Glossary
Churning
Excessive trading in a customer account by a broker mainly to generate commissions; it violates FINRA rules.
Churning is when a broker trades excessively in a customer's account, not to serve the customer's goals but to generate commissions, markups or other fees for the broker. It is a form of misconduct under US securities rules. Each trade may look reasonable on its own; what makes it churning is the overall frequency and cost of trading relative to the customer's investment profile.
How regulators assess it
In the US, churning falls under FINRA's suitability rule (Rule 2111), whose "quantitative suitability" component requires that a series of recommended trades not be excessive when taken together, and under the SEC's Regulation Best Interest for recommendations to retail customers. Two measures commonly appear in enforcement cases and arbitration:
There is no single legal cut-off; regulators weigh these figures together with the customer's objectives, experience and whether the broker effectively controlled the trading.
Protecting yourself
- Read your statements and trade confirmations, and compare total costs with your account's value.
- Be wary of frequent "in and out" trades you did not initiate, or of switching between similar mutual funds that each carry sales charges.
- Check the representative's record on FINRA BrokerCheck.
Commission-free stock trading has made classic churning rarer at online brokers, but it still occurs in full-service accounts, with products that carry markups and in options trading.