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Table of Contents

 

 

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 25, 2015

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

incorporation or organization)

 

(IRS Employer

Identification No.)

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  (do not check if a smaller reporting company)

  

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 30, 2015, 918,390 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.

 

 

 


Table of Contents

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 Cash Flows

     5   
 

Notes to Consolidated Financial Statements

     6   
Item 2.  

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

     16   
Item 3.  

Quantitative and Qualitative Disclosures about Market Risk

     36   
Item 4.  

Controls and Procedures

     37   
Part II.  

OTHER INFORMATION

  
Item 1.  

Legal Proceedings

     38   
Item 1A.  

Risk Factors

     39   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     39   
Item 6.  

Exhibits

     40   
 

Signatures

     41   

 

2


Table of Contents

PART I.     FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

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

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

 

     September 25,      December 31,  

(Dollars in millions)

   2015      2014  

ASSETS:

     

Cash and cash equivalents

   $ 962       $ 1,033   

Cash and investments segregated under federal regulations

     8,949         8,848   

Securities purchased under agreements to resell

     793         634   

Receivable from:

     

Clients

     3,027         2,789   

Mutual funds, insurance companies and other

     471         437   

Brokers, dealers and clearing organizations

     140         122   

Securities owned, at fair value:

     

Investment securities

     188         161   

Inventory securities

     67         69   

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

     559         549   

Other assets

     107         128   
  

 

 

    

 

 

 

TOTAL ASSETS

   $ 15,263       $ 14,770   
  

 

 

    

 

 

 

LIABILITIES:

     

Payable to:

     

Clients

   $ 11,446       $ 11,320   

Brokers, dealers and clearing organizations

     103         88   

Accrued compensation and employee benefits

     996         980   

Accounts payable, accrued expenses and other

     219         161   

Long-term debt

     2         3   
  

 

 

    

 

 

 
     12,766         12,552   
  

 

 

    

 

 

 

Contingencies (Note 6)

     

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

     

Limited partners

     919         632   

Subordinated limited partners

     368         335   

General partners

     1,047         1,006   
  

 

 

    

 

 

 

Total

     2,334         1,973   

Reserve for anticipated withdrawals

     163         245   
  

 

 

    

 

 

 

Total partnership capital subject to mandatory redemption

     2,497         2,218   
  

 

 

    

 

 

 

TOTAL LIABILITIES

   $ 15,263       $ 14,770   
  

 

 

    

 

 

 

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

 

3


Table of Contents

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 25,     Sept 26,      Sept 25,      Sept 26,  
   2015     2014      2015      2014  

Revenue:

          

Fee revenue

          

Asset-based

   $ 856      $ 797       $ 2,540       $ 2,277   

Account and activity

     179        156         511         447   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total fee revenue

     1,035        953         3,051         2,724   

Trade revenue

     598        606         1,838         1,832   

Interest and dividends

     40        34         114         97   

Other revenue (loss), net

     (9     3         14         25   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total revenue

     1,664        1,596         5,017         4,678   

Interest expense

     19        13         56         41   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net revenue

     1,645        1,583         4,961         4,637   
  

 

 

   

 

 

    

 

 

    

 

 

 

Operating expenses:

          

Compensation and benefits

     1,146        1,125         3,476         3,264   

Occupancy and equipment

     97        91         286         274   

Communications and data processing

     71        73         213         216   

Advertising

     16        13         50         50   

Professional and consulting fees

     26        16         60         44   

Postage and shipping

     13        13         39         38   

Other operating expenses

     68        57         193         176   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total operating expenses

     1,437        1,388         4,317         4,062   
  

 

 

   

 

 

    

 

 

    

 

 

 

Income before allocations to partners

     208        195         644         575   

Allocations to partners:

          

Limited partners

     30        20         93         61   

Subordinated limited partners

     23        23         72         66   

General partners

     155        152         479         448   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net Income

   $ —        $ —         $ —         $ —     
  

 

 

   

 

 

    

 

 

    

 

 

 

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

   $ 32.67      $ 32.77       $ 101.04       $ 96.71   
  

 

 

   

 

 

    

 

 

    

 

 

 

Weighted average $1,000 equivalent limited partnership units outstanding

     920,508        635,856         923,199         637,638   
  

 

 

   

 

 

    

 

 

    

 

 

 

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

 

4


Table of Contents

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  
     Sept 25,     Sept 26,  

(Dollars in millions)

   2015     2014  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ —        $ —     

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

    

Income before allocations to partners

     644        575   

Depreciation and amortization

     62        61   

Changes in assets and liabilities:

    

Cash and investments segregated under federal regulations

     (101     312   

Securities purchased under agreements to resell

     (159     216   

Net payable to clients

     (112     (634

Net receivable from brokers, dealers and clearing organizations

     (3     61   

Receivable from mutual funds, insurance companies and other

     (34     (59

Securities owned

     (25     4   

Other assets

     21        19   

Accrued compensation and employee benefits

     16        102   

Accounts payable, accrued expenses and other

     57        71   
  

 

 

   

 

 

 

Net cash provided by operating activities

     366        728   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchase of equipment, property and improvements, net

     (71     (67
  

 

 

   

 

 

 

Net cash used in investing activities

     (71     (67
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Repayment of long-term debt

     (1     (1

Repayment of subordinated liabilities

     —          (50

Issuance of partnership interests (net of partnership loans)

     351        55   

Redemption of partnership interests

     (156     (122

Distributions from partnership capital (net of partnership loans)

     (560     (500
  

 

 

   

 

 

 

Net cash used in financing activities

     (366     (618
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (71     43   

CASH AND CASH EQUIVALENTS:

    

Beginning of period

     1,033        600   
  

 

 

   

 

 

 

End of period

   $ 962      $ 643   
  

 

 

   

 

 

 

Cash paid for interest

   $ 56      $ 41   
  

 

 

   

 

 

 

Cash paid for taxes

   $ 11      $ 8   
  

 

 

   

 

 

 

NON-CASH ACTIVITIES:

    

Issuance of general partnership interests through partnership loans in current period

   $ 119      $ 84   
  

 

 

   

 

 

 

Repayment of partnership loans through distributions from partnership capital in current period

   $ 101      $ 101   
  

 

 

   

 

 

 

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

 

5


Table of Contents

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 for the three and nine month periods ended August 31, 2015 and 2014 in the Partnership’s Consolidated Financial Statements 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 a registered broker-dealer in the United States (“U.S.”) and one of Edward Jones’ subsidiaries is a registered securities dealer in Canada. Through these entities, the Partnership serves primarily individual investors in the U.S. and Canada. Edward Jones primarily derives its revenues from the retail brokerage business through the distribution of mutual fund shares, fees related to assets held by and account services provided to its clients, including investment advisory services, the sale of securities and insurance products, investment banking, and principal transactions. The Partnership conducts business throughout the U.S. and Canada with its clients, various brokers, dealers, clearing organizations, depositories and banks. 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, 2014 (“Annual Report”). The results of operations for the three and nine month periods ended September 25, 2015 are not necessarily indicative of the results to be expected for the year ending December 31, 2015. These Consolidated Financial Statements should be read in conjunction with the Annual Report.

 

6


Table of Contents

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.

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, equities listed in active markets and government and agency obligations.

