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(Exact name of registrant as specified in its charter)
iDelaware
i20-3717839
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i4707 Executive Drive,
iSan
Diego,
iCalifornia
i92121
(Address of Principal Executive
Offices) (Zip Code)
i(800)
i877-7210
(Registrant’s telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock - par value $0.001 per share
iLPLA
iThe
Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. xiYeso
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). xiYeso No
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
Accelerated Filer
x
Accelerated Filer
☐
Non-accelerated Filer
☐
Smaller Reporting Company
i☐
Emerging Growth Company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
i☐
Yes x No
The number of shares of Common Stock, par value $0.001 per share, outstanding as of April 27, 2021 was i79,943,183.
We file annual, quarterly and current reports, proxy statements and other information required by the Securities Exchange Act of 1934, as amended (“Exchange Act”), with the Securities and Exchange Commission (“SEC”). Our SEC filings are available to the public from the SEC’s internet site at SEC.gov.
We post the following filings to LPL.com as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: our annual reports on Form 10-K, our proxy statements, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. Copies of all such filings are available free of charge by request via email (investor.relations@lpl.com), telephone
((617) 897-4574) or mail (LPL Financial Investor Relations at 75 State Street, 22nd Floor, Boston, MA02109). The information contained or incorporated on our website is not a part of this Quarterly Report on Form 10-Q.
We may use our website as a means of disclosing material information and for complying with our disclosure obligations
under Regulation Fair Disclosure promulgated by the SEC. These disclosures are included on our website in the “Investor Relations” or “Press Releases” sections. Accordingly, investors should monitor these portions of our website, in addition to following the Company’s press releases, SEC filings, public conference calls and webcasts.
When we use the terms “LPLFH”, “LPL”, “we”, “us”,
“our” and “the Company”, we mean LPLFinancial Holdings Inc., a Delaware corporation, and its consolidated subsidiaries,taken as a whole, unless the context otherwiseindicates.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements in Part I, “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of this Quarterly Report on Form 10-Q regarding:
•the
Company’s future financial and operating results, outlook, growth, plans, business strategies, liquidity and future share repurchases, including statements regarding future resolution of regulatory matters, legal proceedings and related costs;
•projected savings and anticipated improvements to the Company’s operating model, services and technologies as a result of its investments, initiatives, programs
and acquisitions;
•expected impacts of the coronavirus disease 2019 (“COVID-19”) pandemic on the Company’s businesses; and
•any other statements that are not related to present facts or current conditions or that are not purely historical, constitute forward-looking statements.
These forward-looking statements are based on the Company’s historical performance and its plans, estimates and expectations as of May 4, 2021. The words “anticipates,”“believes,”“expects,”“may,”“plans,”“predicts,”“will”
and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Forward-looking statements are not guarantees that the future results, plans, intentions or expectations expressed or implied by the Company will be achieved. Matters subject to forward-looking statements involve known and unknown risks and uncertainties, including economic, legislative, regulatory, competitive and other factors, which may cause actual financial or operating results, levels of activity or the timing of events to be materially different than those expressed or implied by forward-looking statements. Important factors that could cause or contribute to such differences include:
•changes in general economic and financial
market conditions, including retail investor sentiment;
•changes in interest rates and fees payable by banks participating in the Company’s client cash programs, including the Company’s success in negotiating agreements with current or additional counterparties;
•the Company’s strategy and success in managing client cash program fees;
•fluctuations in the levels of advisory and brokerage assets, including net new assets, and the related impact on revenues;
•effects
of competition in the financial services industry;
•the success of the Company in attracting and retaining financial advisors and institutions, and their ability to market effectively financial products and services;
•whether retail investors served by newly-recruited advisors choose to move their respective assets to new accounts
at the Company;
•changes in growth and profitability of the Company’s fee-based business, including the Company’s centrally managed advisory platform;
•the effect of current, pending and future legislation, regulation and regulatory actions, including disciplinary actions imposed by federal and state regulators and self-regulatory organizations;
•the cost of settling and remediating issues related to regulatory matters or legal proceedings, including actual costs of reimbursing customers for losses in excess
of our reserves;
•changes made to the Company’s services and pricing, including in response to competitive developments and current, pending and future legislation, regulation and regulatory actions, and the effect that such changes may have on the Company’s gross profit streams and costs;
•execution of the Company’s capital management plans, including its compliance with the terms of its credit agreement and the indentures governing its senior notes;
•the
price, the availability and trading volumes of shares of the Company’s common stock, which will affect the timing and size of future share repurchases by the Company, if any;
•execution of the Company’s plans and its success in realizing the synergies, expense savings, service improvements or efficiencies expected to result from its investments, initiatives and acquisitions, including its acquisition involving the wealth management business of Waddell & Reed Financial, Inc., expense plans and technology initiatives;
•the performance of third-party service providers to which
business processes have been transitioned;
•the Company’s ability to control operating risks, information technology systems risks, cybersecurity risks and sourcing risks;
•the effects of the COVID-19 pandemic, including efforts to contain it; and
•the other factors set forth in Part I, “Item 1A. Risk Factors” in the Company’s 2020 Annual Report on Form 10-K, as may be amended or updated in the Company’s Quarterly Reports on Form 10-Q.
Except
as required by law, the Company specifically disclaims any obligation to update any forward-looking statements as a result of developments occurring after the date of this Quarterly Report on Form 10-Q, even if its estimates change, and you should not rely on statements contained herein as representing the Company’s views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.
Item 2.Management’s Discussion and Analysis of Financial Condition andResults of Operations
Business Overview
LPL is a leader in the markets we serve, supporting more than 17,000 financial advisors nationwide. We are steadfast in our commitment to the advisor-centered model and the belief that Americans deserve access to objective guidance from a financial advisor. At LPL, independence means that advisors have the freedom they deserve to choose
the business model, services, and technology resources that allow them to run their perfect practice. And they have the freedom to manage their client relationships, because they know their clients best. Our mission is to take care of our advisors, so they can take care of their clients.
We do that through a singular focus on providing our advisors with the front-, middle- and back-office support they need to serve the large and growing market for comprehensive financial advice from an advisor. We believe that we are the only company that offers advisors the unique combination of an integrated technology platform, comprehensive self-clearing services and open architecture access to a wide range of non-proprietary products, all delivered in an environment unencumbered by conflicts from product manufacturing, underwriting and market-making.
We
believe investors achieve better outcomes when working with a financial advisor. We strive to make it easy for advisors to do what is best for their clients, while protecting advisors and investors and promoting freedom and choice through access to a wide range of diligently evaluated non-proprietary products.
Executive Summary
Financial Highlights
Results for the first quarter of 2021 included net income of $129.6 million, or $1.59 per share, which compares to $155.6 million, or $1.92 per share, for the first quarter of 2020.
Asset Growth Trends
Total
advisory and brokerage assets were $958.3 billion as of March 31, 2021, up 43% from $669.9 billion as of March 31, 2020. Total net new assets were $28.9 billion for the three months ended March 31, 2021, compared to $14.3 billion for the same period in 2020.
Net new advisory assets were $22.7 billion for the three months ended March 31, 2021, compared to $13.2 billion for the same period in 2020. As of March 31, 2021, our advisory assets were $496.7 billion,
up from $322.3 billion as of March 31, 2020, an increase of 54%, and represented 52% of total advisory and brokerage assets served.
Net new brokerage assets were $6.2 billion for the three months ended March 31, 2021, compared to $1.2 billion for the same period in 2020. As of March 31, 2021, our brokerage assets were $461.6 billion, up from $347.6 billion as of March 31, 2020, an increase of 33%.
Gross Profit Trends
Gross profit,
a non-GAAP financial measure, of $579.4 million for the three months ended March 31, 2021, increased 1% from $575.6 million for the three months ended March 31, 2020. Gross profit is calculated as total revenues, less commission and advisory expenses and brokerage, clearing and exchange fees. Management presents gross profit because we believe that measure may provide useful insight to investors in evaluating the Company’s core operating performance before indirect costs that are general and administrative in nature. See footnote 9 to the Financial Metrics table within the “How We Evaluate Our Business” section for additional information on gross profit.
Shareholder
Capital Returns
We returned $20.0 million of capital, in the form of dividends, to shareholders during the three months ended March 31, 2021.
In response to the COVID-19 pandemic, we have taken measures to protect the health and safety of our employees, as well
as the stability and continuity of our operations. For example, we have equipped and enabled a substantial majority of employees to work remotely, implemented physical distancing and enhanced cleaning protocols throughout our corporate offices, and have worked closely with our vendors to maintain service continuity throughout the increased market volatility and operational volumes that occurred during the year. We also made extra support available to our advisors by extending service hours and providing additional resources to enable them to deliver differentiated services to their clients. Please consult Part I, “Item 1A. Risk Factors” in our 2020 Annual Report on Form 10-K for more information about the risks associated with COVID-19.
Our Sources of Revenue
Our
revenues are derived primarily from fees and commissions from products and advisory services offered by our advisors to their clients, a substantial portion of which we pay out to our advisors, as well as fees we receive from our advisors for the use of our technology, custody, clearing, trust and reporting platforms. We also generate asset-based revenues through our bank sweep vehicles and money market programs and the access we provide to a variety of product providers with the following product lines:
• Alternative Investments
• Retirement Plan Products
•
Annuities
• Separately Managed Accounts
• Exchange Traded Products
• Structured Products
• Insurance Based Products
• Unit Investment Trusts
• Mutual Funds
Under our self-clearing platform, we custody the majority of client assets invested in these financial products,
for which we provide statements, transaction processing and ongoing account management. In return for these services, mutual funds, insurance companies, banks and other financial product sponsors pay us fees based on asset levels or number of accounts managed. We also earn interest from margin loans made to our advisors’ clients.
We regularly review various aspects of our operations and service offerings, including our policies, procedures and platforms, in response to marketplace developments. We seek to continuously improve and enhance aspects of our operations and service offerings in order to position our advisors for long-term growth and to align with competitive and regulatory developments. For example, we regularly review the structure and fees of our products and services, including related disclosures, in the context of the changing regulatory environment and competitive landscape for advisory and brokerage accounts.
We focus on several key metrics in evaluating the success of our business relationships and our resulting financial position and operating performance. In April 2020, we updated our definition of net new assets to make our figures more comparable with other companies. Our updated definition now includes dividends and interest, and subtracts advisory fees. All net new asset figures below align with our new definition. Our key operating, business and financial metrics are as follows:
As
of and for the Three Months Ended March 31,
Operating Metrics (dollars in billions)(1)
2021
2020
Advisory and Brokerage Assets
Advisory assets(2)(3)
$
496.7
$
322.3
Brokerage
assets(2)(4)
461.6
347.6
Total Advisory and Brokerage Assets(2)
$
958.3
$
669.9
Advisory Assets % of Total Advisory and Brokerage Assets
51.8
%
48.1
%
Net
New Assets
Net new advisory assets(5)
$
22.7
$
13.2
Net new brokerage assets(6)
6.2
1.2
Total
Net New Assets(7)
$
28.9
$
14.3
Total
Net New Assets Annualized Growth Rate(8)
12.8
%
7.5%
Client Cash Balances(2)
Insured cash account balances
$
37.4
$
34.5
Deposit
cash account balances
7.9
8.7
Total Bank Sweep Balances
45.3
43.2
Money market account balances
1.3
1.8
Purchased
money market fund balances
1.6
2.8
Total Client Cash Balances
$
48.3
$
47.8
Net
Buy (Sell) Activity(9)
$
17.4
$
0.2
As
of and for the Three Months Ended March 31,
Business and Financial Metrics (dollars in millions, except per share data)
EPS prior to amortization of intangible assets and acquisition costs(13)
$
1.77
$
2.06
Gross
Profit(14)
$
579.4
$
575.6
EBITDA(15)
$
267.5
$
280.2
EBITDA
as a % of Gross Profit
46.2
%
48.7
%
Core G&A(16)
$
236.3
$
223.2
_______________________________
(1)Totals
may not foot due to rounding.
(2)Advisory and brokerage assets consists of assets that are custodied, networked and non-networked and reflect market movement in addition to new assets, inclusive of new business development and net of attrition. Insured cash account balances, deposit cash account balances, money market account balances and purchased money market fund balances are also included in total advisory and brokerage assets.
