UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended March 25, 2016

OR

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)

 

 

 

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 o

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 o

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):

 

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

As of April 29, 2016, 911,999 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.

 

 

 

 

 

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

INDEX

 

 

 

 

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PART I. FINANCIAL INFORMATION

 

 

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

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

 

 

 

 

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

 

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PART I. FINANCIAL INFORMATION

 

 

 

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

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

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

 

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PART I. FINANCIAL INFORMATION

 

 

 

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

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

 

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PART I. FINANCIAL INFORMATION

 

 

 

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 for the three month periods ended February 29, 2016 and February 28, 2015 are included 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 primarily serves 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 purchase or sale of securities and insurance products, 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 (“Trust Co.”), a wholly-owned subsidiary of the Partnership. Olive Street Investment Advisers, L.L.C. ("Olive Street"), a wholly-owned subsidiary of the Partnership, provides investment advisory services to the sub-advised mutual funds in the Bridge Builder Trust (the "Trust").  

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, 2015 (“Annual Report”). The results of operations for the three month period ended March 25, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016. These Consolidated Financial Statements should be read in conjunction with the Annual Report.

 

 

 

 

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PART I. FINANCIAL INFORMATION

 

 

 

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 at contracted amounts which approximate fair value given the short time to maturity.

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 three and twelve month periods ended March 25, 2016 and December 31, 2015, respectively. In addition, there were no transfers into or out of Levels I, II or III during these periods.

 

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PART I. FINANCIAL INFORMATION

 

 

 

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

 

 

 

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PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

NOTE 3 – PARTNERSHIP CAPITAL

The Partnership makes loans available to those general partners and, in limited circumstances, subordinated limited partners, in each case, other than 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”)), who require financing for some or all of their Partnership capital contributions. It is anticipated that of the future general and subordinated limited partnership capital contributions (in each case, other than for Executive Committee members) requiring financing the majority will be financed through Partnership loans. In limited circumstances a general partner may withdraw from the Partnership and become a subordinated limited partner while he or she still has an outstanding Partnership loan. Loans made by the Partnership to such partners are generally for a period of one year but are expected to be renewed and bear interest at the interest rate 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 March 25, 2016 and December 31, 2015, the outstanding amount of Partnership loans financed through the Partnership was $297 and $218, respectively. Interest income earned from these loans, which is included in interest and dividends in the Consolidated Statements of Income, was $2 for both the three month periods ended March 25, 2016 and March 27, 2015.

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

 

 

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PART I. FINANCIAL INFORMATION

 

 

 

 

The minimum 7.5% annual payment on the face amount of limited partnership capital was $17 for both the three month periods ended March 25, 2016 and March 27, 2015. 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. In addition, on January 4, 2016, the Partnership issued an immaterial amount of additional Interests to individuals participating in retirement transition plans pursuant to the Plan. The remaining $58 of Interests may be issued in connection with the Plan at the discretion of the Partnership in the future.

 

 

NOTE 4 – 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 Canada broker-dealer’s assets and operations.

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

 

 

Net capital and the related capital percentages may fluctuate on a daily basis. In addition, Trust Co. was in compliance with its regulatory capital requirements as of March 25, 2016 and December 31, 2015.

 

 

NOTE 5 – CONTINGENCIES

In the normal course of its business, the Partnership is involved, from time to time, in various legal and regulatory matters, including arbitrations, class actions, other litigation, and examinations, investigations and proceedings by governmental authorities and self-regulatory organizations, which may result in losses. In addition, the Partnership provides for potential losses that may arise related to other contingencies.

 

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PART I. FINANCIAL INFORMATION

 

 

 

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. This liability represents the Partnership’s estimate of the potential loss contingency at March 25, 2016 and is 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 as of March 25, 2016. 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 liabilities at March 25, 2016 are adequate and the liabilities arising from such matters 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.

 

 

NOTE 6 – 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:

 

 

 

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PART I. FINANCIAL INFORMATION

 

 

 

The Partnership derived from one mutual fund company 20% of its total revenue for both the three month periods ended March 25, 2016 and March 27, 2015. 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.

