E*Trade’s Marketing Tactics Under Regulatory Investigation

Marketing practices by one of the largest domestic Internet stockbrokers are under scrutiny by the Securities and Exchange Commission and the National Association of Securities Dealers’ regulatory unit.

As a result, E*Trade has said that it agreed to offer its ads to NASD regulators for approval ten days prior to their scheduled release dates, and will
continue to do so until September 12.

The company’s television ads, which are designed by the San Francisco agency of Goodby, Silverstein & Partners, are widely regarded as edgy, humorous and offbeat.

One of the most memorable ads appeared during Super Bowl XXXIV and featured a chimpanzee lip-synching the song “La Cucaracha.” The tagline reads: “Well, we just wasted 2 million bucks. What are you doing with
your money?”

E*Trade currently is involved in several legal disputes with clients of its online brokerage services who allege that the ads inflate customers’ expectations for investment returns.

According to company documents, the NASDR has previously asked to revise some of the company’s marketing materials. It is not known to which ads in particular the agency took exception.

Spokespeople at E*Trade’s competitors, including Ameritrade and DLJdirect said their firms are not under similar levels of scrutiny.

Nevertheless, regulators are closely watching the entire industry. Last year, SEC Chairman Arthur Levitt publicly criticized online brokers’ ads for potentially appearing to promise riches.

He specifically mentioned an Ameritrade broadcast ad that features a woman bragging that she had made $1,700 on a biotechnology stock during her morning jog. Ameritrade subsequently pulled the ad.

Following Levitt’s comments, the NASD in May 1999 approved rules regarding advertisements for online brokerages, banning advertisements 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.”

NASDR officials declined to comment on its agreement with E*Trade.

This isn’t the first time that E*Trade has found itself at odds with the regulatory agency.

Earlier this week, the NASDR censured and fined the brokerage $20,000 for neglecting to report short interest positions from June 1996 to September 1998, which, the agency said, affected published position records on which investors could base trading decisions.

E*Trade was also fined an additional $20,000 in May for failing to respond to the agency’s requests for information related to customer complaints.

The news comes after E*Trade this week rolled out its latest marketing effort — a co-branded Web site with nationwide discount store owner Target Corporation, which is part of the strategic marketing alliance the two companies announced in May.

Visitors to www.target.etrade.com who open a new E*Trade brokerage account with a minimum of $1,000 will receive a $100 Target gift certificate good throughout Target’s chain of 942 stores nationwide.

E*Trade this week also announced its intention to acquire PrivateAccounts.com, a
private company providing online access to investment planning services and targeting high-net worth individuals. Terms of the deal were not disclosed.

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