SEC Report Examines Online Trading

Washington, DC, February 7, 2001 - The SEC’s Office of Compliance Inspections and Examinations (OCIE) recently issued a report summarizing its findings from a series of examinations of online broker-dealers, along with recommendations.

The first three sections of the report comment on disclosure and investor education, advertising, and best execution issues. The final three sections discuss technological issues. Section IV of the report emphasizes the need for online firms to have sufficient operational capacity to accept and process appropriately customers’ securities transactions. The report recommends that firms:

• establish capacity estimates;
• periodically evaluate the capacity of their systems;
• develop procedures for handling system capacity problems; and
• use every reasonable effort to notify customers of operational difficulties.

Section V offers guidelines on encryption technology, firewalls, passwords, and the use of "cookies" to firms as they implement Regulation S-P. Section VI suggests that firms create written procedures governing employees' use of the Internet, including in the areas of the use of e-mail, chat rooms, bulletin boards, and websites. The report recommends prohibiting employees from communicating with customers outside any channel monitored by the firm. Finally, it recommends that firms consider surveilling the Internet for use of the firm's name to prevent its misuse by employees.