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Securities Lawyer Jonathan Kurta
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What is Churning in Finance?

What does churning mean for investors? “Churning” is another word for “excessive trading.” Regulators define excessive trading as trading an amount of securities that incur so many fees it is virtually impossible for the investor to generate a profit.

When brokers buy and sell securities, they often receive a commission for each trade. Many trades also come with a transaction fee. When brokers churn an account, they excessively buy and sell securities to increase their commissions. It is a highly unethical practice and one that can get brokers into serious trouble with the Financial Industry Regulatory Authority (FINRA). 

Investors Beware: Churning is Not Always Easy to Spot

Churning can be challenging to distinguish from legitimate transactions. For example, monthly brokerage account statements show broker commissions, but they may appear small compared with the trade’s gross amount. (Make sure you see the commissions on your statement – FINRA requires firms to factor commissions into the overall performance of your investment.) Often, a client will not recognize the broker is churning their account until the client receives their end-of-year account summary and adds up the commissions.

Moreover, churning can be difficult to spot because the cost of the trading is not always evident or readily apparent on the trade confirmation. This can be because the brokerage firm charged the investor a “markup” or “markdown” instead of a commission on the trade.  Markups and markdowns are ways brokers and brokerage firms seek to conceal or hide trading costs.

Churning Arbitration Cases

Investors alleging churning must show that the broker has control over the account in question and that the trading in the account was excessive considering the account’s objectives.

If the client gave written authority for the account to be traded on a discretionary basis, the first element might easily be met. However, some churning cases involve non-discretionary accounts, in which the client maintains control over the transactions. In those cases, for an arbitration panel to find churning, there would have to be evidence that the broker exercised de facto >control over the account. For example, if a client agreed with virtually all the broker’s recommendations and never made their own investment decisions, it could be argued that the broker had effective control over the account. Brokers should know their investor’s trading experience and factor that into their recommendations. Therefore, even if the broker regularly consults the investor before entering any trades, that does not mean that the trading activity in the account is proper.

Notably, the SEC’s Regulation Best Interest (“Regulation BI”) relaxed the need to establish control over the subject account. Under Regulation BI, a customer alleging churning must only prove that (1) the broker recommended the series of transactions, and (2) the series of recommendations was “excessive.”

FINRA Churning Rule

Churning violates FINRA Rule 2111, which states that brokers should only recommend suitable investments. If the investments incur too many fees to fit an investor’s financial goals, they are unsuitable. Suitability also considers the investor’s experience. A client’s lack of experience with the financial markets may be a key component of a churning claim. Securities lawyers could also show an unsuitability if an investor churned an account the investor relied on for their income – excessive trading is an especially significant risk to a retired or elderly investor

Two-Part Analysis: Turnover Ratio and Commission-to-Equity Ratio

According to FINRA, there is no single test that ultimately determines whether trading has been excessive. When determining whether trading has been excessive, FINRA representatives typically perform two types of account analysis to determine the account’s turnover rate and commission-to-equity ratio

1. Turnover Rate

The turnover rate measures the number of times new securities replace the securities in the account. FINRA determines this rate by dividing the total dollar amount of purchases by the average monthly equity and annualizing the result. Depending upon the account’s objectives, a turnover ratio of two suggests churning. FINRA considers a turnover ratio of six as conclusive of churning. 

2. Commission-to-Equity Ratio

The other metric used is the commission-to-equity ratio, which measures the amount an account must increase in value just to cover commissions and other expenses or break even, factoring in the cost of trading. A cost-to-equity ratio above twelve is generally viewed as solid evidence of churning.

Example of Churning

On May 20, 2021, a broker entered into an Acceptance, Waiver, and Consent agreement with FINRA. He consented to the findings that he had executed excessive trades in an investor’s account.

The account had an average monthly equity of $55,000. Despite this relatively modest number, the broker executed trades with a total value of more than $1 million. This resulted in an annualized turnover rate of more than eight and a more than 30% cost-to-equity ratio. FINRA concluded that the account would have to grow over 30% – a huge amount – for the investor to simply break even.

You can read a copy of the full AWC here.

What is Reverse Churning?

In addition to churning, investors should also monitor their account statements for signs of reverse churning. “Reverse churning” occurs when a Registered Investment Adviser (RIA) does not place any trades in an account they manage. Investors typically pay RIAs a percentage of their portfolio’s total value, so an RIA who did not execute any trades for an investor could collect a $10,000 commission despite the fact they did not perform any work.

Note: RIAs are different from FINRA brokers – they are regulated by the SEC and not FINRA. They also must adhere to fiduciary standards. You can read about the difference here

Investors Should Seek to Recover Losses from Churning Misconduct

Churning involves a conflict of interest in which a broker seeks to maximize their compensation at the customer’s expense. If the level of trading is “excessive,” the motivation to create high commissions is often all that is necessary to satisfy this element of a churning claim.

If you discover excessive trading in your account, you should contact a churning fraud attorney. Reach out to Kurta Law for a free case evaluation. Call  877-600-0098 or email

Securities Lawyer Jonathan Kurta
Written by: Jonathan Kurta

Jonathan Kurta is an accomplished securities attorney and a founding partner at Kurta Law.