Sales Practices

Regulatory status current as of June 2026 — verify effective dates, dollar thresholds, and pending rulemakings against current SEC/FINRA/FinCEN sources before advising.

Core Concepts

FINRA Rule 2010 — Standards of Commercial Honor

FINRA Rule 2010 is the catch-all ethical standard for all member firms and associated persons. It requires adherence to "high standards of commercial honor and just and equitable principles of trade." This rule is intentionally broad and serves as the basis for disciplinary action even when no other specific rule is violated. Conduct that is unethical, dishonest, or in bad faith — even if technically legal — can be sanctioned under Rule 2010. FINRA enforcement frequently pairs Rule 2010 with more specific rule violations as a supplementary charge. Examples of standalone Rule 2010 violations include forgery, misrepresentation of credentials, conversion of client funds, and failure to disclose material information.

FINRA Rule 2020 — Use of Manipulative, Deceptive, or Other Fraudulent Devices

FINRA Rule 2020 prohibits any member or associated person from effecting any transaction in, or inducing the purchase or sale of, any security by means of any manipulative, deceptive, or other fraudulent device or contrivance. This rule mirrors the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. It covers a broad range of manipulative schemes including pump-and-dump, marking the close, wash trading, matched orders, and any scheme to defraud customers or the market.

Churning and Excessive Trading

Churning occurs when a broker engages in excessive trading to generate commissions rather than to benefit the customer. Two distinct legal frameworks apply, and they have different elements:

• Fraud-based churning (Section 10(b)/Rule 10b-5, Section 15(c)): Requires proof of (1) control — de facto or de jure control over trading decisions (de facto control exists when the customer routinely follows the broker's recommendations without independent judgment); (2) excessive activity inconsistent with the customer's objectives; and (3) scienter — intent to defraud or reckless disregard for the customer's interests.
• Rule-based excessive trading (FINRA Rule 2111.05(c) quantitative suitability; Reg BI Care Obligation for retail customers): Since FINRA's 2020 amendments (Regulatory Notice 20-18, effective June 30, 2020), the control element has been removed — a broker who recommends a series of transactions must have a reasonable basis to believe the series is not excessive in light of the customer's investment profile, regardless of whether the broker controls the account. No scienter is required.