Ethics and the use of listed securities


Australia has long had an active sharemarket, historically driven by big miners and smaller resource companies.

Over the last decade there’s been an explosion in the number and types of listed products available to Australian investors. There’s been a commensurate increase in the number of investors – and financial advisers – using listed securities and products in diversified portfolios. This article, proudly sponsored by GSFM, examines some of the ethical issues pertinent to the use of listed investments.

The term homo economicus, or ‘economic man’, was first coined by British economists in  the nineteenth century, a number of whom built mathematical models based on the economic assumptions contained in the definition – that humans are consistently rational, narrowly self-interested, and pursue subjectively-defined ends. In the 20th century, the term ‘economic man’ was used to describe a person who acted rationally on complete knowledge out of self-interest and the desire for wealth[1].

Consider homo economicus in the context of ethics, which can be defined as a system of moral principles, the rules of conduct recognised in a particular class of human actions. Every day countless decisions are made within your practice, by you and your colleagues, your clients and theirs, that have to balance the need to meet the economic needs of each party with ethical behaviours.

The listed environment is one which has unique features. The recommending of listed securities can pose a number of potential ethical dilemmas.

Australia’s listed investment landscape

Australia has long had an active sharemarket, historically driven by the big miners and plethora of smaller resource companies as the wealth beneath our lands was uncovered. Blue chip stocks have traditionally been the mainstay of many investment portfolios.

Although shares were – and remain – the mainstay of Australia’s securities markets, a number of listed products have emerged over the years. One of the first listed products was the Australian Foundation Investment Company (AFIC), a listed investment company (LIC), which was launched in 1928. Real Estate Investment Trusts (REITs) emerged in Australia during the 1970s, with the launch of the General Property Trust in 1971.

It was some years later before exchange traded funds (ETFs) became part of our market landscape. The first ETF was launched in Australia in 2001 – at the end of July 2020 there were 211 products with $66.9 billion in funds under management (figure one). Globally, assets invested in ETFs and ETPs broke through the $7 trillion milestone at the end of August 2020[2].

A decade of growth

In July 2010, the ASX had 192 listed management investments, with a total market capitalisation of $133.9 billion. Of this, more than 50 percent of this market cap was in A-REITs, which also dominated trades per day, trades for the month and total volumes and values traded. The next highest market cap, as well as value and volume traded, related to listed infrastructure funds.

Fast forward a decade and the landscape has changed markedly (figure one). While the number of available A-REITs have decreased in number, in part due to merger activity, it remains the subsector with the largest average daily value traded. At the same time, that value has fallen significantly over the decade.

The number of exchange traded products has grown enormously, in both number and market cap. There has also been an increase in the type of exchange traded products available, from ‘vanilla’ strategies that mirror specific indices, through to more complex strategies, such as actively managed and smart beta exchange traded products. Other exchanges, such as Chi-X, also list managed investments.

Listed securities and ethics

As the number and variety of listed securities increases, so too does the number of advice professionals who recommend them, including brokers and financial advisers.

As well as being bound by the provisions of the best interest duty, first introduced by FOFA in July 2013, there are a number of ethical requirements particular to listed securities. As well as being required to adhere to the standards in FASEA’s Code of Ethics, members of the Stockbrokers and Financial Advisers Association are also required to abide by the standards outlined in its Code of Ethical Conduct. The objective of this code is to:

“Maintain and improve ethical behaviour in the securities and derivatives profession and the conduct of members of the profession with the consumers of their services.”

This code has 35 standards that specify enforceable rules and provides guidance on standards of ethical conduct. Figure two provides a summary of the code, which includes ethical principles and addresses industry specific issues; as with the standards in FASEA’s Code of Ethics, the intent is that each should be interpreted broadly, rather than by narrow and strict interpretation.

As well as abiding by this code, members of the Stockbrokers and Financial Advisers Association, and all other financial advisers, must comply with FASEAs Code of Ethics, and related ethical standards, which became law on 1 January 2020.

The interplay between two sets of ethical standards

Following is an examination of some of the key standards from the Stockbrokers and Financial Advisers Association’s Code of Ethical Conduct and the interplay between those and the standards in FASEA’s Code of Ethics. These standards cover topics most pertinent to financial advisers dealing in listed securities.

