12.09.99

US Senator Charles E. Schumer Opening Statement SEC Town Hall Meeting December 9, 1999

Thank you, and thank you Chairman Levitt for arranging this event to help New Yorkers make better investment decisions.

We're here today because technology and a sustained economic boom has ushered in a new era of prosperity and democracy in our markets. Technology has revolutionized our markets from a bastion of the elite, to the provenance of everyone.

Today 50% of Americans 78.7 million own equities compared to 42.5 million just 10 years ago. And 14 million started investing in equities in the last 3 years. That's a good thing. But it also means that millions of investors are novices.

Over the past decade, as the market has steadily increased in value and as millions of middle class families have made money it is easy for people to fool themselves into believing that they know enough. But a little knowledge can be a dangerous thing.

That is why we are here today. So New Yorkers can do a better, more informed job of planning and implementing their investment strategy.

The major theme today will be online investing. Today, almost10 million investors trade securities through the Internet accounting for 16% of retail trades, and by 2003 the number of online investors is expected to total over 20 million.

It's firmly taken hold and our markets will never be the same. But with this rapid expansion of online investing, new risks to sound investing have emerged.

What are these risks and how can you protect yourself?

First, with online trading there is a risk that your trade will not be executed in a timely manner.

The speed of the Internet and misleading advertising by some online brokers give a false illusion that your trades are executed instantaneously. The truth is that even when all systems are go and trading volume is light, trades can still take awhile to be processed because investors are not hooked directly into the market. The order is routed first through the online broker, then to the market, and the speed of this complex computer network depends upon a number of factors, especially the capacity of your broker's computer system.

As with all computer systems, there is also a risk of failure. Many online firms' trading systems have suffered repeated failures.

These delays and failures may result in financial losses to investors as trades are delayed and executed at a different price than the market showed when you sent your order or remain unexecuted entirely.

So what can you do? First, before signing up with an online broker, do some basic background research. Not all online brokers are created equal.

Some firms don't even offer telephone access to answer questions about service. Remember you get what you pay for. A $7 trade that results in a delayed execution that winds up costing you $500 because of price movements may not be wise.

Second, you should also be certain to place limit orders which limit the price at which you'd like to buy or sell a stock. It's better that your trade go unexecuted than executed at a prevailing market price that is significantly different than the one you thought you were getting.

In Washington, I have introduced the Online Investor Protection Act that would require online brokers to disclose all outages that delay a brokers' speed of execution so that consumers can compare rack records for reliability when opening an online account.

Another risk is cyber fraud. With the rise of online investing, we've seen a dramatic increase in online fraud. The SEC, as Chairman Levitt can attest, receives 200 300 complaints   daily.

These scams used to take place through a boiler room operation fraudsters telemarketing their "insider tips" to unsuspecting consumers, swaying them into purchasing an "undervalued" stock, pumping up the price and then dumping their investment while these consumers were left holding valueless paper. Now fraud is as easy as posting a stock tip in a popular chat room or two.

How can you avoid it? Don't get taken by online stock tips. Smart investing is the result of careful investigation and deliberation. Comb through the prospectus. Study analysts' reports. And most importantly, invest for the long haul.

The Online Investor Protection Act that I've introduced also addresses cyber fraud by   (1)  Doubling penalties for Internet fraud.   (2)  Adding new money for the SEC Office of Internet Enforcement to investigate fraud and stop it before it starts. (3)  Requiring online broker dealers and investment advisors to provide a quicklink to SEC investor education website at   www.sec.gov   which will point investors in the right direction before getting started in online investing.

In the coming years online brokerage will likely overtake traditional brokerage as the main method of accessing the markets. Make sure you're prepared. Investors who understand the risks of online trading and act to mitigate those risks by researching online firms and stocks carefully can invest online safely and at much lower cost than traditional brokerage.

Thank you. And now I'd like to introduce the point man on investor protection, SEC Chairman Arthur Levitt who organized today's Town Hall meeting and whom I would like to commend for admirable stewardship of the SEC during this revolutionary time for our markets.

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Senator Schumer's "Online Investor Protection Act"

In May, Senator Schumer introduced the "Online Investor Protection Act" (S. 1015), legislation aimed at protecting investors who use Internet brokerages to conduct securities trades by giving the Securities and Exchange Commission (SEC) new powers to monitor online brokers, strengthening penalties for online fraud, and giving investors access to information on a broker's speed of execution before they sign up.

Schumer's bill is the first legislation directly addressing problems that have arisen from the tremendous growth in online investing. Among it's provisions, the legislation will:

 

  1. Require online brokerage firms to disclose any delays in transactions due to service outages, and any investor losses that resulted. This report would be posted quarterly, both on the brokers' site and to the SEC.
  2. Give the SEC authority to study whether there is a greater risk of investor fraud and market volatility due to day trading activity and whether firms are complying with National Association of Securities Dealers' "best execution" rules.
  3. Require online brokerages and investment advisors to provide Internet links to investor education and fraud prevention web sites.
  4. Increase the ability of the SEC to combat fraud by raising the authorization for the SEC Office of Internet Enforcement by $350 million over 5 years and doubling the monetary penalties for fraud.

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