First and foremost, in the business world, “churning” is fraudulent. Churning is the practice of excessive stock trading in order to bring in more commissions on the account for the broker. To play the market in this manner is unethical and illegal. In order for a broker to churn an account, that broker must have and exercise control of the shares in an account. Usually, consent is provided to the broker through a formal written discretionary agreement. This agreement proves that you are giving the broker the authority to do what they wish with the shares of stock in the account.

According to the U.S. Securities and Exchange Commission Web site at www.sec.gov, churning can be a violation of SEC Rule 15c1-7. This rule states that it is a violation to carry out an act “with any discretionary power any transactions or purchase or sale which are excessive in size or frequency in view of the financial resources and character of such account.” Churning also violates FINRA Rule 2310, FINRA Rule 2310-2(b)(2), NYSE Rule 408(c), and NYSE Rule 476(a)(6). Once there is a suspicion that a stockbroker could potentially be churning an account, it is important that the shareholder act immediately. For any suspicion, the first step is to contact an attorney or the Securities and Exchange Commission.

Due to attorney-client privileges, a client can have the accounts he or she suspects of being churned confidentially reviewed for signs of churning by an attorney. These signs are not always consistently found in all accounts that have been churned, but attorneys trained in this area of law will be able to determine if a sound case can be established. Reporting the issue rather than simply voiding your contract with the stockbroker can help protect you and others that are victims of this unfair and illegal practice.