eTrade 2011 Annual Report Download - page 157

NOTE 19—REGULATORY REQUIREMENTS
Registered Broker-Dealers
The Company’s U.S. broker-dealer subsidiaries are subject to the Uniform Net Capital Rule (the “Rule”)
under the Securities Exchange Act of 1934 administered by the SEC and FINRA, which requires the maintenance
of minimum net capital. The minimum net capital requirements can be met under either the Aggregate
Indebtedness method or the Alternative method. Under the Aggregate Indebtedness method, a broker-dealer is
required to maintain minimum net capital of the greater of 6
2
⁄ 3 % of its aggregate indebtedness, as defined, or a
minimum dollar amount. Under the Alternative method, a broker-dealer is required to maintain net capital equal
to the greater of $250,000 or 2% of aggregate debit balances arising from customer transactions. The method
used depends on the individual U.S. broker-dealer subsidiary. The Company’s international broker-dealer
subsidiaries, located in Europe and Asia, are subject to capital requirements determined by their respective
regulators.
As of December 31, 2011, all of the Company’s broker-dealer subsidiaries met minimum net capital
requirements. Total required net capital was $0.1 billion at December 31, 2011. In addition, the Company’s
broker-dealer subsidiaries had excess net capital of $0.7 billion at December 31, 2011.
The table below summarizes the minimum excess capital requirements for the Company’s broker-dealer
subsidiaries (dollars in thousands):
December 31, 2011
Required Net
Capital Net Capital
Excess Net
Capital
E*TRADE Clearing LLC(1) $104,804 $587,819 $483,015
E*TRADE Securities LLC(1) 250 145,423 145,173
E*TRADE Capital Markets, LLC(2) 1,000 24,921 23,921
International broker-dealers 9,183 32,157 22,974
Total $115,237 $790,320 $675,083
(1) Elected to use the Alternative method to compute net capital.
(2) Elected to use the Aggregate Indebtedness method to compute net capital.
Banking
E*TRADE Bank is subject to various regulatory capital requirements administered by federal banking
agencies. Failure to meet minimum capital requirements can trigger certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct material effect on E*TRADE Bank’s
financial condition and results of operations. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, E*TRADE Bank must meet specific capital guidelines that involve quantitative
measures of E*TRADE Bank’s assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. In addition, E*TRADE Bank may not pay dividends to the parent company
without approval from its regulators and any loans by E*TRADE Bank to the parent company and its other
non-bank subsidiaries are subject to various quantitative, arm’s length, collateralization and other requirements.
E*TRADE Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require E*TRADE Bank to
maintain minimum amounts and ratios of Total and Tier I capital to risk-weighted assets and Tier I capital to
adjusted total assets. As shown in the table below, at both December 31, 2011 and 2010, the most recent
notification from its regulators categorized E*TRADE Bank as “well capitalized” under the regulatory
framework for prompt corrective action. However, events beyond management’s control, such as a continued
deterioration in residential real estate and credit markets, could adversely affect future earnings and E*TRADE
Bank’s ability to meet its future capital requirements.
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