Related party transactions, the sharpest test a fund faces.

For a registered managed investment scheme, the Corporations Act 2001 (Cth) addresses related party transactions directly. Chapter 5C applies the related party provisions of Chapter 2E, written for public companies, to registered schemes, so that a financial benefit given to a related party of the responsible entity out of scheme property requires the approval of members before it is given, unless an exception applies. The exceptions carry the practical weight. The most used is the arm's length exception, which permits a benefit given on terms that would be reasonable in the circumstances if the parties were dealing at arm's length, or on terms less favourable to the related party than that. Others cover reasonable remuneration and expense reimbursement. What no exception does is switch off the responsible entity's duties. A dealing can clear Chapter 2E and still breach the duty to act in the best interests of members if it is a transaction the scheme should never have entered at all.

An unregistered wholesale fund sits outside the Chapter 2E machinery but not outside the problem. There the discipline comes from three sources. The trust deed may permit, restrict or condition related party dealings, and typically modifies the general law to allow the trustee to contract with associates on defined terms. The general law of fiduciary obligation exposes a trustee who profits from its position, or places itself in a position of conflict without clear authorisation, regardless of whether the particular deal was fair. And the licensing regime requires an Australian Financial Services Licensee to maintain adequate arrangements for managing conflicts of interest as a condition of holding its licence. Wholesale investors add their own discipline on top. Experienced investors read related party clauses closely, and a deed that authorises unconstrained dealing with the manager's associates is a term many will decline to accept.

The related party net is deliberately wide, and most failures start with a map drawn too narrowly. The statutory definition reaches beyond the responsible entity itself to the entities that control it, its directors, the directors of its controlling entities, close family members of those directors, and entities any of those people control. It also reaches in time, catching entities that were related parties in the recent past and entities reasonably expected to become related parties. For a funds business inside a broader group, the practical map is wider still, because the arrangements that draw scrutiny are rarely with the responsible entity itself. They sit with the entities around it.

The arm's length exception is expressed as a comparison, whether the terms would be reasonable in the circumstances if the parties were dealing at arm's length, and the entity relying on it carries the burden of being able to defend that conclusion. The defensible cases share the same evidentiary spine. An independent valuation of the asset or the service, obtained from a valuer instructed by the fund rather than by the related counterparty. Genuine market testing where the transaction type allows it, so the related party's terms are compared against real alternatives rather than against an internal estimate. Comparable transactions, where the fund or the market has recently priced similar assets or services with unrelated counterparties. And a decision made by people who do not hold the conflict, whether that is the external directors of the responsible entity, a conflicts committee, or the compliance committee where the board lacks an external majority.

The weakest position, and a common one, is an assertion. A board minute recording that management confirmed the terms were arm's length, with nothing beneath it, evidences nothing except that the question was asked. Where independent evidence cannot be obtained, because the asset is unique or the service has no market comparator, the honest course is to treat the arm's length exception as unavailable and either seek member approval or decline the transaction. Straining the exception to cover a deal that cannot be independently priced is how a fund converts a commercial decision into a contravention.

In a registered scheme the responsible entity owns this problem in its entirety. Its statutory duties, to act in the best interests of members and to prefer members' interests over its own where the two conflict, apply with the most force precisely where the responsible entity or its associates stand to benefit. The compliance plan must set out how conflicts of interest are identified and managed, which makes related party dealing an audited process question as well as a transaction question. The annual compliance plan audit will look for the register, the assessments and the approvals the plan promised, and where the board lacks a majority of external directors, the compliance committee is the body Chapter 5C expects to monitor exactly this territory.

In an unregistered wholesale structure the trustee performs the same function through older machinery. Where the trustee is independent of the manager, its consent requirement is the practical control. A manager proposing a related party dealing must persuade an entity that owes its duties to investors rather than to the manager's group, and must persuade it on evidence. Where the trustee and the manager sit inside the same economic group, that control is internal, and the structure needs a substitute for it, whether an independent committee, an investor advisory board with consent rights over conflicted transactions, or deed provisions requiring independent valuation and investor notice before a conflicted dealing completes. A trustee arrangement that cannot decline a conflicted transaction is not operating as a control, and experienced investors assess it accordingly.

Related party arrangements are often the right commercial answer. A sponsor seeding a new fund with capital or assets gives investors a portfolio on day one instead of a blind pool. Manager co-investment on the same terms as members is one of the strongest alignment mechanisms available. An affiliated administrator or property manager can be cheaper and better informed than an external appointee, provided its pricing survives comparison with the market. Warehousing, where a sponsor holds an asset on its own balance sheet and transfers it to the fund at an independently verified value once capital is raised, is a standard and legitimate mechanism. What the legitimate versions share is that they survive daylight. The conflict is named, the terms are tested, and the arrangement is disclosed before investors commit rather than discovered after they have.

The dealings that poison a register share the opposite features. In due diligence an incoming investor reads the related party register as a character document, and certain patterns end the conversation.

The transaction file is where governance either exists or does not. For each related party dealing the record should establish, at the time of the decision rather than reconstructed afterwards, what the conflict was, which exception or approval pathway was relied on, what independent evidence supported the terms, what alternatives were considered, and who made the decision with the conflicted individuals abstaining. ASIC's regulatory guidance on related party transactions expects entities to keep records capable of demonstrating this, and a compliance plan auditor or a due diligence team will ask for them. A dealing that was in fact on fair terms but is undocumented is, from the outside, indistinguishable from one that was not, and it will be treated with the same suspicion.

Disclosure completes the discipline. For retail investors, the offer document must give a fair account of related party arrangements and the fees flowing to the manager's group, and material dealings belong in ongoing and periodic disclosure rather than in a footnote found later. For wholesale investors the obligation is contractual and reputational, and it is not lighter for that, because a wholesale investor who finds an undisclosed related party arrangement mid term rarely distinguishes between concealment and carelessness. A fund that treats every conflicted dealing as one that will eventually be read by a sceptical outsider, and papers it on that assumption, is the fund whose register reads cleanly when the raise, the audit or the regulator arrives.