Charles Schwab 2015 Annual Report Download - page 60

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THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
- 40 -
clearly defines for employees, contractors, and vendors the Company’s expected standards of care for confidential data.
Regular training is provided by the Company in regard to data security.
The Company is actively engaged in the research and development of new technologies, services, and products. The
Company endeavors to protect its research and development efforts, and its brands, through the use of copyrights, patents,
trade secrets, and contracts.
Fiduciary Risk
Fiduciary risk is the potential for financial or reputational loss through breach of fiduciary duties to a client. Fiduciary
activities include, but are not limited to, individual and institutional trust, investment management, custody, and cash and
securities processing. The Company attempts to manage this risk by establishing procedures to ensure that obligations to
clients are discharged faithfully and in compliance with applicable legal and regulatory requirements. Business units have the
primary responsibility for adherence to the procedures applicable to their business. Guidance and control are provided
through the creation, approval, and ongoing review of applicable policies by business units and various risk committees.
Information Security Risk
Information Security risk is the potential for unauthorized access, use, disclosure, disruption, modification, perusal,
inspection, recording or destruction of the firm’s information or systems. The Company has designed and implemented a
security program that knits together complementary tools, controls and technologies to protect systems, client accounts and
data. The Company continuously monitors the systems and works collaboratively with government agencies, law
enforcement and other financial institutions to address potential threats. The Company uses advanced monitoring systems to
identify suspicious activity and deter unauthorized access by internal or external actors. The Company limits the number of
employees who have access to clients’ personal information and enforces internal authentication measures to protect against
the potential for social engineering. All employees who handle sensitive information are trained in privacy and security.
Schwab’s fraud and Cyber security teams monitor activity looking for suspicious behavior. These capabilities allow the
Company to identify and quickly act on any attempted intrusions.
Legal Risk
Legal risk is the risk of a claim for damages or other relief brought by clients, employees or third parties, alleging a breach of
legal requirements or other duties under law. This risk may occur as a result of operational failure but may also occur as a
result of other factors. The financial services industry is subject to substantial litigation risk, and the firm incurs legal claims
in the ordinary course of business. Increased litigation costs or substantial legal liability relating to an extraordinary claim or
incidence of claims could have a material adverse effect on the Company’s business and financial condition. For information
about the Company’s legal risk, see “Item 1A – Risk Factors,” and “Item 8 – Financial Statements and Supplementary Data –
Notes to Consolidated Financial Statements – 15. Commitments and Contingencies.”
Model Risk
Model risk is the potential for adverse consequences from decisions based on incorrect or misused model outputs and reports.
Models are owned by several business units throughout the Company, and are used for a variety of purposes. Model use
includes, but is not limited to, calculating capital requirements for hypothetical stressful environments, estimating interest and
credit risk for loans and other balance sheet assets, and providing guidance in the management of client portfolios. The
Company has established a policy to describe the roles and responsibilities of all key stakeholders in model development,
management, and use. All models at the Company are registered in a centralized database and classified into different risk
ratings depending on their potential financial, reputational, or regulatory impact to the Company. The model risk rating
informs the scope of all model governance activities.