If you believe you have been a victim of churning, unauthorized trading or excessive trading by a financial advisor call 1-866-817-0201. Initial consultations with an attorney are free and confidential.
Churning of securities accounts occurs when a broker acting in his or her own interest, induces transactions in the customer’s accounts which are excessive in size and frequency in light of the character of the account. Such actions are considered to be a form of fraud. There is no set standard under FINRA, the Financial Industry Regulatory Authority, rules as to when trading is excessive, but it is looked at as being excessive in light of the investors objectives. A certain level of trading may be fine for a speculative investor but would be excessive for a conservative investor.
In 2019, regulators increased their policing of churning and unauthorized trading. The number of cases filed by the regulators reflect not just the increase in such activity by brokers, but also reflects the seriousness in which regulators view such actions. As such, you have seen cases such as in re Spolar, where a broker where FINRA instituted a 15-month suspension for a broker for making four unauthorized securities transactions and attempting to state that the transactions were the idea of the investor.
While the rule gives no standard, turnover in the account is commonly looked at to determine churning. Disciplinary actions in front of the SEC have determined that turnovers as low as between two and four are high enough that they could be presumed to be churning depending upon the customer’s objectives.
However, setting a fixed level of turnover as churning is problematic in an investing world comprised of more than stocks and bonds, and where differing investment vehicles can pay a broker widely disparate commissions. One answer to this is comparing the cost of the transactions against the equity in the account. For example, two buys and sells of a high-commission investment product per year could result in a cost equal to 5% or greater of the portfolio’s worth, an entire portfolio of low-commission investment products could be turned over four times at a cost of only 2% of the portfolio’s worth.
In the first example, the person must make at least 5% from his investments just to break even. So if a person needs a 3% return to support themselves, and need only take a small amount of risk to get that return, that person must now take a substantial increase risk commensurate with a person seeking an 8% return just to receive 3%, or else go more than a year without seeing a return.
Another example is the short term trading of long-term investments. Kevin Scott Gunnip of Morgan Stanley engaged in such activity. Gunnip accepted a bar from the securities industry for engaging in such activity and faced three different lawsuits.
For more information, please call the number above. Jeffrey Pederson is a private attorney who can help you understand your rights and whether you have been a victim of investment fraud.