'Churning' is listed in the NISM workbook as one of the main ethical problem areas in the advisory business, where a client's products are frequently switched purely to increase commission earnings. What step has SEBI taken specifically to address this issue?

[ A ]SEBI has mandated that Investment Advisers cannot also carry out distribution activities, removing the commission incentive that drives churning[ CORRECT ]

[ B ]SEBI has banned all forms of commission-based remuneration across the entire financial services industry

[ C ]SEBI requires every switch of a client's product to be logged and reviewed quarterly by an external auditor

[ D ]SEBI has capped the number of product switches a client's portfolio can undergo in a financial year

Takeaway

Option A is correct: SEBI has mandated that Investment Advisers cannot distribute products, which removes the commission motive behind churning, though the workbook notes the problem can still occur through other channels.

Derivation

Section 19.3 ('Ethical issues for an Investment Adviser'), under the listed investor grievance areas, identifies churning -- frequent switching from one product to another to increase commission earnings -- and states that it is for this reason that SEBI has mandated that advisors can't distribute, while cautioning that the problem could still be prevalent in other channels. A common error is assuming SEBI imposed a blanket industry-wide commission ban or a numerical switch cap, neither of which the workbook states.

Why the others fail

B — SEBI has banned all forms of commission-based remuneration across the entire financial services industry

The workbook notes the restriction applies to Investment Advisers being barred from distribution; it explicitly states the churning problem could still be prevalent in other channels, so an industry-wide commission ban is not what was stated.

C — SEBI requires every switch of a client's product to be logged and reviewed quarterly by an external auditor

No such quarterly switch-logging audit requirement for churning is mentioned in the workbook; the actual step cited is the bar on Investment Advisers distributing products.

D — SEBI has capped the number of product switches a client's portfolio can undergo in a financial year

The workbook does not mention any numerical cap on switches; it instead describes SEBI barring advisers from distribution as the measure taken against churning.