Earlier this month, the U.S. Securities and Exchange Commission put out a Risk Alert reminding brokerage firms about their duties when they take part in unregistered transactions for customers. The guidance came, along with the announcement that the agency had filed an enforcement action against former and current E*TRADE Financial Corporation (ETFC) brokerage subsidiaries that did not successfully act as gatekeepers and improperly engaged in the unregistered sales of microcap stock for customers.
According to the SEC, E*TRADE Capital Markets and E*TRADE Securities sold billions of penny stock shares for customers between 2007 and 2011. During this time, there were numerous occasions when they disregarded red flags indicating that the offerings were taking place without an applicable exemption from federal securities laws’ registration provisions.
The two brokerage firms consented to repay over $1.5 million in disgorgement plus prejudgment interest from commissions they made on the improper sales. They also have to pay a $1 million combined penalty.
The SEC’s Risk Alert provides a summary of deficiencies found during a sweep by the SEC’s Office of Compliance Inspections and Examinations of 22 brokerage firms that frequently engage in microcap securities sales. Widespread deficiencies included inadequate policies and steps for monitoring and noticing possible red flags in sales initiated by customers, insufficient controls for assessing the way a securities was acquired by a customer, as well as whether the securities can be resold legally sans registration, and failure to submit reports of suspicious activity as mandated by the Bank Secrecy Act.
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Certain accounts, such as omnibus account, appeared to be among the ones most frequently associated with unregistered illiquid microcap shares sales. Accounts that belong to supposed stock loan companies, under the name of an LLC or a corporate entity, utilize a sub-/master structure, or belong to foreign financial institutions are some of the omnibus accounts noted.
BROKER-DEALER CONTROLS REGARDING CUSTOMER SALES OF MICROCAP SECURITIES, National Exam Program Risk Alert
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