On February 9, the Securities and Exchange Commission (“SEC”) voted to propose rule 206(4)-9 under the Advisers Act and 38a-2 under the Investment Company Act (collectively, “Proposed Rule”). In general, the Proposed Rule would require all advisers and funds to adopt and implement cybersecurity policies and procedures containing several elements. While acknowledging spending on cybersecurity measures in the financial services industry is considerable, the SEC suggested it may nonetheless be inadequate, citing a recent survey finding that 58% of financial firms self-reported “underspending” on cybersecurity measures.

For financial services firms, the stakes are particularly high—it is where the money is.

The Proposed Rule would apply to advisers and funds that are registered or required to be registered with the SEC. Covered advisers include those who provide a variety of services to their clients, such as: financial planning advice, portfolio management, pension consulting, selecting other advisers, publication of periodicals and newsletters, security rating and pricing, market timing, and educational seminars. Compliance will be particularly important for those advisors and funds serving the retirement plan industry and now facing increased cybersecurity scrutiny by plan fiduciaries under the Department of Labor’s cybersecurity guidance.

The SEC recognizes the level of risk can vary advisor to advisor, but also notes that those advisors on the lower end of the risk continuum do not have a pass on compliance. A data breach at an adviser that only offers advice on wealth allocation strategies may not have a significant negative effect on its clients due to the limited personal information it maintains. Compare that to a breach experienced by an adviser performing portfolio management services which holds greater quantities of more sensitive personal information, and may have a degree of control over client assets. But even if personal information is not acquired by hackers, a ransomware event could cause a disruption to the advisor’s services adversely impacting their clients, such as limiting their ability to access funds.

So, there is not a one-size-fits-all approach to addressing cybersecurity risks and the Proposed Rule would allow firms to tailor their cybersecurity policies and procedures to fit the nature and scope of their business and address their individual cybersecurity risks. This is not unlike other cybersecurity frameworks, such as the Security Rule for healthcare providers and plans under the Health Insurance Portability and Accountability Act.

According to the SEC’s Fact Sheet, the Proposed Rule would:

  • Require advisers and funds to adopt and implement written policies and procedures that are reasonably designed to address cybersecurity risks. This requirement includes a comprehensive, documented risk assessment of the adviser’s or fund’s business operations. At least annually, advisors and funds would need to review and evaluate the design and effectiveness of their cybersecurity policies and procedures, which would allow them to update them in the face of ever-changing cyber threats and technologies.
  • Require advisers to report significant cybersecurity incidents to the Commission on proposed Form ADV-C, with similar reporting for funds.
  • Enhance adviser and fund disclosures related to cybersecurity risks and incidents. For instance, the Proposed Rule would amend adviser and fund disclosure requirements to provide current and prospective advisory clients and fund shareholders with improved information regarding cybersecurity risks and cybersecurity incidents.
  • Require advisers and funds to maintain, make, and retain certain cybersecurity-related books and records. This would include records related to compliance with the Proposed Rule and the occurrence of cybersecurity incidents.

The SEC hopes the rules would promote a more comprehensive framework to address cybersecurity risks for advisers and funds, resulting in a reduction in risk and impact of a significant cybersecurity incident. But the SEC also hopes to give clients and investors better information with which to make investment decisions, and itself better information with which to conduct comprehensive monitoring and oversight of ever-evolving cybersecurity risks and incidents affecting advisers and funds.

Tags: ADV-C, advisor, cyber, cybersecurity, data breach, fund, ransomware, RIA, risk assessment, SEC, Securities and Exchange Commission
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Photo of Joseph J. Lazzarotti Joseph J. Lazzarotti

Joseph J. Lazzarotti is a principal in the Berkeley Heights, New Jersey, office of Jackson Lewis P.C. He founded and currently co-leads the firm’s Privacy, Data and Cybersecurity practice group, edits the firm’s Privacy Blog, and is a Certified Information Privacy Professional (CIPP)…

Joseph J. Lazzarotti is a principal in the Berkeley Heights, New Jersey, office of Jackson Lewis P.C. He founded and currently co-leads the firm’s Privacy, Data and Cybersecurity practice group, edits the firm’s Privacy Blog, and is a Certified Information Privacy Professional (CIPP) with the International Association of Privacy Professionals. Trained as an employee benefits lawyer, focused on compliance, Joe also is a member of the firm’s Employee Benefits practice group.

