Ethical Issues Related to the Mass Marketing of Securities

Author(s): Michael P. Coyne and Janice M. Traflet

Source: Journal of Business Ethics, Vol. 78, No. 1/2, The Twelfth Annual International
Conference Promoting Business Ethics (Mar., 2008), pp. 193-198
Published by: Springer
Stable URL: http://www.jstor.org/stable/25075600
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Journal of Business Ethics (2008) 78:193-198
DOI 10.1007A10551-006-9319-7
Ethical Issues Related to the Mass
Marketing of Securities
ABSTRACT. This paper examines ethical issues
involved in the mass marketing of securities to individ
uals. The marketing of products deemed "sociaUy ques
tionable" or "sinful" (like tobacco and alcohol) has long
been recognized as posing special ethical chaUenges
(Kotier, P. and S. Levy: 1971, Harvard Business Review 49,
74-80; Davidson, D. K: 1996, Selling Sin: The Marketing of
Socially Unacceptable Products (Quorum Press, Westport).
We contend that marketers should consider securities
(i.e. common stock, options) in a similar vein, as a
potentiaUy dangerous product. Given the inherent vola
tility of equity prices, responsible marketers need to
exercise caution and restraint in promoting securities. We
evaluate whether the NYSE's current guidelines ade
quately encourage ethical marketing practices and deter
unethical ones. Using recent examples of controversial
brokerage advertisements, we expose weaknesses in the
Exchange's vague injunction that members not "mislead"
reasonable people by making "exaggerated claims" in
their communications. From a moral perspective, we find
it troublesome that intentionality need not be present for
a promotion to be considered misleading. Also prob
lematic is the continued invocation of the reasonable
person standard to judge the propriety of advertisements.
We close with some thoughts on improving the quality of
securities marketing. We suggest that the NYSE, in the
interests of fostering higher ethical behavior among
member marketers, may need to revive a marketing code
of conduct prevalent on WaU Street in an earlier era.
KEY WORDS: advertising, business ethics, codes
of conduct, contramarketing, demarketing, morality,
NYSE, reasonable person standard, self-regulation, SEC
Introduction
Marketing any product or service carries with it
strong ethical responsibilities. However, certain
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? Springer 2007
Michael P. Coyne
Janice M. Traflet
products like tobacco, alcohol, and firearms, have
been identified as posing additional, special ethical
challenges for marketers. As D. Kirk Davidson
(1996 and 2002) has noted, when items are
potentially harmful and of questionable social
legitimacy, any mass marketing efforts, if under
taken, should be conducted with particular cau
tion. Potential customers should be warned of the
products' implicit dangers, and also should be
instructed on proper usage to minimize the chance
of injury to them or to society. Marketing experts
Philip Kotier and Sidney Levy (1971) identify such
warnings and cautionary tactics as belonging to a
strategy of "demarketing" - the practice of trying
to reduce, control, or shape demand for a product.
While demarketing has received considerable
attention in the three decades since Kotier and
Levy first coined the term, securities consistently
have been overlooked as one of the potentially
dangerous products for which the strategy is best
suited. We argue that due to their inherent vola
tility, securities should be considered by marketers
to be in a similar category as tobacco and alcohol,
and treated accordingly. A conservative, cautious
approach to marketing securities is ethically sound,
promoting the best interests of investors, individual
brokerage firms, the securities industry as a whole,
as well as society.
Determining what exactly constitutes "cautious"
brokerage marketing tactics can be, however, a dif
ficult task. Even assuming that one can agree that the
risks of equity investing should be contained in every
promotion or advertisement, how strong or direct
should the wording on the warning label be, and
should regulators indicate precisely what the label
says? And to what extent can the potential benefits of
equity investing be conveyed without diluting the
value of the warnings?
