RICK WURSTER:  Hi, I’m Rick Wurster, President of Charles Schwab. In my role, I talk to clients every day, and what I know from those conversations is that trust and transparency are paramount. One way to build that trust is to ensure clients know how their assets are protected here at Schwab, not just today, but every day. In that spirit, I’ve invited two experts at Schwab to have a conversation about asset protection. I’ve invited Demetra Sullivan, a leader with deep client experience across all wealth levels, and Nigel Murtaugh, our Chief Risk Officer. Demetra, take us away. What questions are most common from our clients about asset protection.

DEMETRA SULLIVAN:  Thank you, Rick, and thank you, Nigel, for joining me today. It’s great to have our chief risk officer here to have this conversation.

So in my role, I lead people who talk to clients every day, clients of all different ages, asset levels, investment styles, and one of the most common questions that comes up, especially in uncertain times, but even in more stable times, is how their assets are protected at Schwab. And so that’s what we’re going to talk about today.

So I’d like to start at one of the more foundational spaces, and that is that Schwab is both a bank and a broker-dealer. Can you explain at a high level for our clients what the difference is?

NIGEL MURTAUGH:  Sure, Demetra. Thanks for having me. At Schwab, it all starts with the brokerage business. That’s been our core business for over 50 years. That’s where we assist clients with their investments, their wealth management, and we custody their securities. More recently, we started Schwab Bank, managed very conservatively, to provide clients with access to checking accounts, debit accounts, and other ways that they can move their money. We also make a small number of loans out of Schwab bank.

DEMETRA:  Okay, that helps a lot. So since clients primarily come to Schwab to invest, and roughly 90% of the 7 trillion or so assets we have at Schwab is at the broker-dealer, let’s start there. How are client’s investments, so their mutual funds, ETFs, stocks, bonds, other securities, how are those protected at Schwab?

NIGEL:  Sure. The first thing for clients to remember is that their securities at Schwab are theirs. Their investments remain theirs. The SEC Security Protection Rule safeguards client assets at brokerage firms by preventing those firms from using customer assets to finance their proprietary business. At Schwab, client’s fully paid securities are segregated from the firm securities and they’re held at a third party depository institution, such as the Depository Trust Company and Bank of New York. There are reporting and auditing requirements to assure that brokerages comply with this rule to segregate client assets. In the very unlikely event that Schwab should become insolvent, those segregated assets are not available to general creditors. They’re protected from any other creditor claims. They remain the client’s assets.

DEMETRA:  Okay, that’s really reassuring. So clients have probably heard about S-I-P-C, or SIPC insurance. Can you explain what that is, and why is it even needed if the client’s assets are theirs?

NIGEL:  Sure. S-I-P-C, or SIPC, stands for the Securities Protection Corporation. And what it provides is protection for securities and cash in brokerage accounts, including those held by clients of our investment advisors at Schwab Advisor Services. And the SIPC protections are activated in the rare event that a broker-dealer fails and client assets are missing. In that situation, SIPC provides up to $500,000 worth of protection against any of those missing assets, including $250,000 in cash against uninvested cash balances.

DEMETRA:  Okay. So it’s great to know that that insurance coverage is there, but 500,000 doesn’t seem like that much. Can you talk a little bit more about that?

NIGEL:  Sure. The key point to remember here is that these assets are the client’s. They’re not commingled with Schwab’s assets on the broker-dealer. So they’re segregated for the benefit of clients. The insurance is just there in the unlikely event that there were some assets missing and the broker-dealer fails. In that situation, the account will receive a pro-rata share of all of the assets in the broker-dealer that have been segregated, and the $500,000 worth of SIPC insurance is there to cover any assets that might be missing.

DEMETRA:  Okay. So I know clients are going to ask this question. How well has SIPC, or S-I-P-C, protected investors in the past?

NIGEL:  Very well. So what SIPC reports to us is the vast majority of broker-dealer failures, even when they do occur, no assets are missing. So the fact that the assets are segregated for the benefit of clients, the clients get those assets back. Since SIPC’s inception 50 years ago, when there has been a liquidation in assets missing, clients have received 99% of their securities back from the failed broker-dealer.

DEMETRA:  That’s helpful. Thanks, Nigel. Let’s transition to the bank and specifically client cash held at Schwab Bank, because even though it is much smaller than our broker-dealer, our clients like to use us as a bank and use checking or savings, or even use us for their transactional needs in their brokerage account. So can you speak to the protection in place for client cash at Schwab Bank?

NIGEL:  Sure. The first thing to remember at Schwab Bank and for deposits is about FDIC insurance. That’s the Federal Deposit Insurance Corporation. It’s an independent agency backed by the US government, and its purpose is to provide protection against client deposits at a bank. The standard FDIC insurance provides up to $250,000 per depositor per insured bank based on an ownership category. So you could get insurance for an individual account and additional insurance for a joint account. The same applies to trust accounts. All of the deposits at Schwab Bank are protected by FDIC insurance. That includes all of our investor checking accounts and savings accounts and CDs.

DEMETRA:  Okay, that makes sense. What about balances over 250,000? How can clients feel reassured about those?

NIGEL:  This is one of the reasons it’s great to bank with Schwab Bank. You want to maintain your deposits at a bank that is conservatively managed and has sufficient liquidity to meet any client request for their deposits back. That’s the way Schwab has always managed this bank so that we have sufficient liquidity on hand in the event any of those clients wanted to have those deposits back.

DEMETRA:  Thank you, Nigel. This was very helpful.

So to summarize, it sounds like as it relates to the broker-dealer assets, clients should know that investments at Schwab are segregated at the broker-dealer. Those are separate and not comingled with assets at Schwab Bank. These segregated securities are protected against creditors’ claims. And as it relates to client cash at Schwab Bank, clients have FDIC insurance up to the limit and beyond that, Schwab has very safe and a liquid balance sheet. Thank you again, Nigel, for joining us today.

NIGEL:  Thank you, Demetra.



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