SEC Staff Releases Examination Report Concerning Day Trading

The Securities and
Exchange Commission today released a staff report entitled Report
of Examinations of Day-Trading Broker-Dealers, which reflects
findings from a broad examination sweep of broker-dealers
providing day-trading opportunities to the public.  While the
examinations did not reveal widespread fraud, they did reveal a
number of serious violations of the federal securities laws
warranting referral to the Commission’s Division of Enforcement.
The examinations also revealed less serious deficiencies in the
areas of net capital, margin, lending disclosure, advertising,
and short sales.  In addition, the examinations found lax
supervision at many firms.

     Lori Richards, Director of the SEC’s Office of Compliance
Inspections and Examinations, which produced the report, said,
“The Commission has sought to address concerns about day trading
through a four-part strategy: by conducting an examination sweep
of day trading firms to evaluate compliance with the law and to
gather information about this new industry; by fostering investor
education about the risks of day trading; by considering
regulatory changes; and by bringing enforcement cases where
appropriate.”
     
     While not explicitly required by Commission or SRO rules at
the time of the examinations, the Commission’s staff found that
many day-trading firms were not providing potential customers
with information concerning the nature and risks of day trading.
The Report noted, however, that a recent review of day trading
firms showed that many had enhanced their risk disclosure to
potential customers.

     The Report describes a number of regulatory initiatives
designed to address regulatory concerns - including SRO rules
tightening margin for day traders, requiring disclosure of the
risks of day trading to potential customers, and requiring day
trading firms to make determinations concerning appropriateness
of day trading for customers before opening accounts.  The Report
also describes recent Commission enforcement actions and
initiatives.  Finally, the Report notes that the Commission’s
staff plans to examine this year, in conjunction with the NASDR,
all remaining day trading firms that were not examined in 1999,
and to conduct targeted reviews to address concerns noted in the
Report.  The Report will be available on the Commission’s web
site at www.sec.gov.