WASHINGTON (March 23, 1999) – Investors venturing on line to trade or get stock tips need to do their homework, be skeptical and watch out for fraud, two state securities regulators told a Senate panel today.
“Legitimate business opportunities for financial services on the Internet are unlimited. At the same time, the risk of fraud is great,” said Peter C. Hildreth, New Hampshire’s Director of Securities Regulation and President of the North American Securities Administrators Association (NASAA), a group of state regulators. “With the click of a mouse, con artists can reach tens of thousands of people via e-mail, literally for pennies. Any con artist not on the Net should be sued for malpractice.”
Hildreth testified before the Senate’s Permanent Subcommittee on Investigations, chaired by Susan Collins (R-Maine).
Expecting regulators to totally clean up the Net is naïve, he said. “Given the size and growth of the Internet, it’s like expecting one precinct house to patrol all of New York City,” he said. Hildreth said investor education is the key. He urged investors to ignore promises of quick riches, delete anonymous e-mail (“spam”) that touts stocks and call their state securities regulators to check out investments and brokers. Be very skeptical of what you read on the Net, he cautioned. “Ask yourself—if it’s such a great money-making idea, why is someone telling 100,000 of their closest friends about it on the Internet?”
Philip Rutledge, Deputy Chief Counsel of the Pennsylvania Securities Commission, called on regulators to use the Net more themselves–to disclose enforcement actions and background information on brokers and securities firms. “The best way to counteract a fraudulent investment scam on the Internet is to provide a quick and easy way for an investor to perform a check of the company or individual promoting the stock or investment.”
Online investors need to expect computer glitches as Wall Street’s systems strain to keep up with growing demand, said Hildreth. “The online brokerage industry is experiencing growing pains. Regulators have been bombarded with complaints from investors” over outages and glitches at major online brokerage firms, he said.
In early February the state of New York announced an inquiry into online brokerage firms—to assess their computer and network capacity, contingency plans, level of customer complaints and how orders are processed and executed.
State securities regulators urge investors to shop around before choosing an online broker and to check with state regulators to see if the firm is properly registered or has a disciplinary history.
“Remember that technology can fail,” Hildreth said. “And in volatile markets your order could be delayed and you may not get the price you want. Consider using limit orders instead of market orders. That way you can set the price you’re willing to pay.”