Anatomy of a Churning Claim

Anderson, Seth C.; Robertson, John F.
September 2000
Journal of Financial Planning;Sep2000, Vol. 13 Issue 9, p144
Academic Journal
This article examines the elements necessary for an investment churning to be pursued using an actual churning case filed with the National Association of Securities Dealers in the U.S. The issue of churning in the investments arena is a problem for both investors and investment managers. As broadly phrased over 30 years ago, churning occurs when a dealer, acting in his own interests and against those of his customer, induces transactions in the customer's account which are excessive in size and frequency in light of the character of the account. The first issue to be proved, that of control, can be manifest in two ways. One is for the broker to have customer-granted discretion over account activity. The second element of a churning claim is that of excessive trading, which for years was considered to be the most difficult for plaintiffs to establish and the most troublesome for courts to evaluate. Frequently tied to the excessive trading element in churning claims is the expense ratio. Obviously, high trading activity generates high expenses.


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