Alerts

Guidance on Disclosure of Side Letters

October 4, 2006

UK-authorised hedge fund managers must disclose, by 31 October, the existence of certain side letters.

In March of this year, the UK Financial Services Authority (FSA) issued a Feedback Statement (FS 06/2) on its earlier Discussion Paper entitled "Hedge Funds: A discussion of risk and regulatory engagement." In the Feedback Statement, the FSA stated "we believe that a market failure may be present regarding the use of side letters" and that "failure by UK based hedge fund managers to disclose the existence of these side letters is, amongst other potential breaches in breach of Principle 1 of our Principles for Business (a firm must conduct its business with integrity)." The FSA went on to indicate that managers must disclose the existence of side letters and that disciplinary action might be taken against those who fail to do so. The use of side letters would be specifically reviewed by FSA inspection teams.