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.


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.