November 24, 2008 Re: Asset Security with Charles Schwab & Co. Inc. In light of ongoing turbulence in the financial markets and in response to questions and concerns you may have, your advisor asked us to provide the enclosed materials to you about the safety of your assets held with Charles Schwab & Co. Inc. ( Schwab ). The safety of customer assets is of paramount importance to us and we believe that our framework contains multiple safeguards to protect them. To help explain them to you, we are enclosing a copy of an update on Schwab s Financial Strength, a brochure called You, Your Advisor and Schwab Institutional, and a document highlighting some concepts regarding measures in place designed to protect client assets. We know that the safety of your assets is a primary concern, and the protection of your assets is of the utmost importance to us. Should you have further questions or if you would like more information, please contact your advisor. Thank you, Schwab Institutional 2008 Charles Schwab & Co., Inc. (Schwab). All rights reserved. Member SIPC. Schwab Institutional is a division of Schwab. (0908-1246) MKT 44619-01
Schwab s Financial Strength With more than 30 years of helping individuals reach their savings and investment goals, The Charles Schwab Corporation is one of the nation s leading providers of financial services. Through our operating subsidiaries, we provide securities brokerage, banking, money management and financial advisory services to individual investors, independent investment advisors and corporate and retirement plan sponsors and participants. The Charles Schwab Corporation is financially strong, and we are committed to our continued financial health. Our capital structure and liquidity are sound, and our internal controls and business standards are designed to keep client assets safe. We maintain a disciplined focus on risk management and operate the firm conservatively to minimize the kind of investment risks that have troubled many other securities firms. We know that our success ultimately depends on how we serve all our clients and their confidence in us. Key financial data as of September 30, 2008 for The Charles Schwab Corporation: More than $4 billion in equity capital 1 Approximately $650 million of freely available cash 2 Long-term debt-to-equity ratio of 22% 1 $1.3 trillion in client assets 3 $24 billion in net new assets over the prior three months 3 Strong credit ratings from Moody s (A2), S&P (A) and Fitch (A) 4 A diversified investment portfolio 5 The Corporation maintains an $800 million committed, unsecured credit facility. Additionally, the Corporation has direct access to $1.0 billion in uncommitted, unsecured bank credit lines. 6 A track record of strong financial performance. For example, the Corporation s income from continuing operations during the first nine months of 2008 was up 13% over the same period last year. 7 While The Charles Schwab Corporation is not subject to specific statutory capital requirements, it is required to maintain capital that is sufficient to support the holding company and its subsidiaries business activities. Charles Schwab Bank is subject to specific capital requirements specified by federal banking laws and regulations. Charles Schwab Bank is considered well capitalized (the highest category) with a Tier 1 Capital Ratio of 16.0%, Total Capital Ratio of 16.2%, and a Leverage Ratio of 6.4%. 8 1 Condensed Consolidated Balance Sheet, The Charles Schwab Corporation Quarterly Report on From 10-Q for the Period Ended September 30, 2008, at p.2. 2 Incorporated within "Cash and cash equivalents" in the Condensed Consolidated Balance Sheet, The Charles Schwab Corporation Quarterly Report on Form 10-Q for the Period Ended September 30, 2008, at p. 2. 3 The Charles Schwab Corporation Quarterly Report on Form 10-Q for the Period Ended September 30, 2008, at p.16. 4 Management's Discussion and Analysis of Financial Condition and Results of Operations, The Charles Schwab Corporation Quarterly Report on Form 10-Q for the Period Ended September 30, 2008, at p. 29. 5 The Charles Schwab Corporation Quarterly Report on Form 10-Q for the Period Ended September 30, 2008, at pp. 6-8. 6 The Charles Schwab Corporation Quarterly Report on Form 10-Q for the Period Ended September 30, 2008, at p. 30. 7 The Charles Schwab Corporation Quarterly Report on Form 10-Q for the Period Ended September 30, 2008, at p. 20. 8 Notes to Condensed Consolidated Financial Statements, The Charles Schwab Corporation Quarterly Report on Form 10-Q for the Period Ended September 30, 2008, at p. 12.