Obey the law

The first standard in the Stockbrokers And Financial Advisers Association Code of Ethical Conduct is to obey the law. Members must ‘obey the just and reasonable laws of the community, including legislation, statutory rules, and regulatory and self-regulatory requirements’. Although this directive may seem obvious to most, the fact that it needs to be enshrined in two codes of conduct suggests this is not always the case.

Laws are frequently updated and it is incumbent on advisers to remain up-to-date. There are laws governing the provision of financial advice in general, those focused on advice given about listed securities and derivatives, as well others regulating tax, superannuation and anti-money laundering.

This is consistent with FASEA’s standard one:

Public interest, honesty and integrity

That members must act with honesty and integrity, and in the best interests of their clients is  consistent with FASEA’s standard two and also

That members must act with honesty and integrity, and in the best interests of their clients is  consistent with FASEA’s standard two and also comes into play with standard nine. Arguably, each of these attributes are implied across most of FASEA’s standards.

Personal responsibility

The code requires members to comply with the standards of the profession notwithstanding pressure from clients, employers, peers, employees or others to compromise those standards. Importantly, the ethical code states that members are personally responsible and accountable for their conduct.

This is also consistent with FASEA standard two – key words are integrity, honesty, honour commitments and best interests. It’s also worth reflecting that FASEA’s Code encapsulates the concept of personal responsibility. Advisers need to abide by the code; if that conflicts with instructions from licensees or actions by peers, it’s important to refer back to the Code. Similarly, licensees need to ensure that directives and guidance it provides to its advisers are consistent with the Code at all times.


The increased number and variety of exchange traded funds (ETFs), as well as listed investment companies (LICs), trusts (LITs), hybrids and other listed instruments has seen an increase in the number of financial advice professionals recommending listed investments.

This requires a different knowledge set from unlisted investments. Advisers must ensure they have relevant knowledge in relation to the products being recommended, and importantly, understand market rules. All relevant information needs to be clearly communicated to clients.

This is consistent with two of FASEA’s standards:

Conflicts of interest

A conflict of interest may arise where the advice provided to a client results in a benefit to the adviser or a related party. Related party has a broad definition an includes colleagues, the licensee, a family member or friend. Meeting the best interests duty – acting in the best interests of clients always – should eradicate conflicts of interest.

Standard three of FASEA’s code encapsulates conflicts of interest:


In the same way the standard requires any commission arrangements to be disclosed to clients prior to providing services, FASEA’s standard seven also covers fees and other costs:

Fair trading

Members must compete fairly in the market, including not taking unfair advantage of other members and not engaging in anti-competitive or unconscionable conduct. Members must not knowingly engage or induce another person to engage in conduct that or is likely to mislead or deceive in the performance of their profession.

There are several important elements to consider with this standard, each of which is particular to the listed environment.

Insider trading

Section 1043A of the Corporations Act 2001 provides that it is an offence for a person to trade using inside information. It is also an offence to communicate inside information to others who are likely to trade based on the inside information.

Inside information is information that’s not generally available, and which is likely to have an effect on the value of a ‘financial product’. Financial products are broadly defined under Division 3 of the Corporations Act and includes all securities able to be traded on a financial market. This information might include advanced knowledge of profit warnings, takeovers or legal action. Even if the transaction is for the benefit of clients, if it is based on insider knowledge, it is illegal.

The maximum penalty for insider trading is ten years’ imprisonment and/or a $450,000 fine.

From a FASEA perspective, insider trading would potentially breach standard one for failing to comply with legal obligations. An adviser who undertakes insider trading for their own benefit does not display either honesty or integrity; one who does it to also benefit clients does not act in their best interests and risks adverse impacts on those clients (standard six).

Best execution

According to ASIC’s regulatory guide 223:

Market operators and market participants must comply with their obligations under the competition market integrity rules.

These rules address issues raised by competition between exchange markets and the operation of crossing systems by market participants. The competition market integrity rules apply to all trading in equity market products and Commonwealth Government Securities (CGS) depository interests.

This applies to trades executed via ASX or Chi-X, and additional rules apply to trading derivatives.

The rules focus on achieving the best execution for clients; for retail investors, best execution is defined as ‘best total consideration’ – for buy orders, paying as little as possible, for sell orders, receiving the best price possible. Best execution applied to all listed securities, whether a share, an ETF or a listed investment company.

