Churning

An agent recommends excessive trading to generate commissions. This is:

1. A.Active managementThe closest call, since some legitimate strategies do trade frequently. Active management is driven by the account's objectives, whereas the stem states the trading was recommended to generate commissions, which makes the agent's compensation the reason for the activity.
2. B.Encouraged for returnsThis assumes turnover produces performance. Every trade imposes a cost on the account, so trading beyond what the objectives call for tends to erode returns rather than build them.
3. C.Churning, which is prohibitedCorrect - trading for commissions is barred.
4. D.Allowed with disclosureDisclosure lets a client evaluate a conflict that is permissible once known. It cannot authorize a course of trading that is prohibited on its face, and no client meaningfully agrees to have their account traded for the agent's benefit.

Why: Excessive trading for commissions is churning, a prohibited practice.

Producer Calder writes an application for the term policy his client asked for, then quietly adds an accidental death rider the client never requested and never discussed, and quotes a single combined premium so the extra charge is not visible. Which unfair practice does this describe?

1. A.ChurningChurning is a producer generating new business by replacing his own clients existing policies. No replacement occurred here.
2. B.RebatingRebating gives the consumer something of value as an inducement to buy. Here the consumer is being charged more, not given something.
3. C.TwistingTwisting is inducing the replacement of an existing policy through misrepresentation. No existing policy is being replaced.
4. D.SlidingCorrect. Sliding is the addition of an unrequested coverage or fee whose charge is concealed from the consumer.

Why: This is SLIDING: adding a coverage, product or fee the consumer did not request and did not knowingly agree to, and collecting the charge for it. The essence of the offense is concealment of a charge for something unrequested, which is why Calder combined the premium into one figure. It is distinct from REBATING, which gives the consumer something of value, and from TWISTING and CHURNING, which involve inducing the replacement of existing coverage through misrepresentation. Note that offering the rider openly and having the client accept it would be perfectly proper.

Excessive trading in a client account mainly to generate commissions is:

1. A.Encouraged for active accountsFrequent trading can suit an active strategy the client has chosen, which is what gives this some surface appeal. Churning is defined by the adviser's purpose, though: when the volume serves the adviser's commissions rather than the client's objectives, the account's activity level is the symptom, not the defense.
2. B.Permitted with disclosureDisclosure cannot legitimize trading undertaken for the adviser's benefit at the client's expense. The client is paying real commissions for transactions that serve no investment purpose, and describing the arrangement does not restore the money or the loyalty owed.
3. C.A fiduciary dutyThis inverts the concept entirely. The fiduciary duty is what churning violates: the adviser must place the client's interest ahead of its own compensation, and trading to generate fees does the opposite.
4. D.Churning, which is prohibitedCorrect - churning is an unethical, barred practice.

Why: Churning - trading for the purpose of generating commissions rather than serving the client - is prohibited.

An agent repeatedly switches a client between funds, generating new sales charges without benefit. This is:

1. A.Allowed with disclosureTelling the client about the new sales charge does not create a reason for him to pay it. The stem stipulates the switches produce no benefit, so disclosure only documents that the client was informed of a cost incurred for the agent's account rather than his own.
2. B.A prohibited practiceCorrect - abusive switching is barred.
3. C.Prudent rebalancingRebalancing is a legitimate discipline, which gives this real pull. Genuine rebalancing is driven by drift from a target allocation and is usually accomplished within a fund family or through exchange privileges that avoid a fresh load. Repeated moves that generate new sales charges and produce no benefit fit the abuse, not the discipline.
4. D.Encouraged for diversificationDiversification is achieved by what the client holds, not by how often the holdings are replaced. A properly diversified mix can sit untouched for years, so nothing about spreading risk requires paying a new sales charge again and again.

Why: Unnecessary switching that generates charges is a prohibited practice (a form of churning/switching abuse).