(The following is a DFI Your money Matters program brochure reproduction)
It used to be that "hot tips" about the stock market came from your barber or your Uncle Louie. If you wanted to buy or sell stocks, you went to the big Wall Street brokerage firm office downtown. If you wanted financial information about a company, you asked your broker or you pored over back issues of The Wall Street Journal or other publications at your local library. But not anymore! As more and more people acquire computers, they also gain access to the Internet. The limits of information obtainable through the World Wide Web have yet to be defined.
But what kind of information is out there in cyberspace and how can an investor sort the good from the bad? Here are some answers that may help you navigate through the investment quadrant of cyberspace. This brochure will not attempt to explain the workings of the Web or web browsers. Rather, it will give you an overview of some types of information available relating to securities and some things to watch out for.
From small, start-up companies to corporate giants, the Web has become a way for businesses to promote themselves, their products and their securities to a tremendous audience. Many corporate websites contain a wealth of financial and business performance information. An investor wanting to do research can start here for a basic outline of the company. In addition, many magazines, newsletters and special websites will have additional information and opinions concerning a company and its securities. You should not rely solely on any one source of information. You should consult multiple sources, looking for several that generally back each other up on the information or recommendations made.
Remember, when reading information or recommendations on the Web, you probably know little about the person or firm making the recommendations. The anonymity of chat rooms, bulletin boards and websites allows anyone to say anything they wish without any requirement to back up their opinions or statements. Securities regulators have seen a marked increase in the number of sites proclaiming glowing reports about obscure stocks and companies. In the world of telephone and paper communications, someone promoting a particular security would be required to substantiate their claims. However, because communication via the Web is instantaneous and the identity and location of the person making the claim often is difficult or impossible to discover, the likelihood of fraud by misrepresentation or omission is heightened.
Claims of having special sources of information on a company may be a sign of two possible types of fraudulent activity. So-called "insider information"information that is known only to persons inside the company and has not been released to the general publicmay be factual or a fabrication. In either event, it is a violation of both state and federal securities laws for anyone to trade on inside information. Should you be discovered to have bought or sold securities on inside information, you could be subject to heavy monetary penalties and forfeiture and possible criminal penalties.
The other possibility, and the more likely one, is that the information is fictitious or the claim of having special information is just a lure to hook you into an investment. Like the boiler room operators who commit telemarketing fraud, those committing cyberfraud make up elaborate stories about their own important place in the securities industry or a company and their connections to key people in corporations or the financial markets. Name-dropping is a common tactic to add credibility to research reports and tips.
If you read about a deal that sounds too good to be true or about information that is secret, there is a good chance that the deal in question is not what it is represented to be.
Another problem identified with stock promotions on the Web has been undisclosed relationships between website operators and issuers of securities. The U.S. Securities & Exchange Commission already has investigated a number of website operators who have received undisclosed compensation from issuers for promoting their securities. Investors have no idea whether the recommendations are truly representative of the merits of the security or just hype paid for by the issuer.
Many companies offering securities for the first time may decide the Web is a cheaper place to attract investors than paying thousands in fees to a brokerage firm to market the securities to the public. Securities offerings must be registered or rely on an exemption from registration with federal and/or state securities regulators in order to be legally sold to the public. Most state securities regulators, including Wisconsin, have taken the position that a website promoting a company and discussing the details of a securities offering does not violate state securities laws. However, they do agree that once a company responds to an inquiry from a potential investor or directs any kind of information or communication on the security to a person in a particular state--Wisconsin, for example--that offering then becomes subject to Wisconsin securities law.
In other words, if you are in Wisconsin surfing the Net and view a page giving information about stock being offered by XYZ Corp., the company does not need to take any action under the Wisconsin securities law. However, if you e-mail the company a request for information, before they can respond with information related to the securities being offered, the company must comply with all registration requirements in Wisconsin, whether or not a sale is actually made.
You can call the Department of Financial Institutions Division of Securities at 1-800-47CHECK to verify whether a security is qualified for sale in the state.
ON-LINE BROKERAGE SERVICES
More and more brokerage firms are hosting websites that not only provide information about stock recommendations but also allow you to access your account information on-line and even place orders electronically, without the aid of a salesperson. Before using such a service, however, you should understand that you will receive no advice concerning your investment choices or how to enter your order to buy or sell. If you are not equipped to do your own research on which investments to buy and when, or if you do not know how to use limits or stops or other order qualifiers, you should strongly consider using the services of a full service broker until you are in a better position to make those decisions for yourself.
As with securities registration, a brokerage firm can host a website without being licensed in Wisconsin until such time as you ask to open an account or the firm contacts you about opening an account or purchasing a security. At that point, the brokerage firm must be licensed with the Department of Financial Institutions Division of Securities before it opens an account or accepts any orders from you. Most brokerage firms will inform you that they cannot conduct business in Wisconsin if the firm is not licensed. You may be advised that the firm will notify you when it becomes licensed or they may suggest you check back at a later date to see if the firm is approved to conduct business in Wisconsin.
