An agent at a wirehouse loans $5,000 to a client who is also her aunt, executes 47 round-trip trades in a retiree's account in one quarter, and forgets to disclose her bartending side gig on Form U4. Three separate NASAA violations, three separate suspensions. The Series 63 tests this exact pattern over and over: conflicts that look harmless, trading that looks active, and disclosures that get missed because nobody thinks they matter.
The Uniform Securities Act and NASAA Model Rules treat conflicts as either flat prohibitions or disclose-and-consent items. The four conflicts the Series 63 tests most often are excessive trading, loans between agent and client, sharing in client accounts, and selling away.
Churning means trading a customer's account excessively in size or frequency relative to the customer's investment objectives, financial situation, and stated needs, for the purpose of generating commissions. Three elements must be present.
- Control of the account by the agent. Discretionary authority is the clearest case, but de facto control counts. If the customer routinely accepts every recommendation, the agent has effective control.
- Trading excessive given the customer's profile. A retired widow seeking income with a $200,000 account who turns over 8 times per year is presumptively churned.
Common mistakes
- Treating turnover above 4 in any account as automatic churning. Turnover is contextual. The trap value is forgetting that a turnover of 6 in an aggressive trader's account may be perfectly suitable. The customer's profile is the test.
- Assuming family loans are always allowed. Borrowing from an aunt still requires the firm's written policy to permit it AND typically pre-approval. The category exception (immediate family) does not eliminate the firm-policy condition.
- Confusing the two sharing rules. NASAA's Statement of Policy requires written authorization from the customer and the broker-dealer. FINRA Rule 2150 adds that the agent's share must be in direct proportion to the agent's financial contribution, except for immediate-family accounts.
Bottom line
- Churning requires agent control, trading excessive for the customer's profile, and intent to generate commissions. Frequency alone does not prove it; customer satisfaction is irrelevant.
- Agents cannot borrow from or lend to clients unless the firm's written policy permits it AND the relationship fits a permitted category (family, regulated lender, outside relationship, same-firm registrant).
- Sharing in a client account requires customer written consent and firm written consent under NASAA's Statement of Policy; FINRA Rule 2150 adds contribution proportional to financial stake, with an immediate-family exemption from that condition.
- Selling away always requires prior written notice; prior written approval is required when the agent receives selling compensation. The transaction is supervised as if it went through the firm.
Exam shortcut
For churning questions, compute turnover and cost-to-equity quickly, then ask "given THIS customer's profile, is this excessive?" Income and preservation customers tolerate very little turnover. Aggressive traders tolerate much more. Pick the answer that ties the trading to the customer's stated objectives, not to absolute numbers. For private transaction questions, look for compensation. Any compensation equals selling away equals prior written approval required.
The full lesson (about 3,799 words, 25 min read) adds 3 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- H21
- H22
- H23
Browse all free Series 63 lessons or jump into free Series 63 practice questions.