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posted on 16 January 2017

Investor Alert: Excessive Trading At Investors' Expense

from the Securities and Exchange Commission

The SEC’s Office of Investor Education and Advocacy (OIEA) and Broker-Dealer Task Force are jointly issuing this Investor Alert to help investors identify excessive trading in their brokerage accounts and to educate investors about steps they should take if their brokerage firm notifies them of a high volume of trade activity in their accounts.

How can I tell if there is excessive trading in my account?

When reviewing your account statements, trade confirmations, or online account, look out for these red flags that may indicate excessive trading:

  • Unauthorized Trading - Be alarmed if you become aware of trades in your account that you did not authorize your broker to make.

  • Frequent Trading - Be wary of frequent in-and-out purchases and sales of securities that don’t seem consistent with your investment goals and risk tolerance.

  • Excessive Fees - Be suspicious if the total amount of fees seems high or if one segment of your portfolio consistently generates high fees.

Churning. A broker typically earns a portion of the commissions or other fees on each purchase or sale of securities that the brokerage firm makes for an investor. When a broker engages in excessive buying and selling (i.e., trading) of securities in a customer’s account without considering the customer’s investment goals and primarily to generate commissions that benefit the broker, the broker may be engaged in an illegal practice known as churning.

Be aware that excessive trading can occur even if the overall account value increases. Also, remember that your account statements, trade confirmations, and online account do not disclose all fees - you can find more information by asking your broker. If you do not understand the reason for a trade or the reason for a fee, contact your broker and ask about it. You also can ask the SEC a question or call the SEC at (800) 732-0330 (or 1-202-551-6551 from outside of the U.S.).

Communicating Your Investment Goals to Your Broker. When you open a brokerage account, your broker should ask you to specify your overall investment goals (or "investment objectives") and how much risk you are willing to tolerate. Different firms use different terms to describe investment objectives or risk-tolerance levels. Some common terms are: "capital preservation," "income," "growth," "moderately aggressive," "aggressive growth," and "speculation." Make sure that you understand what these terms mean and that you know what you communicated to your broker.

What should I do if I am informed of a high volume of trade activity in my account?

If your brokerage account has a high volume of trade activity, your brokerage firm may contact you and ask you to acknowledge the trading or to confirm that you are satisfied with how your broker is handling your account. If you receive such notification, you should ask your broker to explain:

1. The rationale for the broker’s recommended trading activity and investment strategy given your investment objectives;

2. The total commissions or other transaction fees you have paid over the past month, quarter, or year; and

3. What percentage return on your investment you would need to break even on the fees you are paying.

Once you have this information, you may want to speak with the broker’s manager or the firm’s compliance department to understand and to question the nature of the trading in your account in light of your investment goals and risk tolerance.

Examples of SEC Enforcement Actions Involving Excessive Trading. The SEC’s Broker-Dealer Task Force has identified churning and excessive trading as key areas of focus, and the SEC has recently brought enforcement actions against brokers for defrauding investors by churning their accounts and recommending a frequent trading strategy without a reasonable basis for such recommendation:

  • In SEC v. Dean and Fowler, the SEC charged two individuals with fraud for churning three customers’ brokerage accounts and for recommending an investment strategy to twenty-seven customers without a reasonable basis to believe that the strategy was suitable for anyone. The customers allegedly opened the accounts after receiving cold calls from the defendants. The SEC alleged that the three customers whose accounts were churned signed account-opening documents that did not reflect the customers’ true investment objectives. For the twenty-seven customers, the defendants allegedly recommended a short-term investment strategy with high per-trade transaction costs and use of margin trading without a reasonable basis to believe that the strategy was suitable for anyone. In particular, the SEC alleged that this strategy was unsuitable for anyone because the frequent trading, combined with high per-trade costs charged, all but guaranteed losses for the customers. According to the SEC’s complaint, the defendants’ purpose was to generate commissions and other costs, and the defendants charged approximately $1 million in costs to the twenty-seven accounts.

  • In In the Matter of Paul T. Lebel, the SEC charged an individual for churning several brokerage accounts of four customers. According to the Commission’s settled order, the individual engaged in excessive trading of certain of his customers’ mutual fund A shares (designed for long-term investing) to the detriment of those customers and with no justification other than to generate commissions. The individual was found to have received $50,037 in commissions for these trades.

What should I do if I believe there has been excessive trading in my account?

If you believe a broker has engaged in excessive trading including churning, or to report other problems with a broker, submit a complaint in writing to the brokerage firm and to the SEC or FINRA.

Additional Resources

Check the registration status and background of anyone recommending or selling an investment using the SEC’s Investment Adviser Public Disclosure (IAPD) database, which is available on Investor.gov.

Updated Investor Bulletin: How Fees and Expenses Affect Your Investment Portfolio

Investor Bulletin: Investor Complaints

Visit Investor.gov, the SEC’s website for individual investors.

Sign up for OIEA Investor Alerts and Bulletins by email or RSS feed. Follow OIEA on Twitter @SEC_Investor_Ed. Like OIEA on Facebook at facebook.com/secinvestoreducation.

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