On July 30, 2008, the Securities and Exchange Commission (“SEC”) issued a Cease-and-Desist Order (“Order”) imposing remedial sanctions and penalties against E*Trade Clearing LLC and E*Trade Securities LLC (collectively, “E*Trade”), both of which are registered broker-dealers. The SEC initiated cease-and-desist proceedings against E*Trade for allegedly failing to comply with Section 17(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 17a-8 issued thereunder, which require broker-dealers to comply with the reporting, record-keeping and record-retention requirements in regulations issued pursuant to the Bank Secrecy Act, including customer identification program (“CIP”) requirements. Each of the E*Trade entities consented to the Order without admitting or denying the SEC’s findings.
As of October 1, 2003, the CIP rule generally requires broker-dealers that are registered with the SEC to establish, document and maintain procedures for identifying and verifying the identities of their customers. Although E*Trade established CIP procedures requiring verification of all account holders in a joint account, the SEC found that, from October 2003 to June 2005, E*Trade did not verify the identities of 65,442 secondary account holders in joint accounts. The SEC also found that, on several occasions, E*Trade personnel discovered the CIP deficiency, yet E*Trade failed to take any corrective action until the problem resurfaced almost two years after the compliance deadline. As a result, the SEC found that E*Trade failed to comply with its own CIP procedures; E*Trade did not accurately document its CIP because its written procedures were materially different from its actual procedures; and E*Trade’s compliance failure was systematic and willful, resulting from inadequate supervision and organization structure, including lack of adequate management oversight and miscommunications between personnel in several E*Trade business groups.
Under the Order, E*Trade must cease and desist from committing or causing any current or future violations of Section 17(a) of the Exchange Act and Rule 17a-8. Each of the E*Trade entities will pay a civil monetary penalty of $500,000, for a total penalty amount of $1 million. In addition, E*Trade must hire an independent compliance consultant to conduct a regulatory review of E*Trade’s CIP, and develop a written plan to achieve specific regulatory review objectives set forth by the SEC. E*Trade must also implement and maintain written policies and procedures to ensure compliance with the CIP rule.
The Order is available on the SEC’s website at: http://www.sec.gov/litigation/admin/2008/34-58250.pdf.