Investor Resource
Stockbroker Churning Explained
Churning is when a broker executes excessive trades to generate commissions at your expense. Learn how to identify and report it.
What Is Churning?
Churning occurs when a broker engages in excessive buying and selling of securities in a customer's account primarily to generate commissions, rather than to benefit the investor. It is one of the most common forms of securities fraud. A churned account typically shows a high volume of trades with little or no net gain for the investor, while the broker collects commissions on every transaction. Churning violates FINRA Rule 2111 (suitability) and FINRA Rule 2010 (standards of commercial honor), and it is actionable in FINRA arbitration.
How to Spot Churning in Your Account
The most reliable indicator of churning is the 'turnover rate' — how many times the entire value of your portfolio was bought and sold in a given period. A turnover rate above 2 per year raises questions; above 6 is almost certainly churning. Another metric is the 'cost-equity ratio' — the percentage of your portfolio that must be earned just to break even after commissions. A cost-equity ratio above 20% is a red flag. You can calculate both from your account statements. A securities expert like Douglas Schulz can perform a formal analysis and testify to the findings in arbitration.
Recovering Churning Losses
In a churning case, you can recover the commissions and fees generated by the excessive trading, as well as any losses that resulted from the unnecessary trades. Courts and arbitration panels calculate damages using the 'excess trading' model — comparing what you actually earned against what you would have earned with a reasonable buy-and-hold strategy. Punitive damages are available in the most egregious cases. If your account shows a pattern of heavy trading with poor results, contact a securities attorney immediately.
Frequently Asked Questions
How do I know if my account was churned?
Review your account statements and trade confirmations for the number of trades executed per year relative to the size of your account. If your broker was turning over your portfolio more than twice a year without significant growth to show for it, churning may be involved. A securities attorney can perform a quantitative analysis at no charge.
Does churning apply to fee-based accounts?
Traditional churning involves commission-based accounts. In fee-based accounts (where the broker charges a percentage of assets rather than commissions), the analogous violation is called 'reverse churning' — where the broker charges an advisory fee but does little or no trading or management to justify it. Both are actionable.
What is the difference between churning and active trading?
Active trading is not inherently improper if it is consistent with your investment objectives and you authorized each transaction. Churning requires that the trading was excessive relative to your objectives and primarily served the broker's financial interest, not yours. The key factors are: who benefited from the volume of trading, and was the level of activity consistent with your investment goals?
Attorneys Who Handle These Cases
These attorneys have experience with stockbroker churning explained matters.