2. Financial Services
• Financial Services consists
of Stockbroking, Insurance,
Financial Planning, Tax
Advising.
• Trust and Ethics are the
most important factor in
financial services.
• Objectionable practices in
financial services are:-
1. Deception
2. Churning
3. Suitability
3. • Deception is an act of propagating beliefs in things that are not true, or not
the complete truth.
• Clients expect relevant information truthfully in an Understandable,
Nonmisleading manner.
• Information is provided in a confusing manner and has a lot of twists.
• Deception creates feelings of betrayal and distrust in the business.
4. Deception cont’d
• Brokers, Agents, Salespersons obfuscate
vocabulary instead of getting to the point of
relevance.
• A person is deceived when he is misleaded to
buy a less desirable product by false
interpretations or a statement which is
incomplete in some crucial way.
• Salespersons always try to sell their products to
the customers in their self-interest.
• Stockbrokers emphasizes clients to invest more
by stating the strengths of the fund and
minimizes the weakness.
5. CASES of Deception Conduct
• A brokerage firm buys a block of stock prior to
issuing a research report that contains a “buy”
recommendation in order to ensure that
enough shares are available to fill customer
orders. However, customers are not told that
they are buying stock from the firm’s own
holdings, and they are charged the current
market price plus the standard commission for
a trade.
1. What do you think about the stockbroker
in this case? Was this a Deception?
2. What Measures could have been taken to
resolve such problems?
6. Case 2
• A broker assures a client that an Initial Public Offering (IPO) of a
closed-end fund is sold Without a commission and encourages quick
action by saying that after the IPO is sold, subsequent buyers will
have to pay a seven percent commission. In fact, a seven percent
commission is built into the price of the IPO, and this charge is
revealed in the prospectus but will not appear on the settlement
statement for the purchase.
1. Did the broker deceived the Clients in buying the Fund?
2. Is this activity done by the broker in the interest of getting
commissions?
7. Churning cont’d
• Churning occurs when the broker is given the
complete authority to control the clients account.
• A broker acts on behalf of the clients but is always
intended to generate commissions for himself.
• Excessive trading by a broker is disproportionate
to the size of account and the clients portfolio.
• Churning often results in substantial losses in the
clients account, and even if profitable, may
generate tax liabilities for the clients.
8. Suitability
• Brokers, Salespersons and Agents have an obligation to recommend only
suitable securities and financial products.
• These people should provide a reason for believing their recommendation
and how it is suitable for the customers.
• The most important factor is to know about the investors portfolio and
what investments would be suitable accordingly.
9. Suitability cont’d
• Investments mostly consists of Risk’s which often becomes the
reason for unsuitability for the clients.
• Still Brokers suggest for a few risky investments which can be
appropriate in a well-balanced, conservative portfolios.
• Sometimes an aggressive, risk-taking portfolio may also have
unsuitable securities if there is not enough return for the
compensation of the risk.
10.
11. • Insider Trading is defined as trading in the stocks of
corporation on the basis of material, nonpublic
information .
• Insider information is typically gained by someone
who is working within or is close to person working
in the company .
• The market requires certain moral rules and is
expected for moral behavior.
• If a person uses insider information to place trades,
he or she can be found guilty of insider trading.
• The rules not only suggest the prohibition against
fraud but also concerns with the fairness with the
market.
• Insider reading can be illegal or legal depending
What is Insider Trading?
12. Insider Trading
• How is Insider Trading Stated?
1. the trader has violated some legal duty to a corporation and its
shareholders.
2. the source of the information has such a legal duty and the trader
knows that the source is violating that duty.
• What were the Rationales Used to make law on Insider Trading?
1. Property Rights.
2. Fairness in Information.
13. United States v. O’Hagan Case
• James O ‘Hagan (O) was a law firm partner at firm making an offer for
Pillsbury Company. He was less involved in the transaction from a
legal standpoint, but was sufficiently informed to have been aware
that purchasing the stock was a lucrative prospect.
• O ‘Hagan purchased the stock made a multimillion dollar profit from
his transaction.
• The SEC charged O ‘Hagan with a 10b misappropriation of non-public
information (insider trading).
• The SEC also charged O with a Rule 14e3(a) violation. This rule
requires a person in possession of material nonpublic information
requires to either disclose such information or refrain from
purchasing the stock.
14. Conclusion
• Ethics in finance are important for the well being of Finance.
• Ethical misconduct by an individual or a company can be harmful to
the society.
• As there is a lot of money involved, it is necessary to develop efficient
safeguard to ensure personal and organizational ethics.
• As the law governs most financial activities it is important for ethical
leaders and institute to emphasize on the duties of fiduciaries and
fairness in trades.
