Tech Center

New SEC Report Details
'Suitable' Online Trading

By REBECCA BUCKMAN
Staff Reporter of THE WALL STREET JOURNAL

Online stock-trading firms could have a legal responsibility, in some cases, to
make sure investments made by their customers are "suitable" for them, a
long-awaited report from the Securities and Exchange Commission will suggest.

The issue is a thorny one for Internet-based trading firms, which traditionally
have said suitability obligations usually don't apply to them because they simply
execute trade orders and don't recommend specific stocks. But the line
between recommendations and order taking has blurred recently as Web
brokers serve up more investment advice and high-end stock research over the
Web -- meaning firms could be subject to more investor-arbitration complaints
when investments go bad.

The SEC's 100-page report about online trading, written by SEC
Commissioner Laura Unger after nearly 10 months of work, is expected to be
released Monday.

Although it doesn't propose specific regulations for online brokers, the
document -- which deals with a range of issues, from systems breakdowns to
the nitty gritty of trade-order executions -- offers a raft of recommendations for
how brokerage firms, the SEC and other regulators can better manage the
fast-growing industry, people familiar with the report say.

More Information May Be Required

Some of the recommendations could require new rules from industry regulators.
They include requiring Web brokers to give the public more information about
technical problems, such as Web-site outages and for brokers to regularly test
their computer systems and set up contingency plans for breakdowns, one
person familiar with the report says.

The report also recommends that "market centers," such as stock exchanges,
give online brokers better, more-accurate information about stock prices and
market conditions so brokers can route orders to the best execution points, the
person says. The complicated issue of "best execution" has been raised recently
by SEC Chairman Arthur Levitt, who also has criticized arrangements through
which online brokers sell customer orders to specific trading firms to execute.

An SEC spokesman declined to comment on the report, which is expected to
be posted on the SEC's Web site (www.sec.gov1) Monday.

New York Also to Issue Report

Meanwhile, the New York state attorney general's office has scheduled a news
briefing for Monday morning to discuss its own report on online trading. That
report is expected to focus on the technical glitches and systems-capacity
problems that continue to plague many Web brokers.

The New York study also is expected to discuss the heavy advertising spending
by many online firms -- and whether those companies are simultaneously laying
out enough cash to beef up their computer systems to handle the hordes of new
customers brought in by the ads. A spokesman for state Attorney General Eliot
Spitzer declined to comment.

Ms. Unger's report, titled "Online Brokerage: Keeping Apace of Cyberspace,"
will touch on other issues, including Internet chat rooms, privacy rights for Web
investors, and the fees charged online brokers by the New York Stock
Exchange and the Nasdaq Stock Market for real-time stock quotations.
Industry representatives discussed those issues with Ms. Unger during three
roundtable meetings held earlier this year in New York, San Francisco and
Washington.

But Internet-trading firms may be most interested in Ms. Unger's thoughts on
suitability. Though her report doesn't lay out any hard-and-fast rules for Web
brokers, it does give several hypothetical scenarios and analysis about whether
brokers could face suitability obligations in each case, the person familiar with
the report says.

In one case, the person says, an investor uses a common, online
asset-allocation calculator to type in personal financial information -- such as
income and tolerance to risk -- and receives specific stock recommendations as
part of the model portfolio. Ms. Unger concludes that this would likely trigger a
suitability obligation, the person says.

At a public forum earlier this month in Washington, Ms. Unger also said some
Web firms are developing technology that can automatically send information
about specific stocks and products to customers, such as through an e-mail
message, based on their previous investing behavior. Such technology could
further blur the line between what is a recommended investment and what isn't,
she said.

-- Michael Schroeder and Ruth Simon contributed to this article.

Write to Rebecca Buckman at rebecca.buckman@wsj.com2
 

URL for this Article:
http://interactive.wsj.com/archive/retrieve.cgi?id=SB943224037565521207.djm

Hyperlinks in this Article:
(1) http://www.sec.gov
(2) mailto:rebecca.buckman@wsj.com
 

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