Chapter 6 - Making Ethical Decisions.pdf

Making Ethical Decisions 6 CONTENT AREAS Overview of Ethics Understanding Ethical Dilemmas Resolving Ethical Dilemmas LEARNING OBJECTIVES 1 | Define ethics and discuss the role they play within an...

Making Ethical Decisions 6 CONTENT AREAS Overview of Ethics Understanding Ethical Dilemmas Resolving Ethical Dilemmas LEARNING OBJECTIVES 1 | Define ethics and discuss the role they play within an organization. 2 | Describe the primary types of ethical dilemmas. 3 | Identify the basic principles that underlie ethical decision-making. © CANADIAN SECURITIES INSTITUTE  CHAPTER 6      MAKING ETHICAL DECISIONS 6 3 INTRODUCTION In the previous chapter, we discussed the traits, behaviours, skills, and abilities typically demonstrated by leaders. We discussed the importance to a dealer member of hiring qualified people to senior positions and particularly to the position of chief compliance officer. By consistently demonstrating leadership, the chief compliance officer is able to build and maintain trust with all stakeholders at the dealer member. However, leadership skills alone are not enough to ensure the complete success of the compliance function; a strong leader without a moral compass can easily lead people in the wrong direction. In today’s strict regulatory environment, the actions of people in a position of leadership at a dealer member must be grounded in a strong sense of personal ethics. In this chapter, we explore the subject of ethics and its role in compliance with securities regulation. Although chief compliance officers deal mainly with compliance rules and related policies, they must also understand that an effective ethics program helps create a strong corporate culture, where personal values play a critical role. OVERVIEW OF ETHICS 1 | Define ethics and discuss the role they play within an organization. Ethics forms the foundation on which the rules of the securities industry are built and provides a framework for interpreting and evaluating almost any situation. Given the roles that registrants play, the importance of ethics and ethical behaviour cannot be overstated. Rules and industry regulations form only part of the concept of ethics; therefore, following the rules is the minimum standard for ethical behaviour. Rules alone cannot cover every contingency because, for every rule, there is usually an exception. In the securities industry, ethics include principles of conduct that are both explicit, such as those encompassed in compliance rules, and implicit, such as honesty and fairness. Compliance failures often occur when ethical dilemmas are not identified or dealt with effectively. An ethical dilemma arises when there is no clear-cut rule to deal with a situation, and people must rely on their own values. In such situations, the influence of senior management of a dealer member, especially the chief compliance officer, confirms the important role that ethics and values play at the firm. Because ethical issues arise in situations where values are at odds, the CCO at a dealer member must actively encourage an ethical environment within the organization. An effective ethics program can create an atmosphere in the workplace that fosters trust among all employees, both within the dealer member and between clients and business partners. Such a program provides a means for senior management to influence employee behaviour toward common goals without requiring constant scrutiny. Ethics lies at the heart of self-regulation. Conversely, an ineffective ethics program that conforms only to externally established standards attracts few, if any, of the benefits of an effective program. Ethical awareness helps guide behaviour in situations where no specific rule or regulation exists, or directly applies, because it is based on the spirit of the law, not the letter of the law. Increased public, professional, and investor expectations demand that ethical behaviour form the basis of industry conduct. Public opinion, consumer demand, and advocacy groups also raise the level of ethical behaviour above the minimum standards set out by the regulators. One important benefit of ethical corporate conduct is the effect it has on the dealer member’s reputation in the marketplace. An ethical dealer member is seen as an attractive place to do business, and its leaders inspire confidence among investors, issuers, and the public. Its good reputation will also attract talented employees, which further enhances their operating efficiency and profitability. A substantive effort to avoid unethical conduct helps safeguard the interests of clients, the dealer member and its individual registrants, and the industry as a whole. Ethical behaviour across the industry also protects the integrity of the capital markets. A dealer member’s CCO has an important role to play in this regard. Given the © CANADIAN SECURITIES INSTITUTE 6 4 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 3 responsibilities attached to this leadership position, it is in the CCO’s best interest to actively support the creation of an effective ethics awareness program and to demonstrate the behaviour that the program encourages. ETHICS AND PUBLIC TRUST Ethics is