Sophia has little time to devote to her investments, which include stocks, bonds, certificates of deposit, and mutual funds. She doesn’t really understand too much about the whole practice anyway. It seems overwhelming. Her late husband was the one who handled such matters. Sophia’s main concern is that she have money available to her for her retirement years. Sophia engaged the services of a full service brokerage firm to assist her with her investments. Sophia explained her concerns about retirement to her broker. In the year since she engaged the firm, her broker has made so many purchases and sales of securities that Sophia feels she has cause for concern. The amount of the broker’s commissions on all of the transactions he executed is really excessive. Sophia is worried that her retirement money is being depleted as a result of her broker’s actions.
What Is Churning?
The term “churning” refers to an unethical, illegal practice employed by some brokers. In essence, churning occurs when a broker engages in a high volume of trading on behalf of a client for the purpose of increasing his or her commissions, as opposed to serving the client’s needs. The practice is also referred to as “twisting.” For such a practice to occur, the broker must have control over the client’s account.
The Elements of Churning
Generally speaking, there are two key elements to churning:
- Excessive trading by a broker – the determination of whether a broker’s trading was excessive will be based on the client’s investment objectives.
- Fraudulent purpose – the broker must have engaged in the excessive trading with the purpose of defrauding his or her client or in willful or reckless disregard of the client’s interests and authorizations.
What Remedies Are Available To Investors?
If an investor believes that his or her broker has engaged in the practice of churning, the investor should initiate some type of legal action without delay. For more information on the remedies available and the appropriate procedure to initiate a complaint, an investor should contact the United States Securities & Exchange Commission – www.sec.gov.