Ethics Securites Continuing Education CE

The securities industry is a highly competitive one. For a rep, there exists ample opportunity to conduct business inappropriately at the expense of a competitor. Misrepresentation or defamation of a competitor gives the entire industry a bad image.

Defamation is any false of malicious communication-written or oral-that injures another’s reputation or character.
Both individuals and companies can be defamed. Unethical registered reps practice defamation by spreading rumors or falsehoods about the character of a competing rep or another firm.

As a duty to the rep’s firm and to the industry itself, a rep must resist this temptation. Ethics requires a rep to acknowledge the worth of other reps and their products and compete only on the basis of the value of the products and services that she can provide.

Ethics does not have to be incompatible with capitalism. Profit is not a dirty word. In the long run, good ethics is good business. Hard but fair competition cannot help but benefit the public.

Ethics usually precedes the law. While many ethical standards of conduct have been codified, many have not. Something can be legal but not ethical. For example, it is legal to encourage a customer to invest more than she can afford to, though it is not ethical. Ethics goes beyond the letter of the law and entails not only what a person “must do” but what a person “should do.”

However, it should be noted that the law does provide a very specific ethical direction for everyone through civil and criminal statutes. Under the law, ethical conduct is generally defined as that which a reasonable person is expected to do under the circumstances. Also defined in the law are illegal and improper conduct and the penalties for such conduct.

A registered representative’s primary ethical responsibilities are the securities industry regulators, the general public, the rep’s firm and the rep’s customers.

The responsibility to regulate the securities industry is shared by the federal and state governments and the self-regulatory organizations. However, though government regulations and industry regulations may differ, the underlying standard of ethical conduct is the same. The register rep must comply with the intent of as well as the letter of the law.

The registered rep has more control over the public’s attitude toward securities than do sales representatives for most other consumer products. This is because the rep initiates contact with a prospective customer, determines the suitability of investing, recommends certain products or strategies, makes the sales presentation and finally develops a long-term relationship with the customer.

Because this special relationship involves a great deal of contact between the customer and the rep (and because the public generally understands little about the securities markets), public perceptions of the industry itself are based on how will-or how poorly- a rep does his job. Thus, the registered rep has two main ethical responsibilities to the public:

to inform the public about investing with the highest level of professional integrity; and
to strive for an equally high level of professionalism in all public contacts in order to maintain the strong positive image of the securities industry.

Serving on industry committees, assisting with public education and educating yourself are all part of service to the industry; other examples include representing the firm and the industry in community activities and attending industry conferences and seminars.

In carrying out her duties, the registered rep is the direct representative of the broker-dealer. Her day-to day activities directly reflect on the firm’s image within the community. Should the rep behave unethically, everyone in that community is given reason to believe that the firm is also unethical.

Even a well-intentioned employee of a broker-dealer or investment adviser can sometimes run afoul of the regulations. For example, a customer might suggest that an employee deliver a security in person, saving the firm the time and expense of registration and registered-mail delivery. But in most firms, delivering securities in this fashion is strictly against policy, and any person doing so could be subject to dismissal.

Shortcuts are rarely a good idea-policies and regulations protect the employee, the firm and the customer, Included in industry newsletters are numerous accounts of securities industry professionals who have been barred from the business and fined large sums of money. Some of them committed legal violations and others used poor judgment. As a result of their actions, these reps were forced to give up their plans for success in the securities industry and to look in other fields to begin their careers over again.

The registered rep can meet his ethical responsibilities to a customer by filling the customer’s needs and providing quality service. Service is a primary function of the securities industry. The way that service is provided often
determines the rep’s future because customers are a good source for future sales and references. Throughout this course, we will discuss ways in which reps can serve their customers while maintaining ethical standards.

An ethical customer makes full and honest disclosure to the registered representative. This information is all the representative or investment adviser has on which to base recommendations.
Customer information also may be important in gaining permission to engage in specific kinds or sizes of trades. A customer who fails to disclose relevant information could jeopardize the career of the representative or investment adviser.

Failure on the part of a customer to provide information is often the first signal to a compliance department of potential trouble.

Practices that tend to give certain investors and unfair advantage over the general public ( a prime example being insider trading) are prohibited by regulations. It is the responsibility of the individual investor to abide by these regulations.

A registered rep should be aware that an unscrupulous customer may someday try to “trick” him into violating the laws, regulations or rules for the customer’s illicit purposes. New brokers are often the most susceptible to such customer schemes.

Broker-dealers protect their customers through self-regulation. A brokerage firm has the ability to establish policies that maintain a balance of interest among the customer, the registered rep and the firm. For this three-sided relationship to endure, each party must treat the others with respect and professionalism.

Registered reps feel that many ethical challenges confronting them stem from two sources: competition and the stress of performance quotas. Reps notice that the intense competition within the securities industry forces management to look at the bottom line, which creates a conflict with business ethics. The same conflict comes from the competition reps face individually. Reps may feel that the practice of measuring performance on the basis of end results poses a challenge to ethics because the result is considered more important than the means.

One solution to the ethical conflicts presented by the business environment is to remove the pressure to compromise a rep’s own values and standards. The firm can alleviate this pressure by:

emphasizing ethics in business operations;

providing clear communication of appropriate ethical behavior.;

allowing a rep to go to his boss or beyond his boss for ethical advice; and

distributing a code of ethics to all employees.

To address potential conflicts between ethical standards and the firm’s bottom line, broker-dealers might establish rules similar to the following:

Because suitability should drive sales, compensation programs for selling securities must not be structured to encourage unsuitable recommendations.

Increased incentives paid in sales contests or in the introduction of new products might result in a conflict of interest should be controlled.

Supervision of the sales program should be increased in instances where payout to reps is weighted toward proprietary products.

Paying excessive incentives, bonuses and commission rates to reps for accepting employment with the firm should be prevented.