Page 291 - Encyclopedia of Business and Finance

eobf_E 7/5/06 3:01 PM Page 268

Ethics in Finance

trading, misuse of customer funds for personal gain, mis- are accountants, broker-dealers, investment advisers, and
pricing customer trades, and corruption and larceny in investment companies. Any improper or unethical con-
banking have become common occurrences. duct on the part of these professionals is of great concern
Insider trading is perhaps one of the most publicized to the SEC, whose primary responsibility is to protect
unethical behaviors by traders. Insider trading refers to investor interests and maintain the integrity of the securi-
trading in the securities of a company to take advantage of ties market. The SEC can censure, suspend, or bar profes-
material “inside” information about the company that is sionals who practice within its regulatory domain for lack
not available to the public. Such a trade is motivated by of requisite qualifications or unethical and improper con-
the possibility of generating extraordinary gain with the duct. The SEC also oversees self-regulatory organizations
help of nonpublic information (information not yet made (SROs), which include stock exchanges, the National
public). It gives the trader an unfair advantage over other Association of Security Dealers (NASD), the Municipal
Securities Rulemaking Board (MSRB), clearing agencies,
traders in the same security. Insider trading was legal in
transfer agents, and securities information processors. An
some European countries until recently. In the United
SRO is a membership organization that makes and
States, the 1984 Trading Sanctions Act made it illegal to
enforces rules for its members based on the federal securi-
trade in a security while in the possession of material non-
public information. The law applies to both the insiders, ties laws. The SEC has the responsibility of reviewing and
who have access to nonpublic information, and the peo- approving the rules made by SROs.
ple with whom they share such information. Other rule-making agencies include the Federal
Reserve System, the Federal Deposit Insurance Corpora-
Campaign financing in the United States has been a
major source of concern to the public because it raises the tion (FDIC), and state finance authorities. Congress has
entrusted to the Federal Reserve Board the responsibility
issue of conflict of interest for elected officials in relation
of implementing laws pertaining to a wide range of bank-
to the people or lobbying groups that have financed their
ing and financial activities, a task that it carries out
campaigns. The United States has a long history of cam-
paign finance reform. The Federal Election Commission through its regulations. One such regulation has to do
with unfair or deceptive acts or practices. The FDIC has
(FEC) administers and enforces the federal campaign
its own rules and regulations for the banking industry, and
finance statutes enacted by the Congress from time to
it also draws its power to regulate from various banking
time. Many states have also passed lobbying and campaign laws passed by Congress.
finance laws and established ethics commissions to
In addition to federal and state regulatory agencies,
enforce these statutes.
various professional associations set their own rules of
good conduct for their members. The American Institute
ETHICAL CODES of Certified Public Accountants (AICPA), the American
Approaches to dealing with ethical problems in finance Institute of Certified Planners (AICP), the Investment
range from establishing ethical codes for financial profes- Company Institute (ICI), the American Society of Char-
sionals to efforts to replace the rational-maximizer (egois- tered Life Underwriters (ASCLU), the Institute of Char-
tic) paradigm that underlies the modern capitalist system tered Financial Analysts (ICFA), the National Association
by one in which individuals are assumed to be altruistic, of Bank Loan and Credit Officers (also known as Robert
honest, and basically virtuous. Morris Associates), and the Association for Investment
It is not uncommon to find established ethical codes Management and Research (AIMR) are some of the pro-
and ethical offices in American corporations and in finan- fessional associations that have well-publicized codes of
cial markets. Ethical codes for financial markets are estab- ethics.
lished by the official regulatory agencies and
self-regulating organizations to ensure ethically responsi- TOWARD A PARADIGM SHIFT
ble behavior on the part of the operatives in the financial There has been an effort to address the ethical problems
markets. in business and finance by reexamining the conceptual
One of the most important and powerful official reg- foundation of the modern capitalist system and changing
ulatory agencies for the securities industry in the United it to one that is consistent with the traditional model of
States is the Securities and Exchange Commission (SEC). agency relationship. The proponents of a paradigm shift
It is in charge of implementing federal securities laws, question the rational-maximizer assumption that under-
and, as such, it sets up rules and regulations for the proper lies the modern financial-economic theory and reject the
conduct of professionals operating within its regulatory idea that all human actions are motivated by self-interest.
jurisdiction. Many professionals play a role within the They embrace an alternative assumption that human
securities industry, among the most important of which beings are to some degree ethical and altruistic and

268 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION