SEC Issues No-Action Letter to MFA Regarding Investment Company Act Definition of

The SEC Division of Investment Management issued a no-action letter to the Managed Funds Association ("MFA") updating the SEC guidance on the definition of "knowledgeable employees" under Investment Company Act Rule 3c-5 ("Beneficial Ownership by Knowledgeable Employees and Certain Other Persons").

According to an MFA press release, the MFA Investor Adviser Committee worked with the SEC staff on the letter. The no-action letter includes updated guidance on a number of areas covered by the definition of "knowledgeable employees", including that:

• (i) 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; (ii) several business units, divisions or functions within an investment manager may each be considered a principal unit, division or function; and (iii) the unit, division or function need not be part of the investment activities of a Covered Fund to be considered a principal unit, division or function. The letter also provides examples of when an information technology or investor relations department may be considered a principal business, unit, division or function;

• an employee can have a policy-making function regardless of the employee's title and employees can meet the relevant standard either individually or as part of a committee or group;

• an employee can be regarded as participating in the investment activities of a covered fund under the rule if his or her functions relate to a portfolio or portion of a portfolio of a covered fund and not the entire fund, or if his or her functions relate to a separate account (or a portfolio (or portion thereof) of a separate account) for clients that are "qualified clients" and are otherwise eligible to invest in the private funds managed by the adviser and whose accounts pursue investment objectives and strategies that are substantially similar to those pursued by one or more of those private funds;

• 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 would be participating in the investment activities of the fund (subject to the requirements that such activities be a regular part of the person's duties and that the person has been performing the function for at least 12 months);

• knowledgeable employees of a filing adviser or any of its relying advisers (as set out in the ABA's 2012 no-action letter regarding which adviser entities have to file a Form ADV) may be treated as knowledgeable employees with respect to any Covered Fund managed by the filing adviser or its relying advisers, provided that the employees meet the other conditions of the rule; and

• other employees of an adviser, depending on the relevant facts and circumstances, also may be knowledgeable employees and the SEC staff is not expressing a view with respect to employees outside the scope of the letter.

See: SEC No-Action Letter. See generally: Guide to Hedge Fund Regulation, Issuer Exemptions under the ICA and Exchange Act.