A securities broker engages in excessive activity or "churning" when, in disregard of the customer's investment objectives effects transactions in a customer's account for the purpose of generating commissions. These transactions are not effected for the purpose of fulfilling the customer's investment objective, but instead to promote the financial interests of the broker. By placing the broker's interests ahead of the customer's interest, "churning" is also a form of self-dealing and a breach of fiduciary duty. A customer may hold a broker liable for churning as a violation Section 10(b) of the Exchange Act, 15 U.S.C. 78j, and SEC Rule 10b-5, as promulgated thereunder.
Churning is not only also a violation of federal and state common law, but also FINRA Rules. 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 Manual (CCH 2009).
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. See also, NASD Rule IM- 2510( a)("No member shall affect with or for any customers account in respect to which such member or his agent or employee is vested with any discretionary power any transactions or purchase or sale which are excessive in size in frequency in view of the financial resources and character of such account."). While FINRA rules to not generally imply a private right of action, violation of these rules can form part of a course of conduct amounting to fraud.
Churning consists of three elements, all of which must be present:
- (1) the trading must be excessive in light of the customer's investment objectives;
- (2) the broker must exercise control over the account;
- (3) the broker must act with the intent to defraud or with willful and reckless disregard of the customer's interests.
If you believe that you may have been the victim of excessive activity or churning by your broker, contact us for a free evaluation of your claim.