The SEC –Patrolling the Domestic Penny Stock Shores

During the worst economic crisis since the Great Depression, a little confidence can go a long way. It’s even better when the vote of confidence does what it’s actually suppose to do - - instill confidence. The Obama administration unveiled a sweeping regulatory overhaul aimed at restoring confidence in the U.S. financial system… and preventing a repeat of the worst crisis to hit Wall Street in seven decades. The plan gives new, far reaching powers, to the Federal Reserve to oversee the entire financial system. It will also create a new consumer protection agency to guard against the types of abuse that played a big role in the current crisis. Speaking of abuse and a vote of confidence, the Securities and Exchange Commission set tongues wagging when it reached a settlement with Bernard Madoff that keeps him from ever working again in the securities industry. Kevin Bacon thanks you. Back to the regulatory overhaul. Although Obama’s regulatory strategy speaks primarily to the domestic audience, the reaction of the global economic community is also crucial. After all, a move to shore up financial weaknesses could give China, America's biggest foreign creditor, greater confidence. "Although Obama's new rules sent out a positive signal, it's impossible to rebuild the credibility of the U.S. financial system to 100%," said Mei Xinyu, a researcher at China's Ministry of Commerce. That said, I’m not sure any financial system can ever be viewed with a 100% reliability factor, whether it belongs to U.S.A, or dare I suggest, China. While not perfect, the proposed financial overhaul should lead to more enforcement cases brought against stock brokers and others who run amok of the sweeping rules. The increase in powers gives the SEC more authority to regulate financial products. More significantly, it would give the agency more of an ability to investigate possible wrongdoings. A more far reaching SEC safety net is seen as an encouraging sign. Regulators have, justifiably, been under pressure to increase efforts to fight corporate wrongdoing. The SEC has been facing heat from investors and lawmakers for failing to follow up on warnings over the years that money manager Bernard Madoff was running a massive swindle. Under the new guidelines, the SEC can bring civil lawsuits against people for violating securities laws, including cases involving insider trading or market manipulation. If violations of securities laws are deemed willful, prosecutors can also seek criminal charges. One area where the SEC is set to get new power under the proposed overhaul would be in requiring that broker-dealers have a duty to their clients -- just like investment advisers do. This places a higher standard on brokers' conduct that requires they always act in the customer's best interests when recommending products. Brokers and analysts are no longer just culpable for what they do…but they are also responsible for what they do not do. Sins of omission are no longer a valid excuse. Under the rule change, brokers could be charged with securities fraud if they omit information deemed critical for investors, said Steven Feldman, a partner in the white-collar defense practice at the law firm Herrick in New York. "That is a perfect example of raising the bar of behavior for a particular industry," he said. "If people continue to play by the old rules, they will be subject to civil and criminal proceedings." While the SEC may have bigger fish to fry than those brokers, advisors, and newsletters that promote penny stocks, I’m not convinced that there is an avenue that impacts the average American more - and is in need of monitoring. Thanks to the current economic situation, there are more companies than ever before trading under $5.00. At the same time, that also means there are a lot more people buying and selling penny stocks. Dare I say, even a large number of investors who thought they’d never delve into penny stocks. There are also a number of free penny stock newsletters out there taking advantage of the situation, pumping and dumping terrible penny stocks; promising the world while selling subscribers their own worthless shares. If it’s possible for the SEC to clamp down on individual investors who pump penny stocks on message boards, surely it’s possible for the SEC to clamp down on those industry “experts” who tout garbage penny stocks and hide behind small print disclosures. Increasing the SEC’s scope and the world it regulates will certainly create a greater sense of overall market confidence. That said, patrolling the domestic penny stock shores could create an even greater sense of security for the largest segment of the American population.