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, and corporate bonds and notes.

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 nine and twelve month periods ended September 25, 2015 and December 31, 2014, respectively. In addition, there were no transfers into or out of Levels I, II or III during these periods.

 

7


Table of Contents

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 25, 2015  
     Level I      Level II      Level III      Total  

Cash equivalents:

           

Certificates of deposit

   $ —         $ 150       $ —         $ 150   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investments segregated under federal regulations:

           

U.S. treasuries

   $ 1,805       $ —         $ —         $ 1,805   

Certificates of deposit

     —           250         —           250   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments segregated under federal regulations

   $ 1,805       $ 250       $ —         $ 2,055   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities owned:

           

Investment securities:

           

Mutual funds

   $ 179       $ —         $ —         $ 179   

Government and agency obligations

     4         —           —           4   

Equities

     4         —           —           4   

Corporate bonds and notes

     —           1         —           1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities

   $ 187       $ 1       $ —         $ 188   
  

 

 

    

 

 

    

 

 

    

 

 

 

Inventory securities:

           

State and municipal obligations

   $ —         $ 32       $ —         $ 32   

Equities

     17         —           —           17   

Certificates of deposit

     —           10         —           10   

Mutual funds

     5         —           —           5   

Corporate bonds and notes

     —           3         —           3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inventory securities

   $ 22       $ 45       $ —         $ 67   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Financial Liabilities at Fair Value as of  
     September 25, 2015  
     Level I      Level II      Level III      Total  

Securities sold, not yet purchased(1):

           

Mutual funds

   $ 3       $ —         $ —         $ 3   

Corporate bonds and notes

     —           1         —           1   

Certificates of deposit

     —           1         —           1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities sold, not yet purchased

   $ 3       $ 2       $ —         $ 5   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Securities sold, not yet repurchased are included within accounts payable, accrued expenses and other on the Consolidated Statements of Financial Condition.

 

8


Table of Contents

PART I.    FINANCIAL INFORMATION

 

Item 1. Financial Statements, continued

 

     Financial Assets at Fair Value as of  
     December 31, 2014  
     Level I      Level II      Level III      Total  

Cash equivalents:

           

Certificate of deposit

   $ —         $ 100       $ —         $ 100   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investments segregated under federal regulations:

           

U.S. treasuries

   $ 1,109       $ —         $ —         $ 1,109   

Certificates of deposit

     —           225         —           225   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments segregated under federal regulations

   $ 1,109       $ 225       $ —         $ 1,334   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities owned:

           

Investment securities:

           

Mutual funds

   $ 136       $ —         $ —         $ 136   

Government and agency obligations

     19         —           —           19   

Equities

     5         —           —           5   

Corporate bonds and notes

     —           1         —           1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities

   $ 160       $ 1       $ —         $ 161   
  

 

 

    

 

 

    

 

 

    

 

 

 

Inventory securities:

           

State and municipal obligations

   $ —         $ 40       $ —         $ 40   

Equities

     17         —           —           17   

Mutual funds

     5         —           —           5   

Certificates of deposit

     —           3         —           3   

Corporate bonds and notes

     —           2         —           2   

Other

     1         1         —           2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total inventory securities

   $ 23       $ 46       $ —         $ 69   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Financial Liabilities at Fair Value as of  
     December 31, 2014  
     Level I      Level II      Level III      Total  

Securities sold, not yet purchased:

           

Equities

   $ 2       $ —         $ —         $ 2   

Corporate bonds and notes

     —           1         —           1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities sold, not yet purchased

   $ 2       $ 1       $ —         $ 3   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Partnership attempts to reduce its exposure to market price fluctuations of its inventory securities through the use 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 $8 at September 25, 2015 and December 31, 2014, respectively. The underlying assets of these contracts are not reflected in the Partnership’s Consolidated Financial Statements.

 

9


Table of Contents

PART I.    FINANCIAL INFORMATION

 

Item 1. Financial Statements, continued

 

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 25,      December 31,  
     2015      2014  

2013 Credit Facility

   $ 400       $ 400   

Uncommitted secured credit facilities

     365         365   
  

 

 

    

 

 

 

Total lines of credit

   $ 765       $ 765   
  

 

 

    

 

 

 

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”) with an expiration date of November 15, 2018. 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 25, 2015, 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. In addition, to the extent any of the banks included in the uncommitted lines of credit provide financing to partners for Partnership capital contributions, financing available to the Partnership itself may be reduced. Actual borrowing availability on the uncommitted lines of credit is based on client margin securities and firm-owned securities, which would serve as collateral in the event the Partnership borrowed against these lines. On October 30, 2015, the Partnership’s uncommitted lines of credit were reduced by $75 per the agreement with one of the banks. This bank still participates in the 2013 Credit Facility.

There were no amounts outstanding on the 2013 Credit Facility or the uncommitted lines of credit as of September 25, 2015 and December 31, 2014. In addition, the Partnership did not have any draws against these lines of credit during the nine and twelve month periods ended September 25, 2015 and December 31, 2014, respectively.

 

10


Table of Contents

PART I.    FINANCIAL INFORMATION

 

Item 1. Financial Statements, continued

 

NOTE 4 – PARTNERSHIP CAPITAL

The Partnership makes loans available to those general partners who require financing for some or all of their Partnership capital contributions except for members of the Executive Committee (as defined in the Partnership’s Nineteenth Amended and Restated Agreement of Registered Limited Liability Limited Partnership, dated June 6, 2014 (the “Partnership Agreement”)). 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. 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. 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 earned related to these loans. The outstanding amount of Partnership loans financed through the Partnership is reflected as a reduction to total Partnership capital. As of September 25, 2015 and December 31, 2014, the outstanding amount of Partnership loans financed through the Partnership was $216 and $198, respectively. Interest income earned from these loans, which is included in interest and dividends in the Consolidated Statements of Income, was $2 and $6 for the three and nine month periods ended September 25, 2015, respectively, and $1 and $5 for the three and nine month periods ended September 26, 2014, respectively.

The following table shows the roll forward of outstanding Partnership loans for:

 

     Nine Months Ended  
     September 25,      September 26,  
     2015      2014  

Partnership loans outstanding at beginning of period

   $ 198       $ 215   

Partnership loans issued during the period

     119         84   

Repayment of Partnership loans during the period

     (101      (101
  

 

 

    

 

 

 

Total Partnership loans outstanding

   $ 216       $ 198   
  

 

 

    

 

 

 

The minimum 7.5% annual return on the face amount of limited partnership capital was $17 and $52 for the three and nine month periods ended September 25, 2015, respectively, and $12 and $36 for the three and nine month periods ended September 26, 2014, respectively. These amounts are included as a component of interest expense in the Consolidated Statements of Income.

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 Interests to be issued pursuant to the Partnership’s 2014 Employee Limited Partnership Interest Purchase Plan (the “Plan”). On January 2, 2015, the Partnership issued $292 of Interests in connection with the Plan. The remaining $58 of Interests may be issued in connection with the Plan at the discretion of the Partnership in the future.

