On October 9, 2014, the Securities and Exchange Commission (“SEC”) announced the publication of a Risk Alert and FAQs reminding broker-dealers of their obligations when engaging in unregistered transactions on behalf of customers. The guidance was accompanied by the announcement of an enforcement action against two firms for improperly selling billions of shares of penny stocks through unregistered offerings on behalf of customers. The SEC Risk Alert outlines deficiencies discovered by the SEC’s Office of Compliance Inspections and Examinations in the course of a sweep of 22 broker-dealers frequently involved in the sale of microcap securities. Among the deficiencies discovered in the sweep, the SEC highlighted: (i) insufficient policies and procedures to monitor for and identify potential red flags in customer-initiated sales; (ii) inadequate controls to evaluate how customers acquired the securities and whether they could be lawfully resold without registration; and (iii) failure to file suspicious activity reports as required by the Bank Secrecy Act when encountering unusual or suspicious activity in connection with customers’ sales of microcap securities. Along with the Risk Alert, the SEC published FAQs to remind broker-dealers of the requirements for complying with the registration exemption for broker-dealers executing customers’ unregistered sale of securities as provided in Section 4(a)(4) of the Securities Act of 1933.
The SEC Risk Alert is available at:
and the SEC FAQs are available at: