CPD: Ethics and the use of listed investments and securities


For the majority of advisers, what is ethically right by their client is governed by association Codes of Conduct, but it can also be a moral decision.

The upsurge in listed products continues unabated as the share market bull-run continues. The number of active ETF launches has been especially high, resulting in 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.

Ethics and morals both relate to conduct that’s ‘right’ or ‘wrong’; sometimes the classification of right and wrong is black and white, sometimes it falls into the grey area between the two. While ‘ethics’ and ‘morals’ are terms that are often used interchangeably, there is a key difference. Ethics refer to rules provided by an external source, while morals refer to an individual’s own principles regarding right and wrong[1].

In the case of financial advice, ethics rules are provided within the twelve standards that comprise FASEA’s Code of Ethics and for many, individual practice codes of conduct. Many advisers are also members of the Stockbrokers and Financial Advisers Association, which has its own Code of Ethical Conduct.

For the majority of advisers, what is ethically right by their client is also a moral decision. Their personal code of conduct has them acting in their clients’ best interests at every step in the advice process.

The investment environment for listed securities can provide opportunity for less scrupulous participants to operate outside of ethical boundaries. It can be subject to manipulation, conflicts of interest and a wide range of poor practices that can pose a number of potential ethical (and moral) dilemmas to financial advisers and other investment advisers recommending listed investments.

Listed investments continue to grow and evolve

Australia has long had an active share market; most recently the ASX Investor Study 2020 found that 74 percent of Australian investors – or 6.6 million people – hold listed securities in their investment portfolio. Interestingly, 23 percent began investing in the past two years.

According to the report, the research for which was conducted mid-Covid pandemic and shortly after the March 2020 share market fall, many investors responded by becoming more focused on diversification and risk management, as well as sustainability of returns. Many sought to capitalise on falling prices by creating or adding to investment portfolios.

The ASX report also noted that those investors who receive professional advice were particularly active in increasing their holdings during the pandemic, with most agreeing that their adviser has helped them manage the impacts of the pandemic more effectively.

The investment intentions in the wake of Covid of those surveyed make for interesting reading and reinforce the strong interest in listed securities (figure two). Direct ownership of Australian shares is the highest ranked intention for all three cohorts – Next Gen investors (aged 18-24), Wealth Accumulators (25-59) and Retirees (aged 60 plus). There’s a comparatively low level of interest shown in unlisted investments and term deposits, the latter no doubt driven down by persistently low interest rates.

In the wake of Covid-19, 36 percent of investors say their investment goals have not changed; so that’s 64 percent whose goals have changed. This illustrates the importance of keeping in touch with clients, particularly during times of upheaval and change, to check in on their objectives and adjust their financial plan accordingly.

While shares remain the mainstay of Australia’s securities markets, the number of listed products has grown enormously since the first listed investment company (LIC), the Australian Foundation Investment Company (AFIC), was launched in 1928.

Although there has been an increase in the number of LICs and listed investment trusts (LITs) launched in recent years, it’s the exchange traded products (ETPs) that have really taken off; of these, ETFs are the most widely used product. In fact, globally, ETPs experienced a record US$119 billion of net inflows in the first nine months of 2021 (to 30 September 2021) to record total assets under management (AUM) of US$324 billion.[2] In Australia, that total AUM figure was $123 billion[3].

Listed securities and ethics

As well as the steady increase in the number and variety of listed securities, a number of fund managers have launched listed versions of unlisted managed funds, increasing the opportunity set in the listed environment. At the same time, technology has made it easier for investors to ‘go global’ as direct investors. In this environment of increased demand for listed investments, the number of advice professionals who recommend them, including brokers and financial advisers, has increased.

Members of the Stockbrokers and Financial Advisers Association (SAFAA) are required to abide by the standards outlined in its Code of Ethical Conduct, which was updated in December 2020. The code applies to Stockbrokers and Financial Advisers Association Principal Members (organisations) and Stockbrokers and Financial Advisers Association Practitioner Members (individuals).

The objective of this code is to:

“Maintain and improve ethical behaviour in the stockbroking and investment advice profession and the conduct of members of the profession with the consumers of their services”

The SAFAA code stipulates that for those members who are subject to other codes – such as the FASEA Code of Ethics – the two codes must be read in conjunction. It notes that a breach of any of those other codes may be taken into account by the SAFAA in considering the compliance by such members with their obligations under their code.

SAFAA’s Code of Ethical Conduct has a number of 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 the some of the key principles from the SAFAA’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 principle in the SAFAA’s Code of Ethical Conduct is to obey the law, which is consistent with FASEA’s first standard.

Members must obey all applicable laws, which include legislation, statutory rules, regulatory and self-regulatory requirements. As readers will know, laws are frequently revised and updated. 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 the wide range of listed securities and derivatives, those pertaining to maintaining an orderly markets, as well others governing tax, superannuation and anti-money laundering.

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 comes into play with standard nine. Arguably, each of these attributes are implied across most of FASEA’s standards.

Also encapsulated in the standards associated with Honesty and Integrity is the requirement that ‘Members must comply with the standards of the profession’ consistent with FASEA’s standard 12.