 194 Michael P. Coyne and Janice M. Tr?fet
Current NYSE guidelines
and their shortcomings
The NYSE's current guideUnes concerning member
firm marketing, embodied in the NYSE Constitu
tion, are basicaUy prohibitive in character, focusing
on what constitutes unethical marketing. For
instance, Rule 472, "Communications with the
Public," states in part
No member or member organization shaU ut?ize
any communication which contains (i) any untrue
statement or omission of a material fact or is
otherwise false or misleading; or (ii) promises
specific results, exaggerated or unwarranted
claims; or (iii) opinions for which there is no
reasonable basis; or (iv) projections or forecasts
which are not clearly labeled as forecasts. (NYSE
Constitution, Rule 472 (i) 2006)
Member firms that violate this rule face fines or
possible expulsion. Yet identifying violations is not
always easy, especiaUy when the aUeged infraction is
not in the form of an outright he. Whether a mar
keting claim is truly "misleading" or "exaggerated"
is open to interpretation and subject to degree. (How
misleading and how exaggerated must the claim be to
be detected and punished?) Furthermore, certain
marketing tactics - Uke the use of humor and sexy
appeals to enUven advertisements ? may lend
themselves to misinterpretation and therefore per
haps should be expUcitly discouraged.
Ethical controversies and complexities
underlying recent promotions
IUuminating the murky nature of assessing whether
an advertisement is "misleading," a 2002 Ameritrade
commercial featured two attractive women joggers
rushing home to make trades (and presumably sig
nificant money). This advertisement received con
siderable media attention due to its popularity (See,
for instance, Barber and Odeon, 2002). But wh?e
appearing innocent to some viewers, the Ameritrade
advertisement may be faulted by others for making
equity investing seem too simple...and perhaps too
sexy.
SEC officials have repeatedly criticized adver
tisements for glamorizing the stock market and
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exaggerating the upside potential of equity investing.
For instance, airing in 1999, at the height of the
dot.com bubble, a television commercial sponsored
by Morgan Stanley's Discover Brokerage unit fea
tured a fictitious young tow truck driver named
Al. Al's enormous tremendous profits purportedly
allowed him to purchase his own tropical island ?
actually a "country," notes Al in the commercial
(Barber and Odeon, 2002). SEC chairman Arthur
Levitt lambasted Discover Brokerage for this alleg
edly irresponsible advertisement, and also repri
manded the National Association of Securities
Dealers (NASD) and the NYSE for tolerating firms
making such exaggerated claims (Lux, 1999, p. 29).
Certainly, Levitt was right that the tropical island
commercial exaggerated the level of profits one
might reasonably expect from trading. Therefore,
the advertisement technically violated NYSE Rule
472, at least the letter of that law. But, as we will
discuss, it is not equally clear that Discover's use of
hyperbole contradicted the spirit of Exchange law,
nor is it obvious that this commercial actually was
unethical. Discover definitely was not circumspect
in the way it sold itself in this advertisement.
However, while cautious marketing is ethical, the
absence of caution is not, we argue, necessarily
unethical. This is a crucial distinction.
Unethical marketing, according to Craig Smith
and John Quelch (1993), "involves a breach of
ethics, the use of unethical practices within mar
keting to pursue corporate or an individual man
ager's ends." They warn
Unethical marketing also contradicts the social
role of the firm.... It constitutes deviant behavior
and would be dysfunctional as a consequence. If
undetected and unpunished, these practices ben
efit individuals, and perhaps their companies, at
the expense of other individuals and the eco
nomic system. (Smith and Quelch, p. 6)
Denying that his company's commercial was
unethical, Discover Brokerage President Thomas
O'Connell defensively explained that it was in
tended to be humorous and not meant to mislead
(Lux, 1999). However, "intent," while critically
important from an ethical perspective, is not even
mentioned in the NYSE's guidelines.
Likewise, the Federal Trade Commission (FTC)
also disregards intent in its definition of "deceptive
 Ethical Issues Related to the Mass Marketing of Securities 195
advertising" for consumer goods. The FTC char
acterizes advertising as deceptive if it misleads
(unintentionally or intentionally) the "reasonable
person," thereby inflicting harm. Daniel Attas
(1999) has criticized the FTC's legal definition of
deceptive advertising for focusing too much on
consumers' subjective perceptions of advertising and
not enough on marketers' act of deceiving and
underlying intentions. The same accusation could be
levied at the NYSE's marketing guidelines.
