FINRA reminded firms to strengthen their policies and procedures concerning detection, monitoring and reporting of potentially fraudulent low-priced securities activity. FINRA particularly cautioned that fraud may be prevalent as to issuers that purport to have a COVID-related business model.

In a Regulatory Notice, FINRA outlined indicators of fraud involving (i) issuers, (ii) third-party promotional activities and (iii) firm customer that may seek to manipulate the price of a stock.

In order to mitigate the risks associated with low-priced securities fraud, FINRA recommended that firms enhance their supervisory systems by, among other things:

  • monitoring customer investments in low-priced securities to ensure that "unsolicited" trades were in fact not solicited, including ensuring that the customer is not making an investment in an issuer with which a firm representative is associated as an outside business activity;
  • establishing and implementing risk-based criteria for accepting deposits of low-priced securities; and
  • conducting training, education and outreach to raise awareness regarding the risks associated with investments in low-priced securities.

Additionally, FINRA reminded firms of their Suspicious Activity Report filing obligations under FINRA Rule 3310 ("Anti-Money Laundering Compliance Program") and BSA Rule 1023.210 ("Anti-Money Laundering Program Requirements for Brokers or Dealers in Securities").

Primary Sources

  1. FINRA Notice 21-03: FINRA Urges Firms to Review Their Policies and Procedures Relating to Red Flags of Potential Securities Fraud Involving Low-Priced Securities
  2. FINRA Investor Insight: Nothing Micro about Microcap Fraud - Investing in Low-Priced Stocks

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