You trust your broker to manage your investments with your goals in mind. But sometimes, that trust gets broken through excessive trading known as churning. This practice benefits the broker through fees and commissions, not your financial health. Understanding when churning becomes actionable can help you protect your money.
What defines churning?
Churning happens when a broker makes too many trades in your account just to earn commissions. It goes against FINRA Rule 2111, which says trades must be suitable not only on their own but also when viewed together. Even if you gave permission to trade or signed off on certain transactions, that doesn’t make churning acceptable. The law looks at your investment profile—things like your income, goals, and risk tolerance—to decide whether the trading activity made sense.
How do arbitrators assess it?
In arbitration, FINRA panels look at how often trades occurred, how much those trades cost you, and whether those trades lined up with your financial objectives. They may compare how your account performed to the level of trading activity. If your investments didn’t grow—or worse, lost money—while the broker made commissions, that’s a red flag. The pattern of buying and selling quickly, often called “in-and-out” trading, also suggests churning.
What makes it actionable in Texas?
To pursue a claim in Texas, you must show that the broker traded excessively, gained from those trades, and caused you financial harm. Even experienced investors can bring claims. Texas courts don’t automatically side with brokers just because the client knows the markets. FINRA arbitration allows claims under both Texas and federal laws, offering several ways to hold brokers responsible for misconduct.
FINRA allows you to file an arbitration claim up to six years from when the questionable trading happened. You don’t lose your chance to act just because time has passed, especially if you recently discovered the issue. Keep records of your account statements, trade confirmations, and communications with your broker. These details help prove churning and can lead to recovery.