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Online Brokers Falling In With SEC's Push for Moderation

The SEC is pushing online brokers to provide greater risk disclosure and more modest advertising, among other things.

Securities and Exchange Commission

Chairman Arthur Levitt didn't break a lot of new ground with his online trading speech Tuesday, but his remarks will mean changes at some Web-based brokers.

In wrapping up the bits and pieces of online brokerage policy that have emerged during the past few months, Levitt's

National Press Club

speech and an accompanying letter to broker/dealers won't slam the brakes on the e-brokers, but may slow things down a little.

The nation's top securities regulator stopped short of asking for further regulation, but is pushing for greater risk disclosure, more modest advertising and educational efforts (via a connection to an SEC investor education

Web site) from the online brokers and more responsible behavior from their clients.

Online trading has soared to about 25% of all retail trades since its birth in 1994, Levitt pointed out in his speech. And trading volumes rose more than 50% at most major brokerages during the first quarter.

Credit Suisse First Boston

estimates they are running 40% higher this quarter.

The industry, which includes more than 100 firms that offer online trading, will likely support specific disclosure requirements from the SEC because it would create a standard, says Ed Nicoll, president of

Datek Online Holdings


"When the commission says you all have to disclose that trading or investing over the Internet has to take account of the risks involved, it's the same playing field for everybody," Nicoll says.

Changing disclosure statements may be a bit more involved than adding a link to the SEC,

National Discount Brokers/


Chief Executive Dennis Marino says, but there won't be any resistance on the part of his firm. "We have always supported things that are going to help investors invest more responsibly," he says.

Martin Unger, a securities industry lawyer at

Tenzer Greenblatt

, says there was talk among firms of adopting one common disclosure statement, based perhaps on a letter written by

Charles Schwab


(the company, not its founder).

Schwab was one of the firms that reacted first to market volatility in December by raising margin requirements and explaining so-called fast-moving markets in a statement to customers. Other online brokerage sites also began adding some warnings in December, when Internet stocks and IPOs went through a bout of extreme volatility.

The SEC's emphasis on education hasn't escaped most of the larger online brokerages. SEC Commissioner Laura Unger has held a series of roundtables over the past few months, during at least one of which brokerages such as Schwab and



agreed to work with the SEC on more education. E*Trade already has the link to the investor education site that the SEC will now require of online brokerages and Internet chat sites. National Discount Brokers launched last fall a site designed to teach customers about investing called

NDB University


And online brokers may be finding themselves under increasing pressure to tone down their advertising from Levitt and other regulators, such as New York Attorney General Eliot Spitzer.

Morgan Stanley Dean Witter's


Discover Brokerage ad campaign, which features an island-owning truck driver, and


(AMTD) - Get Free Report

ads that portray mutual fund investing as outdated are just two that Levitt says have him worried.

While there hasn't been any broad-based advertising sweep by regulators, Levitt's views on advertising could open this sector up to lawsuits based on the perception that regulators would side with the individuals, says Unger, the securities lawyer.

At E*Trade, which kicked off the online brokerage industry's advertising frenzy last fall with a $150 million campaign, executives are clearly hearing Levitt's message. The latest ad that began running this week shows an employee who loudly quits his job after making a killing on a stock, only to have the stock fall back to its original level.

"Certainly the new advertising campaign says it all," says E*Trade spokeswoman Lisa Nash. "We're really out there saying don't get carried away."