How to Avoid Securities Fraud Churning in Your Investment Portfolio

When a stockbroker buys or sells securities for the primary reason of creating a commission and not because the trade makes financial sense for the investor, this is known as “churning,” and is a violation of SEC rules and securities laws, including SEC Rule 15c1-7 and others. Securities fraud churning is performed by stockbrokers looking to increase their income through a series of trades, often unbeknownst to the investor that may not appear illegal on the surface.

In fact, commissions in connection with excessive trading can make it very difficult for an investment portfolio to be profitable, and goes against the principle that the investor’s interests come first. While it can be difficult to quantitatively measure churning, excessive buying and selling that does not appear necessary to fulfill the investor’s goals and can be considered evidence of churning.

The Financial Industry Regulatory Authority (FINRA), also has a series of rules that include interpretive material on churning, which they call “quantitative suitability.” According to FINRA, “A member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile. A customer’s investment profile includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.”

Churning can only occur if the broker has the authority to make trades on behalf of the investor at his or her own discretion. Generally speaking, this is typically handled through a formal written discretionary agreement.

How to avoid churning:

  • Maintaining control over your portfolio and requiring your authorization prior to any trade.
  • Use a fee-based account instead of a commission-based account, since this will help make sure your interests are truly aligned with yours and not as a means for financing your stockbroker’s personal accounts with your funding.

Call a Los Angeles Securities Lawyer Today

If you believe your stockbroker has been churning your account, you may have certain legal rights which may require your immediate attention. You should contact an experienced Los Angeles securities lawyer today to discuss your rights.