eTrade 2008 Annual Report Download - page 151

Regulatory Matters
The securities and banking industries are subject to extensive regulation under federal, state and applicable
international laws. 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, FINRA, OTS or FDIC 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.
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 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. ETCM was a specialist on the Chicago Stock Exchange during the period under review. 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.
On October 17, 2007, the SEC initiated an informal inquiry into matters related to the Company’s loan and
securities portfolios. That inquiry is continuing. The Company is cooperating fully with the SEC in this matter.
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, Accounting for
Contingencies. 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
In 2008, the Company exited its direct retail lending business, which was the last remaining loan origination
channel of the Company. As a result, the Company had no commitments to originate or sell mortgage loans at
December 31, 2008. Additionally, the Company had no commitments to purchase loans at December 31, 2008.
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