Investment Professional Ethics Survey Report

© 2015 Jonathan LH Blaine

The Center for Financial Ethics and Legal Studies

1

Prepared by

Jonathan LH Blaine

College of Law

The Australian National University

Ethical Perceptions of

Investment Professionals

20 Years On

A Survey of Investment Professionals

The Center for Financial Ethics

and Legal Studies

August 2015



2

From the Author

AS a result of the global financial crisis of 2007, bankers and other financial service pro-

fessionals have found their institutional integrity questioned and their individual ethical character

called into doubt. These criticisms have come from all quarters including regulators, government

officials, journalists, academics and even fellow practitioners themselves. Yet, while many bemoan

the current “lack of ethics” in the investment profession, most studies seek only to confirm that

there is crisis of culture but do little to actually address whether this crisis is something new or pro-

vide any suggestion as to how to address the issue. Many studies focus on assessing the perceived

prevalence of ethical misconduct but fail to inquire as to what these same professionals believe

might help improve the situation.

This report presents the findings of a survey of 100 investment professionals who are mem-

bers of the Chartered Institute for Securities and Investment (CISI), a financial regulatory organiza-

tion based in the United Kingdom. The survey focused on developing an understanding of the per-

ceptions of ethics in the investment profession and what they believe are the drivers and sources of

their own personal ethical development. This study is a repeat of a study conducted under the auspi-

ces of the Association for Investment Management and Research (AIMR), currently known as the

CFA Research Institute. The findings of the current repeat study are compared with findings of the

original study as that study was performed prior to the 2007 Global Financial Crisis and even prior

to the Sarbanes–Oxley Act of 2002 that contained specific provisions, such as the publication of

Code of Ethics modifications, aimed at improving or encouraging greater ethical behavior in busi-

ness generally. The comparison is utilized as a means of understanding what, if any, impact there

has been on the ethical perceptions of investment professionals over the past twenty years given the

increased regulation of this profession and businesses more generally over the past twenty years.

The author thanks the Chartered Institute for Securities and Investment and, specifically,

Mr. Andrew Hall - Head of Professional Standards and Integrity for their kind assistance and coor-

dination in support of this research and for allowing the intrusion on the membership through the

conduct of this survey. The author also wishes to thank the Australian National University, College

of Law and in particular Professor Katherine Hall for their continued support of this important and

informative investigation.



3

Ethical Percep"ons of

Investment Professionals

20 Years On

CONTENTS

1. Are ethical standards improving?

2. Sources, Cues and Drivers

3. Do Codes of Ethics really help?

4. The role of the Compliance Officer

5. Unethical actions and their resolution

6. The role of senior management

7. Law v. ethics— the false dichotomy

8. Implications for regulating ethics

To build [a]

sense of the sys-

temic, business

ul�mately needs

to be seen as a

voca�on, an ac-

�vity with high

ethical stand-

ards, which in

turn conveys

certain responsi-

bili�es.

- Mark Carney

Governor of the

Bank of England



4

Are ethical standards improving?

Before you can solve a problem, there must be a realiza�on that a problem exists.

In order to assess whether ethics is truly a problem for those in the investment profession, a fundamental ques"on

exists as to how individuals in the investment profession view the

ethical standards of their profession and how these percep"ons

have changed over "me. To assess these points three queries were

made (see insert).

The answers to these ques"ons and a look at how these percep"ons

have changed over the past twenty years, provides insight into

whether these professionals see their industry as becoming more or

less ethical and a basis for assessing whether these percep"ons from inside the profession comport with percep"ons

from outside the profession.

Improving Ethical Standards

As shown in Figure 1, a significant number of invest-

ment professionals, about 64%, expressed a belief that eth-

ics within their own profession had improved over the past

ten years. This stands in sharp contrast to the less than 20%

who reported a belief that things had deteriorated during

that same period. This is an interes"ng finding given that

the survey was conducted in 2014, only six years a9er the

height of the GFC. This is a significant improvement when

compared with the results of the 1992 study, wherein only

about 24% reported improving ethical standards in the in-

vestment profession, while almost 35% reported deterio-

ra"ng ethics. Several factors may contribute to these differ-

ences but one main point is clear. Investment professionals

believe that their profession has become more ethical since

the 1990s.

Outlook for Improvement

In addi"on to believing that ethical standards have improved, respondents also reported being more op"mis-

"c about future improvements. Figure 2 shows that the vast majority (74.4%) believe ethics will improve over the next

ten years, up more than 10% from

1992 levels. This increasingly op"-

mis"c view towards improving

ethics may be a?ributable to post

- GFC reforms and a belief that the

reform effort, with its focus on

addressing unethical behavior, will

actually improve the situa"on.

1) How have ethical standards changed

over the past 10 years?

2) How are ethical standards likely to

change over the next 10 years?

3) How do you perceive the actual ethical

behavior of certain other professionals?



5

How ethical are investment professionals,

rela"vely speaking?

An interes"ng insight into how investment professionals perceive their own professional ethical posi"on is

provided by asking how they compare their profession’s ethical standing to those of other professions. As presented

in Figure 3, the only profession

perceived as being significantly

ethical is that of engineers fol-

lowed in the most recent results,

maybe surprisingly, by a?orneys.

Engineers were rated as either

Moderately or Highly ethical by

84.1% of respondents (50.0% and

34.1%, respec"vely), as compared

with a?orneys at only 62.2% and

investment professionals a close

third at 60.4%. They are followed

by corporate managers at 47.8%,

commercial bankers at 39.6% and

finally, well back in the pack, poli-

"cians who garnered a meager 13.2%. One interes"ng aside about poli-

"cians is the notable percentage of respondents that reported poli"-

cians as being unethical. Just over 50% (50.5%) of respondents rated

poli"cians as “Not Ethical” with an addi"onal 36.3% ra"ng them as on-

ly “Somewhat Ethical”. While this research is focused on investment

and financial professionals, clearly poli"cians have some work to do on

addressing what appears to be a significant distrust of their profession-

al behavior.

