The NASDR's “wrist slap” was disappointing. E*Trade had almost $2.5 billion in sales last year, yet the fine levied was only $90,000!
Do you remember comments Christos Cotsakos, CEO of E*Trade, made in September 1997 at the Montgomery Securities Growth Conference in San Francisco? The following is a direct quote from “The Street.com's” Sept. 23, 1997, daily bulletin:
“In his presentation Monday, Cotsakos continued to take aim at the full-service, full-commission brokerage world. ‘We respect all of you in the brokerage business,’ he said. ‘All those branch offices you all have are going to become fast-food outlets, so you might want to think about your career choices.’”
The rest is history. While many dot.coms are out of business and the online trading volume has dried up, serious investors have come to appreciate even more the value of a competent, ethical investment professional. Apparently, this was one of E*Trade's strategies that was simply coming out the “wazoo.”
You may remember their wazoo ad and others in which they demeaned the value of full-service financial professionals. The National Association of Investment Professionals (NAIP) thought these ads were so exaggerated, we filed a petition with the Federal Trade Commission. We didn't feel NASD Regulation (NASDR) was doing enough.
In February of this year, the director of the division of advertising at the FTC responded to the letter saying, “After review of the petition, the alleged deceptive advertising claims included in the supplement to the petition, and other material, a decision was made not to pursue investigations of the specific matters raised by your petition separately from the joint SEC, CFTC and FTC review of online advertising for day trading.”
The Feb. 28, 2001, letter, however, went on to state that “our conversations with NASD Regulation Inc. indicate that NASDR is actively involved in reviewing, and in some cases pre-clearing, brokerage advertisements, and has considerable experience in assessing the claims made in those advertisements.”
Apparently, the FTC nudged the NASDR to actually enforce their rules because last July, the NASDR finally found that E*Trade “failed to comply with NASD Regulations' advertising rules” in some ads that ran in 1999.
The NASDR's “wrist slap” was disappointing, however. E*Trade had almost $2.5 billion in sales last year, yet the fine levied was only $90,000! Even more surprising, the investigation of their chief compliance officer was dropped in early March of this year. If the compliance officer is not responsible, shouldn't top management be liable for these deceptions?
One should ask why the SEC or the NASD doesn't have the will to more strongly enforce rule violations. We know of the conflicts of interest recently brought to light regarding analysts, investment bankers and accounting firms. We need to ask Congress to investigate the systemic problems related to so-called self-regulation in effect since the passage of the Maloney Act in 1938. The act gave the NASD power to regulate the securities industry. It also gave the NASD the same type of immunity to lawsuits HMOs have, even though citizens can sue the SEC for breaking administrative laws.
The NAIP will be lobbying Congress for this oversight in the coming months. We'll provide them with information to perform a full-scale investigation of firms in the industry as well as the conflicts of interest that exist at the NASD.
Go to our Web site (www.naip.com) for a copy of a letter to send your Congressional representatives so we can all change the system for the better.
T. Sheridan O'Keefe is a registered rep based in Minneapolis, and president of the National Association of Investment Professionals, a trade group for brokers and advisers. The NAIP can be reached at 952/322-6247. He can be contacted at [email protected].