Online brokerage E*Trade Securities this week was fined $90,000 for violating National Association of Securities Dealers advertising rules. The company agreed to pay the fine to settle the matter, but neither admitted nor denied the allegations.
NASD Regulation, the enforcement arm of the NASD, found that E*Trade failed to comply with its rules when it sent two direct mail campaigns, the “Check Coupon” and “Prequalified for Margin” mailers, which went to nearly 10 million potential investors.
From July 1999 to August 2000, E*Trade distributed to 6.6 million potential investors a check-style coupon made out to the recipient offering a $75 bonus to those who opened a brokerage account with the company. NASD Regulation said E*Trade claimed in the coupon that the $75 would be credited to the recipient's account immediately, but that in reality it could take weeks to be credited. The disclosure language on the back of the coupon contradicted the front of the piece, NASD Regulation noted.
“In addition, the Check Coupon Direct Mailers inaccurately portrayed the $75 as a guaranteed return on investment in the market, when in fact, it was simply a bonus for opening an account,” NASD Regulation said.
E*Trade's Prequalified for Margin mailers were sent to 3.2 million investors from October 1999 to April 2000 and stated that the recipient had been selected to receive an offer of a margin account based on his outstanding credit history.
A margin account essentially is a loan from a brokerage that enables investors to buy securities at a discount from their current market value. The investor can buy any number of shares at the discounted margin price and the brokerage would loan him the remaining amount to make up the market price.
NASD Regulation found that in this promotion, the recipient's credit history did not offer the investor any advantage, nor did it offer the investor any “special qualification” for a margin account.
“In fact, approval for margin accounts at E*Trade did not include a review of credit history,” NASD Regulation said.