UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 28, 2018March 29, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________

Commission file number 0-16633

 

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

(Exact name of registrant as specified in its Charter)

 

 

MISSOURI

43-1450818

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

 

12555 Manchester Road

Des Peres, Missouri 63131

(Address of principal executive office)

(Zip Code)

(314) 515-2000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES NO

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

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

As of OctoberApril 26, 2018, 886,4112019, 1,260,268 units of limited partnership interest (“Interests”) are outstanding, each representing $1,000 of limited partner capital.  There is no public or private market for such Interests.

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of exchange on which registered

None

N/A

N/A

 

 

 

 


 

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

INDEX

 

 

 

 

 

Page

 

 

 

 

 

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

 

 

 

 

 

Consolidated Statements of Financial Condition

 

3

 

 

Consolidated Statements of Income

 

4

 

 

Consolidated Statements of Changes in Partnership Capital

5

Consolidated Statements of Cash Flows

 

56

 

 

Notes to Consolidated Financial Statements

 

67

 

 

 

 

 

Item 2.

 

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

 

17

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

3331

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

3331

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

3432

 

 

 

 

 

Item 1A.

 

Risk Factors

 

3532

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

3632

 

 

 

 

 

Item 6.

 

Exhibits

 

3733

 

 

 

 

 

 

 

Signatures

 

4134

 

 

 

2


PART I. FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

ITEM 1.

FINANCIAL STATEMENTS

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

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

 

 

September 28,

 

 

December 31,

 

 

March 29,

 

 

December 31,

 

(Dollars in millions)

 

2018

 

 

2017

 

 

2019

 

 

2018

 

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

876

 

 

$

846

 

 

$

1,370

 

 

$

1,498

 

Cash and investments segregated under federal regulations

 

 

7,592

 

 

 

10,099

 

 

 

7,052

 

 

 

8,241

 

Securities purchased under agreements to resell

 

 

1,241

 

 

 

1,164

 

 

 

1,232

 

 

 

911

 

Receivables from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Clients

 

 

3,456

 

 

 

3,300

 

 

 

3,317

 

 

 

3,359

 

Mutual funds, insurance companies and other

 

 

538

 

 

 

540

 

 

 

620

 

 

 

555

 

Brokers, dealers and clearing organizations

 

 

277

 

 

 

247

 

 

 

300

 

 

 

261

 

Securities owned, at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities

 

 

270

 

 

 

258

 

 

 

270

 

 

 

250

 

Inventory securities

 

 

83

 

 

 

50

 

 

 

57

 

 

 

43

 

Lease right-of-use asset

 

 

795

 

 

 

 

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

depreciation and amortization

 

 

549

 

 

 

544

 

 

 

566

 

 

 

555

 

Other assets

 

 

119

 

 

 

128

 

 

 

116

 

 

 

142

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

15,001

 

 

$

17,176

 

 

$

15,695

 

 

$

15,815

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payables to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Clients

 

$

10,452

 

 

$

12,810

 

 

$

10,223

 

 

$

11,117

 

Brokers, dealers and clearing organizations

 

 

106

 

 

 

67

 

 

 

95

 

 

 

90

 

Lease liability

 

 

809

 

 

 

-

 

Accrued compensation and employee benefits

 

 

1,455

 

 

 

1,339

 

 

 

1,182

 

 

 

1,465

 

Accounts payable, accrued expenses and other

 

 

225

 

 

 

165

 

 

 

212

 

 

 

288

 

 

 

12,238

 

 

 

14,381

 

 

 

12,521

 

 

 

12,960

 

Contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Partnership capital subject to mandatory redemption, net of reserve for

anticipated withdrawals and partnership loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Limited partners

 

 

887

 

 

 

890

 

 

 

1,261

 

 

 

884

 

Subordinated limited partners

 

 

506

 

 

 

463

 

 

 

523

 

 

 

504

 

General partners

 

 

1,186

 

 

 

1,152

 

 

 

1,179

 

 

 

1,119

 

Total

 

 

2,579

 

 

 

2,505

 

 

 

2,963

 

 

 

2,507

 

Reserve for anticipated withdrawals

 

 

184

 

 

 

290

 

 

 

211

 

 

 

348

 

Total partnership capital subject to mandatory redemption

 

 

2,763

 

 

 

2,795

 

 

 

3,174

 

 

 

2,855

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

$

15,001

 

 

$

17,176

 

 

$

15,695

 

 

$

15,815

 

 

 

 

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

 

3


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements, continued

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

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

Three Months Ended

 

 

Nine Months Ended

 

(Dollars in millions, except per unit information and units outstanding)

 

September 28,

2018

 

 

September 29,

2017

 

 

September 28,

2018

 

 

September 29,

2017

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fee revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-based

 

$

1,581

 

 

$

1,316

 

 

$

4,535

 

 

$

3,648

 

Account and activity

 

 

169

 

 

 

164

 

 

 

510

 

 

 

509

 

Total fee revenue

 

 

1,750

 

 

 

1,480

 

 

 

5,045

 

 

 

4,157

 

Trade revenue

 

 

368

 

 

 

314

 

 

 

1,072

 

 

 

1,200

 

Interest and dividends

 

 

92

 

 

 

69

 

 

 

257

 

 

 

192

 

Other revenue

 

 

11

 

 

 

14

 

 

 

34

 

 

 

46

 

Total revenue

 

 

2,221

 

 

 

1,877

 

 

 

6,408

 

 

 

5,595

 

Interest expense

 

 

30

 

 

 

25

 

 

 

92

 

 

 

64

 

Net revenue

 

 

2,191

 

 

 

1,852

 

 

 

6,316

 

 

 

5,531

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

1,536

 

 

 

1,312

 

 

 

4,470

 

 

 

3,918

 

Occupancy and equipment

 

 

114

 

 

 

105

 

 

 

333

 

 

 

310

 

Communications and data processing

 

 

85

 

 

 

80

 

 

 

250

 

 

 

242

 

Fund sub-adviser fees

 

 

35

 

 

 

26

 

 

 

96

 

 

 

70

 

Advertising

 

 

19

 

 

 

17

 

 

 

66

 

 

 

61

 

Professional and consulting fees

 

 

21

 

 

 

17

 

 

 

57

 

 

 

52

 

Postage and shipping

 

 

14

 

 

 

16

 

 

 

43

 

 

 

49

 

Other operating expenses

 

 

94

 

 

 

68

 

 

 

255

 

 

 

196

 

Total operating expenses

 

 

1,918

 

 

 

1,641

 

 

 

5,570

 

 

 

4,898

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before allocations to partners

 

 

273

 

 

 

211

 

 

 

746

 

 

 

633

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allocations to partners:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Limited partners

 

 

31

 

 

 

26

 

 

 

86

 

 

 

79

 

Subordinated limited partners

 

 

35

 

 

 

27

 

 

 

96

 

 

 

80

 

General partners

 

 

207

 

 

 

158

 

 

 

564

 

 

 

474

 

Net Income

 

$

 

 

$

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income allocated to limited partners per weighted average

   $1,000 equivalent limited partnership unit outstanding

 

$

35.42

 

 

$

29.33

 

 

$

96.60

 

 

$

87.93

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average $1,000 equivalent limited partnership

   units outstanding

 

 

888,481

 

 

 

894,852

 

 

 

890,911

 

 

 

898,374

 

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

4


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements, continued

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) 

 

 

Nine Months Ended

 

(Dollars in millions)

 

Sept 28,

2018

 

 

Sept 29,

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

 

 

$

 

Adjustments to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Income before allocations to partners

 

 

746

 

 

 

633

 

Depreciation and amortization

 

 

69

 

 

 

63

 

 

 

 

 

 

 

 

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Investments segregated under federal regulations

 

 

709

 

 

 

1,550

 

Securities purchased under agreements to resell

 

 

(77

)

 

 

(17

)

Net payable to clients

 

 

(2,514

)

 

 

(3,059

)

Net receivable from brokers, dealers and clearing organizations

 

 

9

 

 

 

13

 

Receivable from mutual funds, insurance companies and other

 

 

2

 

 

 

(31

)

Securities owned

 

 

(45

)

 

 

(60

)

Other assets

 

 

9

 

 

 

4

 

Accrued compensation and employee benefits

 

 

116

 

 

 

169

 

Accounts payable, accrued expenses and other

 

 

60

 

 

 

29

 

Net cash used in operating activities

 

 

(916

)

 

 

(706

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchase of equipment, property and improvements, net

 

 

(74

)

 

 

(55

)

Net cash used in investing activities

 

 

(74

)

 

 

(55

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Issuance of partnership interests

 

 

60

 

 

 

73

 

Redemption of partnership interests

 

 

(181

)

 

 

(182

)

Distributions from partnership capital

 

 

(657

)

 

 

(521

)

Net cash used in financing activities

 

 

(778

)

 

 

(630

)

Net decrease in cash, cash equivalents and restricted cash

 

 

(1,768

)

 

 

(1,391

)

 

 

 

 

 

 

 

 

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH:

 

 

 

 

 

 

 

 

Beginning of period

 

 

8,537

 

 

 

9,572

 

End of period

 

$

6,769

 

 

$

8,181

 

See Note 11 for additional cash flow information.

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

5


PART I. FINANCIAL INFORMATION

Item 1.Financial Statements, continued

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

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

Three Months Ended

 

 

(Dollars in millions, except per unit information and units outstanding)

 

March 29,

2019

 

 

March 30,

2018

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Fee revenue

 

 

 

 

 

 

 

 

 

Asset-based

 

$

1,559

 

 

$

1,453

 

 

Account and activity

 

 

172

 

 

 

172

 

 

Total fee revenue

 

 

1,731

 

 

 

1,625

 

 

Trade revenue

 

 

368

 

 

 

364

 

 

Interest and dividends

 

 

103

 

 

 

79

 

 

Other revenue

 

 

28

 

 

 

6

 

 

Total revenue

 

 

2,230

 

 

 

2,074

 

 

Interest expense

 

 

40

 

 

 

32

 

 

Net revenue

 

 

2,190

 

 

 

2,042

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

1,536

 

 

 

1,454

 

 

Occupancy and equipment

 

 

119

 

 

 

109

 

 

Communications and data processing

 

 

86

 

 

 

80

 

 

Fund sub-adviser fees

 

 

36

 

 

 

30

 

 

Advertising

 

 

24

 

 

 

25

 

 

Professional and consulting fees

 

 

23

 

 

 

18

 

 

Postage and shipping

 

 

15

 

 

 

14

 

 

Other operating expenses

 

 

110

 

 

 

79

 

 

Total operating expenses

 

 

1,949

 

 

 

1,809

 

 

 

 

 

 

 

 

 

 

 

 

Income before allocations to partners

 

 

241

 

 

 

233

 

 

 

 

 

 

 

 

 

 

 

 

Allocations to partners:

 

 

 

 

 

 

 

 

 

Limited partners

 

 

37

 

 

 

27

 

 

Subordinated limited partners

 

 

29

 

 

 

30

 

 

General partners

 

 

175

 

 

 

176

 

 

Net Income

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

Income allocated to limited partners per weighted average

   $1,000 equivalent limited partnership unit outstanding

 

$

29.20

 

 

$

30.16

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average $1,000 equivalent limited partnership

   units outstanding

 

 

1,262,740

 

 

 

893,700

 

 

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

4


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements, continued

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

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERSHIP CAPITAL

SUBJECT TO MANDATORY REDEMPTION

FOR THE THREE MONTHS ENDED MARCH 29, 2019 and MARCH 30, 2018

(Unaudited)

(Dollars in millions)

 

Limited

Partnership

Capital

 

 

Subordinated

Limited

Partnership

Capital

 

 

General

Partnership

Capital

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Q1 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL PARTNERSHIP CAPITAL SUBJECT TO MANDATORY

   REDEMPTION, DECEMBER 31, 2017

 

$

956

 

 

$

499

 

 

$

1,340

 

 

$

2,795

 

Reserve for anticipated withdrawals

 

 

(66

)

 

 

(36

)

 

 

(188

)

 

 

(290

)

Partnership capital subject to mandatory redemption, net of

   reserve for anticipated withdrawals, December 31, 2017

 

$

890

 

 

$

463

 

 

$

1,152

 

 

$

2,505

 

Partnership loans outstanding, December 31, 2017

 

 

 

 

 

3

 

 

 

294

 

 

 

297

 

Total partnership capital, including capital financed with partnership loans,

   net of reserve for anticipated withdrawals, December 31, 2017

 

 

890

 

 

 

466

 

 

 

1,446

 

 

 

2,802

 

Issuance of partnership interests

 

 

4

 

 

 

51

 

 

 

170

 

 

 

225

 

Redemption of partnership interests

 

 

(2

)

 

 

(6

)

 

 

(151

)

 

 

(159

)

Income allocated to partners

 

 

27

 

 

 

30

 

 

 

176

 

 

 

233

 

Distributions

 

 

 

 

 

(1

)

 

 

(11

)

 

 

(12

)

Total partnership capital, including capital financed with partnership loans

 

 

919

 

 

 

540

 

 

 

1,630

 

 

 

3,089

 

Partnership loans outstanding, March 30, 2018

 

 

 

 

 

(2

)

 

 

(379

)

 

 

(381

)

TOTAL PARTNERSHIP CAPITAL SUBJECT TO MANDATORY

   REDEMPTION, MARCH 30, 2018

 

$

919

 

 

$

538

 

 

$

1,251

 

 

$

2,708

 

Reserve for anticipated withdrawals

 

 

(27

)

 

 

(29

)

 

 

(140

)

 

 

(196

)

Partnership capital subject to mandatory redemption, net of

   reserve for anticipated withdrawals, March 30, 2018

 

$

892

 

 

$

509

 

 

$

1,111

 

 

$

2,512

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Q1 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL PARTNERSHIP CAPITAL SUBJECT TO MANDATORY

   REDEMPTION, DECEMBER 31, 2018

 

$

956

 

 

$

545

 

 

$

1,354

 

 

$

2,855

 

Reserve for anticipated withdrawals

 

 

(72

)

 

 

(41

)

 

 

(235

)

 

 

(348

)

Partnership capital subject to mandatory redemption, net of

   reserve for anticipated withdrawals, December 31, 2018

 

$

884

 

 

$

504

 

 

$

1,119

 

 

$

2,507

 

Partnership loans outstanding, December 31, 2018

 

 

 

 

 

4

 

 

 

328

 

 

 

332

 

Total partnership capital, including capital financed with partnership loans,

   net of reserve for anticipated withdrawals, December 31, 2018

 

 

884

 

 

 

508

 

 

 

1,447

 

 

 

2,839

 

Issuance of partnership interests

 

 

380

 

 

 

51

 

 

 

162

 

 

 

593

 

Redemption of partnership interests

 

 

(3

)

 

 

(31

)

 

 

(37

)

 

 

(71

)

Income allocated to partners

 

 

37

 

 

 

29

 

 

 

175

 

 

 

241

 

Distributions

 

 

 

 

 

 

 

 

(6

)

 

 

(6

)

Total partnership capital, including capital financed with partnership loans

 

 

1,298

 

 

 

557

 

 

 

1,741

 

 

 

3,596

 

Partnership loans outstanding, March 29, 2019

 

 

 

 

 

(5

)

 

 

(417

)

 

 

(422

)

TOTAL PARTNERSHIP CAPITAL SUBJECT TO MANDATORY

   REDEMPTION, MARCH 29, 2019

 

$

1,298

 

 

$

552

 

 

$

1,324

 

 

$

3,174

 

Reserve for anticipated withdrawals

 

 

(37

)

 

 

(29

)

 

 

(145

)

 

 

(211

)

Partnership capital subject to mandatory redemption, net of

   reserve for anticipated withdrawals, March 29, 2019

 

$

1,261

 

 

$

523

 

 

$

1,179

 

 

$

2,963

 

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

5


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements, continued

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) 

 

 

Three Months Ended

 

(Dollars in millions)

 

March 29,

2019

 

 

March 30,

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

 

 

$

 

Adjustments to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Income before allocations to partners

 

 

241

 

 

 

233

 

Depreciation and amortization

 

 

25

 

 

 

22

 

 

 

 

 

 

 

 

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Investments segregated under federal regulations

 

 

(491

)

 

 

402

 

Securities purchased under agreements to resell

 

 

(321

)

 

 

340

 

Net payable to clients

 

 

(852

)

 

 

(821

)

Net receivable from brokers, dealers and clearing organizations

 

 

(34

)

 

 

45

 

Receivable from mutual funds, insurance companies and other

 

 

(65

)

 

 

(60

)

Securities owned

 

 

(34

)

 

 

(40

)

Lease right-of-use asset

 

 

10

 

 

 

 

Other assets

 

 

26

 

 

 

6

 

Lease liability

 

 

4

 

 

 

 

Accrued compensation and employee benefits

 

 

(283

)

 

 

(263

)

Accounts payable, accrued expenses and other

 

 

(76

)

 

 

24

 

Net cash used in operating activities

 

 

(1,850

)

 

 

(112

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchase of equipment, property and improvements

 

 

(36

)

 

 

(25

)

Cash used in investing activities

 

 

(36

)

 

 

(25

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Issuance of partnership interests

 

 

430

 

 

 

57

 

Redemption of partnership interests

 

 

(71

)

 

 

(159

)

Distributions from partnership capital

 

 

(281

)

 

 

(218

)

Net cash provided by (used in) financing activities

 

 

78

 

 

 

(320

)

Net decrease in cash, cash equivalents and restricted cash

 

 

(1,808

)

 

 

(457

)

 

 

 

 

 

 

 

 

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH:

 

 

 

 

 

 

 

 

Beginning of period

 

 

8,737

 

 

 

8,537

 

End of period

 

$

6,929

 

 

$

8,080

 

See Note 11 for additional cash flow information.


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

6


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements, continued

Financial Statements, continued

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in millions)

 

 

NOTE 1 – INTRODUCTION AND BASIS OF PRESENTATION

The accompanying Consolidated Financial Statements include the accounts of The Jones Financial Companies, L.L.L.P. and all wholly-owned subsidiaries (collectively, the “Partnership” or "JFC").  All material intercompany balances and transactions have been eliminated in consolidation.  The financial position of the Partnership’s subsidiaries in Canada as of August 31, 2018February 28, 2019 and November 30, 20172018 are included in the Partnership’s Consolidated Statements of Financial Condition and the results for the three and nine month periods ended August 31,February 28, 2019 and 2018 and 2017 are included in the Partnership’s Consolidated Statements of Income, Consolidated Statements of Changes in Partnership Capital Subject to Mandatory Redemption,  and Consolidated Statements of Cash Flows because of the timing of the Partnership’s financial reporting process.

The Partnership’s principal operating subsidiary, Edward D. Jones & Co., L.P. (“Edward Jones”), is a registered broker-dealer and investment adviser in the United States (“U.S.”), and one of Edward Jones’ subsidiaries is a registered broker-dealer in Canada.  Through these entities, the Partnership primarily serves individual investors in the U.S. and Canada. Edward Jones is a retail brokerage business and primarily derives revenues from fees for providing investment advisory and other account services to its clients, fees for assets held by clients, the distribution of mutual fund shares, and commissions for the purchase or sale of securities and the purchase of insurance products.  The Partnership conducts business throughout the U.S. and Canada with its clients, various brokers, dealers, clearing organizations, depositories and banks. Trust services are offered to Edward Jones’ U.S. clients through Edward Jones Trust Company (“Trust Co.”), a wholly-owned subsidiary of the Partnership.  Olive Street Investment Advisers, LLC, a wholly-owned subsidiary of the Partnership, provides investment advisory services to the sub-advised mutual funds in the Bridge Builder® Trust.Trust ("BB Trust").  Passport Research, Ltd., a wholly-owned subsidiary of the Partnership, provides investment advisory services to the Edward Jones Money Market Fund.Fund (the "Fund").    

The Consolidated Financial Statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles generally accepted in the U.S. (“GAAP”), which require the use of certain estimates by management in determining the Partnership’s assets, liabilities, revenues and expenses.  Actual results could differ from these estimates.  The Partnership has evaluated subsequent events through the date these Consolidated Financial Statements were issued and identified no matters requiring disclosure.

The interim financial information included herein is unaudited.  However, in the opinion of management, such information includes all adjustments, consisting primarily of normal recurring accruals, which are necessary for a fair statement of the results of interim operations.

There have been no material changes to the Partnership’s significant accounting policies or disclosures of recently issued accounting standards as described in Part II, Item 8 – Financial Statements and Supplementary Data – Note 1 of the Partnership's Annual Report on Form 10-K for the year ended December 31, 2018 (the "Annual Report"), except as disclosed in Note 2 herein.  The results of operations for the three and nine month periodsperiod ended September 28, 2018March 29, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2018.2019.  These unaudited Consolidated Financial Statements should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and notes thereto included in the Annual Report.


 

67


PART I. FINANCIAL INFORMATION

Item 1.Financial Statements, continued

Financial Statements, continued

NOTE 2 – RECENTLY ISSUED AND ADOPTED ACCOUNTING STANDARDS

In May 2014,February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), a comprehensive new revenue recognition standard that supersedes nearly all existing revenue recognition guidance.  The objective of ASU 2014-09 is for a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  In August 2015, the FASB deferred the effective date of ASU 2014-09 to the first quarter of 2018.  An entity can elect to adopt ASU 2014-09 using one of two methods, either full retrospective adoption to each prior reporting period, or modified retrospective adoption by recognizing the cumulative effect of adoption at the date of initial application.  Effective January 1, 2018, the Partnership adopted ASU 2014-09 using the modified retrospective method.  As a result of adoption, there was no cumulative impact to Partnership capital as of January 1, 2018, no impact to total revenue for the three and nine month periods ended September 28, 2018 and no impact to the consolidated statements of financial condition as of September 28, 2018.  There was a presentation change that did not impact the timing or amount of total revenue, net revenue or income before allocations to partners.  See Note 3 for additional information.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”).  ASU 2016-01 provides a comprehensive framework for the classification and measurement of financial assets and liabilities. The Partnership adopted ASU 2016-01 effective January 1, 2018 and adoption did not have a material impact on the Consolidated Financial Statements.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230) – Restricted Cash, a consensus of the FASB Emerging Issues Task Force (“ASU 2016-18”).  ASU 2016-18 requires restricted cash to be included within cash and cash equivalents on the Consolidated Statements of Cash Flows.  The Partnership's restricted cash represents cash segregated in special reserve bank accounts for the benefit of U.S. clients pursuant to the Customer Protection Rule 15c3-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act").  The Partnership adopted ASU 2016-18 on a retrospective basis in the first quarter of 2018, which resulted in including restricted cash of $5,893, $7,691, $7,186 and $8,525 as of September 28, 2018, December 31, 2017, September 29, 2017 and December 31, 2016, respectively, in the cash and cash equivalents balances on the Consolidated Statements of Cash Flows.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASC 842”), which will be effective January 1, 2019.  ASC 842 requires lessees to recognize leases with terms greater than 12 months on the balance sheet as lease right-of-use assets and lease liabilities. TheIn July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), which allows an entity to recognize a cumulative-effect adjustment to the opening balance of Partnership iscapital in the processperiod of completing its evaluation ofadoption and prior periods do not have to be restated.  Effective January 1, 2019, the impact ofPartnership adopted ASC 842 and expects to recordrecorded a lease right-of-use asset of $785 and lease liability of approximately $725 - $825 primarily$805 related to the Partnership's branch office network (amount will be dependentand home offices. The lease right-of-use asset was reduced by $20 for deferred rent on existing leases outstanding at adoption date).  Adoptionadoption. The cumulative-effect adjustment to the opening balance of ASC 842 willPartnership capital was zero and prior periods were not have arestated. The Partnership elected the package of practical expedients for leases that commenced prior to January 1, 2019, which allowed the Partnership to not reassess whether any contracts are or contain leases, lease classification for expired or existing leases, and initial direct costs for existing leases.  There was no material impact on the Consolidated Statements of Income, Consolidated Statements of Cash Flows or net capital requirements of Edward Jones. See Note 3 for additional information.

In July 2018,June 2016, the FASB issued ASU No. 2018-11,2016-13, LeasesFinancial Instruments – Credit Losses (Topic 842)326) – Measurement of Credit Losses on Financial Instruments, which allows an entity (“ASU 2016-13”).  ASU 2016-13 removes the "probable" threshold for credit loss recognition, requiring companies to apply ASC 842 atcapture all expected credit losses and to consider a broader range of reasonable and supportable information to inform credit loss estimates.  The Partnership is in the process of evaluating the update and expects to adopt ASU 2016-13 as of January 1, 2019 adoption date and recognize a cumulative-effect adjustment2020 with no material impact to the opening balance of Partnership capital in the period ofConsolidated Financial Statements from adoption.  Prior periods do not have to be restated.  The Partnership expects to use this transition method and expects the cumulative-effect adjustment to be zero.

 

NOTE 3 – REVENUELEASES

The Partnership leases branch office space under numerous operating leases from non-affiliates and financial advisors.  Branch offices are generally leased for terms of five years and generally contain a renewal option.  Renewal options are not included in the lease term because it is not reasonably certain the Partnership will exercise the renewal option. The Partnership also leases a few of its home office spaces from non-affiliates with terms ranging from 12 to 30 years.

Revenue Recognition.The Partnership's revenuePartnership recognizes lease liabilities for future lease payments and lease right-of-use assets for the right of use of an underlying asset within a contract.  Current leases are all classified as operating leases. Lease right-of-use assets and lease liabilities are recognized on the Consolidated Statements of Financial Condition at commencement date and calculated as the present value of the sum of the remaining fixed lease payments over the lease term. The lease right-of-use asset includes the impact from the timing of lease payments and straight-line rent expense. The Partnership used its incremental borrowing rate based on information available at lease commencement as leases do not contain a readily determinable implicit rate.  A single lease cost, or rent expense, is recognized based on contracts with clients, mutual fund companies, insurance companies and other product providers.  As a full-service brokerage firm, Edward Jones provides clients with custodial services, including safekeeping of client funds, collecting and disbursing funds from a client's account, and providing trade confirmations and account statements.straight-line basis over the lease term. The Partnership does not chargeseparate lease components (i.e. fixed payments including rent, real estate taxes and insurance costs) from non-lease components (i.e. common-area maintenance) and recognizes them as a separate feesingle lease component. Variable lease payments not included within lease contracts are expensed as incurred.  

For the three months ended March 29, 2019, cash paid for these services.  Revenue is generally recognizedamounts included in the same mannermeasurement of operating lease liabilities was $67 and lease right-of-use assets obtained in exchange for bothnew operating lease liabilities was $67.  As of March 29, 2019, the U.S.weighted-average remaining lease term was four years, and Canada segments.  The Partnership classifies its revenue into the following categories:weighted-average discount rate was 3.5%.

 

 

 

 

 

 

78


PART I. FINANCIAL INFORMATION

Item 1.Financial Statements, continued

Financial Statements, continued

 

Asset-based fee revenue – Revenue is derived from fees determined byFor the underlying valuefirst quarter of client assets2019, operating lease cost was $66 and includes advisory programs fees, service fees, and other asset-based fee revenue.  The primary source of asset-based fee revenue is generated from program fees for investment advisory services provided within the Partnership’s advisory programs, includingvariable lease costs not included in the U.S., the Edward Jones Advisory Solutions® program (“Advisory Solutions”) and the Edward Jones Guided Solutions® program ("Guided Solutions") and, in Canada, the Edward Jones Portfolio Program® and the Edward Jones Guided Portfolios® program.  Advisory program contracts outline the investment advisory services to be performed for a client under the contract and do not have a definite end date.  Program fees are based on the average daily market value of client assets in the program and are charged to clients monthly and collected the following month.  The investment advisory services performed in an advisory program contract are a series of distinct services that are substantially the same and have the same pattern of transfer to the client.  As a result, the contract has one performance obligation and program fee revenue is recognized over time as clients simultaneously receive and consume the benefit from the investment advisory services performed by the Partnership.

The Partnership has selling agreements with mutual fund and insurance companies that allow the Partnership to sell that company's products to clients (see Trade revenue below for the associated commissions earned from clients).  The selling agreements, along with the prospectuses for mutual funds, also allow the Partnership to earn service fees for providing certain ongoing distribution and marketing support services for that company's products which are held by Edward Jones clients.  Service fees are generally based on the average daily market value of client assets heldlease liability were $14, resulting in a company's mutual fund or insurance product.  Fortotal lease cost of $80. The Partnership's future service fees the Partnership may earn on existing client assets, market constraints prevent reasonably estimating the transaction price and estimates could result in significant revenue reversals.  Thus, service fee revenue is recognized monthly at the time the market constraints have been removed, the transaction price is known and the services have been performed.  Other asset-based fee revenue consistsundiscounted cash outflows for operating leases as of revenue sharing, fund adviser fees, cash solutions and Trust Co. fees.  The Partnership has agreements with clients or product providers to earn other asset-based fees for providing services, which generally include providing investment advice or service to clients or mutual funds, or marketing support or other services to product providers.  FeesMarch 29, 2019 are generally based on asset values held in clients' accounts.  The services performed for other asset-based fee contracts are a series of distinct services that are substantially the same and have the same pattern of transfer to the client.  As a result, the contracts have one performance obligation and revenue is recognized over time as the customer simultaneously receives and consumes the benefit from the services performed by the Partnership.  For both service fees and other asset-based fee revenue, revenue is collected monthly or quarterly based on the agreements and the agreements generally do not have a term.  Due to the timing of receipt of information, the Partnership uses estimates in recording the accruals related to certain asset-based fees, which are based on historical trends and are adjusted to reflect market conditions for the period covered.  

Account and activity fee revenue – Revenue is derived from fees based on the number of accounts or activity and includes shareholder accounting services fees, self-directed individual retirement account ("IRA") fees, and other activity-based fee revenue from clients, mutual fund companies and insurance companies.  The Partnership has agreements with mutual fund companies for shareholder accounting services in which the Partnership performs certain transfer agent support services, which may include tracking client holdings, distributing dividends and shareholder information to clients, and responding to client inquiries.  Shareholder accounting services fees are based on the number of mutual fund positions held by clients and fees are collected monthly or quarterly based on the agreements, which generally do not have a term.  The transfer agent support services performed in a shareholder accounting services contract are a series of distinct services that are substantially the same and have the same pattern of transfer to the client.  As a result, the contract has one performance obligation and revenue is recognized over time as the mutual fund company simultaneously receives and consumes the benefit from the services performed by the Partnership.  The Partnership also earns retirement account fees for providing reporting services pursuant to the Internal Revenue Code and account maintenance services.  Clients are charged an annual fee per account for these services.  Revenue is recognized over a one-year period as the services are provided, which are simultaneously received and consumed by the client.  summarized below:

8


PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements, continued

2019

$

202

 

2020

 

232

 

2021

 

184

 

2022

 

128

 

2023

 

74

 

Thereafter

 

60

 

Total lease payments

 

880

 

Less: Interest

 

71

 

Total present value of lease liabilities

$

809

 

 

Trade revenue – Revenue is derived from fees based on client transactionsWhile the rights and includes commissions and principal transactions.  The primary source of trade revenue is commissions revenue which consists of charges to clientsobligations for the purchase or sale of mutual fund shares and equities and the purchase of insurance products.  Principal transactions revenue primarily results from the Partnership’s distribution of and participation in principal trading activities in municipal obligations, over-the-counter corporate obligations, and certificates of deposit.  Principal transactionsleases that have not yet commenced are generally entered into bynot significant, the Partnership to facilitate a client's buy or sell order for certain fixed income products.  Brokerage contracts outline the transaction services to be performed for a client under the contract and do not have a term.  The transaction charge to clients varies based on the product and size of the trade.  The Partnership also has contracts with various companies which allow the Partnership to sell that company's products to clients and receive a certain commission.  Trade revenue is recognized at a point in time when the transaction is placed, or trade date.  On trade date the client obtains control through a right to either own a security for a purchase or receive payment for a sale.  Transaction charges are received no later than settlement date.does continually enter into new branch office leases.    

Interest and dividends revenueNOTE 4Interest revenue is earned on client margin (loan) account balances.  In addition, interest revenue is earned on cash and cash equivalents, cash and investments segregated under federal regulations, securities purchased under agreements to resell and Partnership loans, none of which is based on revenue contracts with clients.

Other forms of revenue are recorded on an accrual basis.  Activity or transaction-based revenue is recorded at a point in time when the transaction occurs and asset-based revenue is recorded over time as the services are provided.  

REVENUE

As of September 28, 2018March 29, 2019 and December 31, 2017, $4002018, $421 and $346,$377, respectively, of the receivable from clients balance and $268$295 and $279,$278, respectively, of the receivable from mutual funds, insurance companies and other balance related to revenue contracts with customers.  

The Partnership derived 14% and 15% of its total revenue for the three month periods ended March 29, 2019 and March 30, 2018, respectively, from one mutual fund complex.  

 

9


PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements, continued

The following table shows the Partnership's disaggregated revenue information. See Note 9 for segment information.

 

 

Three Months Ended September 28, 2018

 

 

Three Months Ended September 29, 2017

 

 

Three Months Ended March 29, 2019

 

 

Three Months Ended March 30, 2018

 

 

U.S.

 

 

Canada

 

 

Total

 

 

U.S.

 

 

Canada

 

 

Total

 

 

U.S.

 

 

Canada

 

 

Total

 

 

U.S.

 

 

Canada

 

 

Total

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fee revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-based fee revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advisory programs fees

 

$

1,086

 

 

$

16

 

 

$

1,102

 

 

$

878

 

 

$

11

 

 

$

889

 

 

$

1,081

 

 

$

15

 

 

$

1,096

 

 

$

982

 

 

$

13

 

 

$

995

 

Service fees

 

 

314

 

 

 

22

 

 

 

336

 

 

 

294

 

 

 

20

 

 

 

314

 

 

 

292

 

 

 

21

 

 

 

313

 

 

 

305

 

 

 

22

 

 

 

327

 

Other asset-based fees

 

 

143

 

 

 

 

 

 

143

 

 

 

113

 

 

 

 

 

 

113

 

 

 

150

 

 

 

 

 

 

150

 

 

 

131

 

 

 

 

 

 

131

 

Total asset-based fee revenue

 

 

1,543

 

 

 

38

 

 

 

1,581

 

 

 

1,285

 

 

 

31

 

 

 

1,316

 

 

 

1,523

 

 

 

36

 

 

 

1,559

 

 

 

1,418

 

 

 

35

 

 

 

1,453

 

Account and activity fee revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholder accounting services

fees

 

 

107

 

 

 

 

 

 

107

 

 

 

102

 

 

 

 

 

 

102

 

 

 

107

 

 

 

 

 

 

107

 

 

 

109

 

 

 

 

 

 

109

 

Other account and activity fee

revenue

 

 

59

 

 

 

3

 

 

 

62

 

 

 

59

 

 

 

3

 

 

 

62

 

 

 

62

 

 

 

3

 

 

 

65

 

 

 

59

 

 

 

4

 

 

 

63

 

Total account and activity fee

revenue

 

 

166

 

 

 

3

 

 

 

169

 

 

 

161

 

 

 

3

 

 

 

164

 

 

 

169

 

 

 

3

 

 

 

172

 

 

 

168

 

 

 

4

 

 

 

172

 

Total fee revenue

 

 

1,709

 

 

 

41

 

 

 

1,750

 

 

 

1,446

 

 

 

34

 

 

 

1,480

 

 

 

1,692

 

 

 

39

 

 

 

1,731

 

 

 

1,586

 

 

 

39

 

 

 

1,625

 

Trade revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commissions

 

 

325

 

 

 

11

 

 

 

336

 

 

 

271

 

 

 

12

 

 

 

283

 

 

 

322

 

 

 

11

 

 

 

333

 

 

 

318

 

 

 

14

 

 

 

332

 

Principal transactions

 

 

30

 

 

 

2

 

 

 

32

 

 

 

30

 

 

 

1

 

 

 

31

 

 

 

34

 

 

 

1

 

 

 

35

 

 

 

31

 

 

 

1

 

 

 

32

 

Total trade revenue

 

 

355

 

 

 

13

 

 

 

368

 

 

 

301

 

 

 

13

 

 

 

314

 

 

 

356

 

 

 

12

 

 

 

368

 

 

 

349

 

 

 

15

 

 

 

364

 

Net interest and dividends revenue

 

 

60

 

 

 

2

 

 

 

62

 

 

 

43

 

 

 

1

 

 

 

44

 

Other revenue

 

 

7

 

 

 

4

 

 

 

11

 

 

 

15

 

 

 

(1

)

 

 

14

 

Total revenue from customers

 

 

2,048

 

 

 

51

 

 

 

2,099

 

 

 

1,935

 

 

 

54

 

 

 

1,989

 

Net interest and dividends and other

revenue

 

 

87

 

 

 

4

 

 

 

91

 

 

 

49

 

 

 

4

 

 

 

53

 

Net revenue

 

$

2,131

 

 

$

60

 

 

$

2,191

 

 

$

1,805

 

 

$

47

 

 

$

1,852

 

 

$

2,135

 

 

$

55

 

 

$

2,190

 

 

$

1,984

 

 

$

58

 

 

$

2,042

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 28, 2018

 

 

Nine Months Ended September 29, 2017

 

 

U.S.

 

 

Canada

 

 

Total

 

 

U.S.

 

 

Canada

 

 

Total

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fee revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-based fee revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advisory programs fees

 

$

3,093

 

 

$

43

 

 

$

3,136

 

 

$

2,350

 

 

$

29

 

 

$

2,379

 

Service fees

 

 

922

 

 

 

66

 

 

 

988

 

 

 

881

 

 

 

58

 

 

 

939

 

Other asset-based fees

 

 

411

 

 

 

 

 

 

411

 

 

 

330

 

 

 

 

 

 

330

 

Total asset-based fee revenue

 

 

4,426

 

 

 

109

 

 

 

4,535

 

 

 

3,561

 

 

 

87

 

 

 

3,648

 

Account and activity fee revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholder accounting services

fees

 

 

325

 

 

 

 

 

 

325

 

 

 

312

 

 

 

 

 

 

312

 

Other account and activity fee

revenue

 

 

175

 

 

 

10

 

 

 

185

 

 

 

188

 

 

 

9

 

 

 

197

 

Total account and activity fee

revenue

 

 

500

 

 

 

10

 

 

 

510

 

 

 

500

 

 

 

9

 

 

 

509

 

Total fee revenue

 

 

4,926

 

 

 

119

 

 

 

5,045

 

 

 

4,061

 

 

 

96

 

 

 

4,157

 

Trade revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commissions

 

 

933

 

 

 

37

 

 

 

970

 

 

 

1,050

 

 

 

39

 

 

 

1,089

 

Principal transactions

 

 

98

 

 

 

4

 

 

 

102

 

 

 

108

 

 

 

3

 

 

 

111

 

Total trade revenue

 

 

1,031

 

 

 

41

 

 

 

1,072

 

 

 

1,158

 

 

 

42

 

 

 

1,200

 

Net interest and dividends revenue

 

 

159

 

 

 

6

 

 

 

165

 

 

 

125

 

 

 

3

 

 

 

128

 

Other revenue

 

 

25

 

 

 

9

 

 

 

34

 

 

 

43

 

 

 

3

 

 

 

46

 

Net revenue

 

$

6,141

 

 

$

175

 

 

$

6,316

 

 

$

5,387

 

 

$

144

 

 

$

5,531

 

 

 

109


PART I. FINANCIAL INFORMATION

 

Item 1.Financial Statements, continued

Financial Statements, continued

 

NOTE 45 – FAIR VALUE

The Partnership's valuation methodologies for financial assets and financial liabilities measured at fair value and the fair value hierarchy are described in Part II, Item 8 – Financial Statements and Supplementary Data – Note 1 of the Partnership's Annual Report.  There have been no material changes to the Partnership's valuation methodologies since December 31, 2017.2018.

