NASAA Series 66 Uniform Combined State Law ExaminationLaws, Regulations, and Guidelines, including Prohibition on Unethical Business PracticesEasy
An agent of a broker-dealer is found to have 'churned' a client's account, executing excessive trades solely to generate commissions, without regard for the client's investment objectives. The client suffered significant losses as a result. This unethical practice would be considered a violation of which broad principle?
- AThe duty of fair dealing and ethical conduct.
- BThe duty of best execution.
- CThe duty to maintain adequate records.
- DThe duty to disclose all material facts.
Show answer & explanationAnswer & explanation
Correct answer: A. The duty of fair dealing and ethical conduct.
Churning is a classic example of an unethical business practice that violates the broad principle of fair dealing and ethical conduct owed to clients. It prioritizes the agent's financial gain over the client's best interest.
Why the other options are wrong
- B. The duty of best execution relates to getting the best price for trades, not the appropriateness or frequency of the trades themselves.
- C. Maintaining records is an operational duty, not directly related to the unethical act of churning.
- D. While related, the primary issue with churning is not a failure to disclose, but rather the excessive and inappropriate trading itself for personal gain.
Churning
Churning is an unethical and illegal practice where a broker-dealer agent executes excessive trades in a client's account solely to generate commissions, disregarding the client's investment objectives and financial well-being.
- Excessive trading volume.
- Primary motive is commission generation.
- Disregards client's best interests and objectives.
- Violates ethical duties of fair dealing and suitability.
Memory trick: Bad brokers and IAs put their wallets first, not their clients.