Have Things Improved?

When compared with their results in 1992, both investment

professionals and commercial bankers saw a significant decline in the

percep"ons of their ethicality from inside the profession. While in

1992, investment professionals received the equivalent of low ‘B’

grade (2.85) for ethics they declined to a solid ‘B-’ (2.67) by 2014. Com-

mercial bankers faired even worse falling from a low ‘B’ (2.81) to a high

‘C’ (2.25) when it came to ethical percep"ons. These declines are even

more interes"ng when one considers that they are being reported

from inside the financial profession itself. This precipitous fall in per-

cep"ons of ethicality among investment professionals and commercial

bankers is consistent with having only just immerged from a global fi-

nancial crisis, the founda"ons of which have been laid at the feet of

bankers and other finance professionals.

0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%80.0%90.0%100.0%

2014201420142014

Highly Ethical

Moderately Ethical

Somewhat Ethical

Not Ethical

Figure 3

Figure 4

2014 1992 Diff

Not 15.6% 10.6% 5.0%

Somewhat 22.2% 41.2% -19.0%

Moderately 48.9% 41.2% 7.7%

Highly 13.3% 7.0% 6.3%

Weighted Rating 2.60 2.45 0.15

2014 1992 Diff

Not 15.4% 2.0% 13.4%

Somewhat 45.1% 25.3% 19.8%

Moderately 38.5% 62.1% -23.7%

Highly 1.1% 10.6% -9.5%

Weighted Rating 2.25 2.81 (0.56)

2014 1992 Diff

Not 10.0% 1.5% 8.5%

Somewhat 42.2% 23.0% 19.2%

Moderately 43.3% 69.6% -26.3%

Highly 4.4% 5.8% -1.4%


2014 1992 Diff

Not 5.5% 1.3% 4.2%

Somewhat 34.1% 23.3% 10.8%

Moderately 48.4% 64.8% -16.5%

Highly 12.1% 10.6% 1.5%


2014 1992 Diff

Not 50.5% 41.4% 9.2%

Somewhat 36.3% 48.1% -11.9%

Moderately 12.1% 9.3% 2.8%

Highly 1.1% 1.3% -0.2%


2014 1992 Diff

Not 2.2% 0.0% 2.2%

Somewhat 13.2% 4.1% 9.1%

Moderately 50.5% 55.2% -4.7%

Highly 34.1% 40.7% -6.6%


Investment Pro fess iona lsInvestment Pro fess iona lsInvestment Pro fess iona lsInvestment Pro fess iona ls

Co rpo ra te managersCo rpo ra te managersCo rpo ra te managersCo rpo ra te managers

Commerc ia l bankersCommerc ia l bankersCommerc ia l bankersCommerc ia l bankers

Atto rneysAtto rneysAtto rneysAtto rneys

Eng ineersEng ineersEng ineersEng ineers

Po litic iansPo litic iansPo litic iansPo litic ians



6

Answer Op tionsAnswer Op tionsAnswer Op tionsAnswer Op tions No t Ethica lNo t Ethica lNo t Ethica lNo t Ethica lSomewha t Somewha t Somewha t Somewha t

Ethica lEthica lEthica lEthica l

Mode ra te ly Mode ra te ly Mode ra te ly Mode ra te ly


H ighly H ighly H ighly H ighly

Ethica lEthica lEthica lEthica lWght. Ra tingWght. Ra tingWght. Ra tingWght. Ra ting RankingRankingRankingRanking

Attorneys 15.6% 22.2% 48.9% 13.3% 2.60 3333

Commercial bankers 15.4% 45.1% 38.5% 1.1% 2.25 5555

Corporate managers 10.0% 42.2% 43.3% 4.4% 2.42 4444

Investment professionals 5.5% 34.1% 48.4% 12.1% 2.67 2222

Politicians 50.5% 36.3% 12.1% 1.1% 1.64 6666

Engineers 2.2% 13.2% 50.5% 34.1% 3.16 1111

2.462.462.462.46

2014201420142014

Answer Op tionsAnswer Op tionsAnswer Op tionsAnswer Op tions No t Ethica lNo t Ethica lNo t Ethica lNo t Ethica lSomewha t Somewha t Somewha t Somewha t




H ighly H ighly H ighly H ighly

Ethica lEthica lEthica lEthica lWght. Ra tingWght. Ra tingWght. Ra tingWght. Ra ting Rank ingRank ingRank ingRank ing

Attorneys 10.6% 41.2% 41.2% 7.0% 2.45 2222

Commercial bankers 2.0% 25.3% 62.1% 10.6% 2.81 3333

Corporate managers 1.5% 23.0% 69.6% 5.8% 2.80 3333

Investment professionals 1.3% 23.3% 64.8% 10.6% 2.85 3333

Politicians 41.4% 48.1% 9.3% 1.3% 1.70 6666

Engineers 0.0% 4.1% 55.2% 40.7% 3.37 1111

2.662.662.662.66

1992199219921992

38.6%

v.

72.7%

As figures 5 shows, while their overall ethicality ra"ng fell from the 1992 results, their ranking actually im-

proved from being essen"ally "ed with commercial bankers and corporate managers to being ranked second behind

only engineers. This improvement in their raking was due more to a precipitous fall in their percep"ons of the ethics or

corporate managers and even more drama"c downgrading of their commercial banking brethren. The decline in per-

cep"ons of banker ethics is notable. In the 1992 survey a significant majority (72.7%) of those ques"oned considered

commercial bankers be moderately or highly ethical, while that number dropped to just under 40% (39.6%) in 2014.

