Commercial Honor and FINRA Rule 2010
We often trust professional brokers and firms to invest our money wisely and honestly. Of course, we all hope that brokers handle our portfolios using the highest standard of professionalism, but what happens when this doesn't happen? Read on to learn more about commercial honor as governed by FINRA Rule 2010.
FINRA: An Overview
The Financial Industry Regulatory Authority (FINRA) is a non-governmental organization that governs individual brokers and brokerage firms. FINRA differs from the Securities and Exchange Commission (SEC) in that the SEC is a government agency aimed at protecting individual investors, while FINRA is a membership-based and self-regulating private organization that governs brokers and firms. FINRA does so by creating its own rules and enforcing federal securities laws. FINRA is ultimately subject to the oversight of the SEC.
To facilitate this goal, FINRA has developed rules that govern members of the securities industry. FINRA is authorized to discipline members who violate these rules with monetary fines and sanctions.
Commercial Honor and Rule 2010
FINRA Conduct Rule 2010 is perhaps one of the shortest FINRA rules, however, it’s arguably the most powerful rule with the most far-reaching effects. Rule 2010 requires that all members, in the conduct of business, observe the "highest standards of commercial honor and just and equitable principles of trade." This rule is viewed as somewhat of a "catch-all" rule and it can punish unethical behavior as well as violations of federal securities laws by imposing monetary sanctions.
Acts that have been found to violate FINRA Rule 2010 include:
- Downloading non-public customer information and sending it to a competing firm
- Disclosing confidential client information
- Misappropriating funds from a client
- Passing bad checks
- Forging a client signatures
- Altering client documents or affixing client signatures
Rule 2010 Investigations and Monetary Awards
The process through which FINRA enforces Rule 201 typically begins with some sort of report of wrongdoing by a broker or firm. The report can come from a variety of sources, including automated surveillance reports, examination findings, filings made directly with FINRA, customer complaints, anonymous tips, referrals from other organizations, and press reports. Once it receives a report, FINRA staff launches a thorough investigation of all allegations. This process is an objective fact-finding mission that is non-public and confidential. FINRA staff requests documents and takes sworn testimony. Firms and individuals under investigation are entitled to be represented by counsel throughout this process.
Once FINRA has found there to be a violation of Rule 2010 and issues a sanction, this information becomes public. Some examples of FINRA Rule 2010 violations and sanctions include:
- In December 2014, FINRA ordered two St. Louis-based brokers associated with Wells Fargo Advisors to pay a joint fine of $1.5 million for failing to comply with anti-money laundering compliance programs.
- Also in December 2014, FINRA fined Pershing LLC $3 million for violations of 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.
Speak with a Lawyer About FINRA Issues
If you believe your broker has violated FINRA Conduct Rules, or you are a broker and have questions about FINRA compliance, a good first step is to gather as much information as possible. You may want to seek legal advice from an attorney who has experience with securities law.