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Business - Ethical Issues in Financial Services.docx

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Philosophy 2074F/G
Michael Herbert

ETHICAL ISSUES IN FINANCIAL SERVICES – BOATRIGHT  Finance would be impossible without ethics. The very act of placing our assets in the hands of other people requires immense trust.  Twisting, in which an insurance agent persuades a policy holder to replace an older policy with a newer one that provides little if any additional benefit but generates a commission for the agent, and flipping in which a loan officer persuades a borrower to repay an old and with a new one, thereby incurring more fees  The ethical treatment of clients requires salespeople to explain all of the relevant information truthfully in an understandable, non-misleading manner  Deception is often a matter of interpretation  The Securities Act of 1933 requires the issuer of a security to disclose all material information, which is defined as information about which an average prudent investor ought reasonably to be informed or to which a reasonable person would attach importance in determining a course of action in a transaction  Churning is defined as excessive or inappropriate trading for a client’s account by a broker who has control over the account with the intent to generate commissions rather than to benefit the client  Churning as distinct from unauthorized trading occurs only when a client turns over control of an account to a broker, and by taking control a broker assumes a responsibility to serve the client’s interests  The courts have held that for churning to occur a broker must trade with the intention of generating commissions rather than benefiting the client  Commission system is too deeply rooted to be significantly changed and recommended better training and oversight by brokerage firms  Ensuring that a recommended security is suitable for a given investor thus involves many factors but people in the financial services industry offer to put their specialized knowledge and skills to work for us  The rules and expectations for markets are concerned with fairness, which is often expressed as a level playing field  Insider trading is commonly defined as trading in the stock of publicly held corporations on the basis of material, non-public information  Much of the uncertainty in the law on insider trading revolves around the relation of the trader to the source of the information. Corporate executives are definitely insiders, but some outsiders have also been charged with insider trading  The stockholder and the psychiatrists, however, knew or should have known that they were obtaining inside information indirectly from high level executives who had a duty to keep the information confidential  One difficulty in using the property rights or misappropriation argument is to determine who owns the information in question  Many employers prohibit the personal use of any information that an employee gains in the course of his or her work  What is morally objectionable about insider trading, according to its critics though, it is not the misappropriation of a company’s information but the harm done to the investing public  Trades will take place only if the buyers and sellers of a stock have different information that leads them to different conclusions about the stock’s worth  The information is unavailable not for lack of effort but for lack of access  The main difficulty is the fairness argument is to determine what information ought to be revealed in a transaction  The trouble with such a claim is that some economists argue that the stock market would be more efficient without a law against insider trading  Economic arguments about market efficiency look only at the cost of registering information i the market and not at possible adverse consequences of legalized inside
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