Churning

Churning is the practice of a salesperson or broker executing trades in a client's investment account in order to generate commission for themselves rather than to serve the client's interest; it is a breach of securities law in many jurisdictions and is generally actionable by the account holder for the return of the commissions paid and any resulting losses. Courts typically examine an account's turnover, the number of times its capital has been reinvested in a year: an actively managed mutual fund typically turns over its holdings every six to twenty-four months, while a churned account may be traded monthly or more often, generating high commissions that quickly erode its value. Because accounts holding steady, low-volatility securities generate no commission, critics argue the commission-based brokerage system itself indirectly encourages churning. Frequent trading in a fee-based account, where no commission is charged per trade, is not churning; the reverse problem, placing an infrequently trading client into a fee-based account so they are charged ongoing fees regardless of activity, is known as reverse churning.