FINRA recently issued Regulatory Notice 21-03 providing information to help FINRA member firms that engage in low-priced securities business assess and, as appropriate, strengthen their controls to identify and mitigate their risk, and the risk to their customers, including specified adults and seniors, of becoming involved in activities related to fraud involving low-priced securities.  FINRA issued this guidance because it has observed potential misrepresentations about low-priced securities issuers’ involvement with COVID-19 related products or services, such as vaccines, test kits, personal protective equipment, and hand sanitizers.

This Notice specifically provides a non-exhaustive list of activities that may be red flags of fraud involving low-priced securities.  These red flags include issuers making abrupt or frequent changes of issuer name, ticker symbol, or business model, or abrupt expansion of an existing business model, often to benefit from the latest trend, such as COVID-19 cures, test kits, or prevention-related products.  Also included are firm customers, particularly specified adults and seniors, who are being solicited to purchase low-priced securities where the customer has not invested in low-priced securities previously; the purchase is outside the customer’s investment or risk profile; or the low-priced security constitutes a large concentration of the customer’s investments.

This Notice also describes selected effective supervisory and other control practices FINRA has observed firms implement; firms’ suspicious activity report filing obligations; and additional avenues for firms to report potential fraud involving low-priced securities.  We encourage our clients that engage in low-priced securities business to review Regulatory Notice 21-03 and their policies and procedures relating to red flags of potential fraud involving low-priced securities.