Getting Knowledgeable About "Knowledgeable Employees"
Partner Bertrand C. Fry, co-chair of Pryor Cashman’s Investment Management Group, has authored an article for the IAA Newsletter entitled "Getting Knowledgeable About ‘Knowledgeable Employees.’ "
Investment advisers often seek to have a fund’s principals and employees invest in the fund alongside third-party investors. But because the private funds rely on exclusions from the definition of "investment company" under the Investment Company Act of 1940 (the Act) that require the funds’ investors to be "qualified purchasers" or to limit the number of their investors, a tension is created between complying with these regulations and conforming to the expectations of employees to invest in the fund. Rule 3c-5 under the Investment Company Act eases this tension by creating a category of "Knowledgeable Employee" that is permitted to invest in the adviser’s private funds without implicating these exclusions.
The article discusses the "Knowledgeable Employee" exclusion under Rule 3c-5, which states that a person may qualify as a Knowledgeable Employee by falling into one of two broad categories. Fry uses the "Policy-Making Test" and the "Investment Activities Test" to explain the requirements imposed by the two categories.
The Knowledgeable Employee test is applied at the time of investment. The authority and responsibility to determine whether an officer or employee is a Knowledgeable Employee reside with the applicable investment adviser and private fund. Consequently, it is essential that investment advisers adopt policies providing for a compliance review of each officer’s and employee’s subscription into a private fund that the adviser manages.
To read the article in its entirety, please click here
