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1999. To date, more than 30 sites have needed revisions to achieve compliance with our rules. The subject firms have been notified of the deficiencies identified in their sites. In the more serious situations, NASDR staff contacted the firms immediately and recommended that materials or representations on the sites be removed. In each of these cases, the problematic portions of the sites were taken down.

One such site involved a day-trading firm's claims about the profitability that customers could expect from day trading. Under a banner headline, "Do the Math," the firm suggested that a typical day-trading customer could easily make almost a quarter-million dollars per year. What was the basis for this prediction? A simple syllogistic formula. "One point on 1,000 shares equals $1,000. One point average per day, 240 trading days, equals $240,000 annually." One can only imagine what the portrayed profits would have been on the site if the firm had taken into account extended trading hours.

To address the risk presented by day-trading firms both to individuals and to firms, NASDR also has engaged in rulemaking initiatives in three areas: Risk disclosure, appropriateness determinations, and margin requirements. These newly proposed rules require that firms that promote day trading to individuals fully disclose the risks involved, as well as assess whether such a strategy is appropriate for the individual. These rules were filed with the SEC last August, and after receiving comments, amended rules were filed with the SEC last week.

We believe that the proposed rules, as amended, serve to maintain the standards necessary for the protection of investors without imposing overly burdensome regulatory requirements on firms that promote day trading. We are also working closely with the New York Stock Exchange to amend margin requirements applicable to day traders.

Earlier this year, NASDR filed with the SEC a rule proposal that would amend the margin requirements that apply to pattern day traders. The amendments would do a number of things. First, they would change the definition of day trader to cover only true day traders, not incidental or occasional day traders. The rule would require minimum equity of $25,000 in day trader's account on any day in which the customer trades. The rule would permit day trading buying power of up to four times a day trader's maintenance margin excess. However, unlike the present rules that allow funds to meet a day trading margin call to be deposited after the day trading risk has already been incurred, the proposed rule amendment requires that the funds be in the account prior to any trading. The rule would also prohibit cross-guaranteeing of accounts.

Finally, NASDR is continuing to look at whether to impose any restrictions on day-trading firms' activities when they facilitate or participate in arranging loans among customers. We believe that there may be an inherent conflict of interest when member firms facilitate or participate in lending activities with or between their customers. It is these lending activities that often allow customers to continue to trade when they would not otherwise be in a financial position to do so, thereby generating more commissions for the

representatives, and significant shareholders of members lend funds to customers, those are already addressed in the rules and we are looking to see whether we need to do more.

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 NASD rules, we will bring additional enforcement actions. We have received a broad array of very constructive comments on our new rule proposals and we will work hard with the SEC and all interested parties to finalize them and get them on the books as soon as possible. At this time, we remain of the view that no new legislation on this subject is necessary.

On behalf of NASDR, I would like to thank the Chair, Senator Levin, and the rest of this Subcommittee for the opportunity to appear here today and provide testimony on these important issues. would be happy to answer any questions you may have. Thank

you.

Senator COLLINS. Thank you, Mr. Goldsmith. Ms. Bortner.

TESTIMONY OF DEBORAH R. BORTNER,1 DIRECTOR, SECURITIES DIVISION, WASHINGTON STATE DEPARTMENT OF FINANCIAL INSTITUTIONS, OLYMPIA, WASHINGTON

Ms. BORTNER. Good morning, Chairman Collins, and Senator Levin. My name is Deborah Bortner. I am the Director of Securities in the State of Washington. I am also President-Elect of the North American Securities Administrators Association, NASAA, for short. I want to thank you for the invitation to testify today as you continue to look into issues surrounding day trading.

Chairman Collins, as you know, day trading has been a concern of State securities regulators for several years now. We appreciate your leadership in bringing this issue to the attention of Congress and to the American public. This AP article that was published yesterday reached hundreds of thousands of people. Try as we might, it is very hard for us to reach that many people with our educational efforts to let people know that day trading is risky.

