+ CG-Q02 —
How is confidentiality treated according to the INREV Corporate Governance Guidelines and how do you deal with the conflict between protecting sensitive information about your investors and being fully transparent?
The INREV industry standards are touching upon confidentiality in different areas:
- The Corporate Governance Module: principle number 7 refers to confidentiality and principle number 5 to transparency.
- The INREV Due Diligence Questionnaires (DDQs) touch on confidentiality in the assessment process.
- INREV provides a standard non-disclosure agreement (NDA) with the purpose to replace the wide variety of NDAs currently being used in the industry.
Looking at these three sources, the question needs to be raised as to the position the INREV standards represent in order to solve the dilemma between confidentiality and transparency in non-listed real estate investment vehicles.
The Corporate Governance Module is built upon seven principles. Principle 5 refers to Transparency and promotes free information flow between all involved parties in an investment vehicle in order 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 individual side letter agreements to all investors to create full transparency among all investors.
Principle 7 refers to Confidentiality and mainly addresses the confidential treatment of commercially sensitive information. This information should be kept confidential and not to be made publically available.
Obviously these two principles partially contradict each other. The Corporate Governance Module solves this conflict by stating that the two positions always need to be balanced out by each other and that in case of a conflict the requirement for transparency should always prevail.
Besides this clear prioritisation INREV however recognises the need for confidentiality agreements in certain circumstances and therefore provides a standard non-disclosure agreement. Increased standardisation by using a template will lead to better balance between confidentiality and transparency.
The INREV DDQs are asking to disclose any confidentiality restrictions of the manager regarding disclosure of information about potential client due diligence towards current investors in the vehicle.
The most practical description of how the principles should be interpreted might be found in the best practices described in the Corporate Governance Assessment tool. Good governance is presented by binding all investors under the same confidentiality clause and to additionally disclose this clause in a very clear manner to ensure all investors know of the conditions under which investors subscribe in the vehicle. It is important that the terms are disclosed in the vehicle marketing documents so that investors are informed by the time they make their final investment decisions. Unequal treatment of confidentiality agreements is seen as merely acceptable and having no confidentiality agreements at all as only acceptable in exceptional circumstances.
With regards to the manager it is best practice to have confidentiality restrictions with third parties in place, which are set out in the constitutional terms. The terms should enable potential investors to receive information without the need of entering into confidentiality agreements beforehand. A governance framework which doesn’t respect the latter is only acceptable if the manager has exceptional reasons for that. Having no restrictions regarding confidentiality in place is also rated only as acceptable corporate governance.
Under the Corporate Governance Guidelines, the leading principle is that information regarding vehicles and investors’ (clients’) interests in vehicles which is not publicly available should always be treated confidentially.
However, the need to maintain confidentiality will conflict from time to time with the need of transparency; if there is a conflict, the need for transparency should prevail. In practice, this may work as follows:
- There should be free flow of information between existing investors and the fund. The fund documentation should prescribe a mutually binding confidentiality undertaking.
- If there is a business need to provide information outside of the investor group – for example, to a potential new investor looking to buy a secondary position – then the manager should be able to refer to the fund’s documentation, which should state clearly under which conditions and circumstances such information should be provided.
- The condition could be to ensure that the investor would be qualified for admission to the investment vehicle (e.g. minimum net worth tests, tax position et cetera).
- The manager should then provide confidential information provided that the outside party has signed an appropriate NDA.
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