FINRA Rule 2010: A Short Rule With a Long Reach

In keeping with this broader definition, FINRA has used Rule 2010 to discipline representatives for misconduct that puts customers at risk without requiring a finding of ill intent. In one case, for example, the president of a broker-dealer was sanctioned under Rule 2010 for his firm’s violation of the SEC’s net capital rule, which requires broker-dealers to keep a certain level of liquid assets on hand at all times.  The president argued that he did not intend for his firm to violate the net capital rule, but both FINRA and the SEC, which affirmed the sanction, held that whether the president intended to violate the rule was irrelevant. He was responsible for the rule violation because he was aware of his firm’s net capital insufficiency and permitted the firm to engage in securities transactions anyway.

In a similar vein, supervisory failures can also be the basis of a Rule 2010 violation even in cases where there is no suggestion that the supervisor acted in bad faith or with fraudulent intent. In a case from last year, a firm’s chief compliance officer was sanctioned under Rule 2010 for failing to ensure that his firm’s emails and instant messages were reviewed on a daily basis, as required by the firm’s written supervisory procedures.

Broad as it is, Rule 2010 is not limitless. In one recent case, a bank employee was accused of violating the rule when he twice allowed a business customer with an insufficient balance to cash checks against its account after the customer promised that additional funds would be deposited to the account shortly later. In reliance on those promises, the employee applied “credit memos” to the account, which permitted the customer immediate access to the cash.  On the second occasion, the bank suffered a loss when the promised funds never arrived.

FINRA argued that the employee acted unethically in applying the credit memos to let the customer cash the checks, but the hearing panel rejected this theory. Among other things, it found that there was no clear proof that the bank’s internal policies prohibited applying credit memos in these situations or that doing so was contrary to common industry practices.

Rule 2010 is also limited, at least in theory, by the requirement that the alleged misconduct be “business-related.” The misconduct does not have to involve securities or the securities industry to fall within the rule, though, and defense arguments on this point almost never succeed, both because the requirement is interpreted broadly and because FINRA naturally focuses its enforcement efforts on misconduct that affects the industry.

These guideposts help us understand the scope of Rule 2010, but the clear takeaway is that the rule is a flexible and powerful tool that FINRA turns to often to police industry misconduct.

John Curley is a partner at Hoguet Newman Regal & Kenney, LLP in New York. He focuses his practice on complex business and securities litigation, as well as securities-related regulatory investigations and proceedings. He can be reached at [email protected].