Churning is a practice of buying and selling securities by the broker in an investor’s account with a selfish motive of generating commissions by which the broker benefits irrespective of profit or loss to the investor. Churning is illegal and brokers can be charged and prosecuted under the laws of the market regulators, Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA).
The rules of the market regulators require every broker or advisor to do a comprehensive study of their client’s requirements and risk appetite before recommending any securities with full disclosures to the risks and other market factors. It is mandatory for the broker/advisor to follow the "quantitative suitability" obligation, which focuses on whether the number of transactions within a given timeframe is appropriate in view of the customer's financial circumstances and investment goals.
The two most important metrics in churning are ‘annualized turnover ratio’ and ‘cost to equity ratio’. You need not fret over these metrics. Our team has the expertise of senior analysts to deal with such metrics. Broker’s commission rate is another important data in churning cases. It serves as additional evidence when there are higher commissions levied for more frequent transactions.
If you are a victim of churning, then do not hesitate and reach out to us to counsel and provide you with the best possible plan of action. Any delay in time from your end may prove costly. FINRA rule 12206 states that no claim is admissible for arbitration if six years have elapsed from the date of occurrence of the event.