What specific warning must be included on account statements for customers holding penny stock positions?
Correct answer: A. The SEC penny stock disclosure rules requires a conspicuous legend warning that the estimated value may be based on a limited number of trades or quotes and that the customer may not be able to sell the securities at the stated price.
Why not the others?
- B (That penny stocks are not suitable for all investors and may result in total loss of principal): While penny stocks are indeed risky, the specific required legend addresses the reliability of the estimated market value, not a general suitability warning.
- C (That the securities are not listed on a national exchange and therefore are not covered by SIPC): SIPC coverage is based on the brokerage firm's membership, not on whether a security is exchange-listed. The required penny stock legend addresses pricing data limitations.
- D (That the broker-dealer may have acted as a market maker in the transaction): While market-maker disclosures may be required in other contexts, the penny stock statement legend specifically addresses the limited reliability of estimated market values.
Penny stock account statements carry a required warning because thin trading makes any value shown on the statement unreliable. The disclosure exists so a customer does not assume the printed price is a price they can actually sell at.