Churning

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DEFINITION of 'Churning'

Excessive trading by a broker in a client's account largely to generate commissions. Churning is an illegal and unethical practice that violates SEC rules and securities laws. While there is no quantitative measure for churning, frequent buying and selling of securities that does little to meet the client's investment objectives may be construed as evidence of churning. Churning may often result in substantial losses in the client's account, and even if profitable, may generate a tax liability for the client.

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BREAKING DOWN 'Churning'

Since churning can only occur if the broker has discretionary authority over the client's account, the obvious way to avoid this risk is for the client to always maintain full control over the account. Another alternative is to use a fee-based account rather than a commission account, since this ensures the broker's objectives are aligned with those of the client.

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