FINRA proposes new rule for Churning Fraud – Excessive trades
The Financial Industry Regulatory Authority Inc. is proposing a new rule to catch more brokers who are churning customer accounts, according to an article in Investment News on Monday.
FINRA and the Securities and Exchange Commission have been targeting churning and reverse churning in their examination priorities over the last few years.
Churning is an illegal and unethical practice that takes place when a broker or financial advisor excessively buys and sells a client’s securities to increase their own commissions. The more a broker trades the more they get paid. In many cases this is enough incentive for unscrupulous brokers to over-trade in a client’s account.
Churning may result in significant losses and exposes the client to unnecessary tax liabilities. Often churning occurs when a broker has discretionary authority (either actual or implied) of a client’s account, meaning they do not need the clients consent to trade on their behalf.
According to FINRA’s proposal released April 20, the regulator would no longer require that a broker control a client’s account in order to find that the broker has churned it. Under current rules, a broker can only be found liable for churning if he has discretion.
The rule targets situations where a customer is relying on the brokers’ guidance even though the customer must authorize the buying and selling of investments in the account.
FINRA would still be required to demonstrate that transactions were “excessive and unsuitable” based on the circumstances of a particular case with the new rule.
The proposal will reportedly be open for a public comment period that ends June 19. The SEC must approve FINRA rule proposals before they become final.
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