Short Sale - Who does the "arms lenght affadavit" pertain to anyway?

On a short sale, who does the arms lenght affavadit pertain to?  I was reading a blog on another site and there is a BofA short sale where the Realtor is representing both the buyer and seller.  The seller happens to be her sister.  It is unknown if this was disclosed up front to the sellers lender.  The file was at the stage of investor review when BOOM, it was denied due to seller and Realtor being related.  There was a lot of feedback from Realtors on this.  Some feel that the arms lenght does not apply, escpecially if the relationship was disclosed and it should be fought.  Some say that no related party can benefit from a short sale.  So Active Rainers - whats your take?