Call Now For a Free Consultation:
(614) 532-4576
Nationwide Representation

FINRA Proposing a Wider Net to Capture Churning Brokers

On April 20, the Financial Industry Regulatory Authority (FINRA) proposed a new rule that expands the liability of churning practices. The new rule states that a broker does not have to be in control of a client's account to be found liable for losses caused from churning. Under current FINRA rules, a broker can only be found liable for churning if he/she has discretion. The current law requires brokers who control client’s accounts to have a reasonable belief that the transactions they recommend are not unsuitable or excessive for their client.

FINRA's new proposed rule is intended to protect investors from unscrupulous brokers who use excessive trading as a way to increase their own profits. FINRA is concerned that a client has little protection against unethical churning tactics since the client relies on the broker's guidance for buying and selling investments. In such cases, clients routinely accept their broker's advice when making investment decisions, and they do not recognize that churning is going on. FINRA states that broker control of a client's account places an unnecessary burden on clients when trying to prove broker churning. Although the new FINRA rule will provide more protection for investors, FINRA will still have to prove that transactions were excessive and unsuitable for the investor.

The Securities and Exchange Commission (SEC) and FINRA have been investigating and targeting churning practices used by brokers for years. Both traditional churning, excessive trading, and reverse-churning, where brokers put buy-and-hold clients into advisory accounts that charge asset-based fees, cost unsuspecting investors millions of dollars in losses each year. Although no single test defines excessive trading activity, there are red flags that include:

  • Annual turnover rates greater than six
  • Cost-to-equity ratio greater than 20 percent
  • In-and-out trading patterns in a short period of time
  • Excessive account fees
  • Significant tax liabilities associated with investments

If the SEC approves FINRA's new rule, it could expand liabilities and violations for churning beyond brokers who control a client's account. If churning tactics are proven, even brokers who don't have account control can receive violations and penalties. If you have been a victim of broker misconduct, contact the investment fraud attorneys at Meyer Wilson at 888-390-6491 for a free consultation today.

Related Posts:

The information contained in The Firm’s posts on its blog, fraud alerts, investigations or elsewhere on the site is based upon information obtained from other sources including, but not limited to, news outlets and federal, state, and regulatory agency filings. All suspects and subjects of postings herein are presumed innocent until proven guilty in a court of law or administrative action and any and all crimes are alleged until a court or regulatory agency finds otherwise .

Share This Story
If you found the information provided by this article useful, consider sharing to your social media channels to help others in their search for reliable resources.
Consult with Our Legal Team
There is never a cost associated with a consultation
Atlanta Office

945 East Paces Ferry Road, Suite 2275
Atlanta, GA 30326
Columbus Office

305 W. Nationwide Blvd
Columbus, OH 43215
Meyer Wilson
New Orleans Office

900 Camp Street 
Suite 337
New Orleans, LA 70130
Los Angeles Office

2029 Century Park East,
Suite 400N
Los Angeles, CA 90067
Cleveland Office

4781 Richmond Rd.
Suite 400
Warrensville Heights, OH 44128
Bloomfield Hills Office

41000 Woodward Ave.,
Suite 350
Bloomfield Hills, MI 48304
Quick Links
The information contained in this Website is provided for informational purposes only, and should not be construed as legal advice on any subject matter. No recipients of content from this site, clients or otherwise, should act or refrain from acting on the basis of any content included in the site without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from an attorney licensed in the recipient's state. Read More
The information contained in this Website is provided for informational purposes only, and should not be construed as legal advice on any subject matter.
Read More
chevron-down linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram