Document ID: SEC-2009-0368-0001
Agency: sec
Document Type: Notice
Title: Application and Temporary Order: E*TRADE Capital Markets LLC, et al.
Posted Date: 2009-03-18T04:00Z

[Federal Register: March 18, 2009 (Volume 74, Number 51)]
[Notices]               
[Page 11619-11621]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18mr09-91]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-28645; 812-13639]

 
E*TRADE Capital Markets LLC, et al.; Notice of Application and 
Temporary Order

March 12, 2009.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Temporary order and notice of application for a permanent order 
under section 9(c) of the Investment Company Act of 1940 (``Act'').

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Summary of Application: Applicants have received a temporary order 
exempting them from section 9(a) of the Act, with respect to an 
injunction entered against E*TRADE Capital Markets LLC (``ETCM'') on 
March 11, 2009, by the United States District Court for the Southern 
District of New York (``Injunction'') until the Commission takes final 
action on an application for a permanent order. Applicants also have 
applied for a permanent order.

Applicants: ETCM, E*TRADE Financial Corporation (``ETFC''), E*TRADE 
Asset Management, Inc. (``E*TRADE Asset Management''), E*TRADE 
Securities LLC (``E*TRADE Securities'') and Kobren Insight Management, 
Inc. (``Kobren'') (collectively, other than ETCM and ETFC, the ``Fund 
Servicing Applicants,'' and together, the ``Applicants'').\1\
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    \1\ Applicants request that any relief granted pursuant to the 
application also apply to any other company of which ETCM is or 
hereafter becomes an affiliated person within the meaning of section 
2(a)(3) of the Act (together with the Applicants, the ``Covered 
Persons'').

Filing Dates: The application was filed on March 4, 2009 and amended on 
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March 12, 2009.

Hearing or Notification of Hearing: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Commission's Secretary 
and serving applicants with a copy of the request, personally or by 
mail. Hearing requests should be received by the Commission by 5:30 
p.m. on April 6, 2009, and should be accompanied by proof of service on 
applicants, in the form of an affidavit or, for lawyers, a certificate 
of service. Hearing requests should state the nature of the writer's 
interest, the reason for the request, and the issues contested. Persons 
who wish to be notified of a hearing may request notification by 
writing to the Commission's Secretary.

[[Page 11620]]

ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F 
Street, NE., Washington, DC 20549-1090; Applicants: ETCM, 440 S. 
LaSalle Street, Suite 3030, Chicago, IL 60605; ETFC and E*TRADE 
Securities, 135 E. 57th Street, New York, NY 10022; E*TRADE Asset 
Management, 4500 Bohannon Drive, Menlo Park, CA 94025; and Kobren, 20 
William Street, Suite 200, Wellesley Hills, MA 02481.

FOR FURTHER INFORMATION CONTACT: Jaea F. Hahn, Senior Counsel, at 202-
551-6878 or Julia Kim Gilmer, Branch Chief, at 202-551-6821 (Division 
of Investment Management, Office of Investment Company Regulation).

SUPPLEMENTARY INFORMATION: The following is a temporary order and 
summary of the application. The complete application may be obtained 
for a fee at the Commission's Public Reference Room, 100 F Street NE., 
Washington DC 20549-1520 (tel. 202-551-5850).

Applicants' Representations

    1. ETFC is a global financial services company organized under the 
laws of Delaware. Through its subsidiaries and affiliates, ETFC 
provides a wide range of financial services including an assortment of 
trading, investing, banking and lending products. ETCM is a wholly 
owned subsidiary of ETFC and is registered as a broker-dealer under the 
Securities Exchange Act of 1934 (``Exchange Act''). ETCM is primarily 
engaged in the business of over-the-counter market making activities. 
E*TRADE Asset Management and Kobren (together, the ``Adviser 
Applicants'') are each a wholly owned subsidiary of ETFC and registered 
as an investment adviser under the Investment Advisers Act of 1940. 
Each Adviser Applicant currently provides investment management and 
advisory services to registered investment companies (``Funds''). 
E*TRADE Securities is registered as a broker-dealer under the Exchange 
Act and acts as principal underwriter to various open-end Funds.
    2. On March 11, 2009, the United States District Court for the 
Southern District of New York entered a judgment, which included the 
Injunction, against ETCM (``Judgment'') in a matter brought by the 
Commission.\2\ The Commission alleged in the complaint (``Complaint'') 
that ETCM violated certain rules of the Chicago Stock Exchange by 
engaging in improper trades for its own proprietary accounts by trading 
ahead of, instead of matching customer orders, interpositioning and 
trading ahead of unexecuted open or cancelled orders. The Complaint 
also alleged that ETCM violated section 17(a) of the Exchange Act and 
rule 17a-3 thereunder by failing to make or keep a current blotter 
containing an itemized daily record of all purchases and sales of 
securities effected by ETCM for its proprietary accounts. Without 
admitting or denying any of the allegations in the Complaint, ETCM 
consented to the entry of the Injunction.
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    \2\ Securities and Exchange Commission v. E*TRADE Capital 
Markets LLC. Final Consent Judgment as to E*TRADE Capital Markets 
LLC., 09 Civ. 1976 (S.D.N.Y., filed March 11, 2009).
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Applicants' Legal Analysis

