Laws Regarding Penny Stocks and the Rights of Investors

Laws Regarding Penny Stocks and the Rights of Investors

By law, prior to effecting any penny stock transaction for a retail customer (there are exceptions for institutional investors), the broker needs to furnish to the customer a Risk Disclosure Document on Penny Stocks. The document must contain the SEC’s definition of the risks involved in penny stock transactions. In addition for each penny stock transaction the broker must disclose to the client the compensation the registered representative (broker) received for the transaction, the compensation the broker firm will receive from the transaction and the current quote of the security.

The SEC has formulated rule 15g-9 which is also known as the cold call rule. This rule places conditions on the way brokers solicit business in penny stocks. Prior to a client being able to trade penny stocks the broker must have in writing a document which is signed by a client acknowledging the suitability and awareness of penny stocks and its risks.