FINRA FINRA Quantitative Suitability (Anti-Churning)

FINRA’s quantitative suitability (anti-churning) requirement means you must detect and stop excessive trading in any customer account where your firm or representative has actual or de facto control, even if each trade looks suitable by itself. Operationalize it with account-level surveillance (turnover and cost-to-equity), clear escalation rules, and documented principal review tied to the customer’s investment profile. ¹

Key takeaways:

• The duty triggers when there is actual control (discretion) or de facto control (customer routinely follows recommendations). ¹
• Build surveillance that evaluates a series of recommended transactions, not isolated suitability checks. ²
• Keep “exam-ready” evidence: exception reports, metric calculations, principal dispositions, and the customer investment profile used in the analysis. ¹

Quantitative suitability is where many suitability programs break: the firm has decent new account documentation and can defend individual recommendations, but lacks a repeatable way to prove that trading activity as a whole was not excessive for the customer. FINRA Rule 2111(b) closes that gap by requiring a reasonable basis to believe a series of recommended transactions is not excessive and unsuitable when taken together, if the firm or the associated person controls the account. ²

For a CCO or GRC lead, the fastest path to operationalizing this requirement is to treat it like a surveillance-and-supervision problem with defined inputs, thresholds for review, and documented supervisory outcomes. Your controls have to answer three questions: (1) which accounts are “controlled,” including de facto control, (2) which accounts show red flags of excessive trading, and (3) what your supervisors did when red flags appeared. FINRA’s related guidance (Regulatory Notice 12-25) is especially useful because it clarifies how to think about control and which indicators are commonly used to evaluate excessive trading. ³

Requirement: FINRA quantitative suitability (anti-churning)

Plain-English interpretation

If your firm or representative effectively controls a customer account, you must be able to show that the overall trading pattern you recommended was not excessive for that customer’s investment profile, even when each individual trade could be defended on its own. ²

“Control” is broader than formal discretion. De facto control can exist when a customer routinely follows the representative’s recommendations, even without a discretionary authorization on file. ³

Who it applies to (entity and operational context)

Applies to:

• FINRA member broker-dealers and their associated persons making recommendations. ²

Most relevant operational contexts:

• Discretionary accounts (actual control via discretionary authority documentation).
• Non-discretionary accounts with de facto control, where the trading is effectively driven by the representative’s recommendations and the customer’s consistent acceptance. ³
• Accounts with frequent in-and-out trading, high commissions/fees relative to equity, or significant activity inconsistent with the customer’s profile. ³

Regulatory text

Primary obligation (excerpt):
“A member or an associated person who has actual or de facto control over a customer account must have a reasonable basis to believe that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer when taken together in light of the customer's investment profile.” ²

What the operator must do with this text:

• Translate “series of recommended transactions” into a repeatable review unit (account-level activity over a defined review period).
• Define “actual or de facto control” in procedures, including how you identify de facto control in non-discretionary accounts. ³
• Build supervision and documentation that demonstrates a reasonable basis for concluding activity is not excessive for that customer’s investment profile, and take corrective action when it is. ²

What you actually need to do (step-by-step)

1) Define the controlled-account population

Create a written definition and tagging logic for:

• Actual control: discretionary authority on file (account agreements/authorizations).
• De facto control: criteria you will treat as control indicators (for example: trading based primarily on representative recommendations; patterns of near-automatic acceptance; limited customer sophistication combined with high activity). Your criteria should be specific enough that surveillance teams can apply it consistently. ³

Deliverable: a controlled-account standard embedded in WSPs and implemented as an operations flag in your books and records environment.

