Ethics are not just good business. They are mandated by law.

The clearest embodiment of this is found in the requirement contained in the California Insurance Code Section which mandates that you not engage in conduct that is inconsistent with just and equitable principles of trade. This means that industry professionals must conform to unwritten, as well as written, ethical standards.

The Commissioner has the authority to enforce this principle, to effectively regulate ethics. This authority to establish ethical principles as law has long been upheld by the SEC.

In one decision, for example, the SEC noted that the requirement that members of self-regulatory organizations (SROs) follow high standards of commercial honor and just and equitable principles of trade is not limited to rules of legal conduct but incorporates broad ethical principles.

One noted legal scholar stated that the SEC was invariably placed in the ethics business when … [Congress] gave it jurisdiction to review NASD disciplinary proceedings for violation of its ethical structures

The Chicago School

This course will not focus on theoretical ethics. Nevertheless, there is an ongoing debate in the world of finance which is of interest and has pertinence to ethics. The so-called Chicago School of Law and Economics has begun to challenge current thinking on regulatory role models. The Chicago School challenges the assumption that the government is the most efficient mechanism for disciplining financial wrongdoers. Greatly simplified, the Chicago School asserts that the market will discipline those who engage in improper or undesirable activities.

The Chicago School is now helping to shape the way and manner in which the markets are regulated. To what extent that school of thought will be carried is unknown. For our purposes, it is sufficient to note that either the government or the market will sanction you if you do not adhere to high ethical standards.

The Shingle Theory

A key element of the regulatory structure for securities is the registration requirement for industry professionals. This allows the regulators to deny entry into the industry to persons who are unfit because of prior disqualifying conduct or because they do not meet minimum knowledge requirements. The registration concept is also related to the shingle theory. As a registrant, you are viewed to be holding yourself out to the public as a professional in whom the public places trust and confidence.

In other words, you are hanging out your shingle to the public, just as does a Doctor or a lawyer. The public expects that you will have all the skills and product knowledge that would be expected of a professional in your position.  They depend on you for professional advice in the management of their affairs.

SEC Views

Over fifty years ago, the SEC stated that inherent in the relationship between a dealer and his customer is the vital representation that the customer will be dealt with fairly and in accordance with the standards of the profession. The SEC stated that, as a broker, you are holding yourself out to the public as a professional who will act in accordance with trade customs.