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Difficulty: HardSelf-Regulatory Organizations (SROs) and FINRA

A financial holding company owns both a FINRA-member broker-dealer and a state-chartered commercial bank. A non-registered employee who works exclusively within the commercial bank's consumer savings division is suspected of misappropriating funds from bank deposit accounts. Which of the following statements correctly describes FINRA's regulatory jurisdiction over this matter?

  1. FINRA lacks jurisdiction over the employee and the banking division because its regulatory authority is restricted to member firms, associated persons, and securities-related activities.Answer
  2. B
    FINRA has statutory authority to examine the commercial banking division and bar the employee because FINRA regulates all financial subsidiaries under a broker-dealer's holding company.
  3. C
    FINRA can initiate criminal prosecution and issue subpoenas to non-registered banking staff, provided any final disciplinary censure is submitted to the SEC for approval.
  4. D
    FINRA assumes jurisdiction over the banking employee only if the bank acted as a principal dealer by buying securities directly from the customer's savings account.

Answer

FINRA lacks jurisdiction over the employee and the banking division because its regulatory authority is restricted to member firms, associated persons, and securities-related activities.
As a Self-Regulatory Organization (SRO), FINRA's enforcement authority is strictly defined by membership and association. It governs member broker-dealers, registered representatives, and securities business. Commercial bank deposit operations and non-registered bank employees fall outside FINRA's regulatory umbrella and are instead governed by banking regulators such as the FDIC, OCC, or state banking departments.

Step-by-Step Solution

1
Identify the entity and individual involved in the scenario.
The individual is a non-registered employee working exclusively for a state-chartered commercial bank division, not registered with or associated with a broker-dealer.
Regulatory jurisdiction depends on the specific legal charter of the institution and the registration status of the associated person.
2
Determine the scope of FINRA authority as a Self-Regulatory Organization (SRO).
FINRA regulates member broker-dealers, associated registered representatives, and securities transactions.
FINRA does not regulate commercial banking activities (such as savings/checking deposit accounts or traditional bank lending), which fall under federal and state banking regulators (e.g., FDIC, Federal Reserve, OCC).
3
Evaluate FINRA's jurisdiction over corporate affiliates.
Sharing a common parent holding company with a FINRA-member broker-dealer does not automatically subject a commercial bank or its non-securities employees to FINRA rules.
FINRA jurisdiction does not extend to non-member affiliates or non-registered personnel conducting purely commercial banking functions.

Key Concept

FINRA SRO Jurisdiction vs. Commercial Banking Oversight
Estimated Time:1m 40s
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Topics

Self-Regulatory Organizations (SROs) and FINRA

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