“For the past few years, securities regulators have been battling E*Trade Group Inc., questioning whether some of the online broker’s cheeky, aggressive advertisements crossed the legal line,” writes Michael Schroeder in The Wall Street Journal this morning.

“But after months of negotiations, an investigation of E*Trade’s ads could soon be settled — with a whimper, not a bang.

“The Menlo Park, Calif., firm disclosed in a quarterly earnings report in August that its advertising practices were being investigated by the National Association of Securities Dealers’s regulatory arm and the Securities and Exchange Commission. The firm’s practices were targeted after former SEC Chairman Arthur Levitt and traditional brokerage firms criticized the online-brokerage industry for advertising they said unfairly portrayed the benefits of online investing without disclosing the risks.

“The SEC has dropped its case, but a settlement with the NASD is expected soon, according to people familiar with the matter. At one point, the NASD had informed E*Trade that there could be a “systematic failure” that involved questions about a few dozen E*Trade advertisements dating back to 1998 from among 2,400 print, radio and television ads, according to a document filed in the case and a person familiar with the situation.

“Now, however, the case could be boiled down to issues involving a handful of possible violations, including a newspaper advertisement for a technology index mutual fund which E*Trade promoted as the Ôlowest costÕ such fund, according to a person with knowledge of the case. E*Trade, while admitting that there was no support for the claim, blamed the problem on a clerical error and pulled the ad after NASD objected.

“Asked about a settlement with the NASD and specifics of the allegations, John Metaxas, an E*Trade spokesman, said: ÔIt is the standard policy of E*Trade not to respond to questions of this type.Õ The NASD declined to comment.

“Earlier this month, the NASD alleged violations against several Ôday-tradingÕ online firms for making unsubstantiated advertising claims about that fast-moving trading strategy, but tagging more traditional online brokers with violations has been more difficult. While the NASD in the past had dealt primarily with staid investment promotions from traditional Wall Street broker dealers and mutual funds, the regulator was forced to grapple with a new advertising genre that helped define the era of upstart online brokers in the late 1990s.

“Regulators have been concerned that neophyte investors were getting the wrong message from off-the-wall ads which suggested that Internet trading was a key to riches — even though no explicit promises or guarantees were made. The NASD even held focus groups, in part, to get input on whether humorous television ads about online trading overly influenced consumer decisions to invest in stocks.

“The answer: ÔNot particularly,Õ according to several officials from online firms that were briefed by the NASD.

“Indeed, some advertisements may have tested rules of taste, but not securities laws. For instance, E*Trade’s compliance department raised questions — even though the NASD didn’t — about the propriety of a television spot showing a patient rushed into a hospital because he had “money coming out of the wazoo,” according to a person with knowledge of the situation.

“In general, NASD rules say advertisements can’t make exaggerated claims for investment returns and can’t be misleading or deceptive. NASD has the authority to censure broker-dealers or employees, fine them, and force them to alter or halt advertising. The SEC has no specific advertising rules, but has the authority to file complaints against broker advertising if it is alleged to be fraudulent — a high standard that requires evidence of intentional and egregious behavior.