What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-21 compared with 2023-02-23 · 215 added, 185 removed, 491 unchanged (45% of the section changed)

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Please consult Part I, “Item 1.

Business” for additional information related to our business activities.

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Business” for information related to our business activities.

Our Sources of Revenue

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Significant Events

Closed on the acquisition of Financial Resources Group Investment Services

On November 2, 2022, we entered into a definitive purchase agreement to acquire FRGIS, an independent branch office and broker-dealer supporting approximately 800 advisors and 85 financial institutions, serving approximately $40 billion of brokerage and advisory assets, for an initial payment of approximately $140 million with potential contingent payments over the three years following the closing .

The transaction closed on January 31, 2023.

The Board approved a $2 billion increase to the Company’s existing share repurchase authorization beginning in 2023

On September 21, 2022, the Board authorized a $2.1 billion increase to the amount available for repurchases of the Company’s issued and outstanding common shares, with $2.0 billion available for repurchases beginning in 2023.

As of December 31, 2022, the Company had $2.0 billion remaining under its existing share repurchase program.

Implemented client cash account (“CCA”) as primary sweep overflow vehicle

During the third quarter of 2022, the Company implemented CCA, its cash product held at LPL Financial, as the primary sweep overflow vehicle for funds in excess of capacity in its third-party sweep program.

The Company places sweep overflow that cannot be allocated to its insured cash account (“ICA”) product into the CCA.

These deposits are either used to fund client margin lending or placed in third-party bank or investment accounts, both of which are segregated under federal or other regulations, where they are held as cash or invested in short-term U.S.

treasury bills.

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Entered into a definitive purchase agreement to acquire Atria Wealth Solutions, Inc.

On February 13, 2024, the Company announced that it had entered into a definitive purchase agreement to acquire Atria, a wealth management solutions holding company headquartered in New York.

As part of the agreement, Atria will transition its brokerage and advisory assets, currently custodied with its network of broker-dealers, to the Company’s platform.

The Company expects to close the transaction in the second half of 2024 with the conversion expected in mid-2025, subject to receipt of regulatory approval and other closing conditions.

Completed initial investment grade debt offering

On November 17, 2023, the Company completed its initial investment grade debt offering with the issuance of $750.0 million in aggregate principal amount of 6.750% senior unsecured notes due 2028.

See Note 11 - Corporate Debt and Other Borrowings, Net , within the notes to the consolidated financial statements for further detail.

Announced a strategic relationship agreement with Prudential’s retail wealth management business

On August 24, 2023, the Company announced an agreement with Prudential to transition the brokerage and investment advisory assets of Prudential Advisors, Prudential’s retail wealth management business, from its current third-party custodian to LPL Financial in the second half of 2024, subject to receipt of regulatory approval and other conditions.

Closed various acquisitions during the year

During the year ended December 31, 2023, the Company completed 19 acquisitions under our Liquidity & Succession solution, in which we buy advisor practices.

The Company also completed the acquisition of Boenning & Scattergood’s Private Client Group and FRGIS on January 31, 2023.

See Note 4 - Acquisitions , within the notes to the consolidated financial statements for further detail.

Executive Summary

Financial Highlights

Results for the year ended December 31, 2022 included net income of $845.7 million, or $10.40 per diluted share, which compares to $459.9 million, or $5.63 per diluted share, for the year ended December 31, 2021.

Results for the year ended December 31, 2023 included net income of $1.1 billion, or $13.69 per diluted share, which compares to $845.7 million, or $10.40 per diluted share, for the year ended December 31, 2022.

Total advisory and brokerage assets served were $1.4 trillion at December 31, 2023, compared to $1.1 trillion at December 31, 2022.

Total net new assets were $104.1 billion for the year ended December 31, 2023, compared to $95.9 billion for the same period in 2022.

Net new advisory assets were an inflow of $52.4 billion for the year ended December 31, 2022, compared to $123.5 billion in 2021.

Advisory assets were $583.1 billion, or 52.5% of total advisory and brokerage assets served, at December 31, 2022, down 9% from $643.2 billion at December 31, 2021.

Net new brokerage assets were an inflow of $43.5 billion for the year ended December 31, 2022, compared to $66.6 billion in 2021.

Brokerage assets were $527.7 billion at December 31, 2022, down 6% from $563.2 billion at December 31, 2021.

Gross Profit Trends

Net new advisory assets were $76.0 billion for the year ended December 31, 2023, compared to $52.4 billion in 2022.

Advisory assets were $735.8 billion, or 54.3% of total advisory and brokerage assets served, at December 31, 2023, up 26% from $583.1 billion at December 31, 2022.

Net new brokerage assets were $28.1 billion for the year ended December 31, 2023, compared to $43.5 billion in 2022.

Brokerage assets were $618.2 billion at December 31, 2023, up 17% from $527.7 billion at December 31, 2022.

Gross Profit Trend

Gross profit, a non-GAAP financial measure, was $4.0 billion for the year ended December 31, 2023, an increase of 26% from $3.2 billion for the year ended December 31, 2022.

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Common Stock Dividends and Share Repurchases

During the year ended December 31, 2022, we paid stockholders cash dividends of $79.8 million and repurchased 1,566,527 of our outstanding shares for a total of $325.0 million.

The Company has increased its quarterly cash dividend by 20% to $0.30 per share beginning in the first quarter of 2023.

During the year ended December 31, 2023, we paid stockholders cash dividends of $92.2 million and repurchased 5,075,900 of our outstanding shares for a total of $1.1 billion.

Key Performance Metrics

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Total organic net new assets annualized growth (4)

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As of and for the Years Ended December 31,

Client Cash Balances

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Client Cash Balances as a % of Total Assets 3.6% 5.8%

As of and for the Years Ended December 31,

Net buy (sell) activity (5)

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Non-GAAP Financial Metrics (dollars in millions, except per share data)

EPS prior to amortization of intangible assets and acquisition costs (9)

Adjusted EPS (8)

$ 15.72 $ 11.52

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(1) Totals may not foot due to rounding.

(2) Consists of total advisory and brokerage assets under custody at the Company’s broker-dealer subsidiary, LPL Financial.

(2) Consists of total advisory and brokerage assets under custody at the Company’s primary broker-dealer subsidiary, LPL Financial.

Please consult the “ Results of Operations” section for a tabular presentation of advisory and brokerage assets.

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We consider conversions from and to brokerage or advisory accounts as deposits and withdrawals, respectively.

(4) Calculated as annualized current period organic net new assets divided by preceding period assets in their respective categories of advisory assets or total advisory and brokerage assets.

(5) During the second quarter of 2022, the Company updated its definition of client cash balances to include CCA and exclude purchased money market funds.

CCA balances include cash that clients have deposited with LPL Financial that is included in Client payables in the consolidated statements of financial condition.

Prior period disclosures have been updated to reflect this change as applicable.

(4) Calculated as annualized current period organic net new assets divided by preceding period assets in their respective categories of a dvisory assets or total advisory and brokerage assets.

