eTrade 2003 Annual Report Download - page 45

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Table of Contents
Index to Financial Statements
or expel a broker-dealer or any of its officers or employees. The OTS may take similar action with respect to our banking activities. Similarly,
the attorneys general of each state could bring legal action on behalf of the citizens of the various states to ensure compliance with local laws.
The ability to comply with applicable laws and rules is dependent in part on the establishment, maintenance and enforcement of an effective
losses or disciplinary or other actions.
If we do not maintain the capital levels required by regulators, we may be fined or even forced out of business
The SEC, NYSE, NASD, OTS and various other regulatory agencies have stringent rules with respect to the maintenance of specific
levels of net capital by securities broker-dealers and regulatory capital by banks. Net capital is the net worth of a broker or dealer (assets minus
liabilities), less deductions for certain types of assets. Failure to maintain the required net capital could result in suspension or revocation of
registration by the SEC and suspension or expulsion by the NYSE and/or NASD, and could ultimately lead to the firm’s liquidation. In the
past, our broker-dealer subsidiaries have depended largely on capital contributions by us in order to comply with net capital requirements. If
such net capital rules are changed or expanded, or if there is an unusually large charge against net capital, operations that require an intensive
use of capital could be limited. Such operations may include investing activities, marketing and the financing of customer account balances.
Also, our ability to withdraw capital from brokerage subsidiaries could be restricted, which in turn could limit our ability to repay debt and
redeem or purchase shares of our outstanding stock. See Note 23 of Item 8 Consolidated Financial Statements and Supplemental Data for the
minimum net capital requirements for our domestic broker-dealer subsidiaries for the current reporting period.
Similarly, the Bank is subject to various regulatory capital requirements administered by the OTS. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could harm a bank’
s
operations and financial statements. A bank must meet specific capital guidelines that involve quantitative measures of a bank’s assets,
liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. A bank’s capital amounts and classification
are also subject to qualitative judgments by the regulators about the strength of components of its capital, risk weightings of assets, off-balance
sheet transactions and other factors.
Quantitative measures established by regulation to ensure capital adequacy require a bank to maintain minimum amounts and ratios of
Total and Tier 1 Capital to risk-weighted assets and of Tier I Capital to adjusted total assets. To satisfy the capital requirements for a “well
capitalized” financial institution, a bank must maintain minimum Total and Tier 1 Capital to risk-weighted assets and Tier I Capital to adjusted
total assets ratios. See Note 23 of Item 8 Consolidated Financial Statements and Supplemental Data for the Bank for the current reporting
period.
As a non-grandfathered savings and loan holding company, we are subject to regulations that could restrict our ability to take
advantage of certain business opportunities
We are required to file periodic reports with the OTS and are subject to examination by the OTS. The OTS also has certain types of
enforcement powers over the Company, ETBH and E*TRADE Re, LLC, including the ability to issue cease-and-
desist orders, force divestiture
of the Bank and impose civil and monetary penalties for violations of Federal banking laws and regulations or for unsafe or unsound banking
practices. In addition, under the Gramm-Leach-Bliley Act, our activities are restricted to those that are financial in nature and certain real
estate-related activities. We may make merchant banking investments in companies whose activities are not financial in nature if those
investments are made for the purpose of appreciation and ultimate resale of the investment and we do not manage or operate the company.
Such merchant banking investments may be subject to maximum holding periods and special recordkeeping and risk management
requirements.
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