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Ethical Issues Related to the Mass Marketing of Securities

Author(s): Michael P. Coyne and Janice M. Traflet

Source: Journal of Business Ethics, Vol. 78, No. 1/2, The Twelfth Annual International
Conference Promoting Business Ethics (Mar., 2008), pp. 193-198
Published by: Springer
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Accessed: 12-12-2016 14:27 UTC

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Journal of Business Ethics (2008) 78:193-198 ? Springer 2007
DOI 10.1007A10551-006-9319-7

Ethical Issues Related to the Mass

Michael P. Coyne
Marketing of Securities Janice M. Traflet

ABSTRACT. This paper examines ethical issues products like tobacco, alcohol, and firearms, have
involved in the mass marketing of securities to individ been identified as posing additional, special ethical
uals. The marketing of products deemed "sociaUy ques challenges for marketers. As D. Kirk Davidson
tionable" or "sinful" (like tobacco and alcohol) has long (1996 and 2002) has noted, when items are
been recognized as posing special ethical chaUenges
potentially harmful and of questionable social
(Kotier, P. and S. Levy: 1971, Harvard Business Review 49,
legitimacy, any mass marketing efforts, if under
74-80; Davidson, D. K: 1996, Selling Sin: The Marketing of
Socially Unacceptable Products (Quorum Press, Westport).
taken, should be conducted with particular cau
We contend that marketers should consider securities tion. Potential customers should be warned of the
(i.e. common stock, options) in a similar vein, as a products' implicit dangers, and also should be
potentiaUy dangerous product. Given the inherent vola instructed on proper usage to minimize the chance
tility of equity prices, responsible marketers need to of injury to them or to society. Marketing experts
exercise caution and restraint in promoting securities. We Philip Kotier and Sidney Levy (1971) identify such
evaluate whether the NYSE's current guidelines ade warnings and cautionary tactics as belonging to a
quately encourage ethical marketing practices and deter strategy of "demarketing" - the practice of trying
unethical ones. Using recent examples of controversial to reduce, control, or shape demand for a product.
brokerage advertisements, we expose weaknesses in the
While demarketing has received considerable
Exchange's vague injunction that members not "mislead" attention in the three decades since Kotier and
reasonable people by making "exaggerated claims" in
Levy first coined the term, securities consistently
their communications. From a moral perspective, we find
it troublesome that intentionality need not be present for
have been overlooked as one of the potentially
a promotion to be considered misleading. Also prob dangerous products for which the strategy is best
lematic is the continued invocation of the reasonable suited. We argue that due to their inherent vola
person standard to judge the propriety of advertisements. tility, securities should be considered by marketers
We close with some thoughts on improving the quality of to be in a similar category as tobacco and alcohol,
securities marketing. We suggest that the NYSE, in the and treated accordingly. A conservative, cautious
interests of fostering higher ethical behavior among approach to marketing securities is ethically sound,
member marketers, may need to revive a marketing code promoting the best interests of investors, individual
of conduct prevalent on WaU Street in an earlier era. brokerage firms, the securities industry as a whole,
as well as society.
KEY WORDS: advertising, business ethics, codes
Determining what exactly constitutes "cautious"
of conduct, contramarketing, demarketing, morality,
brokerage marketing tactics can be, however, a dif
NYSE, reasonable person standard, self-regulation, SEC
ficult task. Even assuming that one can agree that the
risks of equity investing should be contained in every
promotion or advertisement, how strong or direct
should the wording on the warning label be, and
Introduction should regulators indicate precisely what the label
says? And to what extent can the potential benefits of
Marketing any product or service carries with it equity investing be conveyed without diluting the
strong ethical responsibilities. However, certain value of the warnings?

