PROFESSIONAL ETHICS AND

CORPORATE GOVERNANCE
Lecture: 1

Section 1 & 2
Dr Do Duy Kien
• Email: doduykien.cs2@ftu.edu.vn

• Education:
PhD in Finance, Middlesex University, London, UK

MSc in Accounting and Financial Management, King’s College London, UK

BSc in Economics and Finance, University of Wyoming, USA

Newton Fund Scholar

• Working experiences:
Investment fund analyst (USA), investment banker (USA), financial advisor (VN)
Chapter 1 Introduction to Investment ethics
(Peck, 2011)

Learning objectives:
• Describe some of the significant scandals in the history of investment
• A brief overview of the Investment industry
• How CFA Institute supports Ethical behavior
• Fundamental Ethical Principles
• Code of Ethics
• Standards of Professional Conduct.
https://marketbusinessnews.com/financial-glossary/mortgage-backed-securities/
Ethics?
• Ethics standards for determining right or wrong behavior toward
others in a particular context.
• Ethics are not religion, morals, laws, or what is considered acceptable
behavior in society.
• The Golden Rule—‘‘Do unto others as you would have them do unto
you’
PRINCIPLE 1: ETHICAL UNDERSTANDING
you have an obligation not to knowingly engage in an
investment transaction that either you or others do not
sufficiently understand. This includes the underlying source
of returns or fees charged.
PRINCIPLE 2: ETHICAL USE OF INFORMATION

you have an obligation to ensure that you and others have access to
relevant information and that you and others do not misuse or
distort information in the investment transaction.
PRINCIPLE 3: RESPONSIBLE INVESTING

you have an obligation to ensure that you do not knowingly make or

recommend investments that support activities that harm others.

=> Fiduciary duty: a duty that is owed to others when placed in a

position of trust.
Moral hazard
- When parties do not fully bear the costs of their
risk-taking behavior
- Take more risks than they would otherwise.
- Moral hazard became an important topic during the
financial crisis of 2008.
- Many financial institutions got into trouble by loading up
on complex, derivative debt instruments (i.e.,
mortgage-backed securities) without fully understanding
their underlying risks.
- When housing prices collapsed, so did these firms.
- The Federal Reserve Board provided emergency
financing to stave off a systemic market collapse. Some
argued the bailout created moral hazard.
The Investment Industry – A legacy of
scandals and a need for Ethics
• Ponzi schemes
• Madoff investment scandal
• There were the insider trading scandals of the 1980s, the accounting
scandals of the late 1990s
• The financial crisis that began in the fall of 2008
🡪 Ethical education and standards are critical in protecting students
entering into the profession from ethical pitfalls that can ruin their
careers.
Ponzi scheme in 1920
Ponzi scheme in 1920
• Charles Ponzi was born in 1882 in Parma, Italy.

• He attended the University of Rome La Sapienza but could not graduate.

• Ponzi arrived in Boston in November 1903 aboard the S.S. Vancouver. He

later told the New York Times that he gambled away most of his money on
the voyage to America. "I landed in this country with $2.50 in cash and $1
million in hopes, and those hopes never left me."
Ponzi scheme in 1920
• In 1907, he moved to Montreal and worked like a teller at Bank Zarossi.
When the bank went bankrupt because of bad loans, Ponzi was sentenced
to three years in a Quebec prison after he was caught forging a bad check.

• When he was released from jail, Ponzi got involved in yet another criminal
venture, smuggling Italian immigrants across the border into the United
States. This too landed him in jail—he spent two years behind bars in
Atlanta.
Ponzi scheme in 1920
• Ponzi returned to Boston, where he married stenographer Rose Gnecco in
1918.

• He received a letter in the mail from a company in Spain that contained in it

an international reply coupon (a coupon that can be exchanged for a
number of priority airmail postage stamps from another country). Ponzi
realized that he could turn a profit by buying IRCs in one country, and
exchanging them for more expensive stamps in another country.
Ponzi scheme in 1920
Ponzi scheme in 1920
• Ponzi's racket worked like this: He would send money to agents
working for him in other countries, who would buy IRCs and send
them back to the United States. Ponzi would then exchange the IRC
for stamps worth more than he paid for them, and sell the stamps.
• Ponzi reportedly made more than 400 percent on some of these
sales.
• Not satisfied with running the profitable scheme on his own, Ponzi
began to seek investors to turn even higher profits. He promised
investors outrageous returns of 50 percent in 45 days, or 100 percent
in 90 days.
Ponzi scheme in 1920
• Ponzi's manipulation made him very rich—he bought a mansion in
Lexington, Massachusetts, with air conditioning and a heated
swimming pool. He reportedly made $250,000 a day.