For Charles Schwab & Co., Inc. (the brokerage subsidiary of The Charles Schwab Corporation): Net capital of $1.1 billion ($882 million in excess of the regulatory minimum) 9 For Charles Schwab Bank (the banking subsidiary of The Charles Schwab Corporation): $23.7 billion in assets and $5.3 billion in outstanding mortgage and home equity lines of credit (HELOCs). 10 Strong credit quality of the Bank s portfolio of mortgages and HELOCs, with credit scores and loan-to-value ratios significantly better than industry averages, reflecting our solid underwriting discipline. 11 Payment delinquencies representing a very small fraction of outstanding loan balances (less than one-half of 1 percent) 12, substantially less than the national average delinquency rate of over 6.4%. 13 High-quality investment portfolio, including U.S. agency and non-agency mortgagebacked securities, corporate debt securities, asset-backed securities, and long-term certificates of deposit. No subprime securities or collateralized debt obligations (CDOs). Our Commitment to Our Clients Recent developments in the market point out the importance of choosing wisely among financial services firms. That s just one of the reasons our clients should continue to feel good about doing business with Schwab. We are highly focused on maintaining our financial health. We deeply appreciate and value the trust our clients have placed in us and look forward to continuing to help them achieve their financial goals. Financial results and more information about The Charles Schwab Corporation s business and financial condition can be viewed at any time at www.aboutschwab.com. 9 Management's Discussion and Analysis of Financial Condition and Results of Operations, The Charles Schwab Corporation Quarterly Report on Form 10-Q for the Period Ended September 30, 2008, at p. 31. 10 Quarterly earnings press release for the period ended September 30, 2008, p. 2. 11 First American CoreLogic, LoanPerformance data as of September 2008. 12 Management's Discussion and Analysis of Financial Condition and Results of Operations, The Charles Schwab Corporation Quarterly Report on Form 10-Q for the Period Ended September 30, 2008, at p. 33. 12 Mortgage Banker's Association National Deliquency Survey, 2008 Second Quarter. Charles Schwab & Co., Inc. and Charles Schwab Bank are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation. Brokerage products offered by Charles Schwab & Co., Inc., Member SIPC, are not insured by the FDIC, are not deposits or obligations of Charles Schwab Bank, and are subject to investment risk, including the possible loss of principal invested. Deposit and lending products and services are offered by Charles Schwab Bank, Member FDIC and an Equal Housing Lender. 2008 Charles Schwab & Co., All rights reserved. Member SIPC. SCH 06076 (1108-6707) TEM44607 MKT44661-01 (11/08)
November 24, 2008 Asset Security with Charles Schwab & Co., Inc. As a registered broker-dealer, Schwab is subject to the rules and regulations of the Securities and Exchange Commission ( SEC ), and those of other regulatory entities. The basic financial responsibility rules for brokerdealers are found in the SEC s net capital rule. These SEC regulations are designed to help ensure the financial strength and liquidity of broker-dealers and that sufficient reserves are accessible to broker-dealers as needed. Schwab maintains liquid capital well in excess of the required minimum to support client-related and/or firm-related activities. As disclosed in the Charles Schwab Corporation s latest Form 10-Q filed with the SEC, as of September 30, 2008, Schwab s net capital was $1.1 billion, which was $882 million in excess of the minimum required net capital. Complete financial results and more information about Schwab s business and financial condition can be viewed at www.aboutschwab.com. Schwab is also subject to SEC Rule 15c3-3 (the Customer Protection Rule ). The Customer Protection Rule is in part designed to safeguard customers cash and securities and to facilitate liquidations of insolvent brokerdealers. Pursuant to the Customer Protection Rule, Schwab holds all clients securities that are fully paid for, as well as any excess margin securities, under the company s control. Fully paid securities generally include those securities deposited by a customer with a broker-dealer for safekeeping, securities purchased by