churning
Churning, which is also referred to as excessive trading, is the frequent buying and selling of securities by a stock broker using a customer’s account with the main purpose of promoting the broker’s personal gains, such as generating commission, instead of promoting the customer’s primary investment goals. (See: Investor Alert: Excessive Trading at Investors’ Expense from the SEC’s Investor Alerts and Bulletins )
The excessiveness of trading could be based on a number of factors, such as the character of the account, the customer’s objectives as expressed to the broker, the customer's investment profile based on reasonable diligence, and the customer’s financial resources. (See: 17 CFR 240.15c1-7 ; FINRA Rule 2111 ; Temporary Dual FINRA-NYSE Member Rule Series Rule 408T(c) )
Churning abuses a customer’s confidence in a stock broker. Moreover, a broker who churns violates the fiduciary duty owed to the customer. Both U.S. federal securities regulations and self-governing bodies, such as FINRA , prohibit churning. As a matter of law, churning is considered a violation of federal securities law proscribing fraud in connection with the purchase and sale of securities. Section 10(b) of the Securities Exchange Act of 1934 makes it unlawful to “use or employ, in connection with the purchase or sale of any security” a “manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe.” 15 U.S.C. § 78j(b) .
[Last reviewed in January of 2025 by the Wex Definitions Team ]
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