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U.S. Securities and Exchange Commission

United States Securities and Exchange Commission Portals Roundtable: Relationships Between Broker-Dealers and Internet Web Sites

Securities and Exchange Commission
Room 1C30
450 Fifth Street, N.W.
Washington, D.C. 20549

Wednesday, May 23, 2001


Panel I: What's Happening in the World of Financial Portals and Internet Marketing?

Moderators: Laura S. Unger, Acting Chairman,
U.S. Securities and Exchange Commission;
Isaac C. Hunt, Jr., U.S. Securities and Exchange Commission


William Bishop, CBS MarketWatch.com, Inc.
Nadine Grant, UBS PaineWebber Inc.
Craig Gibson/Katherine Ennis Wychulis, America Online, Inc.
Julio Gomez, Gomez, Inc.
Lawrence T. Greenberg, The Motley Fool, Inc.
Donna L. Hoffman, Vanderbilt University
R. Clark Hooper, NASD Regulation, Inc.
Phillip K. Lynch, Reuters America, Inc.
John Scheibel, Yahoo! Inc.
Gregg Sharenow, Deutsche Bank/National Discount Brokers
Fran Smallson, Intuit, Inc.

Panel II: Where Should We Draw the Regulatory Line?

Moderators: Laura S. Unger, Acting Chairman,
U.S. Securities and Exchange Commission;
Isaac C. Hunt, Jr., U.S. Securities and Exchange Commission


Brandon Becker, Cutler & Pickering
W. Hardy Callcott, Charles Schwab & Co., Inc.
Robert L. D. Colby, U.S. Securities and Exchange Commission
Michael Hogan, CSFBdirect Inc.
Jeffrey S. Holik, NASD Regulation, Inc.
Ellen L. S. Koplow, Ameritrade Holding Corporation
David Lipton, The Catholic University of America
Kevin J. Moynihan, Merrill Lynch & Co., Inc.
Andre E. Owens, Schiff Hardin & Waite
John Polanin, Jr., USB Warburg LLC
Steven W. Stone, Morgan, Lewis & Bockius, LLP
Dr. Harold P. Wittman, American Association of Individual Investors


Panel 1

Acting Chairman Unger: Welcome, everybody. I just thought you would appreciate the female touch of the flowers. Actually they were left over from a party, so don't worry. It wasn't really the government's expense for the flowers, but good afternoon, and welcome to the SEC's Portals Roundtable.

I want to thank all of you for being here today and for my colleague's participation. I am particularly grateful to the panelists for making today's roundtable possible.

The event is being webcast live over the SEC's website, so welcome to all of you out there in cyberspace.

Commissioner Carey regrets not being able to be here but promises he will listen at least once to an entire replay of today's events.

I will say that because this roundtable is being webcast, if you could speak directly into the microphone and avoid speaking or having more than one person speak simultaneously, that would be very helpful to the people listening who aren't in the room.

As you all know, online trading has increased significantly over the last several years and a growing number of investors now manage their finances through online accounts and Internet portals that act as gateways to broker- dealers.

The portal issue, as many of you in the room probably know, has been of great interest to me for some time. My November 1999 Online Brokerage Report highlighted this issue and recommended that the Commission consider various types of compensation arrangements between broker- dealers and unregistered entities that would allow these entities to maximize the advantages and efficiencies of technology and Internet advertising models while still taking investor protection concerns into account.

Portals have evolved considerably since the roundtables in 1999 and particularly in the last year. The purpose of today's roundtable is to better inform the Commission on the types and extent of the services available to investors on the Internet.

We are also interested in learning more about the types of marketing and advertising relationships that exist in the Internet context both within and outside the financial services area.

This will be the focus of our discussion on the first panel, and I want to emphasize that our discussion, particularly of the various marketing arrangements, is very general and abstract and isn't meant to put anyone on the spot in terms of their own particular arrangements. We are not intending to elicit any proprietary or sensitive information from any of the panelists.

The focus of the second panel will be on the legal issues. Enough from me. Who I really want to hear from today are the panelists, and what I would like to do, after giving my colleague an opportunity to make a few comments, is to go around the room and just have each of the panelists introduce themselves and maybe make two to three minutes of comments and then we will turn the time, the mike, and the video presentation over to Professor Hoffman, who will give us an overview of online marketing and online advertising, and she will review the types of advertising and some of the key pricing models.

So with that, Commissioner Hunt.

Commissioner Hunt: Thank you, Madam Chair.

Good afternoon, ladies and gentlemen. It is a pleasure to be here. I have very little to say. I want to hear what you have to say. These are growing and important issues and will be critical issues for the Commission to understand tomorrow and going forward from then, so I look forward to hearing what you have to say about where you think we are now, what are the regulatory implications for the Commission, and where do we expect the whole Internet and portal development area to go in the future. So thank you and welcome. Thank you.

Acting Chairman Unger: Thank you, Commissioner Hunt. Nadine, can we start with you?

Ms. Genet: Sure.

Acting Chairman Unger: You have to turn your — this is not the latest in technology up here.

Ms. Genet: Good afternoon. I am Nadine Genet. I am the director of marketing at UBS PaineWebber, and marketing for us includes online services as well as offline services.

Our point of view in terms of marketing on the Internet is really focused on how it supports our business model, which is the financial advisor and client relationship, so we really believe it is a supportive relationship.

We have everything geared toward that financial advisor relationship, so therefore whether it is on our public website or on our online services, the role of the advisor and all of the information and all the services are done to support that relationship.

That is how we market it and that is how we use it in terms of our business model, so it is intrinsically linked to how we view our clients and their needs based on the information and the services that they want.

Acting Chairman Unger: Thank you, Nadine. Mr. Bishop — William or Bill, I am not sure.

Mr. Bishop: Bill Bishop from CBS MarketWatch.

First, I would like to thank the Commission for giving MarketWatch the opportunity to participate in this very important discussion today.

CBS MarketWatch is at its heart a financial media company along the lines, albeit a lot smaller, of Dow Jones or Reuters. We employ about 100 journalists to deliver news on the markets in real time. We strive to be a source of unbiased information, and we in no way recommend securities to our readers or perform any of the functions of a broker- dealer.

I would just like to make three brief points.

To the topic at hand, CBS MarketWatch has entered into a handful of pay-for-performance compensation arrangements with some of the online brokers. We have received compensation for new account generation but not for orders placed.

We don't like these deals from a business perspective but there's tremendous, and I would say increasing, pressure from the brokers to establish these types of arrangements.

Second, as part of this discussion, I think it is very important that the Commission carefully defines what exactly a financial portal is. Not all financial websites are portals and at CBS MarketWatch we consider ourselves as much an online newspaper as a portal.

We do not offer things like account aggregation or seamless integration to trading screens on online brokerage sites as some other sites may do.

If you look at us from the perspective of an online newspaper and decide more regulation is needed, I would have to ask why then would those regulations not be extended to also include traditional publications like The Wall Street Journal, Barron's, The Financial Times, or The New York Times.

I think doing so would obviously raise some important First Amendment issues.

The third point is that with over 8 million readers each month, CBS MarketWatch plays a very important role in leveling the playing field for individual investors by providing them access to information similar in quality and quantity to what Wall Street professionals have enjoyed for decades.

Regulation as a broker-dealer would hamper our ability to inform and educate the millions of individual investors in this country, and we believe it would do them a significant disservice. Thank you.

Acting Chairman Unger: Thank you very much. Clark.

Ms. Hooper: Thank you. I am Clark Hooper, and I am Executive Vice President for NASD Regulation in the strategic programs arena.

That encompasses advertising regulation. In that venue we regulate all of the communications with the public that are made by NASD member firms.

We began confronting many of the concerns that were so well articulated in Commissioner Unger's report several years ago, and this is a trend that has not diminished in any respect, especially as more and more investors have become interested in doing online investing.

There is absolutely no doubt in our minds that online broker-dealers face a greater number of rules and regulations with respect to the content of their websites than do other financial website operators.

As a self-regulatory organization, the primary concern of NASD Regulation is the protection of investors, including protection from fraudulent or misleading communications that are made through the Internet.

We are equally concerned that parties that are offering the same products and services compete on a level playing field.

I will later on go into a brief description of some of the restrictions that NASD member firms are subject to and the types of regulations that their Internet websites must comply with, and so I won't go into that now, but I think you will understand why we are particularly concerned that some of the areas that are out there, so to speak, are treated differently and we will be very interested in hearing the discussions that go on today in terms of what this group feels is probably the proper way to ensure the protection of investors while allowing people the opportunity to express themselves via Internet or any other medium. Thank you.

Acting Chairman Unger: Thank you, Clark. Phillip?

Mr. Lynch: Hi. My name is Phil Lynch. I am the co-CEO of Reuters America.

First of all, I would like to also say thank you for having the opportunity to come here today. It is very important to us — obviously the Internet has allowed us, has provided a medium for us to extend the information, news, financial services that we have provided for the institutional customers for — we're celebrating our 150th anniversary this year — but it has enabled us to provide that to a whole new group of users — consumers.

Our concern here today is that we balance the very good distribution that the Internet has provided for tools and information that had previously only been available to financial professionals while at the same time affording them the type of protection that they deserve.

So what seems clear to us is that over the last few years it's been a very good thing for investors to be able to access tools and information that only a few years ago were only available to professionals who paid thousands upon thousands of dollars per month to get similar types of service.

But unfortunately, somebody has to pay for that, and what seems to be becoming abundantly clear is that that business model is not yet, it's not clear as to how that's going to evolve.

There are many different business models that have been tried, from subscription to advertising, that have not yet seemed to have caught hold and many websites have gone out of business because their business models were not supported.

So it seems to come down to the individual investors, who also are not willing to pay for these services but certainly do rely on them to manage their finances.

So the question is who is going to pay for them and how, and we just want to make sure that in this time before the business model, the successful business models are clarified, that we don't cut off the options that are available to make these services available to consumers by putting, you know, regulation in place that might make it uneconomical for companies like us to provide this information to consumers, which we think is a very valuable service to them.

Until things are clarified as to the successful business models that will carry forward and continue to encourage companies like us to provide more and more tools and information to consumers, we would ask that we have some flexibility while at the same time balancing against the needs for consumer protection.

That is Reuters' position on this.

Acting Chairman Unger: Thank you, Phillip. John.

Mr. Scheibel: I am John Scheibel, the Washington Counsel and Director of Government Relations for Yahoo!.

Madam Chairman, Commissioner Hunt, Yahoo! appreciates the opportunity to appear before you today on this most important topic. We are fully committed to the protection of Internet consumers, and the investment area is no exception. Yahoo! is a preeminent Internet communications, commerce and media company offering a comprehensive, branded network of services to more than 192 million individuals worldwide each month. We are an aggregator and disseminator of information and advertising.

We neither perform the functions of a broker-dealer nor do we hold ourselves out as a broker-dealer to our users. Those who come to Yahoo! understand this and recognize that if they seek to trade in securities they must do so through a registered broker-dealer.

We therefore respectfully submit, Madam Chairman, that Internet portals such as Yahoo! should not be regulated as broker-dealers.

As an aggregator of information Yahoo!'s objective is to facilitate ease of access to the incredible resources available on the Internet. We do this in a broad array of categories and subcategories from arts and humanities to business and economy, from entertainment to health, from news and media to recreation and sports.

While we have branched out considerably since the time that our founders began the directory in 1994, our commitment to making information available has never wavered. That is what we do. The quick, easy and personally tailored availability of information is good for our users as consumers, as citizens, as patients, as parents, as students — and in any other capacity in which there is a need for such material.

In addition to our directory, as a broad-based Internet portal we have a wide variety of offerings that number close to 90 including Yahoo! Sports, Yahoo! News, Yahoo! Maps, chatrooms and clubs, movies and music, e-mail and instant messaging and dozens more.

We also run a large amount of paid advertising, the content of which is the responsibility of our advertisers.

Yahoo! Finance represents one of approximately 90 properties on Yahoo!. Yahoo! Finance makes available an extensive amount of information, all provided by third parties. It includes real time stock quotes provided by the markets, in-depth information on individual stocks, news on international, financial and economic developments, and news and editorial comments from respected sources such as Business Week, Motley Fool, the Industry Standard, the Street.com, and Forbes.

Since we share the Commission's desire to protect investors, it is important to make clear not only what we do but also what we don't do.

We do not open, maintain, administer, or close investment accounts. We are not involved with the solicitation of trades or the resolution of problems or disputes involving brokerage accounts or related securities transactions.

We do not hold ourselves out as a broker, as taking orders for securities, as executing trades or as assisting in settling securities transactions, nor do we in fact perform any of these functions.

We do not answer questions or engage in negotiations involving brokerage accounts or related securities transactions. We do not make recommendations regarding potential investments, nor do we make suitability determinations for any investor.

A significant part of Yahoo!'s income derives from advertising that could be found all over the site, and that includes Yahoo! Finance.

On Yahoo! Finance as well as other parts of the site we carry the advertising of broker-dealers. Payment for the advertising of broker-dealers is based on the number of page views, the number of click-throughs, the number of completed applications to open a brokerage account, or some combination thereof.

We believe that the extensive financial and economic information available on Yahoo! Finance serves the interests of consumers. It is our sincere desire to continue to provide this quality and quantity of material.

As has been widely discussed, the Internet economy is in transition. It is not absolutely clear exactly what course this new economy will take. If you agree that there is significant value to consumers in the information and services that we currently provide, we respectfully urge you to exercise caution in restricting the terms under which we can financially support the provision of such information and services.

It is extremely important that we be allowed to avail ourselves of the economic efficiencies that the Internet brings to our relationships with our advertisers. We believe that allowing for flexibility in these relationships is consistent with protecting the interests of consumers.

We do not believe that it would be appropriate to regulate Internet portals such as Yahoo! as broker-dealers, nor do we believe that it would serve the best interest of investors.

Acting Chairman Unger: Thank you, John. Craig.

Mr. Gibson: Good morning. My name is Craig Gibson, with America Online, and I am Vice President of the Personal Finance Channel. We appreciate the opportunity to talk to the Commission. We believe we have a common goal with the SEC similar to our colleagues at Yahoo!

We are an Internet portal that allows over 29 million members to be able to have easy access to a number of different news items and tools, and I will briefly discuss a few of those today, but we also feel that obtaining easy access to that information does require a business model that does require us to look at a number of different viewpoints and we will talk about a few of those today as well.

A hallmark of the America Online service has been the ease of use and the convenience of America Online, and this certainly extends to the personal finance area.

AOL seeks to make financial information and financial tools easily accessible to the members and to be able to access those channels with the same ease that they access our other 20 channels that provide information to various different locations and interests for our members.

Some of the tools that AOL makes accessible to its subscribers are certainly business and stock news, portfolio tracking, analysts' reports, stock screeners, financial calculators, and a number of other tools that we feel are important for our members to be able to have access to in order to make intelligent decisions as they decide where and how to utilize their portfolio income.

While AOL seeks to make quality financial information and tools available, AOL does not now or plan in the future to undertake broker functions. We do not plan to enter the environment of opening or maintaining or closing accounts. We do not plan or now currently provide any customer service for broker accounts, nor do we accept or route any orders or select a broker or execute a trade.

Most importantly, we do not accept customer funds or securities in connection with any of the broker orders that occur on our site.

We certainly are very aware and conscious of the broker-dealer rules and I think we have worked well in the past with the SEC ensuring that we are not in violation and we take a very aggressive, conservative platform in working transactions with our various content providers that we aggregate for on the financial services site.

AOL is trying to provide content providers design and supply in the content of ads and there are situations where we are providing opportunities for individual content providers or for broker relationships to provide their services on our site.

We welcome the opportunity to work with the SEC to determine the best way for our members to be able to view that without violating any of the rules that are out there.

Again we thank the SEC for allowing us here. Thank you.

Acting Chairman Unger: Thank you, Craig. Julio?

Mr. Gomez: Thank you, Chairman Unger. My name is Julio Gomez. It's my pleasure to be here. I'm the CEO of Gomez, Inc., formerly known as Gomez Advisors.

Our company is an Internet quality measurement firm. We provide research, data and tools to business designed — to help them improve the quality of their Internet offering.

We focus on e-commerce and, within that, in financial services. In addition, we operate the Gomez.com website, which provides a lot of the data that we collect in our research to consumers to assist them in the selection of a service provider over the Internet.

A large amount of the traffic on our site is focused on financial services and on the brokerage industry in particular.

And we have a business model for that site, which is exclusively a pay-for-performance business model.

So today I come to you wearing two hats. One is as an industry analyst, and additionally as a firm that has engaged in pay-for-performance with the brokerage industry.

Because of my experience — I was first a Series 7 registered representative more than 15 years ago. And I had a career in financial services, which ended with my selling my business to the partners in the company which I acquired before going to be an Internet analyst.

So not only am I wearing two hats, but I guess I'm wearing two shirts because I'm not only an Internet person but also a securities professional historically.

Actually, that's not the only way I'm overdressed. I'm wearing a wool blazer. Obviously I'm the only one from New England here. It was 50 degrees when I left this morning.

And with these lights — it does have an effect, but not so much that I'm losing interest. I'm actually very interested in hearing the discussion today because to me it seems as though there is a fairly simple concept of companies trying to access the value of the media through some form.

And pay-for-performance and all of the mechanisms that are being created right now are really mechanisms that are being created because they can be created because of the Internet — some accountability in terms of the performance of the media.

And I think we will all agree that most of the media exists because of advertisers and because of their willingness to pay in order to acquire customers.

The reason that we get to watch "The West Wing" and "CBS News with Dan Rather" is not because Congress has decided that we should be better informed citizenry, but because General Motors thinks that they can sell cars to people who want to watch those shows.

And so what you see evolving over the Internet right now is taking it from black and white to more of a spectrum in terms of the payment mechanisms for that media.

And so there's actually quite a lot of creativity in terms of how media gets paid. And I'm sympathetic to the gentleman from CBS MarketWatch, who as a businessman doesn't like this because it, in fact, puts the risk on media entities to deliver results then.

You know, who wants to do that? But I think that what you see driving a lot of the brokers to push for pay- for-performance is that they want to pay based on the results that the media provides.

So I'm looking forward to seeing how that affects the discussions here today. Because I don't think anyone in media wants to be a regulated broker-dealer.

Having been there I can tell you all, you don't want to be a regulated broker-dealer at this point. And many of you will drop your programs as fast as you can say FOCUS Report.


Mr. Gomez: So I look forward to this meeting and I thank the Commission for its invitation.

Acting Chairman Unger: Thank you, I think.


Acting Chairman Unger: Donna, did you want to make a brief introductory comment? Or would you rather wait for the presentation?

Ms. Hoffman: Thank you, Madam Chairman. I'm very pleased to be here today. Because I'm going to speak in a few minutes, I'll just introduce myself now.

