FINRA Rule 2020

Where FINRA Rule 2010 establishes the broad principles-based ethical standard applicable to all conduct of member firms in their business — the catch-all rule described in detail in the FINRA Rule 2010 entry of this dictionary — Rule 2020 addresses the specific category of manipulative, deceptive, and fraudulent devices in connection with securities transactions, providing FINRA with a focused anti-fraud enforcement authority that parallels the SEC's authority under Rule 10b-5.

The Three Categories of Prohibited Conduct

Rule 2020 prohibits three overlapping categories of conduct in connection with securities transactions — manipulation, deception, and fraud — each of which addresses a distinct form of market misconduct that undermines the integrity of the securities markets and harms investors.

Manipulative devices are schemes that artificially affect the price or perceived market activity of a security — creating a false impression of supply, demand, or market interest that causes other investors to transact at prices that do not reflect genuine market forces. Market manipulation distorts the price discovery function of securities markets — the process through which buyers and sellers interact to establish prices that reflect the genuine supply and demand for securities — substituting artificial signals for real ones and inducing investors to make decisions based on false market information.

Deceptive devices are schemes that mislead investors about material facts relevant to their investment decisions — including misrepresentations about the characteristics, risks, or prospects of a security, misleading omissions of material information, and the creation of false impressions about market conditions, company performance, or regulatory status. Deception in the securities context encompasses both affirmative misstatements and misleading omissions — the duty to disclose material information is a core component of the anti-fraud framework applicable to broker-dealers making recommendations to customers.

Fraudulent contrivances are the broadest category — encompassing any scheme, artifice, or device designed to defraud investors or to obtain money or property through false pretences in connection with securities transactions. The fraudulent contrivance category ensures that novel forms of securities fraud that do not fit neatly into the manipulation or deception categories are nonetheless captured within the anti-fraud prohibition.

Rule 2020 and Section 10(b) of the Securities Exchange Act — The Parallel Framework

The relationship between Rule 2020 and Section 10(b) of the Securities Exchange Act of 1934 is one of parallel and mutually reinforcing authority — two regulatory frameworks addressing the same fundamental wrong through different enforcement mechanisms.

Section 10(b) and SEC Rule 10b-5 — described in detail in the Securities Exchange Act of 1934 entry of this dictionary — prohibit any person from employing any device, scheme, or artifice to defraud, making any untrue statement of a material fact, omitting any material fact necessary to make statements made not misleading, or engaging in any act, practice, or course of business that operates as a fraud or deceit in connection with the purchase or sale of any security. These prohibitions apply to all persons — not only FINRA members — and violations are enforced by the Securities and Exchange Commission through civil and administrative enforcement actions and, where a violation is wilful, by the Department of Justice through criminal prosecution.

Rule 2020 applies the same anti-fraud principle specifically to FINRA member firms and associated persons — providing FINRA with independent enforcement authority against the same conduct that Section 10(b) addresses at the federal level. A registered representative who manipulates a security's price or deceives a customer about a material fact can be charged simultaneously with a Rule 2020 violation by FINRA and a Section 10(b) violation by the SEC — the two enforcement actions are independent and the resolution of one does not preclude the other.

The practical significance of this parallel framework is that FINRA can act swiftly through its own disciplinary process — imposing fines, suspensions, and bars through FINRA's internal adjudicatory system — while the SEC pursues the same conduct through the federal court system or its own administrative proceedings. The speed and efficiency of FINRA's disciplinary process means that registered representatives who engage in manipulative or fraudulent conduct can be removed from the industry quickly while federal enforcement proceedings are still pending.

