In May 2023, the Securities and Exchange Commission (the “SEC”) adopted amendments to Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds, requiring, among other things, large hedge fund advisers (i.e., hedge fund advisers with at least $1.5 billion in hedge fund assets under management) to file a current report as soon as practicable, but no later than 72 hours from the occurrence of one or more trigger events that occurs at a qualifying hedge fund1 that they advise. The 72-hour period begins upon the occurrence of the reporting event, or the time when the adviser reasonably believes that the event occurred, and Form PF requires the adviser to respond to the best of its knowledge on the date of the report.2 Such trigger events include extraordinary investment losses, certain margin events, counterparty defaults, material changes in prime broker relationships, operations events, and certain events associated with redemptions. The current reporting events generally incorporate objective tests to allow advisers to determine whether a report must be filed.
In light of the CrowdStrike outage that occurred overnight Thursday, July 18th into early Friday morning, July 19th, large hedge fund advisers should consider whether the impact of the CrowdStrike outage triggers a current reporting event filing, in particular, due to an “operations event.” Under Item G of Form PF, an “operations event” means that the reporting fund or private fund adviser experiences a significant disruption or degradation of the reporting fund’s critical operations, whether as a result of an event at a service provider to the reporting fund, the reporting fund itself, or the adviser3. For this purpose, “critical operations” means operations necessary for: (i) the investment, trading, valuation, reporting, and risk management of the reporting fund; or (ii) the operation of the reporting fund in accordance with the Federal securities laws and regulations. Operations events are not limited to the initiation of a business continuity or disaster recovery plan and, notably, this reporting requirement relates to operations events that go beyond cybersecurity given the SEC’s separate Cybersecurity Proposal. The SEC clarified in the Adopting Release that operations events could involve more isolated adviser or fund specific events that would not trigger a business continuity plan, like when certain key persons that are integral to a fund’s operations or trading systems or software are unavailable and the adviser or fund is unable to perform its critical operations without them. For example, the SEC believes that an operations event involving a qualifying hedge fund could have systemic risk implications if the fund is not able to trade as a result of such an event. In particular, such events could include a service provider outage that may affect the ability of multiple funds to trade, leading to negative implications for those funds’ investors and broader systemic risks.
Under the original SEC proposal regarding the amendments to Form PF, the SEC defined “significant disruption or degradation” to mean a 20 percent disruption or degradation of normal volume or capacity. Although the SEC decided not to adopt the definition of a “significant disruption or degradation” which contains the 20 percent threshold, the SEC in its Adopting Release clarified that in circumstances where operations are reasonably measurable, a 20 percent disruption or degradation of normal volume or capacity generally might be indicative of the types of stress for which reporting may be necessary. For example, in most cases, operations event reporting would likely be required if a software malfunction at the adviser disrupted the trading volume of a reporting fund by 20 percent or more of its normal capacity.4
If you are a large hedge fund adviser affected by the CrowdStrike outage and this has had an effect on your operations (e.g., downtimes involving critical infrastructure, such as order management systems or live feeds relevant for trading, pricing or valuation), you may have an obligation to file a current event report as soon as practicable, but no later than 72 hours (i.e., most likely by Monday, July 22nd given the well-publicized nature of the CrowdStrike outage and the timing thereof).
1A qualifying hedge fund is defined in Form PF as “any hedge fund that has a net asset value (individually or in combination with any feeder funds, parallel funds and/or dependent parallel managed accounts) of at least $500 million as of the last day of any month in the fiscal quarter immediately preceding your most recently completed fiscal quarter.”
2To illustrate, if an adviser determined that a current reporting event occurred on Monday at noon, it would have to file a current report, as soon as practicable, but no later than Thursday before noon.
3In the Adopting Release, the SEC stated that it believes it is important to include adviser events in the operations report, because it will allow the SEC and the Financial Stability Oversight Council to determine quickly whether all, or just some, of an adviser’s funds or other systems are significantly disrupted or degraded.
4In addition, the SEC also stated in the Adopting Release that this item will require reporting in cases where an adviser’s ability to value the fund’s assets is significantly disrupted or degraded, for example, in connection with operational issues at a service provider. As another example, events such as a severe weather event causing wide-spread power outages that significantly disrupt or degrade critical operations also would require reporting.
