Agreed-- AMTD down 6.5%; TWE down 6% EGRP only 3.5%
Seen this ??
Revamping e-trade rules 'premature'
But SEC Report recommends look at investor "suitability"
By William L. Watts and Emily Church,
CBS MarketWatch
Last Update: 2:52 PM ET Nov 22, 1999 NewsWatch
WASHINGTON (CBS.MW) -- A top regulator's long-awaited report on online trading issued Monday urged against drafting new rules to govern the fast-growing industry.
However, the 95-page report by Securities and Exchange Commission member Laura S. Unger recommended the regulatory body take a hard look at whether e-brokerages need to determine if certain investments are "suitable" for their customers.
"I think it may still be premature for extensive rulemaking in (the online trading) area, but the report will allow the commission to focus upon and consider the most vital issues concerning online brokerages," Unger said.
Separately, New York Attorney General Eliot Spitzer on Monday announced that the Securities Industry Association would spend $500,000 on an advertising campaign to educate investors about online trading.
New York's agreement with the SIA ends a nine-month investigation into complaints from online brokerage customers.
Volume alert
Unger, who drafted the report after a 10-month-long series of roundtable discussions with industry leaders, called on the SEC to take steps to make sure online brokers can handle rapid growth of online trading volume. Outages at various firms earlier this year drew the ire of regulators and investors, the report noted.
The report said the SEC may want to require broker-dealers to regularly test their trading and back-up systems and keep records on significant outages.
The number of online trading accounts has grown from 3.7 million in 1997 to almost 9.7 million by the second quarter of this year, the report noted. It's estimated that online trade accounted for more than 15 percent of all equity trading in the first quarter of 1999.
Unger also recommended that regulators study the impact that chat-room discussions have on individual stock prices. The report said best-execution practices, market data dissemination, investor education efforts and online privacy issues should also be put under the microscope.
The question of how to apply suitability requirements to online trading firms has been a thorny issue for regulators and broker-dealers.
Brokers that provide specific trading recommendations to customers are obligated under law to determine the suitability of recommended investments for each individual client. Discount brokers, which don't offer trading advice, are exempt from suitability requirements.
Most online brokers insist they should continue to be treated as discount brokers. The firms usually don't check on their customers' suitability beyond using basic controls on trading on margin, for example.
Yet once the industry moved to accommodate more than the hyper trader, the lines between information and recommendations began to blur. Many of the brokers, including big players like Schwab (SCH: news, msgs) and E-Trade (EGRP: news, msgs), run sophisticated data and information centers on their Web sites. Smaller e-brokers like Wit Capital (WITC: news, msgs) even have their own investment banking analysts who distribute stock recommendations.
'Data mining'
The distinction between information and recommendations has been further complicated by technological advances such as "data mining," which allow online brokers to target information to individual investors based on past trading patterns, according to the Unger report.
That said, investors may not want this information flow restricted -- "even at the expense of receiving unsuitable advice," the report added.
Industry executives welcomed the report, which followed a series of roundtable meetings between regulators and industry officials.
The regulators "are taking their time with this, and not making rash decisions and I think that's appropriate," said Bruce Zucker, president of Mydiscountbroker.com.
"But the real onus of this lies with the individual investor, who's got to take some of the responsibility for educating themselves," Zucker added. He said it's not hard to envision a future where all trading is electronic, and that means a world without brokers.
The report urges the SEC to study how data mining works, what information the products will provide, and whether customers understand that they've been given customized information.
Alternatively, the SEC and other regulators could review the information brokers provide customers when they conduct individual company reviews. The report also asked regulators to come up with industry guidelines on suitability obligations.
Chris Musto, an analyst at Gomez Advisors, a consulting firm, said the industry's rapidly changing landscape makes a re-evaluation of issues such as suitability inevitable.
The SEC recommendations "are reflective of an overall trend of the mainstreaming of Internet brokerages," Musto said. "Are the discount brokers really discounters? Or are they 'life-goal' planners as well?
"As the general investing population (invests) larger sums online, the SEC is going to become more interested in the (discount) industry, which has historically been a safe harbor from suitability (requirements)," Musto added. "The industry was going to have to change anyway and the SEC report records that fact."
New York probe
The New York state probe focused on seven online brokerages and three other "industry participants." Spitzer's office declined to name the firms and the probe didn't appear to result in any action against the firms.
Typical complaints from customers included an inability to access the brokerage sites and delays when orders to buy or sell stocks were placed, said Scott Brown, a spokesman for the New York state attorney general.
Numerous online brokerages experienced outages and related technology problems when online trading volumes soared in the second quarter this year. Trading volumes have come down since then, and some firms have upgraded their technology, but that doesn't mean the problems have been solved, Brown said.
"Complaints have gone down, and frankly, that's a result of fewer problems that consumers have been experiencing. But that's not to say that a site couldn't crash tomorrow," Brown said, adding, "Firms need to continually increase their ability to handle a great number of trades and to increase the quality (of their services)."
Spitzer's office indicated the probe could resume if the industry doesn't respond to the report's guidelines and recommendations regarding disclosure, system capacity and advertising.
William L. Watts is a reporter for CBS MarketWatch. Emily Church is New York bureau chief for CBS MarketWatch.
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