Series 7: 17.6.2.3. Penny Stock Disclosure Rules

17.6.2.3. Penny Stock Disclosure Rules

Penny stocks typically are low-priced (below $5), thinly traded securities. They typically are not listed on Nasdaq or any other national exchange. They are usually quoted on OTC Link. Because less information is available on these kinds of stock, investing in them can be risky. For this reason, the SEC has put in place specific rules that broker-dealers must follow before selling penny stocks.

Risk disclosure. Customers must be given a copy of a risk disclosure document prior to their first penny stock transaction. The risk disclosure document was created by the SEC and describes the risks of penny stock investing. It also outlines questions to ask a broker-dealer about the penny stocks being considered. Customers must submit written acknowledgement that they have received the risk disclosure document before executing their first transaction.

Broker-dealer disclosures. The broker-dealer must provide customers with the current market bid and offer, if any, for the penny stock. This is to prevent broker-dealers from quoting prices that are far from the current market for the security.

The member firm must provide customers with information on the amount of compensation that the firm and its broker(s) will receive from any source in connection with the trade. The member firm must also send customers monthly account statements showin