Clearly the role of bankers in the GFC along with repeated public shaming of bankers ethical behavior in the

media post-GFC appears to have taken its reputa"onal toll. Yet, it is interes"ng that while the investment professionals

surveyed noted some decline in their own professional ethics over the period from 1992 to 2014, they did not report

perceiving the same level of ethical decline in their own profession as compared to others, as shown in Figure 4. This

distancing of the investment professionals from the banking community could be the result of an ethical self-repor"ng

bias, wherein one tends to see one’s self as more moral than others. This added with the public shaming of bankers

may have resulted in a desire to not be seen to be as “bad as them”. This apparent percep"on gap needs to be over-

come, if investment professionals are to be convinced there is a need to improve ethical development within their own

profession.

Impact of the GFC on Percep"ons

of Investment Professional and

Commercial Banker Ethicality

Figure 5



7

Sources, Cues and Drivers:

Improving ethics in the finance profession

PuJng aside the debate as to whether ethical failures were the root cause of the

financial crisis, one can hardly argue that providing ongoing training that raises the

awareness of ethical issues and provides financial professionals with the tools to make

“the right choices” when confronted with ethical dilemmas would be a “bad” thing. Yet,

one could argue and many have about the right way to go about such training and about

how to ensure that such training is taken seriously and implemented in an effec"ve man-

ner. While a full discussion of these issues would fill volumes, the research findings pre-

sented in this sec"on are meant to help ground ethical development and training pro-

grams in a framework that is consistent with what the recipients perceive to be effec"ve

sources for training, taking into considera"on from where these professionals take their

ethical cues and based on what mo"vates them to behave ethically, versus what does

not.

“It [the US Senate Fi-

nancial Crisis Report]

shows without a doubt

the lack of ethics in

some of our financial

ins�tu�ons who em-

braced known conflicts

of interest to accom-

plish wealth for them-

selves, not caring

about the outcome for

their customers.”

Senator Tom Coburn

(R-Okla.)

Sources for Ethical Training and Development

In an a?empt to understand how to more effec-

"vely structure ethical training and development pro-

grams, the professionals par"cipa"ng in this survey

were asked to provide their insights into what they con-

sider as sources for ethical training and educa"on. They

were asked to assess “how much of an investment pro-

fessional’s training and educa"on about ethical behav-

ior should come from each” of six poten"al sources (see

insert).

Sources of Training/Educa*on

1. School or college

2. Home environment

3. Professional organiza"ons

4. Employing firm (training)

5. Senior management (on the job)

6. Religious educa"on

When asked what they perceive to be the best sources for ethical training, respondents overwhelmingly point-

ed to Senior management as the number one source by a fairly significant margin with over 80% of respondents indi-

ca"ng that learning by example (i.e., ethical leadership) is substan"ally important to their own ethical development.

When combined with the second

ranked result that a substan"al

amount of training should come from

internal employer based training pro-

grams, it seems clear that the role of

the employing firm and management

in the ongoing ethical development of

financial professionals within the firm

is not only impacMul but is seen to be

essen"al in the development and im-

plementa"on of programs meant to

ins"ll ethical values in the firm.

Answer Op tionsAnswer Op tionsAnswer Op tionsAnswer Op tions NoneNoneNoneNoneSmall Sma ll Sma ll Sma ll

AmountAmountAmountAmount

Modera te Modera te Modera te Modera te


Substantia l Substantia l Substantia l Substantia l


We ighted We ighted We ighted We ighted

Ra tingRatingRatingRatingRankRankRankRank

Senior management (by example) 0.0% 1.1% 18.5% 80.4% 3.79 1111

Employing firm (training programs) 0.0% 6.5% 28.3% 65.2% 3.59 2222

Home environment 0.0% 10.9% 23.9% 65.2% 3.54 3333

Professional organizations 0.0% 5.4% 35.9% 58.7% 3.53 4444

School or college 1.1% 22.8% 40.2% 35.9% 3.11 5555

Religious education 35.9% 25.0% 22.8% 16.3% 2.20 6666

Other 59.6% 19.1% 12.8% 8.5% 1.70 7777

2014201420142014

Figure 6



8

How Effec*ve are Current Sources?

Respondents were then asked to assess how effec"ve each of these six sources of ethical training have actually

been according to their own personal experience. Analysis of the independent results of these queries yields insight

into effec"ve program design while a considera"on of the combined results of these two ques"ons demonstrates a

current and historical disconnect between how training has been structured and how it might be more effec"vely

structured.

As revealed in response to the efficacy ques"on, these professionals report that their home environment has

been the most effec"ve source of ethical training while they reported that firm training and senior management have

been fairly moderate influences on their ethical training, even ranking the role of professional organiza"ons above

their own firm’s efforts. This is consistent with the historical approach to ethical training for professionals, which has

tended to be, generally speaking, relegated to a few hours of professional development conducted under the guidance

of, or pursuant to a requirement set out by, a self-regulator/professional organiza"on. Even though professional or-

ganiza"ons ranked second only behind home environment, their effec"veness is rated as highly effec"ve with only

about 26% of respondents indica"ng that such en""es are “Highly Effec"ve” with almost of fi9h (19.3%) of par"ci-

pants repor"ng that these organiza"ons are only “Slightly Effec"ve”. Notably, the efficacy of organiza"ons in the role

of ethical development has not changed significantly over the past twenty plus years with respondents in the 1992 sur-

vey ra"ng professional organiza"ons at 2.91 overall as compared to the weighted ranking of 3.02 in 2014, with “Very

Effec"ve” ra"ngs actually falling from 26.8% in 1992 to 26.1% in 2014.

How to Improve Ethical Training Efficacy?

