Time to Reel in the Financial Portals?

They're looking a lot like brokers these days. Regulators wonder if it's time for action

From their earliest days on the Internet, financial portals have been among the financial-service industry's most valued allies. Microsoft's MSN MoneyCentral, Yahoo! Finance, and AOL's Personal Finance channel opened the financial world to millions of people by offering voluminous free information about the stock market, banking, and insurance. Banks and brokers eagerly sought them out as places to advertise, planting "trade now" buttons that linked customers to their own sites.

But are financial portals too powerful? Securities regulators worry that independent portals--those not operated by regulated brokers--look and operate so much like brokers' sites that it's hard to tell them apart. So they are considering whether to issue new regulations to make sure consumers understand the differences. Some brokers, long worried about the portals' growing clout, say they wouldn't mind added oversight. Their fear: that portals are turning into more foe than friend. "The online portals have morphed into fairly sophisticated [sites], and suddenly a former affiliate has turned into a competitor instead of a partner," says Michael Hogan, general counsel of online broker CSFBdirect Inc.

MICROSOFT STEPS UP. The competitive heat is getting more intense as Microsoft Corp. prepares to roll out an upgraded financial portal sometime around July 25 and a new operating system, Windows XP, on Oct. 25. The new version of Microsoft's MoneyCentral portal, which is visited by more than 5 million people a month (table), will have a wide range of additional financial services provided both by Microsoft and third parties. Included will be online payments by e-mail and personalized financial planning that gives specific stock recommendations. In the future, these services will be closely linked to Microsoft's Passport system, a central log-on for visiting online services provided by Microsoft and its partners, including e-mail, online credit-card shopping, and numerous other financial services.

A Microsoft spokes- man says the Passport log-on and Windows log-on will appear separately in Windows. Even so, some competitors fear that the bundling of Microsoft-approved financial products with Passport could make big inroads into their businesses. Peter Thiel, chief executive officer of e-mail payments specialist PayPal Inc., believes that if Microsoft's new e-mail payment system using Citibank's C2IT is too closely linked to Windows XP, "that would be a massive antitrust problem." Microsoft marketing executive Chris Jolley says the company has no interest in holding people's money (as PayPal does). "There is no connection between XP and C2IT," says MSN Group Product Manager Bob Visse.

Other portals, struggling to replace dwindling ad spending by brokers, are also piling on services. Yahoo! Finance offers cash transfers between multiple financial accounts, while AOL subscribers can make payments by e-mail through Citibank, and subscribers to Intuit Inc.'s Quicken.doc can get personalized investment recommendations from mPower.com, a retirement advice site. Portals also offer information, such as "whisper numbers" about forthcoming earnings announcements, which, due to regulatory fears, brokers don't publish.

MISLEADING? The pressing question, says Securities & Exchange Commission acting Chairman Laura S. Unger, is whether portals are now crossing the line into areas that should be regulated. "Do investors understand that when they visit a portal, most often it's not registered, so they don't have the same investor protections?" she asks. The SEC in September plans to release a report on portals that may recommend new rules. Unger says her main concern is that payments made by brokers to portals shouldn't encourage trading or the publication of misleading material. Lawyers at brokerage houses say one possible move would be to eliminate "pay-for-performance" that rewards portals based on trades executed or accounts opened, and to require detailed disclosure of financial arrangements between brokers and portals.

Charles Schwab & Co., is encouraging regulators' scrutiny. "Our concern is that if portals step over the line [into brokerage], we may get held liable for that," says general counsel W. Hardy Callcott. But most portal execs insist that worries are overblown. So far, there have been no investor lawsuits related to portals, says Steven W. Stone, an attorney for several portals. What's more, says America Online Vice-President Craig Gibson, people understand that portals, like magazines and newspapers, are not brokers. Besides, he says, "We're not in the business of banking, brokerage, or giving investment advice--we're a primary source of information."

Brokers and regulators alike seem eager to keep any new rules on portals to a minimum. At present, portals are publishers and brokers are regulated businesses. But if portals get much deeper into giving specific advice to individual investors or into sharing the fees from trading, their unregulated ride could come to an abrupt end.

Corrections and Clarifications The correct name of Intuit Inc.'s Quicken Web site is Quicken.com ("Time to reel in the portals?" Finance, July 23). And mPower.com Inc. does not provide services to it.

By Geoffrey Smith in Boston, with Christopher H. Schmitt in Washington

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