ETHICS AND PROFFESIONAL STANDARDS
Through our individual actions, each of us can affect the lives of others. Our decisions and behavior can harm or benefit a variety of stakeholders—individuals or groups of individuals who could be affected either directly or indirectly by a decision and thus have an interest, or stake, in the decision. Examples of stakeholders in decisions
made by investment industry professionals include our colleagues, our clients, our employers, the communities in which we live and work, the investment profession, trade associations, regulators, and other financial market participants. In some cases, our actions may benefit all of these stakeholder groups; in other cases, our actions
may benefit only some stakeholder groups; and in still other cases, our actions may benefit some stakeholder groups and harm others. For example, recall the research analyst in the introduction who wrote misleading research reports with the aim of increasing the financial benefit to himself and his employer. In the very short term, his conduct seemed to directly benefit some stakeholders (certain clients, himself, and his employer) and to harm other stakeholders (clients who invested based on his reports). Over a longer time period, his conduct resulted in harm to himself and many other stakeholders—his employer, his employer’s clients, his colleagues, investors,
and through loss of trust when the story was published, the larger financial market.
Ethics encompasses a set of moral principles and rules of conduct that provide guidance for our behavior. The word “ethics” comes from the Greek word “ethos,” meaning character, used to describe the guiding beliefs or ideals characterizing a society or societal group. Beliefs are assumptions or thoughts we hold to be true. A principle is defined as a belief or fundamental truth that serves as the foundation for a system of belief or behavior or a chain of reasoning. Our beliefs form our values— those things we deem to have worth or merit. Moral principles or ethical principles are beliefs regarding what is good, acceptable, or obligatory behavior and what is bad, unacceptable, or forbidden behavior.
Ethical principles may refer to beliefs regarding behavior that an individual expects of himself or herself, as well as shared beliefs regarding standards of behavior expected or required by a community or societal group.
The study of ethics examines the role of consequences and personal character in defining what is considered good, or ethical, conduct. Ethical conduct is behavior that follows moral principles and balances self- interest
with both the direct and the indirect consequences of the behavior on others. Ethical actions are those actions that are perceived as beneficial and conforming to the ethical expectations of society. An action may be considered beneficial if it improves the outcomes or consequences for stakeholders affected by the action. Telling the truth
about the risks or costs associated with a recommended investment, for example, is an ethical action—that is, one that conforms to the ethical expectations of society in general and clients in particular. Telling the truth is also beneficial; telling the truth builds trust with customers and clients and enables them to make more informed
decisions, which should lead to better outcomes for them and higher levels of client/
customer satisfaction for you and your employer.
Widely acknowledged ethical principles include honesty, transparency, fairness or justice, diligence, and respect for the rights of others. Most societal groups share these fundamental ethical principles and build on them, establishing a shared set of rules regarding how members should behave in certain situations. The principles or
rules may take different forms depending on the community establishing them.
Governments and related entities, for example, may establish laws and/or regulations to reflect widely shared beliefs about obligatory and forbidden conduct. Laws and regulations are rules of conduct specified by a governing body, such as a legislature or a regulator, identifying how individuals and entities under its jurisdiction should
behave in certain situations. Most countries have laws and regulations governing the investment industry and the conduct of its participants. Differences in laws may reflect differences in beliefs and values.
In some countries, for example, the law requires that an investment adviser act in the best interests of his or her clients. Other countries require that investment professionals recommend investments that are suitable for their clients. These differing requirements can also hold true within one country where some advisers are held to
a suitability standard and others to the fiduciary standard of the client’s best interests.
Investment advisers and portfolio managers who are required by law to act in their
clients’ best interests must always put their clients’ interests ahead of their own or their employers’ interests. An investment adviser who is required by law to act in a client’s best interest must understand the client’s financial objectives and risk tolerance, research and investigate multiple investment opportunities, and recommend the investment or investment portfolio that is most suitable for the client in terms of meeting his or her long- term financial objectives. In addition, the investment adviser would be expected to monitor the client’s financial situation and investments to ensure that the investments recommended remain the best overall option for meeting the client’s
long- term financial objectives. In countries with only a suitability requirement, it is legal for investment professionals to recommend a suitable investment to a client even if other, similar suitable investments with lower fees are available. These differences in laws reflect differences in beliefs and values.
Specific communities or societal groups in which we live and work sometimes codify their beliefs about obligatory and forbidden conduct in a written set of principles, often called a code of ethics. Universities, employers, and professional associations often adopt a code of ethics to communicate the organization’s values and overall
expectations regarding member behavior. The code of ethics serves as a general guide for how community members should act. Some communities will also expand on their codes of ethics and adopt explicit rules or standards that identify specific behaviors required of community members. These standards of conduct serve as
benchmarks for the minimally acceptable behavior of community members and can help clarify the code of ethics. Members can choose behaviors that demonstrate even higher standards. By joining the community, members are agreeing to adhere to the community’s code of ethics and standards of conduct. To promote their code of ethics
and reduce the incidence of violations, communities frequently display their codes in prominent locations and in written materials. In addition, most communities require that members commit to their codes in writing on an annual or more frequent basis.
Violations of a community’s established code of ethics and/or standards of conduct can harm the community in a variety of ways. Violations have the potential to damage the community’s reputation among external stakeholders and the general public. Violations can also damage the community’s reputation internally and lead to
reduced trust among community members and can cause the organization to fracture or splinter from within. To protect the reputation of its membership and limit potential harm to innocent members, the community may take corrective actions to investigate possible violations, repair any damages, and attempt to discipline the violator or, in
severe cases, revoke the violator’s membership in the community.