Risks increase as regulators battle to keep up with developments

PUBLISHED : Sunday, 29 November, 1998, 12:00am
UPDATED : Sunday, 29 November, 1998, 12:00am

REGULATORS are scrambling to keep up with stock-trading scams on the Internet, but it is an uphill battle and cross-border transactions receive no special scrutiny, says the Nasdaq Stock Market's chief regulator.

'What I worry about is that securities regulators and securities regulation could become irrelevant, not because they don't serve an important purpose, but because they might not be able to keep up with technology, globalisation and the fantastic growth of markets and products,' said Mary Schapiro, president of NASD Regulation, the regulatory arm of the National Association of Securities Dealers, parent of the Nasdaq Stock Market.

Speaking to personal-finance journalists last week at a conference organised by the Society of American Business Editors and Writers, Ms Schapiro painted a dark picture of hundreds of thousands of individual investors, many of them novices, flooding into markets with little guidance or protection.

Nearly 50 per cent of US residents owned stocks, she said, either directly or indirectly through mutual funds. The typical new stockholder earns less than US$70,000 a year, almost half are women, and 38 per cent are non-professional, salaried workers. Altogether, US individual investors have poured US$7 trillion into equities.

At the same time as more individuals are putting their life savings on the line - total stock-market assets now exceed those in bank accounts - technological advances mean these new players have the ability to trade for themselves, 'with no one standing between their finger tips and a financial commitment', as Ms Schapiro put it.

Officials at NASD Regulation are seeking ways to insert speed bumps along the information superhighway, similar to the hoops through which a full-service brokerage's compliance officer might force a client to jump. One idea is to have a screen pop up on computers asking an investor whether the trade about to be completed is consistent with investment objectives.

'Are there any ways to insert back into the electronic relationship some of the things that exist in a traditional broker-client relationship, like a bit of an opportunity for the customer to pause? I don't know that we will ever be able to do that but, certainly, it's something that we're talking about or thinking about,' Ms Schapiro said.

NASD Regulation already has taken some steps to protect investors. For example, it has an electronic robot constantly prowling the Internet in search of enticing marketing terms, such as 'hot little stock', 'guaranteed' and 'the next Microsoft'. This information is indexed, and unregistered offerings and other apparently fraudulent conduct is referred to the main securities watchdog, the Securities and Exchange Commission.

'But, let's be clear,' Ms Schapiro said. 'Neither we nor any other regulator will ever 'cover' the activity that is occurring on the Internet in a comprehensive way.' She acknowledges that regulatory oversight is even less comprehensive for investors outside the United States.

NASD chairman Frank Zarb's drive to forge alliances with stock exchanges around the world - including engaging in preliminary talks with the Stock Exchange of Hong Kong - undoubtedly will force increased attention to such matters.

'Where the Nasdaq Stock Market goes, we must go,' Ms Schapiro said. 'As Nasdaq builds alliances we must make sure that the regulatory regimes can accommodate and safely protect investors who are transacting between our jurisdiction and the foreign jurisdiction.'




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