eTrade 2004 Annual Report Download - page 54

Table of Contents
Index to Financial Statements
supervision and examination by the OTS, and, in the case of the Bank, the FDIC. Such regulation covers all banking business, including
lending practices, safeguarding deposits, capital structure, recordkeeping, transactions with affiliates and conduct and qualifications of
personnel.
If we fail to comply with applicable securities, banking and insurance laws, rules and regulations, we could be subject to disciplinary
actions, damages, penalties or restrictions that could significantly harm our business
The SEC, NYSE, NASD, Commodities Futures Trading Commission or other self-regulatory organizations and state securities
commissions can, among other things, censure, fine, issue cease-and-desist orders or suspend 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 and maintenance of a reasonable compliance system. The failure to establish and enforce
reasonable compliance procedures, even if unintentional, could subject us to significant 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.
Similarly, the Bank is subject to various regulatory capital requirements administered by the OTS. Failure to meet minimum capital
requirements can trigger 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 higher Total and Tier 1 Capital to risk-weighted assets and Tier I Capital to adjusted
total assets ratios.
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
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