AIMA has published an Industry Guidance Note on the use of side letters. The Guidance Note offers clarification on a number of key issues which have been raised by regulators.
The development of this Guidance Note follows statements by the UK Financial Services Authority (FSA) and other regulatory bodies that the use of side letters by hedge fund management firms may lead to a potential lack of disclosure for investors.
As the UK is home to nearly 80 percent of the European hedge fund industry, AIMA has been working closely with the FSA to clarify the issues involved and to formulate a practical guide to the disclosure of side letters for the industry.
The FSA has reviewed the Guidance Note and has confirmed that it will take the Note into account when exercising its regulatory functions.
Hedge fund management firms will be expected to disclose to investors and potential investors the existence of those side letters which contain “material terms”. Firms will have until 31 October 2006 to disclose to investors any side letters containing material terms already in existence.
“AIMA’s Industry Guidance Note is a concrete example of how the hedge fund industry, through AIMA, is working with the FSA and other regulatory bodies worldwide to create clear and practical guidance for the benefit of all stakeholders,” says Matthew Jones, the Regulatory & Legal Manager at AIMA. “Our dialogue with the FSA has been constructive and has addressed the FSA’s concerns regarding side letters in a very positive way. We believe both hedge fund managers and investors will benefit from the additional clarification which the Note provides”.