 

 

NOTE 7 – 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:

 

 

 

 

NOTE 8 – ADOPTED AND RECENTLY ISSUED ACCOUNTING STANDARDS

In February 2015, the FASB issued Accounting Standards Update ("ASU") No. 2015-02, Consolidation (Topic 810) – Amendments to the Consolidation Analysis (“ASU 2015-02”), which provided updated guidance on consolidation of variable interest entities. ASU 2015-02 was adopted on January 1, 2016 and adoption did not have a material impact on the Consolidated Financial Statements.

In May 2014, the FASB and the International Accounting Standards Board (“IASB”) jointly issued 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 for a company to 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 of ASU 2014-09 to 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 impact, if any, ASU 2014-09 will have on the Consolidated Financial Statements or which adoption method will be used.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which will be effective for the first quarter of 2018. ASU 2016-01 provides a comprehensive framework for the classification and measurement of financial assets and liabilities. The Partnership is in the process of evaluating the new standard and does not expect ASU 2016-01 will have a material impact on the Consolidated Financial Statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which will be effective for the first quarter of 2019. ASU 2016-02 requires lessees to recognize leases with terms greater than 12 months on the balance sheet as lease assets and lease liabilities. The Partnership is in the process of evaluating the impact of ASU 2016-02 and does not know the impact ASU 2016-02 will have on the Consolidated Financial Statements.

 

 

 

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PART I. FINANCIAL INFORMATION

 

 

 

NOTE 9 – SUBSEQUENT EVENTS

The Partnership has evaluated subsequent events through the date these Consolidated Financial Statements were issued and identified no matters requiring disclosure, except for the event noted below.

On April 6, 2016, the Department of Labor ("DOL") issued its final rule on the definition of the term "fiduciary" and exemptions related thereto in the context of the Employee Retirement Income Security Act ("ERISA") and Individual Retirement Accounts ("IRAs").  The final rule will become applicable in April of 2017.  At this time, the Partnership is reviewing the final rule and determining the scope and depth of changes that will need to be made to the Partnership's operations as a result of the rule.  As such, the Partnership cannot predict at this time the full extent of any adverse impact on its operating results.

 

 

 

 

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PART I. FINANCIAL INFORMATION

 

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 earned from the purchase or sale of mutual fund shares, listed and unlisted equities and insurance products, and principal transactions. 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.

 

 

 

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PART I. FINANCIAL INFORMATION

 

 

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 month periods ended March 25, 2016 and March 27, 2015. Management of the Partnership relies on this financial information and the related metrics to evaluate the Partnership’s operating performance and financial condition.

 

 

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PART I. FINANCIAL INFORMATION

 

 

First Quarter 2016 versus First Quarter 2015 Overview

The average S&P 500 Index decreased 6% and the average Dow Jones Industrial Average decreased 7% in the first quarter of 2016 compared to the first quarter of 2015, impacting results. Despite the market decreases, client assets under care increased 1% as of March 25, 2016 compared to March 27, 2015. Fee revenue increased 3%, while, overall, net revenue decreased 5% in the first quarter of 2016 compared to 2015.

Financial advisors gathered $9.7 billion in net new assets during the first quarter of 2016, compared to $14.4 billion in 2015, resulting in a 1% increase in client assets under care as of March 25, 2016 to $886.4 billion. Average client assets under care decreased 1% for the first quarter of 2016 compared to the first quarter of 2015, which included a 1% decrease in the advisory programs’ average assets under care to $137.9 billion. The inflow of client dollars into advisory programs was $2.4 billion for the three months ended March 25, 2016 compared to $3.5 billion in the prior year due to the programs continuing to mature and market uncertainty.

Net revenue decreased 5% to $1,561 for the first quarter of 2016 compared to 2015. This decrease was led by a 17% decrease in trade revenue, primarily due to fewer client dollars invested and the impact of market volatility.

Operating expenses decreased 4% in the first quarter of 2016 compared to 2015, primarily due to decreased compensation expense from lower revenues on which financial advisors are paid and lower variable compensation due to the softening of financial results.

Overall, the decrease in net revenue, partially offset by the decrease in operating expenses, generated income before allocations to partners of $191, an 11% decrease over a record 2015 first quarter.

RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED MARCH 25, 2016 AND MARCH 27, 2015

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 3% to $1,010 in the first quarter of 2016 compared to the same period in 2015. Asset-based fee revenue increased 1% and account and activity fee revenue increased 10%. A discussion of fee revenue components follows.

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PART I. FINANCIAL INFORMATION

 

 

Asset-based

 

 

For the three months ended March 25, 2016, asset-based fee revenue increased 1% to $830 compared to the three months ended March 27, 2015, led by an increase in cash solutions revenue. Cash solutions revenue included fees earned on money market funds, which increased due to higher fund yields as a result of an increase in interest rates in the first quarter of 2016 compared to the first quarter of 2015. Advisory programs fees were flat despite a slight 1% decrease in average client asset values.  

Asset-based fee revenue also increased due to a $10 increase in Olive Street fees for the three months ended March 25, 2016, reflecting the addition of seven funds to the Trust during 2015. The Trust pays Olive Street for performing investment advisory services. The fees earned by Olive Street are offset by the fees paid by Olive Street to the sub-advisers to the funds in the Trust. Olive Street has contractually agreed to waive any investment advisory fees which exceed the investment advisory fees paid to sub-advisers, resulting in no impact on the Partnership's net income. The investment advisory fees paid to sub-advisers are recognized in professional and consulting fees.

As disclosed in the Partnership's Annual Report, on February 5, 2016, the Partnership entered into a non-binding letter of intent to acquire the remaining 50.5% general partner interest of Passport Research, Ltd. ("Passport Research"), the investment adviser to two money market funds made available to Edward Jones clients, from Federated Investment Management Company ("Federated").  Federated approved the transfer on February 18, 2016, and the Partnership and Federated entered into a definitive agreement on April 27, 2016. The transfer is expected to be completed in the fourth quarter of 2016, subject to customary regulatory and fund shareholder approvals, and is not expected to have a material impact on the Consolidated Financial Statements.

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PART I. FINANCIAL INFORMATION

 

 

Account and Activity

 

 

For the three months ended March 25, 2016, account and activity fee revenue increased 10% to $180 compared to the three months ended March 27, 2015.  Revenue growth was led by shareholder accounting services fees due to the increase in the average number of client mutual fund holdings serviced.

Trade Revenue

Trade revenue, which consists of commissions and principal transactions, decreased 17% to $522 in the first quarter of 2016 compared to the same period in 2015. Results reflect market volatility due to external factors, including continued speculation over the Federal Reserve raising interest rates, volatility in the price of oil and slowing growth in China.  Commissions revenue decreased 18% and principal transactions revenue decreased 8%. A discussion of trade revenue components follows.

 

 

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PART I. FINANCIAL INFORMATION

 

 

Commissions – Mutual funds

For the three months ended March 25, 2016, mutual funds revenue decreased 16% to $249. The decrease was primarily due to a decrease in client dollars invested and fewer net new assets resulting from market volatility and uncertainty.  

Commissions – Equities

For the three months ended March 25, 2016, equities revenue decreased 22% to $142.  The decrease was primarily attributable to a decrease in client dollars invested due to the strong equity market performance in the first quarter of 2015 as compared to the market volatility during the first quarter of 2016.  

Commissions – Insurance Products

For the three months ended March 25, 2016, insurance revenue decreased 13% to $71. The decrease was primarily due to a decrease in client dollars invested.

Principal Transactions

For the three months ended March 25, 2016, principal transactions revenue decreased 8% to $60. The decrease was primarily due to a decrease in client dollars invested in unit investment trusts due to equity market volatility.  

Net Interest and Dividends

 

 

For the three months ended March 25, 2016, net interest and dividends revenue increased 47% to $25. Results reflected a 125% increase in short-term investing interest due to increases in the average funds invested and the average rate earned.

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PART I. FINANCIAL INFORMATION

 

 

Other Revenue

Other revenue decreased 50% to $4 in the first quarter of 2016, compared to the first quarter of 2015. The decrease was primarily attributable to a decrease in the value of investments held related to the Partnership’s nonqualified deferred compensation plan during the current quarter compared to an increase in the first quarter of the prior year.  The Partnership has chosen to hedge the future liability for the plan by purchasing investments in an amount similar to the future expected liability. As the market value of these investments fluctuates, the gains or losses are recorded in other revenue with an offset in compensation and fringe benefits expense, resulting in minimal net impact to the Partnership’s income before allocations to partners.

