How to Ensure Compliance in Alternative Data Usage
Using alternative data for investments can be risky without proper compliance. Here's what you need to know:
Key Risks: Avoid using Material Non-Public Information (MNPI) and ensure compliance with privacy laws like GDPR and CCPA.
Best Practices:
Vet data providers for transparency and legal data collection.
Implement safeguards like encryption and role-based access controls.
Train employees on compliance and privacy regulations.
Steps to Compliance:
Perform risk assessments.
Regularly audit data sources and practices.
Use tools like TickerTrends for monitoring and secure data handling.
Bottom line: Strong compliance frameworks reduce legal risks, protect privacy, and build trust in data-driven strategies.
Alternative Data and the Challenges of Staying Compliant
What Is Alternative Data?
Alternative data comes from sources outside the usual financial reports, such as social media activity or app usage. It gives investors a closer look at consumer behavior, market shifts, and how companies are performing in real-time [1][2].
Here are some key types of alternative data:
]Social Media
Public opinion and mentions
Tracks consumer interests
Web Traffic
Website engagement metrics
Measures online presence
App Usage
User activity
Shows product popularity
Satellite Data
Supply chain visuals
Assesses operations
IoT Sensors
Device usage patterns
Monitors equipment status
Navigating Compliance Risks
Using alternative data can get tricky when it comes to staying within legal and regulatory boundaries. A notable example is the App Annie case, which highlighted the importance of having strong systems to prevent misuse of Material Non-Public Information (MNPI) or insider data [4].
Privacy laws like GDPR and CCPA add another layer of complexity. These regulations demand that firms:
Collect data through legal means
Anonymize personal information
Store and share data securely
Clearly define how the data will be used
"The SEC's current stance permits the use of alternative data by investors and advisers as long as AD providers are properly vetted and are compliant with data privacy regulations." [4]
To manage these risks, investment firms need clear, written policies that cover:
Vetting data providers to ensure they follow the rules
Ongoing checks to stay aligned with privacy laws
Investigating and resolving any issues tied to data use
Training employees on how to handle data responsibly
While alternative data opens up new opportunities, it also comes with challenges that demand careful attention. Proper management is essential to make the most of this resource while staying compliant. Next, we'll dive into how to create a compliance plan tailored for alternative data.
Steps to Create a Compliance Plan for Alternative Data
Assessing Risks in Data Usage
Building a compliance plan begins with a detailed risk assessment of how alternative data is handled. The key priorities are identifying potential MNPI (Material Non-Public Information) risks and ensuring adherence to data privacy regulations.
Here’s what to focus on during the assessment:
Data Collection & Usage
Legitimacy of data sources, MNPI exposure
Verify sources, set clear usage protocols
Security & Privacy
Data protection, regulatory compliance
Use encryption, limit access to sensitive data
To meet SEC standards, firms should implement written policies that address data verification, risk monitoring, and incident response. These policies serve as the backbone for overseeing data providers and ensuring compliance throughout the process.
Reviewing and Monitoring Data Providers
"The SEC's risk alerts and priorities underscore the need for robust policies and procedures, diligent vendor reviews, and compliance with regulatory requirements" [3]
The App Annie case highlights the importance of transparency and regulatory adherence when sourcing data [4]. When assessing data providers, firms should prioritize:
Clear and transparent data collection practices
Documented compliance policies
Strong security measures to safeguard data
Regular updates on compliance standards
Start with a legal review and verification of how the provider collects data. Follow this up with ongoing audits and performance evaluations to ensure both compliance and quality. Regular monitoring is essential to catch potential issues early, preventing them from escalating into major problems.
When evaluating providers, focus on their methods for gathering data, their track record in compliance, and their security measures. This proactive strategy helps firms stay compliant while making the most of their alternative data investments.
Protecting Data Privacy and Security
Security Practices for Handling Data
It's crucial to implement strong safeguards that protect sensitive information while ensuring the data remains useful.
Data Encryption
End-to-end encryption for storage and transmission
Prevents unauthorized access and aligns with regulatory requirements
Access & Storage Controls
Role-based permissions, authentication, protected servers, and regular backups
Restricts access, ensures data integrity, and provides audit trails
Organizations should focus on building security into every step of the data lifecycle. This means integrating protections during collection, processing, and storage. For instance, encryption ensures that even if data is exposed, unauthorized users can't make sense of it.
While these measures safeguard data integrity, privacy concerns become especially important when integrating data from various sources.
Maintaining Privacy in Data Integration
Protecting privacy is just as important as securing data, particularly when combining information from different origins.
