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

During an investigation into potential market manipulation, enforcement staff from the Financial Industry Regulatory Authority (FINRA) issue formal requests for documents and testimony to three individuals: a registered representative at a member broker-dealer, an executive at a commercial bank, and an unaffiliated retail investor. Which of the following statements correctly describes FINRA's regulatory jurisdiction and authority to compel cooperation from these individuals?

  1. FINRA has the authority to compel documents and testimony from the registered representative through its membership rules, but it lacks jurisdiction to compel cooperation from the commercial bank executive or the retail investor.Answer
  2. B
    FINRA possesses statutory federal subpoena powers that allow it to compel testimony and records from all three individuals regardless of their membership status.
  3. C
    Because FINRA oversees securities market integrity, the Securities and Exchange Commission (SEC) automatically delegates federal subpoena authority to FINRA for all active enforcement investigations.
  4. D
    FINRA can issue administrative fines and suspend the professional licenses of both the commercial bank executive and the retail investor if they refuse to respond to the information request.

Answer

FINRA has regulatory authority to compel cooperation only from its member firms and their registered associated persons. It cannot compel testimony or records from non-member entities or public retail investors.
As a self-regulatory organization (SRO), FINRA derives its enforcement authority from membership rules and regulatory registration agreements. Under FINRA rules (such as Rule 8210), registered representatives of member broker-dealers are required to provide testimony and documents upon request. However, FINRA lacks sovereign subpoena power and cannot compel cooperation, issue administrative orders, or levy sanctions against non-member parties such as commercial bank personnel or public retail investors. Obtaining testimony or evidence from non-members requires a federal agency with statutory subpoena authority, such as the Securities and Exchange Commission (SEC).

Step-by-Step Solution

1
Identify the legal structure and statutory status of the investigating regulator.
FINRA is a self-regulatory organization (SRO) overseen by the SEC, rather than a federal government agency.
SRO authority is contractual and regulatory over industry participants, not sovereign over the general public.
2
Determine FINRA's jurisdictional boundary relative to the subjects of the investigation.
FINRA possesses regulatory power over the registered representative of its member firm, but lacks jurisdiction over the commercial bank executive and the retail investor.
Non-members have not submitted to FINRA rules or membership agreements.
3
Evaluate the mechanism required to compel information from non-member entities.
To obtain compelled testimony or documents from non-members, FINRA must refer the matter to a federal authority such as the SEC, which possesses statutory subpoena power.
Subpoena authority over non-regulated public entities is reserved for governmental agencies and courts.

Key Concept

Scope of SRO Compulsory Jurisdiction vs. Federal Agency Subpoena Power
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Topics

Regulatory Entities and Self-Regulatory Organizations (SROs)

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