Financial Services Bulletin: Action At The SEC And FRB


SEC releases Guidance Expanding Knowledgeable Employee Categories

On Thursday, February 6, 2014, the Securities and Exchange Commission (the “SEC”) released guidance regarding who qualifies as a “knowledgeable employee” in rule 3c-5 under the Investment Company Act of 1940 (“Investment Company Act”).  The definition applies to private funds such as hedge funds, private equity funds, and other types of pooled investment vehicles that are excluded from the definition of an “investment company” by Section 3(c)(1) or 3(c)(7) of the Investment Company Act.  Section 3(c)(1) excludes funds whose outstanding securities (other than short-term paper) are beneficially owned by not more than 100 persons and who are not making and do not presently propose to make a public offering of its securities.  Section 3(c)(7) excludes funds whose outstanding securities are owned exclusively by persons who, at the time of acquisition, are “qualified purchasers” and who are not making and do not at that time propose to make a public offering of such securities.  Rule 3c-5 permits a “knowledgeable employee” of a private fund (“Covered Fund”), or a “knowledgeable employee” of an affiliated person that manages the investment activities of a Covered Fund, to invest in a Covered Fund without being counted for purposes of the 100-person limit in Section 3(c)(1) or regardless of whether the knowledgeable employee is a “qualified purchaser” for purposes of Section 3(c)(7).  This guidance expands who may be deemed a knowledgeable employee to include certain employees that do not actively manage the fund itself, such as investor relations and policy-making employees.

Read the SEC release

FRB Amends Prudential Standard Rules

On Tuesday, February 18, 2014, the Board of Governors of the Federal Reserve System (the “FRB”) adopted amendments to Regulation YY implementing certain of the enhanced prudential standards required to be established under Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act for bank holding companies and foreign banking organizations with total consolidated assets of $50 billion or more.  The enhanced prudential standards include risk-based and leverage capital requirements, liquidity standards, requirements for overall risk management (including establishing a risk committee), stress-test requirements, and a 15-to-1 debt-to-equity limit for companies that the Financial Stability Oversight Council (the “FSOC”) has determined pose a grave threat to financial stability.  The amendments also establish risk-committee requirements and capital stress-testing requirements for certain bank holding companies and foreign banking organizations with total consolidated assets of $10 billion or more.  The Regulation YY does not impose enhanced prudential standards on nonbank financial companies designated by the FSOC for supervision by the FRB.

Read the FRB release

Topics:  Federal Reserve, Hedge Funds, Investment Company Act of 1940, Private Funds, Prudential Standards, SEC

Published In: Finance & Banking Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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