a customer and left with the broker-dealer in street name, or securities purchased by a customer but which have not yet been delivered. Excess margin securities are those securities carried for a customer account whose market value exceeds 140% of the amount owed by the customer to the broker-dealer by virtue of a margin account. In accord with the Customer Protection Rule, Schwab compares the amounts held for customers or owed to customers (credits) with the amounts owed by customers to Schwab (debits). Pursuant to the Rule, the excess credits are deposited into a special reserve account kept for the benefit of Schwab customers. This reserve account is separate from all other firm accounts and maintained free of any direct or indirect lien of the brokerdealer. An additional protection is afforded by the Securities Investor Protection Corporation ( SIPC ), of which Schwab is a member. SIPC protects the securities of its members customers up to $500,000 (including $100,000 for claims for cash). However, SIPC protection does not cover fluctuations in the market value of securities. Account protection is also not provided for the accounts of banks or broker-dealers maintained from their own account. An explanatory brochure is available upon request from SIPC or may be found at www.sipc.org. To the extent that SIPC cannot make customers whole, Schwab has an Excess SIPC policy through Lloyd s of London (discussed below), which will then provide excess coverage. In the unlikely event that SIPC protections are needed, we believe you can derive confidence from SIPC s track record, given the very high percentage of client assets that are recovered during liquidation. SIPC estimates that no fewer than 99 percent of persons who are eligible have been made whole in the failed brokerage firm cases that it has handled from its creation in 1970 through December, 2006. (For more information about SIPC s track record, please visit http://www.sipc.org/who/sipctrackrecord.cfm). However, please note that SIPC s account protection does not cover fluctuations in the market value of clients securities. Another safeguard for the security of client assets consists of additional excess SIPC protection is provided through Schwab s policy with underwriters at Lloyd s of London. Under the policy Schwab has with Lloyd s, excess SIPC protection for Schwab clients is provided to an aggregate of $600 million of securities and cash for all clients. The combined return to any client from a trustee, SIPC and Lloyd s is $150 million, including cash of up to $1 million. This additional protection becomes available in the event that SIPC limits are exhausted. 2008 Charles Schwab & Co., Inc. (Schwab). All rights reserved. Member SIPC. Schwab Institutional is a division of Schwab. (0908-1246) MKT44620-01
If your assets were held in custody by Schwab, eligible cash and securities (such as stocks and bonds) held by you in those accounts would be protected by SIPC, as described above. Some investments are ineligible for SIPC protection, such as commodity futures and currency, as well as investment contracts (such as limited partnerships) that are not registered with the Securities and Exchange Commission under the Securities Act of 1933. More information is available from SIPC, at www.sipc.org. Schwab s policy with Lloyd s of London would provide additional protection for assets in custody with Schwab. 2008 Charles Schwab & Co., Inc. (Schwab). All rights reserved. Member SIPC. Schwab Institutional is a division of Schwab. (0908-1246) MKT44620-01
A Winning Relationship: You, Your Advisor and Schwab Institutional
When the expertise of your advisor is combined with When the expertise of your advisor custody at Schwab, we share a common objective: is combined with custody at Schwab, to protect and grow your assets we share a common objective: to protect and grow your assets IN THIS GUIDE: Working together for you... 2 Full range of investment strategies and trading services... 4 Wealth management services... 5 Safeguards designed to protect your assets... 6 Schwab s internal standards... 7 Technology and service support for your advisor... 8
