United States: SEC Privacy Risk Alert May Foreshadow Upcoming Reg S-P Enforcement Against Broker-Dealers, Investment Advisers

On April 16, 2019, the U.S. Securities and Exchange Commission's ("SEC") Office of Compliance Inspections and Examinations ("OCIE") issued a Risk Alert addressing all registered broker-dealers and investment advisers' (together, "Firms")[1] privacy-related obligations under Regulation S-P ("Reg S-P"). The Risk Alert set out the most frequent Reg S-P deficiencies OCIE identified during examinations over the past two years, and encouraged registrants to review their written privacy policies and procedures as well as the consistency with which these policies and procedures have been implemented. The Alert is the latest in a series of recent privacy and cybersecurity guidance documents issued by the SEC, including the February 2018 Commission Statement and Guidance on Public Company Cybersecurity Disclosures and October 2018 Report of Investigation on cyber-related frauds and public company accounting controls.

This Risk Alert is consistent with the SEC's approach of seeking to influence the conduct of registrants by providing guidance on specific compliance issues, followed by Risk Alerts noting common exam deficiencies, prior to pursuing enforcement actions. Investment advisers and broker-dealers should take this as a prompt to review their relevant policies and procedures to ensure they are appropriate and being followed in practice.

Reg S-P Requirements and Noted Deficiencies

Reg S-P requires broker-dealers, investment advisers, and investment companies[2] to notify customers of their privacy policies and establish sufficient safeguards for their personal and financial information. In the Risk Alert, OCIE flagged frequent deficiencies and weaknesses identified with respect to these Reg S-P requirements in the course of their examinations of registered advisers and broker-dealers.

Privacy Policies and Opt-Out Notices – Under Reg S-P, all Firms must provide customers with "clear and conspicuous"[3] notice of their privacy policy—both at the inception of the customer relationship and annually thereafter.[4] Among other disclosures, these notices must cover the categories of nonpublic personal information ("NPPI") that Firms collect and disclose about their customers to unaffiliated third parties, and the categories of third parties such information is disclosed to. All notices need only provide a general description of the institution's privacy policy and its treatment of customer NPPI, but they must be accurate when provided. Additionally, Firms must give customers "clear and conspicuous" notice of the right to opt-out of certain disclosures of their NPPI to unaffiliated third parties.[5]

In the Risk Alert, OCIE indicated it had frequently identified deficiencies with regard to Firms' provision of adequate notice to their customers. In many such instances, Firms failed to adequately and accurately detail their policies and procedures in notices. In more egregious cases, Firms failed to provide customers with any required privacy or opt-out notices at all.

Written Safeguard Policies and Procedures – Under Reg S-P, Firms must also adopt written policies and procedures that address "administrative, technical, and physical safeguards for protecting customer records and information"—under what is known as the Safeguards Rule.[6] Such policies and procedures must be "reasonably designed" to ensure that all customer information will remain secure and confidential through protections against any anticipated threats to the security and integrity of customers' NPPI, or against any unauthorized access of such information. Furthermore, such policies must be actually implemented.

In its Risk Alert, OCIE detailed two types of common deficiencies with Firms' attempts at compliance with the Safeguards Rule that it identified in the course of its examinations: (1) those involving Firms with non-existent and incomplete policies and procedures; and (2) those involving Firms' policies that were "not reasonably designed" to protect customers' NPPI, or that were adopted, but not fully implemented.

In the first category, OCIE identified a number of Firms that failed to adopt written policies or procedures designed to address the Safeguards Rule at all. In other instances, Firms had adopted policies and procedures, but OCIE indicated they were insufficient to satisfy the Safeguards Rule. Both investment advisers and broker-dealers are obligated to adopt compliance policies and procedures specially tailored to their business operations and the risks they present.[7] However, OCIE indicated that Firms had often either merely restated the Safeguards Rule itself, or crafted incomplete written policies and procedures that left "numerous blank spaces."

In the second category of deficiencies OCIE identified a number of instances where polices had been adopted, but not fully implemented. In others, OCIE identified a number of consistent, substantive deficiencies with Firms' fully adopted and implemented policies. In particular, these policies and procedures were deficient as they failed to (a) ensure all customer records and information was kept secure and confidential; (b) anticipate threats and hazards to customer records and information security; and (c) prevent unauthorized access to such information. To guide Firms subject to Reg S-P, OCIE highlighted the following, most frequently observed deficiencies:

  • Employee Personal Devices Not Addressed – Policies and procedures frequently failed to address how to configure personal devices to safeguard customer information. Additionally, OCIE found many employees regularly kept personal customer information on their personal laptops.
  • Email Policies – Policies and procedures often failed to properly address the inclusion of customer personal information in emails. In particular, such policies were not reasonably designed to protect against such information being sent via unencrypted emails to customers.
  • Inadequate Training and Monitoring of Employees – Some registrants that had policies and procedures designed to address encryption of customer information, password protections, and establishing pre-approved methods for information transmittal, still lacked adequate plans to train employees on such policies, and thereafter to monitor their activities.
  • Distribution of Private Customer Information to Unsecure Networks – OCIE also indicated that numerous registrants failed to prohibit their employees from sending private customer information to unsecured, external locations.
  • Improper Management of Outside Vendors – Some registrants also failed to follow their own policies and procedures in not contractually mandating that vendors keep customers' private information confidential.
  • Inadequate Inventory of Customer Personal Information – Registrants' policies and procedures often did not account for all systems used to maintain customer personal information. OCIE warned that the failure to do so limits a registrant's ability to "adopt reasonably designed policies and procedures and adequately safeguard customer information."
  • Incomplete Incident Response Plans – Particular areas of concern for OCIE included (1) a lack of assigned roles for implementation; (2) inadequate arrangements for a cybersecurity incident; and (3) incomplete assessments of a registrant's technical vulnerabilities.
  • Unsecured Storage of Customer Personal Information – Common deficiencies included storage in unlocked file cabinets with open offices.
  • Excessive Availability of Login Credentials – OCIE indicated registrants provided customer login credentials to more employees than the firm's policies and procedures permitted.
  • Failure to Restrict Access to Former Employees – OCIE found registrants had failed to halt the access rights of former employees to restricted customer information after they had left the firm.

OCIE encouraged all registrants to use the Risk Alert as a guide in reviewing, updating, and implementing policies and procedures that are fully compliant with Reg S-P. However, OCIE also made sure to note that the Risk Alert only focused on the most commonly identified deficiencies, and that registrants should consider whether other, unrelated updates will be necessary—noting that Reg S-P compliance can only be determined based on the specific facts and circumstances of the firm's operations.

Takeaways

The SEC's issuance of the OCIE Risk Alert may be a harbinger of increased enforcement activity that addresses Reg S-P compliance. Since Chairman Clayton came into office in 2017, the Commission has often issued initial guidance to securities industry market participants—such as in the cybersecurity and digital asset space— prior to bringing enforcement actions against violators of related U.S. securities laws and regulations.[8]

Furthermore, OCIE's Risk Alert aligns closely with the Commission's increased focus on retail investor protection under Chairman Clayton. Reg S-P is an inherently consumer protection-focused regulation. Indeed, the Safeguards Rule thereunder—the primary focus of OCIE's Risk Alert—is aimed directly at protecting the confidentiality of customer records and information. The OCIE Risk Alert may thus be viewed as the latest in a recent string of retail investor-focused activity by the SEC.

Given both the SEC's pattern of guidance before enforcement under Chairman Clayton, along with its recently increased focus on protecting retail investors, all broker-dealers and investment advisers would be well advised to evaluate and, where necessary, update their compliance policies and procedures promptly. In doing so, broker-dealers and investment advisers should also be careful to ensure their Reg S-P policies and procedures are tailored to their current business activities and related risks. Furthermore, such firms should carefully examine their operations to ensure they are appropriately implementing and reviewing the effectiveness of their existing policies and procedures, and promptly address any shortcomings.


[1] Reg S-P applies to all broker-dealers, investment advisers, and investment companies operating within U.S. securities markets, regardless of whether they have satisfied their registration obligation. Notably, OCIE only examines registered entities. As such, the findings detailed in the Risk Alert are limited only to the deficiencies identified in such entities' Reg S-P compliance policies and procedures.

[2] Note that while Reg S-P covers investment companies as well, the Risk Alert only addressed examinations of broker-dealers and investment advisers.

[3] Reg S-P defines "clear and conspicuous" to mean "reasonably understandable and designed to call attention to the nature and significance of the information in the notice." See 17 C.F.R. § 248.3(c)(1).

[4] See generally 17 C.F.R. §§ 248.4 and 248.5 detailing the Initial and Annual Privacy Notice requirements.

[5] See 17 C.F.R. § 248.10 detailing Reg S-P opt-out requirements.

[6] The so-called "Safeguards Rule" under Reg S-P can be found at 17 C.F.R. § 248.30(a).

[7] See FINRA Rule 3110(b)(1) (Requiring all FINRA member broker-dealers to "establish, maintain, and enforce written procedures to supervise the types of business in which it engages..."); see also Advisers Act Rule 206(4)-7 at 17 C.F.R. § 275.206(4)-7 (Requiring investment advisers to adopt written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act of 1940 and SEC rules adopted under the Act.).

[8] Following its DAO Investigative Report in July 2017, where the SEC highlighted how digital assets could qualify as "securities," the SEC has proceeded to bring numerous enforcement actions against initial coin offering token issuers for failure to register their public offering of securities or conducted the offering subject to an exemption. The SEC has also brought multiple actions against digital asset market participants who engaged in regulated activities with digital assets without appropriately registering with the Commission or satisfying an exemption, including against a broker-dealer and an exchange.

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