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[Release No. 34-51983; File No. S7-02-04]
Amendments to the Penny Stock Rules
AGENCY: Securities and Exchange Commission.
SUMMARY: The Securities and Exchange Commission is amending the definition of
"penny stock" as well as the requirements for providing certain information to penny
stock customers. These amendments are designed to address market changes, evolving
communications technology and legislative developments.
EFFECTIVE DATE: September 12, 2005.
In January 2004, the Commission proposed amendments to rules under the
Exchange Act defining the term "penny stock" and requiring certain broker-dealers to
provide certain information to customers regarding penny stock transactions.1 These
proposed amendments were designed to respond to changing market structures, new
technology, and legislative developments.
In proposing these amendments, the Commission was particularly concerned with
their potential effect on small business capital formation. We recognized the important
contributions small companies make to the economy, and stressed that the rule
amendments were not intended to impede the access of small businesses to the capital
markets or eliminate viable secondary markets for their securities.2
The Commission received a total of 11 comment letters. Commenters included
investors, employees of broker-dealers, an attorney, a law school group, the American
Stock Exchange LLC ("Amex"), the National Futures Association ("NFA"), and The
Nasdaq Stock Market, Inc. ("Nasdaq").3 While many commenters generally supported
the Commission's proposals, some expressed concerns regarding particular provisions.
We discuss specific comments below in connection with the discussion of the rule
After carefully considering the comments, the Commission is adopting the rule
amendments as proposed with a technical modification to correct a typographical error in
the proposal. In particular, we are amending Exchange Act Rule 3a51-1 to provide that
securities relying on the exclusions from the definition of penny stock for reported
securities, as defined in Exchange Act Rule 11Aa3-1(a), and for certain other exchangeregistered
securities must either be listed on a "grandfathered" national securities
exchange4 or be listed on a national securities exchange or an automated quotation
system sponsored by a registered national securities association (including Nasdaq) that
satisfies certain minimum quantitative listing standards.
In addition, the Commission is amending Rule 3a51-1 to exclude security futures
products from the definition of penny stock. We are also eliminating an outdated
exclusion for securities quoted on Nasdaq, as well as an outdated provision relating to
Amex's Emerging Company Marketplace.5
The Commission is also amending Exchange Act Rules 15g-2 and 15g-9 to
provide an explicit "cooling-off period" to replace the implicit period that customers
traditionally have had when the disclosure documents required by the penny stock rules
are provided by postal mail rather than electronically. Moreover, we are amending the
penny stock disclosure document (as defined below) and the instructions to it set forth in
Schedule 15G under the Exchange Act6 to update and streamline the document and to
make it more useful and easily readable.
Taken as a whole, these amendments are intended to ensure that investors
continue to receive the protections of the penny stock rules, regardless of changing
technology or market structures.
New Patrons of The Penny Stock Bar may be found on the Securities and Exchange Commission web site:
The list below provides links to notices and orders concerning the institution and/or settlement of administrative proceedings.