Charles Schwab 2010 Annual Report Download - page 24

THE CHARLES SCHWAB CORPORATION
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 – Note to
Consolidated Financial Statements – 14. Commitments and Contingent Liabilities.”
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 is expected to 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, including changes to
the laws governing taxation, electronic commerce, client privacy and security of client data. In addition, the rules and regulations
could result in limitations on the lines of business the Company conducts, modifications to the Company’s business practices,
increased capital requirements, or additional costs.
Financial reforms and related regulations may affect the Company’s business activities, financial position and profitability.
The “Dodd-Frank Wall Street Reform and Consumer Protection Act” was signed into law in July 2010. This legislation makes
extensive changes to the laws regulating financial services firms and requires significant rule-making. In addition, the legislation
mandates multiple studies, which could result in additional legislative or regulatory action. CSC continues to review the impact that
the legislation, studies and related rule-making will have on the Company’s business, financial condition, and results of operations.
The legislation charges the Federal Reserve with drafting enhanced regulatory requirements for “systemically important” bank
holding companies and certain other non-bank financial institutions designated as “systemically important” by the Financial Stability
Oversight Council, which may include CSC. The enhanced requirements include more stringent capital, leverage and liquidity
standards. The legislation permits the Federal Reserve to tailor its enhanced requirements to the perceived risk profile of an individual
financial institution. Among other things, the legislation authorizes various assessments and fees, requires the
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