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10-Q - PDF OF 10-Q - JONES FINANCIAL COMPANIES LLLPd781883d10q1.pdf
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

(Mark One)

[ X ]

   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)   
   OF THE SECURITIES EXCHANGE ACT OF 1934   

For the quarterly period ended September 26, 2014

OR

 

[    ]

   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE   
   SECURITIES EXCHANGE ACT OF 1934   

For the transition period from                      to                     

Commission file number 0-16633

THE JONES FINANCIAL COMPANIES, L.L.L.P.

 

 

(Exact name of registrant as specified in its Charter)

 

        MISSOURI

 

 

43-1450818

 

    (State or other jurisdiction of   (IRS Employer Identification No.)
  incorporation or organization)  

12555 Manchester Road

Des Peres, Missouri 63131

 

 

(Address of principal executive office)

(Zip Code)

(314) 515-2000

 

 

(Registrant’s telephone number, including area code)

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. YES [ X ] NO [    ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). YES [ X ] NO [    ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer [    ]

    

Accelerated filer [    ]

 

Non-accelerated filer [ X ]

    

Smaller reporting company [     ]

 

(do not check if a smaller reporting company)

    

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [    ] No [ X ]

As of October 31, 2014, 634,255 units of limited partnership interest (“Interests”) are outstanding, each representing $1,000 of limited partner capital. There is no public or private market for such Interests.


THE JONES FINANCIAL COMPANIES, L.L.L.P.

INDEX

 

       Page   

Part I.

 

FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements

  
 

Consolidated Statements of Financial Condition

     3   
 

Consolidated Statements of Income

     4   
  Consolidated Statements of Changes in Partnership Capital Subject to Mandatory Redemption      5   
 

Consolidated Statements of Cash Flows

     6   
 

Notes to Consolidated Financial Statements

     7   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      18   

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     39   

Item 4.

 

Controls and Procedures

     40   

Part II.

 

OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     41   

Item 1A.

 

Risk Factors

     43   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     43   

Item 6.

 

Exhibits

     44   
 

Signatures

     45   

 

2


PART I.     FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

THE JONES FINANCIAL COMPANIES, L.L.L.P.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

 

(Dollars in millions)   

September 26,

2014

    

December 31,

2013

 

 

 

ASSETS:

     

Cash and cash equivalents

   $ 643       $ 600   

Cash and investments segregated under federal regulations

     8,123         8,435   

Securities purchased under agreements to resell

     810         1,026   

Receivable from:

     

Clients

     2,658         2,300   

Mutual funds, insurance companies and other

     464         405   

Brokers, dealers and clearing organizations

     126         148   

Securities owned, at fair value:

     

Inventory securities

     86         102   

Investment securities

     153         141   

Equipment, property and improvements, at cost, net of accumulated depreciation and amortization

     546         543   

Other assets

     76         95   
  

 

 

    

 

 

 

TOTAL ASSETS

   $ 13,685       $ 13,795   
  

 

 

    

 

 

 

LIABILITIES:

     

Payable to:

     

Clients

   $ 10,320       $ 10,596   

Brokers, dealers and clearing organizations

     118         79   

Accrued compensation and employee benefits

     945         843   

Accounts payable, accrued expenses and other

     210         142   

Long-term debt

     3         4   
  

 

 

    

 

 

 
     11,596         11,664   
  

 

 

    

 

 

 

Liabilities subordinated to claims of general creditors

     -         50   

Contingencies (Note 6)

     

Partnership capital subject to mandatory redemption, net of reserve for anticipated withdrawals

     1,954         1,858   

Reserve for anticipated withdrawals

     135         223   
  

 

 

    

 

 

 

Total partnership capital subject to mandatory redemption

     2,089         2,081   
  

 

 

    

 

 

 

TOTAL LIABILITIES

   $ 13,685       $ 13,795   
  

 

 

    

 

 

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

3


PART I.     FINANCIAL INFORMATION

 

Item 1. Financial Statements, continued

 

THE JONES FINANCIAL COMPANIES, L.L.L.P.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

    Three Months Ended     Nine Months Ended  
 

 

 

   

 

 

 

(Dollars in millions, except per unit information and

units outstanding)

 

  Sept 26,  

2014

   

  Sept 27,  

2013

   

  Sept 26,  

2014

   

  Sept 27,  

2013

 
 

 

 

   

 

 

 

Revenue:

       

Fee revenue

       

Asset-based

  $ 797      $ 646      $ 2,277      $ 1,833   

Account and activity

    156        143        447        422   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total fee revenue

    953        789        2,724        2,255   

Trade revenue

       

Commissions

    532        504        1,609        1,610   

Principal transactions

    32        64        106        124   

Investment banking

    42        30        117        88   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total trade revenue

    606        598        1,832        1,822   

Interest and dividends

    34        33        97        99   

Other revenue

    3        12        25        38   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    1,596        1,432        4,678        4,214   

Interest expense

    13        14        41        44   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

    1,583        1,418        4,637        4,170   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

       

Compensation and benefits

    1,084        956        3,126        2,786   

Occupancy and equipment

    91        88        274        267   

Communications and data processing

    73        74        216        220   

Payroll and other taxes

    53        47        171        158   

Advertising

    13        12        50        42   

Postage and shipping

    13        12        38        39   

Professional and consulting fees

    16        13        44        34   

Other operating expenses

    45        48        143        135   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    1,388        1,250        4,062        3,681   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income before allocations to partners

    195        168        575        489   

Allocations to partners:

       

Limited partners

    20        20        61        57   

Subordinated limited partners

    23        17        66        53   

General partners

    152        131        448        379   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

  $ -          $ -          $ -          $ -       
 

 

 

   

 

 

   

 

 

   

 

 

 

Income allocated to limited partners per weighted average $1,000 equivalent limited partnership unit outstanding

  $ 32.77      $ 30.13      $ 96.71      $ 87.77   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average $1,000 equivalent limited partnership units outstanding

    635,856        644,042        637,638        646,223   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

4


PART I.     FINANCIAL INFORMATION

 

Item 1. Financial Statements, continued

 

THE JONES FINANCIAL COMPANIES, L.L.L.P.

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERSHIP CAPITAL

SUBJECT TO MANDATORY REDEMPTION

NINE MONTHS ENDED SEPTEMBER 26, 2014 AND SEPTEMBER 27, 2013

(Unaudited)

 

(Dollars in millions)   

Limited

Partnership

Capital

   

Subordinated

Limited

Partnership

Capital

   

General

Partnership

Capital

    Total  

 

 

TOTAL PARTNERSHIP CAPITAL SUBJECT TO

MANDATORY REDEMPTION, DEC 31, 2012

   $ 696      $ 302      $ 985      $ 1,983   
  

 

 

   

 

 

   

 

 

   

 

 

 

Reserve for anticipated withdrawals

     (45     (19     (107     (171
  

 

 

   

 

 

   

 

 

   

 

 

 

Partnership capital subject to mandatory redemption, net

of reserve for anticipated withdrawals, Dec 31, 2012

   $ 651      $ 283      $ 878      $ 1,812   

Partnership loans outstanding, Dec 31, 2012

     -            -            170        170   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total partnership capital, including capital financed

with partnership loans, net of reserve for anticipated

withdrawals, Dec 31, 2012

     651        283        1,048        1,982   

Issuance of partnership interests

     -            31        101        132   

Redemption of partnership interests

     (8     (10     (92     (110

Income allocated to partners

     57        53        379        489   

Distributions

     (5     (48     (267     (320
  

 

 

   

 

 

   

 

 

   

 

 

 

Total partnership capital, including capital financed

with partnership loans

     695        309        1,169        2,173   

Partnership loans outstanding, Sept 27, 2013

     -            -            (215     (215
  

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL PARTNERSHIP CAPITAL SUBJECT TO

MANDATORY REDEMPTION, SEPT 27, 2013

   $ 695      $ 309      $ 954      $ 1,958   
  

 

 

   

 

 

   

 

 

   

 

 

 

Reserve for anticipated withdrawals

     (52     (5     (59     (116
  

 

 

   

 

 

   

 

 

   

 

 

 

Partnership capital subject to mandatory redemption, net

of reserve for anticipated withdrawals, Sept 27, 2013

   $ 643      $ 304      $ 895      $ 1,842   

TOTAL PARTNERSHIP CAPITAL SUBJECT TO

MANDATORY REDEMPTION, DEC 31, 2013

   $ 688      $ 329      $ 1,064      $ 2,081   
  

 

 

   

 

 

   

 

 

   

 

 

 

Reserve for anticipated withdrawals

     (48     (24     (151     (223
  

 

 

   

 

 

   

 

 

   

 

 

 

Partnership capital subject to mandatory redemption, net

of reserve for anticipated withdrawals, Dec 31, 2013

   $ 640      $ 305      $ 913      $ 1,858   

Partnership loans outstanding, Dec 31, 2013

     -            -            215        215   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total partnership capital, including capital financed

with partnership loans, net of reserve for anticipated

withdrawals, Dec 31, 2013

     640        305        1,128        2,073   

Issuance of partnership interests

     -            47        92        139   

Redemption of partnership interests

     (5     (16     (101     (122

Income allocated to partners

     61        66        448        575   

Distributions

     (5     (59     (314     (378
  

 

 

   

 

 

   

 

 

   

 

 

 

Total partnership capital, including capital financed

with partnership loans

     691        343        1,253        2,287   

Partnership loans outstanding, Sept 26, 2014

     -            (2     (196     (198
  

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL PARTNERSHIP CAPITAL SUBJECT TO

MANDATORY REDEMPTION, SEPT 26, 2014

   $ 691      $ 341      $ 1,057      $ 2,089   
  

 

 

   

 

 

   

 

 

   

 

 

 

Reserve for anticipated withdrawals

     (56     (7     (72     (135
  

 

 

   

 

 

   

 

 

   

 

 

 

Partnership capital subject to mandatory redemption, net

of reserve for anticipated withdrawals, Sept 26, 2014

   $ 635      $ 334      $ 985      $ 1,954   

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

5


PART I.     FINANCIAL INFORMATION

 

Item 1. Financial Statements, continued

 

THE JONES FINANCIAL COMPANIES, L.L.L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Nine Months Ended  
  

 

 

 
     September 26,     September 27,  
(Dollars in millions)    2014     2013  

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ -      $ -   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Income before allocations to partners

     575        489   

Depreciation and amortization

     61        62   

Changes in assets and liabilities:

    

Cash and investments segregated under federal regulations

     312        (377

Securities purchased under agreements to resell

     216        97   

Net payable to clients

     (634     (97

Net receivable from brokers, dealers and clearing organizations

     61        105   

Receivable from mutual funds, insurance companies and other

     (59     (45

Securities owned

     4        (34

Other assets

     19        29   

Accrued compensation and employee benefits

     102        134   

Accounts payable, accrued expenses and other

     71        29   
  

 

 

   

 

 

 

Net cash provided by operating activities

     728        392   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchase of equipment, property and improvements, net

     (67     (63
  

 

 

   

 

 

 

Net cash used in investing activities

     (67     (63
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Repayment of long-term debt

     (1     (1

Repayment of subordinated liabilities

     (50     (50

Issuance of partnership interests (net of partnership loans)

     55        38   

Redemption of partnership interests

     (122     (110

Distributions from partnership capital

     (601     (491

Issuance of partnership loans

     —          (11

Repayment of partnership loans

     101        60   
  

 

 

   

 

 

 

Net cash used in financing activities

     (618     (565
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     43        (236

CASH AND CASH EQUIVALENTS:

    

Beginning of period

     600        601   
  

 

 

   

 

 

 

End of period

   $ 643      $ 365   
  

 

 

   

 

 

 

Cash paid for interest

   $ 41      $ 43   
  

 

 

   

 

 

 

Cash paid for taxes

   $ 8      $ 8   
  

 

 

   

 

 

 

NON-CASH ACTIVITIES:

    

Additions of equipment, property and improvements in accounts payable and accrued expenses

   $ 1      $ 2   
  

 

 

   

 

 

 

Issuance of general partnership interests through partnership loans in current period

   $ 84      $ 94   
  

 

 

   

 

 

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

6


PART I.     FINANCIAL INFORMATION

 

Item 1. Financial Statements, continued

 

THE JONES FINANCIAL COMPANIES, L.L.L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in millions)

NOTE 1 – INTRODUCTION AND BASIS OF PRESENTATION

The accompanying Consolidated Financial Statements include the accounts of The Jones Financial Companies, L.L.L.P. and all wholly-owned subsidiaries (collectively, the “Partnership”). All material intercompany balances and transactions have been eliminated in consolidation. Non-controlling minority interests are accounted for under the equity method. The results of the Partnership’s subsidiaries in Canada are included in the Partnership’s Consolidated Financial Statements for the three and nine month periods ended August 31, 2014 and 2013 because of the timing of the Partnership’s financial reporting process.

