Stockbrokers are usually compensated each time they conduct a transaction for a client. The more transactions a broker makes for a client, the more commission they earn. This compensation structure is flawed because it often encourages dishonest brokers to execute as many trades as possible in their client’s accounts. When a stockbroker puts his or her own interests ahead of the interests of the customer by effecting trades that are "excessive in light of the objectives and resources of the customer's account," the broker is churning the account.
Regulators often use the turnover ratio of an account to determine if an account has been churned. The turnover ratio can be calculated by dividing the average net value of an account into the total dollar amount of purchases over the course of one year. If the annual turnover ratio is six or more it is likely that the account has been churned.
Regulators also consider the break-even ratio to determine if an account has been churned. This ratio illustrates the amount of money the account would need to appreciate just to break even from commission charges. This ratio is calculated by dividing the total commissions by the average account value over an annual basis.
SEC Rule Addressing Churning:
Rule 15c1-7 -- Discretionary Accounts
a. The term "manipulative, deceptive, or other fraudulent device or contrivance," as used in Section 15(c) of the Act, is hereby defined to include any act of any broker, dealer or municipal securities dealer designed to effect with or for any customer's account in respect to which such broker, dealer or municipal securities dealer or his agent or employee is vested 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.
b. The term "manipulative, deceptive, or other fraudulent device or contrivance," as used in Section 15(c)(1) of the Act, is hereby defined to include any act of any broker, dealer or municipal securities dealer designed to effect with or for any customer's account in respect to which such broker, dealer or municipal securities dealer or his agent or employee is vested with any discretionary power any transaction of purchase or sale unless immediately after effecting such transaction such broker, dealer or municipal securities dealer makes a record of such transaction which record includes the name of such customer, the name, amount and price of the security, and the date and time when such transaction took place.
Seek Legal Help Quickly
If you have been the victim of churning in your investment account it is important to seek legal help immediately. Any hesitation in filing a complaint and seeking legal help may be viewed negatively by arbitration panels and courts.
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Contact Mark & Associates, P.C. today to have your churning case evaluated for free by an experienced stockbroker fraud securities lawyer. Please complete the case evaluation form on the right side of this page or call 1-866-50-RIGHTS (1-866-507-4448) to have your case reviewed.