I'm Donna Hoffman, professor of management at Vanderbilt University. And I am the co-founder and co-director of eLab, which we founded in 1994 to study the Internet opportunity.

And in 1995 my colleagues and I launched the first formal program for MBAs to study electronic commerce. We graduated a single student. That was in 1995. I'm very pleased to report now that we've grown to become one of the most popular programs in the country.

And about half of our classes now — our MBA classes — elect to emphasize electronic commerce.

For the past seven years my research has focused on three main areas. I study Internet marketing strategy and web-based business models. We study online consumer behavior, particularly the creation of compelling online customer experiences and we are also focused on the policy implications of commercializing the Internet, with special attention to privacy and consumer trust issues.

I am very pleased to be here today at this important roundtable and I am looking forward to talking to you in a few minutes about some of the more general trends in Internet advertising.

Acting Chairman Unger: Thank you, Donna. Fran?

Ms. Smallson: Hello, I'm Fran Smallson. I'm assistant general counsel and director of Intuit. And I represent, among others, the computer finance division.

I think it may be useful to get a little bit at Intuit's history to understand the context that we find ourselves in 2001.

Intuit started in the early '80s. And their mission statement — which actually has not changed in the almost 20 years of Intuit's history — is to revolutionize the way people do their personal finance.

It started with our checkbook management system, and it has evolved over the years to include all sorts of different ways that people can manage their personal finances.

It evolved to include the portfolio and the product evolved with various tools to manage your finances, whether it be your insurance, your mortgage, your retirement, et cetera.

What we found in 1995 was that the Internet happened and we wanted to take Quicken and bring it to the Internet.

And we found that we created our first site in 1995 and all of a sudden we found that 80 percent of the people that were coming to our site were not Quicken users. They were other users — they were consumers.

And those consumers were looking for all sorts of information in order to manage their personal finances. And so our site grew.

It grew to include stock quotes and news. It grew to include retirement planners and insurance information. It grew to include banking and aggregation.

And it grew to include many, many tools and information so that the consumer could better manage their personal finance.

What we have found in recent years is that the consumer has demanded these things from Intuit. And we've tried to provide it on the Internet for free.

We've also tried to do integration with desktop software. And in trying to meet those consumer demands we have given them types of information and believe that that's what in the future — and now — the consumers need and want in order to — in this context manage their investments or manage the kinds of financial matters they need to.

We at Intuit believe in consumer protection. We believe that we need to look at what best serves the consumer, give them objective information and tools in order for them to do that.

We also see in recent years that there's been — and actually throughout Intuit's history — there's been a need for a flexible business model.

That's where I agree with several of the panelists here, that we need to have that flexibility because as there is this evolution, various business models have either — let's say not brought the kind of returns on investment to both parties — actually, I would disagree with one of the panelists when he said that we don't like the e-business arrangements.

The bottom line is, is that unless a partnership — we believe the only way a partnership is going to work is with a win-win. And you have to have return on investment or else the partners are just not going to come.

And on the Internet partnerships are a major source of the way the Internet has grown.

So we at Intuit believe that we need flexibility when we look at the business model in the future, we need to provide the return on investment not only for Intuit but for those partners — those partners being broker-dealers in certain contexts, financial institutions, ISPs, whoever we're dealing with. The new model in this era is going to be pay- for-performance.

So the issue is how can we balance this new model that is occurring on the Internet and have the pay-for- performance and also protect consumers.

We at Intuit have not personally seen where consumer protection has not occurred. We have not seen the consumer abuses occurring.

If our consumers, for instance, have issues with Intuit, we hear about it and we address it. That has been our model.

And so we would urge the Commission today to look at the flexible arrangements that we could have with broker- dealers, as well as other entities who we are doing business with in order to make sure that both parties have the return on investment and at the same time, have consumer protection. Thank you.

Acting Chairman Unger: Thank you very much. Lawrence?

Mr. Greenberg: Thank you, I'm Lawrence Greenberg. I'm the chief legal officer at the Motley Fool. And on behalf of the Motley Fool, I'm very grateful and honored to have the opportunity to be here today.

The Motley Fool is like CBS Marketwatch in particular, a media company. We're dedicated to educating, informing and amusing individuals. And to help them make financial decisions for themselves.

We publish content in a variety of media starting with Fool.com, but branching out into radio, newspapers, television and magazines, as well.

It's kind of hard for me as the Motley Fool to say that we don't feel special here because we like to think that we are.

But in fact, our concerns very much mirror those of CBS Marketwatch. We're very excited about the ability of the Internet as a medium for people to learn personal finance and to gain and share information and to execute transactions more easily and cheaply.

We think that we're in the early days of harnessing these technologies. And we recognize that just as it's very hard to come up with a business model that works on the Internet, it may be equally as hard to come up with regulations that work and don't harden into unproductive avenues, future developments of the Internet and business.

As a message-oriented company, as an advocate we feel for individual investors as a whole, we care a lot about their protection.

And as I said, we are looking forward to having the opportunity to participate in this discussion and further discussions revolving around this issue.

Acting Chairman Unger: Thank you, Lawrence. Gregg?

Mr. Sharenow: Hi, my name is Gregg Sharenow. I'm a managing director with National Discount Brokers.

First, I want to thank the Commission for inviting me to talk today.

Our business started out as a traditional discount brokerage and in 1995 we went online. And soon after that, we discovered that we can do a few things. We can be both a brokerage and we can be a portal. We can do both.

So we went out and purchased a lot of content from a lot of different players and we put it on our site. And customers come to us and they do a lot of their research and they do their trading and investing.

But we obviously recognized that there was a tremendous customer base that was using other financial portals.

And so we went out and started advertising on those portals. We started the basic model of CPM advertising. But as time went on, CPM advertising lost its luster.

And we saw that our returns were just not there.

And we, in fact, pushed the portals — who were pushing back pretty hard at that time — to go to a pay-for-performance model.

And currently those models really include paying for orders, not executed orders, and paying for applications, not necessarily a bona fide customer account.

So those are sort of the conditions under which we've been working with the portals.

We've got other deals with banks, credit unions, insurance companies and others — and not-for-profit organizations which actually operate under different rules.

And what we would like to do is we would like to be able to pay portals — or pay other types of institutions according to a model that works for us — on an ROI basis.

So what we would like to do is we would like to see a more consistent application of the regulations to all the entities to whom we make payments for performance. Thank you.

Acting Chairman Unger: Thank you very much, Gregg. I'm glad that you're all here to help us in terms of identifying some of the key issues that we're facing and some of them are the same as the issues that you are facing.

What I'm hearing is that there is a common theme from all the participants that — one is that there are new sources of information that people are eager to supply to investors.

Two is that technology has truly made this feasible and changed the playing field both from a competitive perspective and a consumer-product oriented perspective.

And that we probably share the goals of how we can allow you to move forward and develop new business models and new products, while at the same time ensuring consumer protection and investor protection.

So with that I'll turn the — I don't know what it is — conference, the video presentation over to Donna to give a context for our discussions moving forward on these issues.

Ms. Hoffman: Thank you. I've prepared something very brief. For people who are interested, there's a copy available both on the SEC web site and also available at the URL that's posted on the bottom of this page here, if you wanted to go ahead and grab a copy for yourself.

I'm just going to take about 10 or 15 minutes to hit the highlights of some of the key issues in online advertising in general, and I'm not going to talk specifically about the financial services area, but I think it's useful from just a background discussion, to set the stage for the specific discussion to follow, to talk about some of these issues.

So I wanted to run through some of the most common types of marketing arrangements, some of which you've already gotten a flavor for from some of the panelists, and talk a little bit about the shift that's occurred, as we've moved from straight banner ads and buttons to more sophisticated marketing types of arrangements, and then talk a little bit about some of the compensation and pricing models and some of the shifts that we've seen take place there from, as I think Gregg mentioned, from CPMs to, as many of the panelists mentioned, pay-for-performance.

So I wanted to start first with just a few numbers, and then move into some of that discussion, and then leave with a couple of policy issues before turning it back over to Laura.

Just in terms of a few numbers here, I think you can see very clearly the web is huge — I don't think this is a surprise to anyone — and growing very rapidly.

Estimates are that there are expected to be about 10 million websites globally by the end of this year. About 60 percent of that is publicly accessible, and about 70 percent of that, or somewhere around five billion pages, is thought to be commercial in one level or another.

Of course, that clearly doesn't mean that all of those are pages that are accepting advertising. Depending on whose estimates you look at, somewhere between 6,000 and about 19,000 pages of that is probably out there looking for advertising revenues at some point in time.

Now, in terms of just the size of the market, last year web ad spending topped about $7 billion, and that represents only about 3 percent of total ad spending in the United States.

Clearly, the landscape is still dominated by the traditional players, including papers, broadcast TV, direct mail, but web spending is growing very rapidly, while these other areas are relatively stagnant, and so I think that's very interesting.

On the other hand, 2001, as many of you know, has been a very tough year, due to the dotcom flameout and changes in trends, so those triple-digit growth rates are pretty much over.

On the other hand, online advertising is still expected to be very healthy and is probably going to grow about 40 percent on average annually, at least through 2005, and there are some long-range changes expected.

The traditional media that are thought most likely to be hit the hardest are going to be those that are accepting classifieds and then newspapers and direct mail.

A couple of other numbers, just in terms of some of the categories.

If you want to look at the top websites that are capturing nearly three-quarters of all online ad dollars, those are the search sites and the portals followed by business and finance, classified, technology, and then news and information.

If you want to look at the flip side of that and take a look at the industries that are accounting for most of that spending, you can see that there are five industries at the top that account for about 83 percent of that, starting with consumer, which is pretty much retail, mail order, autos, music, home, pretty much everything but travel, which is broken out as a separate category and is very small, so I don't list it here, followed by computing and then financial services and so on.

Now, getting to some of the issues that I wanted to review and spend a few minutes on before I turn it back for our panel discussion, if you take a look at the breakdown in the types of online marketing spending, you can see that there's a lot of activity going on out there, but that banners and buttons and then sponsorships account for over three-quarters of all online advertising spending.

Now, a couple of things I think are interesting to point out about this chart that I prepared for you.

First, that these numbers here in no way reflect effectiveness, and so even though quite a bit of spending is certainly going into banners, that certainly doesn't mean that they are the most effective form of online advertising, and I think that's important to point out.

Another one I want to draw your attention to is, if you take a look at intersticials and rich media and e-mail marketing, you can see that those certainly get a lot of media attention, but really account for very small portions of spending, at least at this time.

I just wanted to give you a few examples of some of these, and of course everybody is familiar with banner ads.

What I've prepared in this chart for you here — and again, banners account for about 52 percent of online marketing spending, and these are the top five banner ads that were viewed in the United States a couple of weeks ago.

I think as these point out, it's easy to see why banners get a lot of criticism.

Now, another one here, just to show you, is intersticials, if you're not familiar with these.

These only account for about 3 percent of spending, but I think they're particularly interesting because they're particularly annoying. They are very slow to load and, particularly from the consumer side, they absolutely cannot be avoided, because these are what happens when you click on something else, waiting for it to happen, and they become what is called part of the content loading process.

In this example that I've showed here, if I go to Excite.com and I want to play a game, as I'm clicking to wait for the game to load, I am treated here to this intersticial from eBay.

And then I think it's also interesting to recognize their close cousin, what are called the supersticials. Those are the nightmares online that can be up to 100K in size and include full animation, sound and graphics that you wait for to load.

I can tell you from our leads on the research side, consumers really hate these things.

Now, in terms of sponsor content, again, this accounts for more than one-quarter of online ad spending, and this is a very interesting and growing area in the online marketing arena.

Sponsorship can take on many different forms. I think generally, the way to think about it is it's advertiser-supported links on a publisher's site, and some of the more common forms we tend to see are things like direct links to a sponsor's site, what are called micro-sites and co-branded pages, things called featured sponsorship and editorial sponsorship.

I think sometimes sponsorships can actually be banner ads, except one of the key ways to distinguish a straight banner from a sponsorship relationship between the advertiser or the sponsor and the publisher is that the sponsorships tend to involve more extensive integration of the sponsor's brand with the publisher's content, and I think that becomes very important, particularly from a policy perspective.

They can be exclusive. The prices can vary. There can be sponsored sections, sponsored pages, sponsored key words. These really can become very creative.

One example here, this is what we would call a co-branded arrangement.

For example, I could go onto the ESPN.com website, and a while ago, I could have followed the contest link to this page right here, which would have taken me to a battle of the fans competition.

Then I could have clicked on the sponsored link. That's what I've circled here for you. That's the Tostitos up there in the right.

Then I would be taken to another site, in this case paid for by the sponsor, who, in this case, is Tostitos.

Now, another example here, which I think is also particularly interesting, of sponsorship, is what Google does, and here they offer a number of opportunities for advertising with key words and key word phrasing, and in categories.

So in this case, a text-based ad appears, and I've circled these in red here. You can see them.

I've put in a search for new cars in the search box at Google, and then a text-based ad has appeared on this Google results page, because the key word has been purchased and is included in the search.

If you'll notice here, I think this is an interesting development. The ad appears adjacent to, but is clearly distinguished from, the results listing, because it's highlighted, and as I indicated by the arrow, it clearly says that it's a sponsored link.

And there are variations on this theme. The boxes on the right-hand side — Google refers to these as self- service ad words — and the pricing for these varies, depending on the number of impressions and also where in the placement they would go.

Another example here is — this is an example of a featured sponsorship, and this one involves what is called a strategic partner, so in this case, if I go to the iVillage.com site, there's a set of links on the — running on the right side, which lists all their featured sponsors, and those are their strategic partners.

If I were to click on one of those, in this case Match.com, I then would be taken to a website which, in this case, is hosted by that strategic partner, Match.com.

Another example of a featured sponsor relationship is shown here on Baby Center's site, and here you can see that this one is hosted on the publisher's own server, so it's on the Baby Center site, not on the Beechnut site.

Notice here that, in this case, the editorial department of Baby Center has researched and written a special package on solid foods, and then it is sponsored by Beechnut.

Closely related to these kinds of arrangements that we see are editorial sponsorships. Now, under this particular revenue model, the company would then sponsor existing sections or pages of a site, and these sorts of techniques have been pioneered by the portals.

Now, another area that's particularly interesting, and is really rising in popularity, is affiliate programs and affiliate marketing.

These come under referrals in terms of spending, and they only account for about less than 5 percent of spending, so I think one of the things to notice about them that's particularly interesting is they are extremely inexpensive to implement, but they can be very effective in terms of customer acquisition.

The basic idea is that a publisher would put a link on his or her site to an advertiser, and then when the consumer would click through to that particular advertiser and then purchase or do something that met a strategic objective, the publisher would get a cut of that.

The payment is either by flat fee or commission.

Most commissions tend to run in the 8 to 12 percent range, although some might go as high as 25 percent.

They're very popular. One very popular affiliate network, called Commission Junction, alone has 1,500 merchants and 350,000 affiliates, and third parties have now emerged in a very sophisticated marketing area to help manage the enormous demand.

So this example that I have here is from GoTo.com. They have a program called Search in a Box, and you can, if you have a website, so you're the publisher, you can add a GoTo.com search tool to your site. And then you get paid every time one of the visitors to your site goes ahead and uses that search engine, and you get 2 cents a click every time that happens.

Another example of an affiliate program is one that eBay just recently launched with Commission Junction, and in this case, every time you would click through from the publisher's site to the eBay site, and go ahead and actually register at eBay, eBay would pay you $4.

These are some very interesting emerging examples of pay-for-performance based advertising.

Now, just to put this sort of back to a framework for talking about some of the models here, originally, you know, a long time ago when things started, so that was like circa '94, circa '95, flat fees were the mode.

That quickly evolved into what we call CPMs or cost-per-thousand impression based advertising.

Just in terms of numbers, the average CPM, just back in September of last year, was about $28, which means that a web site will charge an advertiser $28.28 to make an impression on 1,000 web browsers — that's how it's calculated, and it comes from traditional advertising — or about 2.8 cents to expose a single consumer to a banner.

So it sounds cheap, but of course, when you start to get into some of the effectiveness issues, it turns out not to be very cheap at all.

Now, CPMs tend to range from a low of about $1 for a low-traffic, very untargeted site, to $100 or even more for extremely targeted and highly desirable demographics on a very high-traffic site.

I think one of the things important to point out, though, is that what I've given you are official CPMs. The actual CPMs, after negotiation, are actually much, much lower than the number I'm telling you here, because there is routine discounting and bartering.

The average is probably closer to $10 or $20 CPMs. Some industry analysts have suggested that the normal discounts are probably 70-to-85-percent off rate cards, and if you monitor the discussion on Internet online advertising groups, it looks there like most websites don't really get much more than $5 to $10 a CPM, and so I think it's important to talk about that.

Now, what emerged from that model was what are called the click-throughs, or the click-through rates.

Currently, those rates are hovering at about 0.3 percent. In 1997, the click rates, on average, were about 2 to 3 percent. That meant that was the number of people who would actually be exposed to a banner and then click through to the page behind it.

A couple years ago, they were about 1.35 percent, and now, as you can see, they've really plummeted.

Now, in terms of some of the trends, before I talk about some of the emerging models, I think it's very important to note now that there is now significant unsold inventory in the online advertising industry.

Leftover ad space is now sold at a serious discount. Obviously, this is putting downward pressure on — pricing pressure on CPMs. The number of pages available far outstrips the demand for online ads.

There are an awful lot of websites chasing advertising revenues. The number of those sites is growing every day.

This glut, unfortunately, has led to the rise of third-party networks who have now emerged to sell the space. That's putting downward pressure on some of the profits, because they're taking a cut for those placement fees.

If you add to that some of the consumer behavior issues, for example, half of all consumers who are out there online have never clicked on a banner ad and don't ever plan to.

To many other people who did bother to click, there are just too many ads out there. The novelty has worn off, and people just simply aren't interested.

Some other trends that I think are interesting, against this backdrop, then — and I think you've seen this in some of the comments of the panelists — are advertisers really want to start holding the new medium accountable, and online managers now are increasingly dissatisfied with banner ads and flat fee portal deals because there's this sense of, "I need a way to measure ROI."

So one of the things we're finding is that firms are increasingly looking for ways, first to integrate offline advertising with online — that they don't occur in separate spaces.

An interesting trend from the traditional area, which is also, I think, motivating a lot of the trends we're seeing in the online space, is that major advertisers with traditional media are now increasingly compensating their agencies based on results, so this is another form of pay- for-performance, rather than based on commissions.

The traditional way, which has been in effect for over 100 years in this country, has been to pay on 15 percent of billings, but now more than two-thirds of major ad agencies in the United States have labor-based compensation agreements, and these are now based on pay-for-performance or incentives which are linked to sales goals, and these are clearly having an impact on some of the things that we're seeing on the Internet space, as well.

