May 4, 1999
 
 
 

                   SEC Chief Wants Online-Trading Firms
                   To Disclose the Risks of Internet Dealing

                   By MICHAEL SCHROEDER and REBECCA BUCKMAN
                   Staff Reporters of THE WALL STREET JOURNAL

                   U.S. Securities and Exchange Commission Chairman Arthur Levitt wants
                   brokers to tell their customers that online trading can be hazardous to their
                   wealth.

                   In a major online-trading speech Tuesday, Mr. Levitt is expected to
                   discuss plans to require online brokers to disclose trading risks as part of a
                   campaign to make the industry more responsible for educating investors.
                   It's the electronic-commerce equivalent of a warning label on a package of
                   cigarettes or prescription drugs.

                   To help the SEC keep pace with Internet
                   oversight, the chairman also plans to set up an
                   advisory panel of eight to 10 Internet and
                   business-technology experts and urge
                   Congress to approve new funds to bolster
                   SEC enforcement.

                   Those funds may be on the way. Sen. Judd
                   Gregg (R., N.H.), who heads the committee
                   that oversees the SEC's budget, has proposed
                   boosting the agency's funding next year by
                   $5.5 million for Internet enforcement, a
                   congressional aide said Monday.

                   In his speech at the National Press Club in Washington, Mr. Levitt also is
                   expected to express apprehension about the quality of online firms'
                   executing of trades and about hyped advertising that he says sounds more
                   like commercials for the lottery. State regulators already are examining
                   whether some ads from mainstream online brokers create unrealistic profit
                   expectations.

                   The SEC and state regulators have become concerned about the sudden
                   popularity of individuals buying and selling stocks on the Internet. With
                   more than five million online accounts, Web trading now accounts for
                   about 30% of small-investor trading. Regulators are particularly alarmed
                   about people mimicking professionals who trade throughout the day.

                   Mr. Levitt isn't expected to call for new regulations in his speech, although
                   he hasn't ruled them out. An SEC spokesman declined to discuss the
                   speech.

                   In the past few months, the SEC and the National Association of
                   Securities Dealers, which oversees broker-dealers, have dispatched
                   examiners to scrutinize electronic trading to determine if online- and
                   day-trading firms are in compliance.

                   The reviews likely will result in some enforcement cases. Mr. Levitt had
                   wanted to disclose a day-trading case Tuesday, but the enforcement staff
                   isn't expected to announce an action for a few weeks. According to a
                   lawyer familiar with the SEC's probe, the agency hasn't yet uncovered
                   serious industrywide violations.

                   The SEC and NASD have been collecting information from firms about
                   their policies for educating customers, determining whether customers have
                   the knowledge and means for certain kinds of risky trading, and margin
                   requirements. The industry may be told to adopt the best practices to
                   educate customers.

                   For instance, the SEC has been debating whether to ask the roughly 100
                   online-trading firms to inform customers about the pitfalls of rapid online
                   trading, possibly with new disclosures in customer agreements, quarterly
                   customer statements or on firms' Web sites. Currently, firms must disclose
                   how they ensure that customers get the best and quickest execution of
                   trades.

                   Earlier this year, most big online-trading firms posted notices on their Web
                   sites warning investors about volatile market conditions and how that could
                   affect execution. Charles Schwab Corp. began including in its quarterly
                   customer statements a four-page discussion of the risks of volatile markets,
                   which the SEC and NASD could point to as a model for other firms.

                   The SEC also is considering requiring chat rooms and online firms to have
                   a link on their Internet sites directly to the investor-education portion of the
                   SEC's Web page.