SEC Company Response from LPL Financial Holdings Inc. (LPLA) (CIK 0001397911) (LPLA) — Jan 10, 2013
LPL Financial Holdings Inc. (LPLA) (CIK 0001397911)
Date: Jan. 10, 2013 · CIK: 0001397911 · Accession: 0001397911-13-000002
AI Filing Summary & Sentiment
File numbers found in text: 001-34963
Referenced dates: December 7, 2012
Letter
VIA EDGAR Securities and Exchange Commission Division of Corporation Finance Attention: Filed February 27, 2012 Form 10-Q for the Quarterly Period ended September 30, 2012 Filed October 31, 2012 File No. 001-34963
Dear Mr. West and Ms. Shannon:
On behalf of LPL Financial Holdings Inc. (the “Company”), we are writing in response to your comment letter dated December 7, 2012 relating to the Company's Form 10-K for the fiscal year ended December 31, 2011 (the “Form 10-K”) and Form 10-Q for the quarterly period ended September 30, 2012 (the "Form 10-Q") filed with the Securities and Exchange Commission on February 27, 2012 and October 31, 2012, respectively. We have, for your convenience, reproduced your comments, followed by the Company's responses, below.
Form 10-K for the Fiscal Year Ended December 31, 2011
Management's Discussion and Analysis, page 33
Results of Operations, page 45
Commissions, page 46
1. We understand certain recurring commission revenues include fees generated based on the current market value of investment holdings in trail-eligible assets, similar to your advisory fees which are generated based on your advisory assets under management. In an effort to provide greater transparency and more meaningful information to an investor, please provide in your future filings a table that summarizes the activity within your investment holdings in trail-eligible assets for the periods presented, similar to the rollforward of advisory assets under management at the top of page 47.
Response to Comment 1:
We advise the Staff that we are unable to provide a table summarizing the activity within our clients' investment holdings in trail-eligible assets as we do for advisory assets under management. The recordkeeping for the underlying assets that qualify and do not qualify as trail-eligible, the principal or face amount of investments purchased and sold within each client account, asset flows data, and daily valuations are maintained directly by the product sponsors, which do not provide us with this level of detail. The product sponsors only provide the periodic trail commissions payment, accompanied by a summary of accounting of payments by client by advisor and by client by product.
Securities and Exchange Commission
- 2 -
January 10, 2013
We advise the Staff supplementally that fees generated based on the current market value of clients' investment holdings in trail-eligible assets (“trail revenues”) are generally paid to LPL Financial LLC (“LPL”) by mutual fund product sponsors quarterly in arrears and by annuity product sponsors monthly in arrears, based upon the market value of the trail-eligible assets over the payment period. We estimate and accrue the amount of these trail revenues for each reporting period based upon the summary of accounting provided by the product sponsors, and an analysis of the historical receipts from approximately 500 mutual fund and annuity product sponsors, adjusted for estimated changes in market levels. When LPL collects the amounts for the reporting period, we compare the actual receipts to our estimated receipts. To date, these comparisons have not yielded any material differences between the actual receipts and our estimates. We also periodically confirm our understanding of the payment frequency and measurement period with a sample of the mutual fund companies and annuity product sponsors.
In our discussion of critical accounting policies and estimates in the Form 10-K, we state that management must estimate a portion of trail revenues for each accounting period for which the proceeds have not yet been received. We also explain that the estimates are necessary because a significant volume of mutual fund and variable annuity purchases and sales are transacted by financial advisors directly with product sponsors, and we describe the factors on which the estimates are based. In addition, we present investors with a relevant point-in-time metric, advisory and brokerage assets that are custodied by us and brokerage positions held at product sponsors. In future filings, and as set forth below in our response to Comment 2, we will expand our accounting policy in an effort to provide greater transparency about our trail revenues and how we estimate such revenues. We believe that with this additional disclosure, investors will have a better understanding of our trailing commission revenues.
