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November 1, 1999

Tough New Regulations on Day Trading? Lawmaker's Remarks Over Protecting the In

By William Hoffman

Day trading firms are bracing for tough new regulations that may be imposed on their activities by the National Association of Securities Dealers and the Securities and Exchange Commission.

The new regulations would likely take aim at the most controversial areas of day trading, uncovered in recent scrutiny of day trading by state securities regulators, Capitol Hill sources say.

Nancy Condon, a spokeswoman for the NASD Regulation, said her organization would have no comment until after the SEC returned collected comments on NASD Regulation's proposed rule 99-42 sometime after Oct. 12 (and after the self-regulatory organization had time to formulate its responses).

Comments by SEC Chairman Arthur Levitt and Senate Banking Committee Chairman Phil Gramm (R-Texas) aren't clearing the air.

Gramm opposes the proposal by NASD Regulation, the regulatory arm of the NASD. The proposal would require day-trading firms to reject potential customers whose financial resources, experiences, and goals are judged unsuitable for the risky investments commonly exchanged on a daily basis.

"You can't protect people from making bad decisions," Gramm said during an interview following a recent hearing at the Senate Permanent Investigations Subcommittee. "You're getting into a level of paternalism that I'm not going to support."

Conflicting Signals

Meanwhile, Levitt sent conflicting signals with his written testimony filed for the hearing and his oral testimony delivered in person.

"I certainly feel there's a responsibility on the part of any firm to see to it that individuals who are clearly not in a position to engage in that kind of activity not be allowed to trade," Levitt told the investigations panel during oral testimony.

In written testimony, however, Levitt said, "If day traders are adequately apprised of the risks of their day-trading strategy, the commission believes that individual day traders bear responsibility to make sure that they do not trade with funds they cannot afford to lose."

So, which is it? Investor responsibility, or the responsibility of the day trading firms? The SEC declined comment, referring a reporter to Levitt's statements to the subcommittee.

Gramm's Banking Committee spokesperson, Christi Harlan reiterated Gramm's sentiment that "he really feels that there's not much of a rule you can write to protect people who are determined to lose money."

Electronic Traders Association (ETA) President James Lee prefers to look on the bright side: "I think Sen. Gramm has the right idea about this...Once customers are apprised of the risk, customers need to be responsible for their own actions." (The ETA is the umbrella organization for electronic day-trading firms.)

Lee is encouraged by Levitt's written testimony, quoting the SEC chairman that there are isolated problems with day-trading firms' advertising, but nothing systemic or pervasive.

However, in his oral testimony, Levitt also told the panel, "Our preliminary findings indicate that many [day-trading] firms have extremely lax compliance practices. The inability of some firms to monitor their adherence with capital, margin, and the short sale rule, or to maintain adequate books and records raises serious concerns.

Lee contends that the NASD and the SEC are to some extent caught up in a manufactured hysteria: "This isn't the industry against day trading; it's really (regulators) out on an island."