• Broker-Dealer Regulation Under the New Penny Stock Disclosure Rules: An Appraisal
  • February 18, 2015
  • Law Firm: Dennis Hernandez Associates PA - Tampa Office
  • O. Dennis Hernandez, Jr., Broker-Dealer Regulation Under the New Penny Stock Disclosure Rules: An Appraisal, 1993 Colum. Bus. L. Rev. 27

    The over-the-counter (“OTC”) market serves as the primary equity market in the United States for small publicly-traded corporations. Historically, regulatory authorities and private sector analysts have failed to effectively monitor the veracity of broker-dealer transactions in this market, principally due to the relative obscurity in which it operates. In an attempt to eliminate the fraud and abuse of broker-dealers transacting in “penny stocks” in this market, Congress enacted the Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (the “Reform Act”), pursuant to which the Securities and Exchange Commission (“SEC”) recently adopted the Penny Stock Disclosure Rules (the “Penny Stock Rules”). In addition, Rules *29 15c2-6 and 15c2-11 of the Securities Exchange Act of 1934 (the “Exchange Act”)intertwine with the objectives of the Reform Act.

    The Reform Act directs the SEC to curtail penny stock fraud by (1) requiring that comprehensive disclosures be made by broker-dealers to penny stock investors about the risks involved in this market, and (2) improving market transparency by establishing an automated quotation system on which all penny stocks are to be traded, with limited exceptions.

    This Article reviews the adequacy of the Reform Act, the Penny Stock Rules and related SEC regulations in providing meaningful disclosure and market transparency to penny stock investors and argues that although strides have been made in adopting an efficient quotation system, there remain significant regulatory loopholes preventing adequate risk disclosure to investors. Part II of this Article discusses fraudulent practices plaguing the penny stock market. Part III reviews the historical and current disclosure requirements related to the penny stock market under SEC regulations. Part IV examines suitability requirements related to the sale of penny stocks. Part V analyzes automated quotation requirements in the sale of penny stocks.