Charles Schwab

Mark Miller: 

We’re talking about doing Schwab today. You said that the financial securities terms of service is in a different ballgame than the other stuff that we’ve been talking about. What are you referring to? 

Joel MacMull: 

I think it’s very different because the securities industry is highly regulated. They have that overlay with respect to mandatory arbitration. Some of the service-oriented that we’ve been looking at with respect to other models, I’m not so convinced it’s apples to apples. And as you can imagine, you go through this document which is some 67 pages in length, and a lot of it speaks to what I’ve been talking about generally the kind of, security angle of this that I think puts us into a whole different milieu in terms of regulations. 

I’m not disputing that some of the language is oppressive, but I think it also comes from a very different place . 

Mark Miller: 

I’m not in disagreement with you. As I started looking at this, I started thinking, this is what I expected. This is a financial institution that has a whole different set of laws that have to be applied to what they’re doing. What impressed me though, as I was looking at this is it was relatively clear what I was looking at. There was a lot of it but it was relatively clear what I was looking at. 

Joel MacMull: 

And I think that’s important because this is really intended to be consumer friendly, because effectively I think it has to be. We have all these disclaimers, for example, about margin calls and short selling and all of that, because they need to make these disclosures. 

One of the provisions in here talks about investment advice. This appears at Subsection 28. And these are the kind of, consumer friendly disclosures I think they have to make. It says “You agree and acknowledge”, you being of course the account holder and these terms would apply upon creating a self-directed account under the Schwab brand. It says, “Unless we otherwise agree with you in writing, Schwab will act only as your broker dealer and not as an investment advisor. And your account will be a brokerage account and not an investment advisory account governed by the Investment Advisors Act of 1940.”

That’s important because what they’re saying is we’re not an investment advisor. You’re creating this account. It’s gonna be entirely self-directed. 

When Robinhood came out a couple of years ago, there was some buzz about it. I was admittedly one of the subscribers that thought that this was gonna really revolutionize the securities industry. It was a mobile app. It was very easy to use. It allowed people like myself who like to dabble in the market but don’t know much to execute trades. And I like the fact that it was a kind of a clean interface. 

 Before when I was growing up as a kid, and not that I knew a lot about the securities industry, but it was a black box. Only people in the know and with some degree of wealth traded and frankly, I didn’t know anything about it. I do like the concept of these self-directed accounts, which of course now are at least 30 years old. It’s the democratization of the investment industry generally. There’s a lot to be said for that. 

So I was one of those suckers that invested in Robinhood when it was an IPO. I still hang onto it, perhaps under the mistaken belief that it’s gonna bounce back. 

Getting back to this provision, though,  if they are an investment advisor, that’s a whole different can of beans right. Now they’re purposely advising you. That doesn’t mean that they advise you and if you take their advice and if things go south, you have a cause of action as a consumer. That provision among others jumped out at me because they’re trying to clearly delineate this is your bag, man. As opposed to somehow holding us responsible as being an advisor.

Mark Miller: 

Yeah, I got that too in several locations. There’s also some funny stuff in there that I literally laughed out loud when I read it. If you look at Section Number 5, Use of Account, it says, you may not use your account or any account related service to process gambling transactions. I’m thinking does that mean that if I go to the casino and I’ve got $50,000 in winnings, I can’t deposit it into my account at Schwab?

Joel MacMull: 

That has a very specific meaning in the minds of the drafters. I don’t know as someone on the outside what that’s intended to mean. Now, you may say, but Joel, isn’t this intended to be to any user? Yes. I have no idea what that means, and I appreciate it presents a problem.

I have to wonder though, whether this is what they’re getting at. I certainly don’t gamble a lot these days and I am certainly a neophyte when it comes to online gambling. But what I do know is that in some of these online gambling forums, you have to pledge. In other words, the way it works is you’ve gotta, I believe you have to make a deposit into your account to obviously wager the amounts that you wanna wager. 

 I suspect what the case is that securities laws preclude a security acting as essentially a guarantee in connection with a gambling. In other words, you can’t pledge a security is my guess. 

Mark Miller: 

It’s interesting because I assume that’s what they were saying, right? But that’s not what they said. There’s a difference there. 

Joel MacMull: 

I just don’t know enough about securities to know what that means, but the gambling thing is to process gambling transactions. That’s gotta be something specific that either is spoken to in the law or which they’ve gotten in trouble for before. Where someone I’m sure has used their securities account as a backstop to a wager. 

 Here’s the other reason, if you think about this logically. And again, I’m completely outta my depths and I may be 100% wrong on this, but one of the reasons why you probably can’t tie a security to a gambling debt is that gambling debt is fixed. I paid a hundred dollars, I lost, and now I owe, $200, whatever it is.

As you can imagine in the stock market, there’s never a fixed amount until the time that you sell the security. The value of that security is constantly fluctuating, which I suspect is one of the reasons why, either internally or from a regulatory perspective, you can’t pledge a security in connection with a gambling debt.

Mark Miller: 

Okay. I’ve got another one too that I laughed at because it’s like you can’t tell me what to do. Meaning in Section Number 4, it’s farther down. It’s a Subsection 4, it’s called Financial Market Information, No Warranty. 

It says that, you agree that neither Schwab or the information providers nor the information transmitters shall be liable. That kind of thing. And they said, we’re gonna put you, in front of information that was done by analysts.

