The Code Of Ethics In Financial Industry

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Why do we need to understand ethics in finance?

The ethical issues in the financial industry affect almost everyone. People’s lives are inseparable from the financial industry, so the moral issues of the financial industry are also the focus of attention. Many people even think that the financial services industry has more ethical issues than other industries.

The ethics in the financial industry are different from the ethics in our daily lives. What you think is ethical behavior in life may be unethical in the financial industry. For example, we have good friends who talk about everything in our daily lives. You will share everything with him. This is out of trust in him. But those engaged in the financial industry must abide by ethics. But when he shares the work information with his friends, if he knows the information but does not tell his friends, it means that he does not trust his friends, which is our deep-rooted idea. But out of the ethical standards of the industry, if he tells his friends relevant information and exerts a bad influence, this is also a violation of the ethical standards. This puts employees in an ethical dilemma.

Today, global transaction volume is gradually expanding. Although unethical situations are limited, the impact of unethical behavior is more complex and severe in the Internet age. If the company’s senior management attempts to obtain benefits, modify the financial statements and fraud, it may even cause the company to fail. And we can also find that this kind of ethical behavior is more personally controlled than the environment, so it is important to understand the ethical standards of the financial industry and establish correct regulations for employees to follow

From a philosophical point of view, ethics is equivalent to a standard that regulates people’s code of conduct. If a person follows the good side of everyone’s common understanding, then this person will be said to be ethical. But if a person does not comply with ethical standards, he may not receive serious punishment. Therefore, in this angle, ethics needs to be maintained by human self-consciousness. But the ethics of financial markets are different. The ethics of financial markets are more like a bottom line. Anyone who touches the bottom line will be punished.

Financial markets affect a large number of people. Even if you do not work in the financial field, you are still a consumer in this field. Therefore, it is very important to maintain the ethics of the financial market. The basic requirement of financial market ethics is fairness. Not everyone can abide by the financial market ethics One of the characteristics of human beings is greed. Some people’s desire for money trumps their sense of financial market ethics. This kind of person will make ethical violation behavior that destroys financial market ethics. And the most common violation of financial market ethics is insider trading.

Cases on insider trading

Sometimes insiders sell or buy stocks based on their own secret information. Next, let me share a related typical case. In December 2001, the US Food and Drug Administration (FDA) announced that it would stop the production of a drug. This drug is an important part of the company’s production line. So after the news spread, the company’s stock fell sharply. Many investors have been affected. But the company’s CEO Samuel Waksal has not been affected. Martha Stewart is one of those who has not been affected. Because Martha Stewart’s broker Peter Bacanovic told her that Samuel Waksal sold her own company’s stock. The reason the broker knew the news was that Samuel Waksal was another of his clients. After knowing this news, Martha Stewart sold 4000 shares before the news came out. The total price of the stock sold is about 250,000 dollars. After this incident, many investors began to boycott Samuel Waksal. Samuel Waksal was also forced to resign as CEO. And she was eventually arrested in 2003, sentenced to more than seven years in prison, and fined 4.3 million dollars. In 2004, Martha Stewart was also convicted of insider trading. She was sentenced to five months in prison and fined 30,000 dollars. This is a good illustration of the truth that the risks of violating financial market ethics are much higher than the benefits. Obeying the financial market ethics can make the market fairer, and your investment can also get the return you deserve.

When a person is in a different position, the information that can be obtained is different. The higher the status of a person, the easier it is to obtain internal information. But the more likely he is to violate financial ethics. The most serious event in 2020 may be the outbreak of COVID-19. This global disaster had a serious impact on the economic development of the entire world. The US stock market has experienced four unprecedented blows due to the full-scale outbreak of COVID-19 in the United States. It had negatively affected almost everyone in the financial market. But some people are not affected by the stock market crash. When the epidemic in the United States was not as serious, US Senator Richard Burr knew the severity of the epidemic in advance. He learned that the epidemic in the United States may have a serious impact on the economy. But he spread the news to the people that the US epidemic can be controlled. At the same time, he sold 33 different stocks on February 13 with a total value of between 630,000 dollars and 1.7 million dollars. He is not the only one doing this kind of behavior. After investigation, at least four senators and about twenty members of the House of Representatives sold some financial assets at the same time. Although they have been found to be selling shares, they deny that they are using information unknown to the public for profit.

