage hacker looking for some kicks and the most sophisticated crime 
rings alike were raiding the virtual treasure troves of personal 
information at businesses, universities, and information brokers. But, 
news of the breaches at DSW, Bank of America, and Boston College, to 
name a few, has made consumers and Congress alike realize that more 
needs to be done to protect consumers' personal information.
    The bill we have been working on seeks to stop the pillaging of 
personal information by raising the bar for the handling and security 
of consumers' data. It seeks to make information brokers--those whose 
business is to turn your name into a commodity--more accountable to 
consumers. The bill would also take California's groundbreaking idea--
that consumers have a right to know when their information has been 
compromised--and turn it into the standard for our country.
    The draft at hand is a good start, but we have to do more to make 
sure that we provide the best protection for consumers that we can. 
When we consider the scope of the information our bill covers, we need 
to remember that it does not matter to the victim of identity theft 
where their information was stolen from -a small business or a massive 
data broker, and it does not matter what form it was in--paper or 
electronic. It does not matter if access was gained by an outsider who 
was not authorized to do so or an insider who had the key to the 
encryption code. It does not matter if their file was the only one 
compromised or if it was one of thousands. We also must keep in mind 
that identity theft is not the only threat with which we should be 
concerned. Information in the wrong hands could put domestic violence 
and stalkers' victims' lives at risk.
    Additionally, consumers need to know more than that their 
information is secure. Since data brokers sell personal information to 
those who will decide whether consumers will get jobs, roofs over their 
heads, and even whether they have the legal right to vote, consumers 
must have the right to make sure that the information that is meant to 
represent what kind of risk they are to employers, landlords, and the 
local government is correct.
    We have heard claims from information brokers that allowing 
consumers to correct their files would be difficult to do because much 
of the data they have is from public records and the brokers do not 
have the legal authority to correct them. However, I believe we should 
not throw up our hands and say that nothing can be done. I believe that 
if consumers question the accuracy of their files, data brokers could--
at a minimum--``flag'' that information to let those using the files 
know that there is a question of the accuracy of the file. And, a 
common problem with inaccurate reports is not that the original record 
is incorrect, but that one person's file has been mixed with another's. 
For instance, my file may be mixed with a Jean Schakowsky's or Jan 
Stockowski--or both. I believe that data brokers should be compelled to 
fix those ``mixed files.'' Consumers must have every opportunity 
possible to set the record straight because of the impact incorrect 
information can have on their lives.
    Finally, I believe it is important that we establish a strong 
federal standard so that we do not have to worry about preempting 50 
state laws. While I can understand the desire to see one federal 
standard, I believe that if we set the floor high enough, states will 
not have to go beyond our requirements. Because so many states have 
beat us to protecting consumers--including Illinois, Florida, and 
Texas-- I believe we must exercise great caution when we consider how 
we will contend with state laws on data security and breach 
notification.
    Once again, Mr. Chairman, I look forward to working with you on our 
common goal of protecting consumers. Although there are many issues 
that are still on the table, I think that using consumers' rights and 
safety as our guiding principles, we will be in good shape. Thank you.
                                 ______
                                 
   Prepared Statement of Hon. Edward J. Markey, a Representative in 
                Congress from the State of Massachusetts
    Mr. Chairman, thank you for holding this important hearing today.
    Mr. Chairman, on March 15th, following massive breaches of personal 
information at ChoicePoint, Bank of America and LexisNexis, you wisely 
convened a hearing in this Subcommittee to question executives from 
major data profiling firms. This hearing provided important momentum 
for ongoing efforts to strengthen privacy protections for the millions 
of Americans whose private information is gathered by data merchants 
who view our Social Security numbers, credit records and other 
sensitive personal information as commodities to be bought and sold for 
a profit.
    Since the Subcommittee hearing, a tidal wave of personal data has 
gushed from a long list of data brokers, public companies, 
universities, financial institutions, high schools, hospitals and other 
organizations. The Privacy Rights Clearinghouse has reported that more 
than 48 million personal records have been lost or stolen over the past 
four months alone.
    Mr. Chairman, today's hearing on draft legislation you are 
preparing in collaboration with the Democrats on the Committee is 
another step towards providing Americans with increased control over 
their most precious and private personal information. I commend you for 
your efforts to date.As you know, Mr. Chairman, the draft bill defines 
personal information as ``an individual's first and last name in 
combination with any 1 or more of the following data elements for that 
individual: Social Security account number, driver's license number or 
other State identification number, financial account number, or credit 
or debit card number' that would enable access to an individual's 
financial account. [Sec. 5. Definitions, Page 9]. The bill also permits 
the Federal Trade Commission to modify this definition. [Sec.5. 
Definitions, Page 11].
    Last week, the full Energy and Commerce Committee marked up H.R. 
1132, legislation to provide grants to states for building or enhancing 
state-run prescription drug databases. These databases will contain 
personal information about patients--their name, address and phone 
number--along with the type of prescription, quantity dispensed, the 
number of refills and related data about the drugs they are prescribed 
that are subject to the bill's reporting requirement.
    I appreciate the Chairman's comments during last week's mark-up 
about the importance of securing this health information and notifying 
patients in the event that their electronic medical records are lost, 
stolen or used for an unauthorized purpose. As the data security bill 
before this Subcommittee evolves, I look forward to working with the 
Chairman to ensure that consumers' medical information is covered by 
the protections contained in this bill.
    I would also like to point out a few other areas of this draft 
legislation that deserve further review and adjustment.
    1. The scope of the bill: As noted in the testimony provided by 
Fran Maier of Trust-e (TRUST-E), it appears that the bill, in its 
current form, does not cover personal information held by banks, 
unions, thrifts and government entities like the state-run databases 
that maintain records on patients and the prescription drugs they take. 
I agree with the Mr./Ms. Maier that when a consumer's personal 
information is leaked from a database, it matters not whether the 
information was leaked from a bank or a university or a state's 
department of health. This bill's privacy protections should be brought 
to bear whenever a consumer's personally-identifiable information is 
lost, stolen or divulged for an unauthorized purpose.
    2. Pre-emption of state law: I am concerned that this bill would 
pre-empt stronger state laws. For example, because California has a law 
that requires consumer notification in the event of data breaches at 
financial firms and government institutions, consumers in California 
would be denied this protection if this bill were to become law, since 
it contains no such coverage and would pre-empt the California statute.
    3. The trigger for notification: While the method and content of 
the consumer notification requirement in the bill is specific and 
detailed [Page 5], the conditions that trigger this notification are 
murky. For consumers to be notified of a breach that affects their 
personal information there must be a compromise of security that 
results in ``the acquisition of personal information by an unauthorized 
person that may result in identity theft.'' [Page 5] I would suggest 
that this trigger be expanded so that notification would occur if the 
information were lost, stolen or used for an unauthorized purpose. The 
``identity theft test'' is too difficult to determine, particularly in 
the immediate aftermath of a breach, and there is other damage--beyond 
identity theft--that can be inflicted upon consumers by the misuse of 
their personal information. Consumers should be notified in these 
instances too, even if the breach may not result in someone stealing 
their entire identity.
    I commend the gentleman from Florida, Chairman Stearns, for holding 
today's hearing, and I look forward to working with you to refine this 
bill. I appreciate the witnesses appearing before us this morning and 
look forward to their testimony.
    Thank you.

    Mr. Stearns. We will ask the witnesses to come forward. We 
have Ms. Fran Maier, Executive Director and President of 
TRUSTe, San Francisco, California; Mr. Michael Hintze, Senior 
Attorney, Microsoft Corporation, Redmond, Washington; Mr. Chris 
Hoofnagle, Electronic Privacy Information Center, Senior 
Counsel and Director, West Coast office in San Francisco; and 
Mr. Daniel Burton, Vice President of Government Affairs, 
Entrust, Inc., McLean, Virginia.
    Ms. Maier, we welcome your opening statement.

  STATEMENTS OF FRAN MAIER, EXECUTIVE DIRECTOR AND PRESIDENT, 
TRUSTe; MICHAEL HINTZE, SENIOR ATTORNEY, MICROSOFT CORPORATION; 
   CHRIS HOOFNAGLE, SENIOR COUNSEL AND DIRECTOR, ELECTRONIC 
   PRIVACY INFORMATION CENTER, WEST COAST OFFICE; AND DANIEL 
  BURTON, VICE PRESIDENT OF GOVERNMENT AFFAIRS, ENTRUST, INC.

