The staff of the SEC’s Division of Investment Management issued a no-action letter indicating that several funds that are qualified purchasers by virtue of being “family companies” under Section 2(a)(51)(A)(ii) of the Investment Company Act of 1940, as amended (the “1940 Act”), would not lose that status if the funds’ executive director, who has no spousal or family relationship with any of the funds’ investors, is allowed to become a fund investor. Each investor in an investment vehicle relying on Section 3(c)(7) under the 1940 Act must at the time of purchase be a qualified purchaser or a “knowledgeable employee” as defined in Rule 3c-5 under the Act. In general terms, under Section 2(a)(51)(A)(ii), an entity that (a) is owned directly or indirectly by individuals who are related by birth, adoption or marriage and (b) has at least $5 million in investments, is a “qualified purchaser.” The family funds sought no-action relief because if they admitted the executive director as an investor they would no longer be “family company” qualified purchasers, and would be unable to meet the conditions of the other qualified purchaser categories. In granting relief, the SEC staff noted its particular reliance on the fact that (a) the executive director is both a knowledgeable employee of the family funds and a qualified purchaser, and is primarily responsible for all the family’s investment decisions, and (b) the family’s investment committees have indicated that they want the executive director to align his interests with those of the funds by becoming a fund investor.
Alert June 24, 2008