Investors attracted to the often risky penny-stock market would be given new protection from fraud under provisions of a bill passed by the House this week.
The measure approved by voice vote would give the Securities and Exchange Commission greater authority to police the largely unregulated market in penny stocks.The Senate has approved a similar bill, and the two chambers are expected to work out a compromise version of the legislation.
Penny stocks are low-priced, highly speculative stocks sold on the over-the-counter market and usually not listed on a regular exchange. The stocks often are sold over the telephone.
Under present law, sellers are required to disclose very little information to prospective buyers. As a result, penny stocks have become a major means of defrauding investors.
Rep. Ed Markey, D-Mass., said the reform bill represents a "powerful expansion of the enforcement weapons available to combat the problems of securities fraud."
Markey noted that Congress is developing other measures to reform the financial markets and that, taken together, they "give SEC the legal foundation to right the wrongs perpetrated over much of the last decade."
Rep. Matthew Rinaldo, R-N.J., said that the legislation makes "a powerful statement that Congress will never allow the integrity of the securities markets to be compromised and that investors will be protected."
The House bill requires that brokers and dealers must give their customers specific information about stocks, including the bid and ask prices, the number of shares at specified prices and the amount of commissions or other fees the brokers or dealers receive.
Brokers also would have to provide customers with a disclosure document that describes the risky nature of the penny-stock market and specifies the customer's rights and remedies.
The SEC would be given authority to void the sale of certain penny stocks unless they comply with SEC rules.
The bill also authorizes the SEC to seek civil monetary penalties against violators and to bar or suspend persons who violate securities laws from serving as an officer or director of a company registered with the SEC.