eTrade 1999 Annual Report Download - page 62

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and trading problems that are reported to the NASD or the SEC by dissatisfied customers are investigated by the NASD or the SEC,
and, if pursued by such customers, may rise to the level of arbitration or disciplinary action. One or more of such claims or disciplinary
actions decided adversely against the Company could have a material adverse effect on the Company's business, financial condition
and results of operations. The Company is also subject to periodic regulatory audits and inspections.
The securities industry is subject to extensive regulation under federal, state and applicable international laws. As a result, the
Company is required to comply with many complex laws and rules and its ability to so
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comply is dependent in large part upon the establishment and maintenance of a qualified compliance system. The Company is aware of
several instances of its noncompliance with applicable regulations. In particular, in fiscal 1997, the Company's failure to timely renew
its broker-dealer registration in Ohio resulted in a $4.3 million pre-tax charge against earnings.
The Company maintains insurance in such amounts and with such coverage, deductibles and policy limits as management believes are
reasonable and prudent. The principal risks that the Company insures against are comprehensive general liability, commercial property
damage, hardware/software damage, directors and officers, and errors and omissions liability. The Company believes that such
insurance coverage is adequate for the purpose of its business.
The Company has entered into employment agreements with several of its key executive officers. These employment agreements
provide for annual base salary compensation, stock option acceleration and severance payments in the event of termination of
employment under certain defined circumstances, or change in the Company's control. Base salaries are subject to adjustments
according to the Company's financial performance.
15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET CREDIT RISK AND CONCENTRATIONS OF CREDIT RISK
The Company's customer securities activities are transacted on either a cash or margin basis. In margin transactions, the Company
extends credit to the customer, subject to various regulatory and internal margin requirements, collateralized by cash and securities in
the customer's account. As customers write option contracts or sell securities short, the Company may incur losses if the customers do
not fulfill their obligations and the collateral in customer accounts is not sufficient to fully cover losses which customers may incur
from these strategies. To control this risk, the Company monitors required margin levels daily, and customers are required to deposit
additional collateral, or reduce positions, when necessary.
Through its broker-dealer subsidiaries, the Company loans securities temporarily to other brokers in connection with its securities
lending activities. The Company receives cash as collateral for the securities loaned. Increases in security prices may cause the market
value of the securities loaned to exceed the amount of cash received as collateral. In the event the counterparty to these transactions
does not return the loaned securities, the Company may be exposed to the risk of acquiring the securities at prevailing market prices in
order to satisfy its customer obligations. The Company controls this risk by requiring credit approvals for counterparties, by
monitoring the market value of securities loaned on a daily basis and by requiring deposits of additional cash as collateral when
necessary.
The Company is obligated to settle transactions with brokers and other financial institutions even if its customers fail to meet their
obligations to the Company. Customers are required to complete their transactions on settlement date, generally three business days
after trade date. If customers do not fulfill their contractual obligations, the Company may incur losses. The Company has established
procedures to reduce this risk by requiring that customers deposit cash and/or securities into their account prior to placing an order.
The Company may at times maintain inventories in equity securities on both a long and short basis. While long inventory positions
represent the Company's ownership of securities, short inventory positions represent obligations of the Company. Accordingly, both
long and short inventory positions may result in losses or gains to the Company as market values of securities fluctuate. To mitigate the
risk of losses, long and short positions are marked to market daily and are continuously monitored by the Company.
16. ACQUISITIONS
ShareData
On July 30, 1998, the Company acquired ShareData, Inc., ("ShareData"). ShareData supplies stock plan knowledge-based software
and FSSPA consulting services for pre-IPO and public companies. The Company
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issued 5.2 million shares of its common stock in exchange for all outstanding common stock of ShareData. The Company also
2002. EDGAR Online, Inc.