Securities Industry Essentials (SIE) ExamOverview of Regulatory FrameworkMedium
A registered representative (RR) is found to have engaged in excessive trading in a client's account, generating high commissions without a legitimate investment purpose, a practice known as churning. This action violates ethical standards and FINRA rules. Which ethical consideration is directly compromised by the practice of churning?
- AUpholding the duty of fair dealing and acting in the client's best interest.
- BComplying with prospectus delivery requirements for new issues.
- CEnsuring the firm's anti-money laundering (AML) program is effective.
- DMaintaining a Chinese Wall to prevent insider trading.
Show answer & explanationAnswer & explanation
Correct answer: A. Upholding the duty of fair dealing and acting in the client's best interest.
Churning directly violates a registered representative's duty to act in the client's best interest and engage in fair dealing. It prioritizes the RR's financial gain (commissions) over the client's investment objectives, which is a breach of fiduciary-like responsibility.
Why the other options are wrong
- B. Prospectus delivery is for new issues, unrelated to trading practices in existing accounts.
- C. AML programs combat illicit money, not excessive trading for commissions.
- D. Chinese Walls prevent information flow between departments, unrelated to churning.
Churning
Excessive trading in a client's account by a registered representative solely to generate commissions, without a legitimate investment purpose, violating the duty to act in the client's best interest.
- Prohibited practice under FINRA rules.
- Focuses on commissions over client benefit.
- A breach of the ethical duty of fair dealing.
Memory trick: Always act right, for the client's light.