The Partnership did not have any assets or liabilities categorized as Level III during the ninethree and twelve month periods ended September 28, 2018March 29, 2019 and December 31, 2017,2018, respectively.  In addition, there were no transfers into or out of Levels I, II or III during these periods.

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

 

 

Financial Assets at Fair Value as of

 

 

Financial Assets at Fair Value as of

 

 

September 28, 2018

 

 

March 29, 2019

 

 

Level I

 

 

Level II

 

 

Level III

 

 

Total

 

 

Level I

 

 

Level II

 

 

Level III

 

 

Total

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

 

 

$

277

 

 

$

 

 

$

277

 

 

$

 

 

$

298

 

 

$

 

 

$

298

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments segregated under federal regulations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

1,495

 

 

$

 

 

$

 

 

$

1,495

 

 

$

1,493

 

 

$

 

 

$

 

 

$

1,493

 

Certificates of deposit

 

 

 

 

200

 

 

 

 

 

 

200

 

Total investments segregated under federal regulations

 

$

1,495

 

 

$

200

 

 

$

 

 

$

1,695

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities owned:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds(1)

 

$

264

 

 

$

 

 

$

 

 

$

264

 

 

$

264

 

 

$

 

 

$

 

 

$

264

 

Government and agency obligations

 

 

3

 

 

 

 

 

 

 

 

 

3

 

 

 

3

 

 

 

 

 

 

 

 

 

3

 

Equities

 

 

2

 

 

 

 

 

 

 

 

 

2

 

 

 

2

 

 

 

 

 

 

 

 

 

2

 

Corporate bonds and notes

 

 

 

 

 

1

 

 

 

 

 

 

1

 

 

 

 

 

 

1

 

 

 

 

 

 

1

 

Total investment securities

 

$

269

 

 

$

1

 

 

$

 

 

$

270

 

 

$

269

 

 

$

1

 

 

$

 

 

$

270

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inventory securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal obligations

 

$

 

 

$

30

 

 

$

 

 

$

30

 

 

$

 

 

$

27

 

 

$

 

 

$

27

 

Mutual funds

 

 

28

 

 

 

 

 

 

 

 

 

28

 

Equities

 

 

16

 

 

 

 

 

 

 

 

 

16

 

 

 

22

 

 

 

 

 

 

 

 

 

22

 

Corporate bonds and notes

 

 

 

 

 

6

 

 

 

 

 

 

6

 

 

 

 

 

 

3

 

 

 

 

 

 

3

 

Certificates of deposit

 

 

 

 

 

3

 

 

 

 

 

 

3

 

 

 

 

 

 

3

 

 

 

 

 

 

3

 

Mutual funds

 

 

2

 

 

 

 

 

 

 

 

 

2

 

Total inventory securities

 

$

44

 

 

$

39

 

 

$

 

 

$

83

 

 

$

24

 

 

$

33

 

 

$

 

 

$

57

 

 

(1)

The mutual funds balance consists primarily of securities held to economically hedge future liabilities related to the non-qualified deferred compensation plan.plan and securities held in relation to profit sharing contributions on behalf of service partners.

 

1110


PART I. FINANCIAL INFORMATION

 

Item 1.Financial Statements, continued

Financial Statements, continued

 

 

 

Financial Assets at Fair Value as of

 

 

Financial Assets at Fair Value as of

 

 

December 31, 2017

 

 

December 31, 2018

 

 

Level I

 

 

Level II

 

 

Level III

 

 

Total

 

 

Level I

 

 

Level II

 

 

Level III

 

 

Total

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

 

 

$

275

 

 

$

 

 

$

275

 

 

$

 

 

$

298

 

 

$

 

 

$

298

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments segregated under federal regulations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

2,399

 

 

$

 

 

$

 

 

$

2,399

 

 

$

998

 

 

$

 

 

$

 

 

$

998

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities owned:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds(1)

 

$

252

 

 

$

 

 

$

 

 

$

252

 

 

$

244

 

 

$

 

 

$

 

 

$

244

 

Government and agency obligations

 

 

3

 

 

 

 

 

 

 

 

 

3

 

 

 

3

 

 

 

 

 

 

 

 

 

3

 

Equities

 

 

2

 

 

 

 

 

 

 

 

 

2

 

 

 

2

 

 

 

 

 

 

 

 

 

2

 

Corporate bonds and notes

 

 

 

 

 

1

 

 

 

 

 

 

1

 

 

 

 

 

 

1

 

 

 

 

 

 

1

 

Total investment securities

 

$

257

 

 

$

1

 

 

$

 

 

$

258

 

 

$

249

 

 

$

1

 

 

$

 

 

$

250

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inventory securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equities

 

$

16

 

 

$

 

 

$

 

 

$

16

 

State and municipal obligations

 

$

 

 

$

24

 

 

$

 

 

$

24

 

 

 

 

 

 

15

 

 

 

 

 

 

15

 

Equities

 

 

16

 

 

 

 

 

 

 

 

 

16

 

Mutual funds

 

 

4

 

 

 

 

 

 

 

 

 

4

 

 

 

6

 

 

 

 

 

 

 

 

 

6

 

Certificates of deposit

 

 

 

 

 

4

 

 

 

 

 

 

4

 

 

 

 

 

 

3

 

 

 

 

 

 

3

 

Corporate bonds and notes

 

 

 

 

 

2

 

 

 

 

 

 

2

 

 

 

 

 

 

3

 

 

 

 

 

 

3

 

Total inventory securities

 

$

20

 

 

$

30

 

 

$

 

 

$

50

 

 

$

22

 

 

$

21

 

 

$

 

 

$

43

 

NOTE 5 – LINES OF CREDIT

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

 

 

September 28,

 

 

December 31,

 

 

 

2018

 

 

2017

 

2018 Credit Facility

 

$

500

 

 

$

-

 

2013 Credit Facility

 

 

-

 

 

 

400

 

Uncommitted secured credit facilities

 

 

290

 

 

 

290

 

Total bank lines of credit

 

$

790

 

 

$

690

 

In November 2013, the Partnership entered into a $400 committed unsecured revolving line of credit ("2013 Credit Facility"), which had a November 2018 expiration date.  In September 2018, the Partnership entered into a new $500 committed revolving line of credit ("2018 Credit Facility"), which replaced the 2013 Credit Facility.  In accordance with the terms of the 2018 Credit Facility, the Partnership is required to maintain a leverage ratio of no more than 35% and minimum Partnership capital, net of reserve for anticipated withdrawals and Partnership loans, of at least $1,884.  In addition, Edward Jones is required to maintain a minimum tangible net worth of at least $1,344 and minimum regulatory capital of at least 6% of aggregate debit items as calculated under the alternative method.  The 2018 Credit Facility is intended to provide short-term liquidity to the Partnership should the need arise.  As of September 28, 2018, the Partnership was in compliance with all covenants related to the 2018 Credit Facility.

There were no amounts outstanding on the 2018 Credit Facility or the uncommitted lines of credit as of September 28, 2018, and the 2013 Credit Facility or the uncommitted lines of credit as of December 31, 2017.  In addition, the Partnership did not have any draws against these lines of credit during the nine month period ended September 28, 2018.  For the purpose of testing draw procedures, the Partnership made overnight draws on the uncommitted facility in April and September 2018.

12


PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements, continued

 

NOTE 6 – PARTNERSHIP CAPITAL

The Partnership makes loans available to those general partners and, in limited circumstances, subordinated limited partners (in each case, other than members of the Executive Committee, as defined in the Partnership’s Twentieth Amended and Restated Agreement of Registered Limited Liability Limited Partnership, dated August 6, 2018 (the “Partnership Agreement”)), who require financing for some or all of their Partnership capital contributions.  In limited circumstances a general partner may withdraw from the Partnership and become a subordinated limited partner while he or she still has an outstanding Partnership loan.  It is anticipated that, of the future general and subordinated limited partnership capital contributions (in each case, other than for Executive Committee members) requiring financing, the majority will be financed through Partnership loans.  Loans made by the Partnership to such partners are generally for a period of one year but are expected to be renewed and bear interest at the interest rate defined in the loan documents.  The Partnership recognizes interest income for the interest earned related to these loans.  The outstanding amount of Partnership loans is reflected as a reduction to total Partnership capital.  As of September 28, 2018March 29, 2019 and December 31, 2017,2018, the outstanding amount of Partnership loans was $349$422 and $297,$332, respectively.  Interest income earned from these loans, which is included in interest and dividends in the Consolidated Statements of Income, was $5$6 and $13$4 for the three and nine month periods ended September 28,March 29, 2019 and March 30, 2018, respectively, and $3 and $9 for the three and nine month periods ended September 29, 2017, respectively.  As discussed in the Form 8-K filed on August 6, 2018, the Partnership Agreement includes tax allocation modifications to simplify the tax situation for the Partnership's limited partners and subordinated limited partners and authorizes a new class of partner, known as a service partner, who must also be a limited partner, among other updates.  Service partners will not receive capital interests in addition to their limited partnership interests.

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

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

Sept 28,

 

 

Sept 29,

 

 

March 29,

 

 

March 30,

 

 

2018

 

 

2017

 

 

2019

 

 

2018

 

Partnership loans outstanding at beginning of period

 

$

297

 

 

$

266

 

 

$

332

 

 

$

297

 

Partnership loans issued during the period

 

 

170

 

 

 

142

 

 

 

163

 

 

 

168

 

Repayment of Partnership loans during the period

 

 

(118

)

 

 

(110

)

 

 

(73

)

 

 

(84

)

Total Partnership loans outstanding

 

$

349

 

 

$

298

 

 

$

422

 

 

$

381

 

 

The minimum 7.5% annual payment on the face amount of limited partnership capital was $17 and $50 for the three and nine month periods ended September 28, 2018, respectively, and $17 and $51 for the three and nine month periods ended September 29, 2017, respectively.  These amounts are included as a component of interest expense in the Consolidated Statements of Income.

The Partnership filed a Registration Statement on Form S-8 with the U.S. Securities and Exchange Commission ("SEC") on January 17, 2014, to register $350 of Interests to be issued pursuant to the Partnership's 2014 Employee Limited Partnership Interest Purchase Plan (the "2014 Plan").  The Partnership previously issued approximately $298 of Interests under the 2014 Plan.  In the third quarter of 2018, the Partnership terminated the 2014 Plan and deregistered all remaining unsold Interests. 

The Partnership filed a Registration Statement on Form S-8 with the SEC on January 12, 2018, to register $450 of Interests to be issued pursuant to the Partnership's 2018 Employee Limited Partnership Interest Purchase Plan (the "2018 Plan").  The Partnership's initial offering under the 2018 Plan is expected to close early in 2019. 


1311


PART I. FINANCIAL INFORMATION

Item 1.Financial Statements, continued

The minimum 7.5% annual payment on the face amount of limited partnership capital was $24 and $17 for the three month periods ended March 29, 2019 and March 30, 2018, respectively.  These amounts are included as a component of interest expense in the Consolidated Statements of Income.

The Partnership filed a Registration Statement on Form S-8 with the U.S. Securities and Exchange Commission ("SEC") on January 12, 2018, to register $450 of Interests to be issued pursuant to the Partnership's 2018 Employee Limited Partnership Interest Purchase Plan (the "2018 Plan").  The Partnership issued approximately $380 of Interests under the 2018 Plan on January 2, 2019. The remaining $70 of Interests may be issued under the Plan at the discretion of the Managing Partner in the future.

Financial Statements, continued

NOTE 7 – NET CAPITAL REQUIREMENTS

As a result of its activities as a U.S. broker-dealer, Edward Jones is subject to the net capital provisions of Rule 15c3-1 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and capital compliance rules of the Financial Industry Regulatory Authority (“FINRA”) Rule 4110.  Under the alternative method permitted by the rules, Edward Jones must maintain minimum net capital equal to the greater of $0.25 or 2% of aggregate debit items arising from client transactions.  The net capital rules also provide that Edward Jones’ partnership capital may not be withdrawn if resulting net capital would be less than minimum requirements.  Additionally, certain withdrawals require the approval of the SEC and FINRA to the extent they exceed defined levels, even though such withdrawals would not cause net capital to be less than minimum requirements.

The Partnership’s Canada broker-dealer subsidiary is a registered broker-dealer regulated by the Investment Industry Regulatory Organization of Canada (“IIROC”).  Under the regulations prescribed by IIROC, the Partnership’s Canada broker-dealer subsidiary is required to maintain minimum levels of risk-adjusted capital, which are dependent on the nature of the Partnership’s Canada broker-dealer subsidiary’s assets and operations.

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

 

 

September 28,

 

 

December 31,

 

 

March 29,

 

 

December 31,

 

 

2018

 

 

2017

 

 

2019

 

 

2018

 

U.S.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net capital

 

$

1,061

 

 

$

1,107

 

 

$

1,372

 

 

$

1,280

 

Net capital in excess of the minimum required

 

$

1,001

 

 

$

1,049

 

 

$

1,315

 

 

$

1,221

 

Net capital as a percentage of aggregate debit

items

 

 

35.2

%

 

 

38.1

%

 

 

48.1

%

 

 

43.6

%

Net capital after anticipated capital withdrawals,

as a percentage of aggregate debit items

 

 

18.6

%

 

 

21.6

%

 

 

28.8

%

 

 

28.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Canada:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Regulatory risk-adjusted capital

 

$

40

 

 

$

50

 

 

$

35

 

 

$

40

 

Regulatory risk-adjusted capital in excess of the

minimum required to be held by IIROC

 

$

35

 

 

$

42

 

 

$

24

 

 

$

39

 

 

NetU.S. net capital, Canada risk-adjusted capital and the related capital percentages may fluctuate on a daily basis. In addition, Trust Co. was in compliance with its regulatory capital requirements as of September 28, 2018 and December 31, 2017.requirements.

NOTE 8 – CONTINGENCIES

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

The Partnership assesses its liabilities and contingencies utilizing available information.  The Partnership accrues for potential losses for thoseThese matters where it is probable that the Partnership will incur a potential loss to the extent that the amount of such potential loss can be reasonably estimated, in accordance with FASB ASC No. 450, Contingencies.  This liability represents the Partnership’s estimate of the probable loss at September 28, 2018, after considering, among other factors, the progress of each case, the Partnership's experience with other legal and regulatory matters and discussion with legal counsel, and is believed to be sufficient.  The aggregate accrued liability may be adjusted from time to time to reflect any relevant developments.include:

 


 

1412


PART I. FINANCIAL INFORMATION

Item 1.Financial Statements, continued

Financial Statements, continued

 

For such matters where an accrued liability has not been establishedMutual Fund Share Class Waivers. As previously disclosed, on October 26, 2015, Edward Jones, without admitting or denying the findings, entered into a settlement agreement with FINRA in connection with its investigation of possible violations of the federal securities laws or rules with respect to mutual fund purchases and sales charge waivers for certain retirement plan and charitable organization accounts.  On June 12, 2015, the Division of Enforcement of the SEC informed Edward Jones that it is also investigating this matter.  The SEC’s review is ongoing.  Consistent with its practice, Edward Jones is cooperating fully with the SEC with respect to its investigation.

Retirement Plan Litigation. On August 19, 2016, JFC, Edward Jones and certain other defendants were named in a putative class action lawsuit (McDonald v. Edward D. Jones & Co., L.P., et al.) filed in the U.S. District Court for the Eastern District of Missouri brought under the Employee Retirement Income Security Act of 1974, as amended, by a participant in the Edward D. Jones & Co. Profit Sharing and 401(k) Plan (the "Retirement Plan").  The lawsuit alleges that the defendants breached their fiduciary duties to Retirement Plan participants and seeks declaratory and equitable relief and monetary damages on behalf of the Retirement Plan.  The defendants filed a motion to dismiss the McDonald lawsuit which was granted in part dismissing the claim against JFC, and denied in part as to all other defendants on January 26, 2017.

On November 11, 2016, a substantially similar lawsuit (Schultz, et al. v. Edward D. Jones & Co., L.P., et al.) was filed in the same court.  The plaintiffs consolidated the two lawsuits by adding the Schultz plaintiffs to the McDonald case, and the Partnership believesSchultz action was dismissed.  The plaintiffs filed their first amended consolidated complaint on April 28, 2017. On December 13, 2018, the court entered a loss is both reasonably possiblepreliminary order approving a class action settlement agreement reached among the parties. Following a fairness hearing held on April 18, 2019, the court entered judgment on April 22, 2019 in which it granted final approval of the settlement, effected a full release of claims by the settlement class in favor of the defendants, and estimable,dismissed the consolidated lawsuit with prejudice.

Wage-and-Hour Class Action. On March 13, 2018, JFC and Edward Jones were named as defendants in a purported collective and class action lawsuit (Bland, et. al. v. Edward D. Jones & Co., L.P, et. al.) filed in the U.S. District Court for the Northern District of Illinois by four former financial advisors.  The lawsuit was brought under the Fair Labor Standards Act as well as Missouri and Illinois law and alleges that the defendants unlawfully attempted torecoup training costs from departing financial advisors and failed to pay all overtime owed to financial advisor trainees among other claims.  The lawsuit seeks declaratory and injunctive relief, compensatory and liquidated damages.  JFC and Edward Jones deny the allegations and intend to vigorously defend against the allegations in this lawsuit. On March 19, 2019, the court entered an order granting the defendants' motion to dismiss all claims, but permitting the plaintiffs to amend and re-file certain of their claims.

Securities Class Action.  On March 30, 2018, Edward Jones and its affiliated entities and individuals were named as defendants in a putative class action (Anderson, et. al. v. Edward D. Jones & Co., L.P., et. al.) filed in the U.S. District Court for matters wherethe Eastern District of California.  The lawsuit was brought under the Securities Act of 1933, as amended (the "Securities Act"), and the Exchange Act, as well as Missouri and California law and alleges that the defendants inappropriately transitioned clients from commission-based accounts to fee-based programs.  The plaintiffs have requested declaratory, equitable, and exemplary relief, and compensatory damages.  Edward Jones and its affiliated entities and individuals deny the allegations and intend to vigorously defend this lawsuit.

Discrimination Class Action.  On May 24, 2018, Edward Jones and JFC were named as defendants in a putative class action lawsuit (Bland v. Edward D. Jones & Co., L.P., et al.) filed in the U.S. District Court for the Northern District of Illinois by a former financial advisor.  An amended complaint was filed on September 24, 2018, under 42 U.S.C. § 1981, alleging that the defendants discriminated against the former financial advisor and financial advisor trainees on the basis of race.  On November 26, 2018, the plaintiffs filed a second amended complaint adding an accrued liability has been recorded but for which an exposure to loss in excessallegation of discrimination of Title VII of the amount accrued is both reasonably possibleCivil Rights Act of 1964. The lawsuit seeks equitable and estimable,injunctive relief, as well as compensatory and punitive damages.  Edward Jones and JFC deny the current estimated aggregated range of additional possible loss is $0allegations and intend to $9 as of September 28, 2018.  This range of reasonably possible loss does not necessarily represent the Partnership's maximum loss exposure as the Partnership was not able to estimate a range of reasonably possible loss for all matters.vigorously defend this lawsuit.