With the variety of investment alternatives available today, choosing to work with an independent investment advisor can provide the financial expertise, portfolio guidance and personalized relationship that many affluent investors seek. Selecting the right brokerage firm is an equally important decision. When you and your advisor place assets at Schwab, you ve chosen a custodian with experience in catering to the unique needs of independent advisors and their affluent clients. We focus on developing innovative products and services specifically designed to support the financial planning and portfolio management services advisors provide to affluent investors. Furthermore, we understand that you and your advisor need to feel confident in Schwab as the custodian of your assets. Therefore, Schwab is committed to meeting our industry s rigorous regulations and upholding our own stringent business standards to position our company for longterm financial health and stability. When the expertise of your advisor is combined with custody at Schwab, we share a common objective: to protect and grow your assets. 1
Working together for you When you and your advisor choose Schwab Institutional as a custodian, your advisor has access to comprehensive services from one of the most experienced firms in the business. Schwab was a pioneer in the business of exclusively serving independent, fee-based investment advisors and their clients. More than 5,500 advisors currently look to Schwab as the institution of choice for their affluent clients. More than 1,800 employees are dedicated to providing responsive custody, trading and operational support that can help your investment advisor deliver timely, quality service to you. More than 1.7 million client accounts are custodied at Schwab, representing over $570 billion in assets managed by investment advisors. With this depth of experience and resources, we are able to provide a wide range of products and services to help you and your advisor work toward your financial goals. 2 Statistics as of 06/30/2008
We begin each day with one goal: to help your investment advisor serve you better 3
Full range of investment strategies and trading services Your advisor can leverage Schwab Institutional s depth of investment products, experienced traders and the flexibility to access investment alternatives throughout the financial community to make appropriate choices for your unique investment situation. Because we focus on service, not sales, the trades your advisor places on your behalf are handled by an institutional trading team whose priorities are to represent your best interests and deliver quality execution. Equities Schwab Institutional equity specialists have access to all major national and regional exchanges. If your advisor trades listed or over-the-counter stocks, large orders or thinly traded issues, Schwab specialists are available to help with the order, striving to obtain the best price. Fixed income If your advisor recommends government, corporate or municipal bonds, a Schwab fixed income specialist works to locate the most favorable combination of rates and maturities. Mutual funds If your portfolio includes mutual funds, your advisor can work with Schwab Institutional s mutual fund trading desk, eliminating the need to contact each fund family separately. Schwab s Mutual Fund Marketplace offers: 1 One-stop access to nearly 14,000 mutual funds. More than 500 well-known fund families. More than 6,500 funds available exclusively to investment advisors. Institutional Share Classes with lower operating expenses than retail equivalents. Flexibility and convenience To help you take advantage of resources throughout the investment community, your investment advisor can place trades with other brokerage firms through Schwab s Prime Brokerage and Trade Away services. With these trading and investment advantages, you can experience the convenience of a single custodian, Schwab, rather than establishing multiple accounts at a number of brokerage firms. 1 Investors should carefully consider information contained in the prospectus, including investment objectives, risks, charges and expenses. You can request a prospectus by calling 800-435-4000. Please read the prospectus carefully before investing. Statistics as of 06/30/2008. 4 Charles Schwab & Co., Inc., member SIPC, receives remuneration from fund companies participating in the Mutual Fund OneSource service for recordkeeping and shareholder services and other administrative services. Schwab also may receive remuneration from transaction fee fund companies for certain administrative services.
