Penny stocks are no longer welcome at Bank of America‘s Merrill Lynch brokerage.
The company recently told clients that it was changing its trading policy regarding penny stocks, typically shares of tiny and unknown companies that trade over-the-counter for less than $5 each, according to people with direct knowledge of the move.
The bank’s Merrill Lynch division banned purchases of the risky securities in late July, according to the people, who declined to be identified speaking about the move. About six weeks later, the bank abruptly said that it was restricting clients’ sales of penny stocks, then amended that policy to give financial advisers more time to exit positions, the people said.
Penny stocks, which the Securities and Exchange Commission defines as a small company trading for less than $5 a share and on an over the counter market, occupy a disreputable corner of financial markets. Since the shares are thinly traded away from major exchanges and face few disclosure requirements, they have for decades been a tool for fraudulent schemes. One common approach is the pump-and-dump where criminals hype a stock before exiting positions. That was the method Jordan Belfort, the so-called Wolf of Wall Street, used to enrich himself before getting caught.