NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Fund Distribution and Channel Management Practices
A distributor receives a purchase application from an investor and, without disclosing the facts, advises the investor to switch units frequently mainly because it earns the distributor fresh commission each time. Which description best fits this practice?
This practice is called churning: encouraging an investor to switch or redeem and reinvest again and again mainly so the distributor earns fresh commission. It is unethical and against the investor's interest. Rebating, by contrast, means sharing commission with the investor.
- ARebating
- BChurningCorrect
- CCross-selling of insurance
- DSub-brokering
Explanation
Churning means inducing an investor to switch or redeem and reinvest repeatedly mainly to earn commissions, not for the investor's benefit. Rebating is passing part of the commission to the investor. The other terms do not describe this conduct.
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