United States: Hedge Funds and Data Protection

Last Updated: June 9 2013
Article by Anthony Murray

The obligations of hedge funds, investment managers and service providers to protect confidential information relating to investors and avoid breaches of data privacy legislation is increasingly in focus. Hedge Funds have long been required to obtain personal data on their investors as a result of anti-money laundering/ know your customer requirements and investor suitability purposes. New regulations including FATCA will require that investment managers, funds and service providers obtain additional amounts of personal data. With the requirement to obtain increased amounts of personal data, combined with the penalties and reputational risks involved with the breach of data privacy legislation, this is an area that cannot be overlooked or ignored. This article will examine some of the issues on this topic, including the cross-border transfer of investor information and data.

Due to the nature of a hedge funds business being inherently multi-jurisdictional it is likely that the data protection legislation in at least two or more jurisdictions, if not more, will apply. The European Union ("EU") is widely regarded as the most progressive political entity to have legislated in this area with the the EU Data Protection Directive ("EU Data Protection Directive"), passed in 1995. As it was passed in the form of a Directive, the European Union member states are subject to minimum standards as set out in the Directive, and may implement higher standards which several states have done. The laws of the EU member states should therefore be considered when analyzing the rules that apply for registration or notification with respect to the standards and requirements for holding personal data. One of the key points to note is the extraterritorial nature of the EU Data Protection Directive which requires that personal data, subject to certain exceptions, may not be transmitted to a jurisdiction that does not have a level of protection which is adequate by the EU. In the United States, the situation is more complex as there is generally no federal laws regulating the protection of data in the same manner as the EU Data Protection Directive and it has been left to the individual states to pass legislation in this area. Massachusetts is a notable jurisdiction which has adopted some of the strictest data protection legislation and which hedge fund managers and service providers should be aware of, in the event that personal data is held on Massachusetts residents.

What data is in scope?

The data which is regarded as in scope and the parties to whom the data relates differs between the jurisdictions. Under the EU Data Protection Directive, the data is described as "Personal Data". Personal Data includes information that identifies the "Data Subject", which is the person to whom the data applies. Data Subjects are natural persons, and therefore the Directive would not apply to data on a corporate entity. It will of course apply to the Personal Data relating to natural persons obtained in respect of the corporate entity e.g. the directors or shareholders.

As many of the rules in this area follow the person to whom the data applies it is critical to understand the obligations you may have in the jurisdictions where your investors are based. By way of example, Massachusetts has enacted some of the strictest data protection laws in the U.S. Under the Massachusetts regulations an entity is subject to their rules simply by holding personal data on a Massachusetts resident. A party covered by those rules does not need to have a place of business in the state or other nexus with the state (which is required for the regulations in other states to apply). The data which would bring an entity in scope of theMassachusetts regulations is holding a resident's first name and last name or first initial and last name in combination with any one or more of the following data elements that relate to such resident: (a) Social Security number; (b) driver's license number or state-issued identification card number; or (c) financial account number, or credit or debit card number, with or without any required security code, access code, personal identification number or password, that would permit access to a resident's financial account.

What restrictions are placed on the use of data

It is very unlikely that a hedge fund or service provider will use personal data received other than for the purposes of processing an investment and meeting their legitimate reporting and record keeping obligations. In this regard the EU imposes the strictest uses on the handling and use of personal data. The EU Data Protection Directive imposes a number of principles to the handling of data including requiring that data is processed fairly and lawfully and for a specific legitimate purpose. Other principles applying under the EU Data Protection Directive require that only relevant information is collected (i.e. additional information not directly required is obtained), and importantly, personal data is destroyed when no longer required. In addition, when complying with the principles data if further processing or use of the data is to be undertaken this may only be done when the Data Subject consents or other exceptions provided by law or other public interest exclusions apply. In addition, the EU Data Protection Directive requires that the party holding the data discloses to the data subject upon request what data they hold on them.

What are the notification requirements for a breach of data protection rules?

Most U.S states have implemented data breach notification statutes, including California, Arizona, Massachusetts amongst others. Generally, the data breach notification laws will require that the person to whom the data relates is notified of the breach. Notification is also normally required to the state (e.g. Attorney General). The procedures, penalties, required actions and liabilities for a data breach vary from state to state. In the European Union certain countries have also enacted data breach notification requirements and the EU Commission has proposed that rules relating to such breaches should be incorporated in amendments to the EU Data Protection Directive.

What impact do the data protection rules impose on contractual negotiations?

When negotiating contracts or agreements where a third party (e.g. a service provider such as an Administrator), the parties should take care to oblige the service provider to ensure that they comply with relevant data protection laws and will protect the data which they receive or will process. A careful review of the liability clauses and indemnities should be reviewed to establish which party will be liable in the event that there is a breach. Certain jurisdictions require paperwork to be put in place covering export or transfers of data (see the references to the EU Model Contracts below). In addition, by way of example the Massachusetts data protection regulations require that parties include a contractual provision in contracts to implement and maintain appropriate security measures for the safeguarding of personal information. As from March 2012, parties were required go back and request that such a provision be included in existing contracts.

What terms should be included in an Offering Memorandum or Subscription document to cover data protection?

When preparing the disclosures in the offering memorandum and subscription documents, consideration should be given to including risk disclosures that information may be transferred to jurisdictions which do not have comparable data protection standards, opt-in or opt-out clauses for investors to decide if they want to share their information (or consents) and consents in the event that information is to be shared with third parties.

What restrictions apply to data export from the EU?

In the European Union, the key term is that a third country to which information is exported must have data protection measures which are "adequate". Note the use of the term "adequate" rather than "equivalent". The European Union currently recognizes a limited number of jurisdictions as having adequate data protection measures. The jurisdictions are Argentina, Canada, Guernsey, Isle of Man and Switzerland. For the purposes of the EU Data Protection Directive those jurisdictions are therefore treated in the same way as data being transmitted between EU member states. For countries (including the U.S.) which are not so recognized as having adequate data protection standards then additional steps must be taken in order to export the data to such third countries.

The European Union and the U.S. agreed to a special arrangement where data transfers from the EU to the U.S may be regarded as subject to "safe harbor" provisions. Under the terms of the safe harbor, if an entity in the U.S. wishes to process data on EU Data subjects they must self certify to comply with certain data protection principles set out in the EU Data Protection Directive (which are similar to the principles applying to data processors in the EU).

Transfers to other countries which do not have adequate data protection standards, can be achieved on a case-by-case basis by entering into "model contracts" under the terms of the EU Data Protection Directive. The European Union has agreed the form of the "model contracts". The terms of the model contracts are quite standard, however, it should be noted that election as to the type of information being exported may need to be specified. In addition, some European Union member states require registration of the model contracts, while others do not. Therefore, it is important to verify what the laws of the relevant member state require to make the data export under the model contracts effective.

Do you have a proper data protection system or require further advice?

Please contact Anthony Murray of Murray LLP for assistance.
anthony@murrayllp.com
(212) 729 3045

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.