Securities Industry Essentials (SIE) ExamOverview of Regulatory FrameworkEasy
A broker-dealer firm's compliance officer receives an anonymous tip alleging that a registered representative (RR) has been engaging in excessive trading in customer accounts to generate higher commissions. This practice is commonly known as:
- APainting the tape
- BBreakpoint selling
- CFree riding
- DChurning
Show answer & explanationAnswer & explanation
Correct answer: D. Churning
Churning refers to the unethical and illegal practice of a broker-dealer or registered representative engaging in excessive trading in a client's account primarily to generate commissions rather than to benefit the client. This directly violates the firm's duty to act in the client's best interest.
Why the other options are wrong
- A. Painting the tape is an illegal manipulative practice where market players buy and sell securities among themselves to create false activity.
- B. Breakpoint selling is the practice of selling investment company shares just below the breakpoint, which would qualify for a reduced sales charge.
- C. Free riding is buying and selling securities without paying for them.
Churning
Churning is an unethical and illegal practice where a registered representative executes excessive trades in a client's account solely to generate higher commissions, without regard for the client's investment objectives.
- Involves excessive trading volume.
- Primary motivation is to generate commissions.
- Detrimental to the client's financial interests.
- Violates FINRA's suitability rules and ethical conduct standards.
Memory trick: Churn, Burn, Learn (not to do it)