10-K/A 1 rcap-20141231x10ka.htm 10-K/A RCAP-2014.12.31-10K/A

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2014
 
OR
o
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: 001-35924
RCS Capital Corporation
(Exact name of registrant as specified in its charter)
Delaware
 
38-3894716
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
405 Park Ave., 14th Floor, New York, NY
 
10022
(Address of principal executive offices)
 
(Zip Code)
(866) 904-2988
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class:
 
Name of each exchange on which registered:
Common Stock, $0.001 par value per share
 
New York Stock Exchange
 
 
 
Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934:
 
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No  x
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 x No o
Indicate by check mark whether the registrant submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  Yes o No x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer x
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant at June 30, 2014 was approximately $696.3 million based on the New York Stock Exchange closing price for such shares on that date and assuming for this purpose that only directors and executive officers of the registrant and RCAP Holdings, LLC (the holder of sole outstanding share of Class B common stock and thereby the holder of a majority of the voting power of outstanding common stock of the registrant) and its members are treated as affiliates for these purposes.
The number of outstanding shares of the registrant’s Class A common stock and Class B common stock on March 6, 2015 was 73,657,002 shares and one share, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement to be delivered to stockholders in connection with the registrant’s 2014 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. The registrant intends to file its proxy statement within 120 days after its fiscal year end.



EXPLANATORY NOTE
RCS Capital Corporation (the "Company") is filing this Amendment on Form 10-K/A to correct a typographical error in Item 8 (Financial Statements and Supplementary Data) of the Form 10-K for the fiscal year ended December 31, 2014  that the Company originally filed with the Securities and Exchange Commission (the "SEC") on March 10, 2015. 
That typographical error mistakenly indicated that in 2012, net income and net comprehensive income of $7,412,000 was "attributable to Class A Common Stock" instead of that amount being "attributable to non-controlling interests."  In 2012 the Company was privately owned and did not have any Class A Common Stock outstanding. The typographical error appeared and is corrected in the Consolidated Statements of Income on page F-7 and Consolidated Statements of Comprehensive Income on page F-8.  The $7,412,000 of net income and net comprehensive income attributable to non-controlling interests was correctly reflected in the Company’s previous filings with the SEC; there are no changes to any of the other figures in the Company's financial statements. 
No other changes are being made pursuant to this Amendment. This Amendment does not reflect events occurring after the filing of the Form 10-K or modify or update those disclosures that may be affected by subsequent events.
In addition, the first sentence of the Report of Independent Registered Public Accounting Firm as of December 31, 2013 and for the years ended December 31, 2013 and 2012 is being corrected to reference only the financial statements contained in this Amendment on Form 10-K/A.
Pursuant to Rule 12b-15 under the Securities and Exchange Act of 1934, as amended, this Form 10-K/A also contains new certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, which are filed as exhibits hereto.
For convenience, the entire Annual Report on Form 10-K, as amended, is being re-filed.



RCS Capital Corporation and Subsidiaries
Index to Form 10-K Amendment No. 1
December 31, 2014

 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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WHERE YOU CAN FIND MORE INFORMATION
Our website is www.rcscapital.com. We make available free of charge, through our website, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the U.S. Securities and Exchange Commission (the “SEC”). We have adopted, and posted on our website, a Code of Ethics for our executive officers, directors and employees and Corporate Governance Guidelines for our directors.
Forward-Looking Statements
Certain statements included in this Annual Report on Form 10-K are forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “would,” “could,” “should,” “seeks,” “intends,” “plans,” “projects,” “estimates,” “anticipates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases. You can also identify forward-looking statements by discussions of strategy, plans or intentions. Statements regarding the following subjects may be impacted by a number of risks and uncertainties which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements:
the perceived or actual impact on our business of the events relating to the announcement concerning certain accounting errors by American Realty Capital Properties, Inc. (“ARCP”), an unaffiliated company;
our ability to integrate businesses we have acquired in our recent and pending acquisitions with our previously existing businesses;
whether and when we will be able to realize the anticipated benefits from our recent and pending acquisitions;
our indebtedness could adversely affect our financial health and may limit our ability to use debt to fund future capital needs;
significant dilution could result from future issuances of Class A common stock;
future sales of our Class A common stock could lower the market price of our Class A common stock;
adverse developments in the direct investment program industry;
deterioration in the business environment in the specific sectors of the economy in which we focus or a decline in the market for securities of companies within these sectors;
substantial fluctuations in our financial results;
our ability to retain our senior professionals and key management personnel of businesses we acquired or will acquire in recent and pending acquisitions;
pricing and other competitive pressures;
changes in laws and regulations and industry practices that adversely affect our business;
incurrence of losses in the future;
competition from larger firms;
limitations on our access to capital;
malfunctioning or failure in our operations and infrastructure;
failure to achieve and maintain effective internal controls; and
the factors included in this Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q or Current Reports on Form 8-K, including those set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
The forward-looking statements included in this Annual Report on Form 10-K reflect our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements.

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RCS Capital Corporation and Subsidiaries
December 31, 2014

For more information regarding risks that may cause our actual results to differ materially from any forward-looking statements, see “Risk Factors.” We disclaim any obligation to publicly update or revise any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes, except as required by law.
Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. We expressly disclaim any responsibility to update forward-looking statements, whether as a result of events or circumstances that occur after the date on which the statement is made or otherwise.
Unless otherwise indicated or the context requires otherwise, in this Annual Report on Form 10-K, references to “our company,” “we,” “us” and “our” mean RCS Capital Corporation and its consolidated subsidiaries.


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RCS Capital Corporation and Subsidiaries
December 31, 2014

Item 1. Business
Overview
We are an integrated financial services company principally focused on retail investors. We are engaged in the following businesses: the provision of retail advice through independent channel broker-dealers and registered investment advisers, wholesale distribution, investment banking, capital markets, investment management and investment research.
Our retail advice business is conducted through a network of independent channel broker-dealers and registered investment advisers acquired during 2014 which operate collectively under the marketing brand of “Cetera Financial Group” (each individually, a “Retail Firm,” and, collectively, our “Retail Firms” or “Cetera Financial Group”). Each Retail Firm operates independently under its own brand and management, but with certain shared services with other Retail Firms. According to Financial Planning Magazine in June 2014, Cetera Financial Group is the second largest network of independent channel financial advisors in the United States based on the number of registered representatives associated with our Retail Firms. We believe the scope and scale of Cetera Financial Group provides substantial competitive advantages for our Retail Firms, allowing us to provide a broader range of investment products and advisory programs, and invest greater resources in financial advisor training and business development while creating a more attractive platform for the recruitment and retention of financial advisors.
Through our wholesale distribution firms, we are also a leading distributor of direct investment programs in the United States. Our wholesale distribution firms serve as dealer manager or wholesale distributor for public offerings of direct investment programs, consisting primarily of non-traded real estate investment trusts (“REITs”), business development companies (“BDCs”) and registered investment companies, with a focus on alternative investments.
Other highlights of our business include:
9,023 financial advisors serving approximately 2.0 million client accounts with $214.2 billion in assets under administration as of December 31, 2014, before giving effect to the completion of two pending acquisitions;
$7.8 billion in equity capital raised for direct investment programs and registered investment companies distributed by us during 2014;
$2.1 billion in revenue during 2014, including $1.4 billion from Cetera Financial Group, $681.6 million from our wholesale distribution platform and $25.3 million from our other businesses.
Corporate Structure
We are a holding company that was incorporated in Delaware on December 27, 2012. We engage in business through the following operating subsidiaries:
Retail Firms
Cetera Financial Holdings, Inc. (“Cetera”). Cetera provides independent broker-dealer services and advisory programs through registered broker-dealers and investment advisers under the brands “Cetera Advisors,” “Cetera Advisor Networks,” “Cetera Financial Institutions,” “Cetera Financial Specialists,” “Cetera Investment Advisors” and “Cetera Investment Management.” We completed our acquisition of Cetera in April 2014. As of December 31, 2014, Cetera had approximately 6,700 financial advisors across the United States, $154.8 billion in assets under administration and approximately 1,350,000 individual retail investor clients.
First Allied Holdings Inc. (“First Allied”). First Allied provides independent broker-dealer services and advisory programs through registered broker-dealers and investment advisers under the brands “First Allied,” “First Allied Asset Management,” “First Allied Advisory Services” and “First Allied Retirement Services.” Under the brand “The Legend Group,” First Allied provides 403(b) plans, which are retirement savings plans for employees of specific tax-exempt organizations such as health care organizations and colleges and universities. We completed our acquisition of First Allied in June 2014. As of December 31, 2014, First Allied had approximately 1,200 financial advisors across the United States, $35.1 billion in assets under administration and approximately 500,000 individual retail investor clients.
Investors Capital Holdings, Ltd. (“ICH”). ICH provides independent broker-dealer services and advisory programs through a registered broker-dealer and an investment adviser under the brand “Investors Capital.” We completed our acquisition of ICH in July 2014. As of December 31, 2014, ICH had approximately 450 financial advisors across the United States with a concentration in the northeast, $9.4 billion in assets under administration and approximately 125,000 individual retail clients.

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RCS Capital Corporation and Subsidiaries
December 31, 2014

Summit Financial Services Group, Inc. (“Summit”). Summit provides independent broker-dealer services and advisory programs through a registered broker-dealer and an investment adviser under the brand “Summit Financial Services.” We completed our acquisition of Summit in June 2014. As of December 31, 2014, Summit had approximately 300 financial advisors providing securities brokerage and investment retail advice across the United States with a concentration in the southeast, $10.3 billion in assets under administration and approximately 50,000 individual retail investor clients.
J.P. Turner & Company, LLC and J.P. Turner & Company Capital Management, LLC (collectively, “J.P. Turner”). J.P. Turner provides independent broker-dealer services and advisory programs through a registered broker-dealer and an investment adviser under the brand “J.P. Turner & Company.” We completed our acquisition of J.P. Turner in June 2014. As of December 31, 2014, J.P. Turner had approximately 300 financial advisors across the United States with a concentration in the southeast, $4.6 billion in assets under administration and approximately 45,000 individual retail investor clients. J.P. Turner also offers a variety of other investment services, including investment banking and private placements.
VSR Financial Services, Inc. (“VSR”). In August 2014, we entered into an agreement to acquire VSR. When the acquisition is completed, which is expected to occur during March 2015, VSR will become a member of the network of Retail Firms. As of December 31, 2014, VSR had approximately 274 financial advisors across the United States, $12.5 billion in assets under administration.
Girard Securities, Inc. (“Girard”). In August 2014, we entered into an agreement to acquire Girard. When the acquisition is completed, which is expected to occur during March 2015, Girard will become a member of the network of Retail Firms. As of December 31, 2014, Girard had approximately 223 financial advisors across the United States, $9.4 billion in assets under administration.
Wholesale Distribution
Realty Capital Securities. Realty Capital Securities’ primary business is serving as the exclusive dealer manager for public offerings of direct investment programs and the distributor of registered investment programs including open and closed end mutual funds. We acquired Realty Capital Securities in connection with our initial public offering in June 2013. Additionally, under the name “RCS Capital,” Realty Capital Securities provides investment banking and capital market services.
StratCap. StratCap provides distribution, advisory and operational services with respect to non-exchange traded direct investment programs and is a wholesale broker-dealer focused on direct investment programs. We completed our acquisition of StratCap in August 2014.
Hatteras. Hatteras is the sponsor of, investment adviser to and distributor for the Hatteras Funds complex, a family of alternative investment funds registered as investment companies with the SEC. We completed our acquisition of Hatteras in June 2014. As of December 31, 2014, Hatteras had approximately $2.5 billion in assets under management and a product portfolio that includes seven open-end mutual funds and one closed-end fund.
Other Businesses
RCS Advisory Services, LLC (“RCS Advisory”). RCS Advisory provides a range of transaction management services to direct investment programs and their sponsors, including legal, marketing, investor relations, public relations and event planning services. We acquired RCS Advisory in connection with our initial public offering in June 2013.
American National Stock Transfer, LLC (“ANST”). ANST is registered as a transfer agent with the SEC and acts as registrar and transfer agent for direct investment programs and registered investment companies sponsored, co-sponsored or advised by our affiliated companies. We acquired ANST in connection with our initial public offering in June 2013.
SK Research, LLC (“SK Research”). We launched SK Research in March 2014 as the initial component of a new research division dedicated to alternative investment programs. SK Research provides comprehensive due diligence services on a wide array of alternative investment programs. SK Research seeks to provide broker-dealers and financial advisors with research and analytic resources necessary to evaluate the viability, utility and performance of alternative investment programs.
We Are Crowdfunding. We Are Crowdfunding serves as a portal for direct investments that allows investors and potential investors to browse prescreened investments. We established We Are Crowdfunding following the acquisition in July 2014 of substantially all the assets of Trupoly, Inc. (“Trupoly”). We expect We Are Crowdfunding to serve as a portal for crowdfunding investments in the future.
Docupace Technologies, LLC (“Docupace”). Docupace provides a secure electronic processing platform for financial institutions and wealth management firms, including certain of our Retail Firms and our financial advisors. We completed our acquisition of a majority equity interest in Docupace in November 2014.

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RCS Capital Corporation and Subsidiaries
December 31, 2014

Source of Growth
During 2014, we completed the acquisitions or launched the operations of ten operating subsidiaries, five of which are Retail Firms, and entered into agreements to acquire two more businesses that will become Retail Firms following the expected completion of their acquisitions by us in March 2015. We refer to the businesses we have acquired or launched during 2014 and expect to acquire in March 2015, collectively, as the “acquired businesses” and to the transactions in which they were or will be acquired as the “recent and pending acquisitions.”
We intend to continue to grow by:
Expanding our financial advisor base organically and through recruiting. We intend to expand the Retail Firms organically by recruiting new financial advisors to the Retail Firm’s platform, who we believe will be attracted by access to advanced technology and wealth management solutions, with emphasis on risk management. The Retail Firms also intend to aggressively recruit financial advisers through offering tailored recruitment and retention incentives, such as business growth loans. We are also in the process of consolidating IT structures and technology across the Retail Firms to lay the groundwork for implementation of more advanced technology and productivity tools for financial advisors, which we believe will help our financial advisors to better serve their clients.
Maintaining independent cultures at our Retail Firms while leveraging scale. Our Retail Firms operate independently under their own brands and management, but with common shared services, back-office and support infrastructure. We believe that preserving the independent culture of each Retail Firm maintains the value of individual brands while taking advantage of economies of scale and synergies across multiple Retail Firms. This operational independence also facilitates our multi-brand strategy. We believe maintaining multiple Retail Firms allows us to preserve the value of each brand and enables the Retail Firms’ access to support structures not otherwise available to each Retail Firm individually.
Expanding our wholesale distribution and investment banking businesses to new sponsors of direct investment programs and other investment products. We believe we have established ourselves as a leading investment bank and wholesale distributor in the direct investment programs market. The wholesale distribution and investment banking businesses plan to leverage this strength to expand relationships with new sponsors of direct investment programs and registered investment companies, as well as adding to the range of services that are provided. At the same time, we will continue leveraging our relationship with our affiliate, AR Capital, LLC, and, to the extent applicable, the American Realty Capital group of companies (collectively “American Realty Capital”), which were founded in 2007 by Nicholas S. Schorsch, the former executive chairman of our board of directors, and William M. Kahane, our former chief executive officer and a former member of our board of directors, to provide sponsors and advisors of direct investment programs with strategic and financial advice in connection with the formation, distribution, maintenance and liquidation phases of their offerings.
Acquiring or developing complementary businesses: We plan to continue to grow our core businesses through both organic and strategic acquisition opportunities. We may selectively pursue acquisitions of businesses or infrastructure complementary to our businesses, including, potentially, registered investment adviser operations, one or more FINRA‑member entities or other businesses that we consider synergistic to our overall strategy because we intend to integrate them into Cetera Financial Group or one of our other businesses.
Independent Retail Advice
Through financial advisors, the Retail Firms offer independent retail advice, financial products and investment solutions to “mass affluent” individuals and households, which we define as individuals and households with $100,000 to $1,000,000 of investable assets. As of December 31, 2014 and giving effect to the expected completion of our acquisitions of VSR and Girard in March 2015, our Retail Firms serve clients with $236.4 billion in assets under administration through 9,520 financial advisors.
Each Retail Firm we acquired in 2014 has continued to be managed independently under its own brand while benefiting from centralizing certain back-office functions, shared services and support infrastructure. Independent management of individual brands facilitates one of our priorities in integrating the acquired businesses: minimizing the disruption to the operations and ongoing businesses of our financial advisors. This operational independence also facilitates our multi-brand strategy. We believe maintaining multiple Retail Firms allows us to preserve the value of each brand and enables the Retail Firms’ to access support structures not otherwise available to each Retail Firm individually. At the same time, by centralizing certain back-office functions and support systems, we intend to reduce costs and operating risks, strengthen our risk management and deliver services to help our financial advisors grow their businesses. As an example of the benefits available under our network, during September 2014, we negotiated a comprehensive clearing agreement with Pershing LLC on more favorable terms than previously available.
Each of our Retail Firms provides independent groups of affiliated financial advisors or other financial professionals with the technology, infrastructure and other support and services they need to serve their clients. Each Retail Firm also provides its financial advisors with a wide array of practice development and operational support services that we believe help those financial advisors launch new relationships and strengthen existing ones.

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RCS Capital Corporation and Subsidiaries
December 31, 2014

Financial Advisors
The financial advisors of our Retail Firms are licensed- and registered- financial professionals who provide investment and wealth management advice and services primarily to mass affluent clients. These financial advisors have the ability to manage their own operations and focus on distinct areas of the investment business (both in terms of products and services), subject to compliance and supervisory oversight. Our financial advisors include traditional financial advisors, certified public accountants who conduct a securities business through one the Retail Firms, financial advisors who are deployed in bank channels through networking agreements, and independent registered investment advisers who are associated with the Retail Firms as registered representatives, among others, many of whom operate out of offices that they maintain. Financial advisors engaged in the securities broker-dealer or investment advisory businesses are registered with the SEC, the Financial Industry Regulatory Authority (“FINRA”) or state regulatory bodies, as required. Depending on the registration status of our financial advisors they may offer commission-based investment products through our broker-dealer subsidiaries and/or fee-based investment advisory services through our investment adviser subsidiaries. Certain of our financial advisors also may engage in other outside activities, such as fixed insurance sales, appraisal services and tax planning activities, which may not require licensing or registration with a broker-dealer or investment adviser.
As of December 31, 2014, Retail Firm financial advisors deliver their services through approximately 6,050 branch offices located throughout all 50 states, Washington, D.C. and Puerto Rico. We believe our financial advisors are viewed as local providers of independent advice, but with access to the knowledge and resources of a nationwide network.
We believe that many of our financial advisors have entrepreneurial aspirations and are attracted to the flexibility, control and economics inherent in the independent channel retail firm model. Almost all our financial advisors are independent contractors, operating under their own business name or the brand name of one of the Retail Firms, and the Retail Firms provide them with the necessary infrastructure and support they need to conduct their operations in exchange for a percentage of the commissions and advisory fees generated through products and services provided to their clients. Because our financial advisors bear the responsibility for their own operating expenses (including rent, utilities, furniture, equipment, employee wages and benefits and general office supplies), they generally receive a higher percentage of commissions or advisory fees generated, as compared to the percentage of commissions or advisory fees received by financial advisors in traditional brokerage settings or “wirehouses” in which they would not be responsible for a similar portion of their operating expenses.
We require financial advisors who independently operate their offices to possess a sufficient level of experience. As of December 31, 2014, the average tenure of our financial advisors in financial services was approximately eighteen years, and 50.5% of them have been working with one of our Retail Firms for over five years. We believe that the ability to cultivate and grow these longstanding relationships is a key strength of our Retail Firms. A majority of the new financial advisors that we recruit are experienced and join us from a broad range of firms including wirehouses, regional and insurance broker-dealers, banks and other independent firms. This level of industry experience allows us to focus on supporting and enhancing our financial advisors’ businesses without needing to provide basic training or subsidizing financial advisors who are new to the industry.
We give licensed and accredited insurance agents, financial planners, accountants and other financial professionals the opportunity to expand their ability to offer securities products and investment advisory services to their clients. When our financial advisors provide financial planning services to their clients, they evaluate a client’s financial needs and objectives and develop a detailed, customized, financial plan, and advise the client on proper implementation of the plan (which may include recommendation of the purchase or sale of securities and/or a fee-based advisory account through one of the Retail Firms’ broker-dealers and/or investment advisers).
Many financial advisors are also appointed agents of insurance companies. While some of our financial advisors may transact fixed insurance business as an outside business activity, all variable insurance business must be placed through a broker-dealer, and for this reason all of the Retail Firms’ broker-dealers are licensed as insurance agencies, and certain affiliates that are not broker-dealers are also licensed as insurance agencies.
Technology and Infrastructure
We support our financial advisors by providing comprehensive and, in many cases, highly automated front-, middle- and back-office solutions, which we believe enable our financial advisors to focus on their clients while successfully and efficiently managing the complexities of running their own investment businesses. Our financial advisors rely on the infrastructure and technology of our Retail Firms and our centralized systems to manage client relationships and complete a range of activities, including client intake, reporting, account management, and document retention.

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RCS Capital Corporation and Subsidiaries
December 31, 2014

While all the Retail Firms have a range of tools supporting customer relationship management, account aggregation, market intelligence and customized reporting, financial planning, wealth management and portfolio construction, as part of its integration work, we are evaluating which tools currently available only to particular Retail Firms should be implemented across all of our Retail Firms. For example, we are making the Pentameter™ practice management platform and integrated business consulting process, which has only been available to the broker-dealers that were part of First Allied prior to its acquisition by us, available across the entire platform of Retail Firms. Pentameter™ provides financial advisors with enhanced business consulting capabilities to help with advisor business needs including succession planning, hiring, and managing and developing professional resources. In addition, in the first quarter of 2015, we made the Connect2Clients® (“C2C”) marketing portal, which had previously only been available to the broker-dealers that were part of Cetera prior to its acquisition by us, available across the entire platform of Retail Firms.
Using our Retail Firms’ current technology, financial advisors are able to conduct a number of activities including opening new accounts, monitoring existing accounts, updating client accounts, initiating and executing trades, viewing and downloading commission data, downloading client data, delivering statements and confirmations electronically, and delivering research reports and responding to inquiries on companies, securities as well as other financial topics. The Retail Firms are in the midst of transitioning to an integrated IT infrastructure, including a common data center and network, integrated telephony and email systems. The integration of the back-office and support systems of the Retail Firms is ongoing.
Practice Development and Operational Support
Cetera Financial Group provides our financial advisors with a wide array of practice development and operational support services which are designed to help our financial advisors launch new relationships and strengthen existing ones. The support services include the following:
continuing education and support that emphasizes long-range aspects of financial planning and investment, which we believe enables our financial advisors to better inform and serve their clients;
advertising and public relations assistance (including FINRA-approved marketing materials, corporate and product brochures, client letters and website assistance) in order to enhance their profiles, increase public awareness of our financial advisors and the products and services they offer, and to bolster their professional stature in the public’s eye;
a growth loan program which provides our financial advisors with access to capital in various forms, including, in some cases, forgivable loans, to grow their practices;
tools that allow financial advisors to track clients and identify prospects and to distribute recent market commentaries and newsletters;
online learning center and forum style programs, including annual symposiums, local events and monthly conference calls, which introduce new investment strategies and improve wealth management skills; and
support for paperless-office imaging, workflows, and document storage, including through the use of Docupace’s services.
Cetera Financial Group also provides financial advisors with access to C2C, a turn-key marketing program designed by us to help our financial advisors build and grow their business through strengthening personal connections. C2C enables financial advisors to reach out to clients and prospective clients, and network with business professionals, utilizing a variety of tools and resources available within the C2C program. C2C includes a marketing library of over 3,000 marketing materials, much of which can be branded with our financial advisors’ custom information. C2C also assists financial advisors in connecting with clients, prospects and business professionals through social networking through C2C’s monitoring and archiving financial advisor’s social networking activity. Financial advisors also have access to thought-leadership, implementation resources and training to help them effectively engage on social media channels, such as LinkedIn, Facebook and Twitter.
Compliance and Supervision
Our financial advisors are subject to compliance and supervisory requirements through the broker-dealers and investment advisers with whom they are associated. They receive additional support and oversight at the enterprise level. We believe our compliance and supervisory policies, procedures and controls are reasonably designed to achieve and monitor compliance with applicable laws, regulations, rules and other regulatory requirements, including suitability of customer investments, managing conflicts of interest, and disclosure obligations regarding products and services as well as anti-money laundering protocols, among other matters.

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RCS Capital Corporation and Subsidiaries
December 31, 2014

Each of our financial advisors is required to obtain the appropriate licenses to conduct the type of securities or advisory business in which he or she engages, and to register in the various states in which he or she solicits customers and to remain in good standing in those jurisdictions and with the SEC and FINRA. Each of our broker-dealer and investment adviser firms has its own chief compliance officer and maintains its own compliance program. In addition, we provide shared services across all our Retail Firms, performing enterprise-level regulatory compliance functions, such as anti-money-laundering, surveillance, product due diligence and compliance and risk oversight. We also provide training and education on new products, new regulatory guidelines, compliance and risk management tools, security policies and procedures, anti-money laundering and best practices to our financial advisors and assist them in responding to any regulatory inquiries.
We maintain professional liability “errors and omissions” insurance policies which generally provide a limited degree of coverage for certain actions taken and/or omissions made by our financial advisors, employees and other agents in connection with the purchase and sale of securities and the rendering of financial advice. In addition, we maintain a fidelity bond that provides for the reimbursement of losses incurred through certain dishonest acts by our financial advisors or employees.
Financial Products and Retail Advice
The financial products that are available through our Retail Firms allow our financial advisors to offer traditional brokerage services as well as access to fee-based retail advice, wrap-fee programs, portfolio management services and managed account programs. In some instances, our financial advisors also provide advisory and consulting services to retirement plans.
We provide our Retail Firms access to a wide range of financial products, including mutual funds, fixed and variable annuities, alternative investments, equity and fixed income securities, and other financial products from a wide range of sponsors, including products sponsored by our affiliate, American Realty Capital, and our subsidiaries, Hatteras and StratCap. All the products offered through our Retail Firms are reviewed by a shared service centralized due diligence team under the auspices of a centralized due diligence committee. If a product is approved, our Retail Firms are then, in turn, able to determine independently whether they will offer the approved product to their financial advisors, who then, in turn, are able to select independently which of these products they recommend to their clients. SK Research provides additional diligence support for most alternative products, which is evaluated by the due diligence team and due diligence committee.
We believe our scale and experience in serving the investment needs of mass affluent investors provides us with an enhanced understanding of the products they demand. We tailor our product suite and support services in a manner that is intended to best position our Retail Firms and financial advisors to meet their clients’ needs.
We have entered into, and expect to continue to enter into, strategic partner revenue sharing agreements with a variety of product sponsors, including mutual fund, variable annuity, third-party asset managers, and alternative investment firms, to support ongoing marketing and administration and education of our Retail Firms’ employees and financial advisors, and, as our Retail Firms expand, we believe our broad distribution capabilities and scale will enable us to achieve more favorable terms and better access for these investment products.
We offer specialized product training to our financial advisors and help them develop marketing strategies, which gives our financial advisors tools they need to develop more tailored investment solutions for their clients and improve the market penetration of financial products that are offered through the Retail Firms. This product training is also part of our supervisory and compliance efforts to further educate our financial advisors about the products they sell and appropriate sales practices.
Institutional Services
Through Cetera Investment Services LLC (d/b/a Cetera Financial Institutions), our self-clearing broker-dealer subsidiary, Cetera Financial Group provides customized retail investment services through networking agreements with banks and credit unions. In addition, many of the other Retail Firms provide the same retail investment services through networking agreements on a fully disclosed basis through clearing firms. For these institutions, whose core capabilities may not include investment and financial planning services, or who find the technology, infrastructure and regulatory requirements to be cost prohibitive, we provide their customers with investment services through financial advisors located on or off the premises of the institutions. These arrangements allow the institutions to focus their efforts and capital on their core businesses.

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RCS Capital Corporation and Subsidiaries
December 31, 2014

Clearing
Except for Cetera Investment Services LLC (d/b/a Cetera Financial Institutions), our self-clearing broker-dealer subsidiary, our Retail Firms use third-party clearing firms on a fully disclosed basis to execute and clear securities transactions on behalf of financial advisors’ clients. A majority of the securities business of the introducing firms within the Retail Firms is cleared through, and custodied at, Pershing LLC, although many of the Retail Firms’ broker-dealers have agreements with other clearing firms which provide clearance and custody services. Pershing LLC and other third-party clearing brokers provide services including billing, credit extension, trade execution and receipt, custody and delivery of customer securities and funds. SIPC coverage protects client accounts up to $500,000 per customer, including up to $250,000 for cash. Pershing LLC and other third-party clearing brokers also maintain excess securities bonds, “Excess SIPC,” providing additional protection. Pershing LLC and other third-party clearing brokers also lend funds to clients of our financial advisors subsidiaries through the use of margin credit. These loans are made to clients on a secured basis, with Pershing LLC and other third-party clearing firms maintaining collateral in the form of saleable securities, cash or cash equivalents. We have agreed to indemnify Pershing LLC and other third-party clearing firms for losses they may incur on these credit arrangements.
Sources of Revenue
The following chart shows the sources of Cetera Financial Group’s revenues during 2014:
_____________________
(1) Transactional commissions. Commission revenue is derived from the sales of financial products for which we and our financial advisors receive an upfront, one-time commission at the point of sale.
(2) Trails. Trail revenue is from commissions paid out over time and products that charge fees, such as 12b-1 fees charged for marketing expenses by mutual funds, based on the value of the assets invested in the product at periodic (e.g. quarterly or annual) measurement dates and pay a portion of such fees to our Retail Firms.
(3) Advisory fees. Advisory fee revenue is earned on assets in managed accounts or non-discretionary asset-based programs. These fees are computed based on assets held under management by financial advisors for their clients and are generally measured at quarterly measurement dates.