(5) Represents the amount of securities purchased less the amount of securities sold in client accounts custodied with LPL Financial.

(6) Calculated based on the end of period total advisory and brokerage assets divided by the end of period advisor count.

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(7) The leverage ratio is a financial metric from our Credit Agreement and is calculated by dividing Credit Agreement net debt, which equals consolidated total debt less Corporate Cash, by Credit Agreement EBITDA.

Credit Agreement EBITDA, a non-GAAP measure, is defined by the Credit Agreement as “Consolidated EBITDA,” which is Consolidated Net Income (as defined in the Credit Agreement) plus interest expense on borrowings, provision for income taxes, depreciation and amortization, and amortization of other intangibles, and is further adjusted to exclude certain non-cash charges and other adjustments (including unusual or non-recurring charges) and gains, and to include future expected cost savings, operating expense reductions or other synergies from certain transactions .

Credit Agreement EBITDA, a non-GAAP financial measure, is defined by the Credit Agreement as “Consolidated EBITDA,” which is Consolidated Net Income (as defined in the Credit Agreement) plus interest expense on borrowings, provision for income taxes, depreciation and amortization, and amortization of other intangibles, and is further adjusted to exclude certain non-cash charges and other adjustments, and to include future expected cost savings, operating expense reductions or other synergies from certain transactions .

Please consult the “Debt and Related Covenants” section for more information.

Below are reconciliations of corporate debt and other borrowings to Credit Agreement net debt as of the dates below and net income to EBITDA and Credit Agreement EBITDA for the periods presented below (in millions):

Credit Agreement Net Debt Reconciliation 2023 2022

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Acquisition costs and other (13)(14)

$ 110.2 $ 50.7

Employee share-based compensation 66.0 50.1

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Advisor share-based compensation 2.6 2.5

Loss on extinguishment of debt — 24.4

Credit Agreement EBITDA (†)

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(†) Totals may not foot due to rounding.

(9) EPS prior to amortization of intangible assets and acquisition costs is a non-GAAP financial measure defined as adjusted net income, a non-GAAP financial measure defined as net income plus the after-tax impact of amortization of other intangibles and acquisition costs, divided by the weighted average number of diluted shares outstanding for the applicable period.

The Company presents adjusted net income and EPS prior to amortization of intangible assets and acquisition costs because management believes that these metrics can provide investors with useful insight into the Company’s core operating performance by excluding non-cash items and acquisition costs that management does not believe impact the Company’s ongoing operations.

Adjusted net income and EPS prior to amortization of intangible assets and acquisition costs are not measures of the Company's financial performance under GAAP and should not be considered as alternatives to net income, earnings per diluted share or any other performance measure derived in accordance with GAAP.

Below is a reconciliation of net income and earnings per diluted share to adjusted net income and EPS prior to amortization of intangible assets and acquisition costs for the periods presented (in millions, except per share data):

(8) Adjusted EPS is a non-GAAP financial measure defined as adjusted net income, a non-GAAP financial measure defined as net income plus the after-tax impact of amortization of other intangibles, acquisition costs and a regulatory charge related to an investigation of the Company’s compliance with records preservation requirements for business-related electronic communications stored on personal devices or messaging platforms that have not been approved by the Company, divided by the weighted average number of diluted shares outstanding for the applicable period.

The Company presents adjusted net income and adjusted EPS because management believes that these metrics can provide investors with useful insight into the Company’s core operating performance by excluding non-cash items, acquisition costs and a regulatory charge that management does not believe impact the Company’s ongoing operations.

Adjusted net income and adjusted EPS are not measures of the Company's financial performance under GAAP and should not be considered as alternatives to net income, earnings per diluted share or any other performance measure derived in accordance with GAAP.

Below is a reconciliation of net income and earnings per diluted share to adjusted net income and adjusted EPS for the periods presented (in millions, except per share data):

Years Ended December 31,

Adjusted net income / EPS prior to amortization of intangible assets and acquisition costs Reconciliation Amount Per Share Amount Per Share

Adjusted Net Income / Adjusted EPS Reconciliation

Amount Per Share Amount Per Share

Net income / earnings per diluted share $ 1,066.3 $ 13.69 $ 845.7 $ 10.40

Regulatory charge (13)

40.0 0.51 — —

Amortization of other intangibles 107.2 1.38 87.6 1.08

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Tax benefit (37.4) (0.48) (32.7) (0.40)

Adjusted net income / EPS prior to amortization of intangible assets and acquisition costs (†)

Adjusted Net Income / Adjusted EPS (†)

$ 1,224.1 $ 15.72 $ 936.7 $ 11.52

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(†) Totals may not foot due to rounding.

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(10) Gross profit is a non-GAAP financial measure defined as total revenue less advisory and commission expense and brokerage, clearing and exchange expense.

(9) Gross profit is a non-GAAP financial measure defined as total revenue less advisory and commission expense;

brokerage, clearing and exchange expense;

and market fluctuations on employee deferred compensation.

All other expense categories, including depreciation and amortization of property and equipment and amortization of other intangibles, are considered by management to be general and administrative in nature.

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Brokerage, clearing and exchange expense 106.0 86.1

Employee deferred compensation (16)

Gross Profit (†)

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amortization of other intangibles;

loss on extinguishment of debt;

market fluctuations on employee deferred compensation;

promotional (ongoing);

acquisition costs;

employee share-based compensation;

regulatory charges;

and employee share-based compensation.

and acquisition costs.

Management presents core G&A because it believes core G&A reflects the corporate expense categories over which management can generally exercise a measure of control, compared with expense items over which management either cannot exercise control, such as advisory and commission expense, or which management views as promotional expense necessary to support advisor growth and retention, including conferences and transition assistance.

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Brokerage, clearing and exchange (106.0 ) (86.1 )

Loss on extinguishment of debt — 24.4

Employee deferred compensation (16)

Total G&A (†)

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Promotional (ongoing) (14)(17)

(486.3 ) (353.9 )

Regulatory charges (13)

(71.3 ) (32.6 )

Employee share-based compensation (66.0 ) (50.1 )

Acquisition costs (14)

Regulatory charges 32.6 29.4

(48.1 ) (36.2 )

$ 1,369.4 $ 1,191.9

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(†) Totals may not foot due to rounding.

(12) See the “Liquidity and Capital Resources” section for additional information about Corporate Cash.

(14) M&A accretion is an adjustment to reflect the annualized expected run rate EBITDA of an acquisition as permitted by the Credit Agreement for up to eight fiscal quarters following the close of such acquisition.

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(15) Acquisition costs include the costs to setup, onboard and integrate acquired entities.

(13) The Company recorded a $40.0 million regulatory charge for the year ended December 31, 2023 related to an investigation of the Company’s compliance with records preservation requirements for business-related electronic communications stored on personal

devices or messaging platforms that have not been approved by the Company applicable to broker-dealer firms and investment advisors.

See Note 14 - Commitments and Contingencies , within the notes to the consolidated financial statements for further detail.