(3)Advisory assets consists of total advisory assets under custody at our broker-dealer subsidiary, LPL Financial LLC (“LPL Financial”). Please consult the “Results of Operations” section for a tabular presentation of advisory assets.
(4)Brokerage assets consists of brokerage
assets serviced by advisors licensed with LPL Financial.
(5)Net new advisory assets consists of total client deposits into custodied advisory accounts less total client withdrawals from custodied advisory accounts, plus dividends, plus interest, minus advisory fees. We consider conversions from and to brokerage accounts as deposits and withdrawals, respectively. Figures for net new advisory assets reported prior to April 2020 did not include dividends and interest or subtract advisory fees. The figure previously reported for the three months ended March 31, 2020 was an inflow of $12.5 billion.
(6)Net new brokerage assets consists of total client deposits into brokerage accounts less total client withdrawals from brokerage accounts, plus dividends, plus interest. We consider conversions
from and to advisory accounts as deposits and withdrawals, respectively. Figures for net new brokerage assets reported prior to April 2020 did not include dividends and interest. The figure previously reported for the three months ended March 31, 2020 was $0.0 billion.
(7)Includes $11.8 billion of assets that transitioned onto our platform from BMO Harris, during the three months ended March 31, 2021.
(8)Calculated as annualized current period net new assets divided by preceding period total advisory and brokerage assets.
(9)Represents the amount of securities purchased less the amount of securities sold in client accounts custodied with LPL Financial. Reported activity
does not include any other cash activity, such as deposits, withdrawals, dividends received or fees paid.
(10)Calculated based on the end-of-period total advisory and brokerage assets divided by the end-of-period advisor count.
(11)Percentage of capital returned to shareholders is calculated as dividends plus share repurchases, divided by net income plus amortization of intangible assets, net of tax.
(12)A financial covenant from our credit agreement calculated as consolidated total debt to consolidated EBITDA. Please consult the “Debt and Related Covenants” section for more information.
(13)EPS prior to amortization of intangible assets and acquisition costs is a non-GAAP financial measure defined as GAAP EPS plus the per share impact of amortization of intangible assets and acquisition costs. The per share impact is calculated as amortization of intangible assets expense and acquisition costs, net of applicable tax benefit, divided by the number of shares outstanding for the applicable period. Acquisition costs are the one-time costs to setup, onboard and integrate acquired entities. The Company presents EPS prior to amortization of intangible assets and acquisition costs because management
believes that the metric can assist investors in comparing our performance to that of other companies on a consistent basis without regard to certain items which do not directly affect our ongoing operating performance. EPS prior to amortization of intangible assets and acquisition costs is not a measure of the Company's financial performance under GAAP and should not be considered as an alternative to GAAP EPS or any other performance measure derived in accordance with GAAP. Below is a reconciliation of EPS prior to amortization of intangible assets and acquisition costs to the Company’s GAAP EPS for the periods presented:
Three
Months Ended March 31,
EPS Reconciliation (in millions, except per share data)
2021
2020
GAAP EPS
$
1.59
$
1.92
Amortization of
intangible assets
$
17.4
$
16.6
Acquisition costs
$
2.4
$
—
Tax benefit
$
(5.3)
$
(4.6)
Amortization
of intangible assets and acquisition costs, net of tax benefit
$
14.5
$
11.9
Diluted share count
81.6
81.2
EPS impact
$
0.18
$
0.15
EPS
prior to amortization of intangible assets and acquisition costs
$
1.77
$
2.06
(14)Set forth below is a calculation of gross profit, calculated as total revenues less advisory and commission expenses and brokerage, clearing and exchange fees. All other expense categories, including depreciation and amortization of fixed assets and amortization of intangible assets, are considered by management to be general and administrative in nature. Because our gross profit
amounts do not include any depreciation and amortization expense, we consider our gross profit amounts to be non-GAAP financial measures that may not be comparable to those of others in our industry. We believe that gross profit amounts can provide investors with useful insight into our core operating performance before indirect costs that are general and administrative in nature.
Three Months Ended March 31,
Gross
Profit (in millions)
2021
2020
Total revenues
$
1,707.6
$
1,463.4
Advisory and commission expense
1,108.9
870.8
Brokerage,
clearing and exchange fees
19.4
17.0
Gross profit(†)
$
579.4
$
575.6
_______________________________
(†) Totals
may not foot due to rounding.
(15)EBITDA is a non-GAAP financial measure defined as net income plus interest and other expense, income tax expense, depreciation and amortization, and amortization of intangible assets. The Company presents EBITDA because management believes that it can be a useful financial metric in understanding the Company’s earnings from operations. EBITDA is not a measure of the Company’s financial performance under GAAP and should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flows from operating activities as a measure of profitability
or liquidity. In addition, the Company’s EBITDA can differ significantly from EBITDA calculated by other companies, depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. Below is a reconciliation of EBITDA to net income for the periods presented:
(16)Core G&A is a non-GAAP financial measure. Core G&A consists of total operating expenses, excluding the following expenses: advisory and commission, regulatory charges, promotional, employee share-based compensation, depreciation and amortization, amortization of intangible assets, and brokerage, clearing and exchange. Management presents Core G&A because it believes Core G&A reflects the corporate operating expense categories over which management can generally exercise a measure of control, compared with expense items over which management either cannot exercise control, such as advisory and commission expenses, or which management views as promotional expense necessary to support advisor growth and retention, including
conferences and transition assistance. Core G&A is not a measure of the Company’s total operating expenses as calculated in accordance with GAAP. Below is a reconciliation of Core G&A against the Company’s total operating expenses for the periods presented:
Three Months Ended March 31,
Operating
Expense Reconciliation (in millions)
2021
2020
Core G&A
$
236.3
$
223.2
Regulatory charges
7.6
6.2
Promotional
54.2
57.4
Acquisition
costs
2.4
—
Employee share-based compensation
11.4
8.6
Total G&A
311.8
295.4
Advisory
and commission
1,108.9
870.8
Depreciation and amortization
35.5
26.6
Amortization of intangible assets
17.4
16.6
Brokerage,
clearing and exchange
19.4
17.0
Total operating expenses
$
1,493.0
$
1,226.4
Legal
and Regulatory Matters
As a regulated entity, we are subject to regulatory oversight and inquiries related to, among other items, our compliance and supervisory systems and procedures and other controls, as well as our disclosures, supervision and reporting. We review these items in the ordinary course of business in our effort to adhere to legal and regulatory requirements applicable to our operations. Nevertheless, additional regulation and enhanced regulatory enforcement has resulted, and may result in the future, in additional operational and compliance costs, as well as increased costs in the form of penalties and fines, investigatory and settlement costs, customer restitution and remediation related to regulatory matters. In the ordinary course of business, we periodically identify or become aware of purported inadequacies, deficiencies and other issues. It is our policy to evaluate these matters for potential legal
or regulatory violations, and other potential compliance issues. It is also our policy to self-report known violations and issues as required by applicable law and regulation. When deemed probable that matters may result in financial losses, we accrue for those losses based on an estimate of possible fines, customer restitution and losses related to the repurchase of sold securities and other losses, as applicable. Certain regulatory and other legal claims and losses may be covered through our wholly-owned captive insurance subsidiary, which is chartered with the insurance commissioner in the state of Tennessee.
Assessing the probability of a loss occurring and the timing and amount of any loss related to a regulatory matter or legal proceeding, whether or not covered by our captive insurance subsidiary, is inherently difficult and requires judgments based on a variety of factors and assumptions. There are particular uncertainties
and complexities involved when assessing the adequacy of loss reserves for potential liabilities that are self-insured by our captive insurance subsidiary, which depends in part on historical claims experience, including the actual timing and costs of resolving matters that begin in one policy period and are resolved in a subsequent period.
Our accruals, including those established through our captive insurance subsidiary at March 31, 2021, include estimated costs for significant regulatory matters or legal proceedings, generally relating to the adequacy of our compliance and supervisory systems and procedures and other controls, for which we believe losses are both probable and reasonably estimable.
The outcome of regulatory or legal proceedings could result in legal liability, regulatory fines or monetary penalties in excess of
our accruals and insurance, which could have a material adverse effect on our business, results of operations, cash flows or financial condition. For more information on management’s loss contingency policies, see Note 10 - Commitments and Contingencies, within the notes to the unaudited condensed consolidated financial statements.
In June 2018, the U.S. Court of Appeals for the Fifth Circuit invalidated regulations previously enacted by the U.S. Department of Labor (“DOL”) that expanded the definition of “fiduciary” and would have resulted in significant new
prohibited
transaction exemption requirements for our servicing of certain retirement plan accounts subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and individual retirement accounts (“IRAs”). In December 2020, the DOL finalized a new investment advice fiduciary prohibited transaction exemption with regard to such accounts that became effective on February 16, 2021. ERISA plans and IRAs comprise a significant portion of our business and we continue to expect that compliance with current and future laws and regulations with respect to retail retirement savings and reliance on prohibited transaction exemptions under such laws and regulations will require increased legal, compliance, information technology and other costs and could lead to a greater risk of class action lawsuits and other litigation.
In June 2019, the SEC adopted a new
standard of conduct applicable to retail brokerage accounts (“Regulation BI”) with a compliance date of June 30, 2020. Regulation BI requires that broker-dealers act in the best interest of retail customers without placing their own financial or other interests ahead of the customer’s and imposes new obligations related to disclosure, duty of care, conflicts of interest and compliance. Certain state securities and insurance regulators have also adopted, proposed or are considering adopting similar laws and regulations. In addition, it is unclear how and whether other regulators, including banking regulators and state securities and insurance regulators,may respond to or attempt to enforce similar issues addressed by the newly proposed DOL Rule and Regulation BI. As of June 30, 2020, we implemented new procedures in
accordance with Regulation BI.
Future laws and regulations, including the new rule proposed by the DOL and state rules relating to the standards of conduct applicable to both retirement and non-retirement accounts, may affect our business in ways that cannot be anticipated or planned for, and may have negative impacts on our products, services and results of operations.
Acquisitions, Integrations and Divestitures
We continuously assess the competitive landscape in connection with our capital allocation framework as we pursue acquisitions, integrations and divestitures. These activities are part of our overall growth strategy, but can distort comparability when reviewing revenue and
expense trends for periods presented. Our recent acquisitions are as follows:
•Waddell & Reed Financial, Inc. (“Waddell & Reed”) - In December 2020, we entered into an agreement with Macquarie Management Holdings, Inc. (“Macquarie”) to acquire the wealth management business of Waddell & Reed. The transaction closed on April 30, 2021.
•Blaze Portfolio Systems LLC (“Blaze”) - In October 2020, we acquired Blaze, a technology company that provides an advisor-facing trading and portfolio rebalancing platform.
•E.K. Riley Investments, LLC (“E.K. Riley”) - In August 2020, we acquired business relationships with advisors from E.K. Riley, a broker-dealer and registered investment adviser
(“RIA”).
•Lucia Securities, LLC (“Lucia”) - In August 2020, we acquired business relationships with advisors from Lucia, a broker-dealer and RIA firm.
See Note 4 - Acquisitions, within the notes to the unaudited condensed consolidated financial statements for further detail.
Economic
Overview and Impact of Financial Market Events
Our business is directly and indirectly sensitive to several macroeconomic factors and the state of the U.S. financial markets. The global economy in general continued to show improvement in the first quarter of 2021, supported by additional fiscal stimulus, accommodative central bank policy and accelerating vaccine distribution. Despite clear progress, efforts to contain the COVID-19 pandemic continue to play a significant role in the global economy and the recovery has been uneven, with progress in some regions delayed by the impact of new COVID-19 variants as well as varying policy responses.
The outlook for the U.S. economy, in particular, has improved substantially over the first quarter of 2021. The Federal Reserve’s (“Fed”) most recent median GDP projection for 2021, released following its March 16-17, 2021 policy meeting,
saw the economy growing 6.5% in 2021, a large upgrade from a median projection of 4.2% just three months earlier. According to the most recent estimate by the U.S. Bureau of Economic Analysis, the U.S. economy expanded at an annualized rate of 4.3% in the fourth quarter of 2020 after a dramatic rebound in the third quarter. Data received during the first quarter of 2021 suggests that growth has likely accelerated further from fourth quarter 2020 levels. The unemployment rate, which had spiked to 14.8% in April 2020 has declined steadily to 6.0% in March 2021, according to the Fed. The Fed also reports that consumer spending has increased, supported by an additional fiscal stimulus passed in March 2021, high savings levels and the gradual reopening of the economy. Business investment has continued to rebound and readings on both manufacturing and service sector activity are showing strong acceleration, although off of weak levels for those sectors most impacted by the
pandemic.
