SIE Ready🚫 Prohibited Activities · Lesson 3 of 6 · 5 min
Churning, Discretion and Permission
🔁 Every trade earns the rep a commission. That is exactly why a rep cannot trade more, or trade without asking, just because it pays.
💡 Key idea
No trading without permission. Choosing the security, amount or action needs prior written authorization; time and price alone does not, and it lasts only that business day.
🧠 Why it matters
CHURNING is excessive trading for commissions, out of line with the customer's profile, even if each trade alone looked reasonable. An UNAUTHORIZED TRADE is one placed without the customer's permission in a non-discretionary account. DISCRETION (choosing the security, the amount or buy versus sell) requires the customer's PRIOR WRITTEN AUTHORIZATION and the firm's written acceptance; each discretionary order is promptly approved in writing and the account reviewed often (FINRA Rule 3260). TIME AND PRICE discretion alone is not full discretion: the customer names the security, amount and action, the rep picks only time and price, and it ends at the close of that business day unless the customer signs a contrary instruction. Recommendations must also meet Reg BI.
📈 In the real world
📞 Customer Ruth says, 'Buy 300 shares of XYZ today, try to get a better price than now.' Rep Omar waits until 2 p.m. and buys at a lower price: that is time-and-price discretion, fine without paperwork. The next week he buys a different stock because he 'knew she'd like it.' That trade is unauthorized.
📌 Takeaways
- Churning = excessive trading for commissions, judged against the customer's profile
- Full discretion requires prior written authorization and the firm's acceptance
- Time-and-price discretion needs no written authority and expires at the end of the business day
📖 Terms in this lesson
Churning: Excessive trading in a customer's account, mainly to generate commissions.
Unauthorized trading: Placing a trade in a customer's account without the customer's permission or written discretionary authority.
✅ Test yourself
Which instruction from a customer may a rep act on without written discretionary authority?
- Buy 500 ABC today at a good price
- Sell anything in my account that has dropped
- Invest $10,000 however you see fit
- Buy whatever tech stock looks best
Answer: A · Buy 500 ABC today at a good price
When the customer names the security, the amount and the action, letting the rep choose only time and price is not full discretion. The others leave the security or amount to the rep and need prior written authorization.
Unless the customer gives a signed, dated contrary instruction, how long does a grant of time-and-price discretion last?
- Until the end of that business day
- Until the customer cancels it in writing
- For 30 calendar days
- Until the end of the week
Answer: A · Until the end of that business day
Under Rule 3260, time-and-price discretion lasts until the end of the business day it was granted, unless the customer gives a signed, dated contrary instruction. The other periods have no basis in the rule.
What is the main feature of churning?
- Too much trading for the customer's profile
- Trading only in large, liquid stocks
- Trading that loses money in a falling market
- Trading that a principal approved in writing
Answer: A · Too much trading for the customer's profile
Churning is excessive trading relative to the customer's objectives and means, usually to generate commissions. Losses alone do not make it churning, and principal approval does not cure excessive trading.
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