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Zorluk: OrtaProhibited Market Manipulation and Fraudulent Practices

A registered representative holding discretionary authority over a client's account executes a rapid series of transactions in low-volatility mutual funds and corporate bonds. Over a six-month period, these transactions generate significant commission revenue for the representative while resulting in zero capital appreciation and substantial transaction fee drag for the client. Which of the following prohibited market practices has the registered representative committed?

  1. ChurningCevap
  2. B
    Wash trading
  3. C
    Acting as a principal dealer without disclosure
  4. D
    Free-riding

Cevap

Churning, which is excessive trading in a customer's account by a registered representative for the purpose of generating commissions.
The correct answer is Churning. Churning is defined as excessive trading in a customer's account by a broker who exercises control or discretionary authority over the account, conducted primarily to generate commissions without regard for the customer's financial interest.

Adım Adım Çözüm

1
Analyze the registered representative's trading activity described in the scenario.
The representative exercised discretionary authority to execute frequent, high-turnover trades that served primarily to generate commissions rather than advance the customer's investment objectives.
Excessive trading relative to the client's financial profile and objectives constitutes churning under FINRA rules.
2
Distinguish churning from other prohibited trading practices.
Unlike wash trading (creating artificial volume without changing ownership) or free-riding (selling securities before paying for the purchase), churning focuses on excessive turnover driven by broker compensation.
Identifying the misuse of discretionary authority to generate commissions isolates churning as the specific regulatory violation.

Anahtar Kavram

Churning and Unsuitable Excessive Trading
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Prohibited Market Manipulation and Fraudulent Practices