The U.S. Securities & Exchange Commission (SEC) defines churning as follows:
“Churning occurs when a broker engages in excessive buying and selling of securities in a customer’s account chiefly to generate commissions that benefit the broker. For churning to occur, the broker must exercise control over the investment decisions in the customer’s account, such as through a formal written discretionary agreement. Frequent in-and-out purchases and sales of securities that don’t appear necessary to fulfill the customer’s investment goals may be evidence of churning.
Churning is illegal and unethical. It can violate SEC Rule 15c1-7 and other securities laws.”
The Financial Industry Regulatory Authority (FINRA) refers to churning as “quantitative suitability” in their rules , stating:
“No single test defines excessive activity, but factors such as the turnover rate, the cost-equity ratio, and the use of in-and-out trading in a customer’s account may provide a basis for a finding that a member or associated person has violated the quantitative suitability obligation.”
Perhaps the Wikipedia definition is the easiest to comprehend:
“Churning is the practice of executing trades for an investment account by a salesman or broker in order to generate commission from the account.”
Churning and the “Looper” Turnover Rate
The Looper turnover rate calculates the total dollar amount of purchases during a time period divided by the average account equity and then annualized. As a rule of thumb, twice a year turnover is “suggestive” of excessive trading. Four times a year is “indicative” and six times a year turnover is “conclusive” of excessive trading.
If you think that your brokerage account has been churned, call for a no obligation discussion with an experienced securities attorney.
Examples of Churning
Follow this link to see cases involving churning.
Rex Securities Law , with offices in Boca Raton, FL, and Austin, TX, provides representation to investors nationwide who are seeking recovery of investment losses due to the negligence or fraud of stockbrokers and broker dealers. If you have questions about how your account has been handled, call to speak with an experienced securities attorney.
Most cases handled on a contingent fee basis meaning that you do not pay legal fees unless we are successful.
Rex Securities Law
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