a set of moral principles that guide behaviour. Depending on the context, ethics refers to the conduct of a particular group or profession, or of society as a whole. The conventions of conduct are established according to shared standards of right and wrong. In these contexts, a study of ethics includes the study of the general nature of morals and the moral choices people make. Ethics as a standard of conduct is also used by society to encourage behaviour that is not necessarily prescribed by specific rules. It governs the many ways that one interacts with others, either directly or indirectly, and is the basis on which trust is created between people and groups. The integrity of a person or organization is a measure of the extent to which their ethical values consistently determine their behaviour and decisions. When they demonstrate integrity over time, their reputation influences public perception and leads others to trust them. It is no small task for a dealer member to achieve such a reputation. Typically, it takes years, or even decades, of dedicated and consistent adherence to high standards of ethical business conduct. A single lapse, even if uncommon, can destroy public goodwill that has taken years to build. Many professionals consider reputation risk one of the most significant risks in the investment and financial services industry. Capital and financial solvency are essential to create public trust in financial institutions. Capital adequacy standards exist to ensure that dealer members maintain an appropriate level of capital and have prudent and appropriate internal controls. However, as important as financial solvency is, clients typically want more than simple assurance that any funds they entrust to the institution are adequately supported. They also expect that the actions of the dealer member and its representatives will be governed by a strong code of ethics. The importance of such client expectations is reflected in the extent to which ethics, integrity, and trust often feature prominently in marketing and advertising. It is also reflected in securities regulations that prohibit marketing, advertising, or sales communication that is deceptive, misleading, or not founded in fact. The core mandate of securities regulators regarding communication with clients is to ensure full, true, and plain disclosure. For the dealer member, the underlying reason for ethical behaviour is obvious: it creates trust, which is essential to the firm’s survival. Investors must trust that their advisors will provide competent, fair, and unbiased advice, that their assets will be safeguarded, and that their accounts will be managed in their best interests. Unethical conduct by employees at any level can lead to significant losses and impairment to reputation, which may lead to additional costs arising from litigation. From a compliance point of view, ethical conduct is necessary not just to the dealer member but also to the securities industry as a whole. The public’s willingness to invest its savings is tied to the reputation of both the dealer member and the industry. Without this public confidence in the integrity of the capital markets, considerably fewer investors would participate in securities transactions. ETHICS AND PROFESSIONALISM A dealer member’s reputation is largely determined by the regulatory history and reputation of its senior management. Poor regulatory history and a damaged reputation are some of the most difficult risks for senior compliance staff to manage. Dealer members with a reputation for integrity tend to hire compliance personnel who challenge senior management by providing viable alternatives to proposed business decisions that might result in compliance failures. Some dealer members, in contrast, view compliance as an externally imposed cost of doing business. They see the compliance area more as a necessary evil than a prudent business practice. Such firms are more likely to hire compliance personnel who exercise no independent judgment, but simply acquiesce to senior management’s views. © CANADIAN SECURITIES INSTITUTE  CHAPTER 6      MAKING ETHICAL DECISIONS 6 5 When the senior management team fosters a culture of resistance to compliance, if not outright non-compliance, the dealer member is more susceptible to misconduct, fraud, and unethical behaviour. It is exposed to greater risk of regulatory and legal action, as well as reputational damage. This increased susceptibility makes the CCO’s task unnecessarily difficult. In the event of a compliance failure, senior management may blame the CCO, who becomes liable to personal risk of regulatory liability. ETHICS AND INDUSTRY REGULATIONS The investment industry is subject to complex and extensive rules and regulations. However, ethical conduct goes beyond simple compliance with industry rules; in fact, some of those rules specifically require ethical behaviour. Certain securities industry regulations define broad, principle-based requirements. For example, CIRO imposes the following requirements on dealer members and their representatives: They must observe high standards of ethics and conduct in the transaction of their business. They must not engage in any business conduct