Notes to Consolidated Financial Statements, page F-8
Note 2 - Summary of Significant Accounting Policies, page F-9
Revenue Recognition Policies, page F-9
2. We note your disclosure that commissions include mutual fund and variable annuity trails, which are recognized as earned. Please tell us, and revise your future filings to explain your definition of “as earned.” In this regard, your disclosure should clearly differentiate between mutual funds with front-end commissions and those with no front-end commissions or sales fees. Further, expand your disclosure to specifically identify what your “trailing revenues” represent. In your response, provide us with the literature that you rely upon for your accounting treatment (i.e., mutual fund commissions with and without front-end fees, as well as trailing revenues), and address whether you believe you are within the scope of ASC 946-605-25-8 that states certain distributors of mutual funds should recognize fees when received.
Response to Comment 2:
In future filings, we will revise the disclosure of our revenue recognition policies to provide further clarity around “as earned” and “trailing revenues.”
With respect to mutual fund products, we advise the Staff that we act as a selling agent and not as a distributor of mutual funds, and thereby are not responsible for the offering costs of the shares of any mutual fund company. Accordingly, we do not believe we are within the scope of ASC 946-605-25-8. As selling agent, we receive a front-end sales commission from the distributor at the point of sale, as well as a trailing commission for providing ongoing support, awareness and education to clients of our advisors. Subsequent penalties for early redemption (e.g., deferred contingent sales charges) are paid by the client and retained by the distributor. Accordingly, we do not recognize revenues or expenses for these types of transactions.
Front-end sales commissions are recognized as revenue on a trade-date basis, as the earnings process is considered to be complete, in accordance with ASC 940-605-25-3. We recognize revenue for trailing commissions as earned over the period in which the related services are performed, provided that persuasive evidence of an arrangement exists, the fee is fixed or determinable and collectability is reasonably assured.
Securities and Exchange Commission
- 3 -
January 10, 2013
The literature upon which we rely for our accounting treatment of trailing commissions is ASC 940-20-25-2 and SEC Staff Accounting Bulletin No. 104. This accounting guidance focuses primarily on the reasonable assurance of collectability of payment for the performance of services where we have persuasive evidence that an arrangement exists with a fee that is fixed or determinable.
In order to provide clarity around our definition of “as earned” and what our “trailing revenues” represent, we expect to revise the disclosure of our revenue recognition policy for commissions revenue to read substantially as follows in our upcoming Annual Report on Form 10-K:
Commission - Commission revenue represents gross commissions generated by the Company's advisors for their clients' purchases and sales of securities, and various other financial products such as mutual funds, variable and fixed annuities, alternative investments, fixed income, insurance, group annuities, and option and commodity transactions. The Company generates two types of commission revenues: front-end sales commissions that occur at the point of sale, as well as trailing commissions for which the Company provides ongoing support, awareness, and education to clients of its advisors.
The Company recognizes front-end sales commissions as revenue on a trade-date basis, which is when the Company's performance obligations in generating the commissions have been substantially completed. The Company settles a significant volume of transactions that occur directly between its advisors and product sponsors, particularly with regard to mutual fund, 529 plan, and fixed and variable products. As a result, management must estimate a portion of its commission revenues earned from clients for purchases and sales of these products for each accounting period for which the proceeds have not yet been received. These estimates are based on the amount of commissions earned from transactions in these products in prior periods.
Commission revenue includes mutual fund, 529 plan, and fixed and variable product trailing fees which are recurring in nature. These trailing fees are earned by the Company based on a percentage of the current market value of clients' investment holdings in trail-eligible assets, and recognized over the period during which services are performed. Because trail commission revenues are generally paid in arrears, management estimates the majority of trail commission revenues earned during each period. These estimates are based on a number of factors including market levels and the amount of trail commission revenues received in prior periods.
The amount of such accruals are shown as commissions receivable from product sponsors and others, and are classified within receivables from product sponsors, broker-dealers and clearing organizations in the consolidated statements of financial condition.
A substantial portion of the commission revenue is ultimately paid to the advisors. The Company records an estimate for commissions payable based upon payout ratios for each product for which the Company has accrued commission revenue. Such amounts are recorded by the Company as production expense.
Securities and Exchange Commission
- 4 -
January 10, 2013
3. We note your revenue recognition policies related to commission and advisory fees; however, it is unclear how you have considered gross versus net revenue reporting (ASC 605-45). Please revise your disclosure in future filings to specify the revenue arrangements that you analyze under ASC 605-45 for gross versus net revenue reporting, and identify which arrangements you report on a net basis and a gross basis. In your disclosure regarding your gross versus net analysis, specifically address how you consider commissions revenue for which a substantial portion is ultimately paid to the advisors, and advisory fees for which a substantial portion is paid to the related advisor. Additionally, provide us with a more detailed analysis of how you considered each of the factors included in ASC 605-45-45-3 through 45-18. Your response should address how the following criteria impact your revenue reporting analysis:
•
Whether you or another party are the primary obligor in your commission and advisory
revenue arrangements; and
•
Whether your commissions and fees are fixed in percentage terms.
Response to Comment 3:
We advise the Staff that we record commissions and advisory fees on either a gross or net basis in accordance with ASC 605-45-45 based on the facts and circumstances of each arrangement.
In determining the appropriate recognition of commissions, we review the terms and conditions of the brokerage account agreements between LPL and our advisors' clients, our representative agreements with our advisors, which includes payout rates and terms, and our selling agreements with product sponsors for packaged investment products such as mutual funds, annuities, insurance and alternative investments. In determining the appropriate recognition of advisory fees, we review the terms and conditions of the advisory agreements between our advisors' clients and the applicable Registered Investment Advisor (“RIA”), our representative agreements with our advisors and agreements with third parties who provide specific investment management or investment strategies.
Advisors licensed with us are able to conduct commission-based business through our brokerage platform and fee-based advisory business through our corporate RIA. Advisory fee revenues represent fees charged on our corporate RIA platform to clients of our advisors based on the value of advisory assets.
We also support stand-alone RIAs (“Independent RIAs”) who conduct their advisory business through separate entities by establishing their own RIAs, rather than using our corporate RIA. These Independent RIAs retain 100% of their advisory fees charged to clients for the advisory services that they provide, and engage us for technology, clearing, administrative and custody services, as well as for access to certain of our investment platforms.
We consider the determination of the primary obligor in the arrangement, the entity that has the responsibility for determination of product or service specifications, and the entity that has latitude in establishing prices, to be strong indicators in ascertaining whether to report revenues on a gross or net basis. Other considerations include credit risk, discretion in supplier selection and general inventory risk. After weighing all of the above factors we believe that gross revenue reporting is appropriate for all commissions and for our corporate RIA advisory fees, and that net revenue reporting is appropriate for Independent RIA advisory fees.
Securities and Exchange Commission
- 5 -
January 10, 2013
The following table details our analysis of the factors included in ASC 605-45-45-3 through 45-18 for commissions and advisory fees:
ASC 605-45 Indicator
Commissions
Advisory Fees
Corporate
RIA
Independent
RIA
The entity is the primary obligor in the arrangement
Gross: we are primarily responsible for the execution of clients' purchases and sales as we settle each trade. Advisors must be registered with and licensed through LPL in order to receive a commission. Client brokerage accounts are the responsibility of LPL. Furthermore, we maintain the relationship with the product sponsors and with the industry clearing houses. Therefore we are the primary obligor in the arrangement.
Gross: we are the RIA. Advisors receiving advisory fees through our corporate RIA must be registered with and licensed through LPL. Therefore, we are the primary obligor in the arrangement.
Net: certain advisors have established their own Independent RIA; as an Independent RIA, the advisor is the primary obligor in the arrangement.
The entity has general inventory risk
Gross: we are required to post capital and, acting as the clearing agent, we are subject to settlement risk. Furthermore, we bear general inventory risk if the advisor does not perform on behalf of the client.
Gross: we are required to post capital and, acting as the clearing agent and as custodian of clients' assets, we have general inventory risk. Furthermore, we bear general inventory risk if the advisor does not perform on behalf of the client.
Gross: we are required to post capital and, acting as the clearing agent and as custodian of clients' assets, we have general inventory risk.
The entity has latitude in establishing price
Gross: we establish a recommended pricing grid for use by advisors in charging their clients. Additionally, we determine the amount of commissions that are ultimately paid to the advisor. For certain investment products (e.g., mutual
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CORRESP
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filename1.htm
Correspondence 2013-01
LPL FINANCIAL HOLDINGS INC.
75 State Street
Boston, MA 02109
January 10, 2013
VIA EDGAR
Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549
Attention:
Hugh West
Staci Shannon
Re:
SEC Comment Letter dated December 7, 2012
LPL Financial Holdings Inc.
Form 10-K for the Fiscal Year Ended December 31, 2011
Filed February 27, 2012
Form 10-Q for the Quarterly Period ended September 30, 2012
Filed October 31, 2012
File No. 001-34963
Dear Mr. West and Ms. Shannon:
On behalf of LPL Financial Holdings Inc. (the “Company”), we are writing in response to your comment letter dated December 7, 2012 relating to the Company's Form 10-K for the fiscal year ended December 31, 2011 (the “Form 10-K”) and Form 10-Q for the quarterly period ended September 30, 2012 (the "Form 10-Q") filed with the Securities and Exchange Commission on February 27, 2012 and October 31, 2012, respectively. We have, for your convenience, reproduced your comments, followed by the Company's responses, below.
Form 10-K for the Fiscal Year Ended December 31, 2011
Management's Discussion and Analysis, page 33
Results of Operations, page 45
Commissions, page 46
1. We understand certain recurring commission revenues include fees generated based on the current market value of investment holdings in trail-eligible assets, similar to your advisory fees which are generated based on your advisory assets under management. In an effort to provide greater transparency and more meaningful information to an investor, please provide in your future filings a table that summarizes the activity within your investment holdings in trail-eligible assets for the periods presented, similar to the rollforward of advisory assets under management at the top of page 47.
Response to Comment 1:
We advise the Staff that we are unable to provide a table summarizing the activity within our clients' investment holdings in trail-eligible assets as we do for advisory assets under management. The recordkeeping for the underlying assets that qualify and do not qualify as trail-eligible, the principal or face amount of investments purchased and sold within each client account, asset flows data, and daily valuations are maintained directly by the product sponsors, which do not provide us with this level of detail. The product sponsors only provide the periodic trail commissions payment, accompanied by a summary of accounting of payments by client by advisor and by client by product.
Securities and Exchange Commission
- 2 -
January 10, 2013
We advise the Staff supplementally that fees generated based on the current market value of clients' investment holdings in trail-eligible assets (“trail revenues”) are generally paid to LPL Financial LLC (“LPL”) by mutual fund product sponsors quarterly in arrears and by annuity product sponsors monthly in arrears, based upon the market value of the trail-eligible assets over the payment period. We estimate and accrue the amount of these trail revenues for each reporting period based upon the summary of accounting provided by the product sponsors, and an analysis of the historical receipts from approximately 500 mutual fund and annuity product sponsors, adjusted for estimated changes in market levels. When LPL collects the amounts for the reporting period, we compare the actual receipts to our estimated receipts. To date, these comparisons have not yielded any material differences between the actual receipts and our estimates. We also periodically confirm our understanding of the payment frequency and measurement period with a sample of the mutual fund companies and annuity product sponsors.
In our discussion of critical accounting policies and estimates in the Form 10-K, we state that management must estimate a portion of trail revenues for each accounting period for which the proceeds have not yet been received. We also explain that the estimates are necessary because a significant volume of mutual fund and variable annuity purchases and sales are transacted by financial advisors directly with product sponsors, and we describe the factors on which the estimates are based. In addition, we present investors with a relevant point-in-time metric, advisory and brokerage assets that are custodied by us and brokerage positions held at product sponsors. In future filings, and as set forth below in our response to Comment 2, we will expand our accounting policy in an effort to provide greater transparency about our trail revenues and how we estimate such revenues. We believe that with this additional disclosure, investors will have a better understanding of our trailing commission revenues.
