Organize Your Legal Agreements and Documents with Ease

Side letter compliance is primarily governed by:

1. Investment Advisers Act Rule 206(4)-7 – Requires registered investment advisers (Ie: Venture capital funds, private fund managers, asset managers, wealth managers, etc.) to implement compliance policies for preferential treatment disclosure and monitoring

2. Securities Exchange Commission (SEC) requirements around:

• Material disclosure obligations to all investors

• Fair treatment provisions

• Fiduciary duty requirements

• Record-keeping rules under Rule 204-2

3. Form ADV disclosure requirements about side letter arrangements and preferential terms

4. ERISA fiduciary obligations if pension assets are involved

Key compliance focus areas include transparency, fair disclosure, consistent monitoring, and maintaining detailed records of side letter terms and their implementation.

Non compliance of the above such terms can result in severe enforcement actions including substantial monetary fines, disgorgement of profits, suspension or revocation of registration, and individual liability for officers, while also causing significant reputational damage that can fundamentally impact a firm’s ability to continue operating in the investment advisory business.

Note that specific governance may vary based on jurisdiction and investment vehicle type. Always consult your counsel for current regulatory requirements.

Side letters are legally binding documents that modify or supplement primary agreements without changing the original contract. They allow firms to address specific concerns or grant additional rights while maintaining the integrity and confidentiality of the main paperwork.

These documents are particularly common in investment management, where they might grant specific investors unique terms, and in M&A transactions where they address particular contingencies or provide additional assurances. Side letters must be carefully structured to avoid conflicting with existing terms or creating unintended consequences.

Side letters modify existing documents with binding legal force, serving as amendments or supplements to primary agreements. Side letters typically address specific issues or grant particular rights to certain participants while maintaining the main agreement’s structure.

MOUs, in contrast, are generally non-binding documents that outline intended actions or relationships between groups. They serve as preliminary agreements or statements of intent, often preceding formal contracts, and typically lack the enforceability of side letters.

A limited partnership (LP) agreement is a legal document establishing a business structure where general partners manage operations and assume full liability, while limited partners, often institutional investors, invest capital but have restricted involvement. It defines essential elements including profit sharing, management rights, transfer restrictions, and dissolution procedures.

These are particularly common in private equity, real estate, and investment funds where there’s a clear separation between management and passive investors. They provide limited partners with liability protection while allowing general partners to maintain operational control.

ISDA (International Swaps and Derivatives Association) provides standardized documentation for over-the-counter derivatives transactions, establishing consistent legal and credit frameworks for financial institutions. The core ISDA Master Agreement defines how transactions will be handled in various scenarios, including defaults and early terminations.

Financial institutions rely on ISDA agreements to reduce uncertainty and negotiation time when trading derivatives. They establish standardized terms for complex financial transactions while allowing customization through schedules and credit support annexes.

In mergers and acquisitions, side letters address specific issues that firms prefer to keep separate from the main purchase agreement. These might include price adjustment mechanisms, employee retention terms, or specific representations and warranties that apply to particular participants.

Side letters allow deal parties to maintain confidentiality around sensitive terms while ensuring legally binding commitments. Side letters are particularly useful when certain terms need to apply to specific parties without affecting the main transaction documents.

Writing an effective side letter requires clear identification of the parties involved, explicit reference to the primary agreement being modified, and precise language describing the additional terms or modifications. The side letter should establish whether it’s intended to be binding and include proper execution requirements.

Best practices for side letters include involving your firm’s counsel in drafting and review, ensuring consistency with the primary agreement, and following proper execution procedures. The side letter should address specific issues concisely while maintaining clarity about its relationship to the main agreement.

Side letters are lawful documents when properly structured, disclosed, and executed in accordance with applicable laws and regulations. Side letters must not violate existing agreements, regulatory requirements, or fiduciary duties, and should maintain consistency with the primary terms they modify.

The key to maintaining compliant side letters is proper disclosure to relevant parties, careful drafting to avoid conflicts with existing obligations, and appropriate execution procedures. Side letters become problematic only when used to circumvent legal requirements or when they create conflicts with primary agreements.