Section 15(c)(1) of the Exchange Act — The Broker-Dealer Model for Rule 2020's Wording

Rule 2020's operative words are closer to Section 15(c)(1) of the Securities Exchange Act of 1934 than to Section 10(b). Section 15(c)(1)(A) is the anti-fraud provision addressed specifically to brokers and dealers: it provides that no broker or dealer shall make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any security by means of any manipulative, deceptive, or other fraudulent device or contrivance. Rule 2020 uses the same verbs — effecting a transaction and inducing a purchase or sale — and the same closing phrase. Section 10(b), by contrast, is addressed to any person, and prohibits the use or employment of any manipulative or deceptive device or contrivance in contravention of the Commission's rules in connection with the purchase or sale of any security.

The statutory text nonetheless differs from Rule 2020's in ways that matter when the two are compared. Section 15(c)(1)(A) is framed around the use of the mails or of a means or instrumentality of interstate commerce — a jurisdictional element that Section 10(b) and Rule 10b-5 also contain and that the text of Rule 2020 does not. The statute also excludes commercial paper, bankers' acceptances and commercial bills from its reach, where Rule 2020 speaks simply of any security.

The statutory prohibition is not confined to brokers and dealers in corporate securities. Section 15(c)(1)(B) applies the same prohibition to brokers, dealers and municipal securities dealers in transactions in municipal securities, and Section 15(c)(1)(C) applies it to government securities brokers and government securities dealers in transactions in government securities, so that the broker-dealer anti-fraud prohibition reaches the municipal and government securities markets through the intermediaries registered to deal in them.

The Statutory Mandate Behind Rule 2020 — Section 15A(b)(6) and (7)

Rule 2020 is also one of the ways FINRA meets conditions the Exchange Act places on its own registration. Under Section 15A(b), an association of brokers and dealers shall not be registered as a national securities association unless the Commission determines, among other things, that its rules are designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade and, in general, to protect investors and the public interest. That requirement is Section 15A(b)(6), and an anti-fraud rule binding every member is a direct expression of it.

Section 15A(b)(7) adds a second condition: the association's rules must provide that its members and persons associated with its members shall be appropriately disciplined for violation of any provision of the Exchange Act, the rules or regulations under it, the rules of the Municipal Securities Rulemaking Board, or the rules of the association itself. FINRA's disciplinary reach is therefore not confined to its own rulebook.

In a FINRA proceeding the same misstatements can accordingly be found to violate Section 10(b) and Rule 10b-5 as well as Rule 2020. In its 2018 decision in Department of Enforcement v. Gomez, FINRA's National Adjudicatory Council found that a registered representative who misrepresented material facts to investors had violated both the federal securities laws and FINRA rules. The parallel framework described above is therefore not a strict division of labour in which only the Commission enforces Section 10(b): the Commission enforces it directly, and FINRA enforces it against the members and associated persons within its jurisdiction.

How the Commission Has Defined the Phrase — Rules 15c1-2 and 10b-3

The phrase manipulative, deceptive, or other fraudulent device or contrivance is not left undefined in federal law. For the purposes of Section 15(c)(1) the Commission has defined it in a series of rules, Rules 15c1-2 through 15c1-9, which bind brokers and dealers directly as federal law alongside Rule 2020.

Rule 15c1-2 is the general definition. Paragraph (a) provides that the phrase includes any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person. Paragraph (b) provides that it includes any untrue statement of a material fact, and any omission to state a material fact necessary in order to make the statements made not misleading, which is made with knowledge or reasonable grounds to believe that it is untrue or misleading. The standard in paragraph (b) is therefore not confined to a broker or dealer that actually knew a statement was false; it also reaches one that had reasonable grounds to believe so.

Paragraph (c) provides that the scope of Rule 15c1-2 is not limited by any of the specific definitions of the phrase contained in other rules adopted under Section 15(c)(1). The specific rules add to the general definition rather than marking its outer edge, so a practice that none of them names can still fall within it.

Rule 10b-3 carries these definitions across to Section 10(b). It makes it unlawful for any broker or dealer, in connection with the purchase or sale of any security otherwise than on a national securities exchange, to use or employ any act, practice, or course of business defined by the Commission to be included within the phrase as used in Section 15(c)(1). For over-the-counter transactions the same definitions therefore operate under both statutory provisions.

