Ethics & Investing

Ethics in investing is a process used by investors to align ethical and moral standards with how they make investments. As investors become more involved with how their money is distributed across financial markets, regulators, financial professionals, and businesses have begun to incorporate investors of all sizes in their decision making process. This has led to greater diversity on boards, committees, and increased opportunity for investor feedback on new and existing federal and state regulations.

Applying ethics to investing is known to provide investors with greater:

  • Transparency
  • Stability
  • Security
  • Potential for higher returns

These moral guidelines help to prevent:

  • Fraud
  • Corruption
  • Harassment and discrimination
  • Financial loss and insolvency


Defining Ethics

Ethics can be defined as the moral principles or rules that influence an individual’s behavior and decision making when it affects others. Ethics in finance protects investors from being taken advantage of by industry professionals and “insiders.” It also supports:

  • Trust and stability across global financial markets;
  • Transparency and regulation to avoid  securities fraud;
  • Ongoing learning requirements that adapt to growing risks and challenges that may compromise ethics.

Insiders are individuals who have a high degree of power within a company or industry, such as a director, senior executive, or local policy maker. Anyone who may have access to non-public information (NPI) and has influence is generally considered an insider.

NPI refers to any information that is not public, and in the context of investing, if shared, could affect the price of a company’s stock, regardless of whether it is good or bad information. Ethics helps to ensure NPI remains private and that insiders make the best decisions to prevent and avoid fraud and corruption.

Most companies issue handbooks to new employees, associates, and business partners that include rules for their business, including a code of ethics, also known as a code of conduct. Each company may have a different code of ethics from their competitor or fellow business, and these differences have caused some companies to be perceived as caring more about ethics than others. These contrasts have also made it difficult for regulators to determine if an event happened because of intended corruption or carelessness.


Government Oversight Agencies

Regardless, ethics in finance expects businesses to have policies and procedures that provide investors and insiders with a rule book for how to handle an event, when it happens. The following organizations and U.S. government agencies are known for overseeing ethics in finance and investing: 

 U.S. Securities and Exchange Commission (SEC) – Office of the Ethics   Counsel is   responsible for advising and counseling all Commission employees and members on   issues such as:

  • Personal and financial conflicts of interest
  • Securities holdings and transactions of Commission employees and their immediate families
  • Gifts
  • Seeking and negotiating other employment
  • Outside activities
  • Financial disclosure
  • Post-employment restrictions.

The Ethics Office also assists Presidential appointees with various aspects of financial disclosure to the Senate and the U.S. Office of Government Ethics in connection with the confirmation process.


 U.S. Office of Government Ethics (OGE) established by the Ethics in Government Act of   1978 provides overall leadership and oversight of the executive branch ethics program,       which is designed to prevent and resolve conflicts of interest. OGE’s mission is part of the   very foundation of public service.

The first principle in the Fourteen General Principles of Ethical Conduct for Government Officers and Employees is, “Public service is a public trust, requiring employees to place loyalty to the Constitution, the laws and ethical principles above private gain.” OGE is headed by a Director who is appointed to a five-year term by the President.


The Financial Industry Regulatory Authority (FINRA) plays a critical role in ensuring the integrity of America’s financial system. Working under the supervision of the Securities and Exchange Commission, FINRA writes and enforces rules, examines firms for compliance, and strives to protect investors in today’s rapidly evolving market. FINRA also educates investors and promotes market transparency.


 CFA Institute is the world’s largest association of investment professionals. The   institute generates value for its members to advance ethics, market integrity, and professional standards of practice, which collectively contributes value to society. CFA Institute is committed to improving outcomes for investors, and benefits members through greater demand for educated and ethical investment management professionals.



Federal and state securities laws help to protect investors against fraud and unethical investment practices. Laws require that investors receive accurate information and disclosure with regard to financial professionals, their business, and the ways they interact with securities markets. States have established laws, known as blue sky laws, which were established to prevent investors from being sold nothing but “blue sky.”

The government and financial community work together to establish ethical standards and laws that help to raise public awareness of ethics, and also in response to damaging abuses by market insiders. The following U.S. federal securities laws have shaped ethics standards:

  • Securities Act of 1933: Often referred to as the “truth in securities”   law, the Securities Act of 1933 has two basic objectives: require that investors receive financial and other significant information concerning securities being offered for public sale; and prohibit   deceit, misrepresentations, and other fraud in the sale of securities.
  • Securities Exchange Act 1934: With this Act, Congress created the Securities and Exchange Commission. The Act empowers the SEC with broad authority over all aspects of the securities industry. This includes the power to register, regulate, and oversee brokerage firms, transfer agents, and clearing agencies, as well as the nation’s securities self-regulatory organizations (SROs). The various securities exchanges, such as the New York Stock Exchange, the NASDAQ Stock Market, and the Chicago Board of Options are SROs. The Financial Industry Regulatory Authority (FINRA) is also an SRO.
  • The Maloney Act of 1938 was signed into law in June 1938. The   Investment Bankers Conference worked with the SEC to meet the Act’s requirements. Renamed the National Association of Securities Dealers, Inc. (NASD), it registered as an SRO on August 7, 1939. By the end of 1939, some 2,616 broker-dealer firms had joined the NASD.

