SEC Steps Up Oversight of Online Brokers

The Securities and Exchange Commission Thursday announced plans to increase its oversight of the online brokerage industry.

According to The Wall Street Journal, the SEC’s inquiry is still in its early stages and no one knows specifically what action might be taken.

However, this marks the first time the SEC’s Office of Compliance Inspections and Examinations has taken a detailed look at the online trading industry which now accounts for almost 30 percent of trades made by individual investors. SEC representatives have already met with officials from Charles Schwab Corp. and E*Trade Group Inc. and will meet with others.

The SEC said the primary purpose of the inspections is to ensure the brokers are complying with SEC rules on trading and investor protection.

Schwab’s general counsel told The Journal “regulators should be pleased about the quality and quantity of information being conferred on retail investors as well as lower costs and greater treating efficiency” offered through online trading.

Lisa Nash, an E*Trade spokesman, said the company works very closely with regulators and is in constant contact with them.

The investigation comes as the SEC is conducting a separate inquiry into online investment fraud. SEC officials are also planning to meet with Massachusetts securities officials who have launched their on crackdown on Internet fraud.

Last week, in a move some online brokers believed is targeting them, the SEC proposed broker-dealers would be in violation of securities rules if they lacked the “operational capability” to handle daily activities. Although occasional outages would not be a problem, a pattern of problems could be considered a violation.

SEC Commissioner Laura Unger is also heading up a study on the online trading business that could call for new regulation. Unger’s report is scheduled to be complete by the fall.

While regulatory authorities say their actions are being taken solely to safeguard investors, some advocates of smaller firms believe larger Wall Street firms, whose business is being threatened by the lower cost of online trading, have moved the SEC to take the action.

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