Q: What does 'churning' mean in the context of investment fraud?
A: Churning in connection with investment fraud is simply when a customers investment advisor generates a high amount of trading activity in the customers investment account in order to collect more commissions. Churning is most commonly measured by checking the turnover ratio of the investment account. This formula measures the amount of trades in the investment account in a given time period relative to the total amount of assets being managed by the investment advisor. Churning is a violation of a FINRA and SEC rules as they pertain to the management of customer investment accounts. Churning violates FINRA Rule 2111 as a broker must believe an investment is suitable to a customers investment profile in order to enter a trade. Executing trades simply to obtain more commissions from a customer does not qualify as something suitable to an investors financial profile.
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