Data protection and privacy laws will be reformed across Europe when Regulation (EU) 2016/679, commonly known as the General Data Protection Regulation (GDPR), comes into force on 25 May 2018. The GDPR builds on existing legislation and seeks to harmonise and enhance data protection and privacy laws across the EU. It also introduces significant fines in respect of breaches. The GDPR will have immediate effect in EU Member States and will, therefore, automatically apply to organisations which are established in the EU. However, it also has extra-territorial scope, such that it will apply to third country organisations which have an establishment in the EU (e.g. through a representative or branch) or where the processing of personal data relates to:
a) the offering of goods or services to EU residents; or
b) the monitoring of the behaviour of EU residents where the behaviour takes place in the EU.
In the context of investment funds, the offering of interests in a fund is generally considered to be an "offer of goods or services", thereby bringing funds within the scope of the GDPR.
Jersey's new Data Protection (Jersey) Law 2018 and Guernsey's new Data Protection (Bailiwick of Guernsey) Law 2017 (together, the DP Laws), each of which mostly mirror the requirements of the GDPR, will come into force on the same day. The DP Laws apply the requirements of the GDPR on a global basis (that is, not only in respect of data relating to EU-resident individuals). Importantly, this means that Jersey and Guernsey are likely to continue to be classed by the European Commission as adequate third countries to which data can be transferred, which can only be good news for Jersey and Guernsey service providers.
Personal data is any information in respect of which a natural person can be identified, such as their name, address, identification number, as well as online identifiers (including cookies). This type of data is typically collected from investors during the subscription process. However, the GDPR imposes a higher compliance burden in respect of "special category data" which includes data revealing racial origin, political opinions or religious beliefs. The latter category is unlikely to be relevant for most funds, though sharia funds, socially responsible or ethical investing funds could find that they hold special category data. In addition, political affiliations of PEPs may result in such data being held.
The GDPR was drafted with social media and the on-line/digital economy in mind and it is inevitable, therefore, that some industries will be impacted disproportionately. The asset management industry is an example of this, not least because of the international nature of the activities carried out, the practice of outsourcing services and the cross border transfer of data. In addition to which, the industry is already highly regulated with consequential costs which will only increase to ensure compliance with the GDPR.
As a firm, we are closely monitoring developments in market practice and industry guidance in respect of the application of the GDPR to investment funds. We have also reached out to a number of our clients across a variety of asset classes and regulatory categories to understand how they are proposing to deal with the new requirements. The reality is that, for most fund managers, service providers and even advisers, given the volume of recent regulatory changes (not least, MiFID II), the GDPR has only become an area of real focus in the last few weeks. Given that the implementation date is fast approaching, attention is now turning to taking practical steps to ensure compliance, if not by 25 of May, as soon as possible thereafter. The following key action points should assist funds and service providers set their priorities:
1. Carry out a full mapping of the types and sources of personal data collected, identify who might potentially control and/or process the data, for what purposes and how the data moves between the fund and its service providers. Identify whether there are any joint controllers processing the same data for the same purposes. In this regard, we have identified a number of cases where service providers are identified as joint controllers of investor data, whereas they are, in fact, processors of that data (although they may be controllers in their own right for different purposes). This is important because the GDPR imposes certain additional obligations on joint controllers. In a funds context, there is another important reason to clarify who the controllers are in that, whilst the fund will inevitably bear the cost of its own compliance with the new rules, it should not be bearing the cost of compliance by multiple controllers who are processing investor data for their own business purposes.
2. Consider the legal basis on which the data is processed. Under existing legislation, investor consent was typically used as the legal basis for processing personal data. This may still be appropriate, particularly where a vehicle is very closely held or where the consent of investors is easy to obtain (and update, if necessary) – note, however, that funds are unlikely to be able to rely on grandfathering in order to continue to process data, so that renewed consent from existing investors should be sought. For many funds there will be administrative challenges to obtaining the consent of each and every investor and the risk of consent not being given in accordance with the specific requirements of the GDPR or of an investor withdrawing consent, are driving reliance on different, or a combination of, legal bases. In most cases, it will be possible to rely on the legal contract (and pre-contractual steps) between investors and the fund as the legal basis for processing data collected in respect of their investment. Where data is processed for the purposes of compliance with a legal obligation to which the fund is subject (such as, to maintain registers or compliance with AML or FATCA obligations), then that is also a legal basis which is being relied upon. Finally, there is the "legitimate interests" basis, a catch–all basis (unless the resulting processing prejudices investors' rights and freedoms) and which, from what we are seeing, is being used to justify processing of personal data for marketing, staff training or systems stress-testing purposes.
3. Prepare a notification to investors (commonly referred to as a Privacy Notice) which complies with the prescribed disclosures set out in the GDPR. Privacy Notices are quite lengthy documents as they must detail clearly and in plain language specific information including the purposes for which data is to be used, the legal basis for each such use, an explanation of the rights of investors as data subjects and how to exercise them (these include the right to make access requests, request the rectification of inaccurate data, object to or restrict the processing of data and erase the data held on certain grounds). The notice must also set out the right of data subjects to complain to the Data Protection Authority. Consideration should then be given to the most appropriate way for the Privacy Notice to be made available to investors and this, again, is an area where a variety of practices have developed from mailing copies of the notice to all investors to setting it out in the fund's subscription documents or making it available on a website. In terms of priority, the availability of the Privacy Notice is generally considered to be the most urgent pre-implementation date matter and this is now the focus for most of our funds clients.
4. Amend the fund documents. It is likely that offering documents will contain data protection language which requires updating. In addition, we now see additional risk factors being included with reference, in particular, to the risk of fines being imposed on funds in the event of a breach of data protection obligations. Fund websites will also need to be reviewed with the necessary updates made. Service provider agreements which involve the processing of data (for example, administration, registrar and transfer agency agreements) will also need to be amended because the GDPR contains a prescriptive list of matters which processor agreements must contain. If the processing will involve the transfer of data outside Jersey, Guernsey or the EEA, further considerations will apply. There is no single way to deal with service provider agreements and practice has included side letter agreements, specific addenda and, as an interim stop-gap solution, high level undertakings to comply with applicable law (including the GDPR), with the detail to follow. As a minimum, funds should seek confirmation of compliance with the GDPR from their services providers prior to 25 May 2018.
In addition to the above action points, much activity will be required in the background, the adoption of specific policies and procedures to deal with the GDPR (particularly breaches), staff training, preparation of records of processing activities, consideration of the appointment of a Data Protection Officer and an EU representative. The expectation is that reliance will be placed on fund administrators to provide the resources and infrastructure required for these activities, though it is important to note that data controllers retain responsibility for damage caused by processing data in contravention of the GDPR. Fund and management boards should also, therefore, be trained in the requirements of the GDPR.