Expanded Definition of “Knowledgeable Employee” for Investment Company Act Exemptions
The staff of the Division of Investment Management has issued a no-action letter that expands the definition of knowledgeable employees eligible to invest in private funds without regard to the 100-person or qualified purchaser limitations. The staff indicates that a person can be considered the head of a principal business unit without regard to the function, the title, or whether the person acted as a part of a committee. The staff says that the determination of a “principal business unit” depends on the facts and circumstances and indicates that such areas as information technology and investor relations could be principal business units if engaged in certain substantive activities. The staff also addresses employees of affiliates and those involved with separate accounts.
OUR TAKE: This is good news for insiders that want to participate in their firms’ investment activities. We would argue that the Chief Compliance Officer should be considered a policy-making function and thereby eligible for investing. However, just because insiders can invest, they still must ensure compliance with their Codes of Ethics so that clients get full disclosure and are not disadvantaged.