Further, the matters underlying any disclosed estimated range will change from time to time, and actual results may vary significantly.  While the outcome of these matters is inherently uncertain, based on information currently available, the Partnership believes that its established liabilities at September 28, 2018 are adequate and the liabilities arising from such matters will not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Partnership.  However, based on future developments and the potential unfavorable resolution of these matters, the outcome could be material to the Partnership’s future consolidated operating results for a particular period or periods.

13


PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements, continued

In addition to these matters, the Partnership provides for potential losses that may arise related to other contingencies. The Partnership assesses its liabilities and contingencies utilizing available information.  The Partnership accrues for potential losses for those matters where it is probable that the Partnership will incur a potential loss to the extent that the amount of such potential loss can be reasonably estimated, in accordance with FASB Accounting Standards Codification No. 450, Contingencies.  This liability represents the Partnership’s estimate of the probable loss at March 29, 2019, after considering, among other factors, the progress of each case, the Partnership's experience with other legal and regulatory matters and discussion with legal counsel, and is believed to be sufficient.  The aggregate accrued liability may be adjusted from time to time to reflect any relevant developments.

For such matters where an accrued liability has not been established and the Partnership believes a loss is both reasonably possible and estimable, as well as for matters where an accrued liability has been recorded but for which an exposure to loss in excess of the amount accrued is both reasonably possible and estimable, the current estimated aggregated range of additional possible loss is up to $32 as of March 29, 2019.  This range of reasonably possible loss does not necessarily represent the Partnership's maximum loss exposure as the Partnership was not able to estimate a range of reasonably possible loss for all matters.

Further, the matters underlying any disclosed estimated range will change from time to time, and actual results may vary significantly.  While the outcome of these matters is inherently uncertain, based on information currently available, the Partnership believes that its established liabilities at March 29, 2019 are adequate, and the liabilities arising from such matters will not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Partnership.  However, based on future developments and the potential unfavorable resolution of these matters, the outcome could be material to the Partnership’s future consolidated operating results for a particular period or periods.

 

NOTE 9 – SEGMENT INFORMATION

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

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

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

Sept 28,

2018

 

 

Sept 29,

2017

 

 

Sept 28,

2018

 

 

Sept 29,

2017

 

Net revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

2,131

 

 

$

1,805

 

 

$

6,141

 

 

$

5,387

 

Canada

 

 

60

 

 

 

47

 

 

 

175

 

 

 

144

 

Total net revenue

 

$

2,191

 

 

$

1,852

 

 

$

6,316

 

 

$

5,531

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-variable income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

534

 

 

$

427

 

 

$

1,487

 

 

$

1,225

 

Canada

 

 

5

 

 

 

(2

)

 

 

10

 

 

 

(1

)

Total pre-variable income

 

 

539

 

 

 

425

 

 

 

1,497

 

 

 

1,224

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable compensation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

 

261

 

 

 

208

 

 

 

734

 

 

 

577

 

Canada

 

 

5

 

 

 

6

 

 

 

17

 

 

 

14

 

Total variable compensation

 

 

266

 

 

 

214

 

 

 

751

 

 

 

591

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before allocations to partners:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

 

273

 

 

 

219

 

 

 

753

 

 

 

648

 

Canada

 

 

 

 

 

(8

)

 

 

(7

)

 

 

(15

)

Total income before allocations to partners

 

$

273

 

 

$

211

 

 

$

746

 

 

$

633

 

The Partnership derived 14% of its total revenue for both the three and nine month periods ended September 28, 2018, and 14% and 16% for the three and nine month periods ended September 29, 2017, respectively, from one mutual fund complex.  The revenue generated from this company relates to business conducted with the Partnership’s U.S. segment.  Significant reductions in this revenue due to regulatory reform or other changes to the Partnership’s relationship with this mutual fund complex could have a material impact on the Partnership’s results of operations.

1514


PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements, continued

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

 

 

Three Months Ended

 

 

 

 

March 29,

2019

 

 

March 30,

2018

 

 

Net revenue:

 

 

 

 

 

 

 

 

 

U.S.

 

$

2,135

 

 

$

1,984

 

 

Canada

 

 

55

 

 

 

58

 

 

Total net revenue

 

$

2,190

 

 

$

2,042

 

 

 

 

 

 

 

 

 

 

 

 

Pre-variable income (loss):

 

 

 

 

 

 

 

 

 

U.S.

 

$

488

 

 

$

466

 

 

Canada

 

 

(1

)

 

 

3

 

 

Total pre-variable income

 

 

487

 

 

 

469

 

 

 

 

 

 

 

 

 

 

 

 

Variable compensation:

 

 

 

 

 

 

 

 

 

U.S.

 

 

240

 

 

 

230

 

 

Canada

 

 

6

 

 

 

6

 

 

Total variable compensation

 

 

246

 

 

 

236

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before allocations to partners:

 

 

 

 

 

 

 

 

 

U.S.

 

 

248

 

 

 

236

 

 

Canada

 

 

(7

)

 

 

(3

)

 

Total income before allocations to partners

 

$

241

 

 

$

233

 

 

 

NOTE 10 – OFFSETTING ASSETS AND LIABILITIES

The Partnership does not offset financial instruments in the Consolidated Statements of Financial Condition.  However, the Partnership enters into master netting arrangements with counterparties for securities purchased under agreements to resell that are subject to net settlement in the event of default.  These agreements create a right of offset for the amounts due to and due from the same counterparty in the event of default or bankruptcy.

The following table shows the Partnership's securities purchased under agreements to resell as of:

 

 

 

Gross

amounts of

 

 

Gross

amounts

offset in the

Consolidated

Statements of

 

 

Net amounts

presented in the

Consolidated

Statements of

 

 

Gross amounts not offset

in the

Consolidated Statements of

Financial Condition

 

 

 

 

 

 

 

recognized

assets

 

 

Financial

Condition

 

 

Financial

Condition

 

 

Financial

instruments

 

 

Securities

collateral(1)

��

 

Net

amount

 

September 28, 2018

 

$

1,241

 

 

 

 

 

 

1,241

 

 

 

 

 

 

(1,241

)

 

$

 

December 31, 2017

 

$

1,164

 

 

 

 

 

 

1,164

 

 

 

 

 

 

(1,164

)

 

$

 

 

 

Gross

amounts of

 

 

Gross

amounts

offset in the

Consolidated

Statements of

 

 

Net amounts

presented in the

Consolidated

Statements of

 

 

Gross amounts not offset

in the

Consolidated Statements of

Financial Condition

 

 

 

 

 

 

 

recognized

assets

 

 

Financial

Condition

 

 

Financial

Condition

 

 

Financial

instruments

 

 

Securities

collateral(1)

 

 

Net

amount

 

March 29, 2019

 

$

1,232

 

 

 

 

 

 

1,232

��

 

 

 

 

 

(1,232

)

 

$

 

December 31, 2018

 

$

911

 

 

 

 

 

911

 

 

 

 

 

(911

)

 

$

 

 

(1)

Actual collateral was 102% of the related assets in U.S. agreements and 100% in Canada agreements for all periods presented.

15


PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements, continued

 

NOTE 11 – CASH FLOW INFORMATION

The following table shows supplemental cash flow information for:

 

Nine Months Ended

 

 

Three Months Ended

 

 

Sept 28,

2018

 

 

Sept 29,

2017

 

 

March 29,

2019

 

 

March 30,

2018

 

Cash paid for interest

 

$

92

 

 

$

63

 

 

$

40

 

 

$

31

 

Cash paid for taxes

 

$

8

 

 

$

8

 

 

$

2

 

 

$

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of general partnership interests through

partnership loans in current period

 

$

170

 

 

$

142

 

 

$

163

 

 

$

168

 

Repayment of partnership loans through distributions from

partnership capital in current period

 

$

118

 

 

$

110

 

 

$

73

 

 

$

84

 

Lease right-of-use assets obtained in exchange for lease obligations

 

$

67

 

 

$

-

 

 

The following table reconciles certain line items on the Consolidated Statements of Financial Condition to the cash, cash equivalents and restricted cash balance on the Consolidated Statements of Cash Flows as of:

 

 

September 28,

2018

 

 

December 31,

2017

 

 

September 29,

2017

 

 

December 31,

2016

 

 

March 29,

2019

 

 

March 30,

2018

 

 

Cash and cash equivalents

 

$

876

 

 

$

846

 

 

$

995

 

 

$

1,047

 

 

$

1,370

 

 

$

1,017

 

 

Cash and investments segregated under federal regulations

 

 

7,592

 

 

 

10,099

 

 

 

9,791

 

 

 

12,680

 

 

 

7,052

 

 

 

9,069

 

 

Less: Investments segregated under federal regulations

 

 

1,699

 

 

 

2,408

 

 

 

2,605

 

 

 

4,155

 

 

 

1,493

 

 

 

2,006

 

 

Total cash, cash equivalents and restricted cash

 

$

6,769

 

 

$

8,537

 

 

$

8,181

 

 

$

9,572

 

 

$

6,929

 

 

$

8,080

 

 

 

Restricted cash represents cash segregated in special reserve bank accounts for the benefit of U.S. clients pursuant to the Customer Protection Rule 15c3-3 under the Exchange Act.

 

 

 

 

16


PART I. FINANCIAL INFORMATION

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis is intended to help the reader understand the results of operations and the financial condition of the Partnership.  Management’s Discussion and Analysis should be read in conjunction with the Consolidated Financial Statements and accompanying notes included in Part I, Item 1 – Financial Statements of this Quarterly Report on Form 10-Q and Part II, Item 8 – Financial Statements and Supplementary Data of the Partnership’s Annual Report.  All amounts are presented in millions, except as otherwise noted.

Basis of Presentation

The Partnership broadly categorizes its net revenues into four categories: fee revenue, trade revenue, (revenue from clients' buy or sell transactions of securities), net interest and dividends revenue (net of interest expense) and other revenue.  In the Partnership’s Consolidated Statements of Income, fee revenue is composed of asset-based fees and account and activity fees.  Asset-based fees are generally a percentage of the total value of specific assets in client accounts.  These fees are impacted by client dollars invested in and divested from the accounts which generate asset-based fees and changes in market values of the assets.  Account and activity fees and other revenue are impacted by the number of client accounts and the variety of services provided to those accounts, among other factors.  Trade revenue is composed of commissions and principal transactions revenue. Commissions are earned from the purchase or sale of mutual fund shares and equities, as well as the purchase of insurance products,products. Principal transactions revenue primarily results from the Partnership's distribution of, and participation in, principal transactions.trading activities in municipal obligations, certificates of deposit, and over-the-counter corporate obligations. Trade revenue is impacted by the number of financial advisors, trading volume (client dollars invested), mix of the products in which clients invest, size of trades, margins earned on the transactions and market volatility.  Net interest and dividends revenue is impacted by the amount of cash and investments, receivables from and payables to clients, the variability of interest rates earned and paid on such balances, the number of Interests outstanding, and the balances of Partnership loans.

 

 

17


PART I. FINANCIAL INFORMATION

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations, continued

 

OVERVIEW

The following table sets forth the changes in major categories of the Consolidated Statements of Income as well as several related key metrics for the three and nine month periods ended September 28, 2018March 29, 2019 and September 29, 2017.March 30, 2018.  Management of the Partnership relies on this financial information and the related metrics to evaluate the Partnership’s operating performance and financial condition.

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

 

Sept 28,

 

 

Sept 29,

 

 

%

 

 

Sept 28,

 

 

Sept 29,

 

 

%

 

 

March 29,

 

 

March 30,

 

 

%

 

 

 

2018

 

 

2017

 

 

Change

 

 

2018

 

 

2017

 

 

Change

 

 

2019

 

 

2018

 

 

Change

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fee revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-based

 

$

1,581

 

 

$

1,316

 

 

 

20

%

 

$

4,535

 

 

$

3,648

 

 

 

24

%

 

$

1,559

 

 

$

1,453

 

 

 

7

%

 

Account and activity

 

 

169

 

 

 

164

 

 

 

3

%

 

 

510

 

 

 

509

 

 

 

0

%

 

 

172

 

 

 

172

 

 

 

0

%

 

Total fee revenue

 

 

1,750

 

 

 

1,480

 

 

 

18

%

 

 

5,045

 

 

 

4,157

 

 

 

21

%

 

 

1,731

 

 

 

1,625

 

 

 

7

%

 

% of net revenue

 

 

80

%

 

 

80

%

 

 

 

 

 

 

80

%

 

 

75

%

 

 

 

 

 

 

79

%

 

 

80

%

 

 

 

 

 

Trade revenue

 

 

368

 

 

 

314

 

 

 

17

%

 

 

1,072

 

 

 

1,200

 

 

 

-11

%

 

 

368

 

 

 

364

 

 

 

1

%

 

% of net revenue

 

 

17

%

 

 

17

%

 

 

 

 

 

 

17

%

 

 

22

%

 

 

 

 

 

 

17

%

 

 

18

%

 

 

 

 

 

Net interest and dividends

 

 

62

 

 

 

44

 

 

 

41

%

 

 

165

 

 

 

128

 

 

 

29

%

 

 

63

 

 

 

47

 

 

 

34

%

 

Other revenue

 

 

11

 

 

 

14

 

 

 

-21

%

 

 

34

 

 

 

46

 

 

 

-26

%

 

 

28

 

 

 

6

 

 

 

367

%

 

Net revenue

 

 

2,191

 

 

 

1,852

 

 

 

18

%

 

 

6,316

 

 

 

5,531

 

 

 

14

%

 

 

2,190

 

 

 

2,042

 

 

 

7

%

 

Operating expenses

 

 

1,918

 

 

 

1,641

 

 

 

17

%

 

 

5,570

 

 

 

4,898

 

 

 

14

%

 

 

1,949

 

 

 

1,809

 

 

 

8

%

 

Income before allocations to partners

 

$

273

 

 

$

211

 

 

 

29

%

 

$

746

 

 

$

633

 

 

 

18

%

 

$

241

 

 

$

233

 

 

 

3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Related metrics:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Client dollars invested(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade ($ billions)

 

$

29

 

 

$

18

 

 

 

61

%

 

$

80

 

 

$

66

 

 

 

21

%

 

$

30

 

 

$

25

 

 

 

20

%

 

Advisory programs ($ billions)

 

$

8

 

 

$

16

 

 

 

-50

%

 

$

36

 

 

$

59

 

 

 

-39

%

 

$

6

 

 

$

16

 

 

 

-63

%

 

Client households at period end

 

 

5.3

 

 

 

5.2

 

 

 

2

%

 

 

5.3

 

 

 

5.2

 

 

 

2

%

 

 

5.4

 

 

 

5.2

 

 

 

4

%

 

Net new assets for the period

($ billions)(2)

 

$

16

 

 

$

9

 

 

 

78

%

 

$

46

 

 

$

35

 

 

 

31

%

 

$

16

 

 

$

14

 

 

 

14

%

 

Client assets under care:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At period end ($ billions)

 

$

1,189

 

 

$

1,074

 

 

 

11

%

 

$

1,189

 

 

$

1,074

 

 

 

11

%

 

$

1,208

 

 

$

1,116

 

 

 

8

%

 

Average ($ billions)

 

$

1,171

 

 

$

1,054

 

 

 

11

%

 

$

1,149

 

 

$

1,022

 

 

 

12

%

 

$

1,163

 

 

$

1,135

 

 

 

2

%

 

Advisory programs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At period end ($ billions)

 

$

360

 

 

$

290

 

 

 

24

%

 

$

360

 

 

$

290

 

 

 

24

%

 

$

370

 

 

$

329

 

 

 

12

%

 

Average ($ billions)

 

$

354

 

 

$

279

 

 

 

27

%

 

$

340

 

 

$

252

 

 

 

35

%

 

$

357

 

 

$

327

 

 

 

9

%

 

Financial advisors (actual):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At period end

 

 

17,321

 

 

 

15,795

 

 

 

10

%

 

 

17,321

 

 

 

15,795

 

 

 

10

%

 

 

17,894

 

 

 

16,398

 

 

 

9

%

 

Average

 

 

17,085

 

 

 

15,586

 

 

 

10

%

 

 

16,660

 

 

 

15,271

 

 

 

9

%

 

 

17,763

 

 

 

16,235

 

 

 

9

%

 

Attrition % (annualized)

 

 

7.1

%

 

 

6.8

%

 

n/a

 

 

 

7.1

%

 

 

7.1

%

 

n/a

 

Attrition %(3)

 

 

9.6

%

 

 

7.3

%

 

n/a

 

 

Dow Jones Industrial Average (actual):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At period end

 

 

26,458

 

 

 

22,405

 

 

 

18

%

 

 

26,458

 

 

 

22,405

 

 

 

18

%

 

 

25,929

 

 

 

24,103

 

 

 

8

%

 

Average for period

 

 

25,595

 

 

 

21,882

 

 

 

17

%

 

 

25,089

 

 

 

21,093

 

 

 

19

%

 

 

25,118

 

 

 

25,127

 

 

 

0

%

 

S&P 500 Index (actual):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At period end

 

 

2,914

 

 

 

2,519

 

 

 

16

%

 

 

2,914

 

 

 

2,519

 

 

 

16

%

 

 

2,834

 

 

 

2,641

 

 

 

7

%

 

Average for period

 

 

2,850

 

 

 

2,466

 

 

 

16

%

 

 

2,762

 

 

 

2,397

 

 

 

15

%

 

 

2,718

 

 

 

2,733

 

 

 

-1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)(1)

Client dollars invested for trade revenue represents the principal amount of clients’ buy and sell transactions resulting in revenue and for advisory programs revenue represents the net of the inflows and outflows of client dollars into advisory programs.

(2)

Net new assets represents cash and securities inflows and outflows from new and existing clients and excludes mutual fund capital gain distributions received by U.S. clients.

 

18


PART I. FINANCIAL INFORMATION

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations, continued

 

(3)

Attrition % represents the annualized number of financial advisors that left the firm during the period compared to the total number of financial advisors as of period end.

ThirdFirst Quarter 20182019 versus ThirdFirst Quarter 20172018 Overview

The Partnership ended the thirdfirst quarter of 20182019 with 17,321a record 17,894 financial advisors and $1.2 trillion in client assets under care, increases of 10%9% and 11%8%, respectively, compared to the thirdend of the first quarter of 2017.

2018. Net new assets were $16 billion during the thirdfirst quarter of 20182019 compared to $9$14 billion in the thirdfirst quarter of 2017.2018.  Average client assets under care increased 11% for2% during the thirdfirst quarter of 20182019 compared to the same period in 2017,2018, due to increases in the market value of client assets and net new assets fromgathered during the past twelve months.  year.

Advisory programs' average assets under care increased 27%9% in the thirdfirst quarter of 20182019 to $354$357 billion due to the continued investment of client assets into advisory programs as a result of increased client adoption of the features, benefits and value proposition of advisory programs and strong market performance during the past twelve months. 

Net revenue increased 18% to $2,191 for the third quarter of 2018 compared to the same period in 2017.  Results reflected a 20% increase in asset-based fee revenue due to the continued, though lower, investment of client assets ininto advisory programs andprograms.  Market increases in 2019 have nearly offset the impact of market valuedeclines on client asset values experienced toward the end of the underlying client assets held.  The increase in revenue also reflected 17% growth in trade revenue, due in part to increased client activity after restrictions were lifted from certain transaction-based retirement accounts following the Department of Labor's ("DOL") fiduciary rule being vacated as compared to this time last year, partially offset by lower margins earned as a result of a change in product mix.  