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RCS Capital Corporation and Subsidiaries
December 31, 2014

(4) Asset-based fees. Asset-based fee revenue is earned based on the level of assets held under administration by financial advisors for their clients for reasons not directly related to advisory services, such as cash sweep revenue and sponsorship fees from strategic partners.
(5) Transaction and other. Transaction & Other Commission revenue is revenue from sources not covered by any of the other categories listed above, such as affiliation and technology fees paid by our advisors, execution fees, maintenance fees, insurance and margin interest.
Wholesale Distribution and Other Businesses
Since its inception in 2007, Realty Capital Securities has focused on providing financial products and investment solutions through its wholesale distribution of non-traded REITs, BDCs and other direct investment programs sponsored, co-sponsored or advised by our affiliate, American Realty Capital. We launched ANST and RCS Advisory prior to our initial public offering in June 2013 to provide investment banking, capital markets, transaction management and transfer agency services, primarily for non-traded REITs and other direct investment programs sponsored, co-sponsored or advised by our affiliate, American Realty Capital. During 2014, we acquired StratCap and Hatteras, which became part of our wholesale distribution business. Realty Capital Securities, StratCap and Hatteras operate independently under separate brands and management. Also during 2014, we acquired a majority equity interest in Docupace, which provides a secure electronic processing platform for financial institutions and wealth management firms, including certain of our Retail Firms and our financial advisors, and established SK Research, the first component of our new research division, and We Are Crowdfunding, which currently serves as a portal for direct alternative investments and which we expect will serve as our crowdfunding platform in the future.
Wholesale Distribution
During the year ended December 31, 2014, our wholesale distribution business, which includes the results of StratCap and Hatteras from the date they were acquired by us, raised $7.4 billion in equity capital. As of December 31, 2014, we were distributing 17 direct investment programs, with a focus on non-traded REITs, and 13 registered investment companies, with a focus on liquid alternatives.
We define direct investment programs as investment programs which provide for flow-through tax treatment under U.S. tax law, including, but not limited to, REITs and BDCs that offer publicly registered, but non-traded, securities, and other types of real estate programs and oil and gas programs. Generally, securities issued in a direct investment program are not listed on a national securities exchange. We define liquid alternatives as investment companies registered under the Investment Company Act of 1940 designed to deliver non-correlating or alternative strategies to retail investors through a fund structure that offers liquidity, simplified tax reporting and other features.
Hatteras distributes registered investment companies that are sponsored by Hatteras, with a focus on liquid alternatives. The results of operations of Hatteras, including revenues and expenses related to the wholesale distribution of registered investment companies, are included in our Investment Management segment, not our Wholesale Distribution segment. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
We believe that we have built a wholesale platform that can continue to be expanded to sell a larger number of differentiated investment offerings. We believe our wholesale distribution platform has achieved considerable economies of scale and scope over its operational history and, given embedded competencies and relevant experience of its personnel, is well-positioned to realize continued growth in sales and broadened product base.
Direct Investment Programs
Realty Capital Securities and StratCap provide exclusive dealer manager services for affiliated and non-affiliated public, non-traded securities offerings, primarily for non-traded REITs and BDCs, most of which are sponsored, co-sponsored or advised by American Realty Capital. These offerings are conducted on a “best efforts” or “reasonable best efforts” basis, such that a dealer manager is only required to use its good faith efforts and reasonable diligence to sell the shares and has no firm commitment or obligation to purchase any of the shares. A dealer manager also provides wholesaling services to each program in connection with the distribution of the shares offered pursuant to each program’s prospectus. In limited circumstances, a dealer manager also may sell and may have sold a limited number of shares in such offerings at the retail level.
Substantially all the offerings distributed by Realty Capital Securities relate to direct investment programs sponsored, co-sponsored or advised by our affiliate, American Realty Capital. StratCap holds minority interests in four of the direct investment programs that it distributes, and is a joint venture partner along with the sponsor to the fifth direct investment program. Due to these interests, StratCap is entitled to receive a portion of the advisory and incentive performance fees due to the advisors of the direct investment programs it distributes.

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December 31, 2014

We believe that the combination of Realty Capital Securities and StratCap constitute the leading multi-product distribution platform of direct investment program offerings to independent broker-dealers and the retail financial advisor community as measured by total equity capital raised and number of direct investment programs distributed, according to Stanger. As of December 31, 2014, Realty Capital Securities and StratCap were distributing a total of 17 public non-listed direct investment program offerings effective with the SEC and none of their competitors was distributing more than three. For the year ended December 31, 2014 including the results of StratCap from August 2014, the month it was acquired, Realty Capital Securities and StratCap, collectively, had a 34.7% market share measured by equity capital raised of all direct investment programs, according to Stanger. Our market share has declined subsequent to October 31, 2014, which we believe has resulted from the impact of ARCP’s announcement of certain accounting irregularities and other factors, including a liquidity event for one of the investment programs of another sponsor in completed in early January 2015.
Registered Investment Companies
Hatteras manages Hatteras-sponsored open-end registered investment companies and closed-end registered investment companies registered under the Investment Company Act of 1940. Hatteras, through its broker-dealer subsidiary, is the non-exclusive wholesale distributor of these funds. These funds are available through affiliated and unaffiliated channels.
Realty Capital Securities also distributes American Realty Capital-sponsored open-end registered investment companies and closed-end registered investment companies registered under the Investment Company Act.
Selling Group
As the wholesale distributor of interests in direct investment programs and registered investment companies and other securities products, we enter into selling agreements with retail broker-dealers and coordinate the sales process with the retail broker-dealers and registered investment advisers and their financial advisors.
Collectively as of December 31, 2014, Realty Capital Securities, StratCap and Hatteras employed 161 individual wholesalers. These individuals are responsible for promoting sales of products for which we serve as dealer-manager and recruiting new retail broker-dealers and registered investment advisers to sell our products. We are focused on expanding this group by increasing the business we do with existing members and adding new members.
While maintaining separate wholesalers specialized on liquid alternative products and direct investment programs, we are also focused on training our wholesalers so that they can promote other products to selling group members with which they do business.
As of December 31, 2014, we had a selling group of approximately 220 brokerage firms with approximately 1,100 active selling agreements supporting approximately 42,600 financial advisors. Some of these active selling agreements are currently subject to temporary suspensions. See “Risk Factors - Risks Related to our Business -The announcement concerning certain accounting errors by ARCP has resulted in a number of broker-dealer firms temporarily suspending their participation in the distribution of offerings of public, non-traded REITs sponsored directly or indirectly by American Realty Capital that are distributed by us and there can be no assurance that it will not have additional adverse impacts on our results of operations or the market price of our Class A common stock.”
Products Distributed
The offerings distributed by Realty Capital Securities and StratCap as of March 6, 2015 include direct investment programs, which currently consist of 10 public non-traded REITs, three public, non-traded BDCs, an oil and gas program and two public non-traded limited liability companies. The non-traded REIT offerings are sector-specific and consist of healthcare, hospitality, grocery anchored retail, real estate debt, anchored core retail, global sale-leaseback and New York office and retail real estate. The offerings distributed by Realty Capital Securities and StratCap also include four mutual funds, two closed-end interval funds, consisting of a fund that focuses on debt and equity investments in middle market companies, a fund that makes debt investments in broadly syndicated U.S. corporate first lien, floating rate loans and, to a lesser extent, second lien floating rate loans, a real estate securities closed-end interval fund, endowment strategy closed-end interval fund, a BDC open-end fund that invests in equity securities of other BDCs, an open-end fund with a “value” investment approach that invests in dividend paying common stocks and other equity securities of issuers that trade in the U.S. on nationally recognized securities exchanges; a real estate securities open-end fund and a global real estate securities open-end fund. For more details on the current status of each of these offerings, see the tables below.

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December 31, 2014

Programs Sponsored by American Realty Capital
Program
Type of Program
Targeted Investments
Date of First Public Filing with SEC
Aggregate Gross Offering Proceeds Raised as of December 31, 2014
Aggregate Amount Available for Sale as of December 31, 2014
Current Status
American Realty Capital Trust, Inc.
Non-traded REIT
Net lease real estate
September 10, 2007
$1.7 billion
Offering completed in July 2011
Listed on The NASDAQ Global Select Market under the ticker symbol “ARCP” on March 1, 2012; merged with and into Realty Income Corporation on January 22, 2013
New York REIT, Inc. (formerly American Realty Capital New York Recovery REIT, Inc.)
Non-traded REIT
New York City office and retail
November 12, 2009
$1.7 billion
Offering completed in January 2014
Listed on the NYSE under the ticker symbol “NYRT” on April 15, 2014
American Realty Capital Healthcare Trust, Inc.
Non-traded REIT
Healthcare-related properties
August 27, 2010
$1.8 billion
Offering completed in May 2013
Listed on The NASDAQ Global Select Market under the ticker symbol “HCT” on April 7, 2014; merged with and into Ventas Inc. on January 16, 2015
American Realty Capital Daily Net Asset Value Trust, Inc.
Non-traded REIT
Net lease real estate
October 8, 2010
$26.5 million
$1.47 billion
Operational stage
American Realty Capital Trust III, Inc.
Non-traded REIT
Net lease real estate
November 3, 2010
$1.8 billion
Offering completed in October 2012
Merged with and into ARCP on February 28, 2013
American Realty Capital Trust IV, Inc.
Non-traded REIT
Net lease real estate
March 22, 2012
$1.8 billion
Offering completed in April 2013
Merged with and into ARCP on January 3, 2014
American Realty Capital Healthcare Trust II, Inc.
Non-traded REIT
Healthcare-related properties
October 31, 2012
$2.06 billion
Offering completed in October 2014
Operational stage
Realty Finance Trust, Inc.
Non-traded REIT
Commercial real estate debt
January 22, 2013
$383.9 million
$1.62 billion
Offering stage
American Realty Capital Trust V, Inc.
Non-traded REIT
Net lease real estate
March 6, 2013
$1.6 billion
Offering completed
Operational stage
American Realty Capital New York City REIT, Inc.
Non-traded REIT
New York City office and retail
February 26, 2014
$511.0 million
$1.0 billion
Offering stage
Business Development Corporation of America
Business development company
Middle market debt
May 7, 2010
$1.74 billion
$883.9 million
Offering stage
American Energy Capital Partners, LP
Oil and gas limited partnership
Oil and natural gas properties
December 13, 2013
$6.2 million
$1.99 billion
Offering stage
Realty Capital Income Funds Trust
Open-end mutual fund
Real estate related securities
December 28, 2012
$41.1 million(1)
Not applicable
Offering stage
AR Capital Real Estate Income Fund
Open-end mutual fund (a series of Realty Capital Income Funds Trust)
Real estate related assets and securities
December 28, 2012
$47.1 million(1)
Not applicable
Offering stage
AR Capital Global Real Estate Income Fund
Open-end mutual fund (a series of Realty Capital Income Funds Trust)
Real estate related assets and securities
February 27, 2014
$10.2 million(1)
Not applicable
Offering stage
AR Capital Dividend & Value Fund
Open-end mutual fund (a series of Realty Capital Income Funds Trust)
Dividend paying common stocks and other equity securities of issuers that trade in the U.S. on nationally recognized securities exchanges
December 20, 2013
$1.4 million(1)
Not applicable
Offering stage
AR Capital BDC Income Fund
Open-end mutual fund (a series of Realty Capital Income Funds Trust)
Investments in common stocks and other equity securities of business development companies
December 20, 2013
$9.4 million(1)
Not applicable
Offering stage
American Real Estate Income Fund
Closed-end mutual fund
Investments in real estate related assets and securities
August 15, 2011
$0(1)
Not applicable
Offering stage
___________________
(1) Represents net sales.

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RCS Capital Corporation and Subsidiaries
December 31, 2014

Programs Sponsored or Co-Sponsored by American Realty Capital That Have Third-Party Service Providers
Program
Type of Program
Targeted Investments
Date of First Public Filing with SEC
Aggregate Gross Offering Proceeds Raised as of December 31, 2014
Aggregate Amount Available for Sale as of December 31, 2014
Current Status
Phillips Edison - Grocery Center REIT Inc.(1)
Non-traded REIT
Grocery-anchored retail
January 13, 2010
$1.7 billion
Offering completed in January 2014
Operational stage
American Realty Capital - Retail Centers of America, Inc.(2)
Non-traded REIT
Anchored core retail
September 14, 2010
$939.5 million
Offering completed in September 2014
Operational stage
American Realty Capital Global Trust, Inc.(3) (“Global I”)
Non-traded REIT
Global sale-leaseback
October 27, 2011
$687.5 million
Offering completed in August 2014
Operational stage
Phillips Edison - Grocery Center REIT II, Inc.(4)
Non-traded REIT
Grocery-anchored retail
August 13, 2013
$362.0 million
$1.04 billion
Offering stage
American Realty Capital Hospitality Trust, Inc.(5)
Non-traded REIT
Lodging
August 19, 2013
$253.5 million
$1.75 billion
Offering stage
United Development Funding Income Fund V(6)
Non-traded REIT
Residential real estate and related assets and securities
February 26, 2014
$9.8 million
$740.2 million
Offering stage
American Realty Capital Global Trust II, Inc.(3) (“Global II”)
Non-traded REIT
Global sale-leaseback
June 6, 2014
$31.3 million
$3.1 billion
Offering stage
American Realty Capital Retail Centers of America II, Inc.(2)
Non-traded REIT
Grocery-anchored retail
June 9, 2014
$0 million
$3.125 billion
Offering stage
___________________
(1) Originally co-sponsored by American Realty Capital and Phillips Edison Limited Partnership, a third party not affiliated with our company or American Realty Capital. The executive officers of the program are affiliates of Phillips Edison Limited Partnership. An affiliate of Phillips Edison Limited Partnership currently serves as the program’s external advisor. The program also has engaged an entity wholly owned by Phillips Edison Limited Partnership as its property manager.
(2) Sponsored by American Realty Capital. An affiliate of American Realty Capital serves as the program’s external advisor. The external advisor has retained Lincoln Retail REIT Services, LLC, a third party not affiliated with our company or American Realty Capital, to provide, subject to the external advisor’s oversight, real estate-related services.
(3) Sponsored by American Realty Capital. An affiliate of American Realty Capital serves as the program’s external advisor. Solely with respect to investments in Europe, the program’s external advisor has delegated substantial real estate-related duties to Moor Park Capital Partners LLP (with respect to Global I) and Moor Park Capital Global II Advisors Limited (with respect to Global II), in each case a third party not affiliated with our company or American Realty Capital. Solely with respect to the program’s foreign investment strategy outside of Europe, the program’s external advisor may also delegate certain of its advisory duties to one or more additional service providers.
(4) Co-sponsored by American Realty Capital and Phillips Edison Limited Partnership, a third party not affiliated with our company or American Realty Capital. The executive officers of the program are affiliates of Phillips Edison Limited Partnership. An affiliate of American Realty Capital serves as the program’s external advisor. The program’s external advisor has delegated most of its duties to a sub-advisor wholly owned by Phillips Edison Limited Partnership. The program also has engaged an entity wholly owned by Phillips Edison Limited Partnership as its property manager. The program’s external advisor and sub-advisor own interests in the special limited partner of the program’s operating partnership.
(5) Sponsored by American Realty Capital. Affiliates of American Realty Capital serve as the program’s external advisor and property manager. The program’s sub-property manager is a joint venture between American Realty Capital and Barceló Crestline Corporation, a third party not affiliated with our company or American Realty Capital. The program’s sub-property manager is responsible for managing certain of the program’s lodging and other hospitality properties.
(6) Co-sponsored by American Realty Capital and UDF Holdings, L.P., a third party not affiliated with our company or American Realty Capital. The executive officers of the program are affiliates of UDF Holdings, L.P. An affiliate of American Realty Capital serves as the program’s external advisor. The program’s external advisor has delegated most of its duties to a sub-advisor wholly owned by UDF Holdings, L.P.

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December 31, 2014

Programs Distributed by StratCap
Program
Type of
Program
Targeted
Investments
Date of First Public Filing with SEC
Aggregate Gross Offering Proceeds Raised as of December 31, 2014
Aggregate Amount Available for Sale as of December 31, 2014
Current Status
Carter Validus Mission Critical REIT, Inc.
Non-traded REIT
Net Lease, Mission Critical Data Center/ Healthcare Real Estate
March 23, 2010
$1.8 billion
Offering Completed on June 6, 2014
Operational stage
Sierra Income
Corporation
Non-traded BDC
Direct Origination, Senior Secured Corporate Debt
July 18, 2011
$572.7 million
$928 million
Offering Stage
RREEF Property Trust, Inc.
Non-traded REIT
Diversified Core Real Estate; Real Estate Securities
March 26, 2012
$47.6 million
$2.45 billion
Offering Stage
TriLinc Global Impact Fund LLC
Non-traded LLC
Diversified, Global (Developing Economy) Impact Investments (Direct Loans and Trade Finance Facilities)
October 22, 2012
$70.5 million
$1.43 billion
Offering Stage
Greenbacker Renewable Energy Company LLC
Non-traded LLC
Diversified Renewable Energy Investments
December 11, 2012
$12.3 million
$1.48 billion
Offering Stage
Carter Validus Mission Critical REIT II, Inc.
Non-traded REIT
Net Lease, Mission Critical Data Center/ Healthcare Real Estate
October 11, 2013
$70.7 million
$2.28 billion
Offering Stage
Registered Investment Companies Distributed by Hatteras
Investment Vehicle
Type of Program
Targeted Investments
Commencement of Operations
Assets under Management as of December 31, 2014
Current Status
Hatteras Core Alternatives Fund LP
Closed-End Fund
Multi-strategy
April 1, 2005
$157 million
Open
Hatteras Core Alternatives TEI Fund LP
Closed-End Fund
Multi-strategy
April 1, 2005
$208 million
Open
Hatteras Core Alternatives Institutional Fund LP
Closed-End Fund
Multi-strategy
January 1, 2007
$169 million
Open
Hatteras Core Alternatives TEI Institutional Fund LP
Closed-End Fund
Multi-strategy
February 1, 2007
$451 million
Open
Hatteras Alpha Hedged Strategies Fund
Open-End Mutual Fund
Multi-strategy
September 23, 2002
$610 million
Open
Hatteras Hedged Strategies Fund
Open-End Mutual Fund
Multi-strategy
May 2, 2011
$279 million
Open
Hatteras Long/Short Debt Fund
Open-End Mutual Fund
Fixed income
May 2, 2011
$465 million
Open
Hatteras Long/Short Equity Fund
Open-End Mutual Fund
Equities
May 2, 2011
$35 million
Open
Hatteras Managed Futures Fund
Open-End Mutual Fund
Futures strategy
September 27, 2012
<$1 million
Open
Hatteras Disciplined Opportunities Fund
Open-End Mutual Fund
Options strategy
January 1, 2014
$33 million
Open
Wildermuth Endowment Strategy Fund
Interval fund
Multi-strategy
December 22, 2014
$967 million
Open

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RCS Capital Corporation and Subsidiaries
December 31, 2014

Programs Not Sponsored or Co-Sponsored by American Realty Capital, StratCap or Hatteras
Offering
Type of Program
Targeted Investments
Date of First Public Filing with SEC
Aggregate Gross Offering Proceeds Raised as of December 31, 2014
Aggregate Amount Available for Sale as of December 31, 2014
Current Status
United Development Funding IV(1)
Non-traded REIT
Single-family home development loans
August 5, 2008
$626.6 million
Offering completed in June 2013
Listed on The NASDAQ under the ticker symbol “UDF” on June 4, 2014
Healthcare Trust of America(2)
Non-traded REIT
Healthcare-related properties
April 28, 2006(3)
$2.2 billion(4)
Offering completed in April 2011
Listed on The New York Stock Exchange under the ticker symbol “HTA” on June 6, 2012
___________________
(1) Sponsored by United Development Funding, a third party not affiliated with our company or American Realty Capital.
(2) Sponsored by Triple Net Properties, LLC, a third party not affiliated with our company or American Realty Capital.
(3) Realty Capital Securities did not provide services with respect to such filing, but, effective August 29, 2009, assumed exclusive dealer manager responsibilities for the program’s initial public offering.
(4) Represents the aggregate gross offering proceeds raised during the period during which Realty Capital Securities served as exclusive dealer manager for the program’s initial public offering.
Investment Management
Our investment management business consists of Hatteras. Hatteras provides investment advisory and distribution to the Hatteras family of registered investment company funds, which is focused on liquid alternatives. The Hatteras family of funds includes retail funds (both open- and closed-end) with approximately $2.5 billion in assets under management as of December 31, 2014.
A broker-dealer subsidiary of Hatteras acts as distributor for the funds, Hatteras serves as advisor for all the Hatteras funds and performs investment management services pursuant to contracts with the funds.
These funds are available through affiliated and unaffiliated channels. See “Wholesale DistributionRegistered Investment Companies.”
Investment Banking, Capital Markets and Transaction Management Services
Operating under the name RCS Capital, Realty Capital Securities and RCS Advisory provide direct investment programs, primarily publicly registered non-traded REITs and BDCs as well as open and closed end mutual funds sponsored, co-sponsored or advised by American Realty Capital and distributed by Realty Capital Securities, with strategic advisory and capital markets services including include mergers and acquisitions, capital markets activities, registration management, and other transaction support services that together with our different service and capabilities we believe capture value across the direct investment program lifecycle. During the year ended December 31, 2014, we advised on capital markets and mergers and acquisitions activities representing $25.8 billion in transaction value, substantially all of which involved non-traded REITs sponsored, co-sponsored or advised by American Realty Capital. As of December 31, 2014, we were engaged as strategic advisors for four direct investment programs sponsored by American Realty Capital that are distributed by Realty Capital Securities and one direct investment program distributed by StratCap. We are seeking to expand our services to other sponsors of direct investment programs and other unrelated entities. To date, these services have been provided primarily to clients that were sponsored, co-sponsored or advised by American Realty Capital.
Our investment banking and transaction management fees include revenues that are project-based as well as success-based. Project-based fees are earned for assignments including market overviews, transaction structuring and transaction management where we are engaged for a specified project deliverable and a fixed fee. Success-based transactions are typically investment banking mergers and acquisitions or capital markets transactions where we are paid only upon the successful completion of a specific transaction. Approximately 31% of our $84.4 million in investment banking and transaction management fees in 2014 were project-based and 69% were success-based. To date, all of these fees have been generated through transactions involving direct investment programs or other entities that are sponsored, co-sponsored or advised by American Realty Capital. Due to the transactional nature of our investment banking revenues, investment banking and capital markets profits may fluctuate from period to period based on the volume and nature of transactional activity.

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RCS Capital Corporation and Subsidiaries
December 31, 2014

Investment Banking and Capital Markets Services
Our investment banking business provides strategic advisory services in connection with (1) advising sponsors in the structuring and development of new direct investment programs and registered investment companies and other products; (2) advising sponsors and companies, including with respect to direct investment programs, as both buyers and sellers in connection with merger and acquisition transactions; (3) advising direct investment programs, especially non-traded REITs, in connection with liquidity alternatives, which may include listing on a national securities exchange; and (4) debt and equity capital raising advice, including structuring, pricing and marketing. All of our strategic advisory service clients are entities for whom Realty Capital Securities raises or has raised equity capital. For the year ended December 31, 2014, substantially all of our investment banking and capital markets revenue was attributable to direct investment programs sponsored, co-sponsored or advised by American Realty Capital.    
The investment banking group also engages in a diverse range of equity capital markets transactions, including serving as financial advisor, placement agent, co-manager and selling group member, to various public and private companies. In addition to underwriting co-managed equity offerings, the department coordinates the firm’s syndicate and selling group activities in transactions managed by other investment banking firms. In addition, in October 2014, we entered into an agreement with JMP Securities LLC (“JMP”), the investment banking and capital markets division of JMP Group Inc., pursuant to which JMP may make initial public offerings and other securities offerings underwritten by JMP available to our Retail Firms to syndicate and distribute.
Transaction Management Services
RCS Advisory is comprised of 57 professionals who provide a range of services to direct investment programs and their sponsors including: offering registration and blue sky filings, regulatory advice with respect to the SEC and FINRA, registration maintenance, transaction management, marketing support, due diligence advice and related meetings, events, training and education, conference management and strategic advice in connection with liquidity events and other strategic transactions. We believe that the services offered by RCS Advisory complement the service offerings of our other lines of business.
RCS Advisory is not in the business of, and does not hold itself out as, providing legal advice to its clients. However, it offers services that are intended to assist clients in addressing the complex regulatory environment surrounding the direct investment program industry.
Transfer Agency Services
ANST is registered as a transfer agent with the SEC. ANST acts as registrar, provides record-keeping services and executes the transfer, issuance and cancellation of shares or other securities in connection with offerings conducted by issuers sponsored directly or indirectly by American Realty Capital. ANST employs 27 professionals, and may act on behalf of other issuers of interests in direct investment programs and other securities, including securities issued by registered investment companies. ANST is also responsible for coordinating tax reporting efforts and the payment of distributions and redemptions, among other services. ANST generates fees from a variety of services performed for issuers of interests in direct investment programs and registered investment companies. For the year ended December 31, 2014, our transfer agency services business had revenue of $20.6 million, substantially all of which was attributable to American Realty Capital-sponsored products. ANST has entered into agreements with DST Systems, Inc. (“DST”) pursuant to which DST acts as subcontractor in connection with the services provided by ANST.
Docupace
On November 21, 2014, we completed the acquisition of a controlling financial interest in Docupace, a provider of integrated, electronic processing technologies and systems for financial institutions and wealth management firms. Docupace offers technology solutions that enable broker-dealers to connect systems, documents and data seamlessly to drive cost savings, efficiency and compliance oversight. Docupace’s core offering is a Straight-Through-Processing platform called ePACS®.
Research Division
In March 2014, we launched SK Research, the initial component of a new research division dedicated to alternative investment programs. As a first step in our establishment of a research division, SK Research provides due diligence on traditional and non-traditional investment products to Cetera Financial Group. SK Research also provides focused research, consulting, training and education to Cetera Financial Group, which we believe enhances the financial advice our financial advisors can provide to their clients. SK Research also provides due diligence services in connection with direct investment programs, including direct investment programs sponsored, co-sponsored or advised by American Realty Capital, to other broker-dealers and registered investment adviser firms, as well as individual registered representatives and investment adviser representatives.
As part of the launch of SK Research, we hired due diligence and research professionals Todd Snyder and John Kearney to head SK Research. Messrs. Snyder and Kearney previously operated Snyder Kearney LLC, a law firm that provided due diligence services to broker-dealers relating to alternative investment products, primarily non-traded REITs and BDCs.

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RCS Capital Corporation and Subsidiaries
December 31, 2014

Intellectual Property
We own various registered and unregistered trademarks, service marks and copyrights, including “Cetera,” “Cetera Financial Group,” “Connect2Clients®,” “Pentameter™” and others. We also own various design marks related to logos for various business segments, as well as the Internet domain names for our and our subsidiaries’ websites.
Employees
As of December 31, 2014, we had 1,942 full-time employees and 25 part-time employees. In addition, as of December 31, 2014, we had 9,023 financial advisors, of which 8,862 are independent contractors and 161 are also full- or part-time employees of the company.
Competition
We compete directly with national and regional full-service broker-dealers and a broad range of other financial services firms, including banks, asset management companies, investment advisers, insurance companies and brokerage and investment banking firms. Competition has increased as smaller securities firms have either ceased doing business or have been acquired by or merged into other firms. Mergers and acquisitions have increased competition from these firms, many of which have significantly greater financial, technical, marketing and other resources than we do. Many of these firms offer their clients more products and services than we do. These competitors may be able to respond more quickly to new or changing opportunities, technologies and client requirements. These competitors may have lower costs or provide more services, and they may offer their clients more favorable commissions, fees or other terms than those offered by us.
Part I
Item 1A. Risk Factors
You should carefully consider each of the risks described below, together with all the other information contained in this Annual Report on Form 10-K, before deciding to invest in shares of our Class A common stock. If any of the following risks develop into actual events, our business, financial condition or results of operations could be negatively affected, the market price of your shares could decline and you could lose all or part of your investment. You should also refer to the other information set forth in this Annual Report on Form 10-K, including “Cautionary Note Regarding Forward-Looking Statements.”
Risks Related to Our Business
We have a limited operating history in the businesses we are currently engaged in.
During 2014, we completed the acquisitions or launched the operations of ten businesses that operate independently under separate brands and management. We have also entered into agreements to acquire VSR and Girard, which we also expect will continue to operate independently under separate brands and management following the completion of their acquisitions by us, which we expect will close during March 2015. We refer to the businesses we have acquired or launched during 2014 and expect to acquire in March 2015, collectively, as the “acquired businesses” and to the transactions in which they were or will be acquired as the “recent and pending acquisitions.”
The acquired businesses are predominantly the Retail Firms that comprise Cetera Financial Group. Prior to the completion of the Cetera acquisition in April 2014, we had not previously engaged in the independent retail advice business.
Our investment banking, capital markets, transaction management services and transfer agency businesses were launched during the period from November 2012 through January 2013.
Our lack of an operating history in these businesses may also increase the challenges inherent in the difficult process of integrating and realizing the expected benefits of the recent and pending acquisitions and any future complementary acquisitions we may pursue. See “—Risks Related to Our Acquisitions.” We also are now exposed to operational risks and regulatory risks that we had not previously been exposed to. See “—Risks Related to Our Retail Firms” and “—Regulatory Risks.”
Because of our limited operating history in the businesses we are currently engaged in, you should not rely on our past performance to predict our future results.