 

11


Table of Contents

PART I.    FINANCIAL INFORMATION

 

Item 1. Financial Statements, continued

 

NOTE 5 – NET CAPITAL 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 Securities Exchange Act of 1934, as amended (“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’s Canada broker-dealer 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:

 

     September 25,     December 31,  
     2015     2014  

U.S.:

    

Net capital

   $ 1,187      $ 999   

Net capital in excess of the minimum required

   $ 1,130      $ 948   

Net capital as a percentage of aggregate debit items

     42.1     38.9

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

     28.1     31.1

Canada:

    

Regulatory risk adjusted capital

   $ 26      $ 31   

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

   $ 19      $ 27   

Net capital and the related capital percentages may fluctuate on a daily basis.

EJTC was in compliance with its regulatory capital requirements as of September 25, 2015 and December 31, 2014.

 

12


Table of Contents

PART I.    FINANCIAL INFORMATION

 

Item 1. Financial Statements, continued

 

NOTE 6 – CONTINGENCIES

In the normal course of business, the Partnership is involved, from time to time, in various legal matters, including arbitrations, class actions, other litigation, and investigations and proceedings by governmental organizations and self-regulatory organizations, which may result in losses. 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 25, 2015 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 $1 to $17. 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 25, 2015 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.

 

13


Table of Contents

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, as reported in the following table, is based upon the Consolidated Financial Statements of the Partnership’s Canada operations. The U.S. segment information is derived from the Consolidated Financial Statements less the Canada segment information as presented. Pre-variable income represents income before variable compensation expense and before allocations to partners. This is consistent with how management views the segments in order to assess performance.

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

 

     Three Months Ended      Nine Months Ended  
     Sept 25,      Sept 26,      Sept 25,      Sept 26,  
     2015      2014      2015      2014  

Net revenue:

           

U.S.

   $ 1,599       $ 1,532       $ 4,816       $ 4,483   

Canada

     46         51         145         154   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net revenue

   $ 1,645       $ 1,583       $ 4,961       $ 4,637   
  

 

 

    

 

 

    

 

 

    

 

 

 

Pre-variable income:

           

U.S.

   $ 413       $ 411       $ 1,270       $ 1,157   

Canada

     2         2         6         9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total pre-variable income

     415         413         1,276         1,166   

Variable compensation:

           

U.S.

     203         213         619         575   

Canada

     4         5         13         16   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total variable compensation

     207         218         632         591   

Income (loss) before allocations to partners:

           

U.S.

     210         198         651         582   

Canada

     (2      (3      (7      (7
  

 

 

    

 

 

    

 

 

    

 

 

 

Total income before allocations to partners

   $ 208       $ 195       $ 644       $ 575   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Partnership derived from one mutual fund company 20% of its total revenue for both the three month and nine month periods ended September 25, 2015 and 19% and 20% of its total revenue for the three and nine month periods ended September 26, 2014, respectively. The revenue generated from this company relates 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.

 

14


Table of Contents

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

recognized
assets
     Gross
amounts
offset in the
Consolidated
Statements of

Financial
Condition
     Net amounts
presented in the
Consolidated
Statements of

Financial
Condition
     Gross amounts
not offset in the

Consolidated Statements of
Financial Condition
       
              Financial
instruments
     Securities
collateral(1)
    Net amount  

Sept 25, 2015

   $ 793         —           793         —           (793   $ —     

Dec 31, 2014

   $ 634         —           634         —           (634   $ —     

 

(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. In August 2015, the FASB deferred the effective date by one year and ASU 2014-09 will now be effective for the first quarter of 2018. 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.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810) – Amendments to the Consolidation Analysis (“ASU 2015-02”), which will be effective for the first quarter of 2016. ASU 2015-02 provides updated guidance on consolidation of variable interest entities. The Partnership is in the process of evaluating the new standard and does not expect ASU 2015-02 will have a material impact on the Consolidated Financial Statements.

 

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PART I.    FINANCIAL INFORMATION

 

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

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 Part I, Item 1 – Financial Statements of this Quarterly Report on Form 10-Q and Part II, Item 8 – Financial Statements and Supplementary Data of the Partnership’s Annual Report. All amounts are presented in millions, except as otherwise noted.

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 Partnership’s 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 outstanding, and the balances of Partnership loans and long-term debt.

OVERVIEW

The following table sets forth the changes in major categories of the Consolidated Statements of Income as well as several related key metrics for the three and nine month periods ended September 25, 2015 and September 26, 2014. Management of the Partnership relies on this financial information and the related metrics to evaluate the Partnership’s operating performance and financial condition.

 

16


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PART I.    FINANCIAL INFORMATION

 

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

 

     Three Months Ended     Nine Months Ended  
     Sept 25,     Sept 26,           Sept 25,     Sept 26,        
     2015     2014     % Change     2015     2014     % Change  

Revenue:

            

Fee revenue:

            

Asset-based

   $ 856      $ 797        7   $ 2,540      $ 2,277        12

Account and activity

     179        156        15     511        447        14
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fee revenue

     1,035        953        9     3,051        2,724        12
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of net revenue

     63     60       61     59  

Trade revenue:

            

Commissions

     529        532        -1     1,628        1,609        1

Investment banking

     34        42        -19     110        117        -6

Principal transactions

     35        32        9     100        106        -6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total trade revenue

     598        606        -1     1,838        1,832        0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of net revenue

     36     38       37     40  

Net interest and dividends

     21        21        0     58        56        4

Other revenue (loss), net

     (9     3        -400     14        25        -44
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     1,645        1,583        4     4,961        4,637        7

Operating expenses

     1,437        1,388        4     4,317        4,062        6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before allocations to partners

   $ 208      $ 195        7   $ 644      $ 575        12
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Related metrics:

            

Client dollars invested(1):

            

Trade ($ billions)

   $ 28.0      $ 27.7        1   $ 85.9      $ 83.3        3

Advisory programs ($ billions)

   $ 3.6      $ 5.4        -33   $ 11.1      $ 16.0        -31

Client households at period end

     4.84        4.66        4     4.84        4.66        4

Net new assets for the period ($ billions)(2)

   $ 11.4      $ 11.8        -3   $ 37.9      $ 36.4        4

Client assets under care:

            

Total:

            

At period end ($ billions)

   $ 847.6      $ 848.2        0   $ 847.6      $ 848.2        0

Average ($ billions)

   $ 875.9      $ 850.4        3   $ 880.3      $ 821.8        7

Advisory programs:

            

At period end ($ billions)

   $ 138.1      $ 132.9        4   $ 138.1      $ 132.9        4

Average ($ billions)

   $ 142.7      $ 132.1        8   $ 142.3      $ 125.3        14

Financial advisors (actual):

            

At period end

     14,449        13,807        5     14,449        13,807        5

Average

     14,404        13,659        5     14,241        13,446        6

Attrition %

     8.4     8.8     n/a        9.2     8.5     n/a   

Dow Jones Industrial Average (actual):

            

At period end

     16,315        17,113        -5     16,315        17,113        -5

Average for period

     17,152        16,949        1     17,651        16,580        6

S&P 500 Index (actual):

            

At period end

     1,931        1,983        -3     1,931        1,983        -3

Average for period

     2,036        1,976        3     2,067        1,904        9

 

(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.

(2) 

Net new assets represent cash and securities inflows and outflows from new and existing clients. In the fourth quarter of 2014, net new assets was revised to exclude mutual fund capital gain distributions received by U.S. clients. The previously reported amounts for the third quarter and first nine months of 2014 were updated to conform to the current definition.

