Securities Lawyers Blog
The Financial Industry Regulatory Authority (FINRA) has barred Chad David Kelly (Kelly) concerning allegations of churning (excessive trading) and unauthorized trading. “Churning” is excessive investment trading activity that serves little useful purpose or is inconsistent with the investor’s objectives and is conducted solely to generate commissions for the broker. Churning is also a type of securities fraud.
FINRA alleged that Kelly willfully violated Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act of 1934”), Rule 10b-5, and violated FINRA Rules 2020, and 2010, NASD Rules 2120, 2110, 2310, and IM-2310(a) and (b).
According to FINRA, excessive trading violation occurs when: 1) a broker has control over the account and the trading in the account, and 2) the level of activity in that account is inconsistent with the customer’s objectives and financial situation. Where an intent to defraud or reckless disregard for the customer’s interests is present the activity is also churning. Section 10(b) of the Exchange Act of 1934 prohibits the use of “any manipulative or deceptive act or practice” in connection with the purchase or sale of a security and Rule 10b-5 prohibits “any device, scheme, or artifice to defraud.” NASD Rule 2310(a) provides that when recommending the purchase, sale, or exchange of any security a broker “shall have reasonable grounds for believing that the recommendation is suitable for such customer…” A broker’s recommendations must “be consistent with his customer’s best interests.” NASD IM-2310-2(a)(1) also require that the broker must “’have reasonable grounds to believe that the number of recommended transactions within a particular period is not excessive.” NASD IM-2310-2(b)(2) prohibits brokers from excessively trading in customer accounts.