Respect the rights of clients

This requirement focuses on the notion of ‘informed consent’, particularly in relation to recommendations made and fees charged. As with FASEA’s standard four, it requires the member to clearly explain the work to be undertaken and standard seven, to provide a simple explanation of the fees and charges.


The increased number and variety of ETFs, LICs, LITs, hybrids and other listed securities has seen an increase in the number of financial advice professionals recommending listed investments. This trend has two drivers: increased demand from clients and an increase in the number and variety of available listed securities.

Recommending listed investments requires a different knowledge set from working solely with unlisted investments; advisers need relevant market and product knowledge and importantly, must understand market rules. All relevant information needs to be clearly communicated to clients.

The SAFAA code requires members to take reasonable action to ensure that they have sufficient knowledge of stockbroking and investment advice practice, relevant legal requirements, and where relevant the FASEA Code of Ethics. Members are also expected to maintain this competence through continuing professional development. This is consistent with FASEA’s standard ten that focuses on the development and maintenance of knowledge, skills and competencies and action only where those competencies exist.

Importantly, principal members of the SAFAA must provide staff with information, training and supervision that enables them to do their work competently and comply with the law in the performance of their profession; the same expectation is levelled at financial advice Licensees.

Conflicts of interest

Members must avoid and disclose conflicts of interest where reasonably practicable before or when the service is provided; principal members must minimise the potential adverse impact of conflicts of interest by having adequate arrangements for controlling such conflicts. The SAFAA also requires members comply with FASEA’s Code; within this, standard three also deals with conflicts of interest, with onus on both licensee and practitioner to manage conflicts of interest.

Cooperation and whistleblowing

While the requirements for SAFAA members are more detailed, they are broadly consistent with standard eleven.

Fair & Orderly Market

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 will or is likely to mislead or deceive in the performance of their profession.

There are several important elements to consider with this standard; advisers working with listed securities need to understand and manage of these risks, each of which could see them in breach of the law and, at the very least, FASEA’s standard one.

Insider trading

Inside information refers to confidential information about a company that has not been publicly disclosed and that may impact 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. Such information might include advanced knowledge of unexpected increases or falls in profits, merger and acquisition activity, legal action or new product development. Even if the transaction is for the benefit of clients, if it is based on insider knowledge, it is illegal.

Individuals with access to insider information can have an unfair advantage in the market if they were to trade using that information; the Corporations Act 2001, section 1043A, covers insider trading. It is an offence for a person to trade using inside information or to communicate inside information to others who are likely to trade based on that information.

The maximum penalty for insider trading in Australia is ten years’ imprisonment and/or a $810,000 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 risk adverse impacts on those clients (standard six).

Best execution

ASIC’s regulatory guide RG 265 provides guidance on market integrity rules for participants of securities markets. In terms of best execution, RG265 states:

“Market participants must take reasonable steps to obtain the best outcome for their clients. For retail clients, it means best total consideration, which market participants may interpret as best price while there are not material differences in transaction costs between licensed markets.”

This applies to trades executed via ASX or Chi-X, and additional rules apply to trading derivatives. The notion of ‘best total consideration’ means that for buy orders, investors pay as low a price as possible. Conversely, for sell orders, investors should receive the best possible price. Best execution also means paying the lowest possible transaction costs and applies 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).

Pump and dump

‘Pump and dump’ is a form of securities fraud. Through misleading information, often shared by people with a following on social media or other platforms, share prices are inflated. As the share price is pushed up, a group of investors sell or ‘dump’ their overvalued shares, often at quite a profit.

There have been some notable examples in the past two years. In 2020, a Reddit thread pushed up the share price of US-based Game Stop by 1,915 percent, up to around $US347.51 at its peak. Another example is Elon Musk, a regular commentator on cryptocurrency, most notably Dogecoin. The price of this and other cryptocurrency often seems driven by Musk’s sentiments.

While not new, pump and dump activity has been on the rise, driven by social media and other platforms where groups congregate and share information. Between them, this technology enables the pumpers to reach a much broader audience.

More recently we’ve witnessed the rise of ‘finfluencers’ – inexperienced and unqualified people spruiking investments via social media. These people earn their money by influencing their followers, with nary an AFSL in sight. According to an ASIC bulletin, the number of online finfluencers across platforms such as Facebook, Reddit, Instagram, YouTube and TikTok is clearly growing and is something it is monitoring. While not all social media recommendations are tied to a ‘pump and dump’ program, it’s an avenue that is easily exploited to do so.

It’s clearly unethical to engage in pump and dump 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

Between January and June 2021, ASIC recorded a number of enforcement outcomes including:

  • $29.6 million in civil penalties imposed by the courts
  • 70 people or entities removed or restricted from providing financial services or credit
  • five people imprisoned and five more given non-custodial sentences.

The following case studies are loosely based on ASIC’s enforcement activities, however names and other details have been changed for privacy reasons.

Case study 1: Acting on inside information

Jim is a senior executive of ACME Health, a listed company that builds, renovates and manages a portfolio of small to medium sized private hospitals. He is privy to a range of information about transactions, expansion plans and financial results.

