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Rating:NASD Hits E*Trade with Fine Not Rated 3.0 Email Routing List Email & Route  Print Print
Monday, July 09, 2001

NASD Hits E*Trade with Fine

Reported by Sean Hanna, Editor in Chief

The NASD is paying more attention to fund advertising -- just ask E*Trade. Today the NASD announced that the Internet broker had agreed to pay a $90,000 fine relating to both advertisements and direct mail marketing materials for the E*Trade Technology Index Fund. E*Trade neither admitted nor denied the NASD Regulation's allegations.

The censure and fine in response to what the NASD claims were advertising rule and supervisory system violations made by E*Trade. The NASD alleged that E*Trade took ads in four major publications -- The Wall Street Journal, The New York Times, Investors Business Daily and Barrons -- which stated that the ETI Fund was "ranked by Morningstar as the lowest cost tech index fund."

However, Morningstar had not ranked the fund making the statement incorrect and rendering advertisement misleading, claims the NASD Regulation. The NASD Regulation also found that that the advertisement referred to the 62.4 percent return of the GSTI Composite Index, but did not tell the reader that the ETI Fund was a new fund with no performance history, and did not clearly divorce the past performance of the index from the future performance of the ETI Fund. It alleged that E*Trade also failed to file the ETI Fund advertisement with the NASD Regulation Advertising Regulation Department prior to use as required by NASD advertising rules.

It further cited violations in connection with two direct mail marketing campaigns not related to the ETI Fund. One direct mail pieces featured a check-style coupon offering a $75 bonus to those who opened a brokerage account with E*Trade, the second offered prequalified margin accounts.

The NASD claimed that the check-style fliers informed 6.6 million readers that a $75 bonus would be credited to an account immediately when the credit could actually take several weeks to post to an account. It also claims the payment was inaccurately portrayed as a "guaranteed return on an investment in the market" rather than a bonus for opening an account.

In the second mailing, the NASD Regulation found that a recipient's credit history did not place him or her at any advantage in obtaining a margin account nor did a recipient have a "special qualification," which was not available to others, that would assist him or her in obtaining a margin account. In fact, approval for margin accounts at E*Trade did not include a review of credit history.

NASD Regulation further found that E*Trade's compliance and supervisory procedures in connection with its advertising activities failed to comply with NASD supervisory rules. E*Trade did not require its compliance principals reviewing advertising material to obtain a final version, thereby allowing an advertisement to be published that did not incorporate compliance principals' edits. In addition, NASD Regulation 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.  

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