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SEC urges more protection for investors

Prompted by rapid growth and increasing complaints of fraud, regulators are calling for more investor protection in online stock trading.

Prompted by rapid growth and increasing complaints of fraud and other abuses, government regulators are calling for more investor protection in online stock trading.

In a speech at the National Press Club in Washington today, Security and Exchange Commission chairman Arthur Levitt warned brokerages that they need to inform investors better and outlined a series of steps being taken by his agency to protect consumers.

Virtual Wall Street Lured by low commissions and the ability to participate actively in the market, many investors are moving their money to online brokerages, which offer trading fees as low as $9.95. Investors traded more than 630,000 times a day in April, up from an average of 450,000 trades per day in the first quarter of this year, according to analyst Bill Burnham of Credit Suisse First Boston.

The SEC's Cyberforce of 125 investigators to combat Internet fraud, formed last year, is being doubled this year, he said, and the Commission has asked for an additional $11 million to expand its anti-fraud efforts. The SEC's enforcement division will file new cases about fraudulent Net offerings in the next two weeks.

"Our mission is not to prevent losers or to modulate the sometimes mercurial movement of our markets," Levitt said in his address. Instead, the SEC's "unyielding commitment to the well-being of investors" will guide its efforts.

"I call on all market participants, the media, fellow regulators, and lawmakers to help us fulfill this commitment by working together to make the 21st century defined as much by trust as technology," the nation's top securities regulator said.

Although Levitt said no new laws are necessary to regulate online trading, he did not rule out the possibility that some may be needed in the future.

For now, he noted that the SEC has created a new Web page to help educate investors and has asked online brokerages and firms that host stock-oriented chat rooms to link to the page. He also urged investors to "take what they see over chat rooms not with a grain of salt but with a rock of salt. By doing so, you protect yourself, and you protect the Internet."

Levitt also detailed expanded enforcement efforts in cooperation with the FBI to combat online fraud.

Although the number of fraud cases the SEC has brought is still relatively low, it is growing quickly. "This is not a numbers game; this is a hard-hitting effort," Levitt said. But he noted that catching crooks online is easier than cracking down on telephone scams, citing last months' capture of the man who perpetuated a news hoax about a corporate takeover.

Levitt he has written to all the online brokers today to ask them to improve the quality of the information they disclose to investors. The commission already has inspected firms that handle 80 percent of online trading. And he specifically targeted firms that promote day trading.

"These firms should be on notice that they are still broker-dealers and must operate within the existing rules," Levitt said. "Any firm, whether day trading or online, that recommends a type of investment strategy or customizes research should ensure that it is suitable for its customers."

The SEC chairman directed a cautionary note to investors, stressing individual responsibility. "I am concerned that the great influx of new and fairly inexperienced investors who may be so seduced by the ease and speed of Internet trading that they may be trading in a way that does not match their specific goals and risk tolerance," he said.