SEC Considers Online Brokers’ Obligations
Brokerages that offer stock trading on the Internet may sometimes have a legal responsibility to ensure that their clients’ investments are suitable for their financial goals and level of experience, according to a report issued Monday by a member of the Securities and Exchange Commission.
The report by SEC Commissioner Laura Unger was released as New York’s attorney general said the securities industry will spend $500,000 to educate consumers about the benefits and pitfalls of Internet trading.
Online brokers have resisted the notion that they may have “suitability” obligations like those imposed on traditional stockbrokers, saying they generally only fill trading orders generated by their clients. Unger’s report, though, says technology that lets Web sites customize information for individual clients has raised questions about when online brokerages should screen the investments they may recommend.
“In the online environment, pinpointing what constitutes a recommendation can be difficult,” said Unger’s report, presented to other commissioners. “As data-mining technology enables online firms to customize information and provide it to customers, this question becomes even more pressing.”
Unger’s report lays out recommendations and issues for study that could provide the basis for action to protect clients of online brokerages. It doesn’t, though, specifically call for new regulations, which she said “may still be premature.” The SEC may issue guidelines instead.
Complaints about difficulty accessing accounts and failures or delays in processing orders were the most common complaints compiled by the SEC in the first three quarters of this year. The commission received 504 complaints about accessing accounts, 393 about failures or delays in processing orders and 247 about errors in processing orders, according to Unger’s report.
The report also outlines situations that may trigger obligations on the part of brokers to assess the suitability of a client’s investments. The report also recommends that the SEC expand examinations of online brokerages to include a review of what services firms provide to their customers based on data gleaned from their online sessions.
Online firms have said they merely execute trades with little broker interaction. Unger’s report disagrees, saying new technology is blurring the distinction between mere order-taking and recommendations about investments.
A suitability obligation may kick in, for example, when an Internet brokerage firm uses electronically gathered information about a customer’s past transactions to alert them to similar investment opportunities when they click on the firm’s Web site, the report said.
The report also recommends that the SEC consider:
* requiring “market centers” such as stock exchanges to make sure that uniform information is available on factors that could determine the best way to execute a customer’s order;
* requiring broker-dealers to periodically test contingency plans for dealing with outages and other problems with their systems;
* requiring plain-English disclosure of the risks of systems delays or outages;
* requiring brokerage computers to have “sufficient operational capability”;
* evaluating online firms’ information-collection practices.
Meanwhile, the Securities Industry Assn., a trade group, will collect money from Internet brokerages for a public education campaign, which will include full-page newspaper ads and educational materials developed by the industry and New York Atty. Gen. Eliot Spitzer’s office.
Spitzer said the industry has been “responsive and cooperative.”
