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SEC Staff Issue Risk Alert and FAQs on Customer Sales of Securities


Washington D.C., Oct. 9, 2014 —

The Securities and Exchange Commission today announced publication of a Risk Alert and FAQs to remind broker-dealers of their obligations when they engage in unregistered transactions on behalf of their customers.  The publication of the staff guidance was accompanied by the announcement of an enforcement action against two firms for improperly selling billions of shares of penny stocks through such unregistered offerings.

The Risk Alert summarizes deficiencies that were discovered by the SEC’s Office of Compliance Inspections and Examinations (OCIE) during a targeted sweep of 22 broker-dealers frequently involved in the sale of microcap securities.  The sweep uncovered widespread deficiencies including:

  • Insufficient policies and procedures to monitor for and identify potential red flags in customer-initiated sales.
  • Inadequate controls to evaluate how customers acquired the securities and whether they could be lawfully resold without registration.
  • Failure to file suspicious activity reports, as required by the Bank Secrecy Act, when encountering unusual or suspicious activity in connection with customers’ sales of microcap securities.

“Broker-dealers are key gatekeepers in addressing potential violations of the securities laws by customers,” said Kevin Goodman, National Associate Director of OCIE’s broker-dealer examination program.  “We will continue to assess the controls that firms in this business have in place to monitor for and report any suspicious activities.”

Section 4(a)(4) of the Securities Act of 1933 provides a registration exemption for broker-dealers when executing customers’ unregistered sales of securities if, after reasonable inquiry, the broker-dealer is not aware of circumstances indicating that the customer would be violating the registration requirements of Section 5 of the Securities Act.  The SEC’s Division of Trading and Markets published FAQs to remind broker-dealers of the requirements for complying with the exemption. 

“Broker-dealers must be vigilant when facilitating sales on behalf of customers in unregistered transactions and remember that reliance on the broker’s exemption requires a reasonable inquiry of the customer and transaction,” said Stephen Luparello, Director of the SEC's Division of Trading and Markets.

The FAQs were prepared by Paula Jenson, Lourdes Gonzalez, Kevin Schopp, and Carl Emigholz of the Division of Trading and Markets.  The Risk Alert was prepared by Steven Vitulano and Ellen Hersh of the Office of Compliance Inspections and Examinations. 


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