Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

The SEC has issued a no-action letter regarding Investment Company Act Rule 3c-5 which defines the term “knowledgeable employee.”  Rule 3c-5 is critical for many because it permits a knowledgeable employee of a private fund, or what the no-action letter refers to as a “Covered Fund”, or a knowledgeable employee of an affiliated person that manages the investment activities of a Covered Fund, which the no-action letter refers to as an “Affiliated Management Person”, to invest in a Covered Fund without being counted for purposes of the 100-person limit in Section 3(c)(1) or regardless of whether the knowledgeable employee is a “qualified purchaser” for purposes of Section 3(c)(7).

Some of the guidance offered includes:

  • While the ultimate determination of whether any business unit, division, or function should be deemed principal is a factual determination that must be made on a case-by-case basis, the SEC staff believes that an investment manager could determine that its IT and investor relations departments are principal business units, divisions, or functions under the circumstances described in the no-action letter and, accordingly, the individual in charge of each such department could be a knowledgeable employee.
  • The definition of executive officer in the rule encompasses any officer who performs a policy-making function or any other person who performs similar policy-making functions on behalf of an investment manager. The rule does not require policy-making individuals to have a specific title and includes all employees that have the power to make, and do make, policy on behalf of the investment manager, Covered Fund, or an Affiliated Management Person of the Covered Fund. Accordingly, the SEC staff believes that an employee who does not have a senior manager title, depending on the facts and circumstances, may still be considered an executive officer under the rule if he or she makes policy through day-to-day involvement in the development and adoption of an investment manager’s policies.
  • The SEC believes that a research analyst who researches only a portion of the portfolio of a Covered Fund and provides analysis or advice to the portfolio manager with respect to such portion of the Covered Fund’s portfolio is participating in the investment activities of the Covered Fund for purposes of the rule. Accordingly, the SEC staff believes that such a research analyst could be a knowledgeable employee under rule 3c-5(a)(4)(ii).


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