Sebi tightens 'conflict of interest' rules for market entities

Written by PTI | Mumbai | Updated: Aug 28 2013, 23:55pm hrs
To ensure fair and non- discriminatory treatment to all investors and companies, Sebi today asked stock exchanges, rating agencies, brokers, depositories and other market entities to put in place a strong system to manage any conflict of interest.

The credit rating agencies have been specifically asked to deploy adequate systems and policies to ensure that they address any conflict of interest during investment decisions of their own funds or by their top management and employees.

The rating agencies, their employees and key executives have also been asked not to "take undue advantage of any price sensitive information that they may have about any company".

The key executives, such as CEOs and Managing Directors, would need to take prior approval from the Compliance Officer for sale or purchase of securities of the companies with which the credit rating agency may have rating-related dealings.

Issuing detailed guidelines for avoidance and handling of 'conflict of interest' by market infrastructure institutions and intermediaries, Sebi said all such entities and associated persons would need to maintain "high standards of integrity" in conduct of their business.

They have also been asked not to use any information received from the clients, under the normal business dealings, for any personal interest and to put in place "information barriers" to block flow of confidential information from one department to another.

While separate 'conflict of interest' guidelines are already in place for different classes of entities, Sebi decided to put in place comprehensive general guidelines for all intermediaries as per the Principles set by the International Organisation of Securities Commissions (IOSCO), a grouping of securities regulators from across the world.

Credit rating agencies would need to ensure compliance to the new guidelines by October 1, the others have been asked to review their existing polices and comply within six months.

Market intermediaries, stock exchanges, clearing corporations and depositories have also been made responsible for educating their 'associated persons' for compliance of these guidelines.

All these entities and associated persons would need to lay down, with active involvement of senior management, policies and internal procedures to identify and avoid or to deal or manage actual or potential conflict of interest.

They would also need to develop an internal code of conduct governing operations and formulate standards of appropriate conduct in the performance of their activities, and ensure to communicate such policies, procedures and code to all concerned.

The market entities would also need to disclose to their clients the possible source or areas of conflict of interest, while they have been asked to take prescriptive measures such as putting in place barriers to block the flow of information between their different departments.

The guidelines also ask them to ensure fair treatment of their clients and not discriminate amongst them and ensure that their personal interest does not conflict with their duty to their clients and client's interest always takes primacy in their advice, investment decisions and transactions.

Sebi has also asked them to restrict transactions in securities while handling a mandate of issuer or client in respect of such security, and not to deal in securities while in possession of material non published information.

The guidelines also restrict them from communicating any material non-published information while dealing in securities on behalf of others and from contributing "in any way to manipulate the demand or supply of securities in the market or to influence prices of securities."

Besides, they cannot have an incentive structure that encourages sale of products not suiting the risk profile of their clients.

All entities have been asked to ensure that their existing policies on conflict of interest are in compliance to new guidelines within six months, while their boards have been asked to review the compliance periodically.

As per Sebi norms on conflict of interest for investment/ trading by Credit Rating Agency (CRA), key officials of these agencies would have to seek prior approval from the compliance officer regarding purchase or sale of securities, while a compliance officer dealing in such securities would need approval from the CEO.

"The CEO/Compliance Officer shall ensure that there is no conflict of interest while considering the request for prior approval," Sebi said in a circular today.

"Such approvals, if granted, shall be valid for 7 working days from the date of approval," it added.

The norms also state that new employees of CRAs would have to disclose details of all securities held by them or their dependents to the compliance officer or CEO within 7 working days of their joining.

Further, all key officials and employees of CRAs require to submit details of transactions, furnish a consolidated statement of all securities held by them and declare their interest in the securities/instruments that are considered for rating by the agency, to the CEO or compliance officer.

Besides, "A CRA shall ensure that employees involved in the rating/grading process shall not have ownership of the securities of the issuer," Sebi said.