II

106TH CONGRESS

1ST SESSION S. 1015

To require enhanced disclosure with respect to securities transactions conducted ‘‘online’’, to require the Securities and Exchange Commission

to study the effects of online trading on securities markets, to prevent

online securities fraud, and for other purposes.

IN THE SENATE OF THE UNITED STATES

MAY 12, 1999

Mr. SCHUMER (for himself, Mr. SARBANES, Mr. BRYAN, and Mr. JOHNSON)

introduced the following bill; which was read twice and referred to the

Committee on Banking, Housing, and Urban Affairs

A BILL

To require enhanced disclosure with respect to securities

transactions conducted ‘‘online’’, to require the Securities

and Exchange Commission to study the effects of online

trading on securities markets, to prevent online securities

fraud, and for other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE; DEFINITIONS.

4 (a) SHORT TITLE.—This Act may be cited as the

5 ‘‘Online Investor Protection Act of 1999’’.

6 (b) DEFINITIONS.—In this Act—
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1 (1) the term ‘‘Commission’’ means the Securi2 ties and Exchange Commission;

3 (2) the term ‘‘Internet’’ means the international

4 computer network of both Federal and non-Federal

5 interoperable packet switched data networks;

6 (3) the term ‘‘interactive computer service’’

7 means any information service, system, or access

8 software provider that provides or enables computer

9 access by multiple users to a computer server, in10 cluding specifically a service or system that provides

11 access to the Internet and such systems operated or

12 services offered by libraries or educational institu13 tions;

14 (4) the term ‘‘investment adviser’’ has the same

15 meaning as in section 202 of the Investment Advis16 ers Act of 1940;

17 (5) the term ‘‘investment company’’ has the

18 same meaning as in section 3 of the Investment

19 Company Act of 1940;

20 (6) the term ‘‘registered broker or dealer’’ has

21 the same meaning as in section 3 of the Securities

22 Exchange Act of 1934; and

23 (7) the term ‘‘retail investor’’ means—
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1 (A) any investor other than an accredited

2 investor (as defined in section 2(a)(15) of the

3 Securities Act of 1933); and

4 (B) any other similar person or class of

5 persons, as the Commission determines to be

6 appropriate.

7 SEC. 2. ONLINE TRADING DISCLOSURES.

8 The Securities Exchange Act of 1934 (15 U.S.C. 78a

9 et seq.) is amended by inserting after section 35A the fol10 lowing:

11 ‘‘SEC. 35B. ONLINE TRADING DISCLOSURES.

12 ‘‘(a) IN GENERAL.—Each online broker or dealer

13 shall, on a quarterly basis, make available on the Internet

14 or other interactive computer service, such information as

15 the Commission may require, by rule or order, taking into

16 account the needs of customers, and in such format and

17 within such time periods as the Commission may prescribe

18 regarding—

19 ‘‘(1) the date, time, and duration of any system

20 outage or other event that prevented or materially

21 delayed the execution of online securities trans22 actions during the preceding quarter;

23 ‘‘(2) any steps taken to address or prevent such

24 outages or events; and
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1 ‘‘(3) information regarding limiting risk of loss

2 to securities investors that is unique to online trad3 ing, as required by the Commission, by rule or

4 order.

5 ‘‘(b) EXCEPTIONS.—The Commission, by rule or

6 order, may exempt from the requirements of subsection

7 (a) any online broker or dealer, or class of online brokers

8 or dealers, as the Commission determines to be appro9 priate.

10 ‘‘(c) DEFINITIONS.—In this section—

11 ‘‘(1) the term ‘Internet’ means the international

12 computer network of both Federal and non-Federal

13 interoperable packet switched data networks;

14 ‘‘(2) the term ‘interactive computer service’

15 means any information service, system, or access

16 software provider that provides or enables computer

17 access by multiple users to a computer server, in18 cluding specifically a service or system that provides

19 access to the Internet and such systems operated or

20 services offered by libraries or educational institu21 tions;

22 ‘‘(3) the term ‘online broker or dealer’ means

23 any broker or dealer that provides retail investors

24 with a means to effect securities transactions over

25 the Internet or an interactive computer service;
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1 ‘‘(4) the term ‘online securities transaction’

2 means a securities transaction effected between a re3 tail investor and an online broker or dealer over the

4 Internet or an interactive computer service; and

5 ‘‘(5) the term ‘retail investor’ means—

6 ‘‘(A) any customer of an online broker or

7 dealer, other than an accredited investor (as de8 fined in section 2(a)(15) of the Securities Act

9 of 1933); and

10 ‘‘(B) any other similar person or class of

11 persons, as the Commission determines to be

12 appropriate, by rule or order.’’.

