Many people often ask, Is churning illegal? The answer is yes.
SEC regulations and FINRA rules prohibit the practice of making excessive purchases or sales of securities in investor accounts for the primary purpose of generating commissions, known as churning.
Despite the illegality of churning, FINRA filed 190 arbitration actions for the year of 2020 through the end of December against brokers accused of the practice.
If you suffered losses in your investment account as a result of excessive trading, contact a churning fraud lawyer to determine whether you are entitled to recover compensation.
What Is Churning in Finance?
Churning, also known as excessive trading, takes on a new meaning in the financial industry that doesn’t have anything to do with butter. Excessive trading occurs when a broker makes multiple trades in a customer’s investment account for the primary purpose of generating high commissions.
Churning often results in significant losses for investors. The SEC’s Regulation Best Interest, or Reg BI, establishes a standard of conduct for broker-dealers and their employees when recommending investments to retail customers.
Reg BI requires brokers to act in the customer’s best interest and not place his or her own interests ahead of those of the investor. Churning is almost never in the best interest of the investor—even those with aggressive trading strategies.
Signs Your Advisor Is Churning in Your Investment Account
Churning stocks leads to substantial investor losses, especially in situations where it lasts for a long period of time. Many times, investors fail to recognize the indicators that their broker committed the crime of excessive trading until it is too late.
There are a number of cautionary signs to look out for when you fear your financial advisor is excessively trading in your account.
Unauthorized Trades
Unauthorized trading occurs when a broker trades securities in your investment account without receiving prior authorization.
If you have a discretionary investment account, your financial advisor has authorization to make trades in your account without seeking your approval for each transaction; however, your broker is still bound by the best interest standard. Excessive trading can be more difficult to detect with a discretionary account.
Numerous unauthorized trades appearing on your account statement is a cause for concern. To recognize these transactions, you should review your account statement on a monthly basis and verify the information provided. If you observe unauthorized trades on your account statement, notify your broker and broker-dealer immediately.
Unusually High Trade Volume
A high volume of trading activity in a short period of time can signify churning, especially for investors pursuing a conservative investment strategy. Pay special attention to transactions involving the purchase and sale of the same securities over and over.
Attorney Robert Pearce has over 45 years of experience representing clients whose brokers’ misconduct caused financial losses. Mr. Pearce’s extensive experience enables him to recognize indicators of churning immediately and prove the amount of damages you suffered as a result of your broker’s misconduct.
Excessive Commission Fees
Unusually high commission fees appearing on your account statement is another indication of excessive trading.
If the commission fees jump significantly from one month to the next, or if one segment of your investment portfolio consistently generates higher commissions than any other segment, there is a chance your broker is churning your account.
Account statements do not typically include fee amounts charged for each individual transaction. Thus, do not hesitate to contact your broker-dealer to request an explanation of the commissions charged to your account.
If you feel you are being charged excessive fees in your investment accounts, contact The Law Offices of Robert Wayne Pearce, P.A., to discuss your options.
How Do You Prove Churning in Your Brokerage Account?
Proving churning in your brokerage account means proving the trading was excessive for your objectives because it served commissions or other broker compensation rather than your returns. At the Law Offices of Robert Wayne Pearce, we quantify excess activity using account-wide measures: turnover ratio is a metric, and cost-to-equity ratio is an indicator that shows how much your account needed to earn just to break even after trading costs.
Control is a key element: a discretionary account is an account type that gives the broker authority, and a non-discretionary account can still show de facto control when the broker repeatedly recommends rapid in-and-out trades you feel pressured to approve. Your investment profile matters—risk tolerance is an attribute, time horizon is an attribute, and liquidity needs should align with the frequency and size of trades in stocks, ETFs, mutual funds, options, or variable annuities.
If you suspect churning, preserve evidence: account statements are records, trade confirmations are records, and emails, texts, and call notes are communications that show recommendations and intent. Send a written complaint to the firm’s compliance department to create a dated timeline, then talk with our team about whether FINRA arbitration or another recovery path fits your situation.
Contact Our Office Today for a Free Consultation
Churning in the financial industry can result in monetary sanctions and even disqualification from the financial industry in extreme cases. The practice involves the manipulation and deception of investors that entrust their brokers to act in their best interest, warranting severe punishment.
Robert Wayne Pearce has handled dozens of churning cases and can provide a complete review of your account statements to determine whether excessive trading occurred.
Additionally, The Law Offices of Robert Wayne Pearce, P.A., employs experts that can perform a churning analysis of the trading activity in your account to establish concrete evidence that the practice occurred. We have the experience, expertise, and commitment to obtain the damages you deserve.
Contact our office today for a free case evaluation.
