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Difficulty: EasyProhibited Market Manipulation and Fraudulent Practices

A registered representative repeatedly buys and sells securities in a retail customer's discretionary account primarily to generate additional commission income, paying little attention to the client's stated financial goals. Which prohibited practice has the registered representative committed?

  1. ChurningAnswer
  2. B
    Spoofing
  3. C
    Trading in a principal dealer capacity
  4. D
    Executing an SRO criminal violation

Answer

The prohibited conduct of executing excessive trades in a client's account to generate commissions is known as churning.
The correct response identifies the practice as churning. Churning occurs when a broker or registered representative exercises control over a customer's account and engages in excessive trading activity relative to the customer's objectives, driven by the desire to generate commissions.

Step-by-Step Solution

1
Analyze the registered representative's actions described in the scenario.
The representative is making frequent trades in a discretionary account to maximize commission revenue rather than fulfill the customer's investment strategy.
Identifying the core behavior (excessive trading for commission) is essential to matching it to the regulatory definition.
2
Evaluate regulatory definitions for prohibited market and account practices.
FINRA rules explicitly define excessive trading driven by representative compensation as churning.
Distinguishing churning from other prohibited manipulative tactics ensures accurate classification under SEC and FINRA rules.

Key Concept

Churning (Excessive Trading)
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Prohibited Market Manipulation and Fraudulent Practices