 

17


Table of Contents

PART I.    FINANCIAL INFORMATION

 

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

 

Third Quarter 2015 versus 2014 Overview

The Partnership experienced strong results during the third quarter of 2015 compared to 2014, but results began to soften during the latter part of the third quarter due to market volatility. Overall, the Partnership’s key performance measures were strong during the third quarter of 2015 and financial advisors attracted $11.4 billion in net new assets. Average client assets under care grew 3% to $875.9 billion, which included an 8% increase in the advisory programs’ average assets under care to $142.7 billion. The inflow of client dollars into advisory programs was $3.6 billion for the third quarter of 2015 compared to $5.4 billion in the prior year as the programs continue to mature. In addition, client dollars invested related to trade revenue were up 1% to $28.0 billion.

Net revenue increased 4% to $1,645 for the third quarter of 2015 compared to 2014. This increase was led by a 9% 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. However, the rate of growth slowed in the third quarter compared to earlier in 2015 due to market declines and fewer client dollars invested.

Operating expenses increased 4% for the third quarter of 2015 compared to 2014, primarily due to increased compensation expense from higher revenues on which financial advisors are paid and higher variable compensation due to the increase in the Partnership’s profitability.

Overall, the increase in net revenue, partially offset by the increase in operating expenses, generated income before allocations to partners of $208, a 7% increase over the third quarter of 2014. The rate of growth slowed in the third quarter compared to earlier in 2015.

Year to Date 2015 versus 2014 Overview

The Partnership experienced strong results during the first nine months of 2015 compared to 2014, including record income before allocations to partners and record client assets under care. Results benefitted from net new assets and market conditions. Despite market volatility, the average S&P 500 Index increased 9% and the average Dow Jones Industrial Average increased 6%.

The Partnership’s key performance measures were strong during the first nine months of 2015 and financial advisors attracted $37.9 billion in net new assets. Average client assets under care grew 7% to $880.3 billion, which included a 14% increase in the advisory programs’ average assets under care to $142.3 billion. The inflow of client dollars into advisory programs was $11.1 billion for the first nine months of 2015 compared to $16.0 billion in the prior year as the programs continue to mature. In addition, client dollars invested related to trade revenue were up 3% to $85.9 billion.

Net revenue increased 7% to $4,961 for the first nine months of 2015 compared to 2014. This increase was led by a 12% 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 increases in average market values.

Operating expenses increased 6% for the first nine months of 2015 compared to 2014, primarily due to increased compensation expense from higher revenues on which financial advisors are paid and higher variable compensation due to the increase in the Partnership’s profitability.

 

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Table of Contents

PART I.    FINANCIAL INFORMATION

 

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

 

Overall, the increase in net revenue, partially offset by the increase in operating expenses, generated income before allocations to partners of $644, a 12% increase over the first nine months of 2014.

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 25, 2015 AND SEPTEMBER 26, 2014

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 9% to $1,035 and 12% to $3,051 in the third quarter and first nine months of 2015 compared to the same periods in 2014. The increase in fee revenue for the third quarter and first nine months of 2015 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 25,      Sept 26,            Sept 25,      Sept 26,         
     2015      2014      % Change     2015      2014      % Change  

Asset-based fee revenue:

                

Advisory programs fees

   $ 496       $ 452         10   $ 1,456       $ 1,272         14

Service fees

     304         291         4     908         835         9

Revenue sharing

     44         43         2     140         137         2

Trust fees

     10         10         0     30         29         3

Cash solutions

     2         1         100     6         4         50
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total asset-based fee revenue

   $ 856       $ 797         7   $ 2,540       $ 2,277         12
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Related metrics ($ billions):

                

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

                

Mutual fund assets held outside of advisory programs

   $ 392.1       $ 372.5         5   $ 391.7       $ 359.4         9

Advisory programs

     141.1         131.1         8     140.9         124.5         13

Insurance

     72.9         71.5         2     73.4         69.8         5

Cash solutions

     20.0         19.9         1     20.1         20.1         0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total client asset values

   $ 626.1       $ 595.0         5   $ 626.1       $ 573.8         9
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

(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.

For the three months ended September 25, 2015, asset-based fee revenue increased 7% to $856 compared to the three months ended September 26, 2014. The increase was due to greater advisory programs fees and service fees. The growth in advisory programs and service fees revenue was primarily due to continued investment of client assets and increases in the market value of the underlying assets. Investment of client dollars in advisory programs included new client assets and assets converted from existing clients previously held with the Partnership. The inflow of client dollars into advisory programs was $3.6 billion for the third quarter of 2015 compared to $5.4 billion in the prior year as the programs continue to mature.

 

19


Table of Contents

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 25, 2015, asset-based fee revenue increased 12% to $2,540 compared to the nine months ended September 26, 2014. The increase was primarily due to greater advisory programs fees and service fees. The growth in advisory programs and service fees revenue was primarily due to continued investment of client assets and increases in the market value of the underlying assets. Investment of client dollars in advisory programs included new client assets and assets converted from existing clients previously held with the Partnership. The inflow of client dollars into advisory programs was $11.1 billion for the first nine months of 2015 compared to $16.0 billion in the prior year as the programs continue to mature.

Advisory programs fees include investment advisory fees earned by Olive Street Investment Advisers, L.L.C. (“OLV”) which are paid by the Bridge Builder Trust (the “Trust”). OLV has contractually agreed to waive these fees to the extent such fees exceed the investment advisory fees OLV is required to pay the sub-advisors to the funds in the Trust, which are recognized in professional and consulting fees expense. Thus, while the Partnership anticipates the investment advisory fees earned by OLV to increase as a result of expansion of the Trust, there will be no impact on net income. In 2015, the Trust added seven mutual funds to its series. The Trust has also filed a registration statement with the SEC to register an additional mutual fund which is not yet effective.

Account and Activity

 

     Three Months Ended     Nine Months Ended  
     Sept 25,      Sept 26,            Sept 25,      Sept 26,         
     2015      2014      % Change     2015      2014      % Change  

Account and activity fee revenue:

                

Shareholder accounting services fees

   $ 107       $ 98         9   $ 315       $ 285         11

Retirement account fees

     36         31         16     99         90         10

Insurance contract services fees

     15         5         200     33         5         560

Other account and activity fees

     21         22         -5     64         67         -4
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total account and activity fee revenue

   $ 179       $ 156         15   $ 511       $ 447         14
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Related metrics:

                

Average client:

                

Shareholder accounting holdings serviced

     24.6         22.2         11     24.0         21.6         11

Retirement accounts

     5.2         4.7         11     5.1         4.5         13

For the three months ended September 25, 2015, account and activity fee revenue increased 15% to $179 compared to the three months ended September 26, 2014. Revenue growth was led by shareholder accounting services fees due to the increase in the average number of client mutual fund holdings serviced. Insurance contract services fees are fees earned for administrative support under contracts with certain insurance companies that were primarily entered into in the latter portion of 2014.

For the nine months ended September 25, 2015, account and activity fee revenue increased 14% to $511 compared to the nine months ended September 26, 2014. Revenue growth was led by shareholder accounting services fees due to the increase in the average number of client mutual fund holdings serviced and insurance contract services fees.

