Don’t be deceived by FINRA Rule 2010’s small size: It packs a broad punch. Only 22 words long, the rule reads in full: “A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.”
Flowery phrases like “commercial honor” and “just and equitable principles” offer little insight into the specific types of conduct that can run afoul of the rule, but from the perspective of the Financial Industry Regulatory Authority, this lack of specificity is a feature, not a bug. The rule is a catch-all that provides flexibility to penalize conduct that is not expressly prohibited elsewhere either in FINRA’s rules or the securities laws.
The touchstone of Rule 2010 is its focus on conduct that calls into question an individual’s ability to comply with the regulatory requirements of the securities industry. There is a know-it-when-you-see-it aspect to many cases, but FINRA’s disciplinary decisions have added gloss to the rule that makes clear it reaches both “bad faith” and “unethical” conduct.
So what qualifies as bad faith or unethical conduct? These terms of art are not much clearer than the text of Rule 2010 itself, but there are a handful of guideposts that shed light on the contours of the rule.
An obvious rule of thumb is that dishonest conduct is prohibited. This should not be a surprise; actions taken with an intent to deceive fall comfortably within a consensus understanding of bad faith, a phrase that has been interpreted to mean “dishonesty of belief or purpose.” Examples of bad-faith conduct that FINRA has punished under this rule range from stealing customer funds to submitting false expense reports to cheating on licensing exams.
But the rule prohibits more than just traditionally dishonest conduct. Disciplinary decisions repeatedly emphasize that FINRA is not required to prove that an individual acted with a bad motive or intent to deceive. And, in line with FINRA’s focus on regulatory compliance, it has long been the rule that a violation of any FINRA or SEC rule is also considered a violation of Rule 2010, regardless of whether the underlying violation had an intent component.
Moreover, unethical conduct, unlike bad-faith conduct, is governed by an objective standard. To cite the SEC’s description, unethical conduct is behavior that is not in conformity with moral norms or standards of professional conduct.