2) Build quantitative surveillance that evaluates trading patterns

You need a surveillance process that produces exception reports using indicators FINRA discusses as relevant to excessive trading, including turnover rate and cost-to-equity concepts. ³

Practical build steps:

• Pull trading activity and account equity data.
• Calculate turnover-like and cost-to-equity-like metrics consistently across products you permit (equities, options, mutual funds, etc.), and document your calculation methodology.
• Segment surveillance by risk: discretionary vs non-discretionary, elderly customers, conservative objectives, retirement accounts, etc. Notice 12-25 supports that the investment profile matters, so your segmentation should align to profile fields you maintain. ¹

Thresholds: You can set internal review thresholds informed by industry practice (turnover and cost-to-equity are commonly used), but avoid writing “FINRA requires X.” FINRA Rule 2111(b) is a reasonableness standard; your policy should state that thresholds trigger review, not automatic violations. ²

3) Establish escalation, principal review, and disposition requirements

Write a supervision workflow that makes it hard to “clear” an alert without substance:

• Alert triage: confirm data quality and whether the account is controlled (actual or de facto). ³
• Principal review: require a documented supervisor decision for each exception: approve with rationale, restrict trading, require customer contact, re-paper the account profile, move to heightened supervision, or open an investigation.
• Customer-profile linkage: the disposition must cite the customer’s investment profile fields and explain why the observed activity is consistent with that profile, or what changed. ²

4) Add preventive controls in the front line

Surveillance catches patterns after activity occurs. Add controls that reduce the chance of churning before it starts:

• Tighten pre-trade review or supervisory approvals for higher-risk products in controlled accounts.
• Require documented customer contact for accounts with repeated exceptions or rapid strategy shifts, with notes that capture the customer’s stated objectives and understanding. ³

5) Train, test, and tune

• Train reps and supervisors on (a) what triggers quantitative suitability, (b) what “de facto control” looks like in practice, and (c) how the firm evaluates “excessive” patterns. ³
• Run a lookback on a sample of active controlled accounts to confirm alerts fire and dispositions are defensible.
• Tune thresholds and segmentation based on false positives and missed-risk reviews.

6) Make it exam-ready (governance and documentation)

Define ownership and cadence:

• Who owns surveillance logic (Compliance Surveillance / Supervision).
• Who reviews exceptions (designated principals).
• How often management reviews trends and repeat offenders.
• How you record remediation actions and whether you impose heightened supervision.

If you use a GRC workflow tool (including Daydream), configure it to: (1) ingest exception reports, (2) route alerts to the right principal, (3) enforce required disposition fields tied to the investment profile, and (4) maintain immutable evidence for exams.

Required evidence and artifacts to retain

Examiners commonly ask for a straight line from data → alert → review → outcome. Build a package that includes:

• Turnover/cost-to-equity calculations (methodology + outputs) for sampled accounts. ¹
• Exception reports showing which accounts exceeded internal thresholds and when. ¹
• Principal review records (who reviewed, what they reviewed, what they decided, rationale tied to investment profile). ²
• Customer investment profile records used in the decision (objectives, risk tolerance, time horizon, liquidity needs, etc.). ²
• Discretionary authority documentation for actual control accounts and supporting documentation for any “de facto control” designation. ³
• Customer communications and approvals where relevant to recommendations and strategy changes, especially for non-discretionary accounts. ³

Common exam/audit questions and hangups

Expect these lines of questioning:

1. How do you identify de facto control in non-discretionary accounts? Show criteria and examples. ³
2. What metrics do you use to detect excessive trading, and how are they calculated? Bring your methodology and a sample output. ³
3. Show me the supervisory file for this high-activity account. They want rationale anchored to the investment profile, not generic statements. ²
4. What did you do when you saw repeat alerts? You need documented remediation, not just closures. ²
5. How do you ensure supervisors are independent and accountable? Map alert routing, reviewer roles, and escalation paths.