    Ms. Maier. Mr. Chairman----
    Mr. Stearns. Yes, there is a little switch there.
    Ms. Maier. Hello.
    Mr. Stearns. Yes.
    Ms. Maier. Thank you.
    Mr. Stearns. Yes, that is good.
    Ms. Maier. Mr. Chairman, and members of the subcommittee, 
Ranking Member Towns, I want to thank you for the opportunity 
to address you today on this important proposed legislation and 
to tell you about TRUSTe's security guidelines, which we 
released earlier this year.
    TRUSTe is an online privacy leader. We have been around 
since 1997 as an independent, non-profit organization. As you 
mentioned, we come from San Francisco, adjacent to Silicon 
Valley, and we have been very close to the issues related to 
California's State Bill 1386.
    Our mission is to enable individuals and organizations to 
establish trusting relationships based on respect for their 
personal identity and information in the ever-evolving 
networked world. We are very concerned about Internet, and we 
are very concerned about trust and e-commerce.
    We have over 1,500 companies, their websites, who have been 
certified by TRUSTe's process and carry the TRUSTe trustmark, 
the green and black symbol you have seen. We are also approved 
as a safe harbor for Children's Online Privacy Protection Act 
with the FTC and by the U.S. Department of Commerce for the EU 
Safe Harbor.
    We are also deeply involved in e-mail practices. For 
example, we just launched a new e-mail privacy seal for 
websites, which is based on permission from consumers and 
allows a company to post a seal that says, ``We don't spam,'' 
if they meet the strict standards that we require. We also 
serve as an e-mail accreditation authority for Bonded Sender, 
one of the leading legitimate e-mail sender programs. Again, 
this is to address another issue that faces consumers in terms 
of spam.
    My remarks today will be brief and will focus first on 
TRUSTe's security guidelines and then specific thoughts on the 
proposed legislation.
    Our security guidelines were released in March of this year 
in consultation with many of our shareholders and others in 
industry. As you well know, privacy is closely intertwined with 
security. You can't really deliver privacy unless you have 
security. Security is necessary but not sufficient to deliver 
acceptable privacy to consumers. So we felt that it was very 
important for us to address security and to provide some 
guidelines for our members who are obviously engaged in and 
value privacy.
    The guidelines, of course, are expected to evolve, much as 
we expect this legislation to evolve, to address new 
technologies, new threats, and new consumer concerns. The 
guidelines are drafted in checklist form, and the reason why 
that is important is because small companies and large 
companies, depending on the size, depending on the kind of 
information they collect, might have different reasons or 
different expectations for the kind of security that they 
should abide by. Larger, more complex companies which handle 
data with the highest level of sensitivity will likely find it 
appropriate to adopt all of the recommended practices. However, 
smaller companies collecting less sensitive information may 
conclude that adopting only some set of these controls will 
still enable it to have a security program appropriate to the 
nature of data it collects and its consumers.
    The guidelines like the FTC's guidelines and others echo 
the structure that you could find at those other pieces of 
rules. For example, we have administrative rules. This includes 
drafting an internal security policy and appointing someone to 
be the executive in charge of security, which is similar to 
what you have proposed in the legislation before us. 
Administrative controls also include training of employees and 
other items such as procedures internally. Of course, a big 
part of security guidelines includes tentacle measures. This 
includes password practices, controlling employee access to 
sensitive information, ongoing monitoring, firewalls, 
vulnerability testing, and the like, and then finally physical 
controls which include monitoring access to data, securing 
one's data facilities, and those kinds of physical things, 
covering not only electronic data but also paper-based data.
    All of these guidelines can be found within TRUSTe's 
testimony that we submitted, and of course, on our website.
    Now let us turn to the proposed data protection breach 
notification legislation. We, of course, would like to applaud 
the committee on its hard work on the draft legislation. We 
believe that this is the right balance and mandates high 
standards and allows for flexibility in their implementation. 
And we think it also provides the right incentives for 
companies to put meaningful security safeguards into place in 
their own and consumers' best interests. We believe that the 
desire to minimize a potential negative publicity, brand 
damage, and embarrassment often resulting from the disclosure 
of a data breach has been proven to motivate companies to 
prioritize security much more highly than they otherwise would.
    We wish to focus on a couple provisions of the bill today.
    First of all, in terms of the scope of the legislation and 
the trigger for security breach. We appreciate, first, that the 
committee has put focus on the jurisdiction for the industry 
under which it has jurisdiction. However, from a consumer's 
perspective, when their information is breached, the particular 
industry or organization involved is irrelevant to them. We 
believe that consumers should enjoy the same level of 
protection regardless of the industry involved. So we would 
recommend that the jurisdiction extends to the financial 
services especially.
    In a related way, we would like to express concern about 
the scope and the definition of person under Section 5 
Subsection 6 of the bill. We would urge the committee to expand 
the definition so that the scope of the legislation covers 
local, State, and Federal law. As you know, in California, it 
does cover the State government, which is really where the 
legislation in California came from.
    The second point that we would like to talk about is the 
definition and notice of breach of security. The current draft 
includes a trigger requirement for notice as a result in or 
there is a reasonable basis to conclude has resulted in the 
acquisition of personal information by an unauthorized person 
that may result in identity theft. The qualifier language 
``that may result in identity theft'' we believe is subjective. 
Whether something may result in ID theft depends, in a large 
part, on the sophistication of the wrongful acquirer of the 
data. It is not feasible for the potential provider of the 
breach notice to definitively assess the skill level and 
sophistication of the wrongdoer and certainly not an 
intermediate aftermath of a breach, which is when such an 
assessment would have to be made.
    We would recommend the committee to consider altering this 
definition with a qualifier that is a bit more broad, one that 
could result in the unauthorized disclosure, misuse, 
alteration, destruction, or other compromise of such personal 
information.
    There has been a question of whether or not a broader 
definition or a broader trigger may result in too many notices 
to consumers. We believe that the experience in the State of 
California, which the law has been in effect for over 2 years, 
seems to have struck the right balance. Consumers are receiving 
appropriately useful notices, and based on our own observations 
as well as our consultations with the staff of the California 
Office of Privacy Protection, that the law has not resulted in 
a----
    Mr. Stearns. Ms. Maier, if you could, just sum up.
    Ms. Maier. That is great, sir. Thank you.
    Again, I very much appreciate being here. We look forward 
to working with you and hopefully discussing the creation of a 
safe harbor. And we thank you.
    [The prepared statement of Fran Maier follows:]
 Prepared Statement of Fran Maier, Executive Director and President of 
                                 TRUSTe
    Chairman Stearns, Chairman Barton, Ranking Member Schakowsky, and 
members of the Subcommittee, I am Fran Maier, Executive Director and 
President of TRUSTe. I thank you for the opportunity to address the 
Subcommittee on this important proposed legislation and to tell you 
about TRUSTe's Security Guidelines, which we released earlier this 
year. TRUSTe is an independent, nonprofit organization with the mission 
to enable individuals and organizations to establish trusting 
relationships based on respect for personal identity and information in 
the evolving networked world. Through long-term supportive 
relationships with our licensees, extensive interactions with consumers 
in our Watchdog Dispute Resolution program, and with the support and 
guidance of many established companies and industry experts, TRUSTe has 
earned a reputation as the leader in promoting privacy policy 
disclosure, informed user consent, and consumer education.
    TRUSTe was founded in 1997 to act as an independent, unbiased trust 
entity, and we have earned our reputation as the leading builder of 
trusting relationships between companies and consumers. The TRUSTe 
privacy program--based on a branded online seal, the TRUSTe 
``trustmark''ridges the gap between users' concerns over privacy and 
Web sites' needs for self-regulated information disclosure standards. 
In May 2001, the Federal Trade Commission approved TRUSTe's Children's 
Privacy Seal Program as a safe harbor under the Children's Online 
Privacy Protection Act. We are proud to have received that designation. 
Hundreds of thousands of young children who are active online are 
protected by our program, which currently includes some of the most 
popular Web sites, including www.disney.go.com, www.kids.msn.com, and 
www.epals.com. TRUSTe is also certified as a safe harbor program under 
the Safe Harbor Framework administered by the U.S. Department of 
Commerce for U.S. companies wishing to receive personal data from 
countries in the European Union (``EU''). Our EU Safe Harbor Seal 
Program gives companies assurance that they are in compliance with the 
Framework and, therefore, with national data protection laws in all EU 
member states.
    In addition to these efforts, TRUSTe is deeply involved in 
fostering best practices for email. We have just launched our 
permission-based Email Privacy Seal Program, which allows companies who 
agree to our strict standards to post a TRUSTe ``We Don't Spam'' seal 
on online and offline forms where they collect email addresses. We also 
serve as the email certification authority for senders of legitimate 
email who are members of the Bonded Sender Program.
    Finally, we are a California company, and we closely follow 
developments in California law, including the data breach notification 
law, to keep our licensees informed about compliance issues. We also 
work closely with the California Office of Privacy Protection in its 
ongoing efforts to provide guidance to businesses and consumers on 
privacy and security issues.
                      truste's security guidelines
    In March of this year, TRUSTe issued our first version of Data 
Security Guidelines. As the Committee recognizes, privacy is very 
closely intertwined with security. We believe that security is 
necessary but not sufficient to giving consumers the privacy assurances 
they expect. In developing the Guidelines, we aimed to expand the reach 
of our expertise in privacy by providing our licensees and other 
members of the public a resource they can use as a foundation of 
responsible data security practices.
    The Guidelines are divided into three categories of safeguards: 
administrative, technical, and physical controls. This structure echoes 
that of the Federal Trade Commission (FTC's) Gramm Leach Bliley 
Safeguards Rule, which we discuss in further detail below. 
Administrative controls include, for example, drafting a written 
internal security policy, training employees, conducting ongoing 
security risk assessments, and establishing procedures in connection 
with external third parties (including vendors) with whom data is 
shared. Technical measures include controlling employee access to 
sensitive information on a need-to-know basis, establishing good 
password practices, ongoing monitoring to assess threats and 
vulnerabilities, and establishing incident response procedures. 
Finally, physical controls include practices such as monitoring 
legitimate access to data, establishing physical access controls, and 
securing one's data facilities.
    The Guidelines are drafted in checklist form so that companies can 
assess their own risk levels and adopt the corresponding appropriate 
level of recommended safeguard practices. Larger, more complex 
companies which handle data with the highest level of sensitivity will 
likely find it appropriate to adopt all the recommended practices, 
while a smaller company, collecting less sensitive information, may 
conclude that adopting only a subset of these controls will still 
enable it to have a security program appropriate to the nature of the 
data it collects and handles.
    We anticipate that our Guidelines will evolve over time to reflect 
emerging technologies and business issues that may impact the safety, 
security and quality of sensitive or confidential information used by 
TRUSTe's licensees. We have attached the Guidelines as an appendix to 
our testimony, for the Committee's review. The Guidelines are also 
posted on our Web site at http://www.truste.org/pdf/
SecurityGuidelines.pdf.
    the proposed data protection and breach notification legislation
    TRUSTe applauds the Committee on its work on the draft legislation 
to date. We believe the bill strikes the right balance by both 
mandating high standards and allowing for flexibility in their 
implementation. As a result, the bill provides the right incentives for 
companies to put meaningful security safeguards into place in their 
own, and consumers', best interests. In addition to imposing security 
standards directly, we believe the draft legislation will fundamentally 
empower consumers to take action to minimize the potential impact of ID 
theft. The desire to minimize the potential negative publicity, brand 
damage, and embarrassment often resulting from the disclosure of a data 
breach has been proven to motivate companies to prioritize security. 
The market-driven, non-prescriptive approach you have chosen will 
encourage companies to protect personal information.
    We wish to highlight a few specific provisions in the bill.
                        scope of the legislation
    As the bill's jurisdictional limits are those of the Federal Trade 
Commission Act, it does not cover banks, unions, thrifts, and common 
carriers. We appreciate that the Committee has crafted a bill that 
applies to industries under its jurisdiction, and we understand that 
the House Financial Services Committee, and the Senate Banking 
Committee, are working on parallel legislation governing entities 
within their jurisdiction. We support these efforts. From a consumer's 
perspective, when a database is breached, the particular industry 
involved is irrelevant. We believe that consumers should enjoy the same 
level of protection, regardless of the industry involved.
    Thus, we believe that the legislation's requirements should extend 
across all industries. For instance, insurance institutions would not 
be reached by the scope of this bill. Those financial institutions that 
are regulated under the Gramm Leach Bliley Act have no requirement to 
provide breach notices; therefore it would be appropriate to exempt 
financial institutions from the requirements of section 2, but not from 
section 3. In fact, were this legislation to become law with the 
current preemption language, California residents would have less 
protection than they do now under the California data breach 
notification statute since it applies to financial institutions. In the 
Children's Online Privacy Protection Act (COPPA), 15 U.S.C. 6501-6505, 
Congress gave enforcement authority to the appropriate regulatory 
agencies over industries not regulated under the FTC Act. Perhaps the 
COPPA model could be followed here.
    The Committee has doubtless considered the role of vendors or 
service providers in the context of breach notices. The Federal Trade 
Commission (FTC's) GLB Safeguards Rule expressly recognizes the 
responsibility which principals must take for the security practices of 
their service providers (section 314.4(d)), and we recommend that the 
Committee consider adhering to this philosophy in the context of this 
legislation, also.
    The California data breach notification statute imposes specific 
responsibilities on service providers (i.e., those not having a direct 
relationship with the consumer, and acting on someone else's behalf) to 
notify the party who does have the direct relationship. This allows the 
principal to maintain control of the notification process, and ensures 
that it has the right to be notified itself in case of a breach by a 
service provider. The California law defines service providers as those 
who do not ``own'' the data in question. Since in the customer's eyes 
their relationship is with the principal, from the customer's 
perspective, the principal is responsible for the service provider's 
breach. If the consumer has a relationship with the company (i.e., it's 
not a data broker situation), then it is proper for the consumer to 
hear about the breach from the principal, and not from an unknown third 
party service provider.
    Finally, we would like to express concern about the scope of the 
definition of ``Person'' under Section 5(6) of the bill. This 
definition as defined in 551(2) of title 5, United States Code, does 
not include any governmental agency. We would urge the Committee to 
expand that definition so that the scope of the legislation covers 
local, state and the Federal government. Again, enactment of the 
legislation as drafted with the current preemption provision would 
weaken consumer protections currently provided by the California breach 
notification statute, which extends to governmental agencies.
                  definition of ``breach of security''
    Section 3 of the bill would impose certain notice requirements upon 
companies that discover there has been a ``breach of security'' 
affecting their databases. Although the specific facts and 
circumstances that constitute a ``breach of security'' are left to 
rulemaking by the Federal Trade Commission, the legislation requires, 
at a minimum, that a breach triggering the notice requirement ``result 
. . . in, or there is a reasonable basis to conclude has resulted in, 
the acquisition of personal information by an unauthorized person that 
may result in identity theft.'' Section 3(b) (emphasis added). The 
qualifier language ``that may result in identity theft'' in the 
proposed legislation is subjective in nature. Whether something may 
result in ID theft depends in large part on the sophistication of the 
wrongful acquirer of the data. It is not feasible for the potential 
provider of the breach notice to definitively assess the skill level 
and sophistication of a wrongdoer, and certainly not in the immediate 
aftermath of a breach--which is when such an assessment would have to 
be made.
    We think the Committee should consider altering this definition 
with the qualifier ``that could result in the unauthorized disclosure, 
misuse, alteration, destruction, or other compromise of such [personal] 
information.'' This would mirror the approach taken in the FTC's 
Guidelines. If this approach is taken, the standard could become a 
ceiling for the level of protection granted, eliminating the need for 
the FTC to revise the standard through future rulemaking. Rather the 
FTC could develop guidelines that would be instructive in their nature 
and perhaps fit into a safe harbor program which we address later in 
our testimony. TRUSTe believes that this approach provides strong 
protection for consumers and would not likely lead to an overload of 
notifications. It also provides certainty for businesses who may be 
concerned about the standard changing in the future.
    The parameters of the California security breach notification law 
are instructive in this regard. California Civil Code Sections 1798.29 
and 1798.82-.84. This law, in effect for over two years, seems to have 
struck the right balance in this area. Consumers are receiving 
appropriate and useful notices; and it is our understanding, based upon 
our consultations with staff of the California Office of Privacy 
Protection, that the law has not resulted in an unmanageable deluge of 
notices to consumers. Although anecdotal, the fact that the California 
statute to a large extent has been followed as a nationwide standard 
makes it a good indicator of the potential impact of a nationwide bill 
such as this one.
    We also note that the marketplace approach taken by the California 
statute (as well as the Committee draft) prompts a positive cause-and-
effect dynamic. A broad nationwide breach notice requirement will 
incent companies to improve their practices, thereby, in the long run, 
resulting in fewer breaches and therefore fewer notices. TRUSTe 
believes that this generates a much better outcome than setting the 
initial threshold so high that few breaches generate notice 
requirements, thereby decreasing the motivation to prioritize security.
        minimum requirements for a security policy and statement
    Section 2(a)(1) of the bill would authorize the Federal Trade 
Commission to promulgate rules requiring companies to implement a 
``security policy and statement concerning the collection, use, 
disclosure, and security of personal information.'' We believe the 
Committee should consider adopting relevant provisions of the 
Commission's Security Guidelines for financial institutions provided 
under Gramm-Leach-Bliley as required components of the security 
statement provided for in Section 2(a)(1). Standards for Insuring the 
Security, Confidentiality, Integrity and Protection of Customer Records 
and Information, 16 C.F.R. Part 314. We refer specifically to the 
following provisions in the Guidelines:
         314.3 Standards for safeguarding customer information.
          (a) Information security program. You shall develop, 
        implement, and maintain a comprehensive information security 
        program that is written in one or more readily accessible parts 
        and contains administrative, technical, and physical safeguards 
        that are appropriate to your size and complexity, the nature 
        and scope of your activities, and the sensitivity of any 
        customer information at issue. Such safeguards shall include 
        the elements set forth in  314.4 and shall be reasonably 
        designed to achieve the objectives of this part, as set forth 
        in paragraph (b) of this section.
          (b) Objectives. The objectives of section 501(b) of the Act, 
        and of this part, are to:
          (1) Insure the security and confidentiality of customer 
        information;
          (2) Protect against any anticipated threats or hazards to the 
        security or integrity of such information; and (3) Protect 
        against unauthorized access to or use of such information that 
        could result in substantial harm or inconvenience to any 
        customer.
         314.4 Elements.
          In order to develop, implement, and maintain your information 
        security program, you shall:
          (a) Designate an employee or employees to coordinate your 
        information security program.
          (b) Identify reasonably foreseeable internal and external 
        risks to the security, confidentiality, and integrity of 
        customer information that could result in the unauthorized 
        disclosure, misuse, alteration, destruction or other compromise 
        of such information, and assess the sufficiency of any 
        safeguards in place to control these risks. At a minimum, such 
        a risk assessment should include consideration of risks in each 
        relevant area of your operations, including:
          (1) Employee training and management;
          (2) Information systems, including network and software 
        design, as well as information processing, storage, 
        transmission and disposal; and
          (3) Detecting, preventing and responding to attacks, 
        intrusions, or other systems failures.
          (c) Design and implement information safeguards to control 
        the risks you identify through risk assessment, and regularly 
        test or otherwise monitor the effectiveness of the safeguards' 
        key controls, systems, and procedures.
          (d) Oversee service providers, by:
          (1) Taking reasonable steps to select and retain service 
        providers that are capable of maintaining appropriate 
        safeguards for the customer information at issue; and
          (2) Requiring your service providers by contract to implement 
        and maintain such safeguards.
          (e) Evaluate and adjust your information security program in 
        light of the results of the testing and monitoring required by 
        paragraph (c) of this section; any material changes to your 
        operations or business arrangements; or any other circumstances 
        that you know or have reason to know may have a material impact 
        on your information security program.
These Guidelines provisions reflect a non-prescriptive approach to 
crafting security policies that we believe is best, given the changing 
nature of the overall environment, technology and threats.
    TRUSTe has particular expertise in the area of drafting sound 
consumer-facing privacy statements. We believe that the following 
elements, drawn from guidance set out in recent Federal Trade 
Commission settlements involving security breaches, should be required 
of companies' security statements:

1. The kinds of personal information collected and how it is used, 
        disclosed, or otherwise handled in the regular course of 
        business.
2. How consumers can access their information and have it corrected or 
        updated.
3. How company will notify consumers in the event of a security breach, 
        and what redress will be provided to them.
4. Where consumers can learn more about their rights in the event of a 
        breach.
                   creation of a safe harbor program
    As I mentioned earlier, TRUSTe has particular expertise in 
administering safe harbor programs for industry participants who comply 
with our guidelines. We recommend that the Committee add to your 
legislation a safe harbor that (1) allows businesses to comply with a 
set of guidelines that are approved by the FTC and administered by a 
third party certification organization; and (2) limits a company's 
liability, should a breach of security occur, if that company is in 
full compliance with such guidelines. We believe this is a better 
approach than simply locking in guidelines through an FTC rulemaking. 
Through a safe harbor, your legislation could set a floor of 
protections, and industry self-regulation would then drive even greater 
levels of protection for consumers, while providing businesses the 
flexibility they need to develop marketplace solutions to data 
protection.
                               conclusion
    TRUSTe welcomes this opportunity to share our thoughts on the 
proposed data protection legislation, and to make the Committee aware 
of our efforts to serve as the model for industry best practices in 
information security through our Data Security Guidelines. We look 
forward to working with the Committee as it continues its efforts to 
protect the security of personal information in the twenty-first 
century marketplace.

    Mr. Stearns. And thank you.
    Mr. Hintze.

                   STATEMENT OF MICHAEL HINTZE

    Mr. Hintze. Thank you, Chairman Stearns, Congressman Towns, 
Chairman Barton, and members of the subcommittee.
    My name is Michael Hintze. I am a senior attorney at 
Microsoft. I want to commend the members of this committee for 
their attention to data security and identity theft issues. 
Microsoft shares your concerns.
    I also want to thank you for the opportunity to provide our 
views on the discussion draft. Microsoft firmly believes that 
now is the appropriate time for Congress to adopt Federal data 
security legislation. It would be an effective complement to 
Microsoft's and industry's efforts to develop technological 
solutions, to educate consumers, to adopt best practices, and 
to help enforce existing laws.
    Today, I want to highlight some of the key issues raised by 
the discussion draft.
    First, any required information security program should 
give organizations the discretion to implement the most 
appropriate technologies and procedures for their respective 
environments. Microsoft urges the subcommittee to revise the 
discussion draft to reflect the general framework set forth in 
the Gramm-Leach-Bliley Act. It should also direct the FTC to 
allow organizations to adopt the security programs appropriate 
to their size and complexity, the nature and scope of their 
activities, and the amount and sensitivity of information that 
they collect.
    Second, any required information security program should 
apply to all personal information, whether electronic or paper. 
The consequences of a loss or misuse of personal information on 
paper can be just as devastating to the affected individual as 
the loss of that same data in electronic form. Likewise, the 
programs should not be limited just to sensitive financial 
information. A single, flexible framework for all information 
will create a broader protection for consumers and enable 
companies to comply with one set of security requirements.
    Third, a security breach standard should focus on whether 
the misuse of unencrypted sensitive personal information is 
reasonably possible. This will ensure that consumers receive 
notification regarding breaches of information that could lead 
to identity theft, like Social Security numbers and credit card 
information with associated passwords. This should also 
incorporate a materiality threshold like the Federal banking 
regulators have implied on their guidance on GLB, namely 
notification is required where there is a reasonable 
possibility of misuse. Such an approach will prevent 
notifications from becoming so frequent that consumers 
disregard them or find themselves unable to differentiate 
between those that indicate a significant risk and those that 
do not.
    Fourth, different methods of notification should be 
permitted. The appropriate method for notice will turn on the 
size and type of entity providing it, the number of people 
required to receive it, and the relative cost for different 
methods of providing it. The ways in which an entity typically 
communicates with its customers should also be considered. For 
these reasons, the interagency guidance interpreting GLB gives 
discretion to covered entities to provide notice in any manner 
designed to ensure that a consumer can reasonably be expected 
to receive it. Microsoft urges the subcommittee to follow this 
approach.
    Finally, the Federal legislation in this area should create 
a uniform standard. Security breaches are a national problem, 
and all consumers should be protected by the same high level of 
protection. This will also allow responsible businesses to 
operate without the unnecessary burdens of inconsistent 
security and notification requirements. For these reasons, we 
support the preemption provision in the discussion draft. At 
the same time, we recognize the State Attorney Generals play a 
vital role in ensuring the companies adhere to sound 
information security practices. Microsoft therefore supports 
any clarification that enables State Attorney Generals to 
enforce the provisions of this legislation.
    Thank you for asking us to share our views on data security 
legislation and the discussion draft. We are committed to 
helping create a safe and trusted environment for consumers, 
and we look forward to working with you and your staff toward 
this common goal.
    [The prepared statement of Michael Hintze follows:]
   Prepared Statement of Michael Hintze, Senior Attorney, Microsoft 
                              Corporation
    Chairman Stearns, Ranking Member Schakowsky, and Members of the 
Subcommittee: My name is Michael Hintze, and I am a Senior Attorney at 
Microsoft Corporation. I want to thank you for the opportunity to share 
with the Subcommittee our views on data security legislation. In light 
of the number of recent serious security breaches, the increasing 
concern nationwide over identity theft, and the ever-rising but often 
inconsistent number of state laws imposing security and customer 
notification requirements, Microsoft firmly believes that now is an 
appropriate time for Congress to adopt federal data security 
legislation.
    Microsoft applauds Congress and the members of this Subcommittee 
for their attention to data security and identity theft issues. As the 
Federal Trade Commission has reported, in 2003 alone, roughly 10 
million Americans suffered from identity theft, costing businesses 
$47.6 billion and consumers almost $5 billion.1 As a leading 
provider of software and online services, Microsoft is particularly 
concerned that identity theft threatens to erode trust on the Internet, 
and we are deeply committed to working with you, law enforcement, and 
others in the industry to maximize deterrence and minimize the 
opportunities for identity thieves.
---------------------------------------------------------------------------
    \1\ Federal Trade Commission--Identity Theft Survey Report 7 (Sept. 
2003), available at http://www.consumer.gov/idtheft/stats.html 
[hereinafter ``Identity Theft Survey Report''].
---------------------------------------------------------------------------
    Today, I want to address the focus of this hearing--data security 
legislation. Microsoft generally supports the draft legislation before 
this Subcommittee, dated June 30, 2005 (the ``Discussion Draft''), that 
would require companies both to adopt an information security program 
and to notify consumers in the case of a security breach. This 
legislative approach would be an effective complement to Microsoft's 
own multi-faceted strategy for protecting individuals' personal 
information, which includes developing and implementing technological 
solutions, educating consumers about ways to protect themselves while 
online, meeting or exceeding industry best practices on privacy and 
security, and enforcing existing laws. My testimony today highlights 
some of the key issues raised by federal data security legislation and 
by the Discussion Draft in particular, and recommends ways to proceed 
toward the goal of creating a trusted environment for Internet users.
businesses should be required to adopt an information security program.
    Microsoft supports legislation that would require companies engaged 
in interstate commerce to adopt an information security program. But in 
order to be effective, while avoiding unnecessary burdens on 
responsible businesses, such legislative requirements should be both 
broadly applicable and sufficiently flexible to meet the security 
challenges across a wide variety of business environments and 
scenarios.
(1) Federal Legislation Should Enable Companies to Implement Security 
        Measures Best Suited for Their Environments.
    First, any such legislative requirement should recognize that 
security is an ongoing process, that the threats to data security are 
constantly changing, and that the degree and type of risk can vary from 
one situation to another. An appropriate and effective information 
security program will depend on a number of factors, including, but not 
limited to, an entity's size, the nature of its business, the amount 
and type of information it collects, and the number of employees that 
it has. In short, federal legislation must provide flexibility to 
enable companies to adopt security policies and procedures that are 
responsive to their risk level.
    With this in mind, the framework for an information security 
program set forth in the Gramm-Leach-Bliley Act (``GLB'') is preferable 
to that outlined in section 2(a) of the Discussion Draft. In GLB, 
Congress directed the relevant agencies to provide for the 
establishment of ``appropriate . . . administrative, technical, and 
physical safeguards--
          (1) to insure the security and confidentiality of customer 
        records and information;
          (2) to protect against any anticipated threats or hazards to 
        the security or integrity of such records; and
          (3) to protect against unauthorized access to or use of such 
        records or information which would result in substantial harm 
        or inconvenience to any customer.'' 2
---------------------------------------------------------------------------
    \2\ 15 U.S.C.  6801(b).
---------------------------------------------------------------------------
In response to this directive, the FTC implemented regulations that 
require the development of information security programs ``appropriate 
to the [subject entity's] size and complexity, nature and scope of . . 
. activities, and sensitivity of the customer information at issue.'' 
3
---------------------------------------------------------------------------
    \3\ 16 C.F.R.  314.3.
---------------------------------------------------------------------------
    Microsoft believes a flexible framework such as that established by 
GLB and the FTC's implementing regulations makes sense. It gives 
individual organizations--which are in the best position to understand 
the particular security measures that are best suited to the different 
types and forms of personal information they maintain--the discretion 
to implement the most appropriate technologies and procedures for their 
respective environments. In contrast, a set of federally-mandated 
technical specifications would inevitably impose too high of a burden 
on some organizations for some information, but not adequately protect 
some personal information held by other organizations. And, because 
security measures are constantly changing and improving as technology 
advances and engineers respond to evolving threats to information 
security, a one-size-fits-all regime would likely and rapidly become 
obsolete.4
---------------------------------------------------------------------------
    \4\ We also note that as currently drafted, the Discussion Draft 
could create different regimes for entities that are subject both to 
GLB and to the reach of new data security legislation. That said, 
excluding entities covered under GLB from new data security 
legislation, and then adopting a different standard for other entities, 
would subject companies that house the exact same information to 
different regulatory frameworks--e.g., a retailer would be subject to a 
different information security framework than a bank. For this reason, 
we support creating uniformity to facilitate both the development of 
best practices and the development of service-related expertise--such 
as that provided by auditors--in the area of information security.
---------------------------------------------------------------------------
    For these reasons, Microsoft urges the Subcommittee to replace its 
current section 2(a) with language modeled on the framework set forth 
in GLB and the FTC's implementing regulations. In addition, in light of 
the importance of ensuring that implementing regulations give companies 
the discretion to adopt programs that best suit their respective needs, 
Microsoft encourages Congress to direct the FTC to allow entities to 
develop information security programs consistent with the following: 
(1) the entities' size and complexity, (2) the nature and scope of 
their activities, (3) the sensitivity of the personal information at 
issue, (4) the current state of the art in administrative, technical, 
and physical safeguards for protecting information, and (5) the cost of 
implementing such safeguards. Microsoft believes such a flexible 
approach is the best way to protect individuals' personal information 
now and into the future.5
---------------------------------------------------------------------------
    \5\ This testimony focuses on subsection (a) of Section 2. With 
respect to subsection (b)--which applies special requirements to 
information brokers--Microsoft has only two brief observations. First, 
the definition of ``information broker'' requires a slight revision to 
make clear that it applies strictly to those entities whose primary 
business is selling consumer data. Second, while Microsoft generally 
supports giving individuals access to personal information collected 
about them, we think that certain reasonable exceptions must accompany 
such a legislative requirement for it to make sense. For example, 
access should not be required where the individual requesting access 
cannot reasonably verify his name or identity as the person to whom the 
personal information relates; the rights of other persons would be 
violated; the burden of providing access would be disproportionate to 
the risk of harm to the individual; revealing the information would 
compromise proprietary or confidential information, technology, or 
business processes; or revealing the information would be unlawful or 
affect litigation or a judicial proceeding in which the business or 
individual has an interest.
---------------------------------------------------------------------------
(2) Federal Security Requirements Should Apply to All Personal 
        Information.
    If federal data security legislation includes sufficient 
flexibility to enable companies to develop security practices and 
procedures that are tailored to the situation based on these factors, 
Microsoft believes that federal information security requirements 
should apply to all personal information housed by an organization in 
any form, whether electronic or paper. There is no reason to limit the 
requirements to protect personal information to its electronic form: 
The consequences of a loss or misuse of personal information in paper 
form can be just as serious and devastating to the affected individuals 
as a loss of that same data in electronic form. Likewise, the federal 
security requirements should not be limited only to sensitive 
information that, if exposed, could lead to identity theft.6 
Although a breach of non-sensitive personal information may not expose 
individuals to identity theft, it can have other negative 
consequences.7 Again, as long as the federal legislation 
avoids mandating a one-size-fits-all approach to this data and instead 
provides flexibility, the security requirements can reasonably be 
applied to all personal information.8 The creation of such a 
single, flexible framework for all personal information will create 
broader protection for consumers as well as increase efficiency for 
businesses that otherwise could be faced with having to comply with 
additional and inconsistent security requirements imposed by other 
state or federal laws.
---------------------------------------------------------------------------
    \6\ By ``sensitive information'' we mean the kinds of data that is 
included in the Discussion Draft's definition of ``personal 
information.'' Although we advocate for a broader scope for security 
requirements, as we note later, this narrower definition remains 
relevant for the purposes defining the scope of information that should 
trigger a notification obligation.
    \7\ For example, if a number of e-mail addresses wind up in the 
wrong hands, those individual recipients could be deluged with unwanted 
spam that renders their e-mail account virtually unusable--or even 
subjects them to harmful phishing scams that trick them into disclosing 
sensitive financial information to would-be identity thieves. The 
exposure of other non-sensitive personal information can have similarly 
invasive consequences on an individual's privacy.
    \8\ It is worth noting that the FTC Consent Orders on security have 
required businesses to implement security programs for all personal 
information, not just sensitive personal information.
---------------------------------------------------------------------------
    With this background in mind, Microsoft respectfully suggests that 
the Subcommittee reconsider the approach taken in section 2(a) of the 
Discussion Draft. This section appropriately directs the Federal Trade 
Commission to adopt implementing regulations governing information 
security programs, but only with respect to a narrow class of sensitive 
personal information and only with respect to any such information 
maintained in electronic form. For the reasons stated above, Microsoft 
urges Congress to expand the scope of this provision.
(3) Providing Flexibility in the Information Security Requirement is 
        Essential to Avoid Unnecessary Burdens on Small Businesses and 
        Those That Handle Minimal Amounts of Personal Information.
    Finally, we note that a flexible approach to security, such as the 
one outlined above, also is essential to alleviate the potential burden 
that a national information security requirement could impose on small 
businesses. However, if the Committee believes that the potential costs 
of a national information security requirement necessitates some sort 
of small business exemption even with the flexible approach that we 
recommend, Microsoft believes that such an exemption should be 
triggered by the number of individuals whose personal information an 
entity handles and not by the size of the business. For example, given 
the costs of compliance relative to the risks of exposure, it might 
make sense to exempt from at least section 2(a) an entity that 
collects, stores, uses or discloses personal information from fewer 
than 5,000 individuals in any twelve (12) month period.
   businesses should be required to notify consumers when there is a 
                         material risk of harm.
    Microsoft recognizes that notifying individuals of security 
breaches can be an effective element in the effort to reduce the costs 
and other harms associated with identity theft. But we believe that for 
a notification requirement to provide effective warning to consumers, 
and to be reasonable and fair for all business entities engaged in 
interstate commerce, it must be triggered only when there is a material 
risk of harm to an individual. As recent reports have indicated, an 
overly broad notification requirement could have negative 
effects.9 For example, consumers may begin to receive so 
many notices that they become accustomed to such notices and/or become 
unable to differentiate between those breaches that represent a serious 
risk and those that do not. One likely result is that some consumers 
will do nothing in response; as a result, the costs of the notice will 
be incurred in vain, and consumers will continue to bear the risk of 
any resulting identity theft. Other consumers may err on the side of 
over-reaction, responding to even harmless breaches by imposing credit 
freezes, fraud alerts or changing or closing accounts--all of which 
impose significant and unnecessary costs.10 For these 
reasons, Congress should proceed carefully when articulating the 
standard that triggers notification. We believe that the best standard 
is one that incorporates a materiality threshold like the federal 
banking regulators have applied in the Interagency Guidance on GLB--
namely, notification is required when there is a reasonable possibility 
of misuse.
---------------------------------------------------------------------------
    \9\ See, e.g., Henry Fountain, ``Worry. But Don't Stress Out,'' 
Wall Street Journal, June 26, 2005, Section 4, p.1.
    \10\ See Thomas M. Lenard & Paul H. Rubin, ``An Economic Analysis 
of Notification Requirements for Data Security Breaches,'' The Progress 
& Freedom Foundation 10-11 (July 2005).
---------------------------------------------------------------------------
(1) Notification Obligations Should Be Triggered When Misuse Is 
        Reasonably Possible.
    Microsoft believes that the Interagency Guidance on GLB provides a 
workable framework for a national notification standard. That guidance 
focuses on whether, as a result of unauthorized access, ``misuse of . . 
. information . . . has occurred or is reasonably possible.'' 
11 Although the Discussion Draft contains a relatively 
flexible standard, we have some concern that the ``may result in 
identify theft'' formulation is vague, and in any event, that the 
formulation would establish a slightly different standard than GLB has 
been interpreted to apply to financial institutions. This Interagency 
standard provides clear guidance to industry and consumers: it 
appropriately requires an organization to investigate the circumstances 
of any unauthorized access, and to analyze the risks posed to affected 
individuals before any notification is required. Microsoft believes it 
is critical to make companies responsible for determining the details 
of an unauthorized access to sensitive financial information and the 
level of threat resulting from the specific circumstances. If an 
investigation concludes that misuse of a consumer's information has 
occurred or is reasonably possible in light of the facts surrounding 
the security breach and the exposure of the information, then 
notification must be provided. Thus, this standard ensures that only 
those consumers who are reasonably at risk receive notification, and in 
so doing, it mitigates against both the risk of over-notification and 
the risk of consumer over- and under-reaction.
---------------------------------------------------------------------------
    \11\ Interagency Guidance on Response Programs for Unauthorized 
Access to Customer Information and Customer Notice, 70 Fed. Reg. 15736, 
15752 (Mar. 29, 2005) (emphasis added) [hereinafter ``Interagency 
Guidance''].
---------------------------------------------------------------------------
(2) Notification Obligations Should Cover Only Unencrypted Sensitive 
        Personal Information.
    The purpose of notifying an individual of a security breach is to 
enable that person to prevent two potential types of identity theft: 
(1) the misuse of his or her existing credit card or other account, and 
(2) the fraud that is perpetrated when a thief opens a new account in 
his or her name.12 The scope of any notification obligation 
should be limited to the class of personal information that could lead 
to such misuse. This information should include Social Security 
numbers, and it should include credit card information associated with 
other information that could enable someone to access an account or 
make a credit card purchase. This information should not include basic 
personal information--such as name, address or telephone number--that 
alone or in combination with one another presents virtually no 
increased risk of identity theft.
---------------------------------------------------------------------------
    \12\ See Identity Theft Survey Report, supra note 1, at 4.
---------------------------------------------------------------------------
    The Discussion Draft applies its notification requirements to a 
narrow class of personal information, which is appropriate. To clarify 
that this information is particularly sensitive, Microsoft recommends 
that the Discussion Draft rename this class of information ``sensitive 
financial information.'' It should then include a broader definition of 
``personal information'' to which the obligations set forth in section 
2(a), as described above, apply.
    However, within this class of so-called ``sensitive financial 
information,'' Microsoft believes that encrypted information should be 
excluded. Data encrypted using standard methods is either impossible or 
impracticable to decipher. Therefore, there is no reasonable 
possibility of its misuse if it is accessed without authorization. In 
addition, by specifically exempting such encrypted information from the 
standard for notification, Congress will be creating an explicit 
incentive for companies to adopt encryption technology, thereby 
reducing the risk of a security breach in the first instance. If 
Congress has concerns that a general encryption exception is too vague 
and could be abused,13 Microsoft would support allowing the 
exception to apply only to certain levels of encryption--e.g., the 
encryption level set forth in the Federal Information Processing 
Standards issued by the National Institute of Standards and 
Technology--or more generally to encryption adopted by an established 
standard setting body combined with an appropriate key management 
mechanism to protect the confidentiality and integrity of associated 
cryptographic keys in storage or in transit.
---------------------------------------------------------------------------
    \13\ We think that, if Congress explicitly exempted encrypted 
information from the notification requirement, there would be little 
risk of abuse--after all, as a general matter, it is just as easy to 
use readily available good encryption technology as it is to use 
readily available weak encryption technology, so there would be little 
incentive to use a lower standard.
---------------------------------------------------------------------------
(3) Notification Obligations Should Capture Data Maintained In Any 
        Form.
    Microsoft believes that the public policy interest in protecting 
sensitive financial information against malicious use by third parties 
extends to all forms of data, regardless of whether it is housed in 
electronic or paper form. For this reason, we believe the notification 
requirements set forth in section 3 of the Discussion Draft (like the 
general security obligations set forth in section 2(a)) should not be 
limited to electronic or computerized data. This is the approach 
followed in the Interagency Guidance on GLB.
    Although expanding the requirement beyond data in electronic form 
would potentially heighten the compliance costs associated with this 
federal legislation, the public policy supports such an expansion. 
Identity theft can be committed using information obtained offline and 
in a form other than just computerized data. Simply put, an identity 
thief can defraud a consumer using sensitive personal information 
maintained in paper form just as easily as the thief can using 
computerized data. To adequately protect consumers, the notification 
requirements of the legislation should therefore apply to all sensitive 
financial information--regardless of the form in which the information 
is maintained.
    congress should give companies discretion to determine the most 
           appropriate and effective method for notification.
    Microsoft believes that for a nationwide notification requirement 
to be administratively workable, business entities subject to the 
requirement should have flexibility in how notice is provided. This is 
because the appropriate method for notice will turn on the size and 
type of the entity providing the notice, the number of people required 
to receive notice, the methods by which the entity typically 
communicates with its customers or other individuals, and the relative 
costs for different methods of providing notice. For these reasons, the 
Interagency Guidance on GLB provides discretion to covered entities to 
provide notice ``in any manner designed to ensure that a customer can 
reasonably be expected to receive [the notice.]'' 14
---------------------------------------------------------------------------
    \14\ Interagency Guidance, supra note 11, at 15753.
---------------------------------------------------------------------------
    Microsoft urges Congress to follow the model of the Interagency 
Guidance by giving companies discretion to issue notice in various 
ways, so long as the notice is reasonably expected to reach the 
affected individuals. The Discussion Draft, which would obligate an 
entity to provide notice to an individual in writing and by email and 
through the entity's website, is too restrictive, and there is a real 
risk that it could lead to less effective notifications and/or be too 
costly for many entities to implement. Rather, federal legislation 
should enable entities to provide notice via telephone, regular mail, 
or electronic mail, depending on the circumstance. Indeed, many 
individuals who have received notices of security breaches report that 
they appreciate getting them by telephone, which personalizes the 
process, makes the notice less intimidating, and provides an immediate 
forum for the individual to ask questions.15 While telephone 
notice may not be feasible in cases requiring mass notification, it is 
an option that should be permissible consistent with the interpretation 
of GLB.
---------------------------------------------------------------------------
    \15\ Larry Ponemon, ``Opinion: After a Privacy Breach, How Should 
You Break the News,'' Computerworld, July 5, 2005.
---------------------------------------------------------------------------
    Microsoft also believes that entities should be required to try to 
reach individuals directly, unless certain cost or quantity thresholds 
are present or there is no known number, mailing address, or electronic 
mail address for an individual. Accordingly, Microsoft would propose 
using mass media notice and Internet postings only in exceptional 
circumstances requiring substitute notice.
 congress should consider internal and law enforcement investigations 
       when analyzing the appropriate timeliness of notification.
    Microsoft is pleased that the Discussion Draft accounts for the 
immediate obligations of a company in the aftermath of a breach by 
allowing reasonable time for a company to determine the scope of the 
breach and to restore any compromised systems before issuing notice of 
the breach. Microsoft also believes, however, that federal legislation 
should account for the needs of law enforcement in investigating the 
breach. It is often the case that immediate notification to the public 
can interfere with a criminal investigation of the underlying incident. 
If, for example, law enforcement officials are in the process of 
identifying or apprehending potential suspects, a public announcement 
may cause the suspects to flee, destroy evidence, or otherwise obstruct 
these efforts to bring the perpetrators to justice. The existing GLB 
guidelines regulating financial institutions, as well as most state 
breach notification laws, have accounted for these concerns by allowing 
for delayed notification, consistent with the legitimate needs of law 
enforcement.
    The risk of any abuse with this delay in notification is easily 
addressed by vesting the authority for any such determination in law 
enforcement, rather than the company itself. As the Interagency 
Guidance on GLB provides, ``notice may be delayed if an appropriate law 
enforcement agency determines that notification will interfere with a 
criminal investigation and provides the institution with a written 
request for the delay.'' 16 By accounting for these 
contingencies in imposing a notification requirement, Congress can 
balance the interests of consumers, the legitimate needs of law 
enforcement, and the immediate responsibilities of companies suffering 
data security breaches.
---------------------------------------------------------------------------
    \16\ Interagency Guidance, supra note 11, at 15752.
---------------------------------------------------------------------------
                strong federal preemption is warranted.
    Microsoft believes that for federal legislation to be meaningful in 
this area, it must address the problem of state laws imposing 
potentially inconsistent security and notification requirements. In 
other words, we strongly feel that federal legislation requiring 
entities to implement an information security program and to notify 
individuals of security breaches must ``occupy the field.'' As we have 
seen with the rash of major security breaches over the past several 
months, information security is a national problem that affects all 
Americans. Federal legislation that preempts inconsistent state laws is 
therefore crucial to protect consumers while allowing responsible 
businesses to operate without unnecessary burdens.
    Over the past several months, more than a dozen states have enacted 
breach notification laws, with a few of these states also requiring 
entities to adopt security procedures. Although these statutes 
generally have been patterned after the California law, which pioneered 
breach-related legislation, the statutes are not uniform, and their 
differences can be striking. For one, the statutes sometimes differ on 
the very definition of ``personal information,'' with some states 
broadly covering any account information, some requiring a name coupled 
with other identifying information, and some including a Social 
Security number alone. Similarly, the statutes differ in their 
jurisdictional scope, with most applying to entities conducting 
business within the state, but others applying to anyone who possesses 
information about residents of the state. The statutes are also 
inconsistent as to when notification is required, with some states 
providing an exception when the breach is reasonably believed to be 
harmless. In addition to these disparities, provisions regarding 
notification period, notification method, and available remedies often 
vary from state to state.
    Although some have argued that the federal provision should create 
a ``floor,'' above which states are free to impose additional 
requirements, this would not solve the problem caused by the existing 
patchwork of state regulation. In such an environment, any company that 
participates broadly in the national economy must either abide by the 
strictest applicable standard, or otherwise take measures to 
compartmentalize its transactions on a state-by-state basis. Under the 
former approach, any federal legislation would be rendered meaningless 
absent preemption. And given the realities of today's virtual economy, 
the latter option is largely impracticable; or, for those companies 
that tried to comply with requirements on a state-by-state basis, it 
would potentially cause a harmful distraction from what is important--
protecting the security of consumers' personal information and promptly 
notifying any affected consumers in the event of a security breach that 
is reasonably possible to lead to the misuse of unencrypted sensitive 
financial information. Therefore, the only realistic solution that 
protects consumers while minimizing the operational burdens in 
responsible businesses is to adopt a nationwide standard for security 
and notification. That standard should certainly be robust, but, once 
adopted, should apply uniformly. Hence, any federal legislation on this 
topic should specifically preempt state security and notification laws.
    The Discussion Draft includes an appropriate preemption provision. 
That said, Microsoft supports adding language to the preemption 
provision to make clear that only State Attorneys General can bring a 
civil action under state law that is premised on a violation of the 
federal legislation. At the same time, we recognize that State 
Attorneys General can play a vital role in ensuring that companies 
adhere to sound information security practices. Accordingly, Microsoft 
also supports any clarification that enables State AGs to directly 
enforce the provisions of the legislation and also ensures they can 
continue to rely on their enforcement authority under state consumer 
protection laws.
    congress should consider additional provisions in data security 
                              legislation.
    Requiring entities to implement security procedures that apply to 
personal information and to notify individuals of security breaches, 
where the misuse of unencrypted sensitive financial information is 
reasonably possible, makes sense. But these approaches do not fully 
address a key concern raised in response to recent security breaches--a 
lack of transparency as to how companies are using and disclosing 
personal information in the first place. Individuals want to understand 
better the entities that maintain their personal information, the types 
of information they maintain, how they use that information, and the 
third parties with whom they share such information. For this reason, 
in addition to supporting reasonable security precautions and 
notification requirements, Microsoft looks forward to working with the 
Subcommittee on appropriate legislation that addresses these broader 
concerns. Microsoft believes that adopting a tailored but more complete 
approach to data security legislation at the federal level will better 
inform consumers about who is using their personal information and how, 
and thereby empower consumers to exercise meaningful control over their 
personal information both before and after any security breach occurs. 
In addition, a national standard will give consumers and organizations 
that are facing a patchwork of privacy and data security requirements 
at the state level clarity about the standards for collecting, using, 
disclosing, and storing personal information.
    We commend the Subcommittee for holding this hearing today and 
appreciate your determination to seek strong legislation to help curb 
identity theft. Thank you for extending us an invitation to share our 
recommendations on the Discussion Draft, and we look forward to working 
with you on additional means to help inform and empower consumers both 
before and after a security breach occurs. Microsoft is committed to 
creating a trusted environment for Internet users, and looks forward to 
working with you toward this common goal.

    Mr. Stearns. I thank the gentleman.
    Mr. Hoofnagle, welcome.

                STATEMENT OF CHRIS JAY HOOFNAGLE

    Mr. Hoofnagle. Good morning, Chairman Stearns, Ranking 
Member Towns, and good morning, Chairman Barton.
    My name is Chris Hoofnagle. I am senior counsel with the 
Electronic Privacy Information Center. We are a not-for-profit 
research center that focuses on privacy founded in 1994 here in 
Washington. I run the organization's West Coast office in San 
Francisco.
    There are many different consumer protection issues that 
need the attention in this committee, and we thank you for 
focusing your attention on privacy and security. Ranking Member 
Towns, in your introduction, you discussed about how there are 
new security breaches, it seems, bimonthly. It is actually more 
than that. The Privacy Rights Clearinghouse has a chronology of 
data breaches online, and there have been 60 known such 
breaches since ChoicePoint, the commercial data broker, 
announced their breach back in February. And when you look at 
this chronology, you see that it has been a diverse array of 
businesses. They are in the financial services sector. They are 
in the retail sector. You also see that there is a diverse 
number of attackers. There is a diverse number of threats to 
personal information. Sometimes these breaches are caused by 
insiders. Sometimes they are caused by outsiders. Sometimes it 
is just a mistake. And then sometimes it is willful.
    So your committee is charged with dealing with a very 
difficult situation of writing a law that addresses all of 
these different types of data risks and risks to identity theft 
and other misuse of information.
    With that said, let me focus on just some parts of my 
testimony.
    We were very happy to see the discussion draft. I think it 
is an important first step in addressing security breach 
issues. But there are several issues that we wanted to tweak. 
We have already heard testimony this morning regarding the 
standard for providing notice. And under this bill, there has 
to be a risk of identity theft. We really want to emphasize 
that identity theft is not the only risk to data security.
    There have been cases involving stalking. One of the things 
we work at at EPIC is the problem of investigators who operate 
online who break security of other companies to get information 
and sell that information to other people, including stalkers. 
Data might be accessed by other businesses that are engaged in 
the attempt to locate people. So, for instance, in New Jersey, 
there was a major security breach involving 600,000 records at 
Bank of America and Wachovia. And the people obtaining that 
information weren't trying to steal anybody's identity. What 
they were trying to do was sell that data to debt collectors so 
that the debt collectors could locate them. Data might be 
accessed for corporate espionage purposes. It might even be 
access for extortion. There was a case out in California where 
a hospital had outsourced sensitive medical information to 
Pakistan. The person in Pakistan handling the data was never 
paid, and so she took the data and she put it online saying if 
you don't pay me, I am going to post the rest of this medical 
data.
    And finally, sometimes data is stolen for spam purposes. 
There was a case here on the east coast where a Time Warner 
employee was caught with 92 e-mail addresses of AOL 
subscribers, and he broke the system in order to sell that data 
for direct marketing purposes.
    I also wanted to amplify Ms. Maier's point that it is also 
very difficult to determine whether or not identity theft is 
the intent of an attacker and whether or not the attacker is 
even competent enough to commit that crime. We really need to 
focus on misuse of data rather than identity theft.
    We were also pleased to see that this is a discussion draft 
on data protection. To us, data protection is an issue that is 
much broader than security. Data protection includes privacy, 
the idea that a minimum amount of information should be 
transferred when entering into a transaction, the idea that 
people should have access to their information. They should be 
able to correct it. However, those rights aren't all 
encompassed in this discussion draft. And we urge you in future 
drafts to include other privacy rights, because some of the 
problem here is not just insecurity. The problem is that even 
if this data were sold securely, there is a problem with the 
sale that, in some cases, this information should never be 
sold.
    We also emphasize you to include audit trails in the bills. 
While encryption is a great tool for protecting data from 
outsiders, encryption does not do a good job when insiders are 
stealing data and selling it to other people. And it is at that 
point where audit trails are really important. And what audit 
trails do essentially is track who accesses data, for what 
purpose, and whether they disclose it to anyone. And it is the 
best way to not only deter insiders, but also to catch them 
once they have broken the security.
    I see that I have run out of time, so I want to conclude by 
saying thank you for holding this hearing and for considering 
this legislation. And if I can be of help to the committee, 
please feel free to contact me.
    [The prepared statement of Chris Jay Hoofnagle follows:]
Prepared Statement of Chris Jay Hoofnagle, Director and Senior Counsel, 
        Electronic Privacy Information Center West Coast Office
                              introduction
    Chairman Stearns, Ranking Member Schakowsky, and Members of the 
Subcommittee, thank you for extending the opportunity to testify on 
data security legislation.
    My name is Chris Hoofnagle and I am Senior Counsel to the 
Electronic Privacy Information Center, and director of the group's West 
Coast office, located in San Francisco. Founded in 1994, EPIC is a not-
for-profit research center established to focus public attention on 
emerging civil liberties issues and to protect privacy, the First 
Amendment, and constitutional values.
    EPIC has been on the forefront of the issues being considered in 
today's hearing. For instance, ``commercial data brokers,'' companies 
that extract sensitive information from many sources and sell it as a 
``dossier'' to others, have long been a matter of public 
concern.1 EPIC has engaged in extensive use of the Freedom 
of Information Act to determine the extent of interaction between the 
government and data brokers such as Lexis-Nexis, Acxiom, InfoUSA, and 
Merlin.2
---------------------------------------------------------------------------
    \1\ See Chris Jay Hoofnagle, Big Brother's Little Helpers: How 
ChoicePoint and Other Commercial Data Brokers Collect, Process, and 
Package Your Data for Law Enforcement, 29 N.C.J. Int'l L. & Com. Reg. 
595 (Summer 2004), available at http://www.epic.org/privacy/
choicepoint/cp--article.pdf.
    \2\ EPIC Choicepoint Page, available at http://www.epic.org/
privacy/choicepoint/.
---------------------------------------------------------------------------
    We applaud the Members of the Committee and others who have crafted 
legislation to address security standards for companies that maintain 
personal information. In my testimony today, I will provide comment on 
the Discussion Draft of Data Protection Legislation. The Discussion 
Draft is a good first step in addressing the security risks presented 
by companies with personal information, but fails to fully confer upon 
individuals the tools they need to avoid misuse of personal 
information. I therefore recommend that the Committee move this 
legislation, with reasonable enhancements including: an option for 
credit freeze, a requirement that security measures include audit 
trails, and public reporting of security breaches to the Federal Trade 
Commission. I further recommend that the Committee go beyond security 
issues and consider the privacy risks raised by data brokers.
                            data insecurity
    Well before the recent news of the Choicepoint debacle became 
public, EPIC had been pursuing the company and had written to the FTC 
to express deep concern about its business practices. On December 16, 
2004, EPIC urged the Federal Trade Commission to investigate 
Choicepoint and other data brokers for compliance with the Fair Credit 
Reporting Act (FCRA), the federal privacy law that helps ensure 
personal financial information is not used improperly.3 The 
EPIC letter said that Choicepoint and its clients had performed an end-
run around the FCRA and were selling personal information to law 
enforcement agencies, private investigators, and businesses without 
adequate privacy protection.
---------------------------------------------------------------------------
    \3\ Letter from Chris Jay Hoofnagle, Associate Director, EPIC, and 
Daniel J. Solove, Associate Professor, George Washington University Law 
School, to Federal Trade Commission, Dec. 16, 2004, available at http:/
/www.epic.org/privacy/choicepoint/fcraltr12.16.04.html.
---------------------------------------------------------------------------
    Since the Choicepoint breach, there has been a steady stream of 
news articles and public announcements concerning other companies that 
have failed to secure the personal information of individuals. The 
Privacy Rights Clearinghouse, a San Diego-based group, has posted a 
Chronology of these data breaches.4 As of this writing, this 
Chronology notes 60 different incidents where a company or government 
entity reported a security breach involving the Social Security number, 
drivers license number or financial account number. The Privacy Rights 
Clearinghouse estimates that 50,000,000 individuals have been affected 
by these known breaches.
---------------------------------------------------------------------------
    \4\ Privacy Rights Clearinghouse, A Chronology of Data Breaches 
Reported Since the ChoicePoint Incident, available at http://
www.privacyrights.org/ar/ChronDataBreaches.htm (last visited Jul. 24, 
2005).
---------------------------------------------------------------------------
    This Chronology is worth revisiting for at least three reasons. 
First, it demonstrates the diversity of entities that store sensitive 
personal information and yet have experienced a security incident. 
While there have been major security breaches at commercial data 
brokers such as Lexis-Nexis and Merlin, there have also been security 
problems at banks, schools, government entities such as motor vehicle 
administrations, and retailers. This demonstrates the need for 
intervention across a broad array of entities.
    A privacy-friendly approach would first emphasize the need for 
reducing the amount of personal information collected and maintained. 
Where retention of personal information is necessary, these entities 
should be subject to a framework of ``Fair Information Practices.'' 
Fair Information Practices, or ``FIPs,'' constitute a framework of 
rights and responsibilities that require entities to minimize the 
amount of information they collect, to use it only for purposes 
specified by the individual, to hold it in a secure manner, and to 
provide the individual access to and of the ability to correct their 
personal data.
    Second, the Chronology demonstrates that security breaches may 
occur for reasons other than to commit identity theft. For instance, 
insiders at Bank of America, Wachovia, PNC Bank and Commerce Bank sold 
customers' personal information to attorneys and others who were 
engaged in debt collection efforts.5 That breach affected 
the records of over 600,000 accountholders. Sometimes systems are 
compromised for voyeuristic purposes, such as obtaining the contact 
information or communications data of celebrities or law enforcement 
officials.6 Security breaches may be motivated by a company 
attempting to obtain information about a competitor. Finally, extortion 
may motivate someone to obtain and disclose an individual's personal 
information. For instance, in 2003, a Pakistani clerical worker 
performing transcription services for an American hospital threatened 
to release medical records if she was not paid for her 
services.7 Accordingly, Congress' approach should recognize 
that identity theft is not the only harm to be avoided. Legislation 
passed by Congress should recognize that security breaches may be 
motivated by a number of crimes unrelated to attempted identity theft.
---------------------------------------------------------------------------
    \5\ Jonathan Krim, Banks Alert Customers of Data Theft, Washington 
Post, May 26, 2005, available at http://www.washingtonpost.com/wp-dyn/
content/article/2005/05/25/AR2005052501777.
html
    \6\ Kelly Martin, Hacker breaches T-Mobile systems, reads US Secret 
Service email and downloads candid shots of celebrities, SecurityFocus, 
Jan. 12, 2005
    \7\ David Lazarus, A tough lesson on medical privacy Pakistani 
transcriber threatens UCSF over back pay, Oct. 22, 2003, available at 
http://www.sfgate.com/article.cgi?file=/c/a/2003/10/22/MNGCO2FN8G1.DTL.
---------------------------------------------------------------------------
    Third, the Chronology demonstrates that entities that maintain 
personal information are subject to many different security risks. 
While we typically think of outsiders, such as malicious computer 
hackers, as the prime security risk, the Chronology shows that 
dishonest employees are a major security problem. Accordingly, 
Congress' approach should include measures likely to catch insiders who 
sell information. Audit trails--a requirement that entities record who 
accesses and discloses personal information--would go far in deterring 
and detecting dishonest insiders.
            the draft should contain credit freeze language
    In the Senate, Members are considering legislation that will 
prevent identity theft by allowing individuals to ``freeze'' their 
credit. Under these proposals, individuals can opt to erect a strong 
shield against identity theft by preventing the release of their credit 
report to certain businesses. Because a credit report is always pulled 
before a business issues a new line of credit, a freeze will make it 
very difficult for an impostor to obtain credit in the name of another 
person.8
---------------------------------------------------------------------------
    \8\ Chris Hoofnagle, Putting Identity Theft on Ice: Freezing Credit 
Reports to Prevent Lending to Impostors, Securing Privacy in the 
Internet Age, Stanford University Press (forthcoming 2006) available at 
http://ssrn.com/abstract=650162
---------------------------------------------------------------------------
    According to US PIRG, 10 states have credit freeze laws 
enacted.9 The New Jersey law offers consumers the most 
benefit--any resident may freeze their credit report at minimal cost, 
and consumer reporting agencies must make the thaw mechanism work 
quickly, so that individuals can take advantage of instant credit 
offers.
---------------------------------------------------------------------------
    \9\ US PIRG, State Breach and Freeze Laws, available at http://
www.pirg.org/consumer/credit/statelaws.htm.
---------------------------------------------------------------------------
    We believe that a credit freeze is a good approach that will 
minimize security risks and reduce the risk of identity theft. Simply 
stated, this provision will make it more difficult for others to use a 
consumer's credit report without their consent. Consumers will always 
have the ability to provide their credit reports in those transactions 
that they initiate.
            the need to consider general privacy protections
    The Discussion Draft would establish important security safeguards 
for all businesses with personal information, and heightened duties on 
information brokers. But while the Discussion Draft addresses security 
concerns, it does not contemplate whether general privacy restrictions 
are appropriate.
    Information brokers have operated under a self-regulatory schema, 
known as the Individual Reference Service Group (``IRSG'') Principles. 
Through these principles, the industry conferred upon itself the 
authority to sell detailed dossiers to almost anyone for almost any 
purpose. It was the promiscuity of these principles that led to the 
most recent Choicepoint breach, because the principles allowed data 
brokers to choose who is ``qualified'' buyer of personal information, 
and allowed sale to anyone with a ``legitimate'' business purpose.
    A serious inquiry should be made into the purposes for which these 
dossiers are being sold. Congress should set limits on the contexts in 
which personal information can be sold, and when data is sold, limit 
the secondary uses of personal information.
          the discussion draft of data protection legislation
Section 2 Requirements for Information Security: All Companies
    This section directs the Federal Trade Commission (``Commission'') 
to promulgate regulations to require companies to implement policies 
and procedures to protect personal information. Companies would have to 
develop a security policy and statement on use of personal information. 
Companies would have to identify an employee as being responsible for 
information security. Finally, companies would have to develop 
processes to take preventive and corrective action to address security 
vulnerabilities, including the use of encryption.
    We applaud the Members for encouraging the use of encryption to 
protect personal information. However, we wish to emphasize that once 
data is encrypted, it may still be vulnerable. For instance, the 
company may choose a poor encryption method that can be decoded easily. 
There is also the risk that a malicious actor, especially when he is an 
insider, will have the key or password to decode the encryption. 
Accordingly, an entity that uses encryption should not automatically be 
exempt from other data security responsibilities, such as the 
requirement to provide security breach notices.
    We suggest three improvements to this section:
    First, this section could be significantly enhanced by a 
requirement that companies employ audit trails to deter and detect 
insider misuse of personal information. An audit trail would record who 
accessed individuals' information, the purposes for which it was 
accessed, whether it was disclosed, and to whom it was disclosed. 
Simply put, encryption will be most effective at protecting data from 
outsiders; auditing will be a strong deterrent to insiders.
    Second, where possible, companies should require customers to 
establish a password system for access to their file. Currently, many 
entities with sensitive personal information will give access to files 
based on the provision of simple biographical information, such as 
billing address, phone number, date of birth, or Social Security 
number. The problem is that these biographical identifiers often are 
found in publicly-available databases, such as phone books, public 
records, or the Internet.
    Passwords have some disadvantages. Sometimes people choose poor 
passwords, but an institution can correct this by requiring the 
password to be a certain length. Sometimes individuals forget 
passwords, and in cases where that is a concern, a ``shared secrets'' 
password system could be employed. In such a system, the customer and 
business agrees upon a series of questions that can be asked to verify 
identity. They could include asking the customer what street they lived 
on as a child, the name of their first pet, or their favorite book or 
sports team. The questions are periodically rotated to prevent an 
impostor from learning these secrets.
    Third, some companies are using automatic number identification 
(``ANI''), a form of caller ID, to identify or authenticate customers. 
ANI offers additional security over caller ID, but it now appears that 
ANI too can easily be ``spoofed,'' or falsified, through the use of 
VOIP telephony.
    In crafting security guidelines, the Commission will have to 
consider that new technologies may pose new risks to security systems. 
Accordingly, we recommend that the Commission be directed to 
periodically review security requirements, and new threats to personal 
data.
Section 2 Requirements for Information Security: Special Requirements 
        for Data Brokers
    This section would require information brokers to be audited by the 
Commission. It would also require data brokers to allow individuals to 
obtain their dossier annually at no cost.
    We applaud these requirements. Individuals should be able to obtain 
personal information held by data brokers at no charge. Currently, 
industry practice on providing individuals access to their personal 
information varies widely. For instance, it is not clear whether 
information brokers provide the complete file of personal information 
when an individual makes a request for access. Choicepoint provides 
free access, and in a recent study where 11 people requested their 
files, the company provided individuals with their dossiers in a timely 
fashion. However, the study showed the many errors were found in the 
Choicepoint dossiers.10 Acxiom charges $20 for access, but 
in the study, the company only fulfilled half of the requests made and 
took an average of 89 days to comply. A legal mandate for free and 
timely access is needed.
---------------------------------------------------------------------------
    \10\ PrivacyActivism, Data Aggregators: A Study of Data Quality and 
Responsiveness, May 18, 2005, available at http://
www.privacyactivism.org/Item/222.
---------------------------------------------------------------------------
Section 3 Notification of Database Security Breach
    This section specifies the instances when a company must disclose 
to individuals that their personal information has been obtained by an 
unauthorized person. It defines breach of security as ``the compromise 
of the security, confidentiality, or integrity of data that results in, 
or there is a reasonable basis to conclude has resulted in, the 
acquisition of personal information by an unauthorized person that may 
result in identity theft.'' It specifies how a company must give 
notice, and what the notice must contain. It specifies that a company 
with a security breach must provide three credit reports and a year of 
credit monitoring service to victims.
    There are several critical aspects to this portion of the 
legislation. First, of course, is the severity of events that 
constitute a ``breach of security.'' The language in the Discussion 
Draft tracks the California standard, except that the Discussion Draft 
includes the requirement that the security breach ``may result in 
identity theft.''
    As we explained above, identity theft is only one risk from 
unauthorized access to personal information. Unauthorized access may be 
gained for other purposes that cause harm to the individual, such as 
stalking, obtaining information for debt collectors, corporate 
espionage, extortion, or mere voyeurism. The purpose of data security 
breach legislation is not just to warn individuals of a risk of 
identity theft; it is also designed to shine a light on poor data 
practices.
    More importantly, as identity theft expert Beth Givens has argued, 
companies often cannot tell whether a security breach may result in 
identity theft. The motives of a person who gained access are not 
always clear. Identity theft can also occur months or even years after 
a security breach.
    There has been much discussion of whether to give companies 
discretion to determine whether notice to the public is justified. No 
such discretion is given by the California law, and Congress should 
carefully consider the consequences of extending discretion at the 
federal level. It is already the case that one information broker, 
Acxiom, engaged in acrobatics to avoid giving notice of a 2003 security 
breach that reportedly involved 20 million records.11
---------------------------------------------------------------------------
    \11\ Robert O' Harrow, Jr., No Place to Hide 71-72, Free Press 
(2005). DOJ, Milford Man Pleads Guilty to Hacking Intrusion and Theft 
of Data Cost Company $5.8 Million, Dec. 18, 2003, available at http://
www.usdoj.gov/criminal/cybercrime/baasPlea.htm; DOJ, Florida Man 
Charged with Breaking Into Acxiom Computer Records, Jul. 21, 2004, 
available at http://www.usdoj.gov/opa/pr/2004/July/04_crm_501.htm.
---------------------------------------------------------------------------
    Because it is difficult to gauge the risk of identity theft, 
because there are harms other than identity theft which may result from 
security breaches, and because there is already evidence that companies 
will go to great lengths to avoid giving security breach notices, we 
recommend eliminating the language that gives companies discretion not 
to give notice based on a determination whether the breach ``may result 
in identity theft.''
    If Congress chooses to give some measure of discretion, it should 
set a standard that requires notice where there is a ``reasonable risk 
or reasonable basis to believe that such access could lead to misuse of 
personal information.'' This standard recognizes that security breaches 
should focus on ``misuse'' of personal information instead of just 
identity theft, and would allow companies not to give notice where 
there is no reasonable risk of harm. There should also be a duty to 
thoroughly investigate suspected breaches. The standard set should not 
give data holders incentives to ignore these incidents.
    The second critical factor is the scope of businesses that will be 
subject to the notification requirement. We think the standard set 
forth by the bill--any company that owns or possesses data--is the 
appropriate one. The California standard--any company that owns or 
licenses data--misses the mark in that some companies merely process 
data for others, but may still experience a breach.
    A third critical factor is the form of notice. The California 
security notice legislation was in effect a type of ``Freedom of 
Information Act'' for security standards. Consumers and policymakers 
have benefited from learning more about security standards and 
breaches, but there have also been significant limitations--in many 
cases, only the victims learn of the breach. Consumers and policymakers 
would benefit from hearing of all breaches through a website that could 
be operated by the Commission. We would recommend that the following 
language be added to the legislation, so that there will be public 
reporting of security breaches:
        ``Information submitted to the Commission under sections 
        2(b)(1) and 3(a)(2) shall be posted at a publicly available 
        website operated by the Commission.''
Section 4 Enforcement by the Federal Trade Commission
    This section specifies that the Commission will enforce the law, 
under its authority to address unfair and deceptive trade practices.
    We recommend adding enforcement powers so that state Attorneys 
General can also enforce the law.
    We further recommend that the Commission's authorization and 
appropriation be increased to account for the burdens associated with 
enforcing this law. The Commission must oversee a plethora of business 
practices--from deception in funeral businesses to ``power output 
claims for amplifiers utilized in home entertainment products.'' 
12 This wide range of responsibility requires adequate 
funding.
---------------------------------------------------------------------------
    \12\ See generally Title 16 of the Code of Federal Regulations, 
available at http://www.access.gpo.gov/nara/cfr/waisidx_05/
16cfrv1_05.html.
---------------------------------------------------------------------------
Section 5 Definitions
    This section defines the many terms in the legislation, including 
identity theft and information broker.
    The definition of ``identity theft'' is narrow and does not 
encompass the full range of activities normally understood as identity 
theft. The current definition focuses on the use of others' personal 
information for the purpose of engaging in ``commercial transactions.'' 
This does not recognize the problem of ``criminal identity theft,'' 
where an individual uses the personal information of another in his 
interactions with law enforcement, leaving the victim with a criminal 
record. Accordingly, we recommend that if the law continues to include 
this term, that it be broadened to recognize other activities commonly 
understood to be ``identity theft.''
    Defining ``information broker'' is a challenge. Many companies are 
engaged in the transmission of personal information to third parties. 
In some cases, this occurs within the individual's expectation, such as 
when information must be transferred to execute a transaction requested 
by a consumer. In others, the transfer of personal information raises 
unique privacy risks, and such businesses should be included in the 
definition of ``information broker.''
    Further complicating this matter is the qualifier ``whose business 
is to collect, assemble, or maintain personal information.'' 
Information brokerage is just a small percentage of the business of a 
company like Lexis-Nexis or even Choicepoint. Lexis-Nexis is a huge 
company; most of its information products have no bearing on privacy, 
such as the company's legal and scholarly research databases. According 
to Choicepoint, only about 11% of its operations consist of information 
brokerage outside the Fair Credit Reporting Act. Can it be said that 
Lexis-Nexis and Choicepoint are entities ``whose business is to 
collect, assemble, or maintain personal information'' for provision to 
third parties?
    There have been many attempts to define an information broker, and 
thus far, we think the best is contained in S. 1332:
          The term `data broker' means a business entity which for 
        monetary fees, dues, or on a cooperative nonprofit basis, 
        regularly engages, in whole or in part, in the practice of 
        collecting, transmitting, or otherwise providing personally 
        identifiable information on a nationwide basis on more than 
        5,000 individuals who are not the customers or employees of the 
        business entity or affiliate.
    This definition limits the scope of the law to companies that 
regularly engage in maintaining large databases on non-customers for 
the purpose of providing them to a third party. It provides a good 
starting point for further discussion.
    Congress should also consider giving the Commission rulemaking 
authority to address circumvention of this definition through corporate 
restructuring or technological tweaks. In passing the Fair and Accurate 
Credit Transactions Act, Congress included a provision that prohibits 
``technological circumvention'' of the Fair Credit Reporting Act's 
provisions. The concern was that through database design or corporate 
reorganization, a consumer reporting agency may escape obligations to 
provide a free credit report. We think that a similar provision would 
be appropriate her to avoid a situation where a company simply 
reorganized to avoid security or privacy responsibilities.
    The definition of ``personal information'' in the Discussion Draft 
is narrower than the California law. Under the California law, personal 
information ``means an individual's first name or first initial and 
last name in combination with . . .'' a Social Security number, drivers 
license number, or account number. The Discussion Draft would require 
the individual's first and last name, instead of just the first 
initial. We think that the federal legislation should be as broad as 
the California definition in this regard.
    We further recommend that section 5(5)(A)(iii) should be modified. 
That section treats an account number in combination with an access 
code as ``personal information.'' As currently written, it gives credit 
card companies an out from giving notice by claiming that the three-
digit security code on the card must be present for a breach to occur. 
That is, even though the three-digit code is not necessary to make 
charges, they will claim that a breach does not require notice unless 
that code is included in the compromised files. We accordingly 
recommend that this section be changed to:
          ``(iii) Financial account number, or a credit card number, or 
        a debit card number in combination with any required security 
        code.''
Section 6 Effect on Other Laws
    This section specifies that all state laws concerning breaches of 
security or notification to individuals of breaches of security would 
be preempted.
    The preemption language in the Discussion Draft is overly broad; it 
risks unintentionally preempting many different state laws that address 
security, but are not the target of this law. Data security needs are 
too varied to accommodate a nationwide uniform standard. Floor 
preemption is more appropriate here.
    In privacy and consumer protection law, federal ceiling preemption 
is an aberration. Historically, federal privacy laws have not preempted 
stronger state protections or enforcement efforts. Federal consumer 
protection and privacy laws, as a general matter, operate as regulatory 
baselines and do not prevent states from enacting and enforcing 
stronger state statutes. The Electronic Communications Privacy Act, the 
Right to Financial Privacy Act, the Cable Communications Privacy Act, 
the Video Privacy Protection Act, the Employee Polygraph Protection 
Act, the Telephone Consumer Protection Act, the Driver's Privacy 
Protection Act, and the Gramm-Leach-Bliley Act all allow states to 
craft protections that exceed federal law.13 Even the Fair 
Credit Reporting Act is largely not preemptive.14
---------------------------------------------------------------------------
    \13\ Respectively at 18 U.S.C.  2510 et. seq., 12 U.S.C  3401, 47 
USC  551(g), 18 USC  2710(f), 29 USC  2009, 47 USC  227(e), 18 
U.S.C.  2721, and Pub. L. No. 106-102, 507, 524 (1999).
    \14\ See 15 USC  1681t.
---------------------------------------------------------------------------
    Although the federal government has enacted privacy laws, most 
privacy legislation in the United States is enacted at the state level. 
Many states have privacy legislation on employment privacy (drug 
testing, background checks, employment records), Social Security 
Numbers, video rental data, credit reporting, cable television records, 
arrest and conviction records, student records, tax records, 
wiretapping, video surveillance, identity theft, library records, 
financial records, insurance records, privileges (relationships between 
individuals that entitle their communications to privacy), and medical 
records.15
---------------------------------------------------------------------------
    \15\ See generally, Robert Ellis Smith, Compilation of State and 
Federal Privacy Laws (Privacy Journal 2002).
---------------------------------------------------------------------------
    Finally, the data industry is in a weak position to argue that it 
cannot comply with state laws. This is an industry that ``segments'' or 
groups people by characteristics at the zip+4 level. They know where 
you live now, and where you lived ten years ago. No other industry is 
better equipped to use technology to comply with state law than the 
data brokers.
Section 7 Effective Date and Sunset
    This section specifies that the act will take effect a year after 
enactment, and sunset 10 years from enactment.
    While Congress and the Commission should continue to revisit data 
security issues, security requirements and rights in personal 
information should not automatically sunset. We suggest striking the 
sunset provision.
Section 8 Authorization of Appropriations
    This section would authorize a yet to be determined amount to the 
Commission. For reasons explained above, we support greater funding of 
the Commission.
                               conclusion
    Mr. Chairman and Members of the Committee, thank you for inviting 
me to on the Discussion Draft of Data Protection Legislation. The 
Discussion Draft is a good first step in addressing security risks 
presented both by ordinary companies and information brokers. We 
recommend that the Committee move the legislation, with reasonable 
enhancements, including an option for credit freeze, requirements that 
security measures include audit trails, and public reporting of 
security breaches to the Federal Trade Commission.

    Mr. Stearns. Thank you.
    Mr. Burton, welcome.

