DOB: E Trade Securities ARS Consent Order

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IN THE MATTER OF:

E*TRADE SECURITIES LLC

(CRD No. 29106)




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CONSENT ORDER

NO. CO-12-7995-S

I. PRELIMINARY STATEMENT

WHEREAS, the Banking Commissioner (“Commissioner”) is charged with the administration of Chapter 672a of the General Statutes of Connecticut, the Connecticut Uniform Securities Act (“Act”), and Sections 36b-31-2 to 36b-31-33, inclusive, of the Regulations of Connecticut State Agencies promulgated under the Act (“Regulations”);
 
WHEREAS, E*Trade Securities LLC (“E*Trade”) is a broker-dealer registered under the Act with its principal office at 1271 Avenue of the Americas, 14th Floor, New York, New York;
 
WHEREAS, the Commissioner, through the Securities and Business Investments Division of the Department of Banking (“Division”), conducted an investigation pursuant to Section 36b-26(a) of the Act into the activities of E*Trade to determine whether it had violated, was violating or was about to violate any provisions of the Act or Regulations (“Investigation”);
 
WHEREAS, E*Trade’s activities regarding the sale of auction rate securities (“ARS”) have been the subject of coordinated investigations conducted by a multi-state task force, including Connecticut;
 
WHEREAS, E*Trade has provided documentary evidence and other materials, and provided regulators with access to information relevant to their investigations;
 
WHEREAS, on October 18, 2011, E*Trade and the multi-state task force reached an agreement to resolve the investigations relating to the firm’s sale of auction rate securities to certain customers;
 
WHEREAS, E*Trade has voluntarily agreed, among other things, to purchase, or arrange to have purchased, auction rate securities from certain customers, as described in paragraph 8 of Section VI of this Consent Order, and to make certain payments;
 
WHEREAS, Section 36b-15(a) of the Act authorizes the Commissioner to initiate administrative proceedings with respect to any registration if, inter alia, the commissioner finds that (1) the order is in the public interest, and (2) the registrant has failed to reasonably supervise its agents;
 
WHEREAS, Section 36b-27(a) of the Act authorizes the Commissioner to order any person who has violated, is violating or is about to violate any provision of the Act or any regulation, rule or order adopted or issued under the Act to cease and desist from such violation;
 
WHEREAS, Section 36b-27(d) of the Act authorizes the Commissioner to impose a fine of up to One Hundred Thousand Dollars ($100,000) per violation against any person who has violated any provision of the Act or any regulation, rule or order adopted or issued under the Act;
 
WHEREAS, Section 36b-31(a) of the Act provides, in relevant part, that “[t]he commissioner may from time to time make . . . such . . . orders as are necessary to carry out the provisions of sections 36b-2 to 36b-34, inclusive”;
 
WHEREAS, Section 36b-31(b) of the Act provides, in relevant part, that “[n]o . . . order may be made . . . unless the commissioner finds that the action is necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of sections 36b-2 to 36b-34, inclusive”;
 
WHEREAS, an administrative proceeding initiated under Sections 36b-15 and 36b-27 of the Act would constitute a “contested case” within the meaning of Section 4-166(2) of the General Statutes of Connecticut;
 
WHEREAS, Section 4-177(c) of the General Statutes of Connecticut and Section 36a-1-55(a) of the Regulations of Connecticut State Agencies provide that a contested case may be resolved by consent order, unless precluded by law;

II. CONSENT TO WAIVER OF PROCEDURAL RIGHTS

WHEREAS, E*Trade, through its execution of this Consent Order, voluntarily waives the following rights:

1.
To be afforded notice and an opportunity for a hearing within the meaning of Sections 36b-15(f), 36b-27(a) and 36b-27(d)(2) of the Act and Section 4-177(a) of the General Statutes of Connecticut; 
2.
To present evidence and argument and to otherwise avail itself of Sections 36b-15(f), 36b-27(a) and 36b-27(d)(2) of the Act and Section 4-177c(a) of the General Statutes of Connecticut; 
3. To present its position in a hearing in which it is represented by counsel;
4. To have a written record of the hearing made and a written decision issued by a hearing officer; and
5. To seek judicial review of, or otherwise challenge or contest the matters described herein, including the validity of this Consent Order;

NOW THEREFORE, the Commissioner, as administrator of the Act, hereby enters this Consent Order.

III. JURISDICTION AND CONSENT TO ENTRY OF CONSENT ORDER

E*Trade admits the jurisdiction of the Commissioner and consents to the entry of this Consent Order by the Commissioner, but neither admits nor denies the Findings of Fact and Conclusions of Law contained in this Consent Order.

IV. FINDINGS OF FACT

E*Trade

1. E*Trade is in the business of effecting transactions in securities in Connecticut as a “broker-dealer” within the meaning of the Act.
2.
E*Trade has customers located across the United States of America, including Connecticut.
3.
E*Trade’s business model centers on customers who use the firm’s website to buy and sell securities, generally known as online stock trading.
4. Although E*Trade is an online trading firm, it also has about 30 branch offices across the country, at least some of which were purchased from earlier online trading firms.
5.
Despite the focus of its business model on online retail trading, E*Trade maintained fewer than 20 “financial advisors” (FAs) who were authorized to provide investment advice to clients regarding ARS.  The FAs are assigned to an Investment Specialist Group supervised by a branch manager.  The FAs are alternatively referred to herein as investment specialists or registered representatives.
6.
E*Trade’s FAs are permitted to recommend only those types of investments that have been previously approved by E*Trade’s management.

ARS

7. ARS, or auction rate securities, are fixed income long-term securities whose dividend rates are reset periodically at Dutch-style auctions that take place at set intervals, typically every 7, 28, or 35 days.
8. ARS are considered non-conventional investments (NCIs) in that they do not fall within the traditional categories of stocks, bonds or mutual funds.
9. ARS were introduced to the market in 1984 as a way for issuing entities to diversify their investor base and in the process lower their borrowing costs.  ARS essentially allowed issuers to achieve long-term financing at short-term interest rates.
10. As of the end of 2007, there were approximately $330 billion of ARS outstanding.  Three categories of issuers dominated the market.  Municipalities accounted for approximately half the market.  Student loan trusts made up approximately 25% of the market.  Closed-end bond funds, seeking to leverage their portfolios by issuing preferred shares, made up approximately 20% of the market.
11. Initially, a high minimum investment precluded all but institutions from purchasing ARS.  However, as the minimum investment declined to $25,000, wealthy retail investors became a significant source of demand for the product.
12. ARS are designed to trade at a set price (par value) of $25,000 per unit, but the interest rate fluctuates based upon bids made at periodic auctions.  The rate that is sufficient to clear all the ARS offered for sale at any given auction is known as the “clearing rate.”  The clearing rate, however, cannot exceed the instrument’s maximum or default interest rate (also known as the “penalty” rate), which is typically pegged to a short term index such as the LlBOR.  If, at any given auction, the rate necessary to clear all shares for sale exceeds the maximum rate, then the auction “fails” and the maximum rate becomes the rate of interest the ARS earns until the next successful auction, at which time the rate is reset during the bidding process.
13.
As is generally the case in the capital markets, issuers and investors are connected via intermediaries or financial institutions that serve in various capacities in the ARS marketplace.  The major roles of intermediaries in the ARS market are:  (1) large broker-dealers who act as ARS underwriters and often also serve as auction dealers; (2) auction agents selected by the underwriters to collect orders and match buyers with sellers; (3) major broker-dealers who trade in ARS and act as wholesalers; and (4) downstream broker-dealers who place retail customer orders through the wholesalers trading in ARS.
14.
E*Trade did not perform any of the major intermediary functions identified in subparagraphs (1) through (3) of paragraph 13. above.  Rather, from 2003 to February 2008, it acted as a downstream broker-dealer that relayed retail customer orders to Oppenheimer & Co., which was a wholesaler trading in Auction Rate Preferred Securities (“ARPS”).  Oppenheimer & Co. then transmitted E*Trade’s customer orders to auction dealers to complete the purchase or sale.

ARPS

15. Of the types of ARS that were available from 2003 through February 2008, E*Trade generally sold ARPS to its customers.  ARPS are preferred stock issued by closed-end funds.  Because ARPS are preferred shares, they have no maturity date and the issuer has no obligation to redeem shares on demand.  Therefore, their period of existence is “in perpetuity.”
16. Prior to February 2008 when the market for ARS (including ARPS) collapsed, ARPS were generally perceived to be a relatively safe and liquid fixed income investment.  The primary benefit was a higher rate of interest than could typically be achieved by investing in Treasury bills or money market accounts.  As a general rule, ARPS could be expected to pay a rate of at least 50 basis points, or one-half percent interest, in excess of what a money market account was paying at the same time.
17. ARPS were seen as a relatively safe credit risk because, by law, issuers had to maintain reserves sufficient to cover twice the amount of money outstanding in issued ARPS.  If reserves fell below that amount, issuers were required by law to either increase their reserves or redeem sufficient ARPS to restore the 200% ratio.  Because of these and other factors, credit rating agencies typically gave ARPS high credit ratings.
18.
E*Trade chose to offer for sale only those ARPS that carried credit rating of AAA, which is the highest rating awarded by the credit rating agencies.
19.
Liquidity risk is different from credit risk, and a credit rating of AAA does not speak to the security’s liquidity risk.  Liquidity means the ability to sell a security quickly at par value.  Liquidity risk, therefore, is the possibility that an ARPS cannot be sold or traded upon demand.  Thus, although an ARPS might have a low credit risk because the issuer is financially sound and is likely to continue to make the required interest payments, the ARPS might have high liquidity risk if, for whatever reason, it cannot be sold or otherwise liquidated quickly.  Liquidity risk is an important feature of a security because, even if the security has good credit risk, it may have little value to an investor if the investor cannot sell it when necessary.

E*Trade’s Sale of ARPS

20.
Due to their relative safety in terms of credit risk and perceived liquidity, E*Trade chose to engage in the sale of ARPS to its retail customers, but generally eschewed the sale of riskier types of ARS, especially those involving debt backed securities.
21. Contrary to its practice of making traditional stocks, bonds and mutual funds available for sale online, E*Trade opted to sell ARPS only through its FAs.  A customer seeking financial advice might have called directly or might have been referred to an FA by a local E*Trade office, or alternatively, an FA might have initiated a call to a particular customer if the FA felt that the customer had a particular need.  For example, an FA who noticed that a client had a large cash account balance might have called the client to suggest moving the cash to an investment with a better rate of return.
22. Procedurally, when an FA received a buy or sell order from a client, the FA completed a trade ticket and forwarded it to the Fixed Income Desk located in the same office.  The Fixed Income Desk then forwarded the buy or sell order to the intermediary broker-dealer, Oppenheimer & Co.  Oppenheimer & Co. then aggregated the various buy and sell orders received from all client broker-dealers and forwarded them to the auction agent for presentation at the next available auction.
23.
If the auction was successful and the buy or sell order was executed, a trade confirmation was prepared and forwarded back to the investor.
24.
In recommending ARPS for investors’ consideration, certain FAs described ARPS as “7-day paper” with “daily liquidity” that was as safe as a money market account.  Although FAs also referred to ARPS as “auction rate preferreds”, they rarely if ever explained that ARPS were in fact long-term securities that could only be sold at auction, nor did they mention that if an auction failed, ARPS would lose liquidity.

