Enforcing Rules on Related Party Transactions in Italy: One Securities Regulator’s Challenge

In the wake of the corporate scandals of the early 2000s, Italian policymakers tackled tunnelling via related party transactions (RPTs) by enacting a three-layer regime: a statute setting the goals of a regulation (transparency, and substantial and procedural fairness of RPTs); a regulation enacted by the financial markets authority (Consob), which defines the “principles” for achieving those goals; and individual companies’ internal codes which implement those principles. As a consequence of that approach, Consob was entrusted with two challenging functions: first, to spell out those principles and, second, to enforce the new regime. Consob designed a flexible regulatory framework where, in addition to a set of mandatory provisions, various default ones and some opt-in rules were made available. The core provisions, on the one hand, require immediate disclosure on material transactions to improve market scrutiny, and, on the other, bolster internal governance mechanisms, by granting independent directors veto power on material RPTs. As for Consob’s role in enforcement, which is the focus of this chapter, we first describe the formal and informal powers that Consob can use to prevent tunnelling via RPTs and how, in the first years after the RPT Regulation came into force, Consob prioritized such goals both in its strategic plans and its internal organization choices. Then, we report two cases to illustrate how the regulator’s timely action, particularly requests for additional disclosure, can encourage companies to adopt better practices and improve RPT terms. At the same time, the analysis of substantial issues (e.g. if the RPT is substantially fair) has made actual enforcement trickier, leading Consob to prefer soft rather than formal powers. Our tale, though, has no happy ending. We show how, after a few years of zealous enforcement of the RPT rules, Consob has become less aggressive in its (somewhat isolated) fight against tunnelling.