or practice that is unbecoming or detrimental to the public’s interest. Their character, business reputation, experience, and training must be consistent with these ethical standards. Similarly, the handling of client business must be within the bounds of ethical conduct, consistent with just and equitable principles of trade, and not detrimental to the interests of the securities industry. The industry is also subject to numerous technical and procedural rules for which the moral aspect can be difficult to define. These rules are based on the need for clear and consistent standards of conduct, rather than simply the notion of right and wrong. In some cases, the ethical value any specific rule can be unclear or open to opinions. One major challenge of applying ethics in professional practice is being sure the exact intent of the rule. Nevertheless, financial professionals must diligently follow the ethics and integrity of all rules in effect. Willfully disregarding a rule can lead to even more fundamental ethical considerations. EXAMPLE An employee intentionally fails to disclose a criminal conviction on her registration application and then signs a certificate attesting that the form is complete and accurate. The employee is violating a rule because she did not complete the form fully and accurately. This is also an offence under securities legislation. The larger ethical issue is that she willfully certified the information as being correct. This aspect calls into question her personal integrity, honesty, and moral character. In a different ethical breach, but with similar implications regarding character, a registrant asks his client to sign a blank form. He then uses the form to process transactions in the client’s accounts. Rules are sometimes innocently overlooked, misinterpreted or misapplied. An inadvertent violation of a rule without malicious motivation normally warrants relatively lenient sanction. Such cases are often used as opportunities to assess the effectiveness of compliance training across the organization and reinforce it where necessary. However, a conscious decision to disregard a rule, even one that seems merely administrative, can call into question the violator’s personal ethics. For this reason, repeat offenders are usually seen in a different light than first-time offenders who violate the same rule. Similarly, the reaction of the person found violating a rule can be more telling than the rule violation itself. For example, an offender who intentionally deceives, bullies, or arrogantly dismisses a rule violation, rather than showing remorse and co-operation, clearly reveals a lack of any personal values and ethics. A person who intentionally disregards industry regulations may be considered unethical in almost every situation. However, that does not mean that simply doing the opposite is ethical. For example, technically complying with © CANADIAN SECURITIES INSTITUTE 6 6 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 3 the letter of the law (known as checklist compliance) does not indicate a strongly ethical person, if that person’s behaviour is not also consistent with the spirit and intent of the rules. PRINCIPLE-BASED REGULATION The Canadian securities industry promotes a principle-based regulatory model, which is consistent with the ethical decision-making process described further on in this chapter. Rather than simply following detailed and technical standards, industry participants are expected to apply their judgment and discretion to determine if an activity falls within broadly defined values and standards. EXAMPLE Non-discretionary, fee-based accounts present one example where expectations based on general principles have emerged. Advisors and dealer members that are paid based on a percentage of a client’s assets under administration have a vested interest in the client’s account increasing in value, so that their fee also increases in absolute dollar terms over time. Few clients would argue that they do not share the objective of appreciating value in their accounts. However, regulators have pointed to potential abuses of fee-based accounts: Reverse-churning occurs when the advisor places an otherwise low commission account into a fee-based program. Milking occurs when the advisor places transactions that earn commissions into a fee-based account. It is important that an investment advisor evaluate whether a transaction-based account or a fee-based account is appropriate, based on the client’s circumstances and intentions. ETHICS IN THE ORGANIZATION Most dealer members have a general code of conduct that applies to all employees. The code defines and communicates the firm’s values and its standards for business conduct. Typically, the code is supplemented by detailed compliance policies and procedures that are based on the industry regulations. The dealer member’s values, both explicit and implicit, are the essence of its spirit and leadership philosophy. For ethics to thrive in any organization, senior management must consistently demonstrate the behaviour that is expected of all employees. This concept is usually referred to as setting the tone from the top. Ethical behaviour ultimately begins and ends