Securities Law Section



Message from the Chair

Section Chair: 


 
Charles Niemeier
Williams & Connolly LLP
Washington, D.C.

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The Federal Bar Association - Securities Law Section is a proud sponsor of the virtual museum and archive of the history of financial regulation at www.sechistorical.org. While the museum is free and accessible to everyone at all times, the Section will highlight specific material and information within the museum on securities law issues in the coming months, providing current and prospective Section members with unique insight and context.          

        On October 21, 1988, David S. Ruder, then-Chairman of the SEC, delivered a speech on penny stock manipulation and its effect on investors at the 21st Annual Rocky Mountain State-Federal-Provincial Securities Conference. Penny stocks appealed to financial market manipulators because they were thinly-traded and easily controlled by a single market maker. Through pump-and-dump schemes, a fraudster could raise the price of the stock through high volume selling and then offload their own shares for a massive profit. In 1988 alone, the SEC received over 1,500 complaints about penny stock fraud. Ruder recognized the need to address the issue and announced the establishment of the Penny Stock Task Force with a mission to develop regulatory solutions and educate investors about financial fraud.

        The Penny Stock Task Force was led by Joseph Goldstein, then-Associate Director of the SEC Division of Enforcement, and included members of each of the SEC’s operating divisions and regional offices. The task force collaborated with the National Association of Securities Dealers to examine brokerage firms and shared information with state and federal law enforcement agencies. John Pinto, former NASD executive vice president, described the atmosphere as "like a battle station." Pinto recalled "We had like forty-some odd examiners from the states, the SEC, maybe more, NASD, in a room, we gave them the old go-get-them, and we gave them firms to go examine."

        To reach the public, the SEC published a flyer entitled "Beware of Penny Stock Fraud!" as part of its "Information to Investors" series. The flyer described three common elements of penny stock fraud—unsolicited phone calls, high-pressure sales tactics, and the inability to sell stock and receive cash. Investors were encouraged to obtain as much information about their broker as possible, keep records of investments, and contact an attorney or local and state authorities if they suspected fraud. SEC regional administrators worked with local banks and utility companies to distribute the flyer to the public.

        Regulation followed soon after. In 1989, the SEC adopted Rule 15c2-6, which targeted the high-pressure sales tactics used to ensnare unsophisticated investors by requiring firms to receive written authorization from first-time customers before executing a sale. The following year, Congress passed the Securities Enforcement Remedies and Penny Stock Reform Act, which granted the SEC new administrative power over penny stock broker-dealers and directed the SEC to develop rules requiring firms to disclose material market information to customers. In response, the SEC adopted Rule 3a51-1 and Rules 15g-1 thorough 15g-6, commonly referred to as the Penny Stock Disclosure Rules. These rules required broker-dealers to disclose the outsized risks of penny stocks and the compensation of the broker-dealer and salesperson involved in the transaction and to provide monthly account statements to customers.

        The Penny Stock Task Force established a strong regulatory and educational framework that led to a gradual decline in investor complaints. Today, penny stock fraudsters have moved on from boiler rooms and cold-calls to e-mails, blogs, and websites. But the SEC continues to deploy the tools developed three decades ago to protect investors from abuse.

Resources

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