Charles Schwab 2014 Annual Report Download - page 30

THE CHARLES SCHWAB CORPORATION
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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 customer
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, actions by a suborned employee.
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 relies on outsourced service providers to perform key functions.
The Company relies on external service providers to perform certain key technology, processing, servicing, and support
functions. These service providers face technology, operating, business, and economic risks, and any significant failures by
them, including the improper use or disclosure of the Company’s confidential client, employee, or company information,
could cause the Company to incur losses and could harm the Company’s reputation. An interruption in or the cessation of
service by any external service provider as a result of systems failures, capacity constraints, financial difficulties or for any
other reason, and the Company’s inability to make alternative arrangements in a timely manner could disrupt the Company’s
operations, impact the Company’s ability to offer certain products and services, and result in financial losses to the Company.
Switching to an alternative service provider may require a transition period and result in less efficient operations.
Potential strategic transactions could have a negative impact on the Company’s financial position.
The Company evaluates potential strategic transactions, including business combinations, acquisitions, and dispositions. Any
such transaction could have a material impact on the Company’s financial position, results of operations, or cash flows. The
process of evaluating, negotiating, and effecting any such strategic transaction may divert management’s attention from other
business concerns, and might cause the loss of key clients, employees, and business partners. Moreover, integrating
businesses and systems may result in unforeseen expenditures as well as numerous risks and uncertainties, including the need
to integrate operational, financial, and management information systems and management controls, integrate relationships
with clients and business partners, and manage facilities and employees in different geographic areas. In addition, an
acquisition may cause the Company to assume liabilities or become subject to litigation or regulatory proceedings. Further,
the Company may not realize the anticipated benefits from an acquisition, and any future acquisition could be dilutive to the
Company’s current stockholders’ percentage ownership or to earnings per common share.
The Company’s acquisitions and dispositions are typically subject to closing conditions, including regulatory approvals and
the absence of material adverse changes in the business, operations or financial condition of the entity being acquired or sold.
To the extent the Company enters into an agreement to buy or sell an entity, there can be no guarantee that the transaction
will close when expected, or at all. If a material transaction does not close, the Company’s stock price could decline.