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From Securities Regulation Daily, June 14, 2013

Hedge Fund Industry Asks SEC Chairman for Protection of Proprietary Data

By Jim Hamilton, J.D., LL.M.

In a letter to SEC Chairman Mary Jo White in her capacity as a member of the Financial Stability Oversigh Council (FSOC), the hedge fund industry expressed concern about recent Inspector General and press reports describing the improper use of private, sensitive data that certain regulators have collected for regulatory purposes and the gaps in internal controls at regulators to protect nonpublic information. In the letter, signed by former Rep. Richard Baker (R-La), CEO of the Managed Funds Association (MFA), the industry said that it supports intelligent, well-informed and data-driven regulation of the U.S. securities and derivatives markets and has consistently endorsed the notion that regulators need appropriate levels of information about markets and their participants to make thoughtful policy decisions. In light of new Dodd-Frank Act authorities and information-sharing duties and obligations, the MFA believes it is necessary for regulators to review their existing policies, practices, and controls and to coordinate with fellow FSOC members now before an inadvertent leak occurs or a malicious attack is carried out.

Recommendations for protecting proprietary information. The MFA provided a series of recommendations for increasing the robustness of policies regarding and controls over sensitive, nonpublic information collected or shared as part of a regulator’s oversight of market participants and financial stability. While some of the specific recommendations are addressed to the SEC and the CFTC as the primary regulators of investment advisers, commodity pool operators, and commodity trading advisors, the recommendations are broadly applicable and may be relevant for all members of FSOC.

Specifically, the MFA recommends that the commissions review and harmonize policies and controls concerning the treatment of sensitive and proprietary information. Also, the SEC and other regulators are urged to review the robustness of their policies, practices, and controls relating to their use and treatment of sensitive and proprietary information and adopt such enhancements as are necessary.

In addition, the MFA recommends that financial regulators heighten staff sensitivity and awareness on the handling of nonpublic, sensitive, and proprietary information through annual trainings and certifications. They should also implement a uniform system for sharing and protecting non-public information, including detailed controls and procedures around the access, documentation, and use of non-public information, tailored appropriately for the level of sensitivity of the information.

The SEC and the CFTC are also asked to require and confirm that data repositories and other regulated entities maintain robust policies and controls to protect the confidentiality of sensitive and proprietary information, including the identity of traders and the nature of their trading activities.

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