Where are those certs?: "SEC's Richards Wants Compliance at Internet Speed-Mutual fund and brokerage firms must ensure that customer orders and their own compliance procedures move at Internet speed, according to a senior U.S. Securities and Exchange Commission official.
At a time when one-third of securities are trading online, investors are
demanding reliable, lightening-quick service from fund companies, investment
advisers and brokers, Lori Richards, director of the SEC's office of
compliance, inspections and examinations, said Monday in remarks at a
regulatory conference in Miami.
"To keep their confidence, compliance performance will have to be as fast and
as effective as the rest of the new economy," according to a text of Richards's
speech, which was released in Washington. She gave the usual disclaimer that
her remarks reflect her own views, not those of the SEC itself.
For starters, Richards urged online brokers to strive for "five nines"
reliability, with systems up and running 99.999% of the time, and to spend as
heavily on servicing existing clients as they do to attract new ones.
"If we can achieve five nines operational reliability, industry wide,
investors are going to be much more confident doing business in the Internet
economy," Richards said.
Although online trading is relatively new, operational reliability isn't,
Richards reminded her audience. In the 1960s, when a back-office crisis buried
Wall Street brokers in paper, the SEC warned companies not to accept orders
they couldn't promptly fill, a concept that still holds true in the Internet
era, Richards said.
"If you hold yourself out to the public and accept business that you cannot
consummate, it doesn't matter that you're choking on message traffic instead of
paper traffic," Richards stressed.
Financial firms also must provide customers with the best possible execution
of orders, recognizing that speed is more important than ever, she added.
Many brokerages now have committees review execution quality and ensure
orders are sent to markets that provide the best terms, Richards noted. But,
she said companies can't just monitor markets where they routinely send orders;
they also must consider alternatives and reroute orders to them if that is
appropriate.
Payments for order flow, client referrals and other financial inducements
must not cloud a broker's judgment, she warned.
"If you route orders to the market centers that are best for you, instead of
best for your clients, you are breaching your duty," Richards said.
The SEC official also issued a warning that suitability rules apply to online
brokers who recommend investments to clients. Most online firms say they aren't
subject to the rule, but Richards said the growing use of data mining and
"push" technology could permit online brokers to offer automated, personalized
advice, putting them under the suitability rule.
Turning to investor education, Richards urged companies to do a better job
educating investors about margin, so they understand when they buy on margin -
using borrowed money - they run the risk of doubling their losses. How firms
convey that message is up to them, she added, "but it needs to be done."
Web sites are another area getting close scrutiny, Richards said, with
regulators finding inaccurate performance calculations and back-tested data
depicted as actual results. To avoid problems, Richards said firms need to
check Web site content to be sure investors aren't given an inflated view of
investment results - past or future.
Chat rooms or bulletin boards sponsored by financial firms need careful
policing as well, she added.
"If you are paying someone who is offering opinions on securities in your
chat room, you should make sure that is disclosed, or better yet, to avoid
confusion, don't do it at all," Richards advised.
Lastly, given a spate of hack attacks on Web sites, the SEC official
suggested online firms take security "very, very seriously," and consider
double-layer password protections for their Web sites. Since some
cyber-fraudsters are creating fake sites that mimic real ones, Richards also
advised companies to check the Internet regularly to be sure impostors aren't
using their company's name and reputation to defraud investors. |