                   STATEMENT OF DANIEL BURTON

    Mr. Burton. Thank you, Chairman Stearns, Congressman Towns, 
distinguished members of the committee. My name is Daniel 
Burton. I am Vice President of Entrust, Inc., which is 
headquartered in Addison, Texas. And Entrust is proud to secure 
the digital identities and information of over 1,400 government 
agencies and enterprises and over 50 countries around the 
world.
    Let me start by underscoring two points. First, the data 
security threat you address today is very real, and your 
efforts are timely and critically needed.
    Second, there are effective market solutions readily 
available that can address most of today's threats and give 
your constituents greater peace of mind.
    Over the past few years, while the public's attention has 
been riveted on homeland security, old-fashioned crime has 
infiltrated the Internet. The terms we use to describe it: 
spyware, phishing, identity theft, were relatively unknown only 
a few years ago. These cybercrimes occur at the crossroads of 
privacy and security and are prevalent today.
    This committee's draft bill correctly embodies two critical 
principles necessary to combat cybercrime.
    First, it encourages enterprises to implement effective 
data protection programs to prevent the theft of digital 
information. Second, it encourages them to alert individuals 
when their personal information has been compromised.
    Since I last testified before this committee just 2 short 
months ago, 17 new data breaches have been made public. They 
cover a broad cross-section of organization, from a big data 
services company to a high school. In the aggregate, these 
notifications indicate that over 44 million identities may have 
been compromised in just the past 78 days. And these are just 
the breaches we know about.
    In response, 18 States, most of which are represented by 
distinguished members on this committee, have passed breach 
notification laws. In addition, we have seen private class 
action lawsuits, State lawsuits, shareholder lawsuits, an FTC 
enforcement action, and a major corporation assert that it will 
no longer tolerate lax data security from business partners.
    The fact is, many entities who hold sensitive personal data 
simply do not keep it safe, either by choice or because they do 
not understand how to protect it. If they are left to figure it 
out on their own without any guidance from Congress, many of 
them will continue to lose the battle against today's 
sophisticated cybercriminals, and your constituents will pay 
the price.
    Clearly, it is time for Congress to act. This committee's 
draft bill is an essential step in the right direction, and 
Entrust is proud to support it. This draft gets a lot of the 
key elements right. It focuses on electronic data. It covers 
all persons who hold personal data, and includes special 
requirements for data brokers. It encourages comprehensive 
information security policies and procedures. It establishes a 
national breach notification requirement that preempts State 
law. It gives regulatory authority to the Federal Trade 
Commission. It points to a reasonable notification standard. 
The committee is to be commended for including these elements 
in the draft bill.
    Given Entrust's experience, I would recommend three other 
critically important additions to make sure that this bill 
accomplishes what you want it to.
    No. 1, you must actively engage corporate executive 
management and boards of directors in the effort to secure 
sensitive digital information. Specifically, the bill should 
require regular information security risk assessments, audits, 
and progress reports to CEOs and boards of directors. These 
measures will assure that American board rooms begin to view 
information security as a key component of business plans, not 
just another burdensome technology issue.
    No. 2, just like the 18 States that have passed breach 
notification laws, you should create a safe harbor for 
companies who do the right thing and encrypt their data. All of 
the State breach notification laws that have been passed so far 
require consumer notification only in the event of a breach of 
unencrypted personal information. The reason is that even if 
thieves get access to encrypted data, they will not be able to 
make sense of it since it consists of an indecipherable jumble 
of symbols to anyone looking at it without the proper keys. If 
the members of this committee are going to preempt their own 
State laws, I would strongly encourage you to embrace their 
wisdom on this issue.
    Third, and finally, in order to create a safe harbor for 
strong encryption, you must define it. To assure that you 
define strong encryption without picking winners and losers or 
locking in a static technology, you should reference NIST's 
standards. NIST's standards are developed in close consultation 
with industry and are flexible enough to allow standards bodies 
to drop older encryption products and certify new ones as the 
technology evolves. Failure to define encryption in Federal 
legislation could lead to the emergence of conflicting 
requirements across the United States.
    In closing, I want to reaffirm that your draft data 
security bill makes a strong legislated statement. These 
additions will help make sure that it fully accomplishes your 
purposes of protecting sensitive personal information.
    Thank you.
    [The prepared statement of Daniel Burton follows:]
   Prepared Statement of Daniel Burton, Vice President of Government 
                         Affairs, Entrust, Inc.
    Good Morning. Chairman Stearns, Ranking Member Schakowsky and 
distinguished Members of the Subcommittee, thank you for holding this 
hearing and giving me the opportunity to provide testimony on this 
important subject. My name is Daniel Burton, and I am Vice President of 
Government Affairs for Entrust, Inc. We are headquartered in Addison, 
Texas and are proud to provide cybersecurity software solutions for 
over 1,400 government agencies and enterprises in more than 50 
countries. In my testimony today, I will discuss data security and this 
Committee's draft legislation.
    As a global leader in securing digital identities and information, 
Entrust has insight into the severity of the risks and the nature of 
the threats that concern consumers, enterprises and policymakers alike. 
Our extensive international experience securing governments and 
enterprises around the globe, along with our policy experience co-
chairing two national information security task forces, leads me to 
underscore two points. First, the threat you attempt to address today 
is very real and your efforts are timely and critically needed. Second, 
there are ready and effective market solutions available that can 
address most of today's threats, secure many of our most vulnerable 
digital assets and, more importantly, give your constituents a greater 
peace of mind.
    Over the past several years, while the public's attention has been 
riveted on homeland security, old fashioned crime has infiltrated the 
Internet. The terms we use to describe it--spyware, phishing and 
identity theft--were relatively unknown only a few years ago. These 
crimes occur at the cross-roads of privacy and security. Most of them 
involve gaining unauthorized access to sensitive personal data. 
Sometimes criminals gain this access through technological means; 
sometimes they trick users into revealing the data; sometimes they rely 
on insiders with privileged access; and sometimes they hack into data 
bases or steal the information outright. No matter how the crime is 
committed, however, the goal of public policy remains the same--
encouraging enterprises to implement effective data protection programs 
to prevent theft and to alert individuals when their personal 
information has been compromised. This Committee's draft bill correctly 
embodies these two important principles.
    Since I last testified before this committee two months ago, 
seventeen new data breaches have been made public. They cover a broad 
cross-section of organizations--data services companies, banks, 
corporations, universities, a high school, a community college and a 
travel agency. In the aggregate, these notifications indicate that over 
44,600,000 identities may have been compromised since May of 2005. And 
these are just the breaches we know about. Many breaches are uncovered 
deep inside an organization, never brought to the attention of senior 
management and therefore never made public. Others, as we have learned 
from some recent announcements, tend to be minimized in initial public 
statements and only fully disclosed later under scrutiny. As the legal 
and market penalties for these breaches mount, organizations will be 
even more careful about what they reveal.
    In reaction to data breaches, 35 states have introduced data breach 
legislation, and 18 states have passed breach notification laws. The 
specifics of these laws vary from state to state, but they all require 
organizations to notify individuals whose personal information has been 
compromised. In doing so, they aim not only to protect consumers, but 
also to encourage organizations to be more diligent in securing 
personal information. In the absence of Federal legislation, we're sure 
to see even more states pass data breach notification bills next year.
    State legislatures are not alone in responding to these breaches. 
In the past few months, we have seen private class action lawsuits, 
state lawsuits and shareholder lawsuits against organizations that have 
suffered breaches. As more and more breaches are made public, more 
lawsuits are sure to be filed. In addition, Federal regulators have 
engaged. The FTC recently settled an enforcement action against BJ's 
Wholesale Club that requires it to implement a comprehensive security 
program and undergo independent audits. Perhaps most importantly, the 
recent announcement of VISA that it may no longer do business with 
CardSystems Solutions, Inc., is a clear market signal that business 
partners will no longer tolerate lax data security.
    The public avalanche of data breaches is damaging consumer 
confidence and could endanger our economy. A January 2005 IDC Survey 
showed that close to 60% of US consumers are concerned about identity 
theft. A recent survey that Entrust conducted reaffirmed this concern. 
It found that 80% of individuals are worried about someone stealing 
their on-line identity and using it to access their on-line bank 
accounts. If consumers pull back from online transactions, the promise 
of e-commerce and the productivity gains of the past decade will be at 
risk.
    We should remember that it's no longer just your local bank and 
credit card company that hold your personal information. Numerous 
retailers, data brokers, on-line merchants, corporations and other 
vendors also have ready access to it. Many of these entities do not 
take adequate measures to keep this information safe, either by choice 
or simply because they do not understand how to protect it in a world 
of constantly evolving digital threats. If they are left to figure it 
out on their own, many of them will continue to lose the battle against 
today's sophisticated cyber-criminals. In fact, things may get worse 
before they get better because even when organizations do grasp the 
need for comprehensive data security, it still takes time to put 
effective programs in place. This delay is unfortunate because there 
are ready and effective solutions available to address most of today's 
threats.
    Given the substantial risks facing American consumers and the US 
economy, it is time for Congress to act. In doing so, it should take 
into account the needs of consumers, corporations and citizens, and 
embrace the protections embodied in the 18 state breach notification 
laws. Congress should encourage a program of security management that 
balances the need to protect personal information and notify consumers 
in the event of a breach with the need to grow the digital economy and 
encourage innovative technology solutions. This Committee's draft data 
security bill is an essential step in the right direction, and Entrust 
is proud to support it.
    This draft bill gets a lot of the key elements right:

 It focuses on electronic data. The bill correctly recognizes that the 
        crux of the problem is the growing theft of computerized data. 
        As you know, the electronic data targeted by cyber criminals 
        contains the personal information that has become such a 
        valuable commodity in today's world. Your draft bill, by 
        resisting the temptation to create an overly expansive approach 
        to data security that includes both paper and electronic 
        records, strikes to very core of what must be protected.
 It covers all persons who hold personal data and includes special 
        requirements for data brokers. Breach notification should apply 
        to any agency, enterprise or person who owns or licenses 
        computerized data containing the sensitive personal information 
        of others. It should not be limited to data brokers. The goal 
        should be to protect sensitive personal data, no matter who 
        holds it, instead of focusing exclusively on a few specific 
        sectors or industries.
 It encourages comprehensive information policies and procedures. This 
        is a vital provision that is not yet included in many state 
        breach notification bills. Reasonable security practices 
        encompass a combination of technology, policy and management 
        expertise. Organizations that own or license computerized data 
        containing personal information should be required to develop, 
        implement and maintain reasonable security measures based on 
        widely accepted voluntary industry standards or existing 
        Federal law.
 It establishes a national breach notification requirement that pre-
        empts state law. Since 18 states have already passed data 
        breach notification laws and more are sure to do so, it is 
        incumbent on Congress to create a consistent national standard.
 It gives regulatory authority to the Federal Trade Commission (FTC). 
        Given the reality of widespread cyber crime and the fact that 
        market forces have not resulted in adequate data security 
        programs, it is appropriate for Congress to provide regulatory 
        guidance. The FTC is the proper regulatory agency to undertake 
        this responsibility.
 It points to a reasonable notification standard. The goal of 
        legislation should be to make the notification standard as 
        narrow yet as effective as possible in order to encourage 
        notice of breaches that carry a significant risk and discourage 
        over-notification. In crafting this trigger, Congress should 
        bear in mind that in most cases it is difficult to determine 
        what happens to the data after it is breached and therefore to 
        calibrate precisely the risk to consumers.
    The inclusion of these important elements in the Draft Bill is to 
be commended. Given Entrust's experience, I would encourage this 
Committee to include three additional changes to the bill in the hope 
of further improving its efficacy and cost efficiency. These changes 
will appeal to governments, businesses and other entities that control 
critical data since they will help provide a meaningful road map to 
navigate the tricky and technical world of data management.
    1. Require the Active Engagement of Executive Management--Whether 
Congress gives the FTC responsibility for providing regulatory guidance 
for reasonable security or leaves that responsibility with industry, it 
is imperative that corporate executive management and boards of 
directors be actively engaged. American board rooms must begin to view 
information security as a key component of business plans, not just 
another burdensome technology issue. Congress must realize that 
securing digital information is not simply a technical challenge, but 
one that begins with management embracing its responsibility to protect 
data in the first place. While it is essential to encourage such 
technologies as strong authentication and encryption, they cannot 
substitute for executive attention and corporate policy. In this 
respect, the draft bill's focus on appropriate policies and procedures 
is critical. Specifically, the bill should require regular risk 
assessments, audits, and progress reports to the CEO and Board of 
Directors. These types of actions will go a long way toward elevating 
information security in the corporate decision-making process.
    2. Create an exemption for Encryption--The Committee's bill should 
also encourage the use of strong encryption, just as California and 
other states have done. All of the 18 state breach notification laws 
that have been passed so far (Arkansas, California, Connecticut, 
Delaware, Florida, Georgia, Illinois, Indiana, Louisiana, Maine, 
Minnesota, Montana, Nevada, North Dakota, Rhode Island, Tennessee, 
Texas and Washington) require consumer notification only in the event 
of a breach of unencrypted personal information.
    The reason for this exemption is that even if thieves get access to 
encrypted data, they will not be able to make sense of it. Encrypted 
data consists of an undecipherable jumble of symbols to anyone looking 
at it without the proper keys. This provision is especially important 
for laptops and disks that are lost or stolen in transit. I should note 
that state legislatures included this exemption not because of any 
lobbying by the high tech industry, but because of the requests of 
organizations that hold significant amounts of personal data. These 
organizations view this technology as the final line of protection to 
ensure that even if criminals get past the gate they cannot access the 
real content. This provision also helps provide guidance to 
organizations that want to secure their digital information but are 
unsure what baseline measures to take.
    3. Define Encryption--In order to define encryption without picking 
winners and losers or locking in a static technology, Congress should 
reference NIST standards. I would recommend the following definition 
for encryption, which has been adopted by the Cyber Security Industry 
Alliance:
        The protection of data in storage or in transit using an 
        approved encryption algorithm implemented within a validated 
        cryptographic module that has been approved by NIST or another 
        recognized standards body, combined with the appropriate key 
        management mechanism to protect the confidentiality and 
        integrity of associated cryptographic keys in storage or in 
        transit.
    This definition references standards that are developed in close 
consultation with industry, and does so in a flexible way that allows 
standards bodies to drop older encryption products and certify new ones 
as the technology evolves. It is important to note that it also 
requires that the cryptographic keys which can unlock this data be 
managed in an appropriate, secure manner since these keys are just as 
valuable and sensitive as the data they protect. The flexibility this 
definition allows is crucial since any definition that cannot 
accommodate evolving technology cannot help defend against evolving 
threats. Because this definition is not vendor or product specific, it 
will allow the market to drive choices about security solutions. 
Failure to include a definition in Federal legislation could lead to 
the emergence of conflicting encryption requirements across the United 
States.
    This Committee's draft Data Security Bill makes a strong 
legislative statement. These additional suggestions will better protect 
data, harmonize the Federal plan with laws that have been adopted by 18 
states, and help show organizations how to secure the personal 
information in their possession. By including language that encourages 
organizations to consider information security at the highest levels of 
management, Congress can encourage appropriate data security practices 
at all levels of an organization. And by including language that 
encourages the use of encryption and defines it, Congress can create a 
formidable second line of defense against thieves and hackers.
    The stage is set for Federal legislation. The menace of cyber crime 
is undeniable. The cost to consumers and enterprises is enormous. And 
the multiplicity of state bills highlights the need for a consistent 
Federal regulatory framework. This draft bill gets a lot of the key 
elements right and provides an excellent platform for legislation. This 
Committee should be congratulated for its leadership.

