Attorney General Eliot Spitzer today released the results of a
nine-month investigation into the online trading industry, and announced
a cooperative venture with the industry to help inform consumers
about the risks of trading over the Internet.
"Over the past few years, online trading has revolutionized the
investment world, merging Wall Street and the home office for millions
of consumers," said Spitzer. "With this new technology comes the
need for new ‘rules of the road' for both investors and brokerage
firms. As we're constantly finding, the information superhighway
can be filled with potholes for the unsuspecting, unprepared or
As a result of the investigation, Spitzer said the Securities Industry
Association (SIA) will spend $500,000 on a public campaign to educate
current and potential online investors about both the benefits and
pitfalls of online trading. The campaign will include full-page
newspaper advertisements and educational materials that will be
jointly produced by the industry and Spitzer's office. The materials
will be available in public libraries and on websites.
The Attorney General's investigation, which was prompted by numerous
consumer complaints earlier this year, examined the practices of
seven online brokerage firms and three other industry participants.
The Attorney General's staff reviewed over 120,000 pages of documents
and visited sites in five states. The investigation focused on the
areas of disclosure, oversight, advertising and public education.
As part of his job, Spitzer has both investor protection and consumer
In addition to the consumer education component, the 200-page report
calls for increased disclosure by online firms in such areas as
technology performance (including slowdowns and outages), customer
services, and technology development so that consumers can make
appropriate comparisons among firms when it comes to capacity, trade
execution, and service.
Spitzer said that oversight for such changes and disclosure could
be considered by the Securities and Exchange Commission (SEC), or
self-regulatory bodies like the New York Stock Exchange (NYSE) and
National Association of Securities Dealers (NASD).
Spitzer said that although many of the technological problems that
plagued the industry earlier this year have been remedied, the continuing
explosive growth in online investing demands that firms continually
update, test and improve their technology to prevent problems in
Spitzer also called for online firms to be more forthright in their
advertising: "If you were to believe all the online advertising
today, you would get the impression that investors have access to
both instant trades and instant wealth, neither of which is true,"
Based on his findings, Spitzer is also providing consumers with
advice regarding the online brokerage industry, including the following:
- Making sound investment decisions requires much more than the
click of a mouse; nothing can substitute for good old fashioned
research and education;
- Placing a trade via computer is not the same as executing the
trade. The technology is not instantaneous, and a trade still
has to go through many steps;
- Cheap, easy and frequent trading does not equal successful trading.
Trading over and over may be a good strategy for some, but for
most, making long-term, sound investments is still the best advice;
- Speed, access, and reliability of online services is dependent
on system availability and will inevitably be subject to occasional
- Contrary to some claims, online investors are not directly connected
to the market. Online trading gives the investor the opportunity
to place a trade that previously had to be done by a broker, and;
- Trading fees can be more complicated and expensive then they
appear. Investors must read the fine print to see the cost of
the trades they anticipate making.
"There is no question that online trading is here to stay and that's
its dramatic growth will continue," said Spitzer. "We believe that
the online brokerage industry can yield tremendous benefits for
all participants -- investors, the corporate community, and the
firms themselves -- but the industry must be responsive to the legitimate
concerns of consumers.
"My office will continue to work with and monitor the industry
to ensure that investors are adequately informed and protected.
By doing so, we hope to smooth out as many rough spots as possible
on this section of the information superhighway."
Spitzer added that if the guidelines and oversight recommendations
contained in the report are inadequate, or go unheeded, and problems
continue in the areas of disclosure, advertising, and system capacity
and support, he reserves the right to consider more serious remedies
to ensure that consumers have the knowledge and protection they
need to safely trade online.
The investigation was conducted by the Attorney General's Investor
Protection Bureau, headed by Eric Dinallo, and the Internet Bureau,
headed by Caitlin Halligan. Assistant Attorneys General William
Mohr, Jean Marie Cho and Joel Michael Schwarz worked on the investigation
and contributed to the report.
WALL STREET TO WEB STREET: A REPORT ON THE PROBLEMS AND PROMISE
OF THE ONLINE BROKERAGE INDUSTRY