E*TRADE Group (ETFC)

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SEC to Prod Web Brokers on System Warnings

By Kevin Drawbaugh

WASHINGTON (Reuters) - Internet brokerage sites are likely to be posting clearer and more noticeable warnings of possible system crashes and delays, under measures outlined in a letter from the top U.S. markets cop released on Monday.

The Securities and Exchange Commission (news - web sites) ``intends to encourage online broker-dealers to strengthen the risk disclosures made to customers on their Web sites,' said SEC Chairman Harvey Pitt in a letter to members of Congress.

The SEC's push on the issue comes after it surveyed 27 online brokerages and found 74 percent failed to alert online investors to chances of system delays and outages -- the leading source of complaints among online investors.

Most online brokerage sites tell investors about the risks of investing and buying on margin, but the SEC called the lack of adequate system failure warnings a ``significant weakness.'

``The commission is committed to ensuring that investors are protected, whether they access securities markets online or through traditional means,' Pitt said in the letter.

Online investing -- or buying and selling securities through a web-based account instead of by phone or by visiting a stockbroker's office -- peaked in early 2000 along with the technology stocks bubble. Since then, online trading is down, especially since the Sept. 11 attacks hammered the markets.

Investors executed about 770,000 trades daily through the web in the second quarter of 2001, down 5 to 10 percent from the first quarter and far below the peak of 1.4 million trades daily in the first quarter of 2000, according to JP Morgan H&Q.

Still, new online brokerage accounts continue to be opened. There were more than 19 million active U.S. accounts at the end of 2000, provided by companies such as Charles Schwab Corp. (NYSE:SCH - news), Ameritrade Holding Corp. (Nasdaq:AMTD - news), E+Trade Group Inc. (NYSE:ET - news) and TD Waterhouse Group Inc. (NYSE:TWE - news).

Studies have shown that complaints about online brokerages have fallen since early 1999, but the most common complaint consistently involves failures or delays in processing orders and difficulties in accessing an account.

E+TRADE SITE WARNS OF SYSTEM RISK

Clicking on ``Tell Me More' at Ameritrade's home page leads to a page with a heading for ``Services.' That page leads to another with a heading for ``Ways To Trade.' Clicking under that heading on ``Online' leads to a page with the following footnote at the bottom in small print: ``Market volatility and volume may delay system access and trade executions.'

``Our system is very reliable. We have many things in place, such as a redundant data center ... So we have everything backed up,' said Donna Kush, an Ameritrade spokeswoman.

The E+Trade home page has a heading called ``Important Message about Risk.' Clicking on it opens a page that contains warnings about the risks of investing and this statement:

``Also, there is the risk that you could encounter system failures due to your computer systems, your service provider's systems, or even our own. Please be aware that in the event of any system failures, you generally have other means available to you to access your E+TRADE account-by telephone and interactive voice response.'

John Metaxas, spokesman for E+Trade, said, ``That language is on our site and it's been there for some time.'

The risk of system failure or delay is just one of several facing online investors, said Barbara Roper, director of investor protection at the Consumer Federation of America.

``The risk that you won't be able to get your trade through if the system is delayed can create potential costs that far exceeds the cost of the commission,' Roper said. ``Those risks need to be clearly and prominently disclosed. If the SEC is moving in that direction, then that's a positive step.'

Pitt said the SEC intended to push online brokerages to keep better records on outages and delays and to post clearer and more prominent warnings of their risks.

The commission will monitor industry performance and determine if more rules are needed, Pitt said in the letter addressed to Rep. C.W. Young, the Florida Republican who chairs the House of Representatives Committee on Appropriations.

Pitt's letter came in response to a report issued this summer on online brokerages by the General Accounting Office (news - web sites), the investigative arm of Congress.

http://dailynews.yahoo.com/h/nm/20011105/wr/financial_sec_online_dc_2.html