FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationProfessional Conduct and Ethical ConsiderationsHard
A registered representative discovers that a colleague has been routinely 'churning' client accounts to generate higher commissions. The representative's firm has a strict policy against such activity. What is the representative's ethical obligation?
- ASuggest to their clients that they review their statements carefully without directly accusing the colleague.
- BMonitor the colleague's activity for a few more weeks to gather concrete evidence.
- CConfront the colleague privately and advise them to stop.
- DReport the activity to their immediate supervisor and compliance department.
Show answer & explanationAnswer & explanation
Correct answer: D. Report the activity to their immediate supervisor and compliance department.
Churning is a serious prohibited practice involving excessive trading in a client's account to generate commissions, violating the suitability rule and the principle of fair dealing. A representative has an ethical and regulatory obligation to report such misconduct to their supervisor and compliance department immediately, rather than attempting to handle it themselves or delaying action.
Why the other options are wrong
- A. Indirectly warning clients is insufficient and does not address the core issue of the colleague's misconduct or protect other clients.
- B. Delaying action to gather evidence is unethical and could allow further client harm; immediate reporting is required for serious violations.
- C. Confronting a colleague is not the appropriate action; it could be ineffective or lead to retaliation. It also bypasses proper reporting channels.
Churning
Excessive trading in a client's account, inconsistent with their investment objectives, with the primary purpose of generating commissions for the representative.
- A serious violation of FINRA rules (e.g., Rule 2111 - Suitability).
- Difficult to prove without analyzing turnover rates and commission-to-equity ratios.
- Requires immediate reporting to firm's compliance when suspected.
Memory trick: Churning is a crime, a commission chase; report it fast, leave no trace.