The Dutch Auction Process

25.
ARS, including ARPS, are not traded on the New York Stock Exchange or any other open securities exchange.  Rather, ARS (including ARPS) were, prior to the ARS market collapse in February 2008, traded through a “Dutch auction” process.
26. If, at any given auction, there are insufficient buyers to purchase all the ARS available for sale at a clearing rate below the maximum rate, the auction is said to have “failed.”  An investor who has been unable to sell his or her ARS at a failed auction must then wait until the next periodic auction to again offer them for sale.  Until the ARS are sold at a successful auction, the interest rate paid on that ARS is the maximum or default rate.
27.
Because ARS are typically long-term instruments, and in the case of ARPS are of perpetual maturity, their liquidity depends on the ability of holders to sell the instruments at auction.  If auctions fail, or if the auction process collapses entirely as it did in February 2008, liquidity is severely impaired.
28.
Because there is no established market for ARS apart from the auction process, there is limited ability to liquidate ARS outside that process.  The ARS issuer may decide to redeem those shares if it is economically advantageous to do so, but there is no obligation on the part of issuers to do so.  Alternatively, an ARS holder may be able to arrange a sale on an ad hoc basis outside the auction process.  However, such sales are on a case by case basis and often involve discounts to the par value of the ARS, resulting in a financial loss to the holder.
29.
Consequently, the liquidity of ARS (including ARPS) depended on the continued success of the Dutch auction process.

Collapse of the Dutch Auction Process

30. The Dutch auction process functioned with very few auction failures for many years after the introduction of ARS in 1984.  Over the years, there had been approximately 13 auction failures, typically arising when an issuer lost its creditworthiness, thus eliminating buyer interest in that security.  However, prior to February 2008, there had not been an ARPS auction failure nor had there been a total collapse of the ARS auction market.
31.
Beginning in August 2007, deteriorating economic conditions and tightening credit markets caused a strain on the ARS market, resulting in a number of ARS auction failures.  However, prior to February 2008, these failures did not involve the ARPS auction markets because ARPS were generally considered safer and more creditworthy investments.
32. However, in February 2008, an event occurred that caused the wholesale collapse of the ARS auction market, including ARPS.  The triggering event was the decision by a major underwriter, Goldman-Sachs, to stop submitting cover bids.  Large underwriters, like Goldman-Sachs, found that due to deteriorating financial conditions, they could no longer afford to carry large balances of ARS on their books and thus they stopped buying ARS for their own accounts.  Once Goldman-Sachs stopped submitting cover bids at auction, all the other large underwriters followed suit.
33. Without the support of the large underwriters, insufficient buy bids were received at most auctions to cover all the ARS offered for sale, and as a result the auction market totally collapsed.  The ARPS auction market was particularly hard hit because the maximum, or default, rates for ARPS were generally very low and therefore there was insufficient investor interest to sustain the market in the absence of the underwriter’s cover bids.
34. As of February 13, 2008, E*Trade’s investors nationwide held a balance of approximately $581 million in ARPS, and approximately $870 million altogether in the ARS market, that had lost liquidity as the result of the collapse of the auction process.

Failure to Supervise

35. E*Trade had a policy of hiring experienced FAs who presumably had been trained by other employers with regard to the securities they handled.  However, the firm provided no formal training to its FAs with respect to ARPS.
36. FAs of E*Trade were directly supervised by a branch manager whose supervisory responsibilities were set out in Branch Policies and Procedures manuals.  In addition, FAs were provided with a Registered Representatives Manual that governed their professional practice.  None of these documents specifically addressed the need for FAs to advise ARPS customers of the risks of auction failure and loss of liquidity.  E*Trade maintained a policy of reviewing FA-investor phone conversations and account records on a random basis and providing feedback.  Despite these supervisory reviews, FAs continued to advise ARPS investors that ARPS were highly liquid “7-day paper,” without the additional context that ARPS were in fact long term instruments that could only be liquidated at successful Dutch-style auctions.
37. Even when the significant risk of auction failure with regard to other types of ARS became apparent, FAs were not instructed to provide any warning about the risk of ARPS illiquidity.
38.
E*Trade should have known that its FAs marketed ARS to customers as highly liquid and as an alternative to cash or money market funds without adequately disclosing that ARS are complex securities that may become illiquid.
39.
In connection with the marketing of ARS, E*Trade failed to adopt policies and procedures reasonably designed to ensure that its FAs recommended ARS only to customers who had stated investment objectives that were consistent with their purchase of ARS.  Some of the firm’s FAs recommended ARS to customers as a liquid, short-term investment.  As a result, some of E*Trade’s customers who needed short-term access to funds invested in ARS even though ARS had long-term or no maturity dates.

V. CONCLUSIONS OF LAW

1. The Commissioner has jurisdiction over this matter pursuant to the Act.
2.
The Commissioner finds that E*Trade failed to reasonably supervise its financial advisors in connection with the marketing of ARS to customers of the firm, that this conduct violated Section 36b-31-6f(b) of the Regulations; and that grounds therefore exist to initiate administrative proceedings against the firm under Sections 36b-15(a) and 36b-27 of the Act;
3.
The Commissioner finds that this Consent Order and the following relief are appropriate, in the public interest, and consistent with the purposes fairly intended by the policies and provisions of the Act.

VI. CONSENT ORDER

On the basis of the Findings of Fact, Conclusions of Law, and E*Trade’s consent to the entry of this Consent Order, without admitting or denying the facts or conclusions herein,

IT IS HEREBY ORDERED THAT:

1.
This Consent Order concludes the investigation by the Division and precludes any other action that the Commissioner could commence against E*Trade under the Act on behalf of Connecticut as it relates to E*Trade’s sale of auction rate securities prior to February 13, 2008.
 
2.
This Consent Order is entered into solely for the purpose of resolving the above-referenced multi-state investigation, and is not intended to be used for any other purpose.
 
3.
E*Trade shall CEASE AND DESIST from violating those provisions of the Act and the Regulations requiring registered broker-dealers to exercise reasonable supervisory controls over their agents.
 
4.
No later than the date this Consent Order is entered by the Commissioner, E*Trade shall pay to the “Treasurer, State of Connecticut”, by electronic funds transfer or wire transfer, the sum of Forty Three Thousand Nine Hundred Sixty Two and 4/100 Dollars ($43,962.04) as an administrative fine, which amount constitutes Connecticut’s proportionate share of the total state settlement amount of $5 million.  In the event another state securities regulator determines not to accept E*Trade’s settlement offer, the total amount of the payment to the State of Connecticut shall not be affected and shall remain at $43,962.04.
 
5.
E*Trade shall take, or be able to demonstrate that it has taken, certain measures with respect to current and former customers with respect to “Eligible Auction Rate Securities”, as defined below.
 
6.
Eligible Auction Rate Securities.”  For purposes of this Consent Order, “Eligible Auction Rate Securities” means auction rate securities that E*Trade’s customers purchased through E*Trade, or through an entity acquired by E*Trade, on or before February 13, 2008, and that have failed at auction at least once since February 13, 2008.
 
7.

"Eligible Investors".

(a)    
For purposes of this Consent Order, “Eligible Investors” shall mean:
 
(1)   
Current and former account holders who purchased Eligible Auction Rate Securities through E*Trade on or before February 13, 2008, whether or not such Eligible Auction Rate Securities were transferred away from E*Trade, and who held those securities on February 13, 2008.
 
(2)  With respect to customers who purchased Eligible Auction Rate Securities from an entity acquired by E*Trade, only those customers who became customers of E*Trade and who transferred their ARS holdings to E*Trade following the acquisition shall be considered “Eligible Investors.” 
  
(b)  
For purposes of this Consent Order, “Eligible Investors” shall not include:
(1) 
Senior management of E*Trade and its predecessors or E*Trade’s financial advisors and/or registered representatives.
 
(2)  Customers who, as a result of prior legal proceedings with E*Trade, have previously had claims adjudicated.
 
(3)  Customers who received par value for their ARS through a sale, issuer redemption, or payment from E*Trade.
 

8.
Purchase Offer.  E*Trade shall offer to purchase (or offer to arrange a third party to purchase), at par plus accrued and unpaid dividends/interest, from Eligible Investors their Eligible Auction Rate Securities that have failed at auction at least once since February 13, 2008 (the “Purchase Offer”).
 