Representations the Commission Treats as Fraudulent Devices

Three of the specific definitions address what a broker or dealer tells a customer. Rule 15c1-3 defines as a fraudulent device any representation by a broker or dealer that its registration with the Commission, or the Commission's failure to deny or revoke that registration, indicates in any way that the Commission has passed upon or approved its financial standing, business or conduct, or the merits of any security or transaction. Registration is a regulatory status, not an endorsement, and presenting it as one is treated as deception in itself.

Rule 15c1-8 addresses sales at the market. A broker or dealer that is participating, or otherwise financially interested, in the primary or secondary distribution of a security not admitted to trading on a national securities exchange may not represent to a customer that the security is being offered at the market, or at a price related to the market price, unless it knows or has reasonable grounds to believe that a market for the security exists other than one made, created or controlled by itself, by any person for whom it is acting or with whom it is associated in the distribution, or by any person in a control relationship with it. A price described as the market price misleads when the only market is the seller's own.

Rule 15c1-9 addresses financial statements that purport to give effect to the receipt and application of any part of the proceeds from the sale or exchange of securities, the pro forma balance sheet being the familiar example. Their use is a fraudulent device unless the assumptions on which each such statement is based are clearly set forth as part of its caption, in type at least as large as that used generally in the body of the statement.

Discretionary Accounts and the Customer Definition — Rules 15c1-7 and 15c1-1

Rule 15c1-7 applies the defined phrase to accounts over which a broker or dealer, or its agent or employee, is vested with discretionary power. Paragraph (a) treats as a fraudulent device any act designed to effect, for such an account, transactions of purchase or sale which are excessive in size or frequency in view of the financial resources and character of the account. The measure is the account itself — its resources and its character — rather than the amount of trading considered in the abstract.

Paragraph (b) makes a record-keeping condition part of the same definition. A broker or dealer that effects a transaction in such an account must, immediately after effecting it, make a record that includes the name of the customer, the name, amount and price of the security, and the date and time when the transaction took place. A discretionary transaction effected without that contemporaneous record falls within the defined phrase whether or not the transaction itself was excessive.

Rule 15c1-1 supplies the definitions used in every rule the Commission has adopted under Section 15(c)(1). The term customer does not include a broker or dealer or a municipal securities dealer, although a municipal securities dealer that is not also a broker or dealer is a customer for transactions in securities other than municipal securities. Protections framed around a customer's account, such as those in Rule 15c1-7, therefore do not run to the accounts of other brokers or dealers.

The Mental State Rule 2020 Requires — Scienter

FINRA's National Adjudicatory Council requires proof of scienter to establish a violation of Rule 2020, as it does for Section 10(b) and Rule 10b-5. Scienter is a mental state embracing intent to deceive, manipulate, or defraud, and the NAC treats it as including reckless as well as intentional conduct. Reckless conduct in this sense is a highly unreasonable omission involving not merely simple, or even inexcusable, negligence, but an extreme departure from the standards of ordinary care, which presents a danger of misleading buyers or sellers that is either known or so obvious that the actor must have been aware of it. A careless misstatement, without more, is therefore not a Rule 2020 fraud.

The requirement comes from the words themselves. In Ernst and Ernst v. Hochfelder (1976) the Supreme Court read the words manipulative or deceptive, used in conjunction with device or contrivance, as strongly suggesting that Section 10(b) was intended to proscribe knowing or intentional misconduct. In Aaron v. SEC (1980) it held that scienter is an element of a violation of Section 10(b) and Rule 10b-5 regardless of the identity of the plaintiff or the nature of the relief sought, so that the Commission seeking an injunction must prove it as much as a private plaintiff seeking damages.

