Charles Schwab 2011 Annual Report Download - page 37

THE CHARLES SCHWAB CORPORATION
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that the Company pays on its funding sources, or if prepayment rates increase on the mortgages and mortgage-backed
securities that the Company holds. With the low interest rate environment, the Company’s revenue from interest-earning
assets has been declining more than the rates that the Company pays on its funding sources. The Company may also be limited
in the amount it can reduce interest rates on deposit accounts and still offer a competitive return.
To the extent the overall yield on certain Schwab-sponsored money market mutual funds falls to a level at or below the
management fees on those funds, the Company may waive a portion of its fee in order to continue providing some return to
clients. As a result of the low interest rate environment, the Company has been waiving and may continue to waive a portion
of its management fees for certain Schwab-sponsored money market mutual funds. Such fee waivers negatively impact the
Company’s asset management and administration fees.
The Company is subject to litigation and regulatory investigations and proceedings and may not always be successful
in defending itself against such claims or proceedings.
The financial services industry faces substantial litigation and regulatory risks. The Company is subject to claims and lawsuits
in the ordinary course of business, including arbitrations, class actions and other litigation, some of which include claims for
substantial or unspecified damages. The Company is also the subject of inquiries, investigations, and proceedings by
regulatory and other governmental agencies. Actions brought against the Company may result in settlements, awards,
injunctions, fines, penalties or other results adverse to the Company including reputational harm. Even if the Company is
successful in defending against these actions, the defense of such matters may result in the Company incurring significant
expenses. Predicting the outcome of matters is inherently difficult, particularly where claims are brought on behalf of various
classes of claimants, claimants seek substantial or unspecified damages, or when investigations or legal proceedings are at an
early stage. A substantial judgment, settlement, fine, or penalty could be material to the Company’s operating results or cash
flows for a particular future period, depending on the Company’s results for that period. In market downturns, the volume of
legal claims and amount of damages sought in litigation and regulatory proceedings against financial services companies have
historically increased. See “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial
Statements – 15. Commitments and Contingencies.”
From time to time, the Company is subject to litigation claims from third parties alleging infringement of their intellectual
property rights (e.g., patents). Such litigation can require the expenditure of significant Company resources. If the Company
was found to have infringed a third-party patent, or other intellectual property rights, it could incur substantial liability, and in
some circumstances could be enjoined from using certain technology, or providing certain products or services.
Extensive regulation of the Company’s businesses limits the Company’s activities and may subject it to significant
penalties.
As a participant in the securities, banking and financial services industries, the Company is subject to extensive regulation
under both federal and state laws by governmental agencies, supervisory authorities, and SROs. Such regulation has become
more extensive and complex in response to the recent market disruptions. The requirements imposed by the Company’s
regulators are designed to ensure the integrity of the financial markets, the safety and soundness of financial institutions, and
the protection of clients. These regulations often serve to limit the Company’s activities by way of capital, customer protection
and market conduct requirements, and restrictions on the businesses activities that the Company may conduct. Despite the
Company’s efforts to comply with applicable regulations, there are a number of risks, particularly in areas where applicable
regulations may be unclear or where regulators revise their previous guidance. Any enforcement actions or other proceedings
brought by the Company’s regulators against the Company or its affiliates, officers or employees could result in fines,
penalties, cease and desist orders, enforcement actions, suspension or expulsion, or other disciplinary sanctions, including
limitations on the Company’s business activities, any of which could harm the Company’s reputation and adversely affect the
Company’s results of operations and financial condition.
Legislation or changes in rules and regulations could negatively impact the Company’s business and financial results.
New legislation, rule changes, or changes in the interpretation or enforcement of existing federal, state and SRO rules and
regulations may directly affect the operation and profitability of the Company or its specific business lines. The profitability of
the Company could also be affected by rules and regulations which impact the business and financial communities generally,