with the individual employee. However, a major contributor to that behaviour is the ethical environment of the dealer member. Management’s positive, or negative, environment encourages positive, or negative, behaviour through the accepted norms and the company’s leaders. Codes of conduct, ethical training, and the tools used to improve ethical behaviour at the individual level reinforce a culture of compliance. Consistent application of those tools provides evidence of the organization’s values and beliefs, which are reflected in the day-to-day actions of its employees. By valuing and rewarding ethical behaviour, a dealer member’s leaders protect the firm from unethical conduct. For example, a company that only boasts about ethics, demands strict obedience to authority, and focuses solely on punishing bad behaviour is more likely to encounter problems. A dealer member that fosters ethical conduct is more likely to rely on preventive control systems. These systems are more effective than detective control systems, which rely entirely on the detection of wrongdoing, typically after the fact. They are also more economical, for both the dealer member and industry regulators. If incidences of wrongdoing are reduced, loss to the dealer member is diminished. Preventive measures are also less costly to establish than a punitive system. © CANADIAN SECURITIES INSTITUTE  CHAPTER 6      MAKING ETHICAL DECISIONS 6 7 UNDERSTANDING ETHICAL DILEMMAS 2 | Describe the primary types of ethical dilemmas. The most frequently encountered situations that require an ethical decision are choosing between right and wrong. However, given such a straightforward decision, no ethical dilemma exists; there is only one right choice. Codes of conduct, codes of ethics and compliance policies are mainly concerned with right-versus-wrong situations. CIRO’s sanction guidelines are useful for assessing rule violations and misconduct. These documents set out in specific detail the factors that CIRO considers relevant in assessing a range of rule violations. CIRO also sets out the appropriate range of penalties associated with specific types of violations. However, situations where values clash, and neither choice is obviously right or wrong, are less obvious to assess. Therefore, a right-versus-right quandary is the essence of a true dilemma. RIGHT-VERSUS-WRONG SITUATIONS In a right-versus wrong situation, the right choice is usually clear because the wrong choice has one or more of the following characteristics: It is clearly illegal. It lacks a basis in truth. The negative consequences far outweigh any possible positive results. It does not conform to the fundamental values that define right or wrong actions. If there is still some doubt regarding the right choice, the four tests in Table 6.1 can help determine which decision is right: Table 6.1 | Four Right-Versus-Wrong Tests Legal test Does the decision break any laws or rules? Smell test Does your intuition tell you the decision is wrong, even if you can’t name the problem? Front page test Would your reputation, or that of your employer, suffer damage if the decision were to be publicly broadcast? Mom test Would you want your mother, or any other moral exemplar in your life, to know about your decision? If the decision fails any of these tests, it is probably wrong and, by elimination, the right choice will be clear. However, if the decision passes all four tests, then this may be a right-versus-right dilemma. RIGHT-VERSUS-RIGHT DILEMMAS True ethical dilemmas occur when the values underlying possible solutions to a problem are at odds. Pursuing any solution will satisfy one deeply held value but compromise the other. Ethical dilemmas of this sort are more difficult to resolve than right-versus-wrong issues because two or more of the possible choices are right to some degree, and no choice appears to be clearly wrong. © CANADIAN SECURITIES INSTITUTE 6 8 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 3 The four primary types of ethical dilemmas are described in Table 6.2. Table 6.2 | Four Major Types of Ethical Dilemmas Dilemma Definition Example Integrity The values of honesty or A valued and responsible employee has contravened dilemma integrity clash with the values company policies regarding sick leave. Should the of commitment, personal transgression be disciplined or overlooked? responsibility, or promise keeping. (i.e., honesty versus loyalty) Societal The rights or values of an individual A dealer member actively solicits retired investors dilemma conflict with those of the group. This and advertises its sensitivity to seniors’ concerns. dilemma can also be seen in terms A dividend-paying mutual fund that the company of an us-versus-them, self-versus- distributes is highly valued and relied on by a small others, or smaller-group-versus- group of these older clients. However, the fund is only larger group decision. (i.e., individual marginally profitable to the dealer member, and it versus group) must consider ceasing distribution in order to allocate scarce resources to broader client groups. Goal-based Immediate needs or desires run The management of a small dealer member dilemma counter to future goals; or the acknowledges