Hindenburg alleges impropriety by Sebi chief: what conflict-of-interest rules apply to market regulators in US and UK?

After Buch and her husband Dhaval Buch, and Sebi denied the allegations, the government said it had “nothing further to add”.

As of now, two aspects merit attention, The Indian Express reported — one, whether Buch made full disclosures to the government and two, whether she recused herself while investigating a regulated entity where she or her husband had a direct or indirect interest.

What do the ethics codes of regulating agencies in the United States and United Kingdom say on alleged conflicts of interest?

Securities and Exchange Commission (SEC), US

The SEC’s five commissioners are appointed by the US President with the advice and consent of the Senate. The President designates one commissioner as chairman, the SEC’s top executive.

The SEC is covered by Standards of Ethical Conduct for Employees of the Executive Branch of the federal government, which lay out general principles to uphold honesty, impartiality and fairness.

* The Standards say that employees are “prohibited…from participating personally and substantially in an official capacity in any…matter in which…[they] or any person whose interests are imputed to [them]… has has a financial interest, if [that] matter will have a direct and predictable effect on that interest”.

“Imputed interests” include the financial interests of the employee’s spouse and minor children, and other close relations. Violations could trigger “corrective action or…disciplinary action against an employee”, apart from criminal penalties for violating criminal statutes in the regulations.

* In addition, Supplemental Standards of Ethical Conduct for Members and Employees of the SEC, Executive Branch financial disclosure regulations, and a few other regulations also apply.

The Supplemental Standards prohibit employees from transacting in securities of companies under investigation, engaging in short selling, transacting in derivatives, participating in IPOs for seven calendar days after the offerings, or purchasing or carrying securities on margin (loan).

* To track employee holdings, the SEC has a Personal Trading Compliance System (PTCS). SEC employees must obtain pre-approval for securities transactions made by or on behalf of themselves, their spouses, their minor children, etc.

The PTCS is used for “submission and processing of Pre-Trade Requests for securities transactions and for the Annual Certification of Holdings for the previous calendar year”. After SEC employees submit and process Pre-Trade Requests for securities transactions, the Office of Ethics and Compliance reviews and approves/ rejects them.

* SEC employees are also required, with certain exceptions, to “report and certify all securities holdings” in an approved manner. Anyone who receives a conditional offer of employment from the SEC must report “all securities holdings after acceptance of that offer and before commencement of employment with the Commission”.

Financial Conduct Authority (FAC), UK

The UK government’s economic and finance ministry appoints members of the FAC board.

The FAC’s employee handbook defines conflict of interest: “A potential Conflict of Interest arises when it could be perceived that your actions could be influenced due to your relationships, your access to information, or your personal financial position.”

* Employees must complete a full review of actual or perceived conflicts of interest: “On an ongoing basis you are required to update that disclosure… Once a year you will be asked to formally attest that your declaration is up to date.”

* A Conflict of Interests Portal records activities related to such matters. The information is confidential with the employee’s manager “and those with a ‘need to know’, including the Conflict of Interests team and the Control Room”. Breach of policies on conflict of interest can lead to disciplinary action or dismissal.

* Employees must also disclose their personal positions, including holding securities in listed companies, direct holdings of securities and related investments in non-UK financial firms if they have a UK-based subsidiary or parent company, E-money balances in various types of online wallets or prepaid cards above £5,000, and any other financial relationship that could reasonably be considered a conflict due to its “sensitivity”.