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Question

Difficulty: MediumRegulatory Entities and Self-Regulatory Organizations (SROs)

An investor learns that a registered representative engaged in deceptive sales practices when recommending municipal bonds to retail clients. While the Municipal Securities Rulemaking Board (MSRB) formulates rules governing municipal securities transactions, which entity has the primary authority to examine broker-dealers and enforce MSRB rules?

  1. The Financial Industry Regulatory Authority (FINRA)Answer
  2. B
    The Municipal Securities Rulemaking Board (MSRB)
  3. C
    The National Securities Clearing Corporation (NSCC)
  4. D
    The Securities and Exchange Commission acting as a Self-Regulatory Organization (SRO)

Answer

The Financial Industry Regulatory Authority (FINRA) has the primary authority to examine broker-dealers and enforce MSRB rules.
Although the Municipal Securities Rulemaking Board (MSRB) creates rules to protect municipal investors and municipal entities, it lacks statutory authority to inspect firms or enforce compliance. For securities firms operating as broker-dealers, examination and enforcement of MSRB rules are conducted by the Financial Industry Regulatory Authority (FINRA) along with the SEC.

Step-by-Step Solution

1
Analyze the statutory mandate of the Municipal Securities Rulemaking Board (MSRB).
The MSRB writes rules governing municipal market participants but has no independent inspection or enforcement authority.
The Securities Acts Amendments of 1975 established the MSRB as an SRO dedicated exclusively to rulemaking.
2
Identify the enforcement bodies designated for municipal securities rules.
Enforcement of MSRB rules is divided between FINRA and the SEC for registered broker-dealers, and bank regulators (such as the FDIC, Federal Reserve Board, and OCC) for bank dealers.
Broker-dealer member regulation and day-to-day market practice examination fall directly under FINRA's self-regulatory jurisdiction.

Key Concept

MSRB Rulemaking vs. FINRA Enforcement Authority
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Topics

Regulatory Entities and Self-Regulatory Organizations (SROs)

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