the importance of the revenue of an means clashes with the ends. (i.e., extremely large producer whose clients are generally short-term versus long-term) incurring speculative investment losses. However, retaining these clients is inconsistent with the dealer member’s long-term goal of conservative business. Fairness The values of fairness, equity, and A dealer member must address a problem involving dilemma righteousness conflict with the an employee who inappropriately claims overtime pay values of compassion and empathy. during a period when his partner is unemployed. (I.e. fairness versus compassion) These four dilemma patterns lie at the heart of most ethical conflicts. Understanding and applying the patterns can help clarify the conflict’s issue. However, identifying which core value is at odds with another does not always make it easier to reach a decision. CONFLICTS OF INTEREST A conflict of interest occurs when a duty owed to another person is compromised by either a personal interest or a conflicting duty owed to a third party. Industry professionals must avoid the appearance, or the perception, that a conflict of interest may exist with a client. Conflicts of interest can damage market efficiencies and distort market outcomes. They interfere with the public’s right to rely on reasonable expectations in their business relationships. In general, a conflict arises between the competing interests of different clients. A conflict may also arise between the dealer member and the interests of a registrant working on behalf of a client. For example, a conflict might arise when a dealer member pressures its sales staff to sell a high-risk new issue that it has just underwritten. The firm has an obligation to the issuer (except in a bought deal) to sell the issue to a wide distribution of clients. A registrant, on the other hand, may feel that the investment is unsuitable for a particular client. © CANADIAN SECURITIES INSTITUTE  CHAPTER 6      MAKING ETHICAL DECISIONS 6 9 EXAMPLE A dealer member is underwriting a “hot” new distribution of securities and has an obligation to obtain full value for the issuer of the securities. However, the dealer member must also ensure that the price is fair to the purchasing clients, which creates a conflict for the dealer member. The conflict becomes even more complicated in an active or overheated market. In a similar situation, an investment advisor faces a further conflict-related issue. An advisor needs to allocate the new issue of securities to her clients in a market where demand exceeds availability. However, the advisor wonders to which of her clients she should offer the securities: the client who generates the most revenue; or the longest-tenured client; or maybe the client who has called repeatedly about the issue; or maybe a new potential client? Or should the advisor choose randomly among those who have expressed an interest? In this situation, there is no applicable rule or clear right or wrong answer. The advisor must address the problem using an analytical decision-making process. Provincial securities legislation and the rules of the self-regulatory organizations contain many provisions dealing with potential conflicts of interest with clients. However, not every potential conflict can be dealt with by way of rules and regulations. To promote the integrity of the capital markets, a balance is required between regulatory intervention and practical business considerations. Rules do provide a basic framework for operating in the industry. However, the securities business is largely founded on trust and integrity. Each industry professional must uphold both the letter and the spirit of the rules and avoid bringing the industry into disrepute by compromising the balance between the interests of the registrant and client. DID YOU KNOW? Part 13 of NI 31-103 requires registered firms and individuals to identify, address, and disclose material conflicts of interest. Registrants must address such conflicts in the best interest of the client and provide guidance to explain when a conflict of interest is considered material. When a material conflict cannot be addressed in the best interests of the client, it must be avoided. RESOLVING ETHICAL DILEMMAS 3 | Identify the basic principles that underlie ethical decision-making. Acknowledging and addressing ethical dilemmas can be difficult. Some people, who choose to respond inappropriately, rationalize their responses to ethical issues with the following types of excuses: If we don’t do it, someone This excuse implies that business practices are subject to a lower standard of else will. ethical behaviour than others. It doesn’t hurt anyone. This excuse is often used to rationalize insider trading, in spite of multiple arguments refuting the belief. That’s the way it’s always done. This view acknowledges the ethical issue but chooses to ignore it. © CANADIAN SECURITIES INSTITUTE 6 10 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 3 EXAMPLE Consider the following rationalizations for gifts to various stakeholders at a dealer member: An advisor who has experienced several compliance problems in the past year gives a bottle of scotch to the CCO during the holiday