Notes to Consolidated Financial Statements, page F-8
Note 2 - Summary of Significant Accounting Policies, page F-9
Revenue Recognition Policies, page F-9
2. We note your disclosure that commissions include mutual fund and variable annuity trails, which are recognized as earned. Please tell us, and revise your future filings to explain your definition of “as earned.” In this regard, your disclosure should clearly differentiate between mutual funds with front-end commissions and those with no front-end commissions or sales fees. Further, expand your disclosure to specifically identify what your “trailing revenues” represent. In your response, provide us with the literature that you rely upon for your accounting treatment (i.e., mutual fund commissions with and without front-end fees, as well as trailing revenues), and address whether you believe you are within the scope of ASC 946-605-25-8 that states certain distributors of mutual funds should recognize fees when received.
Response to Comment 2:
In future filings, we will revise the disclosure of our revenue recognition policies to provide further clarity around “as earned” and “trailing revenues.”
With respect to mutual fund products, we advise the Staff that we act as a selling agent and not as a distributor of mutual funds, and thereby are not responsible for the offering costs of the shares of any mutual fund company. Accordingly, we do not believe we are within the scope of ASC 946-605-25-8. As selling agent, we receive a front-end sales commission from the distributor at the point of sale, as well as a trailing commission for providing ongoing support, awareness and education to clients of our advisors. Subsequent penalties for early redemption (e.g., deferred contingent sales charges) are paid by the client and retained by the distributor. Accordingly, we do not recognize revenues or expenses for these types of transactions.
Front-end sales commissions are recognized as revenue on a trade-date basis, as the earnings process is considered to be complete, in accordance with ASC 940-605-25-3. We recognize revenue for trailing commissions as earned over the period in which the related services are performed, provided that persuasive evidence of an arrangement exists, the fee is fixed or determinable and collectability is reasonably assured.
Securities and Exchange Commission
- 3 -
January 10, 2013
The literature upon which we rely for our accounting treatment of trailing commissions is ASC 940-20-25-2 and SEC Staff Accounting Bulletin No. 104. This accounting guidance focuses primarily on the reasonable assurance of collectability of payment for the performance of services where we have persuasive evidence that an arrangement exists with a fee that is fixed or determinable.
In order to provide clarity around our definition of “as earned” and what our “trailing revenues” represent, we expect to revise the disclosure of our revenue recognition policy for commissions revenue to read substantially as follows in our upcoming Annual Report on Form 10-K:
Commission - Commission revenue represents gross commissions generated by the Company's advisors for their clients' purchases and sales of securities, and various other financial products such as mutual funds, variable and fixed annuities, alternative investments, fixed income, insurance, group annuities, and option and commodity transactions. The Company generates two types of commission revenues: front-end sales commissions that occur at the point of sale, as well as trailing commissions for which the Company provides ongoing support, awareness, and education to clients of its advisors.
The Company recognizes front-end sales commissions as revenue on a trade-date basis, which is when the Company's performance obligations in generating the commissions have been substantially completed. The Company settles a significant volume of transactions that occur directly between its advisors and product sponsors, particularly with regard to mutual fund, 529 plan, and fixed and variable products. As a result, management must estimate a portion of its commission revenues earned from clients for purchases and sales of these products for each accounting period for which the proceeds have not yet been received. These estimates are based on the amount of commissions earned from transactions in these products in prior periods.
Commission revenue includes mutual fund, 529 plan, and fixed and variable product trailing fees which are recurring in nature. These trailing fees are earned by the Company based on a percentage of the current market value of clients' investment holdings in trail-eligible assets, and recognized over the period during which services are performed. Because trail commission revenues are generally paid in arrears, management estimates the majority of trail commission revenues earned during each period. These estimates are based on a number of factors including market levels and the amount of trail commission revenues received in prior periods.
The amount of such accruals are shown as commissions receivable from product sponsors and others, and are classified within receivables from product sponsors, broker-dealers and clearing organizations in the consolidated statements of financial condition.
A substantial portion of the commission revenue is ultimately paid to the advisors. The Company records an estimate for commissions payable based upon payout ratios for each product for which the Company has accrued commission revenue. Such amounts are recorded by the Company as production expense.
