Virtu Financial, Inc. (“Virtu”)1 respectfully petitions the Securities and Exchange Commission (the “Commission”) under Rule 192 of the Commission’s Rules of Practice2 to initiate rulemaking proceedings that would prohibit National Securities Exchanges from listing high risk “penny stocks” and mandate additional disclosures from issuers that would facilitate investors’ ability to assess the risks typically inherent in such stocks.

These are classic penny stock companies that are often tied to pump-and-dump trading activity and other forms of market manipulation. They are exactly the type of stocks that the Penny Stock Reform Act and Commission rules intended to keep off the major exchanges to protect investors. Yet, under today’s listing rules, these stocks are eligible for listing on exchanges despite their substantial risks – and can remain listed for long periods of time even when they violate the exchanges’ continuing listing requirements.

Many of these issuers are holding companies that are incorporated in, and conduct much of their operations in, foreign jurisdictions. Many such issuers have disclosed in their SEC filings that, as companies incorporated in foreign jurisdictions, they are permitted to adopt certain home country practices concerning corporate governance matters that differ significantly from the NASDAQ corporate governance requirements. The issuers’ disclosures acknowledge that these practices may afford less protection to shareholders than they otherwise would under rules and regulations applicable to U.S. domestic issuers. As a result, public shareholders of such companies may have more difficulties in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the U.S.

As these examples demonstrate, Main Street investors are being exposed to significant risk from issuers that have the imprimatur of being listed on an exchange when they are no different from penny stocks listed on the OTC market. Securing a listing on a National Securities Exchange is a seal of approval. Most broker-dealers allow their customers to trade any exchange-listed stocks, but impose substantial restrictions on their customers’ trading in riskier, OTC stocks; however, this is circumvented when OTC quality stocks are listed as NMS stocks.

To promote investor protection, we petition the SEC to engage in rulemaking implementing the following recommendations. Recommendation

Recommendation 1: Require Exchanges to Adopt More Rigorous Initial Listing Standards to Prevent Listing of Risky Issuers 

We believe the root of the problem is in the major exchanges’ initial listing standards, which set the bar far too low to prevent the listing of risky issuers. Especially concerning is the dilutive capital structures that are a hallmark of many risky penny stock companies where convertibility is a function of price such that the lower the price, the more stock the insiders can convert. This is highly dilutive and a red flag.

To address this, the Commission should direct the exchanges to adopt initial listing standards requiring that restricted common shares, and securities convertible into restricted common shares, cannot dilute public shareholders of common shares by greater than 5% within 180 days of listing.

The full letter can be read here 

Source: Virtu Financial

Excellent letter by @VirtuFinancial
calling for tighter SEC and stock exchange rules on penny stock listings. https://t.co/BV4gZebLjw https://t.co/MxuJRPBxG8

— Joe Saluzzi (@JoeSaluzzi) July 29, 2024

This is one of the most important reforms @SECGov could undertake. BDs have systems and processes (suitability, surveillance, supervision) built around certain assumptions about exchanges acting as gatekeepers keeping out fraudsters, and those assumptions are currently broken. https://t.co/zaI9lWgT3L

— Tom Hochleutner (@THochleutner) July 29, 2024

.