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194 Michael P. Coyne and Janice M. Tr?fet

Current NYSE guidelines exaggerating the upside potential of equity investing.

and their shortcomings For instance, airing in 1999, at the height of the bubble, a television commercial sponsored
The NYSE's current guideUnes concerning member by Morgan Stanley's Discover Brokerage unit fea
firm marketing, embodied in the NYSE Constitu tured a fictitious young tow truck driver named
tion, are basicaUy prohibitive in character, focusing Al. Al's enormous tremendous profits purportedly
on what constitutes unethical marketing. For allowed him to purchase his own tropical island ?
instance, Rule 472, "Communications with the actually a "country," notes Al in the commercial
Public," states in part (Barber and Odeon, 2002). SEC chairman Arthur
No member or member organization shaU ut?ize Levitt lambasted Discover Brokerage for this alleg
any communication which contains (i) any untrue edly irresponsible advertisement, and also repri
statement or omission of a material fact or is manded the National Association of Securities
otherwise false or misleading; or (ii) promises Dealers (NASD) and the NYSE for tolerating firms
specific results, exaggerated or unwarranted making such exaggerated claims (Lux, 1999, p. 29).
claims; or (iii) opinions for which there is no Certainly, Levitt was right that the tropical island
reasonable basis; or (iv) projections or forecasts commercial exaggerated the level of profits one
which are not clearly labeled as forecasts. (NYSE might reasonably expect from trading. Therefore,
Constitution, Rule 472 (i) 2006) the advertisement technically violated NYSE Rule
Member firms that violate this rule face fines or 472, at least the letter of that law. But, as we will
possible expulsion. Yet identifying violations is not discuss, it is not equally clear that Discover's use of
always easy, especiaUy when the aUeged infraction is hyperbole contradicted the spirit of Exchange law,
not in the form of an outright he. Whether a mar nor is it obvious that this commercial actually was
keting claim is truly "misleading" or "exaggerated" unethical. Discover definitely was not circumspect
is open to interpretation and subject to degree. (How in the way it sold itself in this advertisement.
misleading and how exaggerated must the claim be to However, while cautious marketing is ethical, the
be detected and punished?) Furthermore, certain absence of caution is not, we argue, necessarily
marketing tactics - Uke the use of humor and sexy unethical. This is a crucial distinction.
appeals to enUven advertisements ? may lend Unethical marketing, according to Craig Smith
themselves to misinterpretation and therefore per and John Quelch (1993), "involves a breach of
haps should be expUcitly discouraged. ethics, the use of unethical practices within mar
keting to pursue corporate or an individual man
ager's ends." They warn
Ethical controversies and complexities Unethical marketing also contradicts the social
underlying recent promotions role of the firm.... It constitutes deviant behavior
and would be dysfunctional as a consequence. If
IUuminating the murky nature of assessing whether undetected and unpunished, these practices ben
an advertisement is "misleading," a 2002 Ameritrade efit individuals, and perhaps their companies, at
commercial featured two attractive women joggers the expense of other individuals and the eco
rushing home to make trades (and presumably sig nomic system. (Smith and Quelch, p. 6)
nificant money). This advertisement received con Denying that his company's commercial was
siderable media attention due to its popularity (See, unethical, Discover Brokerage President Thomas
for instance, Barber and Odeon, 2002). But wh?e O'Connell defensively explained that it was in
appearing innocent to some viewers, the Ameritrade tended to be humorous and not meant to mislead
advertisement may be faulted by others for making (Lux, 1999). However, "intent," while critically
equity investing seem too simple...and perhaps too important from an ethical perspective, is not even
sexy. mentioned in the NYSE's guidelines.
SEC officials have repeatedly criticized adver Likewise, the Federal Trade Commission (FTC)
tisements for glamorizing the stock market and also disregards intent in its definition of "deceptive

