1. The financial services industry relies heavily on personal selling by professionals like stockbrokers, agents, and advisers. While integrity is important, misconduct still occurs sometimes due to opportunities for abuse. Customers often blame sellers for failed investments or rejected claims. 2. The document discusses three objectionable practices in selling financial products: deception, churning, and suitability. Deception can involve incomplete or misleading information. Churning refers to excessive trading in a client's account for commissions rather than the client's benefit. Suitability means recommending only appropriate products based on a client's situation and risk tolerance. 3. Financial markets involve risks of fraud, manipulation, and unequal access to information that can tilt the playing

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Financial services
The financial servicesindustrystill operateslargelythroughpersonalsellingbystockbrokers,insurance
agents, financial planer,tax advisers, andotherfinance professionals.Personalsellingcreates
innumerableopportunitiesforabuse,and althoughfiancéprofessionals take pride inthe level of
integrity inthe industry,misconductstilloccurs.However,customerswhoare unhappyoverfailed
investments orrejectinsurance claimsare quicktoblame the sellerof the product,sometime withgood
reason.
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Thissectiondiscussesthree objectionable practicesIsellingfinancialproductstoclients,namely,
deception,churning,andsuitability.
Deception
The ethical treatmentof clientsrequitessalespeopleto explainall of the relevantinformationtruthfully
inan understandable,nonmisleadingmanner. Deceptionisoftenamatterof interpretation.Deception
can alsooccur whenessential informationisnotrevealed: Forexampleasale charge ismergedinto
fundsannual expenses,whichmaybe substantiallyhigherthancompetition’s.
In general,apersonisdeceivedwhenthatpersonisunable tomake a rational choicerasa resultof
holdingafalse belief thatiscreatedbysome claimmade by another.Thatclaimmay be eithera false or
misleadingstatementora statementthatisincomplete insome crucial way.
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Churning
Churningisdefinedasexcessiveorinappropriate tradingforclient’saccountbybrokerwhohascontrol
overthe account withthe intenttogenerate commissionsratherthanto benefitthe client.Although
churningoccurs; there isdisagreementonthe frequencyorthe rate of detection.
The ethical objectiontochurningisstraightforward:Itisa breachof fiduciarydutytotrade in waysthat
are notin the client’sbestinterest.
The legal definitionof churningcontains threeelements
 The brokercontrolsthe accounts
 The trading isexcessiveforthe characterif the account
 The brokeracted withintent

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Suitability
Suitabilityingeneral,brokers,insurance agentsandothersalespersonshave anobligationto
recommendonlysuitable securitiesandfinancialproducts. Itisdifficulttodefine suitabilitybutisbased
on customer’s financial situation, needs,timehorizonandriskappetite&profile.
The most commoncausesof unsuitabilityare:
 Unsuitable typesof securities
 Unsuitable gradesof securities
 Unsuitable diversification
 Unsuitable tradingtechniques
 Unsuitable liquidity
The critical question,of course, is,whenisasecurityunsuitability?Rarelyisasingle securityunsuitability
exceptinthe context of an investor’stotal portfolio.Investmentsare mostoftendeemedtobe
unsuitable becausetheyinvolveexcessiverisk,butafew riskyinvestmentsmay be appropriate inawell-
balanced,generallyconservative portfolio.Furthermore,evenanaggressive;risk-takingportfoliomay
include unsuitable securitiesif the riskisnotcompensatedbythe expectedreturn.
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Financial Markets
Financial transactionstypicallytake place inorganized markets, suchas:stockmarkets,commodity
markets, andfuture or optionsmarkets.
These marketspresupposecertainmoral rulesandexpectationsof moral behavior.The mostbasicof
these isa prohibitionagainstfraudandmanipulation. There shouldbe fairnessandlevel playingfieldfor
all whoparticipate inthese markets,butthe level playingfieldcangettiltedbymanyfactorsincluding
unequal information,bargainingpowerandresources.
Unfairways of financial marketsoperation:
 Fraud andManipulation
 Unequal information
Fraud andManipulation:Manipulationgenerallyinvolvesthe buyingandsellingof securitiesforthe
purpose of creatinga false ormisleadingimpressionaboutthe directionof theirprices soasto induce
otherinvestorstobuy or sell the securities. Fraudisthe willful misrepresentationof amaterial factthat
causesharm to a personwhoreasonablyreliesonthe misrepresentation. Investors –bothas buyersand
sellers–are vulnerabletofraudbecause the value of financial instrumentsdependsalmostentirelyon

3. informationthatisdifficultto verify. FraudandManipulationare addressedbymandatorydisclosures
regulationsaswell asbypenaltiesforfalse andmisleadingstatementsinanyinformationreleasedbya
firm.
Unequal information: Competitionbetweenpartieswithveryunequal informationiswidelyregardedas
unfairbecause the playingfieldistiltedinfavourof aplayerwithsuperiorinformation. Thatevery
personshould possess the same informationisan unrealizable ideal andactual marketsare
characterizedbya great informationasymmetries. The average investorcannothope tocompete on
equal termswitha marketpro.
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InsiderTrading
Insidertradingreferstotradinginthe securitiesof acompanyto take advantage of material "inside"
informationaboutthe companythatisnot available tothe public. Suchatrade ismotivatedbythe
possibilityof generatingextraordinarygainwiththe helpof nonpublicinformation(informationnotyet
made public). Itgivesthe traderan unfairadvantage overothertradersinthe same security.
How doesinsidertradingwork? Aninsiderbuysthe stock(he mightalso alreadyownit).He then
releasesprice- sensitive informationtoa small groupof people close tohim, whobuythe stock based
on it,and spreadthe informationfurther.Thisresultsinanincrease involumesandpricesof the stock.
The inside informationhasnowbecome knowntoalarger groupof people whichfurtherpushesup
volumesandpricesof the stock.
Aftera certainprice has beenreached,whichthe insiderknowsabout,he exits,asdothe onesclose to
him,and the stock’sprice falls.Those whohadinside informationare safe while the ordinaryretail
investorisstuckholdingawhite elephantas,inmanycases,the tip reacheshimonlywhenthe stockis
alreadyona boil.
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Hostile Takeovers
The acquisitionof one company(calledthe targetcompany) byanother(calledthe acquirer) thatis
accomplishednotbycomingtoan agreementwiththe targetcompany'smanagement,butbygoing
directlytothe company'sshareholdersorfightingtoreplace managementinordertogetthe acquisition
approved.A hostile takeovercanbe accomplishedthrougheitheratenderofferora proxyfight.
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FriendlyTakeovers
Friendlytakeoverisone inwhichatarget company’smanagementandboardof directorsagree to
mergeror acquisitionbyanother company

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BailoutTakeovers
Thisinvolvesthe takeoverof afinanciallysickcompanybyafinanciallyrichcompanyasperthe
provisionsof the companies.The objective of thistakeoveristobail outthe sickunitfromlosses
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The Market for CorporateControl
Defendersof hostile takeoverscontendthatcorporationsbecome takeovertargetswhenincumbent
managementisunable orunwillingtotake stepsthat increase shareholdervalue.The raiders’
willingnesstopaya premiumforthe stock reflectsabelief thatthe companyisnotachievingitsfull
potential underthe currentmanagement.