Portfolio (Part 2, Topics 18-20)

Complete the lesson as written. Emphasize the role of government regulation in protecting investors and supporting the functioning of financial markets. Students should understand the distinction between market failure and government failure, the role of the Securities and Exchange Commission (SEC), and how securities regulation addresses problems such as misleading information, unfair treatment, fraud, and theft. Pay particular attention to the lesson’s discussion of Ponzi schemes and the Bernie Madoff case. Reinforce the distinction between losses resulting from the normal risks of investing and losses resulting from fraud or other wrongdoing.

Instructions: Introduce students to the ethical and professional responsibilities of individuals who provide investment advice or make investment decisions for others.

Begin with FINRA’s SEC Regulation Best Interest and Form CRS: What You Need to Know. Focus on the section explaining Regulation Best Interest (Reg BI). Emphasize that when a broker-dealer makes a securities recommendation to a retail customer, the broker-dealer must act in the customer’s best interest and cannot place its own interests ahead of the customer’s. Discuss the importance of disclosure of services, fees, and conflicts of interest.

Briefly review Form CRS as an example of how regulation helps investors evaluate financial professionals. Students should understand that it provides information about services, fees and costs, conflicts of interest, standards of conduct, and disciplinary history. 

Next, introduce the CFA Institute Code of Ethics and Standards of Professional Conduct as an example of professional ethical standards within the investment industry. Do not attempt to teach the entire Code. Focus students’ attention on the following standards:

• Duties to Clients: Loyalty, Prudence, and Care; Fair Dealing; Suitability
• Investment Analysis: Diligence and Reasonable Basis
• Conflicts of Interest: Disclosure of Conflicts

CFA Institute’s current Code and Standards explicitly include each of these areas. 

Emphasize that laws and regulations establish required conduct, while professional ethical standards can impose additional expectations concerning judgment, diligence, fairness, and responsibility.

Use the Federal Reserve Education article Beyond the Hype: An Introduction to Crypto Assets to introduce crypto assets as a modern investment alternative. Students should understand what crypto assets are, the basic role of blockchain and decentralized networks, and major types of crypto assets. Emphasize that crypto assets may be held as financial investments but can involve substantial price volatility and risk. The article also provides useful context by comparing the size of crypto markets with traditional stock and bond markets. Pasted text Pasted text

Pay particular attention to the sections “Beware of Scams,” “Are Crypto Assets Regulated?” and “Considerations Before Investing.” Use these sections to connect crypto investing back to the concepts of risk, investor protection, conflicts of interest, and evaluating sources of investment information introduced elsewhere in the toolkit.

Use the section “Who Demands Meme Stocks?” through the Conclusion from Federal Reserve Education’s Who Buys Meme Stocks?

Focus on the ways technology has changed individual investors’ access to financial markets. Discuss mobile trading apps, reduced or eliminated trading commissions, lower account minimums, and fractional shares.

Emphasize the economic concept of transaction costs: these innovations lowered the costs and other barriers associated with participating in financial markets, making investing accessible to more individual investors. Pasted markdown

Distribute the Applying Investment Ethics Handout. Have students work individually or in small groups to read four investment-related scenarios and identify the ethical or professional standard that best applies to each. Students must select from six possible standards and explain why the standard applies; not all standards will be used. After students complete the activity, review the scenarios using the included Teacher Answer Key.

Conclude with the debrief question: Can an action be legal but still raise an ethical concern? Why? Use the suggested answer provided in the Teacher Answer Key to guide the discussion. Emphasize that legal requirements establish minimum standards of conduct, while professional ethical standards may require additional care, fairness, disclosure, diligence, and judgment.

To prepare the activity, make:

• One copy of the Modern Investing: Robo-Advisors and ESG Funds worksheet for each student.
• Copies of the SEC Automated Investment Tools Investor Alert for half of the students.
• Copies of the SEC Environmental, Social and Governance (ESG) Funds Investor Bulletin for half of the students.

Divide students into two groups. Assign half of the students the SEC Automated Investment Tools Investor Alert and the other half the SEC Environmental, Social and Governance (ESG) Funds Investor Bulletin. Have students place a star next to their assigned topic on the worksheet and complete that section first as they read their assigned resource (approximately 10 minutes).

Next, pair each student with someone who read the other resource. Students should take turns teaching their partner what they learned. As each student listens, they should complete the remaining section of the worksheet based on their partner’s explanation (approximately 8–10 minutes).

Conclude with a brief whole-group discussion using the Debrief Questions and Suggested 

Answers included in the Teacher Answer Key.