Notice
Comments Low-priced securities1 tend to be volatile and trade in low volumes. It may be difficult to find accurate information about them. There is a long history of bad actors exploiting these features to engage in fraudulent manipulations of low-priced securities.
Frequently, these actors take advantage of trends and major events—such as the growth in cannabis-related businesses or the ongoing COVID-19 pandemic—to perpetrate the fraud.2 FINRA has observed potential misrepresentations about low-priced securities issuers’ involvement with COVID-19 related products or services, such as vaccines, test kits, personal protective equipment and hand sanitizers. These misrepresentations appear to have been part of potential pump-and-dump or market
manipulation schemes that target unsuspecting investors.3 These COVID-19-related manipulations are the most recent manifestation of this type of fraud. This Notice provides information that may help FINRA member firms that engage in low-priced securities business assess and, as appropriate, strengthen their controls to identify and mitigate their risk, and the risk to their customers, including specified adults and seniors,4 of becoming involved in activities
related to fraud involving low-priced securities. Firms that engage in low-priced securities business should also be aware of a recent SEC Staff Bulletin—Risks Associated with Omnibus Accounts Transacting in Low-Priced Securities—that highlights for broker-dealers various risks arising from illicit activities associated with transactions in low-priced securities through
omnibus accounts, particularly transactions effected on behalf of omnibus accounts maintained for foreign financial institutions.5 This Notice does not create any new requirements or expectations for member firms outside of their existing obligations pursuant to FINRA rules and applicable law, nor does implementing any of the practices cited here create a safe harbor from these obligations. Questions regarding this Notice should be directed to: Broker-dealers play an important part in identifying and protecting investors from potentially fraudulent activity. A firm’s failure to take appropriate steps as a gatekeeper to the public securities markets—for example, by not conducting a reasonable inquiry into a security’s eligibility for distribution, where required—may expose that firm to liability risks, for example under Section 5 of the Securities Act of 1933 (“Securities Act”).6 In addition, Section 10(b) of
the Exchange Act, Rule 10b-5 thereunder, and Section 17(a) of the Securities Act, as well as FINRA Rules 2010 (Standards of Commercial Honor and Principles of Trade), 2020(Use of Manipulative, Deceptive or Other Fraudulent Devices) and
3110 (Supervision) establish obligations for member firms in connection with potential fraud. Firms also have obligations under the BSA and FINRA Rule 3310 (Anti-Money Laundering Compliance Program) to maintain appropriate risk-based procedures to conduct ongoing customer diligence and to report suspicious
activity to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. This Notice provides information to help firms strengthen their controls in four important areas related to potential fraud involving low-priced securities and thereby protect investors from financial harm and the firms themselves from financial, regulatory and reputational damage: FINRA
notes that a pattern of involvement in low-priced securities transactions—including soliciting customers, conducting offerings or executing transactions related to low-priced securities—informs FINRA’s evaluation of a firm’s risk profile. FINRA may examine or otherwise review more frequently the activity of firms that display these elevated risk characteristics. Detection: Potential Red Flags of Fraud Involving Low-Priced SecuritiesThe red flags discussed below are intended to help inform firms about activity associated with potential fraud involving low-priced securities, including, but not limited to, schemes involving COVID-19 claims.7 The red flags discussed in this Notice may overlap in some instances with red flags of suspicious anti-money laundering activity FINRA identified in Regulatory Notice 19-18 (FINRA Provides Guidance to Firms Regarding Suspicious Activity Monitoring and Reporting Obligations). This Notice provides firms engaged in low-priced securities business with more detailed information regarding red flags that are specific to potential fraud involving low-priced securities. Potential Indicators of Fraud Involving Low-Priced SecuritiesFINRA has observed that the following non-exhaustive list of issuer, third-party or customer activities may be red flags of fraud involving low-priced securities: Issuers
Third-Party Promotional Activities
Firm Customers
Monitoring: Supervisory and Other ControlsMeasures that FINRA has observed firms implement in effective supervisory systems to mitigate risks associated with fraud involving low-priced securities include, but are not limited to, the following: Supervision of Associated Persons
Account and Share Acceptance
Account Monitoring
Other Controls
Reporting Potential Fraud Involving Low-Priced SecuritiesFINRA Rule 3310(f) and 31 CFR 1023.210(b)(5) require that member firms’ AML programs include appropriate risk-based procedures for conducting ongoing customer due diligence, including procedures for conducting ongoing monitoring to identify and report suspicious transactions. In addition, FINRA Rule 3310(a) requires firms to “[e]stablish and implement policies and procedures that can be reasonably expected to detect and cause the reporting of transactions required under [the BSA] and the implementing regulations thereunder;” the BSA and its implementing regulations require financial institutions to report suspicious transactions to FinCEN using SARs.15 FinCEN has issued several notices and advisories noting emerging trends relating to illicit behavior connected to COVID-19, including investment scams and insider trading, and encouraged all financial institutions to enter the term “COVID19” or the specific term provided in a relevant FinCEN notice or advisory in Field 2 of the SAR and provide other requested information in the relevant fields and narrative.16 Financial institutions are also required to provide information to FinCEN in response to requests in furtherance of Section 314(a) of the USA PATRIOT Act for information regarding accounts reasonably suspected based on credible evidence of engaging in terrorist acts or money laundering.17 Financial institutions subject to an anti-money laundering program requirement under FinCEN regulations, and any qualifying association of such financial institutions, are eligible to share information under Section 314(b) of the USA PATRIOT Act. Section 314(b) provides financial institutions with the ability to share information with one another, under a safe harbor provision that offers protections from civil liability, in order to better identify and report potential money laundering or terrorist financing. Although sharing information pursuant to Section 314(b) is voluntary, FinCEN and FINRA strongly encourage financial institutions to participate to enhance their compliance with anti-money laundering/counter-financing of terrorism requirements.18 Beyond the filing obligations discussed above, FINRA urges firms to protect customers and other firms by immediately reporting potential fraud involving low-priced securities to one or more of the following:
In addition, firms should consider whether circumstances would trigger a reporting obligation pursuant to FINRA Rule 4530 (Reporting Requirements).20 Endnotes
Which of the following describes a difference between the trading of a listed versus unlisted security?In credit markets, both listed and unlisted securities allow investors to buy an asset and potentially earn a return. Listed securities are usually traded on an exchange platform (such as the ASX) whereas unlisted securities' trading generally takes place in an over-the-counter (OTC) market.
Can unlisted securities be sold short?Under the regulations of the security industry, can unlisted securities be sold short by an OTC trader? [A] Yes, there is no restriction on such transactions.
Which of the following best describes an order to buy or sell at a specific price or better?A market order instructs the brokerage to complete the order at the best available price. 1 Market orders are generally always executed unless there is no trading liquidity. A limit order is an order to buy or sell a stock at a specific price or better.
Which of the following best describes an order to buy or sell after a stock trades at or through?Which of the following best describes an order to buy or sell after a stock trades at or through a specific price? A. Stop orders become market orders when the stock trades at or through the stop price.
|