Commercial Honor and FINRA Rule 2010

We often trust professional brokers and firms to handle our securities transactions. We want to invest our money with a wise and honest broker-dealer. We hope brokers, financial advisors, and investment advisers handle our portfolios using the highest standard of professionalism.

Is there any oversight to ensure ethical conduct for the securities businesses handing customer funds and customer accounts? Read on to learn more about standards of commercial honor and principles of trade. FINRA Rule 2010 governs such business activities.

FINRA: An Overview

FINRA, the Financial Industry Regulatory Authority, is a non-governmental organization governing individual brokers and brokerage firms. In 2023, FINRA oversaw over 3,000 securities firms, and FINRA-registered representatives totaled more than 600,000 in 2022. Members include:

• Broker-dealers
• Investment advisor representatives
• Dual-registered individuals

FINRA differs from the Securities and Exchange Commission (SEC) in a few ways. The SEC is a government agency that seeks to protect individual investors and covers a broader scope than FINRA. The SEC covers all financial business activity in the U.S.

FINRA also seeks to protect individual investors. FINRA is a membership-based, private self-regulatory organization governing stock brokers and brokerage firms. FINRA does so by creating its own rules and enforcing federal securities laws.

FINRA has developed rules governing members of the securities industry. FINRA is authorized to discipline FINRA members who violate these rules with monetary fines and sanctions. Members must abide by its rules, such as Rule 2010.

Commercial Honor and Rule 2010

FINRA Conduct Rule 2010 is one of the shortest FINRA rules. However, it's one of the most powerful rules with the most far-reaching effects. It provides:

"A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade."

Rule 2010 requires that all member firms and associated persons conducting business, observe the highest standards of commercial honor and just and equitable principles of trade. This rule is somewhat of a catch-all rule. Under this rule, FINRA can punish unethical behavior and impose monetary sanctions to address violations of federal securities laws.

Key Principles of FINRA Rule 2010

The scope of FINRA Rule 2010 is broad. The breadth of this rule can create challenges in interpreting the rule. However, fundamental principles regulate professional behavior among registered firms and individuals. They include the following:

High Standards of Commercial Honor

Member firms and broker-dealers must uphold respectable, ethical business practices. Business practices must prioritize integrity and fairness in the financial sector.

Just and Equitable Principles of Trade

All sales of securities must embody impartiality and objectivity. Transactions and solicitation must promote good faith market participation. This rule prohibits conflicts of interest and unauthorized trading.

Treating Customers in an Ethical Manner

Interactions with clients and customers must reflect moral business principles. Members must put the client's interests first and treat them fairly.

Integrity of Financial Markets

FINRA Rule 2010 prohibits unethical conduct. Such conduct undermines investor confidence and compromises market systems. The rule prohibits gaining an unfair advantage over competitors through manipulative and deceptive practices.

Duty to Public Interest

The securities industry serves the public. It promotes economic security in equity securities sales through high professional standards.

What Are FINRA Rule 2010 Violations?

Federal law authorizes FINRA to discipline member firms and individuals who violate securities laws and FINRA rules. Section 15A of the Securities Exchange Act of 1934 authorizes FINRA to enforce disciplinary action for violations.

Acts found to violate FINRA Rule 2010 include the following:

• Downloading non-public customer information and sending it to a competing firm
• Disclosing confidential client information
• Misappropriating funds from a client
• An investment company failing to implement adequate supervisory protocols
• Communicating false and misleading information in account statements
• Passing bad checks
• Forging client signatures for customer orders
• Executing trades without required confirmations
• Altering client documents or affixing client signatures

FINRA Rule 2010 violations do not come with a fixed penalty. FINRA considers the severity of the behavior and harm when determining sanctions.

Rule 2010 Investigation Process

FINRA Rule 2010 violations often begin with a report of wrongdoing by a broker or firm. The report can come from a variety of sources. These sources can include the following:

• Automated surveillance reports
• Examination findings
• Filings made directly with FINRA
• Customer complaints
• Anonymous tips
• Referrals from other organizations
• Press reports

Once it receives a report, FINRA staff launches a thorough investigation of all allegations. This process is an objective fact-finding mission. The investigation is confidential. FINRA staff requests documents and takes sworn testimony.

This information becomes public once FINRA finds a violation of Rule 2010 and issues a sanction. Some examples of FINRA Rule 2010 violations and sanctions include:

• In 2021, FINRA ordered Robinhood Financial LLC to pay approximately $70 million for systematic supervisory failures and significant harm its customers suffered
• In December 2014, FINRA ordered two brokers associated with Wells Fargo Advisors to pay a joint $1.5 million fine for failing to comply with anti-money laundering compliance programs
• Also in December 2014, FINRA fined Pershing LLC $3 million for violating the Customer Protection Rule and related supervisory failures
• In January 2012, FINRA fined Merrill Lynch $1 million for circumventing mandatory arbitration requirements while pursuing the collection of employee promissory notes

Firms and individuals under investigation are entitled to be represented by counsel throughout this process.

Speak With a Lawyer About FINRA Issues

If you believe your broker violated FINRA Conduct Rules, speaking with a lawyer can offer guidance. A good first step is to gather as much information as possible so you are prepared to discuss your situation.

If you are a broker and have questions about FINRA compliance, contacting a lawyer can also help. An experienced securities law attorney can explain your legal options. Get in touch with a securities law attorney today.