(14) Acquisition costs include the costs to setup, onboard and integrate acquired entities and other costs that were incurred as a result of the acquisition.

The below table summarizes the primary components of acquisition costs for the periods presented (in millions):

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Acquisition Costs

Compensation and benefits $ 20.6 $ 36.4

Fair value mark on contingent consideration

Professional services 10.0 12.0

Compensation and benefits 6.1 20.6

Promotional (17)

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Acquisition Costs

(16) Promotional (ongoing) for the year ended December 31, 2022 includes $16.1 million of support costs related to full-time employees that are classified within Compensation and benefits expense in the consolidated statements of income.

Promotional (ongoing) for the year ended December 31, 2022 excludes $2.3 million of expenses incurred as a result of acquisitions, which are included in the Acquisition costs line item.

Acquisitions, Integrations and Divestitures

We continuously assess the competitive landscape in connection with our capital allocation framework as we pursue acquisitions, integrations and divestitures.

These activities are part of our overall growth strategy but can distort comparability when reviewing revenue and expense trends for periods presented.

Our recent acquisition activity includes the following:

• On November 2, 2022, we entered into a definitive purchase agreement to acquire FRGIS, an independent branch office and broker-dealer supporting approximately 800 advisors and 85 financial institutions, serving approximately $40 billion of brokerage and advisory assets, for an initial payment of approximately $140 million with potential contingent payments over the three years following the closing.

The transaction closed on January 31, 2023.

• We acquired customer relationship intangible assets of $54.1 million as a result of acquisitions under our Liquidity & Succession solution, under which we buy advisor practices, during the year ended December 31, 2022.

• On April 30, 2021, we acquired the wealth management business of Waddell & Reed Financial, Inc.

(“Waddell & Reed”).

See Note 4 - Acquisitions , within the notes to the consolidated financial statements for further detail.

$ 48.1 $ 36.2

(15) M&A accretion is an adjustment to reflect the annualized expected run rate EBITDA of an acquisition as permitted by the Credit Agreement for up to eight fiscal quarters following the close of such acquisition.

(16) During the first quarter of 2023, the Company updated its presentation of employee deferred compensation to be consistent with its presentation of advisor deferred compensation.

This change has not been applied retroactively as the impact on prior periods was not material.

(17) Promotional (ongoing) for the years ended December 31, 2023 and December 31, 2022 includes $30.7 million and $16.1 million, respectively, of support costs related to full-time employees that are classified within compensation and benefits expense in the consolidated statements of income.

Promotional (ongoing) for the years ended December 31, 2023 and December 31, 2022 excludes $3.6 million and $2.3 million, respectively, of expenses incurred as a result of acquisitions, which are included in the acquisition costs line item.

Economic Overview and Impact of Financial Market Events

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economy grew 2.5% in 2023, and at an annualized pace of 3.3% in the fourth quarter of 2023 after growing at an annualized pace of 4.9% in the third quarter of 2023.

Growth was mainly concentrated in the beginning of the fourth quarter as the economy slowed down in December from weaker consumer spending power, rising geopolitical uncertainty and slower business activity.

Although inflation, rising interest rates and volatile global markets were all headwinds, the U.S.

economy is projected to have added approximately 874,000 jobs in the fourth quarter of 2022, while the unemployment rate averaged 3.6% in the fourth quarter, consistent with the average during the third quarter of 2022.

The equity markets experienced volatility from an increasingly hawkish Federal Reserve (“Fed”) yet the S&P 500 appreciated 7% and Bloomberg Barclays U.S.

Aggregate Bond Index rose 1.85% during the fourth quarter.

Our business is also sensitive to current and expected short-term interest rates, which are largely driven by Fed policy.

During the fourth quarter of 2022, Fed policymakers increased the target range for the federal funds rate to 4.25% to 4.50%.

The Fed anticipates that ongoing increases to the target range will continue to be appropriate.

Although geopolitical tension and high interest rates were all headwinds, the U.S.

economy added approximately 494,000 jobs in the fourth quarter of 2023, down from 663,000 in the third quarter.

The unemployment rate averaged 3.7% in the fourth quarter, up slightly from the average in the third quarter of 2023.

Our business is also sensitive to current and expected short-term interest rates, which are largely driven by Federal Reserve (“Fed”) policy.

During the fourth quarter of 2023, Fed policymakers maintained the target range for the federal funds rate at 5.25% to 5.50%, and the equity markets rebounded as the Fed appeared to end their tightening cycle and prepare markets for future rate cuts.

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

Risk Factors” for more information about the risks associated with significant interest rate changes and the potential related effects on our profitability and financial condition.

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Results of Operations

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Brokerage, clearing and exchange 105,984 86,063 23 %

Professional services 72,519 73,231 (1 %)

Communications and data processing 75,717 67,687 12 %

Loss on extinguishment of debt — 24,400 (100 %)

Professional services 72,583 72,519 — %

Other 209,439 143,937 46 %

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$ 1,066,250 $ 845,702 26 %

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Advisory revenue represents fees charged to advisors’ clients’ advisory accounts on our corporate RIA advisory platform and is based on a percentage of the market value of the eligible assets in the clients’ advisory accounts.

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Advisory revenue collected on our corporate RIA advisory platform is proposed by the advisor and agreed to by the client and was approximately 1% of the underlying assets for the year ended December 31, 2023.

We also support Independent RIAs through our Independent RIA advisory platform, which allows advisors to engage us for technology, clearing and custody services, as well as access the capabilities of our investment platforms.

We also support independent RIA firms that conduct their business through our Independent RIA advisory platform, which allows advisors to engage us for technology, clearing and custody services, as well as access the capabilities of our investment platforms.

The assets held under an Independent RIA’s investment advisory accounts custodied with LPL Financial are included in total advisory assets and net new advisory assets.

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Advisory revenue increased during the year ended December 31, 2023 as compared to the same period in 2022.

The increase during the year ended December 31, 2022 was driven primarily by continued organic growth and the full year impact of Waddell & Reed assets, partially offset by a decline in advisory asset balances due to market changes.

The increase during the year ended December 31, 2023 was driven by continued organic growth, which increased advisory asset balances during the period, and a positive market impact as compared to the prior period.

We generate two types of commission revenue:

(1) sales-based commissions that are recognized at the point of sale on the trade date and are based on a percentage of an investment product’s current market value at the time of purchase and (2) trailing commissions that are recognized over time as earned and are generally based on the

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market value of investment holdings in trail-eligible assets.

Sales-based commission revenue, which occurs when clients trade securities or purchase various types of investment products, primarily represents gross commissions generated by our advisors and can vary from period to period based on the overall economic environment, number of trading days in the reporting period and investment activity of our advisors’ clients.

Sales-based commission revenue, which occurs when

clients trade securities or purchase various types of investment products, primarily represents gross commissions generated by our advisors and can vary from period to period based on the overall economic environment, number of trading days in the reporting period and investment activity of our advisors’ clients.

We earn trailing commission revenue primarily on mutual funds and variable annuities held by clients of our advisors.

