FINRA Series 7Opens Accounts and Evaluates Customer ProfileHard
A registered representative's customer has an average monthly account equity of $40,000. Over the past 12 months, the representative made total stock purchases of $280,000 in the account. Using the standard annualized turnover rate formula (total purchases ÷ average equity), what is the account's turnover rate, and what does it suggest?
- A14.0, which automatically constitutes churning under FINRA rules
- B7.0, potentially indicative of excessive trading
- C3.5, well within normal limits
- D7.0, well within acceptable limits and no cause for concern
Show answer & explanationAnswer & explanation
Correct answer: B. 7.0, potentially indicative of excessive trading
Turnover rate = total purchases ÷ average monthly equity = $280,000 ÷ $40,000 = 7.0. A turnover rate above approximately 6 is generally viewed by regulators as a red flag suggesting the account may be traded excessively (churning), warranting further quantitative suitability review, though it is not automatically proof of churning.
Why the other options are wrong
- A. 14.0 is a mathematical error, and no single ratio 'automatically' proves churning without intent/control analysis.
- C. This turnover figure is incorrect based on the calculation.
- D. 7.0 exceeds the general threshold of concern (around 6), so this is not benign.
Turnover Rate (Quantitative Suitability)
A measure of how frequently an account's holdings are traded, calculated as total annual purchases divided by average account equity.
- Turnover rate above ~6 is generally considered a warning sign of excessive trading
- Churning also requires control by the rep and intent to generate commissions
- Quantitative suitability considers the cumulative effect of transactions, not just single trades
Memory trick: Turnover of 6+ turns heads — regulators start asking questions.