Low-priced securities tend to be volatile and trade in low volumes. It may be difficult to find accurate information about them. There is a long history of bad actors exploiting these features to engage in fraudulent manipulations of low-priced securities. Frequently, these actors take advantage of trends and major events—such as the growth in cannabis-related businesses or the ongoing COVID-19 pandemic—to perpetrate the fraud. FINRA has observed potential misrepresentations about low-priced securities issuers’ involvement with COVID-19 related products or services, such as vaccines, test kits, personal protective equipment and hand sanitizers. These misrepresentations appear to have been part of potential pump-and-dump or market manipulation schemes that target unsuspecting investors.3 These COVID-19-related manipulations are the most recent manifestation of this type of fraud.

This Notice provides information that may 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. Firms that engage in low-priced securities business should also be aware of a recent SEC Staff Bulletin—Risks Associated with Omnibus Accounts Transacting in Low-Priced Securities—that highlights for broker-dealers various risks arising from illicit activities associated with transactions in low-priced securities through omnibus accounts, particularly transactions effected on behalf of omnibus accounts maintained for foreign financial institutions.

The Notice provides information to help firms strengthen their controls in four important areas related to potential fraud involving low-priced securities and thereby protect investors from financial harm and the firms themselves from financial, regulatory and reputational damage:

• Detection: the Notice describes possible red flags of potentially fraudulent low-priced securities activity relating to (1) Issuers, (2) Third-Party Promotional Activities, and (3) Firm Customers;

• Monitoring: the Notice describes selected effective supervisory and other control practices FINRA has observed firms implement in the areas of:

  • Supervision of Associated Persons

  • Account and Share Acceptance

  • Account Monitoring

  • Other Controls

• Suspicious Activity Report (SAR) filings and Fraud Reporting: the Notice describes firms’ SARs filing obligations; and additional avenues for firms to report potential fraud involving low-priced securities.

The full FINRA Regulatory Notice 21-03 can be found here.