Key strategies include:
Privacy Techniques: Use anonymization methods and collect only the data necessary for analysis.
Cross-border Compliance: Use Standard Contractual Clauses (SCCs) to ensure international data transfers meet legal requirements.
For organizations working with sensitive data, conducting Data Protection Impact Assessments (DPIAs) is essential. These assessments, required under GDPR, help identify privacy risks and recommend ways to address them.
To stay compliant, establish clear protocols for handling, processing, and securely transferring data. Regular privacy audits can ensure adherence to regulations like GDPR and CCPA.
Finally, privacy isn't just a technical issue. Organizations should promote a culture of privacy awareness through ongoing training and well-defined governance policies.
Discover Alternative Data Insights
Access comprehensive consumer data, track market trends, and gain actionable insights with TickerTrends' innovative data terminal and API services.
GDPR Compliance Checklist - A 12 Step Guide
Tools and Platforms to Support Compliance
Navigating complex regulations while protecting data can be challenging, but the right tools can make compliance more manageable. Using specialized platforms can streamline processes, improve efficiency, and reduce risks.
How TickerTrends Can Assist
TickerTrends provides a secure data terminal and API services designed to address compliance needs. Its features include risk assessment tools, real-time monitoring, and role-based access controls that help organizations stay compliant.
Proprietary Scoring System
Evaluates potential data compliance risks
Secure API Integration
Ensures safe and compliant data interactions
Real-time Monitoring
Quickly identifies and flags potential issues
Access Controls
Limits access based on user roles
While TickerTrends focuses on specific compliance challenges, pairing it with other tools can enhance your overall compliance strategy.
Additional Tools for Risk Management
Other platforms can complement TickerTrends by addressing different aspects of compliance. For example, AlternativeSoft offers features tailored to the handling of alternative data.
When selecting compliance tools, look for key features such as automated data classification, robust audit trails, and real-time monitoring. These functionalities help ensure adherence to regulations. Keep in mind that tools are most effective when implemented correctly and updated regularly to reflect regulatory changes.
To cover all bases, consider using multiple tools to build a multi-layered compliance system. This approach not only strengthens compliance efforts but also ensures data protection is upheld at every level.
Keeping Compliance Up to Date
Staying compliant in the world of alternative data means keeping a close eye on changing regulations and industry standards. The SEC's 2022 Risk Alert and Examination Priorities emphasize just how quickly these requirements can evolve, making it crucial for organizations to remain proactive.
Performing Regular Audits
Conducting regular compliance audits is a must for organizations working with alternative data. These audits should cover areas like data sources, security protocols, privacy compliance, and documentation. By doing so, financial institutions can ensure their practices align with the latest regulations.
The App Annie case serves as a reminder of how critical thorough audits and proper documentation are for compliance. While audits help maintain system-wide adherence, they need to be paired with robust employee training to ensure compliance is upheld in daily operations.
Training Teams on Compliance
Employee training plays a key role in staying compliant. As the alternative data industry increasingly involves legal teams from the start, training programs must cover both technical and regulatory topics.
"Legal and compliance teams are now involved in alternative data initiatives from the beginning, emphasizing concepts like material non-public information, data provenance, and anonymization techniques" [3]
Training should focus on areas like recognizing MNPI, following privacy laws, and reporting compliance concerns. Establishing clear reporting channels and reviewing them regularly is equally important. The FDIC also stresses the need for ongoing training to keep pace with regulatory changes.
Conclusion: Key Points for Staying Compliant
Navigating alternative data compliance demands that investment firms and data providers establish strong compliance frameworks, especially with the SEC increasing its focus in this area. Companies need to create written policies that address MNPI (Material Nonpublic Information) risks and set up clear channels for reporting compliance issues.
"The SEC's risk alerts and priorities underscore the need for robust policies and procedures, diligent vendor reviews, and compliance with regulatory requirements." - Dallán Ryan, Content & Advisory Lead, Data Strategy at Eagle Alpha [3]
As regulations shift, technology plays a growing role in maintaining compliance. Tools like TickerTrends help businesses manage compliance challenges while making the most of alternative data, ensuring privacy and security standards are met.
Regulatory actions emphasize the importance of transparency in how data is sourced and used. This means keeping thorough records of data provider reviews, enforcing security measures, and regularly training teams. These steps not only reduce risks but also build trust and drive progress in data-driven strategies.
To stay ahead, organizations should frequently update their compliance frameworks to reflect new data practices and regulatory changes. With real-time monitoring and oversight becoming more prominent, balancing innovation with compliance is key to fostering a culture that prioritizes regulatory adherence.