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RCS Capital Corporation and Subsidiaries
December 31, 2014

A failure to protect our reputation could adversely affect our businesses.
Our ability to attract and retain clients, investors, employees and financial advisors is highly dependent upon external perceptions of us and our businesses. Damage to our reputation could cause significant harm to our business and prospects and may arise from numerous sources, including litigation or regulatory actions, failing to deliver acceptable standards of service and quality, compliance failures, any perceived or actual weakness in our financial strength or liquidity, unethical behavior and the misconduct of our employees, executive officers, financial advisors, sponsors of financial products we offer or distribute and other third parties we rely on or partner with to conduct our businesses. Negative perceptions or publicity regarding these matters could damage our reputation among existing and potential clients, investors, employees and financial advisors. Adverse developments with respect to our industry may also, by association, negatively impact our reputation or result in greater regulatory or legislative scrutiny or litigation against us.
Our indebtedness could adversely affect our financial health and may limit our ability to use debt to fund future capital needs.
As of December 31, 2014, we had total indebtedness of $804.4 million. Our level of indebtedness could increase our vulnerability to general adverse economic and industry conditions. It could also require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes.
We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. In addition, we are limited in the amount of capital that we can draw from our broker-dealer subsidiaries. If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to sell assets, seek additional capital or seek to restructure or refinance our indebtedness. These alternative measures may not be successful or feasible and may not be on as favorable terms. The secured term loans and revolving credit facility, which we refer to as the “bank facilities,” entered into in connection with the closing of the acquisition of Cetera, and the indenture governing the convertible notes issued on April 29, 2014 in connection with the acquisition of Cetera, which we refer to as the “convertible notes,” restrict our ability to sell assets. Even if we could sell our assets, the proceeds that we realize from such sales may not be adequate to meet any debt service obligations then due. Furthermore, if an event of default were to occur with respect to our outstanding indebtedness, our creditors could, among other things, accelerate the maturity of our indebtedness.
In addition, our level of indebtedness may limit our flexibility in planning for changes in our business and the industry in which we operate, and limit our ability to borrow additional funds. Furthermore, the bank facilities and the indenture governing the convertible notes permit us to incur additional indebtedness. Although the bank facilities and the indenture governing the convertible notes contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial. Also, these restrictions will not prevent us from incurring certain other obligations that do not constitute “indebtedness” as defined in the bank facilities and the indenture governing the convertible notes. To the extent new debt or other obligations are added to our currently anticipated debt levels, the substantial indebtedness risks described above would increase.
We may require additional financing, which may not be available on acceptable terms or at all.
In order for us to have the opportunity for future success and profitability, we periodically may need to obtain additional financing, either through borrowings, public offerings, private offerings, or some type of business combination. We may need to seek to raise additional capital through other available sources, which may include borrowing additional funds or raising additional capital from third parties, and there can be no assurance that we will be successful in obtaining required funds on favorable terms, or at all. Our ability to raise capital may also be limited by restrictions on, among other things, incurring indebtedness, that are contained in the bank facilities, the indenture governing the convertible notes, the certificate of designation (the “Series B COD”) governing our 11% Series B preferred stock, par value $0.001 per share (the “Series B preferred stock”), and the certificate of designation (the “Series C COD”), governing our 7% Series C convertible preferred stock, par value $0.001 per share (the “Series C convertible preferred stock”).
Additionally, the issuance of new securities to raise capital may cause the dilution of shares of Class A common stock held by current stockholders.
In addition to cash required to operate our businesses, we have other cash requirements including the payment of interest on our indebtedness and the cash component of consideration, including post-completion consideration, to be paid in connection with the recent and pending acquisitions. If we are unable to generate adequate cash from our operations, or from financing activities, our liquidity and results of operations could be adversely impacted.

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RCS Capital Corporation and Subsidiaries
December 31, 2014

The bank facilities and the indenture governing the convertible notes contain restrictions that may prevent us from taking actions that we believe would be in the best interest of our business.
The bank facilities and the indenture governing the convertible notes contain customary restrictions on our activities, including covenants that may restrict us from:
incurring additional indebtedness or issuing disqualified stock or preferred stock;
paying dividends on, redeeming or repurchasing our capital stock, subject to certain limited exceptions set forth in the agreements governing the bank facilities;
making investments or acquisitions;
creating liens;
selling assets;
receiving dividends or other payments to us;
guaranteeing indebtedness;
engaging in transactions with affiliates; and
consolidating, merging or transferring all or substantially all our assets.
We also are required to comply with financial covenants regarding a maximum total leverage ratio, a minimum fixed charge coverage ratio and minimum regulatory net capital. These restrictions may prevent us from taking actions that we believe would be in the best interest of our business. Our ability to comply with these restrictive covenants will depend on our future performance, which may be affected by events beyond our control.
If we violate any of these covenants and are unable to obtain waivers, we would be in default under the bank facilities or indenture and payment of our indebtedness could be accelerated. The acceleration of our indebtedness under one agreement may permit acceleration of indebtedness under other agreements that contain cross-default or cross-acceleration provisions. If our indebtedness is accelerated, we may not be able to repay that indebtedness or borrow sufficient funds to refinance it. Even if we are able to obtain new financing, it may not be on commercially reasonable terms or on terms that are acceptable to us. If our indebtedness is in default for any reason, our business could be materially and adversely affected.
Complying with these covenants may also cause us to take actions that are not favorable to holders of our Class A common stock and may make it more difficult for us to successfully execute our business strategy and compete against companies that are not subject to such restrictions.
In addition, the approval of the majority of the outstanding Series B preferred stock and Series C convertible preferred stock is also required for us to (i) issue certain securities, including certain new series or additional shares of preferred stock; (ii) enter into certain affiliate transactions; and (iii) incur any indebtedness or guarantee with an aggregate value of more than 4.0 times LTM Adjusted EBITDA (as defined in the Series B COD and the Series C COD).
Our ability to attract and retain qualified professionals is critical to our success.
We depend on the skills and expertise of the qualified professionals who work for us and our success depends on our ability to retain existing and attract new qualified professionals. The qualified professionals of our operating subsidiaries are generally direct, full-time employees of our operating subsidiaries. The professionals and senior marketing personnel of our operating subsidiaries have direct contact with our clients, financial advisors and retail broker-dealers, and with other key individuals, and the loss of these personnel could jeopardize those relationships and result in the loss of managed accounts. If we lose the services of any key personnel, we may not be able to manage and grow our operations effectively, enter new markets, develop new products or effectively integrate businesses we acquire, including the acquired businesses and any future acquisitions, into our operations.
We also anticipate that it will be necessary for us to hire additional professionals as we further diversify our products and strategies. Competition for employees with the requisite qualifications is intense and we may not be successful in our efforts to recruit and retain the required personnel. Our ability to retain and attract such personnel will depend heavily on the amount of compensation we can offer. Compensation levels in the securities industry are highly competitive. Consequently, our profitability could decline as we compete for personnel. An inability to recruit and retain qualified personnel could affect our ability to provide appropriate levels of service to our clients and hinder our ability to attract new clients, each of which could have a material adverse effect on our business.

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RCS Capital Corporation and Subsidiaries
December 31, 2014

The continued services of our executive officers and other key management personnel, including executive officers and senior managers of the acquired businesses, are critical to our success.
We depend on our executive officers and other key management personnel to manage our businesses. We have entered into agreements with certain of these individuals, including certain executive officers and senior managers of the acquired businesses, pursuant to which they have remained employed by us following the completion of the recent and pending acquisitions.
To the extent we depend on agreements to retain executive officers and other key management personnel, the agreements are terminable contracts and do not ensure that key executive officers and senior managers will remain employed by us for as long as their services would be beneficial to us. The loss of one or more of these individuals, and the failure to recruit a suitable replacement or replacements, could have a material adverse effect on our business.
The announcement concerning certain accounting errors by ARCP has affected sales by RCAP of public, non-traded REITs sponsored directly or indirectly by American Realty Capital that are distributed by us and there can be no assurance that it will not continue to affect equity capital raised and have additional adverse impacts on our results of operations or the market price of our Class A common stock.
On October 29, 2014, ARCP announced that its audit committee had concluded that the previously issued financial statements and other financial information contained in certain public filings should no longer be relied upon. This conclusion was based on the preliminary findings of an investigation conducted by ARCP’s audit committee which concluded that certain accounting errors were made by ARCP personnel that were not corrected after being discovered, resulting in an overstatement of adjusted funds from operations (“AFFO”) and an understatement of ARCP’s net loss for the three and six months ended June 30, 2014. ARCP also announced the resignation of its chief accounting officer and its chief financial officer, who is a member of our controlling stockholder, RCAP Holdings, LLC (“RCAP Holdings”), and a member of American Realty Capital, and also served as our chief financial officer until December 2013. Such former chief financial officer also served as a member of our board of directors until July 2014, but he does not currently have a role in the management of our business. Although ARCP was previously sponsored by an entity under common control with RCAP Holdings and was advised by such entity until January 2014, ARCP is a separate company that is no longer sponsored or advised by an entity under common control with RCAP Holdings. The former executive chairman of our board of directors, who resigned on December 29, 2014, was the chairman of the board of directors of ARCP until his resignation on December 12, 2014.
As a result of the announcement concerning certain accounting errors by ARCP, a number of broker-dealer firms that had been participating in the distribution of offerings of public, non-traded REITs sponsored directly or indirectly by American Realty Capital that are distributed by us have temporarily suspended their participation in the distribution of those offerings and such suspensions have adversely impacted equity capital raised. Although certain of these broker-dealer firms have reinstated their participation in the distribution of our offerings, we cannot predict the length of time these temporary suspensions will continue, whether all such participating broker-dealers will reinstate their participation in the distribution of our offerings or whether there will be additional suspensions. While monthly equity capital raised has increased subsequent to the month after the announcement, equity capital raised subsequent to the announcement has declined in comparison to prior periods. Although the amount of the decline may have been affected by factors in addition to the ARCP announcement, such as absence of liquidity events and the stages of the offerings of individual direct investment programs, the ARCP announcement has had a material adverse effect on equity capital raised by direct investment programs distributed by us during this period, and, accordingly, has had an adverse impact on our results of operations for the period subsequent to the ARCP announcement.
On March 2, 2015, ARCP announced the completion of its audit committee’s investigation and filed amendments to its Form 10-K for the year ended December 31, 2013 and its Form 10-Q for the quarters ended March 31, 2014 and June 30, 2014, which are available at the internet site maintained by the SEC, www.sec.gov. These amendments corrected errors in ARCP’s financial statements and in its calculation of AFFO that resulted in overstatements of AFFO for the years ended December 31, 2011, 2012 and 2013 and the quarters ended March 31, 2013 and 2014 and June 30, 2014 and described certain results of its investigations, including matters relating to payments to, and transactions with, affiliates of American Realty Capital and certain equity awards to certain officers and directors. ARCP also disclosed that the SEC has commenced a formal investigation and that the United States Attorney’s Office for the Southern District of New York contacted counsel for both ARCP’s audit committee and ARCP with respect to the matter.


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RCS Capital Corporation and Subsidiaries
December 31, 2014

We received subpoenas requiring the production of certain documents and other materials relating to sales of certain non-traded REITs and similar products sponsored, co-sponsored or advised by American Realty Capital (“ARC Issuers”). We complied with the subpoenas and intend to comply with any additional subpoenas received in the future. In addition, certain ARC Issuers have received inquiries from certain state securities regulators for information regarding their relationship with ARCP in connection with the annual qualification of such ARC Issuers’ offerings under the state blue sky laws, which is required for the offerings to continue in such states. The ARC Issuers have responded and are continuing to respond to those inquiries. If such ARC Issuers are not successful in responding to these inquiries, it could delay or prevent the offering of securities of such ARC issuers in certain states.
We are also aware of two lawsuits, one filed in December 2014 and one filed in January 2015, which name us as a defendant and allege that we, and certain of our affiliates, made materially false and misleading public statements and violated the securities laws in connection with matters described above. We believe these lawsuits are without merit and intend to defend ourselves vigorously, but there can be no assurance that any such defense will be successful. See “Item 3. Legal Proceedings.”
There can be no assurance that the announcement concerning certain accounting errors by ARCP, the disclosures in ARCP’s SEC filings on March 2, 2015 and any future related disclosures or events will not have additional adverse impact on equity capital raised by direct investment programs distributed by us, our results of operations or the market price of our Class A common stock. In addition, such events could affect the timing of the commencement of new offerings of direct investment programs sponsored, co-sponsored or advised by American Realty Capital and their demand for capital markets transactions and transaction services, which could materially adversely affect our revenues and results of operations.
We are subject to various risks associated with the securities industry.
We are subject to uncertainties that are common in the securities industry. These uncertainties include but are not limited to:
the volatility of domestic and international financial, bond and stock markets;
extensive governmental and industry regulation;
litigation;
exposure to significant legal liability;
intense competition;
substantial fluctuations in the volume and price level of securities; and
dependence on the solvency of various third parties.
As a result, revenues and earnings may vary significantly from quarter to quarter and from year to year. In periods of low volume, profitability is impaired, because certain expenses remain relatively fixed. In the event of a market downturn, our business could be adversely affected in many ways. Our revenues are likely to decline in such circumstances and, if we are unable to reduce expenses at the same pace, our profit margins would erode.
Our business and profitability could be adversely affected by downturns and volatility in the financial markets.
Our business is materially affected by conditions in the financial markets and economic conditions generally, both in the United States and elsewhere around the world. Many factors or events could lead to a breakdown or deterioration in the financial markets including war, terrorism, political uncertainty, natural catastrophes and other types of disasters, rising interest rates, the rate of inflation, currency exchange rates, changes in the regulatory environment or other factors or events. These types of events could cause people to begin to lose confidence in the financial markets and their ability to function effectively. If the financial markets are unable to effectively prepare for these types of events and ease public concern over their ability to function, our revenues are likely to decline and our operations are likely to be adversely affected. Difficult market and economic conditions, the level and volatility of interest rates, investor sentiment and political events have in the past adversely affected and may in the future adversely affect our business and profitability in many ways.
Unfavorable financial or economic conditions may reduce the number and size of the transactions in which we provide underwriting services, mergers and acquisitions consulting and other services. Our investment banking revenues, in the form of financial advisory, placement agent and underwriting fees, are directly related to the number and size of the transactions in which we participate and would therefore be adversely affected by a sustained market downturn. Additionally, a downturn in market conditions could lead to a decline in the volume of transactions that we execute for our clients and that our financial advisors execute on behalf of their clients and, therefore, to a decline in the revenues we receive from commissions and spreads. Lower securities price levels may also result in a reduced volume of transactions and lower levels of assets under management and assets under administration, any of which could adversely affect our business and profitability.

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RCS Capital Corporation and Subsidiaries
December 31, 2014

Demand for investment products, such as direct investment programs and mutual funds, is materially affected by conditions in the global financial markets and economic conditions throughout the world. A decrease in the demand for investment products also could adversely affect our business and profitability.
We face competition from other financial firms.
We compete directly with national and regional full-service broker-dealers and a broad range of other financial services firms, including banks, asset management companies, investment advisers, insurance companies and brokerage and investment banking firms. Competition has increased as smaller securities firms have either ceased doing business or have been acquired by or merged into other firms. Mergers and acquisitions have increased competition from these firms, many of which have significantly greater financial, technical, marketing and other resources than we do. Many of these firms offer their clients more products and services than we do. These competitors may be able to respond more quickly to new or changing opportunities, technologies and client requirements. These competitors may have lower costs or provide more services, and they may offer their clients more favorable commissions, fees or other terms than those offered by us.
Our exposure to legal liability is significant, and damages and other costs that we may be required to pay in connection with litigation and regulatory inquiries, and the reputational harm that could result from legal action against us, could adversely affect our businesses.
We face significant legal risks in connection with our businesses and, in recent years, the volume of claims and amount of damages sought in litigation and regulatory proceedings against financial services businesses have been increasing. We face potential liability under securities and other laws for, among other things, materially false or misleading statements made in connection with securities offerings or other transactions, employment claims, as well as potential liability in connection with the provision of advice to participants in strategic transactions. Moreover, our role as advisor to clients on important underwriting or mergers and acquisitions transactions involves complex analysis and the exercise of professional judgment. These activities may subject us to the risk of significant legal liability to our clients and aggrieved third parties, including our clients’ stockholders who could bring securities class action suits against us. We could also become subject to claims or legal proceedings alleging that we have infringed or misappropriated intellectual property or other proprietary rights of others. We are also subject to claims, litigation and regulatory proceedings involving our Retail Firms resulting from, among other things, alleged and actual errors and omissions, breach of fiduciary or other duties owed to clients, misconduct in effecting securities transactions, rendering investment advice or placing insurance, and criminal misconduct. See “—Risks Related to Our Retail Firms— We are exposed to significant legal liabilities from the operations of our Retail Firms.”
There is also a risk that our employees could engage in misconduct that adversely affects our business. It is not always possible to deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in all cases. If our employees engage in misconduct, our ability to attract and retain clients could be impaired and subjecting us to significant legal liability and reputational harm.
There can be no assurance that indemnities and other provisions to limit our exposure to legal claims relating to our services will protect us or be enforceable in all cases. As a result, we may incur significant legal and other expenses in defending against litigation and may be required to pay substantial damages for settlements and adverse judgments.
Substantial legal liability or significant regulatory action against any of our businesses could harm our results of operations or harm our reputation, which could adversely affect our business and prospects.
Internet and internal computer systems failures and degradations could harm our business.
A portion of our business is conducted through the Internet and through our internal computer system, either of which could experience system failures and degradations in the future due to circumstances beyond our control, which include, but are not limited to:
human error;
subsystem, component or software failure;
a power or telecommunications failure;
an earthquake, fire, or other natural disaster or act of God;
hacker attacks or other intentional acts of vandalism; or
acts of terror or war.
Any of these events could have a material adverse effect on our financial condition and results of operations.
Any of these events could also interfere with our ability to comply with financial reporting and other regulatory requirements, exposing us to potential disciplinary action by regulators.

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RCS Capital Corporation and Subsidiaries
December 31, 2014

Security breaches of our systems, or those of our clients, our financial advisors or third parties, may subject us to significant liability and damage our reputation.
Our businesses involve the storage and transmission of our clients’ and our financial advisors’ clients proprietary information. The secure storage and transmission of confidential information over public networks is a critical element of our operations. Cyber attacks on our systems or the systems of our financial advisors or third-party service providers could expose us to a risk of misappropriation of this information, leading to litigation and possible liability. If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, and, as a result, someone obtains unauthorized access to confidential information, our reputation could be damaged, our business may suffer and we could incur significant liability. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Because techniques used to obtain unauthorized access or to sabotage computer systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventive measures.
A cyber attack or security breach on our system or that of a financial advisor or a third-party service provider could manifest in different ways and could lead to any number of harmful consequences, including but not limited to:
misappropriation of financial assets, intellectual property or sensitive information belonging to us, our clients, our financial advisors, our financial advisors’ clients or our third-party service providers;
corruption of data or causing operational disruption through computer viruses or phishing; and
denial of service attacks to prevent users from accessing our platform.
Our remediation costs and lost revenues could be significant if we fall victim to a cyber attack. We may be required to expend significant resources to repair system damage, protect against the threat of future security breaches or to alleviate problems, including reputational harm, loss of clients and revenues and litigation, caused by any breaches. At this time our cyber insurance only covers the Cetera broker-dealers. We are in the process of expanding this coverage to the rest of the Retail Firms. Security breaches could also result in and could subject us to significant liability or loss that may not be covered by insurance, actions by regulators, damage to our reputation, or a loss of confidence in our security measures, which could harm our business. We also may be found liable for any stolen assets or misappropriated confidential information. Although we intend to continue to implement industry-standard security measures, we cannot assure you that those measures will be sufficient.
Our risk management policies and procedures, and the risk management policies and procedures of certain third parties, may leave us exposed to unidentified risks or an unanticipated level of risk.
The policies and procedures we employ to identify, monitor and manage risks may not be fully effective. Some methods of risk management are based on the use of observed historical market behavior. As a result, these methods may not accurately predict future risk exposures, which could be significantly greater than the historical measures indicate. Other risk management methods depend on evaluation of information regarding markets, clients or other matters that are publicly available or otherwise accessible by us. This information may not be accurate, complete, up-to-date or properly evaluated. Management of operational, legal and regulatory risks requires, among other things, policies and procedures to properly record and verify a large number of transactions and events. There can be no assurance that our policies and procedures will effectively and accurately record and verify this information.
Although we have not previously experienced significant or material losses to date due to gaps in our risk management policies and procedures, our ability to manage risk exposure can never be completely or accurately predicted or fully assured. For example, unexpectedly large or rapid movements or disruptions in one or more financial markets or other unforeseen developments could have a material adverse effect on our results of operations and financial condition.
In addition, although the agreements that we enter into with third-party selling group members in connection with our wholesale distribution business require them to certify that they have implemented their own appropriate risk management policies and procedures, we do not independently review those third-party selling group members’ risk management policies and procedures or supervise their management of their financial advisors. Similarly, our transfer agent business utilizes a third-party vendor to perform back-office transfer agency functions. Although the services agreement between our transfer agent and the third-party vendor establishes minimum standards of performance for the vendor, including a requirement to implement risk management policies and procedures, we do not review these risk management policies and procedures.
Our risk management policies and procedures may not identify potential risks in the operations of our distribution partners or third-party vendors that could impact our business. Our registered broker-dealer and investment adviser subsidiaries are engaged in the sale of products, such as insurance products, including annuities and life insurance, or the provision of financial advice related to such products, and significant risk management and supervisory systems and controls and surveillance protocols are in place for the oversight of these activities. To the extent that our systems and controls are ineffective in assuring compliance with applicable laws, rules and regulations, we could be exposed to significant regulatory or other sanctions.

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RCS Capital Corporation and Subsidiaries
December 31, 2014

Our risk management policies and procedures also monitor operational, legal and regulatory risk of the acquired businesses, which continue to operate independently under separate brands and management, and our financial advisors, most of whom operate through independent offices. This decentralization in our management and operations presents additional challenges to our risk management policies and procedures, which may not be fully effective or adequate to address the challenges we face and prevent material loss.
If we do not continue to develop and enhance our services in a timely manner, our business may be harmed.
Our future success will depend on our ability to develop and enhance our services and add new services. There are significant risks in the development of new or enhanced services, including the risk that we will be unable to effectively use new technologies, adapt our services to emerging industry or regulatory standards or market new or enhanced services.
If we are unable to develop and introduce new or enhanced services quickly enough to respond to market or client requirements or to comply with emerging industry standards, including regulatory standards, or if these services do not achieve market acceptance, our business could be seriously harmed.
Risks Related to Our Retail Firms
Any decrease in assets under administration or assets under management may decrease our revenue.
Management fees are primarily based on assets under management. The results of operations of our Retail Firms also depend on our level of assets under administration. Assets under management and assets under administration balances are impacted by both the flow of client assets in and out of accounts and changes in market values. Poor investment performance by financial products and financial advisors could result in reduced levels of assets under management or administration or a loss of managed accounts and could result in reputational damage that could make it more difficult to attract new investors. If our Retail Firms experience a reduction in assets under administration or assets under management, our revenues may decline.
Our Retail Firms face significant competition for financial advisors.
If our Retail Firms fail to attract new financial advisors or to retain and motivate existing financial advisors, our results of operations may suffer. The market for experienced and productive financial advisors is highly competitive, and significant resources must be devoted to attracting and retaining the most qualified financial advisors. If our Retail Firms are not successful in retaining highly qualified financial advisors, they may not be able to retain their clients or recover the expense associated with attracting and training financial advisors. They also may be unable to recruit suitable replacements. A loss of a materially large group of financial advisors (measured based on either number of financial advisors or assets under administration) could have a material adverse effect on our results of operations.
Financial advisors face significant competition for their clients.
Poor service by our financial advisors, or poor performance of financial products offered by our financial advisors, could result in the loss of managed accounts. In addition, we must monitor the pricing of services and financial products we offer in relation to competitors and periodically may need to adjust commission and fee schedules to remain competitive. Competitive pressures on the pricing of services or products can cause clients to shift their accounts and investments to a different financial advisor or financial product. The development and increased adoption of alternatives to the services provided by financial advisors, such as automated or computerized wealth management services that provide asset allocation strategies and other financial advice, could also exert competitive pricing pressure on us and affect the demand for the services provided by our financial advisors. If we experience losses of managed accounts for any reason, or fail to attract new ones, our revenues would decline.
Our Retail Firms’ relationships with sponsors of financial products may be disrupted.
Our Retail Firms have relationships with most of the leading industry sponsors of financial and insurance products pursuant to selling agreements, including strategic partnership arrangements, that may be terminated upon notice. These relationships are driven by many factors, such as our ability to facilitate sufficient sales volume through their distribution networks, and can be damaged for many reasons. For example, it is possible that our ownership and control of a wholesale distribution business and the fact that we are under common ownership and control with American Realty Capital could create the perception that our financial advisors favor products sponsored by American Realty Capital over products sponsored by other sponsors, which could affect the willingness of other sponsors to enter into, or maintain existing, selling agreements with the Retail Firms.
Any loss or damages to a relationship with a product sponsor for any reason, resulting in termination of a selling agreement or otherwise, could adversely affect our Retail Firms.

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Our Retail Firms compete based on highly specialized and, in many cases, proprietary technologies that are difficult and costly to maintain.
Highly specialized and, in many cases, proprietary technologies are required to support certain essential operational functions of our Retail Firms, including portfolio management, client service, accounting and internal financial processes and controls, and regulatory compliance and reporting. These technology platforms also are necessary to enable our Retail Firms to serve the needs of, and attract, financial advisors and enable them to serve the needs of their clients. Moreover, the effective use of technology increases efficiency and should enable our Retail Firms to reduce costs. There can be no assurance that we will be able to effectively adopt or develop new or adapt existing technologies to meet client, industry and regulatory demands made upon our Retail Firms, and any failure to do so could materially and adversely affect our results of operations.
Moreover, we might be required to make significant capital expenditures to maintain competitive technology and retain skilled information technology employees, although there can also be no assurance that we will retain such skilled information technology employees or that our investments in staff and technology will successfully meet the needs of financial advisors and their clients. Additionally, if the emergence of new industry standards and practices render our existing systems obsolete or uncompetitive, any upgrades or expansions may also require significant expenditures of funds and may also cause us to suffer system degradations, outages and failures. If our technology systems were to fail and we were unable to recover in a timely way, we might be unable to fulfill critical business functions, which could lead to a loss of financial advisors and their clients and could harm our business reputation. A technological breakdown could also interfere with our ability to comply with financial reporting and other regulatory requirements, exposing us to disciplinary action and to liability to our financial advisors and their clients.
There can be no assurance that we will be able to establish or maintain a competitive advantage based on our technology.
A change in the “independent contractor” status of financial advisors could adversely affect us.
Our Retail Firms rely on the treatment of financial advisors as independent contractors. Financial advisors operate from their own offices and are responsible in large part for the costs and expenses involved in their operations. A determination that the financial advisors are not independent contractors or the enactment of any legislation that would affect the eligibility requirements for independent contractor status could have a significant effect on this business model and lead to additional costs and expenses, which could have a material adverse effect on our Retail Firms and our results of operations.
We are exposed to significant legal liabilities from the operations of our Retail Firms.
We are subject to claims, litigation and regulatory proceedings involving our Retail Firms resulting from, among other things, alleged and actual errors and omissions, breach of fiduciary or other duties owed to clients, misconduct in effecting securities transactions, rendering investment advice or placing insurance, and criminal misconduct.
Bases for such legal liability could include, but are not limited to:
recommending transactions that are not suitable for the client or in the client’s best interests;
engaging in unauthorized or excessive trading to the detriment of clients;
engaging in “reverse churning” by placing clients who trade infrequently in fee-based rather than commission-based accounts;
engaging in fraudulent or otherwise improper activity;
binding us to transactions that exceed authorized limits;
hiding unauthorized or unsuccessful activities, resulting in unknown and unmanaged risks or losses;
theft, bribery or other criminal activities;
improperly using or disclosing confidential information;
failure, whether negligent or intentional, to effect securities transactions on behalf of clients;
failure to perform reasonable diligence on a security, product or strategy;
failure to supervise a financial advisor;
failure to provide insurance carriers with complete and accurate information; or
otherwise not complying with regulatory requirements or control procedures.
The nature of some of the matters, the aggregate volume of claims and potential damages and penalties resulting from these claims, litigation and regulatory proceedings could have an adverse impact our business and financial condition and could cause us serious reputational harm. Defending against such claims, litigation and regulatory proceedings may also involve significant defense costs.

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Misconduct and errors by employees and financial advisors, who operate in a decentralized environment, could harm our Retail Firms.
Our Retail Firms generally operate through small, decentralized offices, largely with financial advisors who are not direct employees. We will not always be able to prevent misconduct (intentional or otherwise) or errors by financial advisors, and the precautions taken to prevent and detect these activities may not be effective in all cases. SEC and FINRA rules require our broker-dealer subsidiaries and our investment adviser subsidiaries to supervise the activities of their financial advisors. However, a substantial number of the offices are supervised by registered principals off-site, which may make supervision more challenging.
Misconduct (intentional or otherwise) or errors by our financial advisors, either as affects their clients or otherwise, and any failure to adequately supervise them, could subject us to liability and result in violations of law, regulatory sanctions, damage awards, limitations on activities or other serious reputational or financial harm to us.
We are largely dependent on Pershing LLC to provide clearing services.
A majority of our financial advisors rely on Pershing LLC to provide clearing services, as well as other operational and support functions that they cannot provide internally, pursuant to an agreement we entered into with Pershing LLC in September 2014. If this agreement were terminated, there can be no assurance that the functions previously provided could be replaced on comparable economic terms and, depending on the circumstances, we could be required to pay a termination fee to Pershing LLC, which could be substantial. Some of our Retail Firms also have agreements with other third-party clearing brokers which provide similar clearance and custody services.
Furthermore, in accordance with industry practice, these agreements require our broker-dealer subsidiaries acting as introducing brokers to indemnify Pershing LLC and other third-party clearing brokers against losses from unsettled securities transactions by customers. Because we are liable to the extent of the net losses on any unsettled trades, we are required to post a clearing deposit with Pershing LLC and other third-party clearing brokers. However, there can be no assurance that the amount of any indemnified loss would not exceed the amount of any clearing deposit. Furthermore, in periods of extreme market volatility, it is possible that there could be an increase in the number of unsettled trades, which could cause the loss of any clearing deposit as well as additional amounts.
A failure to preserve the reputations for independence of the acquired businesses could adversely affect our Retail Firms.
The preservation of the reputations for independence of our Retail Firms is important to our future success. Following the completion of their acquisitions by us, our Retail Firms, and any companies engaged in a similar business we may acquire in the future, continue to be operated independently under separate brands and management, subject to our oversight. Currently, our Retail Firms, and any companies engaged in a similar business we may acquire in the future, offer interests in direct investment programs and other products sponsored by American Realty Capital, and we expect they will continue to do so. There is a risk that continuing, or increasing, the level of sales of American Realty Capital products following acquisition by us could affect our Retail Firms’ reputations for independence, which could adversely affect our results of operations.
Our multi-brand strategy may not be successful.
Our Retail Firms were independent businesses prior to their acquisitions by us, and they have continued to operate independently under a variety of different brands as part of our multi-brand strategy to allow us to preserve the value of their brands. We believe that broader recognition and positive perception of these multiple brands individually, as well as collectively under the “Cetera Financial Group” brand, are essential to our future success. Our successful positioning of our brands depends in large part on the success of our advertising and promotional efforts and our ability to continue to provide products and services that are useful to our clients. Accordingly, we have pursued, and intend to continue to pursue, an aggressive brand enhancement strategy, which includes multimedia advertising, promotional programs and public relations activities. These initiatives have required and may continue to require significant expenditures. If our multi-brand strategy is unsuccessful, these expenses may never be recovered. Any failure of our other marketing efforts could also have an adverse impact on us.
The securities settlement process exposes us to risks that may expose our advisors and us to adverse movements in price.
Cetera Financial Institutions, one of our broker-dealer subsidiaries, is a self-clearing broker-dealer that provides clearing services and trade processing for certain financial institutions. Broker-dealers that clear and settle trades are subject to substantial regulatory requirements relating to these functions. Errors in performing clearing functions, including clerical, technological and other errors related to the handling of customer funds and securities, could lead to censures, fines or other sanctions by regulatory authorities as well as liability and losses in related lawsuits or other proceedings brought by our advisors’ clients and others. Any unsettled securities transactions or erroneous transactions could expose us to adverse movements in the prices of such securities.