• Charles Ponzi was arrested on August 12, 1920, and charged with 86
counts of mail fraud. Owing an estimated $7 million, he pleaded guilty
to mail fraud, and subsequently spent 14 years in prison. Rose
divorced him in 1937, and Ponzi died penniless in Rio de Janeiro,
Brazil, on January 18, 1949.
Bernard Madoff
• Bernard Madoff was born on April 29, 1938, in Queens, New York.
• Madoff earned his bachelor's degree in political science from
Hofstra in 1960
• In 1960, he used $5,000 earned from lifeguarding and installing
sprinkler systems, as well as an additional $50,000 borrowed from
his father in-law, he and his wife founded an investment company
called Bernard L. Madoff Investment Securities, LLC.
Bernard Madoff
• With the help of Madoff's father-in-law, a retired CPA, the
business attracted investors through word of mouth and amassed
an impressive client list, including celebrities such as Steven
Spielberg, Kevin Bacon and Kyra Sedgwick.
• Madoff Investment Securities grew famous for its reliable annual
returns of 10 percent or more, and by the end of the 1980s, his
firm was handling more than 5 percent of the trading volume on
the New York Stock Exchange.
Bernard Madoff
•The success of Madoff Securities was in part due to a
willingness to adapt to changing times; the firm was among
the earliest to use computer technology for trading, helping
to give rise to the National Association of Securities Dealers
Automated Quotations (NASDAQ).

•Madoff served as NASDAQ chairman for three one-year

terms (1990,1991, 1993)
Bernard Madoff
•Madoff informed his sons on December 10,2008 that he
planned to give out several million dollars in bonuses earlier
than scheduled, and they demanded to know where the
money was coming from. Madoff then admitted that a
branch of his firm was actually an elaborate Ponzi scheme.

•Madoff was arrested and charged with securities fraud on

December 11,2008.
Bernard Madoff
•Madoff reportedly admitted to investigators that he had lost
$50 billion of his investors' money.

•On June 29, 2009, U.S. District Court Judge Denny Chin
sentenced Madoff to 150 years in prison—the maximum
possible prison sentence for the 71-year-old defendant.
Bernard Madoff
Madoff’s victims include:

•HSBC British bank: $1 billion

•BNP Paribas: $475 million

•Royal bank of Canada: $40.4 million

• Sumitomo Life Insurance: $22 million

Discussions:
• Give one example of history repeating itself in the legacy of financial
scandals?
• Three types of players in the investment industry?
A Brief Overview of the Investment Industry

Essential function of the investment industry:

The investment industry serves to facilitate the exchange

of capital for returns.
A Brief Overview of the Investment Industry
• Corporations or other entities that issue securities in
Issuers exchange for capital

• Parties who seek to invest money or capital in order to

Investors
earn a return.

• Firms or individuals who act to bring other parties (i.e. issuers and
investors) together in an investment transaction for fees and
Intermediaries commissions
A Brief Overview of the Investment Industry
Investor Advisors Act and the Investment
Company Act of 1940
• Register with the SEC with transparent information: business
structure, operations, client activities, etc.

• Rule10b-5: rule preventing the manipulation of markets either

through deceitful trading or use of information (i.e., rumors or inside
information).

• Information disclosure: information that is disclosed to investors in

various required filings by the Securities and Exchange Commission.
Sarbanes-Oxley Act of 2002 (SOX)
or Public Company Accounting Reform and Investor
Protection Act of 2002
• Enforce greater accountability for corporate executives => the
establishment of the Public Company Accounting Oversight Board
(PCAOB)
• Examples:
• The accounting firm is restricted from providing any ‘‘non-audit’’
services to the company during the time of the audit.
• Top executive positions—such as the chief executive officer (CEO),
chief financial officer (CFO), and others—cannot have been on the
auditing committee for one year before employment.
Why ethics matter ?
• Society benefits from efficient capital markets
• Efficient capital markets depend on trust
• Laws and regulations work in conjunction with an ethical foundation
to create fair and transparent markets
• Rigorous ethical standards are critical to investor trust
• Unethical conduct has significant personal consequences and
damages investors’ trust
• Critical to develop a “culture of integrity”
Chapter 2: FIDUCIARY DUTY OF INVESTMENT
PROFESSIONALS
(Peck, 2011)

