FINRA Rules Securities Fraud/Customer Dispute Claims

FINRA Rules Regarding Securities Fraud Claims

2010. Standards of Commercial Honor and Principles of Trade

A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.

2020. Use of Manipulative, Deceptive or Other Fraudulent Devices

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.

2060. Use of Information Obtained in Fiduciary Capacity

A member who in the capacity of paying agent, transfer agent, trustee, or in any other similar capacity, has received information as to the ownership of securities, shall under no circumstances make use of such information for the purpose of soliciting purchases, sales or exchanges except at the request and on behalf of the issuer.

2114. Recommendations to Customers in OTC Equity Securities

Preliminary Note: The requirements of this Rule are in addition to other existing member obligations under FINRA rules and the federal securities laws, including obligations to determine suitability of particular securities transactions with customers and to have a reasonable basis for any recommendation made to a customer. This Rule is not intended to act or operate as a presumption or as a safe harbor for purposes of determining suitability or for any other legal obligation or requirement imposed under FINRA rules and the federal securities laws.
(a) Review Requirement
No member or person associated with a member shall recommend that a customer purchase or sell short any OTC Equity Security, unless the member has reviewed the current financial statements of the issuer, current material business information about the issuer, and made a determination that such information, and any other information available, provides a reasonable basis under the circumstances for making the recommendation.
(b) Definitions
(1) For purposes of this Rule, the term “current financial statements” shall include:
(A) For issuers that are not foreign private issuers,
(i) a balance sheet as of a date less than 15 months before the date of the recommendation;
(ii) a statement of profit and loss for the 12 months preceding the date of the balance sheet;
(iii) if the balance sheet is not as of a date less than 6 months before the date of the recommendation, additional statements of profit and loss for the period from the date of the balance sheet to a date less than 6 months before the date of the recommendation;
(iv) publicly available financial statements and other financial reports filed during the 12 months preceding the date of the recommendation and up to the date of the recommendation with the issuer’s principal financial or securities regulatory authority in its home jurisdiction, including the SEC, foreign regulatory authorities, and bank and insurance regulators; and
(v) all publicly available financial information filed with the SEC during the 12 months preceding the date of the recommendation contained in registration statements or SEC Regulation A filings.
(B) For foreign private issuers,
(i) a balance sheet as of a date less than 18 months before the date of the recommendation;
(ii) a statement of profit and loss for the 12 months preceding the date of the balance sheet;
(iii) if the balance sheet is not as of a date less than 9 months before the date of the recommendation, additional statements of profit and loss for the period from the date of the balance sheet to a date less than 9 months before the date of the recommendation, if any such statements have been prepared by the issuer; and
(iv) publicly available financial statements and other financial reports filed during the 12 months preceding the date of the recommendation and up to the date of the recommendation with the issuer’s principal financial or securities regulatory authority in its home jurisdiction, including the SEC, foreign regulatory authorities, and bank and insurance regulators.
(2) For purposes of this Rule, the term “current material business information” shall include information that is ascertainable through the reasonable exercise of professional diligence and that a reasonable person would take into account in reaching an investment decision.
(3) For purposes of this Rule, the term “OTC Equity Security’ shall have the meaning described in Rule 6420.
(c) Compliance Requirements
(1) A member shall designate a registered person to conduct the review required by this Rule. In making such designation, the member must ensure that:
(A) Either the person is registered as a General Securities Principal or General Securities Sales Supervisor, or the designated person’s conduct in complying with the provisions of this Rule is appropriately supervised by a General Securities Principal or General Securities Sales Supervisor; and
(B) Such designated person has the requisite skills, background and knowledge to conduct the review required under this Rule.
(2) The member shall document the information reviewed, the date of the review, and the name of the person performing the review of the required information. In the event that the person designated to perform the review is not registered as a General Securities Principal or General Securities Sales Supervisor, the member shall also document the name of the General Securities Principal or General Securities Sales Supervisor who supervised the designated person.
(d) Additional Review Requirement for Delinquent Filers
If an issuer has not made current filings required by the issuer’s principal financial or securities regulatory authority in its home jurisdiction, including the SEC, foreign regulatory authorities, or bank and insurance regulators, such review must include an inquiry into the circumstances concerning the failure to make current filings, and a determination, based on all the facts and circumstances, that the recommendation is appropriate under the circumstances. Such a determination must be made in writing and maintained by the member.
(e) Exemptions
(1) The requirements of this Rule shall not apply to:
(A) Transactions that meet the requirements of Rule 504 of SEC Regulation D and transactions with an issuer not involving any public offering pursuant to Section 4(2) of the Securities Act;
(B) Transactions with or for an account that qualifies as an “institutional account” under NASD Rule 3110(c)(4) or with a customer that is a “qualified institutional buyer” under Securities Act Rule 144A or “qualified purchaser” under Section 2(a)(51) of the Investment Company Act;
(C) Transactions in an issuer’s securities if the issuer has at least $50 million in total assets and $10 million in shareholder’s equity as stated in the issuer’s most recent audited current financial statements, as defined in this Rule;
(D) Transactions in securities of a bank as defined in Section 3(a)(6) of the Exchange Act and/or insurance company subject to regulation by a state or federal bank or insurance regulatory authority; or
(E) A security that has a bid price, as published in a quotation medium, of at least $50 per share. If the security is a unit composed of one or more securities, the bid price of the unit divided by the number of shares of the unit that are not warrants, options, rights, or similar securities must be at least $50.
(2) Pursuant to the Rule 9600 Series, FINRA, for good cause shown after taking into consideration all relevant factors, may exempt any person, security or transaction, or any class or classes of persons, securities or transactions, either unconditionally or on specified terms, from any or all of the requirements of this Rule if it determines that such exemption is consistent with the purpose of this Rule, the protection of investors, and the public interest.

2150. Improper Use of Customers’ Securities or Funds; Prohibition Against Guarantees and Sharing in Accounts

(a) Improper Use
No member or person associated with a member shall make improper use of a customer’s securities or funds.
(b) Prohibition Against Guarantees
No member or person associated with a member shall guarantee a customer against loss in connection with any securities transaction or in any securities account of such customer.
(c) Sharing in Accounts; Extent Permissible
(1)(A) Except as provided in paragraph (c)(2), no member or person associated with a member shall share directly or indirectly in the profits or losses in any account of a customer carried by the member or any other member; provided, however, that a member or person associated with a member may share in the profits or losses in such an account if:
(i) such person associated with a member obtains prior written authorization from the member employing the associated person;
(ii) such member or person associated with a member obtains prior written authorization from the customer; and
(iii) such member or person associated with a member shares in the profits or losses in any account of such customer only in direct proportion to the financial contributions made to such account by either the member or person associated with a member.
(B) Exempt from the direct proportionate share limitation of paragraph (c)(1)(A)(iii) are accounts of the immediate family of such member or person associated with a member. For purposes of this Rule, the term “immediate family” shall include parents, mother-in-law or father-in-law, husband or wife, children or any relative to whose support the member or person associated with a member otherwise contributes directly or indirectly.
(2) Notwithstanding the prohibition of paragraph (c)(1), a member or person associated with a member that is acting as an investment adviser may receive compensation based on a share in profits or gains in an account if:
(A) such person associated with a member seeking such compensation obtains prior written authorization from the member employing the associated person;
(B) such member or person associated with a member seeking such compensation obtains prior written authorization from the customer; and
(C) all of the conditions in Rule 205-3 of the Investment Advisers Act (as the same may be amended from time to time) are satisfied.

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