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Risks Related to Wholesale Distribution and Our Other Businesses
A significant portion of the revenues of our wholesale distribution and other businesses are derived from American Realty Capital, which is under common control with us, and there can be no assurance that we will be successful in our long-term strategy of expanding our service offerings to clients other than American Realty Capital.
$658.8 million of the $681.6 million in wholesale distribution revenues generated by us in 2014 (including the results of StratCap following the completion of the acquisition and excluding Hatteras which is part of the investment management segment) resulted from equity capital raised by direct investment programs or other entities sponsored, co-sponsored or advised by American Realty Capital, which is controlled, directly or indirectly, by Messrs. Schorsch and Kahane (who also, directly or indirectly, control RCAP Holdings and RCS Capital Management, LLC (“RCS Capital Management”), the company that provides strategic planning and consulting services to assist us and our subsidiaries in implementing our business strategies, subject to oversight, directly or indirectly, by our board of directors) and accounted for 31.0% of our total revenues for the year ended December 31, 2014. In addition, $104.0 million of the $126.7 million in revenues in 2014 from our investment banking, capital markets, transaction management and transfer agency businesses were derived from direct investment programs or other entities sponsored, co-sponsored or advised by American Realty Capital.
A key component of our long-term business strategy is to expand our wholesale distribution, investment banking, capital markets, transaction management services and transfer agency businesses to sponsors and other participants in the management and sale of direct investment programs other than programs sponsored by American Realty Capital. There can be no assurance that this strategy will be successful. Other direct investment program sponsors may not want to retain us for a variety of reasons, including our common ownership with American Realty Capital and the fact that we may be competing with affiliates, including broker-dealer affiliates, of the other sponsors. If we fail to increase or diversify our market share of direct investment programs, our results of operations and future prospects may be adversely affected.
As a result of our dependence upon revenue derived from American Realty Capital, any adverse impact on the revenue and other results of operations of American Realty Capital would have an adverse impact on our revenue and other results of operations.
We rely on direct investment programs for a significant portion of our revenues.
For the year ended December 31, 2014, a significant portion of our revenues were derived from investment banking, transaction management and transfer agency services provided to direct investment programs, wholesale distribution of equity securities of direct investment programs and retail distribution of equity securities of direct investment programs, and it is anticipated that a substantial portion of our revenues will continue to be derived from direct investment programs in the future. Many factors and events, particularly increased regulatory scrutiny and rising interest rates, may have an adverse impact on the performance of direct investment programs.
Recent scrutiny from FINRA, the SEC and state securities regulators has caused, and could continue to cause, negative publicity about direct investment programs. In recent years, various actions that have been taken against direct investment programs, none of which involved us or our affiliates, have received substantial publicity, much of it negative. In addition, the SEC and FINRA issued bulletins in 2011 and 2012, respectively, urging investors to conduct careful reviews before investing in non-traded REITs, which have also generated negative publicity.
As with other yield-oriented securities, shares of direct investment programs, particularly those marketed to “mass affluent” investors, who we believe seek products with “durable income” characteristics, are impacted by their level of distributions to their stockholders. The distribution rate is often used by investors to compare and rank similar yield-oriented securities for investment decision-making purposes. Changes in interest rates, either positive or negative, may affect the level of distributions that direct investment programs may make and influence the decisions of investors who are considering investing in their securities. A rising interest rate environment, could have an adverse impact on the demand for direct investment programs, their ability to issue additional equity and the cost to them of any such issuance. A rising interest rate environment could also adversely affect the relative attractiveness of direct investment programs to existing and potential investors as compared to other investments with returns that would be expected to benefit from rising interest rates.
In addition to negative publicity due to regulatory scrutiny and the impact of rising interest rates, our exposure to direct investment programs leaves us vulnerable to adverse developments including, but not limited to:
a reduction in the popularity of direct investment programs among retail investors or financial advisors;
continued or increasing negative publicity concerning non-traded REITs due to reasons other than regulatory scrutiny;
changes in tax law;
increased, costly or burdensome regulation from the SEC, state securities regulators or FINRA; and
malfeasance by sponsors, wholesale distributors or retail distributors of direct investment programs, including by our competitors.

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An adverse development relating to direct investment programs for these or any other reason could reduce our sources of revenue and negatively impact the market price of our Class A common stock.
In addition, state securities regulators require that investors in direct investment programs meet certain minimum income and/or net worth standards. These standards may vary from state to state and change frequently. Changes to suitability standards may require us to expend resources familiarizing ourselves, as well as the financial advisors with whom we do business, with the new standards. If a financial advisor does not ensure that customers satisfy the requirements with regards to suitability standards, we could be subject to substantial liability, including fines, penalties and possibly rescission of transactions.
Along with suitability requirements, state regulators have also imposed limitations on an investor’s exposure to direct investment programs. The breadth and scope of these limitations have varied considerably and may operate to limit the exposure that a resident of a certain state has to a product, sponsor or direct investment programs generally. These concentration limitations have been applied with increasing frequency and have increasingly targeted all direct investment programs.
Realty Capital Securities and StratCap are subject to risks that are particular to the role as dealer manager for direct investment program offerings.
In connection with their role as dealer manager for direct investment program offerings, Realty Capital Securities and StratCap provide substantial promotional support to the broker-dealers selling a particular offering, including by providing sales literature, forums, webinars, press releases and other forms of mass communication. Due to the volume of materials that Realty Capital Securities and StratCap may provide throughout the course of an offering, much of which may be scrutinized by regulators, Realty Capital Securities and StratCap may be exposed to significant liability under federal and state securities laws, and subject to fines by the SEC, FINRA and state securities regulators, or even suspension from the securities industry.
We face significant competition for wholesalers.
We are dependent upon our employees, whom we refer to as our wholesalers, who are responsible for promoting sales of products for which we serve as dealer-manager and recruiting new retail broker-dealers and registered investment advisers to sell our products. We are exposed to the risk that our wholesalers could leave or decide to affiliate with one of our competitors and that we would be unable to recruit suitable replacements. A loss of a large group of wholesalers could have a material adverse impact on our wholesale distribution business.
Realty Capital Securities, StratCap and Hatteras are prohibited from raising money for U.S. Net Lease REITs sponsored by American Realty Capital.
During 2013 and 2014, 35.3% and 0.1%, respectively, of equity capital raised by non-traded REITs distributed by us consisted of sales of interests in those non-traded REITs with a primary investment strategy of investing in U.S. single-tenant, net-leased properties (“U.S. Net Lease REITs”), sponsored by American Realty Capital. In connection with the merger between ARCP and Cole Real Estate Investments, Inc. (“Cole”), American Realty Capital and Nicholas Schorsch, our former executive chairman and one of the controlling members of our controlling stockholder, agreed that neither American Realty Capital nor any of its affiliates, which include Realty Capital Securities, StratCap and Hatteras, would be permitted to sponsor or raise capital for any U.S. Net Lease REITs sponsored by American Realty Capital. Mr. Schorsch and other persons affiliated with American Realty Capital are former directors and executive officers of ARCP.
Although this restriction does not prohibit Realty Capital Securities, StratCap and Hatteras from raising money for U.S. Net Lease REITs that are not affiliates of American Realty Capital, Mr. Schorsch or any of their affiliates, there can be no assurance that Realty Capital Securities, StratCap and Hatteras will be able to sell interests in other types of REITs or U.S. Net Lease REITs sponsored by unaffiliated sponsors to replace the loss of sales in U.S. Net Lease REITs sponsored by American Realty Capital.
We are exposed to risks due to our investment banking activities.
Participation in an underwriting syndicate or a selling group involves both economic and regulatory risks. An underwriter may incur losses if it is unable to resell the securities it is committed to purchase, or if it is forced to liquidate its commitment at less than the purchase price. In addition, under the federal securities laws and other laws relating to underwriters’ liability and limitations on the indemnification of underwriters by issuers, an underwriter is subject to substantial potential liability for misstatements or omissions of material facts in prospectuses and other communications with respect to offerings. Acting as a managing underwriter increases these risks. Underwriting commitments constitute a charge against net capital and our ability to make underwriting commitments may be limited by the requirement that our broker-dealer subsidiaries must at all times be in compliance with the net capital rule.

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Providing transaction management services involves providing services that meet the legal needs of our clients and, as a result, we are subject to a variety of complex and evolving laws and regulations.
Providing transaction management services involves providing services that meet the legal needs of our clients, which may subject us to allegations of unauthorized practice of law (“UPL”). UPL generally refers to an entity or person giving legal advice who is not licensed to practice law. However, laws and regulations defining UPL, and the governing bodies that enforce UPL rules, differ among the various jurisdictions in which we operate. We are unable to acquire a license to practice law in the United States, or employ licensed attorneys to provide legal advice to our clients, because we do not meet the regulatory requirement of being exclusively owned by licensed attorneys. We also may be subject to laws and regulations that govern business transactions between attorneys and non-attorneys, including those related to the ethics of attorney fee-splitting and the corporate practice of law. We may incur costs associated with responding to, defending and settling proceedings related to UPL, and the provision of our services more generally. We can give no assurance that we would prevail in such regulatory inquiries, claims, suits or prosecutions on commercially reasonable terms or at all. Responding to, defending and/or settling regulatory inquiries, claims, suits and prosecutions may be time consuming and divert management and financial resources or have other adverse effects on our business. A negative outcome in any of these proceedings may result in changes to or discontinuance of some of our services, potential liabilities or additional costs that could have a material adverse effect on our business, results of operations, financial condition and future prospects.
Hatteras may be affected by the poor investment performance of the mutual funds it sponsors.
Hatteras is dependent on the performance of the mutual funds it sponsors, which can be adversely impacted by many factors, including general market conditions or underperformance relative to competitors or benchmarks, any of which may decrease sales and increase redemptions. If Hatteras experiences a reduction in assets under management, our revenues may decline.
Moreover, because the Hatteras closed-end fund is a fund of funds, which means it generally invests its assets in underlying investment funds, the performance of the fund is affected by the performance of the underlying investment funds, which are outside our control. There can be no assurance that asset allocation of Hatteras or the performance of the underlying investment funds will be successful. Anything that adversely affects the investment funds of Hatteras could adversely affect our results of operations.
Risks Related to Our Acquisitions
Integration of the acquired businesses or any future acquisitions into our business will be challenging and difficult, and we may be unable to profitably operate the acquired businesses and realize the expected benefits of the recent and pending acquisitions or any future acquisitions.
Our success depends in large part on our success in integrating the operations, strategies, technologies and personnel of the acquired businesses. We may fail to realize some or all of the anticipated benefits of the recent and pending acquisitions or any future acquisitions if the integration process takes longer or is more costly than expected or otherwise fails to meet our expectations. In addition, the overall integration of the acquired businesses is a time‑consuming and expensive process that could significantly disrupt the operations of our businesses, including the operations of the acquired businesses, even if it is effectively and efficiently planned and implemented, particularly given the size of the acquired businesses relative to our size prior to the initiation of the recent and pending acquisitions and the fact that we have made multiple acquisitions in a short period of time.
Potential difficulties and challenges we may encounter in the integration process include the following:
the integration of management teams, strategies, technologies and operations, products and services;
the disruption of ongoing businesses and distraction of our management team and the management teams of the acquired businesses from ongoing business concerns;
the creation of a need for additional compliance, documentation, risk management and internal control procedures, which could involve the hiring of additional personnel to develop, implement and monitor the effectiveness of such procedures;
development and implementation of public company internal control systems for our acquired companies, most of which were previously private enterprises;
adjustments or revisions in the allocated value of corporate assets (whether tangible or intangible) of acquired business;
the retention of clients, key employees, and financial advisors of our business, the acquired businesses or any future acquisitions;
the maintenance of an appropriate level of compliance and operational oversight over the acquired businesses, which continue to operate independently under separate brands and management following their acquisitions by us, and financial advisors, who continue to operate through small and decentralized branch offices;
the creation of uniform standards, controls, procedures, policies and information systems appropriate for a public company;

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the consolidation and rationalization of information technology platforms and administrative infrastructures;
the integration of corporate cultures and acquired management teams and maintenance of employee morale;
the integration of accounting, human resources and other administrative systems, and coordination of trading, sales and marketing functions; and
the realization of anticipated synergies and cost savings expected from integrating the acquired businesses and any future acquisitions in our business.
Integration difficulties, or any other factors that make operating the acquired businesses or our other businesses more challenging following the completion of the recent and pending acquisitions, may prevent us from realizing the benefits from the recent and pending acquisitions or any future acquisitions to the extent, or in the time frame, anticipated by us. We have incurred, and expect to continue incurring, substantial expenses related to the recent and pending acquisitions. These transaction and integration expenses could, particularly in the near term, exceed the savings and synergies that we expect to achieve from the elimination of duplicative expenses and the realization of economies of scale and cost savings related to the integration of the acquired businesses following the completion of the recent and pending acquisitions. Any of these factors could have a material adverse effect on our business, results of operations and financial condition or cash flows.
There can be no assurance that we will be successful in pursuing our long-term strategy of expanding into complementary businesses or manage our growth effectively.
We have significantly expanded our operations during 2014 through the recent and pending acquisitions as part of our long-term strategy to expand into complementary businesses. It is also anticipated that we will continue pursuing this strategy through additional acquisitions.
This recent growth, and any future growth if it occurs through the completion of future complementary acquisitions or otherwise, will place significant demands on our management’s attention, infrastructure and other resources. There are many factors that may also prevent us from profitably operating the acquired businesses and realizing the expected benefits of the recent and pending acquisitions or any future acquisitions:
the substantial debt and preferred equity we incurred and issued to finance the recent and pending acquisitions, and any financing of any future acquisitions we obtain, may limit our ability to deploy capital for other purposes;
our failure to successfully further develop the acquired businesses or any future acquisitions;
harm to the key business relationships, brands and reputations of the acquired businesses and our other businesses;
litigation in connection with the activities of the acquired businesses or any future acquisitions, including claims from terminated employees, customers, former stockholders or other third parties;
costs necessary to establish and maintain effective internal controls for the acquired businesses or any future acquisitions; and
increased fixed costs.
If we do not effectively manage our growth we may not be able to meet the needs of our clients and our financial advisors, which could adversely affect our revenues and operations.
To the extent we pursue additional acquisitions, uncertainty regarding whether or not they will be completed may adversely affect our businesses and the businesses to be acquired.
Any additional acquisitions we make will be conditioned on certain closing conditions, and there can be no assurance that such acquisitions will be completed on a timely basis, or at all. In particular, any transaction involving a change in ownership or control of a broker-dealer likely would require an application to FINRA for approval of such change of ownership or control and that approval might not be granted. Accordingly, we may not be able to consummate acquisition transactions requiring FINRA approval that we negotiate in the future. Moreover, FINRA may restrict any proposed business expansion by either an acquisition candidate or one of our existing broker-dealer subsidiaries, further inhibiting our growth opportunities.
Stockholder litigation may also delay or disrupt the completion of future pending acquisitions. Stockholders of certain of the acquired businesses filed two lawsuits related to the recent and pending acquisitions, both of which were settled, and additional lawsuits may be filed challenging the recent and pending acquisitions or any future acquisitions, which name or may name us as a defendant. An adverse judgment in a lawsuit challenging any of our acquisitions may prevent such acquisition from becoming effective within the expected timeframe, or at all, or may subject us to monetary damages. Whether or not any plaintiffs’ claims are successful, this type of litigation is often expensive and diverts management’s attention and resources, which could adversely affect the operation of our business.

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Uncertainty regarding whether or not any future acquisition we enter into will be completed may inhibit our ability to fully execute our growth strategy or otherwise adversely affect our businesses and any businesses we seek to acquire. Moreover, if any future acquisition is not completed on a timely basis, or at all, we may not realize the expected benefits from such acquisition, which could have an adverse effect on our business.
The recent and pending acquisitions may expose us to unknown liabilities.
We are, or will be, subject to all of the liabilities of the acquired businesses, other than certain liabilities not assumed pursuant to the agreements related to the recent and pending acquisitions. If there are unknown liabilities or other obligations, including contingent liabilities, our business could be materially affected.
Moreover, we do not have the right to be indemnified under all of the agreements related to the recent and pending acquisitions, and, to the extent there is indemnification against such losses and liabilities in certain of the agreements, the amount of such indemnification is limited and may not be sufficient to cover the actual losses we may suffer.
Regulatory Risks
Extensive or frequent changes in regulations could adversely affect our business.
The financial services industry is subject to extensive and frequently changing regulatory requirements under federal and state laws and regulations and self-regulatory organization (“SRO”) rules. Such regulation continues to grow more extensive and complex, and regulatory proceedings continue to become more frequent and sanctions more severe. The SEC, FINRA, the Municipal Securities Rulemaking Board (“MSRB”) securities exchanges and other governmental authorities and SROs continue to propose new regulatory initiatives which may result in the adoption of new or revised regulations, as well as changes to interpretations of existing regulations. We may be adversely affected by new regulations, changes in regulatory interpretations, or more rigorous enforcement of applicable regulations, any of which could limit our business activities, increase our costs, adversely affect our results of operations and financial condition and harm our reputation.
Regulatory changes that may have an adverse impact on our business include potential new regulations resulting from the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). These may include the development of alternative standards of conduct for broker-dealers and investment advisers when providing personalized investment advice about securities to retail investors, including the imposition of a fiduciary standard on broker-dealers. The SEC is also considering the potential harmonization of certain other aspects of the regulation of broker-dealers and investment advisers. Additionally, the Department of Labor (the “DOL”) announced in February 2015 that it had submitted a re-proposal of a regulation under the Employee Retirement Income Security Act (“ERISA”) to the Office of Management and Budget for review prior to public release, and that the re-proposal would expand the scope of those who become fiduciaries to capture more of the current services of 401(k) and IRA providers. The adoption of any such SEC or DOL regulations could require changes to certain business practices and require us to invest significant management attention and resources to evaluate and make necessary changes, which could impact our business and financial results.
Additionally, the SEC has approved amendments to the FINRA and NASD rules that address values of certain direct investment programs referred to as direct participation programs (“DPPs”) and unlisted REIT securities. The amendments, which will become effective in 2016, modify the requirements for inclusion of per share estimated values of DPP and REIT securities in customer account statements and make corresponding changes to the requirements applicable to participation by broker-dealers in public offerings of DPP and REIT securities. These rule amendments may result in changes to the values of DPP and REIT securities which appear on customer account statements. If investors or financial advisors react negatively to the new disclosure regime, the demand for these products could be reduced, which could harm our results of operations.
We may also be adversely affected by other evolving regulatory standards, such as FINRA’s new supervision rules, which became effective in December 2014, suitability requirements and enhanced regulatory oversight over incentive compensation.
Broker-dealers and other financial services firms are subject to extensive regulations.
Broker-dealer and other financial services firms are subject to extensive regulatory requirements under federal and state laws and regulations and SRO rules. Our broker-dealer subsidiaries are registered with the SEC as broker-dealers under the Exchange Act and in the states in which they conduct securities business and are members of FINRA and other SROs. Some of our broker-dealers also conduct business involving commodities, futures and/or insurance, in which case they may also be registered or licensed with or members of the Commodity Futures Trading Commission (the “CFTC”), the National Futures Association (the “NFA”), and/or state insurance regulatory authorities. Our broker-dealer subsidiaries are subject to regulation, examination and disciplinary action by the SEC, FINRA and state securities regulators, as well as other governmental authorities and SROs with which they are registered or licensed or of which they are members.

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The regulations applicable to broker-dealers cover all aspects of the securities business, including, among other things, sales practices, fee arrangements, disclosures to clients, capital adequacy, use and safekeeping of clients’ funds and securities, recordkeeping and reporting and the qualification and conduct of officers, employees and independent contractors. As part of this regulatory scheme, broker-dealers are subject to regular and special examinations by the SEC and FINRA intended to determine their compliance with securities laws, regulations and rules. Following an examination’s conclusion, a broker-dealer may receive a deficiency letter identifying potential compliance or supervisory weaknesses or rule violations which the firm must address.
The SEC, FINRA and other governmental authorities and SROs may bring enforcement proceedings against firms and place other limitations on firms subject to their jurisdiction, as well as their officers, directors, employees and independent contractors, whether arising out of an examination or otherwise, for violations of the securities laws, regulations and rules. Sanctions can include cease-and-desist orders, censures, fines, civil monetary penalties and disgorgement, limitations on a firm’s business activities, suspension, revocation of FINRA membership or even expulsion of the firm from the securities industry. Criminal actions are referred to the appropriate criminal law enforcement agency. Any such proceeding against one of our broker-dealers, or any of their associated persons could harm our reputation, cause us to lose clients or fail to gain new clients and adversely affect our results of operations and financial condition.
Financial services firms are subject to numerous conflicts of interest or perceived conflicts of interest. The SEC, FINRA, DOL and other governmental authorities and SROs have increased their scrutiny of potential conflicts of interest. We have adopted, and regularly review and update, policies, procedures and controls designed to address or limit actual or perceived conflicts, but there can be no assurance of the effectiveness of these protocols. Addressing conflicts of interest adequately is complex and difficult and our reputation could be damaged if we fail, or appear to fail, to identify and successfully manage these conflicts of interest. The development and implementation of policies, procedures and controls to address or limit actual or perceived conflicts may also result in increased costs. Failure to identify and successfully manage conflicts of interest procedures could subject us to disciplinary sanctions or litigation or could harm our reputation.
Financial services firms are also subject to rules and regulations relating to the prevention and detection of money laundering. The USA PATRIOT Act of 2001 (the “PATRIOT Act”) mandates that financial institutions, including broker-dealers and investment advisers, establish and implement anti-money laundering (“AML”) programs reasonably designed to achieve compliance with the Bank Secrecy Act of 1970 and the rules thereunder. Financial services firms must maintain AML policies, procedures and controls, designate an AML compliance officer to oversee the firm’s AML program, implement appropriate employee training and provide for annual independent testing of the program. We have established AML programs but there can be no assurance of the effectiveness of these programs. Failure to comply with AML requirements could subject us to disciplinary sanctions and other penalties.
Financial services firms must also comply with applicable privacy and data protection laws and regulations, including SEC Regulation S-P and applicable provisions of the 1999 Gramm-Leach-Bliley Act, the Fair Credit Reporting Act of 1970 and the 2003 Fair and Accurate Credit Transactions Act. Any violations of laws and regulations relating to the safeguarding of private information could subject us to fines and penalties, as well as to civil action by affected parties.
Our ability to comply with applicable laws, rules and regulations is largely dependent on our establishment and maintenance of compliance, supervision, recordkeeping and reporting and audit systems and procedures, as well as our ability to attract and retain qualified compliance, audit and risk management personnel. While we have adopted policies and procedures we believe are reasonably designed to comply with applicable laws, rules and regulations, these systems and procedures may not be fully effective, and there can be no assurance that regulators or third parties will not raise material issues with respect to our past or future compliance with applicable regulations.
Investment advisers are also subject to extensive regulation.
Investment advisers are also subject to extensive regulation. Depending on factors such as assets under management and geographic location, investment advisers are primarily regulated by the SEC or state securities regulators. The SEC oversees the activities of its registered investment advisers under the Investment Advisers Act of 1940 (the “Advisers Act”). State-registered advisers are regulated by the applicable state regulatory authority. SK Research and certain subsidiaries of our independent retail advice businesses are registered as investment advisers either with the SEC or state securities regulators, and they and their associated persons are subject to the requirements of the Advisers Act and state securities laws, as applicable, including examination and enforcement authority. Our investment advisers are subject to laws and regulations related to, among other things, fiduciary duties to clients, performance fees, maintaining an effective compliance program, solicitation arrangements, conflicts of interest, advertising, limitations on agency cross and principal transactions between the adviser and advisory clients, recordkeeping and reporting requirements, disclosure requirements and general anti-fraud provisions.
Failure to comply with the Advisers Act or other federal and state regulations could lead to regulatory investigations and enforcement proceedings which could result in monetary penalties, cease and desist orders or even termination of an adviser’s registration. Criminal actions are referred to the appropriate criminal law enforcement agency. Any such proceedings against one of our investment advisers, or any of their associated persons could harm our reputation, cause us to lose clients or fail to gain new clients and adversely affect our results of operations and financial condition.

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Additionally, our investment adviser subsidiaries have fiduciary obligations that require their financial advisors to act in the best interests of their retail clients. Our investment adviser subsidiaries and/or their financial advisors may face liability for actual or alleged breaches of duties owed to their clients including their fiduciary duty, the suitability of the financial products they recommend, the investment advice they provide and the adequacy of disclosure, including with respect to conflicts of interest, among other things.
Certain of our broker-dealer and investment adviser subsidiaries are subject to regulatory investigations and proceedings and may not be successful in defending against such proceedings.
Certain of our broker-dealer and investment adviser subsidiaries and/or their financial advisors are subject to civil and/or criminal investigations or proceedings.
For example, during March 2014, a broker-dealer subsidiary of ICH entered into a Letter of Acceptance, Waiver, and Consent with FINRA. Without admitting or denying the findings, the broker-dealer subsidiary of ICH accepted and consented to FINRA’s findings that: (i) from about June 2009 through April 2011, the broker-dealer subsidiary of ICH failed to provide prospectuses to customers who purchased ETFs, (ii) the broker-dealer subsidiary of ICH failed to establish, maintain and enforce an adequate supervisory system, including WSPs, concerning the sale of ETFs and its obligations to provide ETF prospectuses to customers, and (iii) by reason of the foregoing, the broker-dealer subsidiary of ICH acted in contravention of Section 5(b)(2) of the Securities Act of 1933 (the “Securities Act”) and thereby violated FINRA Rule 2010, and also violated NASD Conduct Rule 3010. The broker-dealer subsidiary of ICH also consented to a censure and a $100,000 fine.
In addition, during 2014, Hatteras was subject to a SEC Staff examination. The Staff of the Division of Investment Management has asserted, among other things, various potential violations by Hatteras of the anti-fraud provisions of the federal securities laws, including Section 206 of the Advisers Act, Section 34(b) of the Investment Company Act, Section 10(b) of the Exchange Act and Section 17(a) of the Securities Act. The Staff of the Division of Investment Management referred the examination findings to the SEC’s Division of Enforcement. While this investigation closed with no further action taken, there can be no assurance that future investigations will similarly be resolved in our favor.
Such proceedings can require the expenditure of significant resources. Predicting the outcome of such matters is inherently difficult, particularly when investigations are at an early stage. While we maintain insurance designed to lessen the cost of defending and/or settling covered matters (including certain regulatory actions) and paying fines which may be imposed, our insurance policies have limitations and deductibles, do not cover all matters and do not fully insulate our businesses from the costs and other adverse consequences of covered matters. There can be no assurance that the findings of a governmental authority or SRO will not result in disciplinary action against our broker-dealer or investment adviser subsidiaries and/or their officers, directors, employees and independent contractors, including fines, censures, limitations on activities or other civil or criminal sanctions. Any such disciplinary action could cause reputational harm and adversely affect our results and financial condition.
Our Retail Firms engage in regulated activities that are different from those previously undertaken by us and expose us to different risks.
The business we conduct through our Retail Firms is a highly regulated business in which we had not been engaged prior to our acquisition of Cetera in April 2014. This business involves servicing retail clients through networks of financial advisors that operate through multiple separate branch offices. We are responsible for the conduct of a network of independent Retail Firms, including the management and supervision of branch office operations and the supervision of retail activities. Our broker-dealer subsidiaries and investment adviser subsidiaries and their officers, directors, employees and independent contractors, have significant obligations to their clients and are subject to laws, regulations and rules, governmental authorities and SROs to which we had not previously been subject. Engaging in this business has increased our exposure to claims, litigation and regulatory proceedings resulting from, among other things, alleged and actual errors and omissions, breaches of fiduciary or other duties owed to clients, misconduct in effecting securities transactions, rendering investment advice or placing insurance, and criminal misconduct.
In addition, businesses we acquire in the future may engage in regulated activities that are different from those currently undertaken by us and thus may expose us to different risks.

