FINRA Rule 2010. Standards of Commercial Honor and Principles of Trade states, in full:
A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.
This is a broad statement and could be the subject of interpretation. As a service to investors, FINRA provides a list of the types of conduct in the securities industry that is prohibited and would, therefore, be a violation of Rule 2010. That conduct includes:
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Making a security purchase or sale recommendation to a customer that is unsuitable in light of the customer’s investment profile.
- Making a purchase or sale of a security in a customer account without first getting authorization to make the sale or purchase.
- One exception involves a customer giving written discretionary authority to effect transactions in the account.
- Failing to disclose or misrepresenting material facts about an investment.
- Taking funds or securities from a customer's account without the customer's approval.
- Making guarantees to customers that they will not lose money on a transaction, guaranteeing a specific price or making an agreement to share losses.
- Conducting private securities transactions with a customer in violation of FINRA rules, particularly when they are conducted without the knowledge and permission of their firm.
- Trading Ahead, a practice that involves trading securities from a market maker’s firm account ahead of matching bid and ask orders from other market investors.
- Failure to use reasonable diligence in ensuring a customer's order is executed at the best possible price, given prevailing market conditions.
- Effecting transactions or inducing customers to purchase or sell securities through the use of manipulative, deceptive or other fraudulent methods.
This list is certainly not exhaustive; however, it should give you a sense of what is right or wrong, ethical or unethical, good or bad. This list will assist you, as an investor, in ensuring that your financial advisor is staying on the right side of the ethical line and it will assist you, as a financial advisor, on determining where that line is drawn.
For more training courses on types of conduct in the securities industry that is prohibited and would, therefore, be a violation of Rule 2010 view WebCE's Firm Element Training Solutions.
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