The Securities and Exchange Commission (SEC) has called for public comments on a consultation paper on ‘Related Party Transactions’ which sets out proposed guidelines to improve disclosure and governance. Comments have been sought on the likely compliance costs, practical problems in compliance and other impacts, costs and benefits. “Where possible, we are seeking both quantitative [...]

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SEC seeks public comments on consultation paper on related party transactions

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The Securities and Exchange Commission (SEC) has called for public comments on a consultation paper on ‘Related Party Transactions’ which sets out proposed guidelines to improve disclosure and governance.

Comments have been sought on the likely compliance costs, practical problems in compliance and other impacts, costs and benefits. “Where possible, we are seeking both quantitative and qualitative information,” the SEC website said.

In the preamble to the paper the regulator says that as mentioned in the OECD publication on ‘Related Party Transactions and Minority Shareholder Rights’ in 2012, around the world, the potential to abuse related party transactions covering both equity and non-equity transactions is viewed as an important policy issue. “Several jurisdictions have sought to put in place management and approval processes to minimise the negative potential. While the introduction of IFRS (and therefore LKAS 24 for Related Party Transactions) around the world has introduced an important standard for transparency, it is alone not sufficient. Therefore several jurisdictions have introduced requirements for ongoing disclosure of material transactions,” it said.

‘Recurrent Related Party Transaction’ means a related party transaction which is recurrent, of a revenue or trading nature and which is necessary for day-to-day operations of a listed entity or its subsidiaries. The paper said that in approving related party transactions, great emphasis has been placed on boards’ approval, the tendency being for this task to be given to a committee of independent board members. There are often continuing questions about how to ensure effective independence of board members from controlling shareholders. “In several jurisdictions shareholders have been given a say in approving certain transactions, with interested shareholders excluded,” the paper said.

Considering the issues identified on reviews carried out during the past years, the necessity to enhance the current regulation was identified, it said, adding that this discussion paper covers aspects such as the immediate market disclosure if the value of related party transactions exceeds the prescribed threshold, minimum disclosures that should be made in the annual report pertaining to related party transactions, audit committee approval for all related party transactions, shareholder approval if the value of related party transactions exceeds the prescribed threshold, restricting the acquisition of substantial assets from or disposal of substantial assets to, any related party of the entity or its associates without obtaining the special approval of the independent ordinary shareholders of the entity.

“An abusive Related Party Transaction would be against the interests of non-controlling shareholders and thus represent a breach of duty,” the paper said, noting that the SEC issued a consultation paper on “Financial Arrangements with Related Parties” and introduced Listing Rules in 2010 which require certain minimum disclosures relating to ‘Related Party Transactions’ if the value of the transactions exceeds certain thresholds.




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