The SEC’s Division of Investment Management issued updated guidance regarding the definition of “knowledgeable employees” under Rule 3c-5 of the Investment Company Act of 1940. See Managed Funds Ass’n, SEC No-Action Letter, avail. 2/6/14, https://www.managedfunds.org/wp-content/uploads/2014/02/Staff-Response-to-MFA-3c-5-Letter-Final-Outgoing-2-6-14-no-sigs.pdf
The SEC staff explained that “private funds” include private equity funds, hedge funds, and other pooled investment vehicles, excluded from the definition of an “investment company.” Investment Company Act Rule 3c-5 permits a knowledgeable employee of a private fund – “covered fund”- or a knowledgeable employee of an affiliated person managing the investments of a covered fund – “affiliated management person”- to invest in a covered fund, without being subject to certain conditions under Investment Company Act Section 3 that otherwise apply.
The SEC staff clarified the definition of a knowledgeable employee by analyzing the various categories of the term under Rule 3c-5. The staff confirmed that it will not recommend enforcement action against covered funds if they treat certain employees of covered separate accounts as knowledgeable employees. The staff further explained that other employees may also qualify as knowledgeable employees, depending on the facts and circumstances.
The letter recommended that investment managers maintain a written record of employees that have been “permitted to invest in a Covered Fund as knowledgeable employees” and should be able to explain why a particular employee qualifies as a knowledgeable employee.
This guidance provides a road map for those employees acting in this type of fund sphere.