Charles Schwab 2015 Annual Report Download - page 28

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THE CHARLES SCHWAB CORPORATION
- 8 -
Community Reinvestment Act
The Community Reinvestment Act of 1977 (CRA) requires Schwab Bank’s primary federal bank regulatory agency, the
OCC, to assess the bank’s record in meeting the credit needs of the communities served by the bank, including low- and
moderate-income neighborhoods and persons. Institutions are assigned one of four ratings: “Outstanding,” “Satisfactory,”
“Needs to Improve” or “Substantial Noncompliance.” This assessment is reviewed in connection with any acquisition,
merger or branch office application.
Source of Strength
The Dodd-Frank Act codified the Federal Reserve’s long-held position that a depository institution holding company must
serve as a source of financial strength for its subsidiary depository institutions, the so-called “source of strength doctrine.” In
effect, the holding company may be compelled to commit resources to support the subsidiary in the event the subsidiary is in
financial distress. It is anticipated that in 2016 the Federal Reserve will issue guidance as to how it will implement and apply
the doctrine in situations where a holding company’s depository institution subsidiaries are in a troubled condition.
Broker-Dealer and Investment Advisor Regulation
CSC’s principal broker-dealers are Schwab and optionsXpress, Inc. Schwab is registered as a broker-dealer with the United
States Securities and Exchange Commission (SEC), the fifty states, the District of Columbia and Puerto Rico. optionsXpress,
Inc. is registered as a broker-dealer with the SEC, the fifty states, the District of Columbia, Puerto Rico, and the Virgin
Islands. Schwab and CSIM are registered as investment advisors with the SEC. Additionally, Schwab and optionsXpress, Inc.
are regulated by the Commodities Futures Trading Commission (CFTC) with respect to the commodity 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 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. optionsXpress, Inc. is also a member of FINRA and the MSRB. In addition to the SEC, 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 principal purpose of regulating broker-dealers and investment advisors is the protection of clients and the securities
markets. The regulations 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. CSC itself is not a registered broker-dealer and 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 of certain debt
covenants under its credit agreement.
The Uniform Net Capital Rule prohibits a broker-dealer subsidiary from paying cash dividends, or making unsecured
advances or loans to its parent company or repaying subordinated loans to its parent company if such payment would result in
a net capital amount of less than 5% of aggregate debit balances or less than 120% of its minimum dollar requirement of
$250,000.
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 and Options
Clearing Corporation, which may fluctuate significantly from time to time based upon the nature and size of clients’ trading
activity and market volatility.