Brokers May Have to Disclose Computer Delays

The Securities and Exchange Commission is developing a proposal that would require brokerage firms to disclose the potential for trading-computer delays and outages and keep records of their causes, a congressional report says.

Though it may seem as if the measure is too late to do much good given the plunge in trading activity this year, it could be important in the next stock market boom--whenever that might be.

The most common customer complaint about Internet brokerages in 1999 involved people’s difficulties in gaining access to their accounts, said a report released Monday by the General Accounting Office, Congress’ research arm.

About one-quarter of the online firms examined by the SEC last year conducted no reviews of their system capabilities or had trouble answering questions about capacity, the 37-page report said.

“This is ridiculous,” Rep. John D. Dingell and two other Democrats said in a letter to Harvey Pitt, who is soon to be sworn in as SEC chairman. Dingell of Michigan, the senior Democrat on the House Energy and Commerce Committee, released the GAO report.

The SEC staff is preparing a proposal that would “establish requirements for record-keeping and disclosure of operational difficulties for all broker-dealers,” the report said.

The staff plan also might include a requirement that brokers keep written policies showing that they regularly test their systems capabilities.

As growth in Internet trading slowed last year amid a general market slump, complaints about access fell while those about handling of margin accounts rose, the report said. Complaints about brokerage delays in processing orders remained high, it said.

SEC officials have urged online brokerages to create links from their Web sites to the federal agency’s investor-education site, which carries information about the risks of online trading, the report says.

The Securities Industry Assn., a brokerage trade group, said a new rule on system capabilities would be unnecessary.

“Additional rule making in this area is inappropriate because of the inherent difficulty of defining capability, developing a one-size-fits-all measurement of capability, and the potential adverse effects of prescriptive rules on technological and business-model innovation,” the SIA said in a written statement.

The GAO disagreed. “Broker-dealers maintaining consistent records about delays and outages could better inform investors about the potential for and the adverse effects of delays and outages,” the report said.

The SEC proposed a similar rule in March 1999 that would have applied only to online brokerages. The plan was criticized as being vague. Since then, brokerages have said that they have invested heavily in their computers, and that delays and outages have declined, the GAO report said.