Churning
Excessive trading in a client account to generate commissions.
What is Churning?
A prohibited practice requiring control over the account and trading excessive in light of the client's objectives. Measured by turnover rate and cost-to-equity ratio. A clear violation of both suitability and best-interest obligations.
Churning: a worked example
A conservative retiree's account turning over eight times a year.
More terms in Regulation & Professional Duty
Fiduciary Duty
A legal obligation to act in the client's best interest.
Suitability Standard
A recommendation must be appropriate given the client's profile.
Regulation Best Interest (Reg BI)
SEC rule requiring broker-dealers to act in a retail client's best interest.
Registered Investment Adviser (RIA)
A firm registered to give advice for a fee, holding fiduciary duty.
Broker-Dealer
A firm that executes trades as agent (broker) or principal (dealer).
FINRA
The self-regulatory organization overseeing broker-dealers.
Securities and Exchange Commission (SEC)
The federal agency regulating securities markets.
SIPC
Insurance against broker failure - not against investment losses.