Peter Tsirigotis of Brown Brothers Harriman Discusses the Operational Challenges Posed by Side Letters

For hedge fund managers, the panoply of legal and fiduciary duty issues raised by side letters is daunting.  For an insightful discussion of some of these issues, see “Proskauer Partner Christopher Wells Discusses Challenges and Concerns in Negotiating and Administering Side Letters,” Hedge Fund Law Report, Vol. 6, No. 5 (Feb. 1, 2013).  Compounding the legal hurdles of side letters are the operational challenges they raise – the need to abide by a patchwork of different promises to different institutions, and the consequent pitfalls in the interstices of those promises.  As SEC examiners and examined managers routinely tell the Hedge Fund Law Report, the most common violations by hedge fund managers are not of external law, but of their own promises and disclosures.  In side letters, therefore, hedge fund managers raise the compliance bar on themselves considerably.  Side letters help raise assets, but they also raise regulatory risk.  Side letters have received considerable attention – including in the HFLR – from the ex ante perspective, that is, from the perspective of a manager negotiating such an instrument.  See, e.g., “RCA Session Covers Transparency, Liquidity and Most Favored Nation Provisions in Hedge Fund Side Letters, and Due Diligence Best Practices,” Hedge Fund Law Report, Vol. 6, No. 1 (Jan. 3, 2013).  But side letters have received less attention from the ex post perspective.  There has been, that is, less discussion on how hedge fund managers can live with the deals they strike in side letters.  We recently talked to Peter Tsirigotis, Senior Vice President at Brown Brothers Harriman, to shed some light on this as yet obscure area.  In particular, our conversation with Tsirigotis covered, among other topics: reasons for side letters; categories of side letter rights requested; most favored nation provisions; methods for tracking manager obligations incurred through side letters; technologies used to assist managers in administering side letters; negotiation practices for side letters; and recommendations for protection of confidential information.  This interview was conducted in connection with the Regulatory Compliance Association’s upcoming Regulation, Operations & Compliance 2013 Symposium, to be held at the Pierre Hotel in New York City on April 18, 2013.  That Symposium is scheduled to include a panel on side letters entitled “Navigating the Side Letter Negotiation & Due Diligence Process.”  Subscribers to the Hedge Fund Law Report are eligible for a registration discount.

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