    1. Section 9(a)(2) of the Act, in relevant part, prohibits a person 
who has been enjoined from engaging in or continuing any conduct or 
practice in connection with the purchase or sale of a security, or in 
connection with activities as broker or dealer, from acting, among 
other things, as an investment adviser or depositor of any registered 
investment company or a principal underwriter for any registered open-
end investment company, registered unit investment trust, or registered 
face-amount certificate company. Section 9(a)(3) of the Act makes the 
prohibition in section 9(a)(2) applicable to a company, any affiliated 
person of which has been disqualified under the provisions of section 
9(a)(2). Section 2(a)(3) of the Act defines ``affiliated person'' to 
include, among others, any person directly or indirectly controlling, 
controlled by, or under common control, with the other person. 
Applicants state that ETCM is an affiliated person of each of the other 
Applicants within the meaning of section 2(a)(3). Applicants state 
that, as a result of the Injunction, they would be subject to the 
prohibitions of section 9(a).
    2. Section 9(c) of the Act provides that the Commission shall grant 
an application for exemption from the disqualification provisions of 
section 9(a) of the Act if it is established that these provisions, as 
applied to Applicants, are unduly or disproportionately severe or that 
the conduct of the Applicants has been such as not to make it against 
the public interest or the protection of investors to grant the 
exemption. Applicants have filed an application pursuant to section 
9(c) seeking a temporary and permanent order exempting the Applicants 
and the other Covered Persons from the disqualification provisions of 
section 9(a).
    3. Applicants believe that they meet the standards for exemption 
specified in section 9(c). Applicants state that the prohibitions of 
section 9(a) as applied to them would be unduly and disproportionately 
severe and that the conduct of Applicants has been such as not to make 
it against the public interest or the protection of investors to grant 
the requested exemption from section 9(a).
    4. Applicants state that the alleged conduct giving rise to the 
Injunction did not involve any of the Applicants acting in the capacity 
of investment adviser, subadviser or depositor or principal underwriter 
for any Fund. Applicants also state that none of the current or former 
directors, officers, or employees of ETFC and the Fund Servicing 
Applicants had any knowledge or involvement in the conduct alleged in 
the Complaint. Applicants further state that the personnel at ETCM who 
were involved in the violations alleged in the complaint have had no 
and will not have any future involvement in providing advisory, 
subadvisory, depository or underwriting services to Funds.
    5. Applicants state that the inability of the Adviser Applicants to 
provide investment advisory services and E*TRADE Securities to provide 
principal underwriter services to Funds would result in potentially 
severe financial hardships for the Funds and their shareholders. 
Applicants state that they will distribute written materials, including 
an offer to meet in person to discuss the materials, to the boards of 
trustees of the Funds (the ``Boards''), including the trustees who are 
not ``interested persons,'' as defined in section 2(a)(19) of the Act, 
of such Funds, and their independent legal counsel as defined in rule 
0-1(a)(6) under the Act, if any, of the circumstances that led to the 
Injunction, any impact on the Funds, and the application. Applicants 
state that they will provide the Boards with all information concerning 
the Injunction and the application that is necessary for the Funds to 
fulfill their disclosure and other obligations under the federal 
securities laws.
    6. Applicants also state that, if the Fund Servicing Applicants 
were barred from providing investment advisory services to the Funds, 
and underwriting services to open-end Funds and UITs, the effect on 
their businesses and employees would be severe. Applicants state that 
they have committed substantial resources to establishing advisory and 
underwriting expertise. Applicants further state that prohibiting them 
from providing advisory and underwriting services would not only 
adversely affect their businesses, but

[[Page 11621]]

would also adversely affect over 1,500 employees that are involved in 
such services.
    7. None of the Applicants have previously received an order under 
section 9(c) of the Act.

Applicants' Condition

    Applicants agree that any order granting the requested relief will 
be subject to the following condition:
    Any temporary exemption granted pursuant to the application shall 
be without prejudice to, and shall not limit the Commission's rights in 
any manner with respect to, any Commission investigation of, or 
administrative proceedings involving or against, Covered Persons, 
including without limitation, the consideration by the Commission of a 
permanent exemption from section 9(a) of the Act requested pursuant to 
the application or the revocation or removal of any temporary 
exemptions granted under the Act in connection with the application.

Temporary Order

    The Commission has considered the matter and finds that the 
Applicants have made the necessary showing to justify granting a 
temporary exemption.
    Accordingly,
    It is hereby ordered, pursuant to section 9(c) of the Act, that 
Applicants and any other Covered Persons are granted a temporary 
exemption from the provisions of section 9(a), solely with respect to 
the Injunction, subject to the condition in the application, from March 
11, 2009, until the Commission takes final action on their application 
for a permanent order.

    By the Commission.
Elizabeth M. Murphy,
 Secretary.
 [FR Doc. E9-5785 Filed 3-17-09; 8:45 am]

BILLING CODE 8011-01-P