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Re: To Regulate or not to Regulate, That is the question.
Chapman, Spira & Carson - Disscusion

From: Arthur Levitt, SEC Chairman, Thinks cyber-brokerage houses should educate their customers.
Date: 5/5/99
Time: 8:42:55 AM
Remote User:


Mr. Leavitt took a shot at indicating to a mostly "wet behind the ears" public who for the most part have given up their day jobs for a life of day-trading, that in the end, if they don't get smart real quick, they may be in substantial trouble.

He does not seem to feel that they understand the fact that the market goes two ways. On the other hand it may be difficult to impress that upon a cadre of traders that have seen it go only cascade higher in the last eight or nine years. Some of these folks should talk to those in the Thai and Korean breadlines who thought the good times would go one forever. Or maybe even their grandparents who were out of work for five or six years when the black friday hit the market in 1929.

These are extremely dangerous times and if anything, I believe Mr. Leavitt is understating his case. Robert A. Spira Chapman Spira and Carson LLC

SEC Chairman Arthur Levitt Discusses Risks and Rewards of On-Line Trading FOR IMMEDIATE RELEASE 99-43 Calls on Investors To Take Greater Responsibility and On-Line Brokerages To Better Protect Investors

Washington, D.C., May 4, 1999 – In a speech today at the National Press Club, Securities and Exchange Commission Chairman Arthur Levitt discussed the risks and rewards of on-line securities trading, urged investors to accept greater responsibility for their actions, warned on-line brokerages of the need to better inform and protect investors, and outlined various steps the SEC is taking to meet the demands of the Internet.

Chairman Levitt said, "I am not convinced it's necessary for the SEC to pronounce a totally new and radical scheme of regulation specifically tailored to on-line investing. Yet, I don't rule out the possibility that there may come a time when the SEC sees a need for new approaches to better meet the imperatives of the Internet."

Chairman Levitt said, "The SEC will do everything it can to protect and inform investors during this time of great innovation and change. Investor protection – at its most basic and effective level – starts with the investor. In this day and age, there simply is no substitute for a person's awareness and wariness."

I. Investor Responsibilities 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."

II. Brokerage Responsibilities 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."

III. SEC Responsibilities 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 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. Last update: 05/04/1999

Last changed: March 17, 2000