Ethics
The moral principles that decide and influence a person's behaviour — what is right or wrong beyond what the law requires — and the standard an Investment Adviser is expected to hold to the highest degree.
In plain language
Following the law is not the same as behaving well. Doing what is legal keeps a person out of trouble; ethics is the separate, larger question of what is actually right.
The workbook defines ethics as several moral principles that decide and influence a person's behaviour — an area concerned with what is good for individuals and for society. It also defines ethics as a set of moral principles, or rules of conduct, that guide behaviour whenever that behaviour affects other people. Honesty, fairness, diligence, care and respect for others are the widely acknowledged principles the workbook names.
For an Investment Adviser, this matters more than for most professions. The work touches a client's money and their financial future, both deeply personal. Trust, once lost, is very hard for an adviser to rebuild.
How it works
The word itself comes from the Greek ethos, meaning custom, habit or character — the workbook notes the etymology to make the point that ethics grows out of a person's character and values over a lifetime, not out of any single rule.
The workbook gives a concrete illustration of an ethical failure that is not necessarily illegal: an Investment Adviser who never provides after-sales service to clients, even though it is expected and needed. Nothing here breaks a specific law, but it is a clear violation of ethical principle — the client was owed a standard of care the adviser simply did not deliver.
A worked example
Illustrative. An adviser manages a client's Rs 30,00,000 portfolio and is legally free to stop responding once the initial advisory fee is paid — nothing in the contract obliges further contact. Doing so would not be illegal.
An ethical adviser instead proactively checks in every quarter, flags that the client's equity allocation has drifted, and answers questions without charging extra for routine service. The law required neither adviser to do this. Ethics is what separates the two, and it is the difference the workbook says a client's trust is actually built on.
Why NISM asks about it
Chapter 19 (Ethical Issues), section 19.1 (Ethical issues), opens the chapter by defining ethics, its Greek origin, and the honesty–fairness–diligence–care–respect principles, before the chapter moves into ethical dilemmas and fiduciary responsibility. Expect a definitional question on ethics, or one distinguishing a legal breach from a purely ethical one using a scenario.
Common exam traps
- Being legal is not the same as being ethical. The workbook's after-sales-service example is deliberately one where nothing illegal has happened, to make this distinction stick.
- Ethics is described as arising from a lifetime of beliefs and values, not a fixed checklist — do not reduce it to a single memorised rule in an exam answer.
Check yourself
1.The term "ethics" is derived from which word, and what does it mean?
- a)The Latin word "ethica", meaning law
- b)The Greek word "ethos", meaning custom, habit or character
- c)The Greek word "ethikos", meaning goodness
- d)The Latin word "ethos", meaning duty
Show the answer
Answer: (b) The Greek word "ethos", meaning custom, habit or character
The term is derived from the GREEK WORD "ETHOS", WHICH MEANS CUSTOM, HABIT OR CHARACTER. That root explains the workbook's observation that ethics arises out of the basic values and character that a person has and is often the result of a lifetime of beliefs and values — a habit rather than a fresh decision each day.
2.Under the SEC code of ethics, how often must an adviser's access persons report their personal securities transactions?
- a)Once annually
- b)At least once quarterly
- c)Only on becoming an access person
- d)Monthly
Show the answer
Answer: (b) At least once quarterly
The SEC code requires each of an adviser's access persons TO REPORT HIS SECURITIES HOLDINGS AT THE TIME THAT THE PERSON BECOMES AN ACCESS PERSON AND AT LEAST ONCE ANNUALLY THEREAFTER, AND TO MAKE A REPORT AT LEAST ONCE QUARTERLY OF ALL PERSONAL SECURITIES TRANSACTIONS in reportable securities to the adviser's Chief Compliance Officer. Holdings annually, transactions quarterly — the two frequencies must be kept apart.
3.What is the relationship between acting within the law and acting ethically, according to the workbook?
- a)They are identical; anything legal is ethical
- b)Doing things within the ambit of the law ensures nothing illegal is done, but ethics goes one step beyond, bringing into play what is right or wrong behaviour
- c)Ethics is a subset of law
- d)Ethics applies only where the law is silent
Show the answer
Answer: (b) Doing things within the ambit of the law ensures nothing illegal is done, but ethics goes one step beyond, bringing into play what is right or wrong behaviour
Doing things that are within the ambit of the law is one thing, as this ensures that there is nothing illegal being done. BUT ETHICS GOES ONE STEP BEYOND THAT, AS IT BRINGS INTO PLAY WHAT IS RIGHT OR WRONG BEHAVIOUR. The workbook's own example is an adviser who might not provide any after-sales service — no law is broken, yet it is a clear violation of ethical principles.
Where this is taught
Free preparation for NISM Series X-ARelated terms
- Client First principleThe ethical standard that an Investment Adviser must conduct business putting the client's interest above everything else, including their own self-interest, as the base of client trust.
- Ethical dilemmaA situation with two possible courses of action, neither clearly superior, where the choice an Investment Adviser makes reveals — and shapes clients' perception of — their ethical standards.
- FiduciaryA person who acts on behalf of another and is bound to put that other person's interest above their own — the standing SEBI regulation places every Investment Adviser in toward their clients.