by Brian Mahany
The Financial Industry Regulatory Authority (FINRA) has issued additional guidance to stockbrokers regarding low priced securities (so called “penny stocks”) in margin accounts. Price volatility and low priced stocks go hand-in-hand. Newer and smaller companies with lower trading prices tend to be much more volatile than higher priced equities. When these stocks are placed in margin accounts, the risks are much higher and a customer could easily and quickly be wiped out.
Margin accounts allow customers to leverage their investment funds. Suddenly, $250 can be used to acquire $1000 worth of stock on margin. A price swing, however, could be devastating. Recognizing this, FINRA issued special guidance to brokerage firms last month.
Included in the new guidance is a suggested best practice of increased scrutiny and daily monitoring. They also recommend that such positions be subject to reporting to senior management.
While it’s difficult to save people from themselves, stockbrokers need to be very careful if recommending penny stocks or leveraging a client’s account on margin. Inevitably there is a conflict between the broker’s desire for more commissions and the best interests of the customer. Remember brokers like both penny stocks and margin because they can earn significantly more commissions or mark ups.
With FINRA’s new best practices, broker dealers are on notice to be more careful with customers extended on credit or invested in volatile positions. These rules should make it easier for customers to file claims against brokers who recommend risky stocks on borrowed funds.
Brokerage firms are now on notice that regulators find these accounts so risky that they should be monitored every day. Customers who borrow money on margin to purchase penny stocks should also be brought to senior management’s attention. Hopefully, that added scrutiny will keep brokers in check who otherwise like to take big risks with their client’s money.
Although most brokers are honest and work hard for their clients, a few are more interested in their own financial gain. If you lost money based on bad investment advice or feel you were charged excessive commissions, call a lawyer experienced in FINRA arbitrations and investment fraud cases.
Mahany & Ertl is a full service law firm concentrating in fraud, asset recovery and stockbroker arbitrations cases. We represent people across the United States from our offices in Milwaukee, Detroit and Portland. Brian Mahany is a former securities principal and Joe Bird a former securities arbitrator. We know how to quickly get back your hard earned money. For a no obligation consultation, contact Brian at (414) 704-6731 (direct) or at