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Chairman Levitt said, "What must occur is
a greater recognition by investors of their individual responsibility.
Regardless of how frequently an on-line investor trades or invests, the
opportunity to make trading decisions comes with the responsibility to
take the time to understand the implications of those decisions."
Chairman Levitt cited four common misconceptions that
investors should be aware of:
1. Personal Computers Are Not Directly Linked
to the Markets: Chairman Levitt said,
"Although the Internet makes it seem as if you have a direct
connection to the securities market, you don't. Lines may clog; systems
may break; orders may back-up."
2. The Virtue of Limit Orders: Chairman Levitt said, "Price quotes are only for a
limited number of shares; so only the first few investors will receive
the currently quoted price. By the time you get to the front of the
line, the price of the stock could be very different. One way for
investors to protect themselves from a rapid change in the price of a
stock is to use a limit order rather than a market order. A limit order
buys or sells a security at a specific price; the order is executed only
if the market price has not moved past a certain level."
3. Canceling an Order: Chairman
Levitt said, "Another misconception is that an order is canceled
when you hit `cancel' on your computer. But, the fact is it's canceled
only when the market gets the cancellation. You may receive an
electronic confirmation, but that may only mean your request to cancel
was received – not that your order was actually canceled."
4. Buying on Margin: Chairman Levitt said,
"If you plan to borrow money to buy a stock, you also need to know
the terms of the loan your broker gave you. This is called margin. In
volatile markets, investors who put up an initial margin payment for a
stock may find themselves required to provide additional cash if the
price of the stock falls."
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Chairman Levitt said, "Firms should
remember that while on- line trading may place significantly more
responsibility in the hands of investors, it doesn't absolve the firms
of their obligations to customers. As the Internet rapidly becomes more
and more an integral part of investing for more and more Americans, I
ask brokerage firms to help protect the integrity of this medium for the
long-run."
The Chairman noted four areas upon which brokerage
firms should concentrate:
1. Practice What You Preach: Chairman Levitt
said, "Firms need to ensure that their ability to provide effective
customer service keeps pace with their growth. If you're marketing your
firm to new customers, you better be able to provide them service when
they do business with you."
2. Obey Best Execution Rules: Chairman Levitt
said, "All firms – whether on-line, discount or full service –
have an obligation to ensure the best execution of their customers'
orders. That's not just good business practice, its a legal obligation.
I have directed our examiners to focus in on firms' order routing
practices in an examination sweep. I urge all firms now to review their
practices to ensure they're doing right by their customers."
3. Speak Plainly, Disclose More: Firms need to
communicate more clearly and meaningfully with their customers. Chairman
Levitt said, "Talk in realistic terms; let them know their options;
and focus on the quality of your disclosure in your agreements and the
quality of customers' account statements, instead of just the
acceptability of them."
4. Use Responsible Advertising to Create Realistic
Expectations: Chairman Levitt said, "Some on-line firms'
advertisements more closely resemble commercials for the lottery than
anything else. When firms, again and again, tell investors that on-line
investing can make them rich, it creates unrealistic expectations. In a
market environment where many investors are susceptible to quixotic
euphoria, I'm worried these commercials step over the line and border on
irresponsibility.
Chairman Levitt asked the NASD regulatory unit to
hold a roundtable on advertising to add to the work they're already
doing to improve fairness in advertising. He said, "I call on all
of the firms to join in this effort. I've also asked Jay Chiat, former
head of the advertising firm Chiat Day, to work with the NASD and
industry leaders to consider the public interest issues this type of
advertising implicates."
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Chairman Levitt said, "As technology
recasts our markets and helps attract more and more investors than ever
before, the SEC's mission to protect investors and maintain market
integrity remains absolute. We are prepared to do whatever is necessary
to help protect investors."
