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Question

Difficulty: EasyProhibited Market Manipulation and Fraudulent Practices

A registered representative frequently buys and sells securities in a customer's discretionary account primarily to generate commissions for themselves and their firm, without regard for the customer's financial goals or risk tolerance. Which prohibited activity has the registered representative committed?

  1. ChurningAnswer
  2. B
    Spoofing
  3. C
    Trading from inventory as a principal dealer
  4. D
    Exceeding SRO regulatory jurisdiction

Answer

The prohibited activity described is churning.
The correct answer is Churning. Churning occurs when a registered representative exercises control over a customer account and executes trades that are excessive in size or frequency in light of the customer's investment objectives, driven by the intent to generate transaction fees and commissions.

Step-by-Step Solution

1
Identify the key action in the scenario
The registered representative is making excessive trades in a discretionary client account to generate commissions.
Analyzing the primary motive and frequency of trading establishes the regulatory definition of the violation.
2
Match the conduct to the regulatory prohibition
Excessive trading driven by commission generation rather than client suitablity constitutes churning under FINRA and SEC rules.
FINRA rules explicitly prohibit registered reps from overtrading customer accounts.

Key Concept

Churning and Excessive Account Trading Prohibitions
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Topics

Prohibited Market Manipulation and Fraudulent Practices