season. An information technology company that does work for the dealer member invites several dealer member employees to a golf tournament in another city at the company’s expense. A research analyst is nominated for membership in an exclusive club by the chief executive officer of one of the companies that is part of her research. In each situation, the gifts can be offered to someone else if the person turns it down, it appears to be harmless, and anyway, gift-giving is a practice that has always occurred. However, a potential conflict of interest, whether real or perceived, can arise in each of these cases, regardless of how modest or expensive the gift might be. Many dealer members adopt the policy of restrictions on both giving and receiving gifts. Most dealer members allow reasonable business entertainment and token gifts below a threshold value. Higher-value gifts, or gifts given in awkward circumstances, raise a more significant ethical issue. In the third of the examples noted above, the nomination for club membership has no specific monetary value. However, the gesture still raises ethical issues. In fact, this type of gift can be most difficult to resolve simply because there is usually no apparent monetary value. RESOLUTION PRINCIPLES A dealer member’s code of ethics must be designed to help employees understand and resolve ethical dilemmas when there are no clear-cut rules. Ethical dilemmas are typically resolved by applying four principles: Ends-based principle The action chosen should result in the greatest good for the greatest number of people. Rule-based principle The action chosen should follow the rule that deals most effectively with the situation. Social contract-based principle The action should be viewed in terms of how it affects the well-being of the group. Personalistic principle The action supports the decision that is most authentic to the decision-maker as a person. A FRAMEWORK FOR ETHICAL DECISION-MAKING When facing an issue that requires a moral choice, the following six-step process for ethical decision-making can help guide the appropriate behaviour (see Figure 6.1): 1. Identify the issue and determine whether it represents an ethical issue requiring further analysis. 2. Identify the person who must decide on a course of action. Ensure that person accepts responsibility for the decision and accountability for any consequences. 3. Gather the facts, identify potential courses of action, and identify the potential consequences of each action. © CANADIAN SECURITIES INSTITUTE  CHAPTER 6      MAKING ETHICAL DECISIONS 6 11 4. Test each course of action to determine whether the issue is a right-versus-wrong situation: If one of the two possible courses of action fails the test, the right choice is clear. If all options pass the test, analyze the situation to determine which ethical principles are in conflict. Then, apply the four resolution principles to determine the best choice. 5. Make the decision. 6. Reflect on the process. Figure 6.1 | The Ethical Decision-Making Process Identify the ethical issue. Identify right-versus-right conflict: 1. Honesty versus loyalty 2. Individual rights versus group Identify the decision-maker. rights 3. Short-term goals versus long-term goals 4. Fairness versus compassion Gather the facts. Test for right-versus-wrong issue: 1. Legal test 2. Smell test Apply resolution principles: 3. Front page test 1. Ends-based 4. Mom test 2. Rule-based 3. Social contract based 4. Personalistic Principle If right-versus-right dilemma If right-versus-wrong issue Make the decision. Reflect on the process. © CANADIAN SECURITIES INSTITUTE 6 12 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 3 EXAMPLE Consider the following example in the context of the decision-making process: A dealer member has introduced a wrap-fee product that permits investment advisors to convert commission- based accounts to fee-based accounts. Clients pay an annual fee on the product based on their assets with the firm, rather than commissions on individual trades. One advisor, who has more than 600 accounts, is considering requiring all of his clients to convert their accounts to this new product. The wrap-fee product would simplify his business, eliminate the potential perceived conflict of interest that arises from commission-based accounts, end awkward discussions about trade commissions, and annuitize his revenue. For some clients, the new structure would be cost-neutral; for others, the cost might be higher or lower, depending on the number of future transactions in a given period. The framework for ethical decision-making provides a method to resolve this type of ethical issue. The decision- maker should keep in mind the potential value of the wrap-fee product to the clients. He should then consider whether his decision might change depending on the potential negative cost impact to each client ($100 compared to $500 or $1,000). For example, a client might place a higher value on this type of account than all of the commissions that might otherwise be payable. VALUES UNDERLYING ETHICAL DECISION-MAKING A dealer member communicates its values to all employees, both explicitly and implicitly. These values are the essence of the