United States: Podcast: Private Fund Regulatory Update – Network And Cloud Storage

In this Ropes & Gray podcast, asset management partners Laurel FitzPatrick and Joel Wattenbarger discuss the Risk Alert published on May 23, 2019 by the SEC's Office of Compliance Inspections and Examinations, which addresses the obligation to safeguard customer records and other information in cloud-based or network storage solutions.

Transcript:

Joel Wattenbarger: Hello, and thank you for joining us today on this Ropes & Gray podcast, the latest in our series of podcasts and webinars focused on private fund regulatory issues. I'm Joel Wattenbarger, a partner in our asset management group based in New York. Joining me today is Laurel FitzPatrick, a partner in our asset management group also based in New York. Today, we are going to be discussing the Risk Alert published on May 23, 2019 by the SEC's Office of Compliance Inspections and Examinations, or OCIE for short, discussing the obligation to safeguard customer records and other information in cloud-based or network storage solutions.

Laurel, this Risk Alert is not intended to impose new obligations on registered investment advisers or broker-dealers, but rather to highlight some of the common deficiencies the OCIE is seeing with respect to investment advisors' recordkeeping practices. Perhaps it makes sense to briefly summarize the recordkeeping obligations the Risk Alert is addressing.

Laurel FitzPatrick: Of course. This Risk Alert considers the use of network or cloud-based storage and how the use of those platforms may cause a registered investment adviser or broker-dealer to run afoul of Regulation S-P or Regulation S-ID, each of which imposes obligations on financial institutions to protect the confidentiality of their customers' personal information. Registered investment advisers, depending on their clients, may or may not, or may have varying, substantive obligations under these regulations. Also, they or their private funds may instead have obligations under other similar regulations. Given the general nature of the guidance in the Risk Alert, we view it as providing useful insight into the OCIE's overall thinking about privacy and data security, particularly as applied to the use of outsourced electronic storage solutions.

Joel Wattenbarger: Yes, specifically, the Risk Alert provides what is likely to be an outline for how the SEC staff would consider similar issues arising under Rule 204-2 of the Advisers Act, the so called "recordkeeping rule." In addition to setting out a lengthy list of books and records that registered investment advisers are required to make and maintain, Rule 204-2 contains specific requirements applicable to advisers utilizing electronic storage, which is just about everyone these days. Any advisers storing records electronically, must satisfy the following three conditions:

  1. To maintain and preserve the records, so as to reasonably safeguard them from loss, alteration, or destruction;
  2. To limit access to the records to properly authorized personnel and the Commission (including SEC examiners and other representatives); and
  3. To reasonably ensure that any reproduction of a non-electronic original record on electronic storage media is complete, true, and legible when retrieved.

Laurel FitzPatrick: Exactly. Because the first two of those Rule 204 requirements are intended to address the same risks discussed in the Risk Alert, we look at the Risk Alert as being of interest to all registered investment advisers and their compliance staff. The guidelines in the Risk Alert are, as a practical matter, best practices endorsed by OCIE. They very well may serve as touch points for the SEC's evaluation of investment advisers' obligations to store and maintain all required information, not just materials containing personal information. The Risk Alert highlighted three deficiencies in the implementation and use of network and cloud storage. First, the OCIE staff observed that network storage typically permits investment advisers to implement a variety of security features designed to prevent unauthorized access to stored information, it was often the case that these features were not activated or were incorrectly configured. In some cases, advisers made no changes to the default settings. These issues were frequently the result of a lack of oversight during the initial implementation of the storage solution and continued as a result of the lack of any regular or ongoing review of the storage platform and its access and security settings.

Joel Wattenbarger: As the Risk Alert notes, avoiding this pitfall may be as easy as ensuring that an investment adviser's compliance and information technology teams work together on the initial onboarding of a new storage solution to ensure that security settings are appropriately configured and that access controls are consistent with regulators' expectations and with the adviser's compliance policies and procedures. Advisers should also periodically revisit security and access controls to confirm that they remain appropriate.

Laurel FitzPatrick: The second deficiency identified by the OCIE staff was, in principal, the same as the first, but specific to cloud-based storage solutions. Like network storage solutions controlled end-to-end by the adviser, cloud-based storage solutions typically include a number of security and access control features that an investment adviser can implement and configure.

Joel Wattenbarger: And, similarly, this deficiency can be avoided if an adviser's compliance and IT teams work together when onboarding a cloud-based storage solution to ensure that the security and access control features and settings are configured in a manner consistent with the adviser's policies and procedures and its obligations under the various regulations addressing privacy and data security. Advisers should also consider requiring cloud-storage vendors to periodically update software and, if applicable, hardware to maintain and enhance the security and access controls over the term of an engagement.

Laurel FitzPatrick: The third deficiency outlined in the Risk Alert was a failure to accurately identify different types of data stored electronically, and, as a result, a failure to ensure that heightened security or access control measures applied to all applicable data. This can be a difficult issue to address, but registered investment advisers are required to have policies and procedures to identify and retain specific types of information under the Advisers Act Rules 204-2(a)(7) and 206(4)-7, and these policies likely already capture personal information by virtue of the types of materials that are required to be retained or can be expanded as necessary to cover additional types of correspondence and other documents that may contain personal information.

Joel Wattenbarger: Well thank you, Laurel, for joining me today for this discussion. And thank you to our listeners. For more information on the topic we discussed today, or other topics of interest to the private fund community, please visit our website at www.ropesgray.com. And of course, if we can help you navigate any of these areas, please don't hesitate to contact any one of us.

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
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please 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.

Disclaimer

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.

General

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