SIE: 1.3.5. Penny Stocks

1.3.5.  Penny Stocks

Penny stocks are low-priced (usually below $5) equity securities that are not actively traded. Typically, they are not listed on Nasdaq or any other national exchange. They are usually quoted on the over-the-counter quotation system OTC Link. Because less information is available on these kinds of stocks, investing in them can be risky. For this reason, the SEC has 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 the broker-dealer executes 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 broker-dealer must provide customers with information on the amount of compensation that the firm and its broker(s)