9.

Notification and Buyback Procedures.

(a)  
E*Trade shall create a written notice related to the Purchase Offer (the “Notice”).  The Notice shall explain the relevant terms of this Consent Order and describe what Eligible Investors must do to accept, in whole or in part, the Purchase Offer, including how Eligible Investors may accept the Purchase Offer.
 
(b)   Initial Notice

(1)     E*Trade shall provide the Notice to Eligible Investors who purchased Eligible Auction Rate Securities with E*Trade by January 16, 2012.
 
(2)        Furthermore, by January 16, 2012, E*Trade shall have undertaken to use its best efforts to identify and locate customers who purchased Eligible Auction Rate Securities with E*Trade but who transferred such Eligible Auction Rate Securities away from E*Trade between February 13, 2008 and November 16, 2011. E*Trade will provide any such customers with the Purchase Offer described in paragraph 8. of Section VI hereof, the Notification and Buyback Procedures described in paragraph 9 of Section VI hereof and the other terms described in paragraphs 10., 11. and 12. of Section VI of this Consent Order.
   
(c)  
Second Notice.

With respect to each Eligible Investor to whom E*Trade sent the Notice required by paragraph 9.(b) of Section VI of this Consent Order who did not respond, E*Trade shall provide a second copy of the Notice on or before March 30, 2012.
 
(d)   Offer Period

(1) E*Trade shall keep the Purchase Offer open until May 15, 2012 (“Offer Period”).
 
(2)     Eligible Investors may accept the Purchase Offer by notifying E*Trade as described in the Purchase Offer, at any time before 11:59 P.M. Eastern Time, on or before the last day of the Offer Period.  For those Eligible Investors who accept the Purchase Offer within the Offer Period, E*Trade shall purchase or arrange to have purchased their Eligible Auction Rate Securities by no later than five (5) business days following E*Trade’s receipt of such Eligible Investor’s acceptance.
  
(e) An Eligible Investor may revoke his or her acceptance of E*Trade’s Purchase Offer at any time up until E*Trade’s purchase of such Eligible Investor’s Eligible Auction Rate Securities.
 
(f) E*Trade’s obligation to those Eligible Investors who transferred their Eligible Auction Rate Securities away from E*Trade prior to November 16, 2011 shall be contingent on: (1) E*Trade receiving reasonably satisfactory assurances from the financial institution currently holding the Eligible Investor’s Eligible Auction Rate Securities that the bidding rights associated with such Eligible Auction Rate Securities will be transferred to E*Trade; and (2) the transfer to, and receipt in good order by, E*Trade of Eligible Auction Rate Securities.
 
(g) E*Trade shall use its best efforts to identify, contact and assist any Eligible Investor who has transferred the Eligible Auction Rate Securities out of E*Trade’s custody in returning such Auction Rate Securities to E*Trade’s custody, and shall not charge such Eligible Investor any fees relating to or in connection with the return to E*Trade or custodianship by E*Trade of such Eligible Auction Rate Securities.


10.
Customer Assistance.  By no later than the date of the Initial Notice, E*Trade shall establish a dedicated toll-free telephone assistance line and website to provide information and to respond to questions concerning the terms of this Consent Order, and to provide information concerning the terms of this Consent Order and, via an e-mail address or other reasonable means, to respond to questions concerning the terms of this Consent Order.  E*Trade shall maintain the telephone assistance line until August 16, 2012.
 
11. Relief for Eligible Investors Who Sold Below Par.  By January 16, 2012, E*Trade shall use its best efforts to identify each Eligible Investor who:  (a) purchased Eligible Auction Rate Securities from E*Trade on or before February 13, 2008; and (b) who sold those Eligible Auction Rate Securities below par between February 13, 2008 and November 16, 2011 (“Below Par Sellers”).  By January 31, 2012, E*Trade shall pay each Below Par Seller the difference between par and the price at which the Below Par Seller sold the Eligible Auction Rate Securities, plus reasonable interest thereon. Furthermore, E*Trade will pay promptly the difference between par and the price at which the Below Par Seller sold the Eligible Auction Rate Securities, plus reasonable interest thereon to any Below Par Sellers identified after January 31, 2012.

