FINRA Bans Broker for “Churning” Customer Accounts

A stockbroker has an ethical and legal duty to make “suitable” investments with your money. The Financial Industry Regulatory Authority (FINRA), the self-regulatory organization for brokerage firms in the United States, explains this duty in its Rule 2111. Specifically, the rule says a broker must “have a reasonable basis to believe that a recommended transaction or investment strategy … is suitable for the customer, based on … the customer’s investment profile.” A broker who violates this rule and makes unsuitable investments may cost the customer thousands of dollars in lost account value.

Unsuitable Investments Cost Customers $37,000

FINRA recently cited a broker for “churning,” which is industry slang for making excessive investments on a customer’s account in order to generate commissions for the broker. Churning violates Rule 2111 and other FINRA policies designed to ensure all brokers make suitable investments on behalf of their clients. Although the broker in this case had no prior disciplinary history with FINRA, he accepted a permanent ban from working in the securities industry.

The now ex-broker, Rasheed “Richard” Adams, previously worked for a large brokerage in New York. According to FINRA’s investigation, over a 12-month period Adams “excessively and unsuitably traded and churned” two customers’ accounts “in a manner that was inconsistent with those customers’ investment objectives, financial situations, and needs.” FINRA determined Adams earned $57,000 in commissions on these unsuitable trades, while the two customers’ accounts lost a combined $37,000 in value.

In assessing whether churning took place, FINRA measured the cost-to-equity ratio and turnover rate on both customers’ accounts. The cost-to-equity ratio is “the percentage of return on the customer’s average net equity needed to pay broker-dealer commissions and other expenses.” A ratio higher than 12 percent is considered “strong evidence of excessive trading.” In this case, the ratios on Adams’ two clients were 70.9 percent and 91.96 percent, respectively.

Similarly, the turnover rate measures “the aggregate amount of purchases in an account” per month. FINRA considers a turnover rate of six or higher evidence of excessive trading. FINRA said Adams traded his clients accounts at more than three times this level, showing turnover rates of 16.16 and 19.16, respectively.

Adams neither admitted nor denied FINRA’s allegations. He did, however, accept a settlement barring him from working for, or associating with, any FINRA member broker. It should be noted FINRA is not a government agency. Adams’ settlement does not constitute a civil or criminal judgment, nor does it bar the U.S. Securities and Exchange Commission from taking any future action.

Is My Broker Churning?

All investments involve some degree of risk. But stockbrokers must ensure any trades they make on your behalf fit within your stated risk tolerance and preferred investment strategy. If you have reason to believe your broker may be making excessive or unsuitable trades from your account, it is important you get independent legal advice from an experienced Florida securities fraud attorney. The law offices of Gregory Tendrich, P.A., in Boca Raton can assist you with many types of stockbroker fraud and stock fraud claims.