The Partnership’s principal operating subsidiary, Edward D. Jones & Co., L.P. (“Edward Jones”), is comprised of two registered broker-dealers primarily serving individual investors in the United States (“U.S.”) and, through a subsidiary, Canada. Edward Jones primarily derives its revenues from the retail brokerage business through the sale of listed and unlisted securities and insurance products, investment banking, principal transactions, distribution of mutual fund shares, and through fees related to assets held by and account services provided to its clients. The Partnership conducts business throughout the U.S. and Canada with its clients, various brokers, dealers, clearing organizations, depositories and banks. For financial information related to the Partnership’s two operating segments for the three and nine month periods ended September 26, 2014 and September 27, 2013, see Note 7 to the Consolidated Financial Statements. Trust services are offered to Edward Jones’ U.S. clients through Edward Jones Trust Company (“EJTC”), a wholly-owned subsidiary of the Partnership.

The Consolidated Financial Statements have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the U.S. (“GAAP”) which require the use of certain estimates by management in determining the Partnership’s assets, liabilities, revenues and expenses. Actual results could differ from these estimates.

The interim financial information included herein is unaudited. However, in the opinion of management, such information includes all adjustments, consisting primarily of normal recurring accruals, which are necessary for a fair presentation of the results of interim operations. Certain prior period amounts have been reclassified to conform to the current period presentation.

There have been no material changes to the Partnership’s significant accounting policies as described in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2013 (“Annual Report”). The results of operations for the three and nine month periods ended September 26, 2014 are not necessarily indicative of the results to be expected for the year ended December 31, 2014. These Consolidated Financial Statements should be read in conjunction with the Annual Report.

 

7


PART I.     FINANCIAL INFORMATION

 

Item 1. Financial Statements, continued

 

NOTE 2 – FAIR VALUE

Substantially all of the Partnership’s financial assets and financial liabilities covered under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 820, Fair Value Measurement and Disclosure (“ASC 820”), are carried at fair value or contracted amounts which approximate fair value. Upon the adoption of fair value guidance set forth in FASB ASC No. 825, Financial Instruments, the Partnership elected not to take the fair value option on all debt and liabilities subordinated to the claims of general creditors.

Fair value of a financial instrument is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, also known as the “exit price.” Financial assets are marked to bid prices and financial liabilities are marked to offer prices. The Partnership’s financial assets and financial liabilities recorded at fair value in the Consolidated Statements of Financial Condition are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by ASC 820 with the related amount of subjectivity associated with the inputs to value these assets and liabilities at fair value for each level, are as follows:

Level I – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

The types of assets and liabilities categorized as Level I generally are U.S. treasuries, investments in publicly traded mutual funds with quoted market prices, government and agency obligations, and equities listed in active markets.

Level II – Inputs (other than quoted prices included in Level I) are either directly or indirectly observable for the asset or liability through correlation with related market data at the measurement date and for the duration of the instrument’s anticipated life. The Partnership uses the market approach valuation technique which incorporates third-party pricing services and other relevant observable information (such as market interest rates, yield curves, prepayment risk and credit risk generated by market transactions involving identical or comparable assets or liabilities) in valuing these types of investments. When third-party pricing services are used, the methods and assumptions used are reviewed by the Partnership.

The types of assets and liabilities categorized as Level II generally are certificates of deposit, state and municipal obligations, corporate bonds and notes, and collateralized mortgage obligations.

Level III – Inputs are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the inputs to the model.

The Partnership did not have any assets or liabilities categorized as Level III during the periods ended September 26, 2014 and December 31, 2013. In addition, there were no transfers into or out of Levels I, II or III during these periods. Securities sold, not yet purchased are included within accounts payable, accrued expenses and other on the Consolidated Statements of Financial Condition.

 

8


PART I.     FINANCIAL INFORMATION

 

Item 1. Financial Statements, continued

 

The following tables show the Partnership’s financial assets and liabilities measured at fair value:

 

   

Financial Assets at Fair Value as of

September 26, 2014

 
 

 

 

 
         Level I               Level II               Level III               Total       

 

 

Investments segregated under federal regulations:

       

U.S. treasuries

  $ 1,057      $ -      $ -      $ 1,057   

Certificates of deposit

    -        225        -        225   
 

 

 

 

Total investments segregated under federal regulations

  $ 1,057      $ 225      $ -      $ 1,282   
 

 

 

 

Securities owned:

       

Inventory securities:

       

State and municipal obligations

  $ -      $ 43      $ -      $ 43   

Equities

    33        -        -        33   

Certificates of deposit

    -        5        -        5   

Corporate bonds and notes

    -        3        -        3   

Other

    1        1        -        2   
 

 

 

 

Total inventory securities

  $ 34      $ 52      $ -      $ 86   
 

 

 

 

Investment securities:

       

Mutual funds

  $ 129      $ -      $ -      $ 129   

Government and agency obligations

    19        -        -        19   

Equities

    4        -        -        4   

Other

    -        1        -        1   
 

 

 

 

Total investment securities

  $ 152      $ 1      $ -      $ 153   
 

 

 

 
   

 

Financial Liabilities at Fair Value as of

September 26, 2014

  

  

 

 

 

 
    Level I     Level II     Level III     Total  

 

 

Securities sold, not yet purchased:

       

Corporate bonds and notes

  $ -      $ 2      $ -      $ 2   

Equities

    2        -        -        2   
 

 

 

 

Total securities sold, not yet purchased

  $ 2      $ 2      $ -      $ 4   
 

 

 

 

 

9


PART I.     FINANCIAL INFORMATION

 

Item 1. Financial Statements, continued

 

   

Financial Assets at Fair Value as of

December 31, 2013

 
 

 

 

 
         Level I               Level II               Level III               Total       

 

 

Investments segregated under federal regulations:

       

U.S. treasuries

  $ 1,154      $ -      $ -      $ 1,154   

Certificates of deposit

    -        225        -        225   
 

 

 

 

Total investments segregated under federal regulations

  $ 1,154      $ 225      $ -      $ 1,379   
 

 

 

 

Securities owned:

       

Inventory securities:

       

State and municipal obligations

  $ -      $ 67      $ -      $ 67   

Equities

    27        -        -        27   

Corporate bonds and notes

    -        3        -        3   

Certificates of deposit

    -        2        -        2   

Unit investment trusts

    2        -        -        2   

Other

    -        1        -        1   
 

 

 

 

Total inventory securities

  $ 29      $ 73      $ -      $ 102   
 

 

 

 

Investment securities:

       

Mutual funds

  $ 116      $ -      $ -      $ 116   

Government and agency obligations

    19        -        -        19   

Equities

    5        -        -        5   

Other

    -        1        -        1   
 

 

 

 

Total investment securities

  $ 140      $ 1      $ -      $ 141   
 

 

 

 
   

Financial Liabilities at Fair Value as of

December 31, 2013

 
 

 

 

 
    Level I     Level II     Level III     Total  

 

 

Securities sold, not yet purchased:

       

Corporate bonds and notes

  $ -      $ 2      $ -      $ 2   

Equities

    1        -        -        1   

Other

    -        1        -        1   
 

 

 

 

Total securities sold, not yet purchased

  $ 1      $ 3      $ -      $ 4   
 

 

 

 

The Partnership attempts to reduce its exposure to market price fluctuations of its inventory securities through the sale of U.S. Treasury securities futures contracts. The amount of open futures contracts fluctuates on a daily basis due to changes in inventory securities owned, interest rates and market conditions. Futures contracts are settled daily, and any gain or loss is recognized as a component of net inventory gains, which are included in principal transactions revenue. The notional amounts of futures contracts outstanding were $5 and $9 at September 26, 2014 and December 31, 2013, respectively. The average notional amounts of futures contracts outstanding throughout the three and nine month periods ended September 26, 2014 and the year ended December 31, 2013 were approximately $4, $5 and $7, respectively. The underlying assets of these contracts are not reflected in the Partnership’s Consolidated Financial Statements; however, the related mark-to-market adjustments are included in receivables from mutual funds, insurance companies and other in the Consolidated Statements of Financial Condition and were unrealized gains of $0.013 and $0.031 as of September 26, 2014 and December 31, 2013, respectively. The total gains or losses related to these assets, recorded within the Consolidated Statements of Income, were losses of $0.072 and $0.575 for the three and nine month periods ended September 26, 2014, respectively, and gains of $0.013 and $0.214 for the three and nine month periods ended September 27, 2013, respectively.

 

10


PART I.     FINANCIAL INFORMATION

 

Item 1. Financial Statements, continued

 

The Partnership estimates the fair value of long-term debt and the liabilities subordinated to claims of general creditors based on the present value of future principal and interest payments associated with the debt, using current interest rates for debt of a similar nature as that of the Partnership (Level II input). The following table shows the estimated fair values and book values of long-term debt and liabilities subordinated to claims of general creditors as of:

 

    September 26, 2014     December 31, 2013  
    Book Value     Fair Value     Book Value     Fair Value  

Long-term debt

  $ 3      $ 4      $ 4      $ 5   

Liabilities subordinated to claims of general creditors

    -        -        50        50   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 3      $ 4      $ 54      $ 55   
 

 

 

   

 

 

   

 

 

   

 

 

 

In June 2014, the Partnership paid the final scheduled installment on the liabilities subordinated to claims of general creditors of $50.

NOTE 3 – LINES OF CREDIT

The following table shows the composition of the Partnership’s aggregate bank lines of credit in place as of:

 

    September 26,
2014
    December 31,
2013
 

2013 Credit Facility

  $ 400      $ 400   

Uncommitted secured credit facilities

    365        415   
 

 

 

   

 

 

 

Total lines of credit

  $ 765      $ 815   
 

 

 

   

 

 

 

In November 2013, the Partnership entered into an agreement with 12 banks for a five-year $400 committed unsecured revolving line of credit (“2013 Credit Facility”), which has an expiration date of November 15, 2018 and replaced a similar credit facility. The 2013 Credit Facility is intended to provide short-term liquidity to the Partnership should the need arise. The 2013 Credit Facility has a tiered interest rate margin based on the Partnership’s leverage ratio (ratio of total debt to total capitalization). Borrowings made with a three-day advance notice will have a rate of one-month LIBOR plus a margin ranging from 1.25% to 2.00%. Same day borrowings, which are subject to certain borrowing notification cutoff times, will have a rate consisting of a margin ranging from 0.25% to 1.00% plus the greater of the prime rate, the federal funds effective rate plus 1.00%, or the one-month LIBOR rate plus 1.00%. In accordance with the terms of the 2013 Credit Facility, the Partnership is required to maintain a leverage ratio of no more than 35% and minimum partnership capital, net of reserve for anticipated withdrawals, of at least $1,382 plus 50% of subsequent issuances of partnership capital. As of September 26, 2014, the Partnership was in compliance with all covenants related to the 2013 Credit Facility.

The Partnership’s uncommitted lines of credit are subject to change at the discretion of the banks and, therefore, due to credit market conditions and the uncommitted nature of these credit facilities, it is possible these lines of credit could decrease or not be available in the future. Actual borrowing availability on the uncommitted lines of credit is based on client margin securities and Partnership securities, which would serve as collateral in the event the Partnership borrowed against these lines.

 

11


PART I.     FINANCIAL INFORMATION

 

Item 1. Financial Statements, continued

 

There were no amounts outstanding on the 2013 Credit Facility and the uncommitted lines of credit as of September 26, 2014 and December 31, 2013. In addition, the Partnership did not have any draws against these lines of credit during the nine and twelve month periods ended September 26, 2014 and December 31, 2013, respectively, except for one nominal advance made on both the committed facility and the uncommitted facility for the purpose of testing draw procedures.

