The proposed rule change would also revise the current interpretation that requires the sale and repurchase on the same day of a position held from the previous day to be treated as a day trade. Instead, the sale of the position should be treated as a liquidation of the existing position and the subsequent repurchase as the establishment of a new position not subject to the rules affecting day trades.

An important distinction between the current and proposed daytrading margin rules is the significant consequences to the day trader under the proposed rules if he or she exceeds the day-trading buying power limitations. As noted above, under current rules, the funds used to meet a call are deposited after the day-trading risk has already been incurred and need only remain in the account overnight. Under the NASD's proposal, funds used to meet a day-trading margin call must remain in the account for two business days. In addition, once a day-trading margin call is issued, the day-trading account will be restricted to day-trading buying power of two times maintenance margin excess, based on the customer's daily total trading commitment. This will significantly reduce the amount of leverage available to the customer until the call is met. If the day-trading margin call is not met by the fifth business day, the account will be further restricted to trading only on a cash available basis for 90 days or until the call is met.

In authorizing the filing of the proposed rule change with the SEC, the Board recommended the formation of a Day Trading Margin Advisory Task Force (Task Force) to continue to review and evaluate the proposal, and if appropriate, recommend changes to the Board. The Task Force is composed of representatives from 15 member firms, including

representatives from the ETA. The Task Force held its first meeting in early

February and anticipates presenting its preliminary recommendations to the

Board in March.

Finally, NASDR is continuing to look at whether to impose any restrictions on day-trading firms' facilitating or participating in arranging of loans among customers. We believe that there is an inherent conflict of interest when members facilitate or participate in lending activities with or between their customers. These lending activities often allow customers to continue to trade when they would not otherwise be in a financial position to do so, thereby generating more commission income to the member. These same conflicts of interest arise when principals, registered representatives and significant shareholders of members lend funds to customers. Such conflicts of interests can arise in a variety of situations, certainly not limited to day-trading activities.

Conclusion

We will continue our regulatory initiatives with respect to day trading. To the extent that our ongoing investigations find violations of the securities laws or our rules, additional enforcement actions will follow. We have received a broad array of constructive comments on our new rule proposals and will work with the SEC and all interested parties to finalize these rules and get them in place as soon as possible. Working with this Subcommittee, other regulators, our member firms and the investing public, we pledge to continue our vigilance with respect to day-trading and to continue to address the investor protection and market issues this type of trading presents. At this time, we remain of the view that new legislation on this subject is not necessary.

On behalf of NASDR, I wish to thank the Chair for the opportunity to appear before the Subcommittee and provide testimony on these important issues, and would be happy to answer any questions you may have.

Chairman Collins, Senator Levin and Members of the Subcommittee:

I am Deborah Bortner, Director of Securities for the State of Washington and presidentelect of the North American Securities Administrators Association (NASAA).' I want to thank you for the opportunity to appear before you as you continue to look into issues associated with the day trading industry.

NASAA's Concern with Day Trading

As you know, Chairman Collins, day trading has been a concern of state securities regulators for several years now. In 1998, the Colorado Securities Commissioner raised concerns about day trading firms in his state and imposed restrictions on their operations. Massachusetts, Wisconsin and Texas also brought numerous enforcement actions after examining firms in their states. By sounding the alarm on questionable day trading practices, other states were alerted to the presence of these firms in their states and clients were also put on notice of regulators' concerns.

The states realized that the national scope of this problem required the assistance of their federal regulatory counterparts and we appreciate your leadership in bringing this issue to the attention of Congress.

Because of ongoing concerns, in December 1998, the NASAA Board of Directors formed a Day Trading Project Group to conduct research about the industry, prepare a report of its findings and make recommendations. The Project Group was also mandated to assist state securities agencies in confronting this issue by first providing them information to assist their enforcement efforts and secondly by educating the citizens of their states on the risks inherent in this type of investing.

The Project Group worked for seven months gathering information, analyzing issues and studying trading records with the assistance of a consultant. The result of that effort was the "NASAA Day Trading Project Group Report," dated August 9, 1999. NASAA President Peter Hildreth testified before this subcommittee on the specifics of the report last September and a copy of the report and appendix was submitted into the record. It is available on the NASAA web site at www.nasaa.org.

The NASAA report, the first of its kind, catalogued problems regulators found in the day trading industry, including misleading marketing, lax supervision and questionable loan schemes. The Report did not suggest major restrictions or a ban on day trading per se, but called on the firms to do a better job of screening potential customers and disclosing the substantial risks of day trading.

The oldest international organization devoted to investor protection, the North American Securities Administrators Association, Inc., was organized in 1919. Its membership consists of the securities administrators in the 50 states, the District of Columbia, Canada, Mexico and Puerto Rico. NASAA is the voice of securities agencies responsible for grass-roots investor protection and efficient capital formation.

Regulatory Actions

Last fall, NASAA commented on the rules proposed by the National Association of Securities Dealers Regulation (NASDR) relating to the opening of day trading accounts.2 The proposed rule change would require a member firm that is promoting a day trading strategy to furnish a risk disclosure statement to a non-institutional customer prior to opening an account for the customer and to either (1) approve the customer's account for a day trading strategy or (2) obtain from the customer a written agreement that the customer does not intend to use the account for day trading purposes.

NASAA supports the proposed rules which explicitly specify the industry's obligations and recommends that the member firm be required to obtain the customer's signature on the disclosure statement so that it would become part of the member firm's books and records.

This is an important point to emphasize. Currently, the NASD and the SEC require affirmative disclosure to customers prior to engaging in risky activities such as “margin borrowing," "options trading" and purchasing "penny stocks." The brokerage firm is obligated to provide the client with a disclosure statement that details the risk involved in engaging in such activity, the client must sign this disclosure and then it becomes part of the firm's permanent books and records and available for regulatory inspection.

Washington State Report

I am here today not to go over the findings of the NASAA report or to comment on day trading in general, but to focus on a Washington State Report based on recent field examinations of all day trading firms believed to have branches in our State. These exams were undertaken in order to determine whether the branches in the State of Washington would evidence the same kind of problems identified in various state actions around the U.S.

The examination team was assigned the responsibility of inspecting the activities of day trading firms for misleading advertising, questionable loans or guarantees, third-party trading and unsuitable trading accounts. The team was also given the task of looking into possible unregistered broker-dealer and investment adviser activities and short sale violations.

The examination team limited its focus to firms promoting day trading strategies and that offer Level II* trading to their clients. Through our registration and examination records we determined there were seven day trading firms with branches located in the State of Washington. All of the firms examined were located in or near the Seattle metropolitan

3

Letter from NASAA President Bradley W. Skolnik to Jonathan G. Katz dated October 12, 1999.

"Day trading" means buying and selling the same security on the same day. NASD Rule 2520.

Level II Trading shows the customer every market maker and individual selling a particular security and the price they are willing to pay to buy or sell it.