The FINRA Rule 2010, Explained
Gain clarity and confidence in navigating the regulatory landscape with Global Relay's comprehensive guide to FINRA Rule 2010. Unravel the intricacies of this foundational rule, understanding its implications for ethical conduct within the financial industry.
What is FINRA Rule 2010: Promoting high standards in securities markets
The Financial Industry Regulatory Authority (FINRA) oversees U.S. stock brokers and brokerage firms, ensuring that the broker-dealer industry operates with integrity and fairness at all times.
FINRA works under the supervision of the Securities and Exchange Commission (SEC), which is a government organization with a broader scope than FINRA, since the SEC’s remit covers all financial and business activity in the U.S.
In this article, we’ll decode what FINRA Rule 2010 is and answer some FINRA Rule 2010 FAQs to give you clarity over this topic. Importantly, we’ll also delve into the consequences of violating FINRA Rule 2010.
What is FINRA Rule 2010?
FINRA Rule 2010 states that “A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.”
Any FINRA Rule 2010 definition cannot skim over the mention of ‘the principle of commercial honor’, which is undoubtedly open to interpretation. Yet the scope of Rule 2010 is intentionally broad, equipping FINRA with flexibility to penalize bad conduct not specifically stated in other FINRA conduct rules.
The seriousness of breaching FINRA Rule 2010, also known as FINRA Conduct Rule 2010, cannot be understated. We’ll cover the implications of non-compliance of Rule 2010 later in this article.
FINRA Suitability Rule 2111
It’s important to note that FINRA Rule 2010 is distinct from FINRA Rule 2111, which concerns suitability. While there is clear crossover, FINRA’s FAQs on key topics including suitability provide a valuable resource for those seeking clarification.
Who does FINRA Rule 2010 apply to?
FINRA regulates U.S. firms in a critical part of the securities industry, extending its reach to broker-dealers, Capital Acquisition Brokers, and funding portals (also known as a crowdfunding intermediary).
In a 2023 FINRA Industry Snapshot report, the organization oversaw 3,378 securities firms and FINRA-registered representatives totaled 620,882 in 2022. Members consist of broker-dealers, investment advisor representatives, and dual registered individuals.
What are the key principles of FINRA Rule 2010?
FINRA Rule 2010 standards of commercial honor and principles of trade regulates professional behavior among registered firms and individuals, whether that’s towards a customer, internally, or to FINRA itself.
Reviewing FINRA Rule 2010 guidance punctuates its broad scope, posing a challenge to interpret the rules correctly. However, there are some key principles to be aware of:
- High standards of commercial honor: Firms and brokers must uphold respectable, ethical business practices that prioritize integrity and fairness in the financial sector.
- Just and equitable principles of trade: All securities dealings, trading, and business activities must embody impartiality, objectivity, and equality to promote good faith market participation. Therefore, unauthorized trading violates FINRA Rule 2010.
- Ethical treatment of customers: Interactions with customers and clients need to reflect moral business principles that put their interests first and treat them fairly.
- Integrity of financial markets: Unethical conduct that undermines investor confidence, compromises market systems, or seeks to gain unfair advantage over competitors should be prohibited.
- Duty to public interest: The securities industry has a core obligation to serve the wider public good and economic stability through high professional standards.
In essence, Rule 2010 mandates ethical obligations for securities professionals that live up to principles of ethical business practices, justice, integrity, and duty to the investing public. Violating these standards risks disciplinary action.
FINRA Rule 2010 violation: What are the consequences of non-compliance?
Under the provision of Section 15A of the Securities Exchange Act (SEA) of 1934 (which later authorized the formation of the SEC), FINRA possesses the authority to discipline its member firms and certain individuals for violations of securities laws and rules administered by FINRA. FINRA Rule 2010 and Section 15A are related insofar as FINRA established FINRA Rule 2010 under its Section 15A authority.
FINRA has the power to enforce disciplinary actions for violations of its rules and the arrival of a FINRA Rule 2010 Wells Notice marks a key step in FINRA’s enforcement protocol.
FINRA has an arsenal of sanctions it can deploy which includes:
- Imposing fines, suspensions and censures on a respondent
- Limiting a respondent’s business activities for a defined period
- Barring individuals from associating with FINRA-regulated firms
- Expulsion of firms from FINRA and consequently the securities industry
FINRA’s Sanction Guidelines outline how disciplinary sanctions are deployed to protect the investing public by deterring misconduct and upholding high standards of business conduct. There is no fixed FINRA Rule 2010 penalty, since the severity of the behavior and the harm caused is taken into consideration.
Examples of serious violations of FINRA Rule 2010: A case in point
In 2021, Robinhood Financial LLC was slammed for FINRA Rule 2010 violations and ordered to pay approximately $70 Million for systemic supervisory failures and significant harm suffered by millions of customers. The sanctions represent the largest financial penalty ever ordered by FINRA.
In a statement relating to arguably one of the most famous FINRA Rule 2010 cases, Jessica Hopper, Executive Vice President and Head of FINRA’s Department of Enforcement said,
“The fine imposed in this matter, the highest ever levied by FINRA, reflects the scope and seriousness of Robinhood’s violations, including FINRA’s finding that Robinhood communicated false and misleading information to millions of its customers.”
Summary
FINRA Rule 2010 establishes crucial ethical standards for securities industry professionals to uphold high integrity in dealings with customers and market activities.
As the governing regulatory body, FINRA enforces this rule strictly – in 2022 alone, it reports having barred or suspended 555 individuals and imposed $54.5 million in fines for violations.
However, while far-reaching, Rule 2010 does have limits in scope. To help firms follow FINRA rules properly, the FINRA Manual is an important compliance resource, although there is no dedicated FINRA Manual for Rule 2010.
While there is undoubtedly expectation on financial firms to educate themselves on evolving guidelines and mitigate risk of disciplinary action, specialist compliance tools like communications surveillance play a crucial role in spotting issues as they happen, before it’s too late.