In short, his practice focuses on the matrix of laws governing the privacy, security, and management of data, as well as the impact and regulation of social media. He also counsels companies on compliance, fiduciary, taxation, and administrative matters with respect to employee benefit plans.

Privacy and cybersecurity experience – Joe counsels multinational, national and regional companies in all industries on the broad array of laws, regulations, best practices, and preventive safeguards. The following are examples of areas of focus in his practice:

  • Advising health care providers, business associates, and group health plan sponsors concerning HIPAA/HITECH compliance, including risk assessments, policies and procedures, incident response plan development, vendor assessment and management programs, and training.
  • Coached hundreds of companies through the investigation, remediation, notification, and overall response to data breaches of all kinds – PHI, PII, payment card, etc.
  • Helping organizations address questions about the application, implementation, and overall compliance with European Union’s General Data Protection Regulation (GDPR) and, in particular, its implications in the U.S., together with preparing for the California Consumer Privacy Act.
  • Working with organizations to develop and implement video, audio, and data-driven monitoring and surveillance programs. For instance, in the transportation and related industries, Joe has worked with numerous clients on fleet management programs involving the use of telematics, dash-cams, event data recorders (EDR), and related technologies. He also has advised many clients in the use of biometrics including with regard to consent, data security, and retention issues under BIPA and other laws.
  • Assisting clients with growing state data security mandates to safeguard personal information, including steering clients through detailed risk assessments and converting those assessments into practical “best practice” risk management solutions, including written information security programs (WISPs). Related work includes compliance advice concerning FTC Act, Regulation S-P, GLBA, and New York Reg. 500.
  • Advising clients about best practices for electronic communications, including in social media, as well as when communicating under a “bring your own device” (BYOD) or “company owned personally enabled device” (COPE) environment.
  • Conducting various levels of privacy and data security training for executives and employees
  • Supports organizations through mergers, acquisitions, and reorganizations with regard to the handling of employee and customer data, and the safeguarding of that data during the transaction.
  • Representing organizations in matters involving inquiries into privacy and data security compliance before federal and state agencies including the HHS Office of Civil Rights, Federal Trade Commission, and various state Attorneys General.

Benefits counseling experience – Joe’s work in the benefits counseling area covers many areas of employee benefits law. Below are some examples of that work:

  • As part of the Firm’s Health Care Reform Team, he advises employers and plan sponsors regarding the establishment, administration and operation of fully insured and self-funded health and welfare plans to comply with ERISA, IRC, ACA/PPACA, HIPAA, COBRA, ADA, GINA, and other related laws.
  • Guiding clients through the selection of plan service providers, along with negotiating service agreements with vendors to address plan compliance and operations, while leveraging data security experience to ensure plan data is safeguarded.
  • Counsels plan sponsors on day-to-day compliance and administrative issues affecting plans.
  • Assists in the design and drafting of benefit plan documents, including severance and fringe benefit plans.
  • Advises plan sponsors concerning employee benefit plan operation, administration and correcting errors in operation.

Joe speaks and writes regularly on current employee benefits and data privacy and cybersecurity topics and his work has been published in leading business and legal journals and media outlets, such as The Washington Post, Inside Counsel, Bloomberg, The National Law Journal, Financial Times, Business Insurance, HR Magazine and NPR, as well as the ABA Journal, The American Lawyer, Law360, Bender’s Labor and Employment Bulletin, the Australian Privacy Law Bulletin and the Privacy, and Data Security Law Journal.

Joe served as a judicial law clerk for the Honorable Laura Denvir Stith on the Missouri Court of Appeals.

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