The Financial Industry Regulatory Authority (FINRA) has sanctioned brokerage firm Feltl & Company (Feltl) and fined the firm $1,000,000 concerning allegations that the firm, between January 2008, and February 2012. failed to comply with the suitability, disclosure, and record-keeping requirements for broker-dealers who engage in penny stock business. FINRA alleged that Feltl did not provide some customers with Securities and Exchange Commission (SEC) risk disclosure document two days prior to effecting a penny stock transaction in the customers’ accounts. failed to sufficiently supervise penny stock transactions for compliance with applicable rules and regulations, and failed to establish, maintain, and enforce written supervisory procedures for its penny stock business.
Feltl has eight branch offices located in Minnesota and Illinois, and approximately 113 registered representatives and has been a FINRA member since 1975.
The term “penny stock” generally refers to securities that trades below $5 per share, issued by a small company. Penny stocks often trade infrequently making it difficult to sell and price. Due to the size of the issuer, the market cap, the liquidity issues, and other reasons penny stocks are generally considered speculative investments. Consequently, the SEC requires broker-dealers effecting penny stock transactions to make a documented determination that the transactions are suitable for customers and obtain the customers’ written agreement to those transactions.
A broker-dealer must: (a) document the customer’s suitability by sending a written statement to the customer describing the basis of the suitability determination two days prior to purchase and obtain a written agreement from the customer to purchase the penny stock in a specific quantity prior to the transaction; (b) furnish the customer a standardized risk disclosure document two days prior to effecting a penny stock transaction and receive and maintain a signed and dated acknowledgement of its receipt; (c) disclose the current inside bid and ask market quotations; (d) disclose the amount of compensation the broker or dealer will receive for the transaction orally or in writing prior to effecting the transaction; and (e) send monthly account statements showing market and price information for each penny stock
FINRA alleged that Feltl engaged in thousands of penny stock transactions on behalf of its but did not track all penny stock transactions for its records. Thus, FINRA found that the actual number of penny stock transactions and Feltl’s total penny stock related revenue were unknown. With respect to 15 different penny stocks, FINRA alleged that Feltl solicited its customers to make at least 2,450 purchases of penny stocks and received over $2.1 million through markups, markdowns, or commissions. The firm is alleged to have failed to track the individual transactions for which the security may have temporarily not met the definition of a penny stock or the penny stock transactions in securities in which it did not make a market.
In addition, FINRA found that Feltl failed to comply with the disclosure rules for penny stock transactions effected for its customers. It was alleged that Feltl did not: a) document the customer’s suitability for the specific penny stock investment, send a written statement with the basis of the suitability determination two days prior to the transaction, or obtain a written agreement from the customer to purchase the penny stock prior to the transaction; b) furnish all customers the standardized Risk Disclosure Document and receive a signed acknowledgement of receipt two days prior to the transaction; c) disclose to the customer certain market quotations; d) disclose to all customers the amount of compensation the firm would receive for the trade; e) send the customer monthly account statements that showed the value of each penny stock held in the customer’s account with a legend with the required language concerning penny stock risks.
Finally, FINRA alleged that Feltl failed to establish and maintain a system to supervise the activities of its brokers and principals. For example, FINRA found that the firm did not even track whether customer transactions were penny stock transactions, did not monitor for compliance with any of the penny stock rules were required or sent to a customer, whether the required suitability analysis was conducted or documented,
The attorneys at Gana LLP represent investors in securities arbitration matters concerning a variety of investment related claims, including penny stocks. Our consultations are free of charge and the firm is only compensated if you recover.