12.

Consequential Damages Arbitration Process.

(a)   E*Trade shall consent to participate in a special arbitration process (“Arbitration”) for the exclusive purpose of arbitrating any Eligible Investor’s consequential damages claim arising from the Eligible Investor’s inability to sell Eligible Auction Rate Securities.  In the Arbitration, the Special Arbitration Process applicable to firms that have entered into settlements with state regulators (the “State SAP”) will be available for the exclusive purpose of arbitrating any Eligible Investor’s consequential damages claim.  By January 16, 2012, E*Trade shall have notified Eligible Investors of the terms of the Arbitration process through the Notice as set forth in paragraph 9.(b) of Section VI of this Consent Order.
 
(b)   The Arbitration shall be conducted under the auspices of FINRA, pursuant to the NASD Code of Arbitration Procedures for Customer Disputes, effective April 16, 2007.  E*Trade will pay all applicable forum and filing fees.
 
(c)   Any Eligible Investors who choose to pursue such claims in the Arbitration shall bear the burden of proving that they suffered consequential damages and that such damages were caused by their inability to access funds invested in Eligible Auction Rate Securities.  In the Arbitration, E*Trade shall be able to defend itself against such claims; provided, however, that E*Trade shall not contest liability for the illiquidity of the underlying auction rate securities position or use as part of its defense any decision by the Eligible Investor not to borrow money from E*Trade.
 
(d)   Eligible Investors who elect to use the Arbitration provided for herein shall not be eligible for punitive damages, or for any other type of damages other than consequential damages.  However, the State SAP will govern the availability of attorney’s fees.


13.
Loan Interest Expense.  By January 16, 2012, E*Trade shall use its best efforts to identify Eligible Investors that obtained a loan through E*Trade (or its affiliates) secured by Eligible Auction Rate Securities that were not successfully auctioning at the time the loan was taken and who paid more in interest on the loan than the Eligible Investor received in interest or dividends from the Eligible Auction Rate Securities during the time the loan was outstanding (“Negative Carry”).  E*Trade, on or before January 16, 2012, will reimburse the Eligible Investor the amount of Negative Carry actually paid.

14.

Reports and Meetings

(a)   In accordance with the multistate settlement, E*Trade shall submit quarterly reports to the Colorado Division of Securities (the “Lead State”), a lead state in the multistate investigation, detailing E*Trade’s progress with respect to the provisions of such settlement within ten (10) days from the month when a quarterly report is due, beginning with a report covering the quarter ending December 31, 2011 and continuing through and including a report covering the quarter ending December 31, 2012.
 
(b)   In accordance with the multistate settlement, beginning on December 21, 2011, E*Trade shall confer via telephone at least quarterly with the Lead State regarding E*Trade’s progress with respect to the provisions of the multistate settlement.  Such quarterly telephone conferences shall continue until December 31, 2012.
 
(c)   The reporting and telephone conference deadlines set forth above may be amended or modified with written permission from the Lead State.
 
(d)   At the conclusion of the Purchase Offer, E*Trade shall provide a report to the Lead State concerning all customers nationwide impacted by E*Trade’s Purchase Offer and/or reimbursement to those who sold below par.


15. This Consent Order is not intended to indicate that E*Trade or any of its affiliates or current or former officers, directors, trustees, agents, members, partners, or employees (and of any of E*Trade’s parent companies, subsidiaries or affiliates) shall be subject to any disqualifications contained in the federal securities laws, the rules and regulations thereunder, the rules and regulations of self regulatory organizations or various states’ securities laws including any disqualifications from relying upon the registration exemptions or safe harbor provisions.  In addition, this Consent Order is not intended to form the basis for any such disqualifications.
 
