• |

    Aug. 29, 2024

CrowdStrike Outage: A Test of Form PF Current Report Procedures

On December 11, 2023, amendments to Form PF (Amendments) took effect that require large hedge fund advisers to file so-called “current” reports on Form PF no later than 72 hours after the occurrence of designated trigger events, such as a significant disruption of “critical operations.” The first large-scale test of this aspect of the Amendments occurred recently when faulty code in a software update released by cybersecurity firm CrowdStrike crashed some computer systems running Microsoft Windows, causing chaos for airlines, banks, shipping companies, healthcare providers and other organizations. Although the outage did not appear to have a big impact on the private funds space, hedge fund managers should have, at a minimum, at least considered whether they had to file a Form PF current report as a result of the outage. This article summarizes the Form PF current reporting requirements, discusses the details of the CrowdStrike outage, explains what fund managers should have considered when determining whether they had to file a current report and provides key takeaways from the incident. See our two-part series on Form PF current reports: “Monitoring for Trigger Events” (Feb. 29, 2024); and “Reporting Trigger Events” (Mar. 14, 2024).

CFA Institute/IAA Survey Highlights Marketing Rule Compliance Practices

A recent survey conducted by the CFA Institute and the Investment Adviser Association examined how firms are adapting to Rule 206(4)‑1 (Marketing Rule) under the Investment Advisers Act of 1940. The survey focused on key Marketing Rule pain points, including presentation of net performance, what constitutes “performance,” use of extracted performance and presentation of hypothetical performance. This article synthesizes the key findings from the survey. See “Third Marketing Rule Risk Alert and New Settlements Portend Vigorous Enforcement” (Jun. 6, 2024); and “ACA Compliance Testing Survey: Marketing Rule Remains Top Compliance Focus” (Feb. 1, 2024).

SEC Penalizes Adviser for Failing to Preserve Off-Channel Communications

Since February 2022, the SEC has brought more than two dozen enforcement proceedings against broker-dealers, as well as certain affiliated investment advisers, for failing to preserve business communications made on personal devices and/or through unapproved messaging platforms (collectively, off-channel communications) in accordance with SEC rules. It was only a matter of time before the SEC set its sights on registered advisers. In what appears to be the first standalone action against an investment adviser for such violations, the SEC penalized an adviser for failing to preserve off-channel communications and other alleged compliance failures. In addition to paying a $6.5‑million civil penalty, the firm will, as in other similar proceedings, retain a compliance consultant to review its policies, procedures and practices for monitoring for and preserving off-channel communications. This article parses the alleged violations and the terms of the settlement, with commentary from Igor Rozenblit, managing partner at Iron Road Partners, who previously held several senior positions at the SEC, including Co-head of the Private Funds Unit of the Division of Examinations. See “16 Firms Fined $81 Million in Latest SEC Electronic Communications Recordkeeping Settlements” (Apr. 11, 2024); and “SEC and CFTC Continue to Penalize Firms for Electronic Communications Recordkeeping Violations” (Aug. 17, 2023).

SEC Charges Georgia Hedge Fund Adviser With Defrauding Investors

Fraud comes in many shapes and sizes, especially in the eyes of the SEC. At one end of the spectrum, advisers get into trouble for failing to do what they say or say what they do. At the other, individuals like Bernard Madoff are targeted by the SEC when they hide their misappropriation of investor funds with fabricated track records and account statements. The SEC recently commenced an enforcement action against a hedge fund adviser, who allegedly raised nearly $10 million from investors, at least partly on the basis of fraudulent performance representations and account statements. He incurred nearly $4.6 million in trading losses – and helped himself to more than $2.6 million of investors’ funds, the SEC charged. This article parses the SEC’s complaint and the parallel criminal charges. See “Former SEC Officials Discuss Aggressive Enforcement Climate” (Sep. 14, 2023).

Gauging European Investors’ Appetite for U.S. Funds and Considerations in Marketing to Them

Nearly half of European investments are going into U.S. markets, noted Simon Osborn, CEO of IFI Global, at a recent IFI Global program. To give U.S. managers a sense of the challenges and opportunities of marketing funds in Europe, Osborn and Lawin Chandra, CEO of PropTechAM.ai Limited, discussed the diverse European funds market; the current economic climate; key considerations for managers seeking European investment capital; investors’ allocation preferences; and choice of European fund managers, service providers, domiciles and directors. This article synthesizes their observations. See our two-part series on marketing funds in Europe: “Update on Disclosure and Reporting Requirements for Marketing Funds in Europe Under AIFMD” (Jul. 21, 2022); and “Non‑AIFMD Options and Other Regulatory Considerations” (Aug. 4, 2022).

Most-Read Articles