Investor Alert: Excessive Trading at Investor’s Expense

Law IACby Hector Rojas, Spring 2017 Student Intern

The SEC’s Office of Investor Education and Advocacy (OIEA) and Broker-Dealer Task Force recently issued 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 do I know when there is excessive trading in my account?

 In order to be alert of excessive trading in your accounts, you must first know how to identify excessive trading. To do this, you should review your account statements, trade confirmations, or online accounts. The SEC indicates that the following may constitute red flags that may indicate excessive trading:

  • Unauthorized trading— be on the lookout for any trading going on in your account that you did not authorize.
  • Frequent trading—be wary with trading that does not seem to be consistent with you investment objectives.
  • Excessive fees—be suspicious if the fees you are paying seem high.

Remember that even if the overall account value increases, there still may be some excessive trading going on in your account. The SEC also states in their investor alert that account statements, trade confirmations, or online accounts do not disclose all fees being charged in your account so remember to ask your broker for more information regarding your account.

Why should I be worried about excessive trading in my account?

Typically, brokers earn a portion of the commissions or other fees on each purchase or sale of securities that the brokerage firm makes for an investor. As defined by the SEC, 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. This affects the investor in return because of the high fees he/she will be charged and because of risky trades that may not match the investor’s investment goals.

What should you do if you are concerned that there is excessive trading in your account?

The SEC recommends that you notify your broker. Inquire into the rationale for the broker’s recommended trading activity and investment strategy given your investment objectives; the total commissions or other transaction fees you have paid over the past month, quarter, or year; and what percentage return on your investment you would need to break even on the fees you are paying.

Once you have received this information, the SEC recommends that you 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.

Finally, if these conversations do not provide any guidance as to what is going on in your account and you believe that there has been excessive trading in your account or you would like to report other problems with your broker, then you should submit a complaint in writing to the brokerage firm, contact the SEC, or contact FINRA.

Additional Resources

For the full SEC Investor Alert, click here.

For more information on churning, click here.