With the Securities and Exchange Commission cracking down on penny stocks, Merrill Lynch recently told its clients and financial advisers that it is putting restrictions on the purchase and sale of a large swath of low-priced securities.
"To ensure we are complying with SEC regulations and protecting the interests of our clients, we recently made changes to our policy regarding low-priced securities," a Merrill Lynch spokesman, Jerry Dubrowski, wrote in an email. As a result, certain transactions may be subject to restrictions, trading prohibitions or other limitations."
According to a source familiar with the moves, as of July, clients were no longer able to buy penny stocks through Merrill Lynch, and by the end of September, will no longer be able to sell them through the brokerage. The stocks will still be able to be transferred to a different account at another broker-dealer.
After Merrill informed its clients it was not allowing the sale of the securities and gave advisers and clients to the end of the month to complete the trades, advisers raised concerns about closing down clients' positions, according to the source, who asked not to be named.
The changes in Merrill Lynch's stance come as the SEC continues to warn investors about penny stock trading and the risks of market manipulation and higher volatility.
The SEC on Friday said it had settled charges against clearing firm COR Clearing for failing to report suspicious sales of penny stock shares totaling millions of dollars. As part of the settlement, COR has agreed to exit a key penny stock clearing business by significantly limiting the sale of penny stocks deposited at COR, which was fined $800,000 and neither admitted or denied the SEC's findings.
Earlier this month, Dr. Phillip Frost, the largest shareholder of Ladenburg Thalmann Financial Services Inc., was charged with fraud by the SEC for his involvement in a pump-and-dump, penny stock scheme. At the time, Dr. Frost was the non-executive chairman of Ladenburg Thalmann. He
resigned from that position days after the SEC's filed its complaint.
The new restrictions at Merrill do not affect securities listed on the NYSE or Nasdaq, the source said, but apply only to those on the over-the-counter market, which is also known as the Pink Sheets.
"Other firms are saying we don't want these securities," the source said.
Two years ago, UBS Financial Services created a similar policy regarding so-called high-risk stocks, including penny stocks.
According to Merrill Lynch, a low-priced security is generally defined as having one or all of the following traits: securities that trade over-the-counter, or OTC, at or below $5 per share and have a market capitalization of less than or equal to $300 million; securities labeled as "Caveat Emptor" by the OTC Markets Group; and OTC securities that have limited or no financial disclosure information available.
"Caveat Emptor," Latin for "let the buyer beware," is a designation generally used to inform investors that there may be reason to exercise additional care and perform thorough due diligence before making an investment decision in that security, according to Merrill Lynch.
After September 30, Merrill Lynch clients who want to sell existing positions will face additional compliance reviews that could slow down the transactions.
Regulators have increasingly made their views of penny stocks known. The SEC's Division of Economic and Risk Analysis published a white paper in 2016 highlighting the risks of investing in over-the-counter markets. The majority of investors lose money in the trades, and losses worsened for stocks that were the subject of promotional campaigns and those that had weaker disclosures, the SEC said.
CNBC first reported the changes in penny stock policy at Merrill Friday morning.