He added, "Last year, we created the SEC's
Cyberforce – a specially trained nationwide corps of 125 attorneys,
accountants and analysts tasked with searching for Internet fraud. This
year, we're increasing that number by nearly 100 percent. Next year, the
Commission is seeking an $11 million increase to expand our efforts to
combat fraud – including Internet fraud. And, with the support and
insight of Congressional and Administration leaders, we will continue to
step up our efforts in the future."
Chairman Levitt outlined the following steps the SEC
is taking to protect investors and sharpen its understanding of emerging
technologies:
1. More Internet Fraud Cases to Be Brought:
Chairman Levitt said, "In the next two weeks, the SEC's Enforcement
Division will present a number of cases charging fraudulent offerings
over the Internet. These cases would charge issuers and promoters with
making false claims about companies or offering investments in entirely
fictitious companies. We have also been working with the FBI on a
project called `Operation InvestNet' – a nationwide initiative to
address fraudulent securities activities taking place over the
Internet."
2. Scrutiny of On-line/Day Trading Firms Will
Continue: Chairman Levitt said, "The SEC's Office of Compliance
Inspections and Examinations will continue to inspect firms offering
on-line trading. We've already conducted inspections of firms that
represent 80 percent of the market share. Based on our initial findings,
I sent a letter this morning to the largest of the on- line brokerage
firms asking them to improve the quality of their disclosure. The SEC
and the self-regulatory agencies are also inspecting all of the
brokerage firms that specialize in day trading."
3. Creation of Advisory Committee on Technology:
Chairman Levitt announced the formation of a formal SEC public-private
sector Advisory Committee on Technology. The Advisory Committee's
mandate will encompass not only how the Commission might better leverage
its resources to protect investors and safeguard market integrity, but
also to examine issues specifically relating to on- line trading.
Chairman Levitt said, "I have asked General Ken Minihan, former
head of the National Security Agency, and Bran Ferren, a true leader in
technology, to lead this effort in lending cutting edge expertise to the
SEC."
4. New Investor Education Web Page Unveiled:
Chairman Levitt announced that the Commission has created a new Investor
Education Web Page, located at http://www.sec.gov/invkhome.htm.
It includes detailed information and tips on on-line investing, how to
detect fraud both on and off the Internet, and other important
information on saving and investing.
5. Chat Rooms to Link to SEC Web Site: Chairman
Levitt said, "Chat rooms, which increasingly have become a source
of information and mis-information for many investors, have been
compared to a high-tech version of morning gossip or advice at the
company water cooler. But, at least you knew your co-workers at the
water cooler. For the future sake of this medium, I encourage investors
to take what they see over chat rooms – not with a grain of salt –
but with a rock of salt."
He added, "I've asked the major Internet
providers who host these chat rooms to place a link to the SEC's website
where investors can learn more about on-line investing and file a
complaint with us if necessary. I want everyone in a chat room to know
that if someone is taking advantage of the technology, you have the
opportunity to shine the light on it. Think of it as neighborhood watch
on the Internet. With the help of investors, we can get those people who
have only one motivation – to ruthlessly make money at the expense of
others – out of our communities." Chairman Levitt thanked Senator
Susan Collins for drawing attention to this idea through a series of
hearings earlier this year.
Chairman Levitt also thanked President Clinton,
Senator Judd Gregg, and Rep. Harold Rogers for supporting additional
resources for the SEC as it meets the challenges posed by the Internet.
Chairman Levitt also thanked Senator Charles Schumer
for his leadership on this and other investor-focused on-line trading
issues.
http://www.sec.gov/news/levnpc2.htm
The series "INTERNET Corner" which was to begin with this
issue has been delayed so that we could bring you this important message
from the Chairman of the Securities and Exchange Commission (SEC) Arthur
Levitt .
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Nothing herein is to be construed as a
solicitation of any transaction. The information presented has been
obtained from sources considered to be reliable, but it is not purported
to be complete or without error. Freedom Investments Inc. and Fahnestock
& Co. Inc. and/or the officers and directors, and/or members of
their families, may at times have positions in any securities mentioned. |