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$ 2,552,623 $ 2,326,164 $ 226,459 10 %

The decrease in trailing commission revenue in 2022 compared to 2021 was primarily due to volatility-driven declines in trail-eligible assets.

The increase in sales-based commission revenue in 2022 compared to 2021 was primarily driven by increases in sales of annuities, partially offset by a decrease in sales of mutual funds.

The increase in trailing commission revenue in 2023 compared to 2022 was primarily due to an increase in sales of annuities during the period.

The increase in sales-based commission revenue in 2023 compared to 2022 was primarily driven by an increase in sales of annuities and fixed income securities as a result of the higher interest rate environment, partially offset by a decrease in sales of mutual funds and equities.

The following table summarizes activity impacting brokerage assets for the periods presented (in billions):

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Networking revenue on brokerage assets is correlated to the number of positions we administer and is paid to us by mutual fund product sponsors and annuity product manufacturers.

Asset-based revenue for the year ended December 31, 2022 increased b y $612.2 million compared to 2021, primarily due to an increase in client cash revenue.

Client cash revenue for the year ended December 31, 2022 increased compared to 2021 due to increases to the federal funds effective rate and higher average client cash balances.

For the year ended December 31, 2022, our average client cash balances increased to $61.9 billion compared to $47.5 billion for the year ended December 31, 2021.

Asset-based revenue for the year ended December 31, 2023 increased by $617.5 million compared to 2022, primarily d ue to an increase in client cash revenue.

Client cash revenue for the year ended December 31, 2023 increased compared to 2022 due to increases to the federal funds effective rate, partially offset by lower average client cash balances.

For the year ended December 31, 2023, our average client cash balances decreased to $48.8 billion compared to $61.9 billion for the year ended December 31, 2022.

Service and Fee

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We also host certain advisor conferences that serve as training, education, sales and marketing events for which we charge sponsors a fee.

Service and fee revenue for the year ended December 31, 2022 increased by $55.6 million compared to 2021, primarily from increases in

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conference fees, increases in IRA custodian fees driven by growth in accounts, and increases in business services and planning and advice services fees due to growth in subscriptions.

Conference fees were higher in 2022 as all conferences were held in person compared to 2021, where one of our larger conferences was held virtually and several conferences were cancelled due to the COVID-19 pandemic.

Service and fee revenue for the year ended December 31, 2023 increased by $41.1 million compared to 2022, primarily due to increases in IRA

custodian fees, business services and planning and advice services fees, and fees relating to confirmations and error and omission insurance.

Transaction revenue includes transaction charges generated in both advisory and brokerage accounts from mutual funds, exchange-traded funds and fixed income products.

Transaction revenue for the year ended December 31, 2022 increased by $24.9 million compared to 2021, primarily due to increases in the number of transactions and transaction charges for managed assets, mutual funds and fixed income products.

Transaction revenue for the year ended December 31, 2023 increased by $18.7 million compared to 2022, primarily due to increases in the number of transactions and transaction charges for fixed income products, partially offset by a decrease in charges for managed assets.

Interest Income, net

We earn interest income primarily from client margin loans, CCA balances segregated under federal or other regulations and advisor repayable loans.

Interest income, net for the year ended December 31, 2022 increased compared to 2021, primarily due to higher interest earned on margin loans, bank deposits and short-term U.S.

treasury bills, partially offset by interest paid on CCA balances.

We earn interest income primarily from client margin loans, client cash account (“CCA”) balances segregated under federal or other regulations and advisor repayable loans.

Interest income, net for the year ended December 31, 2023 increased compared to 2022, primarily due to increases in interest earned on bank deposits, short-term U.S.

treasury bills and margin loans, partially offset by an increase in interest paid on CCA balances.

Other revenue primarily includes unrealized gains and losses on assets held by us in our advisor non-qualified deferred compensation plan and model research portfolios and other miscellaneous revenue, which is not generated from contracts with customers.

Other revenue for the year ended December 31, 2022 decreased by $158.5 million compared to 2021, primarily due to realized and unrealized losses on assets held in our advisor non-qualified deferred compensation plan, which are based on the market performance of the underlying investment allocations chosen by advisors in the plan.

Other revenue for the year ended December 31, 2023 increased by $205.6 million compared to 2022, primarily due to unrealized gains on assets held in our advisor non-qualified deferred compensation plan, which are based on the market performance of the underlying investment allocations chosen by advisors in the plan, and a related increase in dividend income on assets held in our advisor non-qualified deferred compensation plan.

Advisory and Commission

Advisory and commission expense consists of the following:

payout amounts that are earned by and paid out to advisors and enterprises based on advisory and commission revenue earned on each client’s account, production-based bonuses earned by advisors and enterprises based on the levels of advisory and commission revenue they produce, compensation and benefits paid to employee advisors, the recognition of share-based compensation expense from equity awards granted to advisors and enterprises based on the fair value of the awards at grant date and the deferred advisory and commission fee expense associated with mark-to-market gains or losses on the non-qualified deferred compensation plan offered to our advisors.

payout amounts that are earned by and paid out to advisors and enterprises based on advisory and commission revenue earned on each client’s account, production-based bonuses earned by advisors and enterprises based on the levels of advisory and commission revenue they produce, compensation and benefits paid to employee advisors, share-based compensation expense from equity awards granted to advisors and enterprises based on the fair value of the awards at grant date and the deferred advisory and commission fee expense associated with mark-to-market gains or losses on the non-qualified deferred compensation plan offered to our advisors.

The following table sets forth our payout rate, which is a statistical or operating measure, for the periods presented:

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Payout rate 86.97 % 87.32 % (35) bps

Our payo ut rate increased for the year ended December 31, 2022 compared to 2021 due to increases in sales of higher-payout products and the impact of onboarding of enterprises during the year.

Our payo ut rate decreased fo r the year ended December 31, 2023 compared to 2022, primarily due to the effect of acquisitions during the year and changes in product mix.

Compensation and Benefits

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Compensation and benefits expense for the year ended December 31, 2023 increased by $158.9 million compared to 2022, primarily due to an increase in headcount.

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Promotional expense includes business development costs related to advisor recruitment and retention, costs related to hosting certain advisory conferences that serve as training, sales and marketing events, and other costs that support advisor business growth.

For the year ended December 31, 2022 promotional expense increased by $37.7 million compared to 2021, primarily due to increases in recruited assets and advisors that led to higher costs to support transition assistance and retention, as well as increases in conference spend as we returned to in-person events.

Promotional expense for the year ended December 31, 2023 increased by $119.2 million compared to 2022, primarily due to increases in recruited assets and advisors that led to higher costs to support transition assistance and retention.

Occupancy and Equipment

Occupancy and equipment expense includes the costs of leasing and maintaining our office spaces, software licensing and maintenance costs, and maintenance expense on computer hardware and other equipment.

Occupancy and equipment expense for the year ended December 31, 2022 increased by $34.3 million compared to 2021, primarily due to increased expense related to software licenses.

