On-Line Trading:

Investor Protections Have Improved but Continued Attention Is Needed

GAO-01-858: Published: Jul 20, 2001. Publicly Released: Aug 6, 2001.

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On-line trading continues to be an important part of the securities trading market. The industry reports investing greater resources to improve the performance of their systems, and regulators have made substantial progress in ensuring that investors receive better information in key investor protection areas. However, investors trading on-line continue to file many complaints about failures and delays in processing orders. GAO believes that providing complete information on the websites of on-line broker-dealers would allow investors to make more informed investment decisions.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: Because of 9/11, the agency has been focusing on business continuity planning. According to Kelley Riley, Senior Special Counsel, Division of Market Regulation (942-0752), the Division is looking at issues involving operational capability and that this effort might help in addressing the issue of defining what an outage is. SEC's broker-dealer examination module on electronic communication and trading of December 2001 prescribes steps that broker-dealers should take, including establishing capacity estimates, periodically evaluating capacity, using reasonable efforts to notify customers, and maintaining records.

    Recommendation: To address the continuing concerns that investors have about failures and delays in processing orders, and to improve regulators' ability to assess broker-dealers' compliance with Securities and Exchange Commission (SEC) capacity guidance, the Acting Chairman, SEC should work with the industry to establish consistent and meaningful measures for outages and delays and to ensure that broker-dealers maintain consistent records of system slowdowns and outages that impact their customers. Such information could be used by broker-dealers to better inform investors about the potential for and adverse effects of delays and outages.

    Agency Affected: United States Securities and Exchange Commission

  2. Status: Closed - Implemented

    Comments: The NASDR has issued rule 2341 requiring broker-dealers that offer on-line trading to disclose on their web site in a clear and conspicuous manner a specified margin disclosure statement. In addition, according to the SEC, NASDR newly adopted rule 2210 could be interpreted as requiring disclosure of the risk of systems outages or delays, and trading risk.

    Recommendation: The Acting Chairman, SEC, should take steps to ensure that the conspicuous plain English disclosure of margin risk and the risk of systems outages or delays, and disclosure of trading risk be made on Web sites of broker-dealers that offer on-line trading. Where appropriate, such Web site disclosure would be most useful where its delivery is tailored to individual investors.

    Agency Affected: United States Securities and Exchange Commission

  3. Status: Closed - Implemented

    Comments: SEC has monitored the extent to which broker-dealers have disclosed trading risk and the risks of systems outages. Specifically, SEC reported in October 2001 that its staff had recently reviewed the public web sites of 27 broker-dealers. The review indicated that 81 percent of web sites available for staff review contained disclosures on trading risks, and 76 percent of web sites contained margin disclosures. However, 74 percent of web sites did not include disclosures to customers online the possibility of systems delays and outages. The December 2001 examination module for electronic communication and trading includes steps for examiners to review protection of investor records and information. In June 2005, SEC officials told us that exam modules now include steps to review broker-dealers' business continuity planning efforts, which also addresses the outage and delay issue. Further, SEC has determined that there is no further need for rulemaking in the outage and delay area because it is no longer as significant as it was in the "bubble" period of the late 1990s.

    Recommendation: Given the uncertainty over the ultimate impact of OCIE's recommendations to broker dealers, the Acting Chairman, SEC, should monitor the extent to which broker-dealers embrace OCIE's recommendations and other guidance on disclosing trading risk and the risk of systems outages or failures, and on protecting investor records and information. On the basis of this assessment, the Acting Chairman, SEC, should determine the need for further rule making in these areas.

    Agency Affected: United States Securities and Exchange Commission

 

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