firm’s spirit and leadership philosophy. However, it is not enough to simply communicate those values in a statement. They must be evident in the day-to-day actions of all employees, so that an atmosphere of trust can flourish. When deciding on the right thing to do, people usually turn first to regulations they know and understand. If there is no applicable regulation, they rely on their own values and ethics. Value judgments influence the decision-making process for most decisions made by a dealer member and its employees. Ethical values have four common characteristics: They are beliefs, not facts. They are long lasting (although not unchangeable). They guide personal and corporate behaviour and goals. They influence present actions designed to achieve future goals. Although values guide people’s lives, their meaning is hard to articulate. People tend to interpret meaning unconsciously, through the filter of their personal experiences. Therefore, a group may find it difficult to agree on the meaning of a specific value. A basic starting point to resolve ethical dilemmas is to articulate, and agree on, which ethical values are in conflict. This is a simple concept that tends to be overlooked. Even when all participants share the same values, their perspectives may differ. The five basic values that underlie ethical decision-making are justice, respect, duty of care, responsibility, and compassion. All five values are defined in Table 6.3. © CANADIAN SECURITIES INSTITUTE  CHAPTER 6      MAKING ETHICAL DECISIONS 6 13 Table 6.3 | Five Basic Values Value Definition Justice The concept of justice holds that ethical decisions must be fair to all parties involved. Actions, and the reasons behind a decision, must be seen as fair by objective observers, and not just the parties affected. Respect The concept of respect for others holds that all people must be treated with dignity, and that each person’s humanity depends on such treatment. Duty of care The concept of a duty of care holds that people must exercise special care toward those with whom they have relationships of dependency or reliance. A duty of care imposes two moral requirements of registrants in relation to clients: preserve and nurture client relationships, and always consider the client’s needs from the client’s perspective. Responsibility The concept of responsibility holds that people must keep their promises and act in good faith (i.e., the belief of doing the right thing). Compassion Compassion complements and supports the core value of respect. Professionals in the securities industry who cannot show empathy and understanding to their clients will find it difficult to retain clients over time. Being involved with the client’s financial well- being requires the professional to show empathy for the client’s unique situation and to act with the client’s best interests in mind. EXAMPLE An advisor is committed to acting in good faith toward her clients. She expects to continue to serve her clients diligently until they no longer need her services. The advisor knows that acting in good faith also means that she will disclose any real and perceived conflicts of interest. Therefore, she decides that she must disclose to one of her clients the fact that she has beneficial ownership of certain securities, which could reasonably impair her ability to extend unbiased and objective advice to her client. © CANADIAN SECURITIES INSTITUTE 6 14 CHIEF COMPLIANCE OFFICERS QUALIFYING EXAMINATION      SECTION 3 SUMMARY In this chapter, we explored the subject of ethics and its role in compliance with securities regulation. We discussed that ethics forms the foundation of a good reputation and positive public perception. We also discussed the concept of principle-based regulation. More so than a strict, rule-based approach, principle-based regulation allows a compliance officer to assess behaviour in light of broadly defined ethical values and standards of correct behaviour. We also discussed the five basic values that underlie ethical decision-making: justice, respect, duty of care, responsibility, and compassion. These values help to guide us in resolving ethical dilemmas. In a right-versus- wrong situation, no ethical dilemma exists because there is only one right choice. A true ethical dilemma has characteristics of right-versus-right, which involves a clash of values. By now, when faced with an ethical dilemma, you should be able to identify the values in conflict and explain whether the dilemma is an integrity, societal, goal-based, or fairness dilemma. You should also be able to apply a framework for ethical decision-making using the four resolution principles: ends-based, rule-based, social contract- based, and personalistic. At the beginning of this chapter, you learned that virtually every dealer member’s has a code of conduct supplemented by a set of policies and procedures based on industry regulations. Whereas the code of conduct is a set of guiding principles based on ethical behaviour, a policies and procedures manual is a detailed set of rules governing every aspect of the dealer member’s operations. Those policies and procedures are the subject of the next chapter. © CANADIAN SECURITIES INSTITUTE