Reliance on professional organiza"ons to provide ethical training and development, while convenient and ad-

ministra"vely efficient, is not effec"ve. In order for such training to yield actual, ongoing, tangible results it would ap-

pear from the findings reported in the discussion of sources and cues (see Figure 6) that ethics training needs to be

lead from inside the professional’s workplace through both structured training programs that involve senior manage-

ment as facilitators and teachers and also informal, unstructured, “teachable moments”, where senior management

specifically discusses an issue in context, points out the ethical dilemma, and discusses the alterna"ve solu"ons and

how any one par"cular resolu"on either comports or not with the firm’s ethical culture. Combining ethical develop-

ment and ethical leadership in context, along with professional organiza"on training appears to be the recipe for ad-

vancing the ethical development of investment professionals and as such, regulators, professional organiza"ons and

firms should work together in a manner that structures training and ethical development throughout all firms in the

industry. This approach should also u"lize an understanding of the drivers of ethical behavior as these professionals

see them. An analysis of these drivers and the implica"ons for regula"on is the next subject of this report.

Answer Op tionsAnswer Op tionsAnswer Op tionsAnswer Op tions Not Effe c tiveNo t Effe c tiveNo t Effe c tiveNo t Effe c tiveSlightly Slightly Slightly Slightly

Effec tiveEffec tiveEffec tiveEffec tive


Effe c tiveEffe c tiveEffe c tiveEffe c tive

Ve ry Ve ry Ve ry Ve ry

Effec tiveEffec tiveEffec tiveEffec tive

Weighted We ighted We ighted We ighted

Ra tingRatingRatingRatingRankRankRankRank

Home environment 0.0% 12.2% 24.4% 63.3% 3.51 1111

Professional organizations 2.3% 19.3% 52.3% 26.1% 3.02 2222

Employing firm (training programs) 12.4% 28.1% 33.7% 25.8% 2.73 3333

Senior management (by example) 12.4% 36.0% 28.1% 23.6% 2.63 4444

School or college 14.6% 32.6% 29.2% 23.6% 2.62 5555

Formal religious education 46.1% 33.7% 10.1% 10.1% 1.84 6666

2014201420142014

In your op inion, how e ffe c tive has each o f the fo l lowing been in p rov id ing you In your op inion, how e ffe c tive has each o f the fo l lowing been in p rov id ing you In your op inion, how e ffe c tive has each o f the fo l lowing been in p rov id ing you In your op inion, how e ffe c tive has each o f the fo l lowing been in p rov id ing you

with use ful tra ining and educa tion about e thica l behav io r?with use ful tra ining and educa tion about e thica l behav io r?with use ful tra ining and educa tion about e thica l behav io r?with use ful tra ining and educa tion about e thica l behav io r?

Figure 7



9

What is Effec*ve in Deterring Unethical Behavior?

Assuming, as previously discussed, that ethical training and development needs to be led by the firm through

formal training programs that involve senior management and through informal mechanisms which capture ethical les-

sons learned and support their dissemina"on throughout the organiza"on, what are effec"ve mo"vators in driving for-

ward both ethical behavior and associated training? What do professionals in the industry find to be effec"ve deter-

rents to unethical behavior and what does this mean for the role of regulators, self-regulatory/professional organiza-

"ons and others in regula"ng unethical behavior?

Based on the survey results,

the ins"tu"on that investment profes-

sionals rank as having the greatest de-

terrent effect are government regula-

tors and this ranking has not changed

since 1992. This may be because of the

level of penalty that can be imposed

upon the professional and all the im-

plica"ons that such sanc"ons entail. It

would appear that command and con-

trol regula"on s"ll has some appeal in

deterring nega"ve behaviors and driv-

ing through ethical norms. Even more

so in 2014, as survey respondents in

this la?er survey have asserted that

regulators have an even stronger de-

terrent effect than they did in 1992. This being the case, there is obviously a role to be played by the regulator in sup-

por"ng and driving forward the ethical training agenda. Regulators may not need to be directly involved in the develop-

ment process given the role firm training programs and senior management are expected to play but having a regulator

that mandates such programs exist and that provides for sanc"ons on either the firm for failure to provide such pro-

grams and specific individuals for failure to par"cipate in them would be an effec"ve mechanism for driving the project

forward. Something akin to FCPA and UK Bribery Act defenses for having a compliance program may work in this con-

text, whereby companies are required to provide such programs or else face sanc"ons themselves for employee viola-

"ons of code of ethics or the like. This would require some careful thinking on how best to incorporate such a scheme

but something along these lines could work. As an alterna"ve and u"lizing a common U.S. regulatory tool, govern-

ments could provide companies that provide ethical training for employees with a tax credit of some sort based on

costs incurred or "me spent by employees par"cipa"ng in such trainings. Again, u"lizing regulatory tools with the back-

ing of some sort of government regulator appears to be the most effec"ve method of deterring unethical behavior and

correspondingly ensuring ethical development is taken seriously and driven throughout the regulated enterprise.

What Doesn’t Work?

The survey responses appear to demonstrate that two commonly used methods of driving ethical behavior

into the profession over the past twenty years or more, Self-regula"on and Codes of Ethics, are seen as ineffec"ve de-

terrents. More than a third (34.1%) of respondents find self-regulatory based sanc"ons to be only ‘Slightly Effec"ve’ or

‘Not Important’ and the results are even worse for Codes of Ethics, where almost half (46.7%) of respondents found

these to be also be only slightly effec"ve at best with almost one in five (17.8%) indica"ng they are ‘Not Important’.

