FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationProfessional Conduct and Ethical ConsiderationsMedium
A registered representative discovers that a colleague has been routinely 'churning' client accounts to generate excessive commissions. The representative is hesitant to report it due to fear of retaliation but knows it is wrong. According to FINRA rules, what is the representative's primary obligation in this situation?
- AInform the affected clients of the churning activity.
- BGather more definitive evidence before taking any action.
- CConfront the colleague directly to stop the activity.
- DReport the activity to a principal or appropriate supervisor at the firm.
Show answer & explanationAnswer & explanation
Correct answer: D. Report the activity to a principal or appropriate supervisor at the firm.
FINRA rules, including the Standards of Commercial Honor, require registered representatives to report suspected unethical or illegal activities, such as churning, to their firm's management or compliance department. This is the primary and most effective way to address such misconduct.
Why the other options are wrong
- A. While clients should eventually be informed, the representative's immediate obligation is to report internally.
- B. While gathering evidence can be helpful, delaying reporting while misconduct is ongoing is not acceptable; the primary obligation is to report promptly.
- C. Confronting the colleague may be ineffective or even escalate the situation without resolving the underlying issue.
Reporting Misconduct (Internal)
The obligation of a registered representative to report suspected unethical, illegal, or rule-violating activities by colleagues or the firm to appropriate internal channels, such as a principal or compliance department.
- Required under FINRA's Standards of Commercial Honor.
- Protects clients and the integrity of the industry.
- Firms have a duty to investigate reported misconduct.
- Whistleblower protections exist, but internal reporting is the first step.
Memory trick: See something wrong? Tell a boss, strong!