eTrade 1999 Annual Report Download - page 18

equipment and applications quickly, we have less time and ability to test and validate hardware and software, which could lead to
performance problems. We also rely on a number of third parties to process our transactions, including online and Internet service
providers, back office processing organizations, service providers and market-makers, all of which will need to expand the scope of
the operations they perform for us. Any backlog caused by a third party's inability to expand sufficiently to meet our needs could have
a material adverse effect on our business, financial condition and operating results. As trading volume increases, we may have
difficulty hiring and training qualified personnel at the necessary pace, and the shortage of licensed personnel could cause a backlog in
the processing of orders that need review, which could lead to not only unsatisfied customers, but also to liability for orders that were
not executed on a timely basis.
20
Risks Associated with Government Regulation
The securities industry in the United States is subject to extensive regulation under both federal and state laws. Broker-dealers are
subject to regulations covering all aspects of the securities business, including:
. sales methods;
. trade practices among broker-dealers;
. use and safekeeping of customers' funds and securities;
. capital structure;
. record keeping;
. conduct of directors, officers and employees; and
. supervision.
Because we are a self-clearing broker-dealer, we have to comply with many complex laws and rules. These include rules relating to
possession and control of customer funds and securities, margin lending and execution and settlement of transactions. Our ability to so
comply depends largely on the establishment and maintenance of a qualified compliance system.
Our mode of operation and profitability may be directly affected by:
. additional legislation;
. changes in rules promulgated by the SEC, the NASD, the Board of Governors of the Federal Reserve System, the various stock
exchanges and other self-regulatory organizations; or
. changes in the interpretation or enforcement of existing laws and rules.
The SEC, the NASD or other self-regulatory organizations and state securities commissions can censure, fine, issue cease-and-desist
orders or suspend or expel a broker-dealer or any of its officers or employees. Our ability to comply with all applicable laws and rules
is largely dependent on our establishment and maintenance of a system to ensure such compliance, as well as our ability to attract and
retain qualified compliance personnel. Our growth has placed considerable strain on our ability to ensure such compliance. The
principal purpose of regulation and discipline of broker- dealers is the protection of customers and the securities markets, rather than
protection of creditors and shareowners of broker-dealers. We could be subject to disciplinary or other actions due to claimed
noncompliance in the future, which could have a material adverse effect on our business, financial condition and operating results.
We have initiated an aggressive marketing campaign designed to bring brand name recognition to E*TRADE. All marketing activities
by E*TRADE Securities are regulated by the NASD, and all marketing materials must be reviewed by an E*TRADE Securities Series
24 licensed principal prior to release. The NASD has in the past asked us to revise certain marketing materials. The NASD can impose
certain penalties for violations of its advertising regulations, including:
. censures or fines;
. suspension of all advertising;
2002. EDGAR Online, Inc.