The Expansive Reach of FINRA Rule 2010: Ethical Standards Beyond Securities Transactions

In the highly regulated world of financial services, much attention is paid to the detailed, technical requirements imposed by FINRA’s rulebook. Yet, beneath these specific provisions lies one of the most powerful and flexible rules in the entire securities regulatory framework: FINRA Rule 2010. Though its language is sparse, its reach is expansive, and its enforcement has proven to be a critical tool in FINRA’s enforcement toolbox and in protecting the integrity of the securities markets. In this article, I examine Rule 2010’s operation, the breadth of its application, and its role in policing unethical conduct within the industry.

The Expansive Scope of FINRA Rule 2010

FINRA Rule 2010 is the modern iteration of the New York Stock Exchange's Rule 401 and the National Association of Securities Dealers' (NASD) Rule 2110, both of which emphasized ethical conduct in the securities industry. When FINRA was formed through the merger of the NASD and NYSE regulatory arms in 2007, Rule 2110 was renumbered and retained as Rule 2010. Over time, the application of the rule has evolved but maintained its broad mandate while being applied to various forms of misconduct.

FINRA Rule 2010 lies at the heart of FINRA’s regulatory structure and enforcement mechanism, and provides that “[a] member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.” At first glance, this may appear to be simply a ceremonial or aspirational statement of professional values and not much more. In practice, however, FINRA Rule 2010 functions as both an independent ethical standard and a powerful enforcement tool capable of addressing a wide range of misconduct, including conduct not expressly prohibited by any other FINRA rule or law.

As noted, misconduct does not need to involve a security to constitute an ethical violation reachable by Rule 2010. See e.g. Dep't of Enforcement v. Gallagher, No. 2008011701203, 2011 FINRA Discip. LEXIS 40 (OHO June 13, 2011) ("Rule 2110 is an ethical rule … FINRA's authority to pursue disciplinary action for violations of Rule 2110 is sufficiently broad to encompass any unethical business-related misconduct, regardless of whether it involves a security."), aff'd, 2012 FINRA Discip. LEXIS 61 (NAC Dec. 12, 2012). Nor must the misconduct directly relate to the securities industry to violate FINRA rules. See e.g. Dep't of Enforcement v. Manoff, No. C9A990007, 2001 NASD Discip. LEXIS 4 (NAC Apr. 26, 2001), aff'd, Daniel D. Manoff, Exchange Act Rel. No. 46708, 55 S.E.C. 1155, 2002 SEC LEXIS 2684 (Oct. 23, 2002).

The most common way to run afoul of Rule 2010 is by violating any other FINRA or SEC rule or regulation, as any violation of a FINRA or SEC rule also constitutes a violation of Rule 2010. For example, a failure to cooperate with a FINRA investigation by refusing to respond to FINRA’s request to produce documents or information pursuant to FINRA Rule 8210 also constitutes a violation of FINRA Rule 2010. See e.g. Richard F. Kresge, Exchange Act Rel. No. 55988, 2007 SEC LEXIS 1407 (June 29, 2007) (stating “[i]t is well settled that a violation of a rule promulgated by the Commission or by NASD [the predecessor of FINRA] also violates Conduct Rule 2110” [the identical predecessor of FINRA Rule 2010]). Perhaps not surprisingly, FINRA Rule 2010 is the most cited rule violation in all FINRA disciplinary matters. 

While violations of any other FINRA or SEC Rule necessarily constitute a violation of Rule 2010, the Rule’s broad ethical standards prohibit and encompass misconduct that extends beyond regulatory rules and other legal requirements. The rule’s reach is not contingent on finding other rules or law violations; it applies to unethical misconduct regardless of whether other rules or law violations are established. See Heath v. SEC, 586 F. 3d 122, 132 (2d Cir. 2009) (citing with approval SEC decision rejecting the argument that the ethical rule can only be violated if other rules of legal conduct have been violated); see also Stephen J. Gluckman, 54 S.E.C. 175, 1999 SEC LEXIS 1395 (July 20, 1999), Dep't of Enforcement v. Trende, No. 2007008935010, 2011 FINRA Discip. LEXIS 54 (OHO Oct. 4, 2011). In fact, while admittedly not a frequent occurrence, there are disciplinary matters in which the sole rule violation cited was FINRA Rule 2010. Some examples are listed below:

• Dep’t of Enforcement v. Gadelkareem, No. 2014040968501, 2017 FINRA Discip. LEXIS 11 (NAC Mar. 23, 2017) (Registered representative violated FINRA Rule 2010 by engaging in abusive, intimidating, threatening, and harassing communications and conduct towards individuals associated with his former member firm.)

  
  

• Dep’t of Enforcement v. Grigsby, No. 2012030570301, 2014 FINRA Discip. LEXIS 56 (NAC Dec. 2, 2014) (Respondent violated FINRA Rule 2010 by continuing to act as a Financial and Operations Principal ("FTNOP") when he was prohibited from doing so pursuant to an agreement to settle a prior disciplinary proceeding commonly referred to as an "AWC".)

  
  

• Dep’t of Enforcement v. Hunt, No. 2009018068701, 2012 FINRA Discip. LEXIS 62 (NAC Dec. 18, 2012) (Respondent violated FINRA Rule 2010 by using the name, address, and social security number of a customer to make the customer a guarantor of a student loan without the customer's knowledge or authorization, and by submitting false expense reports to his firm).

  
  

• Dep’t of Enforcement v. McCrudden, No. 2007008358101, 2010 FINRA Discip. LEXIS 25 (NAC Oct. 15, 2010) (Upholding the finding of liability on cause two of the complaint, which held that McCrudden violated NASD Rule 2110, now FINRA Rule 2010, because he induced the filing of a false Form U5.)

  
  

• Dep’t of Enforcement v. Wheeler, No. 2010024320101, 2013 FINRA Discip. LEXIS 17 (OHO Feb. 26, 2013) (Respondent violated FINRA Rule 2010 by falsifying test score reports to make it appear that he had passed the Series 66 examination when he did not.)

However, Rule 2010 ostensibly applies only to “business-related” conduct, a phrase that is, at least in theory, a limiting principle designed to prevent the rule from extending into the purely private affairs of industry professionals. In practice, this limitation has proven remarkably elastic. The case law shows that as long as a person’s misconduct bears some nexus, however attenuated, to their professional role, employment, customers, or any business-related or like relationship that “reflects on the associated person's ability to comply with the regulatory requirements of the securities business,” it can be swept within the rule’s ambit. Daniel E. Manoff, 55 S.E.C. 1155, 1162, 2002 LEXIS 2684, *11 (2002); see also Vail v. SEC, 101 F.3d 37 (5th Cir. 1966) (finding that liability under the rule extends to misconduct related to the business of the member or associated person and affirming associated person's liability for misappropriating funds from the bank account of a political club, of which he was the treasurer).

The matter of Dep’t of Enforcement v. Fretz, No. 2010024889501, 2015 FINRA Discip. LEXIS 54 (NAC Dec 17, 2015), illustrates the broad and flexible interpretation of the term “business-related.” There, while recognizing that the liability under the rule extends to business-related conduct, the NAC went on to explain that the rule applies “in the context of a broker-dealer business, an asset management context, or in any other business or like relationship,” indicating that the “business-related” definition under the rule is broadly construed to apply to a variety of business or like relationships. Consequently, after finding that Fretz violated “the fiduciary duties they took on as managers of a private investment fund,” the NAC panel easily concluded that, even though FINRA lacked jurisdiction over the conduct of a hedge fund and Fretz as its investment manager, because Fretz was also an associated person of a FINRA member firm subject to FINRA’s jurisdiction, his conduct was “business-related” and sanctionable under the rule.

In Dep’t of Enforcement v. Hunt, the respondent was charged, among other things, with falsifying student loan applications for his daughter. In the first instance, Hunt used the name of one of his customers without the customer’s knowledge or authorization to fraudulently designate the customer as the cosigner. In the second instance, he falsified a photocopy of his daughter's driver's license to misrepresent his daughter’s residential address. While the Hearing Panel found that Hunt’s conduct was business-related in the first instance because Hunt used his customer’s name to falsify the application, in a rare decision, it refused to hold Hunt liable for his conduct of falsifying his daughter’s driver’s license because that conduct was not “business-related,” dismissing the charge. Dep’t of Enforcement v. Hunt, No. 200901868701 (OHO Oct. 17, 2011). The Hearing Panel noted, however, that Enforcement failed to prove that the two instances of misconduct concerned the same loan application, strongly implying that the result would have been different if that were the case.