From a FASEA perspective, this speaks to acting in the clients’ best interests (standard two) and acting with competence (standard nine).

Unsolicited offers

Unsolicited offers are those made by an individual, company or group of investors to purchase shares from an individual who was not actively seeking to sell the investment. They are generally made at a price considerably lower than the current market price.

People making unsolicited offers generally aim to take advantage of investors that might not know the current value of the shares; offers are sometimes made by people or companies in possession of inside information.

While unsolicited offers are legal, ASIC will pursue action against individuals making unsolicited offers who do not comply with Division 5A of Part 7.9 of the Corporations Act 2001. This requires the person making the unsolicited offer to provide investors with a written document that includes:

  • The identity of the person making the offer
  • The offer date
  • The offer price
  • How long the offer is open
  • The market value of your shares on the day the offer is made.

In the situation a client receives an unsolicited offer to buy listed securities they hold, before advising them for or against the offer it’s important to:

  • Find out who is making the offer and why
  • Find out whether the relevant company is aware of the offer
  • Determine whether the offer is fair and reasonable.

In terms of FASEA standards, there’s a risk of breaching standard one (and the law) if and adviser was to recommend taking up an unsolicited offer that didn’t comply with Division 5A of Part 7.9 of the Corporations Act 2001. Further, an adviser recommending an unsolicited offer could risk failing to act in clients’ best interest (standard two).

Pump and dump

Very small companies – those that sometimes attract the moniker ‘penny dreadfuls’ – can sometimes attract attention because of the potential for future gains. After all, it’s much easier for a small company to experience significant growth than a larger company.

It’s been known for investment scammers to engage in ‘pump and dump’ schemes where they ‘pump’ inaccurate information into the public domain. This then inflates the company’s price based on false information and data. Once the share price appreciates, they ‘dump’ the shares, which generally results in a sharp price fall.

It’s clearly unethical to engage in such activity. Being able to recognise such schemes comes back to competence (standard nine) and always acting in your clients’ best interests (standard two).

Case studies

Case study 1: Hybrids for income

Bill and Lydia, from Melbourne’s eastern suburbs, are retirees in their late sixties. They had first sought financial advice ten years earlier following the global financial crisis, which was a few years before they had both planned to retire. Between them, they had a reasonable amount of super in a balanced funds and an investment portfolio of dividend paying blue chip stocks. They also benefited from the franking credits attached to the dividends paid by those companies. Their financial objectives in retirement include a steady income and capital preservation.

The couple wanted to increase their retirement income and went to see their financial adviser, Stewart of ACME Advice. He recommended they invest in two hybrid securities, one being issued by XY Bank, the other by AA Corporation. Stewart described hybrids as having a regular income stream and providing the best features of shares and bonds.

Hybrids are complex financial products that do combine the features of bonds and shares, however it’s not always positive. Hybrids can provide income, like a bond, but their value can fluctuate or fall in the same way as shares. Hybrids generally pay a fixed or floating rate of return until a specified date, although there’s no guarantee on the amount and timing of interest payments. Importantly, hybrids may not be suitable for investors who need steady returns or capital security.

Banks issue hybrids that are ‘loss absorbing’. If the bank has financial difficulties, they can convert the hybrids to bank shares that may be worth less than the initial investment or written off completely. This means investors, not the bank, are at risk of suffering a loss. This protects the bank’s depositors, at the expense of hybrid investors.

With a corporate investors ‘lend’ money to a company in return for regular interest payments. But the company can defer interest payments for years and may not repay capital for decades. Corporate hybrids are also known as ‘subordinated notes’; this means corporate hybrid investors get paid last if the company becomes insolvent and interest payments may be held back until other debts are paid.

Despite the risks associated with hybrids, Stewart instigated the sale of a parcel of blue chip stocks and the investment of $100,000 across the two hybrids. Over the next 18 months, XY Bank paid regular income for six months and then, due to a market correction, converted the hybrids to shares in the bank; shares with a lower dividend income stream than the shares sold to purchase the hybrids. The same market correction saw AA Corporation defer its interest payments indefinitely.