NOTE 4 – PARTNERSHIP CAPITAL SUBJECT TO MANDATORY REDEMPTION

The following table shows the Partnership’s capital subject to mandatory redemption as of:

 

     September 26,     December 31,  
     2014     2013  

Partnership capital outstanding:

    

Limited partnership capital

   $ 635      $ 640   

Subordinated limited partnership capital

     336        305   

General partnership capital

     1,181        1,128   
  

 

 

   

 

 

 

Total partnership capital outstanding

     2,152        2,073   

Partnership loans outstanding:

    

Partnership loans outstanding at beginning of period

     (215     (170

Partnership loans issued during the period

     (84     (107

Repayment of partnership loans during the period

     101        62   
  

 

 

   

 

 

 

Total partnership loans outstanding

     (198     (215

Partnership capital subject to mandatory redemption, net of reserve for anticipated withdrawals

     1,954        1,858   

Reserve for anticipated withdrawals

     135        223   
  

 

 

   

 

 

 

Partnership capital subject to mandatory redemption

   $ 2,089      $ 2,081   
  

 

 

   

 

 

 

FASB ASC No. 480, Distinguishing Liabilities from Equity (“ASC 480”), established standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity. Under the provisions of ASC 480, the obligation to redeem a partner’s capital in the event of a partner’s death is one of the criteria requiring capital to be classified as a liability.

In June 2014 the Partnership entered into the Nineteenth Amended and Restated Agreement of Registered Limited Liability Limited Partnership (the “Partnership Agreement”). Under the terms of the Partnership Agreement, a partner’s capital is required to be redeemed by the Partnership in the event of the partner’s death or withdrawal from the Partnership, subject to compliance with ongoing regulatory capital requirements. In the event of a partner’s death, the Partnership generally redeems the partner’s capital within six months. The Partnership has restrictions in place which govern the withdrawal of capital. Under the terms of the Partnership Agreement, limited partners withdrawing from the Partnership are to be repaid their capital in three equal annual installments beginning no earlier than 90 days after their withdrawal notice is received by the Managing Partner. The capital of general partners withdrawing from the Partnership is converted to subordinated limited partnership capital or, at the discretion of the Managing Partner, redeemed by the Partnership. Subordinated limited partners are repaid their capital in six equal annual installments beginning no earlier than 90 days after their request for withdrawal of contributed capital is received by the Managing Partner. The Partnership’s Managing Partner

 

12


PART I.    FINANCIAL INFORMATION

 

Item 1. Financial Statements, continued

 

has discretion to waive or modify these withdrawal restrictions and to accelerate the return of capital. All current and future partnership capital is subordinate to all current and future liabilities of the Partnership. The Partnership Agreement includes additional terms.

Since the Partnership Agreement obligates the Partnership to redeem a partner’s capital after a partner’s death, ASC 480 requires all of the Partnership’s equity capital be classified as a liability. In accordance with ASC 480, income allocable to limited, subordinated limited and general partners is classified as a reduction of income before allocations to partners, which results in presentation of $0 net income.

Net income, as defined in the Partnership Agreement, is equivalent to income before allocations to partners on the Consolidated Statements of Income. Such income, if any, for each calendar year is allocated to the Partnership’s three classes of capital in accordance with the formulas prescribed in the Partnership Agreement. Income allocations are based upon partner capital contributions, including capital contributions financed with loans from the Partnership as indicated in the previous table. First, limited partners are allocated net income (as defined in the Partnership Agreement) in accordance with the prescribed formula for their share of net income. Limited partners do not share in the net loss in any year in which there is a net loss and the Partnership is not dissolved or liquidated. Thereafter, subordinated limited partners and general partners are allocated any remaining net income or net loss based on formulas as defined in the Partnership Agreement.

The Partnership filed a Registration Statement on Form S-8 with the U.S. Securities and Exchange Commission (“SEC”) on January 17, 2014 to register $350 in securities in preparation for its 2014 Limited Partnership offering. The Partnership is in the process of offering approximately $311 in Interests to eligible financial advisors, branch office administrators and home office associates. Of this amount, it is expected approximately $300 will be accepted, with the remainder available for future issuance at the discretion of the Managing Partner and Executive Committee, which may include issuances to financial advisors who complete a retirement transition plan in future years and who may be considered for additional Interests. The 2014 Limited Partnership offering is expected to close in early 2015. Limited partners participate in the Partnership’s profits and are paid a minimum 7.5% annual return on the face amount of their capital (“7.5% Payment”), although the 7.5% Payment is not guaranteed by the Partnership and no reserve has been set aside for such payments.

The Partnership makes loans available to those general partners (other than members of the Executive Committee, which consists of the executive officers of the Partnership) who require financing for some or all of their partnership capital contributions. It is anticipated that a majority of future general and subordinated limited partnership capital contributions (other than for Executive Committee members) requiring financing will be financed through partnership loans. In limited circumstances a general partner may withdraw from the Partnership and become a subordinated limited partner while he or she still has an outstanding partnership loan. Loans made by the Partnership to partners are generally for a period of one year but are expected to be renewed and bear interest at the prime rate, as defined in the loan documents. The Partnership recognizes interest income for the interest received related to these loans. The outstanding amount of partner loans financed through the Partnership is reflected as a reduction to total partnership capital in the Consolidated Statements of Changes in Partnership Capital Subject to Mandatory Redemption. As of September 26, 2014 and December 31, 2013, the outstanding amount of partner loans financed through the Partnership was $198 and $215, respectively. Interest income earned from these loans, which is included in interest and dividends in the Consolidated Statements of Income, was $1 and $5 for the three and nine month periods ended September 26, 2014, respectively, and $2 and $6 for the three and nine month periods ended September 27, 2013, respectively.

 

13


PART I.    FINANCIAL INFORMATION

 

Item 1. Financial Statements, continued

 

The limited partnership capital subject to mandatory redemption is held by current and former associates, who are current and former employees of the Partnership, and general partners of the Partnership. Limited partners participate in the Partnership’s profits and are paid a minimum 7.5% annual return on the face amount of their capital, in accordance with the Partnership Agreement. The minimum 7.5% annual return was $12 and $36 for the three and nine month periods ended September 26, 2014, respectively, and $12 and $36 for the three and nine month periods ended September 27, 2013, respectively. These amounts are included as a component of interest expense in the Consolidated Statements of Income.

The subordinated limited partnership capital subject to mandatory redemption is held by current and former general partners of the Partnership. Subordinated limited partners receive a percentage of the Partnership’s net income determined in accordance with the Partnership Agreement. The subordinated limited partnership capital subject to mandatory redemption is subordinated to the limited partnership capital.

The general partnership capital subject to mandatory redemption is held by current general partners of the Partnership. General partners receive a percentage of the Partnership’s net income determined in accordance with the Partnership Agreement. The general partnership capital subject to mandatory redemption is subordinated to the limited partnership capital and the subordinated limited partnership capital.

NOTE 5 – NET CAPITAL REQUIREMENTS

As a result of its activities as a broker-dealer, Edward Jones is subject to the net capital provisions of Rule 15c3-1 of the Securities Exchange Act of 1934 (“Exchange Act”) and capital compliance rules of the Financial Industry Regulatory Authority (“FINRA”) Rule 4110. Under the alternative method permitted by the rules, Edward Jones must maintain minimum net capital equal to the greater of $0.25 or 2% of aggregate debit items arising from client transactions. The net capital rules also provide that Edward Jones’ partnership capital may not be withdrawn if 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.

The Partnership’s Canada broker-dealer is a registered securities dealer regulated by the Investment Industry Regulatory Organization of Canada (“IIROC”). Under the regulations prescribed by IIROC, the Partnership is required to maintain minimum levels of risk adjusted capital, which are dependent on the nature of the Partnership’s assets and operations.

 

14


PART I.    FINANCIAL INFORMATION

 

Item 1. Financial Statements, continued

 

The following table shows the Partnership’s net capital figures for its U.S. and Canada broker-dealers as of:

 

     September 26,      December 31,  
     2014      2013  

U.S.:

     

Net capital

   $ 958       $ 873   

Net capital in excess of the minimum required

   $ 909       $ 830   

Net capital as a percentage of aggregate debit items

     39.1%         41.4%   

Net capital after anticipated capital withdrawals, as a percentage of aggregate debit items

     27.5%         24.8%   

Canada:

     

Regulatory risk adjusted capital

   $ 27       $ 34   

Regulatory risk adjusted capital in excess of the minimum required to be held by IIROC

   $ 20       $ 27   

Net capital and the related capital percentages may fluctuate on a daily basis. In addition, EJTC was in compliance with its regulatory capital requirements.

NOTE 6 – CONTINGENCIES

In the normal course of business, the Partnership has been named as a defendant in various legal actions, including arbitrations, class actions and other litigation. Certain of these legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. The Partnership is also involved from time to time in investigations and proceedings by governmental and self-regulatory organizations, certain of which may result in adverse judgments, fines or penalties. In addition, the Partnership provides for potential losses that may arise related to other contingencies.

The Partnership assesses its liabilities and contingencies utilizing available information. For those matters where it is probable the Partnership will incur a potential loss and the amount of the loss is reasonably estimable, in accordance with FASB ASC No. 450, Contingencies, an accrued liability has been established. These reserves represent the Partnership’s aggregate estimate of the potential loss contingency at September 26, 2014 and are believed to be sufficient. Such liability may be adjusted from time to time to reflect any relevant developments.

For such matters where an accrued liability has not been established and the Partnership believes a loss is both reasonably possible and estimable, as well as for matters where an accrued liability has been recorded but for which an exposure to loss in excess of the amount accrued is both reasonably possible and estimable, the current estimated aggregated range of additional possible loss is $7 to $39. This range of reasonably possible loss does not necessarily represent the Partnership’s maximum loss exposure as the Partnership was not able to estimate a range of reasonably possible loss for all matters.

Further, the matters underlying any disclosed estimated range will change from time to time, and actual results may vary significantly. While the outcome of these matters is inherently uncertain, based on information currently available, the Partnership believes that its established reserves at September 26, 2014 are adequate and the liabilities arising from such proceedings will not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Partnership. However, based on future developments and the potential unfavorable resolution of these matters, the outcome could be material to the Partnership’s future consolidated operating results for a particular period or periods.

 

15


PART I.    FINANCIAL INFORMATION

 

Item 1. Financial Statements, continued

 

NOTE 7 – SEGMENT INFORMATION

The Partnership has determined it has two operating and reportable segments based upon geographic location, the U.S. and Canada. Canada segment information is based upon the Consolidated Financial Statements of the Partnership’s Canada operations without eliminating intercompany items, such as management fees paid to affiliated entities. The U.S. segment information is derived from the Consolidated Financial Statements less the Canada segment information as presented. This is consistent with how management reviews the segments in order to assess performance.

The Partnership derived from one mutual fund company 19% and 20% of its total revenue for the three and nine month periods ended September 26, 2014, respectively, and 19% of its total revenue for both the three and nine month periods ended September 27, 2013. The revenue generated from this company related to business conducted with the Partnership’s U.S. segment. Significant reductions in revenue due to regulatory reform or other changes to the Partnership’s relationship with this mutual fund company could have a material impact on the Partnership’s results of operations.

The following table shows financial information for the Partnership’s reportable segments:

 

     Three Months Ended     Nine Months Ended  
     September 26,     September 27,     September 26,     September 27,  
     2014     2013     2014     2013  

Net revenue:

        

U.S.

   $ 1,532      $ 1,370      $ 4,483      $ 4,020   

Canada

     51        48        154        150   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

   $ 1,583      $ 1,418      $ 4,637      $ 4,170   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pre-variable income:

        

U.S.

   $ 411      $ 338      $ 1,157      $ 942   

Canada

     2        1        9        6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total pre-variable income

     413        339        1,166        948   

Variable compensation:

        

U.S.

     213        167        575        446   

Canada

     5        4        16        13   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total variable compensation

     218        171        591        459   

Income (loss) before allocations to partners:

        

U.S.

     198        171        582        496   

Canada

     (3     (3     (7     (7
  

 

 

   

 

 

   

 

 

   

 

 

 

Total income before allocations to partners

   $ 195      $ 168      $ 575      $ 489   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

16


PART I.     FINANCIAL INFORMATION

 

Item 1. Financial Statements, continued

 

NOTE 8 – OFFSETTING ASSETS AND LIABILITIES

The Partnership does not offset financial instruments in the Consolidated Statements of Financial Condition. However, the Partnership enters into master netting arrangements with counterparties for securities purchased under agreements to resell that are subject to net settlement in the event of default. These agreements create a right of offset for the amounts due to and due from the same counterparty in the event of default or bankruptcy.

