Charles Schwab 2014 Annual Report Download - page 24

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THE CHARLES SCHWAB CORPORATION
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futures and commodities trading activities they conduct as an introducing broker and futures commission merchant,
respectively.
Much of the regulation of broker-dealers has been delegated to self-regulatory organizations (SROs). Schwab is a member of
the Financial Industry Regulatory Authority, Inc. (FINRA), the Municipal Securities Rulemaking Board (MSRB), NYSE
Arca, and the Chicago Board Options Exchange (CBOE). optionsXpress, Inc. is also a member of FINRA and the MSRB.
The primary regulators of Schwab and optionsXpress, Inc. are FINRA and, for municipal securities, the MSRB. The National
Futures Association (NFA) is Schwab and optionsXpress, Inc.’s primary regulator for futures and commodities trading
activities. The Company’s business is also subject to oversight by regulatory bodies in other countries in which the Company
operates.
The principal purpose of regulating broker-dealers and investment advisors is the protection of clients and the securities
markets. The regulations, to which broker-dealers and investment advisors are subject, cover all aspects of the securities
business, including, among other things, sales and trading practices, publication of research, margin lending, uses and
safekeeping of clients’ funds and securities, capital adequacy, recordkeeping and reporting, fee arrangements, disclosure to
clients, fiduciary duties owed to advisory clients, and the conduct of directors, officers and employees.
Schwab and optionsXpress, Inc. are both subject to Rule 15c3-1 under the Securities Exchange Act of 1934 (the Uniform Net
Capital Rule) and related SRO requirements. The CFTC and NFA also impose net capital requirements. The Uniform Net
Capital Rule specifies minimum capital requirements that are intended to ensure the general financial soundness and liquidity
of broker-dealers. Because CSC itself is not a registered broker-dealer, it is not subject to the Uniform Net Capital Rule.
However, if Schwab fails to maintain specified levels of net capital, such failure could constitute a default by CSC under debt
covenants under CSC’s credit agreement.
The Uniform Net Capital Rule limits broker-dealers’ ability to transfer capital to parent companies and other affiliates.
Compliance with the Uniform Net Capital Rule could limit Schwab’s operations and its ability to repay subordinated debt to
CSC, which in turn could limit CSC’s ability to repay debt, pay cash dividends, and purchase shares of its outstanding stock.
In addition to net capital requirements, as self-clearing broker-dealers, Schwab and optionsXpress, Inc. are subject to cash
deposit and collateral requirements with clearing houses, such as the Depository Trust & Clearing Corporation (DTCC) and
Options Clearing Corporation, which may fluctuate significantly from time to time based upon the nature and size of clients’
trading activity.
Various activities of the Company are subject to the Bank Secrecy Act (BSA), as amended by the USA Patriot Act of 2001,
which requires financial institutions to develop programs reasonably designed to prevent money laundering and the financing
of terrorism. The BSA includes a variety of record-keeping and reporting requirements (such as cash and suspicious activity
reporting), as well as due diligence/ know-your-customer documentation requirements. Various activities of the Company are
also subject to U.S. sanctions programs administered by the Office of Foreign Assets Control.
Sources of Net Revenues
The Company’s major sources of net revenues are asset management and administration fees, net interest revenue, and
trading revenue. The Company generates asset management and administration fees through its proprietary and third-party
mutual fund offerings, as well as fee-based advisory solutions. Net interest revenue is the difference between interest earned
on interest-earning assets and interest paid on funding sources, the majority of which is derived from client cash balances.
The Company generates trading revenue through commissions earned for executing trades for clients and principal
transaction revenue primarily from trading activity in client fixed income securities.
For revenue information by source for the three years ended December 31, 2014, see “Item 7 – Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Results of Operations – Net Revenues.”
Available Information
The Company files annual, quarterly, and current reports, proxy statements, and other information with the SEC. The
Company’s SEC filings are available to the public over the Internet on the SEC’s website at http://www.sec.gov. You may