Hochfelder also explains why the wording of Rule 10b-5 could not lower that bar. Although subsection (b) of the rule, and arguably subsection (c), could be read as reaching any material misstatement or course of conduct that has the effect of defrauding investors, whether intentional or not, the Court held that the scope of Rule 10b-5 cannot exceed the power granted the Commission under Section 10(b). The rulemaking power of an agency is not the power to make law, but the power to adopt regulations to carry into effect the will of Congress as expressed by the statute.

Disclosure as the Boundary of Deception — Santa Fe and O'Hagan

The Supreme Court's readings of the same words in Section 10(b) also show what they do not reach. In Santa Fe Industries v. Green (1977) minority shareholders challenged a Delaware short-form merger as unfair, but they had been given an information statement containing the relevant financial data and appraisals and had been told of their right to an appraisal under state law. The Court held that the conduct alleged was neither deceptive nor manipulative. Manipulation, it said, is virtually a term of art when used in connection with securities markets, referring generally to practices, such as wash sales, matched orders or rigged prices, that are intended to mislead investors by artificially affecting market activity.

The Court restated the point in United States v. O'Hagan (1997): Section 10(b) is not an all-purpose breach of fiduciary duty ban, but trains on conduct involving manipulation or deception, and where all pertinent facts have been disclosed there is no deception through nondisclosure to which liability can attach. An unfair transaction that is fully disclosed may be a wrong for which state law provides a remedy, but it is not a deceptive device.

Full disclosure works the same way under the misappropriation theory of insider trading. Because the deception essential to that theory lies in feigning fidelity to the source of the information, a fiduciary who discloses to the source that he plans to trade on the nonpublic information uses no deceptive device and commits no Section 10(b) violation, although, the Court noted, he may remain liable under state law for breach of a duty of loyalty.

Specific Forms of Manipulation Addressed by Rule 2020

While Rule 2020's language is deliberately broad — encompassing any manipulative, deceptive, or fraudulent device — FINRA enforcement actions and SEC precedent have identified specific forms of market manipulation that clearly fall within its prohibition.

Wash trading — a transaction in a security that involves no change in its beneficial ownership, typically a purchase and sale of the same security entered at or near the same time by the same or affiliated parties — creates artificial trading volume that gives other market participants a false impression of genuine investor interest in the security, potentially inducing them to purchase at inflated prices. Wash trading violates Rule 2020 because it uses artificial transactions to create a deceptive appearance of market activity that does not reflect genuine supply and demand.

Matched orders — orders to buy or sell a security entered with the knowledge that an opposite order of substantially the same size, at substantially the same time and at substantially the same price has been or will be entered, whether by the same or by a different party — similarly create artificial trading activity designed to manipulate prices or volume. Matched orders differ from legitimate arm's length transactions in that the parties have pre-arranged the outcome — removing the genuine price discovery function of market trading.

Marking the close — executing transactions near the end of the trading day specifically to influence the closing price of a security — is a form of manipulation that affects the benchmark prices used for portfolio valuation, index calculations, options expiration settlements, and other purposes that depend on accurate closing price information. The Athena Capital Research case — in which the SEC found that the firm's algorithm systematically manipulated closing prices by exploiting order imbalances at the close — is a prominent example of closing price manipulation.

Layering and spoofing — placing large orders with no intention of executing them, to create a false impression of supply or demand that influences the market price, and then cancelling those orders once the desired price movement has occurred — are modern forms of algorithmic market manipulation that Rule 2020 addresses in conjunction with other FINRA rules governing trading practices.

Rule 2020 and Insider Trading

Rule 2020 operates alongside the insider trading prohibition established by Section 10(b) and Rule 10b-5 — both provisions apply when a registered representative trades on material non-public information or induces a customer to do so.

Insider trading — the purchase or sale of securities on the basis of material non-public information obtained in breach of a fiduciary duty or other relationship of trust and confidence — is both a federal securities law violation and a violation of Rule 2020, because trading on such information uses a deceptive device in connection with securities transactions — the deception lying in the trader's undisclosed breach of a duty of trust and confidence: under the classical theory, a duty owed to the shareholders on the other side of the trade to disclose the information or abstain from trading; under the misappropriation theory, a duty owed to the source of the information, whom the trader deceives by feigning fidelity while secretly trading on its information.

