SEC Issues No-Action Letter on the phrase Knowledgeable Worker

On Feb 7, 2014 the employees of the Division of Investment Control over the Investments and Exchange Commission (the “SEC”) released a no-action letter towards the Handled Funds Association (the “No-Action Letter”), supplying assistance with the phrase knowledgeable worker for reasons of Rule 3c-5 underneath the Investment Company Act of 1940 (the “Investment Company Act”). Section 3(c)(1) and Section 3(c)(7) from the Investment Company Act established the main exemptions depended on by private funds to be able to remain exempt from registration as investment companies.

Section 3(c)(1) excludes funds whose outstanding investments are beneficially possessed by a maximum of 100 persons and that’s not making and doesn’t presently propose to create a public offering of their investments. Section 3(c)(7) excludes funds whose outstanding investments are possessed solely by persons who, during the time of acquisition, are “qualified purchasers,” and which isn’t making and doesn’t in those days propose to create a public offering of these investments. Rule 3c-5 underneath the Investment Company Act enables an educated worker of the private fund depending on Section 3(c)(1) or Section 3(c)(7), or perhaps a knowledgeable worker of the affiliated person who manages an investment activities of these a personal fund, to possess investments of the private fund by supplying that (i) an educated worker won’t be counted for the 100 person limit for any 3(c)(1) fund, and (ii) an educated worker may purchase a Section 3(c)(7) fund whether or not the seasoned worker is really a “qualified customer.” No-Action Letter provides assistance with various areas taught in meaning of knowledgeable worker underneath the Investment Company Act rules, a listing of that is established below.

Executive Officer and policy-making employees

The phrase knowledgeable worker includes an “Executive Officer, director, trustee, general partner, advisory board member, or person serving inside a similar capacity.” An Investment Company Act defines “Executive Officer” because the “president, any v . p . responsible for a principal business unit, division or function (for example sales, administration or finance), every other officer who performs an insurance policy-making function, or other individual who performs similar policy-making functions.” The SEC confirmed the next concerning the Investment Company Act’s meaning of Executive Officer:

  1. for purposes of what will constitute a principal business unit the principal status of an adviser’s unit, division, or function depends on the relevant facts and circumstances of a particular investment manager’s business operations;
  2. several business units, divisions, or functions may each be considered a principal unit, division, or function;
  3. the unit, division, or function need not be part of the investment activities of a private fund to be considered a principal unit, division, or function. For example, an information technology or investor relations department may be considered a principal unit, division or function, depending on the circumstances; and
  4. an employee can have a policy-making function regardless of the employee’s title as long as he or she has and uses the power to make policy on behalf of the investment manager; such an employee can meet the relevant standard either individually or as part of a committee or group that develops and adopts policies, such as a valuation committee, but would not include observers to such a committee or employees who merely provide information or analysis to such a committee.

Employee who participates in the investment activities of a private fund

The phrase knowledgeable worker includes an worker who participates within the investment activities from the private fund within his or her regular function and responsibilities, and it has done this not less than 12 several weeks (“Participating Employee”). The SEC confirmed that Taking part Employees wouldn’t be restricted to people with overall responsibility order activities of the covered fund. Particularly, the next employees, who otherwise satisfy the needs of the provision, may become qualified as an educated worker:

  1. employees who are members of analytical or risk teams, traders, tax professionals, or attorneys whose analysis or advice is material to the portfolio manager’s investment decisions;
  2. an employee, such as a research analyst, who researches and provides analysis or advice to the portfolio manager on a portion of the portfolio of a private fund;
  3. an employee whose functions relate to the investment activities of at least a portion of a portfolio of a separate account (i) for a “qualified client,” as defined under SEC Rule 205-3 under the Investment Advisers Act of 1940, and (ii) provided the separate account client is otherwise eligible to invest in the private funds managed by the adviser and such accounts pursue investment objectives and strategies that are substantially similar to those of the private fund.

Knowledgeable employees of a filing adviser

An educated worker of the filing advisor or any one of its depending advisors (as put down within the American Bar Association’s The month of january 18, 2012 SEC no-action letter regarding which advisor organizations need to file an application ADV) may become qualified as an educated worker regarding any private fund handled through the filing advisor or its depending advisors, so long as the worker meets another conditions from the Investment Company Act rules.

Please be aware that investment managers are needed to create determinations regarding which employees become qualified as knowledgeable employees in line with the relevant details and conditions, should have the ability to explain the foundation for such determinations, and really should conserve a written record of employees an investment manager has permitted to purchase a personal fund. Investment managers should browse the entire No-Action Letter before figuring out whether a specific worker qualifies like a knowledgeable worker underneath the Investment Company Act rules.

The full text of the No-Action Letter is available here.