New Rules Aim to Protect Investors in Penny Stocks : Wall Street: Brokers will have to provide clients with monthly statements on the high-risk securities.

Federal regulators on Friday approved new rules aimed at protecting investors in low-cost, high-risk securities known as penny stocks but limited their scope to avoid hurting small businesses.

The measures unanimously approved by the Securities and Exchange Commission will require penny stock brokers to provide clients with monthly statements on their holdings.

But the final version, less broad than one proposed by the agency a year ago, granted several exemptions to that and other rules.

SEC Chairman Richard C. Breeden said he wanted to avoid sending a message to investors that because a company is small “something is inherently wrong.”

A 1989 study by the North American Securities Administrators Assn., a state regulators’ group, concluded that U.S. investors lose $2 billion a year to penny stock fraud.

Penny stocks are highly speculative securities, selling for under $5 as defined by the new rules, usually issued by new companies with untested or uneven earnings histories.

Penny stocks are vulnerable to fraud because it is difficult to obtain up-to-date information about them, since most are not listed on national stock exchanges or automated price quotation systems like NASDAQ.

The changes implement reforms mandated by Congress in the Securities Enforcement Remedies and Penny Stock Reform Act of 1990.

But Breeden, who has been pushing the agency to create a better regulatory climate for small business, said a number of exemptions were being granted for hundreds of firms including:

* Companies whose stocks trade on the electronic stock market operated by the National Assn. of Securities Dealers.

* Brokerages in which less than 5% of their securities business is in penny stocks.

* Companies with net assets of between $2 million and $5 million, if they have been in business a long time.

* Companies whose stock price fluctuates above and below $5 per share.

“I do not believe the stocks of small companies are inherently suspect,” Breeden said. “I do not believe that stocks below $5 are inherently evil.”

Separately, the SEC also approved a rules change that will give investors using the NASDAQ computerized electronic market more frequent price and volume information.

The change will require NASD-listed stocks to report trades within 90 seconds of completion. Previously, such “real time” reporting was required only of stocks on the NASD’s more selective National Market System.

NASD President Joseph Hardiman said the change will provide investors “with more immediate and detailed pricing and transaction data on all NASDAQ securities.”

The penny stock rules adopted will require brokers to furnish potential buyers with documents outlining the potential risks of their investment.

Brokers also will be required to explain key penny stock market terms; provide monthly statements on the value of a customer’s holdings and an explanation of how much commission the seller gets.

The changes also will limit so-called blank check investments, which solicit investor money for an unidentified investment opportunity to be determined later.

The changes will require blank check companies to identify the investment before the money is used and will give customers at least 20 days to pull their money out.