Merrill Lynch brokerage of Bank of America recently informed its clients that it will no longer be accepting penny stocks due to a change in its trading policy.
Bank of America Bans Penny Stocks
The Bank of America’s Merrill Lynch recently banned the trade of risky securities, according to sources familiar with the situation. Now it has announced that it will not be accepting penny stocks from clients. The bank then decided to retract its decision temporarily in order to give financial advisers enough time to exit their positions.
Penny stocks were initially considered shares that could be sold for $1 per share but the Security and Exchange Commission changed the definition of term to include share valued up to $5 in a small public company or an over-the-counter market. Penny stocks have developed somewhat of a bad reputation in the financial markets due their lack of disclosure agreements which have made them a tool for fraudulent schemes for the past several years.
Major exchanges often refrain from trading penny stock due to their notoriety as a risky security. One common way criminals commit fraud is through the pump and dump method where they inflate the stock prices and then quickly exit positions. This method was also used by the Wolf of Wall Street, Jordan Belfort, who made millions from the fraudulent practice before he was finally caught.
Regulators have consistently voiced their opposition against the penny stocks. In 2016, the Economic and Risk Analysis division under SEC released a white paper which underlined the unsafe nature of over-the-counter markets. SEC highlighted that most investors end up losing money in such markets and the stocks with weaker disclosures or higher promotional campaigns tend to cause even more losses.
Bank of America Becomes First
Now Bank of America is the first financial institution to heed SEC’s warning and ban investors from selling or purchasing penny stocks.
Other firms are also in the process of tightening regulations on riskier trades or banning them altogether. Sources familiar with the institutions’ policies say that investors can still buy penny stocks at UBS and Morgan Stanley, but there is no certainty whether these firms will continue to sell the securities in the future.
Bank of America announced in July that it will be pulling back from risky investments to cut the regulatory costs associated with them. CEO Brian Moynihan says that the bank has spent billions on settlements with the regulators to secure penny stocks and other risky securities.
Earlier this year, the bank banned its clients from using their credit cards to invest in cryptocurrencies. The firm is known for having a small risk appetite which became the reason behind the exit of its banking head, Christian Meissner.
Under $5
The sudden policy shift has also stirred confusion among the bank’s financial advisers who were told to get rid of their penny stocks before a certain deadline. One Merrill Lynch broker said that one of his clients didn’t want to sell his shares and the bank told him that he doesn’t have to, but with the current policy shift, it could become harder to get rid of the security in the future.
Even though the bank has extended its deadline to allow investors to sell off their penny stocks, clients who wish to sell off the shares in the future, but are unable to do so through Merrill Lynch, can transfer them to a different brokerage. But even that has its challenges. Some rival brokerages will not allow investors to transfer the asset class, according to one of the sources.
The bank informed its clients recently that stocks that had a total market cap of less than $300 million and were selling shares at less than $5 would undergo regulatory review. A spokesperson said that the bank’s decision was in compliance with SEC’s regulations in order to protect the client’s interest. As a result of the recent ban, the bank will restrict or limit certain transactions as it deems fit.