The Insider Trading entry of this dictionary addresses the full framework of insider trading liability under federal securities law. Rule 2020 provides FINRA with the parallel self-regulatory authority to discipline registered representatives who engage in insider trading — both alongside any federal enforcement action and independently when federal prosecution is not pursued.

The Supervisory Obligation Under Rule 3110

FINRA Rule 3110 — the supervision rule described in the FINRA Rule 3110 entry of this dictionary — requires member firms to establish and maintain supervisory systems and, under Rule 3110(d), to include in their supervisory procedures a process for reviewing securities transactions reasonably designed to identify trades that may violate the Exchange Act, its rules or FINRA rules prohibiting insider trading and manipulative and deceptive devices, and to investigate promptly any such trade.

This supervisory obligation creates a firm-level responsibility for preventing and detecting manipulative and fraudulent conduct — not merely a prohibition on individual associated persons engaging in such conduct. A member firm that fails to establish adequate surveillance procedures for detecting wash trading, layering, or other manipulative practices in its own trading activity or in activity it facilitates for customers may itself be charged under Rule 3110 for the supervisory failure, in addition to the Rule 2020 charges against the associated persons directly responsible — a failure to supervise being a distinct violation, for which FINRA's Sanction Guidelines provide a separate guideline under Rules 3110 and 2010.

The supervisory obligation under Rule 3110 in conjunction with Rule 2020 creates a comprehensive firm-level anti-manipulation framework — the written supervisory procedures must specifically address transaction review for potential manipulation, the surveillance systems must be capable of identifying suspicious trading patterns, and the escalation procedures must ensure that potential violations are promptly investigated and reported to FINRA as required.

Rule 2020 in a FINRA Proceeding — Department of Enforcement v. Gomez

The National Adjudicatory Council's 2018 decision in Department of Enforcement v. Gomez shows how a Rule 2020 charge is decided. Gomez, a registered representative, told investors that certain private entities owned or had access to pre-IPO shares of Groupon or Zynga, so that investing in those entities would give them an ownership interest in the shares, and told others that a coal company would conduct an IPO in the near future. Both statements were false: the entities did not own the shares, and the company had no plans for an IPO.

The Hearing Panel found that Gomez had misrepresented material facts, but concluded that he lacked scienter and dismissed the fraud claim, while barring him for selling securities away from his firm without giving it notice and for recommending them without a reasonable basis. The Department of Enforcement cross-appealed, and the NAC reversed the Hearing Panel's scienter finding and found the fraud violation. The Commission has held that the NAC acts within its authority in reviewing a Hearing Panel's dismissal of scienter-based fraud allegations, so a dismissal at the hearing stage is not necessarily the end of a fraud charge.

Two further points in the decision bear on Rule 2020 generally. The NAC observed that although Rule 2020 proscribes fraud with language similar to Section 10(b) and Rule 10b-5, it captures a broader range of activities. On sanctions, describing fraud violations as especially serious and subject to the severest of sanctions under the securities laws, it imposed a bar for the fraud violation and separate bars for each of the other violations, rather than a single sanction for the misconduct as a whole.

Sanctions for Rule 2020 Fraud — The FINRA Sanction Guidelines

FINRA's Sanction Guidelines, in their March 2024 version, carry a guideline headed Fraud, Misrepresentations, or Omissions of Material Fact, under FINRA Rules 2020 and 2010. It separates negligent misconduct from intentional or reckless misconduct, and the gap between the two is wide. For an individual, negligent misconduct points to a fine of $5,000 to $50,000 and a suspension in any or all capacities for one month to two years. Intentional or reckless misconduct points to a fine of $10,000 to $100,000 and directs adjudicators to strongly consider barring the respondent; only where mitigating factors predominate does the guideline suggest a suspension of six months to two years instead.