Here is a chronological look at the different types of regulations enacted in the U.S.:

  • Investment Company Act of 1940 regulates the organization of companies, including mutual funds, that engage primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public. The regulation is designed to minimize conflicts of interest that arise in these complex operations.
  •  Investment Advisers Act of 1940 regulates investment advisers. With certain exceptions, this Act requires that firms or sole practitioners compensated for advising others about securities investments must register with the SEC and conform to regulations designed to protect investors.
  • Securities Acts Amendments of 1975 streamlined trade reporting by implementing electronic delivery and alternative communication to physical stock certificates. Before these amendments, the NYSE would close every Wednesday to allow its member  brokerage firms to process paperwork based on trade requests, in order to maintain compliance with the laws. Closing one day a week did not allow enough time for firms to maintain compliance. Brokerage firms began collapsing under the weight of the paper and went out of business, putting at risk the money in their customers’ accounts.
  • Insider Trader and Fraud Act of 1988 amends the Securities Exchange Act of 1934 to revise the authority of the SEC to seek civil penalties against persons who participate in illegal insider trading. In addition, this law authorizes the SEC to seek to impose civil penalties upon any person who, at the time of the violation, directly or indirectly controlled the person who committed the illegal insider trading.
  • Sarbanes-Oxley Act of 2002 mandated a number of reforms to enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud. On July 30, 2002, the  President George W. Bush signed into law the Sarbanes-Oxley Act of 2002, which he characterized as “the most far reaching reforms of American business practices since the time of Franklin Delano Roosevelt.” The Act created the “Public Company Accounting Oversight Board,” also known as the PCAOB, to oversee the activities of the auditing profession.
  • Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 was signed into law on July 21, 2010 by President Barack Obama. The legislation set out to reshape the U.S. regulatory system in a number of areas, including but not limited to, consumer protection, trading restrictions, credit ratings, regulation of financial products, corporate governance and disclosure, and transparency.


Code of Ethics

Code of ethics are rules created and adopted by organizations to establish a minimum set of standards with regard to moral and ethical values. Code of ethics are also known as:

  • Code of conduct
  • Policies and Procedures
  • Standards and policies

Across financial services worldwide, organizations have adopted the CFA Institute’s Code of Ethics and Standards for Professional Conduct. The CFA Institute has made their code of ethics available for use by companies to highlight the importance of ethics within corporate governance.


Ethical Dilemmas

People experience ethical dilemmas every day. These moral dilemmas include a situation that requires a decision that may not have a right or wrong answer. For parents, this may include deciding to monitor your child’s text conversation with friends. Though it may not feel “right” to invade your child’s privacy, on the other hand, a parent is trying to keep their child safe.

Investors experience ethical dilemmas too. In an attempt to make the “best” decision when faced with an ethical dilemma, investors will consider:

  • Impact the dilemma has on overall sales and revenue.
  • Affect to corporate culture and employee engagement.
  • Influence public relations will have on the business and its reputation.
  • Impact to corporate partnerships and relationships that could affect market share and growth.


 Ponzi Schemes

A Ponzi scheme is fraud that involves investments. Ponzi schemes are named after Charles Ponzi, who defrauded investors in the 1920’s with a scheme based on the cost of mail service between the U.S. and other countries.

Ponzi schemes pay existing investors with funds collected from new investors and require a constant flow of new money to survive. Ponzi schemes do not generate legitimate earnings.

Often, organizers will promise to invest money and generate high returns with little or no risk. In turn, fraudsters use the new money received by investors to pay those who invested earlier and may keep some for themselves. When it becomes hard to recruit new investors, or when large numbers of existing investors cash out, these schemes tend to collapse.

  • In 1920, the Charles Ponzi fraud scheme brought down six banks, and investors received less than 30 cents to each dollar invested. Investors lost about 20 million dollars in 1920, which translates to much more in today’s dollar value.
  • In 2008, Bernard Madoff’s similar Ponzi scheme collapsed after he was unable to return investor’s money. Madoff cost his investors over 18 billion dollars, approximately fifty-three times the losses of Ponzi’s scheme in 1920.

Ethics in investing demands compliance with specific standards. However, ethics is more than complying with rules; it is a way of thinking built on a culture of integrity that guides every aspect of investing. The consequences of unethical behavior range from the loss of reputation and trust to monetary penalty and criminal prosecution. By analyzing the circumstances of each decision, investors and investment professionals are able to determine the best course of action to fulfill their responsibilities in an ethical manner.

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