What is FINRA Rule 2020?
FINRA Rule 2020 was put in place by the Financial Regulatory Authority (FINRA), to deter the use of manipulative, deceptive or other fraudulent devices. According to FINRA, no member shall effect any transaction in, or induce the purchase or sale of any security by means of any manipulative, deceptive or other fraudulent device or contrivance. Essentially, this rule is directly correlated with looking out for market manipulation.
What is FINRA?
The Financial Industry Regulatory Authority (FINRA) operates as a nonprofit, self-regulatory organization in the United States’ securities industry. FINRA has several responsibilities they maintain to ensure investor safety in the securities industry. Here are some important things to note about the responsibilities of FINRA:
Licensing and Registration: FINRA oversees the registration and licensing of brokerage firms and their registered representatives. This includes setting qualification and testing standards for industry professionals.
Rules: FINRA sets and upholds rules and regulations that oversee the conduct of its member firms and their affiliated individuals. These regulations span a range of facets within the securities industry, encompassing trading practices, interactions with the public, and sales practices.
Exams and Inspections: FINRA conducts routine examinations and inspections of its member firms to ensure compliance with regulatory requirements. This helps identify potential risks and areas of concern.
Enforcement: FINRA has the authority to take disciplinary actions against member firms and individuals who violate its rules and regulations. Sanctions can range from fines and censures to suspensions and expulsions from the industry.
Arbitration and Mediation: FINRA operates the largest securities dispute resolution forum in the United States. Investors and brokerage firms can use FINRA’s arbitration and mediation services to resolve disputes outside of the court system.
FINRA’s main goal is looking out for investors and making sure the market stays fair by keeping an eye on brokerage firms and their registered representatives. Even though it answers to the U.S. Securities and Exchange Commission (SEC), FINRA is viewed as more of a self-regulatory body than a government agency.
FINRA Rule 2020 Example
In October of 2014, The Securities and Exchange Commission (SEC) took action against a high-frequency trading firm, Athena Capital Research, for manipulating the closing prices of numerous NASDAQ-listed stocks during a six-month period in 2009. Athena utilized an algorithm named “Gravy” to engage in “marking the close,” a tactic involving the buying or selling of stocks just before the market closed with the aim of influencing the closing price. Their significant volume of last-minute trades overwhelmed the market, artificially steering prices in their favor.
Athena accepted a $1 million penalty. This case marked the SEC’s first instance of addressing manipulation in high-frequency trading, highlighting the SEC’s dedication to pursuing market manipulators, regardless of their trading sophistication. The manipulation specifically targeted order imbalances at the close of the trading day, exploiting these imbalances by ensuring their orders received priority treatment. This resulted in the manipulation of closing prices and had an impact on the closing auction process. The SEC issued a censure against Athena for violating securities laws, and the firm agreed to both the penalty and abstaining from future violations.
The Importance of FINRA Rules
FINRA rules act as a shield of protection for everyday investors. The rules ensure that when investors dive into the investment world, all of the transactions and brokers are fair and transparent. These rules have investors’ best interests.
First off, the rules are all about protecting individuals from any questionable practices. By keeping brokerage firms and their brokers in check, FINRA rules help prevent fraud and deceptive practices that could tamper with hard-earned money. Plus, these rules are the guardians of market integrity, making sure the financial grounds are level and equitable. Certain rules are also put in place requiring brokers to maintain full transparency on potential investments risks, fees, and any possible conflicts of interest.
Moreover, when an investment goes bad, or a broker hurts an investor financially, FINRA steps in to help settle disputes through an arbitration and mediation process. Many people find this process less stressful since arbitration and mediation are considered good options for resolving disputes. They offer a streamlined, more cost-effective, and specialized alternative to traditional litigation.
FINRA rules provide guidelines for investors and brokers within the financial landscape to ensure everyone is equipped to make smart financial decisions, while also serving as a reminder of the importance of good business ethics. FINRA continuously contributes to the protection of investors, the integrity of the financial markets, and the long-term sustainability of the financial industry.
Do you need a Securities Fraud Attorney?
The attorneys specializing in FINRA arbitration at The White Law Group have successfully managed more than 700 FINRA arbitration claims, addressing issues such as unauthorized trading, unsuitable investments, fraud, negligence, churning/excessive trading, and improper use of margin. The White Law Group, LLC, is a nationwide law firm focusing on securities fraud, securities arbitration, investor protection, and securities regulation/compliance.