13 SEC. 3. EXTENDING DISCIPLINARY DISCLOSURES TO THE

14 INTERNET.

15 (a) IN GENERAL.—Section l5A of the Securities Ex16 change Act of 1934 (15 U.S.C. 78o–3) is amended by

17 striking subsection (i) and inserting the following:

18 ‘‘(i) OBLIGATION TO MAINTAIN DISCIPLINARY AND

19 OTHER DATA.—

20 ‘‘(1) MAINTENANCE OF SYSTEM TO RESPOND

21 TO INQUIRIES.—A registered securities association

22 shall—

23 ‘‘(A) establish and maintain a toll-free tele24 phone listing or other readily accessible elec25 tronic process to receive inquiries regarding dis-
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1 ciplinary actions and proceedings and other in2 formation involving its members and associated

3 persons of those members; and

4 ‘‘(B) promptly respond to such inquiries.

5 ‘‘(2) RECOVERY OF COSTS.—A registered secu6 rities association may charge persons, other than in7 dividual investors, reasonable fees for responses to

8 inquiries referred to in paragraph (1).

9 ‘‘(3) LIMITATION ON LIABILITY.—A registered

10 securities association shall not have any liability to

11 any person for any action taken or omitted in good

12 faith under this subsection.’’.

13 (b) RECORDS AND REPORTS OF INVESTMENT ADVIS14 ERS.—Section 204 of the Investment Advisers Act of 1940

15 (15 U.S.C. 80b–4) is amended—

16 (1) by striking ‘‘Every investment’’ and insert17 ing the following:

18 ‘‘(a) IN GENERAL.—Every investment’’; and

19 (2) by adding at the end the following:

20 ‘‘(b) FILING DEPOSITORIES.—The Commission, by

21 rule or order, may require an investment adviser—

22 ‘‘(1) to file with the Commission any fee, appli23 cation, report, or notice required to be filed by this

24 title or the rules issued under this title through any
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1 entity designated by the Commission for that pur2 pose; and

3 ‘‘(2) to pay the reasonable costs associated with

4 such filing and the establishment and maintenance

5 of the systems required by subsection (c).

6 ‘‘(c) ACCESS TO DISCIPLINARY AND OTHER INFOR7 MATION.—

8 ‘‘(1) MAINTENANCE OF SYSTEM TO RESPOND

9 TO INQUIRIES.—The Commission shall require an

10 entity designated by the Commission pursuant to

11 subsection (b)(1)—

12 ‘‘(A) to establish and maintain a toll-free

13 telephone listing or other readily accessible elec14 tronic process to receive inquiries regarding dis15 ciplinary actions and proceedings and other in16 formation involving investment advisers and

17 persons associated with investment advisers;

18 and

19 ‘‘(B) to respond promptly to such inquir20 ies.

21 ‘‘(2) RECOVERY OF COSTS.—An entity des22 ignated under subsection (b)(1) may charge persons,

23 other than individual investors, reasonable fees for

24 responses to inquiries referred to in paragraph (1).
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1 ‘‘(3) LIMITATION ON LIABILITY.—An entity

2 designated under subsection (b)(1) shall not have

3 any liability to any person for any action taken or

4 omitted in good faith under this subsection.’’.

5 (c) CONFORMING AMENDMENTS.—

6 (1) IN GENERAL.—Section 203A of the Invest7 ment Advisers Act of 1940 (15 U.S.C. 80b–3a) is

8 amended—

9 (A) by striking subsection (d); and

10 (B) by redesignating subsection (e) as sub11 section (d).

12 (2) REPEAL.—Section 306 of the National Se13 curities Markets Improvement Act of 1996 (Public

14 Law 104–290; 110 Stat. 3438) is repealed.

15 SEC. 4. ELECTRONIC ACCESS TO COMMISSION INFORMA16 TION.

17 (a) ELECTRONIC LINKS.—Not later than 1 year after

18 the date of enactment of this Act, each broker or dealer,

19 investment company, and investment adviser that effects

20 securities transactions with retail investors, or makes se21 curities market information available to retail investors for

22 the purpose of effecting such transactions over the Inter23 net or other interactive computer service, shall provide to

24 those investors information regarding investor education

25 and fraud prevention provided by the Commission,
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1 through a hypertext link to a Commission website estab2 lished for that purpose, or in such other manner as may

3 be prescribed by the Commission.

4 (b) REGULATORY ACTION.—The Commission shall

5 issue final regulations to implement this section not later

6 than 6 months after the date of enactment of this Act.

7 SEC. 5. CIVIL PENALTIES FOR INTERNET-RELATED VIOLA8 TIONS.

9 (a) SECURITIES ACT OF 1933.—Section 20(d)(2) of

10 the Securities Act of 1933 (15 U.S.C. 77t(d)(2)) is

11 amended by adding at the end the following:

12 ‘‘(D) INTERNET-RELATED VIOLATIONS.—

13 In any case in which the Internet or other

14 interactive computer service (as defined in sec15 tion 35B of the Securities Exchange Act of

16 1934) is used as part of the Act or omission re17 sulting in a violation referred to in paragraph

18 (1) the amount of the penalty provided for in

19 this paragraph shall be doubled.’’.

