Uniform Securities Agent State Law (Series 63) Practice Exam

Question: 1 / 400

What is "churning" in the context of securities trading?

The process of holding securities long-term

The unethical practice of buying and selling securities to generate commissions for the broker

Churning refers to the unethical practice of excessively buying and selling securities in order to generate commissions for the broker, rather than to benefit the client. It indicates a focus on the financial interests of the broker over the investment goals of the client. In this context, churning is seen as a breach of fiduciary duty, as it prioritizes the broker's profits derived from commission fees instead of considering the client's financial needs, investment strategy, and risk tolerance.

This practice can lead to significant financial losses for clients due to unneeded transaction costs and potential tax implications associated with frequent trading. Regulations exist to protect investors from churning by requiring brokers and investment advisors to act in the best interests of their clients, adhering to standard practices of fair trading.

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A strategy to diversify investments

A legal practice to minimize client risk

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