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Ethical Issues Related to the Mass Marketing of Securities 195

advertising" for consumer goods. The FTC char subjective input." A reasonable person potentiaUy
acterizes advertising as deceptive if it misleads could misconstrue a promotion, through no fault of
(unintentionally or intentionally) the "reasonable the marketer.
person," thereby inflicting harm. Daniel Attas Returning to the investor-on-his-island com
(1999) has criticized the FTC's legal definition of mercial, Morgan Stanley Discover Brokerage bowed
deceptive advertising for focusing too much on to SEC pressure, and agreed to stop airing the
consumers' subjective perceptions of advertising and controversial advertisement. But O'ConneU could
not enough on marketers' act of deceiving and not resist issuing a parting shot to Levitt and the
underlying intentions. The same accusation could be SEC. O'ConneU insisted, "We don't believe that we
levied at the NYSE's marketing guidelines. violated any rules" and added, "We believe that we
Ignoring for a moment the issue of intentionality, are among the most conservative of firms"
it is important to consider whether the Discover (O'ConneU quoted in Lux, p. 29).
commercial may have misled "reasonable" viewers. Indeed, with its Morgan Stanley blue-blood roots,
If the commercial indeed caused people to hold the Discover Brokerage unit was among the more
erroneous beliefs, it is necessary to assess whether conservative firms on WaU Street. Discover was not
those wrong beliefs caused injury to viewers, to one of the new firms that had sprung up during the
Discover's competitors, or to society. Somewhat bubble, offering cutthroat commission rates
persuasively, O'Connell argued that buying a trop and sometimes practicing less than scrupulous mar
ical island with stock winnings was such a prepos keting tactics to gain a foothold. The fact that a firm
terous idea that no reasonable person would find it as established as Morgan Stanley now was also
credible (Lux, 1999). Therefore, there could be no starting to make exaggerated claims worried the
injury inflicted by the commercial. SEC. In the SEC's eyes, a crackdown was necessary
But even if a reasonable person did misinterpret before other established, reputable brokerage firms
the contents of the commercial, this still does not foUowed suit, and began to lose their own long
prove that the advertisement was necessarily uneth standing marketing caution.
ical. Perhaps the reasonable person standard, long Abandonment of conservative marketing prac
considered sacrosanct, may need to be reconsidered. tices, regulators feared, would induce investors to
Indeed, Daniel Attas, commenting not specifically come into the market with unrealistic expectations,
on the NYSE, but on the FTC's notion of deceptive and to do so just as the bubble might be
advertising, finds flaw in the reasonable person about to burst. Indeed, Federal Reserve chairman
standard. He questions, "Cannot any communicated Alan Greenspan was warning Americans of "irra
message be misleading to some of the people, some tional exuberance", and predicting that a substantial
of the time?" Emphasizing that "misinterpretation is market correction was imminent. (See ShiUer,
a real possibility even for the most 'reasonable' 2000). At such a potentiaUy volatile juncture, WaU
person," Attas gives the example of a man named Street marketers needed to be particularly careful to
Abraham who erroneously believes that a dog on a refrain from any promotional activities that could be
hill in the distance is a sheep negatively perceived as luring people into the market
Another person might see that same dog from a to enrich themselves at others' expense.
different angle, distance, past experience etc. and
recognize it as such. Whatever creates the distorted
belief in Abraham isn't merely the sheep, nor is it The price of deviant marketing
the sheep plus the spatio-temporal qualities of the
situation. It is also due to the total context of Consequently, in the wake of the Discover com
Abraham's prior experience, as well as culture- or mercial, the NYSE and other regulators began more
age-specific set of values and expectations he brings aggressively fining firms for misleading advertising.
to the situation. (Attas, 1999, p. 51) However, wh?e the number of fines increased, the
Attas (p. 51) concludes that "A distorted perception amount of the fines was not particularly substantial.
cannot be attributed exclusively to the objective In 2001, Extrade, for instance, was fined only
features of the perceived thing; there always exists a $90,000 for an advertising infraction. As critics

