From: Hugh Steven Wilson
Re: File Number S-7-25-06 /Rel. No. 33-8766
The following comments are submitted regarding certain rules proposed by the Commission on January 4, 2007 under the Securities Act of 1933 that are intended to provide additional investor protections with respect to pooled investment vehicles.
You have asked whether employees of private investment vehicles or their investment advisors ("pool employees") should be subject to the "accredited natural person" standard set forth in the proposed amendments to Regulation D. We are providing comments to the Commission because we believe this is an important policy issue, even though the current proposed rule would not apply to any of our particular fund structures.
As a Registered Investment Advisor and a medium-sized fund manager, we have seen first hand the importance of allowing our employees to purchase interests in the funds for which they help to find and analyze investment opportunities and to make investment decisions. There is clearly a significant and tangible benefit to investors when a high percentage of the professional staff that performs investment services for particular funds has a personal financial stake in those funds. Virtually all large institutional investors in our funds acknowledge this value and most seek to quantify the level and extent of staff investment as part of their pre-investment diligence. We also believe that allowing employees the opportunity to profit (or not) in a direct way from their efforts in managing the funds it is a fair and effective means of compensation. Certainly our employees place a high value on these investment opportunities.
Pool employees, at least the investment and financial professionals, who may not qualify as accredited natural persons under the proposed rule will generally have more than sufficient knowledge and expertise in financial and business matters to evaluate the merits or risks of an investment in the funds they help manage. (Fund managers of course hire such pool employees precisely because of their financial knowledge and expertise.) Since limiting investors in private investment vehicles to persons with such knowledge and expertise is the stated goal of the proposed amendments to Regulation D, we believe that it is consistent with this goal to allow such pool employees to invest in funds they manage or advise, whether or not they meet the proposed standard of accredited natural person. Indeed, limiting employee investors to accredited natural persons will not provide meaningful investor protection and in fact could reduce the current benefits that flow to outside investors, to pool employees who choose to invest and to fund mangers who want to provide appropriate incentive compensation to their employees.
For the reasons above, we believe that knowledgeable employees should not be subject to the proposed "accredited natural person" standard. (While we believe it is unnecessary, the application of the traditional "accredited investor" definition to knowledgeable pool employees is not too troublesome, because it does not preclude investment by any but the most junior professionals.)
You have also requested comments on whether "knowledgeable employees" (a term to be defined in a manner consistent with the definition under Rule 3c-5 under the Investment Company Act of 1940) should be included within the definition of "accredited natural person." For the reasons stated above, and because Rule 3c-5 itself is sound policy, we believe that this would be a positive change. Reliance on possible available alternatives (unaccredited status under Regulation D, reliance on Section 4(2) or 701, or employment agreements) is an inferior solution, offering no additional investor protection while requiring additional cost, complexity and/or uncertainty.
Hugh Steven Wilson