Commissioner Laura Unger Releases On-Line Trading Report

Securities and
Exchange Commissioner Laura S. Unger today released a report
summarizing the findings from a series of on-line investing
roundtables conducted earlier this year.  The 95-page report
summarizes the significant comments of roundtable participants
and makes recommendations for ongoing dialogue between
regulators and industry and for regulatory strategies she
believes the Commission should consider.

     The findings and recommendations in the report focus on the
issues of suitability, best execution, market data, systems
capacity, investor education, on-line discussion forums,
privacy, and portals.  Commissioner Unger believes these are
among the key on-line issues facing investors and the industry
today.

     Commissioner Unger said, “The Internet is rapidly making on-
line trading ubiquitous.  This report provides the Commission
with a comprehensive examination of the critical issues to be
addressed in the area of technology.  I think it may still be
premature for extensive rulemaking in this area, but the report
will allow the Commission to focus upon and consider the most
vital issues concerning on-line brokerage.”

Report Recommendations:

1.   Suitability:  The report recommends that the Commission:

*    obtain certain information from the industry on data mining
  products;
*    alternatively, include as part of future examinations a
  review of the services firms provide to their customers from
  data mining information; and
*    consider specific scenarios and analysis as guidance to the
industry about on-line suitability obligations.

2.   Best Execution: The report recommends that the Commission:

*    encourage the industry to demonstrate the relative
  importance of speed and certainty of execution in today’s market
  environment;
*    consider requiring market centers to make publicly available        
uniform information regarding certain best execution factors;
*    consider requiring broker-dealers to regularly provide
  customers with plain English information about:  (a) the
  execution quality available on different market centers; (b) the
  broker-dealer’s order handling practices; and (c) inducements
  for receiving order flow received by the broker-dealer; and
*    evaluate the potential impact of new order routing
  technologies on brokers’ best execution obligations, investors,
  and the markets.

3.   Market Data: The report concludes that the Commission
should encourage the broadest possible dissemination of real-
time market data to investors, and that the Commission should
evaluate whether the current pricing scheme accomplishes this.
The report recommends that the Commission’s upcoming market data
concept release address the issues raised in this section.

4.   Systems Capacity: The report concludes that the Commission
should focus on ways to ensure more adequate systems capacity at
all broker-dealers and also encourages the Commission to
repropose the broker-dealer operational capability rule.  The
report recommends that the Commission consider requiring broker-
dealers to:

*    maintain and periodically test contingency plans;
*    maintain records of significant systems outages;
*    conduct regular systems testing and evaluation; and
*    include plain English disclosure of the risks of systems
  delays or outages in new account documentation.

5.   Investor Education: The report reviews the current status
of investor education and recommends that:

*    firms partner with the Commission in helping to educate
  investors; and
*    the Commission study on-line investor behavior to determine
  the best place and time to educate investors on the Internet.

6.   On-line Discussion Forums: The report recommends that:

*    the Commission conduct or encourage researchers to conduct
  a study analyzing the effect of chat room discussions on
  company’s stock prices; and
*    broker-dealers operating on-line discussion forums consider
  adopting certain best practices to prevent investor confusion.

7.   Privacy: The report recommends that the Commission:

*    evaluate on-line firms’ information collection practices;
  and
*    consider certain factors in conducting its statutorily
  required study on privacy.

8.   Portals: Because the federal securities laws generally
prohibit entities not registered as broker-dealers from
receiving securities transaction-based compensation, the report
recommends that the Commission consider whether alternative
compensation arrangements are appropriate for entities not
registered as broker-dealers.

[The is a report by Laura S. Unger.  The Commission and other
Commissioners have expressed no views regarding the analysis,
findings, conclusions, or recommendations herein.]