Occupancy and equipment expense for the year ended December 31, 2023 increased by $28.8 million compared to 2022, primarily due to increased expense related to software licenses and our technology portfolio.

Depreciation and Amortization

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Interest Expense on Borrowings

Interest expense on borrowings includes the interest associated with the Company’s senior notes, senior secured Term Loan B (“Term Loan B”), amortization of debt issuance costs and fees associated with the Company’s revolving lines of credit.

Interest expense on borrowings for the year ended December 31, 2022 increased by $21.8 million compared to 2021, primarily due to increases in interest rates associated with our Term Loan B.

Interest expense on borrowings includes the interest associated with the Company’s senior notes, senior secured Term Loan B (“Term Loan B”) and revolving credit facilities;

amortization of debt issuance costs;

and fees associated with the Company’s revolving lines of credit.

Interest expense on borrowings for the year ended December 31, 2023 increased by $60.6 million compared to 2022, primarily due to increases in interest rates associated with our Term Loan B and revolving credit facilities and higher outstanding debt balances.

See Note 11 - Corporate Debt and Other Borrowings, Net , within the notes to the consolidated financial statements for further detail.

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See Note 4 - Acquisitions and Note 9 - Goodwill and Other Intangibles, Net within the notes to the consolidated financial statements for further detail.

Loss on Extinguishment of Debt

On March 15, 2021, we issued senior unsecured notes due in 2029 and redeemed our existing senior unsecured notes due in 2025.

In connection with these transactions, we incurred a $24.4 million loss on extinguishment of debt for the year ended December 31, 2021.

There was no loss on extinguishment of debt for the year ended December 31, 2022.

Brokerage, Clearing and Exchange

Brokerage, clearing and exchange expense includes expenses originating from trading or clearing operations as well as any exchange membership fees.

These fees fluctuate largely in line with the volume of sales and trading activity.

Brokerage, clearing and exchange expense for the year ended December 31, 2023 increased by $19.9 million compared to 2022, primarily due to an increase in the volume of trades and expenses for quote services.

Other Expense

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Other expense depends in part on the size and timing of resolving regulatory matters and the availability of self-insurance coverage, which in turn depend in part on the amount and timing of resolving historical claims.

Other expense for the year ended December 31, 2022 increased by $12.4 million compared to 2021, primarily due to increases in legal fees and travel-related costs, partially offset by decreases in costs related to Waddell & Reed transitional support.

COVID-19 Impact

The COVID-19 pandemic has had a significant impact on global financial markets, and we continue to monitor for developments that could have a material effect on our operations.

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

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

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Other expense for the year ended December 31, 2023 increased by $65.5 million compared to 2022, primarily due to a $40.0 million regulatory charge recognized in anticipation of a potential settlement with the SEC to resolve the civil investigation into compliance with records preservation requirements for business-related electronic communications stored on personal devices applicable to broker-dealer firms and investment advisors and a fair value adjustment to our contingent consideration liabilities.

See Note 4 - Acquisitions and Note 14 - Commitments and Contingencies , within the notes to the consolidated financial statements for further detail.

Provision for Income Taxes

Our effective income tax rate was 26.2% and 23.9% for the years ended December 31, 2023 and 2022, respectively.

The increase in our effective tax rate for the year ended December 31, 2023 was primarily due to a decreased benefit from share-based compensation recognized during the year as well as an increase in non-deductible expenses due to the $40.0 million regulatory charge described above.

See Note 14 - Commitments and Contingencies , within the notes to the consolidated financial statements for further detail.

Liquidity and Capital Resources

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LPL Holdings, Inc.

(“Parent”), the direct holding company of our operating subsidiaries, considers its primary source of liquidity to be Corporate Cash.

Corporate Cash, a component of cash and equivalents, is the sum of cash and equivalents from the following:

(the “Parent”), the direct holding company of our operating subsidiaries, considers its primary sources of liquidity to be dividends from and excess capital generated by LPL Financial, as well as capacity for additional borrowing under its $2.0 billion secured revolving credit facility, which it has the ability to borrow against for working capital and general corporate purposes.

Dividends from and excess capital generated by LPL Financial are primarily generated through our cash flow from operations.

Subject to regulatory approval or notification, capital generated by regulated subsidiaries can be distributed to the Parent to the extent the capital levels exceed regulatory requirements and internal capital thresholds.

During the years ended December 31, 2023 and 2022, LPL Financial paid dividends of $710.0 million and $1.1 billion to the Parent, respectively.

We believe Corporate Cash, a component of cash and equivalents, is a useful measure of the Parent’s liquidity as it represents the capital available for use in excess of the amount we are required to maintain pursuant to the Credit Agreement.

Corporate Cash is the sum of cash and equivalents from the following:

(1) cash and equivalents held at the Parent, (2) cash and equivalents held at regulated subsidiaries as defined by the Credit Agreement, which include LPL Financial and PTC, in excess of the capital requirements of the Credit Agreement (which, in the case of LPL Financial, is net capital in excess of 10% of its aggregate debits, or five times the net capital required in accordance with Exchange Act Rule 15c3-1) and (3) cash and equivalents held at non-regulated subsidiaries.

We believe Corporate Cash is a useful measure of the Parent’s liquidity as it represents the capital available for use in excess of the amount we are required to reserve pursuant to the Credit Agreement.

The following table presents the components of Corporate Cash (in thousands):

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Corporate Cash

Cash at Parent $ 448,180 $ 202,407

Cash at the Parent

$ 26,587 $ 448,180

Excess cash at regulated subsidiaries per the Credit Agreement 128,327 4,439

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We target maintaining approximately $200 million in Corporate Cash, which covers approximately 12 months of principal and interest due on our corporate debt.

The Company maintains additional liquidity through a $1.0 billion secured committed revolving credit facility.

The Parent has the ability to borrow against the credit facility for working capital and general corporate purposes.

Dividends from and excess capital generated by LPL Financial are the primary sources of liquidity.

During the twelve months ended December 31, 2022 and 2021, LPL Financial paid dividends of $1.1 billion and $465.0 million to the Parent, respectively.

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Cash requirements and liquidity needs are primarily funded through our cash flow from operations and our capacity for additional borrowing.

The decrease in Corporate Cash during the year ended December 31, 2023 was driven primarily by investments in the business, including acquisitions and capital expenditures, and capital returns to shareholders in the form of dividends and share repurchases offset by increases in cash resulting from operating activities and net borrowing.

We actively monitor changes to our liquidity needs caused by general business volumes and price volatility, including higher margin requirements of clearing corporations and exchanges, and stress scenarios involving a sustained market downturn and the persistence of current interest rates.

We believe that based on current levels of operations and anticipated growth, our cash flow from operations, together with other available sources of funds, which include five uncommitted lines of credit, the revolving credit facility established through our Credit Agreement and the committed revolving credit facility of LPL Financial, will provide us with adequate liquidity to satisfy our short-term and long-term working capital needs, the payment of all of our obligations and the funding of anticipated capital expenditures.