 

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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, decreased 1% to $598 in the third quarter of 2015 and increased slightly to $1,838 in the first nine months of 2015 compared to the same periods in 2014. The decrease in trade revenue for the third quarter of 2015 was primarily due to a decrease in the margin earned, partially offset by increased client dollars invested. The slight increase in trade revenue for the first nine months of 2015 was primarily due to increased client dollars invested, partially offset by a decrease in the margin earned. A discussion of trade revenue components follows.

 

     Three Months Ended     Nine Months Ended  
     Sept 25,      Sept 26,            Sept 25,      Sept 26,         
     2015      2014      % Change     2015      2014      % Change  

Trade revenue:

                

Commissions revenue:

                

Mutual funds

   $ 274       $ 274         0   $ 871       $ 858         2

Equities

     160         151         6     489         461         6

Insurance

     95         107         -11     268         290         -8
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total commissions revenue

   $ 529       $ 532         -1   $ 1,628       $ 1,609         1

Investment banking

     34         42         -19     110         117         -6

Principal transactions

     35         32         9     100         106         -6
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total trade revenue

   $ 598       $ 606         -1   $ 1,838       $ 1,832         0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Related commissions revenue metrics:

                

Client dollars invested ($ billions)

   $ 22.6       $ 22.4         1   $ 69.8       $ 67.6         3

Margin per $1,000 invested (actual)

   $ 23.4       $ 23.7         -1   $ 23.3       $ 23.8         -2

U.S. business days

     63         63         0     185         186         -1

Commissions

For the three months ended September 25, 2015, commissions revenue decreased 1% to $529 compared to the three months ended September 26, 2014. The decrease was primarily due to lower insurance revenue reflecting reduced market demand. This decrease was mostly offset by an increase in commissions revenue from equities reflecting an increase in client dollars invested.

For the nine months ended September 25, 2015, commissions revenue increased 1% to $1,628 compared to the nine months ended September 26, 2014. The increase was primarily due to a 3% increase in client dollars invested in commission generating transactions, most notably in equities due to strong equity market performance in the first quarter of 2015. This increase was partially offset by a 2% decrease in the margin earned per $1,000 invested, primarily reflecting an increase in the average trade size of mutual fund transactions. As the average trade size of mutual fund transactions increases, the margin earned on these transactions decreases, resulting in lower commissions earned.

 

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

 

Investment Banking

For the three months ended September 25, 2015, investment banking revenue decreased 19% to $34 compared to the three months ended September 26, 2014. The decrease in investment banking revenue reflected a 16% decrease in client dollars invested, primarily due to market volatility which led to decreased investment in equity unit investment trusts.

For the nine months ended September 25, 2015, investment banking revenue decreased 6% to $110 compared to the nine months ended September 26, 2014. The decrease in investment banking revenue reflected a 5% decrease in the margin earned per $1,000 invested.

Investment banking revenue is primarily derived from the Partnership’s distribution of unit investment trusts, corporate and municipal obligations, and government sponsored enterprise obligations. The Partnership intends to wind down the negotiated fixed income underwriting portion of the investment banking business by the end of 2015. This portion represents less than 10% of the overall investment banking revenue and less than 1% of total revenue. Any costs associated with the closure are expected to be immaterial.

Principal Transactions

For the three months ended September 25, 2015, principal transactions revenue increased 9% to $35 compared to the three months ended September 26, 2014. Principal transactions revenue was positively impacted by an increase in client dollars invested primarily due to relatively higher interest rates during the current quarter compared to the third quarter of 2014.

For the nine months ended September 25, 2015, principal transactions revenue decreased 6% to $100 compared to the nine months ended September 26, 2014. Principal transactions revenue was negatively impacted by a 9% decrease in the margin earned per $1,000 invested. Client investment purchases continued to shift towards products with shorter maturities, which have lower margins, due to the sustained low interest rate environment.

 

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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 25,     Sept 26,           Sept 25,     Sept 26,        
     2015     2014     % Change     2015     2014     % Change  

Net interest and dividends revenue:

            

Client loan interest

   $ 32      $ 28        14   $ 91      $ 79        15

Short-term investing interest

     5        4        25     14        11        27

Other interest and dividends

     3        2        50     9        7        29

Limited partnership interest expense

     (17     (12     42     (52     (36     44

Other interest expense

     (2     (1     100     (4     (5     -20
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net interest and dividends revenue

   $ 21      $ 21        0   $ 58      $ 56        4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Related metrics:

            

Average aggregate client loan balance

   $ 2,798.6      $ 2,396.8        17   $ 2,696.4      $ 2,268.9        19

Average rate earned

     4.56     4.65     -2     4.58     4.72     -3

Average funds invested

   $ 9,952.3      $ 9,205.9        8   $ 9,961.4      $ 9,291.5        7

Average rate earned

     0.20     0.16     25     0.20     0.16     25

Weighted average $1,000 equivalent limited partnership units outstanding

     920,508        635,856        45     923,199        637,638        45

For the three months ended September 25, 2015, net interest and dividends revenue was flat at $21 compared to the three month period ended September 26, 2014. Results reflected a 14% increase in client loan interest primarily due to an increase in the average aggregate client loan balance, slightly offset by a decrease in the average rate earned. The increase in interest income was offset by an increase in limited partnership interest expense due to the issuance of $292 in Interests in connection with the Plan in January 2015.

For the nine month period ended September 25, 2015, net interest and dividends revenue increased 4% to $58 compared to the nine month period ended September 26, 2014. Results reflected a 15% increase in client loan interest primarily due to an increase in the average aggregate client loan balance, slightly offset by a decrease in the average rate earned. The increase in interest income was mostly offset by an increase in limited partnership interest expense due to the issuance of $292 in Interests in connection with the Plan in January 2015.

Other Revenue

Other revenue decreased from $3 to a net loss of $9 in the third quarter of 2015 and decreased from $25 to $14 in the first nine months of 2015 compared to the corresponding periods in 2014. These results were primarily attributable to fluctuations 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 (loss) with an offset in compensation and fringe benefits expense, resulting in minimal net impact to the Partnership’s income before allocations to partners.

 

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

 

Operating Expenses

 

     Three Months Ended     Nine Months Ended  
     Sept 25,      Sept 26,            Sept 25,      Sept 26,         
     2015      2014      % Change     2015      2014      % Change  

Operating expenses:

                

Compensation and benefits:

                

Financial advisor

   $ 648       $ 631         3   $ 1,988       $ 1,865         7

Home office and branch

     291         276         5     856         808         6

Variable compensation

     207         218         -5     632         591         7
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total compensation and benefits

     1,146         1,125         2     3,476         3,264         6

Occupancy and equipment

     97         91         7     286         274         4

Communications and data processing

     71         73         -3     213         216         -1

Advertising

     16         13         23     50         50         0

Professional and consulting fees

     26         16         63     60         44         36

Postage and shipping

     13         13         0     39         38         3

Other operating expenses

     68         57         19     193         176         10
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total operating expenses

   $ 1,437       $ 1,388         4   $ 4,317       $ 4,062         6
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Related metrics (actual):

                

Number of branches:

                

At period end

     12,345         11,906         4     12,345         11,906         4

Average

     12,295         11,842         4     12,189         11,757         4

Financial advisors:

                

At period end

     14,449         13,807         5     14,449         13,807         5

Average

     14,404         13,659         5     14,241         13,446         6

Branch office administrators(1):

                

At period end

     14,304         13,795         4     14,304         13,795         4

Average

     14,334         13,811         4     14,161         13,627         4

Home office associates(1):

                

At period end

     5,811         5,528         5     5,811         5,528         5

Average

     5,912         5,661         4     5,778         5,563         4

Home office associates(1) per

                

100 financial advisors (average)

     41.0         41.4         -1     40.6         41.4         -2

Branch office administrators(1) per 100 financial advisors (average)

     99.5         101.1         -2     99.4         101.3         -2

Average operating expenses per financial advisor(2)

   $ 40,405       $ 39,461         2   $ 119,163       $ 119,441         0

 

(1) 

Counted on a full-time equivalent basis.

