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AIMA issues guidance note on hedge fund side letters

Date: Thursday, September 28, 2006
Author: Opalesque.com

AIMA, the global trade association for hedge funds has today published its 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 the regulatory community.

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% 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” – an explanation of which can be found in our Guidance Note at www.aima.org/uploads/IndustryGuidanceNoteSideLettersPublic.pdf. Additionally, firms will have until 31st October 2006 to disclose to investors any side letters containing material terms already in existence.

Commenting on the development, Matthew Jones, Regulatory & Legal Manager at AIMA said, “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. 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”