Levitt Likely to Fault Day Trading at Hearing

Securities and Exchange Commission Chairman Arthur Levitt is expected to criticize the day-trading industry at a Senate hearing today, saying recently completed investigations of some firms show “lax compliance” with securities laws that raise “serious concerns.”

The SEC has recently finished 40 examinations of day-trading firms to determine whether they skirt rules governing, among other things, “short” selling of stocks and the extension of credit to customers.

“Our preliminary findings indicate that many of these firms have extremely lax compliance practices,” Levitt is scheduled to say in prepared testimony. “The inability of some firms to monitor their adherence with capital, margin and the short-sale rule, or to maintain adequate books and records, raises serious concerns.”

The Governmental Affairs Committee’s permanent subcommittee on investigations is holding the first congressional hearing on day trading--a sometimes controversial practice in which individual investors make dozens of rapid-fire trades a day in pursuit of big profits--to determine whether large numbers of people lose money and whether additional regulations are needed.

The subcommittee, chaired by Sen. Susan Collins (R-Maine), is looking into whether day-trading firms overstate the profitability of their customers and mislead newcomers with deceptive advertising.

The National Assn. of Securities Dealers, the brokerage industry’s self-regulatory trade group, has proposed a rule that would require brokerages to extensively screen customers to ensure they are “appropriate” for day trading.

Mary Schapiro, head of the NASD’s regulatory arm, is scheduled to testify, as are representatives for the North American Securities Administrators Assn., which published a report highly critical of day-trading firms last month.

In rebuttal, the Electronic Traders Assn., a day-trading group, is expected to argue that an appropriateness rule is unnecessary. But if one is adopted, it should be patterned after an NASD rule governing disclosure for options traders, the ETA says.

The day-trading industry would grudgingly accept an appropriateness rule, similar to that covering the options industry, that requires firms to assess the experience and general background of newcomers before they sign up to trade, said ETA President Jim Lee. But it does not want to be forced to assess suitability on a continuing basis.