In an alert posted to its website, the U.S. Federal Bureau of Investigation (FBI) stated that phishing email scams requesting wire fraud transfers have cost firms more than $2.3 billion in losses since 2013.
At the root of a phishing email scam is in-depth reconnaissance during which the cybercriminal delves into employees's personal information and the organization’s processes. During this phase, schemers phish languages within email threads and obtain enough information to pinpoint money-managing employees within the firm. Equipped with this insider information, the criminal sends a spoofed email, assuming the identity of the firm’s CEO or other senior executive, to an employee responsible for managing funds and requests an illegitimate wire transfer. Typically, the message will relay a sense of urgency – a key factor in the fraud's success.
According to the FBI, these email scams have increased by 270 percent (%) since January 2015. With the rise of these incipient, sophisticated attacks, the need for fully managed phishing and training programs grows exponentially. Breaches will happen, but when employees are provided with the tools and knowledge needed to recognize fraudulent emails, risk decreases and a firm’s defense system becomes stronger and more agile.
In case you missed it, the SEC just announced this week that it levied a $1 million fine to a prominent financial services firm for failing to adopt written policies and procedures reasonably designed to protect customer data. The SEC also stated it expects “SEC registrants of all sizes to have policies and procedures that are reasonably designed to protect customer information.”
Eze Castle Integration and Sadis & Goldberg just published ‘A Fund Manager’s Cyber Security Action Plan’ that covers what the SEC expects from managers. You can download the paper at www.eci.com/cyberplan or read an excerpt below.
Cybersecurity has fast become an imminent and pervasive threat to the investment management industry. Investment advisers, including those managing private funds (“Fund Managers”) are required to disclose and report a higher quantum of more sensitive and meaningful information than ever before, via Form ADV, Form PF, CPO-PQR and (for some Fund Managers) Annex IV. Cyber-attacks can be manifested in a variety of ways from multiple sources and can lead to direct losses (e.g., theft of funds, data or other property), reputational harm, regulatory actions, third party litigation and other forms of liability.
While it’s reasonable to believe that a typical CFO would not respond to a “spear-phishing” email from a fictional Nigerian prince, consider the risks presented by a more realistic cyber-attack wherein a personal email is sent to the CFO, purporting to be from your prime broker, auditor or administrator (information discoverable from your Form ADV), mimicking the patterns and style of previous email communications (discoverable from your email server) and asking for confirmation of a recent wire or some other sinister request. Internal attacks such as this are discussed further throughout this paper, and each one has the potential to cripple a fund and/or damage thousands of investors.
The below information is an excerpt from Eze Castle Integration’s 2016 webinar: The Evolution of Investor IT Due Diligence.
Investors have long been asking questions about firm operations and even technology. But with the way IT has evolved over the last 5-10 years, it’s no wonder investor inquiries have changed in both size and scope. Of course, in addition to technology evolution, we’ve also seen influences on the regulatory side, as the SEC continues to examine and evaluate firms’ security practices, which ties heavily into technology.
In looking back, it’s not unfair to say that 10 years ago, technology was what we’d call a “check the box” category. An investor due diligence questionnaire may have been one or two pages and focus mostly on firm investment history, performance, etc. On the IT side, it may have said “are you using an outsourced IT provider” or even “do you have a disaster recovery system” but beyond that, there was very little inquiry into the types of technologies being used at hedge funds as well as the protections in place to mitigate risk.
Of course, times have changed and now we see investor DDQ documents upwards of 5-10-20 pages in length and asking great levels of detail about technology, cybersecurity and operations. So let’s talk a little bit more about the influences for this due diligence evolution.
Categorized under: Hedge Fund Due Diligence Cloud Computing Security Disaster Recovery Hedge Fund Operations Hedge Fund Regulation Infrastructure Communications Outsourcing Business Continuity Planning Trends We're Seeing
It’s no secret that investment manangement firms (including hedge funds and private equity firms) have historically been divided over the use of public and private clouds. We’ve discussed it in depth here on the Hedge IT Blog, explaining the differences between the two and why most funds are choosing to go with a private cloud solution.
