An irreverent Wall Street Blog
by Bill Singer

Penny Stock Sales Mismarked As Unsolicited

May 31, 2013

More fun and games on Wall Street. You got a whole batch of rules that strictly limit the solicitation of penny stock trades. Then you have that hole to drive through: The Non-Solicitation Letter.  What happens when the unstoppable force of wanting to sell penny stocks runs into the immovable object of the non-solicitation letter?  Hey, buddy, wattya lookin' at? Never seen an accident before? Keep movin'

For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Richard R. Miller submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Richard R. Miller, Respondent (AWC 2011029923201 May 22, 2013). 

Miller entered the securities industry in September 2000 in August 2008 was registered with LPL Financial Corp. ("LPL"), until his October 6, 2011 termination. The AWC asserts that Miller had no relevant disciplinary history.

Penny Stocks

The AWC alleges that during October 2009 through May 2010, Miller had solicited purchases in two low-priced securities ("penny stocks"), resulting in 31 purchases by 12 of his customers.  

During the relevant time, LPL prohibited penny stock solicitation by its registered representatives, but the firm did maintain a policy that permitted unsolicited sales of such restricted securities. In order to utilize that exception, registered persons were required to first obtain a non-solicitation letter for each proposed qualifying transaction.  

The AWC alleges that in an apparent effort to circumvent LPL's penny stock policy, Miller had the 12 customers execute non-solicitation letters for 29 of the subject trades despite knowing that, in fact, such transactions had been "solicited." The AWC asserts that a consequence of Miller's subterfuge was to render LPL's books and records inaccurate in violation of Rule 17a-3 of the Securities and Exchange Act of 1934, and by extension, of NASD Conduct Rule 3110(a) and FINRA Rule 2010.

According to online FINRA disclosure documents as of May 31, 2013, LPL indicated that it had "Discharged" Miller on October 6, 2011, based upon the following allegation:

SOLICITING LOW-PRICED SECURITIES IN VIOLATION OF FIRM POLICY AND MISREPRESENTING SUCH ORDERS TO THE FIRM AS UNSOLICITED.

Sanctions

In accordance with the terms of the AWC, FINRA imposed upon Miller a $5,000 fine and a 15-business-day-suspension from association with any FINRA registered broker-dealer m any capacity.

Bill Singer's Comment

For those of you unfamiliar with the arcana of penny stocks, consider this comprehensive posting on the Securities And Exchange Commission's website:

The term "penny stock" generally refers to a security issued by a very small company that trades at less than $5 per share. Penny stocks generally are quoted over-the-counter, such as on the OTC Bulletin Board (which is a facility of FINRA) or OTC Link LLC (which is owned by OTC Markets Group, Inc., formerly known as Pink OTC Markets Inc.); penny stocks may, however, also trade on securities exchanges, including foreign securities exchanges. In addition, the definition of penny stock can include the securities of certain private companies with no active trading market.

Penny stocks may trade infrequently, which means that it may be difficult to sell penny stock shares once you own them. Moreover, because it may be difficult to find quotations for certain penny stocks, they may be difficult, or even impossible, to accurately price. For these, and other reasons, penny stocks are generally considered speculative investments. Consequently,investors in penny stocks should be prepared for the possibility that they may lose their whole investment (or an amount in excess of their investment if they purchased penny stocks on margin).

Because of the speculative nature of penny stocks, Congress prohibited broker-dealers from effecting transactions in penny stocks unless they comply with the requirements of Section 15(h) of the Securities Exchange Act of 1934 ("Exchange Act") and the rules thereunder. These SEC rules provide, among other things, that a broker-dealer must (1) approve the customer for the specific penny stock transaction and receive from the customer a written agreement to the transaction; (2) furnish the customer a disclosure document describing the risks of investing in penny stocks; (3) disclose to the customer the current market quotation, if any, for the penny stock; and (4) disclose to the customer the amount of compensation the firm and its broker will receive for the trade. In addition, after executing the sale, a broker-dealer must send to its customer monthly account statements showing the market value of each penny stock held in the customer's account.

For more information, read the penny stock rules section of our Broker-Dealer Registration Guide. You may also want to review the penny stock rules (Exchange Act Section 15(h) and Exchange Act Rules 3a51-1 and 15g-1 through 15g-100).

Before you consider investing in the stock of any small company, be sure to read our brochure, Microcap Stock: A Guide for Investors.

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