Churning is the illegal and unethical practice of brokers and advisors trading repeadetly in a client’s account in order to generate commissions, rather than following the original investment plan laid out and agreed upon at the start of the investment relationship. A broker or advisor should always have the best interests of their clients, and not of their own. This type of fraud often occurs during volatile market conditions where high trading volume can be justified.

Churning can have devasting impact on an investors porfolio, draining their hard-earned cash, profits, and security. Those who know of a churning scheme may report their concerns to the Securities and Exchange Commission (SEC) and become eligible for an award of between 10 and 30 percent of the collections received, so long as their information leads to a succesful enforcement action.

Reverse Churning

This occurs when a broker or advisor is paid a fee, but doesn’t actually do any actual trading. Many brokers are paid as a percentage of the assets under management (AUM). In reverse churning relationships, a broker or advisor may not make recommendations, or just ignore the client completely, which creates a massive lost opportunity on top of the hefty fees.

We suggest reading our comprehensive guide for whistleblowers – Churning in Finance: What It Is and How to Blow the Whistle to the SEC – which provides a strong overview churning, as well as the red flags to spot, and more about the SEC Whistleblower Program that protects and awards whistleblowers for their information. The commissions generated in order for a whistleblower to become eligible for an award must exceed $1 million.