SEC clears more PE employees to co-invest

A no-action letter from the commission clarified the definition of a ‘knowledgeable employee’.

The US Securities and Exchange Commission (SEC) issued a no-action letter that should clear the way for more private fund employees to invest in their firm’s in-house funds.

Under the Investment Company Act, only “knowledgeable employees” – executive officers, those in charge of a business unit and others who hold significant influence over the fund – can co-invest without having to meet a strict “qualified purchaser” test.

Knowledgeable employees are also exempt from a 100 investor limit under the act.

The letter clarified that principals and directors working in a function not necessarily connected to the fund’s investment activities could still be considered a knowledgeable employee, even if that person was the sole member of that division.

The guidance opens the door for IT directors or heads of investor relations for instance to be determined knowledgeable employees, according to legal experts.

“The letter could mean that an investor relations director that is responsible for handling LP enquiries and answering due diligence questions could be a knowledgeable employee. It probably doesn’t cover IR staff that sets up meetings and simply manages logistical matters though,” said one US-based funds lawyer.

Employees that perform policy-making functions, or help make policy on behalf of an investment manager, do not need a formal sounding title to be determined a knowledgeable employee, the SEC clarified.

“Further, we agree that the rule does not require that the policy-making function be concentrated in one individual and that employees serving as active members of a group or committee that develop and adopt an investment manager’s policies, such as the valuation committee, could be executive officers under the rule,” the letter said.