SIE Ready🚫 Prohibited Activities · Lesson 6 of 6 · 5 min
The Rules Behind the Rules
⚖️ No rulebook can list every trick. So FINRA and the SEC wrote catch-all rules that cover the tricks nobody has invented yet.
💡 Key idea
Rule 2010 (commercial honor), Rule 2020 (no manipulative or fraudulent devices) and SEC Rule 10b-5 (antifraud for any security) catch misconduct that no specific rule names.
🧠 Why it matters
FINRA RULE 2010 requires 'high standards of commercial honor and just and equitable principles of trade.' It reaches conduct a specific rule may not, even outside securities, such as a rep taking money from a charity. FINRA RULE 2020 bans effecting or inducing any securities transaction by a manipulative, deceptive or fraudulent device. SEC RULE 10b-5, under the Exchange Act, is the broad antifraud rule: no scheme to defraud, no untrue statement of a material fact or misleading omission, and no deceptive act in connection with buying or selling ANY security, including exempt securities such as municipal bonds. Consequences can include censure, fines, suspension or a BAR, SEC action, restitution, criminal charges, and disclosures that follow the rep on BrokerCheck.
📈 In the real world
⛪ Rep Carla is treasurer of her church's fundraising committee and quietly borrows $3,000 from it to cover rent, planning to pay it back. No securities were involved, but FINRA can still sanction her under Rule 2010: dishonesty anywhere reflects on fitness to handle customers' money.
📌 Takeaways
- Rule 2010: commercial honor, even for conduct outside securities
- Rule 2020 and SEC Rule 10b-5: no fraud or manipulation in any securities transaction
- Sanctions run from censure and fines to suspension and a permanent bar
📖 Terms in this lesson
Rule 2010: FINRA's rule requiring high standards of commercial honor and just and equitable principles of trade.
Rule 10b-5: The SEC antifraud rule against misstatements, omissions of material facts and deceptive practices in buying or selling securities.
✅ Test yourself
Which rule requires FINRA members to observe high standards of commercial honor and just and equitable principles of trade?
- FINRA Rule 3240
- FINRA Rule 2010
- SEC Rule 17a-4
- FINRA Rule 2210
Answer: B · FINRA Rule 2010
Rule 2010 is the commercial honor rule. Rule 2210 covers communications, 3240 covers borrowing and lending, and 17a-4 covers record retention.
SEC Rule 10b-5 applies to fraud in connection with the purchase or sale of which securities?
- Only securities sold in an IPO
- Only exchange-listed stocks
- Only registered nonexempt securities
- Any security, even exempt ones
Answer: D · Any security, even exempt ones
Rule 10b-5's antifraud reach covers any security, including exempt ones like municipal bonds and government securities. Being exempt from registration never means exempt from antifraud rules.
Which sanction permanently removes a person from associating with any FINRA member?
- A suspension
- A bar
- A fine
- A censure
Answer: B · A bar
A bar permanently prohibits association with any FINRA member firm. A censure is a formal reprimand, a suspension is temporary and a fine is monetary.
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