Web Brokers Protest Plan to Require Screening of Day Traders

A proposal by the National Assn. of Securities Dealers to require day-trading firms to extensively screen their customers is drawing fire from the more mainstream online brokerage industry.

Charles Schwab, E-Trade Group, Fidelity and National Discount Brokers have sent letters to the NASD opposing the plan that would force day-trading firms to assess whether the risky investment strategy is appropriate for individual customers.

Day traders are active investors who sometimes hold stocks for only minutes at a time. The screening proposal is intended to weed out novice investors with little knowledge of the stock market or those with limited savings and income.

Though the plan appears targeted at specialized on-site day-trading firms that offer training and souped-up computers, the online brokers apparently fear the guidelines may be extended to them.

The proposed rules “are too broad and ambiguous and would result in the imposition of significant and burdensome responsibilities on [online brokers] without advancing legitimate investor protection consideration,” E-Trade said in its letter. The firm added that a “suitability” requirement could hike trading commissions.

Traditional, full-service brokerages such as Merrill Lynch, Edward Jones and A.G. Edwards also sent letters opposing the plan.

Day-trading firms fear that an appropriateness rule could limit their potential clientele and leave them vulnerable to legal liability in disputes with customers.

The NASD is also considering a plan that would require day-trading firms to disclose the risks associated with the practice.

The proposals, expected to be considered soon by the NASD board, would have to be approved by the Securities and Exchange Commission.