Excessive trading, or “churning” as is known in the industry, occurs when a broker or financial advisor buys or sells an investment with the purpose of generating a commission. Depending on state law, an investor must generally prove that the broker exercised control over the investor’s account, traded excessively in light of the investor’s investment objectives, and acted either intentionally or with reckless disregard for the investor’s interest.

Proving that an account was churned typically requires a statistical analysis of the broker’s transactions to determine the turnover ratio within a customer’s account. Since it can be difficult to determine whether a broker acted intentionally, a turnover ratio that is high enough can be viewed by courts and arbitrators as conclusive proof that the broker churned the account. Compliance software within a brokerage firm is further capable of detecting excessive trading and should generate an exception report for supervisors. Thus even where the elements of churning cannot be conclusively established, a customer may still be able to raise a claim against the brokerage firm for a failure to supervise its broker or investment advisor.