Operating expenses increased 17% to $1,918 in the third quarter of 2018 compared to 2017, primarily due to increases in financial advisor compensation and variable compensation.  Financial advisor compensation increased largely due to an increase in revenues on which commissions are earned and an increase in the number of financial advisors.  Variable compensation increased primarily due to the increase in the number and level of profitable branches.

Overall, the increase in net revenue, offset by the increase in operating expenses, generated income before allocations to partners of $273, a 29% increase from the third quarter of 2017.

Nine Months Ended September 28, 2018 versus Nine Months Ended September 29, 2017 Overview2018.

Net new assets were $46 billion during the first nine months of 2018 comparedrevenue increased 7% to $35 billion in the first nine months of 2017.  Average client assets under care increased 12%$2,190 for the first nine monthsquarter of 20182019 compared to the same period in 2017, due to net new assets from the past twelve months and increases in the market value of client assets.  

Advisory programs' average assets under care increased 35% in the first nine months of 2018 to $340 billion due to the continued investment of client assets into advisory programs as a result of increased client adoption of the features, benefits and value proposition of advisory programs and strong market performance during the past twelve months.

Net revenue increased 14% to $6,316 for the first nine months of 2018 compared to the same period in 2017.2018.  Results reflected a 24%7% increase in asset-based fee revenue primarily due to the continued, though lower, investmentcumulative impact of client assets innet asset inflows into advisory programs in both 2018 and increases in2019, as well as the market valueincreases throughout much of the underlying client assets held.  Thisfirst quarter of 2019. The increase was partially offset by an 11% decreasein net revenue also reflected 1% growth in trade revenue primarily due to lower margins earned as a result of a change in product mix with a higher proportion ofincreased client dollars invested in fixed income products which earn lower margins, as well as lower client dollars investedthe current quarter, partially offset by a decrease in mutual funds in transaction-based accounts.  margin earned.

Operating expenses increased 14%8% to $5,570$1,949 in the first nine monthsquarter of 20182019 compared to 2017,2018, primarily due to increasesan increase in financial advisor compensation and variable compensation.benefits expense.  Financial advisor compensation increased largely due to an increase in revenues on which commissions are earned, an increase in the number of financial advisors and changesan increase in compensation programs which were effective April 2017, partially offset by certain temporary enhancementsrelated to supporting new financial advisor compensation which increased compensation expense in the first four months of 2017.    Variableadvisors and trainees.  Home office and branch compensation increased primarily due to thean increase in the number of personnel to support increased client activity, the growth of the Partnership’s financial advisor network and level of profitable branches.higher wages.

Overall, the increase in net revenue, offset by the increase in operating expenses, generated income before allocations to partners of $746, an 18%$241, a 3% increase from the first nine monthsquarter of 2017.2018.

RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED MARCH 29, 2019 AND MARCH 30, 2018

The discussion below details the significant fluctuations and drivers for the major categories of the Partnership’s Consolidated Statements of Income.

 

19


PART I. FINANCIAL INFORMATION

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations, continued

 

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 28, 2018 AND SEPTEMBER 29, 2017

The discussion below details the significant fluctuations and drivers for the major categories of the Partnership’s Consolidated Statements of Income.

Fee Revenue

Fee revenue, which consists of asset-based fees and account and activity fees, increased 18%7% to $1,750 and 21% to $5,045$1,731 in the thirdfirst quarter and first nine months of 2018, respectively,2019, compared to the same periodsperiod in 2017.2018.  A discussion of fee revenue components follows.

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

 

Sept 28,

 

 

Sept 29,

 

 

%

 

 

Sept 28,

 

 

Sept 29,

 

 

%

 

 

March 29,

 

 

March 30,

 

 

%

 

 

 

2018

 

 

2017

 

 

Change

 

 

2018

 

 

2017

 

 

Change

 

 

2019

 

 

2018

 

 

Change

 

 

Fee revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-based fee revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advisory programs fees

 

$

1,102

 

 

$

889

 

 

 

24

%

 

$

3,136

 

 

$

2,379

 

 

 

32

%

 

$

1,096

 

 

$

995

 

 

 

10

%

 

Service fees

 

 

336

 

 

 

314

 

 

 

7

%

 

 

988

 

 

 

939

 

 

 

5

%

 

 

313

 

 

 

327

 

 

 

-4

%

 

Other asset-based fees

 

 

143

 

 

 

113

 

 

 

27

%

 

 

411

 

 

 

330

 

 

 

25

%

 

 

150

 

 

 

131

 

 

 

15

%

 

Total asset-based fee revenue

 

 

1,581

 

 

 

1,316

 

 

 

20

%

 

 

4,535

 

 

 

3,648

 

 

 

24

%

 

 

1,559

 

 

 

1,453

 

 

 

7

%

 

Account and activity fee revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholder accounting services

fees

 

 

107

 

 

 

102

 

 

 

5

%

 

 

325

 

 

 

312

 

 

 

4

%

 

 

107

 

 

 

109

 

 

 

-2

%

 

Other account and activity fee

revenue

 

 

62

 

 

 

62

 

 

 

0

%

 

 

185

 

 

 

197

 

 

 

-6

%

 

 

65

 

 

 

63

 

 

 

3

%

 

Total account and activity fee

revenue

 

 

169

 

 

 

164

 

 

 

3

%

 

 

510

 

 

 

509

 

 

 

0

%

 

 

172

 

 

 

172

 

 

 

0

%

 

Total fee revenue

 

$

1,750

 

 

$

1,480

 

 

 

18

%

 

$

5,045

 

 

$

4,157

 

 

 

21

%

 

$

1,731

 

 

$

1,625

 

 

 

7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Related metrics:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average U.S. client asset values

($ billions)(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual fund assets held outside

of advisory programs

 

$

422.3

 

 

$

406.9

 

 

 

4

%

 

$

421.2

 

 

$

403.3

 

 

 

4

%

 

$

408.0

 

 

$

423.3

 

 

 

-4

%

 

Advisory programs

 

$

349.2

 

 

$

274.8

 

 

 

27

%

 

$

335.3

 

 

$

249.0

 

 

 

35

%

 

$

351.5

 

 

$

322.4

 

 

 

9

%

 

Insurance

 

$

85.9

 

 

$

81.3

 

 

 

6

%

 

$

85.4

 

 

$

79.7

 

 

 

7

%

 

$

81.9

 

 

$

85.4

 

 

 

-4

%

 

Cash solutions

 

$

27.2

 

 

$

24.1

 

 

 

13

%

 

$

26.6

 

 

$

24.2

 

 

 

10

%

 

$

32.9

 

 

$

26.1

 

 

 

26

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholder accounting holdings

serviced

 

 

28.0

 

 

26.7

 

 

 

5

%

 

27.6

 

 

26.5

 

 

 

4

%

 

 

28.5

 

 

27.3

 

 

 

4

%

 

 

(1)

Assets on which the Partnership earns asset-based fee revenue. The U.S. portion of consolidated asset-based fee revenue was 98% for the periods presented.

Asset-basedOverall asset-based fee revenue increased 20%7% to $1,581 and 24% to $4,535$1,559 in the thirdfirst quarter and first nine months of 2018, respectively,2019 compared to the same periodsperiod in 2017,2018, primarily due to a 10% increase in revenue from advisory programs fees, slightly offset by a decrease in service fees earned on mutual fund assets in non-advisory accounts.  

Growth in advisory programs fees was due to the continued, though lower, investment of client assets in advisory programs. Market increases in 2019 have nearly offset the impact of market declines on client asset values experienced toward the end of 2018.  The increase in other asset-based fee revenue in 2019 reflected growth in fund adviser fees due to an increase in advisory programs fees.  Growthassets held in advisory programsthe mutual funds comprising the BB Trust.  However, this fund adviser fee revenue was completely offset by fees reflectedpaid to the cumulative impact of strong levels of net inflows over the past twelve months into advisory programs, as a result of increased client adoptionsub-advisers of the features, benefits and value proposition of advisory programs, and increasesfunds comprising the BB Trust.

The decrease in the underlying clients' assets heldservice fees earned on non-advisory accounts was due to the strong market performance during the past twelve months.a decrease in mutual fund assets on which those service fees are primarily earned.

 

 

 

20


PART I. FINANCIAL INFORMATION

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations, continued

 

Account and activity fee revenue increased 3% to $169 and is up slightly to $510 in the third quarter and first nine months of 2018, respectively, compared to the same periods in 2017, primarily resulting from an increase in shareholder accounting services fees due to an increase in holdings serviced.  The increased revenue in the first nine months of 2018 was mostly offset by a decrease in other account and activity fee revenue related to retirement fees due to the increased client adoption of advisory programs.

Trade Revenue

Trade revenue, which consists of commissions and principal transactions, increased 17%1% to $368 in the thirdfirst quarter of 2018 and decreased 11% to $1,072 in the first nine months of 2018,2019 compared to the same periodsperiod in 2017.2018.  A discussion of trade revenue components follows.  

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

 

Sept 28,

 

 

Sept 29,

 

 

%

 

 

Sept 28,

 

 

Sept 29,

 

 

%

 

 

March 29,

 

 

March 30,

 

 

%

 

 

 

2018

 

 

2017

 

 

Change

 

 

2018

 

 

2017

 

 

Change

 

 

2019

 

 

2018

 

 

Change

 

 

Trade revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commissions revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds

 

$

139

 

 

$

118

 

 

 

18

%

 

$

400

 

 

$

542

 

 

 

-26

%

 

$

145

 

 

$

136

 

 

 

7

%

 

Equities

 

 

120

 

 

 

105

 

 

 

14

%

 

 

363

 

 

 

362

 

 

 

0

%

 

 

118

 

 

 

132

 

 

 

-11

%

 

Insurance products and other

 

 

77

 

 

 

60

 

 

 

28

%

 

 

207

 

 

 

185

 

 

 

12

%

 

 

70

 

 

 

64

 

 

 

9

%

 

Total commissions revenue

 

$

336

 

 

$

283

 

 

 

19

%

 

$

970

 

 

$

1,089

 

 

 

-11

%

 

$

333

 

 

$

332

 

 

 

0

%

 

Principal transactions

 

 

32

 

 

 

31

 

 

 

3

%

 

 

102

 

 

 

111

 

 

 

-8

%

 

 

35

 

 

 

32

 

 

 

9

%

 

Total trade revenue

 

$

368

 

 

$

314

 

 

 

17

%

 

$

1,072

 

 

$

1,200

 

 

 

-11

%

 

$

368

 

 

$

364

 

 

 

1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Related metrics:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Client dollars invested ($ billions)

 

$

29

 

 

$

18

 

 

 

61

%

 

$

80

 

 

$

66

 

 

 

21

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds

 

$

7

 

 

$

7

 

 

 

0

%

 

Equities

 

 

7

 

 

 

8

 

 

 

-13

%

 

Insurance products and other

 

 

2

 

 

 

1

 

 

 

100

%

 

Principal transactions

 

 

14

 

 

 

9

 

 

 

56

%

 

Total client dollars invested ($ billions)

 

$

30

 

 

$

25

 

 

 

20

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Margin per $1,000 invested

 

$

12.9

 

 

$

17.1

 

 

 

-25

%

 

$

13.4

 

 

$

18.1

 

 

 

-26

%

 

$

12.2

 

 

$

14.5

 

 

 

-16

%

 

U.S. business days

 

 

63

 

 

 

63

 

 

 

0

%

 

 

188

 

 

 

188

 

 

 

0

%

 

 

61

 

 

 

61

 

 

 

0

%

 

 

TradeThe increase in trade revenue increased 17% to $368 in the third quarter of 2018 compared to the same period in 2017for 2019 was primarily due to increasedan increase in client dollars invested, reflecting increases in all products, due in part to increasedthe number of client activity after restrictions were lifted from certain transaction-based retirement accounts following the DOL fiduciary rule being vacated as compared to this time last year,transactions and financial advisors, partially offset by lower marginsa decrease in margin earned. The decrease in margin earned as a result of a change in product mix.  Trade revenue decreased 11% to $1,072 in first nine months of 2018 compared tois the same period in 2017 primarily due to lower margins earned as a result of the change in product mix with a higher proportion of client dollars invested in certain fixed income products withinthat are traded in a principal transactions revenue,transaction capacity, which earn lower margins, as well as lower client dollars invested in transaction-based mutual funds.  Further, the margin earned for mutual funds decreased as additional breakpoints were earned by clients due to larger average mutual fund holdings, which results in lower commissions.  In addition, due to a reduction in the number of unit investment trust products offered by the Partnership during 2017, principal transactions revenue was negatively impacted in 2018.margins.  

Net Interest and Dividends

 

Net interest and dividends revenue increased 41%34% to $62 and 29% to $165 in$63 during the thirdfirst quarter and first nine months of 2018, respectively,2019 compared to the same periodsperiod in 2017.  Results reflected2018.  Increases in the federal funds rate resulted in an increase in short-term investing interest income as a result of anrevenue.  This increase in the weighted-average rate earned, due to increases in the federal funds rate, partiallywas slightly offset by an increase in limited partnership capital interest expense paid on client credit balances, due tofor the increase in rates.


three month period ended March 29, 2019.

 

21


PART I. FINANCIAL INFORMATION

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations, continued

 

Operating Expenses

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

 

Sept 28,

 

 

Sept 29,

 

 

%

 

 

Sept 28,

 

 

Sept 29,

 

 

%

 

 

March 29,

 

 

March 30,

 

 

%

 

 

 

2018

 

 

2017

 

 

Change

 

 

2018

 

 

2017

 

 

Change

 

 

2019

 

 

2018

 

 

Change

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial advisor

 

$

912

 

 

$

762

 

 

 

20

%

 

$

2,655

 

 

$

2,331

 

 

 

14

%

 

$

917

 

 

$

866

 

 

 

6

%

 

Home office and branch

 

 

358

 

 

 

336

 

 

 

7

%

 

 

1,064

 

 

 

996

 

 

 

7

%

 

 

373

 

 

 

352

 

 

 

6

%

 

Variable compensation

 

 

266

 

 

 

214

 

 

 

24

%

 

 

751

 

 

 

591

 

 

 

27

%

 

 

246

 

 

 

236

 

 

 

4

%

 

Total compensation and benefits

 

 

1,536

 

 

 

1,312

 

 

 

17

%

 

 

4,470

 

 

 

3,918

 

 

 

14

%

 

 

1,536

 

 

 

1,454

 

 

 

6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Occupancy and equipment

 

 

114

 

 

 

105

 

 

 

9

%

 

 

333

 

 

 

310

 

 

 

7

%

 

 

119

 

 

 

109

 

 

 

9

%

 

Communications and data processing

 

 

85

 

 

 

80

 

 

 

6

%

 

 

250

 

 

 

242

 

 

 

3

%

 

 

86

 

 

 

80

 

 

 

8

%

 

Fund sub-adviser fees

 

 

35

 

 

 

26

 

 

 

35

%

 

 

96

 

 

 

70

 

 

 

37

%

 

 

36

 

 

 

30

 

 

 

20

%

 

Advertising

 

 

19

 

 

 

17

 

 

 

12

%

 

 

66

 

 

 

61

 

 

 

8

%

 

 

24

 

 

 

25

 

 

 

-4

%

 

Professional and consulting fees

 

 

21

 

 

 

17

 

 

 

24

%

 

 

57

 

 

 

52

 

 

 

10

%

 

 

23

 

 

 

18

 

 

 

28

%

 

Postage and shipping

 

 

14

 

 

 

16

 

 

 

-13

%

 

 

43

 

 

 

49

 

 

 

-12

%

 

 

15

 

 

 

14

 

 

 

7

%

 

Other operating expenses

 

 

94

 

 

 

68

 

 

 

38

%

 

 

255

 

 

 

196

 

 

 

30

%

 

 

110

 

 

 

79

 

 

 

39

%

 

Total operating expenses

 

$

1,918

 

 

$

1,641

 

 

 

17

%

 

$

5,570

 

 

$

4,898

 

 

 

14

%

 

$

1,949

 

 

$

1,809

 

 

 

8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Related metrics (actual):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of branches:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At period end

 

 

14,059

 

 

 

13,314

 

 

 

6

%

 

 

14,059

 

 

 

13,314

 

 

 

6

%

 

 

14,419

 

 

 

13,640

 

 

 

6

%

 

Average

 

 

13,933

 

 

 

13,224

 

 

 

5

%

 

 

13,734

 

 

 

13,104

 

 

 

5

%

 

 

14,289

 

 

 

13,542

 

 

 

6

%

 

Financial advisors:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At period end

 

 

17,321

 

 

 

15,795

 

 

 

10

%

 

 

17,321

 

 

 

15,795

 

 

 

10

%

 

 

17,894

 

 

 

16,398

 

 

 

9

%

 

Average

 

 

17,085

 

 

 

15,586

 

 

 

10

%

 

 

16,660

 

 

 

15,271

 

 

 

9

%

 

 

17,763

 

 

 

16,235

 

 

 

9

%

 

Branch office administrators(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At period end

 

 

16,005

 

 

 

15,259

 

 

 

5

%

 

 

16,005

 

 

 

15,259

 

 

 

5

%

 

 

16,441

 

 

 

15,619

 

 

 

5

%

 

Average

 

 

15,812

 

 

 

15,292

 

 

 

3

%

 

 

15,648

 

 

 

15,151

 

 

 

3

%

 

 

16,281

 

 

 

15,477

 

 

 

5

%

 

Home office associates(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At period end

 

 

6,695

 

 

 

6,478

 

 

 

3

%

 

 

6,695

 

 

 

6,478

 

 

 

3

%

 

 

6,876

 

 

 

6,689

 

 

 

3

%

 

Average

 

 

6,808

 

 

 

6,539

 

 

 

4

%

 

 

6,706

 

 

 

6,483

 

 

 

3

%

 

 

6,872

 

 

 

6,625

 

 

 

4

%

 

Home office associates(1) per 100

financial advisors (average)

 

 

39.8

 

 

 

42.0

 

 

 

-5

%

 

 

40.3

 

 

 

42.5

 

 

 

-5

%

 

 

38.7

 

 

 

40.8

 

 

 

-5

%

 

Branch office administrators(1) per 100

financial advisors (average)

 

 

92.5

 

 

 

98.1

 

 

 

-6

%

 

 

93.9

 

 

 

99.2

 

 

 

-5

%

 

 

91.7

 

 

 

95.3

 

 

 

-4

%

 

Average operating expenses per

financial advisor(2)

 

$

41,264

 

 

$

40,998

 

 

 

1

%

 

$

124,130

 

 

$

124,812

 

 

 

-1

%

 

$

42,223

 

 

$

41,700

 

 

 

1

%

 

 

(1)

Counted on a full-time equivalent basis.

(2)

Operating expenses used in calculation represent total operating expenses less financial advisor compensation, variable compensation and fund sub-adviser fees.


 

22


PART I. FINANCIAL INFORMATION

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations, continued

 

For the thirdfirst quarter of 2019, operating expenses increased 8% to $1,949 compared to the first quarter of 2018, operating expenses increased 17% to $1,918 compared to the third quarter of 2017, primarily due to a $224an $82 increase in compensation and benefits expense (described below).     and a $31 increase in other operating expenses. Other operating expenses increased due to various items, including expenses related to travel, recruiting, legal and branch business expenses.

Financial advisor compensation and benefits expense increased 20%6% in the thirdfirst quarter of 20182019 due to an increase in revenues on which commissions are earned, and an increasegrowth in the number of financial advisors.  advisors and an increase in compensation related to supporting new financial advisors and trainees.

