Ethics and Professional Conduct
Ethical conduct is fundamental to the securities industry. FINRA rules establish standards for professional behavior that go beyond mere compliance with regulations.
FINRA Rule 2010 (Standards of Commercial Honor)
Rule 2010 is FINRA's catch-all ethics rule requiring members to observe "high standards of commercial honor and just and equitable principles of trade."
What Rule 2010 Covers
This broad rule covers conduct not specifically addressed by other rules:
| Covered Conduct | Example |
|---|---|
| Dishonesty | Lying to customers or regulators |
| Unethical Behavior | Taking advantage of elderly customers |
| Bad Faith | Failing to honor commitments |
| Unfair Dealing | Misleading advertising |
Key Point: Rule 2010 can be violated even when no specific rule is broken.
Outside Business Activities (OBAs)
FINRA Rule 3270 requires disclosure of outside business activities.
Disclosure Requirements
Representatives must provide written notice to their firm before engaging in:
- Any outside business activity
- Employment outside the firm
- Board positions
- Rental property ownership (may be required)
- Other compensated activities
Firm Response
After receiving notice, the firm may:
- Approve the activity
- Disapprove the activity
- Impose conditions on participation
- Request additional information
Purpose of OBA Rules
- Prevent conflicts of interest
- Ensure proper supervision
- Protect firm's reputation
- Identify "selling away" risks
Private Securities Transactions
FINRA Rule 3280 governs securities transactions outside the employing firm.
Requirements
| Situation | Requirement |
|---|---|
| Any participation | Written notice to employer |
| With compensation | Employer must approve and may supervise |
| Without compensation | Employer may still impose restrictions |
What's Considered "Participation"
- Selling securities
- Finding investors
- Negotiating terms
- Providing advice for compensation
Gifts and Gratuities
FINRA Rule 3220 limits gifts to associated persons of other firms.
Gift Limit
| Limit | Details |
|---|---|
| $100 per person per year | Total value of gifts |
| Aggregation | All gifts to same person combined |
| Exceptions | Promotional items, business entertainment |
Business Entertainment
Reasonable business entertainment is NOT subject to the $100 limit if:
- The member representative is present
- Not so lavish as to raise concerns
- Related to business purposes
Example: Taking a client to dinner = OK (if reasonable) Example: Giving a client $200 gift card = Violation
Continuing Education Requirements
FINRA requires ongoing education for registered persons.
Two Components
| Component | Description |
|---|---|
| Regulatory Element | FINRA-developed content; within 120 days of 2nd registration anniversary, then periodically |
| Firm Element | Firm-developed training; annual requirement |
Regulatory Element
- Computer-based training administered by FINRA
- Required every 3 years (on 2nd anniversary, then 5th, 8th, etc.)
- Covers regulatory developments and compliance
- Failure to complete results in inactive status
Firm Element
- Annual training plan developed by firm
- Covers products, compliance, sales practices
- Tailored to firm's business and registered persons' needs
- Documented and maintained
Statutory Disqualification
Certain events can result in statutory disqualification from the securities industry:
| Event | Description |
|---|---|
| Felony Conviction | Any felony in past 10 years |
| Certain Misdemeanors | Securities-related or involving dishonesty |
| Regulatory Orders | Bars, suspensions, revocations |
| Court Injunctions | Securities law violations |
| False Statements | In registration applications |
Consequences
- Cannot associate with a FINRA member firm
- May apply for re-entry through membership application
- Firm must apply for waiver to employ disqualified person
Form U4 and U5 Requirements
Form U4 (Registration)
Required disclosures include:
| Category | Examples |
|---|---|
| Criminal History | Felonies, certain misdemeanors |
| Regulatory Actions | Suspensions, fines, bars |
| Civil Actions | Securities-related lawsuits |
| Customer Complaints | Written complaints, arbitrations |
| Terminations | Reasons for leaving prior firms |
| Financial | Bankruptcies, liens, judgments |
Form U5 (Termination)
When a representative leaves a firm:
- Firm must file U5 within 30 days
- Must disclose reason for termination
- Representative can dispute disclosures
Duty to Update
- Representatives must update U4 within 30 days of material changes
- Failure to disclose can result in discipline
- Firms must report U4 amendments promptly
On the Exam
The Series 7 exam frequently tests:
- Rule 2010's broad ethics requirements
- OBA disclosure requirements
- Gift limitations ($100 per year)
- Continuing education components
- Form U4/U5 disclosure requirements
Under FINRA rules, what is the maximum value of gifts a registered representative can give to an employee of another firm per year?
A registered representative wants to work part-time at a real estate agency on weekends. What must they do?
The Regulatory Element of continuing education must be completed:
FINRA Rule 2010 requires members to observe high standards of commercial honor. This rule can be violated:
A registered representative is convicted of a felony. What is the consequence under securities regulations?
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