Securities Industry Essentials (SIE) ExamOverview of Regulatory FrameworkMedium
A financial professional, registered with FINRA, is found to have engaged in a pattern of excessive trading in a client's account, generating substantial commissions for themselves without commensurate benefit to the client. This unethical practice is known as:
- AInsider trading
- BChurning
- CFront-running
- DMarket manipulation
Show answer & explanationAnswer & explanation
Correct answer: B. Churning
Churning is the unethical and illegal practice of excessive trading in a client's account by a broker, primarily to generate commissions rather than to achieve investment objectives.
Why the other options are wrong
- A. Insider trading involves trading based on material non-public information.
- C. Front-running is executing orders on proprietary accounts before client orders to profit from price movements.
- D. Market manipulation involves artificially influencing the price of a security.
Churning
Churning is an illegal and unethical practice where a broker engages in excessive buying and selling of securities in a client's account primarily to generate commissions, disregarding the client's investment objectives.
- Excessive trading for commissions.
- Disregards client's investment goals.
- Violation of ethical conduct and FINRA rules.
Memory trick: Churning is a 'Commission Carousel' for the broker.