    Mr. Stearns. Thank you, Mr. Burton.
    I will start with the questions.
    Mr. Hoofnagle, I think you read about these security 
breaches and its great headlines. And I guess of the 60 
different breaches, 50 million American consumers have been 
affected. I think you mentioned that in your testimony. Do you 
know how many individuals were either victims of identity theft 
or information that was misused within this huge number?
    Mr. Hoofnagle. Mr. Chairman, that is a very difficult issue 
to determine.
    Mr. Stearns. Yes.
    Mr. Hoofnagle. In reference to the ChoicePoint breach where 
reportedly 144,000 records were stolen by a fraud ring, a 
Nigerian fraud ring in California, 750 of those cases have been 
associated, in some way, with identity theft. But it is very 
difficult to track down when or if identity theft occurs. There 
is also the difficulty that there might be major delay between 
the data security breach and the actual crime of identity theft 
since critical identifiers used by credit companies, such as 
your Social Security number and date of birth, do not change, 
if it is stolen today, there is really no reason why someone 
can't victimize you 2 years down the road.
    Mr. Stearns. You know, I read these in the newspaper, and 
you know, it is just so alarming. But as you point out, a very 
small number of that are affected by this identity theft. You 
testify that security breaches can occur for reasons other than 
identity theft, and so I mean, do we want to come back with 
this bill and put this overlay of the Federal Government on 
these people when we are trying to really pinhole a problem 
here? Should the bill require notification for risk of these 
other misuses?
    Mr. Hoofnagle. I think the Federal banking standards are 
set at reasonable risk of misuse of personal information, and I 
think misuse is the right term to use rather than identity 
theft. For instance, in this New Jersey case where bank 
officials were selling data to debt collectors, it did not 
involve----
    Mr. Stearns. Identity theft, right.
    Mr. Hoofnagle. It did not involve identity theft. This was 
a case where, you know, the security was being breached for 
profit at these sophisticated financial institutions. It didn't 
have anything to do with identity theft. It had to do with this 
other type of privacy violation. And I think that the 
legislation should encompass that type of security breach.
    Mr. Stearns. Mr. Hintze, you state in your testimony that 
legislation should codify into law the FTC implementing 
regulations under the Gramm-Leach-Bliley. Should the FTC be 
given the authority to modify these provisions by rule to adapt 
to changing business and security concerns? Why or why not?
    Mr. Hintze. Yes, Mr. Chairman. We think that the FTC should 
have the authority to make rules in this space, however that 
authority should be guided by Congress in terms of directing 
the FTC to adopt a flexible standard around information 
security programs.
    Mr. Stearns. If the notification obligations are only 
applied to encrypted data, might that let some potential bad 
actors off the hook? Why or why not?
    Mr. Hintze. We don't think so. We think the standard around 
unencrypted data is a reasonable standard. It is the standard 
that the States have adopted. There have been questions raised 
about how you define encryption, and while we wouldn't support 
a specific mandate in the legislation itself, we could support 
something like a reference to the NIST standards or some other 
standard that could evolve over time to ensure that reasonable 
and strong encryption is used.
    Mr. Stearns. Mr. Burton, do you have a comment on that?
    Mr. Burton. Yes, I think that the encryption standard is 
very important. I think first, as I mentioned in my testimony, 
18 States have that unencrypted information in the definition 
of their laws, and I would note that those include Florida, 
Texas, and Tennessee. And I think that encryption is perceived 
often as a complex issue. The way these States have mentioned 
it, it is not a mandate: it is a voluntary action, which 
provides a safe harbor. And I think this is especially 
important for mainstream companies who do not understand the 
world of cybercrime and protecting digital information, and it 
gives them a straightforward way to go in, protect their data, 
and know that they have some sort of safe harbor. And if that 
is associated with NIST standards, then Congress can rest 
assured that it is good, solid encryption.
    Mr. Stearns. So if you were writing the bill, would you 
mandate that we use the National Institute of Standards and 
Technology as a guide?
    Mr. Burton. I would. In my formal testimony to this 
committee, I included a definition of encryption, which 
references NIST standards, which has been endorsed, actually, 
by the Cybersecurity Industry Alliance.
    Mr. Stearns. Okay.
    Mr. Burton. And I think I would include that definition in 
the legislation, yes.
    Mr. Stearns. Ms. Maier, you suggest changing the definition 
of security breach, eliminating the need for an FTC rulemaking. 
But you also state in TRUSTe's guidelines that those guidelines 
are intended as a first draft and that security policies and 
procedures need to change and evolve as technologies and 
businesses do the same. By that logic, wouldn't it make sense 
to allow the FTC to do this by rule so that the FTC can modify 
the standard in the future if it is necessary?
    Ms. Maier. Chairman Stearns, yes, I agree that I think the 
FTC can find positive and good ways to provide the rulemaking 
that does provide for the flexibility and the evolution of the 
rules. So I would agree, yes.
    Mr. Stearns. Okay.
    Mr. Towns.
    Mr. Towns. Thank you very much, Mr. Chairman.
    Let me begin with you, Ms. Maier.
    You mentioned in your remarks that TRUSTe works closely 
with the California Office of Privacy Protection and its 
ongoing efforts to provide guidance to businesses and consumers 
on privacy and security issues. First of all, I want you to 
elaborate a little more on that, but how did these 1,500 
companies become affiliated with you?
    Ms. Maier. Thank you for asking that question.
    TRUSTe has been around since 1997. Companies who want to 
show to their consumers as well as to others that they take 
privacy seriously voluntarily join the TRUSTe program and 
subject themselves to our standards. And our standards require 
a very good privacy statement, disclosure about their practices 
relating to the data that they collect on their website, that 
they abide by reasonable security standards, and provide 
provision and choice to consumers regarding the sharing of 
their information. And so it has been a successful program with 
1,500 companies joining in and subjecting themselves to the 
standards. We developed the security guidelines to help them 
define what is reasonable security, and that has also been very 
successful.
    It makes sense for us to work with the California Office of 
Privacy Protection, because many times, as you well know, a lot 
of legislation comes out of the State of California and has 
very broad impact, and we have enjoyed a good relationship with 
them serving to help develop some guidelines, not rules, per 
se, but guidelines for businesses in terms of the practical 
implementation of these rules. And our experience in California 
in our relationship with the California Office of Privacy 
Protection suggests that the California law is working, and it 
is having a positive impact in two ways: one, in providing 
consumers with notice of breaches and some redrafts and 
information in terms of what to do under that notice; and two, 
providing a market incentive for companies to put into place 
better security.
    Mr. Towns. Thank you. Thank you very much.
    Mr. Hintze, what is your position on broader legislation 
that it would better inform consumers about who is using their 
personal information and how?
    Mr. Hintze. We recognize that as a result of the recent 
security breaches that have been publicized, there is an 
increasing concern among consumers that they simply don't 
understand how their data is collected and used and transferred 
among different entities, and there is a lack of transparency 
there. We believe there is an appropriate role for legislation 
to address those broader issues, and we look forward to working 
with the committee on developing the right rules around that.
    Mr. Towns. All right. State Attorney Generals have played 
an important role over the past few years on data security 
issues. Does Microsoft believe that State Attorney Generals 
should be able to enforce the Federal legislation?
    Mr. Hintze. Yes, we do. Similar to the approach that was 
taken in the Can Spam Act, we think that State Attorney 
Generals have an important enforcement role, and we would 
support an addition to the discussion draft that would make 
that clear.
    Mr. Towns. All right.
    Mr. Hoofnagle, regarding your concerns with our draft, what 
are your thoughts on the feasibility of general privacy 
restrictions? How can we work to structure the limit of the 
sale of information, which is a problem, as you indicated?
    Mr. Hoofnagle. Representative Towns, thanks for asking that 
question. It is very difficult to describe data protection in 5 
minutes, but the common denominator for data protection are 
fair information practices. These are rights that limit the 
collection of information to the minimum necessary to engage in 
a transaction. They are rights to give you access to your data 
when they are held by companies, a right to correct your data 
when it is inaccurate, and a right to have your data deleted 
after a certain amount of time when it is no longer relevant or 
needed for business purposes. These rights are present in many 
nations' laws, but to this date, the United States has not 
adopted these types of restrictions in the private sector. They 
do apply to the Federal Government, however, and the Privacy 
Act itself has many of these fair information practices to stop 
the government from creating a data center on its citizens.
    Mr. Towns. All right. Thank you very much.
    Let me ask you, Mr. Burton.
    In your testimony, you state that you believe that if data 
is encrypted, companies should be provided a safe harbor and 
not be required to disclose when there has been a breach of 
security. Do you believe this should be the case when the 
compromise of information was due to an insider who has the key 
to the encryption? Couldn't an insider provide the key to the 
same people he or she is selling the data to? Or how should 
encryption protect against insiders who are accessing and 
perhaps selling personal information that they shouldn't be 
selling?
    Mr. Burton. That is a very good question, Congressman, and 
one which was alluded to earlier.
    I think the way that I would use the term encryption, and I 
think the way that all of the States use this term, is if you 
have a key, the data is not encrypted. Whether I am an insider 
or an outsider, if I have the encryption keys, I can, 
therefore, unlock the data, and then it is clear text. So the 
encryption safe harbor would only apply to data for which one 
did not have the keys and therefore it was still encrypted. And 
I will give you an example. Actually, I think it happened in 
the State of New York. Time Warner had disks. 600,000 of its 
employees were compromised. Those disks, had they been 
encrypted, you know, they were lost in transit. And that would 
not have had to have been reported, because the data would have 
been scrambled. Similarly, I think there are something like 
50,000 laptops which are left in airports around the country 
today. It is very easy to encrypt the data on those laptops. It 
is not expensive. It is not complex technology. If those are 
encrypted and lost, the person who is going to find those will 
not have the keys, and therefore the data would be safe.
    Mr. Towns. Thank you very much.
    Mr. Stearns. I thank the gentleman.
    Ms. Blackburn.
    Ms. Blackburn. Thank you, Mr. Chairman, and thank you to 
the witnesses.
    You know, I find it really interesting we are sitting here 
having this discussion, and a decade ago, there was PGP and the 
troubles that surrounded that and the designer of that 
technology and application. And of course, we all know what 
happened with that. And the government didn't want that 
application taking place, and now we are sitting here talking 
about how government wants files encrypted and data protected, 
and it is for privacy concerns. And so it is an interesting 
debate and an interesting discussion.
    I do have several questions. I know I am not going to get 
through them, and I will not be here when we do a second round, 
so I am going to submit some questions to you all.
    Mr. Hoofnagle, I think I am going to begin with you.
    And let us talk about the misuse to which you spoke, 
because as we have worked on the identity theft issue and the 
piracy issue with our constituents, this misuse, as you 
mentioned, does come up regularly. And have you all noticed any 
attempts by foreign corporations or businesses or governments 
to try to buy data on Americans from any data brokers?
    Mr. Hoofnagle. We at EPIC have extensively used the Freedom 
of Information Act to determine how companies like ChoicePoint 
and Axiom and Lexus Nexus, which are where commercial data 
brokers buy and sell data. We do not have evidence that these 
entities are selling data to outside the country. I don't think 
that there would be any law restricting them from doing so, if 
they chose to. We do know that the companies have data on 
citizens of other nations, and sometimes the reverse happens. 
American companies, or American governments, buy data on 
citizens of other nations.
    Ms. Blackburn. Okay.
    Ms. Maier, do you have a comment on that, please?
    Ms. Maier. We have not been able to identify absolutely 
that foreign companies have been able to access or sell or 
misuse American data. That is not to say it hasn't happened.
    Ms. Blackburn. Okay. Ms. Maier, let me ask you one other 
thing.
    I noticed in the security guidelines paper that you 
submitted to us, you reference a couple of European countries 
in your footnoting there. Do you all work with any foreign 
governments?
    Ms. Maier. No, we do not have direct relationships with any 
foreign governments. We do sometimes look at some of the data 
protection trends happening.
    Ms. Blackburn. Okay. Great. Then let us talk to those 
trends for a minute.
    How are European countries handling their data security 
problems? Is there anything there that you all have noticed 
that would be a good lesson learned for us?
    Ms. Maier. My experience with the European data protection 
standards is that they have a very strict standard in terms of 
that individuals own their data and have control. And I think 
to the extent that this proposed legislation and some of the 
comments that I think EPIC has provided as well as TRUSTe 
suggest that we continue to provide individuals with access to 
their information and ability to change, update it, or redact 
it. That is a really important lesson that I think we can take 
from the EU experience.
    I also would say that the EU experience has demonstrated, 
to some extent, that a lack of enforcement hinders the 
implementation and the incentive to do some of the right 
things. And I think that we can do a better job here in the 
United States by actively enforcing and providing incentives 
for companies to really live up to a higher standard.
    Ms. Blackburn. Okay. Thank you.
    Mr. Burton, one quick question for you.
    I think it is fair to say that you and some of our 
witnesses may differ on how this legislation should apply to 
individuals who may store and use their personal information. 
And what I would like to ask you is would it or would it not, 
do you think, be a substantial economic burden to associations 
and organizations, like churches and private individuals, who 
have personal information to implement the requirements of the 
bill?
    Mr. Burton. I think that is a very good question. And I 
think in my comments I said that the committee was correct in 
applying this to all persons who hold sensitive data. Clearly, 
if you are a small business, if you are a small non-profit, if 
you do not have, sort of, a lot of administrative ability, then 
that is something that the committee should take into account. 
So I think in terms of size of the data set, size of the 
organization, those may be some limits that you want to 
consider.
    And Congresswoman, if I can beg your deference for one 
moment, I would like to go back to encryption, which is an 
issue that I am obviously focused on. And Congressman Towns, 
there is one important point that I just wanted to make in 
following up your question about the keys to encrypted data. 
And I would just like to alert the committee that if you think 
Social Security numbers are important, encryption keys are an 
extremely important part of personal data, because as you 
rightly pointed out, if you get those keys, you not only get 
Social Security numbers, you get whatever data is encrypted. 
And that is why when I submitted a definition of encryption, we 
very specifically took into account the need to protect those 
keys. There are lots of encryption schemes that leave the keys 
in the clear, they are easy to get, and easy to hack into. And 
so as this committee thinks through that issue, you should pay 
careful attention to making sure that those encryption keys are 
protected.
    Thank you, Congresswoman.
    Ms. Blackburn. Thank you.
    I yield back.
    Mr. Stearns. The gentlelady yields back.
    Mr. Gonzalez.
    Mr. Gonzalez. Thank you very much, Mr. Chairman.
    And I guess I am going to pose this question to all of the 
witnesses. You have already touched on it, and I think, Mr. 
Burton, in response to Congresswoman Blackburn's own question 
regarding about size and who would it apply to. As currently 
written, it would apply to each person engaged in interstate 
commerce that owns or possesses data in electronic form 
containing personal information. And we do many things here 
with unintended consequences, but we are going to go ahead and 
delegate these duties to the FTC and such. And the first 
question that they are going to have is, you know, who comes 
under this jurisdiction of this particular law. And while I 
recognize that there may be problems in its application to 
everyone and everything, the way I would like this law to end 
up is something to the effect of, you know, don't collect it if 
you can't protect it. And that really should be driving this. 
And still be practical about it. And that is going to be a 
really hard balance, and I don't know how we are going to pull 
this thing off.
    So that is my question to each and every one of you, and I 
know that some of you may want to expand on earlier remarks. Do 
we have a problem in just defining who comes under this 
particular net or who we capture in this particular regulatory 
net, if each person engaged in interstate commerce that owns or 
possesses the data? We have made some distinction with 
information and data brokers, which we understand, and we can 
identify those people pretty easily. But there is a whole lot 
else happening out there, and we will get to this solution 
again. But let us start off with this basic concept on 
jurisdiction and who comes within it. And we will go with the 
first witness.
    Ms. Maier. Thank you very much.
    We do very much care about the definition of who is under 
the jurisdiction. As I mentioned in my testimony earlier today, 
consumers don't care. If your information is breached and it is 
your sensitive information or your Social Security number, your 
driver's license, your mother's maiden name, your health 
records, your financial accounts, it does not matter if it 
comes from your retailer online or off-line nor does it matter 
if it comes from, perhaps, the California Department of Motor 
Vehicles or some other State's motor vehicles or my employer 
records. So I think it is important that we try to keep the 
jurisdiction, at least for the notice and the implementation of 
security guidelines with incentives for security to be as broad 
as possible. And we recognize some other committees might be 
looking at their own jurisdiction, for example, or a financial 
institutions. We applaud those efforts. But to the extent that 
this committee can apply it broadly and extend it even to 
government, we think that that would be a very good place. And 
one reason for that is we think, again, consumers are going to 
feel violated no matter where it happens. They don't draw the 
lines as fine as we do. And the second thing is that you really 
want to provide incentives for everybody to put in proper 
security.
    Mr. Hintze. We agree that we think the legislation should 