We regularly evaluate our existing indebtedness, including potential refinancing opportunities, based on a number of factors, including our capital requirements, future prospects, contractual restrictions, the availability of refinancing on attractive terms and general market conditions.

The earliest principal maturity date for our corporate debt is in 2026 and our revolving credit facilities mature between 2023 and 2026, which makes us less dependent on capital markets in the near-term.

We regularly evaluate our existing indebtedness, including potential issuances and refinancing opportunities, based on a number of factors, including our capital requirements, future prospects, contractual restrictions, the availability of refinancing on attractive terms and general market conditions.

As of December 31, 2023, the earliest principal maturity date for our corporate debt with outstanding balances is in 2026 and our revolving credit facilities and uncommitted lines of credit mature between 2024 and 2026.

Share Repurchases

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Our current capital deployment framework remains focused on investing in organic growth first, pursuing acquisitions where appropriate and returning excess capital to stockholders.

While we continue to see opportunities to deploy capital in support of organic growth and acquisitions, we resumed share repurchases in the third quarter of 2021 with the initial focus on an amount to offset dilution.

We repurchased $325.0 million, representing 1,566,527 shares, during the year ended December 31, 2022.

Additionally, on September 21, 2022, the Board authorized a $2.1 billion increase to the amount available for repurchases of our issued and outstanding common shares, with $2.0 billion available for repurchases beginning in 2023.

We currently plan to complete the repurchases over approximately two years.

The timing and amount of share repurchases, if any, is determined at our discretion within the constraints of our Credit Agreement, the Indentures, applicable laws and consideration of our general liquidity needs.

We repurchased 5,075,900 shares for a total of $1.1 billion for the year ended December 31, 2023.

As of December 31, 2023 we had $900.0 million remaining under our existing repurchase program.

The timing and amount of share repurchases, if any, is determined at our discretion within the constraints of our Credit Agreement, applicable laws and consideration of our general liquidity needs.

See Note 15 - Stockholders’ Equity , within the notes to the consolidated financial statements for additional information regarding our share repurchases.

Common Stock Dividends

The payment, timing and amount of any dividends are subject to approval by the Board as well as certain limits under our Credit Agreement and the Indentures.

The payment, timing and amount of any dividends are subject to approval by the Board, as well as certain limits under our Credit Agreement.

The Board approved an increase to the quarterly cash dividend to $0.30 per share beginning in the first quarter of 2023.

See Note 15 - Stockholders’ Equity , within the notes to the consolidated financial statements for additional information regarding our dividends.

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March 2026 $ 280 $ 1,720

Broker-dealer revolving credit facility LPL Financial LLC August 2023 $ — $ 1,000

Unsecured, uncommitted lines of credit LPL Financial LLC September 2023 $ — $ 75

Unsecured, uncommitted lines of credit LPL Financial LLC September 2023 $ — $ 50

Broker-dealer revolving credit facility LPL Financial LLC July 2024 $ — $ 1,000

Unsecured, uncommitted lines of credit LPL Financial LLC None

Unsecured, uncommitted lines of credit LPL Financial LLC September 2024 $ — $ 50

Secured, uncommitted lines of credit LPL Financial LLC March 2025 $ — $ 75

Secured, uncommitted lines of credit LPL Financial LLC None $ — unspecified

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Capital Resources

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Our other working capital needs are primarily related to loans we are making to advisors and timing associated with receivables and payables, which we have satisfied in the past from internally generated cash flows.

We may sometimes be required to fund timing differences arising from the delayed receipt of client funds associated with the settlement of client transactions in securities markets and cash sweep balances held at third-party banks.

These timing differences are funded either with internally generated cash flows or, if needed, with funds drawn on our uncommitted lines of credit at LPL Financial or one of our revolving credit facilities.

LPL Financial is subject to the SEC’s Uniform Net Capital Rule, which requires the maintenance of minimum net capital.

LPL Financial computes net capital requirements under the alternative method, which requires firms to maintain minimum net capital equal to the greater of $250,000 or 2% of aggregate debit balances arising from client transactions.

At December 31, 2022, LPL Financial had net capital of $49.5 million with a minimum net capital requirement of $13.3 million.

LPL Financial’s ability to pay dividends greater than 10% of its excess net capital during any 35-day rolling period requires approval from FINRA.

In addition, payment of dividends is restricted if LPL Financial’s net capital would be less than 5% of aggregate customer debit balances.

We may sometimes be required to fund capital requirements necessary to effect client transactions in securities markets and cash sweep balances held at third-party banks that arise from the delayed receipt of client funds.

These capital requirements are funded either with internally generated cash flows or, if needed, with funds drawn on our uncommitted lines of credit at LPL Financial or one of our revolving credit facilities.

Our broker-dealer subsidiaries are subject to the SEC’s Uniform Net Capital Rule (Rule 15c3-1 under the Exchange Act), which requires the maintenance of minimum net capital.

LPL Financial, our primary broker-dealer subsidiary, computes net capital requirements under the alternative method, which requires firms to maintain minimum net capital equal to the greater of $250,000 or 2% of aggregate debit balances arising from client transactions.

The following table presents the net capital position of the Company’s primary broker-dealer subsidiary (in thousands):

December 31, 2023

LPL Financial LLC

Net capital $ 205,314

required net capital 16,678

Excess net capital $ 188,636

Payment by our broker-dealer subsidiaries of dividends greater than 10% of their respective excess net capital during any 35-day rolling period requires approval from FINRA.

In addition, each broker-dealer subsidiary’s ability to pay dividends would be restricted if its net capital would be less than 5% of aggregate customer debit balances.

LPL Financial also acts as an introducing broker-dealer for commodities and futures.

Accordingly, its trading activities are subject to the NFA financial requirements and it is required to maintain net capital that is in excess of or equal to the greatest of NFA’s minimum financial requirements.

Accordingly, its trading activities are subject to the NFA’s financial requirements and it is required to maintain net capital that is in excess of or equal to the greatest of NFA’s minimum financial requirements.

The NFA was designated by the Commodity Futures Trading Commission as LPL Financial’s primary regulator for such activities.

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Failure to meet the respective minimum capital requirements can result in certain mandatory and discretionary actions by regulators that, if undertaken, could have substantial monetary and non-monetary impacts on PTC’s operations.

Supplemental Guarantor Financial Information

The Company filed a registration statement on Form S-3 to register, among other things, non-convertible debt securities that may be offered by LPL Holdings, Inc.

(the “Issuer”), a wholly owned subsidiary of LPLFH (together with the Issuer, the “Obligor Group”), and full and unconditional guarantees by LPLFH of such debt securities.

The debt securities issued by the Issuer pursuant to such registration statement are fully and unconditionally guaranteed by LPLFH.

LPLFH is a Delaware holding corporation that manages substantially all of its operations through investments in subsidiaries.

See Note 1 - Organization and Description of the Company and Note 11 - Corporate Debt and Other Borrowings, Net , within the notes to the consolidated financial statements for additional information.

Pursuant to Rule 3-10 of Regulation S-X under the Securities Act of 1933, as amended, the following tables present summarized financial information for the Obligor Group on a combined basis.

