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Difficulty: Very hardSelf-Regulatory Organizations (SROs) and FINRA

During a compliance review, a broker-dealer discovers that one of its registered representatives conducted an extensive fraudulent scheme involving off-book securities transactions and wire fraud targeting retail investors. The firm immediately terminates the representative for cause and reports the incident. Following a formal investigation into the matter, FINRA determines that clear statutory violations occurred. Which of the following statements accurately describes the scope and legal limits of FINRA's regulatory enforcement authority in this situation?

  1. FINRA can bar the individual from associating with any member firm and levy administrative fines, but it lacks authority to bring criminal charges or order imprisonment.Answer
  2. B
    FINRA possesses delegated federal prosecutor status under the Securities Exchange Act of 1934, enabling its disciplinary panels to issue criminal indictments and mandate prison sentences directly in federal court.
  3. C
    Because the representative's misconduct violated federal criminal wire fraud statutes, FINRA automatically loses administrative jurisdiction over the associated person and must defer all sanctions to the court system.
  4. D
    FINRA holds direct statutory authority to freeze personal bank accounts and conduct mandatory depositions of non-registered third parties who aided the scheme but were never employed by a member firm.

Answer

FINRA can bar the individual from associating with any member firm and levy administrative fines, but it lacks authority to bring criminal charges or order imprisonment.
FINRA is a self-regulatory organization (SRO) responsible for overseeing broker-dealers and registered representatives. Its jurisdiction is administrative and professional in nature, allowing it to fine, suspend, or permanently bar individuals from the securities industry. However, FINRA is not a government body or law enforcement agency and has no power to bring criminal charges, issue criminal indictments, or sentence individuals to prison. Criminal matters uncovered by FINRA are referred to federal authorities (such as the Department of Justice) or state prosecutors.

Step-by-Step Solution

1
Identify the nature of the entity enforcing rules (FINRA).
FINRA is an SRO (Self-Regulatory Organization) overseen by the SEC, operating on membership contracts and industry regulation.
Understanding SRO status establishes the legal boundary between administrative regulation and government criminal authority.
2
Evaluate FINRA's sanctioning powers over associated persons.
FINRA can censure, fine, suspend, or permanently bar associated persons from membership.
SROs maintain disciplinary authority over industry participants to uphold ethical and operational standards.
3
Distinguish between administrative/civil disciplinary authority and government criminal prosecution.
Imprisonment and criminal indictments require law enforcement action (e.g., Department of Justice, State Attorney General). FINRA must refer criminal matters to federal or state law enforcement authorities.
SROs do not have police powers or prosecutorial authority under federal criminal law.

Key Concept

SRO Jurisdiction vs. Government Criminal Authority
Estimated Time:1m 30s
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Topics

Self-Regulatory Organizations (SROs) and FINRA

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