Ignoring for a moment the issue of intentionality,
it is important to consider whether the Discover
commercial may have misled "reasonable" viewers.
If the commercial indeed caused people to hold
erroneous beliefs, it is necessary to assess whether
those wrong beliefs caused injury to viewers, to
Discover's competitors, or to society. Somewhat
persuasively, O'Connell argued that buying a trop
ical island with stock winnings was such a prepos
terous idea that no reasonable person would find it
credible (Lux, 1999). Therefore, there could be no
injury inflicted by the commercial.
But even if a reasonable person did misinterpret
the contents of the commercial, this still does not
prove that the advertisement was necessarily uneth
ical. Perhaps the reasonable person standard, long
considered sacrosanct, may need to be reconsidered.
Indeed, Daniel Attas, commenting not specifically
on the NYSE, but on the FTC's notion of deceptive
advertising, finds flaw in the reasonable person
standard. He questions, "Cannot any communicated
message be misleading to some of the people, some
of the time?" Emphasizing that "misinterpretation is
a real possibility even for the most 'reasonable'
person," Attas gives the example of a man named
Abraham who erroneously believes that a dog on a
hill in the distance is a sheep
Another person might see that same dog from a
different angle, distance, past experience etc. and
recognize it as such. Whatever creates the distorted
belief in Abraham isn't merely the sheep, nor is it
the sheep plus the spatio-temporal qualities of the
situation. It is also due to the total context of
Abraham's prior experience, as well as culture- or
age-specific set of values and expectations he brings
to the situation. (Attas, 1999, p. 51)
Attas (p. 51) concludes that "A distorted perception
cannot be attributed exclusively to the objective
features of the perceived thing; there always exists a
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subjective input." A reasonable person potentiaUy
could misconstrue a promotion, through no fault of
the marketer.
Returning to the investor-on-his-island com
mercial, Morgan Stanley Discover Brokerage bowed
to SEC pressure, and agreed to stop airing the
controversial advertisement. But O'ConneU could
not resist issuing a parting shot to Levitt and the
SEC. O'ConneU insisted, "We don't believe that we
violated any rules" and added, "We believe that we
are among the most conservative of firms"
(O'ConneU quoted in Lux, p. 29).
Indeed, with its Morgan Stanley blue-blood roots,
the Discover Brokerage unit was among the more
conservative firms on WaU Street. Discover was not
one of the new firms that had sprung up during the
dot.com bubble, offering cutthroat commission rates
and sometimes practicing less than scrupulous mar
keting tactics to gain a foothold. The fact that a firm
as established as Morgan Stanley now was also
starting to make exaggerated claims worried the
SEC. In the SEC's eyes, a crackdown was necessary
before other established, reputable brokerage firms
foUowed suit, and began to lose their own long
standing marketing caution.
Abandonment of conservative marketing prac
tices, regulators feared, would induce investors to
come into the market with unrealistic expectations,
and to do so just as the dot.com bubble might be
about to burst. Indeed, Federal Reserve chairman
Alan Greenspan was warning Americans of "irra
tional exuberance", and predicting that a substantial
market correction was imminent. (See ShiUer,
2000). At such a potentiaUy volatile juncture, WaU
Street marketers needed to be particularly careful to
refrain from any promotional activities that could be
negatively perceived as luring people into the market
to enrich themselves at others' expense.
The price of deviant marketing
Consequently, in the wake of the Discover com
mercial, the NYSE and other regulators began more
aggressively fining firms for misleading advertising.
However, wh?e the number of fines increased, the
amount of the fines was not particularly substantial.
In 2001, Extrade, for instance, was fined only
$90,000 for an advertising infraction. As critics
 196 Michael P. Coyne and Janice M. Tr?fet
noted, this constituted only a mild slap on the wrist,
given the company's $2.5 biUion in revenue that
year ("Broker Group," 2002).