20 (b) SECURITIES EXCHANGE ACT OF 1934.—

21 (1) SECTION 21.—Section 21(d)(3)(B) of the

22 Securities Exchange Act of 1934 (15 U.S.C.

23 78u(d)(3)(B)) is amended by adding at the end the

24 following:
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1 ‘‘(iv) INTERNET-RELATED VIOLA2 TIONS.—In any case in which the Internet

3 or other interactive computer service (as

4 defined in section 35B) is used as part of

5 the act or omission resulting in a violation

6 referred to in subparagraph (A), the

7 amount of the penalty provided for in this

8 subparagraph shall be doubled.’’.

9 (2) SECTION 21B.—Section 21B(b) of the Secu10 rities Exchange Act of 1934 (15 U.S.C. 78u–2(b))

11 is amended by adding at the end the following:

12 ‘‘(4) INTERNET-RELATED VIOLATIONS.—In any

13 case in which the Internet or other interactive com14 puter service (as defined in section 35B) is used as

15 part of the act or omission resulting in a violation

16 referred to in subsection (a), the amount of the pen17 alty provided for in this subsection shall be dou18 bled.’’.

19 (c) INVESTMENT ADVISERS ACT OF 1940.—

20 (1) SECTION 203.—Section 203(i)(2) of the In21 vestment Advisers Act of 1940 (15 U.S.C. 80b–

22 3(i)(2)) is amended by adding at the end the fol23 lowing:

24 ‘‘(D) INTERNET-RELATED VIOLATIONS.—

25 In any case in which the Internet or other
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1 interactive computer service (as defined in sec2 tion 35B of the Securities Exchange Act of

3 1934) is used as part of the act or omission re4 sulting in a violation referred to in paragraph

5 (1), the amount of the penalty provided for in

6 this paragraph shall be doubled.’’.

7 (2) SECTION 209.—Section 209(e)(2) of the In8 vestment Advisers Act of 1940 (15 U.S.C. 80b–

9 9(e)(2)) is amended by adding at the end the fol10 lowing:

11 ‘‘(D) INTERNET-RELATED VIOLATIONS.—

12 In any case in which the Internet or other

13 interactive computer service (as defined in sec14 tion 35B of the Securities Exchange Act of

15 1934) is used as part of the act or omission re16 sulting in a violation referred to in paragraph

17 (1), the amount of the penalty provided for in

18 this paragraph shall be doubled.’’.

19 (d) INVESTMENT COMPANY ACT OF 1940.—Section

20 9(d)(2) of the Investment Company Act of 1940 (15

21 U.S.C. 80a–9(d)(2)) is amended by adding at the end the

22 following:

23 ‘‘(D) INTERNET-RELATED VIOLATIONS.—

24 In any case in which the Internet or other

25 interactive computer service (as defined in sec-
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1 tion 35B of the Securities Exchange Act of

2 1934) is used as part of the act or omission re3 sulting in a violation referred to in paragraph

4 (1), the amount of the penalty provided for in

5 this paragraph shall be doubled.’’.

6 SEC. 6. STUDY AND REPORT ON MARKET IMPACT OF ON7 LINE TRADING.

8 (a) STUDY.—The Commission shall conduct a study

9 of the effects that trading in securities by retail investors

10 over the Internet or other interactive computer service has

11 on the securities markets, including—

12 (1) with respect to ‘‘day trading’’ activities—

13 (A) whether a greater risk of fraud exists;

14 (B) whether such trading results in market

15 volatility;

16 (C) the effects on individual companies,

17 the stock of which fluctuates as a result of such

18 volatility, if any; and

19 (D) the effects on investors and their in20 vestment patterns resulting from such volatility,

21 if any; and

22 (2) the quality of execution received through

23 online trading services, including the effect of ‘‘pay24 ment for order flow’’ and other practices on—

25 (A) the promptness of execution; and
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1 (B) the purchase or sale price obtained for

2 the retail investor.

3 (b) REPORT.—Not later than 1 year after the date

4 of enactment of this Act, the Commission shall submit to

5 the Congress a report on the results of its study under

6 subsection (a).

7 SEC. 7. AUTHORIZATION OF APPROPRIATIONS.

8 There is authorized to be appropriated to the Office

9 of Internet Enforcement of the Securities and Exchange

10 Commission $70,000,000 for each of fiscal years 2000

11 through 2004, for the purpose of Internet enforcement

12 and other related investor protection activities, subject to

13 appropriations Acts.

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