The S&P 500 Index returned 6.2% during the first quarter of 2021. Smaller stocks significantly outperformed the larger stocks represented in the S&P 500 Index for the second straight quarter, as the Russell 2000 Index returned 12.7%. Value-style stocks performed better than their growth counterparts as leading value sectors energy and financials outperformed while the growth-heavy technology sector lagged. Non-U.S. stocks trailed their U.S. counterparts during the quarter as the U.S. dollar strengthened. Developed international equities returned 3.6% while emerging markets (“EM”) returned 2.3%, based on the MSCI EAFE and MSCI EM indexes. Most fixed income sectors fell as interest rates rose sharply, with the 10-year Treasury yield climbing from 0.93% at year-end 2020 to 1.74% at the end of the first quarter 2021. The Bloomberg Barclays U.S. Aggregate Bond Index lost 3.4% over the quarter.
Our
business is also sensitive to current and expected short-term interest rates, which are largely driven by Fed policy. During the first quarter of 2021, Fed policymakers maintained the target range for the federal funds rate at 0.0 to 0.25%. According to projection materials released following the conclusion of the March 16-17, 2021 policy meeting, the median expectation among meeting participants remains that the Fed will not begin raising rates until after 2023, although a few participants projected the Fed raising rates as early as 2022 and several in 2023. Federal Reserve Chair Jerome Powell continues to emphasize the Fed’s belief that any near-term increase in inflation is likely to be transitory and that the Fed would like to see realized inflation moderately above 2.0% for a meaningful period of time before it would raise interest rates.
Please consult the “Risks Related to Our Business and Industry” section within
Part I, “Item 1A. Risk Factors” in our 2020 Annual Report on Form 10-K for more information about the risks associated with significant interest rate changes, and the potential related effects on our profitability and financial condition.
Advisory revenues primarily represent fees charged to clients of our advisors for the use of our corporate RIA advisory platform, and are based on the value of their advisory assets. Advisory fees are billed to clients in advance, on a quarterly basis, and are recognized as revenue ratably during the quarter. The majority of our client accounts are on a calendar quarter and are billed using values as of the last business day of the preceding quarter. The value of the assets in an advisory account on the billing date determines the amount billed, and accordingly, the revenues earned in the following three-month period. Advisory revenues collected on our
corporate advisory platform are proposed by the advisor and agreed to by the client and averaged 1.0% of the underlying assets for the three months ended March 31, 2021.
We also support separate investment adviser firms (“Hybrid RIAs”), through our hybrid advisory platform, which allows advisors to engage us for technology, clearing and custody services, as well as access to the capabilities of our investment platforms. The assets held under a Hybrid RIA’s investment advisory accounts custodied with LPL Financial are included in total advisory assets and net new advisory assets. The advisory revenue generated by a Hybrid RIA is not included in our advisory revenues. We charge separate fees to Hybrid RIAs for technology, clearing, administrative, oversight and custody services, which are included in our transaction and fee revenues in our unaudited condensed consolidated
statements of income. The administrative fees collected on our hybrid advisory platform vary and can reach a maximum of 0.2% of the underlying assets as of March 31, 2021.
The following table summarizes the composition of advisory assets for the periods presented (dollars in billions):
Net new advisory assets are generated throughout the quarter, therefore, the full impact of net new advisory assets to advisory revenues is not realized in the same period. The following table summarizes activity in advisory assets for the periods presented (in billions):
(1)Net new advisory assets consists of total client deposits into custodied advisory accounts less total client withdrawals from custodied advisory accounts, plus dividends, plus interest, minus advisory fees. We consider conversions from and to brokerage accounts as deposits and withdrawals, respectively. Previously reported figures for net new advisory assets did not include dividends and interest or subtract advisory fees. The figure
previously reported for the three months ended March 31, 2020 was an inflow of $12.5 billion.
(2)Market impact is the difference between the beginning and ending asset balance less the net new asset amounts, representing the implied growth or decline in asset balances due to market changes over the same period of time.
The growth in advisory revenues for the three months ended March 31, 2021 compared to 2020 was due to net new advisory assets resulting from our recruiting efforts and strong advisor productivity, as well as market gains as represented by higher levels of the S&P 500 Index.
We generate two types of commission revenues: sales-based commissions and trailing commissions. Sales-based commission revenues, which occur when clients trade securities or purchase various types of investment products, primarily represent gross commissions generated by our advisors. The levels of sales-based commission revenues can vary from period to period based on the overall economic environment, number of trading days in the reporting period and investment activity of our advisors’ clients. Trailing commission revenues, which are paid over time, are recurring in nature and are earned based on the market value of investment holdings in trail-eligible assets. We earn trailing commission revenues primarily
on mutual funds and variable annuities held by clients of our advisors. See Note 3 - Revenues, within the notes to the unaudited condensed consolidated financial statements for further detail regarding our commission revenues by product category.
The following table sets forth our commission revenues included in our unaudited condensed consolidated statements of income (dollars in thousands):
The increase in sales-based commission revenues for the three months ended March 31, 2021 compared to 2020 was primarily driven by rising long-term interest rates that led to an increase in sales of annuities and fixed income products.
The increase in trailing
commission revenues for the three months ended March 31, 2021 compared to 2020 was primarily due to the increase in value of annuities and mutual funds as a result of market increases.
The following table summarizes activity in brokerage assets for the periods presented (in billions):
(1) Net new brokerage assets consists of total client deposits into brokerage accounts less total client withdrawals from brokerage accounts, plus dividends, plus interest. We consider conversions from and to advisory accounts as deposits and withdrawals, respectively. Previously reported figures for net new brokerage assets did not include dividends and interest or subtract advisory fees. The figure previously reported for the three months ended March 31,
2020 was $0.0 billion.
(2) Market impact is the difference between the beginning and ending asset balance less the net new asset amounts, representing the implied growth or decline in asset balances due to market changes over the same period of time.
While there has been a COVID-19 vaccine roll out and the number of cases in the United States is decreasing, that could change and we cannot predict how the ongoing COVID-19 pandemic and foreign and domestic responses to it will impact our future sales-based or trailing commission revenues. While domestic equity markets have recovered, COVID-19 cases remain widespread in many parts of the world, and significant market disruptions and volatility remain possible.
Asset-Based
Asset-based revenues consist of fees from
omnibus processing and networking services (collectively referred to as “recordkeeping”), our sponsorship programs with financial product manufacturers and fees from our client cash programs. Omnibus processing revenues are paid to us by mutual fund product sponsors and are based on the value of custodied assets in advisory accounts and the number of brokerage accounts in which the related mutual fund positions are held. Networking revenues on brokerage assets are correlated to the number of positions we administer and are paid to us by mutual fund and annuity product manufacturers. We receive fees from certain financial product manufacturers in connection with sponsorship programs that support our marketing and sales education and training efforts. Client cash-based revenues are generated on advisors’ clients’ cash balances in
insured bank sweep accounts and money market programs. Pursuant to contractual arrangements, we receive fees based on account type and invested balances for administration and recordkeeping.
Asset-based revenues for the three months ended March 31, 2021 decreased compared to 2020 primarily due to decreased client cash revenues, partially offset by an increase in recordkeeping revenues and sponsorship programs.
Revenues for our recordkeeping and sponsorship programs for the three months ended March 31, 2021, which are largely based on the market value of the underlying assets,
increased compared to 2020 due to the impact of market appreciation on the value of the underlying assets.
Client cash revenues for the three months ended March 31, 2021 decreased compared to 2020 due to the impact of a lower federal funds effective rate, partially offset by higher average client cash balances. For the three months ended March 31, 2021, our average client cash balances increased to $48.4 billion compared to $38.5 billion in 2020.
Transaction and Fee
Transaction revenues primarily include fees we charge to our advisors and their clients for executing certain transactions in brokerage and fee-based advisory accounts. Fee revenues primarily include IRA custodian fees, contract
and licensing fees and other client account fees. In addition, we host certain advisor conferences that serve as training, education, sales and marketing events, for which we charge a fee for attendance.
Transaction and fee revenues increased for the three months ended March 31, 2021 compared to 2020 primarily due to an increase in technology fee revenues, partially offset by a decrease in transaction fees due to trading volatility in 2020 caused by the COVID-19 pandemic.
Interest Income
We earn interest income from client margin loans, cash segregated under federal and other regulations and cash equivalents. Period-over-period variances correspond to changes in the average balances of margin loans and cash balances as well as changes in interest rates.
Interest
income for the three months ended March 31, 2021 decreased compared to 2020, primarily due to lower average interest rates.
Other
Other revenues primarily include mark-to-market gains or losses on assets held by us in our advisor non-qualified deferred compensation plan and model research portfolios, marketing allowances received from certain financial product manufacturers, primarily those who offer alternative investments, such as non-traded real estate investment trusts and business development companies, and other miscellaneous revenues.
Other revenuesfor the three months ended March 31, 2021 increased compared to
2020, primarily due to realized and unrealized gains on assets held in our advisor non-qualified deferred compensation plan, which are based on the market performance of the underlying investment allocations chosen by advisors in the plan, partially offset by a decrease in dividend income on assets held in our advisor non-qualified deferred compensation plan.
Expenses
Advisory and Commission
Advisory and commission expenses consist of the following: payout amounts that are earned by and paid out to advisors and institutions based on advisory and commission revenues earned on each client’s account; production based bonuses earned by advisors and institutions based on the levels of advisory and commission
revenues they produce; the recognition of share-based compensation expense from equity awards granted to advisors and financial institutions based on the fair value of the awards at grant date; and the deferred advisory and commissions fee expenses associated with mark-to-market gains or losses on the non-qualified deferred compensation plan offered to our advisors.
Our
payout ratio for the three months ended March 31, 2021 increased compared to 2020, primarily due to price reductions on our corporate advisory platform.
Compensation and Benefits
Compensation and benefits include salaries, wages, benefits, share-based compensation and related taxes for our employees, as well as compensation for temporary workers and contractors. The following table sets forth our average number of employees for the three months ended March 31, 2021, compared to 2020.
Compensation
and benefits for the three months ended March 31, 2021 increased compared to 2020, primarily due to an increase in salary and employee benefit expenses resulting from an increase in headcount.
Promotional
Promotional expenses include business development costs related to advisor recruitment and retention, costs related to hosting certain advisory conferences that serve as training, sales and marketing events and other costs that support advisor business growth. The decrease in promotional expenses for the three months ended March 31, 2021 compared to 2020 was primarily driven by a decrease in advisor conference expenses due to conferences being cancelled or held in a virtual format in response to the COVID-19 pandemic, partially offset by an increase in costs associated with advisor
loans.
Depreciation and Amortization
Depreciation and amortization relates to the use of fixed assets, which include internally developed software, hardware, leasehold improvements and other equipment. Depreciation and amortization for the three months ended March 31, 2021 increased compared to 2020, primarily due to our continued investment in technology to improve our advisor platform and end-client experience.
Occupancy and Equipment
Occupancy and equipment expenses include the costs of leasing and maintaining our office spaces, software licensing and maintenance costs and maintenance expenses on computer hardware and other equipment. Occupancy and equipment expenses for the three months ended March 31,
2021 increased compared to 2020, primarily due to an increase in costs related to software maintenance and licensing fees in support of our service and technology investments.
Non-Operating Interest Expense and Other
Non-operating interest expense and other include expenses from our senior secured credit facilities, senior unsecured notes, finance leases and other non-operating expenses. Non-operating interest expense and other for the three months ended March 31, 2021 decreased compared to 2020, primarily due to a lower outstanding principal balance on our senior secured term loan.
Loss on Extinguishment of Debt
On March 15, 2021, we closed debt transactions in which we increased the borrowing
capacity and extended the maturity date of our existing senior revolving credit facility to 2026, issued senior unsecured notes due in 2029 and redeemed our existing senior unsecured notes due in 2025. In connection with these transactions, we incurred $24.4 million as a loss on extinguishment of debt.
We estimate our full-year effective income tax rate at the end of each reporting period. This estimate is used in providing for income taxes
on a year-to-date basis and may change in subsequent interim periods. The tax rate in any quarter can be affected positively or negatively by adjustments that are required to be reported in the quarter in which resolution of a particular item occurs. The effective income tax rates reflect the impact of state taxes, settlement contingencies, tax credits and other permanent differences in tax deductibility of certain expenses.
Our effective income tax rate was 21.5% and 25.0% for the three months ended March 31, 2021 and 2020, respectively. The decrease in our effective income tax rate for the three months ended March 31, 2021 compared to 2020 was primarily due to an increase in tax benefits associated with stock compensation under Accounting Standards Codification (“ASC”)
Topic 718, and a reduction in unrecognized tax benefits related to the statute of limitations.
COVID-19 Impact
On March 11, 2020, the World Health Organization designated the spread of COVID-19 as a pandemic. As of the date of this Quarterly Report on Form 10-Q, the COVID-19 pandemic has had a significant impact on global financial markets, and we continue to monitor its effects on the overall economy and our operations. We are not yet able to determine the full impact of the pandemic; however, should it continue, there could be a material and adverse financial impact to our results of operations. Please consult Part I, “Item 1A. Risk Factors” in our 2020 Annual Report on Form 10-K for more information about
the risks associated with COVID-19.
Liquidity and Capital Resources
We have established liquidity and capital policies intended to support the execution of strategic initiatives, while meeting regulatory capital requirements and maintaining ongoing and sufficient liquidity. We believe liquidity is of critical importance to the Company and, in particular, to LPL Financial, our broker-dealer subsidiary. The objective of our policies is to ensure that we can meet our strategic, operational and regulatory liquidity and capital requirements under both normal operating conditions and under periods of stress in the financial markets.
Liquidity
Our
liquidity needs are primarily driven by capital requirements at LPL Financial, interest due on our corporate debt and capital returns to holders of our common stock. Our liquidity needs at LPL Financial are driven primarily by the level and volatility of our client activity. Management maintains a set of liquidity sources and monitors certain business trends and market metrics closely in an effort to ensure we have sufficient liquidity. We believe that based on current levels of cash flows from operations and anticipated growth, together with available external liquidity sources, we have adequate liquidity to satisfy out working capital needs, the payment of all of our obligations and the funding of anticipated capital expenditures for the foreseeable future.
Parent Company Liquidity
LPL Holdings, Inc. (“Parent”), the direct holding company of our operating subsidiaries,
considers its primary source of liquidity to be corporate cash. We define corporate cash as the sum of (1) cash held at the Parent and its non-regulated subsidiaries, (2) cash held at The Private Trust Company, N.A. (“PTC”) in excess of our senior secured credit agreement (the “Credit Agreement”) capital requirements and (3) cash held at LPL Financial in excess of 10 percent of its aggregate debits, which represents five times the net capital LPL Financial is required to maintain under the terms of the Credit Agreement. We believe corporate cash is a useful measure of the Parent’s liquidity as it is the primary source of capital above and beyond the capital deployed in our regulated subsidiaries. Corporate cash is monitored as part of our liquidity risk management. We target
maintaining close to $200 million in corporate cash to cover approximately 24 months of principal and interest due on our corporate debt. The Company maintains additional liquidity through a $1 billion secured committed revolving credit facility. The Parent has the ability to borrow against the credit facility for working capital and general corporate purposes. Dividends from and excess capital generated by LPL Financial are the primary sources of corporate cash. Subject to regulatory approval or notification, capital generated by LPL Financial can be distributed to the Parent to the extent the capital levels exceed both regulatory requirements and internal capital thresholds. As of March 31, 2021, LPL Financial maintained excess regulatory capital of $42 million over Credit Agreement requirements. During the three months ended March 31,
2021, LPL Financial paid dividends of $175 million to the Parent.
We engage in share repurchase programs, which are approved by our board of directors (the “Board of Directors”), pursuant to which we may repurchase our issued and outstanding shares of common stock from time to time. Purchases may be effected in open market or privately negotiated transactions. We suspended share repurchases in early
2020 in light of the business and financial uncertainties created by the COVID-19 pandemic, which have since diminished. Our current capital deployment framework remains focused on investing in organic growth first, pursuing acquisitions where appropriate, and returning excess capital to shareholders. In the near term we are focused on allocating capital to organic growth and acquisitions, and will reassess capital deployment opportunities, including share repurchases over time. If we have excess capital to deploy beyond organic growth and acquisitions, we would consider restarting share repurchases. Also, the resumption, timing and amount of future share repurchases, if any, will be determined at our discretion within the constraints of our Credit Agreement, the indentures governing our senior unsecured notes (the “Indentures”)
and consideration of our general liquidity needs. See Note 11 - Stockholders’ Equity, within the notes to the unaudited condensed consolidated financial statements for additional information regarding our share repurchases.
Common Stock Dividends
The payment, timing and amount of any dividends are subject to approval by the Board of Directors as well as certain limits under our Credit Agreement and the Indentures. See Note 11 - Stockholders’ Equity, within the notes to the unaudited condensed consolidated financial statements for additional information regarding our dividends.
LPL Financial Liquidity
LPL Financial
relies primarily on customer payables to provide liquidity and to fund margin lending. LPL Financial maintains additional liquidity through external lines of credit totaling approximately $575 million. LPL Financial also maintains a line of credit with the Parent.
External Liquidity Sources
The following table presents our external lines of credit at March 31, 2021 (dollars in millions):
Description
Borrower
Maturity
Date
Outstanding
Available
Senior secured, revolving credit facility
LPL Holdings, Inc.
March 2026
$
—
$
1,000
Broker-dealer revolving credit facility
LPL Financial LLC
July 2024
$
—
$
300
Secured,
uncommitted lines of credit
LPL Financial LLC
March 2022
$
—
$
75
Unsecured, uncommitted lines of credit
LPL Financial LLC
September 2021
$
—
$
75
Unsecured, uncommitted lines of credit
LPL
Financial LLC
September 2021
$
—
$
50
Unsecured, uncommitted lines of credit
LPL Financial LLC
None
$
—
$
75
Secured, uncommitted lines of credit
LPL Financial LLC
None
$
—
unspecified
Secured,
uncommitted lines of credit
LPL Financial LLC
None
$
—
unspecified
Capital Resources
The Company seeks to manage capital levels in support of our business strategy of generating and effectively deploying capital for the benefit of our shareholders.
Our primary requirement for working capital relates to funds we loan to our advisors’ clients for trading conducted on margin and funds we are required to maintain for regulatory capital and reserves based on the requirements
of our regulators and clearing organizations, which also consider client balances and trading activities. We have several sources of funds that enable us to meet increases in working capital requirements that relate to increases in client margin activities and balances. These sources include cash and cash equivalents on hand, cash segregated under federal and other regulations, the committed revolving credit facility of LPL Financial and proceeds from repledging or selling client securities in margin accounts. When an advisor’s client purchases securities on margin or uses securities as collateral to borrow from us on margin, we are permitted, pursuant to the applicable securities industry regulations, to repledge, loan or sell securities, up to 140% of the client’s margin loan balance, that collateralize those margin accounts.
Our other working capital needs are primarily related to loans we are making to advisors and timing
associated with receivables and payables, which we have satisfied in the past from internally generated cash flows.
We may sometimes be required to fund timing differences arising from the delayed receipt of client funds associated with the settlement of client transactions in securities markets. These timing differences are funded either with internally generated cash flows or, if needed, with funds drawn on our uncommitted lines of credit at LPL Financial or under one of our revolving credit facilities.
LPL
Financial is subject to the Securities and Exchange Commission’s (“SEC”) Uniform Net Capital Rule, which requires the maintenance of minimum net capital. LPL Financial computes net capital requirements under the alternative method, which requires firms to maintain minimum net capital equal to the greater of $250,000 or 2% of aggregate debit balances arising from client transactions. At March 31, 2021, LPL Financial had net capital of $98.9 million with a minimum net capital requirement of $11.5 million.
LPL Financial’s ability to pay dividends greater than 10% of its excess net capital during any 35-day rolling period requires approval from the Financial Industry Regulatory Authority (“FINRA”). In addition, payment of dividends is restricted if LPL Financial’s net capital would be less than 5% of aggregate customer debit balances.
LPL
Financial also acts as an introducing broker for commodities and futures. Accordingly, its trading activities are subject to the National Futures Association’s (“NFA”) financial requirements and it is required to maintain net capital that is in excess of or equal to the greatest of NFA’s minimum financial requirements. The NFA was designated by the Commodity Futures Trading Commission as LPL Financial’s primary regulator for such activities. Currently, the highest NFA requirement is the minimum net capital calculated and required pursuant to the SEC’s Net Capital Rule.
Our subsidiary, PTC, is also subject to various regulatory capital requirements. Failure to meet the respective minimum capital requirements can result in certain mandatory and discretionary actions by regulators that, if undertaken, could have substantial monetary and non-monetary impacts on PTC’s operations.
Debt
and Related Covenants
The Credit Agreement and the Indentures contain a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to:
•incur additional indebtedness or issue disqualified stock or preferred stock;
•declare dividends, or other distributions to stockholders;
•repurchase equity interests;
•redeem indebtedness that is subordinated in right of payment to certain debt instruments;
•make investments or acquisitions;
•create
liens;
•sell assets;
•guarantee indebtedness;
•engage in certain transactions with affiliates;
•enter into agreements that restrict dividends or other payments from subsidiaries; and
•consolidate, merge or transfer all or substantially all of our assets.
Our Credit Agreement and the Indentures allow us to pay dividends and distributions or repurchase our capital stock only when certain conditions are met.
In addition, our revolving credit facility requires us to be in compliance with certain financial covenants as of the last day of each fiscal quarter. The financial covenants require the calculation of Credit Agreement EBITDA, as defined in, and calculated by management in accordance with, the Credit Agreement. The Credit Agreement defines Credit Agreement EBITDA as “Consolidated EBITDA,” which is Consolidated Net Income (as defined in the Credit Agreement) plus interest expense, tax expense, depreciation and amortization, and further adjusted to exclude certain non-cash charges and other adjustments (including unusual or non-recurring charges) and gains, and to include future expected cost savings, operating expense reductions or other synergies from certain transactions.
As of March 31, 2021, we were in compliance with both financial covenants, a maximum Consolidated Total Debt to Consolidated EBITDA Ratio (as defined in the Credit Agreement) or “Leverage Ratio” and a minimum Consolidated EBITDA to Consolidated Interest Expense Ratio (as defined in the Credit Agreement) or “Interest Coverage”. The breach of these financial covenants would be subject to certain equity cure rights. The required ratios under our financial covenants and actual ratios were as follows:
See Note 8 - Long-term and Other Borrowings, within the notes to the unaudited condensed consolidated financial statements for further detail
regarding the Credit Agreement and the Indentures.
Off-Balance Sheet Arrangements
We enter into various off-balance-sheet arrangements in the ordinary course of business, primarily to meet the needs of our advisors’ clients. These arrangements include Company commitments to extend credit. For information on these arrangements, see Note 10 - Commitments and Contingencies and Note 17 - Financial Instruments with Off-Balance-Sheet Credit Risk and Concentrations of Credit Risk, within the notes to the unaudited condensed consolidated financial statements.
Contractual
Obligations
During the three months ended March 31, 2021, there were no material changes in our contractual obligations, other than in the ordinary course of business, from those disclosed in our 2020 Annual Report on Form 10-K. See Note 8 - Long-term and Other Borrowings andNote 10 - Commitments and Contingencies, within the notes to the unaudited condensed consolidated financial statements, as well as the Contractual Obligations section within Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2020 Annual Report on Form 10-K, for further detail.
Fair
Value of Financial Instruments
We use fair value measurements to record certain financial assets and liabilities at fair value and to determine fair value disclosures. See Note 5 - Fair Value Measurements, within the notes to the unaudited condensed consolidated financial statements for a detailed discussion regarding our fair value measurements.
Critical Accounting Policies and Estimates
In the notes to our consolidated financial statements and in Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2020 Annual Report on Form 10-K, we have disclosed those accounting
policies that we consider to be significant in determining our results of operations and financial condition. There have been no changes to those policies that we consider to be material since the filing of our 2020 Annual Report on Form 10-K. The accounting principles used in preparing our unaudited condensed consolidated financial statements conform in all material respects to GAAP.
Payables
to broker-dealers and clearing organizations
i125,563
i89,743
Accrued
advisory and commission expenses payable
i195,044
i187,040
Accounts
payable and accrued liabilities
i655,787
i681,554
Income
taxes payable
i58,546
i28,145
Unearned
revenue
i123,152
i95,328
Securities
sold, but not yet purchased — at fair value
i1,316
i206
Long-term
and other borrowings, net
i2,332,809
i2,345,414
Operating
lease liabilities
i136,419
i139,377
Finance
lease liabilities
i106,393
i107,424
Total
liabilities
i5,181,090
i5,208,717
Commitments
and contingencies (Note 10)
STOCKHOLDERS’ EQUITY:
Common stock, $i0.001 par value; i600,000,000
shares authorized; i128,136,874 shares issued at March 31, 2021 and i127,585,764 shares issued at December 31,
2020
Make-whole
premium on redemption of senior unsecured notes
(i25,875)
i—
Payment
of contingent consideration
(i3,645)
(i10,000)
Tax
payments related to settlement of restricted stock units
(i16,030)
(i8,370)
Repurchase
of common stock
i—
(i150,036)
Dividends
on common stock
(i19,980)
(i19,713)
Proceeds
from stock option exercises and other
i13,880
i7,947
Principal
payment of finance leases and obligations
(i1,031)
(i996)
Net
cash used in financing activities
(i67,506)
(i112,843)
NET
INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
(i46,955)
i231,817
CASH,
CASH EQUIVALENTS AND RESTRICTED CASH — Beginning of period
i1,799,034
i1,471,778
CASH,
CASH EQUIVALENTS AND RESTRICTED CASH — End of period
$
i1,752,079
$
i1,703,595
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid
$
i33,729
$
i37,842
Income
taxes paid
$
i5,101
$
i6,928
NONCASH
DISCLOSURES:
Capital expenditures included in accounts payable and accrued liabilities
$
i11,535
$
i15,031
Lease
assets obtained in exchange for operating lease liabilities
$
i—
$
i3,447
The
following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the statement of financial condition that sum to the total of the same such amounts shown in the statement of cash flows.
Notes
to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1 - iORGANIZATION AND DESCRIPTION OF THE COMPANY
LPL Financial Holdings Inc. (“LPLFH”), a Delaware holding corporation, together with its consolidated subsidiaries
(collectively, the “Company”), provides an integrated platform of brokerage and investment advisory services to independent financial advisors and financial advisors at financial institutions (collectively, “advisors”) in the United States. Through its custody and clearing platform, using both proprietary and third-party technology, the Company provides access to diversified financial products and services, enabling its advisors to offer objective financial advice and brokerage services to retail investors (their “clients”). The Company’s most significant, wholly owned subsidiaries are described below:
•LPL Holdings,
Inc. (“LPLH” or “Parent”), a Massachusetts holding corporation, is an intermediate holding company and directly or indirectly owns i100% of the issued and outstanding common stock of all of LPLFH’s indirect subsidiaries, including a captive insurance subsidiary (the “Captive Insurance Subsidiary”) that underwrites insurance for various legal and regulatory risks of the Company.
•LPL Financial LLC (“LPL Financial”), with primary offices in San Diego, California; Fort Mill, South Carolina; Boston, Massachusetts; and Austin, Texas, is a clearing broker-dealer and an investment adviser that principally transacts business as an agent for its advisors and financial institutions on behalf of their clients in a broad array of financial products and services. LPL Financial is licensed to operate in all i50 states, Washington D.C., Puerto Rico and the U.S. Virgin Islands.
•Fortigent
Holdings Company, Inc. and its subsidiaries provide solutions and consulting services to registered investment advisers (“RIAs”), banks and trust companies serving high-net-worth clients.
•LPL Insurance Associates, Inc. operates as an insurance brokerage general agency that offers life and disability insurance products and services for LPL Financial advisors.
•AW Subsidiary, Inc. is a holding company for AdvisoryWorld and Blaze Portfolio Systems LLC (“Blaze”). AdvisoryWorld offers technology products, including proposal generation, investment analytics and portfolio modeling, to both the Company’s advisors and external clients in the wealth management
industry. Blaze offers a trading and rebalancing platform to both the Company’s advisors and external clients.
•PTC Holdings, Inc. (“PTCH”) is a holding company for The Private Trust Company, N.A. (“PTC”). PTC is chartered as a non-depository limited purpose national bank, providing a wide range of trust, investment management oversight, and custodial services for estates and families. PTC also provides Individual Retirement Account (“IRA”) custodial services for LPL Financial. Each member of PTCH’s board of directors meets the direct equity ownership interest requirements that are required by the Office of the Comptroller of the Currency.
•LPL Employee Services, LLC is a holding company for Allen & Company of Florida, LLC
(“Allen & Company”), an RIA.
NOTE 2 - iSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
i
Basis
of Presentation
The unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), which require the Company to make estimates and assumptions regarding the valuation of certain financial instruments, intangible assets, allowance for doubtful accounts, share-based compensation, accruals for liabilities, income taxes, revenue and expense accruals, and other matters that affect the consolidated financial statements and related disclosures. The unaudited condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to present fairly the results for the interim periods presented. Actual results could differ from those estimates under different assumptions or conditions and the differences
may be material to the consolidated financial statements.
Notes to Condensed Consolidated Financial Statements (Unaudited)
The
unaudited condensed consolidated financial statements include the accounts of LPLFH and its subsidiaries. Intercompany transactions and balances have been eliminated.
The unaudited condensed consolidated financial statements do not include all information and notes necessary for a complete presentation of results of income, comprehensive income, financial position and cash flows in conformity with GAAP. Accordingly, these financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the related notes for the year ended December 31, 2020, contained in the Company’s
Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”).
i
Recently Issued Accounting Pronouncements
There are no recently issued accounting pronouncements that would materially impact the Company’s consolidated financial statements and related disclosures.
NOTE
3 - iREVENUES
Revenues are recognized when control of the promised services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. Revenues are analyzed to determine whether the Company is the principal (i.e., reports revenues on a gross basis) or agent
(i.e., reports revenues on a net basis) in the contract. Principal or agent designations depend primarily on the control an entity has over the product or service before control is transferred to a customer. The indicators of which party exercises control include primary responsibility over performance obligations, inventory risk before the good or service is transferred and discretion in establishing the price.
Advisory
Advisory revenues represent fees charged to advisors’ clients’ accounts on the Company’s corporate advisory platform. The Company provides ongoing investment advice and acts as a custodian, providing
brokerage and execution services on transactions, and performs administrative services for these accounts. This series of performance obligations transfers control of the services to the client over time as the services are performed. These revenues are recognized ratably over time to match the continued delivery of the performance obligations to the client over the life of the contract. The advisory revenues generated from the Company’s corporate advisory platform are based on a percentage of the market value of the eligible assets in the clients’ advisory accounts. As such, the consideration for these revenues are variable and an estimate of the variable consideration is constrained due to dependence on unpredictable market impacts on client portfolio values. The constraint is removed once
the portfolio value can be determined.
The Company provides advisory services to clients on its corporate advisory platform through the advisor. The Company is the principal in these arrangements and recognizes advisory revenues on a gross basis, as the Company is responsible for satisfying the performance obligations and has control over determining the fees.
Commission
Commission revenues represent sales commissions generated by advisors for their clients’ purchases and sales of securities on exchanges and over-the-counter, as well as purchases of other investment products. The
Company views the selling, distribution and marketing, or any combination thereof, of investment products to such clients as a single performance obligation to the product sponsors.
The Company is the principal for commission revenues, as it is responsible for the execution of the clients’ purchases and sales, and maintains relationships with the product sponsors. Advisors assist the Company in performing its obligations. Accordingly, total commission revenues are reported on a gross basis.
The
Company generates two types of commission revenues: sales-based commissions that are recognized at the point of sale on the trade date and trailing commissions that are recognized over time as earned. Sales-based commission revenues vary by investment product and are based on a percentage of an investment product’s current market value at the time of purchase. Trailing commission revenues are generally based on a percentage of the current market value of clients’ investment holdings in trail-eligible assets, and are recognized over the period during which services, such as ongoing support, are performed. As trailing commission revenues are based on the market value of clients’ investment holdings, the consideration is variable and an estimate of the variable consideration is constrained due to dependence on unpredictable market impacts. The constraint is removed once the investment holdings value can be determined.
i
The
following table presents sales-based and trailing commission revenues disaggregated by product category (in thousands):
Asset-based
revenues consist of fees from the Company’s client cash programs, which consist of fees from its money market programs and insured bank sweep vehicles, sponsorship programs and recordkeeping.
Notes
to Condensed Consolidated Financial Statements (Unaudited)
Client Cash Revenues
Client cash revenues are generated based on advisors’ clients’ cash balances in insured bank sweep accounts and money market programs. The Company receives fees based on account type and invested balances for administration and recordkeeping. These fees are paid and recognized over time.
Sponsorship Programs
The Company receives fees from product sponsors, primarily mutual fund and annuity companies, for marketing support and sales force education and training efforts. Compensation for these performance obligations
is either a fixed fee, a percentage of the average annual amount of product sponsor assets held in advisors’ clients’ accounts, a percentage of new sales or some combination. As the value of product sponsor assets held in advisors’ clients’ accounts is susceptible to unpredictable market changes, these revenues include variable consideration and are constrained until the date that the fees are determinable.
Recordkeeping
The Company generates revenues from fees it collects for providing recordkeeping, account maintenance, reporting and other related services to product sponsors. This includes revenues from omnibus processing in which the Company establishes and maintains sub-account records for its clients
to reflect the purchase, exchange and redemption of mutual fund shares, and consolidates clients’ trades within a mutual fund. Omnibus processing fees are paid to the Company by the mutual fund or its affiliates and are based on the value of mutual fund assets in accounts for which the Company provides omnibus processing services and the number of accounts in which the related mutual fund positions are held. Recordkeeping revenues also include revenues from networking recordkeeping services. Networking revenues on brokerage assets are correlated to the number of positions or value of assets that the Company administers and are paid by mutual fund and annuity product manufacturers. These recordkeeping revenues are
recognized over time as the Company fulfills its performance obligations. As recordkeeping fees are susceptible to unpredictable market changes that influence market value and fund positions, these revenues include variable consideration and are constrained until the date that the fees are determinable.
Depending on the contract, the Company is either principal or agent for recordkeeping revenues. In instances in which the Company is providing services to financial product manufacturers on behalf of third parties and does not have ultimate control of the service before transfer
to the customer, the Company is considered to be an agent and reports revenues on a net basis. In other cases, where the Company uses a sub-contractor to provide services and is responsible for unperformed services, the Company is considered principal and reports revenues on a gross basis.
iThe
following table sets forth asset-based revenues at a disaggregated level (in thousands):
Transaction revenues primarily include fees the Company charges to advisors and their clients for executing certain transactions in brokerage and fee-based advisory accounts. Transaction revenues are recognized at the point-in-time that a transaction is executed, which is generally the trade date. Fee revenues may be generated from advisors or their clients. Fee revenues primarily include IRA custodian fees, contract and licensing fees, and other client account fees. In addition, the Company hosts certain advisor conferences that serve as training, education, sales and marketing events, for which the
Company collects a fee for attendance. Fee revenues are recognized when the Company satisfies its performance obligations. Recognition varies from point-in-time to over time depending on whether the service is provided once at an identifiable point-in-time or if the service is provided continually over the contract life.
(1)Transaction
and fee revenues recognized point-in-time include revenues such as transaction fees, IRA termination fees and technology fees.
(2)Transaction and fee revenues recognized over time include revenues such as error and omission insurance fees, IRA custodian fees and technology fees.
/
The Company is the principal and recognizes transaction and fee revenues on a gross basis as it is primarily responsible for delivering the respective services being provided, which is demonstrated by the Company’s ability to control the fee
amounts charged to customers.
Interest Income
The Company earns interest income from client margin loans, cash segregated under federal and other regulations and cash equivalents.
Other
Other revenues primarily include unrealized gains and losses on assets held by the Company for its advisor non-qualified deferred compensation plan and model research portfolios, marketing allowances received from certain financial product manufacturers, primarily those who offer alternative investments, such as non-traded real estate investment trusts and business development companies, and other miscellaneous revenues. These revenues are
not generated from contracts with customers.
Unearned Revenue
The Company records unearned revenue when cash payments are received or due in advance of the Company’s performance obligations, including amounts which are refundable. The increase in the unearned revenue balance for the three months ended March 31, 2021 is primarily driven by cash payments received or due in advance of satisfying the Company’s performance obligations, offset by $i92.3
million of revenues recognized that were included in the unearned revenue balance as of December 31, 2020.
For advisory services, revenue is recognized as the Company provides the administration, brokerage and execution services over time to satisfy the performance obligations. For conference revenue, the Company recognizes revenue as the conferences are held.
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 4 - iACQUISITIONS
On December 2,
2020, the Company entered into an agreement with Macquarie Management Holdings, Inc. (“Macquarie”) to acquire the wealth management business of Waddell & Reed Financial, Inc. (“Waddell & Reed”) for $i300 million. The transaction closed on April 30, 2021.
On October 26,
2020, the Company acquired Blaze Portfolio Systems LLC, a technology company that provides an advisor-facing trading and portfolio rebalancing platform. The Company paid $i11.6 million at closing and agreed to a potential contingent payment of up to $i4.0
million.
On iAugust 18, 2020, the Company acquired business relationships with advisors from E.K. Riley Investments, LLC (“E.K. Riley”) and Lucia Securities, LLC (“Lucia”), two unrelated broker-dealers and RIAs, for a combined $i18.4
million. Both transactions have potential contingent payments.
NOTE 5 - iFAIR VALUE MEASUREMENTS
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.
Inputs used to measure fair value are prioritized within a three-level fair value hierarchy. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 —
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
There have been no transfers of assets or liabilities between these fair value measurement classifications during the three months ended March 31, 2021.
The Company’s fair value measurements are evaluated within the fair value hierarchy, based on the nature of inputs used to determine the fair value at the measurement date. At March 31, 2021 and December 31, 2020, the
Company had the following financial assets and liabilities that are measured at fair value on a recurring basis:
Cash Equivalents — The Company’s cash equivalents include money market funds, which are short term in nature with readily determinable values derived from active markets.
Securities Owned and Securities Sold, But Not Yet Purchased — The Company’s trading securities consist of house account model portfolios established and managed for the purpose of benchmarking the performance of its fee-based advisory platforms and temporary positions resulting from the processing of client transactions. Examples of these securities include money market funds, U.S.
treasury obligations, mutual funds, certificates of deposit and equity and debt securities.
The Company uses prices obtained from independent third-party pricing services to measure the fair value of its trading securities. Prices received from the pricing services are validated using various methods including comparison to prices received from additional pricing services, comparison to available quoted market prices and review of other relevant market data including implied yields of major categories of securities. In general, these quoted prices are derived from active markets for identical assets or liabilities. When quoted prices in active markets for identical assets and liabilities are not available, the quoted prices are based on similar assets and liabilities or inputs other than the quoted prices that are observable, either directly
or indirectly. For certificates of deposit and treasury securities, the Company utilizes market-based inputs, including observable market interest rates that correspond to the remaining maturities or the next interest reset dates. At March 31, 2021, the Company did not adjust prices received from the independent third-party pricing services.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Other Assets — The Company’s other assets include: (1) deferred compensation plan assets that are invested in money market and other mutual funds, which are actively traded and valued based on quoted market prices; and (2) certain non-traded real estate investment trusts and auction rate notes, which are valued using quoted prices for identical or similar securities and other inputs that are
observable or can be corroborated by observable market data.
Accounts Payable and Accrued Liabilities — The Company’s accounts payable and accrued liabilities include contingent consideration liabilities that are measured using Level 3 inputs.
Level 3 Recurring Fair Value Measurements
The Company determines the fair value for its contingent consideration obligations using a scenario-based approach whereby the Company assesses the expected number of future transactions. The contingent payment is estimated by applying a discount rate to the expected payment
to calculate the fair value as of the valuation date. The Company’s management evaluates the underlying projections and other related factors used in determining fair value each period and makes updates when there have been significant changes in management’s expectations.
i
The following table summarizes the
Company’s financial assets and financial liabilities measured at fair value on a recurring basis at March 31, 2021 (in thousands):
Notes to Condensed Consolidated Financial Statements (Unaudited)
The following table summarizes the Company’s financial assets and financial liabilities measured at fair value on a recurring basis at December 31, 2020 (in thousands):
Level
1
Level 2
Level 3
Total
Assets
Cash equivalents
$
i6,205
$
i—
$
i—
$
i6,205
Securities
owned — trading:
Money market funds
i125
i—
i—
i125
Mutual
funds
i9,137
i—
i—
i9,137
Equity
securities
i492
i—
i—
i492
U.S.
treasury obligations
i19,498
i—
i—
i19,498
Total
securities owned — trading
i29,252
i—
i—
i29,252
Other
assets
i371,202
i8,953
i—
i380,155
Total
assets at fair value
$
i406,659
$
i8,953
$
i—
$
i415,612
Liabilities
Securities
sold, but not yet purchased:
Equity securities
$
i203
$
i—
$
i—
$
i203
Debt
securities
i—
i3
i—
i3
Total
securities sold, but not yet purchased
i203
i3
i—
i206
Accounts
payable and accrued liabilities
i—
i—
i3,228
i3,228
Total
liabilities at fair value
$
i203
$
i3
$
i3,228
$
i3,434
NOTE
6 - iHELD-TO-MATURITY SECURITIES
The Company holds U.S. government notes, which are recorded at amortized cost because the Company has both the intent and the ability to hold these investments to maturity. Interest income is accrued as earned.
Premiums and discounts are amortized using a method that approximates the effective yield method over the term of the security and are recorded as an adjustment to the investment yield.
i
The amortized cost, gross unrealized gain and fair value of held-to-maturity securities were as follows (in thousands):
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 7 - iGOODWILL AND OTHER INTANGIBLE ASSETS
The
balances in goodwill and intangible assets were a result of various acquisitions. See Note 9 - Goodwill and Other Intangible Assets, in the Company’s audited consolidated financial statements and the related notes in
the 2020 Annual Report on Form 10-K for a discussion of the components of goodwill and additional information
regarding intangible assets.
NOTE 8 - iLONG-TERM
AND OTHER BORROWINGS
i
The Company’s outstanding borrowings were as follows (dollars in thousands):
(1)No
leverage or interest coverage maintenance covenants.
(2)The 2025 Notes were redeemed in March 2021.
(3)The 2027 Notes were issued in November 2019 at par.
(4)The 2029 Notes were issued in March 2021 at par.
/
Credit Agreement
On March 15, 2021, LPLFH and LPLH entered into a fifth amendment agreement (the “Amendment”) to the Company’s amended and restated credit
agreement (“Credit Agreement”), which, among other things, increased the size of its senior secured revolving credit facility to $i1.0 billion and extended the maturity date of its senior secured revolving credit facility. In connection with the execution of the Amendment, the Company incurred $i3.2 million
in costs, which are capitalized as debt issuance costs in the unaudited condensed consolidated statements of financial condition. The Credit Agreement subjects the Company to certain financial and non-financial covenants. As of March 31, 2021, the Company was in compliance with such covenants.
Issuance of 2029 Senior Notes
LPLH raised $i900.0 million
in aggregate principal amount of i4.00% senior notes on March 15, 2021, which were issued at par (“2029 Senior Notes”). The 2029 Senior Notes are unsecured obligations, governed by an indenture, that will mature on March 15, 2029, and bear interest at the rate of i4.00%
per year, with interest payable semi-annually. The Company may redeem all or part of the 2029 Senior Notes at any time prior to March 15, 2024 (subject to a customary “equity claw” redemption right) at i100% of the principal amount redeemed plus a “make-whole” premium. Thereafter, the Company may redeem all or part of the 2029 Senior
Notes at annually declining redemption premiums until March 15, 2026, at and after which date the redemption price will be equal to i100% of the principal amount redeemed plus any accrued and unpaid interest thereon. In connection with the issuance of the 2029 Senior Notes, the Company incurred $i9.0
million in costs, which are capitalized as debt issuance costs in the unaudited condensed consolidated statements of financial condition.
Notes
to Condensed Consolidated Financial Statements (Unaudited)
Issuance of 2027 Senior Notes
LPLH raised $i400.0 million in aggregate principal amount of i4.625%
senior notes on November 12, 2019, which were issued at par (“2027 Senior Notes”). The 2027 Senior Notes are unsecured obligations, governed by an indenture, that will mature on November 15, 2027, and bear interest at the rate of i4.625% per year, with interest payable semi-annually. The
Company may redeem all or part of the 2027 Senior Notes at any time prior to November 15, 2022 (subject to a customary “equity claw” redemption right) at i100% of the principal amount redeemed plus a “make-whole” premium. Thereafter, the Company may redeem all or part of the 2027 Senior Notes at annually declining redemption premiums until November 15, 2024, at and
after which date the redemption price will be equal to i100% of the principal amount redeemed plus any accrued and unpaid interest thereon.
Redemption of 2025 Senior Notes
LPLH issued $i500.0
million aggregate principal amount of i5.75% senior notes on March 10, 2017 and $i400.0 million aggregate
principal amount of i5.75% senior notes on September 21, 2017 (together, the “2025 Senior Notes”). The company used the proceeds from the issuance of the 2029 Senior Notes on March 15, 2021, along with existing corporate cash available, to redeem the 2025 Senior Notes. In connection with the transaction, the
Company recognized $i24.4 million as a loss on extinguishment of debt on the unaudited condensed consolidated statements of income.
Term Loan B
Borrowings under the senior secured Term Loan B facility bear interest at a rate per annum of i175
basis points over the Eurodollar Rate or i75 basis points over the base rate (as defined in the Credit Agreement), and have no leverage or interest coverage maintenance covenants. The Eurodollar Rate option is the one-, two-, three- or six-month LIBOR rate, as selected by LPLH, or, with the approval of the applicable lenders, twelve-month LIBOR rate or the LIBOR rate for another period acceptable to the Administrative Agent (including a shorter period). The LIBOR rate, on which the Eurodollar Rate is based, is expected to be discontinued by June
30, 2023. The Credit Agreement permits LPLH to agree with the administrative agent for the Credit Agreement on a replacement benchmark rate subject to certain conditions (including that a majority of the lenders do not object to such replacement rate within a specified period of time following notice thereof from the administrative agent).
The Company is required to make quarterly payments on the Term Loan B facility equal to i0.25%
of the aggregate principal amount of the loans under the Term Loan B facility.
Parent Revolving Credit Facility
Borrowings under the revolving credit facility bear interest at a rate per annum ranging from i125 to i175
basis points over the Eurodollar Rate or i25 to i75 basis points over the base rate, depending on the Consolidated Secured Debt to Consolidated EBITDA
Ratio (as defined in the Credit Agreement).
Broker-Dealer Revolving Credit Facility
On July 31, 2019, LPL Financial, the Company’s broker-dealer subsidiary, entered into a committed, unsecured revolving credit facility that matures on July 31, 2024 and allows for a maximum borrowing of $i300.0
million. Borrowings bear interest at a rate per annum ranging from i112.5 to i137.5 basis points over the Federal Funds Rate or Eurodollar Rate, depending
on the Parent Leverage Ratio (each as defined in the broker-dealer credit agreement). The broker-dealer credit agreement subjects LPL Financial to certain financial and non-financial covenants. LPL Financial was in compliance with such covenants as of March 31, 2021.
Other External Lines of Credit
LPL Financial maintained isix uncommitted lines of credit as of March 31,
2021. iTwo of the lines have limits that are unspecified, and that depend primarily on LPL Financial’s ability to provide sufficient collateral. The other four lines have a total limit of $i275.0 million,
one of which allows for collateralized borrowings while the other three allow for uncollateralized borrowings. There were no balances outstanding as of March 31, 2021.
