Prohibited transactions: Overview, definition, and example
What are prohibited transactions?
Prohibited transactions refer to specific actions or dealings that are restricted or banned under a contract, policy, or law. These restrictions are often in place to prevent conflicts of interest, legal violations, or financial misconduct. Businesses may include prohibited transaction clauses to protect themselves from activities that could result in penalties, legal liability, or reputational harm.
For example, a company’s policy might prohibit employees from engaging in transactions with vendors they have a personal interest in to prevent conflicts of interest.
Why are prohibited transactions important?
Prohibited transaction clauses help businesses manage risk by clearly defining actions that are not allowed. Without these clauses, a business might face regulatory penalties, financial losses, or ethical issues.
In industries like finance, law, and government contracting, prohibited transactions are particularly important because they help maintain compliance with legal standards. A well-defined prohibited transactions clause ensures that all parties understand what actions could lead to a breach of contract.
Understanding prohibited transactions through an example
Imagine a financial advisor who manages investments for clients. If the firm has a rule prohibiting advisors from recommending investment products in which they have a personal financial interest, this would be an example of a prohibited transaction. The rule is designed to prevent conflicts of interest and protect clients from biased recommendations.
Another example is in government contracting. A company that secures a government contract may be prohibited from subcontracting work to a firm owned by one of its executives, as this could create an unfair advantage and raise ethical concerns.
Example of a prohibited transactions clause
Here’s how a prohibited transactions clause might appear in a contract:
“No Party shall engage in any transaction that is expressly prohibited by applicable law, regulation, or the terms of this Agreement, including but not limited to transactions that create a conflict of interest, result in self-dealing, or violate ethical or regulatory standards.”
Conclusion
Prohibited transaction clauses are essential for defining what actions are not allowed under an agreement. They help businesses prevent legal, financial, and ethical risks by setting clear boundaries on certain dealings. Including a well-drafted prohibited transactions clause can protect all parties from unintended liabilities and ensure compliance with relevant laws and regulations.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.