Customer Claims Against Brokerage Firms and Individual Brokers, Illinois Commodities Attorney

QUESTION

What is churning?

ANSWER

Churning occurs when a broker makes excessive trades in a customer's account to further his own interests instead of the customer's. There is no single formula for determining when churning has occurred. The amount of trading done for one customer may be appropriate based on his sophistication and understanding about what his broker was going to do, whereas the same level of trading may be inappropriate for a less sophisticated customer. Arbitration panels and courts consider objective criteria for evaluating churning claims, including turnover and commissions-to-equity ratios. Generally, churning claims may be made only when a broker has made excessive trades in a discretionary account (i.e., where the customer has given the broker a power of attorney over his account). If a customer, however, can demonstrate that the broker exercised de facto control over the account, he may be able to prove churning even though he never gave his broker a power of attorney over his account.

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