Series 66

AAA

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
comments powered by Disqus
Related Articles
  1. Municipal Bond Tips For The Series 7 ...
    Insurance

    Municipal Bond Tips For The Series 7 ...

  2. 6 Proven Tips For Series 6 Success
    Retirement

    6 Proven Tips For Series 6 Success

  3. Tips For Passing The Series 6 Exam
    Insurance

    Tips For Passing The Series 6 Exam

  4. Banker Or Broker: Which Career Is Right ...
    Professionals

    Banker Or Broker: Which Career Is Right ...

  5. Breaking Down Financial Securities Licenses
    Professionals

    Breaking Down Financial Securities Licenses

Trading Center