Frequent implementation mistakes (and how to avoid them)

Mistake	Why it fails	Fix
Treating quantitative suitability as a “discretionary accounts only” issue	De facto control can trigger the obligation. 3	Define and tag de facto control; test it in QA samples.
Relying on trade-by-trade suitability documentation	Rule 2111(b) focuses on a series of transactions. 2	Add account-level pattern surveillance and require principal disposition.
Using “magic number” thresholds as pass/fail	FINRA’s standard is reasonableness; thresholds are your internal triggers. 2	Write thresholds as “review triggers” and require customer-specific analysis.
Weak principal notes (“reviewed, no issue”)	Doesn’t show a reasonable basis tied to the profile. 2	Use a required template: profile fields + trading rationale + action taken.
No follow-up on repeat exceptions	Looks like red flags were ignored. 2	Require heightened supervision steps and management reporting for repeat alerts.

Enforcement context and risk implications

The practical risk is not limited to restitution or fines. Quantitative suitability cases often involve allegations of intentional misconduct and can lead to suspensions or bars, especially where trading is egregious or involves vulnerable customers. Your controls should assume examiners will focus on high-activity accounts, significant losses, and accounts held by elderly customers. ²

Practical 30/60/90-day execution plan

First 30 days: establish scope and minimum viable supervision

• Publish a controlled-account definition (actual + de facto control) in WSPs. ¹
• Inventory data sources needed for turnover/cost-to-equity style metrics; validate completeness.
• Stand up a manual exception process (spreadsheet is acceptable short-term): identify active controlled accounts and require principal sign-off on outliers. ²
• Draft a principal review template tied to investment profile fields.

Days 31–60: implement surveillance and evidence capture

• Automate exception reports for turnover- and cost-to-equity-style indicators; document calculation logic. ³
• Route alerts to designated principals; implement required disposition fields.
• Add enhanced monitoring segments (elderly, conservative objectives) aligned to your customer profile data. ²
• Run a targeted lookback on a sample of active accounts; remediate any urgent issues.

Days 61–90: mature controls and prove they work

• Tune thresholds and segmentation based on review outcomes.
• Implement repeat-alert escalation (heightened supervision, trading restrictions, or rep coaching).
• Add supervisory QA: second-line sampling of closed alerts for sufficiency of rationale.
• Package “exam binder” artifacts: policies, sample exception reports, sample reviews, and evidence of remediation.

Frequently Asked Questions

Does quantitative suitability apply if the customer approved every trade?

It can. If the representative had de facto control because the customer routinely followed recommendations, FINRA treats the account as controlled for Rule 2111(b) analysis. ¹

Are there FINRA-required numeric thresholds for turnover or cost-to-equity?

FINRA Rule 2111(b) does not set numeric thresholds in the rule text. Firms commonly use turnover and cost-to-equity indicators to trigger review, but you should describe them as internal surveillance triggers and document customer-specific analysis. ¹

What’s the single most important artifact to show an examiner?

A principal review record that ties the trading pattern to the customer’s investment profile and documents what supervisory action you took when the account hit an exception. ²

How do we evidence “de facto control” without over-labeling accounts?

Define objective indicators in WSPs and retain the facts supporting your determination (trade confirmation timing, recommendation notes, customer sophistication notes, pattern of acceptance). Apply the designation consistently and review it periodically. ³

Do we need enhanced monitoring for elderly customers?

Rule 2111(b) requires you to evaluate excessiveness in light of the investment profile, and age-related facts often change that analysis. Many firms implement enhanced monitoring for elderly customers because the risk of unsuitable activity is higher in those accounts. ²

What if surveillance flags an account but the customer is profitable?

Profitability alone does not resolve quantitative suitability. Your file still needs a reasonable basis that the series of recommendations was not excessive for the customer’s profile, supported by documented principal review. ²

Related compliance topics

• 2025 SEC Marketing Rule Examination Focus Areas
• Access and identity controls
• Access Control (AC)
• Access control and identity discipline
• Access control management

Footnotes

1. FINRA Rule 2111(b), 2012; FINRA Regulatory Notice 12-25, 2012

2. FINRA Rule 2111(b), 2012

3. FINRA Regulatory Notice 12-25, 2012