SEC Defines Churning by the Numbers
In an enforcement action brought against the principals of a broker-dealer, the SEC provided a definition of churning: an annual turnover rate in excess of 6 and a cost-to-equity ratio in excess of 20%. The SEC defines the annual turnover ratio as the “number of times per year a customer’s securities are replaced by new securities.” The cost-to-equity ratio is defined as “the rate of return than an account has to earn on an annual basis just to cover transaction costs.” In the case, the SEC seeks sanctions against three BD principals for failing to supervise brokers that the SEC alleges churned accounts. The SEC says that the firm’s compliance reports provided to the branch managers showed high turnover rates and cost-to-equity ratios.
OUR TAKE: It is always helpful when the regulator provides a bright-line test. Compliance personnel should ensure that firms measure these ratios as a warning sign to detect churning.
http://www.sec.gov/litigation/admin/2010/34-62996.pdf
OUR TAKE: It is always helpful when the regulator provides a bright-line test. Compliance personnel should ensure that firms measure these ratios as a warning sign to detect churning.
http://www.sec.gov/litigation/admin/2010/34-62996.pdf
Posted by Todd Cipperman at 9/28/2010 6:43 AM 
Categories: Distribution and Broker-Dealers
Tags: broker-dealer churning ratios
Categories: Distribution and Broker-Dealers
Tags: broker-dealer churning ratios
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