What changed in this filing

/stocks — the workspaceLOADING

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2021-02-23 compared with 2020-02-21 · 39 added, 39 removed, 89 unchanged (47% of the section changed)

12 unchanged sentences

At the time a portfolio is developed, we purchase the securities in that model portfolio in an amount equal to the account minimum, which varies by product.

In addition, we are subject to market risk resulting from system incidences or interruptions and human error, which can require customer trade corrections.

We also have market risk on the fees we earn that are based on the market value of brokerage and advisory assets along with assets on which trailing commissions are paid, and assets eligible for sponsor payments.

As of December 31, 2019 , the fair value of our trading securities owned was $46.4 million .

Securities sold, but not yet purchased were $0.2 million as of December 31, 2019 .

In addition, we are subject to market risk resulting from system incidents or interruptions and human error, which can require customer trade corrections.

We also have market risk on the fees we earn that are based on the market value of advisory and brokerage assets along with assets on which trailing commissions are paid, and assets eligible for sponsor payments.

As of December 31, 2020, the fair value of our trading securities owned was $29.3 million, and securities sold, but not yet purchased were immaterial.

The fair value of securities included within other assets was $380.2 million as of December 31, 2020.

Fair Value Measurements , within the notes to consolidated financial statements for information regarding the fair value of trading securities owned, securities sold, but not yet purchased and other assets associated with our client facilitation activities.

Held-to-Maturity Securities , within the notes to consolidated financial statements for information regarding the fair value of securities held to maturity.

See Note 5 - Fair Value Measurements , within the notes to the consolidated financial statements for information regarding the fair value of trading securities owned, securities sold, but not yet purchased and other assets associated with our client facilitation activities.

See Note 6 - Held-to-Maturity Securities , within the notes to the consolidated financial statements for information regarding the fair value of securities held to maturity.

Interest Rate Risk

3 unchanged sentences

The following table summarizes the impact of increasing interest rates on our interest expense from the variable portion of our debt outstanding, calculated using the projected average outstanding balance over the subsequent twelve-month period (in thousands):

Outstanding Variable Interest Rates at

December 31, 2019

Annual Impact of an Interest Rate Increase of

Senior Secured Credit Facilities

Revolving Credit Facility

Variable Rate Debt Outstanding (1)

Outstanding Balance at

December 31, 2020 Annual Impact of an Interest Rate ( † ) Increase of

10 Basis 25 Basis 50 Basis 100 Basis

Senior Secured Credit Facility Points Points Points Points

Term Loan B $ 1,059,300 $ 1,055 $ 2,638 $ 5,276 $ 10,553

____________________

Balances may not foot due to rounding.

See Note 11 .

Debt, within the notes to consolidated financial statements for additional information.

(†) Our interest rate for Term Loan B is locked in for one, two, three, six or twelve months as allowed under the Credit Agreement.

1 unchanged sentence

The effect of these interest rate locks are not included in the table above.

As of December 31, 2019 , we offered our advisors and their clients two primary cash sweep vehicles that are interest rate sensitive:

our insured cash account (“ICA”) for individuals, trusts and sole proprietorships, and entities organized or operated to make a profit, such as corporations, partnerships, associations, business trusts, and other organizations, and an insured deposit cash account (“DCA”) for advisory individual retirement accounts.

In addition, we offered our advisors and their clients a money market program, including money market accounts and purchased money market funds.

While clients earn interest for balances on deposit in ICA and DCA, we earn a fee.

Our fees from ICAs are based on prevailing interest rates in the current interest rate environment.

The fees that we receive from the DCA vehicle are calculated as a per account fee;

such fees increase as the federal funds target rate increases, subject to a cap.

The fees we receive on cash balances in our advisors’ clients’ accounts in our money market program, including administrative and recordkeeping fees based on account type and the invested balances, are also sensitive to prevailing interest rates.

See Note 11 - Long-term and Other Borrowings, within the notes to the consolidated financial statements for additional information.

