Charles Schwab 2015 Annual Report Download - page 34

THE CHARLES SCHWAB CORPORATION
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the rates that the Company pays on its funding sources, or if prepayment rates increase on the mortgages and mortgage-
backed securities the Company holds. The Company may also be limited in the amount it can reduce interest rates on funding
sources, such as deposit accounts, and still offer a competitive return.
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. To the extent the overall yield on certain
Schwab-sponsored money market mutual funds remains 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. Such fee waivers negatively impact the
Company’s asset management and administration fee revenues.
Security breaches of the Company’s systems, or those of its clients or third parties, may subject the Company to
significant liability and damage the Company’s reputation.
The Company’s business involves the secure processing, storage and transmission of confidential information about the
Company and its clients. Information security risks for financial institutions are increasing, in part because of the use of the
internet and mobile technologies to conduct financial transactions, and the increased sophistication and activities of organized
crime, activists, hackers and other external parties. The Company’s systems and those of other financial institutions have
been and are likely to continue to be the target of cyber attacks, malicious code, computer viruses and denial of service
attacks that could result in unauthorized access, misuse, loss or destruction of data (including confidential client information),
account takeovers, unavailability of service or other events. Despite the Company’s efforts to ensure the integrity of its
systems, the Company may not be able to anticipate or to implement effective preventive measures against all security
breaches of these types, especially because the techniques used change frequently or are not recognized until launched, and
because security attacks can originate from a wide variety of sources. Data security breaches may also result from non-
technical means, for example, employee misconduct.
Security breaches, including breaches of the Company’s security measures or those of the Company’s third-party service
providers or clients, could result in a violation of applicable privacy and other laws and could subject the Company to
significant liability or loss that may not be covered by insurance, actions by the Company’s regulators, damage to the
Company’s reputation, or a loss of confidence in the Company’s security measures which could harm the Company’s
business. The Company may be required to expend significant additional resources to modify its protective measures or to
investigate and remediate vulnerabilities or other exposures.
The Company also faces risk related to external fraud involving the compromise of clients’ personal electronic devices that
can facilitate the unauthorized access to login and password information for their various online financial accounts, including
those at the Company. Such risk has grown in recent years due to the increased sophistication and activities of organized
crime and other external parties, including foreign state-sponsored parties. For example, these parties send fraudulent
“phishing” emails to the Company’s clients in order to misappropriate user names, passwords or other personal information.
Losses reimbursed to clients under the Company’s guarantee against unauthorized account activity could have a negative
impact on the Company’s business, financial condition and results of operations.
The Company is subject to litigation and regulatory investigations and proceedings and may not be successful in
defending itself against 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.
Litigation and arbitration claims include those brought by the Company’s clients and the clients of third party advisors whose
assets are custodied at the Company. Claims from clients of third party advisors may allege losses due to investment
decisions made by the third party advisors or the advisors’ misconduct. Litigation claims also include 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 were found to have infringed on a third-party patent, or other intellectual
property rights, it could incur substantial damages, and in some circumstances could be enjoined from using certain
technology, or providing certain products or services.