Wealth management services If you are seeking additional investment solutions to address your complex financial situation, your advisor can help by selecting from our array of wealth management services. Managed account services, helping you and your advisor to leverage the expertise of institutional-caliber money managers who specialize in particular investment styles. Tax-advantaged college savings and charitable giving plans. Tax-deferred earning opportunities through variable annuities. 2 Individualized hedging strategies for concentrated equity holdings. Restricted stock transfer and filing services. Custody services and assistance with purchases of alternative investments. A complete portfolio picture To help you quickly and easily review your portfolio s progress, we consolidate your account transactions into a periodic statement that shows both an overall summary and line-by-line detail at the transaction level. 2 A variable annuity s value will fluctuate depending on the underlying investment. An investor s units, when redeemed, may be worth more or less than the original amount invested. Variable annuities are registered securities that are sold by prospectus only and available by contacting your investment advisor. The prospectus contains details on subaccounts, contract features, fees, expenses and other pertinent information. Please read the prospectus carefully before investing. Withdrawals of taxable amounts will be subject to income tax and if taken prior to age 59 1/2, a 10% penalty may apply. 5
Safeguards designed to protect your assets Schwab believes that asset security measures, those required by our industry s regulators and the additional levels we elect to offer, can provide the protection investors seek when choosing a custodian. Compliance with governmental mandates As a registered broker/dealer, Schwab is subject to the rules and regulations of the Securities and Exchange Commission, the Financial Industry Regulatory Authority, the Municipal Securities Rulemaking Board and all other exchanges of which Schwab is a member. These regulatory entities have established financial responsibility rules designed to help safeguard client assets. Accurate company financial reports SEC Rule 17a-5 requires all registered broker/dealers to routinely file periodic reports regulatory and surveillance information providing accurate detail of their current financial and operational condition. Schwab files these reports both monthly and quarterly for full disclosure of the state of our company. Charles Schwab & Co., Inc., SIPC Coverage Protection for securities and cash by the Securities Investor Protection Corporation (SIPC): Accounts of Charles Schwab & Co., Inc. (including those held by clients of investment advisors with Schwab Institutional), are insured by SIPC for securities and cash in the event of broker-dealer failure. SIPC provides up to $500,000 of protection for accounts that clients of advisors hold in each separate capacity (e.g., joint tenant or sole owner), with a limit of $100,000 for claims of uninvested cash balances. More information about SIPC coverage is available at www.sipc.org. Additional Insurance Coverage Additional brokerage insurance is provided to Charles Schwab & Co., Inc., accounts through underwriters at Lloyd s of London. Schwab s coverage with Lloyd s provides protection of securities and cash up to an aggregate of $600 million, and is limited to a combined return to any customer from a Trustee, SIPC and Lloyd s of $150 million, including cash of up to $1 million. This additional protection becomes available in the event that SIPC limits are exhausted. 6 Note: SIPC and excess SIPC protection do not cover fluctuations in the market value of securities, and are not extended to accounts held by banks or broker-dealers maintained from their own account.
Schwab s internal standards We understand that investors want to feel confident that their assets have been placed with a company that is financially healthy. To that end, we set aggressive business standards designed to position our company for long-term health and stability. Strict business practices We strive to remain our investors strongest financial resource through business practices that place an emphasis on: Prudent expense management We keep a close eye on operational expenses to prudently manage our company. In a difficult market environment, we adjust expenses where necessary on a quarterby-quarter basis. Diversified revenue mix By increasing our reliance on fee-related services and balance-related incomes, rather than trading commissions, we strive to increase the stability of our revenues during fluctuating market conditions. Schwab s commitment to privacy Our most important asset is our relationship with you and your advisor. Recognizing that, Schwab has a privacy policy that applies to consumers who are current or former Schwab brokerage clients. Our privacy policy assures that your personal information is never sold and is only shared with third parties in the very limited circumstances allowed or required by law. Details of our approach to privacy and how personal information is collected and used are explained in the Schwab Privacy Policy. 7
Technology and service support for your advisor Our industry-leading technology and service has been designed to help your advisor cater to your investing needs. Industry-leading technology Our sophisticated technology helps your advisor stay connected to quotes, commentary, account and position data, and trading capabilities, helping them quickly access your portfolio and make informed decisions. Dedicated support teams Our network of service teams are dedicated to supporting every aspect of the investment management services your advisor provides to you. Trading and operations experts, technology consultants and account managers provide trading assistance, account management and strategic information to keep your advisor up-to-date on how to maximize Schwab Institutional services for your benefit. We re here to serve you Whether you prefer to do business in person, on the phone or online, Schwab provides resources to support you and your investment advisor. Ask your advisor about other services and benefits available to you as a client of Schwab Institutional. Together with your advisor, we are committed to your financial success. 8
Together with your advisor, we are committed to your financial success
Printed on 30% post-consumer recycled paper. Schwab is committed to making responsible choices for our environment. 2008 Charles Schwab & Co., Inc. ( Schwab ). Member SIPC. All rights reserved. Schwab Institutional is a division of Schwab. TWI3614 (0908-1078) MKT10401-24 (09/08)