Page 486 - Introduction to Business

460 PART 5 Finance

Ethics in Business

Trust in Investment Services

Imagine that you called a stockbroker a code, it must explain why it has not done so.
and paid her or him to provide you According to the SEC, the proposed rules would
with research about the investment define a code of ethics as a codification of standards
prospects of DaimlerChrysler, McDonald’s, and Sony. that are reasonably necessary to deter wrongdoing
The data in the broker’s report produced for you and to promote
overviewed the return and risk prospects for all three Honest and ethical conduct, including the ethical
firms’ stocks in the next year. One problem: the handling of actual or apparent conflicts of interest
report is biased by the fact that the broker has favor- between personal and professional relationships
able business relationships with these three firms. Avoidance of conflicts of interest, including disclo-
The broker may be offering financial services to these sure to an appropriate person or persons identi-
firms and may even hold stock in its dealer activities fied in the code of any material transaction or
in the stock market. What if CEOs and other top exec- relationship that reasonably could be expected to
utives in these firms received lower brokerage costs give rise to such a conflict
with this broker than other investors? Full, fair, accurate, timely, and understandable dis-
Naturally, these conflicts of interest are cheating closure in reports and documents that a company
the everyday investor seeking brokerage services. In files with, or submits to, the SEC and in other
the last few years, numerous cases of illegal or irreg- public communications made by the company
ular trading practices have surfaced in the financial Compliance with applicable governmental laws,
news. Charles R. Schwab, CEO of the brokerage firm rules, and regulations
bearing his name, observed that these kinds of Prompt internal reporting of code violations to an
widely publicized abuses have shaken investors’ trust appropriate person or persons identified in the code
in the investment community. How can people be Accountability for adherence to the code
sure that investment managers are not subject to
According to the SEC, a company would be
conflicts of interest? His recommendation to Presi-
required to disclose in its annual report whether it
dent Bush and the Securities Exchange Commission
has a code of ethics.
was to require that a code of conduct be imple-
mented. To ensure ethical practices by investment Source: Charles R. Schwab, “Remaking the Market: My Investors, My
Responsibility,” The Wall Street Journal, November 5, 2002, p. A22.
professionals, CEOs and some key investment man-
agers would have to sign a document assuring that
controls over potential conflicts of interest were in Questions
place and describe what those controls are. Personal 1. Suppose that a stockbroker received a large num-
certification of ethical investment conduct by leaders ber of sell orders for a stock. The stockbroker
in financial services firms is an important step to realized that this large volume of sell orders
restoring investor trust. In Schwab’s view, open dis- would cause the stock price to decline. Is it ethical
closure of information and accountability are the keys for the broker to sell any shares of stock they own
to gaining back investors’ confidence. before selling the customers’ orders?
In October 2002, the SEC voted to propose rules 2. Do you think that stockbrokers should include in
implementing ethics-related provisions of the new their code of ethics, under the new 2002 Sar-
2002 Sarbanes-Oxley Act. Consistent with this act, the banes-Oxley Act, something to prevent them from
proposed rules require public companies to disclose “stepping in front” of customers’ stock buy-and-
whether the company has adopted a code of ethics for sell orders?
the company’s principal executive officer and senior 3. Would you trust a securities firm that has no code
financial officers. If a company has not adopted such of ethics?

will be automatically sold to lock in a profit. Or, if the price moves down to some
specified level, the securities will be automatically sold to prevent a large loss. Bro-
institutional investors Large financial kers and dealers seek to move quickly to execute trades for customers at the best
institutions, including insurance prices they can obtain.
companies, pension funds, and
investment companies, that trade Lastly, managers of large institutional investors play a major role in the invest-
securities in financial markets ment world. Insurance companies invest funds from policies they sell to customers

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