(2) 

Operating expenses used in calculation represent total operating expenses less financial advisor compensation and variable compensation. In 2015, payroll taxes were combined with compensation and benefits and financial advisor salary and subsidy was combined with financial advisor compensation. The 2014 operating expense amount used in the calculation was recast to conform to the new presentation.

 

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

 

For the three month period ended September 25, 2015, operating expenses increased 4% to $1,437 compared to the three month period ended September 26, 2014. The change reflected a $21 increase in compensation and benefits, an $11 increase in other operating expenses related to legal, travel and other expenses, and a $10 increase in professional and consulting fees related to fees paid by OLV to sub-advisors (see further discussion in “Fee Revenue - Asset-based” section above).

Financial advisor compensation increased 3% in the third quarter of 2015 primarily due to an increase in asset-based fee revenues on which financial advisor commissions are paid, as well as growth in the number of financial advisors and increased participation in the Partnership’s compensation initiatives.

Home office and branch compensation and benefits expense increased 5% in the third quarter of 2015 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 associates and branch office administrators (“BOAs”) increased 4%.

Variable compensation expands and contracts in relation to the Partnership’s related profitability. A significant portion of profits is allocated to variable compensation and paid to associates in the form of bonuses and profit sharing. Variable compensation decreased 5% in the third quarter of 2015 to $207 as financial results softened in the month of September 2015 due to market declines and fewer client dollars invested.

The Partnership uses the ratios of both the number of home office associates and the number of BOAs per 100 financial advisors and the average operating expenses per financial advisor as key metrics in managing its costs. In the third quarter of 2015, the average number of the home office associates per 100 financial advisors and the number of BOAs per 100 financial advisors decreased 1% and 2%, respectively. These ratios reflected 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 and branch compensation and benefit expense, partially offset by the impact of spreading those expenses over more financial advisors.

For the nine month period ended September 25, 2015, operating expenses increased 6% to $4,317 compared to the nine month period ended September 26, 2014, primarily due to a 6% increase in compensation and benefits. The remaining operating expenses increased 5% ($43), primarily due to increases in other operating expenses and professional and consulting fees, as previously discussed.

Financial advisor compensation increased 7% in the first nine months of 2015 primarily due to an increase in asset-based fee revenues on which financial advisor commissions are paid, as well as growth in the number of financial advisors and increased participation in the Partnership’s compensation initiatives.

Home office and branch compensation and benefits expense increased 6% in the first nine months of 2015 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 associates and BOAs increased 4%. Variable compensation increased 7% in the first nine months of 2015 to $632, reflecting strong financial results.

 

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

 

In the first nine months of 2015, the average number of both the home office associates per 100 financial advisors and the number of BOAs per 100 financial advisors decreased 2%. These ratios reflected 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 was flat.

Segment Information

The Partnership has two operating and reportable segments based upon geographic location, the U.S. and Canada. Canada segment information, as reported in the following table, is based upon the Consolidated Financial Statements of the Partnership’s Canada operations. The U.S. segment information is derived from the Consolidated Financial Statements less the Canada segment information as presented. Pre-variable income represents income before variable compensation expense and before allocations to partners. This is consistent with how management views the segments in order to assess performance.

 

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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.

 

     Three Months Ended     Nine Months Ended  
     Sept 25,     Sept 26,           Sept 25,     Sept 26,        
     2015     2014     % Change     2015     2014     % Change  

Net revenue:

            

U.S.

   $ 1,599      $ 1,532        4   $ 4,816      $ 4,483        7

Canada

     46        51        -10     145        154        -6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

     1,645        1,583        4     4,961        4,637        7

Operating expenses (excluding variable compensation):

            

U.S.

     1,186        1,121        6     3,546        3,326        7

Canada

     44        49        -10     139        145        -4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     1,230        1,170        5     3,685        3,471        6

Pre-variable income:

            

U.S.

     413        411        0     1,270        1,157        10

Canada

     2        2        0     6        9        -33
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total pre-variable income

     415        413        0     1,276        1,166        9

Variable compensation:

            

U.S.

     203        213        -5     619        575        8

Canada

     4        5        -20     13        16        -19
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total variable compensation

     207        218        -5     632        591        7

Income (loss) before allocations to partners:

            

U.S.

     210        198        6     651        582        12

Canada

     (2     (3     33     (7     (7     0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total income before allocations to partners

   $ 208      $ 195        7   $ 644      $ 575        12
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Client assets under care ($ billions):

            

U.S.

            

At period end

   $ 830.3      $ 828.7        0   $ 830.3      $ 828.7        0

Average

   $ 857.8      $ 830.5        3   $ 861.7      $ 802.7        7

Canada

            

At period end

   $ 17.3      $ 19.5        -11   $ 17.3      $ 19.5        -11

Average

   $ 18.1      $ 19.9        -9   $ 18.6      $ 19.1        -3

Net new assets for the period ($ billions):

            

U.S.

   $ 11.2      $ 11.5        -3   $ 36.9      $ 35.3        5

Canada

   $ 0.2      $ 0.3        -33   $ 1.0      $ 1.1        -9

Financial advisors (actual):

            

U.S.

            

At period end

     13,760        13,089        5     13,760        13,089        5

Average

     13,708        12,949        6     13,538        12,748        6

Canada

            

At period end

     689        718        -4     689        718        -4

Average

     696        710        -2     703        698        1

 

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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 25, 2015, net revenue increased 4% compared to the three month period ended September 26, 2014. Revenue growth reflected a 7% ($57) increase in asset-based fee revenue primarily due to increases in advisory programs fees revenue of 9% ($41) and service fees revenue of 5% ($13). Fee revenue growth reflected 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 6% in the third quarter of 2015 primarily due to increases in financial advisor compensation and benefits. Higher financial advisor compensation was due to increases in revenue on which financial advisor commissions are paid. Compensation and benefits expense also 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 25, 2015, net revenue increased 7% compared to the nine month period ended September 26, 2014. Revenue growth reflected a 12% ($255) increase in asset-based fee revenue primarily due to increases in advisory programs fees revenue of 14% ($177) and service fees revenue of 9% ($71). Fee revenue growth reflected 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 7% in the first nine months of 2015 primarily due to increases in financial advisor compensation and benefits. Higher financial advisor compensation was due to increases in revenue on which financial advisor commissions are paid. Compensation and benefits expense also 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 25, 2015, net revenue decreased 10% compared to the third quarter of 2014. Trade revenue decreased 29% ($7) primarily due to a decrease in the amount of client dollars invested and the margin earned. This decrease was slightly offset by an increase in asset-based fee revenue of 9% ($2). Growth in asset-based fees reflected an increase in client assets under care in advisory programs due to increased investment of client dollars.

