12.6 Ethics and Professional Conduct

FINRA Rule 2010 — The Catch-All

Rule 2010 requires members and associated persons to observe "high standards of commercial honor and just and equitable principles of trade." It is intentionally broad, so FINRA can discipline misconduct that no specific rule names — lying to a regulator, taking advantage of an elderly investor, or breaking a personal promise to a client. A key exam point: Rule 2010 can be violated even when no other rule is broken, and it applies to both firms and individuals.

Outside Business Activities — Rule 3270

FINRA Rule 3270 requires a registered person to give prior written notice to the firm before engaging in any outside business activity (OBA) — a second job, a board seat, weekend real-estate work, even certain rental-property income. The firm then evaluates the activity and may approve it, impose conditions, or prohibit it. OBA rules exist to surface conflicts and flag potential selling-away risk. Note the contrast with Rule 3280 (private securities transactions): an OBA needs notice; a securities transaction outside the firm needs notice and, if compensated, firm approval and supervision.

Gifts and Business Entertainment — Rule 3220

FINRA Rule 3220 caps gifts given in connection with the recipient's business to associated persons of other firms. The limit was historically $100 per person per year; the SEC approved an increase and the new cap is $300 per person per year, effective in 2026 — the first change since 1992, made to reflect inflation.

Example: A $325 gift basket to a counterparty's analyst violates the cap; hosting that analyst at a reasonable client dinner you attend does not.

Continuing Education — Rule 1240

FINRA continuing education has two parts. Important update: the Regulatory Element is no longer a 2nd/5th/8th-anniversary cycle. Since 2023, registered persons must complete the assigned Regulatory Element annually, by December 31, for each registration they hold. Miss the deadline and the registration goes CE Inactive, barring registered activity until the requirement is met. The Firm Element remains an annual, firm-designed training plan covering the firm's products, sales practices, and compliance needs.

Statutory Disqualification

A person may be statutorily disqualified — barred from associating with a member — by, among other things:

• A felony conviction within the past 10 years (any felony, not just securities-related)
• Certain misdemeanors involving securities or dishonesty
• A securities-regulator bar, suspension, or revocation
• A court injunction tied to securities activity
• Willful false statements on a registration filing

A firm wishing to employ a disqualified person must seek FINRA approval through the eligibility/MC-400 process.

Form U4 and Form U5

The Form U4 registers a person and discloses criminal history, regulatory actions, civil suits, customer complaints, terminations, and financial events (bankruptcies, liens). A person must amend the U4 within 30 days of a material change. When a rep departs, the firm files Form U5 within 30 days, stating the reason for termination; the rep may dispute the firm's language. False or omitted U4/U5 disclosures are themselves disciplinable. After a U5 is filed, the firm retains jurisdiction over the former rep for FINRA disciplinary purposes for two years.

Conflicts of Interest and Disclosure

Ethical practice centers on identifying and disclosing conflicts of interest. Common conflicts a rep must surface include receiving higher compensation on proprietary or higher-load products, revenue-sharing arrangements with fund families, and trading for the firm's own account in a security the firm recommends. Reg BI's Conflict Obligation requires written policies to identify and mitigate or eliminate these conflicts; merely disclosing some conflicts is not always enough — sales contests tied to specific securities within a limited time must generally be eliminated, not just disclosed.

Senior and Vulnerable Investors — Rules 2165 and 4512

Two rules protect vulnerable customers. FINRA Rule 4512 requires firms to make reasonable efforts to obtain the name of a trusted contact person at account opening. FINRA Rule 2165 permits a firm to place a temporary hold on a disbursement (and, since 2022 amendments, on a securities transaction) when it reasonably suspects financial exploitation of a "specified adult" (age 65+, or 18+ with an impairment). The initial hold can run up to 15 business days, extendable, giving the firm time to investigate suspected elder abuse without violating the customer's instructions.

A Gifts-and-Entertainment Scenario

A rep wants to thank a mutual-fund wholesaler's analyst. Sending a $290 wine set is permissible under the $300 Rule 3220 cap; adding a separate $50 holiday gift later the same year would push the aggregate to $340 and violate the cap, because gifts to one person are combined annually. By contrast, hosting that analyst at a reasonable dinner the rep personally attends is business entertainment, outside the gift cap entirely — unless it is so lavish (e.g., an all-expenses luxury trip) that it raises improper-influence concerns. Always record gifts and entertainment in the firm's log.

On the Exam

Know Rule 2010's breadth, the OBA-vs-Rule 3280 split, the $300 gift cap, the annual December 31 Regulatory Element deadline, that a felony in the past 10 years disqualifies regardless of subject matter, and the 30-day U4/U5 filing windows.