The Financial Industry Regulatory Authority (“FINRA”) is a private corporation that acts as a self-regulatory organization governing broker-dealers doing business in the United States. As such, FINRA promulgates rules by which its membership must abide. One of FINRA’s most powerful rules is Rule 2010 entitled “Standards of Commercial Honor and Principles of Trade.”
The rule states “[a] member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.”
The rule itself seems simple enough to understand and it is but it is the rule’s effects that are wide ranging. Let’s take a brief look at a couple of recent FINRA Letters of Acceptance, Waiver, and Consent (AWC) entered into by various brokers with FINRA arising out of FINRA enforcement proceedings to see the many ways in which Rule 2010 gets applied.
First, we examine the case of a former Wells Fargo Advisors, LLC broker from Naples, Florida, who was suspended from associating with any FINRA member firm for a period of fifteen (15) business days and fined five thousand dollars ($5,000). The broker entered into an AWC with FINRA to resolve allegations that over a five (5) month period of time, he effected discretionary transactions in four customer accounts without first obtaining prior written authorization from the customers and without having the accounts accepted as discretionary accounts by his then employing broker-dealer. He was in violation of NASD Conduct Rule 2510(b) and FINRA Rule 2010.
Next, we turn to a former Allstate Financial Services LLC stockbroker from Brownsville, Texas, who was recently suspended from associating with any FINRA member firm for a period of two (2) years and fined $20,000. The broker entered into an AWC with FINRA whereby she was sanctioned for her alleged actions with regard to facilitating the sales of approximately $1,000,000 of unapproved private securities in On The Edge Marketing LLC in violation of FINRA Rules 3040 and 2010. It was alleged that the broker personally invested in On The Edge Marketing LLC and that she also participated in sales of that company’s private securities to the investing public.
As the above examples illustrate, FINRA Rule 2010 is a powerful tool in the regulatory arsenal of FINRA that is capable of being utilized in a broad range of scenarios to punish its member firms and the agents who work for such firms. While Rule 2010 may seem to be of little value to everyday investors, the same principals of just and equitable trade as addressed in Rule 2010 apply to FINRA member firms’ dealings with the investing public. It can form the basis for establishing liability and ultimately an award in FINRA arbitration proceedings initiated by a customer.
Do you have a question about FINRA Rule 2010? Contact ChapmanAlbin to speak with an attorney.
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