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Failure to comply with net capital requirements could subject us to sanctions imposed by the SEC or FINRA.
The SEC’s uniform net capital rule requires each of our broker-dealer subsidiaries to maintain a specified minimum amount of net capital at all times. The net capital rule focuses on liquidity and is designed to protect securities customers, counterparties and creditors by requiring that broker-dealers have sufficient liquid resources on hand at all times to satisfy claims promptly. The rule also limits the ability of broker-dealers to pay dividends, make payments on certain indebtedness, such as subordinated debt, or make unsecured loans to related persons if any such payment would reduce the firm’s net capital below a specified threshold. Broker-dealers are expected to be able to demonstrate moment-to-moment compliance with the net capital rule. In addition to the minimum net capital requirements, the SEC and FINRA have established early warning levels of capital that exceed a broker-dealer’s minimum capital requirement. A broker-dealer whose capital falls below the early warning level must notify the SEC and FINRA. If the broker-dealer’s net capital falls below its minimum net capital requirement, the SEC or FINRA can require the firm to cease operations. Our broker-dealer subsidiaries may not be able to maintain adequate levels of net capital, or their net capital may fall below the requirements established by the SEC and FINRA, which may subject them to disciplinary action in the form of fines, suspension or expulsion. Even in circumstances where a broker-dealer does not violate its applicable early warning level or minimum net capital requirements, if there is an unusually large charge against one of our broker-dealer subsidiary’s net capital, operations that are capital intensive, such as underwriting may be limited. A large operating loss or other charge against net capital could limit the affected broker-dealer subsidiary’s ability to expand or even maintain its present levels of business, which could adversely affect our results of operations and financial condition. We may not be able to predict the amount of regulatory capital our broker-dealer subsidiaries may require and there can be no assurances that the sources of funding we have in place to manage their regulatory capital requirements will always be sufficient.
There are risks involved in acting as a fiduciary.
Fiduciary risk is the potential for financial or reputational loss through breach of fiduciary duties to a client. Our investment adviser subsidiaries and their financial advisors have a fiduciary duty to act in the best interests of their retail clients when providing personalized investment advice. As a result of the Dodd-Frank Act, a fiduciary standard may also be imposed on broker-dealers when they provide personalized advice to retail investors. Also, certain of our subsidiaries are subject to ERISA and Section 4975 of the Internal Revenue Code of 1986, as amended (the “Code”), and to regulations promulgated thereunder. ERISA and applicable provisions of the Code impose duties on persons who are considered fiduciaries with respect to benefit plan clients. ERISA and applicable provisions of the Code also prohibit specified transactions involving benefit plan clients, including, with respect to ERISA, employee benefit plans and, with respect to the Code, individual retirement accounts and Keogh plans, and impose monetary penalties, including excise taxes, for violations of these duties and restrictions. The DOL is considering re-proposal of a regulation under ERISA that would expand the scope of those who become fiduciaries to capture more of the current services of 401(k) and IRA providers. Any failure to comply with current or expanded fiduciary duties could result in significant liabilities, and potentially limit or restrict the ability of our subsidiaries to act as fiduciaries for any plans.
The SEC may limit 12b-1 fees.
“12b-1” fees are fees paid by a mutual fund out of fund assets (thus, indirectly by investors) to cover distribution expenses and shareholder servicing expenses. 12b-1 fees get their name from the SEC rule that authorizes a fund to pay them. During the year ended December 31, 2014, we received $250.0 million in 12b-1 fees. In 2010, the SEC proposed new rules and disclosure requirements that, if adopted, would significantly change the existing regulatory framework governing distribution and servicing fees, and ongoing sales charges. The proposal could have significant implications for the mutual fund industry, including broker-dealers and investment advisers that sell mutual fund shares. If adopted, the new rules could result in our broker-dealer subsidiaries receiving reduced 12b-1 fees, which could negatively impact our revenues and earnings and have an adverse effect on our growth strategy and our business. The DOL has also proposed changes that would eliminate third-party incentive payments, such as 12b-1 and other revenue sharing fees on mutual funds held in IRA accounts. If adopted, the proposal would also adversely affect our results of operations and financial condition.
Our ability to raise capital in a timely manner in the amount that we may require and to effect changes in ownership is limited by the operation of NASD (FINRA) Rule 1017.
NASD (FINRA) Rule 1017 requires that any member of FINRA file an application for approval of any change in ownership that would result in one person or entity directly or indirectly owning or controlling 25% or more of a member firm’s equity capital. The application must be filed at least 30 days prior to effecting a change. The approval process under Rule 1017 can take six months or more to complete.
The required process under NASD (FINRA) Rule 1017, including the required 30-day notice period before effecting a change in ownership, could hinder or delay us in any effort to raise capital, where, as a result of the capital raised, any person or entity would own or control 25% of more of any of our broker-dealer subsidiaries. A denial of any application we have made under NASD (FINRA) Rule 1017 could also have a material adverse effect on us.

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Risks Related to Our Structure
The structure of our Class B common stock has the effect of concentrating voting control over us in RCAP Holdings and, indirectly, in those who control RCAP Holdings.
For so long as any of our Class B common stock remains outstanding, the holders of our Class B common stock always will have a majority of the voting power of our outstanding common stock. This concentrated control will limit or preclude your ability to influence corporate matters as a holder of Class A common stock. RCAP Holdings — which is directly or indirectly controlled by Messrs. Schorsch and Kahane — holds the sole outstanding share of our Class B common stock and thereby controls a majority of the voting power of our outstanding common stock, retains effective control of our board of directors and has the ability to control all matters submitted to our stockholders for approval.
On December 30, 2014, we announced that Mr. Schorsch and William M. Kahane, the controlling members of our controlling stockholder, had resigned from their positions as, respectively, the executive chairman and a member of our board of directors as part of an initiative to simplify our governance structure, reduce complexity and minimize perceived conflicts of interest among related parties and affiliates, but there can be no assurance that this initiative will be successful.
Due to their control over the sole outstanding share of Class B common stock, Messrs. Schorsch and Kahane currently have the ability to control or influence all matters affecting us, including:
the composition of our board of directors and, through our board of directors, any determination with respect to our business plans and policies;
any determinations with respect to mergers, acquisitions and other business combinations;
our acquisition or disposition of assets;
our financing activities;
certain changes to our certificate of incorporation;
amendments to any agreements between us and RCAP Holdings;
corporate opportunities that may be suitable for us, RCAP Holdings or Messrs. Schorsch and Kahane and the other members of RCAP Holdings;
determinations with respect to enforcement of rights we may have against third parties;
the payment of dividends, if any, and to the extent permitted by the negative covenants contained in the bank facilities and the indenture governing the convertible notes, on our Class A common stock and any preferred stock we have issued or may issue, including the Series B preferred stock and the Series C convertible preferred stock; and
the number of shares available for issuance under our stock plans for prospective and existing employees, as well as the number of shares available under any future stock purchase program.
If RCAP Holdings does not provide any requisite consent allowing us to conduct activities requiring stockholder consent when requested, we will not be able to conduct such activities and, as a result, our business and our operating results may be harmed. Messrs. Schorsch and Kahane also control RCS Capital Management the company that provides strategic planning and consulting services to assist us and our subsidiaries in implementing our business strategies, subject to oversight, directly or indirectly, by our board of directors. This means that these individuals may have an even greater influence over our affairs than their control over RCAP Holdings and direct ownership of shares of our Class A common stock alone would dictate.
RCAP Holdings’ ability to control our board of directors may also make it difficult for us to recruit high-quality independent directors. Persons who would otherwise have accepted an invitation to join our board of directors may decline to do so, which makes the recruitment of the most qualified independent directors more difficult.
On April 29, 2014, RCAP Holdings pledged substantially all of its assets, including the sole outstanding share of our Class B common stock, to secure the bank facilities. An event of a default under the bank facilities and operation of the pledge with respect to the sole outstanding share of Class B common stock could give rise to a change in control of our company.
In the event RCAP Holdings is acquired or otherwise undergoes a change of control, any acquiror or successor will be entitled to exercise the voting control and contractual rights of RCAP Holdings, and may do so in a manner that could vary significantly from that of RCAP Holdings.

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Following the redemption of the sole outstanding share of our Class B common stock, the concentration of ownership of our Class A common stock in the members of RCAP Holdings and Luxor could continue to limit other stockholders’ ability to influence corporate matters.
RCAP Holdings holds the sole outstanding share of our Class B common stock and thereby controls a majority of the voting power of our outstanding common stock, retains effective control of our board of directors and has the ability to control all matters submitted to our stockholders for approval. Luxor Capital Group LP and its affiliates (“Luxor”) currently hold shares of Class A common stock and certain other securities and rights that can be converted into or exercised for newly issued shares of our Class A common stock, namely Series C convertible preferred stock, convertible notes and a put right, which we refer to as the “Luxor put,” with respect to Luxor’s 19.46% membership interest in RCS Capital Management under a put/call agreement entered into on April 29, 2014. For so long as it holds a majority of the Series C convertible preferred stock outstanding, Luxor is also entitled to appoint at least one member to our board of directors and has other rights. The number of shares of Class A common stock issuable upon conversion of the Series C convertible preferred stock or the convertible notes or upon exercise of the Luxor put is restricted by the ownership limitations described under Note 11 of our consolidated financial statements, which we refer to as the “ownership limitations.”
Luxor, RCAP Holdings and the members of RCAP Holdings have agreed to use their reasonable best efforts to cause the rights of our Class B common stock to be amended to allow us, at any time after July 1, 2016, to redeem any outstanding Class B common stock owned by RCAP Holdings for $50.0 million in cash, subject to proportionate increase if the market price of our Class A common stock is above $30.00 per share, although we would be prohibited from doing so by the restricted payments covenant contained in the bank facilities currently in effect. Any such redemption would also be subject to our obtaining the affirmative vote of those holders of Class A common stock owning a majority of the outstanding Class A common stock.
Assuming the redemption occurred as of March 6, 2015, Messrs. Schorsch and Kahane and the other members of RCAP Holdings would control 41.52% of our combined voting power through their direct ownership of 30,584,427 shares of our Class A common stock and Luxor would control 12.15% of our combined voting power through its direct ownership of 8,952,312 shares of our Class A common stock. Assuming the redemption occurred and assuming conversion of the Series C convertible preferred stock and convertible notes held by Luxor and exercise of the Luxor put (without giving effect to the ownership limitations applicable to Luxor), Messrs. Schorsch and Kahane and the other members of RCAP Holdings, would control 33.75% of our combined voting power through their direct ownership of 30,584,427 shares of our Class A common stock and Luxor would control 28.59% of our combined voting power through its direct ownership of 25,906,703 shares of our Class A common stock.
The potential for continued significant concentration of share ownership and control through Messrs. Schorsch and Kahane and the other members of RCAP Holdings, Luxor or all of them, acting together, may adversely affect the trading price for our Class A common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. Moreover, this concentrated voting control would have similar effects to the current concentrated voting control of Messrs. Schorsch and Kahane, as described in more detail above in “- The structure of our Class B common stock has the effect of concentrating voting control over us in RCAP Holdings and, indirectly, in those who control RCAP Holdings.”
There are various conflicts of interest arising out of our relationship with RCAP Holdings and RCS Capital Management, which could result in decisions that are not in the best interests of our stockholders.
We are subject to conflicts of interest arising out of our relationship with RCAP Holdings and RCS Capital Management, both of which are controlled by Mr. Schorsch, the former executive chairman of our board of directors, and Mr. Kahane, our former chief executive officer and a former director. Peter Budko, one of our directors, and Mr. Weil, our chief executive officer and one of our directors, are also executives and members of both RCAP Holdings and RCS Capital Management. These individuals have conflicts between their duties to us and their duties to, and interests in, RCAP Holdings, RCS Capital Management and other affiliates of RCAP Holdings and RCS Capital Management, and these conflicts may not be resolved in our favor.
Conflicts may arise with respect to the interpretation, continuation, renewal or enforcement of our agreements with RCS Capital Management, RCAP Holdings and their affiliates. The resolution of any such conflict in favor or RCAP Holdings, RCS Capital Management or any of their affiliates may materially harm our results of operations and the value of your shares of our Class A common stock.
For example, we have provided certain non-traded REITs sponsored by American Realty Capital, which are affiliates of RCAP Holdings, with a variety of support, advisory and other services in connection with preparation for and execution of their proposed and completed strategic transactions, namely their listings on national securities exchanges, under agreements that provide for fixed advisory fees and fixed fees due at the time of completion of the transaction. We expect that we will enter into similar arrangements on similar terms with other non-traded REITs sponsored by American Realty Capital in the future. A conflict could arise over the rates that we earn under these arrangements, and we could earn less under these arrangements in the future if the individuals who control the non‑traded REITs sponsored by American Realty Capital and us make such a determination. Similar conflicts that are not resolved in our favor could occur in connection with the mergers and acquisitions advisory and capital markets services we provide to other related parties.

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It may be difficult to favorably resolve any disputes that arise between us, RCAP Holdings and RCS Capital Management.
Disputes may arise between us, RCAP Holdings and RCS Capital Management, which is controlled by the controlling members of RCAP Holdings, in a number of areas relating to our ongoing relationships, including:
employee retention and recruiting;
business combinations involving us;
our ability to engage in activities with certain potential clients;
sales or dispositions by RCAP Holdings and its members of all or any portion of their ownership interest in us; and
business development or marketing activities by us which may require the consent of RCAP Holdings.
We may not be able to resolve any potential conflicts, and even if we do, the resolution may be less favorable than if the conflict were between two unaffiliated parties. The agreements we have entered into with RCAP Holdings, RCS Capital Management and their affiliates may only be amended upon agreement between the parties. While we are controlled by RCAP Holdings, we may not have the leverage to negotiate amendments to these agreements, if required, on terms as favorable to us as those we would negotiate with an unaffiliated third party.
We have elected to take advantage of the “controlled company” exemption to the corporate governance rules for NYSE-listed companies, which could make our Class A common stock less attractive to some investors or otherwise harm our stock price.
Because we qualify as a “controlled company” under the corporate governance rules for NYSE-listed companies, we are not required to have a majority of our board of directors be independent, nor are we required to have a compensation committee or an independent nominating function. In light of our status as a controlled company, our board of directors has determined not to have an independent nominating function or to have the full board of directors be directly responsible for nominating members of our board of directors. We have established a compensation committee, although our compensation committee does not meet the independence requirements which would have been required under corporate governance rules for NYSE-listed companies if we were not a controlled company. We have, however, elected a majority of independent members to our board of directors, although there can be no assurance that our board of directors will continue to have a majority of independent directors, as this is not required by corporate governance rules for NYSE-listed companies for controlled companies. Should the interests of our controlling stockholder differ from those of other stockholders, the other stockholders may not have the same protections afforded to stockholders of companies that are subject to all the corporate governance rules for NYSE-listed companies. Our status as a controlled company could make our Class A common stock less attractive to some investors or otherwise harm our stock price.
If we were able to redeem the sole outstanding share of our Class B common stock pursuant to our redemption agreement with RCAP Holdings, we would no longer qualify as a controlled company under corporate governance rules for NYSE-listed companies. See “— Following the redemption of the sole outstanding share of our Class B common stock, the concentration of ownership of our Class A common stock in the members of RCAP Holdings and Luxor could continue to limit other stockholders’ ability to influence corporate matters.”
We are dependent on RCS Capital Management and its officers, who provide services to us through the services agreement.
We rely heavily on RCS Capital Management to conduct day-to-day business operations of our company, and to provide strategic planning and consulting services to us and our operating subsidiaries. Accordingly, the success of our businesses depends to a significant extent upon the efforts, experience, diligence, judgment, skill and network of business contacts of the officers of RCS Capital Management. The departure of any of the officers of RCS Capital Management could have a material adverse effect on our performance and slow our future growth.
While the qualified professionals of our operating subsidiaries generally are the direct employees of those operating subsidiaries and provide services for them on a full-time basis, RCS Capital Management is not obligated to dedicate any of its officers exclusively to us. In addition, none of our officers or the officers of RCS Capital Management is obligated to dedicate any specific portion of his time to our business. Each of these individuals has significant responsibilities for other business segments currently managed by affiliates of American Realty Capital, including as a result of being part of the senior management or key personnel of other American Realty Capital-sponsored entities and their advisors. For example, nine of the American Realty Capital-sponsored or co-sponsored REITs have registration statements that became effective during 2014. Additionally, one American Realty Capital-sponsored program was currently in registration as of December 31, 2014. As a result, these individuals may not always be able to devote sufficient time to the management of our business. Further, when there are turbulent conditions in the real estate markets or distress in the credit markets that affect American Realty Capital, the attention of RCS Capital Management’s principals and executive officers will also be required by the other entities and businesses managed by affiliates of American Realty Capital. In such situations, we may not receive the level of support and assistance that we might receive if we were internally managed.

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In addition, no assurance can be given that RCS Capital Management will continue to provide services to us. The initial term of the services agreement extends until June 10, 2033, with automatic five-year renewals, subject to termination by nonrenewal upon a 180-day prior written notice. If the services agreement is terminated and no suitable replacement is found to provide the services needed by us under that agreement, we may not be able to execute our business plan.
The services agreement was not negotiated on an arm’s-length basis and may not be as favorable as a services agreement negotiated with an unaffiliated third party.
Our chief executive officer and two of our six directors are also members of RCAP Holdings, RCS Capital Management and American Realty Capital. Our services agreement was negotiated between related parties and its terms, including amounts payable thereunder, may not be as favorable as if it had been negotiated with an unaffiliated third party.
Our ability to terminate the services agreement without cause is limited, and would be difficult to exercise. During the initial term, we, together with RCS Capital Holdings, LLC (“RCS Holdings”), an intermediate holding company wholly owned by us, formed in 2014 to own our operating subsidiaries, may terminate the services agreement only for cause. Effective at the expiry of the initial 20-year term or any subsequent five-year renewal term, we, together with RCS Holdings, may terminate the services agreement without cause upon the affirmative vote of at least two-thirds of our independent directors based upon: (1) RCS Capital Management’s unsatisfactory performance that is materially detrimental to us; or (2) a determination that the quarterly fees, incentive fees or performance-based awards payable to RCS Capital Management are not fair, subject to RCS Capital Management’s right to prevent termination based on unfair fees or awards by accepting a reduction of quarterly fees, incentive fees or awards agreed to by at least two-thirds of our independent directors. RCS Capital Management must be provided 180 days’ prior written notice of any such termination. These provisions may adversely affect our ability to terminate RCS Capital Management’s services without cause.
RCS Capital Management is not contractually committed to serve us beyond June 10, 2033. Thereafter, the services agreement will be renewable for five-year terms; provided, however, that RCS Capital Management may terminate the services agreement before the end of any five-year term at will upon 180 days’ prior written notice. If the services agreement is terminated and no suitable replacement is found, we may not be able to execute our business plan.
Pursuant to the services agreement, RCS Capital Management does not assume any responsibility other than to render the services called for thereunder and is not responsible for any action of our board of directors in following or declining to follow its advice or recommendations. RCS Capital Management maintains a contractual as opposed to a fiduciary relationship with us. Under the terms of the services agreement, none of RCS Capital Management or any of its respective officers, members or personnel, any person controlling or controlled by RCS Capital Management or any person providing sub-advisory services to RCS Capital Management will be liable to us, any subsidiary of ours, our directors, our stockholders or any of our subsidiaries’ stockholders or partners for acts or omissions performed in accordance with and pursuant to the services agreement, except because of acts constituting bad faith, willful misconduct or gross negligence. In addition, we have agreed to indemnify RCS Capital Management and each of its officers, stockholders, members, managers, directors and personnel, any person controlling or controlled by RCS Capital Management and any person providing sub-advisory services to RCS Capital Management with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts or omissions of RCS Capital Management not constituting bad faith, willful misconduct or gross negligence.
Payment of fees to RCS Capital Management reduces cash available for business investment and stockholder distribution.
RCS Capital Management provides certain services to us pursuant to a services agreement. RCS Capital Management is paid substantial fees for these services, which reduces the amount of cash available for investment in our business or distribution to our stockholders. Such fees consist of: (i) a quarterly fee; and (ii) an incentive fee. For the period from the closing of our initial public offering on June 10, 2013 to December 31, 2013 and the year ended December 31, 2014, the aggregate of the quarterly and incentive fees was $6.2 million and $2.0 million, respectively. During 2014, RCS Capital Management also received performance-based awards under the Amended and Restated 2013 Manager Multi-Year Outperformance Agreement among the Company, RCS Holdings and RCS Capital Management (the “OPP”) as further described in Note 19 to our consolidated financial statements. In the future we may contract with RCAP Holdings and/or RCS Capital Management to perform other services for us for which we will pay additional fees.
In connection with the closing of the acquisition by Luxor of an interest in RCS Capital Management, the OPP was amended, which resulted in 310,947 LTIP units being earned as of April 28, 2014, and 1,014,053 LTIP Units being forfeited. Following this amendment, no more LTIP Units can be issued under the OPP. On December 31, 2014, the OPP was amended again to provide for the early vesting of the earned LTIP Units such that all the earned LTIP Units became fully vested on December 31, 2014 and were converted into Class C Units in RCS Holdings on a one-for-one basis which, in turn, were converted into shares of Class A common stock on a one-for-one basis. Accordingly, on December 31, 2014, 310,947 shares of Class A common stock were issued pro rata to the individual holders of earned LTIP Units, the members of RCS Capital Management who are also members of RCAP Holdings and American Realty Capital. Following this conversion, no more LTIP Units are outstanding.

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In general, we and our subsidiaries are permitted to deduct all ordinary and necessary business expenses incurred in the operation of our businesses. The quarterly fee payable by us and RCS Holdings to RCS Capital Management, a related party, is allocated among us and RCS Holdings based on any reasonable method determined by our independent directors, such as the relative value of the services provided during the relevant period or the relative amount of time spent by RCS Capital Management providing management services to us, on the one hand, and to RCS Holdings and our operating subsidiaries, on the other hand. The Internal Revenue Service (“IRS”) could challenge the allocation of the quarterly fee among us and RCS Holdings or the deductibility of the quarterly fee by us or RCS Holdings if, for example, the amount of the quarterly fee is not reasonable relative to the services provided. If the deduction were successfully denied, in whole or in part, we or RCS Holdings, as applicable, would compute taxable income without deducting the quarterly fee, thereby increasing taxable income (or reducing losses) despite the reduction in our or RCS Holdings’ cash due to the payment of the quarterly fee to RCS Capital Management.
The quarterly fees payable to RCS Capital Management under the services agreement may cause RCS Capital Management to engage in risky behavior in order to increase its compensation.
Under the services agreement, RCS Capital Management is entitled to receive: (i) quarterly fees based on our GAAP pre-tax income; and (ii) incentive fees based on our Core Earnings. Core Earnings is a non-GAAP measure and is defined as our after-tax GAAP net income (loss), before the incentive fee plus non-cash equity compensation expense, depreciation and amortization, any unrealized gains, losses or other non-cash items recorded in net income for the period, regardless of whether such items are included in other comprehensive income or loss, or in net income (loss).
In providing services to us under the terms of the services agreement, the opportunity to earn compensation based on our GAAP pre-tax income and based on Core Earnings may lead RCS Capital Management to place undue emphasis on the maximization of our aggregate GAAP pre-tax income and Core Earnings at the expense of other criteria that would be beneficial to our business, such as preservation of capital, in order to obtain more compensation. Additionally, RCS Capital Management might engage in risky or speculative behavior in order to maximize Total Return, even if such behavior might put us at risk.
Any material weaknesses in our internal controls may impede our ability to produce timely and accurate financial statements, which could cause us to fail to file our periodic reports timely, result in inaccurate financial reporting or restatements of our financial statements, subject our stock to delisting and materially harm our business, results of operations, financial condition and the price of our Class A common stock.
As a public company, we are required to file annual and quarterly periodic reports containing our financial statements with the SEC within prescribed time periods. As part of the NYSE listing requirements, we are also required to provide our periodic reports, or make them available, to our stockholders within prescribed time periods. We may not be able to produce reliable financial statements or file these financial statements as part of a periodic report in a timely manner with the SEC or comply with NYSE listing requirements. In addition, we could make errors in our financial statements that could require us to restate our financial statements. If we are required to restate our financial statements in the future for any reason, any specific adjustment may be adverse and may cause our results of operations and financial condition, as restated, to be materially adversely impacted. As a result, we could be the subject of adverse publicity, stockholder lawsuits and investigations and sanctions by regulatory authorities, such as the SEC. Any of the above consequences could cause the price of our Class A common stock to decline and could impose significant unanticipated costs on us.
As of December 31, 2014, we no longer qualified as a “smaller reporting company” or an “emerging growth company” under the Securities Act and the Exchange Act. As a result, beginning with our Annual Report on Form 10-K for the year ended December 31, 2014, our independent registered public accounting firm is now required to evaluate and report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and, beginning with our Quarterly Report on Form 10-Q for the quarter ending March 31, 2015, we will become subject to more rigorous disclosure requirements that are applicable to publicly reporting companies that do not qualify as smaller reporting companies or emerging growth companies, including compensation discussion and analysis. The increased personnel requirements and other obligations related to these new requirements will cause an increase in public company reporting and internal and external auditing expenses, which could have an adverse effect on our results of operations.
To the extent we, or our independent registered public accounting firm, find material weaknesses in our internal controls, we, or our independent registered public accounting firm, may determine that we have ineffective internal controls over financial reporting as of any particular fiscal year end. Any material weaknesses or other deficiencies in our internal controls may delay the conclusion of an annual audit or a review of our quarterly financial results.

37

RCS Capital Corporation and Subsidiaries
December 31, 2014

If we are not able to issue our financial statements in a timely manner, or if we are not able to obtain the required audit or review of our financial statements by our independent registered public accounting firm in a timely manner, we will not be able to comply with the periodic reporting requirements of the SEC and the listing requirements of the NYSE. If these events occur, the listing of our Class A common stock on the NYSE could be suspended or terminated and the price of our Class A common stock could materially suffer. In addition, we could be subject to investigation and sanction by the SEC and other regulatory authorities and to stockholder lawsuits, which could impose significant additional costs on us, divert management attention and materially harm our business, results of operations, financial condition and the price of our Class A common stock.
We would be required to pay to RCAP Holdings most of the tax benefit of any depreciation or amortization deductions we may claim as a result of the step up in tax basis we would receive if the exchange by RCAP Holdings of substantially all of its Operating Subsidiaries Units is characterized as a taxable exchange.
If the exchange by RCAP Holdings of substantially all of its Operating Subsidiaries Units for shares of our Class A common stock (and cancellation of its corresponding shares of our Class B common stock) through the exchange transactions qualifies as a tax-free contribution to us under Section 351 of the Code, we would obtain carryover tax basis in the tangible and intangible assets of Realty Capital Securities, RCS Advisory and ANST connected with such Operating Subsidiaries Units. Accordingly, we would not be required to make any payments under the tax receivable agreement we have entered into with RCAP Holdings.
However, if the exchange were treated as a taxable transaction, each of Realty Capital Securities, RCS Advisory and ANST intends to have an election under Section 754 of the Code which would result in us receiving a step up in the tax basis in the tangible and intangible assets of each of Realty Capital Securities, RCS Advisory and ANST with respect to such Operating Subsidiaries Units acquired by us in such exchanges. The increase in tax basis would be expected to reduce the amount of tax that we would otherwise be liable for in the future. Pursuant to the tax receivable agreement we have entered into with RCAP Holdings, we would be required to pay RCAP Holdings 85% of the amount of the reduction, if any, in U.S. federal, state and local income tax liabilities that we realize as a result of this increase in tax basis resulting from the exchange. The amount and timing of any payments under the tax receivable agreement would vary depending on a number of factors, including the extent to which the exchange is taxable, the amount and timing of our income and the tax rates then applicable.
Risks Related to our Class A Common Stock
The market price and trading volume of our Class A common stock may be volatile, which could result in rapid and substantial losses for our stockholders.
The market price of our Class A common stock may be volatile and could be subject to wide fluctuations. In addition, the trading volume of Class A common stock may fluctuate and cause significant price variations to occur. If the market price of our Class A common stock declines significantly, you may be unable to resell your shares of our Class A common stock at or above your purchase price, if at all. There can be no assurance that the market price of our Class A common stock will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect the price of our Class A common stock, or result in fluctuations in the price or trading volume of Class A common stock, include:
adverse publicity about direct investment programs, generally, or individual scandals specifically, including due to the events relating to the announcement concerning certain accounting errors by ARCP;
general market and economic conditions;
variations in our quarterly operating results;
our failure to meet the market’s earnings expectations;
departures of principals or additions/departures of other key personnel;
adverse market reaction to any indebtedness we may incur or securities we may issue in the future;
actions by our stockholders;
changes in market valuations of similar companies;
actual or anticipated poor performance in our underlying investment strategies;
publication of research reports about us or the securities industry, or the failure of securities analysts to cover our Class A common stock;
changes or proposed changes in laws or regulation, or differing interpretations thereof, affecting our business, or enforcement of these laws and regulations, or announcements relating to these matters; and
litigation and governmental investigations, including due to the events relating to the announcement concerning accounting errors by ARCP.

38

RCS Capital Corporation and Subsidiaries
December 31, 2014

Public perceptions of the actual or expected risks or benefits of our recent and pending acquisitions could also affect the price of our Class A common stock. If we do not achieve the perceived benefits of our recent and pending acquisitions as rapidly or to the extent anticipated by financial or industry analysts, or the effect of our recent and pending acquisitions on our financial results is otherwise not consistent with the expectations of financial or industry analysts, the market price of our Class A common stock may decline. In addition, our stock price has been, and may continue to be, materially adversely impacted by the developments described under “—The announcement concerning certain accounting errors by ARCP has affected sales by RCAP of public, non-traded REITs sponsored directly or indirectly by American Realty Capital that are distributed by us and there can be no assurance that it will not continue to affect equity capital raised and have additional adverse impacts on our results of operations or the market price of our Class A common stock.” The market price of our Class A common stock has declined by 40.03% from the closing price on October 28, 2014, the trading date immediately preceding the announcement by ARCP, through the closing price on March 6, 2015. Uncertainty about the completion of our pending acquisitions, which are subject to conditions, may also affect the market price of our Class A common stock.
Future sales of our Class A common stock in the public market or future issuances in connection with acquisitions of businesses could lower the market price of our Class A common stock.
The market price of our Class A common stock could decline as a result of sales of a large number of shares of our Class A common stock or the perception that such sales could occur. Issuances of our Class A common stock will also occur to pay consideration at the completion of the acquisitions of VSR and Girard and to pay post-completion consideration due in connection with the acquisitions of Docupace, StratCap and Trupoly. These sales or issuances, or the possibility that these sales or issuances may occur, also might make it more difficult for us to raise additional capital by selling equity securities in the future, at a time and price that we deem appropriate.
Future issuances could also occur upon conversion of the convertible notes or the Series C convertible preferred stock or upon the exercise of the Luxor put.
There can be no assurance as to the size or price of future issuances of our Class A common stock or the effect, if any, that such future issuances and future sales of shares of our Class A common stock, including future sales by the selling stockholders, may have on the market price of our Class A common stock. Sales or distributions of substantial amounts of our Class A common stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may cause the market price of our Class A common stock to decline.
You may suffer immediate and substantial dilution in connection with the conversion of the Series C convertible preferred stock and the convertible notes, the exercise of the Luxor put option and upon the issuance of securities in connection with certain of our acquisitions.
Significant dilution may occur due to the 14,384,461 shares of our Class A common stock issuable upon conversion of the Series C convertible preferred stock and the convertible notes as of March 6, 2015. This amount is expected to increase because we do not expect to pay cash dividends on the Series C convertible preferred stock, which will accrue additional liquidation preference and be convertible into additional shares of Class A common stock. Furthermore, in connection with the Cetera acquisition, Luxor purchased a membership interest in RCS Capital Management and received the Luxor put, the right to require us to purchase the interest in exchange for, at our election, either cash, shares of our Class A common stock or a combination thereof. As of March 6, 2015, 2,569,930 shares of our Class A common stock would be issuable upon exercise of the Luxor put. An exercise of the Luxor put that requires us to issue additional shares of our Class A common stock could also cause dilution.
Collectively, the potential issuances to Luxor described above would constitute 23.02% of our outstanding Class A common stock as of March 6, 2015.
Additional dilution to existing stockholders may also occur in connection with the issuance of additional shares of our Class A common stock to pay consideration at the completion of the acquisitions of VSR and Girard and to pay post-completion consideration due in connection with the acquisitions of Docupace, StratCap and Trupoly.
These issuances will also increase the number of shares that may be issued under our equity plan, pursuant to which the number of shares of our Class A common stock equal to 10% of our issued and outstanding Class A common stock (on a fully diluted basis) at any time may be granted as awards. Issuances of awards under our equity plan or sales of shares and grants of warrants under our stock purchase program may result in dilution of the economic interests of our public stockholders.
Any additional capital raised by us through the sale of equity or convertible securities or any equity or convertible securities issued as consideration in future acquisitions may also dilute your ownership in us. Furthermore, if we issue additional equity securities, our stockholders will experience dilution and the new equity securities could have rights senior to those of our Class A common stock and the Series C convertible preferred stock. Because our decision to issue securities in any future offering may depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. As a result, our stockholders bear the risk of our future securities offerings reducing the market price of our Class A common stock and diluting their interest in us.

