eTrade 2006 Annual Report Download - page 137

Regulatory Matters
The SEC, in conjunction with various regional securities exchanges, is conducting an inquiry into the
trading activities of certain specialist firms, including the Company’s subsidiary E*TRADE Capital Markets,
LLC (“ETCM”), on various regional exchanges in order to determine whether such firms executed proprietary
orders in a given security prior to a customer order in the same security (a practice commonly known as “trading
ahead”) during the period 1999 – 2005. The SEC has indicated that it will seek disgorgement, prejudgment
interest, and penalties from any firm found to have engaged in trading ahead activity to the detriment of its
customers during that time period. It is possible that such sanctions, if imposed against ETCM, could have a
material impact on the financial results of the Company during the period in which such sanctions are imposed.
The Company and ETCM are cooperating with the investigation.
Beyond this, the securities and banking industries are 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 comply is dependent in part on the establishment and maintenance of a qualified
compliance system. From time to time, the Company has been threatened with or named as a defendant in,
lawsuits, arbitrations and administrative claims involving securities, banking and other matters. The Company is
also subject to periodic regulatory audits and inspections. Compliance and trading problems that are reported to
regulators, such as the SEC, the NYSE, the NASD or the OTS by dissatisfied customers or others are
investigated by such regulators, and may, if pursued, result in formal claims being filed against the Company by
customers or disciplinary action being taken against the Company or its employees by regulators. Any such
claims or disciplinary actions that are decided against the Company could have a material impact on the financial
results of the Company or any of its subsidiaries.
Insurance
The Company maintains insurance coverage that management believes is reasonable and prudent. The
principal insurance coverage it maintains covers commercial general liability; property damage; hardware/
software damage; cyber liability; directors and officers; employment practices liability; certain criminal acts
against the Company; and errors and omissions. The Company believes that such insurance coverage is adequate
for the purpose of its business. The Company’s ability to maintain this level of insurance coverage in the future,
however, is subject to the availability of affordable insurance in the marketplace.
Reserves
For all legal matters, reserves are established in accordance with SFAS No. 5. Once established, reserves are
adjusted based on available information when an event occurs requiring an adjustment.
Commitments
In the normal course of business, the Company makes various commitments to extend credit and incur
contingent liabilities that are not reflected in the consolidated balance sheet. Significant changes in the economy
or interest rates influence the impact that these commitments and contingencies have on the Company in the
future.
Loans
The Company had the following mortgage loan commitments (dollars in thousands):
December 31, 2006
Fixed Rate Variable Rate Total
Purchase loans $ — $1,118,529 $1,118,529
Originate loans $346,656 $ 109,974 $ 456,630
Sell loans $ 56,349 $ 3,933 $ 60,282
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