Integrity of advice and information

HOW does the US Securities and Exchange Commission work to protect the integrity of the information investors rely on to make their investment decisions? It is more important than ever that investors have accurate, complete, information to make decisions about financial plans and portfolios.

Integrity of investment advice

The first area I will touch on involves the integrity of investment advice. Given current market conditions, issues of customer protection will become more important than ever. Online suitability is an especially important concern in today's markets as technology developments lead firms to offer a wider array of investment-related tools and information.

Current market conditions may also cause investors to seek more customised investment advice -- online or offline.

Two years ago, investors flocked to online brokerage, drawn to the appeal of an infallible marketplace. Investors did not want advice, they wanted cheap access. Securities regulators were trying to figure out how best to protect these investors trading on their own, many of whom were first-time investors.

Questions arose as to what -- if anything -- about online brokerage impacted the notion of suitability. In connection with my 1999 online brokerage report, I personally spent a lot of time thinking about online suitability, capacity and privacy issues, and how the industry disclosed the risks of online trading, the risks of initial public offerings, and the risks of margin trading.

The NASD recently issued some interpretive guidance on online suitability to help define when suitability applies online. Determining whether a broker or firm recommended that a customer purchase or sell a security -- triggering a suitability obligation -- has always required a ``facts-and-circumstances'' analysis. Though this remains true in the online environment, technology has added new variables to the analysis.

Communication or recommendation

In addition to specific examples of communications that would and would not generally be considered a recommendation, the NASD set out two guiding principles as to whether a particular communication is a recommendation.

*First, and most notably, the more likely a communication could reasonably be perceived to a customer as a call to action to purchase a security, the more likely the communication is a recommendation.

*Second, the more individually tailored a communication is, the more likely it is a recommendation.

The NASD guidance is probably not the final word on online suitability, but it will be helpful to broker-dealers as they introduce more and more technology into their client relationships.

Integrity of online investment information

The second area involves the integrity of investment information available online. As we all know, the Internet affords today's investors easy access to all kinds of information, both fact (such as real-time stock quotes, SEC filings, and corporate news releases) and opinion (such as communications from online message boards and Internet mailing lists, analysts' reports, Web site discussions, and online chat room conversation).

Entire Internet communities have grown up around particular industries, technologies or issuers, providing incubators for investment ideas, and venues for the expression of competing viewpoints. But, again, as we have all seen, the Internet has also afforded easy access to fraudsters looking to hoodwink investors.

``Stock gurus'' may well redouble their efforts in the current investment climate to take advantage of investors seeking to recover from market declines.

Current market conditions aside, we have witnessed, over the past few years, a rise in the number of persons operating Web sites who pose as seasoned investment authorities. These ``authorities'' make baseless promises to investors not only about the stocks they pitch, but also about their own qualifications and accomplishments.

A recent example is the Commission's action against Mr Yun Soo Oh Park, the owner of an Internet investing site that was once one of the hottest sources of stock picks on the Web. The defendant, known as ``Tokyo Joe'', recently settled a civil action filed last year by the Commission. Mr Park neither admitted nor denied the SEC charges, but agreed to pay $754,630 to settle the case.

The SEC alleged that he not only engaged in unlawful touting and illegal stock scalping (that is, selling stock into the demand created by his own buy recommendations), but also the publication on his Web site of more than 200 misleading assertions, including false statements about his track record as a stock picker.

(To be concluded)

(Edited-extracts on `Protecting the Integrity of Financial Information in Today's Marketplace' from remarks by Acting Chairman, Ms Laura S. Unger US Securities and Exchange Commission.)