Churning Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Churning, written in plain English, along with examples of how it is used.

What is Churning?

An unlawful and immoral method in which a share broker buys shares and stocks in excess on behalf of his client for his personal interst to earn more commission for himself as against the interest of his customer.

History and Definition of Churning

Churning is an illegal practice in the financial industry where a broker engages in excessive buying and selling of securities in a client's account for the primary purpose of generating commissions for themselves. This practice is unethical as it results in financial harm to the client who is often unaware of the broker's actions. Churning violates securities laws and regulations, including the Securities Exchange Act and FINRA rules.

The term "churning" derives its history from the agricultural practice of churning butter, where the process involves excessive stirring and processing to produce the desired outcome. In the financial industry, churning refers to the excessive trading of securities, which involves buying and selling securities in a client's account even when it is unnecessary or not in the client's best interests. The broker or financial advisor engages in this practice to generate commission fees, which can lead to significant financial losses for the client.

Examples of Churning

Here are a few examples of how churning might be identified:

  • A broker trades stocks in a client's account at an excessive rate irrespective of the client's needs.
  • A broker recommends a switch to different mutual funds, resulting in the client incurring significant fees or charges.
  • Broker transactions significantly exceed the client's investment goals or time horizon.
  • The broker executes trades without discussing them with the client.

Legal Terms Similar to Churning

  • Insider trading: The practice of knowingly buying or selling securities using non-public information that gives an individual an unfair advantage in the market.
  • Front-running: The practice of buying securities ahead of large transactions that are known to push prices up or selling ahead of transactions that would bring prices down.
  • Market manipulation: The practice of artificially inflating or deflating prices of securities by using tactics such as spreading rumors or influencing the market supply or demand for the security.