NASD Slaps E*Trade For Misleading Ads

WASHINGTON -- NASD Regulation Inc., the regulatory arm of the National Association of Securities Dealers, has censured E*Trade Group Inc. and fined the online discount brokerage $90,000 for alleged advertising and supervisory violations. NASD Regulation said in a written statement Monday that in settling the matter, E*Trade neither admitted nor denied the allegations. NASD Regulation found that the company failed to comply with NASD advertising rules when it published an advertisement in August 1999 introducing its new mutual fund, the E*Trade Technology Index Fund, or ETI Fund. The advertisement, published in The Wall Street Journal, the New York Times, Investors Business Daily and Barrons,stated that the ETI Fund was "ranked by Morningstar as the lowest cost tech index fund." In fact, Morningstar hadn't ranked the fund. NASD Regulation also found fault with the advertisement's claim that the objective of the fund was to match, before fees and expenses, the total return of the stocks that make up the Goldman Sachs Technology Index, or GSTI Composite Index. NASD Regulation said the advertisement referred to the 62.4% return of the GSTI Composite Index, but didn't tell the reader that the ETI was a new fund with no performance history, and didn't clearly separate the past performance of the index from the future performance of the ETI Fund. E*Trade also failed to file the ETI Fund advertisement with the NASD Regulation Advertising Regulation Department prior to use as required. NASD Regulation also found violations in connection with two E*Trade direct mail marketing campaigns not related to the ETI Fund. The mailings were the "Check Coupon Direct Mailers" and "Prequalified for Margin Direct Mailers," which E*Trade sent to almost 10 million potential subscribers. The Check Coupon Direct Mailers informed the reader that a $75 bonus would be credited to an account immediately; in fact, the credit could actually take several weeks to post to an account. The disclosure language on the back of the mailer contradicted the main body of the letters. The direct mailers also inaccurately portrayed the $75 as a guaranteed return on an investment in the market, when it was simply a bonus for opening an account. The Prequalified for Margin Direct Mailers stated that each recipient had been selected to receive an offer of a margin account based on his or her outstanding credit history. However, NASD Regulation found that a person's credit history didn't place him or her at any advantage, nor did a recipient have a "special qualification," not available to others, that would assist him or her in obtaining a margin account. In fact, approval for margin accounts at E*Trade didn't include a review of credit history. NASD Regulation further found that E*Trade's compliance andsupervisory procedures in connection with its advertising activities failed to comply with NASD supervisory rules. E*Trade didn't require its compliance principals reviewing advertising material to obtain a final version, thereby allowing an advertisement to be published that didn't incorporate compliance principals' edits. NASD Regulation also found that E*Trade didn't have a formal auditing procedure to ensure that firm employees involved in advertising development fully complied with compliance and supervisory procedures. As reported in late June by The Wall Street Journal, securities regulators have questioned E*Trade's aggressive advertisements for the past few years. The company disclosed in a quarterly earnings report in August that its advertising practices were being investigated by NASD Regulation and the Securities and Exchange Commission. E*Trade's practices were targeted after former SEC Chairman Arthur Levitt and traditional brokerage firms criticized the online brokerage industry for advertising they said unfairly portrayed the benefits of online investing without disclosing the risks. The SEC has dropped its case, but NASD Regulation continued its probe,informing the company at one point that there could be a "systematic failure" that involved questions about a few dozen E*Trade advertisements dating back to 1998 from among 2,400 print, radio and television ads. Earlier in June, the NASD alleged violations against several"day-trading" online firms for making unsubstantiated advertising claims about the fast-moving trading strategy. Regulators had been concerned that inexperienced investors were getting the wrong message from ads that suggested that Internet trading was the key to riches, even though no explicit promises or guarantees were made. Copyright (c) 2001 Dow Jones & Company, Inc.

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NASD Slaps E*Trade For Misleading Ads

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