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 client accounts purely to generate commissions, without regard for the client's investment objectives. This unethical and illegal practice is known as:
- AChurning
- BSuitability
- CTwisting
- DFree riding
Show answer & explanationAnswer & explanation
Correct answer: A. Churning
Churning is the unethical and illegal practice of a broker engaging in excessive trading in a client's account primarily to generate commissions rather than to benefit the client.
Why the other options are wrong
- B. Suitability is the obligation to recommend investments appropriate for the client, not a practice of excessive trading.
- C. Twisting is typically associated with insurance, involving inducing a policyholder to exchange one policy for another to the detriment of the client.
- D. Free riding is buying and selling securities without paying for them, usually in a cash account, which is a different violation.
Churning
Churning is an illegal and unethical practice where a registered representative engages in excessive trading in a customer's account for the primary purpose of generating commissions, disregarding the customer's financial interests and investment objectives.
- Excessive trading activity.
- Primary purpose is to generate commissions.
- Disregards client's investment objectives.
- Violation of FINRA rules and anti-fraud provisions.
Memory trick: Churning the account just churns up commissions for the broker.