Answe r Op tionsAnswe r Op tionsAnswe r Op tionsAnswe r Op tionsNo t No t No t No t

Impo rtantImpo rtantImpo rtantImpo rtant

S lightly S lightly S lightly S lightly




Very Very Very Very



Ra tingRa tingRa tingRa tingRankRankRankRank

Sanctions imposed by a regulator 3.3% 17.8% 22.2% 56.7% 3.32 1111

Concern that family or friends will find out 5.5% 18.7% 30.8% 45.1% 3.15 2222

Moral or religious beliefs 12.2% 21.1% 35.6% 31.1% 2.86 3333

Being sanctioned by a self-reglatory 11.0% 23.1% 35.2% 30.8% 2.86 3333

Having a published code of ethics 17.8% 28.9% 32.2% 21.1% 2.57 5555

Answe r Op tionsAnswe r Op tionsAnswe r Op tionsAnswe r Op tionsNo t No t No t No t


S lightly S lightly S lightly S lightly




Very Very Very Very




Sanctions imposed by a regulator 2.5% 14.9% 43.1% 39.5% 3.20 1111

Moral or religious beliefs 9.0% 20.4% 25.4% 45.2% 3.07 2222

Concern that family or friends will find out 7.3% 28.9% 34.7% 29.1% 2.86 3333

Being sanctioned by a self-reglatory 12.6% 34.7% 33.4% 19.3% 2.60 4444

Having a published code of ethics 21.0% 40.2% 25.8% 13.1% 2.31 5555

2014201420142014

In your op inion, how impo rtant is each o f the fo llowing in de terring In your op inion, how impo rtant is each o f the fo llowing in de terring In your op inion, how impo rtant is each o f the fo llowing in de terring In your op inion, how impo rtant is each o f the fo llowing in de terring

the une thica l behavior o f investment p ro fess iona ls?the une thica l behavior o f investment p ro fess iona ls?the une thica l behavior o f investment p ro fess iona ls?the une thica l behavior o f investment p ro fess iona ls?

1992199219921992

Figure 8



10

Do Codes of Ethics Really Help?

have been increasing u"lized over the past twenty years as a sort of internal legisla-

�on, meant to provide professionals and corporate employees with a set of organiza-

"onal or professional standards of behavior. These codes took on special significance in the U.S. post-Sarbanes-Oxley,

as this legisla"on required those publically traded companies having a code of ethics to publish them and any modifica-

"ons made thereto. Given this emphasis on Codes of Ethics as a means of enhancing professional ethics, this survey

asked ques"ons specifically focused on inquiring into the perceived effec"veness of such codes and their importance

for investment professionals. The results were not encouraging.

Firm Perspec*ves on Codes of Ethics

While there has been an increased focus on Codes of Ethics in the academic and even poli"cal realms, it appears that

this has not crossed over into prac"ce as the percentage of reported firms that publish their own code of ethics has not

increase over the past twenty two years and has held

steady at just about 50%. Apparently, someone is either

not geJng the message or these firms have consciously

decided that having such Codes are not par"cularly benefi-

cial to their organiza"ons. Either way, the usefulness of

such codes at least inside investment firms does not appear

to have taken hold. This then raises a ques"ons as to the

perceived effec"veness or important of such codes among

the professionals working inside these firms.

Individual Perspec*ves on Codes of Ethics

As for how individual professionals perceive the importance of a Code of Ethics, Figure 8 demonstrates that

overall that individual percep"ons as to how important a Code of Ethics is as a deterrence mechanism rose 11.1 per-

cent from just above Slightly Important (2.31/4.0) toward the level of being Moderately Important (2.57/4.0). This is

s"ll just barely above the midpoint in the scale meaning that even individuals aren’t convinced as to whether they are

really beneficial or not. In fact, having a Code of Ethics was rated dead last among the five deterrents in both periods.

Codes of Ethics

52.2%

47.8%

Does your firm publish its own code of ethics separate from that of any Does your firm publish its own code of ethics separate from that of any Does your firm publish its own code of ethics separate from that of any Does your firm publish its own code of ethics separate from that of any professional organization's?professional organization's?professional organization's?professional organization's?

Yes

No 51.6%48.4%

Does your firm publish its own code of ethics separate from that of any Does your firm publish its own code of ethics separate from that of any Does your firm publish its own code of ethics separate from that of any Does your firm publish its own code of ethics separate from that of any professional organization's?professional organization's?professional organization's?professional organization's?

Yes

No

Finally, a look at the differences

in importance as reported by those in

companies having a code versus those

that do not also shows that those pro-

fessionals working in a firm with a Code

of Conduct reported that their ra"ng of

the importance of the Code of Conduct

is generally the same as that of those

working in a company without a Code

of Conduct, with only 51 percent of

each group ranking the importance as

“Very” and “Moderately Important”

with 47 percent ranking them as only

“Slightly” or “Not Important” at all.

One addi"onal point, those in-

dividuals working in firms without a

Code of Conduct were actually more

inclined to assess the importance of a

Code of Conduct as “Very Important”

than were those who work in a compa-

nies that have a Code (35 percent v. 30

percent, respec"vely). It appears that

the much lauded Code of Conduct has

all but failed to accomplish its mission

as an effec"ve tool for improving ethics

at either the firm or individual level.

21%

30%

32%

15%

Have a Code

Very

Moderately

Slightly

Not

51%47%

16%

35%26%

21%

Don't Have a Code

Very

Moderately

Slightly

Not

51%47%

Figure 9

Figure 10



11

The Role of the Compliance Officer Increasing numbers, visibility and influence

In the post-GFC world of increased regulatory mandates and legisla"ve fixes, compliance officers have seen

their professional stock on the rise, so to speak. Financial ins"tu"ons across the board have added a steady stream of

compliance officers to their rosters and at increasingly higher levels. These are borne out in the responses by survey

par"cipants who reported a 15 percent increase in the number of firms

having a compliance officer from just over three quarter (75.3%) of firms

back in 1992 to now almost 90 percent (86.7%). Unlike previously dis-

cussed in the context of codes of conduct, clearly ins"tu"ons find value in

having a compliance officer as evidenced by the increasing number of

firms that have them. Addi"onally, the number of individuals who report

that they know the name of their compliance officer has also increase by

just over 5 percent from 1992 levels (85.9% v. 91.0%). Not that simply

knowing the name is any indica"on of effec"veness but it is a clear sign

that not only are firms adding a greater number of compliance officers

but their profiles within the firm are being raised such that most invest-

ment professionals now know who their compliance officer is, and argua-

ble, whom to contact in the case of some ethical viola"on or issue they

spot. This increase profile is also evidenced by the level at which compli-

ance officers sit within the organiza"on.

