Come Oct. 31, hedge fund investors in the U.K. will be in for a treat. That’s the date by which hedge funds are expected to disclose all material terms contained in side letters entered into before then. In honor of the upcoming occasion, the Alternative Investment Management Association has issued a guidance note to help hedge funds comply with the Financial Services Authority requirements. Under the new FSA rules, hedge funds must disclose the existence of those side letters only when they contain “material terms,” which may be defined as, “Any term the effect of which might reasonably be expected to be to provide an investor with more favourable treatment than other holders of the same class of share or interests which enhances that investors’ ability to make decisions about their investments. Some examples of material terms are preferential redemption rights (such as a shorter notice period for redemptions), “key man” provision, redemption “gate” waivers and portfolio transparency rights.” Non-material terms include fee rebates and “most favoured nation” clauses. Beyond the initial Oct. 31 deadline, the AIMA says firms hereon will be expected to keep disclosure “reasonably up-to-date.” In addition, firms must give a brief description of material terms in the side letters - but need not disclose how many side letters they have, or who is party to them.
