By Jeffrey J. Diermeier
Recent discussion has centered on whether Wall Street needs a code of ethics. The answer is a resounding yes. Adoption of a code of ethics is critical to establishing a strong ethical foundation for investment professionals and their firms.
If doing right by investors is not enough of a reason to adopt an ethics code, investment firms should consider this: good ethics is good business.
An ethics code leaves no ambiguity as to the ultimate goal to which all investment professionals and their firms should strive: To place the interests of investors first. CFA Institute members — whether from the buy side or the sell side — no doubt have been waiting for their employers to sign on to the same ethical principles at an enterprise level to which they are bound as individuals.
There are those who point to such self-regulatory answers as window dressing, mere public relations ploys that are empty in their promises to investors. We believe the self-regulatory approach to be superior in most cases to government-imposed regulation, which too often sets the minimum standard rather than the ultimate standard. Even then, regulation inevitably carries with it a "compliance tax" of higher management fees, higher transaction costs and disproportionate expenses for smaller firms that are part of the lifeblood of innovation and competition in our business.
As the American Academy of Arts and Sciences, which counts among its members New York Stock Exchange Chairman John Reed, searches for a source from which to develop an ethical code for investment firms, we would like to call to their attention the code of ethics to which more than 75,000 investment professionals already pledge as members of CFA Institute.
The CFA Institute code of ethics states that its members shall:
Act with integrity, competence, dignity and in an ethical manner when dealing with the public, clients, employers, employees and fellow members.
Practice and encourage others to practice in a professional and ethical manner that will reflect credit on members and their profession.
Strive to maintain and improve their competence and the competence of others in the profession.
Use reasonable care and exercise independent professional judgment.
The securities analysts' registry of dubious distinction — those who have most blatantly failed to put the interests of investor interests first — includes such names as Henry Blodgett and Jack Grubman. Both of these individuals violated the sacred trust placed upon them by their clients. A further common attribute of these two is that neither was a member of CFA Institute, meaning neither was beholden to our ethical code.
Had these individuals been members of CFA Institute, would it have had a material impact on their actions toward investors? It is impossible to say, but analysis of the abundance of ethical scandals that have occurred on Wall Street over the past several years reveals that precious few have involved members of CFA Institute. In fact, so few of our members were implicated in ethical scandals that it has strongly reinforced what we knew already — that ethical codes can and do accomplish their intended goal of preventing unethical behavior. Though regulations certainly have a role to play in our business, they inevitably arrive to the discussion after scandal already has occurred, whereas codes of ethics are geared toward preventing unethical behavior before it begins.
So how do you avoid the breach of trust between pension funds and advisers? We believe one answer to be adapting the ideals of the CFA Institute code of ethics, which has been in place for more than 40 years, for implementation at the enterprise level. This was the inspiration for our new asset manager code of professional conduct, which provides guidance for firms that wish to restore the trust of investors.
It is in this spirit that we applaud the efforts of the American Academy of Arts and Sciences, which is attempting to establish an ethical code for investment banks. We believe establishing a self-regulatory code of ethics has the greatest potential to achieve their intended goal of restoring trust in the global capital markets.
Establishing a code of ethics is not just the right thing to do, but also is the best way to do business. Because, if the past several years have taught us anything, it is that good ethics is good business.
Jeffrey J. Diermeier is president and CEO of the CFA Institute, Charlottesville, Va.