eTrade 2006 Annual Report Download - page 12

documents may be inaccurate and misleading resulting in recommendations or transactions that are inconsistent
with the investors’ intended results. In addition, advisors may not understand investor needs or risk tolerances,
failures that may result in the recommendation or purchase of a portfolio of assets that may not be suitable for the
investor. To the extent that we fail to know our customers or improperly advised them, we could be found liable
for any resulting losses suffered by such customers, which could harm our reputation and business.
Our international efforts subject us to additional risks and regulation, which could impair our business growth
One component of our strategy has been an effort to build an international business, sometimes through
joint venture and/or licensee relationships. We have limited control over the management and direction of these
venture partners and/or licensees, and their action or inaction, including their failure to follow proper practices
with respect to regulatory compliance and/or corporate governance, could harm our operations and/or our
reputation.
Risks Relating to the Regulation of Our Business
We are subject to extensive government regulation, including banking and securities rules and regulations,
which could restrict our business practices
The securities and banking industries are subject to extensive regulation. All of our broker-dealer
subsidiaries have to comply with many laws and rules, including rules relating to sales practices and the
suitability of recommendations to customers, possession and control of customer funds and securities, margin
lending and execution and settlement of transactions. We are also subject to additional laws and rules as a result
of our specialist and market maker operations.
As part of our institutional business we provide clients access to certain third-party research tools and other
services in exchange for commissions earned. Currently, these activities are allowed by various regulatory
bodies. However, changes to the regulations governing these activities have been considered in the United
Kingdom and the United States and may be considered again in the future. If the regulations are changed in the
future in a way that limits or eliminates altogether the services we could provide to clients in exchange for
commissions, we may realize a decrease in our institutional commission revenues.
Similarly, E*TRADE Financial Corporation, E*TRADE Re, LLC and ETB Holdings, Inc., as savings and
loan holding companies, and E*TRADE Bank, as a Federally chartered savings bank, are subject to extensive
regulation, supervision and examination by the OTS and, in the case of the Bank, also 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 and banking laws, rules and regulations, either domestically or
internationally, we could be subject to disciplinary actions, damages, penalties or restrictions that could
significantly harm our business
The SEC, the NASDAQ, NASD and other self-regulatory organizations and state securities commissions,
among other things, can 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. Regulatory agencies in countries outside of the United States have similar authority.
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.
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