apply to all entities that hold personal information. A couple 
of things that we would point out, though, in the position that 
we have taken on this that would alleviate some of the concerns 
that you have raised, we have advocated a similar approach 
under this legislation as is taken in Gramm-Leach-Bliley. As 
Ms. Maier said, consumers don't care about whether or not the 
data was breached by a bank, a retailer, or a small business. 
If the data is breached, the threat can potentially be as 
serious regardless of the source. And so we would urge the 
committee to look at adopting a consistent standard with what 
is currently imposed upon banks and financial institutions 
under the GLB. We have also suggested a flexible standard here. 
And some of the factors that should be considered in 
determining what the right kind of information security program 
that a business should adopt include the size and complexity of 
the business and the sensitivity of the personal information 
that they collect. And so that gives a great deal of 
flexibility to reduce the burden on smaller businesses and 
businesses that don't collect the most sensitive personal 
information. And if we still think that there is a concern 
around the burden on small businesses, we have suggested in our 
written testimony, I believe, that we could support an 
exception for businesses that handle small amounts of 
information rather than based on the size of the business 
itself. We think that a reasonable approach might be something 
like if a business handles less than 5,000 records over the 
course of a year that there could be a reasonable exception 
there or a reduction of the burdens there rather than just 
basing it on small businesses, because a very small business 
could hold enormous amounts of very sensitive personal 
information, and it just doesn't make sense to exempt them.
    Mr. Hoofnagle. Representative Gonzalez, we think that there 
needs to be very broad application of data security standards, 
because in previous laws where there have been limited 
jurisdiction or limited applicability of privacy laws, data 
brokers and other companies that sell data organize in such a 
fashion so that they do not have to comply with those Federal 
laws. And the standard example is the way ChoicePoint and other 
data brokers are organized to escape some provisions of the 
Fair Credit Reporting Act. And so unless there is broad 
application, we risk creating a new industry that fits into a 
loophole.
    Mr. Burton. Yes, Congressman Gonzalez. I think one could 
successfully run for political office on the slogan, ``Don't 
collect it if you can't protect it.'' And I think that you are 
absolutely right, and the Committee is absolutely right, to 
focus on the data, not who holds it. And what this legislation 
does, which tries, and I think in large extent, successfully 
gets at that question, it is not any data. It is sensitive 
private data commingled with public identifiers. And it is when 
you put those two data sets together that there is the 
possibility for harm.
    In response to the Congresswoman's question earlier, I 
would doubt that most churches hold Social Security number, but 
if my church is holding my Social Security number and they get 
hacked, I would sort of like to know about it. So I think there 
do have to be some limits, some size of data sets, but I think 
the basic principle embodied in this legislation to follow the 
data is the correct one.
    Mr. Gonzalez. Thank you very much.
    Mr. Stearns. I thank the gentleman.
    The gentleman from Nebraska, Mr. Terry.
    Mr. Terry. You would be surprised what churches have. Most 
churches now have financial records, because they want you to 
do direct deposits now, electronic transfers so they don't have 
to worry about whether you show up on Sunday and put your check 
in the basket, because it was automatically done on Friday. So 
we have got to worry about the little neighborhood vitamin 
store that may have personal information, including health 
information. So I do agree with the phrase you need to protect 
the data.
    So let us talk about that a little bit.
    And Mr. Burton, you have come here with the theme of 
encryption, and I believe that that is kind of the last 
defense. And I have had people show me how easy it is to 
unencrypt or decrypt, and in fact, at the University of 
Nebraska in Omaha, they went online for me and showed me all of 
the different downloads that you can get just online that will 
unencrypt the basic information. So to me, that is the last 
line of defense. At least you make it tougher, and it is only 
the real data-miners that are out there that are going to know 
where to get that technology. The casual user that finds a 
laptop in the airport probably isn't going to know which sites 
to go to to get their de-encryption software. But as I also 
understand, that is free on the Internet, too.
    So the issue then becomes the vulnerabilities, and this 
proposed legislation does talk about redacting. In fact, I 
think the language in is to mitigate and reduce all of the 
operating software vulnerabilities, which takes me back to part 
of a presentation I had by an IT professor to Microsoft that 
said that there are literally thousands of vulnerabilities in 
the operating software.
    So to Microsoft, let us talk a little bit about the 
vulnerabilities that are inherent in the operating software, 
not necessarily yours, but you do kind of dominate the market 
in operating software. As I understand there are inherent 
vulnerabilities that are absolutely necessary to the operation, 
and sometimes there aren't. How do we differentiate? Because I 
think the first line of attack is reducing the number of 
vulnerabilities that hackers or data-miners can use to 
penetrate the system. So what is Microsoft doing? What do you 
recommend to us by way of the proper language where we can 
realistically close those vulnerabilities but yet still have 
the vulnerabilities? And then my last question is who has the 
responsibility for us in the legislation? Who do we place the 
responsibility on? The Acme Data Corporation who has the 
responsibility of protecting the data directly, because they 
are the ones that own the data? Or is it somewhere that the 
owner or the makers of the operating software?
    So I will start with you, Mr. Hintze, and anyone else who 
wants to chime in on that issue.
    Mr. Hintze. Thank you, Congressman.
    I would first like to point out that Microsoft does take 
security very, very seriously. It is our No. 1 priority in 
software development now. We have invested hundreds of millions 
of dollars over the last couple of years in retraining our 
developers, fundamentally changing our development and release 
processes to make security the No. 1 priority, and those 
effects are paying off in the latest releases and security 
patches and updates that we make available free to users 
online.
    Having said that, I would also point out that the highly 
publicized issues of security breaches we have seen recently 
have not been results of software vulnerabilities. They have 
been failures of processes, they have been human error and the 
like. When software is hacked, and it is impossible to make 
perfect software. It is an enormously complex undertaking.
    Mr. Terry. Are you worried about the language in the bill 
that says that the operating software has to mitigate all 
vulnerabilities?
    Mr. Hintze. I am not familiar with that language in there.
    Mr. Terry. Well, I think that is the intention, and I think 
we need to work through that.
    Mr. Hintze. Yes, we will definitely work with the committee 
on those issues.
    The other point is that when there is a hacker attack, 
there is an intervening criminal act going on, and I think it 
is important to keep that in mind. As I said, Microsoft takes 
this issue very seriously, and we are working very, very hard 
with our partners, with law enforcement and others and our 
consumers to help reduce the problem, and we look forward to 
working with this committee further on that.
    Mr. Terry. And my last question is who has the 
responsibility to control the vulnerabilities of the software?
    Mr. Hintze. As I said, we will continue to work as hard as 
we can to reduce those vulnerabilities and make the software as 
safe as it possibly can be. And we think it is a joint 
responsibility among us, consumers, law enforcement, and 
Congress in helping to make the consumer safe.
    Mr. Burton. Yes, Mr. Congressman, if I could just comment 
briefly on your opening statement about encryption.
    And first of all, thank you for taking the time to have 
demonstrations and look seriously at it.
    If you look at encryption, there are sort of three pieces 
to it, and this is why we reference NIST. Are you using a 
strong algorithm? Is it implemented correctly? Are you 
protecting the keys? If you do those three things, you are left 
with a brute force attack in trying to decrypt the data, and 
that takes hundreds of years. You can't download software from 
the Internet to do that. And I think once you really get strong 
encryption in place, as you say, it is a second line of 
defense, and it is very important.
    Mr. Stearns. Maybe just for clarification, I asked counsel 
just about what the gentleman from Nebraska was talking about, 
and I think within the bill, I think what we are talking about 
is requiring the entity that possesses the consumer data, 
personal data, to take administrative and technological actions 
to secure the data, but we are not asking you to restructure 
the software or restructure things like that.
    I am going to ask you, and every member is welcome to a 
second round here. I am going to go to the heart of where we 
are in this bill and ask--I am sorry, the gentlelady from 
Wisconsin. Yes. Sorry.
    Ms. Baldwin. Thank you, Mr. Chairman.
    Mr. Stearns. I apologize.
    Ms. Baldwin. I am going to try, if I can, to ask a series 
of questions and get all of your perspectives, hopefully with 
very brief answers so that I can get through a couple of 
questions, some of which you might have already dealt with in 
your testimony.
    I am wondering your opinion first on whether there should 
be State Attorney General enforcement added to the bill. And 
why don't we just go from my left to right, if you wouldn't 
mind, Ms. Maier?
    Ms. Maier. Yes, we would be in support of State Attorney 
General enforcement.
    Ms. Baldwin. Okay.
    Mr. Hintze. We are as well.
    Mr. Hoofnagle. Yes, the Federal Trade Commission has too 
much to do.
    Mr. Burton. Yes, we support that.
    Ms. Baldwin. Okay. Is there anyone in the panel who thinks 
that this legislation should be expanded to deal not only with 
electronic personal records but paper personal records?
    Ms. Maier. If I could comment, I think that, first of all, 
we are very happy to see that was expanded to all electronic 
data, not just data collected online. That is the most 
vulnerable, or that is the most useful, to a hacker. But we 
would be supportive of expanding it to paper-based data as 
well.
    Mr. Hintze. As we noted in our oral statement, we support 
that as well. We think whether data was breached in electronic 
or paper form, the effects can be just as devastating to the 
affected individual.
    Mr. Hoofnagle. Yes, we would agree. There are many cases 
were sensitive personal information has been on paper and then 
ends up in a dumpster, thus the phrase ``dumpster diving''. In 
California, there was an attempt to expand the security of the 
breach notification bill to cover paper, but that quest failed.
    Ms. Baldwin. Okay. Mr. Burton?
    Mr. Burton. Yes, we would prefer a focus on electronic 
data. If you look at the breaches which actually sparked this 
committee's interest in this issue, they were all electronic, 
and I think that that really gets at the bulk of the issue, and 
I think that that is the appropriate focus of the bill.
    Ms. Baldwin. Okay. What is each of your opinion on whether 
we should have a provision dealing with audit trails for the 
inside jobs?
    Ms. Maier. Our opinion is that as security policies are 
adopted, audit trails will probably become part of the internal 
policy. I am not sure if it is required for a broad Federal 
legislation. With that being said, I think there are some 
opportunities, through a safe harbor program, to allow for 
auditing or encourage it.
    Mr. Hintze. We think that that may not be the appropriate 
level of detail to get into in the bill itself, but certainly 
that is something that the FTC could look at in the 
implementing regulations around the development of an 
information security program.
    Mr. Hoofnagle. We support audit trails in part because it 
was clear in the California hearings concerning ChoicePoint 
that the company didn't know exactly what information was 
acquired by the criminals and in fact had to rerun the searches 
one by one to determine what data were actually obtained. An 
audit trail requirement would substantially reduce that 
problem.
    Mr. Burton. Yes, I think the audit feature that we would be 
in favor of is broader than that, and that is there needs to be 
an audit of an organization's information security programs and 
that that is really the most important, because that gets at 
prevention. And not only does there need to be an audit, that 
audit needs to be communicated to senior management and the 
board of directors, because ultimately that then changes the 
culture, which is responsible for better information security.
    Ms. Baldwin. Okay. What is your position on a provision in 
the bill that would focus on transparency, some sort requiring 
security breaches to be reported to the FTC and perhaps put on 
a public website or some additional transparency about these 
breaches?
    Ms. Maier. Our opinion is that, first of all, the consumers 
need to know who are affected, and that should be the No. 1 
focus. However, I think that to the extent that any sort of 
notice, be it public-owned websites at the FTC, in sense 
companies have better security practices, then we are 
supportive.
    Mr. Hintze. We think that directly notifying consumers is 
clearly the best way to get the message to the people that need 
to know it the most. In terms of public posting through a 
website or through the press, that should be a provision that 
is in the alternative notice when direct notice is either 
feasible or impossible. Having said that, we would not oppose 
any provision that would require cases where notices are 
required to be reported to the FTC.
    Mr. Hoofnagle. Especially if companies are given discretion 
of whether or not to mail the consumers a notice, we think it 
is very important that the Federal Trade Commission be aware of 
all of the security breaches. It is a weakness in the 
California law that only those who are affected get notice, but 
the corresponding strength of that law is that all breaches 
have to be disclosed. So especially if there is going to be a 
discretion standard, and by the way I think there should be 
some level of discretion. There should be a check on that 
discretion by public reporting to the Federal Trade Commission.
    Mr. Burton. Consumers should clearly be notified of 
breaches. Sunshine is the best disinfectant, therefore public 
notices of breaches are also very important.
    Ms. Baldwin. Thank you.
    I see I have run out of time, so I yield back.
    Mr. Stearns. I thank the gentlelady for asking those 
questions.
    I would like to follow up a little bit on what she talked 
about. This idea of a State Attorney General enforcement of the 
Federal statute. This is an area that has probably has the most 
controversial aspect of our bill. Mr. Burton, your testimony 
states that Entrust agrees with the preemption provisions of 
the bill, but some have said that a Federal standard should 
create a statutory floor and not a ceiling, allowing States to 
go further, if they so desire. I guess please explain why 
Entrust believes that a more comprehensive preemption is 
appropriate.
    Mr. Burton. Well, the concern of much of the private sector 
is that you now have 18 different State breach notification 
bills that is multiplicity of standards, reporting mechanisms, 
penalties, and so what industry is looking to this committee 
for and the Congress for is sort of a baseline, and I think 
that is the reason that you will get so much support for your 
legislation and for preemption. I think given the active 
interest of States in this bill, you have to allow, and you 
should allow State Attorney Generals to enforce----
    Mr. Stearns. The Federal statutes.
    Mr. Burton. Yes, the Federal statutes.
    Mr. Stearns. And State courts?
    Mr. Burton. Let us see. I am not a lawyer, and so I would 
have to take that under advisement and get back to you.
    Mr. Stearns. Well, I am going to ask each of you just to 
make a shot at it, because what the gentlelady from Wisconsin 
talked about, we had in the spam, but we did not have it in 
spyware, and we have taken, in this bill, the same language 
that was adopted in the spyware dealing with the preemption. 
And, in our opinion, this preemption is important, but we 
certainly think there are areas that it could be changed. And 
maybe I will just go to Mr. Hoofnagle. You might comment on 
this, too, about the preemption provisions in our bill.
    Mr. Hoofnagle. We think the preemption provisions should be 
a floor so that States can innovate new solutions, too.
    Mr. Stearns. So, for example, if California has a higher 
standard, there would be an exemption for California?
    Mr. Hoofnagle. No, more broadly, we think, that States 
should be able to pass new laws when new problems arise. We are 
here today----
    Mr. Stearns. So we establish the floor of the bill, and 
then above that, the States. But then wouldn't you be back to 
having 50 States with 50 different----
    Mr. Hoofnagle. In most privacy legislation, it preempts at 
the floor level.
    Mr. Stearns. Okay.
    Mr. Hoofnagle. And it has not created a 50-State set of 
laws, when Congress does a good job and passes a good law. The 
States tend not to try to pass conflicting responsibilities.
    Mr. Stearns. Okay. Mr. Hintze?
    Mr. Hintze. Yes.
    Mr. Stearns. Yes, what is your opinion about what the 
preemption in the bill is and do you support it?
    Mr. Hintze. We do support it. We also would support an 
addition that would permit State Attorney General enforcement 
in Federal court, much like is done in the spam----
    Mr. Stearns. Okay. So you support what is in the spam 
language----
    Mr. Hintze. Yes.
    Mr. Stearns. [continuing] more so than what is in the 
spyware?
    Mr. Hintze. In this case, we think that State Attorney 
General enforcement at Federal courts is appropriate.
    Mr. Stearns. Okay. Ms. Maier?
    Ms. Maier. We are in basic agreement with that as well. 
Coming from California, we certainly would like to see this law 
at least meet the standard that California has set.
    Mr. Stearns. Okay. Well, let me ask one last question.
    The definition of ``information broker'' that has been 
touched on a little bit by the gentleman from Nebraska. And Mr. 
Hoofnagle, is the definition of information broker in the draft 
legislation appropriate, in your opinion, and does it sweep in 
entities that are not information brokers, and does it cover 
all information brokers? That is another area that----
    Mr. Hoofnagle. Information brokers are very difficult to 
define. We have worked----
    Mr. Stearns. Yes, but you have all of the affiliates of 
American Express. I mean, how much should this bill apply to 
all of those?
    Mr. Hoofnagle. In some cases, information is traded in such 
a way that is consistent with the consumer's expectation. So, 
for instance, a check-cashing clearinghouse you wouldn't want 
to consider an information broker. They are affecting a 
transaction that you requested. Generally, information brokers 
are companies that obtain personal information, often from 
public records, but also from private sources, and they sell it 
to third parties, who are not affiliates. And I think if you 
craft a definition that applies to companies that are generally 
selling personal information to third parties and that are not 
initiated by the consumer, for purposes not initiated by the 
consumer, I think you limit the field substantially. But you 
are right. It is a very difficult thing to do, because there 
are many companies out there that are selling sensitive 
personal information without telling anyone and without the 
individual's consent.
    Mr. Stearns. I think we are going to complete our hearing 
today. I want to thank all four witnesses for their time. And I 
think it has been very educational and helpful to myself and 
our staff on both sides.
    And with that, the committee is adjourned.
    Ms. Maier. Thank you.
    Mr. Hoofnagle. Thank you.
    [Whereupon, at 11:32 a.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]

