U.S.: Web Investors Still Need Stronger Protection

Although online trading has experienced sharp growth since 1999, a report released Monday by the U.S. General Accounting Office (GAO) said that many Internet brokerages are still not disclosing basic information about legal protections and potential risks to consumers, hampering their ability to make informed investment decisions.

“Investors trading online continue to file a substantial number of complaints that indicate concern about failures and delays in processing orders, and a lack of knowledge about trading and investing,” concluded the GAO, the investigative arm of Congress.

However, the panel noted that the ratio of complaints to overall trades declined over the two-year period it analyzed.

During the first quarter of 1999, the U.S. Securities and Exchange Commission (SEC) received an average of four complaints for every 100,000 online trades. By the fourth quarter of 2000, online traders lodged an average of one complaint for every 100,000 trades.

Along with the drop in complaints, the GAO said it also found a decrease in the number of online trades, slipping to 900,000 per day in the fourth quarter of 2000 from 1.24 million in the first quarter. Conversely, the number of online trading accounts continued to grow, nearly doubling from 8.6 million in the first quarter of 1999 to more than 17.4 million in the second quarter of last year.

Surveying Risk

The latest study — which was commissioned by U.S. House Energy and Commerce Committee members John Dingell (R-Michigan), Edolphus Towns (D-New York) and Edward Markey (D-Massachusetts) — was undertaken in response to complaints that the SEC was not moving quickly enough to implement previous recommendations made by the GAO in May 2000.

At that time, the GAO’s Financial Markets and Community Investment division reported that brokerages with online trading systems failed to consistently provide information on their Web sites about several key investor protection areas, including privacy, trade execution, margin risk, trading risk, and the potential for service disruptions.

Delays, Delays

In addition, the GAO found that Internet brokerages were not required to reliably record data about outages and delays of their online trading systems.

The GAO advised the SEC to ensure that brokers with online channels take measures to resolve these problems. However, although securities regulators have initiated rules or other forms of guidance on nearly all of the GAO’s recommendations, the GAO said that in some instances, no compliance dates have been set or the actions have yet to be completed.

Common Complaints

The GAO also noted that the nature of online customer complaints changed between 1999 and 2000. While difficulties securing access to their online accounts remains a common problem among investors, complaints involving margin position sellouts — in which stocks are sold without investor permission — increased dramatically.

The study emphasized that the rise in margin complaints does not necessarily equate to an increase in violations, since many online traders do not fully understand margin agreements.

However, the GAO commended efforts by the SEC and other regulators to issue guidance on educating investors about the potential pitfalls of online trading. The study also said that many of the trading firms interviewed reported making hefty investments during the past year to guard against system outages and delays.

In this latest study, the GAO reiterated many of its earlier recommendations. House lawmakers have asked the GAO to submit a follow-up report in May 2002.

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