39

RCS Capital Corporation and Subsidiaries
December 31, 2014

Our ability to pay dividends is restricted.
We paid cash dividends to our Class A common stockholders on a quarterly basis as approved by our board of directors commencing in July 2013 (with respect to the second quarter of 2013) through July 2014 (with respect to the second quarter of 2014). We did not pay a cash dividend with respect to subsequent quarters and, at the present time, we do not expect to pay dividends in the near term, as our ability to pay cash dividends is restricted due to the negative covenants that are contained in the bank facilities and the indenture governing the convertible notes, which prohibit payment of dividends by us and our operating subsidiaries, subject to certain limited exceptions. We also do not expect to pay cash dividends on the Series B preferred stock and the Series C convertible preferred stock in future subsequent quarters for the same reason.
Our stockholders also may not receive the same dividends for other reasons, including the following:
we may not have enough cash to pay such dividends due to changes in our cash requirements, capital spending plans, cash flow or financial position;
we may desire to retain cash to maintain or improve our credit rating;
our stockholders have no contractual or other legal right to dividends that have not been declared and decisions on whether, when and in which amounts to make any future distributions will remain at all times entirely at the discretion of our board of directors, which reserves the right to change our dividend practices at any time and for any reason; and
the amount of dividends that our operating subsidiaries may distribute to us may be subject to restrictions imposed by state law, or regulators and any restrictions imposed by the terms of any current or future indebtedness that these subsidiaries may incur.
As a consequence, we also may have to limit or eliminate payment of dividends on our Class A common stock without regard for the negative covenants described above.
Anti-takeover provisions in our certificate of incorporation and by-laws could discourage a change of control that our stockholders may favor, which could negatively affect the market price of our Class A common stock.
Provisions in our certificate of incorporation and by-laws may make it more difficult and expensive for a third party to acquire control of us even if a change of control would be beneficial to the interests of our stockholders. For example, our certificate of incorporation authorizes the issuance of preferred stock that could be issued by our board of directors to thwart a takeover attempt. In addition, the holders of the majority of the outstanding shares of our Class B common stock always will have a majority of the voting power of our outstanding common stock, and we could issue additional shares of Class B common stock without the consent of our stockholders. The market price of our Class A common stock could be adversely affected to the extent that the provisions of our certificate of incorporation and by-laws discourage potential takeover attempts that our stockholders may favor.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the price and trading volume of our Class A common stock could decline.
The trading market for our Class A common stock depends in part on the research and reports that securities or industry analysts publish about us. If few or no securities or industry analysts cover us, the market price of our Class A common stock could be negatively impacted. If securities or industry analysts cover us and if one or more of such analysts downgrades our Class A common stock or publishes inaccurate or unfavorable research about our business, the price of our Class A common stock may decline. If one or more of the analysts covering us fails to publish reports on us regularly, demand for our Class A common stock could decline, which could cause the price and trading volume of our Class A common stock to decline.
All our debt obligations and outstanding preferred stock, and any future indebtedness or preferred stock we may incur or issue, will have priority over our Class A common stock with respect to payment in the event of a liquidation, dissolution or winding up.
In any liquidation, dissolution or winding up of our company, our Class A common stock would rank below all debt claims against us, such as claims by holders of the convertible notes, and equity securities that rank senior to our Class A common stock, such as the Series B preferred stock and the Series C convertible preferred stock. In addition, any convertible or exchangeable securities or other equity securities that we have issued, such as the Series B preferred stock and the Series C convertible preferred stock, or may issue in the future, may have rights, preferences and privileges more favorable than those of our Class A common stock. As a result, holders of our Class A common stock will not be entitled to receive any payment or other distribution of assets upon the liquidation or dissolution until after our obligations to our debt holders and holders of equity securities that rank senior to our Class A common stock have been satisfied.

40

RCS Capital Corporation and Subsidiaries
December 31, 2014

We could be subject to claims based on the delegation by our board of directors of the authority to grant restricted stock under our equity plan to our officers, which delegation has been ratified by our board of directors.
Our board of directors or our Executive Committee delegated to our officers the authority to designate the grantees of up to 2,158,000 restricted shares of Class A common stock authorized to be issued by the board of directors or Executive Committee under our equity plan. During the period from March 17, 2014 to March 31, 2014, our officers authorized and documented the issuance of an aggregate of 1,817,238 restricted shares of Class A common stock under our equity plan. Because the Delaware General Corporate Law (“DGCL”) does not permit the delegation to officers of the right to issue common stock, these grants were either void or voidable under the DGCL. On May 27, 2014, our board of directors ratified the grants made under our equity plan. Under certain authority, common law ratification by our board of directors would have caused the grants to be valid stock issuances by us at the time of the respective grants. However, a recent decision of the Delaware Chancery Court (which is currently being appealed to the Delaware Supreme Court) suggests that such ratification may not be effective unless we also follow a statutory procedure provided for under Section 204 of the DGCL, which became effective after that decision of the Delaware Chancery Court. We have not followed the statutory procedure under Section 204 of the DGCL. There can be no assurance that stockholders will not assert claims that the defective corporate act or putative stock ratified is void or voidable due to the identified failure of authorization, as well as other claims related thereto, and, if asserted, that any such claims will not be successful. If the ratification were not effective, then the issuance of the shares of restricted stock would be invalid and we could have liability to grantees of the restricted stock.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We own no real property material to our operations. Our principal executive offices are located at 405 Park Avenue, New York, New York and comprise approximately 83,631 gross square feet. The premises are leased to American Realty Capital and we pay an expense allocation related to the rent of this office to American Realty Capital pursuant to a services agreement. American Realty Capital holds a leasehold interest in the premises and a right of exclusive possession and use until the expiration date of the lease, which occurs on a floor-by-floor rolling basis beginning in 2019 and continuing through 2023.
We and our subsidiaries other than our Retail Firms lease additional offices across the US, including in the following locations: Boston, Massachusetts; Dallas, Texas; Irvine, California; Las Vegas, Nevada; Columbia, Maryland and Scottsdale, Arizona, which comprise, in the aggregate, approximately 60,000 gross square feet of office space.
Our Retail Firms lease corporate offices located in: San Diego, California; Costa Mesa, California; Raleigh, North Carolina; Lynnfield, Massachusetts; Boca Raton, Florida and Bay Ridge, New York.
We believe our office facilities are suitable and adequate to the operation of our business.
Item 3. Legal Proceedings
The information contained in Note 17 of our notes to the consolidated financial statements included in this Annual Report on Form 10-K is incorporated by reference into this Item 1. Except as set forth therein, as of the end of the period covered by this Annual Report on Form 10-K, we are not a party to, and none of our subsidiaries are subject to, any material pending legal proceedings.
Item 4. Mine Safety Disclosure
Not applicable.

41

RCS Capital Corporation and Subsidiaries
December 31, 2014

Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market price of our Class A common stock
Our Class A common stock began trading on the NYSE under the symbol “RCAP” on June 5, 2013. Prior to that, there was no public market for our Class A common stock. The table below sets forth, for the periods indicated, the high and low sales prices per share of our Class A common stock since June 5, 2013.
 
Price Per Share of Common Stock
 
High
 
Low
2013 Second Quarter(1)
$19.40
 
$16.69
2013 Third Quarter
$17.88
 
$15.00
2013 Fourth Quarter
$18.35
 
$15.66
2014 First Quarter
$38.92
 
$17.58
2014 Second Quarter
$39.50
 
$19.85
2014 Third Quarter
$24.50
 
$19.64
2014 Fourth Quarter
$23.81
 
$9.38
(1) For the period from June 5, 2013 through June 30, 2013.
As of December 31, 2014, we had 532 holders of record of our Class A common stock. This number excludes owners for whom our Class A common stock may be held in “street” name.
Dividend policy and dividends
We paid cash dividends to our Class A common stockholders in an amount equal to $0.18 per share on a quarterly basis as approved by our board of directors commencing in July 2013 (with respect to the second quarter of 2013) through July 2014 (with respect to the second quarter of 2014). We did not pay a cash dividend with respect to subsequent quarters and, at the present time, we do not expect to pay dividends in the near term, as our ability to pay cash dividends is restricted due to the negative covenants that are contained in the bank facilities and the indenture governing the convertible notes, which prohibit payment of dividends by us and our operating subsidiaries, subject to certain limited exceptions. We also do not presently expect to pay cash dividends on the Series B preferred stock and the Series C convertible preferred stock in future subsequent quarters for the same reason.
Our stockholders also may not receive dividends for other reasons, including the following:
we may not have enough cash to pay such dividends due to changes in our cash requirements, capital spending plans, cash flow or financial position;
we may desire to retain cash to maintain or improve our credit rating;
our stockholders have no contractual or other legal right to dividends that have not been declared and decisions on whether, when and in which amounts to make any future distributions will remain at all times entirely at the discretion of our board of directors, which reserves the right to change our dividend practices at any time and for any reason; and
the amount of dividends that our operating subsidiaries may distribute to us may be subject to restrictions imposed by state law, or regulators and any restrictions imposed by the terms of any current or future indebtedness that these subsidiaries may incur.

42

RCS Capital Corporation and Subsidiaries
December 31, 2014

The declaration and payment of all dividends is at the sole discretion of our board of directors. In determining the amount of any dividends, our board of directors takes into account: (i) the financial results of our operating subsidiaries; (ii) our available cash, as well as anticipated cash requirements (including debt servicing, if any); (iii) our capital requirements and the capital requirements of our operating subsidiaries; (iv) contractual, legal, tax and regulatory restrictions on, and implications of, the payment of dividends by us to our stockholders or by our operating subsidiaries to us; (v) general economic and business conditions; and (vi) any other factors that our board of directors may deem relevant. Under Delaware law, we may only pay dividends from legally available surplus or, if there is no such surplus, out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Surplus is defined as the excess of a corporation’s total assets over the sum of its total liabilities plus the amount the corporation has determined to be capital. Under Delaware law, our board of directors can use the fair value of assets and liabilities, rather than book value, in making this determination. To the extent we do not have sufficient cash to pay dividends, we may decide not to pay dividends. By paying cash dividends rather than investing that cash in our future growth, we risk slowing the pace of our growth, or not having a sufficient amount of cash to fund our operations or unanticipated capital expenditures.
Share Repurchases
For the year ended December 31, 2014, we did not repurchase any shares.
Unregistered Sales of Equity Securities
On December 31, 2014, in connection with the redemption and exchange of the Earned LTIP Units that had previously been distributed by RCS Capital Management to its individual members, we issued 23,445 shares of Class A common stock as consideration to an individual who was a member of RCS Capital Management and a holder of Earned LTIP Units. This individual was an accredited investor, and the shares of Class A common stock were issued pursuant to an exemption from the registration requirements of the Securities Act pursuant to Section 4(a)(2) of the Securities Act and Rule 506 promulgated thereunder. The other 287,502 shares of Class A common stock issued to the other individual members of RCS Capital Management who were also holders of Earned LTIP Units on the same day in connection with the same transaction were issued as awards under the RCS Capital Corporation Equity Plan and registered under a Registration Statement on Form S-8 as these individuals were current or former employees of the Company or RCS Capital Management.

43

RCS Capital Corporation and Subsidiaries
December 31, 2014

Item 6. Selected Financial Data
Presented below is the selected consolidated financial data of our company as of and for the periods indicated. The following selected financial data of our company should be read in conjunction with, and are qualified by reference to, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included in Part IV of this Annual Report on Form 10-K. The direct investment equity capital raised amounts have not been derived from audited financial statements. The selected consolidated operating data for the years ended December 31, 2014 and 2013 and the selected balance sheet data as of December 31, 2014 and 2013 have been derived from the audited consolidated financial statements of our company included elsewhere in this Annual Report on Form 10-K. For periods prior to and including December 31, 2012, we provide data solely for Realty Capital Securities because it was the only operating subsidiary that was in operation as of and prior to December 31, 2012. The selected operating data for the year ended December 31, 2012, has been derived from audited financial statements included elsewhere in this Annual Report on Form 10-K. The selected operating data for the years ended December 31, 2011 and 2010 and the selected balance sheet data as of December 31, 2012, 2011 and 2010 have been derived from audited financial statements that are not included in this Annual Report on Form 10-K.
The selected consolidated operating data only includes the results of operations of Cetera, Summit, J.P. Turner, Hatteras, ICH, StratCap, Trupoly and Docupace beginning on the date of each company’s acquisition during 2014. The selected consolidated balance sheet data as of December 31, 2014 includes the financial position of Cetera, Summit, J.P. Turner, Hatteras, ICH, StratCap, Trupoly and Docupace.
Our acquisition of First Allied on June 30, 2014 was accounted for at historical cost in a manner similar to a pooling-of-interest accounting because when our parent, RCAP Holdings, acquired First Allied on September 25, 2013, we and First Allied became under the common control of RCAP Holdings. Therefore, the selected operating data for the year ended December 31, 2014 and 2013, and the selected balance sheet data as of December 31, 2014 and 2013 include the results of operations and financial position of First Allied as if we had acquired it on September 25, 2013, the date that First Allied was acquired by RCAP Holdings.
 
As of and for the Year Ended December 31,
($ in thousands, except share data)
2014
 
2013
 
2012
 
2011
 
2010
Selected Operating Data:
 
 
 
 
 
 
 
 
 
Revenue
$
2,102,195

 
$
975,067

 
$
287,497

 
$
174,729

 
$
114,131

Operating expenses
2,268,320

 
875,209

 
280,085

 
170,987

 
116,513

Provision (benefit) for (from) income taxes(1)
(46,485
)
 
1,843

 

 

 

Net income (loss)
$
(119,640
)
 
$
98,015

 
$
7,412

 
$
3,742

 
$
(2,382
)
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Cash
$
199,435

 
$
70,059

 
$
12,683

 
$
3,941

 
$
4,157

Total assets
$
2,466,628

 
$
336,525

 
$
16,211

 
$
5,406

 
$
7,491

Long-term debt
$
804,411

 
$
33,302

 
$

 
$

 
$

Total liabilities
$
1,631,339

 
$
120,171

 
$
10,485

 
$
2,538

 
$
4,324

Total mezzanine equity
$
257,988

 
$

 
$

 
$

 
$

Total stockholders’ and member’s equity(2)
$
543,260

 
$
181,684

 
$
5,726

 
$
2,868

 
$
3,167

Non-controlling interest
$
34,041

 
$
34,670

 
$

 
$

 
$

Other Data:
 
 
 
 
 
 
 
 
 
Equity capital raised(3)
$
7,838,619

 
$
8,629,800

 
$
2,952,061

 
$
1,765,125

 
$
1,147,912

Basic earnings per Class A common share
$
(5.55
)
 
$
0.29

 
N/A

 
N/A

 
N/A

Diluted earnings per Class A common share
$
(5.55
)
 
$
0.28

 
N/A

 
N/A

 
N/A

Cash dividends declared per common share
$
0.36

 
$
0.54

 
N/A

 
N/A

 
N/A

(1) As a limited liability company it was not subject to income taxes, accordingly, Realty Capital Securities did not record income tax expense (benefit).
(2) As a limited liability company, Realty Capital Securities was owned by its member, not by a stockholder.
(3) Equity capital raised represents the dollar volume of the aggregate gross proceeds from equity in direct investment programs and registered investment funds sold by retail broker-dealers and registered investment advisers with whom we had a dealer manager relationship. The equity capital raised for the year ended December 31, 2014 includes sales from StratCap and Hatteras beginning on the date of acquisition of $0.3 billion and $0.3 billion, respectively. The equity capital raised for all other years includes only sales from Realty Capital Securities.

44

RCS Capital Corporation and Subsidiaries
December 31, 2014

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The information in this section includes forward-looking statements that involve risks and uncertainties. Please see “Risk Factors” and “Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements. Additionally, if the pending acquisitions are consummated, the retail advice platform will represent a substantial part of our business, and accordingly, our historical results may not be indicative of our performance in the future.
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes of our Company included elsewhere in this Annual Report on Form 10-K. The historical financial data for the Year Ended December 31, 2014 and 2013 discussed below reflect the historical results of operations and financial condition of RCS Capital Corporation and subsidiaries. Due to the limited operating history of RCS Capital Corporation, the historical financial data for the Year Ended December 31, 2012 discussed below reflect the historical results of operations and financial condition of Realty Capital Securities, which was the only operating subsidiary that was in operation as of and prior to December 31, 2012.
Executive Summary
We are an integrated financial services company principally focused on retail investors. We are engaged in the following businesses: the provision of retail advice through independent channel broker-dealers and registered investment advisers, wholesale distribution, investment banking, capital markets, investment management and investment research.
Our Business
We operate through our operating subsidiaries in six principal segments: Independent Retail Advice; Wholesale Distribution; Investment Banking, Capital Markets and Transaction Management Services; Investment Management; Investment Research; and Corporate and Other.
The results of operations of Cetera, Summit, J.P. Turner, Hatteras, ICH, StratCap, Trupoly and Docupace are included in our results of operations from their dates of acquisition in 2014. Our acquisition of First Allied was accounted for at historical cost in a manner similar to a pooling-of-interest accounting because we and First Allied were under the common control of RCAP Holdings at the time of the acquisition of First Allied by RCAP Holdings. Beginning with our financial statements for the quarter ended June 30, 2014, we have presented recast financial information for the relevant periods to reflect the results of operations and financial position of First Allied as if we had acquired it on September 25, 2013, the date that First Allied was acquired by RCAP Holdings.
Independent Retail Advice
Our Independent Retail Advice business is conducted through a network of independent channel broker-dealers and registered investment advisers, the Retail Firms, acquired during 2014, namely Cetera, First Allied, J.P. Turner, Summit and ICH, which operate collectively under the marketing brand of “Cetera Financial Group.” Each Retail Firm operates independently under its own brand and management, but with certain shared services with other Retail Firms. In August 2014, we entered into agreements to acquire VSR and Girard, which will each become Retail Firms following completion of the acquisitions, which is expected to occur in March 2015.
Through financial advisors, the Retail Firms offer independent retail advice, financial products and investment solutions to “mass affluent” individuals and households, which we define as individuals and households with $100,000 to $1,000,000 of investable assets. Each of our Retail Firms provides independent groups of affiliated financial advisors or other financial professionals with the technology, infrastructure and other support and services they need to serve their clients. Each Retail Firm also provides its financial advisors with a wide array of practice development and operational support services that we believe help those financial advisors launch new relationships and strengthen existing ones.
As of December 31, 2014 before giving effect to the expected completion of our acquisitions of VSR and Girard, our Retail Firms serve approximately 2.0 million client accounts with $214.2 billion in assets under administration through 9,023 financial advisors.
Wholesale Distribution
Since its inception in 2007, Realty Capital Securities has focused on providing financial products and investment solutions through its wholesale distribution of non-traded REITs, BDCs and other direct investment programs sponsored, co-sponsored, advised or sub-advised by our affiliate, American Realty Capital. In August 2014, we acquired StratCap, which was engaged in a similar business.
The offerings distributed by Realty Capital Securities and StratCap as of March 6, 2015 are direct investment programs and registered investment companies registered with the SEC, which currently consist of 10 public, non-traded REITs, three public, non-traded BDCs, four mutual funds, two closed-end interval funds, an oil and gas program and two public, non-traded limited liability companies.

45

RCS Capital Corporation and Subsidiaries
December 31, 2014

We believe that the combination of Realty Capital Securities and StratCap constitute the leading multi-product distribution platform of direct investment program offerings to independent broker-dealers and the retail financial advisor community as measured by total equity capital raised and number of direct investment programs distributed, according to Stanger. As of December 31, 2014, Realty Capital Securities and StratCap were distributing a total of 17 public non-listed direct investment program offerings effective with the SEC and none of their competitors was distributing more than three.
All of the results of operations of Hatteras, including the results of the wholesale distribution of registered investment companies by Hatteras described under “Item 1. Business - Wholesale Distribution” are included in our Investment Management segment.
Investment Banking, Capital Markets and Transaction Management Services
Operating under the name RCS Capital, Realty Capital Securities and RCS Advisory provide direct investment programs, primarily publicly registered non-traded REITs and BDCs as well as open- and closed-end mutual funds sponsored, co-sponsored or advised by American Realty Capital and distributed by Realty Capital Securities, with strategic advisory and capital markets services including mergers and acquisitions, capital markets activities, registration management, and other transaction support services. ANST acts as registrar, provides record-keeping services and executes the transfer, issuance and cancellation of shares or other securities in connection with offerings conducted by issuers sponsored directly or indirectly by American Realty Capital. Docupace became a part of our Investment Banking, Capital Markets and Transaction Management Services division when we completed the acquisition in November 2014.
Investment Management
Our Investment Management segment consists of Hatteras. Hatteras provides investment advisory and distribution to the Hatteras family of registered investment company funds, which is focused on liquid alternatives. The Hatteras family of funds includes retail funds (both open- and closed-end) with approximately $2.5 billion in assets under management as of December 31, 2014.
Investment Research
In March 2014, we launched SK Research. SK Research provides due diligence on traditional and non-traditional investment products to Cetera Financial Group. SK Research also provides focused research, consulting, training and education to Cetera Financial Group, which we believe enhances the financial advice our financial advisors can provide to their clients. SK Research also provides due diligence services in connection with direct investment programs, including direct investment programs sponsored, co-sponsored or advised by American Realty Capital, to other broker-dealers and registered investment adviser firms, as well as individual registered representatives and investment adviser representatives.
Corporate and Other
Corporate and other primarily includes interest expense on our long-term debt, share-based compensation related to our board of directors and expenses related to the OPP, changes in the fair value of our derivative contracts, certain acquisition-related expenses, certain public company expenses and the results of our crowdfunding investment platform which we have branded under the name “We Are Crowdfunding.”
Critical Accounting Policies and Estimates
Set forth below is a summary of the critical accounting policies and significant accounting estimates that management believes are important to the preparation of our consolidated financial statements or are essential to understanding of our financial position and results of operations. These significant accounting policies and estimates include:
Revenue and expense recognition for selling commissions and dealer manager fees and the related expenses
We, through certain of our broker-dealer subsidiaries, receive selling commissions and dealer manager fees from related party and non-related party issuers for their wholesale distribution efforts. The commission and dealer manager fee rates are established jointly in a single contract negotiated with each individual issuer. We generally receive commissions of up to 7.0% of gross offering proceeds for funds raised by direct investment programs through the participating independent broker-dealer channel, all of which are reallowed as commissions, and 4.0% in connection with sales of open-end and closed-end mutual funds sold by Realty Capital Securities in accordance with industry practices. Commission percentages are generally established in the issuers’ offering documents leaving us no discretion as to the payment of commissions. Commission revenues and related expenses are recorded on a trade date basis as securities transactions occur.

46

RCS Capital Corporation and Subsidiaries
December 31, 2014

We, serving as a dealer manager, receive fees and compensation in connection with the wholesale distribution of registered non-traded securities. We contract directly with independent broker-dealers and registered investment advisers (“RIAs”) to solicit share subscriptions. The non-traded securities are offered on a “best efforts” basis and we are not obligated to underwrite or purchase any shares for our own account. We generally receive up to 3.0% of the gross proceeds from the sale of common stock as a dealer manager fee and also receive fees from the sale of common stock through RIAs. We have sole discretion as to reallowance of dealer manager fees to participating broker-dealers, based on such factors as the volume of shares sold and marketing support incurred by respective participating broker-dealers as compared to those of other participating broker-dealers. Dealer manager fees and reallowances are recorded on a trade date basis as securities transactions occur.
We contract directly with broker-dealers and RIAs to solicit subscriptions to shares of registered investment company funds. The funds are offered on a “best efforts” basis and we are not obligated to underwrite or purchase any shares of the funds for our own account. We generally receive up to 50 basis points of the gross proceeds from the shares of the fund and also may receive fees from the shares of the funds from broker-dealers and RIAs.
We analyze our contractual arrangements to determine whether to report revenue on a gross basis or a net basis. The analysis considers multiple indicators regarding the services provided to our customers and the services received from our distributors. The goal of the analysis is to determine if we are the primary obligor in the arrangement. After weighing many indicators, including our position as the exclusive distributor or dealer manager primarily responsible for the distribution of our customers’ shares, our discretion in supplier selection, that our distributors bear no credit risk and that the commission and dealer manager fee rates are agreed to with each participating broker-dealer, we concluded that the gross basis of accounting for its commission and fee revenues is appropriate.
During the year ended December 31, 2013, we modified our approach with respect to revenues derived from the sale of interests in direct investment programs purchased through fee-based advisors, by reducing to zero the selling commissions charged on sales through the RIA channel. The offerings affected were generally related party offerings. This selling commission change became effective on July 1, 2013, and the 7.0% selling commission we received from each sale through the RIA channel was reduced to zero. Prior to the change, the full amount of the dealer manager fee (generally 3.0%) and the 7.0% selling commission was charged against the amount invested through the RIA channel, and we retained the dealer manager fee and the 7.0% selling commission charged against the investor’s purchase price. After the change, we no longer receive any selling commissions on sales through the RIA channel, but continue to retain the dealer manager fee (generally 3.0%) of the amount invested in connection with sales through the RIA channel.
This modified business practice does not constitute a change in accounting policy. During the year ended December 31, 2014 and 2013, equity capital raised for related party offerings distributed by Realty Capital Securities through the RIA channel was $484.4 million and $720.2 million, respectively. See “— Results of Operations” for further details.
Investment banking advisory services
We, through our investment banking and capital markets division, receive fees and compensation for providing investment banking, capital markets and related advisory services. Such fees are charged based on agreements entered into with related party and non-related party public and private issuers of securities and their sponsors and advisors, on a negotiated basis. Fees and expenses that are unpaid are recorded in investment banking fees receivable and reimbursable expenses receivable in the statement of financial condition. Investment banking agreements either have a fixed fee or a percentage of the total deal value which are typically contingent upon the consummation of the transaction; these agreements may also include a minimum fee that will be paid even in the event the transaction is not consummated provided that services have been rendered. Income from investment banking agreements is generally recognized upon consummation of the transaction. However, in certain cases, we recognize income from investment banking agreements prior to the consummation of the transaction if services have been rendered and there are no substantive remaining contingencies as of the reporting date. Income from certain investment banking agreements is recorded as deferred revenue in the statement of financial condition and is recognized over the remaining life of the offering. These fees are typically a fixed dollar amount.
Internal commissions, payroll and benefits expenses
Included in internal commissions, payroll and benefits in the consolidated statements of income is performance-based compensation including cash and shared-based compensation. The determination of performance-based compensation involves a high degree of judgment by management and takes into account our actual operating performance, conditions in our industry and other macroeconomic factors. It is possible that revisions to our estimate of performance-based compensation could affect our results of operations in any reporting period.

47

RCS Capital Corporation and Subsidiaries
December 31, 2014

Presentation of certain expenses net versus gross
We consider the nature of certain cash consideration received from a vendor in determining whether the consideration is payment for assets or services delivered to the vendor or is reimbursement of costs incurred by the customer. If the cash consideration represents payments for assets or services delivered to the vendor and the vendor receives an identifiable benefit in exchange for the consideration, the consideration is characterized as revenue. To meet that condition, the identified benefit must be sufficiently separable from the customer’s purchase of the vendor’s products such that the customer would have entered into an exchange transaction with a party other than the vendor in order to provide that benefit, and the customer can reasonably estimate the fair value of the benefit provided. If the cash consideration represents a reimbursement of specific, incremental, identifiable cost incurred by the customer in selling the vendor’s products or services, the cash consideration shall be characterized as a reduction of that cost.
Our broker-dealer subsidiaries partner with a number of vendors to enable their registered representatives to access important technological tools and platforms, data feeds and subscriptions that will enable them to better serve their clients. In addition, the broker-dealers are required to maintain adequate insurance coverage to operate and conduct business. These fees are recognized as consideration for assets or services delivered to the registered representatives. Consideration received for other regulatory fees and clearing costs represent reimbursement of costs incurred by the broker-dealers and is characterized as a reduction of those costs.
The determination of the gross versus net treatment involves a high degree of judgment by management. While the ultimate conclusion does not have an impact on our net income, it is possible that changes in our conclusions could affect our revenues and expenses in any reporting period.
Income taxes
We are subject to the income tax laws of the U.S. and those state and local jurisdictions in which we conduct business. These laws can be complex and subject to interpretation. To prepare the consolidated financial statements we may make assumptions or use judgment when interpreting these income tax laws which could impact the provision for income taxes as well as the deferred tax assets and liabilities.
Our provision for income taxes includes current and deferred taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax basis. We recognize deferred income tax assets if, in management’s judgment, it is more likely than not that they will be realized. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. This determination is based upon a review of all available evidence, both positive and negative, including our earnings history, the timing, character and amount of future earnings potential, the reversal of taxable temporary differences and the tax planning strategies available. As of December 31, 2014, we recorded a valuation allowance of $0.3 million related to state net operating losses. As of December 31, 2013, we did not record a valuation allowance against our deferred income tax asset.
Our net deferred tax liability is subject to changes in tax laws, assumptions, estimates or methods used in the accounting for income taxes, that if significantly negative or unfavorable, could have a material adverse effect on amounts or timing of realization or settlement. Such effects could result in a material acceleration of income taxes currently payable or valuation charges for realization uncertainties, which could have a material adverse effect on our future financial condition or results of operations.
We have a tax receivable agreement with RCAP Holdings. This agreement requires us to pay RCAP Holdings if certain reductions in tax liabilities occur. Due to the uncertainty surrounding these taxable events, management must use assumptions and estimates in determining if a liability is necessary. See “—Tax Receivable Agreement” and Note 19 of our consolidated financial statements for more information. It is possible that changes in our assumptions regarding these taxable events could affect our results of operations in any reporting period. As of December 31, 2014, there was no impact to our financial statements from the tax receivable agreement.
Acquisition accounting/intangible asset valuation and goodwill impairment/contingent and deferred consideration
We acquired Cetera, Summit, J.P. Turner, Hatteras, First Allied, ICH, StratCap, Trupoly and Docupace during 2014.
Accounting for acquisitions, the related valuation of intangible assets and goodwill impairment are critical accounting policies involving significant estimates. We test our goodwill balances at least annually as of October 31, or more frequently if there are indicators of impairment testing using the fair value approach at the reporting unit level. Testing for goodwill impairment involves the use of significant estimates and judgment to determine the fair value of the reporting units that may include the use of discounted future cash flows, projected earnings and peer group analysis. With respect to the First Allied acquisition, the contribution has been accounted for at historical cost rather than the purchase method because First Allied and our company were under the common control of RCAP Holdings at the time of the acquisition of First Allied by RCAP Holdings. There was no impairment of our goodwill and intangible assets during the year ended December 31, 2014.

