OCIE Lists Privacy Blunders; SEC Explains When Digital Assets become Securities; Ohio Mandates IARs and RR to Report Elder Abuse; FINRA Guidance on Departing Reps: Regulatory Update May 2019

For Investment Advisers and Broker-DealersSEC & State Actions

Reg S-P Compliance Violations Spelled out by SEC: OCIE reviewed two years of deficiency letters and came up with a list of the most common Regulation S-P compliance issues.  The risk alert identified the following low-hanging fruit:

  • Failing to provide initial and annual notices, and providing inaccurate privacy notices.
  • Failing to include an opt-out right to clients where firms share nonpublic personal information with nonaffiliated third parties.
  • Policies and procedures that contained blank spaces or described the requirements of Rule 30(a) of Regulation S-P (the “Safeguards Rule”) without describing the firm’s processes for actually protecting client information.

The bottom line is that OCIE found advisers and broker-dealers are aware of the Safeguards Rule and Regulation S-P but have not followed up with administrative, operational and physical safeguards.  Firms also stumble when it comes to training their staff on using encryption, password protection, or other available tools to protect client information.  Some firms have also failed to address the widespread use of personal devices like laptops and cellphones for storing client information without the appropriate anti-theft safeguards.

The SEC has become increasingly concerned about cybersecurity threats, and this alert from OCIE is a clear message to firms that they need to up their game.  Investment advisers and broker-dealers should use the risk alert as a guide for improving their information security protocols.  And if you need further incentive, check out the more recent cases brought by the SEC against R.T. Jones (resulting in a $75,000 fine), Morgan Stanley (resulting in a $1 million fine) and Voya Financial Advisors, Inc. (resulting in $1 million fine). Contributed by Jaqueline M. Hummel, Partner and Managing Director.

Heads Up!  Massachusetts Amended the Data Breach Notification Law:  You may need to update your firm’s Information Security Program to address significant changes to Chapter 93H, which became effective on April 11th.    Best-practice becomes law as broker-dealers and investment advisers subject to the MA law are now required to provide a minimum of 18 months of free, third-party credit monitoring services to affected consumers when there is a breach involving social security numbers.  Also, the notification requirements have been amended to address the timing and content of the notifications provided to the Commonwealth’s Attorney General, the Office of Consumer Affairs and Business Regulation (“OCABR”), and affected consumers.  Firms can no longer delay notification until the number of affected residents is known.  Instead, they must provide additional updates as the correct information becomes available.  See House, No. 4806, Sections 8-11 for a complete list of amendments and modify your Information Security Program and notification templates accordingly.  Contributed by Rochelle A. Truzzi, Senior Compliance Consultant.

Ohio Requires Registered Reps and Investment Adviser Reps to Report Elder Abuse.  Effective March 20, 2019, a new Ohio law took effect requiring certain financial professionals to report cases of suspected elder abuse or financial exploitation.  Specifically, Ohio Revised Code (ORC) 5101.63(A)(2)(dd), a provision within the Ohio Adult Protective Services statutes, was amended to include “a dealer, investment adviser, sales person, or investment advisor representative licensed under Chapter 1707 of the Revised Code” as mandatory reporters of known or suspected elder abuse.  Investment advisers and broker-dealers should train their representatives on how to identify and report elder abuse.  Check out the Ohio Department of Job and Family Services’ Guide to Protecting Ohio’s Elders for more information on what to look for and whom to call.   Reports can be made 24 hours a day, seven days a week by calling 1-855-OHIO-APS (1-877-644-6277).  Contributed by Jaqueline M. Hummel, Partner and Managing Director.

SEC Actions

SEC Issues Digital Asset Analysis and No-Action Letter: The evolution of capital formation, fin-tech, and market structures to include digital assets may or may not fall under the jurisdiction of the SEC.  To help industry participants determine whether a specific digital asset will be considered a security and subject to SEC jurisdiction, the SEC’s Strategic Hub for Innovation and Financial Technology (“FinHub”) published the “Framework for ‘Investment Contract’ Analysis of Digital Assets” (the “Framework”).  The authors of the guidance note that the framework “is not intended to be an exhaustive overview of the law, but rather, an analytical tool to help market participants.”

