Securities Chief Slams TV Ads on Online Investing
Securities and Exchange Commission Chairman Arthur Levitt blasted the booming online brokerage industry Tuesday, saying the advertising campaigns of some firms risk misleading the public by portraying novice investors getting rich quick.
In a speech to the National Press Club in Washington, the nation’s top securities regulator said some online brokerage TV ads “more closely resemble commercials for the lottery” than for careful investing with the ever-present risk of loss.
“When firms again and again tell investors that online investing can make them rich, it creates unrealistic expectations,” Levitt said. “I’m worried these commercials . . . step over the line and border on irresponsibility.”
The SEC chief laid out a number of initiatives aimed at raising awareness among brokerages and investors alike about prudent practices regarding online investing and trading.
Online brokerages have seen their business soar over the last year as millions of individual investors have opened accounts that let them easily trade stocks and mutual funds via orders sent over the Internet, for commissions as low as $8 per trade.
In turn, those small investors have played an increasingly visible role in the soaring stock market, which saw the Dow Jones industrial average close above 11,000 on Monday for the first time.
The dramatic fluctuations of Internet-related stocks in recent months, in particular, have been fueled largely by aggressive individual investors trading actively in search of fast profits.
There are now 7.8 million online brokerage accounts, up from 4.1 million at the end of 1997, according to Gomez Advisors, a Concord, Mass.-based consultant. That figure is projected to rise to 14 million by the end of next year.
A report released Tuesday by Bill Burnham, an analyst at Credit Suisse First Boston, shows that online investors are trading at a frenzied pace. The number of shares traded online ran at a 40% higher clip in April than in the first quarter, the report said.
Heavy TV and print advertising by online brokerages such as E-Trade, Ameritrade and Discover Brokerage has been key to attracting many small investors into the online-trading arena.
Many people, of course, are simply using the Internet to make trades or investments they previously made by calling a broker. Regulators acknowledge that the Internet offers convenience and speed, and they do not take issue with the general idea of using the Internet to invest.
Their concern is whether novice investors understand the risks entailed in virtually any stock investment--and whether online brokerages’ marketing campaigns ignore those risks.
In his speech, Levitt referred specifically to a pair of TV commercials. In one, run by Discover Brokerage, a tow truck driver picking up a stranded motorist indicates that he bought a tropical island with his investment profits earned trading online.
In the other ad, by Ameritrade, a woman jogging with her friend rushes home to trade stocks, breathlessly announcing seconds after logging on that she has just sold a stock at a $1,700 profit.
“The other woman sheepishly replies by admitting she invests in mutual funds,” Levitt said. “What’s the implication of the message here? Has it become passe to invest for the longer term and to diversify your risk?”
Discover Brokerage said in a statement Tuesday that it supports Levitt’s “vision of an informed investing public,” but it refused to comment on its ads.
Ameritrade executives did not return calls seeking comment.
Though the ads are intended to be humorous, some have gotten “a little bit dangerous,” said Dan Burke, a senior analyst at Gomez Advisors, which tracks online investing. “My concern is the ads convey that it’s not hard to make money in the market,” he said.
Stephen Cone, president of marketing at Fidelity Investments, which recently unveiled an ad campaign for its online brokerage, said most ads are “tongue in cheek” and that few investors are likely to believe they’ll end up owning tropical islands by trading stocks online.
But Levitt, citing advertising that “I think may be cute but is also demeaning,” said he has asked the National Assn. of Securities Dealers, the securities industry’s chief self-regulatory agency, to convene a “round table” meeting on the advertising issue. He also asked Jay Chiat, founder of the TBWA Chiat Day ad agency, to review industry ads to consider the message that investors are getting.
In addition, Levitt said he has sent a letter to about 120 online brokerages, asking them to step up their efforts to better disclose to customers the risks of investing.
Mary Schapiro, head of the NASD’s regulatory unit, said in a speech Tuesday that her agency may begin screening online trading ads before they’re aired, according to Bloomberg News.
The NASD currently reviews some ads, mostly after they begin airing, a spokeswoman said. The NASD has the power to require changes in any ad.
Despite the scrutiny over advertising, Levitt said he doesn’t foresee the need for heavy new regulation of online brokerages. He also said that individual investors must be responsible for themselves, and invest cautiously.
“What must occur now is a greater recognition by investors of their individual responsibility,” Levitt said. “I’m often surprised by investors who spend more time deciding what movie they’ll rent than on which stock to buy.”
Nonetheless, the SEC is taking other steps to protect online investors, Levitt said:
* The agency is conducting on-site inspections of both online and specialized “day-trading” brokerages to ensure that rules on customer protection are being followed. The agency already has conducted inspections of firms that account for a combined 80% of the online market.
* The SEC has formed an advisory committee to study broad issues related to online investing and has developed a Web page to educate investors (https://www.sec.gov/invkhome.htm).
* The SEC is asking Congress for an extra $11 million to step up its efforts to combat securities fraud over the Internet. In the next two weeks, the agency will announce a crackdown on illegal stock promotion over the Internet, Levitt said.
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Walter Hamilton can be reached by e-mail at walter.hamilton@latimes.com
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Online Surge
The number of online brokerage accounts is expected to rise 40% this year and another 71% by 2001. Estimated number of accounts, in millions:
Estimated 2001: 18 million
Source: Gomez Advisors