On-line brokerage services will require you to complete an information form similar to a customer new account information form used by traditional brokers. This form will ask for personal information such as your name, address, social security number, financial information, investment objectives and experience, and often, credit card information. On-line firms are subject to the same Wisconsin requirement as traditional brokerage firms in that a copy of this form must be sent to you within 20 days of opening the account. In reviewing website applications of several brokerage firms, the Department has discovered that many of the customer agreements, which are a part of the application, can be lengthy and not easy to locate within the site. You should carefully read these agreements for details on payment procedures, interest charges, fees, mandatory arbitration clauses, and other conditions of opening an account. You should also immediately download a copy of the application and the agreements for your records.
Once the account has been approved, you will receive a user name and password to access the actual trading portions of the website. As with any personal identification numbers or passwords, you should protect the secrecy of that information to prevent unauthorized use of your account by others. Remember, the record of who submits an order will show the user name and password of the account holdernot the e-mail address or other electronic identification information. With an on-line order entry service, YOU are responsible for any trades made using your user name and password. All errors are your responsibility and you will be liable for any losses incurred in correcting an error.
Brokerage firms have different procedures for notifying you of order executions. Most will send you an e-mail response with order execution information. However, unless you are capable of receiving e-mail at any time of the day and reviewing it immediately, you run the risk of receiving information about the status of an order that may require your immediate attention and any delay in reading that mail may mean a loss. The Department has received complaints from on-line investors who entered orders which they were sure would be executed, or for which they even may have received a report of execution, then logged off their computer, only to log on again the following day to find a message correcting an execution or advising that the order was not executed at all. Unlike using a live broker, the electronic system will generate e-mail messages but will not call you back again or leave a message on your answering machine, and will not send a message to a different location. The brokerage firm is not responsible for losses as a result of your not seeing a message until it was too late.
STEPS TO TAKE
Surprisingly, the steps to take to avoid becoming a victim of cyberfraud are the same ones you would use when dealing with anyone offering investment opportunities.
- Know with whom you are dealing. Do not assume the person giving advice or recommendations on-line is really who they say they are. Check with the Department of Financial Institutions Division of Securities for information on the status of licensed securities professionals or principals of a company. Chat rooms and bulletin boards are not policed to verify contributors identities or the truth of their statements.
- Investigate before you invest. Do not be swayed by claims of big gains, inside information or "get in before its too late" investments. Check out the securities with the Department to see if they are qualified for sale in Wisconsin. Look for information on the company in The Wall Street Journal , Barrons, Forbes, or other reliable financial publications. Also, check the National Fraud and Information Center website for information on on-line scams reported by law enforcement and regulatory agencies throughout the United States. The web site address is www.fraud.org.
- Understand on-line investment procedures. Be sure the website operator is a licensed broker-dealer before supplying any personal information to open an account. Call the Division of Securities at 1-800-47CHECK and verify the licensing status and history of the brokerage firm. We cannot advise you to use or not use a particular brokerage firm, but we can give you information on where they are licensed and on any complaints or disciplinary actions taken against the firm by a regulatory agency anywhere in the country. Also, keep copies of the on-line application you submitted along with copies of any agreements that affect your account, order reports, trade confirmations and account statements.
- Determine your own risk tolerance. Before you make any investment, you should determine what your investment objectives are and how much risk you are willing to take to reach those objectives. Once you have made those determinations, dont be lured by quick profits or "sure things," or investments that do not match your own investment objectives or that expose you to more risk than you are comfortable with.
- Beware of unsolicited e-mail messages. These messages have been a gigantic and ever-growing problem. Known by names such as junk mail and "spamming," hidden codes on web pages provide a means of identifying your computer and can either provide solicitors direct access to your own hard drive or send tens or hundreds of unsolicited messages to you on every subject from investment opportunities to match-making services. If the subject of an e-mail message appears unfamiliar or questionable, you may simply want to delete it. Some Internet access providers will block certain types of e-mail if you request it.
- Check it out! If you have any doubts about investment information you see on the Web, or if you think you have been the victim of fraud or deceit in an on-line investment transaction, call the Departments Division of Securities immediately at 1-800-47CHECK, or contact us via our website at www.wdfi.org or by mail at:
DFI Division of Securities
PO Box 1768
Madison, WI 53701-1768
Some sources of information on investments and on-line trading are:
Wisconsin Department of Financial Institutions www.wdfi.org
North American Securities Administrators Association www.nasaa.org
U.S. Securities & Exchange Commission www.sec.gov
National Fraud & Information Center www.fraud.org
Better Business Bureau www.bbb.org
National Association of Securities Dealers www.nasdr.com