SEC Issues Risk Alert, Smacks E*Trade on Penny Stock Sales
On October 9th the SEC brought a settled administrative action against E*Trade Securities and G1 Execution Services (formerly E*Trade Capital Markets) for their part in the unregistered sales of billions of shares of penny stocks between 2007 and 2011. Suffice it to say that they weren’t the only ones. On the same day the Commission also (1) released FAQs on a broker-dealer’s duties on when trying to rely on the reasonable inquiry exemption when executing customer orders; and (2) issued a Risk Alert on broker-dealer controls regarding customer sales of penny stocks. The gist is, broker-dealers cannot turn a blind eye when executing its customers’ sales of securities of dubious or uncertain origin. These documents are all part of the SEC’s larger effort to focus on financial system gatekeepers and thereby save staff resources that would otherwise be spent chasing individual bad actors. What’s most interesting to me about the case and accompanying educational materials is how old the underlying principles are. The SEC has been preaching about broker-dealer oversight of little-known securities for literally half a century. And yet here we are.
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