The SEC wants to kick 2,000 fraud-prone penny stocks from online brokerages, including retail favorites Sears and Blockbuster

SEC
  • The SEC is cracking down on trading in 2,000 penny stocks, including Sears and Blockbuster, according to Reuters.
  • Online brokers like Schwab and Fidelity have already stopped new share purchases ahead of the SEC rule.
  • Retail investors have piled into penny or microcap stocks in the last year, egged on by the rise of online brokerages.
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The Securities and Exchange Commission is rolling out a new rule cracking down on trading in penny stocks, including Sears and Blockbuster, according to a Reuters report.

The rule requires certain stocks that trade over the counter to disclose more information, such as recent financial data. That could potentially force 1,000 to 2,000 stocks to delist for some time.

Online brokers including Schwab and Fidelity have already stopped new share purchases ahead of the SEC rule, according to Reuters. Shareholders will still be able to sell, but brokers are warning that liquidity will dry up.

Affected stocks include the shell companies liquidating bankrupt Sears and Blockbuster. These once-hyped firms trade alongside the likes of Luckin Coffee, the upstart Chinese cafe chain that fell to accounting fraud.

Retail investors have piled into over-the-counter stocks, also called penny or microcap stocks, egged on by the rise of online broker platforms. Penny stock trading volume peaked at 1.9 trillion transactions in February. And even in August, volume remained more than double last year’s levels, according to FINRA data cited by Reuters.

The SEC argues it is ending a loophole that allowed some penny-stock companies to mislead investors by withholding key information. But Daniel Zinn, a lawyer for OTC Markets Group, which hosts the affected penny stocks, said the opposite may end up being true.

“We’re in agreement with the SEC’s goals of providing as much disclosure as possible,” said Zinn. But he added that some tiny companies might not be able to pay for the cost of providing paperwork, and others may be wary of promoting trading in their stock.

“In those circumstances, no quotes at all may lead to more harm than help for existing investors,” said Zinn.