Back To: BUSINESS ENTITIES, CORPORATE GOVERNANCE, & OWNERSHIP

What is Self-Dealing?

Self-dealing is an illegal conduct where a fiduciary takes advantage of his position and acts in his own best interest rather than that of his client or beneficiary. Self-dealing is an illegal act as it represents a conflict of interest, and can lead to penalties, termination of employment, and litigation in most cases. While self dealt can occur in different forms, the most popular occurrence is when the trustee or any other fiduciary attempts to benefit from a transaction that is placed on behalf of the beneficiary or client.

How Does Self-Dealing Work?

Fiduciaries like trustees, corporate and board members, financial advisors, and personal attorneys can involve in self-dealing as they are supposed to provide enough support to an entity in its interest. Self-dealing is easily identified by the actions carried out in transactions. When an individual seeks to enrich himself to the detriment of the entity which he has vowed to provide service to, then that individual is said to be engaging in self-dealing. There are different ways in which this can occur. A fiduciary might decide to use the personal or allotment funds of an entity to give himself a treat, or he can ignore his duty to loyalty to his employer in order to get an opportunity that favors only him. Also, financial advisors can trade company funds on stocks using insider information. However, the risk of the information being incorrect is very high and can lead to loss of capital. It is important to note, however, that most cases of self-dealing might not be directed at enriching the involved fiduciary.

Examples of Self Dealings

A perfect example of self-dealing is a case where a financial advisor suggests that a client invests in a security that is unsuitable for him just to earn a bigger commission. As we stated above, self-dealing is not wholly focused on enrichment in most cases. We have taken a look at some of the examples of self-dealing below:

• When a broker sells their own stock before a clients stock after receiving a sell order from him
• When a party in a business partnership pursues a venture that is meant for both parties solely by himself without informing the other.
• Where a person in position refuses to award a contract to a company unless they (the company) were to provide employment to one of his family or friends.
• A case where an editor-in-chief or a content strategist of a website outsources a task to their personal agency at a higher-than-normal rate without informing the management prior to his action.

IRS Law on Self Dealing and Non-Profits

The Internal Revenue Service (IRS) is permitted to impose a 5% tax on any occurrence of self-dealing by a disqualified individual with a private foundation as specified in the United States Code (26 USCA & 4941). This individual can be a trustee, a corporate officer, an attorney, or any important contributor to the foundation. This law, however, prevents the IRS from charge this amount on loans, leases, sales and exchanges, compensations, and any asset transfer to the disqualified fiduciary.

Related Topics

• Corporate Governance Law (Intro)
• What is Business Governance?
• Berle-Means Thesis 
• Corporate Governance Rating Definition
• Who are the members of a corporation?
• Corporate Charter
• Shareholder Register
• Common Stock
• Preferred Stock
• Par Value
• Authorized Shares
• Issued Shares of Stock
• Unissued Shares of Stock
• Outstanding Shares
• Institutional Shares
• Dual Class Shares
• What is a closely-held corporation?
• Close Corporation Plan Definition
• What is a Private Company vs a Public Company?
• What is the role and purpose of the corporation?
• What is the Agency theory of corporate governance?
• Shareholder-Centric Perspective
• Shareholder Value
• What is the Stakeholder theory of corporate governance?
  
• What is the role & rights of Shareholders in the corporation?
  
• Shareholder Democracy Definition
• Quorum Definition
• Information Circular
• Straight and Cumulative Voting
• Statutory (Straight)
  
• Cumulative Voting
• Plurality Voting
• Class Voting Shareholders
• Changing the Voting Rules
• Supermajority (Voting)
• Shareholder Sponsored Proposal 
• What are the variations on attributes of Ownership structure?
• Stock Split
• What are the fiduciary duties owed by shareholders?
• When is a shareholder personally liable for corporate obligations?
• Appraisal Rights
• Dissenter's Rights
• Say on Pay Rights
• How can shareholder enforce their rights (direct and derivative actions)?
• Amotion
• What is the process for bringing a Derivative action?
• What are corporate vote Proxies?
• Proxy Statement
• Proxy Fight or Contest Definition & Explanation 
• What is Shareholder Activism and the significance of Institutional Investors?
• Activist Investor
• Overview of Board of Directors
• Board Decision Making
• Advisory Board (Observer Directors)
• What is the role of the Board of Directors?
• Board of Trustees
• Board of Governors
• What is the composition of the board of directors?
• Chairman of the Board
• CEO as Chairman of the Board
• Inside Director
  
• Outside Director
• Outside Director or Non-Executive Director Definition
• Independent Outside Director
• Budget Committee
• Audit Committee
• Compensation Committee
• Nomination Committee (Corporate Board)
• What standards govern the actions of the board of directors?
• Duty of Candor Definition
• Duty of Care (Board of Directors)
• Duty of Loyalty (Directors) 
• Self-Dealing
• Board Evaluation Definition
• What is the Business Judgment Rule?
• What is D&O insurance?
• Codetermination (Foreign)
• What is the role of Managers of the corporation?
• What standards govern manager actions?
• Chief Executive Officer (CEO)
• Chief Financial Officer
• Chief Information Officer (CIO)
• Chief Investment Officer (CIO)
• Chief Legal Officer
• Chief Operating Officer
• Chief Risk Officer
• Chief Security Officer
• Chief Technology Officer (CTO)
• What are the primary state and federal corporate governance laws?
• What is the role of the state in corporate governance?
• What is the role of Securities Laws in corporate governance?
• What is the role of the Foreign Corrupt Practices Act in corporate governance?
• What is the Sarbanes-Oxley Act (SOX) effect on corporate governance?
• Sarbanes-Oxley Act (SOX)
• What is the Dodd-Frank Wall Street Reform and Consumer Protection Act effect on corporate governance?
• Corporate Monitors
• What industry organization standards affect corporate governance?
• How do proxy advisory firms affect corporate governance?
• What is the role of ethics in corporate governance?
• What are the major causes of corporate governance issues?
• What are the access to information issues?
• What are decision-making structure issues?
• What are the power struggle or competition issues?
• Holding Company
• What are hostile takeovers and defenses to hostile takeovers?
• Williams Act
• Staggered Board
• Shark Repellent Defenses?
• Poison Pill Defenses?
• Flip Over Poison Pill Definition
• Flip In Poison Pill Definition
  
• Voting Poison Pill Plan
• Delay-Tactic Defenses?
• Legal Lockup Defenses?
• White Knight and Pac Man Defenses?
• Jonestown Defense
• Lady Macbeth Strategy
• Macaroni Defense
• Yellow Knight
• Back-end Plan Definition
• Backflip Takeover Definition
• Dead Hand Provision Definition
• Kamikaze Defense
• Operating Company Property Company Model
• Whitemail
• Scorched Earth Policy Definition
• Revlon Rule
• What are benefit-alignment issues?
• Cadbury Rules Definition