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Why Merrill Lynch is Curbing Advisors from Trading Penny Stocks

October 2, 2018

Wirehouse Merrill Lynch appears to be trying to stay ahead of regulators cracking down on penny stock fraud, recently severely limiting what its advisors can do for clients with such risky securities, CNBC writes.

In July, the wirehouse banned purchases of the securities, people who asked to remain anonymous tell the news website. And September, the firm sent letters to clients about new restrictions on penny stock sales as well, although that policy was then amended to give Merrill Lynch’s financial advisors some time to exit their existing positions, CNBC writes.

As of this week, any trades in stocks under $5 per share with market capitalizations of under $300 million will be subject to the firm’s review and customers may experience a delay in execution as a result, Merrill Lynch said in the letter seen by the website. The firm wanted to ensure compliance with SEC regulations and opted for restrictions and trading prohibitions in penny stocks as a result, spokesman for Bank of America, Merrill Lynch’s parent company, tells CNBC in a statement.

Regulators have zeroed in on over-the-counter securities in recent years, with the SEC issuing a white paper in 2016 on the risks of trading penny stocks, the website writes. Investors usually lose money on penny stocks, particularly in those that are heavily promoted, the regulator said at the time, according to CNBC. In part, that’s because the market is particularly susceptible to fraud, such as the pump-and-dump scheme perpetrated by the so-called Wolf of Wall Street, Jordan Belfort, the website writes.

On Friday, the SEC ordered the broker-dealer COR Clearing LLC to stop selling penny stocks deposited at the firm, except in a very few instances, and to pay a penalty of $800,000 for its alleged failures to report suspicious sales of penny stock shares, according to a press release from the regulator.


Merrill Lynch is at the lead of other large brokerages on restricting trading in penny stocks, according to CNBC. Other firms also have review processes for riskier trades, but Morgan Stanley and UBS clients, for example, can still buy penny stocks, people familiar with the companies’ policies tell the website.

By Alex Padalka
  • To read the CNBC article cited in this story, click here.