As of December 31, 2020, we offered our advisors and their clients two primary bank sweep vehicles that are interest rate sensitive:

(1) our insured cash account (“ICA”) for individuals, trusts, sole proprietorships and entities organized or operated to make a profit, such as corporations, partnerships, associations, business trusts and other organizations;

and (2) an insured deposit cash account (“DCA”) for advisory individual retirement accounts.

addition, we offer our advisors and their clients a money market program, including money market accounts as well as the ability to participate in purchased money market funds.

While clients earn interest on deposits in ICA and DCA, we earn a fee.

The fees we earn from cash held in ICAs are based on prevailing interest rates in the current interest rate environment.

The fees we earn from DCAs are calculated as a per account fee, and such fees increase as the federal funds target rate increases, subject to a cap.

The fees we earn on cash balances in our advisors’ clients’ accounts in our money market program, including administrative and recordkeeping fees based on account type and the invested balances, are also sensitive to prevailing interest rates.

Changes in interest rates and fees for the bank deposit sweep vehicles are monitored by our Rate Setting Committee (the “RSC”), which governs and approves any changes to our fees.

2 unchanged sentences

Credit risk includes the risk that loans we extend to advisors to facilitate their transition to our platform or to fund their business development activities are not repaid in full or on time.

Credit risk also includes the risk that collateral posted with LPL Financial by clients to support margin lending or derivative trading is insufficient to meet client’s contractual obligations to LPL Financial.

Credit risk also includes the risk that collateral posted with LPL Financial by clients to support margin lending or derivative trading is insufficient to meet clients’ contractual obligations to LPL Financial.

We bear credit risk on the activities of our advisors’ clients, including the execution, settlement and financing of various transactions on behalf of these clients.

These activities are transacted on either a cash or margin basis.

Our credit exposure in these transactions consists primarily of margin accounts, through which we extend credit to advisors’ clients collateralized by securities in the client’s account.

Our credit exposure in these transactions consists primarily of margin accounts, through which we extend credit to advisors’ clients collateralized by securities in the clients’ accounts.

Under many of these agreements, we are permitted to sell, repledge or loan these securities held as collateral and use these securities to enter into securities lending arrangements or to deliver to counterparties to cover short positions.

As our advisors execute margin transactions on behalf of their clients, we may incur losses if clients do not fulfill their obligations, the collateral in the client’s account is insufficient to fully cover losses from such investments, and our advisors fail to reimburse us for such losses.

As our advisors execute margin transactions on behalf of their clients, we may incur losses if clients do not fulfill their obligations, the collateral in the clients’ accounts is insufficient to fully cover losses from such investments and our advisors fail to reimburse us for such losses.

Our losses on margin accounts were immaterial during the years ended December 31, 2020 and 2019.

9 unchanged sentences

In the event of the breakdown, obsolescence or improper operation of systems, malicious cyber activity or improper action by employees, advisors or third-party service providers, we could suffer business disruptions, financial loss, data loss, regulatory sanctions and damage to our reputation.

Although we have developed business continuity and disaster recovery plans, those plans could be inadequate, disrupted, or otherwise unsuccessful in maintaining the

competitiveness, stability, security, or continuity of critical systems as a result of, among other things, obsolescence, improper operation, or other limitations of our current technology.

Although we have developed business continuity and disaster recovery plans, those plans could be inadequate, disrupted or otherwise unsuccessful in maintaining the competitiveness, stability, security or continuity of critical systems as a result of, among other things, obsolescence, improper operation, third-party dependencies or limitations of our current technology.

In order to assist in the mitigation and control of operational risk, we have an operational risk framework that is designed to enable assessment and reporting on operational risk across the firm.

3 unchanged sentences

Risk Factors” for more information about the risks associated with our technology, including risks related to security, our risk management policies and procedures, and the potential related effects on our operations.

Our senior management is monitoring developments in the COVID-19 pandemic and has implemented changes to our policies, procedures and operations to protect the integrity and continuity of our business and the health and safety of our employees.

For example, we equipped and enabled a substantial majority of employees to work remotely, implemented physical distancing and enhanced cleaning protocols throughout our corporate offices and worked closely with our vendors to maintain service continuity throughout the market volatility and increased operational volumes that occurred from time to time during the pandemic.

There can be no guarantee that our business continuity plans and the other efforts to manage the business implications of COVID-19 will be effective, or that there will not be material adverse effects on our results of operations.