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 9 - iiLEASES/
The
Company determines if an arrangement is a lease or contains a lease at inception. The Company has operating and finance leases for corporate offices and equipment with remaining lease terms of i1 to i16
years, some of which include options to extend the lease for up to i20 years. For leases with renewal options, the lease term is extended to reflect renewal options the Company is reasonably certain to exercise.
Operating lease assets and operating lease liabilities are recognized based on the present value of the future lease payments over the lease term at the commencement date. As most of the
Company’s leases do not provide an implicit rate, the Company estimates its incremental borrowing rate based on information available at the commencement date in determining the present value of future payments. Lease expense for net present value of payments is recognized on a straight-line basis over the lease term.
Finance lease assets are included in fixed assets in the unaudited condensed consolidated statements of financial condition and at March 31, 2021 were $i101.0
million.
i
The components of lease expense were as follows (in thousands):
The Company is party to certain long-term contracts for systems and services that enable back-office
trade processing and clearing for its product and service offerings.
Guarantees
The Company occasionally enters into contracts that contingently require it to indemnify certain parties against third-party claims. The terms of these obligations vary and, because a maximum obligation is not explicitly stated, the Company has determined that it is not possible to make an estimate of the amount that it could be obligated to pay under such contracts.
LPL Financial
provides guarantees to securities clearing houses and exchanges under their standard membership agreements, which require a member to guarantee the performance of other members. Under these agreements, if a member becomes unable to satisfy its obligations to the clearing houses and exchanges, all other members would be required to meet any shortfall. The Company’s liability under these arrangements is not quantifiable and could exceed the cash and securities it has posted as collateral. However, the potential requirement for the Company to make payments under these agreements is remote. Accordingly, no liability has been recognized for these transactions.
Loan Commitments
From time to
time, LPL Financial makes loans to its advisors, primarily to newly recruited advisors to assist in the transition process, which may be forgivable. Due to timing differences, LPL Financial may make commitments to issue such loans prior to actually funding them. These commitments are generally contingent upon certain events occurring, including but not limited to the advisor joining LPL Financial. LPL Financial had no significant unfunded loan commitments at March 31, 2021.
Legal and Regulatory Matters
The Company is subject to extensive regulation and supervision by U.S. federal and state agencies and various self-regulatory organizations. The Company and its
advisors periodically engage with such agencies and organizations, in the context of examinations or otherwise, to respond to inquiries, informational requests and investigations. From time to time, such engagements result in regulatory complaints or other matters, the resolution of which has in the past and may in the future include fines, customer restitution and other remediation. Assessing the probability of a loss occurring and the timing and amount of any loss related to a legal proceeding or regulatory matter is inherently difficult. While the Company exercises significant and complex judgments to make certain estimates presented in its consolidated financial statements, there are particular uncertainties and complexities involved when assessing the potential outcomes of legal proceedings and regulatory matters. The
Company’s assessment process considers a variety of factors and assumptions, which may include: the procedural status of the matter and any recent developments; prior experience and the experience of others in similar matters; the size and nature of potential exposures; available defenses; the progress of fact discovery; the opinions of counsel and experts; potential opportunities for settlement and the status of any settlement discussions; as well as the potential
Notes to Condensed Consolidated Financial Statements (Unaudited)
for insurance coverage and indemnification, if available. The Company monitors these factors and assumptions for new developments and re-assesses the likelihood that a loss will occur and the estimated range or amount of loss, if those amounts can be reasonably determined. The Company has established an accrual for those legal proceedings and regulatory matters for which a loss is both probable and the amount can be reasonably estimated.
Third-Party
Insurance
The Company maintains third-party insurance coverage for certain potential legal proceedings, including those involving certain client claims. With respect to such client claims, the estimated losses on many of the pending matters are less than the applicable deductibles of the insurance policies.
Self-Insurance
The Company has self-insurance for certain potential liabilities through the Captive Insurance Subsidiary. Liabilities associated with the risks that are retained by the Company are not discounted and are estimated by considering, in part, historical claims experience, severity
factors and other actuarial assumptions. The estimated accruals for these potential liabilities could be significantly affected if future occurrences and claims differ from such assumptions and historical trends, so there are particular complexities and uncertainties involved when assessing the adequacy of loss reserves for potential liabilities that are self-insured. As of March 31, 2021 and December 31, 2020, these self-insurance liabilities were $i57.2 million
and $i51.5 million, respectively, and are included in accounts payable and accrued liabilities in the unaudited condensed consolidated statements of financial condition. Self-insurance related charges are included in other expenses in the unaudited condensed consolidated statements of income.
Other Commitments
As of March 31, 2021, the
Company had approximately $i387.8 million of client margin loans that were collateralized with securities having a fair value of approximately $i542.9
million that LPL Financial can repledge, loan or sell. Of these securities, approximately $i67.1 million were client-owned securities pledged to the Options Clearing Corporation as collateral to secure client obligations related to options positions. As of March 31, 2021, there were no restrictions
that materially limited the Company’s ability to repledge, loan or sell the remaining $i475.8 million of client collateral.
Securities owned, trading, on the unaudited condensed consolidated statements of financial condition includes $ii4.5/
million pledged to the Options Clearing Corporation at both March 31, 2021 and December 31, 2020, and $ii15.0/
million pledged to the National Securities Clearing Corporation at both March 31, 2021 and December 31, 2020.
NOTE 11 - iSTOCKHOLDERS’ EQUITY
Dividends
The payment, timing, and amount of any dividends are
subject to approval by the Company’s board of directors (the “Board of Directors”) as well as certain limits under the Credit Agreement and indentures. iCash dividends per share of common stock and total cash dividends paid on a quarterly basis were as follows (in millions, except per share data):
2021
2020
Dividend
per Share
Total Cash Dividend
Dividend per Share
Total Cash Dividend
First quarter
$
i0.25
$
i20.0
$
i0.25
$
i19.7
Share
Repurchases
The Company engages in share repurchase programs, which are approved by the Board of Directors, pursuant to which the Company may repurchase its issued and outstanding shares of common stock from time to time. Repurchased shares are included in treasury stock on the unaudited condensed consolidated statements of financial condition.
As of March 31, 2021, the Company was authorized to purchase up to an additional $i349.8
million of shares pursuant to share repurchase programs approved by the Board of Directors.
Notes
to Condensed Consolidated Financial Statements (Unaudited)
NOTE 12 - iSHARE-BASED COMPENSATION
In November 2010, the Company adopted the 2010 Omnibus Equity Incentive Plan (as amended and restated in May 2015, the “2010 Plan”), which provides for the granting of stock options, warrants, restricted
stock awards, restricted stock units, deferred stock units, performance stock units and other equity-based compensation. Since its adoption, awards have been and are only made out of the 2010 Plan.
As of March 31, 2021, the 2010 Plan had i20,055,945 shares authorized for grant and i2,072,500
shares remaining available for future issuance.
Stock Options and Warrants
i
The following table summarizes the Company’s stock option and warrant activity as of and for the three months ended March 31, 2021:
The
following table summarizes information about outstanding stock options and warrants as of March 31, 2021:
Outstanding
Exercisable
Range
of Exercise Prices
Number of
Shares
Weighted-
Average
Exercise
Price
Weighted-Average Remaining Life (Years)
Number of
Shares
Weighted-
Average
Exercise
Price
$19.85
- $25.00
i379,343
$
i19.85
i4.87
i379,343
$
i19.85
$25.01
- $35.00
i269,458
$
i29.82
i1.38
i269,458
$
i29.82
$35.01
- $45.00
i335,412
$
i39.64
i5.82
i335,412
$
i39.64
$45.01
- $65.00
i190,378
$
i48.40
i3.62
i190,378
$
i48.40
$65.01
- $75.00
i247,823
$
i65.53
i6.87
i246,312
$
i65.50
$75.01
- $80.00
i304,180
$
i77.53
i7.81
i190,884
$
i77.53
i1,726,594
$
i45.12
i5.18
i1,611,787
$
i42.82
/
The
Company recognized share-based compensation related to the vesting of stock options awarded to employees and officers of $i0.8 million and $i1.4
million during the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, total unrecognized compensation cost related to non-vested stock options granted to employees and officers was $i1.9 million, which is expected to be recognized over a weighted-average
period of i0.91 years.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Restricted Stock and Stock Units
i
The
following summarizes the Company’s activity in its restricted stock awards and stock units, which include restricted stock units, deferred stock units and performance stock units, for the three months ended March 31, 2021:
(1) Includes
i53,133 vested and undistributed deferred stock units.
/
The Company grants restricted stock awards and deferred stock units to its directors and restricted stock units and performance stock units to its employees and officers. Restricted
stock awards and stock units must vest or are subject to forfeiture; however, restricted stock awards are included in shares outstanding upon grant and have the same dividend and voting rights as the Company’s common stock. The Company recognized $i10.2 million and $i6.7
million of share-based compensation related to the vesting of these restricted stock awards and stock units during the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, total unrecognized compensation cost for restricted stock awards and stock units was $i79.2
million, which is expected to be recognized over a weighted-average remaining period of i2.49 years.
The Company also grants restricted stock units to its advisors and to financial institutions. The Company recognized share-based
compensation of $i0.6 million and $i0.7 million related to the vesting of these awards during the three
months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, total unrecognized compensation cost for restricted stock units granted to advisors and financial institutions was $i4.0 million, which is expected to be recognized over a weighted-average remaining period of
i2.02 years.
NOTE 13 - iEARNINGS
PER SHARE
Basic earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the denominator is increased to include the number of additional shares of common stock that would have been outstanding if dilutive potential shares of common stock had been issued. iThe
calculation of basic and diluted earnings per share for the periods noted was as follows (in thousands, except per share data):
Notes to Condensed Consolidated Financial Statements (Unaudited)
The computation of diluted earnings per share excludes stock options, warrants and stock units that are anti-dilutive. For the three months ended March 31, 2021 and 2020, stock options, warrants and stock units representing common share equivalents of i88,853
shares and i390,014 shares, respectively, were anti-dilutive.
NOTE 14 - iINCOME
TAXES
The Company’s effective income tax rate differs from the federal corporate tax rate of i21.0%, primarily as a result of state taxes, settlement contingencies, tax credits and other permanent differences in tax deductibility of certain expenses. These items resulted in effective tax rates of i21.5%
and i25.0% for the three months ended March 31, 2021 and 2020, respectively. The decrease in our effective income tax rate for the three months ended March 31, 2021 compared to 2020 was primarily due to an increase in tax benefits associated with stock compensation under Accounting Standards Codification (“ASC”) Topic 718, and a reduction in unrecognized tax benefits related to the statute of limitations.
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
NOTE 15 - iRELATED PARTY TRANSACTIONS
In the ordinary course of business, the
Company has related party transactions with beneficial owners of more than iten percent of the Company’s outstanding common stock. Additionally, through its subsidiary LPL Financial, the Company provides services and charitable contributions to the LPL Financial Foundation, an organization that provides volunteer and financial support within the
Company’s local communities.
The Company recognized revenues for services provided to these related parties of $ii1.4/
million and $i1.1 million during the three months ended March 31, 2021 and 2020, respectively. The Company incurred expenses for the services provided by these related parties of $i0.4
million and $i0.5 million during the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021 and 2020, receivables from and payables to related parties were not material.
NOTE
16 - iNET CAPITAL AND REGULATORY REQUIREMENTS
The Company’s registered broker-dealer, LPL Financial, is subject to the SEC’s Net Capital Rule (Rule 15c3-1 under the Exchange Act), which requires the maintenance of minimum net capital. The net capital rules also provide that the broker-dealer’s capital may not be withdrawn if the resulting net capital would be less than minimum requirements. Additionally, certain withdrawals require the
approval of the SEC and FINRA to the extent they exceed defined levels, even though such withdrawals would not cause net capital to be less than minimum requirements. Net capital and the related net capital requirement may fluctuate on a daily basis. LPL Financial is a clearing broker-dealer and, as of March 31, 2021, had net capital of $i98.9 million with a minimum net capital requirement of $i11.5
million.
The Company’s subsidiary, PTC, also operates in a highly regulated industry and is subject to various regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have substantial monetary and non-monetary impacts on PTC’s operations.
As of March 31, 2021 and December 31, 2020, LPL Financial and PTC met all capital adequacy requirements to which they were subject.