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Operating Expenses

 

 

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PART I. FINANCIAL INFORMATION

 

 

For the three month period ended March 25, 2016, operating expenses decreased 4% to $1,370 compared to the three month period ended March 27, 2015, primarily due to a $62 decrease in compensation and benefits (described below), partially offset by a $10 increase in professional and consulting fees, primarily related to fees paid by Olive Street to sub-advisers. The fees paid to sub-advisers are offset by investment advisory fee revenue earned by Olive Street, resulting in no impact on the Partnership’s net income (see further discussion in “Fee Revenue – Asset-based” section above).

Financial advisor compensation decreased 5% in the first quarter of 2016 primarily due to a decrease in revenues on which financial advisor commissions are paid, partially offset by growth in the number of financial advisors, increased participation in the Partnership’s compensation programs and changes in new financial advisor compensation. The Partnership expects financial advisor compensation to increase as more financial advisors participate in these compensation programs, which are intended to attract and retain financial advisors.

Home office and branch compensation and benefits expense increased 4% in the first quarter of 2016 primarily due to higher wages and healthcare costs, as well as more personnel to support the growth of the Partnership’s financial advisor network. The average number of the Partnership’s home office associates and branch office administrators (“BOAs”) increased 4% and 3%, respectively.

Variable compensation expands and contracts in relation to the Partnership’s related profitability and margin earned. A significant portion of the Partnership’s profits is allocated to variable compensation and paid to associates in the form of bonuses and profit sharing. Variable compensation decreased 19% in the first quarter of 2016 to $167 as profitability and margin softened.

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 first quarter of 2016, the average number of the home office associates and BOAs per 100 financial advisors increased 1% and was flat, respectively. The Partnership’s longer term cost management strategy is 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 1% primarily due to increases in home office and branch compensation and benefit expense and professional and consulting fees (see above), partially offset by the impact of spreading those costs over more financial advisors.

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

 

 

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

 

 

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PART I. FINANCIAL INFORMATION

 

 

U.S.

For the three month period ended March 25, 2016, net revenue decreased 4% ($63) compared to the three month period ended March 27, 2015.  The decrease in net revenue was primarily due to a decrease in trade revenue, partially offset by increases in account and activity fee revenue and asset-based fee revenue. Trade revenue decreased 16% ($97) primarily due to a decline in the amount of client dollars invested. Account and activity fee revenue increased 11% ($17) primarily due to an increase in shareholder accounting services fees resulting from the increase in the average number of client mutual fund holdings serviced. Asset-based fee revenue increased 1% ($10) primarily due to an increase in investment advisory fees paid by the Trust to Olive Street. The investment advisory fee revenue earned by Olive Street is offset by fees paid to sub-advisers, resulting in no impact on the Partnership’s net income (see further discussion in “Fee Revenue – Asset-based” section above).

Operating expenses (excluding variable compensation) decreased 1% ($6) in the first quarter of 2016 primarily due to a decrease in financial advisor compensation. Financial advisor compensation was down due to decreases in revenue on which financial advisor commissions are paid.

Canada

For the three months ended March 25, 2016, net revenue decreased 21% ($11) compared to the first quarter of 2015.  Trade revenue decreased 30% ($7), attributable to decreases in the amount of client dollars invested and the margin earned, primarily from mutual funds. In addition, results were negatively impacted by foreign currency translation due to the weakening of the Canadian dollar in the first quarter of 2016 compared to the first quarter of 2015.

Operating expenses (excluding variable compensation) decreased 15% ($7) in the first quarter of 2016 compared to the first quarter of 2015 due to a decrease in financial advisor compensation attributable to the decrease in revenue on which financial advisor commissions are paid and fewer financial advisors.

The Partnership remains focused on achieving profitability in Canada. This includes several initiatives to increase revenue and control expenses. Revenue initiatives include the plan to grow the number of financial advisors, client assets under care and the depth of financial solutions provided to clients.

