CCH Wall Street – Ever since a larger number of hedge fund advisors were required to register with the SEC under its new and contested rule, the regulator has begun looking into the intricacies of these vehicles. Now the regulator has begun to increase its focus on one particular aspect in this space, side letters.
Side letters are separate from the offering memorandum the hedge fund firm gives to clients. The offering memorandum is the document that explains the hedge fund’s investment strategy. The side letter is the agreement between the adviser and the investor, which lays out what fees the investor will pay for the services rendered by the fund manager.
In the world of mutual funds, all investors must to be treated the same, charged the same fees and so forth. But for hedge funds the rules are different. A side letter lists specific benefits for the specific investor. These can include the ability to make additional investments in a fund, limiting management fees, and other perksâ€â€if the hedge fund manager so chooses.
Recently the SEC has begun taking an interest in these agreements and are looking to make sure that advisors are upholding their fiduciary duty by disclosing any preferential treatment that could be construed as a conflict of interest, said Derek Meisner, a former branch chief at the SEC’s division of enforcement, and a current partner in the law offices of Kirkpatrick & Lockhart.
“It’s not illegal for one investor to get a benefit over another, but the concern is over disclosure,†he said. “It should be specifically spelled out that one investor may receive a benefit over another.â€Â
