Conflicts of Interest - Excessive Trading and Insider Trading

Excessive Trading
Excessive trading has already been mentioned in the"Suitability" section. By definition, excessive trading is also a conflict of interest, since in most cases an IA who engages in this behavior also receives commissions from such trades. This is a clear case of conflict of interest, since an IA must always put his or her client's interests first. Any time you trade (on a discretionary basis), or recommend trading excessively in or for a client's account, for the sake of generating commissions, you are committing fraud. Legally, the term associated with this action is known as churning.

The SEC defines churning as follows:
Churning refers to excessive buying and selling in your account by your broker. For churning to occur, your broker must exercise control over the investment decisions in your account, either through a formal written discretionary agreement or otherwise, and must engage in excessive trading in light of the financial resources and character of the account for the purpose of generating commissions.

Insider Trading
As the SEC site makes clear; there are actually two types of insider trading, the legal kind and the illegal kind. This clarification is needed because many people associate the term with solely illegal activities. According to the SEC, legal insider trading occurs when insiders (officers, directors and employees) trade their own securities and report any/all transactions to the SEC.


Look Out!
According to the SEC, illegal insider trading occurs when insiders buy or sell securities"in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include \'tipping\' such information, securities trading by the person \'tipped,\' and securities trading by those who misappropriate such information."


Examples of insider trading listed by the SEC include:

  • corporate officers, directors and employees who traded the corporation's securities after learning of significant, confidential corporate developments;

  • friends, business associates, family members and other "tippers" of such officers, directors and employees, who traded the securities after receiving such information;

  • employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded.

Examples of insiders listed by the SEC include:

  • government employees who learned of such information because of their employment by the government; and
  • other persons who misappropriated, and took advantage of, confidential information from their employers.
Selling Away, Client Loans and Confidentiality


Related Articles
  1. Professionals

    Trade Practices

    FINRA/NASAA Series 63: Section 4 Trade Practices. In this section trade practices: suitability, excessive trading, insider trading and selling away.
  2. Investing Basics

    Explaining Insider Trading

    While often associated with illegal activity, insider trading actually encompasses both illegal and legal trading of securities.
  3. Investing

    How The SEC Tracks Insider Trading

    We look at how the SEC tracks and tries to stop insider trading - a seemingly impossible task.
  4. Investing

    Buy Stock With Insiders: How To Track Insider Buying

    Insider buying can be a sign that a company's stock prices will soon rise. Here's how to keep track of insider buying on public databases and websites.
  5. Professionals

    Insider Trading and Securities Fraud Enforcement Act of 1988

    FINRA Series 6 Exam Study Guide - Insider Trading and Securities Fraud Enforcement Act of 1988. This section defines an Insider and discusses the fines and penalties for giving out insider information.
  6. Markets

    Infamous Insider Traders

    Check out these bizarre insider trading cases that helped define the SEC's laws against it.
  7. Options & Futures

    When Insiders Buy, Should Investors Join Them?

    Insider tracking can inform your investment strategy, but it requires research and a level head. Find out what to look for.
  8. Professionals

    The Securities Exchange Act of 1934

    The Securities Exchange Act of 1934
  9. Options & Futures

    Keeping An Eye On The Activities Of Insiders And Institutions

    These transactions reveal much about a stock. We go over what to consider and where to find it.
  10. Professionals

    Standard II-A: Material Nonpublic Information

    CFA Level 1 - Standard 2 Integrity of Capital Markets, Standard II-A: Material Nonpublic Information
RELATED TERMS
  1. Insider Information

    A non-public fact regarding the plans or condition of a publicly ...
  2. Insider Trading

    The buying or selling of a security by someone who has access ...
  3. Insider Buying

    The purchase of shares of stock in a corporation by someone who ...
  4. Dirks Test

    A standard used by the Securities and Exchange Commission (SEC) ...
  5. Form 3

    A document that must be filed with the Securities and Exchange ...
  6. Insider Trading Sanctions Act Of ...

    Legislation that allows the SEC to seek a civil penalty, of up ...
RELATED FAQS
  1. What exactly is insider trading?

    An "insider" is any person who possesses at least one of the following: 1) access to valuable non-public information about ... Read Answer >>
  2. How often should I measure my company's key performance metrics (KPIs)?

    Learn the definition of illegal insider trading while reviewing the people who can be involved and the regulations and consequences ... Read Answer >>
  3. Can you accidentally engage in insider trading?

    Learn why it's possible to commit insider trading by accident, and why insider trading laws create logical inconsistencies ... Read Answer >>
  4. What's the difference between insider trading and insider information?

    Learn about insider information and insider trading and the differences between the two; both involve nonpublic information ... Read Answer >>
  5. If I write a blog post about stocks I own, is that considered insider trading?

    Learn about whether writing a blog post about a stock you own is insider trading. Cracking down on inside trading is an important ... Read Answer >>
  6. What is the difference between wash trading and insider trading?

    Explore the differences between two trading practices, wash trading and insider trading, and find out why these practices ... Read Answer >>
Hot Definitions
  1. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  2. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  3. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  4. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  5. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  6. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
Trading Center