A broker typically earns a portion of the commissions or other fees on each purchase or sale of securities that the brokerage firm makes for an investor. When a broker engages in excessive buying and selling (i.e., trading) of securities in a customer’s account without considering the customer’s investment goals and primarily to generate commissions that benefit the broker, the broker may be engaged in an illegal practice known as churning.
Red flags of excessive trading may include:
• Unauthorized Trading—Be alarmed if you become aware of trades in your account that you did not authorize your broker to make.
• Frequent Trading—Be wary of frequent in-and-out purchases and sales of securities that don’t seem consistent with your investment goals and risk tolerance.
• Excessive Fees—Be suspicious if the total amount of fees seems high or if one segment of your portfolio consistently generates high fees.
If you believe a broker has engaged in churning, submit a complaint in writing to the brokerage firm and to the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA).
In Texas, as in other states, churning by a broker is considered a violation of both state securities laws and federal regulations. Churning occurs when a broker engages in excessive trading in a client's account mainly to generate commissions, without regard for the client's investment objectives. This practice is illegal and can be pursued under the Texas Securities Act, as well as federal laws enforced by the Securities and Exchange Commission (SEC) and rules set by the Financial Industry Regulatory Authority (FINRA). Investors in Texas should be vigilant for signs of churning, such as unauthorized trading, frequent trading that does not align with their investment goals, and excessive fees. If an investor suspects churning, they should file a written complaint with the brokerage firm, the SEC, and FINRA. These regulatory bodies have the authority to investigate and impose sanctions on brokers and firms that engage in this type of misconduct.