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 this Quarterly Report on Form 10-Q, the Partnership continues to monitor several regulatory initiatives and proposed, potential and enacted legislation and 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"), the DOL fiduciary rule and enacted reforms to the regulation of money market funds.

On April 6, 2016, the DOL issued its final rule on the definition of the term "fiduciary" and exemptions related thereto in the context of ERISA and IRAs.  The final rule will become applicable in April of 2017.  At this time, the Partnership is reviewing the final rule and determining the scope and depth of changes that will need to be made to the Partnership's operations as a result of the rule.  As such, the Partnership cannot predict at this time the full extent of any adverse impact on its operating results.

The 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.

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PART I. FINANCIAL INFORMATION

 

 

MUTUAL FUNDS AND INSURANCE PRODUCTS

The Partnership derived 77% and 75% of its total revenue from sales and services related to mutual fund and insurance products for the three month periods ended March 25, 2016 and March 27, 2015, respectively. In addition, the Partnership derived from one mutual fund company 20% of its total revenue for both the three month periods ended March 25, 2016 and March 27, 2015. 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.

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. In addition, on January 4, 2016, the Partnership issued an immaterial amount of additional Interests to individuals participating in retirement transition plans pursuant to the Plan. The remaining $58 of Interests may be issued in connection with the Plan at the discretion of the Partnership in the future. Proceeds from the Interests issued under the Plan have been 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 reduces the Partnership’s net interest income and profitability.

The Partnership’s capital subject to mandatory redemption at March 25, 2016, net of reserve for anticipated withdrawals, was $2,344, a decrease of $4 from December 31, 2015. This slight decrease in Partnership capital subject to mandatory redemption was primarily due to the net increase in Partnership loans outstanding ($79) and redemption of limited partner, subordinated limited partner and general partner interests ($3, $4 and $145, respectively), mostly offset by the retention of general partner earnings ($20) and additional capital contributions related to limited partner, subordinated limited partner and general partner interests ($1, $57 and $149, respectively). During the three month periods ended March 25, 2016 and March 27, 2015, the Partnership retained 13.8% of income allocated to general partners.

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PART I. FINANCIAL INFORMATION

 

 

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 requesting withdrawal 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 requesting withdrawal 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 requesting withdrawal are repaid their capital in six equal annual installments beginning no earlier than 90 days after their request for withdrawal of contributed capital is received by the Managing Partner. The Partnership’s Managing Partner has discretion to waive or modify these withdrawal restrictions and to accelerate the return of capital.

The Partnership makes loans available to those general partners and, in limited circumstances, subordinated limited partners (in each case, other than members of the Executive Committee) who require financing for some or all of their Partnership capital contributions.  It is anticipated that of the future general and subordinated limited partnership capital contributions (in each case, other than for Executive Committee members) requiring financing the majority will be financed through Partnership loans.  In limited circumstances a general partner may withdraw from the Partnership and become a subordinated limited partner while he or she still has an outstanding Partnership loan.  Loans made by the Partnership to such partners are generally for a period of one year but are expected to be renewed and bear interest at the interest rate defined in the loan documents. The Partnership recognizes interest income for the interest earned related to these loans. Partners borrowing from the Partnership will be required to repay such loans by applying the earnings received from the Partnership to such loans, net of amounts retained by the Partnership, amounts distributed for income taxes and 5% of earnings distributed to the 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.

Any partner 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 is 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 redemption of that individual’s capital account to the repayment of the limited partner’s 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

 

 

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.

 

 

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

Lines of Credit

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

 

 

In November 2013, the Partnership entered into a $400 committed unsecured revolving line of credit ("2013 Credit Facility"), 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 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 March 25, 2016, the Partnership was in compliance with all covenants related to the 2013 Credit Facility.  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.

There were no amounts outstanding on the 2013 Credit Facility or the uncommitted lines of credit as of March 25, 2016 and December 31, 2015. In addition, the Partnership did not have any draws against these lines of credit during the three and twelve month periods ended March 25, 2016 and December 31, 2015, respectively.