Balances and transactions between the Obligor Group have been eliminated.

Financial information for non-guarantor subsidiaries, which includes all other subsidiaries of the Issuer, has been excluded and intercompany balances and transactions between the Obligor Group and non-guarantor subsidiaries are presented on separate lines.

The summarized financial information below should be read in conjunction with the Company’s consolidated financial statements contained herein as the summarized financial information for the Obligor Group may not be indicative of results of operations or financial position of the Issuer or LPLFH had they operated as independent entities.

The following tables present the summarized financial information for the periods presented (in thousands):

LPL Holdings, Inc.

& LPL Financial Holdings Inc.

Combined Summarized Statements of Income Year Ended December 31, 2023

Revenues from non-guarantor subsidiaries 21,340

Advisory and commission expense (1)

Interest expense on borrowings 182,559

Expenses from non-guarantor subsidiaries 14,034

Loss before provision for income taxes (251,223)

Net loss (185,794)

____________________

(1) Revenues primarily include unrealized gains and losses on assets held in the non-qualified deferred compensation plan offered to advisors and employees, while advisory and commission expense includes the deferred advisory and commission fee expense associated with mark-to-market gains or losses on the non-qualified deferred compensation plan offered to advisors.

LPL Holdings, Inc.

& LPL Financial Holdings Inc.

Combined Summarized Statements of Financial Condition December 31, 2023 December 31, 2022

Cash and equivalents $ 26,587 $ 448,180

Other receivables, net 2,793 10,926

Property and equipment, net 154,920 165,649

Goodwill 1,251,908 1,251,908

Other intangibles, net 95,461 123,435

Receivables from non-guarantor subsidiaries 153,377 86,069

Other assets 1,017,289 705,048

Corporate debt and other borrowings, net 3,734,111 2,717,444

Accounts payable and accrued liabilities 53,817 32,060

Payables to non-guarantor subsidiaries 76,683 67,135

Other liabilities 986,274 839,479

Debt and Related Covenants

The Credit Agreement and the Indentures contain a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to:

The Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to:

• incur additional indebtedness or issue disqualified stock or preferred stock;

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• consolidate, merge or transfer all or substantially all of our assets.

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Our Credit Agreement and the Indentures allow us to pay dividends and distributions or repurchase our common stock only when certain conditions are met.

Our Credit Agreement allows us to pay dividends and distributions or repurchase our common stock only when certain conditions are met.

In addition, our revolving credit facility requires us to be in compliance with certain financial covenants as of the last day of each fiscal quarter.

The financial covenants require the calculation of Credit Agreement EBITDA, as defined in, and calculated by management in accordance with, the Credit Agreement.

The Credit Agreement defines Credit Agreement EBITDA as “Consolidated EBITDA,” which is Consolidated Net Income (as defined in the Credit Agreement) plus interest expense on borrowings, provision for income taxes, depreciation and amortization and amortization of other intangibles, and is further adjusted to exclude certain non-cash charges and other adjustments (including unusual or non-recurring charges) and gains, and to include future expected cost savings, operating expense reductions or other synergies from certain transactions.

The Credit Agreement defines Credit Agreement EBITDA as “Consolidated EBITDA,” which is Consolidated Net Income (as defined in the Credit Agreement) plus interest expense on borrowings, provision for income taxes, depreciation and amortization and amortization of other intangibles, and is further adjusted to exclude certain non-cash charges and other adjustments, and to include future expected cost savings, operating expense reductions or other synergies from certain transactions.

As of December 31, 2023, we were in compliance with our Credit Agreement financial covenants, which include a maximum Consolidated Total Debt to Consolidated EBITDA Ratio (as defined in the Credit Agreement) or “Leverage Ratio” and a minimum Consolidated EBITDA to Consolidated Interest Expense Ratio (as defined in the Credit Agreement) or “Interest Coverage.” The breach of these financial covenants would be subject to certain equity cure rights.

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Interest Coverage (Minimum) 3.0 12.54

The broker-dealer credit agreement subjects LPL Financial to certain financial and non-financial covenants.

As of December 31, 2022, LPL Financial’s net capital was 8% of its aggregate debits, below the 10% aggregate debits required by a financial covenant.

The agreement allows 5 days to cure non-compliance with this financial covenant, and it was cured within that allowable time period.

LPL Financial was in compliance with all other covenants as of December 31, 2022.

See Note 11 - Corporate Debt and Other Borrowings, Net , within the notes to the consolidated financial statements for further detail regarding the Credit Agreement and the Indentures.

Certain restrictive covenants under certain of our Indentures are currently suspended.

However, a credit rating downgrade to a below investment grade rating could cause currently suspended restrictive covenants under certain of our Indentures to be automatically reinstated.

See Note 11 - Corporate Debt and Other Borrowings, Net , within the notes to the consolidated financial statements for further detail regarding the Credit Agreement.

Contractual Obligations

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As of December 31, 2023, we have a liability for unrecognized tax benefits of $61.6 million, which we have included in other liabilities in the consolidated statements of financial condition.

This amount has been excluded from the

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contractual obligations table because we are unable to reasonably predict the ultimate amount or timing of future tax payments.

This amount has been excluded from the contractual obligations table because we are unable to reasonably predict the ultimate amount or timing of future tax payments.

Risk Management

In order to assist in the mitigation and control of operational risk, we have an enterprise risk management (“ERM”) framework that is designed to enable assessment and reporting on operational risk across the firm.

This framework aims to ensure policies and procedures are in place and appropriately designed to identify and manage operational risk at appropriate levels throughout our organization and within various departments.

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.

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.

We employ an 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.

Risk is an inherent part of our businesses and activities.

To effectively manage these risks, we have an ERM framework designed to facilitate the incorporation of risk assessment into decision-making processes across the Company, enable execution our business strategy, and protect our Company and its franchise.

This framework aims to ensure policies and procedures are in place and appropriately designed to identify and manage risk at appropriate levels throughout our organization and within various departments.

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

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We operate a three lines of defense model to manage risk throughout the organization.

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 operating and supervisory procedures, as well as training manuals (desktop procedures).

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.

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Our risk management governance approach includes the Board and certain of its committees;

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

our ROC and its subcommittees;

and our three lines of defense model.

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

Risk Governance Structure

Audit and Risk Committee of the Board

In addition to its other responsibilities, the Audit and Risk Committee of the Board reviews our policies with respect to risk assessment and risk management, as well as our major financial risk exposures and the steps management has undertaken to control them.

The Audit and Risk Committee generally provides reports to the Board at each of the Board’s regularly scheduled quarterly meetings.

The ARC oversees and monitors, among other things, the Company’s enterprise risk management (except for risks assigned to other committees of the Board or retained by the Board), and is responsible for reviewing and assessing the Company’s processes to manage and control risk.

In this capacity, the ARC reviews reports from risk-focused management committees;

reviews emerging risks and regulatory matters;

and reviews Internal Audit reports on the assessment of the Company’s control environment.

