Regulations and Ethics

• CHAPTER 8: REGULATION AND ETHICS
• THIS SYLLABUS AREA WILL PROVIDE APPROXIMATELY 5 OF THE 50 EXAMINATION QUESTIONS
• Self-regulation


  Ability of market participants to set rules so that there will be agreed standards of behaviour and to provide a mechanism so that disputes could be settled readily
• Example of self-regulation


  • A stock exchange would also set rules for its members and police their implementation, and they also established their own independent regulatory bodies
• IOSCO


  International Organization of Securities Commissions - an international body that brings together securities regulators from around the world to establish and promote global standards for the regulation of securities and financial markets
• Objectives and benefits of regulation

  • Increases confidence and trust in financial markets, systems and products
  • Helps establish an environment that encourages economic development and wealth creation
  • Reduces the risk of market and system failures
  • Consumers are better protected
  • Financial crime is reduced
• Authorization


  Financial regulation in a country will usually make it an offence for a firm to provide financial services without being authorised to do so
• European regulators cooperate to coordinate activities and draft the detailed rules needed to introduce pan-European regulation through the European Securities and Markets Authority (ESMA)
• In Asia, the basic structure and content of securities regulation is increasingly similar to the model adopted in most other parts of the world
• Most countries are members of IOSCO and subscribe to its principles of securities regulation
• Main purposes and aims of regulation

  • Maintain and promote fairness, efficiency, competitiveness, transparency and orderliness
  • Promote understanding by the public of the operation and functioning of the financial services sector
  • Provide protection for members of the public investing in or holding financial products
  • Minimize crime and misconduct in the industry
  • Reduce systemic risks
  • Assist in maintaining the market's financial stability
• SEBI - Securities and Exchange Board of India - is the regulatory body for the securities market in India
• SEBI


  Established on April 12, 1992, under the SEBI Act, 1992 to regulate the securities market in India
• Functions of SEBI


  • Protecting the interests of investors in securities
  • Promoting the development of the securities market
  • Regulating the business of stock exchanges and other securities markets
  • Registering and regulating the working of stockbrokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, etc.
  • Prohibiting fraudulent and unfair trade practices relating to securities markets
  • Promoting investor education and awareness
• Roles of SEBI


  • Regulator
  • Market Development
  • Investor Protection
  • Enforcement
  • Surveillance
  • Market Oversight
  • Policy Formulation
  • International Engagement
• Financial crime


  Illegal activities committed with the intention of generating financial gain or causing financial loss to individuals, businesses, or governments
• Money laundering


  The process of turning money that is derived from criminal activities (dirty money) into money which appears to have been legitimately acquired (clean money)
• Stages of money laundering

  • Placement
  • Layering
  • Integration
• Terrorism financing


  The process of providing financial support, whether directly or indirectly, to individuals, groups, or organizations engaged in terrorist activities
• Differences between terrorist financing and other money laundering

  • Often, only quite small sums of money are required to commit terrorist acts, making identification and tracking more difficult
  • If legitimate funds are used to fund terrorist activities, it is difficult to identify when the funds become terrorist funds
• Other areas of financial crime

  • Identity fraud
  • Identity theft
  • Telecom fraud
  • Non-delivery fraud
  • Romance scams
• Cybercrime


  Criminal activities that are carried out using digital technology, such as computers, networks, and the internet
• Examples of cybercrime


  • Hacking
  • Malware
  • Phishing
• Cybercrime


  Crimes that exploit vulnerabilities in digital systems or use technology as a means to commit traditional crimes
• Cybercrime


  • Can target individuals, organizations, or governments
  • May have various motives, including financial gain, political or ideological motivations, espionage, or simply causing disruption
• Advanced cybercrime (or high-tech crime)

  Sophisticated attacks against computer hardware and software
• Cyber-enabled crime


  Traditional crimes that have taken a new turn with the advent of the internet, such as crimes against children, financial crimes and even terrorism
• Insider trading


  The buying or selling of a security in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, non-public information about the security
• Inside information


  Information that is specific or precise, has not been made public, and if it were made public, would be likely to have a significant effect on the price of the securities
• Insider


  A person who has gained the inside information through being a director, employee or shareholder of an issuer of securities, or by virtue of their employment, office or profession
• Insider trading


  1. Insider acquires, or disposes of, price-affected securities while in possession of unpublished price-sensitive information

  2. Insider encourages another person to deal in price-affected securities, or to disclose the information to another person (other than in the proper performance of employment)
• Instruments covered by insider trading rules

  • Shares
  • Bonds
  • Warrants
  • Depositary receipts
  • Options
  • Futures
  • Contracts for difference