In December 1998, NASAA formed a task force to research the day trading industry. That group spent 7 months gathering information, analyzing issues, and studying trading records from daytrading firms. It released its report last August. Last September, NASAA's then-President of NASAA testified before this Congress on that report and its findings and recommendations. The report did not suggest major restrictions on the day trading industry. Instead, it called on firms to do a better job of screening out unsuitable customers and disclosing the risks for those remaining customers who still wanted to day trade.

I am not here today to go over NASAA's report or to comment on day trading in general. NASAA's findings and views are already part of the Subcommittee's record. I am here to discuss the results of a series of examinations my office conducted last fall. We audited all the known day-trading firms with branches in the State of Washington. I have submitted a copy of our report to be included in the record.2

1 The prepared statement of Ms. Bortner appears in the Appendix on page 206.

A team of my examiners, each of whom have more than 15 years' experience, inspected the branch offices of our seven day-trading firms. They are all located in or near Seattle. The team looked at advertising, loans, third-party trading, and account opening requirements, all issues identified by other State securities regulators as potential problems. The most striking finding had to do with profitability, or should I say, lack of profitability of day trading.

My team analyzed 124 trading accounts. That sample represented 100 percent of the accounts in five of the firms and a representative sample in two of the larger firms. More than threefourths, 77 percent, of the accounts examined had net losses, with an average loss of $36,000. Nine accounts had losses of more than $100,000, the biggest of which was a loss of $641,000. Twenty-three percent of the accounts were profitable, with an average profit of around $22,000. Only two had gains of more than $100,000. The biggest gain was $160,000.

Now, some proponents of day trading, and I think I heard this yesterday in the testimony, suggested that day traders who can survive the learning curve, which purportedly takes about 6 months, are much more likely to be successful. As you can see from our report at Tab E, we analyzed accounts that were open from 1 to 25 months. We found no correlation between the length of time an account was open and its profitability.

In addition to profitability, our examiners reviewed other issues. At several firms, we found questionable loan arrangements between customers. These loan arrangements, we believe, serve to circumvent margin loan requirements, and in some cases, these loans may have resulted in even greater losses by customers.

We also found instances at several firms where day traders were trading on behalf of others. This may prove to be a violation of the registration provisions of our investment advisor laws. We are continuing to investigate these accounts.

After listening to yesterday's testimony about Amy Le, I would like to recommend that before anyone invest with someone in a situation like that, they should call either their State securities regulator or the NASD to make sure that person is registered. If he or she is registered, they can also ask about disciplinary history.

As Deborah Field highlighted in her testimony yesterday, we are also concerned that many firms are encouraging and allowing unsuitable people to day trade. For example, each of the firms we examined claimed to require a minimum balance to open and maintain an account. For most firms, that was around $20,000. But in some cases, we found the branch manager or compliance officer approved new accounts with opening balances far below the minimum, even as low as $6,000. Some firms also allowed customers to continue to trade after they had fallen below their minimum.

A word about day trading advertising, which has been a major concern of State securities regulators. Our examiners only reviewed advertising done by the branch office in Washington, not ads produced and placed by the corporate headquarters of the firms. As it turns out, the branches we examined did either no or little adver

Recently, however, one of the firms did post something problematic in our view on the Web site. On its home page, it made claims about the trading success of its principal with no disclaimer. The required disclaimer is actually a mouse click away from the home page. Our Enforcement Section is reviewing this matter to determine whether that violates the advertising rules.

To conclude, our findings on the profitability of day trading are consistent with those of the NASDR report, which found that about 70 percent of day traders lose money. Exams and enforcement actions by State regulators have highlighted problems with day-trading firms. Federal regulators, the NASDR, and industry representatives are now involved in working to address the regulatory issues from a national perspective. NASAA supports the NASDR's rules to increase risk disclosure and require the firms to determine the appropriateness of the potential customer. We expect to be commenting in support of their new proposed rule to impose higher margin requirements for day-trading customers.

