Regulators from the National Association of Securities Dealers Monday slapped a $90,000 fine on E*Trade Group for what it said were advertising violations — making this the second time in less than a year that the online brokerage has been in hot water with the industry’s self-regulatory body.
For its part, E*Trade neither admitted nor denied the NASD’s accusations of misleading advertising.
The dispute stems from an ad that ran introducing E*Trade’s Technology Index mutual fund in fall 1999. The ad ran in the New York Times, the Wall Street Journal, Investor’s Business Daily and Barron’s, and stated that the ETI Fund had been ranked by mutual fund ratings service Morningstar “as its lowest-cost tech index fund.”
Actually, Morningstar had never rated the fund, according to the group and to NASD regulators.
Additionally, NASD’s Regulation unit said the ad referred to a 62.4 percent return from the Goldman Sachs Technology Index — an index on which the ETI was based — but neglected to specify that the ETI Fund was a new, separate fund with no performance history. Additionally, the ad did not clearly divorce the past performance of the index from the future performance of the ETI Fund, according to regulators.
E*Trade also failed to file the ETI Fund advertisement with the NASDR Advertising Regulation Department prior to use, as required by NASD advertising rules, according to regulators.
If that wasn’t enough, the company also ran into trouble with two direct mailings related to the fund, which were sent to a combined total of more than 10 million potential investors.
The NASD criticized one of the campaign’s direct mail creatives, “Check Coupon,” because the piece did not adequately disclose specifications regarding a $75 bonus for joining the fund.
The second piece, “Prequalified for Margin,” said each recipient had been selected to receive an offer of a margin account based on their outstanding credit history. However, NASD Regulation found that no review had taken place, nor was a review necessary for margin approval at E*Trade.
E*Trade spokespeople did not return requests for comment, but it’s not the first time that the company has been in trouble with the self-regulatory group.
In the past, the NASD has ordered E*Trade to cough up $20,000 for failure to report short positions, $38,000 to repay a customer who claimed the company gave him false stock prices, and $20,000 for failing to respond to the NASD’s inquiries about customer complaints.
In August, the company agreed to hand over all ads to NASD’s Regulation arm for approval ten days prior to their scheduled release dates. That agreement came in the wake of high-profile criticism from industry regulators, including Security and Exchange Commission chair Arthur Levitt.
In a 1999 speech, Levitt lambasted online brokers’ advertising for seemingly promising riches to consumers who use their services. Following Levitt’s tirade, the NASD last May approved rules regarding advertisements for online brokerages, banning ads that “mislead or confuse investors about the risks and rewards of online investing, or that attempt to incite a trading frenzy, harm the investing public and undermine investor confidence in the integrity of the markets.”
But in a statement Monday, the NASD Regulation said it found that “E*Trade had no formal auditing procedure to ensure that firm employees involved in developing advertising fully complied with its compliance and supervisory procedures.”
According to the NASD, that oversight came to a head in the direct mail campaign: the group said that E*Trade had neglected to provide its own compliance-checkers with final versions of the creatives that eventually shipped.
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