 Here’s the key for me. Agreement Not to Contact Analysts. “You agree not to contact any individual or analyst who is an author of or who is named on any research project or any representative of any information or research provider.” 

How can you tell me not to call somebody? 

Joel MacMull: 

Let’s play a game. Now, why do you think that is?

Mark Miller: 

We can play a game. I don’t know, because I know that dealing with Gartner for two decades, I always have access to the analyst. I can call the analyst and talk to them about what he said in his report. 

Joel MacMull: 

Here’s why. You contact the analyst and the analyst turns around and gives you advice. This whole self-directed account now has now suddenly been transformed. You’ve made the analyst an investment advisor. 

Mark Miller: 

I can see that now that you said it. However, that still doesn’t make it legally for me to not be able to call the guy. 

Joel MacMull: 

It is if you wanna use their account. We talk about this almost every show. You can contract away your rights. They can’t preclude you from contacting the analyst. But what they can then do, should they discover it, and I’m sure they have their own internal protocols where the analyst is told on the other side, if anyone ever contacts you, you are to say nothing and immediately hang up and report them to us so that we can terminate their account.

 That provision, I guarantee you, is designed to protect Charles Schwab from a consumer action in which someone like you, or I said, I read the report. I contacted Joe Smith and I said, Joe, are you really sure that I should be investing in this South Korean steel operation at this point in time? You really think this is where it’s at? And Joe says, yes, man. Dump it all into Buson Steel. Okay? And I do that and it goes belly up. And now I turn around and I sue Charles Schwab and I sue the individual analyst. And I say, I read the report, I double checked with him. He said this was golden. It wouldn’t fail. And now all of a sudden, Charles Schwab is on the hook for damages. 

Mark Miller: 

Okay. As always, I don’t agree with it, but I understand it. 

 The reason I wanted to do this show is Schwab bought TD America a while back, and just this last month they started rolling all the accounts into Schwab. 

Joel MacMull: 

So first of all, TD Bank stands for Toronto Dominion. As a Canadian, it’s one of the five big banks in Canada and about 20 years ago they started their foray into the US market. They were ahead of other Canadian banks at the time, cuz you may remember at least 20 years ago, there was quite a disparity between the Canadian and the American dollar. The Canadian dollar was treading at roughly maybe 66 cents. That’s right. 

TD Bank came into the United States, acquired some of the smaller banks, and now had that influx of US cash, which on its Canadian books, really had a nice value of being a third more than its own domestic investments.

Where am I going with this? TD has in turn, in the United States, made such a presence that they’re one of the top, I wanna say 25 banks in this country. Do we know what the dollars were in connection with that purchase? $26 billion. 

Mark Miller: 

All stock. No cash. All stock. 

 What do you got in your notes.

Joel MacMull: 

If we look at paragraph 22, entitled Losses Due to Extraordinary Events, one of the things that jumped out at me here is it says we are not responsible and you agree not to hold us liable for losses caused directly or indirectly by conditions beyond our control, including but not limited to. Then it gives a laundry list: war, natural disasters, government restrictions, exchange or market rulings, strikes, interruptions of communications or data processing services, news or analyst reports, market volatility or disruptions and orderly trading on any exchange or market. 

Now what surprises me about that language is it’s very old. One of the things we’ve seen in these, what we call force majeure clauses, in which we’re assuming no liability, certainly post covid, we’re seeing pandemics. Or even epidemics be baked into this language in which you can’t ultimately hold me accountable. 

The other omission that I thought was interesting, which was a big deal after 9/11 I remember, was acts of terrorism. If you remember, the first thing I started with was war. But war usually, at least in the United States, of course, requires a formal declaration by Congress. So you know Charles Schwab, multi-billion dollar institution, people there that I’m sure that you know an entire legal team that’s ruminating over this.

And I say to myself, why on earth are pandemics and acts of terrorism not included in that exclusion language? I don’t have an answer. 

Mark Miller: 

No, I think that you did give the answer when you say it hasn’t been updated in quite a while. 

Joel MacMull: 

At least that provision hasn’t. And so to the extent that anyone at Charles Schwab is listening, that one’s on the house. Call me for your other external legal needs. I’ll be happy to help. 

Mark Miller: 

I want to remind people that you’re a lawyer, but you are not their lawyer. 

Joel MacMull: 

…at least not yet.

Mark Miller:

Thanks for joining us for this week’s “You’re kidding me… that’s in my EULA??” We’d appreciate your comments on today’s show page, located at WhatsInMyEULA.com. You’ll also find information on how to get in touch with Joel. While you’re on the page, tell us what other EULAs we should investigate. If we use your suggestion, we’ll give you a shoutout in that episode.

“That’s in my EULA??” is published weekly. Special thanks today to Katy, that’s with a ‘T”, Kadi, that’s with a “D”, Edwin, and Tracy for the awesome voiceover work at the beginning of the show. Music today is provided by Hash Out from Blue Dot Sessions. 

We’ll see you next week.

This was a Sourced Network Production.

If you’re interested in talking with Joel about some of the issues in this episode, shoot him an email.

Joel G. MacMull | Partner
Chair, Intellectual Property, Brand Management and Internet Law Practice
(973) 295-3652 | JMacmull@mblawfirm.com