I think one of the things that has really motivated this at its heart is this idea. There's a very well-known quote in advertising, which goes, "I know that half the money I spend on advertising is wasted, but I can never find out which half."

The idea is that the Internet now is suddenly going to let us figure out which half, and so I think that's really been behind a lot of this trend toward accountability, because the Internet actually is an accountable medium.

So that, and some of these other trends that I've outlined for you, have led to the emergence of what are now called pay-for-performance pricing models.

So the early days of the web favored exposure-based pricing models, but those were simply borrowed from traditional media based on CPMs and impressions, but now the trend is very clearly toward paying only when I can quantify that a result has occurred.

As some of the panelists also suggested, we're seeing a lot more risk sharing now, too, because advertisers are putting pressure on publishers to pay for performance, but that's encouraging the publishers to demand revenue sharing for any purchases that they're actually helping to make through their site.

So what we're seeing now are the emergence of hybrid models that take advantage of these different forms here.

And so another way you might think about pay-for- performance is also, some people call it cost-for-action. I like to think of it as this is just sort of cost-for- whatever, so whatever is relevant to be charged for in terms of objectives is what we can develop a pricing model around.

So in terms of just if you're interested in how the breakdowns look here, pure CPMs, again, are the classic impression-based buy. They use CPMs, cost-per-thousand. They can also include sponsorships, of course, which may be priced at a flat fee, but they tend to be calculated or sometimes offer guarantees in terms of impressions.

The hybrid models involve a mixture of these two approaches, and I think they're a very important way for advertisers and publishers to share the risk, and there's no question we're going to be seeing more of those.

As you can see right now, they are the more dominant form, and in fact, if you add up the hybrid and the performance-based together, Forrester estimates that in just a few more years, they will be the form of advertising online.

Now, one of the things I think has been particularly interesting here is being able to do this — for example, negotiating a cost-per-action price — depends on being able to do something called calculating the lifetime value of your customer, and also being able to know your customer acquisition costs.

These are things that traditionally had not been possible or able to pin down for a lot of traditional media, but are now much easier to do, at least in theory, on the Internet.

I think another trend that's been moving that along is the move of direct marketers to the Internet, who are bringing a lot of these sophisticated marketing tools to bear, and which a lot of people who didn't know about them are now learning from.

So that's sort of my summary and my overview, and just to wrap up here, and then I want to turn it back for discussion, I think all of these trends and these emerging pricing models are raising some interesting issues.

I want to throw these out, but I'm not going to talk about them: rights of consumer data ownership, privacy and trust.

These are not new issues, but they become very important in these contexts, particularly as we see the increasing use of personalization and customization and recommender systems, and the capturing of consumer information.

But I think one question I would like to leave for the audience and for the panel, and then turn it back to Madam Chairman, is this idea of, with recommender systems, for example, or with the sponsor editorial content — editorial sponsorships that I've talked about — as the lines blur between advertising and content, important ethical issues arise that we have to start to think about — in terms of whether consumers are informed, how much they know, should we inform them of exactly what's behind some of these recommendations, or that some of these advertisements, and some of this content may, in fact, not exactly be editorial content.

So I think the rise of sponsorship models, the rise of revenue sharing deals is raising some very difficult issues as some of these lines blur between what's an ad and what's the content.

And with that, thank you very much for your attention, and I'll turn it back to Madam Chairman.

Acting Chairman Unger: Thank you very much, Donna.

That was very enlightening, from many perspectives.

I thought what was interesting about what your presentation sort of showed us, and that ties it back to something that Phillip mentioned in his presentation, is that we have all this information that we want to get out to consumers, but somebody is going to have to pay for it.

And who is going to pay for it, and if banner ads are so hugely unsuccessful, then how are broker-dealers driving the content of the portals, and how does that really sort of change the content, and what do investors understand about that content?

So if you can get the conversation started on that general subject.

Mr. Lynch: The quality of the information that consumers get is directly proportional to how much people are willing to pay, and I see the price of pay-for-performance being attractive to companies, because then your costs are in direct proportion to your revenues, which is what we all try to achieve.

So if we lose that possibility to do that, then obviously, the quality of the information that would be available on the Internet, whether it's real-time quotes or real-time news or the types of tools or information that we provide to the financial professionals at a much higher rate, we could not, obviously, we could not cannibalize our business and make that available to consumers, just out of a public service.

So I think, you know, what Gregg was talking about, looking for financial return, but it's in relation to how you make your money, is going to be very important, but again, we don't know — you know, it hasn't settled out yet, and you saw how quickly the revenue models were changing, adapting, and to try to put a box around it right now would be very restrictive.

Acting Chairman Unger: So are the brokers driving or the firms that — who drives the content of the portal site, and how does the pay-for-performance —

Mr. Lynch: Well, you know, in a professional market, people pay a subscription, and many web sites have tried to adapt that to the Internet, but the individual has not shown a propensity for subscription-based, you know, websites. There hasn't been a big — that hasn't been highly successful.

So it is being provided by somebody else, either through advertising or through direct payment, and the people in financial services — obviously the people that are looking for that demographic, are very often financial services companies, and that's what's driving them.

And the way they get paid is, more often than not, transactional, so they like to have something that pays -- that they can pay in relation to how they get paid.

Acting Chairman Unger: Would someone else like to answer, sort of, or address that same issue? And that is, how have the pay-for-performance models changed the relationship between the website operator and the broker- dealer, if at all?


Mr. Sharenow: Yes. I haven't seen any change at this point. I mean, as far as I can tell, we have not driven the content at all on the portal sites. In fact, we never say anything to the portal sites about what they offer. We've basically been much more passive.

We've just put up banners or other kinds of targets on the portal sites, and then it's driven those, the consumers, to our site, and then we — and it's our responsibility then to sell to that consumer.

But as far as content is concerned, I don't really see that there's been very much of a relationship between what we do and the content that's provided on those sites. That's something that we've completely stayed away from.

Ms. Smallson: I would agree with that. I really think that who is driving the content is the consumer. The broker-dealers haven't.

If anything, the consumer has made certain demands. They want, you know, current news. They want quotes. They want tools.

And if you look at kind of several years past, it's the financial portals or the other portals that provided all that, and then a lot of that content started to appear on the broker-dealer sites.

In some cases, the broker-dealer sites were taking content from the financial portals and also the financial portals were licensing some of their tools and content.

So I really don't see it's being driven in that way. It's the broker-dealers providing — I mean, they may want to buy sponsorships, or et cetera, but there's a real — they haven't asked what kind of content.

It's usually they're going to sponsor some, maybe they'll sponsor content to provide a button, but it's clearly identified.

Intuit's position is very clear that they identify exactly what's — you know, who's providing the content, whether it be S&P, whether it be Dow Jones, whether it be the Red Herring, whoever is providing the content, and if there's an ad, it's clearly identified who is — where the ad is, if it's a sponsorship, if it's a button, if it's even, you know, some kind of textual link. They try to identify who is sponsoring that.

So I really don't think it's being driven in the direction which I think you were asking.

Mr. Gibson: One comment that I think is important for the panel and for the audience to recognize is what Donna was saying, that in the past, for literally 60, 70, 80 years, an advertiser would say, "I know half of the advertising isn't working, but I don't know which half."

And now, literally, from 1994-1995, we've gone through six, seven, eight different evolutions of business models out there to where now Macy's, 70 years ago, would simply say, "I believe that this advertising is working," now Macy's or Coke or anyone else, instead of saying, "Is another $1 million of billboard advertising going to make a difference, or am I going to just simply put $1 million into banner advertising, and I can tell what my sales were specifically."

So to your comment earlier, that Phillip was making, we need to start realizing that the advertisers are driving a business model that's stating, "I can now be specific."

The brand theory of, "Well, you're seeing your brand, Coke, all over the Internet page," is not very valuable right now. They want to see actual purchases come from that. I think it's an important point that Phillip was illustrating there.

Acting Chairman Unger: Go ahead.

Mr. Scheibel: Thank you. I think also, for a company like Yahoo!, that has earned its reputation as being independent, and is providing best of breed in any number of content areas, whether it's sports or anything else, you know, the idea that the advertisers would in some way influence or drive content is anathema to us — that it just won't happen.

And sort of the understanding we have with our users is that we're going to bring them the best in each area, regardless of what the advertising is.

So I think that's important.

The other thing that was, I thought, very instructive about what Donna was saying is that she referred to 1994 as the old days.

And, you know, realizing how many times since then the business models have changed and the speed with which this medium is evolving, and which the payment forms are evolving, really is illustrative of how we need flexibility, prospectively.

You know, none of us can be sure of where we're going to be, you know, in a year, maybe not even in a few months, and so it's really important for us to be able to provide this content, to be able to pay for this content and support it, and to not be hemmed in.

Acting Chairman Unger: I guess what I'm trying to get at a little bit, and maybe this is a good way to move on to a slightly different topic, is if you have a portal that has a banner ad, it's pretty clear that the banner ad is an ad, it's across the top, and it mentions the name of the firm or whoever is paying for the advertising.

What might not be so clear, though, is when you have a financial portal that has maybe the top 20 recommendations or I think we saw one that had short sales for mom for Mother's Day, and then the ability to trade — I know. And did you get your mom that for Mother's Day? I didn't.


Acting Chairman Unger: — and the ability to "trade now," and the "trade now" is through a couple of different firms

That, I assume, is another form of advertising, and so my question is, how do people sort of, or how are the firms integrating themselves into your web site? If they're not controlling the content, how do you sort of have the relationship or how does it work? I can't even think of the appropriate words.

And you had mentioned, Fran, that it's very clear to the consumer what's a paid-for advertisement and what's not, and what I'm describing, I'm not sure it is so clear.

So I would like to move on to that sort of content and discussion, if that's appropriate to the participants here.

Ms. Smallson: I guess I can speak for Intuit and some of the others that are around this table.

You know, I don't know how it's not clear, so let's just talk about the "trade now" button. If you can go, you hit the "trade now," and you may have a choice of four or five brokers to go to.

Once you're on that broker's site, it is extremely clear who it is. It's, you know, in our case, it's not co- branded. If you're going to a Schwab site or Ameritrade or Datek or whoever it is, you're seeing who it is.

So, you know, if you look at the button, particularly "trade now," you can have a drop-down menu. That drop-down menu gives you a choice.

So it's a convenience issue for the consumer in that if they want to, let's say, take a look at the stock quote, it looks like it may be good to go, we're not saying one way or the other, and then they go over to the site, they're on the broker-dealer's site, which is subject to the regulations and the disclosures, et cetera.

So I'm still, you know, maybe on the same topic, but it seems clear to me.

We are in the evolution. Right now, obviously, there have been restrictions and the models haven't been flexible with respect to a financial portal and the broker-dealers, so how that's going to evolve in the future is hard to say.

But as we talked about before, you need the return on investment, which the gentleman from Reuters was saying, somebody has got to pay for this.

And to really pay for something that's going to give both the ROI, you need to invest in the technology and then figure out how it's going to work and still, you know, make it clear to the consumer who they're dealing with.

Acting Chairman Unger: So what would the advertising be in that situation that I described? Is it having your name be one of the four or five firms that you could "trade now" to?

Ms. Smallson: Our firm? No, because we're not — I mean, it wouldn't be us, because we're —

Acting Chairman Unger: No, I'm just — in the scenario we described, you have, the portal has the top picks, but then the broker-dealer is — let's say you would hit the "trade now" button, and there's four or five broker- dealers that pop up.

Is that the advertising, having your name be one of the ones that can implement the "trade now," the recommendations made by the portal?

Ms. Smallson: Right, and if you want to appear on the site, and you want to be one of the broker-dealer choices, yes.

Mr. Lynch: From Reuters' perspective, it is critical that we remain independent and that customers view us — I mean, our brand is the trusted provider of information, unbiased information.

If the consumer could not determine what was advertising and what was coming from Reuters, what was coming from somebody who had a stake in the game, then we would very quickly lose our brand.

So it is very important for us, as a provider of decision support tools, a provider of financial information, that we're seen as independent, and we would not recommend a list of stocks to trade.

We would provide financial information on stocks to help people make a decision, but it would be very important for us to box off and for consumers and investors to know specifically that they're going to a transaction site from us, because if we lost our independence, if we lost our unbiased — if people didn't think of our information as unbiased, then it would be much less valuable.

Acting Chairman Unger: So how does an investor understand that, though?

Ms. Genet: I think you have to remember a couple of things.

As an advertiser, people who are on these sites have a different advertising perspective. It's the environment where they think they're going to find customers.

And they don't think of it as a place that will be compromised. They think of it as a place where it's, whether it's television, or whether it's radio, it's another medium where they're going to find customers who probably are likely to buy their products.

They choose to be in those environments and think those environments are right, and they choose those environments because they believe there's credibility in being on those sites.

Once someone has clicked through that site, it is imperative, because no advertiser wants anyone to be confused with anybody else. They want that person to choose their firm amongst all the other firms, and to have a relationship with that firm.

It's really important from the content people that they're clear in terms of their unbiased point of view, in terms of who they are, and it's really clear from the advertisers that they're picking that environment because it's appropriate for their clients, they think they're going to get something from those clients, and once they have a lead that they believe is real, to make sure that lead knows who they are and what services they can provide. That's the inherent interest in both those parties.

So to compromise that relationship would be inappropriate, and it's coming from a place where the other relationships they've had like that, when they would never think of compromising.

So we're injecting a notion here that both parties don't come to the situation with, and have no interest in terms of furthering their business model, to promote.

I think most — many clients and many potential investors are more savvy than we give them credit for, and our investors we believe are very savvy, and that's perhaps why we choose to do what we choose to do in terms of where we put our advertising or not.

But it's not, I think it's not inherently in the interest of the broker-dealer and it's not inherently in the interest of the content provider to at all have their messages compromised or have their audiences be compromised, because if they in some way diminish the value of that relationship, in the end, the down side is far greater than the up side.

Mr. Gomez: There are a couple of areas where marketers are looking to be creative with regard to how they interact with the media, and you have to get down to the essential elements of what they're after.

Yes, they're looking for an environment where there are potential customers, but also what they're looking for is for that media property to have a relationship with their audience that is based on trust, and really to get a piece of that, to have some of that trust carried over to the advertisers so that the affinity gets carried over, as well.

And there is some creative activity that I wouldn't say goes as far as — I wouldn't call it blurring the lines, but, you know, for all of this, there's an offline analogy to everything that's going on here.

For example, in the case of pay-for-performance, there's direct advertising, where you put up an 800 number and you pay the television station based on the number of people that call the 800 telephone number.

Now, there's also an analogy for what's going on here, which is a form of advertorial. Okay.

So if you have a website with an audience that comes to you for certain things, advertisers increasingly are looking for an opportunity to be part of the experience beyond a traditional advertising relationship.

That might mean, for example, on a personal finance portal, to have a recurring column or section on retirement planning, which is brought to you by a company on a regular basis in the form of a sponsorship, but in which there may or may not be some different level of editorial input.

Now, that's a long way from offering transactions, the portal offering transactions, and it's very analogous to when I open up Fortune magazine and seeing a spread on, you know, the business climate in Puerto Rico that is paid for by the Department of Tourism or Chamber of Commerce of San Juan, or whatever it might be.

So there are opportunities that are analogous to opportunities that exist everywhere today, in offline media, that are being translated online.

Mr. Sharenow: Yeah, we have a lot of experience with this, with trade now buttons and things like that.

And I think that it is important, it is important to us that there be no blurring of the lines and that somebody knows that if there is something that goes on on a portal or advertising website, that we're not looked at in any way a part of that, and when they leave that site, and they hit "trade now," and they come to our site, they absolutely know they're on our site.

As I've said before, there is no co-branding. There is no mixing of that. They know that they're at National Discount Brokers, and on every single page they go to, they're at National Discount Brokers.

There is no frame around NDB for our partners. You know, we launch a new browser, a daughter window, so you know that you're someplace else, for sure; and for us, I think it's important that that remains that way.

But I don't see how there is a blurring if, you know, somebody does take some advice, general advice or specific advice, from a portal, clicks "trade now," comes through our site, that we had anything to do with that, and so I don't see any blurring at all. I mean, they know that they're someplace different.

Ms. Hooper: If I could just comment on that, I think that one of the things we all recognize is technology has really opened up the world of information, and it's been by far and away for the better good for investors, because they've been enabled to understand and capture more information more quickly than ever before.

I was really glad to hear your comments, Phillip, about the necessity of keeping the two areas boxed off, if you will, in order to maintain your own integrity, and I think also to enhance the integrity of the marketplace, because after all, if that begins to slide, then everyone loses. We all lose our ability to protect the investors. The investors themselves will turn away from it.

So to my mind, there's got to be an absolute distinction between what the portals are offering and what the "trade now" buttons are leading you into.

I guess my biggest concern is, if you go back to Julio's, I'm sorry, not Julio's, but Donna's reference to the old days, it was really clear as to who was accountable for what was being offered, what was being recommended, what was being suggested or what kind of research was being made available to investors.

And I think it is imperative that that accountability not be compromised by any kind of situation that makes the identity of who's doing what to whom transparent to the investor.

If the investor can't make that distinction and whatever action the investor takes doesn't go the way that he or she had intended or had thought it would based on the information that he or she has received, then the question is, who's accountable?

If that accountability line is blurred, invariably everyone is going to lose, and I think that is probably one of the major concerns that we, as a self-regulatory organization, have, is who is accountable at the end of the day when the information that's being provided is much more specific than just general research or general information that would assist the investor in making his or her own decision.

Ms. Hoffman: I think, building on that point and then getting back to something Julio said about the analogies and also the metaphors that have been borrowed from the traditional world that we've seen put into practice in the online world, for example, with CPMs, that was borrowed from print, and I think people quickly found that's really not working too well.

These exposure-based models are not necessarily the most appropriate, trying to measure impressions online, and so we've seen a rapid evolution, as we saw in pricing models.

But I think one place the analogy breaks down is we are borrowing analogies from the traditional media worlds of print and even from television for some of these advertorials, for example, that you were mentioning.

The problem is, when we read it in Fortune and we see an advertising supplement, it's clearly marked, and everyone understands, because of the standards, that that is an advertisement for investment opportunities in Puerto Rico, and it would be very hard, I think, through consumer research, for example, to find someone who didn't understand that that was not Fortune's editorial position.

The problem with that analogy is there aren't any standards yet on the Internet for this sort of advertising for these advertorials for this editorial sponsorship or for featured sponsorships, and so the notion that we have to be very clear about boxing things off or, you know, we need to make sure that consumers can make these distinctions, then we're relying on the good will and the faith of the companies who want to do the right thing, but one thing we've found in some of the more traditional consumer sectors is not all companies are necessarily doing the right thing, and consumers have been confused.

So I think one of the things that's very important is to start to talk about what some of these standards might be for the boxes and the distinctions, so that there isn't an errant consumer somewhere who isn't really sure what's going on and might take a list from a drop-down box as a recommendation that is completely bias-free.

Acting Chairman Unger: I think that what you are saying — and I want for you all to continue talking, though, is — what I'm hearing is that people intend for there to be the separation and that you want to provide content that's rich and then turn it over to the broker-dealer who provides the traditional broker-dealer services of execution, customer funds — or holding customer funds, et cetera, et cetera.

But is it so clear to the individual visiting the site that, in fact, these are two separate entities providing different services.

And as Clark said, where the liability sort of comes into play for each of the respective entities in terms of information content and services, and I'm not so sure it is so clear if you visit a portal and you see the information and then you buy now, yes, you're on a different site.

But is it so clear that you're on that site because those brokers have paid for the advertising to be on the portal site and to provide the execution based on — not necessarily based on — but in connection with — or whatever wouldn't necessarily trip you up from a broker-dealer registration perspective, but I'm not so sure that that is so clear. And I'm wondering how you make sure that it is clear. What is it that you all look at in terms of making sure that there is no customer confusion and preserving that loyalty in that brand?

Ms. Genet: My sense is that when people go to a site like CBS MarketWatch and Reuters, they know that it's an information-based site. And they're looking for information.

My sense is when they hit the "trade now" — because they may have read something about something — that they have to choose a broker.

And if they don't have an account, they have to open an account. And they have to open a relationship with a broker-dealer.

And they have a choice of seven, eight, ten depending. So all of those options exist for them in terms of what they may or may not want to do when they hit that trade button.

But I think for the average visitor who visits a site that's an information site, they have information — and if they chose to act on the "trade now," they're forced to go through a page that says, I'm going to choose a person or a broker.

I may have a relationship with them. I may not have a relationship with them. If they don't have a relationship with them, they happen to get a relationship with them. And they go through a whole account opening process.

So there's lots of opportunities I believe to make that decision.

I believe that when you're on an information site, it's pretty clear that the information is provided in those particular sites — so I can't speak for these guys — in a way that's presented as news.

That's why our sites choose a site to have news that we have to have because we want to have the endorsement of an unbiased news site for information for our clients.

So it goes both ways. I can't say that every consumer may not get confused. You know, I'm sure there are people who get confused.

But my sense is for those that are information sites where people are looking for information, it seems abundantly clear that the information of that news-related event is different than what's on the left bar about a trade that takes you to a very independent site where if you don't have a relationship you have to acknowledge that you want a relationship with a particular entity.

That is my overall sense of how it is. And that may not be true for every site. It may not be true for every consumer. But at least for information sites that are offering more than three potential brokers to have a relationship with, I think it's clear probably nine and a half times out of ten.

Acting Chairman Unger: Well, you mentioned an interesting point and that is that you choose the portals that have information that you need to make available to your customers?

Ms. Genet: No, we choose to have relationships with news services so we have information on our site.

So our clients, for example — we want to keep our clients on our sites, right?

Acting Chairman Unger: Right.

Ms. Genet: So you want to make sure that they have information that's important to them, as well.

And what the information sites have done is forced us to put things on our sites so that they don't go away. Our clients don't go away.

So we want to have places where they can get news information on our sites so they don't have to click off and go to an independent site.

So what I'm saying is that they have forced us on our sites to pull in third-party contacts — because that's what our clients are looking for.

So we hope that they don't go off and look at their site. We hope that we have enough information on our site that they want to stay with us.

But we have to have a news information place on our site to give our clients the information that they want in an unbiased, news format perspective.

MR. BISHOP: Just to address, I think, one of your questions. As I said we have very few relationships where we're compensated say for a user clicking on a button or a banner and opening an account.

We do have some. And quite frankly, we do not tell the user we're going to get $125 from XYZ Broker if you click over and open an account.

I will say, though, that may be something we should do. But I think it's important to point out, though, that then why would those same kinds of rules not apply to a CNBC television show or a newspaper or a magazine?

Because you do have similar relationships in traditional media.

Acting Chairman Unger: Well, are Donna's statistics correct? Are most firms and website operators wanting to move to a pay-for-performance model? If they're not already there?

Mr. Greenberg: From our perspective we're getting a lot of pressure from the brokerages and other advertisers to move in that direction.

We probably prefer not to, but we prefer to have advertisers to not having advertisers. So it's not necessarily our choice.

One thing that I am curious about is we don't have a "trade now" capability on our site. So we perhaps wouldn't care about this in the same level as other sites.

But is there customer confusion about where they're trading? Because I mean, our customers seem to understand that they're not trading with the Motley Fool.

Or at least they may be so deceived that they don't know that they're not trading and they still think they are.


Mr. Greenberg: But I don't think that's the case because they're relatively informed. But we haven't heard that. And I'm curious whether that has been a problem that you've seen so far.

Acting Chairman Unger: That could be an appropriate question for Clark.

Ms. Hooper: When I was speaking earlier about the confusion, I wasn't so much talking about confusion with which entity you're trading, so much as confusion over who is responsible for the types of recommendations that are being made.

Acting Chairman Unger: Right. But are you seeing anything like that?

Ms. Hooper: Not to my knowledge. Generally speaking, we did some public focus groups two or three years ago regarding online advertising.

And the good news was that most of the investors that were included in the studies were not confused about the fact that they were trading, that they were trading online, that they were not gambling.

So there was — as you mentioned earlier — there was a degree of savvy, savviness — if there's such a word — for the investor that was sort of a relief to us.

There was — on the down side — on the flip side, there was a mentality about online trading that most of these participants exhibited that was somewhat reminiscent of being in Reno.

Because it was just so quick and easy and it was fun. And it sort of reminds me of playing Monopoly. It's a lot like funny money.

I think the confusion comes to an abrupt halt when the results start disappointing you. And that's actually when the confusion means something to the investor.

Because prior to that I don't think there's really that much worry about it, if everything is going up. So what we're seeing is — I think — really what the market conditions are creating, which is a situation where people are looking for someone to point the finger at.

Whether or not they're really confused, I couldn't say. But all I'm really worried about from the — from the regulatory perspective is at the end of the day who is responsible for the information that's being distributed?

Because someone has got to take accountability. And even if it's very clear with whom the individual is trading — and it's my understanding that most firms — even if there is not an existing relationship — by the time the customer can get through the red tape, if you will, of setting up the account, it ought to be abundantly clear with whom they're trading.

But nevertheless the question of what they're trading and who is responsible for the suitability of that trade.

Acting Chairman Unger: And I think what Clark is saying is true of what the Commission sees, and that is, we see almost no suitability-related complaints when the market is going up.

But when the market is going down, people all of a sudden aren't as happy with their investments and so might think that they were not suitable recommendations that were made.

Mr. Gomez: That's a shocker.

Acting Chairman Unger: I know.


Acting Chairman Unger: Yeah, we need to do a study on that.

Ms. Hooper: The other thing that I might just add to that — and if we have time for me to touch on some of the rules which will make filling out a FOCUS Report look like eating a piece of cake, you'll note that one of the things that we get into is the accountability of broker-dealers and remembering that our rules apply only to NASD member firms that are broker-dealers — but the accountability that they might have for any hyperlinks.

And we generally would say that our members are not accountable for information that they've linked to if it's of a general nature, an educational nature, a research type of — and whatever it is, so long as it isn't a direct relationship with something they're offering or selling and it would be almost like linking to a real estate section that was then offering private placements.

Would that be a public advertisement for the private placement? I mean, that's the kind of thing we would be looking towards.

And I think that's why this issue of making a list of recommendations and then having "trade now" next to it raises some questions of who is accountable.

Acting Chairman Unger: I was at a conference — and it was actually a very thoughtful conference — and it was a press discussion, so it wasn't really financially based.

But the discussion was about technology and what if The Wall Street Journal — I don't know if they're here — what if The Wall Street Journal had an article — you know, they have columns. And what if the column discussed vacuum cleaners. And there were two different vacuum cleaners and it discussed the merits of those two, and you could click on and you could buy those vacuum cleaners. What would you think of that?

And this was a small group so people raised their hands — everybody in the room except me — thought that that would be bad, that there would be a bias then to the article and that it would somehow affect the content of what was being discussed.

So pay-for-performance kind of raises some of the same issues. If, in fact, firms are paying for the number of accounts that are being opened as a result of having their presence on a website, does that somehow impact what's being presented on the website?

And so I think that's sort of another way of coming at this issue.

And one of our concerns — because my concern isn't to increase the number of broker-dealers who are registered.

Actually far from that. We have too many.

No, we obviously have limited resources. We don't need to regulate more people. But will people be looking to us to ensure that customers are protected and that they understand what they are looking at and who has responsibility for that content and that information?

And as it moves closer to, say, a recommendation as Clark was discussing then it becomes less clear.

Commissioner Hunt: I think what we've got to also make clear is who has got the liability when you show that the trade has gone through and the broker has somehow screwed up. Or that the information has somehow been misleading.

Is it always clear who gave the information and what that relationship is with the broker? And I'm not so sure. Maybe Reuters thinks it always is because you're so separate.

Mr. Lynch: Well, I'm not sure what you're getting at. But when you make a trade, the confirmation comes back - - usually in the form of an e-mail from the broker that actually identifies where it's coming from. That's my experience anyway.

So we don't get involved in trade confirms or anything like that.

Commissioner Hunt: Well, I guess, one of the things we worry about is how much reliance people are putting on the information they receive and whether that reliance is well place.

Mr. Lynch: Well, it certainly — when you get into this debate, I would like to bring some of our editorial people over — because it's clearly a debate that has been raging in my company for over 100 years.

Acting Chairman Unger: Reliance?

Mr. Lynch: No, about whether — once you take advertising, are you then unbiased?

So I think that would be a much longer conversation than we're having here today because Reuters is a news service without a newspaper, without a television that takes advertising.

You know having a website that takes advertising is really our first foray into media — owning a media that would open us up to that question.

But clearly, Nadine, I think was making the comment, it's just not economical. If your brand and the value of your company is based on building a trust with your consumers, then at what point is it economical to lose that trust because customers don't believe that that information is unbiased.

And for a company like Reuters we have way too much at stake to do that.

Ms. Smallson: I agree with that. I don't see where the model would be for Intuit or Yahoo! or any of us to become so unbiased or to really — if you will — move over to the advertisers, having them control our content, our news.

And again, most of us are aggregating news from a variety of sources, including Reuters or Dow Jones or others. And so I know the analogy is imperfect, but when you look at accountability for information in the offline world, you read an article in Forbes or Barron's and they make some type of a suggestion on good stocks? Or the top ten — whether you're on CNBC, or in the news media.

Where is the accountability for that information? They're publishers. And again you look towards the source of that information.

And hopefully we do have savvy investors. And they're going to say, yes, the Dow Jones does give good information so I can make a good financial decision.

So I think accountability comes from reputation. It comes from the source. It comes from a number of different sources.

But the online world makes it easier. And is it making it easier what concerns the Commission? Or is it somehow some types of consumer problems that are concerning the Commission?

That's something we would like to understand better.

Mr. Gibson: I think the analogy is a very good one between offline and online.

To build on what John was saying earlier that we have the integrity of our members at heart. And very similar to The Washington Post having an editor, a business editor that is driving home the integrity of that information, we also have a business manager that is trying to put advertisements in there.

Your analysis of the vacuum cleaner is a great one. Every single day we have this debate to make sure that those lines aren't blurred, that we're doing some self-regulation in terms of trying to determine what the magazines have done in terms of standards.

We're ensuring that we have standards, as well, because we don't want the members to see any blur. And you asked the question what are our members thinking, and that's something we're looking at literally every day in terms of focus groups.

And our members are clearly understanding that when they go over to the brokerage side, it is a brokerage side.

Commissioner Hunt: I am concerned about the confusion because it's easier. And I wonder whether that's something the Commission has to be thinking about every day.

Acting Chairman Unger: Well, I have a question.

If, as Nadine mentioned, one of the competitive issues is who has got better information on their site, most of your site is accessible to non-customers, right?

Ms. Genet: Our public website, anyone can go on our public website.

And they know that's our website and what the information is and it's really clear when it's third-party information we credit the third party because we have to.

And when it's a point of view from one of our analysts, we're really proud of that. And we beat our chest and say, it's a point of view of our analyst.

If you're a client of ours, you get different information — more information, more of our information — proprietary information, as well as third party information which we think our clients are looking for.

Acting Chairman Unger: So what I'm getting at is, what makes a consumer go to a portal, as opposed to a broker-dealer, if it's similar information? Do you have a sense of that?

Ms. Genet: Well, I mean, it depends on the client. Not all of our clients are going to be clients that are their clients, you know?

So it depends who the client is, what they want, and what information they're looking for.

Acting Chairman Unger: I'm talking about non-clients, members of the public who — as you say — can access a lot of your information?

Ms. Genet: Members of the public who are coming to our site are interested in what our point of view is and the information they can learn from us.

They're not coming to our site to get standard information they would get on a news site. They're looking for, is there a point of difference that UBS PaineWebber has to offer? And is that intriguing enough for them to want to come back and think about us as a potential broker-dealer.

That's why they would come to us and why they may go to a variety of places in terms of saying, is there something different that we're saying that they think is intriguing or interesting.

Ms. Smallson: Well, why would they come to a financial portal I think is a good question. And as it has been, at least since 1996, it's because they felt that this was a source of unbiased information that was reliable from, for instance, Intuit which has been in this business a long time that feels that they could provide unbiased information, that they're not going to tout a particular company or security or particular products that are being offered by a specific broker-dealer.

So they came to us to get this aggregation of information from a variety of sources that was reliable. And as I said before, then if you will — it started with the financial portals.

And then the broker-dealers started offering a lot of that same information that traditionally — if you will — was offered by the online companies.

So they still want to come to the Yahoo!s and Intuits and AOLs because they feel like they're not going to be — let's say — pushed a particular product line, or whatever, and that they can get a variety of different information and tools.

Mr. Gomez: Well, I think that while there may be some consumers that are cynical about their brokers, they think really it has generally been because the financial portals have out-executed the broker-dealers in terms of delivering a high quality customer experience.

They really have been on the forefront delivering news charts, quotes in an integrated way and with other information that people want — to the point where broker- dealers were at risk of squandering the relationship with the customer for market data.

But there has been really a big game of catch-up going on for the past two or three years. And the brokers, by and large, are holding their own in terms of competing with the financial portals in terms of the quality of information and the customer experience.

So that's a constant battle. And it's a battle that the folks at this table are fighting over who owns the customer and provides that value added experience of accessing market information.

And that's something that everyone is concerned with.

Mr. Scheibel: But isn't that discussion a real reflection of how the free market has worked? That somebody comes up with an idea of how we're going to appeal to consumers to draw them to our site, meaning providing very high quality independent information that will be useful to investors and others and lo and behold a lot of other people have to follow and compete with that because, in fact, it's working. So isn't that sort of the independence of what we're doing and the fact that we are all so concerned about our brand that we're not going to in any way compromise that independence, doesn't that show how the marketplace is itself working?

Mr. Gibson: And that's key for the portals that we are providing an unbiased side. As opposed to Paine Webber who may be giving something specific and biased and they've had success for the past six months doing that so the consumer knows they want to go out there and benefit from the experience where they've been successful in the past.

Acting Chairman Unger: It's 2:45 and it's supposed to be time for the panel to be over. But if you wouldn't mind, we started about 10 minutes late. If you wouldn't mind running it over a couple of minutes that would be helpful to continue the discussion.

Because the two things I wanted to touch on were the financial aggregation screen-scraping services and whether anybody here provides them and what they think of that, if that's part of the success of the model of the portals and then also to have Clark talk about the cake- eating experience that FOCUS Reports present compared to the oversight of website content that you provide.

So I guess, I'll open it up — unless anybody wants to comment on anything that we were already discussing.

Acting Chairman Unger: About the financial aggregation services — if anybody here provides those services and sort of what the success rate has been and the customer demand for that service.

Ms. Smallson: Those eyes are turning to us since we do aggregation, and I guess the question on success, I still think that it hasn't been fully polled yet. I will say — yes, there has been consumer demand. Consumers want to be able to look at all their accounts in a single way and to be able to go to a site and let's say if they've got five different bank accounts or brokerage accounts et cetera, that they can look at them and, again, manage their personal finances through not having to go to let's say five portals, maybe desktop software, back to their checkbook et cetera.

You know, Intuit obtains this information from a variety of different ways, through direct OFX connections with agreements by the financial institutions as well as the broker-dealers, as well as through the screen scraping technology, which so far we have not had any complaints from any financial institution about.

Currently, you cannot, again, trade or transfer funds or let's say do more robust types of activities. Whether or not there will be continuing consumer demand for this that would come from a specific financial portal, again, is yet to be seen, but we do have demand.

Mr. Gibson: And the consumer demand for account scraping certainly on the America Online environment has been very strong and was very strong a year ago, and the consumer demand wanted to have more and more account aggregation. But as you joked earlier about how many complaints you get as the market has gone, instead of looking at your portfolio four or five times a day, you want to look at it once a week and then quickly shut it down.

So the account aggregation demands from the consumer have softened dramatically, from one of our top recommendations of what we need to continue to enhance, to not even on the radar screen.

Acting Chairman Unger: Can customers, your customers, actually access their accounts that you provide the aggregated financial data for through the site? Do you provide hyperlinks?

Ms. Smallson: You mean access the account?

Acting Chairman Unger: I mean provide hyperlinks to the accounts that are reflected in the —

Ms. Smallson: You can go directly to the account. For instance, if you have a Wells Fargo account, you can go directly to that Wells Fargo account, or what you would do is be able to come to the aggregator site and be able to connect by basically telling the aggregator to go get the information, and you can either get that information either through the screen scraping technology or through a direct OFX connection, which is the communication protocol that the financial institutions are using with —

Mr. Gomez: It's still very early. It's a one-trick pony. It's one page. The whole service is one page, and it's a snapshot in time that just shows you something approximating a consolidated balance sheet but not. So the idea is that it is an important technology that as there is more interconnection over time, you will actually be able to put some value added services on top of that aggregated data such as, well, you know, "I've looked at this" or "my algorithms have looked at this and you need to diversify" or "you need to pay down your credit card" and so on and so forth. Those are the services that are the promise of this technology, but we are really in the very early — of account aggregation right now.

Acting Chairman Unger: So who pays for the service of the account aggregation?

Mr. Gomez: The institutions.

Acting Chairman Unger: I mean who —

Mr. Gomez: Well, maybe not Intvit — let me just say one thing. There is a dominant provider of account aggregation services, Yodlee, basically the only game in town. And Chase and Fleet and whoever wants to provide that as a service to their customers pays on a per-user basis or a flat-fee basis to allow that account aggregation service to be made available through the financial institution's website. That's through the financial institutions.

Now, in the case of the financial portals —

Ms. Smallson: The financial portals are paying. The consumer is not paying anything right now. And again, we've talked a little about subscription models — don't really see that that is going to go in that direction. So, really, the portals are paying the Yodlees. There is also some third-party software now that is currently being developed to do the same type of functions that Yodlee is doing but, again, it's the portal that is paying, not the consumer.

Ms. Hooper: And the only thing I have to add to that that we've heard from some of our members, and, once again, it's balancing the good and the bad and leaving out the ugly, hopefully, but you know while most of us as investors would want ourselves to have the big picture of where our investments lie, and those could include antiques and rugs and coins and securities, some of our members have expressed a concern that, in using outside aggregation services, they don't have an opportunity to validate the accuracy of the information. They don't feel like they should be accountable for the information that doesn't include exactly what has been sold through their firm. But once again, if that is transparent, if those differences are transparent to the customer, then the member firm sometimes feels that it's going to be held accountable for that bottom line regardless of whether it's had any input into all of the different components of it.

Acting Chairman Unger: Is UBS PaineWebber an operator, screen scraper?

(No response.)

Well, Clark, if I could have you indulge us for a couple of minutes of a description of the oversight of firms.

Ms. Hooper: Thank you, Laura. I actually think that you'll be the ones indulging me, because as someone once said to me, regulation is hardly the sexy side of the securities business. I'll — very quickly, just to draw the distinctions of what broker-dealers, and there are a couple of you here at the table, so I'm sure you have painfully gone through this process, but what we are trying to do in our attempts to protect investors. I've been asked, I guess, basically to sort of briefly cover what we call our advertising rules, which are really the rules that govern what our members say and do in communications with the public, and also suitability rules as they may apply to some of this online advertising.

I guess there are just a few really important points that distinguish what's going on in the broker-dealer community, and that is in — and I'm going to use advertising rules as the catch all. In our advertising rules, there are a few things that have to happen. One is that all advertising done by a broker-dealer has to be approved prior to use by the firm.

So there is a clearance prior to using it — and I'm sure that includes the advertising that is going up on these portals. And advertising includes a variety of media. I'm using advertising once again loosely, but websites would be included in that. So, therefore, when we look at websites, because a lot of them have to be filed with us especially if they relate to certain types of products, we're looking for fairness and balance, and we are looking that material information has not been omitted. We are looking for claims that aren't exaggerated. And no projections are allowed or predictions of performance. So when we start looking at the content, it's a pretty rigorous review of what's allowed in the information on these websites.

In addition to our rules, of course, broker-dealers must comply with SEC regulations as well.

I guess when we look at websites, we are primarily focusing on the content that will promote specific products or services. We are not so much concerned about the general educational type of information that's going out. But in the course of looking at websites, we recognize that there has to be some flexibility, and we are not trying to have our heads in the sand about what's going on in the world of technology today.

So the ones that primarily concern us in terms of looking at them from a broad-based perspective are the ones that are accessible to anyone, the customer as well as the non-customer, the ones that are up there for anyone to view. So we really try to take a closer look at those, and the ones that are not visible by everyone, the ones that are password protected, which I would assume would be those that are open to customers only, they are allowed a little more breadth of information. Group e-mail, for example, is something that we would look at it as a communication with the public, whereas an individual e-mail is treated differently, it's treated as correspondence. Chat rooms are considered sales literature or communications. Bulletin board postings would be considered advertising or sales — so we really are having to look at each different category and recognize and hope that our members recognize that whatever is being said in these different venues has to comply with the content rules that are set forth in our conduct rules.

And once again, I would say, based on what I've learned here today, that hyperlinks would be one of the most important things that our members would have to be looking at to ensure that whatever websites they are linked to are not going to provide any information that in any way might be false or misleading if it's about products or services that they themselves are offering.

In terms of suitability, and this is really the big question that we are grappling with, that everyone in the industry is grappling with, it's very clear and straightforward that when a member makes a recommendation for a security or a strategy to one of its customers, that it's got to ensure that that's a suitable recommendation, and it doesn't matter if that's done online or on phone or in person or whatnot.

Customer interactions, I think, on the Internet, really do raise a host of issues that are new to us, that have not yet been resolved, and that we are all grappling with. We have just issued a notice that lists a number of sort of hypothetical situations to try to give our members some guidance as to where we feel we can draw a line and say yes, you are making a recommendation, or you do have to determine suitability versus not having to do that, and it sort of goes back to whether you're providing general educational information or whether you're really making a distinct type of recommendation for a particular customer.

We're going to have a call-in for our members, a conference call in June, June 20th to be exact, to discuss this issue and to try to get some member interaction and questions so that we can further address some of the questions that are arising for members in terms of determining whether or not they're accountable for making sure that whatever the online customer is doing, is suitable for that customer or not.

Acting Chairman Unger: Thank you very much. So you look at where the firm's hyperlinked to, but you don't look at where the firms are hyperlinked from, right?

Ms. Hooper: In general that's correct. We are provided with hyperlinks. But I have to say that, you know, when you say what we are looking at, I mean in the world of everything that's out there, and I was quite impressed with your statistics Donna, because we are all hit with the enormity of what's happened in such a short period of time, we don't look at everything. What we do is that we require that our members ensure that the content of whatever communication they're using, whether it's a smoke signal or the internet, complies with the content and other conduct rule standards. So if a member firm is hyperlinked to another site or if it provides hyperlinks, we would consider that it should be aware of what it's either hyperlinking to or hyperlinked from and make sure that it's not jeopardizing itself in terms of compliance whether we look at it or not.

A lot of the time when we look at it it's because someone has complained, so they would prefer that we don't look at it for a lot of reasons.

Acting Chairman Unger: Well, I will give the opportunity to the panelists to have the final word if anybody would like to make — we have a couple of seconds left — any final points or address something that hasn't been raised.

And I want to thank all of the panelists. I know it's very brave of you, especially for those of you who are not registered or have anything to do really with the Commission to come to the building and be willing to participate in a discussion such as the discussion we've had today, but I can't tell you how grateful I am for your willingness to do so and to really provide us with the information and education that we need to have a sense of what's out there in the financial and technology world. So thank you very much. (Applause.)

Acting Chairman Unger: So how about a ten minute break so we can switch the panelists and then come back.

(Brief recess.)

Panel 2

Acting Chairman Unger: I want to thank the second panel that we have assembled and apologize for running over. I'm really sorry about being sort of late in getting the second panel started.

I will say by way of introduction briefly that about half this panel was involved in one of my online trading roundtables that sort of originated my interest in portals, which I mentioned earlier. So this is somewhat a reunion to talk about an issue that looks a lot different than it did when we first had the discussion. So I do want to welcome back those participants and welcome the ones that I'm just meeting for the first time today. I really appreciate your time and, again, your willingness to come and participate in the discussion. We're all sort of feeling our way around, and so I appreciate that. If everyone is comfortable with this, what I'd like to do is go around the table and have you give a two-minute introduction of who you are and maybe outline some of the issues you'd like to bring up today. I'll start with you, Dr. Wittman.

Mr. Wittman: My name is Dr. Hal Wittman. I'm a CFP, certified financial planner. I'm Secretary of the American Association of Individual Investors of the local chapter. I'm also a member of its Board of Directors, and I'm a member of the Financial Planning Association of America, which meets on a local level as well.

I'm pleased to be here. Some of these issues are very pertinent, and part of the reason for my being here I think is to serve in part as an investor advocate.

Acting Chairman Unger: That's correct. Thank you. Kevin.

Mr. Moynihan: I'm Kevin Moynihan. I'm an Assistant General Counsel with Merrill Lynch in New York.

I was asked to serve here to substitute for Anne Flannery who was scheduled be here on behalf of Merrill Lynch, but I've been working for the past few years with our online services. Merrill Lynch has an online broker service called Merrill Lynch Direct, in connection with which we've been doing discussions with portals about various types of relationships and Internet advertising. And I guess that's about it for now. I'm pleased to be here.

Acting Chairman Unger: Thank you, Kevin. Andre.

Mr. Owens: Hi, my name is Andre Owens. I'm a partner at Schiff, Hardin & Waite here in Washington. I guess my perspective in this area stems primarily from representing broker-dealers who are involved in advertising, co-branding and referral arrangements with portals.

As in most cases, broker-dealers seek to minimize their potential exposure in connection with portal arrangements, and the primary concern that's frequently voiced by my clients are how they can limit their exposure in the event that a portal partner is later deemed to be — have acted as an unregistered broker-dealer. When we address this issue, we usually focus on all the traditional indicia of broker-dealer status with a heavy emphasis on looking at permissible compensation structures and how to avoid confusion among investors with respect to responsibility for portal content.

With respect to portal compensation arrangements, there are probably a couple of points worth noting. First, I think anyone whose done any work with broker-dealers in this area knows that the range of potential compensation arrangement really varies solely upon the creativity of the business people who are involved, and they're very creative. View on a continuum, you have arrangements that can range from fixed fees to click-through payments or payments for account applications or account openings. And I suppose the most problematic is transaction-based compensation, is pure transaction-based compensation.

There a number of staff no-action letters with respect to finders generally, but in the absence of specific guidance with respect to permissible portal referral arrangements, broker-dealers have looked to the paper world to try to figure out what's permissible and what's not. However, as you know, there is a great variance in terms of what's permissible for not-for-profits and for-profits, and most of the portals that I've dealt with are for-profit.

The second point with respect to compensation that I'd like to mention is that the manner in which the staff looks at permissible compensation arrangements can have competitive disparities, particularly with respect to newer or smaller broker-dealers, who frequently don't have funds to pay large fixed fees. With respect to larger broker-dealers who may be dealing with a new portal that doesn't have an established track record, a fixed fee is particularly risky.

Of course, underlying all of this is the concern with the salesman's stake that comes up in connection with transaction-based compensation, and I suppose that there is some validity to the possibility of a portal sort of modifying its content, in an attempt to take advantage of transaction-based compensation. Without minimizing this, I just wanted to mention there are a few things in place that we ought to think about. First, both the NASD and the SEC have made it pretty clear that broker-dealers should not be linking to sites where they know or have reason to know that there is misleading or confusing information. The NASD, in particular, has that guidance out there.

Second, I think many portals somewhere on their site disclose the extent to which they or their partners are responsible for content, and some brokers indeed use landing pages. I think Steve and others have suggested some novel approaches in terms of disclosure.

I'm really glad to be here today, and I look forward to participating in the discussion.

Acting Chairman Unger: Thank you, Andre. Steve.

Mr. Stone: Thank you very much. I appreciate the opportunity to participate on this roundtable. It covers an area of law that I've actually been very interested in over the past half decade.

I've had the pleasure of participating in the evolving dialogue on these issues working both with broker- dealers and their discussions with the SEC staff, as well as working with portals in urging a rationalization of restrictions in this area.

That said, I'd like to focus briefly on three particular points before we go further. First, I'm not aware, and I'm not sure that anybody else is aware of any abuses or customer protection issues or customer complaints for that matter, that point out the need to treat portals as brokers. After all, customers are protected. Regardless of any arrangement with a portal, it is the registered broker- dealer who holds customer funds and securities, who is effecting the transactions, executing the customer orders and issuing confirmations. The SEC already has ample authority to police, investigate and pursue fraud.

Second, the narrow focus on transaction-based compensation, which may have been appropriate in the early days in 1995 and 1996 when the staff was trying to devise its approach in this area, I think ignores the larger environment in which these arrangements are now developing. One thing the past several years have proven is that the manner in which e-commerce is conducted constantly changes and is difficult to predict. Competitive pressures affecting broker-dealers and portals alike necessitate that compensation arrangements be flexible. Unduly restricting arrangements between broker-dealers and portals in a manner that is not directly related to investor protection issues, is at the very least inefficient from economic and policy perspectives.

Third, with the experience that the SEC staff has, and the industry, for that matter, has now gained in these past five years, we should now be in a position to fine-tune these restrictions on arrangements between brokers and portals in a way that makes more sense and provide some flexibility. One possibility would be to deregulate compensation arrangements involving portals that don't recommend securities, and in so doing, allow portals that recommend securities to recommend securities to receive compensation that at least is not tied to particular trades.

Another approach would be to abandon entirely limits on compensation and borrow the approach taken under the Investment Advisers Act, permitting referral arrangements with appropriate disclosure.

If flexibility in the investment adviser referral arrangements area has been permitted without need for subjecting solicitors to adviser registration, then I think it is unclear why arrangements involving broker-dealers should not be or better yet, should be subject to far greater restrictions.

I question, though, the desirability of creating a "lite" category of brokers for portals. Not only does this seem unwarranted under the circumstances, but I fear it could create a "flight to light," as certain segments of the brokerage industry might jettison traditional licenses in favor of less-regulated lite models. It would be what we've seen in some context, in some segments of the brokerage industry, where certain people who didn't like the supervisory structure of broker-dealers fled and created investment advisers. It raises some policy issues that we have to confront.

Again, I appreciate the opportunity to participate. Thanks.

Acting Chairman Unger: Thank you, Steve. Hardy.

Mr. Callcott: I'm Hardy Callcott, General Counsel of Charles Schwab & Co. I appreciate the opportunity to be here. I think this roundtable is in the best tradition of the SEC — actually seeking input from the real world about what is really happening, as opposed to just sending down a ruling from the mountaintop. I do have some —

Acting Chairman Unger: Hmm, maybe we need to have a roundtable on that.

Mr. Callcott: I do have some specific ideas which I think we'll get to later on. I did want to mention a couple of general principles that I think are worth keeping in mind. The portal companies that were on the last panel are outstanding companies with outstanding sites who want to do the right thing. And I think if there's adequate clear guidance, both they and the broker-dealer industry will do the right thing and not cross over into the line of impermissible unregistered activity. I think that what would be helpful to avoid is sort of 12 factor, multi-factor balancing tests, where you don't really know what factor gets what weight. That's what makes it very hard to structure arrangements that are permissible under the law. And I would say that this area, the Internet in particular, and I by no means mean to criticize the staff here, the no-action letter process, just because of the time that it takes, is a very hard process to use to get adequate guidance in time for the business imperatives.

To echo a little bit something that Steve just said, I think that there has been a lot of focus by the staff on payment arrangements with some results that, and some distinctions that, I frankly think are a little bit counter- intuitive. You know, you can make a nominal payment based on an order but not based on a completed transaction. And we found out about a week ago in the bank release, that nominal has something to do with how much a bank teller's annual salary is. And you can pay a non-profit, like a credit union, based on the opening of new accounts, but a for-profit company, you can pay only based on applications, whether or not they become open accounts or leads or something like that. To me, that is a little bit too much in the weeds of detail, and what the Commission really ought to be looking at is the overall customer experience, and is the customer being misled. Are there investor protection concerns that are raised by what's going on on particular websites? And that is the history of the Commission's focus on investor protection, and I think that's the focus that the Commission ought to have here.

Acting Chairman Unger: Thank you, Hardy, except for the mountain comment. John.

Mr. Polanin: Thank you, Chairman Unger, Commissioner Hunt. Good afternoon. My name is John Polanin. I am an SEC alumnus, but please don't hold that against me. Actually, it's a thrill to sit on this side of the table for once. As most of the staff knows, we usually get the questions from the other side.

I am the Managing Attorney for Equities at UBS Warburg, and I'd also like to thank Chairman Unger for inviting me, notwithstanding the fact that Nadine already spoke earlier today on behalf of our sister company, UBS PaineWebber.

I've been involved with the finder phenomenon as a regulator, as a student and as in-house counsel for a number of years, and I guess I'll rise to the challenge and respond to what Hardy said about no-action letters. No, they're not perfect, and you can't always tell what factors are being balanced, but at least it follows the sort of common law approach of the staff not taking a position until it has to. So it allows for a great degree of flexibility. I think, though, the time has come to provide greater certainty, because when you're counseling clients, whether in-house or at a law firm, what they need is predictability of results.

And so we all look forward to the Commission's anticipated rulemaking in this area.

With respect to Internet portals and also to finders generally, I'd like to echo what Steve said about the Commission formerly considering taking the approach already embodied under Rule 206(4)-3 under the Adviser's Act, which, for those of you who haven't looked at it recently, permits cash payments by investment advisers to solicitors under certain conditions, including a written agreement, customer disclosure, acknowledgement by the person being solicited, and "bona fide" — that's in the regulation — bona fide efforts by the adviser to ascertain the solicitor is indeed complying with the agreement.

Now, Professor Hoffman gave us a grand tour earlier this afternoon of web-based advertising, and one thing that she stressed, and I think the other panelists agreed with, was accountability. Those paying for the advertising can see exactly what the results are, and I would suggest that by the same token, that accountability would allow broker-dealers to better monitor what the portals are actually saying about them, and to control the disclosure that's being made to a degree that I think would assuage the concerns about investor confusion or investor protection, provided that broker- dealers are still responsible, and I think we would all like to be, for opening any accounts either in the online world or offline world. The suitability rule still exists, know your customer requirements are still there, and I think they should address concerns about investor protection, in addition to disclosure.

So, finally, in determining whether and how to regulate the relationship between portals and broker-dealers, I would urge the Commission to look at the cost versus the benefits before imposing too many new requirements, if any, and to figure out what additional protection is actually going to be derived if a registered broker-dealer is already involved in the process.

A lot of the information on the Internet is passive, it's impersonal in nature. It seems very well suited to the kind of approach that Rule 206(4)-3 takes under the Adviser's Act. And I know this is not a novel idea, but I feel that the time has come for it to be formally considered. I think it's been discussed informally with the staff in the past. I think if the staff is not comfortable applying that approach to finders generally, because in the face-to-face context maybe there is a greater need for sales practice regulation, I think in the Internet context, this approach might work and should be considered. I thank you for giving me the chance to express our views.

Acting Chairman Unger: Thank you, John. Did you want to say something? Bob?

Mr. Colby: I'm Bob Colby from the Division of Market Regulation.

Acting Chairman Unger: See how succinct he is. Brandon.

Mr. Becker: I'm Brandon Becker, a partner at Wilmer, Cutler & Pickering. We do a variety of work for broker-dealers and portals.

I think my colleagues have already highlighted a variety of the key issues. The two I guess that I would add are that I would like to see the tone of the conversation change a little bit. Portals have provided a very robust set of information which has enhanced the ability of individuals to evaluate their financial investments. That's all been to the good. It's created more competition for broker-dealers because portals, unlike broker-dealers, are in the business of disaggregation and providing better services for those individuals. We've already heard commentary to the effect that that has induced broker-dealers to provide equally richer and more robust information, rather than spending our time worrying about whether or not a portal may or may not be close to being possibly a broker-dealer, or if it were a broker-dealer it might be regulated differently.

