Hedge funds and other private funds typically rely on the exemptions from registration set forth in Section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 (Act).  Section 3(c)(1) exempts from registration funds that are not planning a public offering and whose securities are owned by fewer than 100 beneficial owners.  Section 3(c)(7) exempts funds that are not planning a public offering and whose securities are owned exclusively by “qualified purchasers” (generally, persons or entities that own more than $5 million in investments).  Rule 3c-5 under the Act provides that “knowledgeable employees” of private funds (Covered Funds) or of affiliated managers of Covered Funds are not counted towards the 100 owner limit under Section 3(c)(1).  In addition, they may invest in Section 3(c)(7) funds even if they are not qualified purchasers.  The knowledgeable employee exemption is important for hedge fund managers who want to use employee participation in their funds for compensation and other purposes.  See “Conflicts and Opportunities Offered by Concurrent Management of Employee-Owned Hedge Funds and Outside-Investor Hedge Funds,” Hedge Fund Law Report, Vol. 2, No. 32 (Aug. 12, 2009).  The Managed Funds Association (MFA) recently asked the SEC for a no-action letter with regard to several of the definitions and concepts used in Rule 3c-5.  In response, the SEC has issued a no-action letter that clarifies the concepts of “principal business unit, division or function”; “policy-making function”; and participation in “investment activities”; and makes clear that the rule may apply to knowledgeable employees of separately managed accounts and of certain related advisers.  In that regard, the SEC has provided valuable guidance on some of the open questions concerning Rule 3c-5.  See “Are the General Counsel and Chief Compliance Officer of a Hedge Fund Manager Considered ‘Knowledgeable Employees’ of the Manager?,” Hedge Fund Law Report, Vol. 5, No. 35 (Sep. 13, 2012).  This article summarizes the SEC’s letter and the relevant portions of the MFA’s request.