• Agency theory: principal vs. agent

https://youtu.be/UmXjfiKOEjQ

• Examples:
• Money management and clients
• CEOs of listed companies, shareholders and stakeholders
THE ROLE OF LAWS, REGULATIONS, AND
PROFESSIONAL STANDARDS
• Financial Industry Regulatory Authority (FINRA): a nonprofit
organization with the legal authority to enforce securities rules and
regulations among its members, who are primarily brokers and
traders.
• Chartered Financial Analyst (CFA)Institute: a designation oriented
toward analysts, portfolio, and active money managers. ® Certification
as a CFA encouraged to indicate ethical standards and competence
among the members.
• Certified Financial Planner (CFP): a designation oriented toward
financial planners. Certification as a CFP® is encouraged to indicate
ethical standards and competence among the members.
 NDA: Non-disclosure Agreement

Any investment: Disclose Transparent (Minh bạch)

Disclose conflicts of interest

(Hợp đồng thoả thuận không tiết lộ)

(Phơi bày) all fees

risks & rewards
• Fees charged for providing investment services
All the information in the NDA can't be disclosed except
• Sales fees earned on different products the requirement of government

• Best execution practices

• Soft dollar practices
• Investment policy statement (IPS) or client agreement
• Treatment of clients: investment allocation policies; fee and service
schedules
CFA Institute mission
• Lead the investment professional globally by promoting the highest
standards of ethics, education, and professional excellence for the
ultimate benefit of society.

• We fulfill this mission through the CFA Institute Code of Ethics and
Standards of Professional Conduct.
CFA Institute Code and Standards
Reflect changes in the market

• Revised periodically
• Globally applicable
• All CFA Institute members and candidates for the CFA designation
must comply
• Sanctions for violations
Fundamental Ethical Principles Applicable to
the Investment Profession:
• Act with Loyalty: Put Clients’ Interest First
• Exercise Independence and Objectivity
• Be Transparent: Offer Full and Faire Disclosure
• Make Suitable Recommendations
• Avoid/Manage Conflicts of Interest
• Treat All Clients Fairly
• Act Diligently: Use Reasonable Care and Prudent Judgment
• Protect Confidentiality
• Prohibit Trading on Material Nonpublic Information
CFA Institute Code of Ethics
• Act with integrity, competence, diligence, respect, and in an ethical
manner with the public, clients, prospective clients, employers,
colleagues in the investment profession, and other participants in the
global capital markets
• Place the integrity of the investment profession and the interests of
clients above their own personal interest.
• Use reasonable care and exercise independent professional
judgment when conducting investment analysis, making investment
recommendations, taking investment actions, and engaging in other
professional activities.
CFA Institute Code of Ethics
• Practice and encourage others to practice in a professional and
ethical manner that will reflect credit on themselves and the
profession.
• Promote the integrity and viability of the global capital markets for
the ultimate benefit of society.
• Maintain and improve their professional competence and strive to
maintain and improve the competence of other investment
professionals.
 CFA Institute Standards of Professional
conduct need to remember these 7 standards

I. Professionalism
II. Integrity of Capital Markets
III. Duties to Clients
IV. Duties to Employers
V. Investment Analysis, Recommendations, and Actions
VI. Conflicts of Interest
VII. Responsibilities as a CFA Institute Member of CFA Candidate
Ethical decision-making framework
• Sharpens your ethical judgment
• Takes you beyond a “business” analysis
• Gives you a tool for following the Code and Standards
• Guides you in choosing the best course of action
Next lecture: Section 3 & Seminar
References:
• Full list of reference: See Course Syllabus
• Ethical and Professional Standards, and Quantitative Methods Book 1
CFA Program Curriculum CFA Exam level 1, CFA Institute (2020)
• Ethical and Professional Standards, and Quantitative Methods Book 1
CFA Program Curriculum CFA Exam level 2, CFA Institute (2020)
• Peck S.W (2011) Investment ethics, John Wiley and Sons, Inc.