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Thursday January 25, 6:54 pm Eastern Time
U.S. examiners critical of online brokerages
By Peter Ramjug
WASHINGTON, Jan 25 (Reuters) - A federal study of brokerages offering
online trading finds the services sometimes risk the privacy of
investors' personal information and fail to ensure customer orders
are executed at the best price.
The Securities and Exchange Commission, prompted by an explosion in
Internet trading and rising customer complaints, did a top-to-bottom
review of large, medium and small firms.
Without naming firms or taking specific action, the SEC staff report
said the online services should also examine the quality of
information they give customers, the objectivity of their advertising
and the robustness of their computer systems.
"With respect to e-mails, 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.
SEC examiners found "many brokerages" were not meeting their best
execution obligations because they sent their orders to their own
clearing houses and either did not conduct independent reviews of
execution quality or did inadequate reviews.
There are currently more than 200 broker-dealers providing online
trading services to over 7.8 million retail investors, according to
figures cited by the SEC. Those investors are making more than
800,000 trades a day.
Many of the firms examined were traditional brokerage firms that have
added Internet trading to their services, although some were formed
to provide Internet services to investors.
The SEC received more than 4,000 complaints from online investors in
the 12 months ended Sept. 30, 2000, that compared to 259 complaints
in the comparable period in 1997.
The most common gripes by online investors included failures or
delays in getting their orders processed and difficulty in accessing
their accounts, the SEC said.
"Trading online is relatively new in the brokerage industry and I
think with anything that's new it will take a bit of time for what we
think of as best practices to become common practices," Lori
Richards, who heads the SEC's Office of Compliance Inspections and
Examinations, told Reuters.
"The goal of our report is to ... hope that firms, in looking at
their online trading systems, will consider some of the issues we
raised in the report," Richards said.
The SEC said firms should evaluate their advertising to make sure
investors' hopes for riches are not inflated, and they should clearly
spell out the risks of buying stocks on margin, where money is
borrowed from a broker to buy shares and the investment is used as
collateral.
Dan Hubbard, a spokesman for Charles Schwab Corp. (NYSE:SCH - news),
the No. 1 U.S. discount and Internet broker, said: "We believe it's a
constructive report and that many of its best practice
recommendations are based on practices already in place at Schwab and
we'll continue to study the specific details."
E*Trade Group Inc. (NasdaqNM:EGRP - news) and AmeriTrade Holding
Corp. (NasdaqNM:AMTD - news), which are also among the largest firms,
did not immediately return calls seeking comment.
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