In 1992, the vast majority (68.1%) of compliance officers reportedly sat at either the vice-president (37.8%) or

senior vice-president (30.3%) level. This had changed significantly by 2014, with a no"ceable trend toward migra"ng

compliance officers up the corporate chain of command with many of them now seated at the director level. The num-

ber of compliance officers now occupying a director level seat rose by almost 30 percent from just around 5 percent in

1992 to just under 35 per-

cent in 2014 accompanied by

a precipitous drop off of

compliance officers at the

vice-president level, down

32.6 percent from 1992 lev-

els. The increasing numbers,

viability and influence within

the firm demonstrates the

increased value these officers appear to add and can be useful in suppor"ng senior management in pushing forward

efforts to increase ethics by both direct training involvement and through oversight of ethical development, training,

and monitoring programs.

86.7%

13.3%

2014201420142014

Yes No

75.3%

24.7%

1992199219921992

Yes No

5.1%

34.6%

1.3%

17.9%

5.1%

19.2%

16.7%

2014201420142014

Chairman of the board

Director

President

Executive or senior vice president

Vice president

Below the vice president level

Not certain

2.0% 5.4%4.4%

30.3%

37.8%

6.8%

13.3%

1992199219921992

Chairman of the board

Director

President

Executive or senior vicepresident

Vice president

Below the vice president level

Not certain

Answe r Op tionsAnswe r Op tionsAnswe r Op tionsAnswe r Op tionsResponse Response Response Response

PercentPercentPercentPercent

Response Response Response Response

CountCountCountCount 2014201420142014 1992199219921992 Diff.D iff.D iff.D iff.Answer Op tionsAnswer Op tionsAnswer Op tionsAnswer Op tions


Pe rcentPe rcentPe rcentPe rcent


CountCountCountCount

Yes 91.0% 71 91.0% 85.9% 5.1% Yes 85.9% 256

No 9.0% 7 9.0% 14.1% -5.1% No 14.1% 42

19921992199219922014201420142014

Do you know the name of your firm's compliance officer?Do you know the name of your firm's compliance officer?Do you know the name of your firm's compliance officer?Do you know the name of your firm's compliance officer?

Figure 11

Figure 12

Figure 13



12

Given the expanded focus on ethics over the past twenty plus years through adop"on of Codes of Ethics, in-

creasing involvement of both government and self-regulatory agencies, addi"onal compliance officers and the like, the

ques"on becomes, “has there been any measurable impact on ethical behavior or at least the percep"on of be?er ethi-

cal behavior?” When viewed overall, the answer is apparently, “Yes, it has”. When asked to report on the frequency

with which they witnessed unethical behavior, survey par"cipants in 2014 reported on the whole that they witnessed

unethical behavior less frequently then those who par"cipated in the 1992 survey. While there was some shi9ing

among the nine categories of unethical behavior that respondents were requested to assess, for the most part there

was a decline in the reported frequency of each type of unethical behavior with the excep"ons of “Plagiarizing an-

other’s work” and “Failure to disclose conflicts of interest”. Of these two unethical behaviors, plagiarizing another’s

work was reported as being about 8 percent more frequent in 2014 then it was in 1992 and jumped in the rankings

from the seventh most frequent unethical behavior to number two, just behind failure to use due diligence, which re-

tained it’s top spot 22 even twenty-two years on.

Overall Frequency of Unethical Behaviors

The decline in reported un-

ethical behavior fell drama"-

cally over the past twenty

years with an average 37

percent repor"ng either Pe-

riodic or Frequent viola"ons

in 2014, down from 45 per-

cent in 1992. Fully, the aver-

age percentage of those re-

por"ng Never seeing any of

the unethical behaviors

listed rose almost 72 percent

(71.9%) from only 17 percent

in 1992 to just under 30 per-

cent (29.2%) in 2014. Fre-

quently reported behavior

held steady over the period

at about 12 percent. One

ironic finding is the preva-

lence of “front running” or

put more correctly, the lack

of front running. In 1992, front running was ranked number 8 in frequency and yet this issue was iden"fied by regula-

tors as a major problem and addressed, thus leading to a fall in the ranking to number 9 . Not a resounding victory con-

sidering the star"ng point. Be?er results were had in regards to insider trading which fell from 3rd place to 7th.

The Impact on Ethical Behavior Frequency of Unethical Ac"vity

Neve rNeve rNeve rNeve r Ra re lyRa re lyRa re lyRa re ly Pe riod ica llyPe riod ica llyPe riod ica llyPe riod ica lly FrequentlyFrequentlyFrequentlyFrequentlyWeighted Weighted Weighted Weighted


Failure to use diligence 15% 35% 30% 20% 2.54 1111

Plagiarizing another's work 22% 28% 34% 16% 2.43 2222

Writing reports toward conclusions 29% 30% 30% 12% 2.25 3333

Not dealing fairly with all clients 23% 42% 24% 10% 2.21 4444

Misrepresenting a firm's performance 27% 36% 25% 11% 2.20 5555

Failure to disclose conflicts of interest 31% 35% 20% 13% 2.16 6666

Communicating inside information 37% 32% 18% 13% 2.08 7777

Trading based on inside information 38% 30% 23% 9% 2.02 8888

Front running 40% 32% 21% 8% 1.97 9999

29%29%29%29% 33%33%33%33% 25%25%25%25% 12%12%12%12% 2.212.212.212.21

2014201420142014

Neve rNeve rNeve rNeve r Ra re lyRa re lyRa re lyRa re ly Pe riod ica llyPe riod ica llyPe riod ica llyPe riod ica lly FrequentlyFrequentlyFrequentlyFrequentlyWeighted Weighted Weighted Weighted