Home office and branch compensation and benefits expense increased 7%6% in the thirdfirst quarter of 20182019 primarily due to an increase in the number of personnel to support increased client activity and the growth of the Partnership’s financial advisor network and higher wages.  The average number of the Partnership’s home office associates and branch office administrators ("BOAs") increased 4% and 3%5%, respectively.

The Partnership uses the ratios of both the number of home office associates and the number of BOAs per 100 financial advisors, as well as the average operating expense per financial advisor, as key metrics in managing its costs.  In the third quarter of 2018, the average number of home office associates and BOAs per 100 financial advisors decreased 5% and 6%, respectively.  The Partnership’s longer term strategy is to continue to grow its financial advisor network at a faster pace than its home office and branch support staff.  The average operating expenses per financial advisor increased 1% primarily due to an increase in home office and branch compensation and benefits expense, partially offset by the impact of spreading costs over more financial advisors.  The Partnership expects to slow the growth in the number of personnel, thereby further reducing the average operating expense per financial advisor over the next few years.    

Variable compensation expands and contracts in relation to the Partnership’s related profitability and margin earned.  A significant portion of the Partnership’s profits is allocated to variable compensation and paid to associates in the form of bonuses and profit sharing.  Variable compensation increased 24%4% in the thirdfirst quarter of 20182019 to $266$246 due to an increase in the Partnership's profitability, including an increase in the number and level of profitable branches.

For the first nine months of 2018, operating expenses increased 14% to $5,570 compared to the first nine months of 2017, primarily due to a $552branches and an overall increase in compensation and benefits expense (described below).    branch profitability.

Financial advisor compensation and benefits expense increased 14% inThe Partnership uses the first nine monthsratios of 2018 due to an increase in revenues on which commissions are earned, an increase inboth the number of financial advisors, and changes in compensation programs which were effective April 2017.  This increase was partially offset by certain temporary enhancements to financial advisor compensation which increased compensation expense in the first four months of 2017.  These enhancements were implemented by the Partnership to support financial advisors' efforts through the implementation of the DOL fiduciary rule and ended in April 2017.

Home office and branch compensation and benefits expense increased 7% in the first nine months of 2018 primarily due to an increase in the number of personnel to support increased client activity and the growth of the Partnership’s financial advisor network and higher wages.  The average number of the Partnership’s home office associates and the number of BOAs both increased 3%.

per 100 financial advisors, as well as average operating expenses per financial advisor (excluding financial advisor compensation, variable compensation and fund sub-adviser fees), as key metrics in managing its costs.  In the first nine monthsquarter of 2018,2019, the average number of home office associates and BOAs per 100 financial advisors both decreased 5%. and 4%, respectively.  The average operating expenses per financial advisor decreasedincreased 1% primarily due to the impactincrease in the number of spreading costs over more financial advisors, partially offset by an increasepersonnel as well as the increases in home office and branch compensation and benefits expense.  Variable compensation increased 27% inand other operating expenses described above, partially offset by the first nine monthsimpact of 2018spreading those expenses over more financial advisors.  The Partnership’s longer term strategy is to $751 duecontinue to angrow its financial advisor network at a faster pace than its home office staff.  The Partnership expects branch expenses to increase in the Partnership's profitability, including an increase in the numbernear term as new financial advisors obtain branch offices and level of profitable branches.incur additional expenses.

Segment Information

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

 

23


PART I. FINANCIAL INFORMATION

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations, continued

 

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

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

 

Sept 28,

 

 

Sept 29,

 

 

%

 

 

Sept 28,

 

 

Sept 29,

 

 

%

 

 

March 29,

 

 

March 30,

 

 

%

 

 

 

2018

 

 

2017

 

 

Change

 

 

2018

 

 

2017

 

 

Change

 

 

2019

 

 

2018

 

 

Change

 

 

Net revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

2,131

 

 

$

1,805

 

 

 

18

%

 

$

6,141

 

 

$

5,387

 

 

 

14

%

 

$

2,135

 

 

$

1,984

 

 

 

8

%

 

Canada

 

 

60

 

 

 

47

 

 

 

28

%

 

 

175

 

 

 

144

 

 

 

22

%

 

 

55

 

 

 

58

 

 

 

-5

%

 

Total net revenue

 

 

2,191

 

 

 

1,852

 

 

 

18

%

 

 

6,316

 

 

 

5,531

 

 

 

14

%

 

 

2,190

 

 

 

2,042

 

 

 

7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses (excluding variable

compensation):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

 

1,597

 

 

 

1,378

 

 

 

16

%

 

 

4,654

 

 

 

4,162

 

 

 

12

%

 

 

1,647

 

 

 

1,518

 

 

 

8

%

 

Canada

 

 

55

 

 

 

49

 

 

 

12

%

 

 

165

 

 

 

145

 

 

 

14

%

 

 

56

 

 

 

55

 

 

 

2

%

 

Total operating expenses

 

 

1,652

 

 

 

1,427

 

 

 

16

%

 

 

4,819

 

 

 

4,307

 

 

 

12

%

 

 

1,703

 

 

 

1,573

 

 

 

8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-variable income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-variable income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

 

534

 

 

 

427

 

 

 

25

%

 

 

1,487

 

 

 

1,225

 

 

 

21

%

 

 

488

 

 

 

466

 

 

 

5

%

 

Canada

 

 

5

 

 

 

(2

)

 

 

350

%

 

 

10

 

 

 

(1

)

 

 

1100

%

 

 

(1

)

 

 

3

 

 

 

-133

%

 

Total pre-variable income

 

 

539

 

 

 

425

 

 

 

27

%

 

 

1,497

 

 

 

1,224

 

 

 

22

%

 

 

487

 

 

 

469

 

 

 

4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable compensation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

 

261

 

 

 

208

 

 

 

25

%

 

 

734

 

 

 

577

 

 

 

27

%

 

 

240

 

 

 

230

 

 

 

4

%

 

Canada

 

 

5

 

 

 

6

 

 

 

-17

%

 

 

17

 

 

 

14

 

 

 

21

%

 

 

6

 

 

 

6

 

 

 

0

%

 

Total variable compensation

 

 

266

 

 

 

214

 

 

 

24

%

 

 

751

 

 

 

591

 

 

 

27

%

 

 

246

 

 

 

236

 

 

 

4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before allocations to partners:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

 

273

 

 

 

219

 

 

 

25

%

 

 

753

 

 

 

648

 

 

 

16

%

 

 

248

 

 

 

236

 

 

 

5

%

 

Canada

 

 

 

 

 

(8

)

 

 

100

%

 

 

(7

)

 

 

(15

)

 

 

53

%

 

 

(7

)

 

 

(3

)

 

 

-133

%

 

Total income before allocations to

partners

 

$

273

 

 

$

211

 

 

 

29

%

 

$

746

 

 

$

633

 

 

 

18

%

 

$

241

 

 

$

233

 

 

 

3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Client assets under care ($ billions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At period end

 

$

1,163.4

 

 

$

1,050.8

 

 

 

11

%

 

$

1,163.4

 

 

$

1,050.8

 

 

 

11

%

 

$

1,182.9

 

 

$

1,091.9

 

 

 

8

%

 

Average

 

$

1,146.0

 

 

$

1,031.0

 

 

 

11

%

 

$

1,124.6

 

 

$

1,000.1

 

 

 

12

%

 

$

1,138.8

 

 

$

1,110.8

 

 

 

3

%

 

Canada

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At period end

 

$

25.2

 

 

$

23.5

 

 

 

7

%

 

$

25.2

 

 

$

23.5

 

 

 

7

%

 

$

25.2

 

 

$

23.8

 

 

 

6

%

 

Average

 

$

24.8

 

 

$

22.9

 

 

 

8

%

 

$

24.5

 

 

$

21.7

 

 

 

13

%

 

$

24.3

 

 

$

24.4

 

 

 

0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net new assets for the period ($ billions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

15.4

 

 

$

8.3

 

 

 

86

%

 

$

44.6

 

 

$

33.6

 

 

 

33

%

 

$

15.2

 

 

$

13.5

 

 

 

13

%

 

Canada

 

$

0.4

 

 

$

0.4

 

 

 

0

%

 

$

1.2

 

 

$

1.3

 

 

 

-8

%

 

$

0.4

 

 

$

0.6

 

 

 

-33

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial advisors (actual):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At period end

 

 

16,498

 

 

 

15,079

 

 

 

9

%

 

 

16,498

 

 

 

15,079

 

 

 

9

%

 

 

17,059

 

 

 

15,627

 

 

 

9

%

 

Average

 

 

16,281

 

 

 

14,885

 

 

 

9

%

 

 

15,883

 

 

 

14,591

 

 

 

9

%

 

 

16,939

 

 

 

15,483

 

 

 

9

%

 

Canada

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At period end

 

 

823

 

 

 

716

 

 

 

15

%

 

 

823

 

 

 

716

 

 

 

15

%

 

 

835

 

 

 

771

 

 

 

8

%

 

Average

 

 

804

 

 

 

701

 

 

 

15

%

 

 

777

 

 

 

680

 

 

 

14

%

 

 

824

 

 

 

752

 

 

 

10

%

 

 

 

24


PART I. FINANCIAL INFORMATION

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations, continued

 

U.S.

For the thirdfirst quarter of 2018,2019, net revenue increased 18%8% to $2,131 compared to the third quarter of 2017.  The increase in net revenue was$2,135, primarily due to both an increase in asset-based fee revenue and an increase in trade revenue. Asset-based fee revenue increased 20%7% to $1,543,$1,523, led by an increase in advisory programs fees.  Growth in advisory programs fees reflectedlargely due to the cumulative impact of strong levels of net asset inflows over the past twelve months into advisory programs, as a result of increased client adoptionwell as the market increases throughout much of the features, benefits and value proposition of advisory programs and increases in the market value of the underlying client assets held.  Trade revenue increased 18% to $355 due in part to increase client activity after restrictions were lifted from certain transaction-based retirement accounts following the DOL fiduciary rule being vacated as compared to this time last year, partially offset by lower margins earned as a result of a change in product mix.period.  

Operating expenses (excluding variable compensation) increased 16%8% to $1,597$1,647 in the thirdfirst quarter of 20182019 primarily due to increasesan increase in compensation and benefits expense for financial advisors and home office and branch associates.  Financial advisor compensation and benefits expense increased largelyprimarily due to higheran increase in revenues on which commissions and an increaseare earned, growth in the number of financial advisors.advisors and an increase in compensation related to supporting new financial advisors and trainees. Home office and branch compensation and benefits expense increased primarily due to an increase in the number of personnel to support increased client activity, the growth of the Partnership’s financial advisor network and higher wages.

Canada

For the first nine monthsquarter of 2018,2019, net revenue increased 14%decreased 5% to $6,141$55 compared to the first nine months of 2017.same period in 2018.  The increasedecrease in net revenue was primarily due to an increase in asset-based fee revenue, partially offset by a decrease in trade revenue.  Asset-based fee revenue increased 24% to $4,426, led by an increase in advisory programs fees.  Growth in advisory programs fees reflected the cumulative impact of strong levels of net inflows over the past twelve months into advisory programs as a result of increased client adoption of the features, benefits and value proposition of advisory programs and increases in the market value of the underlying client assets held.  Trade revenue decreased 11% to $1,031 primarily due to lower margins earned as a result of areflecting the change in product mix with a higher proportion of client dollars invested in fixed income products which earn lower margins, as well as lower client dollars invested in mutual funds in transaction-based accounts.margins.

Operating expenses (excluding variable compensation) increased 12%2% to $4,654 in the first nine months of 2018 primarily due to increases in compensation and benefits expense for financial advisors and home office and branch associates.  Financial advisor compensation and benefits expense increased largely due to higher commissions, an increase in the number of financial advisors, and changes in compensation programs which were effective April 2017, partially offset by certain temporary enhancements to financial advisor compensation which increased compensation expense in the first four months of 2017.  Home office and branch compensation and benefits expense increased primarily due to an increase in the number of personnel to support the growth of the Partnership’s financial advisor network and higher wages.  

Canada

For the third quarter and first nine months of 2018, net revenue increased 28% to $60 and 22% to $175, respectively, compared to the same periods in 2017.  The increase in net revenue was primarily due to an increase in asset-based fee revenue due to increased investment of client assets into advisory programs and higher service fees.  

Operating expenses (excluding variable compensation) increased 12% to $55 and 14% to $165, respectively, in the third quarter and first nine months of 2018 compared to the same periods in 2017$56 due to an increase in financial advisor compensation attributable to an increase in revenues on which financial advisor commissions are earned, growth in the number of financial advisors and an increase in compensation related to supporting new financial advisors and trainees.

The Partnership remains focused on achieving profitability in Canada.  This includes several long-term areas of focus which include a plan to grow the number of financial advisors, client assets under care and the depth of financial solutions provided to clients.


25


PART I. FINANCIAL INFORMATION

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations, continued

LEGISLATIVE AND REGULATORY REFORM

As discussed more fully in Part I, Item 1A – Risk Factors – Risk Related to the Partnership's Business – Legislative and Regulatory Initiatives of the Partnership’s Annual Report, which is supplemented by Part II, Item 1A – Risk Factors – Legislative and Regulatory Initiatives of this Quarterly Report on Form 10-Q and the Quarterly Reports on Form 10-Q for the periodsperiod ended March 30, 2018 and June 29, 2018,2019, the Partnership continues to monitor several proposed, potential and recently enacted federal and state legislation, rules and regulations ("Legislative and Regulatory Initiatives"), including the possibility of a universal fiduciary standard of care applicable to both broker-dealers and investment advisers under the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"), the DOL fiduciary rule and the potential for new legislation and regulation.

There is a high degree of uncertainty surrounding Legislative and Regulatory Initiatives.  The currentCurrent Legislative and Regulatory Initiatives have resulted in an increasingly complex environment in which the Partnership conducts its business.  As such, the Partnership cannot reliably predict when or if any of the proposed or potential Legislative and Regulatory Initiatives will be enacted, when or if any enacted Legislative and Regulatory Initiatives will be implemented, whether there will be any changes to enacted or proposed Legislative and Regulatory Initiatives or the impact that any Legislative and Regulatory Initiatives will have on the Partnership.

ThirdFirst Quarter 20182019 Update

DOL Fiduciary Rule.  The DOL issued its final rule defining the term "fiduciary" and exemptions related thereto in the context of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and retirement accounts in April 2016.  On June 21, 2018, the Fifth Circuit Court of Appeals issued an order vacating the DOL fiduciary rule and related exemptions.  As a result of the court order, the Partnership implemented changes to systems, processes and offerings including lifting restrictions from certain transaction-based retirement accounts impacting the Partnership's financial condition, results of operations and liquidity.

SEC Standards of Conduct for Investment Professionals Rulemaking Package (the "Proposal").  TheOn April 18, 2018, the SEC released its Proposal to address the standard of care for broker-dealers and investment advisers on April 18, 2018.as required by the Dodd-Frank Act. The Proposal sets forth two distinct standards of care: a Regulation Best Interest applicable to broker-dealers and brokerage clients, and the Proposed Standard of Conduct for Investment Advisers clarifying a "fiduciary" standard applicable to investment advisers and advisory clients. The Proposal also includes a new disclosure, the Client Relationship Summary. The Partnership provided feedback to the SEC's Proposal and continues to dedicate significant resources to interpret and implement the Proposal, including evaluating how the Proposal may impact the changes the Partnership made in response to the DOL fiduciary rule.Proposal. The final

25


PART I. FINANCIAL INFORMATION

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations, continued

enactment and implementation of the Proposal may have a materially adverse effect on the Partnership's financial condition, results of operations and liquidity.

Other Standard of Care Initiatives.   In addition, state legislators and other regulators and various licensing entities are proposing, or have adopted, laws and rules to articulate their required standard of care.  The Partnership is dedicating significant resources to interpret and implementaddress these laws and rules as well.  The Partnership cannot reliably predict the ultimate form or impact of such rules and laws, but their enactment and implementation may have an adverse effect on the Partnership's financial condition, results of operations, and liquidity.

26


PART I. FINANCIAL INFORMATION

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations, continued

MUTUAL FUNDS AND INSURANCE PRODUCTS

The Partnership estimates approximately 70% of its total revenue was derived from sales and services related to mutual fund and insurance products for both the three and nine month periods ended September 28, 2018March 29, 2019 and 75% for both the three and nine month periods ended September 29, 2017.March 30, 2018. In addition, the Partnership derived 14% and 15% of its total revenue from one mutual fund complex 14% of its total revenue for both the three month and nine month periods ended September 28,March 29, 2019 and March 30, 2018, and 14% and 16% for the three and nine month periods ended September 29, 2017, respectively. The revenue generated from this company relates to business conducted with the Partnership’s U.S. segment.

Significant reductions in these revenues due to regulatory reform or other changes to the Partnership’s relationship with mutual fund or insurance companies could have a material adverse effect on the Partnership’s results of operations, financial condition, and liquidity.

LIQUIDITY AND CAPITAL RESOURCES

The Partnership requires liquidity to cover its operating expenses, net capital requirements, capital expenditures, distributions to partners and redemptions of Partnership interests.  The principal sources for meeting the Partnership’s liquidity requirements include existing liquidity and capital resources of the Partnership, discussed further below, and funds generated from operations.  The Partnership believes that the liquidity provided by these sources will be sufficient to meet its capital and liquidity requirements for the next twelve months.  Depending on conditions in the capital markets and other factors, the Partnership will, from time to time, consider the issuance of debt and additional Partnership capital, the proceeds of which could be used to meet growth needs or for other purposes.

Partnership Capital

The Partnership’s growth in capital has historically been the result of the sale of Interests to its associates and existing limited partners, the sale of subordinated limited partnership interests to its current or retiring general partners, and retention of general partner earnings.

The Partnership filed a Registration Statement on Form S-8 with the SEC on January 17, 2014, to register $350 of Interests to be issued pursuant to the 2014 Plan.  The Partnership previously issued approximately $298 of Interests under the 2014 Plan.  In the third quarter of 2018, the Partnership terminated the 2014 Plan and deregistered all remaining unsold Interests.  Proceeds from the Interests issued under the 2014 Plan were used for working capital and general firm purposes and to ensure there is adequate general liquidity of the Partnership for future needs, including growing the number of financial advisors.  The Partnership filed a Registration Statement on Form S-8 with the SEC on January 12, 2018, to register $450 of Interests to be issued pursuant to the 2018 Plan.  The Partnership's initial offeringPartnership issued approximately $380 of Interests under the 2018 Plan is expected to close earlyon January 2, 2019. The remaining $70 of Interests may be issued under the 2018 Plan at the discretion of the Managing Partner in 2019.the future.  Proceeds from the offering under the 2018 Plan are expected to be used for working capital and general firm purposes and to ensure there is adequate general liquidity of the Partnership for future needs.  The issuance of Interests reduces the Partnership’s net interest income and profitability.

The Partnership’s capital subject to mandatory redemption at September 28, 2018,March 29, 2019, net of reserve for anticipated withdrawals, was $2,579,$2,963, an increase of $74$456 from December 31, 2017.2018.  This increase in Partnership capital subject to mandatory redemption was primarily due to the retention of general partner earnings ($77)24) and additional capital contributions related to limited partner, subordinated limited partner and general partner interests ($5, $53380, $51 and $172,$162, respectively), partially offset by the net increase in Partnership loans outstanding ($52)90) and redemption of limited partner, subordinated limited partner and general partner interests ($8, $103, $31 and $163,$37, respectively).  During both the three and nine month periods ended September 28,March 29, 2019 and March 30, 2018, and September 29, 2017, the Partnership retained 13.8% of income allocated to general partners.