A case can be made, however, that there’s a time and a place for each cloud platform and both offer their own advantages for financial services firms. We’ve taken a look at some of the key areas firms will consider when looking at public and private clouds and identified which we think comes out on top.
Service & Support
Investment firms demand uptime to ensure operational efficiency and profitability. Public cloud providers, however, do not offer investment-specific IT support and rather have limited customer service representatives troubleshooting the most basic of email and desktop support issues.
Financial services firms are increasingly interested relying on third-party service providers to increase efficiencies and benefit from industry expertise. While outsourcing has grown, however, regulatory bodies such as the Securities & Exchange Commission (US) and Financial Conduct Authority (UK) have begun to evaluate outsourced relationship and provide guidance around how investment management firms should engage and manage these partnerships. In 2015, the FCA drafted a “guidance for firms outsourcing to the ‘cloud’ and other third party services.”
The document aims to ensure that risks associated with outsourcing are appropriately identified and managed. Thirteen key areas of consideration are highlighted below.
Legal and Regulatory Considerations. In undertaking the due diligence process, an investment firm should consider and compare operational risks associated with outsourcing to various providers (e.g. public vs private cloud) as well as any specific legal or regulatory obligations. Firms should identify and record contracts with all service providers, ensuring that compliance with any relevant requirements lives throughout the supply chain.
The information below was originally derived from the expert panelists who spoke at a 2010 Eze Castle Integration event. Given how important this topic is we’ve updated the article to reflect today’s market.
The subject of hedge fund operational due diligence is one that has risen to the forefront for both hedge fund managers and investors in recent years. Prior to the economic downfall in 2008 and high-profile investment scandals made infamous by Bernard Madoff and others, hedge fund due diligence was viewed as an unnecessary assignment.
Historically, there has been a general lack of transparency within the hedge fund industry; larger funds, particularly, used to balk at investor inquiries. They figured there would never be a shortage of investors, so there wasn't a need to spend extra time satisfying their needs.
Due diligence, as a process, did not gain significant importance until recently. in the past, the responsibilities associated with it would often fall under the role of a CFO, CCO or other executive – someone who had very little time to devote specifically to due diligence. But as the industry has evolved over the last several years, so has the need and desire for operational due diligence.
So what exactly has changed?
Successfully launching a hedge fund is a complex endeavor. Not only must emerging managers evaluate traditional deployment strategies, but consider current factors influencing the financial landscape.
Last week, Eze Castle Integration presented a webinar, “How to Launch a Hedge Fund,” featuring an expert panel that addressed some critical areas for consideration, notably capital introduction, legal and technology. There was quite a bit of content discussed during the 1-hour event, so we’ve pulled out some key takeaways.
Capital Raising (Paul Schultz, Director of Capital Introduction, Wells Fargo Prime Services)
Examine both content and context, i.e. cash inflows and outflows as well as the “big picture” that accounts for volatility
Be aware of the kinds of investors coming into the hedge fund space. Large and institutional pension plans are currently the largest investor base.
Be prepared when speaking to investors. Target those who have a history of being receptive to founder share class and who may offer lower management and performance fees.
Show investors that you have a 3+ year budget for working capital without any performance fees.
Have a well thought-out blueprint. Clarity and intention make all the difference.
Categorized under: Launching A Hedge Fund Cloud Computing Security Disaster Recovery Hedge Fund Due Diligence Hedge Fund Operations Hedge Fund Regulation Infrastructure Communications Outsourcing Business Continuity Planning Trends We're Seeing Videos And Infographics
Today’s the day.
The National Futures Association ("NFA") Interpretive Notice Regarding Information Systems Security Programs goes into effect. The NFA's Interpretive Notice to NFA Compliance Rules 2-9, 2-36 and 2-49 entitled Information Systems Security Programs requires Member firms to adopt and enforce written policies and procedures to secure customer data and access to their electronic systems.
