A client loan, a finder's fee on a private deal or a tip passed at dinner happens off the firm's systems. As a principal, you pull that conduct into view and then approve, condition or stop it.
When you supervise the conduct of associated persons, two Financial Industry Regulatory Authority (FINRA) rules underlie every specific requirement. Standards of Commercial Honor and Principles of Trade (FINRA Rule 2010) requires members to observe high standards of commercial honor and just and equitable principles of trade. It reaches dishonesty no specific rule names, such as forging a client's signature.
Use of Manipulative, Deceptive or Other Fraudulent Devices (FINRA Rule 2020), FINRA's own antifraud rule, bars using any such device to effect a transaction or induce a purchase or sale.
KEY: Violating any FINRA rule or securities law also violates Rule 2010, so disciplinary actions almost always cite it alongside the specific rule.
When a representative stands to gain from a customer's account, an issuer's ownership records or a product sponsor's rewards, you must decide whether that interest is allowed.
Common mistakes
- Confusing notice with approval. Treating Rule 3270 notice as an approval requirement, see the 3270/3280 table.
- Mixing up who is covered. Rules 3270 and 3240 apply to registered persons. Rules 3280 and 3210 apply to every associated person, registered or not.
- Accepting post-account friendships. A friendship formed through the account fails the Rule 3240 personal-relationship exception, and a client who left four months ago is still a customer.
Bottom line
- Every violation of a FINRA rule or securities law also violates Rule 2010.
- Rule 2150 bans guarantees and allows account sharing only with written firm and customer authorization, in proportion to contribution, except for immediate family or an adviser meeting Rule 205-3.
- Rules 2320 and 2341 limit gifts to $300 per person per year, never tied to sales targets, and allow firm contests only on total, equally weighted production.
- Rule 3240 permits customer loans only under firm procedures and one of five exceptions, with prior written notice and approval for the same-firm, personal and business exceptions.
Exam shortcut
Notice or approval: "Notice" fits Rule 3270 and unpaid Rule 3280 deals. "Written approval" fits paid Rule 3280 deals and the last three Rule 3240 exceptions. Penalty by person: "Three times" applies to the trader or tipper, and "greater of $1 million" applies to the controller. Wrong answers: Eliminate any choice that makes the firm liable just for being the employer.
The full lesson (about 4,212 words, 28 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- B4
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