Another form of stockbroker misconduct or investment fraud includes excessive activuty or churning. Securities brokers are typically compensated by each transaction effected in your securities account. Sometimes brokers effect these transactions in your account, not for the purpose of reasonably fulfilling your stated investment objectives, but instead in an effort to generate excessive commissions for themselves and their firm. Such conduct is called churning. is It is a form of stockbroker fraud or misconduct and is actionable under the federal securities laws.
FINRA Conduct Rule IM-2310-2, relating to Fair Dealing with Customers, specifically prohibits "excessive activity in a customers account, often referred to as ‘churning.’" FINRA Conduct Rule IM-2310-2(2) (CCH 2010). Churning occurs when, to generate excessive commissions, a broker causes securities in a customer's account to be bought and sold with a frequency too great in light of the customer’s financial needs, resources, and investment objectives.
Churning is a type of fraudulent conduct in a broker-customer relationship where the broker over-trades a customer's account to generate inflated sales commissions. The necessary elements for a churning claim are:
a. that the broker effectively exercised control over the account (either de facto discretionary authority or the customer always agreed to every purchase and sale recommended by the broker);
b. the broker engaged in excessive trading in light of the character of the account; and that
c. the broker acted with intent to defraud or with willful or reckless disregard for the interests of the client.
Churning or Excessive activity is examined in light of the customer's investment objective and the type of securities being traded. For example, it may be inappropriate to pay a sales charge by buying and selling a mutual fund in a period of, let us say, a year. However, during this same period, it may not be inappropriate for a person seeking to trade options turn over their account twenty times.
Churning is often marked by short holding periods without any appreciable change in securities prices. Churning is often measured by the account's "turnover rate," or the total purchases divided by the average value of the account, and the "Goldberg rate," which is the commissions charged divided by the average value of the account. On an annual basis, these calculations show the number of times your account was turned over and how much your account had to return just be break even after paying commissions. Once again, what is reasonable depends on your acceptance of risk and measure of anticipated returns.
However, if you think that you may have been the victim of excessive activity, you should have your account reviewed by a professional and contact us for a free evaluation.
Guiliano Law Firm, P.C. Practice limited to the representation of investors in arbitration claims against stockbrokers for fraud, the sale of unsuitable investments, breach of fiduciary duty, failure to supervise. National Practice. Contingent Fee. Free Consultation. (877) SEC-ATTY.