The Security and Exchange Commission (SEC) defines penny stocks as stocks that are priced under $5 and are traded on the Pink Sheets or the OTC Bulletin Board. You can also trade these stocks via foreign and other securities exchanges.
The rules established by the SEC to help regulate the trade of penny stocks include:
● The brokerage house must secure a written agreement from their client about the transaction, and the client must be in a position to complete this agreement.
● The SEC requires all brokerage firms to supply their clients with documentation outlining the risks involved with trading penny stocks.
● SEC rules also state that the client must be notified if there is a market quotation, and what that market quotation is for the penny stocks they wish to buy.
● The firm must also inform clients of its commission on the trade.
● The SEC requires brokerage houses to provide customers with a monthly statement outlining the market value of each of their penny stocks.
● Rule 15c3-3 or the Customer Protection Rule states that the money you pay to the broker is in their control. The broker must periodically figure how much of the money being held belongs to the customer or has been gained through stocks owned by the customer. If there is more money on the books than what is owed to the customer, or if the customer has over paid, the excess must be placed in a reserve bank account. This overage is for the specific use of the customer, and cannot be used to advance the broker’s business.
Penny stock rules ensure the proper trading of penny stocks and mandate that investors know the risks involved. In addition, these rules are designed to protect the customer, the stock market, and the broker. Breaking one of the SEC’s rules will put the broker in jeopardy as the subject of an SEC investigation.