While these smaU fines might suggest that
unethical marketing on WaU Street largely goes
unpunished, in fact, many deviant firms eventuaUy
did endure just retribution, but more from market
forces than from punitive regulatory action. As the
stock market boom turned bust, fledgling companies
that had promised too much and delivered too little
often lost customers to more established - and more
reputable - competitors. Of course, though, the
damage to unsuspecting investors' pocketbooks was
already done.
In the bear market that foUowed the coUapse of
the bubble, financial marketing largely returned to
more conservative themes. Once again, most firms
emphasized the risks more than the rewards of
investing. A cursory examination of some recent
advertisements iUustrates this trend. For instance,
a Salomon Smith Barney promotion begins,
"Sometimes, NO is the most positive advice we can
give.... Helping you avoid the wrong investments is
as important as finding the right ones. If you're in
the market for a financial partner who's not afraid to
say no, talk with a Smith Barney Financial Consul
tant" (quoted in Eccleston 2002, p. 1). Similarly, a
Prudential Financial print advertisement emphasizes
"Growing and Protecting Your Wealth," not just
"Growing Your Wealth." The advertisement con
tinues:
Protect yourself against market volatility. We'U
help you create a customized asset aUocation to
find the right mix of stock, bond and cash
equivalent investments. Our world-class research
team wiU help you identify which areas are poised
for growth ? and which could pose a risk. And
we'U help you employ proven techniques for
managing volatility, like doUar-cost averaging,
(quoted in Eccleston 2002, p. 1)
These advertisements also indicate another devel
opment in the wake of the dot.com bubble burst:
a decline in the legitimacy of do-it-yourself investing
and a corresponding increase in the perceived
necessity of working with a financial advisor. This
issue of investing on one's own versus with a broker,
addressed by McGoun et al. (2006), raises some
interesting ethical issues. While modern technology
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now allows investors to trade without the assistance
of intermediaries, it remains to be determined
whether advertisements encouraging the general
public to trade this way are indeed ethical. For
various reasons such as lack of education and possible
addictive gambling propensities, many people may
be unable to invest competently on their own. For
example, the gullible might be unable to penetrate
potentially exaggerated claims by more aggressive
marketers. Companies like E*trade, Ameritrade, and
Charles Schwab therefore might be on shaky moral
ground when they make mass overtures to investors
to "do-it-yourself. Conversely, it is also not nec
essarily ethical to suggest that all investors absolutely
need financial advisors to achieve success.
Preliminary recommendations
While these and other ethical issues related to the
mass marketing of securities need to be more fully
addressed, we believe that it is helpful at this juncture
to make some preliminary observations and recom
mendations. We return to our original thesis that
securities indeed are dangerous products, given the
real possibility that investors (acting on their own or
with the help of financial advisors) may incur capital
losses. As a result, marketers, to be ethically correct,
carefully need to control and shape demand. In
short, they need to "demarket," to borrow Kotier
and Levy's term (1971). This means marketers must
not just encourage viewers to buy, but also must
adequately warn people that this particular product
or service may not be right for everyone. As we have
discussed, it is difficult to find the right balance
between encouraging and discouraging consump
tion.
We suggest that examining how the NYSE
executive body historically has handled walking this
line may illuminate a viable marketing path for the
future. Importantly, the NYSE once adhered to
much more stringent regulations on marketing.
Indeed, for more than a century and a half after its
founding, the NYSE refused to allow members to
run promotions with excessive text or even to fea
ture illustrations in advertisements (except pictures
of the company's executives). As the marketing
consulting firm Stewart McDougall and Associates
 Ethical Issues Related to the Mass Marketing of Securities 197
noted (1953), NYSE member firm promotions once
were so dry and somber that they were dubbed
"tombstone advertisements" and simply contained
the most basic information.2 We are not suggesting a
return to these harsh marketing restraints. However,
we do think it is valuable to examine the transition
period after World War II when the NYSE began to
relax its advertising restrictions.
