Churning
Churning is the practice of excessively buying or selling in a customer’s account to generate additional commissions for the broker. Churning is strictly prohibited. Excessive buying and selling means recommending or executing transactions in a customer account that are excessive in size or frequency, given the customer’s suitability information.
Example: Megan, a representative, recommends that a customer, Robert, should roll over his 529 plan into another 529 plan with a better return. Robert agrees, so Megan rolls over the account. Two months later, Megan finds out that another 529 plan has an even better return. She recommends rolling it over again to receive the better return. Robert agrees again, so Megan rolls over the account. The MSRB advises that Megan could be guilty of churning if she recommends rolling over the plan enough times so that the customer loses his federal tax benefit. Customers are only allowed to rollover the plan once a year or they lose their federal tax benefit (they may have to pay a 10% penalty and federal taxes on the earnings). Megan recommended rolling over the account more than once, perhaps causing Robert to lose his tax benefit.
Example: Joe is a registered representative. A client, Linda, comes in to discuss purchasing a 529 for her son, Carson. Joe recommends that Linda open several 529 plans for two reasons. First, more plans means she can hedge her bets and get the best average return across funds. Second, saving in a 529 plan is a great way to save money for the future. Joe tells her that if she saves much more than Carson needs, she will be able to retrieve it when she is ready to retire. The MSRB advises that Joe could be guilty of churning if he recommends multiple 529 plans to a customer, because each plan will have its own sales load, and Linda may have been able to take advantage of breakpoints if she had put all of her money into one 529 plan. In addition, recommending that a customer invest m