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Related laws and regulations

Therefore, maintaining financial market ethics requires specific means. If the relevant legal provisions are not stipulated to maintain the ethics of the financial market, there will always be such a person to disturb the fairness of the financial market. Once the financial market is no longer fair, the vitality and participation of the financial market will be greatly reduced. In fact, the law has relevant provisions. The company must report the transaction content to the company’s important internal management personnel and the board of directors and disclose the situation to the Securities and Exchange Commission (SEC). The definition of a company’s key internal personnel is a person who holds 10% or more of the company’s shares. If the Securities and Exchange Commission investigates the insider’s insider trading problem, it will be punished by law. Participants in insider trading will be fined three times their illegally obtained profits and will judge the length of jail time based on serious circumstances. This is stipulated in the ‘Internal Trading Sanctions Law’ promulgated in 1984 and the ‘Inside Trading and Securities Trading Law’ promulgated in 1988. But the law can only play a role of supervision and punishment. The most important thing is that each of us consciously abides by financial market ethics. If we do not touch this bottom line, then we will have a better financial market environment.

Conflicts of interests

Conflicts of interest is a condition in which a person has an interest that restricts that person’s ability to act in the interest of another when that person is responsible to act in that other person’s interest . In other words, financial managers should act in the interest of their clients instead of themselves.

Conflict of interest is a moral hazard. A company or its employee providing financial services realizes the interests of one party at the expense of the interests of the other party. Conflicts of interest can significantly reduce the quality of information in financial markets and make the problem of information asymmetry more serious. It will also block financial markets from transferring funds to the most productive investment opportunities and resulting in lower efficiency of financial markets and economic operations.

Conflict of interest is a moral issue for financial managers. Financial services companies or their employees hide information or provide false information, thereby harming the interests of their customers. The investment bank may allocates some popular, undervalued initial public offerings (IPOs) to company executives who have potential business with the investment banks. This behavior is called spinning. Conflicts of interest may also happen in accounting institutions. Customers will put pressure on auditors and ask them to change their comments and opinions, otherwise their accounting and management business will be delivered to other companies. Auditors provide biased audit reports in order to expand or maintain audit business. Credit rating agencies evaluate the results that satisfy the securities issuing company. In the 2007-2008 subprime mortgage crisis, institutions that should provide reliable information to investors were motivated to deceive investors, and thus profited from investors and their customers. Conflicts of interest will also happen in universal bank. Banks make active promotions. However, customers need fair and rational suggestion.

Although the market can sometimes weaken the adverse effects of conflicts of interest, it is difficult to always effectively control the driving forces of those conflicts of interest. In 2002, Sarbanes-Oxley Act was introduced. It sets new requirement for all us public company boards, management and accounting firms. It is used to monitor and prevent conflicts of interest. The Global Legal Settlement was also introduced in 2002. First, it directly reduces conflicts of interest and requires investment banks to cut off the link between research and securities underwriting. It prohibits spinning. Second, it encourages investment banks to contain conflicts of interest themselves. Accused investment bank is fined $ 1.4 billion. It proposes specific measures to improve the quality of information in financial markets. It requires investment banks to disclose the content of recommendations provided by their analysts. Investment banks are required to sign 5-year contracts with no less than 3 independent research institutions and provide research services to their brokerage clients.

Conflicts of interests can be managed by transparent regulatory measures and separation of business functions. By setting up a firewall, the business activities of different departments are separated. The agent will not be responsible for multiple principals at the same time. Conflicts of interest can also be controlled by developing a sense of professionalism so that financial agencies get to know the importance of objective independent judgement.


Our society is built on morality. In the financial industry, observance of ethics is very important.The consequences of unethical behavior are painful for the company and the market. Companies can implement their own ethical standards, etc. to avoid unethical events. Creating a fair and ethical financial market environment is beneficial to everyone in the market, but this requires more than company or legal constraints. It is more necessary for each of us to understand the moral standards, enhance moral awareness, and keep the moral bottom line in our hearts.


  1. Boatright, J., 2011. Ethics In Finance. [online] ResearchGate. Available at: [Accessed 25 April 2020].
  2. Essays, UK. (November 2018). Ethics in the Finance and Investment Industry. Retrieved from
  3. Sebastian, A. (2020, January 29). Why Insider Trading Is Bad for Financial Markets. Retrieved from
  4. Lipton, E., Fandos, N., Lafraniere, S., & Barnes, J. E. (2020, March 20). Stock Sales by Senator Richard Burr Ignite Political Uproar. Retrieved from
  5. Insider trading. (n.d.). Retrieved from
  6. Hall, M. (2020, March 19). What Is Insider Trading and Is It Illegal? Retrieved from

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The Code Of Ethics In Financial Industry. (2021, September 23). Edubirdie. Retrieved July 6, 2022, from
“The Code Of Ethics In Financial Industry.” Edubirdie, 23 Sept. 2021,
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