Burr & Forman

02.11.2021   |   Blog Articles, FINRA, Securities Litigation

FINRA Issues Compliance Guidance on Low-Priced Stocks

The Wall Street Journal reports traders on Reddit’s WallStreetBets forum – the same social medium that helped fuel the GameStop short squeeze – have started bidding up cannabis stocks.  Mentions on the forum jumping from near zero to over 8,000 in just a few days.  WallStreetBets Traders Set Cannabis Stocks Alight (Wall St. J., Feb. 11, 2021), is here.

Perhaps not coincidentally, the day before, FINRA issued a Special Alert reminding firms of their regulatory obligations regarding low-priced, often volatile, stocks.  The Alert is to

“help FINRA member firms that engage in low-priced securities business assess and, as appropriate, strengthen their controls to identify and mitigate their risk, and the risk to their customers, including specified adults and seniors, of becoming involved in activities related to fraud involving low-priced securities.”

Alert at 1.  The Alert points out that low-priced securities can be vehicles for fraud, including pump-and-dump schemes.  FINRA addresses firms’ obligations of:  (a) Detection – noting red flags for potential fraud; (b) Monitoring through supervisory and compliance controls; (c) Anti-Money Laundering (“AML”) requirements, such as filing Suspicious Activity Reports (“SARs”); and (d) Fraud reporting.

In many ways, the Alert merely repeats existing requirements and prior guidance regarding low-priced, low-volume stocks.  What’s striking though, is the Alert’s focus on stocks related to COVID-19 products, cannabis businesses, and those touted extensively on social media.

For example, among the “red flags” FINRA calls out are:

  • hyping and promoting issuers (or their products or services), especially where the information cannot be reliably confirmed;
  • promotional investor email alerts, banner advertisements, dedicated promotional websites or seemingly independent news or research coverage, which prominently feature or advertise the issuer’s new potential business prospects that (1) may be related to the latest trend (e.g., winning a large contract or developing a new product or service), (2) may also present recent or projected investment returns, and (3) cannot be reliably confirmed;
  • generating a spike in social media promotions (e.g., on Twitter, Instagram or Facebook), and activity on investor chat rooms or message boards…

Alert at 4.  Suggested monitoring activities include extra suitability reviews and controls, and additional risk alerts or investor education.

The Alert reminds firms that activity in low-priced securities may require heightened AML compliance.  FINRA points out recent FinCEN Notices particularly calling out COVID-related fraud and asking broker-dealers to explicitly report “COVID19” in SAR filings.

“FINRA Urges Firms to Review Their Policies and Procedures Relating to Red Flags of Potential Securities Fraud Involving Low-Priced Securities,” Reg. Notice No. (FINRA Feb. 10, 2021), is here.

Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Tom is licensed in Tennessee, Texas, and Louisiana. He has over 34 years of experience representing financial institutions in litigation, regulatory, and compliance matters. See attorney profile.

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