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196 Michael P. Coyne and Janice M. Tr?fet

noted, this constituted only a mild slap on the wrist, now allows investors to trade without the assistance
given the company's $2.5 biUion in revenue that of intermediaries, it remains to be determined
year ("Broker Group," 2002). whether advertisements encouraging the general
While these smaU fines might suggest that public to trade this way are indeed ethical. For
unethical marketing on WaU Street largely goes various reasons such as lack of education and possible
unpunished, in fact, many deviant firms eventuaUy addictive gambling propensities, many people may
did endure just retribution, but more from market be unable to invest competently on their own. For
forces than from punitive regulatory action. As the example, the gullible might be unable to penetrate
stock market boom turned bust, fledgling companies potentially exaggerated claims by more aggressive
that had promised too much and delivered too little marketers. Companies like E*trade, Ameritrade, and
often lost customers to more established - and more Charles Schwab therefore might be on shaky moral
reputable - competitors. Of course, though, the ground when they make mass overtures to investors
damage to unsuspecting investors' pocketbooks was to "do-it-yourself. Conversely, it is also not nec
already done. essarily ethical to suggest that all investors absolutely
In the bear market that foUowed the coUapse of need financial advisors to achieve success.
the bubble, financial marketing largely returned to
more conservative themes. Once again, most firms
emphasized the risks more than the rewards of Preliminary recommendations
investing. A cursory examination of some recent
advertisements iUustrates this trend. For instance, While these and other ethical issues related to the
a Salomon Smith Barney promotion begins, mass marketing of securities need to be more fully
"Sometimes, NO is the most positive advice we can addressed, we believe that it is helpful at this juncture
give.... Helping you avoid the wrong investments is to make some preliminary observations and recom
as important as finding the right ones. If you're in mendations. We return to our original thesis that
the market for a financial partner who's not afraid to securities indeed are dangerous products, given the
say no, talk with a Smith Barney Financial Consul real possibility that investors (acting on their own or
tant" (quoted in Eccleston 2002, p. 1). Similarly, a with the help of financial advisors) may incur capital
Prudential Financial print advertisement emphasizes losses. As a result, marketers, to be ethically correct,
"Growing and Protecting Your Wealth," not just carefully need to control and shape demand. In
"Growing Your Wealth." The advertisement con short, they need to "demarket," to borrow Kotier
tinues: and Levy's term (1971). This means marketers must
Protect yourself against market volatility. We'U not just encourage viewers to buy, but also must
help you create a customized asset aUocation to adequately warn people that this particular product
find the right mix of stock, bond and cash or service may not be right for everyone. As we have
equivalent investments. Our world-class research discussed, it is difficult to find the right balance
team wiU help you identify which areas are poised between encouraging and discouraging consump
for growth ? and which could pose a risk. And tion.
we'U help you employ proven techniques for We suggest that examining how the NYSE
managing volatility, like doUar-cost averaging, executive body historically has handled walking this
(quoted in Eccleston 2002, p. 1) line may illuminate a viable marketing path for the
These advertisements also indicate another devel future. Importantly, the NYSE once adhered to
opment in the wake of the bubble burst: much more stringent regulations on marketing.
a decline in the legitimacy of do-it-yourself investing Indeed, for more than a century and a half after its
and a corresponding increase in the perceived founding, the NYSE refused to allow members to
necessity of working with a financial advisor. This run promotions with excessive text or even to fea
issue of investing on one's own versus with a broker, ture illustrations in advertisements (except pictures
addressed by McGoun et al. (2006), raises some of the company's executives). As the marketing
interesting ethical issues. While modern technology consulting firm Stewart McDougall and Associates