Teaching members how to market ethically yet
a little more aggressively than in prior years, the
NYSE after World War II embarked on an
important marketing campaign known as "Own
Your Share of American Business," which ran
from 1953 to 1968.3 While the NYSE now al
lowed pictures in advertisements and also began to
encourage members to utilize a new medium
(television), the institution continued to urge
members to make sure their advertisements stressed
the risks more than the rewards of investing
(Traflet, 2003, 2004).
As Ruddick Lawrence, Vice President of Mar
keting at the NYSE in the 1950s, explained, the
Own Your Share campaign initiated a "Four Cau
tion" strategy. According to this marketing plan,
every member firm advertisement needed to hit on
these four key points:
First, understand the risk. Don't invest if you
can't afford it.
Secondly, have a cash reserve for emergen
cies. Don't put the rent money or the insur
ance money in the stock market.
Third, get good advice, go to a broker or
your banker or somebody who can help you
and...[then] check it out.
And finally.... Get the facts. Buy securities
on which you can get information. And
understand the facts, try to learn the facts.
(Lawrence, 1984).
Said Lawrence (1984), "We wanted people to be
educated [from advertisements], we wanted them to
be informed." Only on that basis could the NYSE
"proceed soundly to develop this nation of stock
holders."
Recollecting the NYSE's mid-twentieth century
marketing strategy in his Oral History, Lawrence
(1984) argued that it constituted a model code of
conduct which advertisers in other industries even
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tuaUy emulated. Supporting Lawrence's argument, a
few years after the NYSE initiated the Own Your
Share campaign (and before regulators began to
demand warning labels on certain products), the
tobacco industry in the late 1960s began attaching
cautionary labels to cigarette cartons (Lawrence,
1984).
For the securities industry, the "Four Caution"
strategy was an effective path to successful demar
keting. The NYSE was not aiming to decrease de
mand, but to control and shape it. In the two
decades (the 1950s and 1960s) when marketers
consistently preached the caution mantra, share
ownership substantially increased, as did investors'
level of education about the market (Traflet, 2004,
p. 268).
While some securities marketers still emphasize
some or aU of these warnings, perhaps it is time to
modify NYSE rules to ensure a modern day equiv
alent of the "Four Cautions" and its consistent
application. Demarketing through some version of
an updated "Four Cautions" seems the wisest and
safest promotional strategy for brokerage firms in the
long-run. However, as we have tried to highlight,
this does not necessarily mean it is unethical to
embark upon slightly more aggressive and risky
tactics, like the use of humor or hyperbole. More
over, it is worthwhile to note that, while regulators
like the NYSE, NASD, and SEC possess a strong
fiduciary responsibility to protect investors from
inappropriate and misleading inducements, con
sumers of securities also must assume some respon
sibility for their own buying behavior. If both
investors and marketers rise to their respective eth
ical duties, society wiU be best served.
Notes
Greenspan first used the phrase "irrational exuber
ance" in a speech in December 1996, and the phrase
gained in popularity during subsequent years. Robert
Shiller also helped popularize the term in his book by
that title, Irrational Exuberance (2000, Princeton: Prince
ton University Press).
Only containing the firm's name and address,
"tombstone ads" lacked a "message to the reader" and
hence were "not truly advertisements in the modern
merchandising concept," as consulting firm Stewart,
Dougall & Associates noted (1953, p. 6).
 198 Michael P. Coyne and Janice M. Tr?fet
The "Own Your Share of American Business" cam
paign material is preserved in the NYSE Archives. See
Own Your Share Campaign Folder, Box 1, Press Rela
tions, Public Information Advertising Campaigns, 1954
1964.
References
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Davidson, D. K.: 2002, The Moral Dimension of Marketing:
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Eccleston, J.: (2002), 'Truth in Advertising? Reps
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Kotier, P. and S. Levy: 1971, 'Demarketing, Yes,
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Michael P. Coyne and Janice M. Traflet
Management Department,
Bucknell University,
309 Taylor Hall, Moore Avenue, Lewisburg, PA,
17837, U.S.A.
E-mail: mcoyne@bucknell.edu