eTrade 2009 Annual Report Download - page 12

volume and price levels of securities and futures transactions which may, in turn, result in lower trading volumes
and margin lending. In particular, a decrease in trading activity within our lower activity accounts or our
accounts related to employee stock option management software and services would significantly impact
revenues and increase dependence on more active trading customers who receive more favorable pricing based
on their trade volume. A decrease in trading activity or securities prices would also typically be expected to result
in a decrease in margin borrowing, which would reduce the revenue that we generate from interest charged on
margin borrowing. More broadly, any reduction in overall transaction volumes would likely result in lower
revenues and may harm our operating results because many of our overhead costs are fixed.
We depend on payments from our subsidiaries.
We depend on dividends, distributions and other payments from our subsidiaries to fund payments on our
obligations, including our debt obligations. Regulatory and other legal restrictions may limit our ability to
transfer funds to or from our subsidiaries. In addition, many of our subsidiaries are subject to laws and
regulations that authorize regulatory bodies to block or reduce the flow of funds to us, or that prohibit such
transfers altogether in certain circumstances. These laws and regulations may hinder our ability to access funds
that we may need to make payments on our obligations. The majority of our capital is invested in our banking
subsidiary E*TRADE Bank, which may not pay dividends to us without approval from the OTS. Our primary
brokerage subsidiaries, E*TRADE Securities LLC and E*TRADE Clearing LLC, are both subsidiaries of
E*TRADE Bank; therefore, as our primary banking regulator and as a result of the memoranda of understanding
with the OTS under which we continue to operate, the OTS controls our ability to receive dividend payments
from our brokerage business as well. Furthermore, even if we receive the approval of the OTS to receive
dividend payments from our brokerage business, in the event of our bankruptcy or liquidation or E*TRADE
Bank’s receivership, we would not be entitled to receive any cash or other property or assets from our
subsidiaries (including E*TRADE Bank, E*TRADE Clearing LLC and E*TRADE Securities LLC) until those
subsidiaries pay in full their respective creditors, including customers of those subsidiaries and, as applicable, the
FDIC and the Securities Investor Protection Corporation.
We rely heavily on technology, and technology can be subject to interruption and instability.
We rely on technology, particularly the Internet, to conduct much of our activity. Our technology operations
are vulnerable to disruptions from human error, natural disasters, power loss, computer viruses, spam attacks,
unauthorized access and other similar events. Disruptions to or instability of our technology or external technology
that allows our customers to use our products and services could harm our business and our reputation. In addition,
technology systems, whether they be our own proprietary systems or the systems of third parties on whom we rely
to conduct portions of our operations, are potentially vulnerable to security breaches and unauthorized usage. An
actual or perceived breach of the security of our technology could harm our business and our reputation.
Vulnerability of our customers’ computers could lead to significant losses related to identity theft or other fraud
and harm our reputation and financial performance.
Because our business model relies heavily on our customers’ use of their own personal computers and the
Internet, our business and reputation could be harmed by security breaches of our customers and third parties.
Computer viruses and other attacks on our customers’ personal computer systems could create losses for our
customers even without any breach in the security of our systems, and could thereby harm our business and our
reputation. As part of our E*TRADE Complete Protection Guarantee, we reimburse our customers for losses
caused by a breach of security of the customers’ own personal systems. Such reimbursements could have a
material impact on our financial performance.
Downturns in the securities markets increase the credit risk associated with margin lending or stock loan
transactions.
We permit customers to purchase securities on margin. A downturn in securities markets may impact the
value of collateral held in connection with margin receivables and may reduce its value below the amount
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