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Ethical Issues Related to the Mass Marketing of Securities 197

noted (1953), NYSE member firm promotions once tuaUy emulated. Supporting Lawrence's argument, a
were so dry and somber that they were dubbed few years after the NYSE initiated the Own Your
"tombstone advertisements" and simply contained Share campaign (and before regulators began to
the most basic information.2 We are not suggesting a demand warning labels on certain products), the
return to these harsh marketing restraints. However, tobacco industry in the late 1960s began attaching
we do think it is valuable to examine the transition cautionary labels to cigarette cartons (Lawrence,
period after World War II when the NYSE began to 1984).
relax its advertising restrictions. For the securities industry, the "Four Caution"
Teaching members how to market ethically yet strategy was an effective path to successful demar
a little more aggressively than in prior years, the keting. The NYSE was not aiming to decrease de
NYSE after World War II embarked on an mand, but to control and shape it. In the two
important marketing campaign known as "Own decades (the 1950s and 1960s) when marketers
Your Share of American Business," which ran consistently preached the caution mantra, share
from 1953 to 1968.3 While the NYSE now al ownership substantially increased, as did investors'
lowed pictures in advertisements and also began to level of education about the market (Traflet, 2004,
encourage members to utilize a new medium p. 268).
(television), the institution continued to urge While some securities marketers still emphasize
members to make sure their advertisements stressed some or aU of these warnings, perhaps it is time to
the risks more than the rewards of investing modify NYSE rules to ensure a modern day equiv
(Traflet, 2003, 2004). alent of the "Four Cautions" and its consistent
As Ruddick Lawrence, Vice President of Mar application. Demarketing through some version of
keting at the NYSE in the 1950s, explained, the an updated "Four Cautions" seems the wisest and
Own Your Share campaign initiated a "Four Cau safest promotional strategy for brokerage firms in the
tion" strategy. According to this marketing plan, long-run. However, as we have tried to highlight,
every member firm advertisement needed to hit on this does not necessarily mean it is unethical to
these four key points: embark upon slightly more aggressive and risky
tactics, like the use of humor or hyperbole. More
First, understand the risk. Don't invest if you over, it is worthwhile to note that, while regulators
can't afford it. like the NYSE, NASD, and SEC possess a strong
Secondly, have a cash reserve for emergen fiduciary responsibility to protect investors from
cies. Don't put the rent money or the insur inappropriate and misleading inducements, con
ance money in the stock market. sumers of securities also must assume some respon
Third, get good advice, go to a broker or sibility for their own buying behavior. If both
your banker or somebody who can help you investors and marketers rise to their respective eth
and...[then] check it out. ical duties, society wiU be best served.
And finally.... Get the facts. Buy securities
on which you can get information. And
understand the facts, try to learn the facts. Notes
(Lawrence, 1984).
Greenspan first used the phrase "irrational exuber
Said Lawrence (1984), "We wanted people to be ance" in a speech in December 1996, and the phrase
gained in popularity during subsequent years. Robert
educated [from advertisements], we wanted them to
Shiller also helped popularize the term in his book by
be informed." Only on that basis could the NYSE
that title, Irrational Exuberance (2000, Princeton: Prince
"proceed soundly to develop this nation of stock ton University Press).
Only containing the firm's name and address,
Recollecting the NYSE's mid-twentieth century "tombstone ads" lacked a "message to the reader" and
marketing strategy in his Oral History, Lawrence hence were "not truly advertisements in the modern
(1984) argued that it constituted a model code of merchandising concept," as consulting firm Stewart,
conduct which advertisers in other industries even Dougall & Associates noted (1953, p. 6).

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198 Michael P. Coyne and Janice M. Tr?fet

The "Own Your Share of American Business" cam Lux, H.: 1999, 'Keeping On-Line Ads in Line', Institu
paign material is preserved in the NYSE Archives. See tional Investor 33(6), 9.
Own Your Share Campaign Folder, Box 1, Press Rela McGoun, E. G., M. S. Bettner and M .P. Coyne:
tions, Public Information Advertising Campaigns, 1954 (forthcoming, expected publication in 2007), 'Money
1964. n' Motion - Born to be Wild', Critical Perspectives in
NYSE Constitution: 2006, (
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Michael P. Coyne and Janice M. Traflet
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Transcription, NYSE Archive . E-mail:

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