SEC Mulls Oversight Of Financial Web Portals

But Jeffrey Holik, acting general counsel at NASD Regulation, urged the SEC to protect investors from sites that promote the owners or advertisers favorite stocks, and sites that misuse the data investors enter into personal finance calculating tools.

The SEC also needs to ensure that investors understand whether they are dealing with a heavily regulated broker-dealer or some other kind of entity, Holik argued.

“Wherever the lines are ultimately drawn, they must be visible to investors,” Holik said.

Many panelists also spoke of the difficulty of coming up with definitions clear enough to serve as the basis for effective portal regulations.

Stockbrokers often use the term “broker-dealer” to refer to a Wall Street wirehouse or a regional securities firm, but the SEC has broadened the meaning of the term in semiofficial letters to include any entity that “participates in a chain of events that lead to a transaction in securities,” according to David Lipton, a law professor at Catholic University.

If the SECs current, broad interpretation prevails, “it would be very hard to keep a portal out of the definition,” Lipton said.

The term “financial portal” could refer to any Web site that presents financial information from several different sources, but, in practice, conference participants said they were using the term to refer to elaborate sites that offer features such as stock tickers and columns on investment strategies.

Web sites have been offering financial information for years, but they attracted more regulatory attention in late 2000 and early 2001, when they began adding prominent “Trade Now!” links.

SEC rules permit a broker-dealer to pay a portal a fee for each time a consumer clicks on a link, or fills out an account application after clicking on a link, but they cannot base fees on the number of consumers who end up trading stocks or the volume of trading generated.

Portal representatives asked the SEC to eliminate the restriction on transaction-based compensation.

The restriction “has impeded effective negotiations between private parties who arent trying to do anything illegal, immoral or fattening,” complained Brandon Becker, a lawyer with Washington officer of Wilmer, Cutler & Pickering, Washington.

Unger and other panelists suggested the SEC could regulate portals by treating portals as full-fledged broker-dealers; establishing a “broker-dealer light” category just for portals; asking portals to do a better job of disclosing their conflicts of interest; or asking broker-dealers using Web portals to sign solicitation agreements clearly spelling out responsibility for any problems that might crop up.

Panelists noted that some of the solutions might create new problems. Establishing a broker-dealer light category could lead to a “flight to light,” by encouraging traditional broker-dealers to cut regulatory costs by turning themselves into portals, according to Andre Owens, a lawyer in the Washington office of Schiff, Hardin & Waite.

Reproduced from National Underwriter Life & Health/Financial Services Edition, June 11, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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