The Cybersecurity Interpretive Notice applies to all membership categories--futures commission merchants, swap dealers, major swap participants, introducing brokers, forex dealer members, commodity pool operators and commodity trading advisors.
Rather than taking a ‘one-size-fits-all approach,’ the Cybersecurity Interpretive Notice adopts a principles-based risk approach to allow Member firms some degree of flexibility in determining what constitutes "diligent supervision," given the differences in Members' size and complexity of operations, customer types and counterparties.
But whatever approach is taken, the Cybersecurity Interpretive Notice requires Members to adopt and enforce an information systems security program (ISSP) appropriate to its circumstances.
Information Systems Security Program Key Areas
Similar to the SEC’s expectations, the Cybersecurity Interpretive Notice requires a written information security program to contain:
A security and risk analysis;
A description of the safeguards against identified system threats and vulnerabilities;
The process used to evaluate a security incident, including impact and incident response; and
Description of ongoing education and training related to information systems security for employees.Executive-level participation and annual review of the information security program is expected. Additionally, firms must provide employees training during the onboarding processes as well as periodically during employment.
Categorized under: Security Launching A Hedge Fund Hedge Fund Insiders Disaster Recovery Hedge Fund Due Diligence Hedge Fund Operations Hedge Fund Regulation Business Continuity Planning Trends We're Seeing
The following is the second excerpt from our new whitepaper, Launching a Hedge Fund: 10 Keys to Success. To read part one, click here.
Develop an IT budget for your first 2-3 years.
Operating capital may be limited in the first few years after your launch, so careful budgeting and long range planning will serve your firm well. Your information technology budget should include priorities and figures for at least two to three years, including infrastructure/hardware and software requirements. Some questions you’ll want to consider:
How many offices are you launching with? Do you plan to open additional offices in the near future?
How many users do you have on day one? How many can you expect to have in years 2 and 3?
Where are your offices located? Are there cost differences between domestic and international offices?
What are your trading practices and how does this impact your budget?
What kinds of systems do you need? (Order Management, Portfolio Accounting, Risk Management, CRM, etc.)
Ensure your technology budget coincides with your firm’s growth plan. Do you expect to grow quickly? Open new offices? Expand internationally? You will need to account for these changes.
Understand hedge fund regulations and how they affect your firm.
Governmental oversight of the financial industry has evolved dramatically in the last decade. Hedge funds, private equity firms and registered investment advisers now operate in a world where they are beholden to regulatory bodies with growing expectations and requirements. When launching your hedge fund, you’ll need to be clear up front with any responsibilities you may have to any applicable agencies – in the United States, that means the Securities and Exchange Commission (SEC). Are you required to register? If so, represent your firm accurately and be descriptive of your operations. If not forthcoming, you may open up your firm to serious regulatory and criminal prosecution.
Categorized under: Launching A Hedge Fund Cloud Computing Security Disaster Recovery Hedge Fund Due Diligence Hedge Fund Operations Hedge Fund Regulation Infrastructure Communications Outsourcing Business Continuity Planning Software Trends We're Seeing
Today's hedge funds are facing an environment defined by regulatory pressure, investor demands and fierce competition. For hedge fund startups, the challenges are even greater, so too are the demands. Successfully operating a new startup beyond the first year is a feat many managers struggle to accomplish, therefore it's critical for emerging managers to gain a full understanding of the industry that awaits them and the hurdles they should expect to face.
While the list of considerations is surely long for new managers, we've whittled it down to 10 Keys to Launching a Hedge Fund Successfully - a guide for new startups to use when setting off on their new journey.
Take a look at our latest video for a quick look at our 10 Keys to Success. And be sure to come back to Hedge IT later this week when we'll be sharing an excerpt from our brand new whitepaper on the same topic!
Categorized under: Launching A Hedge Fund Cloud Computing Security Disaster Recovery Hedge Fund Due Diligence Hedge Fund Operations Hedge Fund Regulation Infrastructure Communications Outsourcing Business Continuity Planning Trends We're Seeing