Ethics and the conduct of business 8th by john boatright and smith 2017 chapter 11

Learning Objectives 1 of 2• 11.1: Explain the three basic forms of ethical misconduct when selling financial products and services, and the responsibilities brokers have to their clients

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Ethics and the Conduct of Business

Eighth edition

Chapter 11 Ethics in Finance

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• Introduction: Ethics in Finance

• 11.1: Financial Services

• 11.2: Financial Markets

• 11.3: Insider Trading

• 11.4: Hostile Takeovers

• Conclusion: Ethics in Finance

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Learning Objectives (1 of 2)

•

11.1: Explain the three basic forms of ethical misconduct when selling financial products and services, and the responsibilities brokers have to their clients

•

11.2: Assess the significance of the three main elements of fairness in financial markets and the ethical issues introduced by new financial instruments and practices

•

11.3: Summarize the two main arguments against insider trading and the challenges in applying these theories to its prevention and prosecution

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Learning Objectives (2 of 2)

•

11.4: Analyze the ethical issues raised by various hostile takeover tactics and what they suggest about the rights and fiduciary duties of officers and directors

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Introduction: Ethics in Finance

• Case: Goldman Sachs

• Creating the deal

• Expert analysis

• Collapse of the deal

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Figure 11.1: Objectionable Sales Practices for Financial Products

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11.1: Financial Services (1 of 2)

Objective: Explain the three basic forms of ethical misconduct when selling financial products and services, and the responsibilities brokers have to their clients

11.1.1: Deception

Overview

Information that should be disclosed

11.1.2: Churning

Overview

Legal definition of churning

Issues in defining excessive trading

Best practices to avoid churning

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11.1: Financial Services (2 of 2)

Objective: Explain the three basic forms of ethical misconduct when selling financial products and services, and the responsibilities brokers have to their clients

11.1.3: Suitability

Meaning

Common causes of unsuitability

Ethical principles

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Figure 11.2: The Equity/Efficiency Trade-Off

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11.2: Financial Markets (1 of 2)

Objective: Assess the significance of the three main elements of fairness in financial markets and the ethical issues introduced by new financial instruments and practices

11.2.1: Fairness in Markets

Overview

Regulation of financial market protects everyone

Fraud and manipulation

Unequal information

Unequal bargaining power

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Table 11.1: Fraud and Manipulation in Financial Markets

What is fraud? Willful misrepresentation of a material fact that causes harm to a person who reasonably relies on the

misrepresentation

Who is a fraud? Anyone involved in the buying or selling of securities who makes a false or misleading statement or engages in

any practice or scheme designed to defraud

Who is vulnerable? Investors (buyers and sellers) are particularly vulnerable because the value of financial instruments often

depends on information that is difficult to obtain or verify

How is manipulation different? Manipulation involves buying or selling securities to create a false or misleading impression about future prices,

rather than just misrepresenting facts

How can both be prevented? Fraud and manipulation can be prevented by providing investors with easy access to reliable information

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11.2: Financial Markets (2 of 2)

Objective: Assess the significance of the three main elements of fairness in financial markets and the ethical issues introduced by new financial instruments and practices

11.2.2: Derivatives and HFT

Derivatives

High-frequency trading

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11.3 Insider Trading (1 of 2)

Objective: Summarize the two main arguments against insider trading and the challenges in applying these theories to its prevention and prosecution

11.3.1: Theories of Insider Trading

Fairness theory

Property rights theory

11.3.2: Evaluation of the Two Theories

Fairness theory

Property rights theory

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11.3 Insider Trading (2 of 2)

Objective: Summarize the two main arguments against insider trading and the challenges in applying these theories to its prevention and prosecution

11.3.3: Recent Insider Trading Cases

The O’Hagan decision

Galleon and the mosaic theory

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Figure 11.3: Causes of Unequal Bargaining Power

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11.4 Hostile Takeovers (1 of 2)

Objective: Analyze the ethical issues raised by various hostile takeover tactics and what they suggest about the rights and fiduciary duties of officers and directors

11.4.1: Market for Corporate Control

Advantages

Challenges

Review

11.4.2: Takeover Tactics

Takeover process

Defensive measures

Ethical issues

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11.4 Hostile Takeovers (2 of 2)

Objective: Analyze the ethical issues raised by various hostile takeover tactics and what they suggest about the rights and fiduciary duties of officers and directors

11.4.3: Role of Directors

Board members’ role

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Conclusion: Ethics in Finance

• They bear on our financial well-being

• Misconduct has the potential to rob people of their life savings

• Should emphasize integrity of financial professionals and ethical leadership

• Principles are duty of fiduciary and fairness

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