Operating expenses (excluding variable compensation) decreased 10% in the third quarter of 2015 primarily due to a decrease in financial advisor compensation attributable to the decrease in revenue on which financial advisor commissions are paid.

For the nine month period ended September 25, 2015, net revenue decreased 6% compared to the first nine months of 2014. Trade revenue decreased 24% ($19) primarily due to decreases in the amount of client dollars invested and margin earned on mutual funds. This decrease was partially offset by an increase in asset-based fee revenue of 15% ($8). Growth in asset-based fees reflected an increase in client assets under care in advisory programs due to increased investment of client dollars.

 

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PART I.    FINANCIAL INFORMATION

 

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

 

Operating expenses (excluding variable compensation) decreased 4% in the first nine months of 2015 primarily due to a decrease in financial advisor compensation attributable to the decrease in revenue on which financial advisor commissions are paid.

LEGISLATIVE AND REGULATORY REFORM

As discussed more fully in Part I, Item 1A – Risk Factors – Legislative and Regulatory Initiatives of the Partnership’s Annual Report, which is supplemented by Part II, Item 1A – Risk Factors – Legislative and Regulatory Initiatives in the Partnership’s Quarterly Reports on Form 10-Q for the periods ended March 27, 2015 and June 26, 2015, the Partnership continues to monitor several regulatory initiatives and proposed, potential or enacted legislation or rules (“Legislative and Regulatory Initiatives”), including the possibility of a universal fiduciary standard of care applicable to both broker-dealers and investment advisers under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and enacted reforms to the regulation of money market mutual funds.

On April 20, 2015, the Department of Labor (“DOL”) published in the Federal Register its proposed rule on the definition of the term fiduciary and exemptions related thereto, which commenced a 75-day comment period. Subsequently, the DOL extended the comment period by 15 days. The DOL held public hearings in August, followed by a second comment period. The DOL is reviewing feedback and comments and will then craft a final rule. At this time, the Partnership is continuing to review the proposed rule and has submitted a comment letter to the DOL. The Partnership cannot predict at this time the extent of adverse impact the rule may have on its operating results if it is enacted as proposed.

These Legislative and 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 proposed or potential Legislative and Regulatory Initiatives will be enacted or the impact that any Legislative and Regulatory Initiatives will have on the Partnership.

MUTUAL FUNDS AND ANNUITIES

The Partnership derived 75% and 76% of its total revenue from sales and services related to mutual fund and annuity products for the three and nine month periods ended September 25, 2015, respectively, and 78% and 77% for the three and nine month periods ended September 26, 2014, respectively. In addition, the Partnership derived from one mutual fund company 20% of its total revenue for both the three and nine month periods ended September 25, 2015 and 19% and 20% of its total revenue for the three and nine month periods ended September 26, 2014, 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, financial condition, and liquidity.

 

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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 of Interests to be issued pursuant to the Plan. On January 2, 2015, the Partnership issued $292 of Interests in connection with the Plan. The remaining $58 of Interests may be issued at the discretion of the Partnership in the future. Proceeds from the Interests issued on January 2, 2015 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, including growing the number of financial advisors. The issuance of Interests will reduce the Partnership’s net interest income and profitability in 2015.

Partnership capital subject to mandatory redemption, net of reserve for anticipated withdrawals, at September 25, 2015 was $2,334, an increase of $361 from December 31, 2014, which includes proceeds from the Interests issued on January 2, 2015. This increase in Partnership capital subject to mandatory redemption was due to the retention of general partner earnings ($65) and additional capital contributions related to limited partner, subordinated limited partner and general partner interests ($296, $43 and $131, respectively), partially offset by the net increase in Partnership loans outstanding ($18) and redemption of limited partner, subordinated limited partner and general partner interests ($9, $9 and $138, respectively). During the nine month periods ended September 25, 2015 and September 26, 2014, the Partnership retained 13.8% of income allocated to general partners.

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 (as defined in the Partnership Agreement). 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.

 

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PART I.    FINANCIAL INFORMATION

 

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

 

The Partnership makes loans available to those general partners (other than members of the Executive Committee) who require financing for some or all of their Partnership capital contributions. 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. 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. 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 earned related to these loans. General 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, amounts distributed for income taxes and any earnings distributed to the general partner. The Partnership has full recourse against any partner that defaults on loan obligations to the Partnership. The Partnership does not anticipate that Partnership loans will have an adverse impact on the Partnership’s short-term liquidity or capital resources.

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 his or her bank loan prior to any funds being released to the partner. In addition, the partner is required to apply Partnership 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 financing to the Partnership. To the extent any of these banks increase credit available to the partners, financing available to the Partnership itself may be reduced.

 

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PART I.    FINANCIAL INFORMATION

 

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

 

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 25, 2015  
     Limited
Partnership
Interests
    Subordinated
Limited
Partnership
Interests
    General
Partnership
Interests
    Total
Partnership
Capital
 

Total Partnership capital(1)

   $ 919      $ 370      $ 1,261      $ 2,550   
  

 

 

   

 

 

   

 

 

   

 

 

 

Partnership capital owned by partners with individual loans

   $ 490      $ 4      $ 637      $ 1,131   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     53.3     1.1     50.5     44.4

Partner loans

   $ 133      $ 2      $ 214      $ 349   
  

 

 

   

 

 

   

 

 

   

 

 

 

Partner loans as a percent of total Partnership capital

     14.5     0.5     17.0     13.7

Partner loans as a percent of respective Partnership capital owned by partners with loans

     27.1     50.0     33.6     30.9

 

(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.

 

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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:

 

     September 25,      December 31,  
     2015      2014  

2013 Credit Facility

   $ 400       $ 400   

Uncommitted secured credit facilities

     365         365   
  

 

 

    

 

 

 

Total bank lines of credit

   $ 765       $ 765   
  

 

 

    

 

 

 

In November 2013, the Partnership entered into a $400 committed unsecured revolving line of credit which has an expiration date of November 15, 2018. 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 firm-owned securities, which would serve as collateral on loans in the event the Partnership borrowed against these lines. On October 30, 2015, the Partnership’s uncommitted lines of credit were reduced by $75 per the agreement with one of the banks. This bank still participates in the 2013 Credit Facility.

There were no amounts outstanding on the 2013 Credit Facility or the uncommitted lines of credit as of September 25, 2015 and December 31, 2014. In addition, the Partnership did not have any draws against these lines of credit during the nine and twelve month periods ended September 25, 2015 and December 31, 2014, respectively.

The Partnership was in compliance with all covenants related to its outstanding debt agreements as of September 25, 2015. For details on covenants related to lines of credit, see the discussion in Part I, Item 1 – Financial Statements – Note 3 to this Quarterly Report.

