Churning
Churning is excessive trading in a customer’s account by a broker who controls it, done to generate commissions rather than to benefit the customer. Tracy Pride Stoneman represents investors in these claims in FINRA arbitration nationwide, from Westcliffe, Colorado.
By Tracy Pride Stoneman, securities arbitration attorney Updated
| What happened | Rule or law | How it is proved |
|---|---|---|
| Trading far beyond anything the customer’s objectives justify | FINRA Rule 2111(c) (quantitative suitability); Rule 2020; Exchange Act §10(b) and Rule 10b-5 | Annualized turnover ratio: six or more has long been treated as a red flag. Cost-to-equity ratio: at 20 percent the account must earn 20 percent a year just to break even |
| Broker control of the account | Rule 3260 (written discretion); de facto control where the customer relied on the broker for every decision. Since June 30, 2020 quantitative suitability under Rule 2111 no longer requires proof of control | A signed discretionary agreement, or testimony and records showing the customer approved whatever the broker proposed |
| Commissions out of proportion to the account | FINRA Rule 2121 (fair prices and commissions); Rule 2010 | Commission runs, in-and-out trades, switches between near-identical funds or annuities, margin interest |
| The firm’s failure to catch it | FINRA Rule 3110 | Active-account and turnover exception reports the branch manager signed off on |
A FINRA panel can award compensatory damages (out-of-pocket losses or market-adjusted “well-managed account” damages), interest, costs, attorney’s fees where a statute or contract allows them, and punitive damages in egregious cases. Claims must be filed within six years of the events under FINRA Rule 12206, and shorter state statutes of limitation may also apply.
If any of this sounds like your account, the next step costs nothing: a free, honest evaluation. Tell me what happened or call (719) 783-0303.
Common questions
Churning: what clients ask
What are the warning signs of churning?
Frequent buying and selling you did not initiate, high commissions or fees relative to the size of the account, many short-term in-and-out trades, and account value falling while the activity stays high.
How is churning proven?
With numbers from your statements. Common measures include the turnover rate, how many times the account's value was traded in a year, and the cost-to-equity ratio, how much the account had to earn just to cover trading costs. Those figures are compared against your investment goals.
Can I recover the commissions I paid?
Often, yes. Damages in a churning case can include the excessive commissions and fees as well as the losses the trading caused.
Your move
A free evaluation has no downside other than your time.
Tell me what happened. I will tell you honestly whether you have a case worth pursuing — and every way I can be paid, including contingency: nothing unless you recover.