The following article was written and contributed by James E. Grand, Esq. of The Securities Law Group, a specialized boutique law firm dedicated exclusively to representing investment advisers.
We are often asked by advisers who are switching firms whether they can use in their own performance presentation or the predecessor firm’s performance record at their new firm. There are two separate questions here: First; if Jill Doe moves from one firm to another, can Jill use her own performance record while she worked at the old firm in the new firm’s advertising? Second, can Jill use the old firm’s overall performance record in the new firm’s advertising?
A number of SEC staff no-action letters address these questions. These no-action letters generally take the position that an advertisement that includes prior performance of accounts managed by advisors at their prior place of employment will not, in and of itself, be deemed to be misleading so long as:
1. The advertisement is consistent with SEC staff interpretations with respect to the advertisement of performance results.
2. All accounts that were managed in a substantially similar manner are advertised unless the exclusion of any account would not result in materially higher performance. For example, in one case we know of the SEC allowed a newly registered adviser solely owned by an employee to use performance data of several accounts managed by the employee prior to registration. In other words, Jill could advertise the performance of some but not all of her prior client accounts so long as such performance is not materially higher than her accounts’ overall performance.
3. The accounts managed at the old firm are so similar to the accounts currently under management at the new firm that the performance record would provide relevant information to prospective clients.
4. The person(s) managing accounts at the new firm are also those primarily responsible for achieving the prior performance results at old firm. In other words, the individual(s) primarily responsible for achieving the prior performance results must also be the individual(s) primarily responsible for the accounts at the new firm. To put in another way, it would be misleading for an adviser to advertise the performance results of accounts managed at her prior place of employment when she was one of several persons responsible for selecting the securities for the adviser’s clients. The question is whether she was actually responsible for making investment decisions without the need for consensus from other advisers (e.g., an investment committee, etc.).
5. The advertisement includes all relevant disclosures, including that the performance results were from accounts managed at another firm.
In another airline-hedge fund technology parallel, United Airlines recently introduced a new two-factor authentication system for MileagePlus frequent flier program members. Great, right? Well, maybe. Maybe not. The system has been receiving criticism of late from those who don’t consider United’s security practices as true two-factor authentication (2FA).
Here’s how it works.
When a member attempts to log into their account from a device that is not recognized by the airline, a user will be asked to answer two security questions. During account setup, the flyer’s answers must be chosen from a provided dropdown list, meaning the answers are predefined and, hence, not unique to each customer.
To dispel some of the concern, Ben Vaughn, United's director of IT security intelligence, has stated that the dropdown menu options stop hackers from being able to do keystroke logging and automated attacks to gain access to accounts.
Time will tell if United’s 2FA system is successful in preventing security breaches for airline customers, but in the meantime, let’s review the common types of two-factor authentication, since the kind United is using is actually the weakest:
The SEC and other financial regulatory bodies have increased transparency demands with regard to cybersecurity in recent years, and as such, registered investment advisers face a long list of requirements to meet on the technology and operational front. In each of its cybersecurity guidance updates, the SEC has called out the need for hedge funds and private equity firms to "indicate whether they conduct periodic risk assessments to identify cybersecurity threats, vulnerabilities and potential business consequences", and if so, who conducts them and how often.
Risk and vulnerability assessments have not only become must-haves for financial firms due to these regulatory initiatives, but also as a result of growing investor calls for transparency. Side note: If you missed the news, Eze Castle Integration has expanded its cybersecurity consulting services to deliver comprehensive vulnerability assessments (as well as penetration testing and third party due diligence audits) across both internal and external networks. Click here to read more about Eze Vulnerability Assessments.
We field a lot of questions about what exactly a security vulnerability assessment is, so we thought it best to review what such a test entails.
Here’s a quick overview.
The type of risk assessment typically associated with information technology/security is an external vulnerability assessment. Essentially, this is the process of identifying and categorizing vulnerabilities related to a system or infrastructure. Typical steps associated with a vulnerability scan or assessment include:
Identifying all appropriate systems, networks and infrastructures;
Scanning networks to assess susceptibility to external hacks and threats;
Classifying vulnerabilities based on severity; and
Making tactical recommendations around how to eliminate or remediate threats at all levels.