Cash Activity

As of September 25, 2015, the Partnership had $962 in cash and cash equivalents and $793 in securities purchased under agreements to resell, which generally have maturities of less than one week. This totaled $1,755 of Partnership liquidity as of September 25, 2015, a 5% ($88) increase from $1,667 at December 31, 2014. This increase was primarily due to timing of client cash activity and the resulting requirement for segregation. The Partnership had $8,949 and $8,848 in cash and investments segregated under federal regulations as of September 25, 2015 and December 31, 2014, respectively, which was not available for general use.

 

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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 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 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’s Canada broker-dealer 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:

 

     September 25,     December 31,        
     2015     2014     % Change  

U.S.:

      

Net capital

   $ 1,187      $ 999        19

Net capital in excess of the minimum required

   $ 1,130      $ 948        19

Net capital as a percentage of aggregate debit items

     42.1     38.9     8

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

     28.1     31.1     -10

Canada:

      

Regulatory risk adjusted capital

   $ 26      $ 31        -16

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

   $ 19      $ 27        -30

Net capital and the related capital percentages may fluctuate on a daily basis.

EJTC was in compliance with its regulatory capital requirements as of September 25, 2015 and December 31, 2014.

OFF BALANCE SHEET ARRANGEMENTS

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

 

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PART I.    FINANCIAL INFORMATION

 

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

 

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, firm-owned securities 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

Refer to Part I, Item 1 – Financial Statements – Note 9 to this Quarterly Report for a discussion of Recently Issued Accounting Standards.

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 and other technology-related risks; (9) a fluctuation or decline in the fair value of securities; and (10) the risks discussed under Part I, Item 1A – Risk Factors in the Partnership’s Annual Report and Part II, Item 1A – Risk Factors in the Partnership’s Quarterly Reports on Form 10-Q for the periods ended March 27, 2015 and June 26, 2015. 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.

 

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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 Part III, Item 10 – Directors, Executive Officers and Corporate Governance of the Partnership’s Annual Report. All amounts are presented in millions, except as otherwise noted.

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 $2.7 billion and $10.0 billion, respectively, for the nine month period ended September 25, 2015. 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 $92. 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 $21. 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 20 basis points (0.20%) in the first nine months of 2015, 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 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 approximately $75 for both the nine month periods ended September 25, 2015 and September 26, 2014, or approximately $100 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.

 

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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 25, 2015.

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.

 

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Table of Contents

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 the discussion in Part II, Item 1 – Legal Proceedings in the Partnership’s Quarterly Report on Form 10-Q for the periods ended March 27, 2015 and June 26, 2015.

Daniel Ezersky, individually and on behalf of all others similarly situated. On March 14, 2013, Edward Jones was named as a defendant in a putative class action lawsuit in the Circuit Court of St. Louis County, Missouri. The petition alleged that Edward Jones breached its fiduciary duties and was unjustly enriched through the use of an online life insurance needs calculator that plaintiff claims inflated the amount of insurance he needed. The plaintiff sought damages on behalf of Missouri residents who purchased certain life insurance products from Edward Jones between March 2008 and the present, including: actual damages, or alternatively, judgment in an amount equal to profits gained from the sale of term, whole life or universal life insurance to plaintiff/damages class; punitive damages; injunctive relief; costs, including reasonable fees and expert witness expenses; and reasonable attorneys’ fees. On August 18, 2014, Edward Jones filed a motion for summary judgment, which was subsequently granted by the Court. Plaintiff filed a notice of appeal on December 10, 2014. The Missouri Court of Appeals for the Eastern District affirmed summary judgment on October 20, 2015. On November 4, 2015, plaintiff filed an application to transfer the case to the Supreme Court of Missouri.

In the Matter of Edward D. Jones & Co., L.P. Municipal Bond Pricing. On April 27, 2012, the SEC’s Division of Enforcement informed Edward Jones that it had commenced an investigation into Nebraska Public Power District’s (“NPPD”) Taxable Build America Bonds (“BAB”), which formed part of NPPD’s 2009 General Revenue Bonds offering. Edward Jones was a co-manager of that offering. The SEC’s investigation inquired into whether Edward Jones and others may have engaged in possible violations of the Securities Act of 1933, as amended, the Exchange Act, and Municipal Securities Rulemaking Board Rules. In January 2013, the SEC commenced an investigation that subsumed the one just described, relating more generally to municipal bond pricing at issuance and inquiring into the same types of possible violations. On August 13, 2015, Edward Jones, without admitting or denying the findings, entered into a settlement agreement with the SEC to resolve these matters. Pursuant to the settlement, Edward Jones agreed to pay disgorgement and prejudgment interest of $5.2 million to current and former customers of Edward Jones, and has paid a civil money penalty in the amount of $15.0 million. In entering into the settlement, the SEC took into consideration remedial acts undertaken by Edward Jones related to this matter.

On October 30, 2013, the Special Inspector General for the Troubled Asset Relief Program issued a subpoena to Edward Jones requesting documents relating to certain BAB transactions and informed Edward Jones that it is in the process of reviewing these issues. Consistent with its practice, Edward Jones is cooperating fully with the Special Inspector General with respect to its investigation. No assurance can be given as to how or when this matter will be resolved and/or concluded.

 

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PART II.    OTHER INFORMATION

 

Mutual Fund Share Class Waivers. On May 5, 2015, FINRA’s Enforcement Division advised Edward Jones that it was investigating whether any violations of the federal securities laws or rules have occurred with respect to mutual fund purchases and sales charge waivers for certain retirement plan and charitable organization accounts. Prior to being advised of the investigation, Edward Jones had commenced a review of this issue and self-reported to FINRA. On October 26, 2015, Edward Jones, without admitting or denying the findings, entered into a settlement agreement with FINRA to resolve this matter. Pursuant to the settlement, Edward Jones agreed to provide remediation to certain customers, estimated at the time of the settlement agreement to be approximately $13.5 million. A monetary penalty was not imposed by FINRA. The settlement did not have a material adverse impact on the Partnership’s consolidated financial condition. On June 12, 2015, the Division of Enforcement of the SEC informed Edward Jones that it is also investigating this matter. The SEC’s review is ongoing. Consistent with its practice, Edward Jones is cooperating fully with the SEC with respect to its investigation.

 

ITEM 1A. RISK FACTORS

For information regarding risk factors affecting the Partnership, please see the language in Part I, Item 2 – Forward-looking Statements of this Quarterly Report on Form 10-Q and the discussion in Part I, Item 1A – Risk Factors of the Partnership’s Annual Report, which is supplemented by Part II, Item 1A – Risk Factors of the Partnership’s Quarterly Report on Form 10-Q for the periods ended March 27, 2015 and June 26, 2015.

 

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

None.

 

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PART II.    OTHER INFORMATION

 

ITEM 6. EXHIBITS

 

Exhibit
Number

  

Description

    3.1 *   

Sixth Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated August 24, 2015.

    3.2 *   

Seventh Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated September 21, 2015.

    3.3 *   

Eighth Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated October 26, 2015.

  31.1 *   

Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15(d)-14(a) of the Securities Exchange 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 Exchange 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

 

*

Filed herewith.

 

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PART II.    OTHER INFORMATION

 

SIGNATURES

Pursuant to the requirements 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 6, 2015

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 6, 2015

James D. Weddle

     

/s/ Kevin D. Bastien

   Chief Financial Officer    November 6, 2015

Kevin D. Bastien

   (Principal Financial and Accounting Officer)   

 

41