eTrade 2012 Annual Report Download - page 15

banking subsidiary E*TRADE Bank, which may not pay dividends to us without approval from the OCC and the
Federal Reserve. Our primary brokerage subsidiaries, E*TRADE Securities LLC and E*TRADE Clearing LLC,
are both subsidiaries of E*TRADE Bank; therefore, the OCC, together with the Federal Reserve, controls our
ability to receive dividend payments from our brokerage business as well. Furthermore, even if we receive the
approval of the OCC and the Federal Reserve to receive dividend payments from our brokerage business, in the
event of our bankruptcy or liquidation or E*TRADE Bank’s receivership, we would not be entitled to receive any
cash or other property or assets from our subsidiaries (including E*TRADE Bank, E*TRADE Clearing LLC and
E*TRADE Securities LLC) until those subsidiaries pay in full their respective creditors, including customers of
those subsidiaries and, as applicable, the FDIC and the Securities Investor Protection Corporation.
We submitted an initial long-term strategic and capital plan to the OCC and Federal Reserve during the
second quarter of 2012. The plan included: our five-year business strategy; forecasts of our business results and
capital ratios; capital distribution plans in current and adverse operating conditions; and internally developed
stress tests. During the third quarter of 2012, we received initial feedback from our regulators on this plan and we
believe that key elements of this plan, specifically reducing risk, deleveraging the balance sheet and the
development of an enterprise risk management function, are critical. We submitted an updated long-term
strategic and capital plan to the OCC and Federal Reserve in February 2013, which included the key elements
outlined in the initial plan as well as the progress made during 2012 on those key elements. We believe that our
targets for capital levels at E*TRADE Bank and corresponding distributions of capital from E*TRADE Bank and
its subsidiaries to the parent company will be achievable over time. We plan to continue an active and ongoing
dialogue with our regulators to ensure our execution of the plan is consistent with their expectations.
We are subject to investigations and lawsuits as a result of our losses from mortgage loans and asset-backed
securities.
In 2007, we recognized an increased provision expense totaling $640 million and asset losses and
impairments of $2.45 billion, including the sale of our asset-backed securities portfolio to Citadel. As a result,
various plaintiffs filed class actions and derivative lawsuits, which were subsequently consolidated into one class
action and one derivative lawsuit, alleging disclosure violations regarding our home equity, mortgage and
securities portfolios during 2007. The class action has been resolved by a settlement that was approved by the
Court. The shareholder derivative action is subject to a settlement agreement that is pending Court approval.
Many of our competitors have greater financial, technical, marketing and other resources.
The financial services industry is highly competitive, with multiple industry participants competing for the
same customers. Many of our competitors have longer operating histories and greater resources than we have and
offer a wider range of financial products and services. Other of our competitors offer a more narrow range of
financial products and services and have not been as susceptible to the disruptions in the credit markets that have
impacted our Company, and therefore have not suffered the losses we have. The impact of competitors with
superior name recognition, greater market acceptance, larger customer bases or stronger capital positions could
adversely affect our revenue growth and customer retention. Our competitors may also be able to respond more
quickly to new or changing opportunities and demands and withstand changing market conditions better than we
can. Competitors may conduct extensive promotional activities, offering better terms, lower prices and/or
different products and services or combination of products and services that could attract current E*TRADE
customers and potentially result in price wars within the industry. Some of our competitors may also benefit from
established relationships among themselves or with third parties enhancing their products and services.
Turmoil in the global financial markets could reduce trade volumes and margin borrowing and increase our
dependence on our more active customers who receive lower pricing.
Online investing services to the retail customer, including trading and margin lending, account for a
significant portion of our revenues. Turmoil in the global financial markets could lead to changes in volume and
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