He made an appointment to see his financial adviser Patrick, who holds membership of both SAFAA and the FPA. Patrick has a long history of providing financial advice to Jim that includes investment recommendations of unlisted and listed financial products.

During their meeting, Jim tells Patrick about a takeover offer received by ACME Health, one that the board was likely to accept. This information was yet to be communicated to the market. Jim tells Patrick he is aware he is unable to trade using this information but asks if there is any way he could use it to his advantage. He wants to know whether he could do so in his children’s names or through some a structure that is not in his name.

Patrick has two options at this point: he can help Jim find a way to profit from this information or he can tell him that it is not possible, nor lawful.

Patrick chooses the latter. Doing so, he avoids potentially breaching the following standards from the SAFAA Code of Ethical Conduct:

Patrick’s actions would also have been considered in the context of FASEA’s Code of Ethics. Had he agreed to use the information, his conduct would potentially have breached:

Case study 2: Engaging ‘finfluencers’

Finn and Rochelle are financial advisers building up a practice targeting millennial investors. Most of their clients are invested in portfolios comprised of ETFs; typically a core of passive ETFs with additional actively managed ETF products, depending on each client’s risk tolerance.

Their marketing and communication strategy is largely digital, and they use social media to communicate with existing and prospective clients. One of their marketing approaches to attract new clients is to promote their ‘Power Portfolio’, an investment portfolio of high growth investments. It’s presented as the best way to accumulate the funds necessary for that first home deposit, which in many places, now requires upward of $200,000. In an environment where interest rates are so low, a high growth investment can be an attractive proposition.

Finn and Rochelle decide to engage a TikTok influencer with a very large following of people they see as their target market. They work with the influencer to develop a range of loose scripts to use, focused on the benefits of building up savings – and getting into that first home earlier – using the Power Portfolio. The ‘finfluencer’ uses performance numbers but does not explain how they are attained or the time period to which they relate. There is no mention of the risks associated with the strategy, nor are any warnings or disclaimers used.

The use of the finfluencer to promote their services and in-house portfolios was found to be in breach the guidelines provided in RG 234 ‘Advertising financial products and services’.

Further, the activity was potentially breached Sections 1012C and 1018a Corporations Act 2001 (Cth), relating to offers of financial products for sale and a failure to refer potential investors to the product PDS respectively.

Section 1041E states that financial service providers cannot make false or misleading statements. Under that provision, a false or misleading statement may lead to a civil or criminal penalty if:

  • it is materially false or misleading
  • is likely to induce persons to apply for, dispose of or acquire financial products or to affect the price for trading in financial products or markets
  • the person making the statement does not care whether it is true or false or knows or ought reasonably to have known that it was materially misleading.

Finn and Rochelle potentially breached the following Standards of Ethical Conduct:


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

Case study three: High risk investments

Earlier this year, ASIC banned the sole director and four employees of a retail over-the-counter (OTC) derivative issuer, AAAFX, from providing financial services for periods ranging from three to ten years.

AAAFX employed account managers who were incentivised to encourage retail clients to trade in high-risk products, including contracts-for-difference (CFDs) and margin foreign exchange contracts (FX Contracts) that were products issued by AAAFX. Their remuneration included a percentage of client deposits received, paid as ‘commission’.

The company’s breaches of the Corporations Act 2001 included:

  • failing to do all things necessary to ensure the financial services are provided efficiently, honestly and fairly
  • failing to have in place adequate arrangements for the management of conflicts of interest; this included a commission structure that entitled team leaders and account managers to a percentage of client “net deposits” (deposits less withdrawals).

ASIC found that AAAFX’s management put pressure on account managers to:

  • implement high pressure sales tactics when engaging with clients
  • offer incentives to clients to encourage deposits
  • recommend trading strategies that would increase a client’s exposure to the market
  • pressure clients to deposit funds into their trading accounts
  • pressure clients to delay or cancel withdrawal requests.

It was also found that individuals within the organisation:

  • did not comply with financial services laws
  • made misleading representations to clients
  • pressured clients to deposit funds into their trading account and delay or cancel withdrawals to maximise remuneration based on ‘net deposits’, which amounted to unconscionable conduct
  • gave personal advice to clients while not understanding the nature of the financial products (CFDs and FX Contracts) about which advice was provided.

The team at AAAFX breached many of the SAFAA’s Standards of Ethical Conduct, including:

The actions must also be considered in the context of FASEA’s Code of Ethics. The conduct from the team at AAAFX potentially breached the following standards:

Financial advisers are required to act ethically and in the best interests of their clients at all times; only then will the advice industry be viewed as a profession. Ethics in this context can be distilled into a simple sentence: the provision of advice that’s in a client’s best interests and will help them achieve their financial objectives.

It is also important to ensure each 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. A binding Code of Ethics is a positive step towards true professionalism for the industry.


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[1] https://www.diffen.com/difference/Ethics_vs_Morals
[2] https://etfgi.com/news/press-releases/2021/10/etfgi-reports-esg-etfs-and-etps-listed-globally-gathered-record-us119
[3] ASX Investment Products 30 September 2021

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