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Difficulty: MediumSelf-Regulatory Organizations (SROs) and FINRA

An investor discovers that a registered representative at a FINRA member broker-dealer engaged in unauthorized trading within their brokerage account. The investor demands that FINRA file criminal charges against the representative and send them to federal prison. Which of the following statements correctly evaluates FINRA's regulatory authority in this scenario?

  1. FINRA can investigate the allegation, issue monetary fines, and suspend or bar the representative from the securities industry, but it lacks statutory authority to file criminal charges or order imprisonment.Answer
  2. B
    FINRA operates as a federal government agency with statutory criminal jurisdiction to prosecute securities fraud and sentence violators directly to federal prison.
  3. C
    FINRA lacks jurisdiction over customer account misconduct because its regulatory scope is restricted to overseeing commercial bank deposit accounts and mortgage lending practices.
  4. D
    FINRA disciplinary rules apply only when a broker-dealer acts as a principal trading from its own inventory, excluding agency transactions conducted for retail clients.

Answer

FINRA can investigate the allegation, issue monetary fines, and suspend or bar the representative from the securities industry, but it lacks statutory authority to file criminal charges or order imprisonment.
As a self-regulatory organization (SRO) overseen by the SEC, FINRA possesses administrative and disciplinary jurisdiction over member broker-dealers and their registered representatives. FINRA can conduct investigations, levy monetary fines, issue censures, and suspend or permanently bar associated persons from the securities industry. However, because FINRA is not a government agency, it has no statutory police power to file criminal charges or sentence individuals to prison; criminal matters must be referred to state or federal prosecutors.

Step-by-Step Solution

1
Identify FINRA's organizational status within the regulatory framework.
FINRA is a non-governmental Self-Regulatory Organization (SRO) authorized by federal law to regulate broker-dealers under SEC oversight.
An entity's legal classification determines its regulatory scope and legal powers.
2
Distinguish between administrative SRO disciplinary powers and criminal police authority.
FINRA can impose administrative sanctions such as fines, censures, suspensions, or lifetime industry bars. However, criminal prosecution and imprisonment require statutory authority held exclusively by government entities (such as state attorneys general or the federal Department of Justice).
SROs possess jurisdiction over industry membership compliance, not criminal statutory enforcement.

Key Concept

FINRA Regulatory Scope and Disciplinary Limits
Estimated Time:1m 15s
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Topics

Self-Regulatory Organizations (SROs) and FINRA

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