 

 

 

 

 

2726


PART I. FINANCIAL INFORMATION

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations, continued

 

Under the terms of the Partnership Agreement, a partner’s capital is required to be redeemed by the Partnership in the event of the partner’s death or withdrawal from the Partnership, subject to compliance with ongoing regulatory capital requirements.  In the event of a partner’s death, the Partnership generally redeems the partner’s capital within six months.  The Partnership has restrictions in place which govern the withdrawal of capital.  Under the terms of the Partnership Agreement, limited partners requesting withdrawal from the Partnership are to be repaid their capital in three equal annual installments beginning no earlier than 90 days after their withdrawal notice is received by the Managing Partner (as defined in the Partnership Agreement).Partner.  The capital of general partners requesting withdrawal from the Partnership is converted to subordinated limited partnership capital or, at the discretion of the Managing Partner, redeemed by the Partnership.  Subordinated limited partners requesting withdrawal are repaid their capital in six equal annual installments beginning no earlier than 90 days after their request for withdrawal of contributed capital is received by the Managing Partner.  The Partnership’s Managing Partner has discretion to waive or modify these withdrawal restrictions and to accelerate the return of capital.

The Partnership makes loans available to those general partners and, in limited circumstances, subordinated limited partners (in each case, other than members of the Executive Committee) who require financing for some or all of their Partnership capital contributions.  In limited circumstances a general partner may withdraw from the Partnership and become a subordinated limited partner while he or she still has an outstanding Partnership loan.  It is anticipated that, of the future general and subordinated limited partnership capital contributions (in each case, other than for Executive Committee members) requiring financing, the majority will be financed through Partnership loans.  Loans made by the Partnership to such partners are generally for a period of one year but are expected to be renewed and bear interest at the interest rate defined in the loan documents.  The Partnership recognizes interest income for the interest earned related to these loans.  Partners borrowing from the Partnership will be required to repay such loans by applying the earnings received from the Partnership to such loans, net of amounts retained by the Partnership, amounts distributed for income taxes and 5% of earnings distributed to the partner.  The Partnership has full recourse against any partner that defaults on loan obligations to the Partnership.  The Partnership does not anticipate that Partnershippartner loans will have an adverse impact on the Partnership’s short-term liquidity or capital resources.

Any partner may also choose to have individual banking arrangements for their Partnership capital contributions.  Any bank financing of capital contributions is in the form of unsecured bank loan agreements and is between the individual and the bank.  The Partnership does not guarantee these bank loans, nor can the partner pledge his or her Partnershippartnership interest as collateral for the bank loan. The Partnership performs certain administrative functions in connection with its limited partners who have elected to finance a portion of their Partnership capital contributions through individual unsecured bank loan agreements from banks with whom the Partnership has other banking relationships.  For all limited partner capital contributions financed through such bank loan agreements, each agreement instructs the Partnership to apply the proceeds from the redemption of that individual’s capital account to the repayment of the limited partner’spartner's bank loan prior to any funds being released to the partner.  In addition, the partner is required to apply Partnership earnings, net of any distributions to pay taxes, to service the interest and principal on the bank loan.  Should a partner’s individual bank loan not be renewed upon maturity for any reason, the Partnership could experience increased requests for capital liquidations, which could adversely impact the Partnership’s liquidity.  In addition, partners who finance all or a portion of their capital contributions with bank financing may be more likely to request the withdrawal of capital to meet bank financing requirements should the partners experience a period of reduced earnings.  As a partnership, any withdrawals by general partners, subordinated limited partners or limited partners would reduce the Partnership’s available liquidity and capital.

Many of the same banks that provide financing to limited partners also provide financing to the Partnership.  To the extent any of these banks increase credit available to the partners, financing available to the Partnership itself may be reduced.

 

 

2827


PART I. FINANCIAL INFORMATION

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations, continued

 

The Partnership, while not a party to any partner unsecured bank loan agreements, does facilitate making payments of allocated income to certain banks on behalf of the limited partner.  The following table represents amounts related to Partnership loans as well as limited partner bank loans (for which the Partnership facilitates certain administrative functions).  Partners may have arranged their own bank loans to finance their Partnershippartnership capital for which the Partnership does not facilitate certain administrative functions and therefore any such loans are not included in the table.

 

 

As of September 28, 2018

 

 

As of March 29, 2019

 

 

Limited

Partnership

Interests

 

 

Subordinated

Limited

Partnership

Interests

 

 

General

Partnership

Interests

 

 

Total

Partnership

Interests

 

 

Limited

Partnership

Interests

 

 

Subordinated

Limited

Partnership

Interests

 

 

General

Partnership

Interests

 

 

Total

Partnership

Interests

 

Total Partnership capital(1)

 

$

887

 

 

$

509

 

 

$

1,532

 

 

$

2,928

 

 

$

1,261

 

 

$

528

 

 

$

1,596

 

 

$

3,385

 

Partnership capital owned by partners with

individual loans

 

$

79

 

 

$

7

 

 

$

904

 

 

$

990

 

 

$

637

 

 

$

8

 

 

$

996

 

 

$

1,641

 

Partnership capital owned by partners with individual

loans as a percent of total Partnership capital

 

 

9

%

 

 

1

%

 

 

59

%

 

 

34

%

 

 

51

%

 

 

2

%

 

 

62

%

 

 

48

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individual loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individual bank loans

 

$

18

 

 

$

 

 

$

 

 

$

18

 

 

$

193

 

 

$

 

 

$

 

 

$

193

 

Individual Partnership loans

 

 

 

 

 

3

 

 

 

346

 

 

 

349

 

 

 

 

 

 

5

 

 

 

417

 

 

 

422

 

Total individual loans

 

$

18

 

 

$

3

 

 

$

346

 

 

$

367

 

 

$

193

 

 

$

5

 

 

$

417

 

 

$

615

 

Individual loans as a percent of total Partnership capital

 

 

2

%

 

 

1

%

 

 

23

%

 

 

13

%

 

 

15

%

 

 

1

%

 

 

26

%

 

 

18

%

Individual loans as a percent of respective Partnership

capital owned by partners with loans

 

 

23

%

 

 

43

%

 

 

38

%

 

 

37

%

 

 

30

%

 

 

63

%

 

 

42

%

 

 

37

%

 

(1)

Total Partnership capital, as defined for this table, is before the reduction of Partnership loans and is net of reserve for anticipated withdrawals.

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


 

2928


PART I. FINANCIAL INFORMATION

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations, continued

 

Lines of Credit

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

 

 

September 28,

 

 

December 31,

 

 

March 29,

 

 

December 31,

 

 

2018

 

 

2017

 

 

2019

 

 

2018

 

2018 Credit Facility

 

$

500

 

 

$

-

 

 

$

500

 

 

$

500

 

2013 Credit Facility

 

 

-

 

 

 

400

 

Uncommitted secured credit facilities

 

 

290

 

 

 

290

 

 

 

290

 

 

 

290

 

Total bank lines of credit

 

$

790

 

 

$

690

 

 

$

790

 

 

$

790

 

 

In accordance with the terms of the 2013Partnership's $500 committed revolving line of credit (the "2018 Credit Facility, the Partnership was required to maintain a leverage ratio of no more than 35% and minimum Partnership capital, net of reserve for anticipated withdrawals, of at least $1,382 plus 50% of subsequent issuances of Partnership capital.  In September 2018, the PartnershipFacility") entered into thein September 2018, Credit Facility, which replaced the 2013 Credit Facility.  In accordance with the terms of the 2018 Credit Facility, the Partnership is required to maintain a leverage ratio of no more than 35% and minimum Partnership capital, net of reserve for anticipated withdrawals and Partnership loans, of at least $1,884.  In addition, Edward Jones is required to maintain a minimum tangible net worth of at least $1,344 and minimum regulatory net capital of at least 6% of aggregate debit items as calculated under the alternative method.  The Partnership has the ability to draw on various types of loans. The associated interest rate depends on the type of loan, duration of the loan, whether the loan is secured or unsecured and the amount of leverage. Rates include the federal funds rate plus the applicable rate, eurodollar rate plus the applicable rate, and the Alternative Base Rate plus the applicable rate. The 2018 Credit Facility is intended to provide short-term liquidity to the Partnership should the need arise.  As of September 28, 2018,March 29, 2019, the Partnership was in compliance with all covenants related to the 2018 Credit Facility.

In addition, the Partnership has uncommitted lines of credit that are subject to change at the discretion of the banks.  Based on credit market conditions and the uncommitted nature of these credit facilities, it is possible that these lines of credit could decrease or not be available in the future.  Actual borrowing availability on the uncommitted secured lines is based on availability of client margin securities and firm-owned securities, availability, which would serve as collateral on loans in the event the Partnership borrowed against these lines.

 

There were no amounts outstanding on the 2018 Credit Facility or the uncommitted lines of credit as of September 28, 2018, and the 2013 Credit FacilityMarch 29, 2019 or the uncommitted lines of credit as of December 31, 2017.2018.  In addition, the Partnership did not have any draws against these lines of credit during the ninethree month period ended September 28, 2018.March 29, 2019. For the purpose of periodically testing draw procedures, the Partnership made an overnight drawsdraw on the uncommitted facility in April and September 2018.2019.

Cash Activity

As of September 28, 2018,March 29, 2019, the Partnership had $876$1,370 in cash and cash equivalents and $1,241$1,232 in securities purchased under agreements to resell, which generally have maturities of less than one week.  This totaled to $2,117$2,602 of Partnership liquidity as of September 28, 2018, a 5%March 29, 2019, an 8% ($107)193) increase from $2,010$2,409 at December 31, 2017.  This increase2018.  The Partnership had $7,052 and $8,241 in cash and investments segregated under federal regulations as of March 29, 2019 and December 31, 2018, respectively, which was not available for general use. Changes in cash were primarily due to timing of daily client cash activity in relation to the weekly segregation requirement.  The Partnership had $7,592 and $10,099 in cash and investments segregated under federal regulations as of September 28, 2018 and December 31, 2017, respectively, which was not available for general use.  The decline in cash and investments segregated under federal regulations was primarily due to the investment of client cash.

Regulatory Requirements

As a result of its activities as a U.S. broker-dealer, Edward Jones is subject to the net capital provisions of Rule 15c3-1 of the Exchange Act and capital compliance rules of the FINRA Rule 4110.  Under the alternative method permitted by the rules, Edward Jones must maintain minimum net capital equal to the greater of $0.25 or 2% of aggregate debit items arising from client transactions.  The net capital rules also provide that Edward Jones’ partnership capital may not be withdrawn if the resulting net capital would be less than minimum requirements.  Additionally, certain withdrawals require the approval of the SEC and FINRA to the extent they exceed defined levels, even though such withdrawals would not cause net capital to be less than minimum requirements.

30


PART I. FINANCIAL INFORMATION

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations, continued

The Partnership’s Canada broker-dealer subsidiary is a registered broker-dealer regulated by IIROC.  Under the regulations prescribed by IIROC, the Partnership's Canada broker-dealer subsidiary is required to maintain minimum levels of risk-adjusted capital, which are dependent on the nature of the Partnership’s Canada broker-dealer subsidiary's assets and operations.

29


PART I. FINANCIAL INFORMATION

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations, continued

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

 

 

September 28,

 

 

December 31,

 

 

 

 

 

 

March 29,

 

 

December 31,

 

 

 

 

 

 

2018

 

 

2017

 

 

% Change

 

 

2019

 

 

2018

 

 

% Change

 

U.S.:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net capital

 

$

1,061

 

 

$

1,107

 

 

 

-4

%

 

$

1,372

 

 

$

1,280

 

 

 

7

%

Net capital in excess of the minimum required

 

$

1,001

 

 

$

1,049

 

 

 

-5

%

 

$

1,315

 

 

$

1,221

 

 

 

8

%

Net capital as a percentage of aggregate debit

items

 

 

35.2

%

 

 

38.1

%

 

 

-8

%

 

 

48.1

%

 

 

43.6

%

 

 

10

%

Net capital after anticipated capital withdrawals,

as a percentage of aggregate debit items

 

 

18.6

%

 

 

21.6

%

 

 

-14

%

 

 

28.8

%

 

 

28.3

%

 

 

2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Canada:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Regulatory risk-adjusted capital

 

$

40

 

 

$

50

 

 

 

-20

%

 

$

35

 

 

$

40

 

 

 

-13

%

Regulatory risk-adjusted capital in excess of

the minimum required to be held by IIROC

 

$

35

 

 

$

42

 

 

 

-17

%

 

$

24

 

 

$

39

 

 

 

-38

%

 

NetU.S. net capital and Canada risk-adjusted capital and the related capital percentages may fluctuate on a daily basis. In addition, Trust Co. was in compliance with its regulatory capital requirements as of September 28, 2018 and December 31, 2017.requirements.

OFF BALANCE SHEET ARRANGEMENTS

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

THE EFFECTS OF INFLATION

The Partnership’s net assets are primarily monetary, consisting of cash and cash equivalents, cash and investments segregated under federal regulations, firm-owned securities, and receivables, less liabilities.  Monetary net assets are primarily liquid in nature and would not be significantly affected by inflation.  Inflation and future expectations of inflation influence securities prices, as well as activity levels in the securities markets.  As a result, profitability and capital may be impacted by inflation and inflationary expectations.  Additionally, inflation’s impact on the Partnership’s operating expenses may affect profitability to the extent that additional costs are not recoverable through increased prices of services offered by the Partnership.


31


PART I. FINANCIAL INFORMATION

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations, continued

RECENTLY ISSUED AND ADOPTED ACCOUNTING STANDARDS

There have been no material changes to the Partnership’s disclosures of recently issued accounting standards as described in Part II, Item 8 – Financial Statements and Supplementary Data – Note 1 of the Partnership's Annual Report.  See Note 2 of this Quarterly Report on Form 10-Q for adopted accounting standards.

 

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, and in particular Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of the federal securities laws.  You can identify forward-looking statements by the use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “will,” “should,” and other expressions which predict or indicate future events and trends and which do not relate to historical matters.  You should not rely on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Partnership.  These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Partnership to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements.

 

Some of the factors that might cause differences between forward-looking statements and actual events include, but are not limited to, the following: (1) general economic conditions, including an economic downturn or volatility in the U.S. and/or global securities markets; (2) regulatory actions; (3) changes in legislation or regulation, including new regulations under the Dodd-Frank Act and rules promulgated by the SEC and DOL; (4) actions of competitors; (5) litigation; (6) the

30


PART I. FINANCIAL INFORMATION

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations, continued

ability of clients, other broker-dealers, banks, depositories and clearing organizations to fulfill contractual obligations; (7) changes in interest rates; (8) changes in technology and other technology-related risks; (9) a fluctuation or decline in the fair value of securities; (10) our ability to attract and retain qualified financial advisors and other employees; and (11) the risks discussed under Part I, Item 1A – Risk Factors in the Partnership’s Annual Report and Part II, Item 1A – Risk Factors in the Partnership's Quarterly Reports on Form 10-Q for the periodsperiod ended March 30, 2018, June 29, 2018 and September 28, 2018.2019. These forward-looking statements were based on information, plans, and estimates at the date of this report, and the Partnership does not undertake to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.

 


ITEM 3. quantitative and qualitative disclosures about market RISK

32


PART I. FINANCIAL INFORMATION

ITEM 3.

quantitative and qualitative disclosures about market RISK

Various levels of management within the Partnership manage the Partnership’s risk exposure.  Position limits in inventory accounts are established and monitored on an ongoing basis.  Credit risk related to various financing activities is reduced by the industry practice of obtaining and maintaining collateral.  The Partnership monitors its exposure to counterparty risk through the use of credit exposure information, the monitoring of collateral values and the establishment of credit limits.  For further discussion of monitoring, see the Risk Management discussion in Part III, Item 10 – Directors, Executive Officers and Corporate Governance of the Partnership’s Annual Report. All amounts are presented in millions, except as otherwise noted.

The Partnership is exposed to market risk from changes in interest rates.  Such changes in interest rates impact the income from interest-earning assets, primarily receivables from clients on margin balances and short-term, primarily overnight, investments, which are primarily comprised of cash and cash equivalents, investments segregated under federal regulations, and securities purchased under agreements to resell, which averaged $3.0$2.9 billion and $10.4$9.6 billion, respectively, for the nine month periodthree months ended September 28, 2018.March 29, 2019.  These short-term investments earned interest at an average annual rate of approximately 156225 basis points (1.56%(2.25%) during the first nine monthsquarter of 2018.2019.  Changes in interest rates also have an impact on the expense related to the liabilities that finance these assets, such as amounts payable to clients.

The Partnership performed an analysis of its financial instruments and assessed the related interest rate risk and materiality in accordance with the SEC rules.  Under current market conditions and based on current levels of interest-earning assets and the liabilities that finance these assets, the Partnership estimates that a 100 basis point (1.00%) increase in short-term interest rates could increase its annual net interest income by approximately $57 million.$85.  Conversely, the Partnership estimates that a 100 basis point (1.00%) decrease in short-term interest rates could decrease the Partnership’s annual net interest income by approximately $81 million.  The Partnership has put in place an interest rate floor for the interest charged related to its client margin loans, which helps to limit the negative impact of declining interest rates.  An increase in short-term$75. If interest rates has a lesser impact on net interest income as the increase in interest income earned on receivables from client margin balances and investments segregated under federal regulations would be primarily offset by an increase in interest expense paid on amounts payable to clients.  For interest paid on amounts payable to clients, the positive impact of declining interest rates is limited, due to the current low interest rate environment, and the negative impact of increasing interest rates is limited, asincreased 100 basis points, the Partnership does not expect to increase interest rates at the same level.

level, resulting in a smaller increase in interest expense and an overall greater impact on net interest income.

ITEM 4.

controls and procedures

The Partnership maintains a system of disclosure controls and procedures which are designed to ensure that information required to be disclosed by the Partnership in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including the Partnership’s certifying officers, as appropriate to allow timely decisions regarding required disclosure.

Based upon an evaluation performed as of the end of the period covered by this report, the Partnership’s certifying officers, the Chief Executive Officer and the Chief Financial Officer, have concluded that the Partnership’s disclosure controls and procedures were effective as of September 28, 2018.March 29, 2019.

There have been no changes in the Partnership’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.

 

 

 

 

3331


PART II. OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

The following information in Part I, Item 1, Note 8 supplements the discussion in Part I, Item 3 – Legal Proceedings in the Partnership's Annual Report.

Mutual Fund Share Class Waivers. As previously disclosed, on October 26, 2015, Edward Jones, without admitting or denying the findings, entered into a settlement agreement with FINRA in connection with its investigation of possible violations of the federal securities laws or rules with respect to mutual fund purchases and sales charge waivers for certain retirement plan and charitable organization accounts.  On June 12, 2015, the Division of Enforcement of the SEC informed Edward Jones that it is also investigating this matter.  The SEC’s review is ongoing.  Consistent with its practice, Edward Jones is cooperating fully with the SEC with respect to its investigation.

Retirement Plan Litigation. On August 19, 2016, JFC, Edward Jones and certain other defendants were named in a putative class action lawsuit (McDonald v. Edward D. Jones & Co., L.P., et al.) filed in the U.S. District Court for the Eastern District of Missouri brought under ERISA, by a participant in the Edward D. Jones & Co. Profit Sharing and 401(k) Plan (the "Retirement Plan").  The lawsuit alleges that the defendants breached their fiduciary duties to Retirement Plan participants and seeks declaratory and equitable relief and monetary damages on behalf of the Retirement Plan.  The defendants filed a motion to dismiss the McDonald lawsuit which was granted in part dismissing the claim against JFC, and denied in part as to all other defendants on January 26, 2017.