                Retail Industry Leaders Association
                                              Arlington, VA
                                                      July 28, 2005
The Honorable Cliff Stearns
Chairman
Subcommittee on Commerce, Trade, and Consumer Protection
Committee on Energy and Commerce
2123 Rayburn House Office Building
U.S. House of Representatives
Washington, D.C. 20515

RE: Statement for the Hearing Record on ``Data Security: The Discussion 
Draft of Data Protection Legislation.''

    Dear Chairman Stearns: On behalf of the Retail Industry Leaders 
Association (RILA), I am submitting this letter for the record of the 
subcommittee's hearing entitled ``Data Security: The Discussion Draft 
of Data Protection Legislation.'' We appreciate the opportunity to 
submit these comments.
    The Retail Industry Leaders Association (RILA) is an alliance of 
the world's most successful and innovative retailer and supplier 
companies--the leaders of the retail industry. RILA members represent 
almost $1.4 trillion in sales annually and operate more than 100,000 
stores, manufacturing facilities and distribution centers nationwide. 
Its member retailers and suppliers have facilities in all 50 states, as 
well as internationally, and employ millions of workers domestically 
and worldwide. Through RILA, leaders in the critical disciplines of the 
retail industry work together to improve their businesses and the 
industry as a whole.
    Retailers and their product and service suppliers value their 
relationship with their customers above all else. Consumers vote with 
their feet every day by purchasing goods and services from retailers 
and suppliers that they know and trust to provide the quality, prices 
and services that they expect.
    RILA members are committed to maintaining the security and 
confidentiality of consumer information. RILA supports a uniform 
federal standard should sensitive customer information be breached and 
there is a reasonable belief or actual knowledge that harm has been 
caused by a result of the breach.
    As the Judiciary Committee considers data security legislation RILA 
asks that the committee consider the following core principles:

 Preemption: RILA members are committed to policies and practices that 
        safeguard personal data and records and are in full compliance 
        with the current California data breech notification statute. 
        However, other states and jurisdictions have also enacted or 
        are considering similar laws. While these proposals similar, 
        they are rarely consistent, making the potential for a 
        conflicting and confusing regulatory and legal framework all 
        too real. Complying with various and inconsistent state laws 
        could, in fact, slow down the notification process, create 
        unnecessarily complex internal systems, and add cost to the 
        bottom line. Therefore, RILA supports a strong federal 
        preemption that would create a uniform standard ``trigger'' for 
        notification and for the type of notification that must occur.
 Trigger: RILA members believe that notification should only be 
        ``triggered'' when it is determined that there is, or there is 
        a reasonable belief that there is, a significant risk of harm 
        to consumers. We would note that this is a similar standard 
        supported by the Federal Trade Commission in testimony it has 
        presented before Congress this year. RILA members have 
        legitimate concerns about over notification and believe that 
        clearly defining an appropriate trigger is fundamental to 
        achieving meaningful consumer notice.
 Covered Data: Proposals should be limited to unencrypted computerized 
        information.
 Notification: RILA members support a uniform notification standard 
        through direct mail or email and are opposed to redundant and 
        costly notification requirements that would do little to 
        increase awareness. RILA also supports a substitute 
        notification delivery method--email, website, local media, 
        etc.--if notification costs would exceed $250,000 or the breach 
        affects more than 500,000 consumers.
 Private Right of Action: RILA supports data security legislation that 
        would prohibit individual private rights of action.
 Credit Freeze: RILA has concerns regarding the impact of so-called 
        credit freeze proposals that would allow consumers to place a 
        freeze on their credit report. While proposals of this nature 
        have the biggest impact on the credit agencies, retailers, 
        particularly those who provide instant credit, are concerned 
        about the spill over effects of credit freeze requirements. 
        When a customer freezes their credit file they are likely to 
        forget to ``unfreeze'' their file before they apply for instant 
        credit creating consumer frustration and confusion when instant 
        credit cannot be issued. In addition, retailers are concerned 
        that additional credit agency requirements could drive up the 
        cost of credit reports. While the industry has concerns with 
        credit freeze requirements, if provisions are adopted, there 
        should be a uniform national standard.
    With regard to the draft document that the committee is considering 
at today's hearing, we have prepared the attached comments, which we 
have previously provided to the subcommittee staff.
    If you have any questions about this matter, please don't hesitate 
to contact me or my colleague Lori Denham, Senior Vice President, 
Policy and Planning.
            Sincerely,
                                              Paul T. Kelly
        Senior Vice President, Federal and State Government Affairs
Attachment
Retail Industry Leaders Association General Comments on Barton/Stearns 
   Discussion Draft ``Data Security & Security Breach Notification''
                             july 28, 2005
Security Requirements for Data
Section 2
 Rules promulgated by the FTC may require specific policies and 
        procedures that may or may not be appropriate for the 
        protection of the personal information maintained by companies. 
        While we support the idea that companies should have policies 
        and procedures in place to protect personal information, we 
        believe individual companies are in the best position to 
        determine what form those policies and procedures should take.
 RILA supports an exemption for data that is encrypted.
Nationwide Notification for Material Security Breaches
Section 3
 Breach of Security. We agree with the concept of risk assessment in 
        determining whether a notice of breach to consumers is 
        necessary. Inundating consumers with notices regarding a breach 
        of information when there is no evidence that the breach has, 
        or will, result in identity theft is counter-productive. There 
        is a real danger that over notification will result in 
        consumers becoming numb to the notices and they will, 
        therefore, fail to take necessary steps to protect their 
        information.
 Timeliness of Notification. Many of the state laws regarding security 
        breach notification have included a provision that would allow 
        for the delay of notification to consumers in cases where law 
        enforcement requests a delay so they can complete an 
        investigation.
 Method of Notification. Notification by mail and email and web site 
        could prove burdensome. We would support a notification scheme 
        whereby individuals could be notified by mail or email and by 
        the posting of a notice on the company's web site. It is not 
        necessary to notify consumers by both mail and email. Companies 
        should be able to choose the method that is most practical and 
        efficient depending on the circumstances. Providing notice on 
        the company's web site would then be an appropriate and 
        practical addition to the mail or email notification. If a 
        company chose to send notice by email, it should be allowed to 
        do so without having prior ``consent'' from the consumer to 
        receive such messages. This would be an operational (not a 
        commercial) email message and one that consumers would want and 
        need to receive regardless of whether they had previously 
        provided consent.
Definitions
Section 5
 ``Personal Information''. The definition of personal information is 
        consistent with the definitions established in California's 
        (and other state's) security breach notification laws. If this 
        definition is acceptable, why would the Commission be allowed 
        to modify it in the rulemaking?
Effect on Other Laws
Section 6
 The preemption language is limited to ``. . . breaches of security of 
        data in electronic form.'' State laws have contemplated 
        breaches in forms other than electronic. The preemption should 
        be complete so that companies can implement one security breach 
        notification process. Companies should not be put in a position 
        whereby they have to follow specific state laws for information 
        that is maintained in forms other than electronic.
 Banks, credit unions, thrifts and common carriers are exempt from 
        coverage because they do not fall under the jurisdiction of the 
        FTC. However, these entities would need/want to take advantage 
        of the preemption provision. If these entities are not included 
        in the preemption provision they will be subject to federal 
        regulatory guidance and the myriad state laws that address 
        security of information and notification in the event a 
        security breach occurs.
Effective Date and Sunset
Section 7
 What is the reason for attaching a sunset provision to this 
        legislation?
    For more information, contact Lori Denham, Senior Vice President, 
Policy and Planning (703) 600-2012 or [email protected] or 
Paul T. Kelly, Senior Vice President, Federal and State Government 
Affairs (703) 600-2014 or [email protected].

                                 
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