48

RCS Capital Corporation and Subsidiaries
December 31, 2014

In connection with certain of our recent acquisitions, the purchase price includes contingent consideration, also referred to as earn-outs, and deferred payments, which represent future payments of cash or equity interests to the former owners of the businesses acquired. These earn-outs and deferred payments are recorded at fair value in the consolidated statements of financial condition. Earn-outs are subsequently remeasured each reporting period. The discount on the deferred payments is accreted into earnings. The fair value of the earn-outs and deferred payments are determined by the use of third-party valuation firms that use internally developed proprietary models using various input parameters which is then reviewed by us.
Fair Value
The fair value of the majority of our financial instruments, except for our derivative contracts, is based on quoted market prices in active markets or observable market parameters, or is derived from such prices or parameters. These instruments include government and agency securities, listed equities, mutual funds, certificates of deposit, money market funds and corporate debt.
In addition, we hold financial instruments for which no market prices are available, and which have reduced or no price transparency. For these instruments the determination of fair value requires subjective assessment and varying degrees of judgment depending on the risks affecting the specific instrument. In such circumstances, valuation is determined based on management’s best estimate of fair value. These instruments include certain derivatives and other long-term investments. The fair values for our derivatives are determined by a third-party valuation firm that uses internally developed proprietary models using various input parameters which is then reviewed by us.
Litigation Contingencies
We and our subsidiaries are involved in legal proceedings from time to time arising out of our business operations, including arbitrations and lawsuits involving private claimants, and subpoenas, investigations and other actions by government authorities and self-regulatory organizations. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases in which claimants seek substantial or indeterminate damages, we cannot estimate what the possible loss or range of loss related to such matters will be. We recognize a liability with regard to a legal proceeding when we believe it is probable a liability has occurred and the amount can be reasonably estimated. If some amount within a range of loss appears at the time to be a better estimate than any other amount within the range, we accrue that amount. When no amount within the range is a better estimate than any other amount, however, we accrue the minimum amount in the range. We maintain insurance coverage, including general liability, errors and omissions, excess entity errors and omissions and fidelity bond insurance. When there is indemnification or insurance, we may engage in defense or settlement discussions and subsequently seek reimbursement for such matters. We record legal reserves and related insurance recoveries on a gross basis.
Defense costs with regard to legal proceedings are expensed as incurred and classified as professional services within the consolidated statements of income.

49

RCS Capital Corporation and Subsidiaries
December 31, 2014

Results of Operations
The following table provides an overview of our consolidated results of operations for the years ended December 31, 2014 and December 31, 2013 (dollars in thousands):
 
Year Ended
 
 
 
December 31,
 
 
 
2014
 
2013
 
% Change
Revenues
$
2,102,195

 
$
975,067

 
116
 %
Expenses
2,268,320

 
875,209

 
159
 %
Income (loss) before taxes
(166,125
)
 
99,858

 
(266
)%
Provision (benefit) for (from) income taxes
(46,485
)
 
1,843

 
(2,622
)%
Net (loss) income
$
(119,640
)
 
$
98,015

 
(222
)%
 
 
 
 
 
 
Basic (loss) earnings per share(1)
$
(5.55
)
 
$
0.29

 
(2,014
)%
Diluted (loss) earnings per share(1)
$
(5.55
)
 
$
0.28

 
(2,082
)%
 
 
 
 
 
 
EBITDA (Non-GAAP)(2)
$
(45,524
)
 
$
102,307

 
(144
)%
Adjusted EBITDA (Non-GAAP)(2)
$
166,342

 
$
110,649

 
50
 %
 
 
 
 
 
 
Adjusted net income (Non-GAAP)(2)
$
99,159

 
$
108,094

 
(8
)%
Adjusted net income per adjusted share (Non-GAAP)(2)
$
1.89

 
$
3.39

 
(44
)%
_____________________
(1) See Note 15 for more information on our calculation.
(2) See “Non-GAAP Measures” for more information on our calculation.
We recorded a net loss of $119.6 million for the year ended December 31, 2014, or $5.55 per diluted share, compared to net income of $98.0 million for the year ended December 31, 2013, or $0.28 per diluted share, primarily as a result of the $60.0 million litigation settlement with ARCP and costs related to the recent acquisitions. In addition we had higher interest expense reflecting our incurrence of long-term debt during 2014, an increase in amortization expense on the intangible assets from the recent acquisitions, losses from our wholesale distribution business which is further explained below and losses on our derivative contracts.
The adjusted net income for the year ended December 31, 2014 totaled $99.2 million, or $1.89 per adjusted share, versus adjusted net income of $108.1 million, or $3.39 per adjusted share, for the year ended December 31, 2013.
Our results of operations only include the results of operations of Cetera, Summit, J.P. Turner, Hatteras, ICH, StratCap, Trupoly and Docupace beginning on the date of each company’s acquisition. In addition, our acquisition of First Allied was accounted for at historical cost in a manner similar to a pooling-of-interest accounting because we and First Allied were under the common control of RCAP Holdings at the time of the acquisition of First Allied by RCAP Holdings. Beginning with our financial statements for the quarter ended June 30, 2014, we have presented recast financial information for the relevant periods to reflect the results of operations and financial position of First Allied as if we had acquired it on September 25, 2013, the date that First Allied was acquired by RCAP Holdings. Therefore, our results for the year ended December 31, 2013 only include First Allied’s results from September 25, 2013 through December 31, 2013 but all of First Allied’s results for the year ended December 31, 2014 are included in our results for those periods.
As a result of the announcement concerning certain accounting errors by ARCP, a number of broker-dealer firms that had been participating in the distribution of offerings of public, non-traded REITs sponsored directly or indirectly by American Realty Capital that are distributed by us have temporarily suspended their participation in the distribution of those offerings and such suspensions have adversely impacted equity capital raised. Although certain of these broker-dealer firms have reinstated their participation in the distribution of our offerings, we cannot predict the length of time these temporary suspensions will continue, whether all such participating broker-dealers will reinstate their participation in the distribution of our offerings or whether there will be additional suspensions.

50

RCS Capital Corporation and Subsidiaries
December 31, 2014

Subsequent to the ARCP announcement, average monthly equity capital raised by direct investment programs distributed by us for the period from November 2014 through February 2015 were 61.6% less than the average monthly equity capital raised by direct investment programs distributed by us during the same months during the preceding year and 64.2% less than the average monthly sales during the four months (July 2014 to October 2014) preceding the ARCP announcement. While monthly equity capital raised has increased subsequent to the month after the announcement, equity capital raised subsequent to the announcement has declined in comparison to prior periods. Although the amount of the decline may have been affected by factors in addition to the ARCP announcement, such as absence of liquidity events and the stages of the offerings of individual direct investment programs, the ARCP announcement has had a material adverse effect on equity capital raised by direct investment programs distributed by us during this period, and, accordingly, has had an adverse impact on our results of operations for period subsequent to the ARCP announcement.
On March 2, 2015, ARCP announced the completion of its audit committee’s investigation and filed amendments to its Form 10-K for the year ended December 31, 2013 and its Form 10-Q for the quarters ended March 31, 2014 and June 30, 2014, which are available at the internet site maintained by the SEC, www.sec.gov. These amendments corrected errors in ARCP’s financial statements and in its calculation of AFFO that resulted in overstatements of AFFO for the years ended December 31, 2011, 2012 and 2013 and the quarters ended March 31, 2013 and 2014 and June 30, 2014 and described certain results of its investigations, including matters relating to payments to, and transactions with, affiliates of AR Capital and certain equity awards to certain officers and directors. ARCP also disclosed that the SEC has commenced a formal investigation and that the United States Attorney’s Office for the Southern District of New York contacted counsel for both ARCP’s audit committee and ARCP with respect to the matter.
There can be no assurance that the announcement concerning certain accounting errors by ARCP, the disclosures in ARCP’s SEC filings on March 2, 2015 and any future related disclosures or events will not have additional adverse impact on equity capital raised by direct investment programs distributed by us, our results of operations or the market price of our Class A common stock.. In addition, the ARCP announcement could affect the timing of the commencement of new offerings of direct investment programs offered by us and capital markets transactions and transaction services, which could impact our revenues. See “Risk Factors — Risks Related to Our Business — The announcement concerning certain accounting errors by ARCP has affected sales by RCAP of public, non-traded REITs sponsored directly or indirectly by American Realty Capital that are distributed by us and there can be no assurance that it will not continue to affect equity capital raised and have additional adverse impacts on our results of operations or the market price of our Class A common stock.”
Revenues for the year ended December 31, 2014 increased $1.1 billion, or 116%, to $2.1 billion, as compared to $975.1 million for the year ended December 31, 2013 primarily due to:
(i)
$1.3 billion in increased revenue related to the inclusion of the results of operations of Cetera, Summit, J.P. Turner, Hatteras, ICH, StratCap and Docupace beginning on the date of each company’s acquisition and the inclusion of First Allied’s results for the year ended December 31, 2014 (none of the acquired businesses’ results, except for First Allied’s results from September 25, 2013 through December 31, 2013, were included for the year ended December 31, 2013);
(ii)
$41.9 million in increased revenues in Investment Banking, Capital Markets and Transaction Management Services due to (a) an increase in the size of capital markets, mergers and acquisition transactions and strategic advisory transactions for the year ended December 31, 2014 compared to the year ended December 31, 2013; and (b) the fact that substantially all of those operations began in early 2013 and were still in the process of ramping up during most of the year ended December 31, 2013;
(iii)
partially offset by a $140.6 million decrease in revenues from Realty Capital Securities’ wholesale distribution business due to (a) the fact that we modified our treatment of selling commissions on the sale of securities purchased through the RIA channel, which is explained in greater detail below, and (b) a decrease in equity capital raised by direct investment program offerings distributed by Realty Capital Securities from $8.6 billion for the year ended December 31, 2013 to $7.4 billion for the year ended December 31, 2014; and
(iv)
$45.2 million in losses during the year ended December 31, 2014 related to changes in the fair value of our derivative contracts.
Expenses for the year ended December 31, 2014 increased $1.4 billion, or 159%, to $2.3 billion, as compared to $875.2 million for the year ended December 31, 2013 primarily due to:
(i)
$1.3 billion in increased expenses related to the inclusion of the results of operations of Cetera, Summit, J.P. Turner, Hatteras, ICH, StratCap and Docupace, including the amortization of intangible assets, beginning on the date of each company’s acquisition and the inclusion of First Allied’s results for the year ended December 31, 2014 (none of the acquired businesses’ results, except for First Allied’s results from September 25, 2013 through December 31, 2013, were included for the year ended December 31, 2013);

51

RCS Capital Corporation and Subsidiaries
December 31, 2014

(ii)
$31.1 million in increased expenses in Investment Banking, Capital Markets and Transaction Management Services due to (a) the fact that substantially all of their operations began in early 2013 and were still in the process of ramping up during most of the year ended December 31, 2013; (b) higher personnel expenses reflecting higher headcount and the initiation of share-based compensation expenses; and (c) increased system costs for our transfer agent, ANST, needed to support the increased activity levels due to accounts being added as a result of equity capital raised by direct investment programs distributed by us;
(iii)
$140.3 million in increased expenses in Corporate and Other reflecting (a) the $60.0 million litigation settlement over the termination of the agreement to acquire Cole Capital from a subsidiary of ARCP; (b) our incurrence of interest expense on our long-term debt during 2014; (c) certain expenses related to the recent and pending acquisitions; (d) our initiation of share-based compensation to our board of directors during 2014; and (e) higher OPP-related expenses;
(iv)
$11.8 million in increased expenses in Investment Research (which began operations in March 2014) primarily reflecting personnel costs and amortization of intellectual property;
(v)
partially offset by a $55.3 million decrease as the selling expense portion of expenses, which decreased in tandem with the decrease in revenues, as well as a $4.0 million decrease in Quarterly Fees. These decreases were partially offset by higher payroll and benefits expenses due to increased headcount as a result of the build-out of our back-office infrastructure and our initiation of share-based compensation to our employees.
We may incur higher professional fees, interest expense and intangible asset amortization in connection with the recent and pending acquisitions and we may incur losses in future periods because of the level of amortization of intangible assets acquired and new interest expense as a result of debt incurred in connection with the recent and pending acquisitions.
Comparison of Year Ended December 31, 2013 to Year Ended December 31, 2012
For the year ended December 31, 2012, we provide data solely for Realty Capital Securities because it was the only operating subsidiary that was in operation as of and prior to December 31, 2012.The following table provides an overview of our consolidated results of operations (dollars in thousands):
 
Year Ended
 
 
 
December 31,
 
 
 
2013
 
2012
 
% Change
Revenues
$
975,067

 
$
287,497

 
239
%
Expenses
875,209

 
280,085

 
212
%
Income (loss) before taxes
99,858

 
7,412

 
1,247
%
Provision (benefit) for (from) income taxes
1,843

 

 

Net (loss) income
$
98,015

 
$
7,412

 
1,222
%
 
 
 
 
 
 
Basic (loss) earnings per share(1)
$
0.29

 
N/A
 

Diluted (loss) earnings per share(1)
$
0.28

 
N/A
 

 
 
 
 
 
 
EBITDA (Non-GAAP)(2)
$
102,307

 
$
7,443

 
1,275
%
Adjusted EBITDA (Non-GAAP)(2)
$
110,649

 
$
7,443

 
1,387
%
 
 
 
 
 
 
Adjusted net (loss) income (Non-GAAP)(2)
$
108,094

 
$
7,412

 
1,358
%
Adjusted net (loss) income per adjusted share (Non-GAAP)(2)
$
3.39

 
N/A

 

_____________________
(1) See Note 15 for more information on our calculation.
(2) See “Non-GAAP Measures” for more information on our calculation.

52

RCS Capital Corporation and Subsidiaries
December 31, 2014

We recorded net income of $98.0 million for the year ended December 31, 2013 compared to net income of $7.4 million for the year ended December 31, 2012. Revenues for the year ended December 31, 2013 increased $687.6 million, or 239%, to $975.1 million, as compared to $287.5 million for the year ended December 31, 2012 primarily due to an increase in gross equity capital raised by serving as dealer manager with respect to direct investment programs through our wholesale broker-dealer business. The increase in revenues was primarily due to commissions and dealer manager fees from distributing related party products for the year ended December 31, 2013, which increased $239.2 million and $132.7 million, respectively, as compared to the year ended December 31, 2012. Equity capital raised increased 192% for the year ended December 31, 2013 as compared to the year ended December 31, 2012.
Our transaction management, investment banking and capital markets and transfer agent businesses, which commenced operations in 2013, contributed $83.9 million to the increased revenues. We ranked as the second largest firm in North American real estate mergers and acquisitions advice for the year ended December 31, 2013 with $10.3 billion in total transaction value, according to SNL Financial.
For the year ended December 31, 2013, expenses increased $595.1 million, or 212%, to $875.2 million compared to $280.1 million for the year ended December 31, 2012. The increase primarily reflected higher selling expenses in our wholesale broker-dealer business which increased in tandem with corresponding revenues. The increased selling expenses were primarily from higher commission expenses and third-party reallowance expenses from distributing related party products for the year ended December 31, 2013, which increased $234.5 million and $39.6 million, respectively, as compared to the year ended December 31, 2012.
Expenses also increased as a result of the operational set-up of our transaction management, investment banking and capital markets and transfer agent businesses, which commenced operations in 2013. Quarterly fees paid to RCS Capital Management were $6.0 million higher for the year ended December 31, 2013 compared to the year ended December 31, 2012 reflecting the services agreement entered into in connection with our initial public offering in June 2013. For the year ended December 31, 2013, professional fees increased $4.2 million, or 271%, to $5.8 million compared to $1.6 million for the year ended December 31, 2012. The increase reflected higher acquisition related expenses.
Independent Retail Advice
Comparison of Year Ended December 31, 2014 to Year Ended December 31, 2013
The following table provides an overview of the results of operations of our Independent Retail Advice business (dollars in thousands):
 
Year Ended
 
 
 
December 31,
 
 
 
2014
 
2013
 
% Change
Revenues
$
1,395,262

 
$
94,930

 
1,370
 %
Expenses
1,416,529

 
95,624

 
1,381
 %
Income (loss)
$
(21,267
)
 
$
(694
)
 
(2,964
)%
Following the completion of the Cetera, Summit, J.P. Turner, First Allied and ICH acquisitions during 2014, we are engaged in the Independent Retail Advice business. Our results include the results of operations of Cetera, Summit, J.P. Turner and ICH beginning on the date of each company’s acquisition and the inclusion of First Allied’s results for the entire year ended December 31, 2014. There are no comparable results for the year ended December 31, 2013 as none of the acquired businesses’ results, except for First Allied’s results from September 25, 2013 through December 31, 2013, were included for the year ended December 31, 2013.
In managing our Independent Retail Advice business, we are focused on increasing assets under management, recruiting new advisors with gross dealer concessions greater than financial advisors who are terminated or leave, improving financial advisors’ productivity in terms of both number of client accounts and commission and fee revenues and achieving cost savings through synergies. We expect the results of our Independent Retail Advice business to benefit during 2015 from the recognition of synergies related to higher strategic partner revenues as well as expense synergies associated with back office, technology and clearing efficiencies, the elimination of duplicative public company expenses and other factors.
Revenues - Revenues for the year ended December 31, 2014 were $1.4 billion and primarily included commissions on securities transactions which are driven by trading volumes, advisory fees which are based on the value of our clients’ portfolios, asset-based fees and other revenues and transaction fees.

53

RCS Capital Corporation and Subsidiaries
December 31, 2014

Expenses - Expenses for the year ended December 31, 2014 were $1.4 billion and primarily included commission expenses which are correlated to the volume of revenues in a given period, employee compensation expenses and amortization of intangible assets.
On a pro forma basis giving effect to all the acquisitions completed during 2014 as if they were completed on January 1, 2013, revenues for the Independent Retail Advice business were $2.0 billion for the year ended December 31, 2014, as compared to $1.8 billion for the year ended December 31, 2013, an increase of $0.2 billion. For the year ended December 31, 2014, basic expenses, inclusive of acquisition related costs, increased at a slightly higher rate resulting in a $22.2 million increase in pre-tax net loss as compared to the year ended December 31, 2013. Pre-tax net loss for the Independent Retail Advice business was $79.2 million for the year ended December 31, 2014, as compared to $57.0 million for the year ended December 31, 2013,
Comparison of Year Ended December 31, 2013 to Year Ended December 31, 2012
Independent Retail Advice did not begin operations until September 2013 and only includes First Allied’s results from September 25, 2013 through December 31, 2013, for the year ended December 31, 2013.
Wholesale Distribution
Comparison of Year Ended December 31, 2014 to Year Ended December 31, 2013
The following table provides an overview of the results of operations of our Wholesale Distribution business (dollars in thousands):
 
Year Ended
 
 
 
December 31,
 
 
 
2014
 
2013
 
% Change
Revenues
$
681,624

 
$
802,965

 
(15
)%
Expenses
702,455

 
757,792

 
(7
)%
Income (loss)
$
(20,831
)
 
$
45,173

 
(146
)%
Revenues - Our Wholesale Distribution results include the results of operations of StratCap beginning on August 29, 2014, the date of the acquisition. All of the results of operations of Hatteras, including the results of the wholesale distribution of registered investment companies by Hatteras described under “Item 1. Business - Wholesale Distribution” are included in our Investment Management segment. Wholesale Distribution revenues are primarily driven by the amount of equity capital raised by the selling of direct investment programs distributed by us through sales of shares in such direct investment programs by broker-dealers with whom we have a dealer manager relationship. The offerings we have distributed have limited durations and different closing dates, which can cause fluctuations in equity capital raised from quarter to quarter. The rate of equity capital raised generally increases, in some cases very sharply, over the life of an offering so that an increase in equity capital raised would be expected when an offering is in the mid to latter stages of its lifecycle.
Revenues for the year ended December 31, 2014, decreased $121.3 million, or 15%, to $681.6 million, compared to $803.0 million for the year ended December 31, 2013. The decrease was due to (i) a decrease in equity capital raised due to the timing of the closings of offerings and to temporary suspensions in participation in the distribution of offerings, which is explained in greater detail below and (ii) the fact that we modified our treatment of selling commissions on the sale of securities purchased through the RIA channel, which is explained in greater detail below. These decreases were partially offset by an increase in revenues due to the inclusion of revenues from StratCap from the date of the acquisition of StratCap on August 29, 2014. Equity capital raised by direct investment program offerings distributed by Realty Capital Securities decreased from $8.6 billion for the year ended December 31, 2013 to $7.4 billion for the year ended December 31, 2014 (including equity capital raised by StratCap since the date of acquisition).
The decrease in revenues and equity capital raised was due to:
(i)
Three offerings that closed during the year ended December 31, 2013 and two offerings that closed early in the first quarter of 2014 which contributed to a sharp increase in equity capital raised during the year ended December 31, 2013 whereas there were only two offerings that closed later in 2014. These offerings typically have an increase in equity capital raised when they are in the later stages of their lifecycle, so the number of offerings closing during a period contributes significantly to the amount of equity capital raised during that period. Although the closed offerings were replaced by second-generation offerings but the normal process of building the selling group at the outset of any offering results in lower initial sales relative to the later stages of an offering’s life.

54

RCS Capital Corporation and Subsidiaries
December 31, 2014

(ii)
As a result of the announcement concerning certain accounting errors by ARCP on October 29, 2014, a number of broker-dealer firms that had been participating in the distribution of offerings of public, non-traded REITs sponsored directly or indirectly by American Realty Capital temporarily suspended their participation in the distribution of those offerings. The impact of the ARCP announcement, including these temporary suspensions, had an adverse effect on our ability to raise equity capital and as a result, generate wholesale revenues during the last two months of 2014.
(iii)
During the year ended December 31, 2013, we modified our treatment of selling commissions on the sale of securities purchased through the RIA channel, by reducing to zero the selling commissions charged on sales sold through the RIA channel. The offerings affected were generally related party offerings. This modified business practice does not constitute a change in accounting policy. See “— Critical Accounting Policies & Estimates — Revenue and expense recognition for selling commissions and dealer manager fees and the related expenses” for further details. During the year ended December 31, 2014 and December 31, 2013, RIA sales were approximately 7% and 8%, respectively, of total sales. This selling commission change became effective on July 1, 2013, when the 7% selling commission we received from each sale through the RIA channel was reduced to zero. Prior to the change, the full amount of the dealer manager fee (generally 3%) and the 7% selling commission was charged against the amount invested through the RIA channel, and we retained the dealer manager fee and the 7% selling commission charged against the investor’s purchase price. After the change, we no longer receive any selling commissions on sales through the RIA channel, but continue to retain the dealer manager fee (generally 3%) of the amount invested in connection with sales through the RIA channel. The 7% selling commission was calculated based on the gross amount invested and represented $51.9 million for the year ended December 31, 2013. We estimate that the forgone revenue attributable to eliminating the 7% selling commission was $33.1 million in the year ended December 31, 2014.
(iv)
A decrease in industry-wide equity capital raised by 13.1% from 2013 to 2014.
During the year ended December 31, 2014, we had related party commissions and dealer manager fees of $445.7 million and $208.5 million, respectively, as compared to $400.6 million and $227.4 million, respectively during the year ended December 31, 2013. During the year ended December 31, 2014, we had non-related party commissions and dealer manager fees of $11.5 million and $5.6 million, respectively, as compared to $116.1 million and $56.4 million, respectively during the year ended December 31, 2013. The decrease in non-related party commissions and dealer manager fees for the year ended December 31, 2014, as compared to the year ended December 31, 2013, reflected one non-related party offering that closed in mid-2013 and another that closed in early 2014. One of these non-related party offerings was replaced by a second-generation or new non-related party offering and the other offering was replaced as a related party offering.
Expenses - Expenses related to the activities of serving as dealer manager are correlated to the volume of revenues in a given period. Corresponding general and administrative expenses generally remain relatively constant compared to revenues.
For the year ended December 31, 2014, expenses decreased $55.3 million, or 7%, to $702.5 million compared to $757.8 million for the year ended December 31, 2013 as the selling expense portion of expenses decreased in tandem with the decrease in revenues as well as a decrease in Quarterly Fees. The decrease was partially offset by higher payroll and benefits expenses due to increased headcount as a result of the build-out of our back-office infrastructure, our initiation of share-based compensation to our employees and an increase in expenses related to inclusion of StratCap in our results beginning on August 29, 2014.
During the year ended December 31, 2014, we had related party wholesale commissions and reallowance expenses of $374.8 million and $59.5 million, respectively, as compared to $395.9 million and $64.0 million, respectively, during the year ended December 31, 2013. During the year ended December 31, 2014, we had non-related party wholesale commissions and reallowance expenses of $11.0 million and $1.9 million, respectively, as compared to $115.6 million and $19.5 million, respectively during the year ended December 31, 2013. The decrease in non-related party wholesale commissions and reallowance expenses for the year ended December 31, 2014, as compared to the year ended December 31, 2013, reflected one non-related party offering that closed late in 2013 and another that closed in early 2014.

55

RCS Capital Corporation and Subsidiaries
December 31, 2014

Comparison of Year Ended December 31, 2013 to Year Ended December 31, 2012
The following table provides an overview of the results of operations of our Wholesale Distribution business (dollars in thousands):
 
Year Ended
 
 
 
December 31,
 
 
 
2013
 
2012
 
% Change
Revenues
$
802,965

 
$
286,572

 
180
%
Expenses
757,792

 
280,085

 
171
%
Income (loss)
$
45,173

 
$
6,487

 
596
%
Revenues - Revenues for the year ended December 31, 2013, increased $516.4 million, or 180%, to $803.0 million, compared to $286.6 million for the year ended December 31, 2012 as industry-wide equity capital raised for the years ended December 31, 2013 and 2012 were $24.5 billion and $10.3 billion, respectively according to Stanger. Revenues generated by serving as dealer manager with respect to the raising of equity capital for non-related party offerings represented 21% and 10% of the total revenues for the years ended December 31, 2013 and 2012, respectively. Sales of equity capital from programs sponsored, co-sponsored or advised by American Realty Capital excluded one investment program co-sponsored by American Realty Capital and in which an affiliate of American Realty Capital is an advisor, but in which none of the executive officers are affiliates of American Realty Capital and in which the sub-advisor, which is unaffiliated with American Realty Capital is responsible for selection of investments on behalf of the advisor. Despite the fact that equity capital raised decreased from $2.4 billion for the three months ended September 30, 2013 to $1.8 billion for the three months ended December 31, 2013, for the year ended December 31, 2013, equity capital raised by direct investment programs distributed by Realty Capital Securities was $8.6 billion, representing an increase of 192% compared to the year ended December 31, 2012. For the year ended December 31, 2013 the market share of Realty Capital Securities of the total equity capital raised in the entire direct investment real estate channel was 35% according to Stanger.
Expenses - Expenses related to the activities of serving as dealer manager with respect to the raising of gross equity capital are correlated to the volume of revenues in a given period. Corresponding general and administrative expenses remain relatively constant compared to revenues, resulting in increased profitability. For the year ended December 31, 2013, expenses increased $477.7 million, or 171%, to $757.8 million compared to $280.1 million for the year ended December 31, 2012. The increase primarily reflects the selling expense portion of expenses increased in line with the increase in revenues, for the year ended December 31, 2013 compared to the year ended December 31, 2012.
Investment Banking, Capital Markets and Transaction Management Services
Comparison of Year Ended December 31, 2014 to Year Ended December 31, 2013
The following table provides an overview of the results of operations of our Investment Banking, Capital Markets and Transaction Management Services business (dollars in thousands):
 
Year Ended
 
 
 
December 31,
 
 
 
2014
 
2013
 
% Change
Revenues
$
126,670

 
$
84,810

 
49
%
Expenses
60,288

 
29,213

 
106
%
Income (loss)
$
66,382

 
$
55,597

 
19
%
Revenues - Investment Banking, Capital Markets and Transaction Management Services revenues primarily consist of fees earned from capital markets and financial advisory services for offerings and liquidity events of direct investment programs sponsored, co-sponsored, or advised by American Realty Capital and its affiliates and other investment banking and financial advisory services for companies which were sponsored, co-sponsored or advised by American Realty Capital and its affiliates. We also may earn fees from capital markets and financial advisory services for offerings and liquidity events of direct investment programs sponsored, co-sponsored or advised by StratCap. Services revenues and reimbursable expense revenues are earned from transaction management services and revenues are earned as a result of the service fees charged by our transfer agent to the various REITs and other issuers for which it serves as transfer agent that are based on transactions or number of active accounts (new account setup, account maintenance and closed accounts), or service level driven (in-bound and out-bound telephone calls).

