Quantitative and Qualitative Disclosures About Market Risk
−Removed: We maintain trading securities owned and securities sold, but not yet purchased in order to facilitate client transactions, to meet a portion of our clearing deposit requirements at various clearing organizations and to track the performance of our research models.
−Removed: These securities could include mutual funds, debt securities and equity securities.
+Added: We maintain trading securities owned and securities sold, but not yet purchased in order to facilitate client transactions, to meet a portion of our clearing deposit requirements at various clearing organizations, to track the performance of our research models and in connection with our dividend reinvestment program.
+Added: Trading securities are included in investment securities while securities sold, but not yet purchased are included in other liabilities on the consolidated statements of financial condition and can include mutual funds, debt securities and equity securities.
Changes in the value of our trading securities may result from fluctuations in interest rates, credit ratings of the issuer, equity prices or a combination of these factors.
In facilitating client transactions, our securities owned and securities sold, but not yet purchased generally involve mutual funds, including dividend reinvestments.
−Removed: Our positions held are based upon the settlement of client transactions, which are monitored by our Service, Trading and Operations (“STO”) department.
+Added: Our positions held are based upon the settlement of client transactions, which are monitored by our Service, Trading and Operations (“Care”) department.
Positions held to meet clearing deposit requirements consist of U.S.
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The amount of securities deposited depends upon the requirements of the clearing organization.
−Removed: The level of securities deposited is monitored by the settlements group within our STO department.
+Added: The level of securities deposited is monitored by the settlements group within our Care department.
Our Research department develops model portfolios that are used by advisors in developing client portfolios.
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In addition, we are subject to market risk resulting from system incidents or interruptions and human error, which can require customer trade corrections.
−Removed: 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.
−Removed: 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.
+Added: We also bear market risk on the fees we earn that are based on the market value of advisory and brokerage assets, as well as assets on which trailing commissions are paid and assets eligible for sponsor payments.
+Added: As of December 31, 2021, the fair value of our trading securities was $39.3 million , and securities sold, but not yet purchased were not material.
The fair value of securities included within other assets was $623.3 million as of December 31, 2021.
−Removed: 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.
−Removed: 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.
+Added: See Note 5 - Fair Value Measurements , within the notes to the consolidated financial statements for information regarding the fair value of trading securities, securities sold, but not yet purchased and other assets associated with our client facilitation activities.
Interest Rate Risk
We are exposed to risk associated with changes in interest rates.
−Removed: As of December 31, 2020, $1.1 billion of our outstanding debt under our Credit Agreement was subject to floating interest rate risk.
−Removed: While our senior secured term loan is subject to increases in interest rates, we do not believe that a short-term change in interest rates would have a material impact on our income before taxes given assets owned, which are generally subject to the same, but off-setting, interest rate risk.
+Added: As of December 31, 2021, $1.1 billion of our outstanding debt was subject to floating interest rate risk.
+Added: While our senior secured term loan is subject to increases in interest rates, we do not believe that a short-term change in interest rates would have a material impact on our net income given revenue generated by our client cash balances, which is generally subject to the same, but off-setting, interest rate risk.
The following table summarizes the impact of increasing interest rates on our interest expense from the variable portion of our debt outstanding, calculated using the projected average outstanding balance over the subsequent twelve-month period (in thousands):
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10 Basis 25 Basis 50 Basis 100 Basis
−Removed: Senior Secured Credit Facility Points Points Points Points
+Added: Corporate Debt and Other Borrowings Points Points Points Points
Term Loan B $ 1,048,600 $ 1,042 $ 2,605 $ 5,210 $ 10,419
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The effect of these interest rate locks are not included in the table above.
−Removed: See Note 11 - Long-term and Other Borrowings, within the notes to the consolidated financial statements for additional information.
−Removed: As of December 31, 2020, we offered our advisors and their clients two primary bank sweep vehicles that are interest rate sensitive:
−Removed: (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;
−Removed: and (2) an insured deposit cash account (“DCA”) for advisory individual retirement accounts.
−Removed: 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.
+Added: See Note 11 - Corporate Debt and Other Borrowings, Net, within the notes to the consolidated financial statements for additional information.
+Added: As of December 31, 2021, we offered our advisors and their clients two insured bank sweep vehicles and a money market program, including money market accounts as well as the ability to participate in purchased money market funds, that are interest rate sensitive.
+Added: Our sweep vehicles include an (1) 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.
While clients earn interest on deposits in ICA and DCA, we earn a fee.
−Removed: The fees we earn from cash held in ICAs are based on prevailing interest rates in the current interest rate environment.
+Added: The fees we earn from cash held in ICAs are based primarily 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.
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Credit risk is the risk of loss due to adverse changes in a borrower’s, issuer’s or counterparty’s ability to meet its financial obligations under contractual or agreed upon terms.
−Removed: 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.
−Removed: 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.
−Removed: 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.
