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Question

Difficulty: EasyProhibited Market Manipulation and Fraudulent Practices

A registered representative manages a discretionary customer account and frequently buys and sells securities on the customer's behalf. An audit reveals that the volume and frequency of the transactions do not align with the client's conservative investment goals and were executed primarily to generate additional commission income for the representative. Which prohibited market practice has the representative committed?

  1. A
    Wash trading
  2. ChurningAnswer
  3. C
    Interpositioning
  4. D
    Backing away

Answer

Churning
The correct answer is churning. Churning is a fraudulent and prohibited practice defined as excessive trading in a customer's account by a broker who exercises control over the account, driven primarily by the desire to generate commissions rather than serving the client's financial interests.

Step-by-Step Solution

1
Analyze the registered representative's trading behavior described in the scenario.
The representative executed a high volume of trades inconsistent with the customer's investment profile.
Trades must always align with customer suitability and investment objectives.
2
Identify the primary motivation behind the excessive trading volume.
The primary motive was generating commission income for the representative rather than benefiting the client.
Excessive trading for commission generation defines the prohibited practice of churning.

Key Concept

Churning (Excessive Trading)
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Topics

Prohibited Market Manipulation and Fraudulent Practices