SEC Issues No-Action Letter On The Definition Of Knowledgeable Employee

On February 7, 2014 the staff of the Division of Investment Management of the Securities and Exchange Commission (the "SEC") issued a no-action letter to the Managed Funds Association (the "No-Action Letter"), providing guidance on the definition of knowledgeable employee for purposes of Rule 3c-5 under the Investment Company Act of 1940 (the "Investment Company Act"). Section 3(c)(1) and Section 3(c)(7) of the Investment Company Act set forth the primary exemptions relied on by private funds in order to remain exempt from registration as investment companies.

Section 3(c)(1) excludes funds whose outstanding securities are beneficially owned by no more than 100 persons and that is not making and does not presently propose to make a public offering of its securities. Section 3(c)(7) excludes funds whose outstanding securities are owned exclusively by persons who, at the time of acquisition, are "qualified purchasers," and which is not making and does not at that time propose to make a public offering of such securities. Rule 3c-5 under the Investment Company Act allows a knowledgeable employee of a private fund relying on Section 3(c)(1) or Section 3(c)(7), or a knowledgeable employee of an affiliated person that manages the investment activities of such a private fund, to own securities of a private fund by providing that (i) a knowledgeable employee will not be counted towards the 100 person limit for a 3(c)(1) fund, and (ii) a knowledgeable employee may invest in a Section 3(c)(7) fund regardless of whether the knowledgeable employee is a "qualified purchaser." The No-Action Letter provides guidance on various areas covered by the definition of knowledgeable employee under the Investment Company Act rules, a summary of which is set forth below.

Executive Officer and policy-making employees

The definition of knowledgeable employee includes an "Executive Officer, director, trustee, general partner, advisory board member, or person serving in a similar capacity." The Investment Company Act defines "Executive Officer" as the "president, any vice president in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy-making function, or any other person who performs similar policy-making functions." The SEC confirmed the following regarding the Investment Company Act's definition of Executive Officer:

for purposes of what will constitute a principal business...