+Added: We are subject to credit risk from certain loans extended to our advisors as well as the activities of our advisors’ clients during the execution, settlement and financing of various transactions on behalf of these clients.
+Added: Credit risk from certain loans to advisors arises when we extend loans with repayment terms to facilitate advisors’ transition to our platform or to fund business development activities that are not repaid in full or on time.
+Added: Credit risk also arises in respect of advisor loans when a forgivable loan converts to repayable upon advisor termination.
+Added: Credit risk also arises when collateral posted with LPL Financial by clients to support margin lending or derivative trading is insufficient to meet clients’ contractual obligations to LPL Financial.
These activities are transacted on either a cash or margin basis.
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These risks are less direct and quantifiable than credit and market risk, but managing them is critical, particularly in a rapidly changing operating environment with increasing transaction volumes and in light of increasing reliance on systems capabilities and performance, as well as third-party service providers.
−Removed: 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.
+Added: In the event of
+Added: the breakdown, obsolescence or improper operation of systems, malicious cyber activity or improper action by employees, advisors or third-party service providers, we could suffer business disruptions, financial loss, data loss, regulatory sanctions and damage to our reputation.
Although we have developed business continuity and disaster recovery plans, those plans could be inadequate, disrupted or otherwise unsuccessful in maintaining the competitiveness, stability, security or continuity of critical systems as a result of, among other things, obsolescence, improper operation, third-party dependencies or limitations of our current technology.
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These control mechanisms attempt to ensure that operational policies and procedures are being followed and that our employees and advisors operate within established corporate policies and limits.
−Removed: Notwithstanding the foregoing, please consult the “Risks Related to Our Technology” and the “Risks Related to Our Business and Industry” sections within Part I, “Item 1A.
+Added: Please consult the “Risks Related to Our Technology” and the “Risks Related to Our Business and Industry” sections within Part I, “Item 1A.
Risk Factors” 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.
−Removed: 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.
+Added: For example, we equipped and enabled a substantial majority of employees to work remotely, implemented 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 have 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.
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Business” of this Annual Report on Form 10-K.
−Removed: 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.
+Added: 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.
Please consult the “Risks Related to Our Regulatory Environment” and the “Risks Related to Our Business and Industry” sections within Part I, “Item 1A.
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Our framework is designed to promote clear lines of risk management accountability and a structured escalation process for key risk information and events.
−Removed: 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.
−Removed: 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.
−Removed: 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.
−Removed: 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.
−Removed: The third line of defense is independent verification of the effectiveness of internal controls and is conducted by the Internal Audit department.
+Added: We operate a three-lines-of-defense model to manage risk throughout the organization.
+Added: Primary ownership for risk and control processes is with the business units and control owners, who are the “first line” of defense in effectively managing risks, and who are responsible for day-to-day compliance and risk management, including execution of desktop and supervisory procedures.
+Added: These business units and certain control owners implement and execute controls to manage risk, execute risk assessments, identify emerging risks, and comply with risk management policies.
+Added: The second line of defense consists of certain departments within Compliance, Legal and Risk (“CLR”) and provides risk oversight and monitoring.
+Added: The third line of defense is independent verification of the effectiveness of risk management practices and 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;
our Risk Oversight Committee (the “ROC”) and its subcommittees;
−Removed: and our three-lines-of-defense.
+Added: and our three-lines-of-defense model.
We regularly reevaluate and, when necessary, modify our processes to improve the identification and escalation of risks and events.
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The Audit Committee has mandated that the ROC oversee our risk management activities, including those of our subsidiaries.
−Removed: 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.
+Added: The Chief Risk 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.
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Internal Audit reports directly to the Audit Committee, which provides oversight of Internal Audit’s activities and approves its annual plan.
−Removed: The Internal Audit department provides regular updates to the ROC and reports to the Audit Committee at least as often as quarterly.
+Added: The Internal Audit department provides regular updates to the ROC and reports to the Audit Committee at least quarterly.
Control Groups
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The CLR department includes the Chief Legal Officer, who reviews the results of the Company’s risk management process with the ROC, the Audit Committee and the Board as necessary.
−Removed: STO and Technology each have risk management teams that identify, define and remediate risk-related items within their respective groups.
+Added: Care and Technology each have risk management teams that identify, define and remediate risk-related items within their respective groups.
Additionally, the Internal Audit department is a control group.
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We have conducted Company-wide escalation training for our employees.
−Removed: Certain business lines, including STO and Technology, have dedicated personnel with responsibilities for monitoring and managing risk-related matters.
Business lines are subject to oversight by the control groups, and the Finance, CLR, Technology and Human Capital departments also execute certain control functions and report matters to the ROC, Audit Committee and Board as appropriate.
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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.
−Removed: Our client and advisor policies address the extension of credit for client accounts, data and physical security,
−Removed: compliance with industry regulations and codes of conduct and ethics to govern employee and advisor conduct, among other matters.
+Added: 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.