Guidelines

How is confidentiality considered in the INREV Governance module and how to respond to the conflict between protecting sensitive information about your investors and being transparent?

The INREV standards refer to confidentiality in certain key areas:

• The Governance Module: principle number 5 refers to confidentiality in the context of transparency.
• The INREV Due Diligence Questionnaires (DDQs) refer to confidentiality in the assessment process.
• INREV provides a standard Non-Disclosure Agreement (NDA) with the purpose of providing a standardised alternative to the wide variety of NDAs currently being used in the industry. 

The Governance Module is built upon seven principles. Principle 5 refers to being transparent while respecting confidentiality considerations. In general, it promotes free information flow between all involved parties in an investment vehicle to enable investors to understand the performance of the vehicle and its compliance with the vehicle strategy. The best practices in the module go as far as to disclose the terms of side letter agreements to all investors to create full transparency among all investors.

At the same time, Principle 5 also stresses the need for confidentiality. These provisions are mainly focused on the treatment of commercially sensitive information such as the identity of individual investors or information which would be advantageous to competitors. This information should be kept confidential and not made publicly available.

As referred to in the Governance guidelines, the general provisions covering confidentiality requirements and information to be disclosed to investors should be included in the constitutional documents. However, a significant amount of practical judgment needs to be applied during the lifetime of the investment vehicle to balance the information needs of investors whilst protecting the confidentiality requirements of both investors and the investment managers.

Given the wide variety of investment vehicle types, investment strategies, number and nature of investments it is difficult to be prescriptive on how to strike the right balance between transparency and confidentiality. There are many potential situations in the lifecycle of a vehicle that need to be considered when applying these basic principles. These may include but are not limited to:

• The risk that investors acquire commercially sensitive information from a specific vehicle and use this information inappropriately in other transactions or relationships;
• Investors wishing to waive the right to anonymity in order to collaborate with other investors;
• Investment managers using the identity and information regarding the position of existing investors in a vehicle to inappropriately promote their own interests;
• Investment managers entering into agreements with individual investors outside the normal terms of the vehicle, which modify the relevant investors engagement in the vehicle (side letters) without the knowledge of other investors;
• The risk that investment managers inappropriately withhold information about key events that impact the performance of an investment vehicle on the grounds of confidentiality;
• The risk that investment managers inappropriately use confidential information about a specific investment vehicle to promote interests in other non-related investment vehicles managed by the same investment manager;
• The risk that potential investors do not disclose all relevant information in relation to their qualification for admission to an investment vehicle (minimum net worth tests, tax position, etc).

In exercising practical judgment, investment managers and investors should always prioritise transparency over confidentiality while putting the best interests of all investors in the vehicle first and respecting the relevant constitutional terms.

In order to promote understanding and protect the confidentiality requirements of the parties involved, non-disclosure agreements are commonly used in the industry. To facilitate and standardise this understanding between the parties, INREV provides a non-disclosure agreement (NDA) template. For example, this may be used when providing information to potential new investors looking to buy interests in the vehicle through primary or secondary trades (INREV Liquidity Guidelines).

In addition, the INREV DDQs also include specific questions to help investors understand the scope of confidentiality requirements the manager and investors need to comply with regarding the disclosure of certain information about the vehicle and interests in it.