As we said before, day trading is a very risky strategy. We will continue to monitor it and bring enforcement actions when appropriate. We are working closely with the SEC and the NASD to address issues in this area.

Again, I appreciate this opportunity to testify and I look forward to answering any questions you might have.

Senator COLLINS. Thank you very much, Ms. Bortner.

As you were speaking, I was thinking that probably only the people in this room, when they hear the term NASAA, think of securities regulations rather than space exploration. We are probably unusual in that regard.

Ms. Richards, your report points out that day traders incur significant costs day trading because of the commissions. As I thought more about this issue, I am reminded of a traditional problem that the securities regulators have dealt with of churning, of brokers needlessly selling stocks in order to generate commissions. With day trading, we have moved to a whole different level, where it is the individual customer that is doing the trades, but the result is the same. You have, arguably, excessive commissions being generated.

Could you describe to us what your findings were with regard to commissions? In particular, it is my understanding that our estimates, based on our survey, are actually lower than what you found would be generated annually. So could you talk about what your findings were in that area?

Ms. RICHARDS. Yes. We found that day trading is extremely expensive. The average commission cost per trade at the firms that we reviewed ranged from $15 to $25 per trade. There are additional costs that many day traders incur for services like data feeds, news, research. Those services can range anywhere between $50 and $675 a month at the firms that we visited.

So collectively, putting those costs together, we did an analysis to evaluate how profitable day traders would have to be simply in order to break even. On page 9 of our report, we analyzed three fee structures of typical day-trading firms. We concluded that in a typical day-trading firm with what we determined was a medium

day trader paid $150 per month for additional services, that that day trader, if he or she made 50 trades per day, would need to generate $16,850 each month in trading profits simply to be able to recoup the cost from the commissions and from the extra costs that he or she would pay to the firm.

Clearly, we believe that day trading is expensive and we want to make sure that investors realize that they are going to incur significant costs before they even reach a point where they can break

even.

Last fall, we put on our Web site tips for investors which would remind them that they have high expenses, that they need to pay their firm sometimes large amounts in commissions for training, for computers, and for other services, and I know that as part of the NASD's rule proposal, one of the items that day-trading firms would be required to disclose is the fact that total daily commissions that day traders may pay may add to customers' losses or significantly reduce their earnings.

Senator COLLINS. So what you found, if my quick math here is correct, is that for the median fee structure, the day trader would actually have to generate more than $200,000 a year just to pay the commissions, before incurring one cent of profit, is that correct?

Ms. RICHARDS. You did the math more quickly than I did, but it is $16,850 each month. The total cost would exceed $200,000 a year that an investor would have to generate in order to make a profit.

Senator COLLINS. Has any consideration been given, and I would ask all three of you who are working on comments on the rules that the SEC has, to using that as an example in the risk disclosures that are going to be required from these firms? It seems to me if you told most people who are interested in opening a day trading account that they would have to generate in excess of $200,000 just to pay commissions and other fees, that that would discourage a lot of people from opening an account because it would make them understand very clearly the fiscal realities and how difficult it was going to be for them to make a profit for themselves, much less make a living day trading, which is what these people are doing.

Has any thought been given to actually putting that concrete example-I mean, it is one thing to warn people that it is expensive to trade, that commissions are high. That example really says it all.

Ms. RICHARDS. What we have reminded investors in the educational tips on our Web sites is that they should ask the firm how many clients the firm has who have lost money and how many clients the firm has who have made money, and as we have told investors, if the firm says that it does not know or will not tell you, that that investor should think twice about doing business with the firm.

In our report, we also recommend that the day-trading firms provide this information to customers, that it is information that they need to provide to allow the customer to make an informed judgment about whether or not he or she should day trade.

Senator COLLINS. But the rule that the SEC is looking at simply says, as part of the disclosure, day trading may result in your pay

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