For firms the guideline sets separate fine ranges for small firms and for midsize or large firms, following the Guidelines' general approach of tailoring monetary sanctions to firm size. For a firm's intentional or reckless misconduct it suggests considering a suspension of the firm with respect to the relevant business lines or activities for up to two years and, where aggravating factors predominate, strongly considering expelling the firm. A footnote extends the guideline to violations of Sections 10(b) and 15(c)(1) of the Exchange Act, Section 17(a) of the Securities Act of 1933 and the rules under them.

Rule 2020 also appears in a second guideline, Churning, Excessive Trading, or Switching, which cites FINRA Rules 2020, 2111 and 2010 and Regulation Best Interest. For an individual it points to a suspension of one month to two years, or to a suspension of two years or a bar where aggravating factors predominate, and it directs adjudicators to strongly consider a bar for reckless or intentional misconduct, giving churning as the example.

Dissemination Without Authorship — Janus and Lorenzo

Who is liable for a false statement matters when a representative passes on words someone else wrote. In Janus Capital Group v. First Derivative Traders (2011) the Supreme Court held that the maker of a statement under subsection (b) of Rule 10b-5 is the person with ultimate authority over the statement, including its content and whether and how to communicate it, so that an investment adviser that merely participated in drafting a false statement made by another could not be held liable in a private action under that subsection.

Lorenzo v. SEC (2019) addressed the person who sends such a statement on. Francis Lorenzo, while director of investment banking at a registered broker-dealer, sent two e-mails to prospective investors whose content his boss had supplied and approved. The e-mails described a debenture investment as protected by $10 million in confirmed assets, although Lorenzo knew the company had disclosed that its total assets were worth less than $400,000, and he signed them with his own name and title. The Court held that dissemination of false or misleading statements with intent to defraud can fall within subsections (a) and (c) of Rule 10b-5, and within Section 17(a)(1) of the Securities Act, even if the disseminator did not make the statements and so falls outside subsection (b).

The decisions bear on Rule 2020 because FINRA reads its anti-fraud rule alongside Rule 10b-5: in Gomez the NAC cited the D.C. Circuit's decision in Lorenzo when setting out the subsections of Rule 10b-5 it applied together with Rule 2020. A representative who forwards a misleading communication with intent to defraud cannot escape liability under subsections (a) and (c) of Rule 10b-5 by pointing out that a colleague drafted it.

Examination Relevance and Key Takeaways

FINRA Rule 2020 is tested on the Series 7 and Series 65 examinations in the context of the anti-fraud framework governing broker-dealers, market manipulation, the relationship between FINRA's self-regulatory anti-fraud authority and the federal securities law anti-fraud provisions, and the supervisory obligations applicable to member firms.

The key points to retain are these.

FINRA Rule 2020 — Use of Manipulative, Deceptive or Other Fraudulent Devices — prohibits every FINRA member firm and 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. The three categories of prohibited conduct are manipulative devices — artificially affecting prices or creating false impressions of market activity — deceptive devices — misleading investors about material facts through misrepresentations or misleading omissions — and fraudulent contrivances — any scheme or artifice designed to defraud investors in connection with securities transactions.

Rule 2020 is the self-regulatory organisation level counterpart to Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 — the primary federal anti-fraud prohibition. Both frameworks apply simultaneously to the same conduct — FINRA can discipline registered representatives under Rule 2020 while the SEC pursues the same conduct under federal law independently. 

Specific forms of manipulation prohibited by Rule 2020 include wash trading, matched orders, marking the close, layering, and spoofing. Insider trading violates both Rule 2020 and the federal anti-fraud provisions simultaneously. Member firms must establish supervisory systems under FINRA Rule 3110 that include procedures for identifying potential Rule 2020 violations in firm and customer trading activity.