Earlier this week Delta Airlines suffered a major system outage that resulted in more than 740 flight cancellations and thousands of flight delays.
Delta’s Chief Operating Officer Gil West explained that “Monday morning a critical power control module at [Delta’s] Technology Command Center malfunctioned, causing a surge to the transformer and a loss of power. The universal power was stabilized and power was restored quickly. But when this happened, critical systems and network equipment didn’t switch over to backups. Other systems did. [As a result, Delta saw] instability in these systems.”
As with any major “uh oh” moment, there are lessons that can be learned. So let’s take a look at what hedge funds can learn from Delta’s IT mishap.
1. Outdated technology can hurt in a big way. Airlines are saddled with legacy IT systems, complicated by mergers and acquisitions requiring complex integrations. Unlike airlines however, most asset management firms are not relying on technology from 80s or 90s. But that doesn’t give firms a pass when it comes to staying current with technology.
Outdated IT systems insert instability into a firm’s operations and provide holes for cyber hackers to exploit. The reality is that outdated systems will only continue to fall behind in the race of technology, trouble shooting will take longer, future applications will fail to run, or crash the server altogether, and the cost to migrate increases concurrently as the pool of experts shrinks.
2. You can’t ignore the IT industry’s transition to cloud computing. As noted in a ZDNet article, “the big question is why in 2016 airlines are being brought down by single points of failure when cloud services offer resiliency zones, backup options, and redundancy to keep critical systems running.”
Enterprise-grade clouds deliver significant resiliency in both the hardware and data centers, with cloud infrastructures spanning geographically diverse facilities. Beyond hardware, top tier cloud providers (Eze!) have teams of senior engineers managing and monitoring the infrastructure. Additionally systems are upgraded on a regular frequency.
In the investment management industry, it is common to hear investors state they are more comfortable with fund managers utilizing a private cloud rather than keeping IT on premise. At larger funds, the prevalence of cloud-based solutions provides Chief Technology Officers (CTOs) the opportunity to execute more strategic technology initiatives and focus on risk mitigation.
There's a lot to learn about business continuity planning for investment managers. To help, you might want to watch our recent webinar highlighting the SEC's June 2016 business continuity guidance update. You can watch the full webinar replay here. The SEC not only highlights the importance of being able to access critical systems and applications during a disruption, but also the importance of effective communication.
It is vital to communicate with your employees about the procedures of your business continuity plan before, during and after an incident. By doing so, you set the wheels in motion by creating the guidelines for the firm’s recovery.
Effective communication should include, but not be limited to:
Accounting for employees;
Setting workload expectations; and
Providing employees with recovery status updates.
Let’s take a deeper look into those strategies.
Last month, the SEC issued a guidance update for registered advisers regarding how funds (and their service providers) plan for potential business disruptions. Eze Castle Integration’s Certified BCP Planners have reviewed the guidance and recently shared their thoughts on how hedge funds and private equity firms can meet the SEC’s growing expectations and standards with regard to business continuity practices.
Read on for five takeaways from the SEC’s business continuity guidance update or scroll down to watch our full, 30-minute webinar replay.
Include all All Key Components of Your Firm
When writing a BCP, firms undoubtedly remember to create plans for their physical office facilities and technology systems, but it is important that you don’t overlook other important components that drive the well-being of your firm. This includes data/colocation centers, employees, activities and dependencies on critical third parties. You could face an array of issues affecting one or more factors within your firm, so it is important to implement a business continuity plan that not only addresses potential risks but also outlines comprehensive protection methods.
A BCP is a Living Document
Internal participation is a fundamental driver for a successful BCP. From senior management executives to representatives from Human Resources and Compliance, internal business continuity contributors need to be informed of and up-to-date on policies and procedures. The BCP should also take into consideration the ideas, recommendations and changes brought forward from other departments within the firm.
Remember: A business continuity plan is dynamic, therefore changes and challenges faced need to be transparent with all parts of the company.