I'd like to try and facilitate the conversation to help determine how can these kind of robust information services be made more widely available to more individuals.

I do think that transaction-related compensation has become too much of a talisman where basically we've taken a perfectly credible portion of a test and tied to identify a group and forgotten that what it's trying to identify is whether you're engaged in the business of effecting securities transactions. And as a result of that, it's impeded effective negotiations between private parties who are not trying to do anything illegal, immoral or fattening, but are just trying to come to an economic rationale about how to make information available to individuals. So I hope that that can be more widely recognized as a good thing, rather than something to spend a lot of time being afraid of.

Acting Chairman Unger: Thank you, Brandon. Mike.

Mr. Hogan: Hard to follow. I'm Mike Hogan. I'm Managing Director and General Counsel of CSFBdirect. A lot of the debate seems to confuse several different issues to me, and disaggregation — I was going to use the word disintermediation.

What's happening out there is a disintermediation of all of the functions. The earlier panel, I thought, was fascinating, because everybody was trying to go find a broker, a live human being, a customer's man to worry about who's accountable, who's responsible, who's going to take care of something. The Internet channel to date has become a delivery vehicle for the self-directed individual. It is absolutely not reaching out to everyone. Everyone does not use it. There are clear select groups of people who prefer that channel over others, but there are larger portions of the population who prefer the traditional models of a living, breathing, human broker who is going to help them with things.

The other thing that's happened is the regulatory pattern about what is a broker-dealer. When you break it down, you provide confirms, you provide statements, you provide information of a limited nature. You didn't used to be able to do that in an aggregated way and in a live, real- time way. What the portals were able to do quicker than the broker-dealers could was provide that functionality to someone in a useable way. That's not a bad thing, it's a very good thing. What I think needs to be the result from about 10,000 feet, without getting into how, is you don't want to regulate portals or websites that provide aggregated information from identified sources, and you don't want to prevent people from being able to pay fees — I'll call them "finders fees" — for the referral of people who become customers. And those are the two principal places I think we all want to land. Thanks.

Acting Chairman Unger: Thank you very much. Jeff.

Mr. Holik: Thank you. I'm Jeff Holik, Acting General Counsel of NASD Regulation.

First off, I would just simply like to acknowledge the Commission and Chairman Unger in particular for the leadership role on these issues. We at NASD Regulation came to appreciate a little bit better the importance and the difficulty, frankly, of applying core regulatory principles to Internet activities when working together with the SEC and NASAA we developed our online suitability policy statement.

The ultimate decision of how to characterize portals under current federal securities laws will, of course, rest with the Commission. Thinking about my participation today, I decided that perhaps the most useful contribution I could make is to draw on my SRO experience and perspective to address some of the fundamental investor protection issues that I think should be considered in making this determination.

The longer I've had a chance to think about it, the more I've come to the conclusion that it is no simple task to decide, let alone to clearly articulate where the line should be drawn between mere sources of investment related information, and those instrumentalities that facilitate securities transactions to a degree warranting regulatory oversight. I found myself in agreement with Hardy and his phrase "The customer experience." I tend to agree that in making these determinations, the focus really ought to be on the function being performed and the degree to which that function creates risks that could harm investors. If, for example, the content of solicitation and promotional materials is deceptive or misleading, the provider perhaps is motivated out of undisclosed self-interest, investment recommendations are not prepared or appropriately supervised by properly qualified people, or the provider is in a position to take unfair advantage of information that investors may disclose while using tools.

Wherever the lines are ultimately drawn, they must be visible to investors. There was a lot of discussion about that at the first panel. As we've learned in the case of bank broker-dealer networking arrangements, investors receiving information and advice, opening new accounts, and placing orders, really need to know with whom they're dealing. And I think we need to know who's responsible for the information, whether it's opening an account, you need to know whether it's a broker-dealer, an investment adviser, a bank or as with many portals today, an unregulated entity. And any rule should ensure segregation of online real estate so that investors are informed, not confused, and are able to appreciate the important distinctions.

Difficult though the line drawing may be, we certainly applaud the Commission for sponsoring this forum, and I personally want to thank Chairman Unger for inviting us to participate.

Acting Chairman Unger: Thank you Jeff, Ellen?

Ms. Koplow: I'm Ellen Koplow. I'm Acting General Counsel of Ameritrade Holding Corporation, and I also want to thank you for allowing us to participate in this panel today. First off, Ameritrade also has a very active relationship with the portals, and we value those relationships. They have benefitted us greatly, and we consider them to be valuable and want to continue them.

We do, though, have some concerns as we watch the evolution of the portals with the type of information, services, and products that they offer, not alone as information providers, but in combination with the trading links, how, or where, the trading links are placed, and the technology that is now used — the direct links, the hyperlinkings to the brokerage sites — and whether there has not been some crossover to be discussed in the brokerage arena. I look forward to a lively discussion on that topic.

Acting Chairman Unger: Thank you, Ellen. David?

Mr. Lipton: I'm David Lipton. I'm a professor of law at Catholic University, Columbus School of Law. I head up there something that we call the securities regulation program.

I see that it is quarter to four and this ends at 4:45, so I guess I have about an hour for my introduction.


Mr. Lipton: I always wonder what they do with the law professor on these panels, because we really don't get involved in the nitty gritty, we're up in the ivory towers, or ivy-covered towers, and I tried to think of what it is that I am supposed to do here, and as a good law professor, I decided I would try to ask questions.


Mr. Lipton: And as the afternoon has progressed, fewer and fewer of these questions seem to be necessary to ask because so many of them have been previously addressed, though that doesn't always stop me from asking them.

One of the questions that I think we need to focus on is one that seems very obvious, but one that perhaps we haven't fully discussed, is how are we going to define these terms, "portal," and how are we going to define the term "broker-dealer."

And I suspect we believe that we have definitions for broker-dealers out there, but if you look at some of the current no-action letters, I think particularly MuniAuction from last year, the definition, or at least the mechanism for flushing out the definition, has expanded so that it would be very difficult to keep a portal out from the definition of broker-dealer, and from participation in the chain of events that lead to the transaction of securities. It's very hard to keep almost anyone out of that definition.

Secondly, I think we need to ask, how are we going to evaluate the desirability of regulating portals. And I believe that on that issue there has been the greatest concurrence. There seems to be, at least from the first panel, a broad consensus that it should be balancing investor risk against the desirability of maintaining some economic incentives for continuing to provide the services that portals provide.

And that's well and good, and if we all agree that that's the question to ask, there are still questions as to how we are going to measure those items, and particularly the investor risk, and that's where I saw some of the greatest disagreement.

Historically, the Commission has not relied exclusively on empirical evidence nor exclusively on anecdotal evidence, but has sometimes done the dastardly deed of just applying intuitive reasoning, and I've been trying to think out in my mind what the first few paragraphs of the executive summary of the ultimate portal release is going to look like, and I'm sure it's going to include both some anecdotal evidence, some empirical evidence, and some intuitive reasoning as to what the risks are to investors from leaving the portal system as they currently are in terms of regulation.

Another question that I think has been addressed most recently by panelists on the other side of the table, John and Steve, is how do we respond to these regulatory risks? And I think that in the course of discussions, we've seen virtually the full panoply of approaches, but I think we have to move away from the thought that responding at all is going to strangle portals.

We have seen a broad range of possible regulations from full-blown broker-dealer regulations and broker-dealer lite, to caveat emptor type regulations — "We are not a broker-dealer" or "We do take compensation from our advertisers" — to reactive regulation — anti-fraud provisions.

I think if I have a contribution to make, and that remains to be seen, my own particular interest is trying to analyze what the distinctions are between the risks that are involved in traditional advertising and information dissemination activities in print and in electronic communication media other than the Internet, from the risks that are involved in those activities on the Internet.

And there's been just the beginning of a discussion on that. I think at times we've heard said, well, the Internet is not very personal so we do not have to worry about that persuasive element of the broker calling you up and giving you a sizzle on the phone.

At the same time, the Internet provides a certain type of medium that is unlike the print, or television, or radio in that the activity that is being requested — the pressing of the button, the execution — exists within the same transmission medium as the advertising, unlike The Wall Street Journal, as we discussed earlier today, putting in the advertising saying, "call you're broker up."

There is no second medium to go to. It's immediate. It is almost fun at times to press those buttons. It is obviously widespread, and it is extraordinarily simple to activate at any time of the day at any location, and that also distinguishes it from print media and television media. And I think we need to spend a little bit of time focusing on those distinctions in order to come back to the other questions of what are the risks involved and how do we want to respond to those risks.

Thank you.

Acting Chairman Unger: I was just thinking you might have been serious about that hour.

Mr. Lipton: Yeah, right. I was worried myself.


Acting Chairman Unger: Thank you very much.

I'm torn about proceeding in two ways. One is just sort of stepping back from the existing regulatory scheme, because I think that's what's giving us a little bit of a problem in terms of how do we make what exists now fit into what we're talking about.

But what if we were to just step back and say, well all right, say nothing really exists. What is it about portals that presents a regulatory challenge? What if anything presents an investor or risk of investor loss, or a compromise to investor protection? What is it that portals are doing? What's at stake and what should the Commission be looking at from that perspective, as if there was a clean slate?

Commissioner Hunt: Yes, it would be very nice to talk about a clean slate. I've never thought about doing that, but we've got 60 year old statutes we've got books full of regulations, we've got people who know the industry, at least knew it before the Internet. And I don't think it's possible, although Senator Graham says he's going to do it, at least he said that before yesterday.


Acting Chairman Unger: Right.

Commissioner Hunt: And devise a whole new regulatory scheme just for the Internet. I just don't know that we can do that unless we're going to redraft the whole regulatory system.

Acting Chairman Unger: Well not so much the Internet as portals, because I think what I'm hearing, based on the first panel, and I think some people on the second panel have said it as well, is you can distinguish portals from broker-dealers because really they provide a valuable information resource without the salesman pressure, without handling customer funds, without a lot of the issues associated with broker-dealer regulation.

What's got us started on this discussion was, gee, portals are starting to look a lot like broker-dealers. They provide all that information, but they also make it really easy to execute a transaction and they're doing some financial aggregation, though not as much apparently as they were, and are they beginning to look a lot like broker- dealers.

So, I guess I'll just throw both of those up in the air and say, what do people think? Say you were back at the SEC, how would you approach regulating this type of activity, if at all. I mean one of our prominent staff people says we should just follow the money because the money is what presents the conflicts and the conflicts are what presents the potential impact on investor protection.

How would you approach it?

Mr. Polanin: I guess I would respond by saying sometimes what portals do reminds me more of investment advisory activity than brokerage activity, but then we're getting back into trying to fit a round peg into a square hole.

The two tests for who's a broker, which make the most sense to me, are "how are they paid," and "what are they doing." And I think the "how are they paid" test is predominating the discussion rather than the "what are they doing."

And if a portal is providing information and allowing investors an opportunity more quickly than over the phone perhaps to go to a broker and execute a trade, they still have to open an account with that broker unless they've done so already, so they can push the button immediately but that doesn't mean that the trade will be executed immediately.

So they are providing referrals, and they're engaged in the business of providing information and some of the information that they provide is, let's say it's advertising given to them by a registered broker-dealer who's already responsible for that information.

I'm not sure what extra bang for our regulatory buck we would get by regulating them.

Acting Chairman Unger: But it's not just about executing transactions. I mean the definition also goes to effecting a securities transaction.

Mr. Polanin: Well I would grant that "effecting" means more than "executing." That's axiomatic, especially if you look at the 11(a) rules, but that's not for public discussion.

I think that soliciting a transaction is a sign of broker-dealer activity, or as David Lipton calls it, a badge of broker-dealer activity, but I question seriously whether what the portals are doing is soliciting a specific transaction.

They're providing information about markets, about securities, maybe about performance of mutual funds, and as Mike said, it's aimed at a self-directed person, and these people are deciding either to use a pre-existing brokerage account which they can get to more quickly, or to go someplace where they have to open one up. So to me, what they're doing falls more into the investment advice category than the brokerage category, unless they can take advantage of the publisher's exemption from investment adviser registration, which is still there.

Acting Chairman Unger: Well why don't you pick up on that, Hardy, and discuss in more detail, the customer experience notion that you had raised.

Mr. Callcott: Yes, I think the investment advice issue is an important one, and a distinction I'd like to introduce is the difference between — which is in the NASDR's online suitability rule — generalized investment advice and individualized customer specific investment advice.

So the SEC and the CFTC have both lost the issue in the courts about their ability to regulate sort of generalized publishers kind of investment advice, which I think is primarily what you're seeing on the portals today.

Now one of the major portals does have an individualized advice tool, a retirement planning tool, which gets you to specific securities recommendations. That, however, is offered through a registered investment adviser. And I think when you get to the point of being paid, whether it be by advertisers, or by the customer for individualized investment advice, there definitely is the set of customer risks that ought to cause that to be in a regulated arena, whether it be in a broker-dealer or a registered investment adviser.

The generalized investment advice I think is much more difficult for the Commission to regulate. The type of site to me that is the most difficult, and I frankly don't have the answer, is the sort of stock touting sites — Tokyo Joe, as an example, where there is generalized investment advice, but for a subscription, with a "trade now" button and the expectation that virtually everybody who sees that is going to go and trade on it, and it is going to move stocks, and that raises certain concerns which the Commission's enforcement action addressed relative to touting and scalping, and those are very problematic activities.

And the question is, is the Commission's anti-fraud authority sufficient to address those, or do you want to have the ability to do examinations of those kinds of sites and not have to get formal orders of investigations and subpoenas. And as I said, I think that's a difficult issue and I don't know what the right answer is.

Clearly the Commission has been successful against some of those sites using its anti-fraud authority, but there is a broader regulatory issue there, and, as I said, I don't know what the right answer is, but I think it's an important one for the Commission to address.

Mr. Becker: Although on that point, I do think you can't always chase ghosts. There has to be a way for large companies that are trying to design reasonable compensation structures that take into account the issues that were raised by the first panel — accountability, responsibility for recommendations, clarity of the customer relationship where everyone is duly registered — to then negotiate their own compensation understandings between and among themselves, so long as people understand they're dealing with a regulated entity, and not have that entire regime haunted by whether or not it will make for a good enforcement case against Tokyo Joe.

And that just doesn't work in terms of letting those folks go about negotiating their business. And to that extent, to the extent that there are other avenues, whether it's a cash solicitation rule, or whether it's broker-dealer lite, or whether it's re-discovering securities information processors, or some notice provision.

You can accomplish that, but it needs to provide an avenue for people to go forward with their economic arrangements without having to always worry that every contract between an ISP and a broker-dealer isn't somehow suspect.

I think the SEC has a lot of resources to deal with people who tout or scalp online. They have made effective use over the past four or five years of section 17(b), an anti-fraud provision, of the '33 Act that had maybe two or three cases over 20 years. And also Rule 10b-5, as well as the provisions of Section 206 under the Advisers Act, which provide a wealth of ammunition for the Commission and its staff in pursuing people like Tokyo Joe, who would pursue, you know, through online means, fraudulent schemes. And I'm not sure that we need to place restrictions on what brokers can do with portals to accomplish those ends.

I would also add, you know, where brokers and portals have relationships, I think there is some — I would think that brokers have at least some responsibility not to police what's on the third party site, but just to make sure that the site is a reasonable one, seems to have some integrity as to its operations.

In the same sense, if a broker provides third party content, they have a certain level of responsibility for that content.

Acting Chairman Unger: And do you sense that is the current practice?

Mr. Stone: Oh, I do. I don't think any major broker has an arrangement with a portal whereby they will try to drive business from that portal or advertise their services on that portal, except with having some comfort as to the manner in which that portal conducts business.

Mr. Wittman: Thank you, Ms. Unger, for having me on the panel. I'm one of the few people who's not an attorney here. Therefore, I appreciate due process to give me a chance to express myself.

Acting Chairman Unger: They let you into Washington without being an attorney?

Mr. Wittman: It's unbelievable, isn't it?

First, there may be potentially an issue with the First Amendment here. There is a right for an individual to have free expression and free press. So one has to be very careful on setting boundaries as to what can or cannot be expressed or said. That's the first thing I'd like to add to you.

The second issue as I find it is whether or not a portal is a registered investment adviser or acts in that capacity in some way, shape, or form. And economics drives the system, in all systems. And when economics becomes involved, we're dealing with a different issue completely.

The third issue that I have found very interesting is the fact that the SEC — rightfully so — has indulged itself tremendously on FD regulations, full disclosure. Everything that goes on the Internet dealing with a hyperlink should expressly be defined as to where it comes from, and the position of the portal in reference to it. If not, the average person seeing the portal will draw his own conclusions, which might very well be erroneous; and acts as a — shall we say — shadowing effect with hiding the true effectiveness of the industry.

Another thing is, it seems that everyone is looking for a "Good Housekeeping" stamp of approval on what a portal does. That's going to be a very difficult thing to do.

Thirdly, or fourthly, economics, as I said, drives the system. Yet the express intent of the Internet is the dissemination of information. However, it can be abused and misused, and subject to interpretation by the individual viewer.

Now, how do you monitor that completely? You don't in any way, shape, or form except perhaps by compelling hyperlinks, in a manner of speaking, to identify who they are and what their relationship is to the portal. That at least gives some evidence to the viewer as to whether he's dealing with a hyperlink that has a vested interest in relationship to the portal itself.

As an investor, I use the Internet primarily to do what every good broker asks me to do, and that's called due diligence. And due diligence requires that I get information based upon credibility, that does not have a vested interest, I hope, or else I'm steered in the wrong direction completely.

And I think these are the factors that really have to be included when using a portal for dissemination.

And the fifth thing that's very important: It's a very competitive world. Everyone is looking for innovations and new ways to get to the public and to get to a customer. And there is a tendency sometimes unintentionally to stretch things a little bit, or to tell half-truths or distort it or not say anything. It happens to be part of the economics of the system.

And how does the average person really know that? How do you identify the credibility of the portal?

Acting Chairman Unger: Is the answer through the disclosure?

Mr. Wittman: Yes. I think the disclosure is terribly, terribly significant. I mean, even to say that we're not responsible for whatever happens when you go to this hyperlink is fine. At least let somebody know that someone who is responsible also has to be accountable. Responsibility carries accountability.

The individual broker who uses the portal is responsible for what that hyperlink says. But does the investor know that?

Acting Chairman Unger: Did you want to respond to that, Kevin?

