eTrade 2008 Annual Report Download - page 13

We have a significant deferred tax asset and cannot assure it will be fully realized
We had net deferred tax assets of $1.0 billion as of December 31, 2008. We did not establish a valuation
allowance against our federal net deferred tax assets as of December 31, 2008 as we believe that it is more likely
than not that all of these assets will be realized. In evaluating the need for a valuation allowance, we estimated
future taxable income based on management approved forecasts. This process required significant judgment by
management about matters that are by nature uncertain. If future events differ significantly from our current
forecasts, a valuation allowance may need to be established, which would have a material adverse effect on our
results of operations, financial condition and our regulatory capital position at E*TRADE Bank. In addition, a
significant portion of the net deferred tax asset relates to a $2.3 billion federal tax loss carryforward, the
utilization of which may be further limited in the event of certain material changes in the ownership of the
Company.
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, execution and settlement of transactions and anti money-laundering. We are also subject to additional
laws and rules as a result of our market maker operations.
Similarly, E*TRADE Financial Corporation and ETB Holdings, Inc., as savings and loan holding
companies, and E*TRADE Bank, E*TRADE Savings Bank and United Medical Bank, as federally chartered
savings banks, are subject to extensive regulation, supervision and examination by the OTS and, in the case of
the savings banks, 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, FINRA 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 U.S. 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.
If we do not maintain the capital levels required by regulators, we may be fined or even forced out of business
The SEC, FINRA, 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 FINRA, 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
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