Over-the-Counter ("OTC") Securities Acknowledgment
Throughout 2023, E*TRADE Securities LLC (“ETS”) will be transitioning existing clients to Morgan Stanley Smith Barney LLC (“MSSB” and together with ETS, the “Company”, “we”, “our” or “us”). To identify which entity is currently servicing your account(s), please check the bottom of your most recent account statement.
There are special characteristics and risks associated with trading in Over-the-Counter (“OTC”) securities, which may include, but are not limited to, penny stocks, low-priced securities, and “pink sheet” stocks. In transacting in such products, including on any E*TRADE from Morgan Stanley (“E*TRADE”) trading platform or mobile application, you acknowledge that you understand the risks of trading OTC securities, including those risks described below, and agree to the terms and conditions provided in this Acknowledgment, as well as the terms and conditions provided in the E*TRADE Customer Agreement, the E*TRADE from Morgan Stanley Client Agreement for Self-Directed Accounts, and other relevant disclosures.
1. Risks Associated with OTC Securities
OTC securities present unique and potentially significant risks beyond those posed by exchange-listed securities. Due to these risks, OTC securities may not be appropriate for all investors.
- Risk of Lower Liquidity. Liquidity refers to the ability of market participants to buy and sell securities. Generally, the more orders that are available in a market, the greater the liquidity. Liquidity is important because with greater liquidity it is easier for investors to buy or sell securities, and as a result, investors are more likely to pay or receive a competitive price for securities purchased or sold. There may be lower liquidity in OTC securities, which tends to increase price volatility and may impair your ability to buy or sell within a reasonable period of time without adversely impacting execution prices.
- Risk of Higher Volatility. Volatility refers to the frequency and magnitude of changes in the price of a financial instrument. Generally, the higher the volatility of an instrument, the greater its price swings, and the more risk associated with the instrument. Because OTC securities may be more illiquid than exchange-listed securities, there may be greater volatility in trading these products, and thus more risk of price swings and losses.
- System Delays & Lack of Price Protection. OTC securities may be subject to different trading rules and systems than other securities available on an E*TRADE platform or mobile application. OTC securities orders may encounter significant delays in executions, reports of executions, and updating of quotations, which may impact your ability to buy or sell OTC securities at expected prices. Furthermore, OTC securities are not subject to market price protection rules, including those establishing a “national best bid and offer” or other price protection rules that exist for exchange-listed securities. Accordingly, customers transacting in OTC securities are not guaranteed top of book prices and may trade at prices significantly different than those displayed.
- Lack of Issuer Information. Unlike issuers of exchange-listed securities, reliable information regarding issuers of OTC securities may not be available or may be difficult to find. Accordingly, it may be difficult to properly value an OTC security, as the lack of information makes it less likely that quoted prices are based on full and complete information about the issuer. You should exercise additional care and perform thorough due diligence before making any investment decision regarding an OTC security. In the event an issuer of an OTC security that you own or may own in the future fails to report required information, such securities could become restricted to “expert” markets, which may prevent you from selling the security. If this happens, the value of your security may be significantly negatively affected or eliminated entirely.
- Risk of Fraud or Manipulation. Since publicly available information regarding OTC securities may be scarce, these products may be more susceptible to fraud or manipulation, such as “pump-and-dump” or other schemes. The illiquid or volatile nature of OTC securities also make these products targets for such schemes. Red flags or indicators of fraud in OTC securities may include, but are not limited to, a lack of real business operations, unexplained increases in stock price or trading volume, or frequent changes in company name or type of business.
- Trading Restrictions. Because OTC securities are traded on different market systems and with different rules, OTC securities may be more susceptible to regulatory trading halts and other trading restrictions at both the issuer level or through us. OTC securities may become temporarily or permanently unavailable for trading at any time, with or without notice from applicable regulatory and/or self-regulatory organizations or the Company. Additionally, the Company reserves the right to restrict certain order types and trading strategies in OTC securities for your protection or our risk mitigation. The Company may restrict the availability of all or certain types of market orders in OTC securities, which may result in poor executions or executions significantly away from the quoted market at the time of order entry due to volatility. Short sales in OTC securities are not permitted.
- Unknown Risks. You understand that the Company may not be able to predict and describe all of the special trading risks that could arise with trading these products. Therefore, you agree NOT to hold the Company, its affiliates, and its employees responsible for any risks you undertake by transacting in such products.
If you would like to learn more about OTC securities, visit our Transactions in Over-the-Counter Equity Securities page, or refer to the Help Center.
2. Account Holder/Authorized Agent Acknowledgment
By choosing to transact in OTC securities, you understand and acknowledge the following:
i. You understand the risks of the product, including the potential loss of the entire amount invested, are acting as a self-directed investor, and, accordingly, are capable of making your own investment decisions.
ii. Although the Company identifies these investments on its web and mobile platforms and provides certain education about them, it does not provide any investment advice nor make any recommendations regarding OTC securities to Self-Directed Accounts. As such, you have not relied, nor will you rely, on the Company or its representatives for any information or guidance in determining the appropriateness of the product for your Self-Directed Account.
iii. This acknowledgement applies to all purchases of these products for all Self-Directed Accounts, and failure to provide this acknowledgement may result in your being prohibited from purchasing the product.