Mr. Moynihan: I'd like to make a comment. The earlier panel had four or five portals, and I think people talk about a portal as though, you know, it's very identifiable what we're talking about. But, you know, these are the most prominent and most respectable portals in the industry, and they obviously have their own standards.

But, you know, talking about what portals should be allowed to do, or what they are doing, is like talking about what 5,000 broker-dealers are doing. It's very difficult to identify what they're doing and what they want to do.

I think a — and I don't think the folks — I also heard them say this morning, basically, or earlier, that they — I don't think they want to be broker-dealers.

Acting Chairman Unger: It doesn't sound like anyone wants to be a broker-dealer.

Mr. Moynihan: So perhaps the focus needs to be more on the relationships between broker-dealers and the portals in their various varieties. And I think there, from my own experience, there is a great deal of confusion under the existing interpretations about what broker-dealers can do by way of relationships and payments.

I think I'm concerned that if you took off the current transaction-based test, you would probably get into areas that are going way beyond advertising. I think there may be some — you know, some of the portals are very powerful businesses, and I think there may be practices developing. I think we have to ask ourselves: What practices would develop if you took away the current restrictions?

And I think it is a very complicated area. I don't think it's simple at all.

Acting Chairman Unger: So who has an answer to that question?

Mr. Owens: I don't have an answer, but I have sort of an observation. I mean, it sounds like, you know, we're really concerned about portal content since they're not executing trades. With few exceptions, they're not transmitting orders themselves.

And when you think about the content issue, it seems to me you have to decide whether you're interested in making investors aware of potential conflicts, or what you really want is to have that content scrubbed in accordance with, for example, NASDR rules.

If you're worried about conflicts, then some of the disclosure approaches that Steve and others have raised, I think, go a long way toward making you comfortable. You just have to decide what you want people to disclose.

If you're worried more about making sure that someone is actually — a principal is looking at the content and signing off on it, then that leads you down another direction.

But I would suggest that before you go there, you would have to think about some of the brand considerations that were talked about in the last panel, the fact that most broker-dealers are very much interested in putting their hyperlinks on reputable sites, and sort of balance that cost against what would happen if you, in fact, imposed the types of content restrictions or content review procedures onto portals.

Acting Chairman Unger: Well, Andre, I think you raised an important point, and a seemingly obvious point, but not one that shouldn't be stressed nonetheless, which is that portals do not appear to want to register as broker-dealers. I think someone said that they would drop those services faster than you could say "FOCUS Report."

What do investors give up or what do regulators give up by allowing portals to present this information on their site without being regulated, was the question that I asked when we first started this whole discussion, not necessarily here today but in this building.

And the answer is, registration, testing, education, sales practice rules — not necessarily the regulation of the entity itself, which is what would be more critical if they were executing trades and taking customer money, but what about the content of the portals? And if you have recommendations on these portal sites of specific stocks or shorts for Mom for Mother's Day or something like that, what does the investor think about that information? What's the credibility of that information?

And that is the second prong that you sort of raised: Not just is there conflict, but gee, how do I judge the value of this information? And I think you raised the First Amendment issue in that context, and that is a very real concern. And ironic that the non-lawyer would raise that.

But I think that's what we're looking at. And do investors distinguish between a portal where you have maybe these stock picks because of the fact that you can hyperlink to a broker-dealer — there's four or five firms, or there's "trade now"?

Does that somehow change the dynamics and the fact that there are these compensation arrangements? Is that different from reading in Money Magazine, as some of the other panelists have said, somebody else's idea of an article on top 50 picks or shorts for Mom or something like that?

And so do the regulatory concerns differ as a result of that? And I think the answer is yes.

Commissioner Hunt: I think the answer is yes, too. I think because it's easier and because there's not another step to take, even a physical step to take, I think the regulatory landscape changes.

Mr. Becker: But there is — one quick note. Money Magazine is online. The Economist is online. Wallstreetjournal.com is online. You're not going to be able to maintain a distinction that says, well, if you're the Wall Street Journal portal online, you have to register because you've got a "trade now" line. You are going to run up against these very well — and they're building in the same functionalities because they want to then capture the financial service.

So all I'm trying to highlight for you is that the distinction that says somehow the Journal is a different media: It ain't going to stay there. That's not going to be sustainable.

Acting Chairman Unger: Right. And what makes it not sustainable is the fact that they'll add these features that are leading us to this discussion today.

Mr. Hogan: Well, the marketing decision — the business decision is: Whose customer is it and who is going to let that customer be given up? We use all of these organizations. We advertise on all of them. And we now deliver our own content, as well as third party content, because what the consumer wants is the convenience that the Internet provides and the convenience that the computer can give you to sort and search things.

They want to do the right job. They want to go get ideas, which you get from an article that says, "short six stocks on Mother's Day." They want to then look up each one of the stocks. They want to see what we say about it. They want to see what Dow Jones says about it. They want to see what Motley Fool says about it. Then they may or may not want to trade.

And it's shortening the fact pattern a little bit to say this "trade now" button — I think we're focused on the wrong thing. That's not what it does next. It's really the relationship.

So as they said in the earlier panel, the push now, I think, for all of the firms — certainly ours — is to provide that quality experience with labeled information so they can see mine, and they can see the Motley Fool's, and they can see Dow Jones', and they can make their own weighted decision about over time about whose was better. And if they want to trade, fine.

They may decide that they don't want to do anything now. They've done their research. They're happy they were able to do it in a convenient, easy, simple place. Right now our consumer research shows that Yahoo! Finance is the most popular place to be, and often people will have that open as well as our site.

And they will use it for a whole bunch of different utility reasons, but they want to be able to go through the sorting and searching. That will shift over 18 months. Certainly I believe that we will be able to produce a more compelling way to do the exact same things.

But it's a competition for the customer. You want the customer to know you, to rely on you to provide the information. And I think it's going to self-sort itself out. The fact that I pay, in a metered way, Motley Fool to run an ad for us — to acquire a customer because that's all it's ever going to do — isn't terribly meaningful to me. And I've seen finder's payments over 20 years, and none of them have ever matured into anything that has been other than acquiring a customer.

So the real focus to me is providing quality information to people. And I don't like the word disclosure. That's labeled. You should know who the author of the article is. You should know the source of the information. You shouldn't have banners that say, "Beware." People ignore them after three or four, and it becomes just like the banner ads.

So the focus to me is, we have a moment in time that will not be the same 18 months from now because the broker-dealer sites will be different yet again, as will the portal sites. The positive good to the consumer is the delivery of all of this information in a competitive marketplace that they can get to, which is self-sorting at the credible level because everybody knows what everybody else is doing.

And there is instant feedback when anybody makes a mistake, when anybody comes up with a lie, when anybody comes up with a problem. The chat boards instantly have that information.

I don't think you want to do anything that shortens the ability of consumers to make their choice as to how to get the information. You simply want to make it available. And I don't think you want to do anything that prevents payment streams to develop, whatever they may be. And metering payment streams, as you saw in the earlier presentation, really is a practical functionality in terms of what are you going to be willing to pay for?

In the old days, you'd pay a bounty, is what the phrase was. It was a flat fee, and it was a projection that somebody made at a moment in time about what the value of an account was going to be over the lifespan of an account. And that was it. It was a one-time payment and it was over. All you acquired was the client.

There has to be a more mature way to make payments relative to the acquisition of clients, it seems to me. I don't think you run a high degree of regulatory risk, and I don't think you have any lack of jurisdiction over fraud in any event.

So the real bad thing you can get to — the development of a marketplace and the delivery of a consumer-empowering good — I don't think you want to get in the way of.

Acting Chairman Unger: Thank you.

Mr. Wittman: If I may add something, the means by which we disseminate information lately has been turned into a marketing instrument by many people. So it's gone above and beyond the original event of just disseminating the information.

The important thing is that it isn't a marketing vehicle. You've identified as much. I think the public is entitled to know that, just like an advertisement in a newspaper will put at the bottom, "This advertising for so- and-so." I don't see anything wrong with that. That's not regulation. That's really dissemination of information.

Mr. Holik: I think disclosure is certainly important. I'm not sure that in all cases, though, it would be enough. We've started to see at NASD some membership applications — not sure yet whether it's enough of a trend to be a business model — where an online firm applies for broker-dealer and membership and has an affiliate an online firm that's completely unregistered.

And the business arrangement contemplates that the applicant, our member, the broker-dealer, will do all the trade execution, handle all the money, et cetera, but that its affiliate, undisclosed, which is probably part of the problem, is going to do all of the marketing.

And ostensibly, on the surface of what this marketing arm looks like, it looks like a library. It looks like it's providing information. But the prospect, if not the intent from the get-go, will be more aggressive marketing that will be done.

So I guess our question is whether disclosure — that might be a starting point — but shouldn't we be potentially worried if this unregistered, completely unregulated marketing unit doesn't have qualification standards, the people could be subject to statutory disqualification — all manner of things could go on, and I'm not sure that we would be able to reach back to the broker-dealer for full responsibility.

Commissioner Hunt: And you don't think disclosure would solve all of those problems?

Mr. Holik: I don't. I don't think necessarily that it will.

Commissioner Hunt: But it's a good first step?

Mr. Holik: I think it is an important thing.

Acting Chairman Unger: I think that Steve wants to respond to this comment. And I'm glad you raised this, Jeff, because one of the things that I was going to raise next was, so if you in fact have this relationship, what if all of the selling — what you call marketing — goes into the portal and the execution goes into the broker-dealer, all the execution functions?

And I had heard some people in the industry saying, "Well, if you guys don't regulate portals, they're going to compete with us. They're going to take all of the customers, and we're going to become just execution facilities. That's all. We're not going to have any value added, and there isn't going to be any customer loyalty. No one's going to need a brokerage firm and have a relationship with the brokerage firm if they can get everything through the portal."

Mr. Stone: That's a good point. I think perhaps Michael, the one who talked about the intermediation or disintermediation issue is far eloquent on that point than I.

Just to respond to Jeff a second, this has been an interesting past couple of years. There have been some situations where portals have applied for NASD membership — not the larger recognized ones — and essentially the NASD had taken the position that you're not actively engaged in the brokerage business if all you're doing is operating a portal and essentially getting a finder's fee.

And, ironically, there were situations where I had to send in letters and talk to Caite McGuire in order to convince the NASD to permit the application to go through, which is a great irony.

But the reality is, if we are going to push portals into broker-dealer registration with respect to what they do, any large, broad-based portal is going to have to figure out some way of containing the scope of the registration, the scope of the regulation.

And that's an area in which there has been no clarification. People are really feeling their way. And what Jeff describes, I understand, may be unreasonable in some context, but may be reasonable in others.

So, for example, if Dow Jones decided that to receive compensation based on a pay-for-performance model they wanted to create a broker-dealer subsidiary that would be responsible — or, in the words of the MuniAuction letter, would take and assume full responsibility — for the brokerage-related functions on the website, and they were reasonable in defining what those were, I don't think that the whole of The Wall Street Journal website or publication should be subjected to mandatory NASD filing of advertising, which would include the entirety of their website, for a year, or forever for mutual funds, and the full panoply of regulations.

So I think the issue that Jeff has highlighted is perhaps in greatest relief when we're pushing portals to regulation as brokers. We're not going to have that issue if we say, well, let's focus more on the arrangements, set some reasonable contours, and have the brokers assuming some responsibility as they do in the bank channel for insuring that the arrangements are appropriate.

Mr. Stone: I think there has to be a balance.

Mr. Holik: And just to be clear, I'm not necessarily suggesting that, in my example, the unregistered affiliate ought to be a broker-dealer.

I think it's important, though, to define and find responsibility for the sales and marketing activity that someone has regulatory jurisdiction over.

Mr. Stone: I agree. I think we've all seen, over the past couple of years, people who have not come from the securities industry attempt to operate web sites in the financial sphere, and to get compensation for trading — for actually creating trading web sites — without an understanding of the discipline of our securities markets or the structure of regulation. That raises some significant issues.

What we're talking about here are arrangements with substantial portals, and we're dealing with recognized and registered broker-dealers, where the customer's assets are with a broker, the broker is executing the transactions, and I think that's pretty different. It's not quite the wild west.

Acting Chairman Unger: But what happens to the industry if you add to my scenario or hypothetical — if you actually allow a pay-for-performance advertising model, and then you really incentivize that marketer to change the dynamics of maybe the information on that site?

I mean, that's again another regulatory challenge for us going forward, and then to take it a step further, how do we preserve the ability to let those players who intend — who have the best intentions, to have the flexibility they need and not require the regulation yet?

Mr. Stone: I agree with the concern. I think you have one of two approaches.

Again, one is to make sure that if a portal has that arrangement, that they tag their bias, they disclose it and structure it under the Adviser's Act sort of approach, so that buyers can beware.

The Advisers Act, as we've talked about, does impose reasonable supervision obligations on an adviser in the referral context, and I think you deal with it in that way.

An alternative approach is to provide the greatest flexibility and compensation arrangements to pay-for- performance in a context where the portal is not providing the sort of recommendations that would be associated as creating suitability obligations under SRO principles.

Obviously, if you have a site that is providing personalized investment advice or recommendations, they're outside of the publisher's exclusion under the Advisers Act. Depending on the compensation arrangement, they may well be thrown into the throes of broker-dealer-dom.

But right now — and this may change — right now, we don't really have portals that are providing personalized, or, in broker-dealer-speak, customer-specific recommendations.

Mr. Calcott: If I could just add something, I think when you talk about transaction-based compensation, there ought to be a distinction made.

For me, it's very hard to get from the statutory language — effecting transactions for the accounts of others — for that to cover compensation based on account opening.

I just don't think opening an account is effecting a securities transaction for the accounts of others.

On the other hand, I think where you have the greater sales practice abuse, and where you may want to focus, is where the transaction is based on actual securities transactions, whether it be orders or transactions.

And, you know, I should step back and recognize that, you know, Schwab's no-action letters have introduced some of the confusion that exists on this issue, but I think that may be a line that is worth exploring.

I think what you heard this morning on the first panel was that there's a lot of interest in the account opening area and that's something, you know, with the current guidance, I think is very murky.

That's the issue where, you know, we have had the most difficulty working with outside counsel and working with portals on what exactly is permissible and what's permissible for for-profits and what's permissible for non-profits, and I think some clarity in that area would be very helpful for all of us.

I don't think you have to have the same answer on that issue as you do for the compensation based on specific securities transactions.

Mr. Polanin: I would echo what Hardy said and what Steve started. You may be able to have a sliding scale.

I mean, the received wisdom is that the transaction-based compensation comes from the "engaged in the business" part of the language, but getting a payment for opening an account arguably doesn't fit within that language, when you look at what these portals are engaged in the business of actually doing, which is providing information.

Mr. Owens: Can I add to that, that I think most of the broker-dealers that I've worked with have thought that account openings were different and distinct from transaction-based compensation.

I know there's been some discussion, informally, with the staff on the difference between an account opening and paying based on an application that's received, but in the Graham-Leach release that came out recently, there's a statement in there with respect to bank network arrangements that bank employees should not be paid in a way such that they are incentivized to either encourage individual securities transactions or account opening.

I was a little — that's the first time I've seen the Commission actually make a statement on account openings, and I know it's in the bank networking context, but I wondered if you would comment on that.

Acting Chairman Unger: I don't think so, not at this point, because those rules are actually out for comment. Even though they're interim final rules, they are in the comment period, so I think that it would be better not to say anything during that period.

Mr. Becker: I do think we come back to a point mentioned earlier, which goes back to the function of what it is you're trying to regulate, and I know we circle on that a great deal, but I just wanted to pick up on Jeff's example.

If the unregistered affiliate in your example is doing general marketing and advertising, and not recommending securities or doing anything like that, then presumably, they've got a structure that works, and there's nothing that needs to be regulated.

If, in fact, they are really taking the broker- dealer advertising or the recommendations or the customer relationship, arguably they've got their own registration problem.

The difficulty that I have, however, with the conversation is, to the extent that the argument is, well, we have to do this because we do it to broker-dealers, I don't think that's a good rationale. If you use that as the rationale, gee, our portals are competing with us, well, then you will be in the middle of wallstreetjournal.com, because once you get Yahoo! Finance, you're still going to have the publication of general circulation.

So I think you've got to come back to the example you've giving and say, well, what is the advertising that they're doing that's inappropriate, and are they, in fact, making security recommendations, are they recommending that you have something to do with that particular broker-dealer such that you want to collapse those two and say they need to register as a broker-dealer or have they, in good faith, figured out how to slice those two functions and create them with reasonable separation?

I don't know how you get away from that factual analysis.

Mr. Holik: No, I agree with you.

What if they are — what if they're posting lists of stocks, they're not personalizing, they're not making what we would consider to be a customer-specific recommendation, but they're posting short lists of stocks that the principals just happen to have a financial interest in, or where there's an undisclosed relationship that might be material, but that would not, on its face, incur or raise a definite suitability obligation, and they're promoting those stocks, but in a generalized way, and directing people to an undisclosed affiliated broker-dealer for execution?

Mr. Becker: I'll be quick.

I think you've probably given me enough facts to make that one an easier case, because I think that the Commission, via Tokyo Joe or otherwise, could deal with that on a material omission analysis.

And as the Chair has otherwise emphasized, the question of how specific do you get before you have a recommendation would be brought into play and you probably then have a registration issue.

I'm trying to keep coming back to, if I can, the sort of structural registration issue, where you are talking about a Yahoo! Finance — I'll just pick on them because they're big — where you're not really worried that they're selling securities, and they are providing an alternative competitive framework for broker-dealers.

Acting Chairman Unger: Well, we haven't heard from our investor representative for a while. Would you care to comment on the progress of the conversation?

Mr. Wittman: I've listened to all the conversations that have been conducted here. One question that arises in my mind is, you're ending up with the potential possibility of fragmenting liability for the various things that may occur on the portal.

Who is going to ultimately be responsible for what is said? Is it the advertiser or the marketer, or is it the portal that offers its own opinion in reference to that particular advertisement?

So you may potentially be fragmenting and increasing the legal difficulties that might ensue from an investor who sees that portal and follows its instructions or recommendations.

So far, you've also sort of dwelled on the economic aspect of compensation in reference to it. Well, correct me if I'm wrong, but if you enter into a contract with somebody, you put in earnest money.

When you put in earnest money, you have established a firm, binding contract to which you have to live and be responsible and accountable for.

When you compensate an advertiser, like a newspaper, you've entered into a firm contract with obligations on the part of both parties.

The idea here is to define what the obligation of the portal is in reference to the advertiser. If he puts a hyperlink in, what is the obligation of the portal to that hyperlink?

Does he have an ownership to it? Does he have responsibility to lead its viewers to that hyperlink?

It assumes a certain amount of reciprocal relationships here.