On appeal, the NAC upheld the Hearing Panel’s findings of liability, stating:

Dep’t of Enforcement v. Hunt, No. 200901868701 (NAC Dec. 18, 2012). In short, although the misconduct involved neither securities transactions nor customer funds, and appeared purely personal in nature, the NAC held that the conduct was business-related because it involved confidential client information obtained through the respondent’s professional role with his firm, thereby violating Rule 2010. Enforcement did not appeal, and the NAC did not consider, the Hearing Panel’s determination that Hunt’s alteration of the photocopy of his daughter’s license was not business-related.

In Dep’t of Enforcement v. Vedovino, the NAC considered whether Vedovino's conversion of funds from an entity affiliated with his member firm qualifies as business-related conduct actionable under FINRA Rule 2010. While working at his FINRA member firm, Vedovino maintained personal bank and credit card accounts at a bank affiliated with his broker-dealer employer. Because Vedovino worked at the affiliated broker-dealer, the bank conferred certain employee-like “team-member” privileges on his accounts, including waiving certain bank and/or transaction fees that would otherwise have been charged. Subsequently, Vedovino submitted false reimbursement claims to the bank affiliate, falsely claiming that he was a victim of fraud and that several transactions in his bank account were unauthorized.

Even though the NAC conceded that these transactions were for personal consumption, it determined that his conduct was sufficiently “business-related” because Vedovino “converted funds from [the bank affiliate] through the use of his team member checking and credit card accounts, to which he was entitled solely based on his status as a registered representative with” his affiliated broker-dealer firm, a FINRA member firm. Dep’t of Enforcement v. Vedovino, No. 2015048362402, 2019 FINRA Discip. LEXIS 20 (NAC May 15, 2019). While acknowledging that Vedovino’s transactions were for “personal consumption purposes only,” the NAC reasoned that “the interconnectedness of his status as an associated person, his team member accounts, and the ethical implications of his misconduct support a finding of liability under FINRA Rule 2010.”

Under Vedovino’s broad reading of Rule 2010, even when conduct is admittedly for purely personal consumption purposes, it can still be deemed "business-related" under FINRA Rule 2010 if the misconduct is tied to privileges or opportunities arising from one's status as an associated person of a member firm.

As these decisions illustrate, FINRA Rule 2010 operates both as a companion provision for enforcing other FINRA and SEC rules and regulations and as an independent ethical standard capable of reaching broad categories and types of unethical conduct tangentially connected to business-like conduct.

Sanctions, Due Process, and Practical Implications for the Industry

Given the expansive scope of Rule 2010, it is unsurprising that its application has raised recurring due process concerns. At issue is whether a rule so broadly worded and so flexibly applied provides associated persons with fair notice of what conduct is prohibited and whether it is administered consistently. While respondents have argued that extending Rule 2010 to personal misconduct risks overreach, the SEC and FINRA adjudicators have consistently upheld its broad application, reasoning that the rule is essential for preserving market integrity and public confidence.

The NAC’s decisions in Fretz, Vedovino and Hunt suggest that regulators are prepared to pursue Rule 2010 violations in circumstances where the business-related nexus is tenuous but the reputational risk to the industry is material. This signals an important compliance message: brokers and firms must be vigilant not only in traditional securities activities but in any business-related context where professional ethics might come into question.

For firms, this expansive enforcement posture reinforces the importance of comprehensive ethics training and compliance programs that address both technical rule violations and broader ethical standards. Registered persons must understand that their obligations under Rule 2010 potentially extend to seemingly personal conduct involving firm resources, client information, and any other circumstances that may reflect upon their professional fitness.

Sanctions for Rule 2010 violations vary based on the severity and nature of the misconduct. FINRA’s Sanction Guidelines recommend a wide range of penalties, from fines and suspensions to permanent bars. FINRA will not hesitate to impose the most severe penalties where misconduct undermines public confidence or involves serious ethical lapses, even in cases not involving securities transactions.

The Future of Rule 2010 Enforcement

Looking ahead, Rule 2010 will remain one of FINRA’s most relied-upon disciplinary tools, precisely because of its inherent flexibility. As new technologies, business models, and financial products continue to evolve, so too will the potential risks to investors and market integrity. Rule 2010 provides FINRA with a catch-all mechanism to discipline unethical conduct that threatens the securities industry’s reputation, even if no specific rule or law has been violated.

At the same time, due process concerns surrounding the rule’s breadth are unlikely to disappear. To maintain the rule’s legitimacy and fairness, FINRA’s Enforcement department and adjudicatory bodies should continue to clearly articulate the specific factual basis for finding business-relatedness and ethical misconduct in each case. Consistency and transparency in this area are essential to balancing regulatory oversight with fairness to industry participants.