TD Ameritrade to restrict orders in Caveat Emptor designated OTC securities to liquidating trades only
According to a statement posted on the TD Ameritrade website, the popular trading platform will restrict orders in Caveat Emptor designated OTC securities to liquidating trades only starting May 25, 2021.
The OTC Markets Group designates securities as Caveat Emptor to inform investors that there may be reason to exercise additional care and perform thorough due diligence before making an investment decision in that security, including:
- A questionable stock promotion
- Known investigation of fraudulent activity or other criminal activities
- Regulatory suspensions
- Undisclosed corporate actions
- Other public interest concerns
The move by TD Ameritrade is the latest by giant trading platforms to protect investors against the largely unregulated penny stock market, which is rife with market manipulation and fraud, in response to a sharp uptick in trading in these high-risk securities starting during the latter half of 2020.
E*Trade restricted trading in Caveat Emptor securities to liquidation only in November of 2020. That restriction remains in place today.
TD Ameritrade (over 11 million users) currently ranks second behind Robinhood (over 13 million users) in terms of total users, with E*Trade close behind (around 8 million users). Robinhood has never allowed the trading of Caveat Emptor securities.
TD Ameritrade provided a list of Caveat Emptor securities to its users in the notice, but that list does change as OTC adds new securities and removes others. According to the OTC Corporate Actions Page, five new securities were designated with the Caveat Emptor designation since the April 12th TD Ameritrade list was published — FPWM, ELCR, IMNPQ, HWIN and PTZH.
According to the OTC Market Screener, there are currently 1,036 securities designated as Caveat Emptor.
The large brokers aren’t the only ones making moves to protect a growing number of traders from penny stock scams. The Securities and Exchange Commission (“SEC”) is making changes to SEC Rule 15C2-11, which governs when broker-dealers may publish electronic quotes in securities that are not traded on any exchange.
The new rule, scheduled to go into effect on September 28, 2021, will make companies not publishing “current” information (including financial statements from the last fiscal year and other information describing the company’s business) ineligible to have their securities publicly quoted by a broker-dealer.
The SEC is, however, considering a proposal made by the OTC Markets Group for an “Expert Market” exemption that would permit broker-dealers to quote and trade these stocks electronically but would limit the distribution of quotes only to qualified experts such as brokers, institutions, and those that qualify as accredited investors.
If the proposal is approved, the OTC Link ATS trading platform will serve as a “qualified interdealer quotation system,” allowing brokers to maintain public quoting in lieu of submitting a Form 211 with FINRA.
Currently, there are around 2,700 issuers not providing adequate information that are in jeopardy of no longer being quoted come September 28, 2021. Many of those stocks are abandoned, and most serve little purpose except as vehicles for stock manipulation, largely through social media sites.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
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