On February 6, 2014, the Staff of the Division of Investment Management of the Securities and Exchange Commission (“SEC”) issued the Managed Funds Association (the “MFA”) a no-action letter (the “MFA Letter”) clarifying and expanding the SEC’s interpretation of the defined term “Knowledgeable Employee” in Rule 3c-5 under the Investment Company Act of 1940 (as amended, the “Investment Company Act”).

Many hedge funds, private equity funds, and other types of pooled investment vehicles rely on exclusions from the definition of “investment company” provided under Sections 3(c)(1) or 3(c)(7) (each, a “Covered Fund”) of the Investment Company Act. Rule 3c-5 under the Investment Company Act permits a knowledgeable employee of such Covered Funds, and a knowledgeable employee of certain Affiliated Management Persons,¹ to invest in a Covered Fund that relies on Section 3(c)(1) without being counted toward the 100-person limit imposed upon a Section 3(c)(1) fund. The rule also permits such employees to invest in a Covered Fund that relies on Section 3(c)(7) without having to be a qualified purchaser with respect to a Section 3(c)(7) Fund and without being counted for purposes of determining whether a Section 3(c)(7) fund is owned exclusively by qualified purchasers.

Rule 3c-5 defines the term “knowledgeable employee” to include two categories:

• “Executive officers,” which term includes the “president, any vice president in charge of a principal business unit, division or function (such as sales, administration, or finance), and other officers who performs a policy making function, or any person who performs similar policy making functions” for a Covered Fund or an Affiliated Management Person of the Covered Fund; and
• Non-executive employees (other than those performing solely clerical, secretarial or administrative functions) who regularly participate in the investment activities of a Covered Fund or an Affiliated Management Person of a Covered Fund, provided such employee...