Table of Contents
SERIES 7 | SERIES 65 | FINANCIAL REGULATION COURSES
FINRA Rule 2020 — Use of Manipulative, Deceptive or Other Fraudulent Devices — is the self-regulatory organisation level anti-fraud prohibition applicable to every FINRA member firm and associated person, stated in its entirety as follows: 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.
Rule 2020 is FINRA's codification at the self-regulatory level of the anti-fraud principle established at the federal level by Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 — the primary federal anti-fraud prohibition applicable to all purchases and sales of securities.
Together Rule 2020 and its federal counterparts create an overlapping and mutually reinforcing anti-fraud framework that subjects the full range of manipulative, deceptive, and fraudulent conduct in connection with securities transactions to both federal regulatory enforcement by the Securities and Exchange Commission and self-regulatory enforcement by FINRA.
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.
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.
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 enforcement actions and 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.
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 — the simultaneous or near-simultaneous purchase and sale of the same security 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 — coordinated trades between two or more parties who agree in advance to buy and sell specific securities at specific prices — 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 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 being the false impression conveyed to the market that the trade reflects legitimate market analysis rather than misappropriated confidential 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.
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 that include procedures for reviewing securities transactions to identify potential violations of Rule 2020 and the federal anti-fraud provisions.
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 face Rule 2020 charges for failing to prevent the manipulative conduct, in addition to the individual charges against the associated persons directly responsible.
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.
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.
