The arm's length transaction only comes into play for the buyer. You can't be related or have a relationship to the seller as a short sale buyer.
Lastly, as far as being a violation, the seller's bank will not usually allow the seller to sell their OWN house as an agent because they are not allowed to profit from the sale and a commission would be a profit.
Debbie Albert, PA
Coldwell Banker Residential
It is the bank decision on which offer to accept NOT the listing agent.