Failure to use diligence 7% 26% 49% 18% 2.77 1111

Writing reports toward conclusions 12% 32% 40% 16% 2.60 2222

Communicating inside information 12% 33% 39% 16% 2.59 3333

Trading based on inside information 17% 35% 35% 13% 2.44 4444

Not dealing fairly with all clients 19% 39% 32% 10% 2.34 5555

Misrepresenting a firm's performance 19% 43% 32% 5% 2.23 6666

Plagiarizing another's work 17% 46% 32% 5% 2.25 7777

Front running 26% 39% 27% 8% 2.18 8888

Failure to disclose conflicts of interest 24% 45% 26% 5% 2.13 9999

17%17%17%17% 38%38%38%38% 35%35%35%35% 11%11%11%11% 2.392.392.392.39

1992199219921992

Figure 14



13

The Role of Senior Management

One prominent outcome of this survey is the role senior management can and should play in the development

of an ethical ethos within an organiza"on. Recall from page 7, when asked how much of an investment professional’s

training and educa"on should come from certain sources “Senior Management” (i.e., by example) was ranked number

1 as it was in 1992 with over 80 percent of respondents claiming a Substan"al Amount should come from their leaders

with a full 99 percent expressing a desire to see management provide a Moderate to Substan"al Amount of this train-

ing. In fact, the desire to see senior management play a role in ethical development has increased almost a full 30

point from 1992 levels. Senior management must take the lead in not just seJng an ethical tone at the top but needs

to take "me to formally address ethical issues and express the organiza"on’s view as to what it means to “do the right

thing”.

Part of what makes senior management involvement so important is the high opinion employees have of the

ethical disposi"on of their bosses. When asked if they believe that senior management “seeks high ethical standards

for all employees” an overwhelming majority (77.5%) answered “Yes”. This is a resounding expression of their belief in

senior management and the faith placed in them. And while this result is significantly lower than their opinion of sen-

ior management’s support of ethicality in 1992 (86.6%), it is s"ll abundantly clear that investment professionals want

to take their cues from their bosses and leaders and that no other group in the regulatory or governance space can

have as much impact on ins"lling ethical values in an organiza"on.

Yet, this group has apparently not been living up to the expecta"ons set by their employees as evidenced in

the response to the ques"on as to how effec"ve senior management has actually been in providing ethical training

and educa"on (P. 8). Again, even though 99 percent of employees expressed a desire to have senior management be

the major source of ethical training, only 52 percent of these same respondents felt that senior management has actu-

ally been either “Moderately” or “Very” effec"ve in doing so, placing it fourth in the rankings. This is an expecta"ons

gap of 47 percent and is a decline from 1992 levels where senior management was adjudged as 59 percent

“Moderately” or “Very” effec"ve. Senior management is failing to do its part in seJng the appropriate tone not just at

the top but throughout the organiza"on and must do more to promote an ethos of ethics within organiza"ons.

Senior management can provide real world examples, express the ethical values that a firm desires, and lever-

age the power of highly influen"al posi"ons within an organiza"on. They are there to be modelled a9er. They have

achieved their posi"on because it is believed they demonstrate the values that organiza"on admires and thus can

serve as examples of how things should be done. It should come as no surprise that senior management is the exam-

ple that will be followed. Any ethical development program must leverage this powerful force in order to succeed.

2014201420142014

Answe r Op tionsAnswe r Op tionsAnswe r Op tionsAnswe r Op tionsResponse Response Response Response



CountCountCountCount 2014201420142014 1992199219921992 Diff.D iff.D iff.D iff.Answe r Op tionsAnswe r Op tionsAnswe r Op tionsAnswe r Op tions


Pe rcentPe rcentPe rcentPe rcent



Yes 77.5% 69 77.5% 86.6% -9.1% Yes 86.6% 343

No 22.5% 20 22.5% 13.4% 9.1% No 13.4% 53

1992199219921992

77.5%

22.5%

2014201420142014

Yes

No

86.6%

13.4%

1992199219921992

Yes

No

Figure 16



14

Law v. Ethics

The false dichotomy

In the context of the GFC and other financial crises, one commonly expressed conceptualiza"on used to excuse unethical

decisions made by financial professionals has been that their ac"ons were not illegal, however unethical their ac"vi"es may

have been. This view that the law and ethics are separate and dis"nguishable represents what could be called a false dichot-

omy between law and morality. While a full philosophical discussion of this issue is well beyond the scope of this report, a

prac"cal point can be made regarding the fairly commonly accepted no"on that ethics and legality are dis"nct. This no"on

can, and arguably is, o9en used as a method for ra"onalizing unethical behavior and encourages ethical lapses in judgment

by tapping into the “it’s OK if I don’t get caught” ra"onale. The arguably false dis"nc"on between law and morality allows an

individual, who knows what they are doing is wrong, with an out.

They can say either publicly or in their own mind, “well, it’s not

illegal.” This is a very powerful ra"onaliza"on technique and it’s

value should not be underes"mated as evidenced be the response

of the survey par"cipant to the ques"on, “When you are faced

with a choice between an ethical obliga"on or a legal obliga"on,

which are you more likely to fulfill?”

Almost two thirds of respondents claimed they were more likely to fulfill a legal obliga"on over a ethical one. To be

clear the choice here is not a choice between right and wrong (as ethical dilemmas are o9en characterized) but a choice be-

tween two right answers, one being the ethical response and the other the legal requirement. This preference to follow the

law is most likely based on the poten"al impact of not following the law (fines, jail or other punishment) versus the down-

side of not doing the ethical thing which are arguably lesser “punishments” (feeling bad, facing public scorn, etc.). Yet, it

could be argued that the law is merely a form of standardized ethics, a set of democra"cally agreed upon ethics which are

valued broadly enough to a?ach punishment for viola"ons thereof, and that the dis"nc"on between law and ethics is a false

one, that viola"ons of either the law or ethics are conceptually a viola"on of the same fundamental principle that one should

do what is considered “right”. This is exemplified by respondents agreement with the statement that “it is as important to be

ethical as it is to follow the law”.

