Watching the Stock Watchers

SAN FRANCISCO (06/11/2000) - When a system outage occurs at your online brokerage, the only way you might find out is if you're stuck in the middle of a trade or if the media reports the outage. But it happens more frequently than is reported.

Many outages occur in small geographic areas and for just a short amount of time. But brokerages aren't required to disclose these outages to customers, the Securities and Exchange Commission or to any other regulatory body. Many times they don't even keep records of their own on small outages.

The U.S. General Accounting Office has a problem with that.

In a report filed with members of the commerce committee and Congress last month, the GAO recommends that the securities regulators step up their oversight of online brokers. The GAO says the SEC should require online brokers to maintain records of outages and include more accurate online disclosures of risks in margin requirements, privacy considerations and trade executions. The report was made available to the public on Thursday.

"This is a new and growing area and regulators have resource problems," said Richard Hillman, associate director of the financial institutions and markets group for the GAO. "Sometimes it takes a while for them to catch up and stay on top of things. They certainly understand that there are issues."

Officials at E-Trade and Charles Schwab declined to comment on the issue.

The SEC and the regulatory body of the National Association of Securities Dealers have demonstrated their commitment to protecting online investors. In speeches made by SEC Chairman Arthur Levitt and educational resources made available online, regulators have made it clear that they are aware of the issues and that they are taking steps to protect investors. But the GAO, after investigating 12 online brokerages and examining the evidence of enforcement provided by the SEC and NASDR, came to the conclusion that they aren't doing enough.

In letters of response to the GAO, officials from the SEC and NASDR agreed with the areas of concern voiced by the GAO. Both agencies defended their own practices, thanked the GAO for the report, and ensured it that they'll continue to protect online investors.

Hillman says the agencies aren't required to heed the GAO's recommendations, but 75 percent of the time the government agencies do follow its advice. It is quite possible, he said, that Congress will ask the GAO to conduct a follow-up investigation to determine the progress made on these issues.

"Our mission is to issue reports to Congress on how to make the government work better," Hillman says. "There is nothing binding in the recommendations we make."

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