United States: Key Data Privacy And Security Concerns For Investment Firms

I. Introduction

Privacy and data security concerns are among the most critical issues facing investment funds, advisors and managers (collectively, "investment firms"). This article outlines the privacy and data security challenges confronting investment firms, including the increased focus on the privacy and security of sensitive information by state, federal, and foreign authorities. With daily attacks by hackers on corporate networks and the looming threat of government enforcement actions and civil litigation, investment firms are wise to develop and implement effective strategies to protect their organizations and the portfolio companies they manage from privacy and security threats.

II. Privacy and Data Security Challenges

Investment firms have always been highly attractive targets for cyber criminals because of the extremely sensitive information they possess. While the security of personal and financial information has garnered most of the attention over the last ten years, investment firms also should focus their attention on the protection of non-public information of potential transactions, as failure to secure such information could place such transactions in jeopardy. A security breach resulting in the disclosure of such sensitive information could cost the investment firm hundreds of millions of dollars in remediation and litigation costs, not to mention the reputational harm of such a breach.

Not only should investment firms secure their own networks and information, it is important that they consider and address the privacy and data security practices of the portfolio companies they manage because a privacy or security incident could undermine a firm's investment in a portfolio company. For similar reasons, investment firms should review the privacy and data security practices of third-parties with which portfolio companies contract to provide services. Managing privacy and data security risk within a portfolio is an especially challenging task, given that an investment firm's portfolio likely includes a broad range of industries, varying types of information that must be secured, and a host of third parties interacting with those portfolio companies.

III. Complex Regulatory Environment

A. Privacy and Data Security Regulators

The active regulatory environment and the various agencies involved in the regulation of consumer and investor data creates additional complexity in complying with the myriad of privacy and data security rules and regulations. In the United States, several federal agencies, including the Federal Trade Commission, Federal Communications Commission and Consumer Financial Protection Bureau, have claimed authority to regulate privacy and data security. Determining which agency is likely to claim jurisdiction (and sometimes there is more than one) will depend on the business sector of the company, the activities in which the company is engaged, or the underlying data at issue. Several state Attorneys General have also sought to regulate corporate privacy and data security practices, with a handful of states often taking a leadership role in multi-state investigations. Investment firms can further be subject to foreign privacy and data security obligations, so they must closely examine key privacy and data security developments in countries in which they operate and/or invest, such as the European Union's recent General Data Protection Regulation (adopted by the EU Council and Parliament in April 2016).

Additionally, the U.S. Securities and Exchange Commission has increasingly focused on cybersecurity risks facing investment firms. In April 2014, the SEC's Office of Compliance Inspections and Examinations ("OCIE") announced a series of examinations to identify data security risks in the securities industry. Following completion of these examinations, in February and April 2015, OCIE provided guidance to investment firms regarding three broad categories of cybersecurity protections they should implement: 1) conduct periodic risk assessments regarding cybersecurity practices, 2) develop a cybersecurity strategy to prevent, detect, and respond to cybersecurity threats, and 3) implement that strategy through policies, procedures, and training. On September 15, 2015, OCIE announced a second round of examinations that would focus on six key areas: 1) governance and risk assessment, 2) access rights and controls, 3) data loss prevention, 4) vendor management, 5) training, and 6) incident response.

The SEC's identification of these six areas, combined with OCIE's April 2015 guidance, provides a framework for the type of cybersecurity program that the SEC expects investment firms to adopt. Further, the SEC's public pronouncements on cybersecurity indicate that failure to meet these expectations can result in an enforcement action. Indeed, on September 22, 2015, only one week after its notice of a second round of cybersecurity examinations, the SEC announced its first settlement of an enforcement action against an investment adviser arising from a cybersecurity breach. In that case, R.T. Jones Capital Equities Management allegedly failed to establish cybersecurity policies and procedures prior to a breach of the personally identifiable information of approximately 100,000 individuals that was stored on a third-party-hosted web server. Even though none of R.T. Jones' clients were alleged to have been harmed as a result of the intrusion, R.T. Jones agreed to pay a $75,000 penalty as part of the settlement.

B. HIPAA Enforcement

While many of the regulators described above could attempt to regulate both an investment firm and its portfolio companies, firms that invest in the health care industry must also be aware of their obligations relating to the protection of healthcare data.

