Regulatory Focus On Investor Side Letters

Side letters are an important component of most fund finance deals. They are reviewed by lenders in connection with due diligence reviews (i) for subscription line facilities to determine the rights and obligations of investors in respect of capital commitment collateral and (ii) for NAV facilities to determine the liquidity and information rights attached to equity interest collateral. The SEC is expected to revert shortly on a proposed rule published last year that, if adopted, could impact the substance of side letters. That proposal received extensive feedback from fund managers, investors, industry groups and other market participants. Below we have discussed certain aspects of the proposed rule. We note that this is merely a proposed rule, and the contours of what will be included in the final rule are unclear.