The ARC reports to the Board on a regular basis and coordinates with the Board and other Board committees with respect to the oversight of risk management and risk assessment guidelines.

Compensation and Human Resources Committee of the Board

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Risk Oversight Committee of LPL Financial

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

The Chief Risk Officer of LPL Financial serves as chair of the ROC, which generally meets on a quarterly 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-

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officio members and represent key control areas of the Company.

The ROC, a management committee chaired by the chief risk officer, oversees our risk management activities, including those of our subsidiaries.

The chief risk officer of LPL Financial serves as chair of the ROC, which generally meets once every two months, 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.

Participation in the ROC by senior officers is intended to ensure that the ROC covers the key risk areas of the Company, including its subsidiaries, and that the ROC thoroughly reviews significant matters relating to risk priorities, policies, control procedures and related exceptions, certain new and complex products and business arrangements, transactions with significant risk elements and identified emerging risks.

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Subcommittees of the Risk Oversight Committee

The ROC has established multiple subcommittees that cover key areas of risk.

The subcommittees meet regularly and are responsible for keeping the ROC informed and escalating issues in accordance with the Company’s escalation policies.

The ROC has established multiple subcommittees to support effective supervision of our risk exposures and processes.

The subcommittees meet regularly and are responsible for keeping the ROC informed and escalating issues in accordance with the Company’s escalation protocols.

The responsibilities of such subcommittees include, for example, oversight of operational risk;

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As the third line of defense, the Internal Audit department provides independent and objective assurance of the effectiveness of the Company’s governance, risk management and internal controls by conducting risk assessments and audits designed to identify and cover important risk categories.

Internal Audit reports directly to the Audit and Risk Committee, which provides oversight of Internal Audit’s activities and approves its annual plan.

The Internal Audit department provides regular updates to the ROC and reports to the Audit and Risk Committee at least quarterly.

Internal Audit reports directly to the ARC, which provides oversight of Internal Audit’s activities and approves its annual plan.

The Internal Audit department reports to the ARC at least quarterly.

Operational Risk

Operational Risk is reviewed, monitored and challenged by the Operational Risk Oversight Committee (the “OROC”), which is a subcommittee of the ROC.

Operational risk is defined as the risk of loss resulting from failed or inadequate processes or systems, actions by people or external events.

We operate in diverse markets and are reliant on the ability of our employees and information technology systems, as well as third-party service providers and their systems, to manage a large volume of transactions and confidential information, including personally identifiable information, effectively and securely.

Managing these risks 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.

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, third-party dependencies or limitations of our current technology.

We are exposed to a variety of operational risks and actively monitor and manage them across the following risk categories:

• Information Security & Cybersecurity Risk – the potential disclosure, misuse or loss of our data (including client data) that may adversely impact the availability, integrity and/or confidentiality of our data or information through unintentional or malicious acts, either internal or external.

• Information Technology Risk – the potential for a technology failure, obsolescence or improper operation of our technology systems.

• Third Party Risk – the risk of exposure caused by our reliance on third-party service providers to execute critical processes.

• General Operational Risk – all other types of operational risks not detailed above, including external or internal fraud, execution, process or internal control failures, business disruptions unrelated to technology, or human capital risk, such as key person dependencies.

Regulatory and Legal Risk

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We consider the following critical accounting policies to be most significant because they involve a higher degree of judgment and complexity and require management to make estimates regarding matters that are uncertain and susceptible to change where such change may result in a material adverse impact on our financial condition or results of operations.

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Revenue Recognition

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Management exercises judgment to estimate revenue accruals.

In particular, our trailing commission revenue, included in commission revenue on the consolidated statements of income, is generally received in arrears and therefore requires our management to estimate accrued amounts based on revenue received in prior periods, market performance and payment frequency of each product type or sponsor.

In particular, our trailing commission revenue, included in commission revenue on the consolidated statements of income, is generally received in arrears and therefore requires management to estimate accrued amounts based on revenue received in prior periods, market performance and payment frequency of each product type or sponsor.

See Note 2 - Summary of Significant Accounting Policies and Note 3 - Revenue , within the notes to the consolidated financial statements for further detail.

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For additional information, see Note 2 - Summary of Significant Accounting Policies and Note 14 - Commitments and Contingencies - “Legal and Regulatory Matters,” within the notes to the consolidated financial statements.

Valuation of Goodwill and Other Intangibles, Net

Goodwill is recognized as a result of business combinations and is measured as the excess of the purchase price over the fair value of the net assets acquired.

The valuation of goodwill and other intangibles, net requires management to apply judgment and assumptions when estimating future earnings and performance.

Acquisitions, including those accounted for under the acquisition method of accounting for business combinations or as asset acquisitions, require management to allocate purchase consideration, including contingent consideration, to the fair value of assets acquired or liabilities assumed, as applicable.

This allocation requires management to apply judgment and make assumptions about future earnings and performance and may be based on preliminary valuations.

Estimates and assumptions used in the acquisition method of accounting for business combinations are subject to change during the respective measurement period, which is not to exceed one year from the acquisition date, as valuations are finalized.

Any changes in estimates or assumptions will change the purchase price allocations, including any amounts allocated to other intangible assets, liabilities for contingent consideration, other assets acquired or liabilities assumed, or goodwill, as applicable.

Goodwill is recognized as the excess of the purchase consideration over the fair value of net assets acquired.

Certain of the Company’s acquisitions include contingent consideration, which may result in the transfer of additional cash consideration to the sellers if certain asset or revenue growth is achieved in the years following an acquisition.

For acquisitions accounted for under the acquisition method of accounting for business combinations, any such contingent consideration is recognized at its estimated fair value on the date of acquisition within other liabilities in the consolidated statements of financial condition.

This contingent consideration is remeasured at its fair value at each subsequent reporting date until the contingency is resolved.

Any changes in fair value are recognized in other expense in the consolidated statements of operations.

The Company does not recognize a liability for contingent payments in acquisitions that are accounted for as asset acquisitions as the amounts to be paid will be uncertain until a future measurement date.

For additional information, see Note 4 - Acquisitions and Note 9 - Goodwill and Other Intangibles, Net within the notes to the consolidated financial statements.

Goodwill and Other Intangibles, Net

Management also applies judgment when testing for impairment of goodwill and other indefinite-lived intangible assets, including estimating fair values.

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For additional information, see Note 2 - Summary of Significant Accounting Policies and Note 9 - Goodwill and Other Intangibles, Net within the notes to the consolidated financial statements.

In preparing the consolidated financial statements, we estimate income tax expense based on various jurisdictions where we conduct business.

In preparing the consolidated financial statements, we estimate the provision for income taxes based on various jurisdictions where we conduct business.

This requires management to estimate current tax obligations and to assess temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities.

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Refer to Note 2 - Summary of Significant Accounting Policies, within the notes to the consolidated financial statements for a discussion of recent accounting pronouncements or changes in accounting pronouncements that are of significance, or potential significance, to us.

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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 7. Management’s Discussion and Analysis