Views on improving the integrity of global capital markets
30 November 2011

Fatally Flawed: Compliance without Ethics in the Investment Industry

Jon Stokes

A regulatory compliance program that is not centered on ethics and a strong ethical culture risks not being adequate or effective, according to Carlo V. di Florio, director of the U.S. SEC’s Office of Compliance Inspections and Examinations (OCIE). In a speech last month to the National Society of Compliance Professionals, di Florio stated that “ethical culture objectives should be central to an effective regulatory compliance program,” and that “leading standards have recognized the centrality of ethics and have explicitly integrated ethics into the elements of effective compliance and enterprise risk management.”   

The director’s remarks mirror the long-held position of CFA Institute that “check-the-box” compliance programs not grounded in fundamental ethical principals will ultimately fail to protect firms from potential compliance violations and, more importantly, fail to adequately protect the interests of investors. The “centrality of ethics” is embodied in the general principles of conduct found in the CFA Institute Asset Manager Code of Professional Conduct.  For the over 600 firms claiming compliance, the Asset Manager Code serves as the fundamental step in achieving di Florio’s vision of an effective, ethics-based compliance program. 

Ethics is a topic of “enormous significance” to anyone seeking to promote compliance with federal securities laws, and “ethical concepts continue to be a touchstone for both Congress and the Commission in developing and interpreting the federal securities laws,” according to di Florio. The OCIE Director acknowledged that a focus on ethics is important not just for compliance but is also good business. Having a strong ethical commitment to serving the best interests of clients “helps build a firm’s reputation and brand, while attracting the best employees and business partners.” On the other hand, ignoring the importance of ethics and ethical behavior “is incredibly damaging to [a firm’s] reputation and business prospects.” As a result, standards of behavior “must go beyond mere compliance with the law,” according to di Florio. 

Di Florio went on to reiterate the elements that make an effective compliance and ethics program, several of which directly track with the provisions of the CFA Institute Asset Manager Code: 

  • Promoting integrity and ethical values in decision-making across the organization
  • Ensuring an effective process to identify, assess, mitigate, and manage risk
  • Developing policies and procedures tailored to the firm 

Di Florio also identified as key communication and training for firm personnel so that “each critical partner in the compliance process understands their roles and responsibilities.” 

Firms can meet what di Florio characterized as rising expectations “around the world for a stronger culture of ethical behavior at financial service firms of all types and sizes” by taking concrete steps to build and reinforce a strong culture of ethics. Public adoption of a strong code of conduct, such as the Asset Manager Code, as well as rigorous ethical training of key firm personnel will go a long way toward meeting demands of key stakeholders to reach or exceed high standards of ethical behavior. Without a solid ethical foundation, compliance plans implemented with the best intentions, following the most rigorous standards, will not be enough.

About the Author(s)
Jon Stokes

Jon Stokes was the Director of Ethics and Standards Education at CFA Institute. His responsibilities included design and creation of on-line ethics education, development and maintenance of the CFA Institute Code of Ethics and Standards of Professional Conduct, and the design and management of the CFA Institute Ethical Decision-Making and Giving Voice to Values education programs. Stokes holds a JD degree.

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