16. Except in an action by the State of Connecticut to enforce the obligations of E*Trade in this Consent Order, this Consent Order may neither be deemed nor used as an admission of or evidence of any alleged fault, omission or liability of E*Trade in any civil, criminal, arbitration or administrative proceeding in any court, administrative agency or tribunal.  For any person or entity not a party to this Consent Order, this Consent Order does not limit or create any private rights or remedies against E*Trade or any of its affiliates or current or former officers, directors, trustees, agents, members, partners, or employees (and of any of E*Trade’s parent companies, subsidiaries or affiliates) including, without limitation with respect to the use of any emails or other documents of E*Trade or of others concerning the marketing and/or sales of auction rate securities, limit or create liability of E*Trade, or limit or create defenses of E*Trade to any claims.
 
17. This Order is not intended to disqualify E*Trade or any of its affiliates or current or former officers, directors, trustees, agents, members, partners, or employees (and of any of E*Trade’s parent companies, subsidiaries or affiliates) from any business that they otherwise are qualified or licensed to perform under applicable state securities law and this Consent Order is not intended to form the basis for any disqualification.  This Consent Order may not be read to indicate that E*Trade or any of its affiliates or current or former officers, directors, trustees, agents, members, partners, or employees (and of any of E*Trade’s parent companies, subsidiaries or affiliates) engaged in fraud or to serve as the basis for any future independent action to establish a violation of any federal laws, the rules or regulations thereunder, or the rules and regulations of self-regulatory organizations.
 
18.
This Consent Order shall be binding upon E*Trade and its successors and assigns as well the successors and assigns of relevant affiliates with respect to all conduct subject to the provisions herein and all future obligations, responsibilities, undertakings, commitments, limitations, restrictions, events and conditions.

NOW THEREFORE, the Commissioner enters the following:

1. The Findings of Fact, Conclusions of Law and Consent Order set forth above, be and are hereby entered;
2. Entry of this Consent Order by the Commissioner is without prejudice to the right of the Commissioner to take enforcement action against E*Trade based upon a violation of this Consent Order or the matters underlying its entry, if the Commissioner determines that compliance with the terms herein is not being observed or if any representations made by E*Trade and reflected herein are subsequently discovered to be untrue; and
3. This Consent Order shall become final when entered.


 
So ordered at Hartford, Connecticut      _______/s/_________
this 18th day of April 2012.      Howard F. Pitkin 
    Banking Commissioner 


CONSENT TO ENTRY OF ORDER

I, James E. Ballowe, Jr., state on behalf of E*Trade Securities LLC, that I have read the foregoing Consent Order; that I know and fully understand its contents; that I am authorized to execute this Consent Order on behalf of E*Trade Securities LLC; that E*Trade Securities LLC, without admitting or denying the Findings of Fact and Conclusions of Law contained in this Consent Order, agrees freely and without threat or coercion of any kind to comply with the terms and conditions stated herein; and that E*Trade Securities LLC voluntarily consents to the entry of this Consent Order, expressly waiving any right to a hearing on the matters described herein.  E*Trade Securities LLC further agrees that it shall not claim, assert, or apply for a tax deduction or tax credit with regard to any state, federal or local tax for any administrative monetary penalty that E*Trade Securities LLC shall pay pursuant to the foregoing Consent Order.     

 
     E*Trade Securities LLC
  
           
By: ______/s/____________________
Name:  James E. Ballowe, Jr.
Title:  General Counsel, Brokerage
  E*Trade Financial Corporation

 
State of: Virginia

County of:  Arlington

On this the 13th day of April, 2012, before me, the undersigned officer, personally appeared James Ballowe, who acknowledged himself/herself to be the General Counsel, Brokerage of E*Trade Securities LLC, a limited liability company, and that he/she, as such General Counsel, Brokerage, being authorized to do so, executed the foregoing instrument for the purposes therein contained, by signing the name of the limited liability company by himself/herself as General Counsel, Brokerage.
 
In witness whereof I hereunto set my hand.


_____/s/_________________________
Notary Public
Date Commission Expires: May 31, 2016

  

Administrative Orders and Settlements