The following table shows the Partnership’s securities purchased under agreements to resell as of:

 

     Gross
amounts of
     Gross amounts
offset in the
Consolidated
Statements of
     Net amounts
presented in the
Consolidated
Statements of
     Gross amounts not offset
in the Consolidated
Statements of Financial
Condition
       
     recognized
assets
     Financial
Condition
     Financial
Condition
     Financial
instruments
     Securities
collateral(1)
    Net amount  
  

 

 

    

 

 

   

 

 

 

Sept 26, 2014

   $ 810         -         810         -         (810   $ -   

Dec 31, 2013

   $ 1,026         -         1,026         -         (1,026   $ -   

(1) Actual collateral was greater than 102% of the related assets in U.S. agreements and greater than 100% in Canada agreements for all periods presented.

NOTE 9 – RECENTLY ISSUED ACCOUNTING STANDARDS

In May 2014, the FASB and the International Accounting Standards Board (“IASB”) jointly issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance. The objective of ASU 2014-09 is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will be effective for the first quarter of 2017. An entity can elect to adopt ASU 2014-09 using one of two methods, either full retrospective adoption to each prior reporting period, or recognize the cumulative effect of adoption at the date of initial application. The Partnership is in the process of evaluating the new standard and does not know the effect, if any, ASU 2014-09 will have on the Consolidated Financial Statements or which adoption method will be used.

 

17


PART I.     FINANCIAL INFORMATION

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following Management’s Discussion and Analysis is intended to help the reader understand the results of operations and the financial condition of the Partnership. Management’s Discussion and Analysis should be read in conjunction with the Consolidated Financial Statements and accompanying notes included in Item 1, Financial Statements of this Quarterly Report on Form 10-Q and Item 8, Financial Statements and Supplementary Data of the Partnership’s Annual Report.

Basis of Presentation

The Partnership broadly categorizes its net revenues into four categories: fee revenue, trade revenue (revenue from client buy or sell transactions of securities), net interest and dividends revenue (net of interest expense) and other revenue. In the Consolidated Statements of Income, fee revenue is composed of asset-based fees and account and activity fees. Trade revenue is composed of commissions, principal transactions and investment banking. These sources of revenue are affected by a number of factors. Asset-based fees are generally a percentage of the total value of specific assets in client accounts. These fees are impacted by client dollars invested in and divested from the accounts which generate asset-based fees and change in market values of the assets. Account and activity fees and other revenue are impacted by the number of client accounts and the variety of services provided to those accounts, among other factors. Trade revenue is impacted by the number of financial advisors, trading volume (client dollars invested), mix of the products in which clients invest, margins earned on the transactions and market volatility. Net interest and dividends revenue is impacted by the amount of cash and investments, receivables from and payables to clients, the variability of interest rates earned and paid on such balances, the number of Interests, and the balances of partnership loans, long-term debt and liabilities subordinated to claims of general creditors.

 

18


PART I.     FINANCIAL INFORMATION

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

 

OVERVIEW

The following table sets forth the change in major categories of the Consolidated Statements of Income as well as several key related metrics for the three and nine month periods ended September 26, 2014 and September 27, 2013. Management of the Partnership relies on this financial information and the related metrics to evaluate the Partnership’s operating performance and financial condition. All amounts are presented in millions, except the number of financial advisors and as otherwise noted.

 

     Three Months Ended      Nine Months Ended  
     Sept 26,
2014
     Sept 27,
2013
     % Change      Sept 26,
2014
     Sept 27,
2013
     % Change  

Revenue:

                 

Fee revenue:

                 

Asset-based

   $ 797       $ 646         23%       $ 2,277       $ 1,833         24%   

Account and activity

     156         143         9%         447         422         6%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fee revenue

     953         789         21%         2,724         2,255         21%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

% of net revenue

     60%         56%            59%         54%      

Trade revenue:

                 

Commissions

     532         504         6%         1,609         1,610         0%   

Principal transactions

     32         64         -50%         106         124         -15%   

Investment banking

     42         30         40%         117         88         33%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total trade revenue

     606         598         1%         1,832         1,822         1%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

% of net revenue

     38%         42%            40%         44%      

Net interest and dividends

     21         19         11%         56         55         2%   

Other revenue

     3         12         -75%         25         38         -34%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net revenue

     1,583         1,418         12%         4,637         4,170         11%   

Operating expenses

     1,388         1,250         11%         4,062         3,681         10%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income before allocations to partners

   $ 195       $ 168         16%       $ 575       $ 489         18%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Related metrics:

                 

Client dollars invested(1):

                 

Trade ($ billions)

   $ 27.7       $ 26.4         5%       $ 83.3       $ 80.6         3%   

Advisory programs ($ billions)

   $ 5.4       $ 4.5         20%       $ 16.0       $ 14.6         10%   

Client households at period end (millions)

     4.66         4.58         2%         4.66         4.58         2%   

Net new assets for the period end ($ billions)

   $ 12.3       $ 9.7         27%       $ 39.0       $ 30.8         27%   

Client assets under care:

                 

Total:

                 

At period end ($ billions)

   $ 848.2       $ 745.8         14%       $ 848.2       $ 745.8         14%   

Average ($ billions)

   $ 850.4       $ 728.4         17%       $ 821.8       $ 711.3         16%   

Advisory programs:

                 

At period end ($ billions)

   $ 132.9       $ 106.8         24%       $ 132.9       $ 106.8         24%   

Average ($ billions)

   $ 132.1       $ 103.4         28%       $ 125.3       $ 97.4         29%   

Financial advisors:

                 

At period end

     13,807         12,996         6%         13,807         12,996         6%   

Average

     13,659         12,877         6%         13,446         12,693         6%   

Attrition %

     8.8%         9.1%         n/a         8.5%         9.3%         n/a   

Dow Jones Industrial Average (actual):

                 

At period end

     17,113         15,258         12%         17,113         15,258         12%   

Average for period

     16,949         15,288         11%         16,580         14,760         12%   

S&P 500 Index (actual):

                 

At period end

     1,983         1,692         17%         1,983         1,692         17%   

Average for period

     1,976         1,675         18%         1,904         1,601         19%   

(1) Client dollars invested related to trade revenue represent the principal amount of clients’ buy and sell transactions resulting in commissions, principal transactions and investment banking revenues. Client dollars invested related to advisory programs revenue represent the net inflows of client dollars into the programs.

 

19


PART I.     FINANCIAL INFORMATION

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

 

Third Quarter 2014 versus 2013 Overview

The Partnership experienced strong results during the third quarter of 2014 compared to 2013, including record net revenue, income before allocations to partners and client assets under care. Results benefitted from net new assets and rising market conditions, including increases of 18% in the average S&P 500 Index and 11% in the average Dow Jones Industrial Average.

The Partnership’s key performance measures were strong during the third quarter of 2014 and financial advisors attracted $12.3 billion in net new assets. Average client assets under care grew 17% to $850.4 billion, which included a 28% increase in the advisory programs’ average assets under care to $132.1 billion. In addition, client dollars invested related to trade revenue were up 5% to $27.7 billion.

Net revenue increased 12% to $1.6 billion for the third quarter of 2014. This increase was led by a 21% increase in total fee revenue, primarily due to higher levels of asset values on which fees were earned, driven by the continued investment of client dollars into advisory programs and the overall rise in equity markets.

Operating expenses increased 11% for the third quarter of 2014 compared to 2013, primarily due to increased compensation expense driven by higher revenues on which financial advisors are paid and higher variable compensation due to the increase in the Partnership’s profitability.

Overall, the 12% increase in net revenue, partially offset by the 11% increase in operating expenses, generated income before allocations to partners of $195 million, a 16% increase over the third quarter of 2013.

Year to Date 2014 versus 2013 Overview

The Partnership experienced strong results during the first nine months of 2014 compared to 2013, including record net revenue, income before allocations to partners and client assets under care. Results benefitted from net new assets and rising market conditions, including increases of 19% in the average S&P 500 Index and 12% in the average Dow Jones Industrial Average.

The Partnership’s key performance measures were strong during the first nine months of 2014 and financial advisors attracted $39.0 billion in net new assets. Average client assets under care grew 16% to $821.8 billion, which included a 29% increase in the advisory programs’ average assets under care to $125.3 billion. In addition, client dollars invested related to trade revenue were up 3% to $83.3 billion.

Net revenue increased 11% to $4.6 billion for the first nine months of 2014. This increase was led by a 21% increase in total fee revenue, primarily due to higher levels of asset values on which fees were earned, driven by the continued investment of client dollars into advisory programs and the overall rise in equity markets.

Operating expenses increased 10% for the first nine months of 2014 compared to 2013, primarily due to increased compensation expense driven by higher revenues on which financial advisors are paid and higher variable compensation due to the increase in the Partnership’s profitability.

 

20


PART I.     FINANCIAL INFORMATION

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

 

Overall, the 11% increase in net revenue, partially offset by the 10% increase in operating expenses, generated income before allocations to partners of $575 million, an 18% increase over the first nine months of 2013.

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 26, 2014 AND SEPTEMBER 27, 2013

The discussion below details the significant fluctuations and drivers for the major categories of the Partnership’s Consolidated Statements of Income.

Fee Revenue

Fee revenue, which consists of asset-based fees and account and activity fees, increased 21% to $953 million and 21% to $2,724 million in the third quarter and first nine months of 2014 compared to the same periods in 2013, respectively. The increase in fee revenue for the third quarter and first nine months of 2014 was primarily due to higher asset values and continued client investment in advisory programs. A discussion of fee revenue components follows.

Asset-based

 

     Three Months Ended      Nine Months Ended  
     Sept 26,
2014
     Sept 27,
2013
     % Change      Sept 26,
2014
     Sept 27,
2013
     % Change  

Asset-based fee revenue ($ millions):

                 

Advisory programs fees

   $ 452       $ 354         28%       $ 1,272       $ 987         29%   

Service fees

     291         243         20%         835         700         19%   

Revenue sharing

     43         39         10%         137         115         19%   

Trust fees

     10         9         11%         29         25         16%   

Cash solutions

     1         1         0%         4         6         -33%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total asset-based fee revenue

   $ 797       $ 646         23%       $ 2,277       $ 1,833         24%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Related metrics ($ billions):

                 

Average U.S. client asset values(1):

                 

Mutual fund assets held outside of advisory programs(2)

   $ 372.5       $ 315.2         18%       $ 359.4       $ 304.9         18%   

Advisory programs

     131.1         103.0         27%         124.5         97.1         28%   

Insurance

     71.5         63.4         13%         69.8         60.8         15%   

Cash solutions

     19.9         19.9         0%         20.1         19.8         2%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total client asset values

   $ 595.0       $ 501.5         19%       $ 573.8       $ 482.6         19%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(1) Assets on which the Partnership earns asset-based fee revenue. The U.S. portion of consolidated asset-based fee revenue was 98% for all periods presented.

(2) The amounts previously reported for the third quarter and first nine months of September 27, 2013 of $401.8 billion and $386.6 billion, respectively, have been corrected to exclude $86.6 billion and $81.7 billion, respectively, in mutual fund assets held in advisory programs which had been previously included. The amounts previously reported for the same periods for total client asset values were also corrected by the same amounts. Similar prior period adjustments will be made upon filing the 2014 annual results.

 

21


PART I.     FINANCIAL INFORMATION

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

 

For the three months ended September 26, 2014, asset-based fee revenue increased 23% to $797 million compared to the three months ended September 27, 2013. The increase is primarily due to greater advisory programs fees and service fees. The growth in advisory programs fees was primarily due to increased investment of client assets into advisory programs and increases in the market value of the underlying assets. Service fees increased in the third quarter of 2014 due to increases in the market value of the underlying assets as well as continued client investment into mutual fund products, which includes new client assets. A majority of client assets held in advisory programs were converted from other client investments previously held with the Partnership.

For the nine months ended September 26, 2014, asset-based fee revenue increased 24% to $2,277 million compared to the nine months ended September 27, 2013. The increase is primarily due to greater advisory programs fees and service fees. The growth in advisory programs fees was primarily due to increased investment of client assets into advisory programs and increases in the market value of the underlying assets. Service fees increased in the first nine months of 2014 due to increases in the market value of the underlying assets as well as continued client investment into mutual fund products, which includes new client assets. A majority of client assets held in advisory programs were converted from other client investments previously held with the Partnership.

Account and Activity

 

     Three Months Ended      Nine Months Ended  
     Sept 26,
2014
     Sept 27,
2013
     % Change      Sept 26,
2014
     Sept 27,
2013
     % Change  

Account and activity fee revenue ($ millions):

                 

Sub-transfer agent services

   $ 98       $ 89         10%       $ 285       $ 260         10%   

Retirement account fees

     31         31         0%         90         91         -1%   

Other account and activity fees

     27         23         17%         72         71         1%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total account and activity fee revenue

   $ 156       $ 143         9%       $ 447       $ 422         6%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Related metrics (millions):

                 

Average client:

                 

Sub-transfer agent holdings serviced

     22.2         20.0         11%         21.6         19.6         10%   

Retirement accounts

     4.7         4.2         12%         4.1         4.1         0%   

For the three months ended September 26, 2014, account and activity fee revenue increased 9% to $156 million compared to the three months ended September 27, 2013. Revenue growth was led by sub-transfer agent service fees due to the increase in the average number of client mutual fund holdings serviced.

For the nine months ended September 26, 2014, account and activity fee revenue increased 6% to $447 million compared to the nine months ended September 27, 2013. Revenue growth was led by sub-transfer agent service fees due to the increase in the average number of client mutual fund holdings serviced.

 

22


PART I.     FINANCIAL INFORMATION

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

 

Trade Revenue

Trade revenue, which consists of commissions, principal transactions and investment banking revenue, increased 1% to $606 million and 1% to $1,832 million in the third quarter and first nine months of 2014, respectively, compared to the same periods in 2013. The increase in trade revenue for the third quarter and first nine months of 2014 was primarily due to the impact of increased client dollars invested, partially offset by a decrease in the margin earned. A discussion of trade revenue components follows.

Commissions

 

     Three Months Ended      Nine Months Ended  
     Sept 26,
2014
     Sept 27,
2013
     % Change      Sept 26,
2014
     Sept 27,
2013
     % Change  

Commissions revenue ($ millions):

                 

Mutual funds

   $ 274       $ 266         3%       $ 858       $ 893         -4%   

Equities

     151         145         4%         461         443         4%   

Insurance

     107         93         15%         290         274         6%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commissions revenue

   $ 532       $ 504         6%       $ 1,609       $ 1,610         0%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Related metrics:

                 

Client dollars invested ($ billions)

   $ 22.4       $ 20.4         10%       $ 67.6       $ 65.8         3%   

Margin per $1,000 invested

   $ 23.7       $ 24.7         -4%       $ 23.8       $ 24.5         -3%   

U.S. business days

     63         63         0%         186         187         -1%   

For the three months ended September 26, 2014, commissions revenue increased 6% to $532 million compared to the three months ended September 27, 2013. The increase was primarily due to a 10% increase in client dollars invested in commission generating transactions, most notably in insurance products, due to the continued strong equity market. This increase was partially offset by a 4% decrease in the margin earned per $1,000 invested due to a lower proportion of revenue from mutual funds which have a higher margin than revenue from equities.

For the nine months ended September 26, 2014, commissions revenue was essentially flat at $1,609 million compared to the nine months ended September 27, 2013. The 3% decrease in the margin earned per $1,000 invested was due to a lower proportion of revenue from mutual funds which have a higher margin than revenue from equities. This decrease was offset by a 3% increase in client dollars invested in commission generating transactions due to the continued strong equity market.

Principal Transactions

For the three months ended September 26, 2014, principal transactions revenue decreased 50% to $32 million compared to the three months ended September 27, 2013. Principal transactions revenue was negatively impacted by a 32% decrease in the margin earned per $1,000 invested in the third quarter of 2014 as client investment purchases shifted towards products with shorter maturities which have lower margins. Additionally, revenue was negatively impacted by relatively lower interest rates during the third quarter of 2014 compared to the third quarter of 2013 which caused demand to decline and led to a 28% decrease in client dollars invested.

 

23


PART I.     FINANCIAL INFORMATION

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

 

For the nine months ended September 26, 2014, principal transactions revenue decreased 15% to $106 million compared to the nine months ended September 27, 2013. Principal transactions revenue was negatively impacted by a 15% decrease in the margin earned per $1,000 invested as client investment purchases shifted towards products with shorter maturities which have lower margins. The decrease in revenue was also due to a 5% decline in client dollars invested resulting from a weak fixed income market. This decline was partially offset by a $5 million net inventory loss in 2013, while there was a $1 million net inventory gain in 2014.

Investment Banking

For the three months ended September 26, 2014, investment banking revenue increased 40% to $42 million compared to the three months ended September 27, 2013. The growth in investment banking revenue reflects a 46% increase in client dollars invested, primarily due to improved market conditions which have led to increased investment in equity unit investment trusts.

For the nine months ended September 26, 2014, investment banking revenue increased 33% to $117 million compared to the nine months ended September 27, 2013. The growth in investment banking revenue reflects a 37% increase in client dollars invested, primarily due to improved market conditions which have led to increased investment in equity unit investment trusts.

 

24


PART I.     FINANCIAL INFORMATION

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

 

Net Interest and Dividends

 

     Three Months Ended      Nine Months Ended  
     Sept 26,
2014
    Sept 27,
2013
    % Change      Sept 26,
2014
    Sept 27,
2013
    % Change  

Net interest and dividends revenue ($ millions):

             

Client loan interest

   $ 28      $ 27        4%       $ 79      $ 80        -1%   

Short-term investing interest

     4        3        33%         11        10        10%   

Other interest and dividends

     2        3        -33%         7        9        -22%   

Limited partnership interest expense

     (12     (12     0%         (36     (36     0%   

Other interest expense

     (1     (2     -50%         (5     (8     -38%   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total net interest and dividends revenue

   $ 21      $ 19        11%       $ 56      $ 55        2%   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Related metrics ($ millions):

             

Average aggregate client loan balance

   $ 2,396.8      $ 2,104.1        14%       $ 2,268.9      $ 2,102.8        8%   

Average rate earned

     4.65%        5.12%        -9%         4.72%        5.12%        -8%   

Average funds invested

   $ 9,205.9      $ 8,820.8        4%       $ 9,291.5      $ 8,578.4        8%   

Average rate earned

     0.16%        0.15%        7%         0.16%        0.16%        0%   

Weighted average $1,000 equivalent limited partnership units outstanding

     635,856        644,042        -1%         637,638        646,223        -1%   

For the three month period ended September 26, 2014, net interest and dividends revenue increased 11% to $21 million compared to the three month period ended September 27, 2013. Results reflect a 4% increase in client loan interest primarily due to an increase in the average aggregate client loan balance, partially offset by a decrease in the average rate earned. This increase was aided by a decrease in other interest expense primarily due to lower average debt balances during the current period as a result of debt repayments.

For the nine month period ended September 26, 2014, net interest and dividends revenue increased 2% to $56 million compared to the nine month period ended September 27, 2013. Results reflect a decrease in other interest expense primarily due to lower average debt balances during the current period as a result of debt repayments.

Other Revenue

Other revenue decreased 75% to $3 million and 34% to $25 million in the third quarter and first nine months of 2014, respectively, compared to the same periods in 2013. These decreases are primarily attributable to smaller increases in the value of the investments held related to the Partnership’s nonqualified deferred compensation plan during the current periods compared to prior year. The Partnership has chosen to hedge the future liability for the plan by purchasing investments in an amount similar to the future expected liability. As the market value of these investments fluctuates, the gains or losses are recorded in other revenue with an offset in compensation and fringe benefits expense, resulting in minimal net impact to the Partnership’s income before allocations to partners. The decrease in other revenue during the first nine months of 2014 is also attributable to $4 million the Partnership received in the first quarter of 2013 related to the mortgage joint venture dissolution.

 

25


PART I.     FINANCIAL INFORMATION

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

 

Operating Expenses

 

     Three Months Ended      Nine Months Ended  
     Sept 26,
2014
     Sept 27,
2013
     % Change      Sept 26,
2014
     Sept 27,
2013
     % Change  

Operating expenses ($ millions):

                 

Compensation and benefits:

                 

Financial advisor

   $ 549       $ 503         9%       $ 1,615       $ 1,484         9%   

Home office and branch

     255         231         10%         742         701         6%   

Variable compensation

     218         171         27%         591         459         29%   

Financial advisor salary and subsidy

     62         51         22%         178         142         25%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total compensation and benefits

     1,084         956         13%         3,126         2,786         12%   

Occupancy and equipment

     91         88         3%         274         267         3%   

Communications and data processing

     73         74         -1%         216         220         -2%   

Payroll and other taxes

     53         47         13%         171         158         8%   

Advertising

     13         12         8%         50         42         19%   

Postage and shipping

     13         12         8%         38         39         -3%   

Professional and consulting fees

     16         13         23%         44         34         29%   

Other operating expenses

     45         48         -6%         143         135         6%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

   $ 1,388       $ 1,250         11%       $ 4,062       $ 3,681         10%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Related metrics:

                 

Number of branches:

                 

At period end

     11,906         11,584         3%         11,906         11,584         3%   

Average

     11,842         11,539         3%         11,757         11,476         2%   

Financial advisors:

                 

At period end

     13,807         12,996         6%         13,807         12,996         6%   

Average

     13,659         12,877         6%         13,446         12,693         6%   

Branch associates(1)(3):

                 

At period end

     13,795         13,358         3%         13,795         13,358         3%   

Average

     13,811         13,433         3%         13,627         13,260         3%   

Home office associates(1)(3):

                 

At period end

     5,528         5,405         2%         5,528         5,405         2%   

Average

     5,661         5,486         3%         5,563         5,426         3%   

Home office associates(1) per

                 

100 financial advisors (average)

     41.4         42.6         -3%         41.4         42.7         -3%   

Branch associates(1) per 100 financial advisors (average)

     101.1         104.3         -3%         101.3         104.5         -3%   

Average operating expenses per financial advisor(2) (actual)

   $ 45,465       $ 44,715         2%       $ 138,034       $ 136,910         1%   

(1) Counted on a full-time equivalent (“FTE”) basis.

(2) Operating expenses used in calculation represent total operating expenses less financial advisor and variable compensation.

(3) The methodology used to calculate FTEs was revised at the beginning of 2014. Prior period metrics were updated to conform to the new methodology.

 

26


PART I.     FINANCIAL INFORMATION

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

 

For the three month period ended September 26, 2014, operating expenses increased 11% to $1.4 billion compared to the three month period ended September 27, 2013 primarily due to a 13% increase in compensation and benefits (described below). The remaining operating expenses increased 3% ($10 million) primarily due to a $6 million increase in payroll and other taxes as a result of increased compensation.

Financial advisor compensation increased 9% ($46 million) in the third quarter of 2014 primarily due to increases in asset-based fee and trade revenues on which financial advisor commissions are paid. Financial advisor salary and subsidy increased 22% ($11 million) primarily due to growth in financial advisors and compensation initiatives.

Home office and branch salary and fringe benefit expense increased 10% ($24 million) in the third quarter of 2014 primarily due to higher wages and healthcare costs, as well as more personnel to support increased client activity and growth of the Partnership’s financial advisor network. The average number of both the Partnership’s home office and branch associates increased 3%.

Variable compensation expands and contracts in relation to the Partnership’s related profit margin. As the Partnership’s financial results and profit margin improve, a significant portion is allocated to variable compensation and paid to associates in the form of increased bonuses and profit sharing. As a result, variable compensation increased 27% ($47 million) in the third quarter of 2014 to $218 million.

The Partnership uses the ratios of both the number of home office and the number of branch associates per 100 financial advisors and the average operating expenses per financial advisor as key metrics in managing its costs. In the third quarter of 2014, the average number of both the home office associates per 100 financial advisors and the number of branch associates per 100 financial advisors decreased 3%. These ratios reflect the Partnership’s longer term cost management strategy to grow its financial advisor network at a faster pace than its home office and branch support staff. The average operating expense per financial advisor increased 2% primarily due to increases in home office associates’ salary and fringe benefit expenses and branch operating expenses to support the Partnership’s financial advisor network, partially offset by the impact of spreading those expenses over more financial advisors.

For the nine month period ended September 26, 2014, operating expenses increased 10% to $4.1 billion compared to the nine month period ended September 27, 2013 primarily due to a 12% increase in compensation and benefits (described below). The remaining operating expenses increased 5% ($41 million) primarily due to a $13 million increase in payroll and other taxes as a result of increased compensation, a $10 million increase in professional and consulting fees and an $8 million planned increase in advertising costs.

Financial advisor compensation increased 9% ($131 million) in the first nine months of 2014 primarily due to increases in asset-based fee and trade revenues on which financial advisor commissions are paid. Financial advisor salary and subsidy increased 25% ($36 million) primarily due to growth in financial advisors and compensation initiatives.

Home office and branch salary and fringe benefit expense increased 6% ($41 million) in the first nine months of 2014 primarily due to higher wages and more personnel to support increased client activity and growth of the Partnership’s financial advisor network. The average number of both the Partnership’s home office and branch associates increased 3%.

Variable compensation increased 29% ($132 million) in the first nine months of 2014 to $591 million, reflecting strong financial results and profit margin.

 

27


PART I.     FINANCIAL INFORMATION

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

 

In the first nine months of 2014, the average number of both the home office associates per 100 financial advisors and the number of branch associates per 100 financial advisors decreased 3%, reflecting growth in the number of financial advisors at a faster pace than growth in the number of home office and branch support staff. The average operating expense per financial advisor increased 1%, primarily due to increases in home office associates’ salary and fringe benefit expenses and branch operating expenses to support the Partnership’s financial advisor network, partially offset by the impact of spreading those expenses over more financial advisors.

Segment Information

The Partnership has determined it has two operating and reportable segments based upon geographic location, the U.S. and Canada. Canada segment information is based upon the Consolidated Financial Statements of the Partnership’s Canada operations without eliminating intercompany items, such as management fees paid to affiliated entities. The U.S. segment information is derived from the Consolidated Financial Statements less the Canada segment information as presented. This is consistent with how management reviews the segments in order to assess performance.

 

28


PART I.     FINANCIAL INFORMATION

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

 

The following table shows financial information for the Partnership’s reportable segments. All amounts are presented in millions, except the number of financial advisors and as otherwise noted.

 

    Three Months Ended     Nine Months Ended  
    Sept 26,
2014
    Sept 27,
2013
    % Change     Sept 26,
2014
    Sept 27,
2013
    % Change  

Net revenue:

           

U.S.

  $ 1,532      $ 1,370        12%      $ 4,483      $ 4,020        12%   

Canada

    51        48        6%        154        150        3%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

    1,583        1,418        12%        4,637        4,170        11%   

Operating expenses (excluding variable compensation):

           

U.S.

    1,121        1,032        9%        3,326        3,078        8%   

Canada

    49        47        4%        145        144        1%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    1,170        1,079        8%        3,471        3,222        8%   

Pre-variable income:

           

U.S.

    411        338        22%        1,157        942        23%   

Canada

    2        1        100%        9        6        50%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total pre-variable income

    413        339        22%        1,166        948        23%   

Variable compensation:

           

U.S.

    213        167        28%        575        446        29%   

Canada

    5        4        25%        16        13        23%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total variable compensation

    218        171        27%        591        459        29%   

Income (loss) before allocations to partners:

           

U.S.

    198        171        16%        582        496        17%   

Canada

    (3     (3     0%        (7     (7     0%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total income before allocations to partners

  $ 195      $ 168        16%      $ 575      $ 489        18%   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Client assets under care ($ billions):

           

U.S.

           

At period end

  $ 828.7      $ 728.1        14%      $ 828.7      $ 728.1        14%   

Average

  $ 830.5      $ 711.1        17%      $ 802.7      $ 694.1        16%   

Canada

           

At period end

  $ 19.5      $ 17.7        10%      $ 19.5      $ 17.7        10%   

Average

  $ 19.9      $ 17.3        15%      $ 19.1      $ 17.2        11%   

Financial advisors:

           

U.S.

           

At period end

    13,089        12,333        6%        13,089        12,333        6%   

Average

    12,949        12,223        6%        12,748        12,045        6%   

Canada

           

At period end

    718        663        8%        718        663        8%   

Average

    710        655        8%        698        648        8%   

 

29


PART I.     FINANCIAL INFORMATION

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

 

U.S.

For the three month period ended September 26, 2014, net revenue increased 12% compared to the three month period ended September 27, 2013. Revenue growth reflected a 24% ($152 million) increase in asset-based fee revenue primarily due to increases in advisory programs fees revenue of 28% ($97 million) and service fees revenue of 19% ($44 million). The growth reflects an increase in client assets under care resulting from continued investment of client dollars as well as market increases. In addition, trade revenue increased 2% ($9 million) primarily due to an increase in client dollars invested, partially offset by a decrease in the margin earned on client dollars invested.

Operating expenses (excluding variable compensation) increased 9% in the third quarter of 2014 primarily due to increases in financial advisor compensation and salary and fringe benefits. Higher financial advisor compensation was due to increases in asset-based fee and trade revenues on which financial advisor commissions are paid. Salary and fringe benefits expense increased due to wage increases and more personnel to support increased client activity and growth of the Partnership’s financial advisor network.

For the nine month period ended September 26, 2014, net revenue increased 12% compared to the nine month period ended September 27, 2013. Revenue growth reflected a 25% ($438 million) increase in asset-based fee revenue primarily due to increases in advisory programs fees revenue of 29% ($282 million) and service fees revenue of 19% ($127 million). The growth reflects an increase in client assets under care resulting from continued investment of client dollars as well as market increases.

Operating expenses (excluding variable compensation) increased 8% in the first nine months of 2014 primarily due to increases in financial advisor compensation and salary and fringe benefits. Higher financial advisor compensation was due to increases in asset-based fee and trade revenues on which financial advisor commissions are paid. Salary and fringe benefits expense increased due to wage increases and more personnel to support increased client activity and growth of the Partnership’s financial advisor network.

Canada

For the three month period ended September 26, 2014, net revenue increased 6% compared to the third quarter of 2013. Asset-based fee revenue increased 33% ($5 million) reflecting an increase in client assets under care resulting from the investment of client dollars and higher market values of the underlying assets. Trade revenue decreased 4% ($1 million) primarily due to decreases in the margin earned and the amount of client dollars invested.

Operating expenses (excluding variable compensation) increased 4% in the third quarter of 2014 compared to the third quarter of 2013. As a result, pre-variable income increased 100% ($1 million) in the third quarter of 2014.

For the nine month period ended September 26, 2014, net revenue increased 3% compared to the nine month period ended September 27, 2013. Asset-based fee revenue increased 25% ($11 million) reflecting an increase in client assets under care resulting from the investment of client dollars and higher market values of the underlying assets. Trade revenue decreased 6% ($5 million) primarily due to decreases in the margin earned and the amount of client dollars invested. Operating expenses (excluding variable compensation) increased 1% in the first nine months of 2014 compared to the first nine months of 2013.

 

30


PART I.     FINANCIAL INFORMATION

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

 

As a result, pre-variable income improved 50% ($3 million) in the first nine months of 2014. Improvement in Canada is due in part to the continued focus to achieve profitability. This includes several initiatives to increase revenue and control expenses. Revenue initiatives include the plan to grow the number of financial advisors, client assets under care and the depth of financial solutions provided to clients, and the roll out of additional advisory and fee-based programs.

LEGISLATIVE AND REGULATORY REFORM

As discussed more fully in the “Legislative and Regulatory Initiatives” risk factor in Part I, Item 1A – Risk Factors of the Partnership’s Annual Report and in the “Legislative and Regulatory Reform” section in Part I, Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-Q for the quarters ended March 28, 2014 and June 27, 2014, the Partnership continues to monitor several regulatory initiatives and proposed, potential and enacted rules (“Regulatory Initiatives”), including the possibility of a universal fiduciary standard of care applicable to both broker-dealers and investment advisers under the Dodd-Frank Act, potential limits on fees paid by mutual funds (often called 12b-1 fees), and enacted reforms to the regulation of money market mutual funds.

The SEC adopted amendments to the rules that govern money market mutual funds on July 23, 2014. The amendments preserve stable net asset value for certain retail funds and government funds. The amendments also impose, under certain circumstances, liquidity fees and redemption gates on non-government funds. The Partnership continues to evaluate the potential impact of these amendments.

These Regulatory Initiatives may impact the manner in which the Partnership markets its products and services, manages its business and operations, and interacts with clients and regulators, any or all of which could materially impact the Partnership’s results of operations, financial condition, and liquidity. However, the Partnership cannot presently predict when or if any Regulatory Initiatives will be enacted or the impact that any Regulatory Initiatives will have on the Partnership.

MUTUAL FUNDS AND ANNUITIES

The Partnership derived 78% and 77% of its total revenue from sales and services related to mutual fund and annuity products in the three and nine month periods ended September 26, 2014, respectively, and 74% and 75% in the three and nine month periods ended September 27, 2013, respectively. In addition, the Partnership derived from one mutual fund company 19% and 20% of its total revenue for the three and nine month periods ended September 26, 2014, respectively, and 19% of its total revenue for both the three and nine month periods ended September 27, 2013, respectively. The revenue generated from this company relates to business conducted with the Partnership’s U.S. segment.

Significant reductions in these revenues due to regulatory reform or other changes to the Partnership’s relationship with mutual fund companies could have a material adverse effect on the Partnership’s results of operations.

 

31


PART I.     FINANCIAL INFORMATION

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

 

LIQUIDITY AND CAPITAL RESOURCES

The Partnership requires liquidity to cover its operating expenses, net capital requirements, capital expenditures, debt repayment obligations, distributions to partners and redemptions of partnership interests. The principal sources for meeting the Partnership’s liquidity requirements include existing liquidity and capital resources of the Partnership, discussed further below, and funds generated from operations. The Partnership believes that the liquidity provided by these sources will be sufficient to meet its capital and liquidity requirements for the next twelve months. Depending on conditions in the capital markets and other factors, the Partnership will, from time to time, consider the issuance of debt and additional partnership capital, the proceeds of which could be used to meet growth needs or for other purposes.

Partnership Capital

The Partnership’s growth in capital has historically been the result of the sale of Interests to its associates and existing limited partners, the sale of subordinated limited partnership interests to its current or retiring general partners and retention of general partner earnings.

The Partnership filed a Registration Statement on Form S-8 with the SEC on January 17, 2014 to register $350 million in securities in preparation for its 2014 Limited Partnership offering. The Partnership is in the process of offering approximately $311 million in Interests to eligible financial advisors, branch office administrators and home office associates. Of this amount, it is expected approximately $300 million will be accepted, with the remainder available for future issuance at the discretion of the Managing Partner and Executive Committee, which may include issuances to financial advisors who complete a retirement transition plan in future years and who may be considered for additional Interests. The 2014 Limited Partnership offering is expected to close in early 2015. The issuance of Interests will reduce the percentage of participation in net income by general partners and subordinated limited partners. Proceeds from the 2014 Limited Partnership offering are expected to be used toward working capital and general corporate purposes and to ensure there is adequate general liquidity of the Partnership for future needs.

Any issuance of new Interests will decrease the Partnership’s net interest income by the 7.5% Payment for any such additional Interests, and holders of existing Interests may suffer decreased returns on their investment because the amount of the Partnership’s net income they participate in may be reduced as a consequence. Accordingly, the issuance of Interests will reduce the Partnership’s net interest income and profitability beginning in 2015.

The Partnership’s capital subject to mandatory redemption, net of reserve for anticipated withdrawals, at September 26, 2014 was $1,954 million, an increase of $96 million from December 31, 2013. This increase in the Partnership’s capital subject to mandatory redemption was primarily due to the retention of general partner earnings ($62 million), additional capital contributions related to subordinated limited partner and general partner interests ($47 million and $92 million, respectively) and the net decrease in partnership loans outstanding ($17 million), partially offset by the redemption of limited partner, subordinated limited partner and general partner interests ($5 million, $16 million and $101 million, respectively). During the nine month periods ended September 26, 2014 and September 27, 2013, the Partnership retained 13.8% of income allocated to general partners.

 

32


PART I.     FINANCIAL INFORMATION

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

 

In June 2014 the Partnership entered into the Nineteenth Amended and Restated Agreement of Registered Limited Liability Limited Partnership (the “Partnership Agreement”). Under the terms of the Partnership Agreement, a partner’s capital is required to be redeemed by the Partnership in the event of the partner’s death or withdrawal from the Partnership, subject to compliance with ongoing regulatory capital requirements. In the event of a partner’s death, the Partnership generally redeems the partner’s capital within six months. The Partnership has restrictions in place which govern the withdrawal of capital. Under the terms of the Partnership Agreement, limited partners withdrawing from the Partnership are to be repaid their capital in three equal annual installments beginning no earlier than 90 days after their withdrawal notice is received by the Managing Partner. The capital of general partners withdrawing from the Partnership is converted to subordinated limited partnership capital or, at the discretion of the Managing Partner, redeemed by the Partnership. Subordinated limited partners are repaid their capital in six equal annual installments beginning no earlier than 90 days after their request for withdrawal of contributed capital is received by the Managing Partner. The Partnership’s Managing Partner has discretion to waive or modify these withdrawal restrictions and to accelerate the return of capital. The Partnership Agreement includes additional terms.

The Partnership makes loans available to those general partners (other than members of the Executive Committee, which consists of the executive officers of the Partnership) who require financing for some or all of their partnership capital contributions. It is anticipated that a majority of future general and subordinated limited partnership capital contributions (other than for Executive Committee members) requiring financing will be financed through partnership loans. In limited circumstances a general partner may withdraw from the Partnership and become a subordinated limited partner while he or she still has an outstanding partnership loan. Loans made by the Partnership to partners are generally for a period of one year but are expected to be renewed and bear interest at the prime rate, as defined in the loan documents. The Partnership recognizes interest income for the interest received related to these loans. Partners borrowing from the Partnership will be required to repay such loans by applying the earnings received from the Partnership to such loans, net of amounts retained by the Partnership and amounts distributed for income taxes. The Partnership has full recourse against any partner that defaults on loan obligations to the Partnership. The Partnership does not anticipate that partner loans will have an adverse impact on the Partnership’s short-term liquidity or capital resources.

The Partnership has not and will not provide loans to members of the Executive Committee. Executive Committee members who require financing for some or all of their partnership capital contributions will continue to borrow directly from banks willing to provide such financing on an individual basis. Other partners may also choose to have individual banking arrangements for their partnership capital contributions.

Any bank financing of capital contributions is in the form of unsecured bank loan agreements and are between the individual and the bank. The Partnership does not guarantee these bank loans, nor can the partner pledge his or her partnership interest as collateral for the bank loan. The Partnership performs certain administrative functions in connection with its limited partners who have elected to finance a portion of their partnership capital contributions through individual unsecured bank loan agreements from banks with whom the Partnership has other banking relationships. For all limited partner capital contributions financed through such bank loan agreements, each agreement instructs the Partnership to apply the proceeds from the liquidation of that individual’s capital account to the repayment of their bank loan prior to any funds being released to the partner. In addition, the partner is required to apply partnership

 

33


PART I.     FINANCIAL INFORMATION

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

 

earnings, net of any distributions to pay taxes, to service the interest and principal on the bank loan. Should a partner’s individual bank loan not be renewed upon maturity for any reason, the Partnership could experience increased requests for capital liquidations, which could adversely impact the Partnership’s liquidity. In addition, partners who finance all or a portion of their capital contributions with bank financing may be more likely to request the withdrawal of capital to meet bank financing requirements should the partners experience a period of reduced earnings. As a partnership, any withdrawals by general partners, subordinated limited partners or limited partners would reduce the Partnership’s available liquidity and capital.

Many of the same banks that provide financing to limited partners also provide various forms of financing to the Partnership. To the extent these banks increase credit available to the partners, financing available to the Partnership may be reduced.

The Partnership, while not a party to any partner unsecured bank loan agreements, does facilitate making payments of allocated income to certain banks on behalf of the limited partner. The following table represents amounts related to partnership loans as well as limited partner bank loans (for which the Partnership facilitates certain administrative functions). Partners may have arranged their own bank loans to finance their partnership capital for which the Partnership does not facilitate certain administrative functions and therefore any such loans are not included in the table.

 

    As of September 26, 2014  
 

 

 

 
($ in millions)  

Limited

Partnership

Interests

   

Subordinated

Limited

Partnership

Interests

   

General

Partnership

Interests

   

Total

Partnership

Capital

 
 

 

 

 

Partnership capital(1):

       

Total partnership capital

  $ 635      $ 336      $ 1,181      $ 2,152   
 

 

 

 

Partnership capital owned by partners with individual loans

  $ 69      $ 2      $ 585      $ 656   
 

 

 

 

Partnership capital owned by partners with individual loans as a percent of total partnership capital

    10.9%        0.6%        49.5%        30.5%   

Partner loans

  $ 13      $ 2      $ 196      $ 211   
 

 

 

 

Partner loans as a percent of total partnership capital

    2.0%        0.6%        16.6%        9.8%   

Partner loans as a percent of partnership capital owned by partners with loans

    18.8%        100.0%        33.5%        32.2%   

(1) Partnership capital, as defined for this table, is before the reduction of partnership loans and is net of reserve for anticipated withdrawals.

Historically, neither the amount of partnership capital financed with individual loans as indicated in the table above, nor the amount of partner capital withdrawal requests has had a significant impact on the Partnership’s liquidity or capital resources.

 

34


PART I.     FINANCIAL INFORMATION

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

 

Lines of Credit and Debt

The following table shows the composition of the Partnership’s aggregate bank lines of credit in place as of:

 

($ millions)    September 26,
2014
     December 31,
2013
 

2013 Credit Facility

   $ 400       $ 400   

Uncommitted secured credit facilities

     365         415   
  

 

 

    

 

 

 

Total bank lines of credit

   $ 765       $ 815   
  

 

 

    

 

 

 

In November 2013, the Partnership entered into the 2013 Credit Facility, which has an expiration date of November 15, 2018 and replaced a similar credit facility. The 2013 Credit Facility is intended to provide short-term liquidity to the Partnership should the need arise. In addition, the Partnership has uncommitted lines of credit that are subject to change at the discretion of the banks. Based on credit market conditions and the uncommitted nature of these credit facilities, it is possible that these lines of credit could decrease or not be available in the future. Actual borrowing availability on the uncommitted secured lines is based on client margin securities and partnership securities, which would serve as collateral on loans in the event the Partnership borrowed against these lines.

There were no amounts outstanding on the 2013 Credit Facility and the uncommitted lines of credit as of September 26, 2014 and December 31, 2013. In addition, the Partnership did not have any draws against these lines of credit during the nine and twelve month periods ended September 26, 2014 and December 31, 2013, respectively, except for one nominal advance made on both the committed facility and the uncommitted facility for the purpose of testing draw procedures.

The Partnership was in compliance with all covenants related to its outstanding debt agreements as of September 26, 2014. For details on covenants related to lines of credit, see the discussion in Note 3 to the Consolidated Financial Statements.

In June 2014, the Partnership paid the final scheduled installment on the liabilities subordinated to claims of general creditors of $50 million.

Cash Activity

As of September 26, 2014, the Partnership had $643 million in cash and cash equivalents and $810 million in securities purchased under agreements to resell, which have maturities of less than one week. This totals $1,453 million of Partnership liquidity as of September 26, 2014, an 11% ($173 million) decrease from $1,626 million at December 31, 2013. This decrease is primarily due to timing of client cash activity and the resulting requirement for segregation. The Partnership had $8,123 million and $8,435 million in cash and investments segregated under federal regulations as of September 26, 2014 and December 31, 2013, respectively, which was not available for general use.

 

35


PART I.     FINANCIAL INFORMATION

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

 

Regulatory Requirements

As a result of its activities as a U.S. broker-dealer, Edward Jones is subject to the net capital provisions of Rule 15c3-1 of the Exchange Act and capital compliance rules of the FINRA Rule 4110. Under the alternative method permitted by the rules, Edward Jones must maintain minimum net capital, as defined, equal to the greater of $0.25 million or 2% of aggregate debit items arising from client transactions. The net capital rules also provide that Edward Jones’ partnership 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.

The Partnership’s Canada broker-dealer is a registered securities dealer regulated by IIROC. Under the regulations prescribed by IIROC, the Partnership is required to maintain minimum levels of risk adjusted capital, which are dependent on the nature of the Partnership’s assets and operations.

The following table shows the Partnership’s net capital figures for its U.S. and Canada broker-dealers as of ($ in millions):

 

    September 26,     December 31,        
    2014     2013     % Change  

U.S.:

     

Net capital

  $ 958      $ 873        10%   

Net capital in excess of the minimum required

  $ 909      $ 830        10%   

Net capital as a percentage of aggregate debit items

    39.1%        41.4%        -6%   

Net capital after anticipated capital withdrawals, as a percentage of aggregate debit items

    27.5%        24.8%        11%   

Canada:

     

Regulatory risk adjusted capital

  $ 27      $ 34        -21%   

Regulatory risk adjusted capital in excess of the minimum required to be held by IIROC

  $ 20      $ 27        -26%   

Net capital and the related capital percentages may fluctuate on a daily basis. In addition, EJTC was in compliance with its regulatory capital requirements.

The Partnership and its subsidiaries are subject to examination by the Internal Revenue Service (“IRS”) and by various state and foreign taxing authorities in the jurisdictions in which the Partnership and its subsidiaries conduct business. In 2012, the IRS began an examination of Edward Jones’ income tax returns for the years ended 2009 and 2010. This examination is ongoing and is not expected to have a material impact to the Partnership.

OFF BALANCE SHEET ARRANGEMENTS

The Partnership does not have any significant off-balance-sheet arrangements.

 

36


PART I.     FINANCIAL INFORMATION

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

 

CRITICAL ACCOUNTING POLICIES

The Partnership’s financial statements are prepared in accordance with GAAP, which may require judgment and involve estimation processes to determine its assets, liabilities, revenues and expenses which affect its results of operations.

The Partnership believes that of its significant accounting policies, the following critical policies require estimates that involve a higher degree of judgment and complexity.

Asset-Based Fees. Due to the timing of receipt of information, the Partnership must use estimates in recording the accruals related to certain asset-based fees. These accruals are based on historical trends and are adjusted to reflect market conditions for the period covered. Additional adjustments, if needed, are recorded in subsequent periods.

Legal Reserves. The Partnership provides for potential losses that may arise out of litigation, regulatory proceedings and other contingencies to the extent that such losses can be estimated, in accordance with ASC No. 450, Contingencies. See Note 6 to the Consolidated Financial Statements and Part II, Item 1 – Legal Proceedings for further discussion of these items. The Partnership regularly monitors its exposures for potential losses. The Partnership’s total liability with respect to litigation and regulatory proceedings represents the best estimate of probable losses after considering, among other factors, the progress of each case, the Partnership’s experience and discussions with legal counsel.

Included in Note 1 of the Partnership’s Annual Report is additional discussion of the Partnership’s accounting policies.

THE EFFECTS OF INFLATION

The Partnership’s net assets are primarily monetary, consisting of cash and cash equivalents, cash and investments segregated under federal regulations, securities owned and receivables, less liabilities. Monetary net assets are primarily liquid in nature and would not be significantly affected by inflation. Inflation and future expectations of inflation influence securities prices, as well as activity levels in the securities markets. As a result, profitability and capital may be impacted by inflation and inflationary expectations. Additionally, inflation’s impact on the Partnership’s operating expenses may affect profitability to the extent that additional costs are not recoverable through increased prices of services offered by the Partnership.

RECENTLY ISSUED ACCOUNTING STANDARDS

In May 2014, the FASB and the International Accounting Standards Board (“IASB”) jointly issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance. The objective of ASU 2014-09 is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will be effective for the first quarter of 2017. An entity can elect to adopt ASU 2014-09 using one of two methods, either full retrospective adoption to each prior reporting period, or recognize the cumulative effect of adoption at the date of initial application. The Partnership is in the process of evaluating the new standard and does not know the effect, if any, ASU 2014-09 will have on the Consolidated Financial Statements or which adoption method will be used.

 

37


PART I.     FINANCIAL INFORMATION

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, continued

 

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, and in particular Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of the federal securities laws. You can identify forward-looking statements by the use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “will,” “should,” and other expressions which predict or indicate future events and trends and which do not relate to historical matters. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Partnership. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Partnership to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements.

Some of the factors that might cause differences between forward-looking statements and actual events include, but are not limited to, the following: (1) general economic conditions; (2) regulatory actions; (3) changes in legislation or regulation, including new regulations under the Dodd-Frank Act; (4) actions of competitors; (5) litigation; (6) the ability of clients, other broker-dealers, banks, depositories and clearing organizations to fulfill contractual obligations; (7) changes in interest rates; (8) changes in technology; (9) a fluctuation in the fair value of securities; and (10) the risks discussed under the caption “Risk Factors” in the Partnership’s Annual Report and subsequent Quarterly Reports on Form 10-Q. These forward-looking statements were based on information, plans, and estimates at the date of this report, and the Partnership does not undertake to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.

 

38


PART I.     FINANCIAL INFORMATION

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Various levels of management within the Partnership manage the Partnership’s risk exposure. Position limits in trading and inventory accounts are established and monitored on an ongoing basis. Credit risk related to various financing activities is reduced by the industry practice of obtaining and maintaining collateral. The Partnership monitors its exposure to counterparty risk through the use of credit exposure information, the monitoring of collateral values and the establishment of credit limits. For further discussion of monitoring, see the Risk Management discussion in Item 10 – Directors, Executive Officers and Corporate Governance of the Partnership’s Annual Report.

The Partnership is exposed to market risk from changes in interest rates. Such changes in interest rates impact the income from interest earning assets, primarily receivables from clients on margin balances and short-term investments, which averaged $2.3 billion and $9.3 billion, respectively, for the nine month period ended September 26, 2014. The changes in interest rates may also have an impact on the expense related to liabilities that finance these assets, such as amounts payable to clients and other interest and non-interest bearing liabilities.

The Partnership performed an analysis of its financial instruments and assessed the related interest rate risk and materiality in accordance with the SEC rules. Under current market conditions and based on current levels of interest earning assets and the liabilities that finance these assets, the Partnership estimates that a 100 basis point (1.00%) increase in short-term interest rates could increase its annual net interest income by approximately $81 million. Conversely, the Partnership estimates that a 100 basis point (1.00%) decrease in short-term interest rates could decrease the Partnership’s annual net interest income by approximately $16 million. A decrease in short-term interest rates currently has a less significant impact on net interest income due to the low interest rate environment. The Partnership has two distinct types of interest bearing assets: client receivables from margin accounts and short-term, primarily overnight, investments, which are primarily comprised of cash and investments segregated under federal regulations and securities purchased under agreements to resell. These investments have earned interest at an average rate of approximately 16 basis points (0.16%) in the first nine months of 2014, and therefore the financial dollar impact of further decline in rates is minimal. The Partnership has put in place an interest rate floor for the interest charged related to its client margin loans, which helps to limit the negative impact of declining interest rates.

In addition to the interest earning assets and liabilities noted above, the Partnership’s revenue earned related to its minority ownership interest in the adviser to the Edward Jones money market funds is also impacted by changes in interest rates. As a 49.5% limited partner of Passport Research Ltd., the investment adviser to two of the money market funds made available to Edward Jones clients, the Partnership receives a portion of the income of the investment adviser. Due to the current historically low interest rate environment, the investment adviser voluntarily chose (beginning in March 2009) to reduce certain fees charged to the funds to a level that will maintain a positive client yield on the funds. This reduction of fees reduced the Partnership’s cash solutions revenue by $76 million and $73 million for the nine month periods ended September 26, 2014 and September 27, 2013, respectively, or approximately $100 million annually, and is expected to continue at that level in future periods, based upon the current interest rate environment. Alternatively, if the interest rate environment improved such that this reduction in fees was no longer necessary to maintain a positive client yield, the Partnership’s revenue could increase annually by that same level.

 

39


PART I.     FINANCIAL INFORMATION

 

ITEM 4. CONTROLS AND PROCEDURES

 

The Partnership maintains a system of disclosure controls and procedures which are designed to ensure that information required to be disclosed by the Partnership in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including the Partnership’s certifying officers, as appropriate to allow timely decisions regarding required disclosure.

Based upon an evaluation performed as of the end of the period covered by this report, the Partnership’s certifying officers, the Chief Executive Officer and the Chief Financial Officer, have concluded that the Partnership’s disclosure controls and procedures were effective as of September 26, 2014.

There have been no changes in the Partnership’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

 

40


PART II.     OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

The following information supplements the discussion in Part I, Item 3 “Legal Proceedings” in the Partnership’s Annual Report and Part II, Item 1 “Legal Proceedings” in the Partnership’s Quarterly Report on Form 10-Q for the periods ended March 28, 2014 and June 27, 2014:

Countrywide. There have been five cases filed against Edward Jones (in addition to numerous other issuers and underwriters) asserting claims under the U.S. Securities Act of 1933 (the “Securities Act”) in connection with registration statements and prospectus supplements issued for certain mortgage-backed certificates issued between 2005 and 2007. Three cases were purported class actions (David H. Luther, et al. v. Countrywide Financial Corporation, et al. filed in 2007; Maine State Retirement System, et al. v. Countrywide Financial Corporation, et al. filed in 2010; and Western Conference of Teamsters Pension Trust Fund v. Countrywide Financial Corporation, et al. filed in 2010). All three cases, however, have been settled, and on December 6, 2013, the court granted plaintiffs’ motion for final approval of the settlement. The settlement that was approved by the court (1) establishes a fund to be paid exclusively by Countrywide, (2) contains a complete release for all defendants in all three cases, including Edward Jones, (3) contains proposals for the administration of the settlement fund, and (4) provides for the dismissal of all three cases once the Court enters the final approval of the settlement and enters a final judgment. Because Edward Jones was being indemnified and defended in all three cases, Edward Jones will not be paying and is not required to pay any money into the settlement fund. On December 17, 2013, the Court entered the final judgment and dismissal for all three cases. On January 14, 2014, some objectors to the class action settlement filed their Notice of Appeal of the Court’s final judgment and dismissal. The appeal will be heard by the Ninth Circuit Court of Appeals, but no briefing schedule has been entered.

On August 10, 2012, the Federal Deposit Insurance Corporation (“FDIC”), in its capacity as receiver for Colonial Bank, filed a separate lawsuit (FDIC v. Countrywide Securities Corporation, Inc., et al.) in the U.S. District Court for the Central District of California against numerous issuers and underwriters including Edward Jones. However, plaintiff does not allege that it purchased any tranche of any offering for which Edward Jones acted as dealer. Following defendant’s motion to dismiss, plaintiff filed its first amended complaint on November 6, 2012. On April 8, 2013, the Court dismissed FDIC v. Countrywide based on statute of limitations grounds. The FDIC filed its notice of appeal of the Court’s dismissal on October 3, 2013. The appeal has been stayed until November 28, 2014.

On December 12, 2013, a case was filed in the Superior Court of the State of California, County of Los Angeles, Northwest District styled Triaxx Prime CDO 2006-1 LTD et al. v. Banc of America Securities, LLC et al. The case involved allegations regarding the sale of Countrywide Private Label Mortgage Backed Securities. The complaint alleged that Edward Jones was the underwriter for two tranches of securities sold to the plaintiffs. Edward Jones denied that it was the underwriter for said tranches. The plaintiffs sought damages in an amount that was to be determined at trial and the consideration paid for the tranches at issue, less any income received on the tranches. The defendants removed the case to federal court on January 10, 2014. A settlement was reached between the parties, and the case was dismissed with prejudice, by court order on October 1, 2014. The settlement is not expected to have a material adverse impact on the Partnership’s consolidated financial condition.

 

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PART II.     OTHER INFORMATION

 

Item 1. Legal Proceedings, continued

 

Nicholas Maxwell, individually and on behalf of all others similarly situated. On December 18, 2012, Edward Jones was named as a defendant in a putative class action complaint in Alameda Superior Court. The complaint asserted causes of action for unlawful wage deductions (Labor Code sections 221, 223, 400-410, 2800, 2802, Cal. Code Reg. title 8, section 11040(8)); California Unfair Competition Law violations (Business and Professions Code sections 17200-04); and waiting time penalties (Labor Code sections 201-203). Plaintiff alleged that Edward Jones improperly charged its California financial advisors fees, costs, and expenses related to trading errors or “broken” trades, and failed to timely pay wages at termination. The parties reached a settlement that does not have an adverse material impact on the Partnership’s consolidated financial condition. The Court granted final approval of the settlement on September 22, 2014. A final compliance hearing is set for January 8, 2015.

Yavapai County Litigation. In September, 2009, three lawsuits were filed in the State of Arizona; all three lawsuits were consolidated before the U.S. District Court for the District of Arizona. The actions related to bonds underwritten by Edward Jones and other brokerage firms for the purpose of financing construction of an event center in Prescott Valley, Arizona. Edward Jones sold approximately $2.9 million of the bonds. The plaintiffs alleged the underwriters, including Edward Jones, made material misrepresentations and omissions in the preliminary official statement and/or in the official statement. Plaintiffs sought an unspecified amount of damages including attorneys’ fees, costs, expenses, rescission or statutory damages, out-of-pocket damages and prejudgment interest. The District Court entered an order in November, 2010 dismissing several of the claims against Edward Jones. The District Court then entered an order on September 13, 2013, granting in part and denying in part various motions for summary judgment filed by Edward Jones. The case was settled in September, 2014, which resolved all actions then pending in the Federal and state courts. Edward Jones’ payment under the settlement agreement did not have a material adverse impact on the Partnership’s consolidated financial condition.

 

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PART II.     OTHER INFORMATION

 

ITEM 1A. RISK FACTORS

 

For information regarding risk factors affecting the Partnership, please see the language regarding forward-looking statements in Item 2 of Part I of this Report on Form 10-Q and the discussion in Part I – Item 1A of the Partnership’s Annual Report.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the quarter ended September 26, 2014, the Partnership made the following issuance of its subordinated limited partnership interests (“SLP Interests”), which are fully described in the Partnership Agreement. The SLP Interests were issued in exchange for withdrawing general partner interests.

 

Date of
Sale
  

Security

  

Amount of
Security
Sold

  

Aggregate
Offering
Price

  

Aggregate
Underwriting
Discounts or
Commissions

  

Exemption from
Registration

7/1/2014

   SLP Interests    $1,425,000    $1,425,000    $0    Regulation D of The Securities Act of 1933, Rule 506; as general partners of the Partnership, all purchasers were Accredited Investors. The required information was provided to all purchasers, no general solicitations or advertisements were used, and reasonable care was exercised to assure that all purchasers were not underwriters.

 

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PART II.     OTHER INFORMATION

 

ITEM 6. EXHIBITS

 

Exhibit

  Number

   

Description

  3.1     

Nineteenth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated July 17, 2014.

  3.2     

First Amendment of Nineteenth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated August 21, 2014.

  3.3     

Second Amendment of Nineteenth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated September 22, 2014.

  31.1     

Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15(d)-14(a) of the Securities Act of 1934, as amended, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

  31.2     

Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15(d)-14(a) of the Securities Act of 1934, as amended, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

  32.1     

Certification of Chief Executive Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

  32.2     

Certification of Chief Financial Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

  101.INS     

XBRL Instance Document

  101.SCH     

XBRL Taxonomy Extension Schema

  101.CAL     

XBRL Taxonomy Extension Calculation

  101.DEF     

XBRL Extension Definition

  101.LAB     

XBRL Taxonomy Extension Label

  101.PRE     

XBRL Taxonomy Extension Presentation

 

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PART II.     OTHER INFORMATION

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

THE JONES FINANCIAL COMPANIES, L.L.L.P.

By:

 

/s/ James D. Weddle

  James D. Weddle
  Managing Partner (Principal Executive Officer)
  November 7, 2014

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated:

 

Signatures    Title   Date

/s/ James D. Weddle

  

Managing Partner

(Principal Executive Officer)

 

November 7, 2014

James D. Weddle     

/s/ Kevin D. Bastien

Kevin D. Bastien

  

Chief Financial Officer

(Principal Financial and

Accounting Officer)

 

November 7, 2014

 

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