56

RCS Capital Corporation and Subsidiaries
December 31, 2014

Revenues for the year ended December 31, 2014 were $126.7 million, an increase of 49% compared to the year ended December 31, 2013 reflecting the fact that substantially all of Investment Banking, Capital Markets and Transaction Management Services operations began in early 2013 and were still in the process of ramping up during most of the year ended December 31, 2013. In addition, Investment Banking, Capital Markets and Transaction Management Services revenues increased due to higher transaction value, including the $11.2 billion merger of ARCP and Cole Real Estate Investments, Inc., in which we earned $28.4 million as advisor to ARCP. We and ARCP mutually terminated our investment banking relationship in July of 2014. While this relationship accounted for $17.0 million of our Investment Banking, Capital Markets and Transaction Management Services revenues during 2013 and $33.8 million during 2014, we believe its termination allows our Investment Banking, Capital Markets and Transaction Management Services personnel to focus on other strategic opportunities. Transaction management revenues were also higher primarily due to increases in services revenues and reimbursable expense revenues attributable to increased mergers and acquisitions activity and liquidity events from affiliate-sponsored REITs. Revenues from transfer agency services were higher as ANST provided transfer agency services to an increased number of accounts during the year ended December 31, 2014, compared to the year ended December 31, 2013. We expect the number of accounts being serviced by ANST, and thus the revenues earned, to continue to increase.
Expenses - Investment Banking, Capital Markets and Transaction Management Services expenses primarily consisted of personnel costs and the costs of a third-party system and service provider under a third-party services agreement, whereby ANST pays a vendor for its efforts in providing certain transfer agency related services, including information warehousing.
Expenses for the year ended December 31, 2014, were $60.3 million, an increase of 106% compared to the year ended December 31, 2013. The increase for the period reflects higher expenses from Investment Banking, Capital Markets and Transaction Management Services operations due to costs related to the recent acquisitions as well as higher personnel expenses, which reflected higher headcount and the initiation of share-based compensation expenses. System costs for the transfer agent also increased to support increased activity levels due to accounts being added as a result of equity capital raised by direct investment programs distributed by us.
Comparison of Year Ended December 31, 2013 to Year Ended December 31, 2012
Substantially all of Investment Banking, Capital Markets and Transaction Management Services’ operations began in January 2013 and, accordingly, no information exists to compare the 2013 results against 2012 results.
Investment Management
Comparison of Year Ended December 31, 2014 to Year Ended December 31, 2013
Following the completion of the Hatteras acquisition on June 30, 2014, we are now engaged in the investment management business. The following table provides an overview of the results of operations of our Investment Management business (dollars in thousands):
 
Year Ended
 
 
 
December 31,
 
 
 
2014
 
2013
 
% Change
Revenues
$
31,829

 
$

 

Expenses
27,652

 

 

Income (loss)
$
4,177

 
$

 

The results of operations of Hatteras did not have an impact on our results for the period prior to its acquisition on June 30, 2014.
As of December 31, 2014, Hatteras had $2.5 billion in assets under management, a decrease from $2.7 billion in assets under management as of June 30, 2014 and a decrease from $2.8 billion in assets under management as of September 30, 2014. This decrease in the fourth quarter was due to decline in portfolio values and withdrawals resulting from such declines. We expect management fees and servicing fees to continue to increase or decrease proportionately with levels of assets under management.
Revenues - Revenues for the year ended December 31, 2014 were $31.8 million and primarily included management fees, servicing fees and incentive fees from the investment companies for which we served as the investment adviser. Management fees and servicing fees are driven by the level of net assets of the funds under management.
Expenses - Expenses for the year ended December 31, 2014 were $27.7 million and primarily included fund expenses, service fees and management fees as well as employee compensation expenses and benefits expenses and amortization of intangible assets.

57

RCS Capital Corporation and Subsidiaries
December 31, 2014

On a pro forma basis giving effect to the acquisition of Hatteras as of January 1, 2013, revenues were $62.3 million for the year ended December 31, 2014, as compared to $47.6 million for the year ended December 31, 2013, an increase of $14.7 million. For the year ended December 31, 2014, basic expenses, inclusive of acquisition related costs, increased at a slightly lower rate resulting in a $5.0 million increase in pre-tax net income as compared to the year ended December 31, 2013. Pre-tax net income was $6.7 million for the year ended December 31, 2014, as compared to $1.7 million for the year ended December 31, 2013.
Comparison of Year Ended December 31, 2013 to Year Ended December 31, 2012
Investment Management did not have operations until the acquisition of Hatteras in June 2014 and, accordingly, no information exists to compare the 2013 results against 2012 results.
Investment Research
Comparison of Year Ended December 31, 2014 to Year Ended December 31, 2013
The following table provides an overview of the results of operations of our Investment Research business (dollars in thousands):
 
Year Ended
 
 
 
December 31,
 
 
 
2014
 
2013
 
% Change
Revenues
$
2,721

 
$

 

Expenses
11,762

 

 

Income (loss)
$
(9,041
)
 
$

 

Revenues - Investment Research had revenues of $2.7 million for the year ended December 31, 2014, reflecting fees earned from due diligence performed on non-traded REITs and BDCs. Investment Research began operations in March 2014 and, accordingly, there are no comparable 2013 results.
Expenses - Expenses for the year ended December 31, 2014 which primarily represented personnel costs and amortization of intellectual property were $11.8 million. Investment Research began operations in March 2014 and, accordingly, there are no comparable 2013 results.
Comparison of Year Ended December 31, 2013 to Year Ended December 31, 2012
Investment Research began operations in March 2014 and, accordingly, no information exists to compare the 2013 results against 2012 results.
Corporate and Other
Comparison of Year Ended December 31, 2014 to Year Ended December 31, 2013
The following table provides an overview of the results of operations of our Corporate and Other (dollars in thousands):
 
Year Ended
 
 
 
December 31,
 
 
 
2014
 
2013
 
% Change
Revenues
$
(44,848
)
 
$

 

Expenses
140,559

 
218

 
(64,377
)%
Income (loss)
$
(185,407
)
 
$
(218
)
 
(84,949
)%
Revenues - Corporate and Other had negative revenues of $44.8 million for the year ended December 31, 2014 primarily reflecting changes in the fair value of our derivative contracts.
Expenses - Corporate and Other expenses primarily included the $60.0 million litigation settlement over the termination of the agreement to acquire Cole Capital from a subsidiary of ARCP, interest expense on our long-term debt, share-based compensation related to our board of directors, expenses related to the OPP, certain acquisition-related expenses and certain public company expenses. Corporate and Other expenses were $140.6 million for the year ended December 31, 2014 reflecting our incurrence of long-term debt during 2014, expenses related to the recent and pending acquisitions, our initiation of share-based compensation to our board of directors during 2014 and higher OPP-related expenses based on the amendment to the OPP in April 2014 whereby 310,947 LTIP units previously issued were earned and all other outstanding LTIP Units were forfeited.

58

RCS Capital Corporation and Subsidiaries
December 31, 2014

Comparison of Year Ended December 31, 2013 to Year Ended December 31, 2012
Substantially all the transactions that give rise to revenues and expenses in Corporate and Other did not take place until the year ended December 31, 2014, and, accordingly, no information exists to compare the 2013 results against 2012 results.
Income Taxes
We recorded an income tax benefit of $46.5 million for the year ended December 31, 2014 and income tax expense of $1.8 million for the period ended December 31, 2013. We did not have any income tax expense for the year ended December 31, 2012 as Realty Capital Securities, which was the only operating subsidiary at that time, is not subject to income taxes. The effective tax rate for the year ended December 31, 2014 and 2013 was 27.98% and 1.85%, respectively. For the year ended December 31, 2014, our effective tax rate was less than the US federal statutory rate due to losses on our derivative contracts which are excluded from the computation of income taxes. The change in the effective tax rate was primarily due to the fact that pre-tax income for the period ended December 31, 2013 included non-controlling interest of 90.6% of our operating subsidiaries, with the remaining 9.4% of the income taxable to us. On February 11, 2014, that non-controlling interest ceased to exist (other than a de minimis interest related to the sole outstanding share of Class B common stock and as of April 28, 2014, the 310,947 earned LTIP units). On December 31, 2014, the earned LTIP units were exchanged for shares of Class A common stock. As a result we no longer have a non-controlling interest related to the earned LTIP units.
As of December 31, 2014, we had a net deferred tax liability of $266.2 million. This net deferred tax liability will likely reverse in future years as the intangible assets are amortized for book purposes and could negatively impact cash flows from operations in the years in which reversal occurs which would result in higher taxable income. Changes in tax laws, assumptions, estimates or methods used in the accounting for income taxes, if significantly negative or unfavorable, could have a material adverse effect on amounts or timing of realization or settlement. Such effects could result in a material acceleration of income taxes currently payable or valuation charges for realization uncertainties, which could have a material adverse effect on our future financial condition or results of operations.
Non-Controlling Interest
We had a controlling interest in each of Realty Capital Securities, RCS Advisory and ANST (the “Original Operating Subsidiaries”) that were in existence and under our control as of December 31, 2013, and, as a result, our financial statements include the consolidated financial results of the Original Operating Subsidiaries. As of December 31, 2013, we owned 9.4% of the economic interest in the Original Operating Subsidiaries. As a result, we were required to present the 90.6% we did not own (the non-controlling interest) in our consolidated financial statements.
On February 11, 2014, this non-controlling interest ceased to exist (other than a de minimis interest related to the sole outstanding share of Class B common stock and as of April 28, 2014, the 310,947 earned LTIP units) when RCAP Holdings exchanged all its Class B common stock and Class B Units in the Original Operating Subsidiaries except for one share of Class B common stock and one Class B Unit in each of the Original Operating Subsidiaries for a total of 23,999,999 shares of our Class A common stock. In connection with these Restructuring Transactions, RCS Holdings issued LTIP units to RCS Capital Management which are structured as a profits interest in RCS Holdings with all the rights, privileges and obligations associated with Class A Units in RCS Holdings, subject to certain exceptions, and do not have any voting rights and therefore are classified as non-controlling interest.
Following receipt of stockholder consent, we amended our certificate of incorporation effective July 2, 2014 and amended the Exchange Agreement on August 5, 2014 to permit RCAP Holdings to continue to hold one share of Class B common stock without holding one Class B Unit in each Original Operating Subsidiary. Following this amendment, the remaining Class B Unit in each Original Operating Subsidiary owned by RCAP Holdings was exchanged for one share of Class A common stock, which was not issued as RCAP Holdings waived the right to receive it. Accordingly, no more Class B Units in any of the Original Operating Subsidiaries are outstanding and the voting and economic interests in the Original Operating Subsidiaries are now held by the Company, indirectly, through RCS Holdings’ ownership of the Class A Units.
On December 31, 2014, the earned LTIP units were exchanged for shares of Class A common stock. As a result we no longer have a non-controlling interest related to the earned LTIP units.
On November 21, 2014, we completed the acquisition of 53.525% ownership interest in Docupace. We reflect the portion of Docupace that we do not own as a non-controlling interest.

59

RCS Capital Corporation and Subsidiaries
December 31, 2014

Non-GAAP Measures
We use EBITDA, adjusted EBITDA and adjusted net income, which are non-GAAP measures, as supplemental measures of our performance that are not required by, or presented in accordance with GAAP. None of the non-GAAP measures should be considered as an alternative to any other performance measure derived in accordance with GAAP. We use EBITDA, adjusted EBITDA and adjusted net income as an integral part of our report and planning processes and as one of the primary measures to, among other things:
monitor and evaluate the performance of our business operations;
facilitate management’s internal comparisons of the historical operating performance of our business operations;
facilitate management’s external comparisons of the results of our overall business to the historical operating performance of other companies that may have different capital structures and debt levels;
analyze and evaluate financial and strategic planning decisions regarding future operating investments;
provide useful information to investors regarding financial and business trends related to our results of operations; and
plan for and prepare future annual operating budgets and determine appropriate levels of operating investments.
We define EBITDA as earnings before taxes, depreciation and amortization and interest. We define adjusted EBITDA as earnings before taxes, depreciation and amortization, interest, adjusted to exclude equity-based compensation, acquisition-related expenses (including integration-related employee compensation and related costs), amortization of capitalized advisor costs, change in contingent and deferred consideration and other items. We define adjusted net income as net income attributable to the Company (using the effective tax rate) and adjusted to exclude equity-based compensation, acquisition related expenses, amortization of capitalized advisor compensation, change in contingent and deferred consideration, amortization of intangible assets and other items. We believe similarly titled measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry, many of which present EBITDA, adjusted EBITDA and adjusted net income and other similar metrics when reporting their financial results. Our presentation of EBITDA, adjusted EBITDA and adjusted net income should not be construed to imply that our future results will be unaffected by unusual or nonrecurring items.
The following table provides a reconciliation of net income attributable to us (GAAP) to our EBITDA (Non-GAAP) and adjusted EBITDA (Non-GAAP) for the years ended December 31, 2014, 2013 and 2012 (in thousands):
 
Year Ended December 31,
 
2014
 
2013
 
2012
Net income (loss) (GAAP)
$
(119,640
)
 
$
98,015

 
$
7,412

Add back: Provision (benefit) for income taxes
(46,485
)
 
1,843

 

Add back: Depreciation and amortization expense
71,447

 
2,208

 
31

Add back: Interest expense
49,154

 
241

 

EBITDA (Non-GAAP)
(45,524
)
 
102,307

 
7,443

Add back: Non-cash equity compensation
23,694

 
1,497

 

Add back: Acquisition-related expenses(1)
37,232

 
6,262

 

Add back: Amortization of capitalized advisor compensation
8,869

 
573

 

Add back: Change in contingent and deferred consideration
8,865

 
10

 

Add back: Change in the fair value of embedded derivative contracts
45,213

 

 

Add back: ARCP settlement
60,000

 

 

Add back: Other (2)
27,993

 

 

Adjusted EBITDA (Non-GAAP)
$
166,342

 
$
110,649

 
$
7,443

________________
(1) Includes integration-related employee compensation and related costs.
(2) Comprised primarily of the OPP, start-up costs and severance expenses.

60

RCS Capital Corporation and Subsidiaries
December 31, 2014

The following table provides a reconciliation of net income (loss) attributable to us (GAAP) to our adjusted net income (Non-GAAP) and adjusted earnings per share (Non-GAAP) for the years ended December 31, 2014, 2013 and 2012 (in thousands):
 
Year Ended December 31,
 
2014
 
2013
 
2012
Net income (loss) (GAAP)
$
(119,640
)
 
$
98,015

 
$
7,412

Adjusted net income adjustments:
 
 
 
 
 
Add back: Non-cash equity compensation
17,064

 
1,469

 

Add back: Acquisition-related expenses(1)
26,814

 
6,146

 

Add back: Amortization of capitalized advisor compensation
6,387

 
562

 

Add back: Change in contingent and deferred consideration
6,385

 
10

 

Add back: Change in the fair value of embedded derivative contracts
32,562

 

 

Add back: ARCP settlement
43,212

 

 

Add back: Other(2)
20,161

 

 

Total adjusted net income adjustments
152,585

 
8,187

 

Amortization of intangible assets(3)
66,214

 
1,892

 

Adjusted net income (Non-GAAP)
$
99,159

 
$
108,094

 
$
7,412

Adjusted net income per adjusted share (Non-GAAP)
$
1.89

 
$
3.39

 
N/A
Adjusted share reconciliation:
 
 
 
 
 
Weighted-average basic shares (GAAP)
49,765,160

 
7,885,186

 
N/A
Weighted average of Class B common stock
2,696,416

 
24,000,000

 
N/A
Total adjusted weighted-average shares (Non-GAAP)
52,461,576

 
31,885,186

 
N/A
Effective tax rate used in the reconciliation of net income (loss) to adjusted net income
27.98
%
 
1.85
%
 
0.00
%
________________
(1) Includes integration-related employee compensation and related costs.
(2) Comprised primarily of the OPP bonus, start-up costs and severance expenses.
(3) Amount is not tax effected.
The non-GAAP measures have limitations as analytical tools, and you should not consider any of these measures in isolation or as a substitute for analyses of our income or cash flows as reported under GAAP.
Some of these limitations are:
they do not reflect our cash expenditures, or future requirements for capital expenditures, or contractual commitments;
they do not reflect changes in, or cash requirements for, our working capital needs;
they do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; and
depreciation and amortization are non-cash expense items that are reflected in our statements of cash flows.
In addition, other companies in our industry may calculate these measures differently than we do, limiting their usefulness as a comparative measure. We compensate for these limitations by relying primarily on our GAAP results and using the non-GAAP measures only for supplemental purposes. Please see our consolidated financial statements and the related notes thereto.
The bank facilities and our convertible notes include covenants and other provisions based on a definition of EBITDA, which we refer to as “Covenant EBITDA,” that differs from the definition of EBITDA described above. Furthermore, our Series B preferred stock and our Series C convertible preferred stock also include covenants and other provisions based on a definition of EBITDA that differs from both the definition of EBITDA described above and Covenant EBITDA, which is defined in the Series B COD and the Series C COD, as LTM, or last twelve months, Adjusted EBITDA.
Covenant EBITDA is used, among other things, in calculating the Leverage Ratio, First Lien Leverage Ratio, Secured Leverage Ratio and Fixed Charge Covenant Ratio, as defined in the bank facilities, in calculating similar ratios in the indenture governing the convertible notes. These ratios are used under both agreements as part of covenants relating to, among other things, incurrence of debt and payment of dividends and distributions.

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RCS Capital Corporation and Subsidiaries
December 31, 2014

Covenant EBITDA is only generally comparable to EBITDA and adjusted EBITDA. Under the bank facilities and the indenture governing the convertible notes, Covenant EBITDA is similar to EBITDA, subject to certain additional adjustments, including further adjustments to add back (i) equity-based compensation and other non-cash charges and extraordinary, nonrecurring or unusual losses or expenses; (ii) fees and expenses incurred in connection with equity issuances and debt incurrences, and certain fees and expenses incurred in connection with the financing of the acquisition of Cetera, the acquisitions of Cetera, Hatteras, ICH, Summit and J.P. Turner and Permitted Acquisitions (as defined in the bank facilities), which, in the aggregate (other than fees and expenses for the financing of the acquisition of Cetera and the recent and pending acquisitions to the extent scheduled), do not exceed 10% of Covenant EBITDA for the relevant period; (iii) certain projected net cost savings and synergies related to the acquisitions of Cetera, Hatteras, ICH, Summit and J.P. Turner and the financing of the acquisition of Cetera based on actions to be taken within 18 months; and (iv) projected net cost savings and synergies related to other acquisitions and asset sales permitted under the credit agreement based on actions to be taken within 12 months, which, in the aggregate and prior to giving effect to such net cost savings and synergies, do not exceed 10% of Covenant EBITDA for the four quarters preceding the relevant determination date. The adjustments made to EBITDA to derive adjusted EBITDA are similar to the adjustments made to EBITDA to derive Covenant EBITDA, but there are also differences that could lead the results to not be comparable under certain circumstances, such as the differences in adjustments made to add back acquisition related expenses.
In addition, LTM Adjusted EBITDA is used as part of the covenants relating to incurrence of debt in the Series B COD and the Series C COD. LTM Adjusted EBITDA is similar to EBITDA, subject to certain additional adjustments, including further adjustments for employee share-based compensation expense, acquisition and integration related expenses and equity issuance and related offering costs. The adjustments made to EBITDA to derive adjusted EBITDA are similar to the adjustments made to EBITDA to derive LTM Adjusted EBITDA, but there are also differences that could lead the results to not be comparable under certain circumstances, such as the adjustment made to add back integration related expenses.
We also use Core Earnings, a non-GAAP measure, to calculate the incentive fee payable to RCS Capital Management under our services agreement. While Core Earnings includes certain adjustments for non-cash items, it is based on after-tax GAAP net income and also includes adjustments for items such as unrealized gains or losses recorded for the period and the payment of incentive fees. Accordingly, Core Earnings is not comparable to EBITDA or adjusted EBITDA.
Liquidity and Capital Resources
Currently, our principal use of existing funds and any funds raised in the future is to expand our lines of business through internal growth and by acquiring complementary businesses, including the recent and pending acquisitions, as well as for the payment of operating expenses. We have agreed to make additional capital contributions to Docupace of up to $28.0 million in cash in 2015 and up to $20.0 million in cash in 2016 and may be required to pay contingent consideration based on the acquired companies’ meeting certain performance criteria with regard to certain of our other recent acquisitions. In addition, we and RCS Holdings are party to agreements requiring payment of quarterly fees and incentive fees to our service provider, RCS Capital Management.
Concurrently with the closing of the Cetera acquisition on April 29, 2014, we entered into the bank facilities, consisting of: (i) a $575.0 million senior secured first lien term loan facility, having a term of five years; (ii) a $150.0 million senior secured second lien term loan facility, having a term of seven years; and (iii) a $25.0 million senior secured first lien revolving credit facility having a term of three years (was not drawn down at closing). The proceeds to us from the bank facilities were $685.1 million after original issue discount and following the payment of fees and expenses due at closing. On July 21, 2014, we drew down $1.1 million in the form of a backstop letter of credit.
On the same day, also in connection with the closing of the Cetera acquisition, we issued $120.0 million (face amount) of 5% convertible notes at a price of $666.67 per $1,000 of par value and $270.0 million (aggregate liquidation preference) of 7% Series A convertible preferred stock, par value $0.001 per share (the “Series A convertible preferred stock”), issued at a price of 88.89% of the liquidation preference per share.
On December 12, 2014 we entered into a Securities Exchange Agreement with Luxor (the “Securities Exchange Agreement”) pursuant to which, on December 19, 2014, we exchanged the remaining 11,584,427 shares of Series A convertible preferred stock held by Luxor for 5,800,000 shares of Series B preferred stock and 4,400,000 shares of Series C convertible preferred stock. $3.0 million of accrued and unpaid dividends on Series A convertible preferred stock through December 12, 2014, the date of their submission for conversion, were included proportionately as part of the first dividend payments accrued on the Series B preferred stock and the Series C convertible preferred stock. See Note 11 of our consolidated financial statements for more information.
As of December 31, 2014, in addition to the $25.0 million senior secured first lien revolving credit facility described above, Cetera had a line of credit for $50.0 million, with no maturity date and that was unfunded as of December 31, 2014, and ICH had a line of credit for $1.0 million, with no maturity date and that was unfunded as of December 31, 2014.

62

RCS Capital Corporation and Subsidiaries
December 31, 2014

We expect to meet our future short-term operating liquidity requirements through cash on hand and net cash provided by our current operations (and draws from our revolving credit facility). We expect that our operating subsidiaries will generate sufficient cash flow to cover operating expenses, the payment of interest on our indebtedness, and the quarterly fee and incentive fee to RCS Capital Management.
Our initial public offering of our Class A common stock, which closed in June 2013, resulted in net proceeds after offering costs and underwriting discounts and commissions of $43.6 million. Our follow-on public offering of our Class A common stock, which closed on June 10, 2014, including shares issuable on exercise by the underwriters of their option to purchase additional shares from us to cover over-allotment, resulted in net proceeds after offering costs and underwriting discounts and commissions of $373.9 million. Our concurrent private offering of our Class A common stock, which closed on June 10, 2014, resulted in net proceeds after offering costs and underwriting discounts and commissions of $47.7 million. We have used and expect to use cash available from these offerings of our Class A common stock, the financing of the acquisition of Cetera, ongoing operations and draws from our revolving credit facility to fund cash requirements for the recent and pending acquisitions and for general corporate purposes.
In order to meet our future long-term liquidity requirements or to continue to pursue strategic acquisition opportunities, including the completion of the pending acquisitions, we expect to utilize cash on hand and cash generated from our current operations and we may issue equity securities and debt securities in both public and private offerings in the future. The issuance of these securities will depend on future market conditions, our obligations under the agreements related to the pending acquisitions to pay consideration in shares of our Class A common stock, funding needs and other factors, and there can be no assurance that any such issuance will occur or be successful.
Regulated Subsidiaries
Our broker-dealers are subject to the SEC Uniform Net Capital Rule 15c3-1. SEC Uniform Net Capital Rule 15c3-1 requires the maintenance of the greater of the minimum dollar amount of net capital required, which is based on the nature of the broker-dealer’s business, or 1/15th of aggregate indebtedness, as defined, and requires that the ratio of aggregate indebtedness to net capital, both as defined, not exceed 15 to 1. Certain of our broker-dealers have elected to use the alternative method of computing net capital which requires the maintenance of the greater of the minimum dollar amount of net capital required, which is based on the nature of the broker-dealer’s business, or 2% of aggregate debit items. As of and during the year ended December 31, 2014 and the year ended December 31, 2013 all our subsidiaries that were under our control or under common control were in compliance with their net capital requirements. See Note 18 to our consolidated financial statements for more information.
Dividends
At the present time, we do not expect to pay quarterly dividends on our Class A common stock or on our Series B preferred stock and Series C convertible preferred stock in the near term, as our ability to pay cash dividends is restricted due to negative covenants in the bank facilities.
During the year ended December 31, 2014, we declared $16.2 million in dividends and dividend equivalents on our Class A common stock (including Class A common stock issued pursuant to restricted stock awards). During the year ended December 31, 2013, we declared $1.4 million in dividends and dividend equivalents on our Class A common stock.
During the year ended December 31, 2014, we declared $8.0 million in dividends on our Series A convertible preferred stock and accrued $0.8 million and $0.4 million in dividends on our Series B preferred stock and Series C convertible preferred stock, respectively. $3.0 million of accrued and unpaid dividends on Series A convertible preferred stock through December 12, 2014, the date of their submission for conversion, were included proportionately as part of the first dividend payments accrued on the Series B preferred stock and the Series C convertible preferred stock. During the year ended December 31, 2014, we also recorded $0.3 million in dividends on the LTIP units. The LTIP units were entitled to a catch-up dividend when the units were determined to have been earned on April 28, 2014. During the year ended December 31, 2013, the holders of the LTIP units waived their dividend rights.
Cash Flows
As of December 31, 2014, we had cash balances of $199.4 million and as of December 31, 2013, we had cash balances of approximately $70.1 million. As of December 31, 2012, we had cash balances of $12.7 million.
Our cash flows are complex, particularly because of the impact and timing of acquisitions. As a result, traditional cash flow analysis may not be a particularly useful method to evaluate our liquidity position.

63

RCS Capital Corporation and Subsidiaries
December 31, 2014

Net cash used in operating activities was $135.7 million for the year ended December 31, 2014. Net cash provided by operating activities was $47.7 million for the year ended December 31, 2013. Net cash provided by operating activities was $13.4 million for the year ended December 31, 2012. The difference between the cash used in operating activities for the year ended December 31, 2014, as compared to the cash provided by operating activities for the year ended December 31, 2013 and 2012 was primarily due to the timing of collections of receivable balances and the payment of payable balances at period-end. For Realty Capital Securities, commission and dealer manager fees receivable typically represent one day of fees earned from the distribution of related party and non-related party products. Payables to broker-dealers, however, can represent up to six days of commissions as payment is typically made on a weekly basis, while commissions, which are included in accrued expenses, are paid twice monthly. Our change in the deferred revenue was driven by the timing of the Cetera acquisition, which closed on April 29, 2014. Cetera collects quarterly advisory fees in the first month of a quarter and then recognizes that revenue over the course of the quarter. The change in other liabilities reflects payments made to certain Cetera employees as a result of the automatic vesting of share-based compensation in connection with the change in control. In addition, pursuant to the terms of the settlement, we paid ARCP a negotiated break-up fee consisting of a cash payment of $42.7 million, which is inclusive of the $10.0 million payment already delivered by us in connection with the first closing under the definitive agreement.
Net cash used in investing activities was $1.0 billion for the year ended December 31, 2014. Net cash provided by investing activities was $30.9 million for the year ended December 31, 2013. Net cash used in investing activities was $0.1 million for the year ended December 31, 2012. The net cash used in investing activities for the year ended December 31, 2014 was primarily a result of payments made for acquired businesses. The investing activities for the year ended December 31, 2013 included the purchase of property and equipment and purchases and sales of available-for-sale securities. Additionally, we acquired all the equity interests in First Allied from RCAP Holdings in exchange for 11,264,929 shares of Class A common stock. As a result of the acquisition, we obtained First Allied’s cash and cash equivalents of $40.7 million as of September 25, 2013. The investing activities for the year ended December 31, 2012, included the purchase of property and equipment.
Net cash provided by financing activities was $1.3 billion for the year ended December 31, 2014. Net cash used in financing activities was $21.3 million for the year ended December 31, 2013. Net cash used in financing activities was $4.6 million for the year ended December 31, 2012. The financing activity for the year ended December 31, 2014 was driven by our follow-on public offering, our concurrent private offering of common stock, the issuance of term loans, our issuances of convertible notes and issuances of Series A convertible preferred stock. Our follow-on public offering of our Class A common stock, which closed on June 10, 2014, including shares issuable on exercise by the underwriters of their option to purchase additional shares from us to cover over-allotment, resulted in net proceeds after offering costs and underwriting discounts and commissions of $373.9 million. Our concurrent private offering of our Class A common stock to Luxor, which also closed on June 10, 2014, resulted in net proceeds after offering costs and underwriting discounts and commissions of $47.7 million. On April 29, 2014, in connection with the closing of the Cetera acquisition, we issued convertible notes and Series A convertible preferred stock to Luxor. Additionally, we entered into a senior secured first lien term loan facility and a senior secured second lien term loan facility to finance the Cetera acquisition. During the year ended December 31, 2012, we made distributions of $8.2 million and received a contribution of $3.6 million.
We expect all current liquidity needs will be met with our available cash and other activities as described above.
Tax Receivable Agreement
We are party to a tax receivable agreement with RCAP Holdings requiring us to pay to RCAP Holdings 85% of the amount of the reduction, if any, in U.S. federal, state and local income tax liabilities that we realize (or are deemed to realize upon an early termination of the tax receivable agreement or a change of control, both discussed below) as a result of the increases in tax basis, if any, created by RCAP Holdings’ exchanges described below. For purposes of the tax receivable agreement, reductions in tax liabilities will be computed by comparing our actual income tax liability to the amount of such taxes that we would otherwise have been required to pay had there been no increase to the tax basis of the tangible and intangible assets of each operating subsidiary. The term of the tax receivable agreement will continue until all such tax benefits have been utilized or expired, unless we exercise our right to terminate the tax receivable agreement early. If we exercise our right to terminate the tax receivable agreement early, we will be obligated to make an early termination payment to RCAP Holdings, or its transferees, based upon the net present value (based upon certain assumptions and deemed events set forth in the tax receivable agreement, including the assumption that we would have enough taxable income in the future to fully utilize the tax benefit resulting from any increased tax basis that results from each exchange and that any Original Operating Subsidiaries Units that RCAP Holdings, or its transferees, own on the termination date are deemed to be exchanged on the termination date) of all payments that would be required to be paid by us under the tax receivable agreement. If certain change of control events were to occur, we would be obligated to make payments to RCAP Holdings using certain assumptions and deemed events similar to those used to calculate an early termination payment.
The actual increase in tax basis, as well as the amount and timing of any payments under the tax receivable agreement, will vary depending upon a number of factors, including the timing of exchanges, the price of our Class A common stock at the time of an exchange, the extent to which such exchanges are taxable, the amount and timing of our income and the tax rates then applicable.

64