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 17 - iFINANCIAL
INSTRUMENTS WITH OFF-BALANCE-SHEET CREDIT RISK
AND CONCENTRATIONS OF CREDIT RISK
LPL Financial’s client securities activities are transacted on either a cash or margin basis. In margin transactions, LPL Financial extends credit to the advisor’s client, subject to various regulatory and internal margin requirements, collateralized by cash and securities in the client’s account. As clients write options contracts or sell securities short, LPL Financial may incur losses if the clients do not fulfill their obligations and the collateral in the clients’ accounts is not sufficient to fully cover losses that clients may incur from these strategies. To control this risk, LPL Financial monitors margin levels daily and clients are required to deposit additional collateral, or reduce positions,
when necessary.
LPL Financial is obligated to settle transactions with brokers and other financial institutions even if its advisors’ clients fail to meet their obligation to LPL Financial. Clients are required to complete their transactions on the settlement date, generally two business days after the trade date. If clients do not fulfill their contractual obligations, LPL Financial may incur losses. In addition, the Company occasionally enters into certain types of contracts to fulfill its sale of when-issued securities. When-issued securities have been authorized but are contingent upon the actual issuance of the security. LPL Financial has established procedures to reduce this risk by generally requiring that clients deposit cash or securities
into their account prior to placing an order.
LPL Financial may at times hold equity securities on both a long and short basis that are recorded on the unaudited condensed consolidated statements of financial condition at market value. While long inventory positions represent LPL Financial’s ownership of securities, short inventory positions represent obligations of LPL Financial to deliver specified securities at a contracted price, which may differ from market prices prevailing at the time of completion of the transaction. Accordingly, both long and short inventory positions may result in losses or gains to LPL Financial as market values of securities fluctuate. To mitigate the risk of losses, long and short positions are marked-to-market daily and are continuously monitored by LPL Financial.
NOTE
18 - iSUBSEQUENT EVENTS
On April 30, 2021, the Company paid $i300
million to acquire all the equity interest of the wealth management business of Waddell & Reed, which includes a broker-dealer and registered investment advisor, and certain of its subsidiaries.
Item 3. Quantitative and
Qualitative Disclosures About Market Risk
Market Risk
We maintain trading securities owned and securities sold, but not yet purchased in order to facilitate client transactions, to meet a portion of our clearing deposit requirements at various clearing organizations and to track the performance of our research models. These securities could include mutual funds, debt securities and equity securities. Changes in the value of our trading securities may result from fluctuations in interest rates, credit ratings of the issuer, equity prices or a combination of these factors.
In facilitating client transactions, our securities owned and securities sold, but not yet purchased generally involve mutual funds, including dividend reinvestments. Our positions held are based upon the settlement of client transactions, which are monitored by our Service,
Trading and Operations (“Care”) department.
Positions held to meet clearing deposit requirements consist of U.S. government securities. The amount of securities deposited depends upon the requirements of the clearing organization. The level of securities deposited is monitored by the settlements group within our Care department.
Our Research department develops model portfolios that are used by advisors in developing client portfolios. We maintain securities owned in internal accounts based on these model portfolios to track the performance of our Research department. At the time a portfolio is developed, we purchase the securities in that model portfolio in an amount equal to the account minimum, which varies by product.
In addition, we are subject to market risk resulting from system incidents or interruptions and human error,
which can require customer trade corrections. We also have market risk on the fees we earn that are based on the market value of advisory and brokerage assets along with assets on which trailing commissions are paid, and assets eligible for sponsor payments.
As of March 31, 2021, the fair value of our trading securities owned was $48.0 million and securities sold, but not yet purchased were immaterial. The fair value of securities included within other assets was $408.0 million as of March 31, 2021. See Note 5 - Fair Value Measurements, within the notes to the unaudited condensed consolidated financial statements for information regarding the fair value of trading securities owned, securities sold, but not yet purchased and other assets associated with our client facilitation activities.
See Note 6 - Held-to-Maturity Securities, within the notes to the unaudited condensed consolidated financial statements for information regarding the fair value of securities held to maturity.
Interest Rate Risk
We are exposed to risk associated with changes in interest rates. As of March 31, 2021, $1.1 billion of our outstanding debt under our Credit Agreement was subject to floating interest rate risk. While our senior secured term loan is subject to increases in interest rates, we do not believe that a short-term change in interest rates would have a material impact on our income before taxes given assets owned, which are generally subject to the same, but off-setting, interest rate risk.
The following table summarizes the impact of increasing
interest rates on our interest expense from the variable portion of our debt outstanding, calculated using the projected average outstanding balance over the subsequent twelve-month period (in thousands):
(†) Our
interest rate for Term Loan B is locked in for one, two, three, six or twelve months as allowed under the Credit Agreement. At the end of the selected periods the rates will be locked in at the then current rate. The effect of these interest rate locks are not included in the table above.
See Note 8 - Long-term and Other Borrowings,within the notes to the unaudited condensed consolidated financial statements for additional information.
As of March 31, 2021, we offered our advisors and their clients two primary bank sweep vehicles that are interest rate sensitive: (1) our insured cash account (“ICA”) for individuals, trusts, sole proprietorships and entities organized or operated to make a profit, such as corporations, partnerships,
associations, business trusts and other organizations; and (2) an insured deposit cash account (“DCA”) for advisory individual retirement accounts. In
addition, we offer our advisors and their clients a money market program, including money market accounts as well as the ability to participate in purchased money market funds. While clients earn interest on deposits in ICA and DCA, we earn a fee. The fees we earn from cash held in ICAs are based on prevailing interest rates in the current interest rate environment.
The fees we earn from DCAs are calculated as a per account fee, and such fees increase as the federal funds target rate increases, subject to a cap. The fees we earn on cash balances in our advisors’ clients’ accounts in our money market program, including administrative and recordkeeping fees based on account type and the invested balances, are also sensitive to prevailing interest rates. Changes in interest rates and fees for the bank deposit sweep vehicles are monitored by our Rate Setting Committee (the “RSC”), which governs and approves any changes to our fees. By meeting promptly around the time of Federal Open Market Committee meetings, or for other market or non-market reasons, the RSC considers financial risk of the insured bank deposit sweep vehicles relative to other products into which clients may move cash balances.
Credit Risk
Credit risk is the risk of loss
due to adverse changes in a borrower’s, issuer’s or counterparty’s ability to meet its financial obligations under contractual or agreed upon terms. Credit risk includes the risk that loans we extend to advisors to facilitate their transition to our platform or to fund their business development activities are not repaid in full or on time. Credit risk also includes the risk that collateral posted with LPL Financial by clients to support margin lending or derivative trading is insufficient to meet clients’ contractual obligations to LPL Financial. We bear credit risk on the activities of our advisors’ clients, including the execution, settlement and financing of various transactions on behalf of these clients.
These activities are transacted on either a cash or margin basis. Our credit exposure in these transactions consists primarily of margin accounts, through which we extend credit to advisors’ clients collateralized by
securities in the clients’ accounts. Under many of these agreements, we are permitted to sell, repledge or loan these securities held as collateral and use these securities to enter into securities lending arrangements or to deliver to counterparties to cover short positions.
As our advisors execute margin transactions on behalf of their clients, we may incur losses if clients do not fulfill their obligations, the collateral in the clients’ accounts is insufficient to fully cover losses from such investments and our advisors fail to reimburse us for such losses. Our losses on margin accounts were immaterial during the three months ended March 31, 2021 and 2020. We monitor exposure to industry sectors and individual securities and perform analyses on a regular basis in connection with our margin lending activities. We adjust
our margin requirements if we believe our risk exposure is not appropriate based on market conditions.
We are subject to concentration risk if we extend large loans to or have large commitments with a single counterparty, borrower or group of similar counterparties or borrowers (e.g., in the same industry), or if we accept a concentrated position as collateral for a margin loan. Receivables from and payables to clients and stock borrowing and lending activities are conducted with a large number of clients and counterparties and potential concentration is monitored. We seek to limit this risk through review of the underlying business and the use of limits established by senior management, taking into consideration factors including the financial strength of the counterparty, the size of the position or commitment, the expected duration of the position or commitment and other positions or commitments outstanding.
Operational
Risk
Operational risk is defined as the risk of loss resulting from failed or inadequate processes or systems, actions by people or external events. We operate in diverse markets and are reliant on the ability of our employees and information technology systems, as well as third-party service providers and their systems, to manage a large volume of transactions and confidential information, including personally identifiable information, effectively and securely. These risks are less direct and quantifiable than credit and market risk, but managing them is critical, particularly in a rapidly changing operating environment with increasing transaction volumes and in light of increasing reliance on systems capabilities and performance, as well as third-party service providers. In the event of the breakdown, obsolescence or improper operation of systems, malicious cyber activity or improper action by employees, advisors or third-party
service providers, we could suffer business disruptions, financial loss, data loss, regulatory sanctions and damage to our reputation. Although we have developed business continuity and disaster recovery plans, those plans could be inadequate, disrupted or otherwise unsuccessful in maintaining the competitiveness, stability, security or continuity of critical systems as a result of, among other things, obsolescence, improper operation, third-party dependencies or limitations of our current technology.
In order
to assist in the mitigation and control of operational risk, we have an operational risk framework that is designed to enable assessment and reporting on operational risk across the firm. This framework aims to ensure policies and procedures are in place and appropriately designed to identify and manage operational risk at appropriate levels throughout our organization and within various departments. These control mechanisms attempt to ensure that operational policies and procedures are being followed and that our employees and advisors operate within established corporate policies and limits. Notwithstanding the foregoing, please consult the “Risks Related to Our Technology” and the “Risks Related to Our Business and Industry” sections within Part I, “Item 1A. Risk Factors” in our 2020 Annual Report on Form 10-K for more information about the risks associated with our technology, including risks related to security, our risk management policies
and procedures, and the potential related effects on our operations.
Our senior management is monitoring developments in the COVID-19 pandemic and has implemented changes to our policies, procedures and operations to protect the integrity and continuity of our business and the health and safety of our employees. For example, we equipped and enabled a substantial majority of employees to work remotely, implemented physical distancing and enhanced cleaning protocols throughout our corporate offices and worked closely with our vendors to maintain service continuity throughout the market volatility and increased operational volumes that occurred from time to time during the pandemic. There can be no guarantee that our business continuity plans and the other efforts to manage the business implications of COVID-19 will be effective, or that there will not be material adverse effects on our results of operations. Please consult Part
I, “Item 1A. Risk Factors” in our 2020 Annual Report on Form 10-K for more information about the risks associated with COVID-19.
Regulatory and Legal Risk
The regulatory environment in which we operate is discussed in detail within Part I, “Item 1. Business” in our 2020 Annual Report on Form 10-K. In recent years, and during the period presented in this Quarterly Report on Form 10-Q, we have observed the SEC, FINRA and state regulators broaden the scope, frequency and depth of their examinations and inquiries to include greater emphasis on the quality, consistency and oversight of our compliance systems and programs. Please consult the “Risks Related to Our Regulatory Environment” and the “Risks Related to Our Business and Industry” sections within Part I, “Item 1A. Risk Factors” in our 2020 Annual Report on Form 10-K for more information about the risks associated
with operating within our regulatory environment, pending regulatory matters and the potential related effects on our operations.
Risk Management
We employ an enterprise risk management (“ERM”) framework that is intended to address key risks and responsibilities, enable us to execute our business strategy and protect our Company and its franchise. For a discussion of our ERM framework, please see the “Risk Management” section within Part II, “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our 2020 Annual report on Form 10-K.
Item 4.Controls
and Procedures
Evaluation of Disclosure Controls and Procedures
Management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective.
Change in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the first quarter ended March 31, 2021, that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting.
From time
to time, we have been subjected to and are currently subject to legal and regulatory proceedings arising out of our business operations, including lawsuits, arbitration claims, and inquiries, investigations and enforcement proceedings initiated by the SEC, FINRA and state securities regulators, as well as other actions and claims. See Note 10 - Commitments and Contingencies, within the notes to the unaudited condensed consolidated financial statements for additional information.
Item 1A. Risk Factors
There have been no material changes in the information regarding the Company’s risks, as set forth under Part I, “Item 1A. Risk
Factors” in the Company’s 2020 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