Bill and Lydia made a formal complaint about Stewart’s advice, firstly to the licensee and later to the Australian Financial Complaints Authority (AFCA). They believed Stewart had provided inappropriate advice that proved detrimental to their retirement; it reduced their retirement income and did not take into account their desire for capital preservation. They did not understand the risks associated with hybrids and believed Stewart’s actions were taken in self-interest, as they believed commission was paid on investing in the hybrids, although this was not disclosed at the time.

In this scenario, as a member of the Stockbrokers and Financial Advisers Association, Stewart potentially breached the competency requirement of the Standards of Ethical Conduct.

In addition, he potentially breached the following standards in FASEA’s Code of Ethics:

Case study 2: Insider knowledge

Lena is an authorised representative of ABC Brokers, a firm with a large private client base. She has worked with ABC for more than a dozen years and has built up a solid client list. Most of her clients invest in primarily listed securities – shares, A-REITs and ETFs – although she does use unlisted managed funds to get exposure to some asset classes.

Lena had dinner with her best friend. Her friend’s husband is a C-suite executive of a logistics business. Over dinner he suggested there were some changes in the wind and it ‘wouldn’t hurt’ to load up on shares in the company he works for. He wouldn’t tell her more.

The following week, Lena did some research. There was no information available that would suggest something that would lead to an increase in the company’s share price. She wondered whether she should ignore his suggestion; after all, if the share price did take off, it was a tip off from someone with inside information, although she wasn’t acting on the information itself.

Because Lena wasn’t sure of the legitimacy of the tip, she didn’t use the information to add the company’s shares to client portfolios. However, she transferred funds to her sister and had her purchase shares on her behalf, but in her sister’s name. Her sister decided to follow Lena’s lead and also buy some shares; in total, the sisters purchased $25,000 stock in XYZ Logistics.

A week later, XYZ Logistics announced it was being acquired by overseas conglomerate Megacorp, which would purchase all shares at a significant premium.

Although Lena’s actions had no impact on her clients, as a member of the Stockbrokers and Financial Advisers Association, she potentially breached the following Standards of Ethical Conduct:

Lena’s actions must also be considered in the context of FASEA’s Code of Ethics. Her conduct was potentially a breach of:

Case study 3: An unsolicited offer

Michael and Patrick are the principles of M&P Financial Advice in Melbourne. They provide personal and business advice to Dan, the CEO of a small, listed biotechnology company called ABC Bio. Dan’s business has had two major successes and is on the cusp of developing a vaccine for a virulent disease.

In a regular meeting with his advisers, Dan advised them that he was considering an offer to acquire the business. The offer came from a major listed biotech company and would be financially beneficial to him both personally and as a shareholder. The discussions centred around paying a significant premium to the prevailing share price.

Given the potential windfall for investors in ABC Bio, Michael and Patrick discuss the pros and cons of making an unsolicited offer to their clients holding the stock. Because of their close work with ABC Bio, they believed it was a good investment and had recommended it to a number of their clients.

Without advising Dan or his company, Michael and Patrick wrote to clients offering to buy their shares in ABC Bio at a 25 percent discount to the prevailing share price. The letter was not on their company letterhead and their identity was not disclosed. The letter hinted at an upcoming corporate action, but one that might be to the company’s detriment rather than something likely to increase its share price. It did not disclose the company’s current share price.

Overall, Michael and Patrick were able to acquire 260,000 shares in ABC Bio, for which they paid $1.50 per share. Two months later the company was acquired and shareholders received $2.50 per share, a profit of $260,000 for the two.

As members of the Stockbrokers and Financial Advisers Association, Michael and Patrick potentially breached the following Standards of Ethical Conduct:

Michael and Patrick’s actions must also be considered in the context of FASEA’s Code of Ethics. Their conduct was potentially a breach of:

Ethics in financial advice is about providing sound advice that is in a client’s best interests and will help them achieve their financial objectives. It is also about making sure the client understands the advice and relevant investment recommendations, whether in relation to listed or unlisted securities. Acting ethically and being trustworthy will continue to build trust among consumers and increase their confidence in using financial services. FASEA’s Code of Ethics (and for those members of the Stockbrokers and Financial Advisers Association, the Code of Ethical Conduct) is critical to build and maintain a positive reputation for the advice industry.




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