The Health Insurance Portability and Accountability Act, the Health Information Technology for Economic and Clinical Health ("HITECH") Act, and their implementing regulations (collectively, "HIPAA") requires the protection of individual health information and applies to entities known as "covered entities" and "business associates." An investment firm's portfolio companies, such as health care providers or data analysis and storage organizations, may be covered entities or business associates, and as a result would be subject to HIPAA.

The Department of Health and Human Services Office for Civil Rights ("OCR") is responsible for enforcing HIPAA. In general, OCR enforces HIPAA by investigating complaints and reported breaches, although under its audit program it additionally conducts periodic, proactive audits of covered entities and business associates. OCR may impose civil monetary penalties on covered entities and business associates that range from $100 to $50,000 per violation (with an annual maximum fine per violation of $1.5 million), with aggregate penalties trending higher in recent years.

Other entities may also be involved in HIPAA enforcement activities. The Department of Justice, for example, may investigate complaints alleging a violation of a criminal provision of HIPAA. Additionally, state Attorneys General have the authority to bring civil actions for HIPAA violations on behalf of state residents. Finally, the FTC has worked with OCR on joint enforcement actions related to privacy violations. For example, in 2010, FTC and OCR pursued joint enforcement under HIPAA and the FTC Act against Rite Aid, at the time publicly traded but partly owned by a private investment firm, for Rite Aid's alleged failure to safeguard the privacy of its consumers when disposing of identifying information on pill bottles labels and other information. Rite Aid paid a $1 million fine and agreed to a 3-year corrective action plan with HHS, and is subject to an FTC consent order for 20 years.

IV. Mitigating Cybersecurity Risks

Based on the risks and complex regulatory obligations faced by private investment firms, it is important that such firms develop an effective privacy and data security program. Set forth below are some of the proactive steps an investment firm can take to mitigate cybersecurity risks, although all strategies should be carefully tailored to address the risks applicable to a particular entity.

A. Pre-Acquisition Diligence

Investment firms should conduct appropriate due diligence on potential investments or acquisition targets to minimize risk to the target and to the firm post-closing. Representations and warranties in the transaction documents can help limit risk but diligence should be undertaken to understand how a potential target collects, uses, stores, discloses, transfers, and disposes of data in its business operations. Prior to signing, investment firms should also develop post-closing remediation plans and evaluate how such plans impact the valuation model for the investment.

B. Policies and Procedures

Investment firms should develop policies and procedures to prevent, detect, and respond to security threats. Such policies and procedures should clearly document privacy and security expectations at the enterprise level and address the types of technical safeguards that firms should employ. Investment firms should also have a written incident response plan that clearly defines the roles and responsibilities for managing the incident, as coordination between various internal stakeholders is critical to a successful response. The response plan should account for the retention of legal, technology and public relations experts and the plan should be a living document. In other words, the plan should be tested, adjusted to account for the testing experience, and periodically tested again ideally involving the retained specialists so that when an incident happens, the entire team is ready to work together in a productive, efficient manner.

C. Training and Assessments

Investment firms should also develop and implement training programs for officers and employees regarding privacy and security obligations, security threats, and responses to such threats. Such training should cover the monitoring of compliance with the firm's policies and procedures regarding security. As part of a firm's monitoring efforts, an investment firm should also conduct periodic assessments regarding its technology infrastructure, internal and external cybersecurity threats, its governance structure for managing cybersecurity risks, and common networks shared with third parties. These assessments should be conducted under privilege wherever possible and appropriate.

D. Vendor Management

Given the impact that third-party privacy and data security practices can have on an investment firm and its portfolio companies, investment firms should establish a robust vendor management program. Such programs typically have three components: 1) a process to select and retain third-party providers that are capable of maintaining the security of the company's network and data, 2) standard contractual clauses to implement security controls that are appropriate to the services being provided, and 3) ongoing monitoring of the relationship over time to ensure that the vendor continues to have in place appropriate controls designed to protect the client's systems and data.

E. HIPAA Compliance Programs

Entities subject to HIPAA should ensure that their HIPAA compliance programs are comprehensive and up to date. In particular, entities subject to HIPAA are required to undertake a periodic "risk analysis" in order to assess risks and vulnerabilities to patient information. This analysis has become a focal point of OCR HIPAA enforcement and is often among the first documents requested by OCR during a HIPAA audit or investigation. Entities subject to HIPAA should also ensure the sufficiency of their policies, procedures, practices and training. Finally, entities subject to HIPAA should ensure that business associate agreements are in place as required; this has also become an OCR focal point in recent years. 

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.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions