Churning and Excessive Trading Claims
When the volume of trading in a brokerage account served the broker’s commissions rather than the customer’s objectives: the rules that apply, how excessive trading is measured, and where the claim is brought.
Churning is the practice of trading a customer’s account at a level that cannot be justified by the customer’s investment profile, so that the account generates commissions or fees for the broker while the customer absorbs the cost. FINRA’s rules treat this as a distinct violation, and since June 30, 2020, Regulation Best Interest has imposed its own standard on recommendations made to retail customers. This page explains the rules that an excessive trading claim rests on, the measures arbitrators look at when deciding whether trading was excessive, and the forum in which the claim is heard.
Industria Business Lawyers represents investors nationwide in FINRA arbitration. Every rule cited on this page was read from the FINRA Manual or the Code of Federal Regulations on the date this page was last reviewed.
The Rules an Excessive Trading Claim Rests On
Two regimes apply, depending on when the trading took place and whether the customer is a retail customer. These are the provisions that matter.
Quantitative Suitability Under FINRA Rule 2111
Supplementary Material .05(c) to FINRA Rule 2111 provides that quantitative suitability requires a member or associated person to have a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer when taken together in light of the customer’s investment profile. The rule states that no single test defines excessive activity, but that the turnover rate, the cost-equity ratio, and the use of in-and-out trading may provide a basis for a finding that the obligation was violated.
The Care Obligation Under Regulation Best Interest
For recommendations to retail customers, Exchange Act Rule 15l-1(a)(2)(ii)(C) requires a broker-dealer or associated person to have a reasonable basis to believe that a series of recommended transactions, even if in the retail customer’s best interest when viewed in isolation, is not excessive and is in the retail customer’s best interest when taken together in light of the retail customer’s investment profile, and does not place the financial or other interest of the broker ahead of the interest of the retail customer. Rule 2111.08 provides that Rule 2111 does not apply to recommendations subject to Regulation Best Interest.
Excessive Transactions in Discretionary Accounts
FINRA Rule 3260(a) provides that no member shall effect with or for any customer’s account in respect to which the member or its agent or employee is vested with any discretionary power any transactions of purchase or sale which are excessive in size or frequency in view of the financial resources and character of the account.
Discretion Without Written Authorization
Rule 3260(b) provides that no member or registered representative shall exercise any discretionary power in a customer’s account unless the customer has given prior written authorization to a stated individual or individuals and the account has been accepted by the member, as evidenced in writing. A pattern of trades the customer did not direct and did not authorize in writing raises this rule alongside the excessive trading rules.
The Firm's Duty to Approve and Review
Rule 3260(c) requires the member or a duly designated person to approve promptly in writing each discretionary order entered and to review all discretionary accounts at frequent intervals in order to detect and prevent transactions which are excessive in size or frequency in view of the financial resources and character of the account. This is the provision under which the firm, and not only the individual broker, answers for the activity.
Manipulative, Deceptive or Fraudulent Devices
FINRA Rule 2020 provides that no member shall effect any transaction in, or induce the purchase or sale of, any security by means of any manipulative, deceptive or other fraudulent device or contrivance. Where trading was generated through misstatements about what the activity was for or what it cost, this rule is pleaded with the suitability and discretionary account rules.
How Excessive Trading Is Measured
The rules name the measures. The account records supply the numbers.
Turnover rate. The rule text points first to the turnover rate, which compares the total cost of purchases in the account over a period to the average equity in the account over the same period. It is computed from the trade confirmations and monthly statements, and it is read against the customer’s stated objectives, time horizon, and liquidity needs as recorded on the new account form.
Cost-equity ratio. The second named measure is the cost-equity ratio, which asks what rate of return the account had to earn just to cover the commissions, markups, margin interest, and fees charged during the period. When that break-even rate is high relative to the account’s objectives, the trading is difficult to justify on the customer’s behalf.
In-and-out trading. The third named measure is the purchase and sale of the same or similar positions over short intervals. Rule 2111.05(c) states that no single test defines excessive activity, and an evaluation looks at all three together with the customer’s profile.
Who directed the trades. The text of Rule 2111.05(c) as it reads today does not condition the quantitative suitability obligation on the broker having controlled the account. Where the broker held written discretion, Rule 3260(a) applies directly; where the broker did not, Rule 3260(b) is the question.
The forum. FINRA Rule 12200 requires arbitration under the Code where arbitration is required by a written agreement or requested by the customer, the dispute is between a customer and a member or associated person, and the dispute arises in connection with the member’s business activities. Rule 12206(a) provides that no claim is eligible for submission where six years have elapsed from the occurrence or event giving rise to the claim, and Rule 12206(b) provides that dismissal under that rule does not prohibit a party from pursuing the claim in court.
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How We Evaluate an Excessive Trading Claim
Monthly statements, trade confirmations, the account agreement, the new account form with the recorded investment profile, any discretionary authorization, and every communication with the broker.
Turnover rate and cost-equity ratio computed from the confirmations and statements for each period, with in-and-out patterns identified position by position.
The activity read against the objectives, time horizon, liquidity needs, and risk tolerance the firm itself recorded for the customer.
Each period assigned to the regime that governs it: Rule 2111.05(c), Regulation Best Interest for retail customer recommendations after June 30, 2020, and Rule 3260 where discretion was held or exercised.
Commissions, fees, markups, and margin interest charged, together with the account’s performance measured against the customer’s stated objectives, documented in a form a panel can follow.
The claim filed with FINRA Dispute Resolution Services under the Customer Code, with the rule citations, the trading analysis, and the supporting records attached.
Discovery under the Code, mediation where it is useful, and a hearing before the panel if the matter does not resolve.
FAQ
01 • Investors What is churning?
Trading in a customer’s account that is excessive in light of the customer’s investment profile, so that the activity serves the broker’s compensation rather than the customer’s objectives. FINRA Rule 2111.05(c) and Regulation Best Interest each describe the obligation in terms of a series of transactions that, taken together, are excessive.
02 • Investors Does it matter that I approved each trade?
The quantitative suitability obligation in Rule 2111.05(c) is written in terms of recommended transactions, and Regulation Best Interest is written in terms of a series of recommendations. Neither provision, as its text reads today, requires that the broker controlled the account. Where the broker held written discretion, Rule 3260(a) applies as well.
03 • Investors How much trading is excessive?
Rule 2111.05(c) states that no single test defines excessive activity. It names the turnover rate, the cost-equity ratio, and in-and-out trading as factors that may support a finding, and those measures are read together with the customer’s profile rather than against a fixed number.
04 • Investors Do I have to bring the claim in FINRA arbitration?
Under Rule 12200, a dispute between a customer and a member or associated person arising from the member’s business must be arbitrated where a written agreement requires it or the customer requests it. Most account agreements contain that clause. A claim dismissed as ineligible under Rule 12206 may be pursued in court under Rule 12206(b).
05 • Investors How long do I have?
Rule 12206(a) makes a claim ineligible for arbitration where six years have elapsed from the occurrence or event giving rise to it. Statutes of limitation that apply to the underlying claims may be shorter, so the review of an account starts with the dates on the statements.
Investors nationwide. Call (202) 860-1210 or send your account statements and trade confirmations through the form. Free consultation. Every claim is reviewed against the rule text in force for the period in question.
This page provides general information about churning and excessive trading claims under FINRA rules and Regulation Best Interest and does not constitute legal advice. Reading it does not create an attorney-client relationship with Industria Business Lawyers. Whether a claim exists depends on the account records and the rules in force for the period involved. Rules cited were read on September 23, 2026 from finra.org and the Code of Federal Regulations.