CandleFocus Glossary Editor
Churning is an illegal and unethical practice where brokers excessively trade assets in a client’s brokerage account in order to generate commissions. The practice involves a broker executing multiple trades in an investor’s account more than what is necessary for the portfolio’s strategy, with the sole purpose of making money. This can create market problems, in addition to an expensive bill for investors.
Churning is an unethical practice made illegal by the U.S. Securities Exchange Commission (SEC). The SEC defines churning as when a broker “excessively trades a customer’s account, such that the activity serves no legitimate investment purpose and is instead merely used to generate commissions or fees”. The SEC and Financial Industry Regulatory Authority (FINRA) has set forth rules and regulations under the Securities Exchange Act of 1934, which determine what constitutes excessive activity. According to FINRA, one major sign of churning is the account having a large number of trades compared to their defined investment strategy. Other signs include frequent placement of orders and switching between different investment types or securities without a valid investment purpose.
The punishment for churning is severe, with penalties including disgorgement (which is a penalty made to reimburse affected investors) and/or suspension or expulsion from the industry.
Investors can avoid churning and its potential consequences by taking an active role in investment decision-making. Consumers should work with reputable brokerage firms and partners, communicate openly with their brokers, and ask their broker detailed questions about their strategy. Investors should closely monitor their accounts and look for patterns that could indicate excessive trading. They should also be aware of financial products and potential commission costs associated with the use of those products. Lastly, investors need to be aware of the various regulation and laws in place to protect them from being subjected to churning.
In essence, churning is an improper practice that uses excessive trading to generate commissions. It is an illegal practice that is regulated by the SEC and FINRA and can result in severe sanctions and fines. To protect themselves, investors should take an active role in financial decision-making, closely and regularly monitor their accounts, and be aware of the laws that protect them from being scammed or taken advantage of by a brokerage firm or broker.
Churning is an unethical practice made illegal by the U.S. Securities Exchange Commission (SEC). The SEC defines churning as when a broker “excessively trades a customer’s account, such that the activity serves no legitimate investment purpose and is instead merely used to generate commissions or fees”. The SEC and Financial Industry Regulatory Authority (FINRA) has set forth rules and regulations under the Securities Exchange Act of 1934, which determine what constitutes excessive activity. According to FINRA, one major sign of churning is the account having a large number of trades compared to their defined investment strategy. Other signs include frequent placement of orders and switching between different investment types or securities without a valid investment purpose.
The punishment for churning is severe, with penalties including disgorgement (which is a penalty made to reimburse affected investors) and/or suspension or expulsion from the industry.
Investors can avoid churning and its potential consequences by taking an active role in investment decision-making. Consumers should work with reputable brokerage firms and partners, communicate openly with their brokers, and ask their broker detailed questions about their strategy. Investors should closely monitor their accounts and look for patterns that could indicate excessive trading. They should also be aware of financial products and potential commission costs associated with the use of those products. Lastly, investors need to be aware of the various regulation and laws in place to protect them from being subjected to churning.
In essence, churning is an improper practice that uses excessive trading to generate commissions. It is an illegal practice that is regulated by the SEC and FINRA and can result in severe sanctions and fines. To protect themselves, investors should take an active role in financial decision-making, closely and regularly monitor their accounts, and be aware of the laws that protect them from being scammed or taken advantage of by a brokerage firm or broker.