SEC Warns Online Stock Firms

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The Securities and Exchange Commission is advising online stock brokers to change their business practices, including the way they advertise online trading.


In a report released last week, the SEC warned that "aggressive" advertising could lead investors to have unrealistic expectations about the risks and rewards of investing.


"Along with the growth in online trading, there has been a surge in investor complaints related to online trading," the report said. Complaints rose from 1,114 in 1998 to 4,258 last year, primarily caused by delays or errors in processing orders as well as difficulty in accessing online accounts.


The report did not address how, if at all, the increase in people trading online balanced out the rise in complaints.


In its review of 200 small, mid-sized and large online traders, the SEC also found advertising that "may have inflated investor expectations. ... Firms should ensure that their advertising is balanced, describing the risks as well as the potential rewards of trading and investing."


Because many online investors are new to the business and rely on the information presented on the brokers' sites, the report said that firms must do a better job of educating clients about trading and investing. The sites should provide a basic explanation of securities trading and "conspicuous, plain English" disclosure about the risks of securities trading, including the possibility of systems outages or failures.


Firms also should communicate the risks of trading on margin before clients open an account. One-third of the companies surveyed do not provide any information on their sites about trading on margin, and one-quarter had incomplete data, the SEC said.


Stock brokers also should improve operational capability by evaluating their backup systems, considering dual running sites or a backup site, employing multiple Internet service providers, improving server capacity and evaluating the capability of their telephone system.


The SEC also recommended that sites improve security procedures.


"The staff observed many instances of confidential information being sent without any security measures, including account numbers, passwords, social security numbers or details of trades placed," the report said. Only one-fifth of the companies warned clients about sending confidential information via e-mail.


The report said online brokers should also take steps to prevent unintended duplicate orders, another common customer complaint that occurs when reports of cancellations are delayed significantly and the customer assumes that the initial trade was not executed. Some firms have already handled this problem by eliminating the cancel option or providing trading status screens.

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