Laws often codify ethical behavior, but legal and ethical conduct are not always the same. In the investment industry there are many cases where laws may not promote the most ethical behavior. An example is trading in a stock while in possession of material non-public information (also called inside information.) Some countries do not have laws preventing this behavior, though many professionals (and the CFA Institute Code of Ethics) consider it unethical.
Although a robust legal framework can increase public confidence in the investment industry, there are a number of reasons that laws do not always lead to more ethical behavior.
First, laws tend to lag market practices. In many cases, laws are crafted only after a crisis has exposed a particular practice as potentially unethical. Regulators tend to take a cautious approach, which can often take considerable time. During this time, the practice may continue or even worsen. And a law that prevents one type of activity may inadvertently open up another, equally problematic activity. Finally, practitioners may engage in “regulatory arbitrage” by moving certain activities to countries that have not yet made the practice illegal.
Ethical practice must therefore go beyond what is legally required. Good ethical judgment requires consideration of the impact on (and potential benefit to) multiple stakeholders.