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PART I. FINANCIAL INFORMATION

 

 

Cash Activity

As of March 25, 2016, the Partnership had $989 in cash and cash equivalents and $589 in securities purchased under agreements to resell, which generally have maturities of less than one week. This totaled $1,578 of Partnership liquidity as of March 25, 2016, an 11% ($202) decrease from $1,780 at December 31, 2015. This decrease was primarily due to timing of client cash activity and the resulting requirement for segregation. The Partnership had $9,837 and $9,982 in cash and investments segregated under federal regulations as of March 25, 2016 and December 31, 2015, respectively, which was not available for general use.

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 Canada broker-dealer's assets and operations.

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

 

 

Net capital and the related capital percentages may fluctuate on a daily basis. In addition, Trust Co. was in compliance with its regulatory capital requirements as of March 25, 2016 and December 31, 2015.

OFF BALANCE SHEET ARRANGEMENTS

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

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PART I. FINANCIAL INFORMATION

 

 

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.

ADOPTED AND RECENTLY ISSUED ACCOUNTING STANDARDS

Refer to Part I, Item 1 – Financial Statements – Note 8 to this Quarterly Report for a discussion of adopted and 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, including an economic downturn or volatility in the U.S. and/or global securities markets; (2) regulatory actions; (3) changes in legislation or regulation, including new regulations under the Dodd-Frank Act and rules promulgated by the DOL; (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 this Quarterly Report on Form 10-Q.  These forward-looking statements were based on information, plans, and estimates at the date of this report, and the Partnership does not undertake to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.

 

 

 

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PART I. FINANCIAL INFORMATION

 

Various levels of management within the Partnership manage the Partnership’s risk exposure. Position limits in 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 $2.9 billion and $11.1 billion, respectively, for the three month period ended March 25, 2016. 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 $91. 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 $29. 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 cash equivalents, investments segregated under federal regulations, and securities purchased under agreements to resell. These investments earned interest at an average rate of approximately 34 basis points (0.34%) in the first three months of 2016, 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 investment adviser to the money market funds made available to Edward Jones clients, is also impacted by changes in interest rates. As a 49.5% limited partner of Passport Research, the Partnership receives a portion of the income of Passport Research. 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 $18 and $25 for the three month periods ended March 25, 2016 and March 27, 2015, respectively. Based upon the current interest rate environment, the annual reduction in revenue for 2016 is estimated to be approximately $70. 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.  As previously discussed in Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations – Fee Revenue – Asset-based, the Partnership has entered into a definitive agreement to acquire the remaining 50.5% general partner interest of Passport Research from Federated.

 

 

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PART I. FINANCIAL INFORMATION

 

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 March 25, 2016.

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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PART II. OTHER INFORMATION

 

 

The following information supplements the discussion in Part I, Item 3 – Legal Proceedings in the Partnership’s Annual Report.

Tribune.  In August 2011, retirees of Times Mirror/Tribune Company filed suit in the U.S. District Court for the Southern District of New York (the "MDL Court") against numerous brokerage firms and banks, including Edward Jones, claiming that a fraudulent transfer occurred during the 2007 Times Mirror/Tribune Company merger. Plaintiffs alleged that payments made to Tribune Company shareholders, of which Edward Jones’ customers received approximately $6.5 million, constituted fraudulent transfers. On June 1, 2015, the MDL Court entered an Order dismissing Edward Jones without prejudice from the lawsuit captioned In Re: Tribune Company Fraudulent Conveyance Litigation, Marc S. Kirschner, as Litigation Trustee for the Tribune Litigation Trust v. FitzSimons, et al. Two of the other related lawsuits, Deutsche Bank Trust Company Americas v. Ametek, Inc., and Niese v. Alliance Bernstein L.P., were dismissed by the MDL Court in 2013 and the dismissal was appealed to the U.S. Court of Appeals for the Second Circuit. On March 29, 2016, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal.

 

 

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. The following risk factor supplements the risk factor in Part I, Item 1A – Risk Factors – Legislative and Regulatory Initiatives of the Partnership's Annual Report.

