eTrade 2012 Annual Report Download - page 172

or before February 13, 2008, if such auction rate securities had failed at auction at least once since February 13,
2008 (“the Purchase Offer”). E*TRADE Securities LLC also agreed to identify eligible investors who purchased
auction rate securities through E*TRADE Securities LLC on or before February 13, 2008, and sold those
securities below par between February 13, 2008, and November 16, 2011, and to reimburse those sellers the
difference between par value and the actual sales price plus reasonable interest. E*TRADE Securities LLC
agreed to hold open the Purchase Offer until May 15, 2012, and to various other undertakings set forth in the
Consent Order, including the establishment of a dedicated toll-free telephone assistance line and website to
provide information and to respond to questions regarding the Consent Order. As of December 31, 2012, no
existing Colorado customers held any auction rate securities, and the total amount of auction rate securities held
by E*TRADE Securities LLC customers nationwide was approximately $2.6 million. The Company recorded an
estimated liability of $48 million during the year ended December 31, 2011. During the second quarter of 2012,
the Company recorded a benefit of $10.2 million related to a reduction in the estimated liability as a result of the
completion of the Purchase Offer which expired on May 15, 2012. The estimated liability represented the
Company’s estimate of the current fair value relative to par value of auction rate securities held by E*TRADE
Securities LLC customers, as well as former customers who purchased auction rate securities through E*TRADE
Securities LLC and are covered by the Consent Order. The estimated liability also included penalties and other
estimated settlement costs. The agreement included the resolution of all material individual auction rate securities
arbitrations and litigations.
On August 24, 2010, the South Carolina Securities Division filed an administrative complaint before the
Securities Commissioner of South Carolina against E*TRADE Securities LLC based upon purchases of auction
rate securities through E*TRADE Securities LLC by South Carolina residents. The complaint sought to suspend
the South Carolina broker-dealer license of E*TRADE Securities LLC until South Carolina customers who
purchased auction rate securities through E*TRADE Securities LLC and who wished to liquidate those positions
were able to do so, and sought a fine not to exceed $10,000 for each potential violation of South Carolina statutes
or rules. On March 25, 2011, E*TRADE Securities LLC, without admitting or denying the underlying
allegations, findings or conclusions, resolved the South Carolina administrative action by entering into a consent
order, pursuant to which E*TRADE Securities LLC agreed to pay a $10,000 civil penalty and to reimburse the
South Carolina Securities Division’s investigative costs of $2,500. As of December 31, 2012, no existing South
Carolina customers held any auction rate securities.
The Company recently completed a review of order handling practices and pricing for order flow between
E*TRADE Securities LLC and G1 Execution Services, LLC (G1X). The purpose of the review was to examine
whether E*TRADE Securities LLC was providing “best execution” of customer orders as well as otherwise
complying with applicable securities laws and dealing appropriately with its market making affiliate under
applicable federal bank regulatory standards. The review was conducted by separate firms of outside broker-
dealer and bank regulatory counsel. The firms’ reports identified shortcomings in the Company’s historical
methods of measuring best execution quality and suggested additions and changes to the Company’s standards,
processes and procedures for measuring execution quality and for monitoring and testing transactions between
the Bank and non-Bank affiliates to ensure compliance with relevant regulations. The Company is in the process
of implementing the recommended changes, and expects to complete the process in the near future. Banking
regulators and federal securities regulators were regularly updated during the course of the review. The
Company’s regulators may initiate investigations into its historical practices which could subject it to monetary
penalties and cease-and-desist orders, which could also prompt claims by customers of E*TRADE Securities
LLC. Any of these actions could materially and adversely affect the Company’s market making and trade
execution businesses.
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
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