Another form of stockbroker misconduct or investment fraud includes excessive activity or churning. Securities brokers are typically compensated by each transaction effected in your securities account. Sometimes brokers effect these transactions in your account, not for the purpose of reasonably fulfilling your stated investment objectives, but instead in an effort to generate excessive commissions for themselves and their firm. Such conduct is called churning. It is a form of stockbroker fraud or misconduct and is actionable under the federal securities laws.
Churning or Excessive activity is examined in light of the customer's investment objective and the type of securities being traded. For example, it may be inappropriate to pay a sales charge by buying and selling a mutual fund in a period of, let us say, a year. However, during this same period, it may not be inappropriate for a person seeking to trade options turn over their account twenty times.
Churning is often marked by short holding periods without any appreciable change in securities prices. Churning is often measured by the account's "turnover rate," or the total purchases divided by the average value of the account, and the "Goldberg rate," which is the commissions charged divided by the average value of the account. On an annual basis, these calculations show the number of times your account was turned over and how much your account had to return just be break even after paying commissions. Once again, what is reasonable depends on your acceptance of risk and measure of anticipated returns.
However, if you think that you may have been the victim of excessive activity, you should have your account reviewed by a professional and contact the FSIC for a free evaluation.