SEC: Online brokerages need improvement

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(IDG) -- The Securities and Exchange Commission (SEC) has released a report written by its staff that calls for brokerage firms and securities dealers to evaluate their online trading programs and highlights "areas where some [companies] can enhance their practices."

In particular, the report said that about 25 percent of the online trading Web sites that SEC staffers reviewed "either did not conduct any assessment of their operational capability or had difficulty responding to questions regarding their [processing] capacity." Many other companies indicated that they don't conduct regular capacity assessments, with the report noting that only "a few" do such assessments on a weekly or monthly basis.

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That could be problematic, given that the report said the most common complaints submitted to the SEC by users of trading sites involve "failures or delays in processing their orders online, difficulty in accessing their online accounts and errors in processing their orders." The growing popularity of online trading "makes having sufficient capability to handle this volume critical," the report added.

To help prevent problems from reoccurring, the SEC recommended that online brokers consider maintaining detailed records of capacity evaluations, system slowdowns and outages, including information about the causes and impacts of problems. Companies should also "use every reasonable effort to notify customers of operational difficulties," the report said.

The report, which was released last week and made available in summarized form on the SEC's Web site, also said that SEC staffers "observed many instances of confidential information being sent without any security measures, including account numbers, passwords, Social Security numbers or details of trades placed." At some companies, it said, some customer service representatives "routinely requested confidential information from customers" via e-mail.

Only about 20 percent of the online trading firms reviewed by the SEC had written policies regarding the inclusion of confidential customer information in employee e-mail messages, according to the report. The percentage of companies that issue warnings to customers about sending confidential data was similar, added the SEC, which called on brokerages to re-evaluate the security of their Web sites and e-mail systems.

The report said the commission has also received numerous complaints from users "that appear to indicate a lack of knowledge about trading and investing." As a result, the SEC said online brokers should "provide conspicuous, plain English disclosure[s] about the risks of securities trading, including the risk of systems outages or failures," on their Web sites.

Companies also should consider adding basic explanations of securities trading, including definitions of the terms that are used on the pages where Web site visitors go to enter trades, according to the SEC.

The report was prepared by staffers in the SEC's Office of Compliance Inspections and Examinations. Lori Richards, director of that office, said in a statement that it's becoming "ever more important for broker-dealers to ensure that their online systems are meeting the needs and expectations of investors," given the growth in Internet-based trading.

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Summary of SEC Findings and Recommendations
U.S. Securities and Exchange Commission (SEC)

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