Brick-and-click brokerage E*Trade (NYSE: ET) will pay a US$90,000 fine for advertising and marketing tactics that the National Association of Securities Dealers (NASD) deemed misleading to investors.
NASD Regulation, a branch of the securities industry group, said Monday italso censured E*Trade for violating NASD advertising rules and supervisory measures.
The Menlo Park, California-based online brokerage agreed to settle thedispute without admitting or denying the allegations, the NASD said.
The NASD also said E*Trade did not require its compliance principals to review its advertising material, and had no formal auditing procedure in place to ensure compliance with the rules.
E*Trade reportedly said it had improved compliance procedures to address theNASD’s concerns. Company officials were not immediately available tocomment.
Ad in Question
According to NASD, E*Trade misled investors in an August 1999 ad published over several days in The Wall Street Journal, The New York Times, Investors Business Daily and Barrons.
The ad touted a new mutual fund, the E*Trade Technology Index, as being “ranked by Morningstar as the lowest-cost tech index fund,” when in fact Morningstar had not ranked it at all, the NASD said.
The ad also did not “clearly divorce” past performance from future resultsand did not tell the reader that the fund was a new one with no performancehistory, the securities group said. In addition, the NASD said, E*Trade didnot file the advertisement with NASD ad regulators as required.
The fine and censure also cover two direct-mail campaigns conducted in 1999 and 2000.One of the mailings was distributed to 6.6 million potential investors between July 1999 and April 2000, and included a “check-style coupon” offering a $75 bonus for openinga brokerage account, NASD said.
While the main body of the letters said the bonus would be immediate, the fine print on the back said it would take several weeks, according to the NASD. In addition, the group said, the mailer “portrayed the $75 as a guaranteed return on an investment in the market, when, in fact, it was simply a bonus for opening an account.”
A second mailing, sent to 3.2 million investors between October 1999 andApril 2000, said the recipient was “selected” to receive a margin account,when in fact there was no special prequalification, the NASD said.
Also Monday, E*Trade said it extended its tender offer for WebStreet (Nasdaq: WEBS), an online brokerage that E*Trade agreed to acquire for $45 million in stock, until July 13th. About 85.5 percent of WebStreet shares have been tendered so far, E*Trade said.
With the stock-market slump and collapse of the Internet industry putting pressure on results, E*Trade and other online brokers are looking for new sources of revenue.
E*Trade, which in February acquired online mortgage company LoansDirect, recently introduced a mortgage service that will allow it to collect revenue from origination points, loan-related fees and gain-on-sale revenue.