Mr. Moynihan: Related to that point, if you look at the terms and conditions for the average portal, or Internet service provider, and especially this new legislation that exculpates Internet service providers from any liability for third-party content if they make certain disclosures, the standards that the portals operate by are not the same standards as broker-dealers, in terms of what they try to disclaim responsibility for.

Mr. Wittman: That's what I just now said.

There is no clear definition as to what the responsibility of the portal is, what the responsibility of the advertiser or the marketing agent is, and until you can define the boundaries there, then each one knows what their obligations are each other, and the viewer of that particular ad understands the vested interests that are involved and can make decisions based upon that, or crank that into the decision they make.

Acting Chairman Unger: But can that be cured just by having a disclosure of the compensation arrangement — or I think that's what been discussed, in terms of disclosure — so that someone traveling to the portal can make his own decision based on an informed view of the basis for the information or the provider of the information?

Mr. Wittman: Well, they're two separate issues. I think one is an economic issue, the other one is an information issue.

Acting Chairman Unger: And which is the economic? I'm sorry, I lost you.

Mr. Wittman: Well, if there's the compensation between the advertiser or the broker-dealer to the portal, that's an economic arrangement.

Acting Chairman Unger: Right.

Mr. Wittman: Who is responsible —

Acting Chairman Unger: You mean in terms of the content?

Mr. Wittman: That's correct.

Acting Chairman Unger: Right.

Mr. Wittman: Ultimately, the way it's set up now, the broker-dealer is responsible for the content, is that not right?

Acting Chairman Unger: No, the broker-dealer is not responsible for the content of the portal, because as far as I know, my position would be that the portal is responsible for hyperlinking to the broker-dealer, but not the other way around.

But what I heard today was that the practice of most broker-dealers who link to a portal is they wouldn't link or have themselves be linked to or from a portal that was irresponsible in terms of its content, because it wouldn't be good for business.

Mr. Wittman: Right, it wouldn't be good business and then again, it might be good business.

For some people, unfortunately —

Acting Chairman Unger: That's sort of what we're getting at.

Mr. Wittman: — dollars have a tempting effect upon people, and performance issues on the part of firms that demand performance sometimes makes them stretch what they do.

Acting Chairman Unger: Right. Well, that's sort of what Jeff's and my hypotheticals were getting to.

As you move further and further away and you dis- intermediate the functions of the broker from the sales arm of the portal, does that present a problem and is that problem exacerbated if you compensate the portal based on the performance of the broker-dealer in terms of the advertising on the site?

Mr. Hogan: If we stand on the fraud example, what's going to happen in the next iteration is there are going to be second-and-third-generation tools, calculators, ability to do analytics. All of this information is going to be delivered into the marketplace.

Interestingly enough, it's all there now. You just have to be an institutional desk trader to know that it's there or get at it.

And so the average consumer is going to be delivered the ability, if they so choose, to do analytics on their own finances, on hypothetical finances, you don't know which.

It's going to be in my view, value-added, consumer- positive — a good thing, generally, to have happen — and it's going to strain the concept of when registration comes in or not, but at the end of the day, it's simply making public information that, in my view is in the marketplace, and therefore, the public should have anyway, and it helps educate them about either their own finances or, hypothetically, finances that they would like to have or used to have or are going to inherit.

Now, if you ignore the fraud end of life and stay in ordinary business concepts, I don't think that's the kind of thing you want to limit as a distribution matter to broker-dealers, and I don't think broker-dealers should have any different obligations if and when they deliver these things than portals should.

I mean, right now, we now have implemented the ability to send money, we're not a bank, to us. We're going to implement bill pay shortly, to send money back out.

All of these things are going to come together. They're coming together because consumers want the convenience, they want the ability.

So am I going to become a portal? Not in the context that we're talking today, but everybody is going to be a little bit homogenized in terms of how they implement all these things.

Acting Chairman Unger: So then what value will portals provide in terms of competition?

I mean, right now, what I heard from the first panel, and I think from you all, was people go to portals because they're viewed as independent sources, and then they check the independence of that against a brokerage firm and it's another, supposedly more objective source of information.

Mr. Hogan: Sure.

Acting Chairman Unger: If it becomes homogenous, then, what's the value of it?

Mr. Hogan: Well, I've certainly said over the years that my three biggest competitive threats are Yahoo!, Quicken, and MSN Investor, and I mean it. I know Schwab, I know Fidelity. We can do that all day long.

The reason is, they're very, very good consumer interface companies. They understand consumers. They're able to provide what they want, and in the way they want it, quickly.

I believe we will beat them at that, and we will do that over the next 18 months to two years. I believe we've already —

Acting Chairman Unger: Wait. You'll beat Schwab and —

Mr. Hogan: No, no, no, no, no. The Quickens and the Yahoos! and —

Acting Chairman Unger: They're not at the table.

Mr. Hogan: I was trying to pick somebody else.

But it's a matter of going back to the marketing conversation — branding, loyalty, trust, and providing a value-added service. You need to let that develop.

The competitive presence of the portals has stimulated a great deal of development on the on-line brokerage community side, and has probably moved the traditional brokers faster to embrace some of these things than they otherwise would have.

But I don't think you want to get to a place, as Brandon has said and several people have indicated, if you go too far, you're going to have captured The Wall Street Journal, Banker's Trust, and anybody and everybody else that's out there, because all of it's going to delivered in multiple packages.

People will go to the package that has what they want. If you come to us, we won't have the advertising, because that's not what we want to do.

You will have the trust factor, in theory. We're selling you the fact that you can give us your money and it's safe. We're going to provide you a value-added convenience.

On the reverse side, you could have a Quicken with all the same functionality presented entirely differently, and a broker-dealer in the background, and what you've done there is you've done the clearing broker model, and it's an entirely different thing.

So am I going to let that happen as a matter of brand, as a matter of marketing? I'm going to try very hard not to let it happen. It's not going to be driven by a regulatory scheme licensing mechanic.

And I think that's what you very much want to let develop, because in that next snapshot in a moment in time in 18 months or two years, the landscape will change again, and it's all going to be beneficial to the consumer at the end of the day.

Acting Chairman Unger: Well, that's what we're trying to make sure, and how do we protect consumers, without incurring the expense on innovation and competition?

Mr. Hogan: Well, it's interesting. We got to go back.

What people are doing today is what they've been doing for, I would say, 20 years that I know about. They are trying to acquire customers.

They're not trying to get people to trade. They're not trying to provide recommendations to people.

This is an account acquisition process that we're talking about, and it's putting the fact that you are in business in front of consumers who might be interested in that.

So you go to Yahoo! Finance, you go to AOL's finance area, personal finance area, because presumably people who have that interest are the ones that are there and you've already limited to the right target audience who you want to see things.

The next draw is simply to get them away from those organizations and into yours. That's all this is about.

The idea that you meter the payment, because now the Internet lets you do that in a more intelligent way, and you only pay for what you got, a real person who turned into an actual client that really put a balance with you and actually might have done a trade is a good thing. It's measurable now.

I'm just unfamiliar with any problems that have come up over the years. I'm absolutely unfamiliar with any Internet problems around this issue.

I think the registration reaction is understandable, but I think it's the wrong place to go, and as people have said earlier, focusing on the metric for payment isn't the right place to be. It will bring too many people that you really don't want to regulate into the trap.

Acting Chairman Unger: Does anybody want to add anything?

Because if not, I think the last thing that I wanted to sort of wrap up with at the same time, that I sort of ask this catch-all question is, one of the things that I wanted to talk about was alternatives to broker-dealer registration, and maybe not necessarily broker-dealer lite, but maybe something along the lines of what you raised earlier, which is disclosure of the source of information or more transparency in some ways.

So if you wouldn't mind, let's take a minute each and go around the table, and just sort of maybe say your view on whether there should be anything done in order to clear up customer confusion, because, if that's really the only issue remaining — or if there's something else that you just want to sort of us to leave the conversation with.

Let's start with you.

Mr. Lipton: I'm sure I won't do it in a minute, but I'll try hard.

I found it interesting that repeatedly, when we're talking about portals, we're sort of distinguishing between the "white shoe" portals and the others, the Tokyo Joes and stuff.

And I'm trying to figure out in my own mind what are the triggers that get you from being white shoe over to Tokyo Joe, and I think we've identified some of them.

I think that transmit button is important, I think accepting advertising is important, I think the mechanism of compensation is important, and maybe you look at a constellation of those factors, and when that constellation is achieved, at that point, yes, it would be nice to have some sort of disclosure — "By the way, we take compensation for our advertisements," or "We take compensation for customers that go over to brokerage firms," or, "By the way, please bear in mind that we have an investment in some of these equities that we're mentioning on our line."

A little bit more than a minute.

Acting Chairman Unger: Pretty close, though. Thank you.

Ms. Koplow: I agree in that regard, in that the distinction has to be — sorry — the distinction is not, certainly, in the compensation method at all, but is in the information that's being given on the portals and making sure that the investor knows where the portals are coming from, and where we have those obligations with regard to our advertising and having it be scrutinized, that there be, not a scrutinization, but certainly that they have to take some responsibility for what they're giving the investors as that link gets tied closer and closer together with the actual — how easy it is to click the button.

Acting Chairman Unger: Thank you.

Mr. Holik: I think disclosure is very important.

Perhaps I am just too much of an old world thinker, though, because I become concerned that, to the extent that more and more traditional brokerage services short of execution are being pushed out into other entities, there are certain core principles in securities regulation that have served us very well.

They include supervision, they include qualifications, they've more recently begun to include organized continuing education.

And it's hard for me to envision a world where those principles would not have some application where some of the most important customer liaison services are being provided outside of the broker-dealer.

I'm just afraid that, while the example I guess I gave a couple of minutes ago was a poor one, because it was too obvious and it invoked broad anti-fraud authority, I'm not sure that I think that the cure for all of this is the fact that the Commission can bring an anti-fraud case.

I'm not sure that after the fact, selective, very time-consuming and resource-intensive anti-fraud enforcement cases are the way to go as the primary line of defense to ensure customer protection.

Commissioner Hunt: What is your organization doing about this?

Mr. Holik: We are, among other things, we are anxiously awaiting the Commission to define —


Mr. Holik: To my knowledge, we have not had a lot of activity in this area. I think Steve mentioned before that a couple of portals have come in and sought membership and filed Form BDs.

I think we probably will be seeing a lot more of it, and I think to the extent that we can get our arms around this soon, it will be very helpful to us.

Acting Chairman Unger: Thank you.

Commissioner Hunt: Thanks.

Mr. Hogan: To me, absent advice for a fee, I think you really want to go and simply focus on, I call it labeling, not disclosure.

If you look at MSN Investor, which is a site I use as an example all the time, I think it's a great presentation, but the authors of the articles are all identified.

There are absolutely specific stocks identified. Recommendations to buy those stocks are not made. There are publications in, to my mind, in the truest sense of newspaper-type publications or "my views about" type publications.

It's connected to the ability to look at portfolios and all of that. It's the right kind of thing.

If you looked at that and said, what are the four or five things that happened here that are really simple, that we can call what you need to do and have a best practice of that standard from that, that's probably the route to go.

I'd be stunned if you found consumers who are confused by that, and I think it would let us have the flexibility to deal as businesspeople with portals, as opposed to having a regulatory arbitrage about registration and/or other things that are going to happen.

Acting Chairman Unger: Thank you. Brandon?

Mr. Becker: Two quick observations.

It would be good if, when the Commission speaks, it did so prospectively. It can create some difficulties for a variety of people if it announces new law before anyone has a chance to conform their conduct.

Second, whatever the Commission does, there is the issue of 51 other jurisdictions, so that if you are a broker- dealer, we do need a mechanism by which you can be a federal broker-dealer or something without paying or dealing with the state issues.

In terms of registration categories, I think you've got at least a couple options.

You've got a broker-dealer lite, some kind of striped down, introducing, broker-like notion, so that you can be a BD to share fees if it comes to that.

Second, you can do some sort of securities information processor or the like, or you can do some sort of a notice issue.

In any event, I think Steve's point at the get-go about a solicitation rule with a backstop of a written agreement is important, because what you really want to make sure, what we've talked about a lot of times is that people who are responsible know they're responsible and it's set forth in a way in which they can be held accountable for it. Writing is sometimes helpful to achieve that objective.

And then, to come full circle, you do get to the functions, because while I think statutory qualification standards, disqualification, and continuing education, and the like are very important, those are important if you're doing one of the two things that broker-dealers do — executing transactions and thereby holding customer funds and securities, or making recommendations.

If you're not doing either of those things, then you shouldn't have to take tests to figure out whether you can do them.

Mr. Polanin: Thank you.

I would reiterate briefly the points I made at the beginning, that we should look not just at the compensation but the activities that are being conducted.

If there was a written agreement between a broker- dealer and a portal that was receiving transaction-based compensation, not for the amount of trades or the number of trades or the value of trades, but for opening accounts, and that written agreement could be examined by the local district of the NASD or the New York Stock Exchange and a disclosure was made to the customers online so that the broker-dealer could verify that it was being made properly, and the broker-dealer had some responsibility — we'll call it reasonable supervision, all right — to visit that site and make sure that nothing was being said that would rise to the level of inducing or attempting to induce someone to actually effect a trade, as opposed to open an account, I think the Commission would deal with investor confusion, and with investor protection without imposing regulations where the costs would outweigh the benefits.

Acting Chairman Unger: Thank you. Hardy.

Mr. Calcott: I think one thing you want to consider is a sort of safe harbor from broker-dealer registration where, if a portal makes disclosure, you know, online to the customers, that it's a portal and not a broker- dealer, and makes some baseline disclosure about financial relationships that it may have with broker-dealers, and if it then doesn't cross certain sort of conduct lines — like making individualized recommendations to specific customers or having order entry screens that are the portal's order entry screen, which there are some portals going in that direction, as opposed to a broker-dealer order entry screen - - I think that kind of safe harbor from broker-dealer registration might give the level of certainty that both, I think, the portals and the broker-dealer industry are interested in having, while maintaining some flexibility for the Commission and for people who fall outside of that safe harbor, you know, to then apply the more standard badges of broker-dealer activity that they have looked at in other contexts.

Acting Chairman Unger: Thank you, Hardy. Steven?

Mr. Stone: I agree with Hardy entirely.

I think it would be worthwhile, if we take this course, to follow an approach in Rule 3a4-1, that is, in taking a non-exclusive safe harbor approach that doesn't create a presumption that portals are brokers for other purposes.

I agree with Brandon entirely that we do have to be cognizant of the state issue.

And, you know, for example, going back to the adviser side, there is a little bit of a tricky dance that advisers do under the cash referral fee rule, because they're covered by the blanket of the adviser's license when engaging in this arrangement, but on the state level, they may be treated as investment advisers and subject to state-level licensing requirements because they're not technically subject to the benefit of pre-emption under NSMIA.

So I would hope that there would be a safe harbor that would say we don't think these things are brokers within the context of this rule, so it at least doesn't create a presumption for state law purposes.

Just to finish one other thought on the issue of confusion, from what I have seen, there hasn't been a lot of confusion as to who is the portal, who is the broker, whose content is it, and that is in part a function of the fact that brokers will not tolerate it.

If there is confusion, there is potential liability for the content on the part of the broker. It interferes with the branding strategy of the broker. It interferes with the customer ownership of the broker.

So in the arrangements that pervade, I don't think there is a risk of confusion.

I would also add that, while we've talked about the trade now buttons that, in the past six months, have popped up on some of the major portal sites, I'm not sure that's really anything that's different than what was contemplated in the 1996 Schwab letter that contemplated payments based on orders transmitted, and I think that's exactly what the "trade now" buttons are doing.

I think even in that context, it's pretty clear that you're sending a trade to Schwab, a CSFB direct, or other firms.

Acting Chairman Unger: Thank you, Steve.

Mr. Owens: I just want to reiterate what Brandon said that I hope that whatever comes out of all this will be prospective in nature, because there are a lot of arrangements out there now that people have had to make decisions under very difficult circumstances.

In terms of where you should go from here, I think that labeling, better labeling in terms of who is responsible for what content is always a good idea.

I think the investment adviser solicitation type of disclosure makes a lot of sense, at least as a starting point, and to the extent that a broker-dealer has sort of elaborate information on its services on a portal site, clearly you want the broker-dealer to be responsible for that.

But in terms of other content on the site, I think I would just encourage some sort of statement that broker- dealers have some sort of reasonable diligence to make sure they're not establishing hyperlinks to a site that's obviously fraudulent or misleading.

Acting Chairman Unger: Thank you. Kevin?

Mr. Moynihan: I don't think there is a lot of confusion on behalf of the public consumers. I think there is confusion among lawyers about what the current standards are.


Acting Chairman Unger: And regulators.

Mr. Moynihan: And regulators.

But I do think if the Commission decides to change the current standards, there may be an evolution to a different business model than there currently is, and I can't predict what it is. I'm not sure whether that's a good or bad thing, but I think it's very likely that will happen.

Acting Chairman Unger: Thank you. Harold?

Mr. Wittman: I'd like to break down my comments to three areas.

Specifically, one of them is legal. There are already rules and conditions for what an RIA is, and applying those rules and regulations to a portal automatically, I would assume, delineates whether or not that portal is violating the rules of being an RIA or not. Correct me if I'm wrong.

Secondly, excuse the medical term, I am very much interested in the origin and insertion of information into a portal, like a muscle, so I know exactly where it's coming from and where it's going. The second part of that is whether there is a vested interest on the part of the portal concerning that specific hyperlink that might be involved. I think that's terribly important.

The third thing I certainly leave with the attorneys is to be careful not to violate any First Amendment business, because you'll have the ACLU on you claiming that you're climbing all over their back.

Thank you very much for the opportunity to be here.

Acting Chairman Unger: So he's an investor, he's a lawyer, and a doctor.


Mr. Wittman: Do you think I should be?


Acting Chairman Unger: Thank you.

Commissioner Hunt: I just want to thank the panel for this useful information. I think there were some great ideas.

We're certainly aware of the First Amendment problem. That's governed a lot of our lives for the last year-and-a-half in terms of being able to work around that.

But I think there are a lot of useful ideas here about what we can do in this field, and I want to thank all of you very much for participating.

Acting Chairman Unger: I'm going to align myself with my colleague's remarks — this colleague — and thank all of you for your participation.

I think you were very thoughtful, very constructive, and very informative in your ideas, and I appreciate your willingness to have an afternoon of non- billable time with us here at the agency, and I think it was very helpful.

I want to thank my colleague for sitting through it and actually participating more than you probably wanted to.

So thank you, and I can assure you now, we have come down off our mountain and that we will regulate from the ground on this one, if at all.

Commissioner Hunt: Thanks.

Acting Chairman Unger: Thank you.

(The Commission adjourned at 4:57 p.m.)



Modified: 04/04/2002