Disclosure of Side Letter Terms: Are Some Investors More Equal Than Others?

  • Do undisclosed side letter arrangements constitute fraud or raise potential conflicts?
  • Preferential redemption rights, key man provisions, redemption gate waivers and portfolio transparency rights among potentially material terms often contained in side letters that may be appropriate for disclosure in the PPM.
  • Non-preferred investors may claim that side letters violate fund managers’ fiduciary duty of fair treatment.
  • U.K. regulators lead the way in guidance for disclosure of side letters, requiring that firms disclose the existence of side letters containing material terms.
  • Some hedge fund attorneys advise clients to disclose in the PPM the existence of side letters arrangements or the fact that the fund may enter into such arrangements. However, disclosure has not been tested in court or an administrative proceeding, so it is not certain that hedge fund advisers can disclose their way out of breach of fiduciary duty claims based on preferential rights granted in side letters.

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