Month: June 2023

FINRA Rule 2010 was in the news this month when an Edward Jones advisor received a 15-month suspension and $15,000 fine for violating FINRA Rules 2010, 8210, and 4511.

So what is FINRA Rule 2010 and how do you stay in compliance?

 

FINRA Rule 2010 rule requires that “A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.”

Rule 2010 is purposefully broad and requires members to conduct themselves in an ethical manner in all business practices. The rule applies not only to a member’s behavior towards clients, but also applies to their relationship with FINRA. In 2015, FINRA found that advisors under investigation “each breached his fiduciary duty to those investors in misusing that fund’s assets” and also included in the ruling that the advisors provided misleading information to FINRA and failed to update their U4 form, in violation of FINRA Rule 2010 (1).

In another ruling, FINRA found that “associated persons may be held liable under FINRA Rule 2010 for any unethical, business-related conduct, regardless of whether it relates to securities or an associated person’s customers” (2). This definition goes back to a 1996 ruling in the case Vail v S.E.C. where the SEC upheld a ruling that Henry Vail “misappropriated funds from the Houston Young Professional Republicans Club” finding that this was “ business-related” conduct even if it did not involve securities (3).

Summary: Rule 2010 regulates all professional behavior, not just relationships with clients. This rule also applies to any business-related conduct as well as actions and behaviors towards regulators.

Contributor – Anne Harris, Head of Marketing, Presults

Sources:

1. https://www.finra.org/sites/default/files/NAC_2010024889501_121715.pdf

2. https://www.finra.org/sites/default/files/2019-07/nac-2015048362402-vedovino-051519.pdf

3. https://casetext.com/case/vail-v-sec#cb6d993c-f2ec-4703-b833-a922f85b23ae-fn4

Photo by Towfiqu barbhuiya on Unsplash

The SEC adopted new amendments last week that will remove and replace references to credit ratings from the existing exceptions in Rules 101 and 102 of Regulation M.

In conjunction with this rule, the SEC added a new records retention requirement for broker dealers with regards to the exception in Rule 101. In accordance with Regulation 17a-4, “broker-dealers would be required to preserve for a period of not less than three years, the first two years in an easily accessible place, the written probability of default determination made pursuant to proposed paragraph (c)(2)(i) of Rule 101.”

Per SEC Chair Gensler, “This adoption fulfills Congress’s wishes in the wake of the 2008 financial crisis, ensuring we don’t embed in our ruleset a reliance on credit ratings – and instead have appropriate alternative measures of creditworthiness.”

 

Read the full press release from the SEC here: https://www.sec.gov/news/press-release/2023-105

Find the final rule here: https://www.sec.gov/rules/final/2023/34-97657.pdf

To learn more visit, presults.com.

Contributor – Anne Harris, Head of Marketing, Presults