Nearly 85 percent of those surveyed agreed with the posi"on that law and ethics are equally important while only

13 percent did not. This expressed personally held belief that the

law and ethics are equally important demonstrates that individuals

somehow understand that the two are basically the same, in the

sense that they represent the right thing to do. Yet, this belief fal-

ters when it becomes a choice between the two “goods”. This is

the classic ethical dilemma, a choice between two right things hav-

ing differing outcomes. While this report does not purport to have

an answer to what decision should be made in such cases, the results discussed here demonstrate that such choices need to

be considered as ethical choices and should be framed as such. Thus, the answer that “we have to do what the law requires”

should not be the end of the conversa"on and it should not serve as a ra"onale or excuse for avoiding the consequences of a

decision. This fundamental reframing of the law as ethics should serve as one of the fundamental training outcomes of any

ethical development program as these decisions, which should o9en be one of the most discussed, tend to be one of the

least based merely on the fact that the legal duty should always take precedent. This is not always that case and a fuller un-

derstanding of the ethical dilemma created by such conflicts as well as training and educa"on in the tools for ethical decision

making in these types of consequen"al situa"ons should form part of the ethical development of professionals to ensure

their ability to discuss these issues fully and promote be?er decision making.





The ethical obligation 36.7% 33

The legal obligation 63.3% 57

When you are faced with a choice between an ethical obligat ion When you are faced with a choice between an ethical obligat ion When you are faced with a choice between an ethical obligat ion When you are faced with a choice between an ethical obligat ion

or a legal obligat ion, which are you be more likely to fulf ill?or a legal obligat ion, which are you be more likely to fulf ill?or a legal obligat ion, which are you be more likely to fulf ill?or a legal obligat ion, which are you be more likely to fulf ill?





Strongly disagree 9.9% 9

Disagree 3.3% 3

Not Sure 2.2% 2

Agree 31.9% 29

Strongly agree 52.7% 48

It is as important to be ethical as it is to follow the law.It is as important to be ethical as it is to follow the law.It is as important to be ethical as it is to follow the law.It is as important to be ethical as it is to follow the law.

84.6%

Figure 17

Figure 18



15

Implica"ons for “Regula"ng”

Ethical Behavior?

In the wake of the GFC, actors at all levels of society have made asser"ons regarding the unethical culture with-

in the finance industry and research has been conducted to support these claims and yet li?le research has been done

as to what to do about the problem. This research specifically focused on obtaining the views of those inside the in-

vestment profession as to their own percep"ons of the ethicality of the profession and how these percep"ons have

changed over the past twenty plus years. In addi"on, the impressions of those in the profession as to how best to ad-

dress their own ethical training and development were sought to provide guidance as to how to approach the structur-

ing of development and monitoring programs aimed at ins"lling a more robust ethical ethos throughout the profes-

sion. The results of this research point to several factors which can be leveraged in the development of such programs

and called into ques"on the reliance on some classic tools.

1) Senior Management’s role in providing guidance and ins"lling ethics throughout the

organiza"on is a must. Senior Management needs to be ac"ve in the development of

ethical training programs, par"cipate in these programs alongside others, and must be

an integral part of both a formal process of training and educa"on as well as a source

for on-the-job informal ethical development. Employees are hungry for their guidance

and Senior Management, as stewards of the organiza"onal culture, need to be an

overt part of this process.

2) Regulators need to mandate a formal requirement that organiza"ons provide a

system of ethical development, monitoring and evalua"on. A simple requirement that

a company publish a code of ethics has proven completely ineffec"ve and simply will

not do the trick anymore. Something more formalized needs to be implemented and

given the deterrent effect of regulator ac"on, there is an important role to be played

by regulators in holding ins"tu"ons to account.

3) Compliance officers should be leveraged as the link between management and the

regulators. Compliance officers should be responsible for overseeing ethical programs

from the inside and they should be posi"oned at the board level to ensure effec"ve

ness and profile. It may even be that a new type of commi?ee should be created at the

board level similar to an audit commi?ee, with responsibili"es for approving ethical

programs, addressing ethical issues and resolving poten"al conflicts.

4) The old role of self-regulators as guardians of professional ethics needs to be re-

thought as these ins"tu"ons have been seen to be completely ineffec"ve at least in

the investment profession context. It may be that these ins"tu"ons have historically

not been seen as terribly important in contrast to their legal or accoun"ng brethren

and therefore they should be more integrated into the overall regulatory frame-

work.

As the research discussed here reveals a rethinking of how regulators, ins"tu"ons, senior management and other mar-

ket par"cipants can effec"vely structure a framework for developing programs aimed at improving ethical decision

making with the financial services industry is necessary and this report sets out an approach to addressing the problem.

We need a greater

focus on pro-

mo�ng individual

integrity. In the

Aristotelian tradi-

�on, virtues are

molded from hab-

it—developing

and nurturing

good behavior

over �me.

Chris"ne Lagarde

Managing Director

IMF



16

Jonathan LH Blaine is a Senior Associate at the interna-

"onal law firm of Baker & McKenzie (Bangkok) and a

doctoral student in the College of Law at The Australian

Na"onal University where he studies and researches

regula"on of financial professionals and markets as well

as teaches Law & Regula"on.

Jonathan is a USCPA (Hawaii), a Member of the Char-

tered Ins"tute of Securi"es and Investment (MCSI) and

is an Affiliate Member of the CFA Society of Thailand

and has over twenty years of finance, accoun"ng, taxa-

"on and regulatory advising experience.

He holds a BA in Interna"onal Rela"ons from Kent State

University, MBA in Business and Administra"on from

Chaminade University of Honolulu, JD from Seton Hall

Law School. He teaches in the areas of Law, Regula"on,

Finance, Accoun"ng and Taxa"on.

ABOUT THE AUTHOR

Jonathan LH Blaine (JD, USCPA, MCSI, MBA)

Founder and Director

Center for Financial Ethics

and Legal Studies (CFELS)

PH: +66.92.395.4554

EM: [email protected]

Documents

Investment Professional Ethics Survey Report