Module 5, Summary

Summary
Lesson 1 of 1

Summary

In this module, we looked at how ethics and regulation are key forces driving the investment
industry. Trust, the importance of rules and regulations, and the benefits that ethical decision
making bring to the investment industry and society at large were significant themes we
covered.

Trust is essential to the functioning of the investment industry as well as to the broader
financial services industry. Trust depends on participants complying with rules and acting
ethically. Increased trust in the fairness of financial markets and the ethical conduct of market
participants leads to increased market participation. Increased market participation leads to
increased liquidity, market e ciency, and availability of capital at a reduced cost. As a result, the
overall economy thrives.

Laws and regulations are necessary to protect investors and ensure the integrity,
transparency, and fairness of financial markets. Rules are helpful but are unlikely to
cover every situation encountered. In the absence of clear rules, ethical principles
can help guide decision making and behaviour. Professional organisations, such as
CFA Institute, establish codes of ethics and professional standards based on ethical
principles to guide practice.

Regulations are rules carrying the force of law that are set and enforced by
legislative bodies and other entities authorised by legislative bodies. It is important
that all investment industry participants comply with relevant regulation. Those
that fail to do so face sanctions that can be severe.

Financial services and products are highly regulated because a failure or disruption
in the financial services industry, which includes the investment industry, can have
catastrophic consequences for individuals, companies, and the economy as a whole.
 Regulation is necessary for many reasons, including to protect consumers; to foster
capital formation and economic growth; to support economic stability; to promote
fair, e cient, and transparent financial markets; and to improve society.

The types of regulations that have been developed in response to perceived needs
include rules on gatekeeping, operations, disclosure, sales practice, trading, anti-
money-laundering, and business continuity planning.

Finally, we explored the consequences of regulatory and compliance failure.

Failure to comply with regulation and policies and procedures can have significant
consequences for employees, managers, customers, the firm, the investment
industry, and the economy.

Module Glossary

In this module, you learned the following terms (in order of appearance):

Lesson 1: Key Forces Driving the Investment Industry

Regulations: Rules that set standards for conduct and carry the force of law. They are set and
enforced by legislative bodies and by other entities authorised by legislative bodies.

Insider trading: Trading while in possession of material nonpublic information.

Lesson 2: Ethics and the Investment Industry

Ethical standards: Principles that support and promote desired values or behaviours.

Professional standards: Guidelines set by professional associations based on fundamental

Ethical dilemmas: Situations in which values, interests, and/or rules potentially conflict.

Lesson 3: Financial Industry Regulation

No new terms introduced in this lesson.

Lesson 4: Objectives of Regulation

Systemic failure: Failure of the financial system as a whole, including loss of access to credit
and collapse of capital markets.

Money laundering: A process in which criminals use financial services to transfer money
from illegal operations to other legal activities; the money becomes ‘clean’ in the process.

Lesson 5: Types of Regulation

Market manipulation: Abusive trading practice that involves taking actions intended to
move the price of a stock to make a short-term profit.

Front-running: The act of placing an order ahead of a customer’s order to take advantage
of the price impact that the customer’s order will have.
Lesson 6: Consequences of Compliance Failure
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No new terms introduced in this lesson.

Up Next

Now that we have learned the structure of the investment industry and gained an appreciation
of its benefits, including the importance of trust and ethical conduct, in Course 2, Types and
Functioning of Markets, we will delve into primary and secondary markets and how they
operate. This will include an introduction to decentralised finance, the concept of investment
vehicles, how they are structured, and how those structures serve investors.