US Brokerages Still Challenged by Microcap Securities: Regulator

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U.S. brokerages in recent months have begun processing larger volumes of foreign-based, low-priced securities despite the high regulatory risk associated with such trades, sources told ACAMSmoneylaundering.com

Microcap securities, also known as penny stocks, have drawn regulatory scrutiny for more than two decades because of their frequent use in “pump and dump” schemes, in which fraudsters use deceptive marketing and other cons to falsely to inflate the price of obscure corporate shares they secretly control and sell for a profit. 

More than half of the enforcement actions Finra disclosed last year were connected in some form to microcap trades, Sarah Green, the agency’s senior director of enforcement, said last week during a panel at the ACAMS AML & Financial Crime Conference in Las Vegas.

Finra brought 1,434 disciplinary actions in 2016, including against registered members and registered firms, and levied $176 million in fines, according to the agency’s website.

Panelists at the AML conference in Las Vegas also noted that dealers are increasingly routing their low-priced stock trades through their foreign affiliates and subsidiaries, creating an additional step between the owner of the shares and the compliance team’s visibility into the trading activity in question.

That trend in particular poses a more long-term risk of U.S. securities firms unknowingly facilitating fraud schemes, said Bao Nguyen, a former examiner for Finra.

“Gone are the days where you say, ‘That’s our sister company, they have their own compliance program, and we’re okay with it.’ Finra and the SEC aren’t going to buy that,” said Nguyen, now a principal of risk advisory services at Kaufman Rossin.

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Bao Q. Nguyen, MBA, CFE, is a risk advisory services principal in Kaufman Rossin’s Boca Raton, Florida, office. Kaufman Rossin is one of the top CPA and advisory firms in the U.S.  Bao can be reached at bnguyen@kaufmanrossin.com.


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