Please consult Part I, “Item 1A.

Risk Factors” for more information about the risks associated with the COVID-19 pandemic.

Regulatory and Legal Risk

1 unchanged sentence

Business” of this Annual Report on Form 10-K.

In recent years, and during the period presented in this Annual Report on Form 10-K, we have observed the SEC, FINRA, DOL and state regulators broaden the scope, frequency, and depth of their examinations and inquiries to include greater emphasis on the quality, consistency and oversight of our compliance systems and programs.

In recent years, and during the period presented in this Annual Report on Form 10-K, we have observed the SEC, FINRA and state regulators broaden the scope, frequency and depth of their examinations and inquiries to include greater emphasis on the quality, consistency and oversight of our compliance systems and programs.

Please consult the “Risks Related to Our Regulatory Environment” and the “Risks Related to Our Business and Industry” sections within Part I, “Item 1A.

1 unchanged sentence

Risk Management

We employ an enterprise risk management framework (“ERM”) that is intended to address key risks and responsibilities, enable us to execute our business strategy, and protect our Company and its franchise.

We employ an enterprise risk management (“ERM”) framework that is intended to address key risks and responsibilities, enable us to execute our business strategy and protect our Company and its franchise.

Our framework is designed to promote clear lines of risk management accountability and a structured escalation process for key risk information and events.

We operate a three lines of defense model whereby the primary ownership for risk and control processes is the responsibility of business and control owners who are the “first line” of defense in effectively managing risks.

The first line is responsible for risk process ownership and is comprised of the business units, whose primary responsibility is for day-to-day compliance and risk management, including execution of desktop and supervisory procedures.

We operate a three-lines-of-defense model whereby the primary ownership for risk and control processes is with the business and control owners who are the “first line” of defense in effectively managing risks.

The first line is responsible for risk process ownership and consists of the business units, whose primary responsibility is for day-to-day compliance and risk management, including execution of desktop and supervisory procedures.

These business owners and certain control owners implement and execute controls to manage risk, execute risk assessments, identify emerging risks, and comply with risk management policies.

The second line of defense is comprised of certain departments within Compliance, Legal and Risk (“CLR”), STO, Technology, Finance, and Human Capital, and this second line of defense provides risk and control assessment and oversight.

The third line of defense is independent verification of the effectiveness of internal controls and is conducted by the Internal Audit department or in third-party reviews.

The second line of defense consists of certain departments within Compliance, Legal and Risk (“CLR”), Technology, Finance and Human Capital, and provides risk and control assessment and oversight.

The third line of defense is independent verification of the effectiveness of internal controls and is conducted by the Internal Audit department.

Our risk management governance approach includes the Board of Directors (the “Board”) and certain of its committees;

the Risk Oversight Committee of LPL Financial (the “ROC”) and its subcommittees;

the Internal Audit department and the CLR department of LPL Financial;

and business line management.

our Risk Oversight Committee (the “ROC”) and its subcommittees;

and our three-lines-of-defense.

We regularly reevaluate and, when necessary, modify our processes to improve the identification and escalation of risks and events.

6 unchanged sentences

The Audit Committee has mandated that the ROC oversee our risk management activities, including those of our subsidiaries.

The Chief Compliance Officer of LPL Financial serves as chair of the ROC, which generally meets on a monthly basis with ad hoc meetings as necessary.

The Chief Compliance Officer of LPL Financial serves as chair of the ROC, which generally meets on a monthly basis with additional ad hoc meetings as necessary.

The members of the ROC include certain Managing Directors of LPL Financial, as well as other members of LPL Financial’s senior management team who serve as ex-officio members and represent key control areas of the Company.

24 unchanged sentences

In addition to the ERM framework, we also have written policies and procedures that govern the conduct of business by our advisors, employees and the terms and conditions of our relationships with product manufacturers.

Our client and advisor policies address the extension of credit for client accounts, data and physical security, compliance with industry regulations, and codes of conduct and ethics to govern employee and advisor conduct, among other matters.

Our client and advisor policies address the extension of credit for client accounts, data and physical security,

compliance with industry regulations and codes of conduct and ethics to govern employee and advisor conduct, among other matters.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk