What are the 'Rules of Fair Practice'

The Rules of Fair Practice is a code of conduct for U.S. broker-dealers that requires loyalty to and fair dealing with customers. Developed by the National Association of Securities Dealers and now administered by the Financial Industry Regulatory Authority (FINRA), the Rules of Fair Practice provide detailed guidelines on how brokers can adhere to its mission, which is to protect investors and to maintain the integrity of the market. The Rules of Fair Practice, which set and promote ethical standards, are in addition to the full range of legal requirements as specified by securities laws.

Breaking Down 'Rules of Fair Practice'

Put succinctly, the Rules of Fair Practice require broker-dealers to treat customers fairly and equitably. In a broad view, the Rules of Fair Practice cover the fair dealing, duty of loyalty, obligation of disclosure and other duties broker and dealers perform for their customers.

Rules of Fair Practice: Prohibited Conduct

With its Rules of Fair Practice FINRA places a number of restrictions on brokers and dealers. For example, brokers are prohibited from using information gleaned from a seller to solicit sales from other clients unless the seller explicitly approves such an action. The rules also cover several other unethical behaviors, such as churning, in which a broker creates an excessive amount of activity in a client account to generate outsized commissions.

The Rules of Fair Practice also address fraudulent and deceptive practices. For example, trading ahead, which involves a broker executing trades for their firm's account while there are still customer order outstanding, is a prohibited practice. In addition, the rules forbid brokers from making trades in a customer account without their knowledge. Other prohibited actions include:

  • Making performance guarantees, making short-term mutual funds trades or switching from one fund to another for no reason, or personally lending money to a client or borrowing money from a client.
  • Recommending complex, high-risk products, such as derivatives, options and other risky securities until they know that a customer can afford a significant loss.
  • Misrepresenting products, making blanket recommendations, selling dividends or omitting key facts about a security or investment product.

For more, see FINRA's informational page on prohibited conduct.

Rules of Fair Practice: Penalties

Violation of the Rules of Fair Practice can lead to serious penalties for brokers and dealers. For example, brokers and dealers may be subject to fines, sanctions, restrictions to their practices, public censure of their behavior, the revocation of their FINRA membership or even a prohibition on associating with other FINRA members. FINRA publishes list of monthly and quarterly list of disciplinary actions taken against individuals or firms that violate its rules.

RELATED TERMS
  1. Fair Trade Investing

    Fair Trade Investing is the act of investing in companies or ...
  2. Fair Value

    Fair value is the value of a company’s assets and liabilities ...
  3. Financial Industry Regulatory Authority ...

    The Financial Industry Regulatory Authority (FINRA) is a regulatory ...
  4. Association Of Futures Brokers ...

    Association Of Futures Brokers And Dealers was a London-based ...
  5. Fair Trade Price

    Fair trade price is the minimum price paid for certain agricultural ...
  6. Agency Broker

    An agency broker is a broker that acts as an agent to its clients. ...
Related Articles
  1. Financial Advisor

    What Advisors Need to Know About Rule 3210

    Here's what advisors and brokers need to know about FINRA Rule 3210.
  2. Insights

    FINRA: How It Protects Investors

    Find out the history of FINRA, and how it's organized to monitor the markets and protect investors.
  3. Financial Advisor

    How to Avoid Advisors Who've Been Disciplined

    It's not hard to find out if a potential financial planner has a shady past. Here's why it's so important to check an advisor's credentials and history.
  4. Trading

    Is your forex broker a scam?

    While the forex market is slowly becoming more regulated, there are many unscrupulous brokers who should not be in business.
  5. Financial Advisor

    Why Financial Advisor Background Checks Are Vital

    An alliance of public interest groups is pressuring FINRA to broaden its BrokerCheck tool.
  6. Personal Finance

    How to Evaluate Financial Advisors Via BrokerCheck

    Many people research restaurants or movies, but few select brokers or financial advisors with much due diligence. Here's how BrokerCheck can help.
  7. Investing

    SEC to Propose Stricter Broker Standards

    The SEC will propose rules next week that will provide retail investors with more clarity into why a stockbroker is recommending a product.
  8. Financial Advisor

    Finra Releases Q&A Guidance on Recruiting

    FINRA has issued further guidance on its recruiting practices rule, which includes clarifying the definition of a former customer.
  9. Trading

    Price Shading In The Forex Markets

    This practice puts brokers ahead of their clients, but it doesn't have to be a negative for traders.
  10. Financial Advisor

    Choosing A Financial Advisor: Suitability Vs. Fiduciary Standards

    Discover the differences between the Suitability and Fiduciary Standards when hiring a financial advisor.
RELATED FAQS
  1. How does FINRA differ from the SEC?

    Discover how Securities and Exchange Commission (SEC) is different from the Financial Industry Regulatory Authority (FINRA) ... Read Answer >>
  2. Why Do Brokers Ask for Personal Information?

    There are 3 reasons a broker needs personal information: suitability, record-keeping and the law. Read Answer >>
  3. What is the difference between the rule of 70 and the rule of 72?

    Find out more about the rule of 70 and the rule of 72, what the two rules measure and the main difference between them. Read Answer >>
Hot Definitions
  1. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  2. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  3. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  4. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  5. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  6. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
Trading Center