The disciplinary action stemmed from several different newspaper and direct mail advertising campaigns the company conducted between 1999 and 2000. Although Menlo Park, Calif.-based E*Trade agreed to the terms of the settlement, it did not admit or deny the NASD allegations.
"NASD Regulation found that E*Trade failed to comply with NASD advertising rules," the organization said in a statement. "NASD Regulation further found that E*Trade's compliance and supervisory procedures in connection with its advertising activities failed to comply with NASD rules."
E*Trade has addressed the NASD's complaints, the company said in a statement. "E*Trade's advertising review and approval procedures, along with its supervisory system and written supervisory procedures, have been enhanced to further ensure compliance with NASD rules concerning advertisements and sales literature," the company said in a statement.
E*Trade and NASD representatives did not return calls seeking comment.
When E*Trade introduced a new mutual fund in 1999, the company promoted it in newspaper advertisements by saying that research company Morningstar had ranked the fund as the "lowest-cost tech index fund." The company also drew connections between the fund and the returns posted by an unrelated fund offered by Goldman Sachs.
But Morningstar had never reviewed E*Trade's fund, making the ad misleading, the NASD charged. The NASD also charged that the company did not clearly distinguish between its fund and the past performance of the Goldman Sachs fund. And the securities dealers organization charged that E*Trade violated NASD rules by not submitting the advertisement to the NASD before it ran.
From July 1999 to April 2000, E*Trade sent out millions of direct-mail advertisements to potential investors. In one, the company offered investors a $75 bonus for opening an account with the company. The company misled investors by saying it would credit investors the $75 "immediately," when it often took weeks to apply the credit, the NASD charged.
In another direct mail advertisement sent during the same time period, E*Trade told potential investors that its review of their credit history pre-qualified them for a margin account. A margin account allows investors to buy stocks and invest in mutual funds on credit. The company did not review investors' credit history before approving them for margin accounts, the NASD charged.
This is not the first time E*Trade has been disciplined by the NASD. Last fall, an NASD arbitration panel ordered E*Trade to pay more than $38,000 to a customer who alleged that the company gave him an erroneous stock price.
Last August, the NASD's regulatory body censured and fined E*Trade $20,000 for failing to report short positions. An investor holds a short position when he sells a stock he doesn't own, with the goal of buying back shares at a lower price and earning a profit.
NASD's regulatory body censured and fined $20,000 in May of 2000 for failing to provide to the agency in a timely manner information on customer complaints.