Securities and Exchange Commission
- 4 -
January 10, 2013
3. We note your revenue recognition policies related to commission and advisory fees; however, it is unclear how you have considered gross versus net revenue reporting (ASC 605-45). Please revise your disclosure in future filings to specify the revenue arrangements that you analyze under ASC 605-45 for gross versus net revenue reporting, and identify which arrangements you report on a net basis and a gross basis. In your disclosure regarding your gross versus net analysis, specifically address how you consider commissions revenue for which a substantial portion is ultimately paid to the advisors, and advisory fees for which a substantial portion is paid to the related advisor. Additionally, provide us with a more detailed analysis of how you considered each of the factors included in ASC 605-45-45-3 through 45-18. Your response should address how the following criteria impact your revenue reporting analysis:
•
Whether you or another party are the primary obligor in your commission and advisory
revenue arrangements; and
•
Whether your commissions and fees are fixed in percentage terms.
Response to Comment 3:
We advise the Staff that we record commissions and advisory fees on either a gross or net basis in accordance with ASC 605-45-45 based on the facts and circumstances of each arrangement.
In determining the appropriate recognition of commissions, we review the terms and conditions of the brokerage account agreements between LPL and our advisors' clients, our representative agreements with our advisors, which includes payout rates and terms, and our selling agreements with product sponsors for packaged investment products such as mutual funds, annuities, insurance and alternative investments. In determining the appropriate recognition of advisory fees, we review the terms and conditions of the advisory agreements between our advisors' clients and the applicable Registered Investment Advisor (“RIA”), our representative agreements with our advisors and agreements with third parties who provide specific investment management or investment strategies.
Advisors licensed with us are able to conduct commission-based business through our brokerage platform and fee-based advisory business through our corporate RIA. Advisory fee revenues represent fees charged on our corporate RIA platform to clients of our advisors based on the value of advisory assets.
We also support stand-alone RIAs (“Independent RIAs”) who conduct their advisory business through separate entities by establishing their own RIAs, rather than using our corporate RIA. These Independent RIAs retain 100% of their advisory fees charged to clients for the advisory services that they provide, and engage us for technology, clearing, administrative and custody services, as well as for access to certain of our investment platforms.
We consider the determination of the primary obligor in the arrangement, the entity that has the responsibility for determination of product or service specifications, and the entity that has latitude in establishing prices, to be strong indicators in ascertaining whether to report revenues on a gross or net basis. Other considerations include credit risk, discretion in supplier selection and general inventory risk. After weighing all of the above factors we believe that gross revenue reporting is appropriate for all commissions and for our corporate RIA advisory fees, and that net revenue reporting is appropriate for Independent RIA advisory fees.
Securities and Exchange Commission
- 5 -
January 10, 2013
The following table details our analysis of the factors included in ASC 605-45-45-3 through 45-18 for commissions and advisory fees:
ASC 605-45 Indicator
Commissions
Advisory Fees
Corporate
RIA
Independent
RIA
The entity is the primary obligor in the arrangement
Gross: we are primarily responsible for the execution of clients' purchases and sales as we settle each trade. Advisors must be registered with and licensed through LPL in order to receive a commission. Client brokerage accounts are the responsibility of LPL. Furthermore, we maintain the relationship with the product sponsors and with the industry clearing houses. Therefore we are the primary obligor in the arrangement.
Gross: we are the RIA. Advisors receiving advisory fees through our corporate RIA must be registered with and licensed through LPL. Therefore, we are the primary obligor in the arrangement.
Net: certain advisors have established their own Independent RIA; as an Independent RIA, the advisor is the primary obligor in the arrangement.
The entity has general inventory risk
Gross: we are required to post capital and, acting as the clearing agent, we are subject to settlement risk. Furthermore, we bear general inventory risk if the advisor does not perform on behalf of the client.
Gross: we are required to post capital and, acting as the clearing agent and as custodian of clients' assets, we have general inventory risk. Furthermore, we bear general inventory risk if the advisor does not perform on behalf of the client.
Gross: we are required to post capital and, acting as the clearing agent and as custodian of clients' assets, we have general inventory risk.
The entity has latitude in establishing price
Gross: we establish a recommended pricing grid for use by advisors in charging their clients. Additionally, we determine the amount of commissions that are ultimately paid to the advisor. For certain investment products (e.g., mutual