Legislative and Regulatory Initiatives — Proposed, potential and recently enacted federal and state legislation, rules and regulations could significantly impact the regulation and operation of the Partnership and its subsidiaries.  In addition, such laws, rules and regulations may significantly alter or restrict the Partnership’s historic business practices, which could negatively affect its operating results.

The Partnership is subject to extensive regulation by federal and state regulatory agencies and by self-regulatory organizations.  The Partnership operates in a regulatory environment that is subject to ongoing change and has seen significantly increased regulation in recent years.  The Partnership may be adversely affected as a result of new or revised legislation or regulations, changes in federal, state or foreign tax laws and regulations, or by changes in the interpretation or enforcement of existing laws and regulations.  The Partnership continues to monitor several Legislative and Regulatory Initiatives, including, but not limited to:

The Dodd-Frank Act.  The Dodd-Frank Act, signed into law in July 2010, includes provisions that could potentially impact the Partnership’s operations.  Since the passage of the Dodd-Frank Act, the Partnership has not been required to enact material changes to its operations.  However, the Partnership continues to review and evaluate the provisions of the Dodd-Frank Act and the impending rules to determine what impact or potential impact they may have on the financial services industry, the Partnership and its operations.  Among the numerous potentially impactful provisions in the Dodd-Frank Act are: (i) pursuant to Section 913 of the Dodd-Frank Act, the SEC staff issued a study recommending a universal fiduciary standard of care applicable to both broker-dealers and investment advisers when providing personalized investment advice about securities to retail clients, and such other clients as the SEC provides by rule; and (ii) pursuant to Section 914 of the Dodd-Frank Act, a new self-regulatory organization to regulate investment advisers could be proposed.  In addition, the Dodd-Frank Act contains new or enhanced regulations that could impact specific securities products offered by the Partnership to investors and specific securities transactions.  Proposed rules related to all of these provisions have not yet been adopted by regulators.  The Partnership cannot predict what impact any such rules, if adopted, would have on the Partnership.

DOL Fiduciary Rule.  In 2010, the DOL proposed a modification to a rule that would have impacted ERISA’s definition of “fiduciary” and potentially limited certain of Edward Jones’ business practices.  In September 2011, the DOL announced that it was withdrawing the proposed rule and stated its intention to re-propose the rule in the future.  In April 2015, the DOL re-proposed its rule.  On April 6, 2016, the DOL issued its final rule on the definition of the term "fiduciary" and exemptions related thereto in the context of ERISA and IRAs. The final rule will become applicable in April of 2017.  At this time, the Partnership is reviewing the final rule and determining the scope and depth of changes that will need to be made to the Partnership's operations as a result of the rule.  As such, the Partnership cannot predict at this time the full extent of any adverse impact on its operating results.

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PART II. OTHER INFORMATION

 

 

Item 1A.    Risk Factors, continued

 

Health Care Reform.  The Patient Protection and Affordable Care Act, which was signed into law in March, 2010, amended and revised by the Health Care and Education and Reconciliation Act of 2010 (collectively referred to as the “Affordable Care Act”).  The Affordable Care Act contains provisions that will be implemented over the next several years that may impact the Partnership.  The Partnership is not yet able to determine the full potential financial impact of the Affordable Care Act.

Money Market Mutual Funds.  The SEC adopted amendments to the rules that govern money market mutual funds in July 2014.  The amendments preserve stable net asset value for certain retail funds and government funds.  The amendments also impose, under certain circumstances, liquidity fees and redemption gates on non-government funds.  The Partnership continues to evaluate the impact of these amendments on its operations and to consider the implementation of policies and procedures to address the amendments.

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.  Regulatory changes or changes in the law could increase compliance costs which would adversely impact our profitability.  However, the Partnership cannot presently predict when or if any of the proposed or potential Legislative and Regulatory Initiatives will be enacted or the impact that any Legislative and Regulatory Initiatives will have on the Partnership.

 

 

As previously disclosed in Part II, Item 5 – Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities of the Partnership's Annual Report, the Partnership issued an aggregate of $370,500 of Interests to certain retired associates of Edward Jones for aggregate consideration of $370,500 in a private placement in reliance on the exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder.

 

 

 

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PART II. OTHER INFORMATION

 

 

 

 

 

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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.

 

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:

 

 

 

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