Today’s private equity funds are increasingly being compared to their hedge fund counterparts and, as a result, are also facing more scrutiny. When it comes to managing and mitigating risk, PE fund managers are wrestling with growing threats on the security front and beyond and mounting pressures from the likes of the SEC and other industry best practice standards.
Security and Business Threats for Private Equity
Security threats abound for financial services firms, and private equity firms are not immune. From the inside out, the risks to PE firms grow daily, with savvy and experienced hackers looking to target financial firms – and perhaps more concerning – untrained and unaware employees blindly putting their firm’s operational standing in danger.
Beyond cybersecurity, however, there are also business threats to consider. Non-security incidents – everything from minor, incidental business disruptions to large-scale, regional impact events – can also wreak havoc for private equity firms otherwise unprepared to resume business functions. Downtime may prove to be less concerning for a PE manager than his hedge fund counterpart, but that does little to calm uneasy clients and investors who expect operations to run smoothly at all times.
PE Firms Feeling the Regulatory Pressure
The above security and business threats pose a serious challenge for private equity firms today. But beyond managing those risks to satisfy a fund manager’s own inherent desire to protect his/her firm, private equity firms also face significant and growing pressure from external bodies to meet operational excellence standards that continue to develop and evolve.
The following article was written by Dean Hill, Executive Director, Eze Castle Integration and first appeared on Hedgeweek as part of their special report: A Guide to Setting up an Alternative Investment Fund in Europe.
There is no shortage of threats to financial services firms, and the list of requirements from investors and regulators alike is growing at a rapid pace. As a startup, it's important to demonstrate to investors that you take your business seriously, hence, investments in operational excellence are required. On the cybersecurity front, that means leveraging technology infrastructure with robust, security-rich features including intrusion detection and ongoing traffic monitoring, regular vulnerability assessments and next-generation software, firewalls and patches to keep hackers out and firm assets secure.
But beyond technology safeguards, today's successful financial firms require the wherewithal to implement comprehensive cybersecurity programmes – whether you're a seasoned firm or embarking on your first investment venture. The most effective cyber programmes will focus on four critical administrative areas: (1) developing comprehensive security policies and plans to prevent external cyber-attacks or internal breaches, (2) training firm employees on said policies and current cyber threats, (3) cultivating a culture of security awareness from Management down, and (4) managing an effective risk programme via external vendor oversight.
Plan: True cybersecurity defence starts with proper planning. To start, funds need to develop written information security plans – comprehensive documentation of the firm's corporate security initiatives. This should include technical and administrative safeguards being employed to secure confidential data. In the development stage, firms will need to identify systems and plans currently being used, technical procedures and systems in effect, employee access controls relative to confidential data as well as user responsibilities for both prior to and in the event of a data breach.
Unless you’re living under a rock, you’ve at least heard rumblings about the newest app craze to hit the market: Pokémon GO. In existence for a mere 6 days thus far, Pokémon GO has already amassed more daily users than Twitter and Snapchat. And we’re not just talking about kids and millennials here. The app seems to be, perhaps unexpectedly, popular with users of all ages.
The potentially big concern to be aware of is the information users are making accessible to the app’s developer, Niantic Labs. To play the game, a Google login is required (unless you have a login with Pokémon), meaning the permissions you grant to the app include giving access to your full portfolio of Google accounts. That means email, contacts, calendar, photos and files. Even scarier, if you use Google Apps for Work, what information are you unwillingly providing to Pokémon GO?
If you’re a public cloud user and leverage Google Apps for corporate purposes, it’s worth taking the time to research the potential privacy and security impacts if your firm’s users also happen to be Pokémon GO users. At just six days old, there’s likely plenty more to be learned from the app, and the developer will likely be sharing more information in the near future on security permissions and settings.
When assessing technology options and evaluating outsourced IT providers, there are a number of questions hedge fund managers should be asking in order to make the best decision for their firms.
As we talk with investment managers – especially those whose firms are considering a move to the cloud – we’re hearing many of these great questions on an increasingly regular basis. One particular area where there tends to be some confusion, however, is the topic of audit standards which govern service organizations and the data centers they manage on behalf of client firms. To help you navigate through the evaluation process, we’ve pulled together a guide to understanding audit terminology and industry standards.