When you entrust your investment decisions to a brokerage firm in Michigan, you should have faith that the firm will act in your best interests. When a broker recklessly infringes on that trust for personal enrichment, the broker may have violated securities law. Some clients find that their brokerage firm has engaged in a specific financial crime known as churning.
FindLaw elaborates on what churning entails. Typically, brokers earn commissions when they buy and sell securities on behalf of their clients. Some brokers decide to boost their commissions by increasing how many securities they purchase and sell without considering how this will affect their clients. For churning to take place, the broker must exercise actual or effective command over investment decisions of a client.
Churning is illegal because it breaks the fiduciary duty a broker must maintain with a client. A churning broker disregards what a client wants and runs the risk of making bad investments that could devastate the account of the client. Churning is also insidious because it is hard to distinguish from legitimate transactions. Unfortunately, some investors are not experienced enough to detect when they are being taken advantage of.
Churning may break a number of securities laws. A broker who conducts excessive transactions of securities could violate SEC Rule 15c1-7, which forbids brokers from engaging in deceptive or manipulative actions while exercising discretionary power over the account of a client. FINRA Rule 2111 stipulates that brokers should reasonably base their transactions and recommendations on the investment profile of a client, which may include investment goals, risk tolerance, and the experience of the client.
As the SEC explains, a red flag that churning is taking place is when a broker buys and sells securities frequently and the transactions do not seem to fulfill the investment goals of the client. Still, it may not be easy to tell if churning is taking place. Consultation with legal counsel may be needed to understand if your broker is taking advantage of your account for personal gain.
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