On November 11, 2016, a substantially similar lawsuit (Schultz, et al. v. Edward D. Jones & Co., L.P., et al.) was filed in the same court.  The plaintiffs consolidated the two lawsuits by adding the Schultz plaintiffs to the McDonald case, and the Schultz action was dismissed.  The plaintiffs filed their first amended consolidated complaint on April 28, 2017.  The defendants filed a motion to dismiss the lawsuit on May 26, 2017, which was denied on March 27, 2018.

Wage-and-Hour Class Action.  On September 22, 2017, Edward Jones was named as a defendant in a purported collective and class action lawsuit (White v. Edward D. Jones & Co., L.P.) filed in the U.S. District Court for the Northern District of Ohio by a former branch office administrator.  The lawsuit was brought under the Fair Labor Standards Act as well as Ohio law and alleges that Edward Jones underpaid overtime compensation to branch office administrators.  The lawsuit seeks compensatory damages in the amount of the unpaid wages as well as liquidated damages in an equal amount.  On April 24, 2018, the court approved the parties' settlement and issued its final order of dismissal, without prejudice.  The case will be considered to be dismissed with prejudice in late December 2018.  The final settlement accounting is scheduled to be completed in January 2019.   

Wage-and-Hour Class Action. On March 13, 2018, JFC and Edward Jones were named as defendants in a purported collective and class action lawsuit (Bland, et. al. v. Edward D. Jones & Co., L.P, et. al.) filed in the U.S. District Court for the Northern District of Illinois by four former financial advisors.  The lawsuit was brought under the Fair Labor Standards Act as well as Missouri and Illinois law and alleges that the defendants unlawfully attempted torecoup training costs from departing financial advisors and failed to pay all overtime owed to financial advisor trainees among other claims.  The lawsuit seeks declaratory and injunctive relief, compensatory and liquidated damages.  JFC and Edward Jones intend to vigorously defend against the allegations in this lawsuit.

Securities Class Action.  On March 30, 2018, Edward D. Jones & Co., L.P. and its affiliated entities and individuals were named as defendants in a putative class action (Anderson, et. al. v. Edward D. Jones & Co., L.P., et. al.) filed in the U.S. District Court for the Eastern District of California.  The lawsuit was brought under the Securities Act of 1933 and the Securities Exchange Act of 1934, as well as Missouri and California law and alleges that the defendants inappropriately transitioned clients from commission-based accounts to fee-based programs.  The plaintiffs have requested declaratory, equitable, and exemplary relief, and compensatory damages.  Edward Jones and its affiliated entities and individuals deny the allegations and intend to vigorously defend this lawsuit.

Discrimination Class Action.  On May 24, 2018, Edward Jones and JFC were named as defendants in a putative class action lawsuit (Bland v. Edward D. Jones & Co., L.P., et al.) filed in the U.S. District Court for the Northern District of Illinois by a former financial advisor.  An amended complaint was filed on September 24, 2018, under 42 U.S.C. § 1981, alleging that the defendants discriminated against the former financial advisor and financial advisor trainees on the basis of race.  The lawsuit seeks equitable and injunctive relief, as well as compensatory and punitive damages.  Edward Jones and JFC deny the allegations and intend to vigorously defend this lawsuit.

34


PART II. OTHER INFORMATION

 

ITEM 1A.

RISKRISK FACTORS

For information regarding risk factors affecting the Partnership, please see the language in Part I, Item 2 – Forward-looking Statements of this Quarterly Report on Form 10-Q and the discussion in Part I, Item 1A – Risk Factors of the Partnership's Annual Report and the Part II, Item 1A – Risk Factors of the Quarterly Reports on Form 10-Q for the periods ended March 30, 2018 and June 29, 2018.Report. The following risk factors supplement the risk factors in Part I, Item 1A – Risk Factors – Risk Related to the Partnership's Business of the Partnership's Annual Report.

Legislative and Regulatory InitiativesLegislative and Regulatory Initiatives could significantly impact the regulation and operation of the Partnership and its subsidiaries.  In addition, Legislative and Regulatory Initiatives may significantly alter or restrict the Partnership’s historic business practices, which could negatively affect its operating results.

The Partnership is subject to extensive regulation by federal and state regulatory agencies and by self-regulatory organizations ("SROs") and other regulators. The Partnership operates in a regulatory environment that is subject to ongoing change and has seen significantly increased regulation in recent years. The Partnership may be adversely affected as a result of new or revised legislation or regulations, by changes in federal, state or foreign tax laws and regulations, or by changes in the interpretation or enforcement of existing laws and regulations.

Legislative and Regulatory Initiatives may impact the manner in which the Partnership markets its products and services, manages its business and operations, and interacts with clients and regulators, any or all of which could materially impact the Partnership’s results of operations, financial condition, and liquidity. Regulatory changes or changes in the law could increase compliance costs which would adversely impact profitability.

 

There is a high degree of uncertainty surrounding Legislative and Regulatory Initiatives. The currentCurrent Legislative and Regulatory Initiatives have resulted in an increasingly complex environment in which the Partnership conducts its business. As such, the Partnership cannot reliably predict when or if any of the proposed or potential Legislative and Regulatory Initiatives will be enacted, when or if any enacted Legislative and Regulatory Initiatives will be implemented, whether there will be any changes to enacted or proposed Legislative and Regulatory Initiatives or the impact that any Legislative and Regulatory Initiatives will have on the Partnership.

The Partnership continues to monitor several Legislative and Regulatory Initiatives, including, but not limited to:

DOL Fiduciary Rule.  The DOL issued its final rule defining the term "fiduciary" and exemptions related thereto in the context of ERISA and retirement accounts in April 2016.   On June 21, 2018, the Fifth Circuit Court of Appeals issued an order vacating the DOL fiduciary rule and related exemptions.  As a result of the court order, the Partnership implemented changes to systems, processes and offeringsincluding lifting restrictions from certain transaction-based retirement accounts impacting the Partnership's financial condition, results of operations and liquidity.

SEC Standards of Conduct for Investment Professionals Rulemaking Package (the "Proposal").  TheOn April 18, 2018, the SEC released its Proposal to address the standard of care for broker-dealers and investment advisers on April 18, 2018.as required by the Dodd-Frank Act. The Proposal sets forth two distinct standards of care: a Regulation Best Interest applicable to broker-dealers and brokerage clients, and the Proposed Standard of Conduct for Investment Advisers clarifying a "fiduciary" standard applicable to investment advisers and advisory clients. The Proposal also includes a new disclosure, the Client Relationship Summary. The Partnership provided feedback to the SEC's Proposal and continues to dedicate significant resources to interpret and implement the Proposal, including evaluating how the Proposal may impact the changes the Partnership made in response to the DOL fiduciary rule.Proposal. The final enactment and implementation of the Proposal may have a materially adverse effect on the Partnership's financial condition, results of operations and liquidity.

Other Standard of Care Initiatives. In addition, state legislators and other regulators and various licensing entities are proposing, or have adopted, laws and rules to articulate their required standard of care. The Partnership is dedicating significant resources to interpret and implementaddress these laws and rules as well. The Partnership cannot reliably predict the ultimate form or impact of such rules and laws, but their enactment and implementation may have an adverse effect on the Partnership's financial condition, results of operations, and liquidity.

 

35


PART II. OTHER INFORMATION

Item 1A.Risk Factors, continued

Litigation and Regulatory Investigations and ProceedingsAs a financial services firm, the Partnership is subject to litigation involving civil plaintiffs seeking substantial damages and regulatory investigations and proceedings, which have increased over time and are expected to continue to increase.

Many aspects of the Partnership’s business involve substantial litigation and regulatory risks.  The Partnership is, from time to time, subject to examinations, informal inquiries and investigations by regulatory and other governmental agencies, as well as SROs and other regulators.  Given the growth of financial advisors and increasing scale and complexity of the Partnership's business, the types and frequency of these matters may also increase.

Such matters have in the past, and could in the future, lead to formal actions, which may impact the Partnership’s business.  In the ordinary course of business, the Partnership also is subject to arbitration claims, lawsuits and other significant litigation such as class action suits.  Over time, there has been increasing litigation involving the financial services industry, including class action suits that generally seek substantial damages.

The Partnership has incurred significant expenses to defend and/or settle claims in the past.  In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases in which claimants seek substantial or indeterminate damages or in actions which are at very preliminary stages, the Partnership cannot predict with certainty the eventual loss or range of loss related to such matters.  Due to the uncertainty related to litigation and regulatory investigations and proceedings, the Partnership cannot determine if such matters will have a material adverse effect on its consolidated financial condition.  As such, the return of limited partners, including those purchasing an Interest in the 2018 Plan, may be adversely impacted by such losses, including events that preceded the limited partner's purchase of an Interest.

Such legal actions may be material to future operating results for a particular period or periods.  See Part I, Item 3 – Legal Proceedings in the Partnership's Annual Report and Part II, Item 1—Legal Proceedings in this Quarterly Report on Form 10-Q for more information regarding certain unresolved claims.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the quarter ended September 28, 2018, the Partnership issued subordinated limited partnership interests (the “SLP Interests”), which are described in the Partnership Agreement.  The Partnership issued the SLP Interests pursuant to Section 4(a)(2) under the Securities Act of 1933, as amended, in a privately negotiated transaction and not pursuant to a public offering or solicitation.  The SLP Interests were issued to a general partner of the Partnership in July 2018 for an aggregate price of $1.5 million and to a retiring general partner of the Partnership in September 2018 for an aggregate price of $1.4 million.None.  

 

 

3632


PART II. OTHER INFORMATION

 

ITEM 6.

Exhibits

 

Exhibit Number

 

Description

3.1

*

Twentieth Amended and Restated Agreement of Registered Limited Liability Limited Partnership, dated August 6, 2018, incorporated by reference from Exhibit 3.1 to The Jones Financial Companies, L.L.L.P. Form 8-K dated August 6, 2018.

3.2

*

TwentiethTwenty-First Restated Certificate of Limited Partnership of Thethe Jones Financial Companies, L.L.L.P., dated January 30, 2015, incorporated by reference from Exhibit 3.2 to The Jones Financial Companies, L.L.L.P. Annual Report on Form 10-K for the year ended December 31, 2014.

3.3

*

First Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated March 9, 2015, incorporated by reference from Exhibit 3.3 to The Jones Financial Companies, L.L.L.P. Annual Report on Form 10-K for the year ended December 31, 2014.

3.4

*

Second Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated April 7, 2015, incorporated by reference from Exhibit 3.1 to The Jones Financial Companies, L.L.L.P. Form 10-Q for the quarterly period ended March 27, 2015.

3.5

*

Third Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated May 12, 2015, incorporated by reference from Exhibit 3.1 to The Jones Financial Companies, L.L.L.P. Form 10-Q for the quarterly period ended June 26, 2015.

3.6

*

Fourth Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated June 24, 2015, incorporated by reference from Exhibit 3.2 to The Jones Financial Companies, L.L.L.P. Form 10-Q for the quarterly period ended June 26, 2015.

3.7

*

Fifth Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated July 27, 2015, incorporated by reference from Exhibit 3.3 to The Jones Financial Companies, L.L.L.P. Form 10-Q for the quarterly period ended June 26, 2015.

3.8

*

Sixth Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated August 24, 2015, incorporated by reference from Exhibit 3.1 to The Jones Financial Companies, L.L.L.P. Form 10-Q for the quarterly period ended September 25, 2015.

3.9

*

Seventh Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated September 21, 2015, incorporated by reference from Exhibit 3.2 to The Jones Financial Companies, L.L.L.P. Form 10-Q for the quarterly period ended September 25, 2015.

3.10

*

Eighth Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated October 26, 2015, incorporated by reference from Exhibit 3.3 to The Jones Financial Companies, L.L.L.P. Form 10-Q for the quarterly period ended September 25, 2015.

3.11

*

Ninth Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated November 20, 2015,2019, incorporated by reference from Exhibit 3.2 to The Jones Financial Companies, L.L.L.P. Annual Report on Form 10-K for the fiscal year ended December 31, 2015.2018.

3.12    3.3

*

TenthFirst Amendment of TwentiethTwenty-First Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated January 22, 2016,February 21, 2019, incorporated by reference from Exhibit 3.3 to The Jones Financial Companies, L.L.L.P. Annual Report on Form 10-K for the fiscal year ended December 31, 2015.2018.

3.13    3.4

**

EleventhSecond Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated February 16, 2016, incorporated by reference from Exhibit 3.4 to The Jones Financial Companies, L.L.L.P. Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

37


PART II. OTHER INFORMATION

Exhibit Number

Description

3.14

Twelfth Amendment of TwentiethTwenty-First Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated March 21, 2016, incorporated by reference from Exhibit 3.1 to The Jones Financial Companies, L.L.L.P. Form 10-Q for the quarterly period ended March 25, 2016.2019.

3.15    3.5

**

ThirteenthThird Amendment of TwentiethTwenty-First Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated April 26, 2016, incorporated by reference from Exhibit 3.2 to The Jones Financial Companies, L.L.L.P. Form 10-Q for the quarterly period ended March 25, 2016.22, 2019.

3.16

*

Fourteenth Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated May 23, 2016, incorporated by reference from Exhibit 3.1 to The Jones Financial Companies, L.L.L.P. Form 10-Q for the quarterly period ended June 24, 2016.

3.17

*

Fifteenth Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated June 22, 2016, incorporated by reference from Exhibit 3.2 to The Jones Financial Companies, L.L.L.P. Form 10-Q for the quarterly period ended June 24, 2016.

3.18

*

Sixteenth Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated July 20, 2016, incorporated by reference from Exhibit 3.3 to The Jones Financial Companies, L.L.L.P. Form 10-Q for the quarterly period ended June 24, 2016.

3.19

Seventeenth Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated August 25, 2016, incorporated by reference from Exhibit 3.1 to The Jones Financial Companies, L.L.L.P. Form 10-Q for the quarterly period ended September 30, 2016.

3.20

*

Eighteenth Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated September 21, 2016, incorporated by reference from Exhibit 3.2 to The Jones Financial Companies, L.L.L.P. Form 10-Q for the quarterly period ended September 30, 2016.

3.21

*

Nineteenth Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated October 19, 2016, incorporated by reference from Exhibit 3.3 to The Jones Financial Companies, L.L.L.P. Form 10-Q for the quarterly period ended September 30, 2016.

3.22

*

Twentieth Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated November 17, 2016, incorporated by reference from Exhibit 3.22 to The Jones Financial Companies, L.L.L.P. Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

3.23

*

Twenty-First Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated December 21, 2016, incorporated by reference from Exhibit 3.23 to The Jones Financial Companies, L.L.L.P. Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

3.24

*

Twenty-Second Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated January 25, 2017, incorporated by reference from Exhibit 3.24 to The Jones Financial Companies, L.L.L.P. Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

3.25

*

Twenty-Third Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated February 22, 2017, incorporated by reference from Exhibit 3.25 to The Jones Financial Companies, L.L.L.P. Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

3.26

*

Twenty-Fourth Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated April 25, 2017, incorporated by reference from Exhibit 3.26 to The Jones Financial Companies, L.L.L.P. Form 10-Q for the quarterly period ended March 31, 2017.

3.27

*

Twenty-Fifth Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated May 25, 2017, incorporated by reference from Exhibit 3.27 to The Jones Financial Companies, L.L.L.P. Form 10-Q for the quarterly period ended June 30, 2017.

38


PART II. OTHER INFORMATION

Exhibit Number

Description

3.28

*

Twenty-Sixth Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated June 21, 2017, incorporated by reference from Exhibit 3.28 to The Jones Financial Companies, L.L.L.P. Form 10-Q for the quarterly period ended June 30, 2017.

3.29

*

Twenty-Seventh Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated July 12, 2017, incorporated by reference from Exhibit 3.29 to The Jones Financial Companies, L.L.L.P. Form 10-Q for the quarterly period ended June 30, 2017.

3.30

*

Twenty-Eighth Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated September 20, 2017, incorporated by reference from Exhibit 3.30 to The Jones Financial Companies, L.L.L.P. Form 10-Q for the quarterly period ended September 29, 2017.

3.31

*

Twenty-Ninth Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated November 17, 2017, incorporated by reference from Exhibit 3.31 to The Jones Financial Companies, L.L.L.P. Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

3.32

*

Thirtieth Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated December 20, 2017, incorporated by reference from Exhibit 3.32 to The Jones Financial Companies, L.L.L.P. Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

3.33

*

Thirty-First Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated January 24, 2018, incorporated by reference from Exhibit 3.33 to The Jones Financial Companies, L.L.L.P. Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

3.34

*

Thirty-Second Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated February 21, 2018, incorporated by reference from Exhibit 3.34 to The Jones Financial Companies, L.L.L.P. Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

3.35

*

Thirty-Third Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated March 28, 2018, incorporated by reference from Exhibit 3.35 to The Jones Financial Companies, L.L.L.P. Form 10-Q for the quarterly period ended March 30, 2018.

3.36

*

Thirty-Fourth Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated April 25, 2018, incorporated by reference from Exhibit 3.36 to The Jones Financial Companies, L.L.L.P. Form 10-Q for the quarterly period ended March 30, 2018.

3.37

*

Thirty-Fifth Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated May 24, 2018, incorporated by reference from Exhibit 3.37 to The Jones Financial Companies, L.L.L.P. Form 10-Q for the quarterly period ended June 29, 2018.

3.38

*

Thirty-Sixth Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated June 20, 2018, incorporated by reference from Exhibit 3.38 to The Jones Financial Companies, L.L.L.P. Form 10-Q for the quarterly period ended June 29, 2018.

3.39

*

Thirty-Seventh Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated July 12, 2018, incorporated by reference from Exhibit 3.39 to The Jones Financial Companies, L.L.L.P. Form 10-Q for the quarterly period ended June 29, 2018.

3.40

**

Thirty-Eighth Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated August 21, 2018.

3.41

**

Thirty-Ninth Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated September 19, 2018.

3.42

**

Fortieth Amendment of Twentieth Restated Certificate of Limited Partnership of The Jones Financial Companies, L.L.L.P., dated October 30, 2018.

39


PART II. OTHER INFORMATION

Exhibit Number

Description

10.1

**

$500,000,000 Credit Agreement dated as of September 21, 2018, among The Jones Financial Companies, L.L.L.P. and Edward D. Jones & Co., L.P. as borrowers and lenders Fifth Third Bank and Wells Fargo Bank, National Association.

31.1

**

Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15(d)-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

31.2

**

Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15(d)-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.

32.1

**

Certification of Chief Executive Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

32.2

**

Certification of Chief Financial Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

**

XBRL Instance Document

101.SCH

**

XBRL Taxonomy Extension Schema

101.CAL

**

XBRL Taxonomy Extension Calculation

101.DEF

**

XBRL Extension Definition

101.LAB

**

XBRL Taxonomy Extension Label

101.PRE

**

XBRL Taxonomy Extension Presentation

 

 

 

*

Incorporated by reference to previously filed exhibits.

**

Filed herewith.

 

 

 

 


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

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

 

 

 

By:

 

/s/ James D. WeddlePenny Pennington

 

 

James D. WeddlePenny Pennington

 

 

Managing Partner (Principal Executive Officer)

 

 

November 13, 2018May 10, 2019

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated:

 

Signatures

 

Title

 

Date

 

 

 

 

 

/s/ James D. WeddlePenny Pennington

 

Managing Partner

(Principal Executive Officer)

 

November 13, 2018May 10, 2019

James D. WeddlePenny Pennington

 

 

 

 

 

/s/ Kevin D. Bastien

 

Chief Financial Officer

(Principal Financial and

Accounting Officer)

 

November 13, 2018May 10, 2019

Kevin D. Bastien

 

 

 

4134