Consistent with prior SEC pronouncements, the Framework applies the Supreme Court’s Howey test for determining a transaction qualifies as an “investment contract,” which is considered a security and governed by federal securities laws.  The Framework focuses on the third and fourth prongs of the Howey test, specifically whether investors have an (i) expectation of profit (ii) in reliance on the efforts of others. On the same day that the Framework was released, the SEC’s Division of Corporate Finance issued the TurnKey Jet, Inc. No-Action Letter applying the Framework to find that tokens used to purchase services would not qualify as securities subject to SEC registration.  The model described in the no-action letter involves digital assets that would only be used on a closed private network to purchase air charter services.

The Framework and the TurnKey Jet, Inc. No-Action letter further emphasizes the limited circumstances under which a digital asset can avoid being considered as a security.  To prevent security status, the SEC wants to see that the digital assets and associated network are fully functional at the time of sale. It seems likely that many digital assets will be considered “securities” subject to registration during the fundraising stage since the efforts of a promoter will be key to the enterprise’s success and the proceeds from sales will likely be used to develop the platform.  The Framework indicates, however, that the digital asset can transform from a security to a non-security once the asset operates within a fully functioning network.  Market participants should approach selling digital assets with caution.   Contributed by Doug MacKinnon, Senior Compliance Consultant.

For Broker-Dealers:  FINRA Actions 

FINRA Issues Guidance for Communications with Customers Regarding Departing Representatives:  FINRA issued Regulatory Notice 19-10 to remind member firms that when a registered representative leaves, the firm should “promptly and clearly” notify affected customers how their accounts will continue to be serviced.  FINRA’s goal is to provide customers with timely information to make an informed decision about where to maintain their assets.  If your written supervisory procedures do not already address such communications, you should adopt and document procedures that provide prompt notification and the name and contact information of the individual(s) to whom the customer may direct questions and trade instructions, and when assigned, the name and contact information of the representative to whom the customer’s account(s) were assigned.  In addition, the firm may clarify the customer’s options to either retain the assets with the firm to be handled by the assigned representative or another representative at the firm or transfer the assets to another firm.  If the firm knows of and has consent from the departing representative, it may provide customers, upon request, with the departing representative’s business phone number, email address or mailing address. Contributed by Rochelle A. Truzzi, Senior Compliance Consultant.

Attention Underwriting Syndicate Members who enter into Backstop Agreements:  FINRA released updates to the Interpretations on Financial and Operational Rules dealing with open contractual commitments.  A backstop agreement is an agreement between two syndicate members, the Backstop Recipient and the Backstop Provider, where the Backstop Provider agrees to deduct from its own net capital calculation any applicable open contractual commitment attributable to the Backstop Recipient.  If the backstop agreement is executed and effective before the Backstop Recipient becoming obligated to the underwriting commitment (which and requires the Backstop Provider to purchase any unsold securities allocated to the Backstop Recipient), the Backstop Recipient does not need to take a capital deduction for its share of the open contractual commitment charge.  See interpretations on Securities Exchange Act Rule 15c3-1(c)(2)(viii), page 654. Contributed by Rochelle A. Truzzi, Senior Compliance Consultant.

FINRA Will Permit the Use of Electronic Signatures for Discretionary Accounts:  Effective May 6th, firms may accept the electronic signature of those named, associated persons authorized to exercise discretion in client accounts, to satisfy FINRA Rule 4512(a)(3) regarding customer account information.  The electronic mark must clearly identify the signatory and comply with Section 101(d) of the Electronic Signature Act by being accurate, accessible, and capable of reproduction.  Electronic records maintained in accordance with 17a-4(f) comply with 101(d) of the E-Sign Act.  Contributed by Rochelle A. Truzzi, Senior Compliance Consultant.

