On-Line Trading: Better Investor Protection Information Needed on Brokers' Web Sites

As of November 2010, SEC's Office of Compliance Inspections and Examinations had completed its examinations of 20 or more broker-dealer firms conducted to assess their compliance with tracking and reporting outages and website capacities. These reviews indicated that firms were generally monitoring outages and delays and were expanding capacities sufficiently to handle even recent peak traffic days. They also found that brokers were making disclosures on their websites about the potential for outages. As a result, although the SEC staff saw a possibility in the future for creating a rule in this area, such a rule did not seem warranted now given the level of appropriate practices currently in use at firms. In addition, with the assistance of a recently-hired information technology specialist, they anticipated continuing to take steps in future examinations to ensure that firms were maintaining good practices regarding outages and website capacity.

As of July 2002, various SEC and Financial Industry Regulatory Authority (FINRA) rules that apply to all broker-dealers requires that firms must provide disclosures to their customers and post conspicuously on their websites regarding the risks and other information that apply to online trading. First under NASD Rules 2341, firms must disclose to customer and post on their websites information about the risk of margin trading. The risks that must be disclosed include that customers can lose more funds than are deposited in the margin account, that the firm can force the sale of securities or other assets in the accounts, securities or other assets may be sold without contacting the customer, customers are not entitled to choose which securities or other assets are liquidated or sold to meet a margin call, the firm can increase its maintenance margin requirements at any time and is not required to provide advance written notice of such, and customers are not entitled to an extension of time on a margin call. In addition, NASD Rule 2361 requires firms that are promoting a day-trading strategy must furnished to each customer and post in a clear and conspicuous manner to the firm's Web site a disclosure statement that highlights various risks of such trading. These risks include being cautious of claims of large profits from day trading and that such trading can be extremely risky, requires knowledge of securities markets, requires knowledge of a firm's operations, will generate substantial commissions even if the per trade cost is low, and that trading on margin or short selling may result in losses beyond the initial investment. SEC Regulation S-P that became effective July 1, 2001 requires firms to disclose their privacy policies to their customers, including allowing such disclosures to be made on their websites. SEC Regulation NMS that became effective in August 2005 also includes disclosure requirements for broker-dealers regarding best execution practices. SEC's Office of Compliance Inspections and Examinations recently completed during the summer of 2008 a review of more about 20 firms that offer online trading to their customers and found that these firms were generally disclosing the required information covered by these rules on their websites.