SEC Requirements of Penny Stock Brokers
SEC Rules for Penny Stock Brokers
Before your first trade in a penny stock, the U.S. Securities and Exchange Commission (SEC) requires your broker to give you a SEC Schedule 15g, and obtain your signature to show that you have received it. This statement contains important information before you decide to purchase or sell a penny stock. You should read it carefully before you sign it.
In addition to obtaining your signature, the SEC requires your broker to wait at least two business days after sending you this statement before executing your first trade to give you time to carefully consider your trade.
Investing Information You Should Get:
In addition to the Schedule 15g, your broker is required to review your financial situation and investment goals and the suitability of penny stocks as a part of your investment goals. Your broker is also required to obtain your agreement to the proposed penny stock transaction.
Before Buying Penny Stocks:
Before buying your penny stocks, federal law requires your salesperson to tell you the “Ask” price and the “Bid” on the penny stock, and the “compensation” the salesperson and the firm receive for the trade. The firm also must send a confirmation of these prices to you after the trade. You will need this price information to determine what profit or loss, if any, you will have when you sell your stock.
The Ask price is the wholesale price at which the dealer is willing to sell stock to other dealers. The Bid price is the wholesale price at which the dealer is willing to buy the stock from other dealers. In its trade with you, the dealer may add a retail charge to these wholesale prices as compensation (called a “markup” or “markdown”). For more information, see “Bid Price vs. Ask Price Explained.”
The difference between the bid and the offer price is the dealer’s “spread.” A spread that is large compared with the purchase price can make a resale of a stock very costly. To be profitable when you sell, the bid price of your stock must rise above the amount of this spread and the compensation charged by both your selling and purchasing dealers. Remember that if the dealer has no Bid price, you may not be able to sell the stock after you buy it, and may lose your whole investment.
After Buying Penny Stocks:
After buying your penny stocks, your brokerage firm must send you a monthly account statement that gives an estimate of the value of each penny stock in your account, if there is enough information to make an estimate. If the firm has not bought or sold any penny stocks for your account for six months, it can provide these statements every three months.
Brokers’ Duties and Customer’s Rights and Remedies:
The SEC encourages you to learn all you can before making this investment. Remember that your salesperson is not an impartial advisor. They are being paid to sell you stocks. Do not completely rely only on the salesperson, but seek outside advice before you buy any penny stock. You can get the disciplinary history of a salesperson or firm from FINRA at 1-800-289-9999 or contact FINRA via the Internet at www.finra.org. You can also get additional information from your state securities official. The North American Securities Administrators Association, Inc. can give you contact information for your state. You can reach NASAA at (202) 737-0900 or via the Internet at www.nasaa.org.
If you have problems with a salesperson, contact the firm’s compliance officer. You can also contact the securities regulators listed above. Finally, if you are a victim of fraud, you may have rights and remedies under state and federal law. In addition to the regulators listed above, you also may contact the SEC with complaints at (800) SEC-0330 or via the Internet at Complaint Form.
Buying Penny Stocks
