Unsolicited Order

After reading an industry article on his own, Gideon Halloway calls his representative and directs her to buy 400 shares of a speculative biotechnology stock. She had never mentioned the company and offers no view on it. Does Regulation Best Interest's Care Obligation attach to this purchase?

1. A.No, because Gideon acted on published research and is therefore treated as an institutional customerInstitutional status depends on the customer's assets and character, not on where the customer got an idea. Gideon remains a retail customer.
2. B.Yes, because the security is speculative and the firm therefore assumes responsibility for its suitabilityRisk level does not create a recommendation. Firms may still restrict or refuse a speculative order under their own policies, but that is separate from Reg BI.
3. C.Yes. Any securities transaction a firm executes for a retail customer is subject to the Care ObligationExecution alone does not trigger Reg BI. The rule turns on whether a recommendation was made.
4. D.No. Reg BI attaches to recommendations, and a genuinely unsolicited order is not one, though the order must be marked unsolicitedCorrect. Absent a recommendation there is no Reg BI trigger, but the firm must document the order as unsolicited and still owes best execution.

Why: Regulation Best Interest is triggered by a RECOMMENDATION of a securities transaction or investment strategy to a retail customer. A genuinely self directed, unsolicited order is not a recommendation, so the Care Obligation does not attach to it. The firm must still mark the order unsolicited, handle it fairly and with best execution, and it cannot use the label to disguise a recommendation that was in fact made.

Before selling a NON-EXCHANGE-LISTED stock priced at $2 to a first-time customer, the SEC penny stock rules require the broker-dealer to:

1. A.Register the stock with the state firstWrong-but-tempting. SECONDARY trading exemptions may cover registration - the CONDUCT rules still bite.
2. B.Guarantee repurchase at cost for 90 daysWrong. Guarantees are prohibited, not required.
3. C.Deliver the risk disclosure document and obtain a signed written suitability statementCorrect. The 15g procedures gate first-time penny stock solicitations.
4. D.Nothing beyond ordinary suitabilityWrong. Penny stocks carry their own enhanced procedural regime.

Why: Cold-calling new customers into sub-$5 non-exchange stocks triggers the full penny stock regime: risk document, signed suitability determination, and quote/compensation disclosures, with established-customer and unsolicited exemptions. Citation: SEC Rules 15g-2 through 15g-9. Takeaway: new customers + penny stocks = signed suitability statement and disclosure stack.

Ardmore Securities is a syndicate member in a follow-on offering of Kestrel Aviation, a thinly traded issuer, and the Regulation M restricted period is under way. Ardmore may do all of the following EXCEPT:

1. A.Buy Kestrel shares for the firm's own investment account to demonstrate confidence in the issueCorrect, this is the exception. Proprietary bids and purchases of the covered security are exactly what the restricted period forbids.
2. B.Enter a single stabilizing bid at a price no higher than the last independent bid or the offering priceStabilizing is permitted under Rule 104, subject to the one bid, price ceiling, and disclosure conditions. It is an excepted activity.
3. C.Execute unsolicited customer orders to buy Kestrel sharesUnsolicited brokerage transactions are excepted. The rule targets the participant's own bidding and purchasing, not customer initiated orders.
4. D.Impose a penalty bid to reclaim selling concessions on shares flipped back into the syndicatePenalty bids are a recognized excepted practice under Regulation M and are used to discourage immediate flipping.

Why: Regulation M bars distribution participants from bidding for or purchasing the covered security during the restricted period, because those purchases would prop up the very price at which the distribution is being sold. Several activities are expressly excepted: one stabilizing bid at a price no higher than the last independent bid or the offering price, unsolicited brokerage transactions for customers, and a penalty bid used to reclaim selling concessions on shares that are flipped back. Buying for the firm's own account to signal confidence is precisely the conduct the rule prohibits.