For Mutual Funds: SEC Actions

SEC Issues Guidance on Mutual Fund Reporting Requirements.  The SEC recently revised its Small Entity Compliance Guide: Investment Company Reporting Modernization Rules.  The guide highlights mutual fund reporting requirements associated with Forms N-PORT and N-CEN, which replace Forms N-Q and N-SAR, respectively.  This update reflects the SEC’s interim final rule adopted in February 2019, which adjusted the timing of initial Form N-PORT filings by large and small fund complexes.  Contributed by Cari A. Hopfensperger, Senior Compliance Consultant.

Liquidity Risk Management FAQs Updated.  The SEC also recently updated its Investment Company Liquidity Risk Management Programs FAQ to address the temporary impact of an “extended holiday closure” on the liquidity classification of securities that are otherwise publicly traded.  An extended holiday closure is one that lasts seven or more calendar days.  While the SEC acknowledged that such investments do become temporarily illiquid, the related liquidity risk “differs from the liquidity risk N-LIQUID is designed to flag,” because funds can generally plan for the temporary closure ahead of the holiday.  Provided the fund’s board is notified of its plans to manage liquidity during the closure, the FAQ clarifies that the SEC “would not object if a fund does not file Form N-LIQUID for an investment that becomes illiquid solely due to the extended holiday closure.”  Contributed by Cari A. Hopfensperger, Senior Compliance Consultant.

For Hedge Fund Managers: CFTC Actions 

Help is available for understanding NFA Interpretive Notice 2-9 on Internal Controls.  The NFA has been busy making various guidance and training resources available to Member firms implementing Interpretive Notice 2-9 regarding Internal Controls.  The following list highlights recent educational opportunities and where you can find copies.

  • NFA updated its Self Examination Questionnaire to assist firms in preparing for 2-9.
  • It held a webinar designed to educate Members on their obligations under the interpretive notice.  The archived webinar and transcript are available on the NFA website.
  •  NFA’s February Member Workshops discussed the Interpretive Notice and the Workshop materials are available on NFA’s website.

Contributed by Cari A. Hopfensperger, Senior Compliance Consultant

Photo Credits: Photo by Bruno Aguirre on Unsplash

Written by:

Hardin Compliance Consulting LLC

Hardin Compliance Consulting LLC on:

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JD Supra Privacy Policy

Updated: May 25, 2018:

JD Supra is a legal publishing service that connects experts and their content with broader audiences of professionals, journalists and associations.

This Privacy Policy describes how JD Supra, LLC ("JD Supra" or "we," "us," or "our") collects, uses and shares personal data collected from visitors to our website (located at www.jdsupra.com) (our "Website") who view only publicly-available content as well as subscribers to our services (such as our email digests or author tools)(our "Services"). By using our Website and registering for one of our Services, you are agreeing to the terms of this Privacy Policy.

Please note that if you subscribe to one of our Services, you can make choices about how we collect, use and share your information through our Privacy Center under the "My Account" dashboard (available if you are logged into your JD Supra account).

Collection of Information

Registration Information. When you register with JD Supra for our Website and Services, either as an author or as a subscriber, you will be asked to provide identifying information to create your JD Supra account ("Registration Data"), such as your:

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Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

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  • Measure readership and usage of the Website and Services;
  • Communicate with you regarding your questions and requests;
  • Authenticate users and to provide for the safety and security of our Website and Services;
  • Conduct research and similar activities to improve our Website and Services; and
  • Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

  • Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.
  • If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.
  • Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.
  • Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.
  • Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.
  • Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.
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How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at privacy@jdsupra.com.

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
    • Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.
    • Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.
    • Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to privacy@jdsupra.com. We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to privacy@jdsupra.com.

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at: privacy@jdsupra.com.

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at www.jdsupra.com) (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
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  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

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JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

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Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit http://www.aboutcookies.org which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at: privacy@jdsupra.com.

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