10-Q 1 ck0000815917-10q_20180330.htm 10-Q ck0000815917-10q_20180330.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 30, 2018

OR

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

For the transition period from _________ to _________

Commission file number 0-16633

 

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

(Exact name of registrant as specified in its Charter)

 

 

MISSOURI

43-1450818

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

 

12555 Manchester Road

Des Peres, Missouri 63131

(Address of principal executive office)

(Zip Code)

(314) 515-2000

(Registrant’s telephone number, including area code)

 

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

Indicate by check mark whether the registrant has submitted electronically 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES NO

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

 

 

 

 

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

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

As of April 27, 2018, 891,593 units of limited partnership interest (“Interests”) are outstanding, each representing $1,000 of limited partner capital.  There is no public or private market for such Interests.

 

 

 

 

 


 

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

INDEX

 

 

 

 

 

Page

 

 

 

 

 

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

 

 

 

 

 

Consolidated Statements of Financial Condition

 

3

 

 

Consolidated Statements of Income

 

4

 

 

Consolidated Statements of Cash Flows

 

5

 

 

Notes to Consolidated Financial Statements

 

6

 

 

 

 

 

Item 2.

 

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

 

16

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

31

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

32

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

33

 

 

 

 

 

Item 1A.

 

Risk Factors

 

33

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

35

 

 

 

 

 

Item 6.

 

Exhibits

 

36

 

 

 

 

 

 

 

Signatures

 

40

 

 

 

2


PART I. FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

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

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

 

 

 

March 30,

 

 

December 31,

 

(Dollars in millions)

 

2018

 

 

2017

 

ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,017

 

 

$

846

 

Cash and investments segregated under federal regulations

 

 

9,069

 

 

 

10,099

 

Securities purchased under agreements to resell

 

 

824

 

 

 

1,164

 

Receivable from:

 

 

 

 

 

 

 

 

Clients

 

 

3,335

 

 

 

3,300

 

Mutual funds, insurance companies and other

 

 

600

 

 

 

540

 

Brokers, dealers and clearing organizations

 

 

256

 

 

 

247

 

Securities owned, at fair value:

 

 

 

 

 

 

 

 

Investment securities

 

 

251

 

 

 

258

 

Inventory securities

 

 

97

 

 

 

50

 

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

   depreciation and amortization

 

 

547

 

 

 

544

 

Other assets

 

 

122

 

 

 

128

 

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

16,118

 

 

$

17,176

 

 

 

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

 

Payable to:

 

 

 

 

 

 

 

 

Clients

 

$

12,024

 

 

$

12,810

 

Brokers, dealers and clearing organizations

 

 

121

 

 

 

67

 

Accrued compensation and employee benefits

 

 

1,076

 

 

 

1,339

 

Accounts payable, accrued expenses and other

 

 

189

 

 

 

165

 

 

 

 

13,410

 

 

 

14,381

 

Contingencies (Note 7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Partnership capital subject to mandatory redemption, net of reserve for

   anticipated withdrawals and partnership loans:

 

 

 

 

 

 

 

 

Limited partners

 

 

892

 

 

 

890

 

Subordinated limited partners

 

 

509

 

 

 

463

 

General partners

 

 

1,111

 

 

 

1,152

 

Total

 

 

2,512

 

 

 

2,505

 

Reserve for anticipated withdrawals

 

 

196

 

 

 

290

 

Total partnership capital subject to mandatory redemption

 

 

2,708

 

 

 

2,795

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

$

16,118

 

 

$

17,176

 

 

 

 

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

3


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements, continued

 

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

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

Three Months Ended

 

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

 

March 30,

2018

 

 

March 31,

2017

 

Revenue:

 

 

 

 

 

 

 

 

Fee revenue

 

 

 

 

 

 

 

 

Asset-based

 

$

1,453

 

 

$

1,115

 

Account and activity

 

 

172

 

 

 

172

 

Total fee revenue

 

 

1,625

 

 

 

1,287

 

Trade revenue

 

 

364

 

 

 

457

 

Interest and dividends

 

 

79

 

 

 

58

 

Other revenue

 

 

6

 

 

 

13

 

Total revenue

 

 

2,074

 

 

 

1,815

 

Interest expense

 

 

32

 

 

 

18

 

Net revenue

 

 

2,042

 

 

 

1,797

 

Operating expenses:

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

1,454

 

 

 

1,277

 

Occupancy and equipment

 

 

109

 

 

 

102

 

Communications and data processing

 

 

80

 

 

 

81

 

Fund sub-adviser fees

 

 

30

 

 

 

20

 

Advertising

 

 

25

 

 

 

23

 

Professional and consulting fees

 

 

18

 

 

 

17

 

Postage and shipping

 

 

14

 

 

 

15

 

Other operating expenses

 

 

79

 

 

 

65

 

Total operating expenses

 

 

1,809

 

 

 

1,600

 

 

 

 

 

 

 

 

 

 

Income before allocations to partners

 

 

233

 

 

 

197

 

 

 

 

 

 

 

 

 

 

Allocations to partners:

 

 

 

 

 

 

 

 

Limited partners

 

 

27

 

 

 

25

 

Subordinated limited partners

 

 

30

 

 

 

25

 

General partners

 

 

176

 

 

 

147

 

Net Income

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

Income allocated to limited partners per weighted average

   $1,000 equivalent limited partnership unit outstanding

 

$

30.16

 

 

$

27.33

 

 

 

 

 

 

 

 

 

 

Weighted average $1,000 equivalent limited partnership

   units outstanding

 

 

893,700

 

 

 

901,720

 

 

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

 

4


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements, continued

 

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) 

 

 

 

Three Months Ended

 

(Dollars in millions)

 

March 30,

2018

 

 

March 31,

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

 

 

$

 

Adjustments to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Income before allocations to partners

 

 

233

 

 

 

197

 

Depreciation and amortization

 

 

22

 

 

 

20

 

 

 

 

 

 

 

 

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Investments segregated under federal regulations

 

 

402

 

 

 

9

 

Securities purchased under agreements to resell

 

 

340

 

 

 

123

 

Net payable to clients

 

 

(821

)

 

 

(11

)

Net receivable from brokers, dealers and clearing organizations

 

 

45

 

 

 

50

 

Receivable from mutual funds, insurance companies and other

 

 

(60

)

 

 

(89

)

Securities owned

 

 

(40

)

 

 

(37

)

Other assets

 

 

6

 

 

 

(6

)

Accrued compensation and employee benefits

 

 

(263

)

 

 

(177

)

Accounts payable, accrued expenses and other

 

 

24

 

 

 

14

 

Net cash (used in)/provided by operating activities

 

 

(112

)

 

 

93

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchase of equipment, property and improvements, net

 

 

(25

)

 

 

(23

)

Net cash used in investing activities

 

 

(25

)

 

 

(23

)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Issuance of partnership interests

 

 

57

 

 

 

64

 

Redemption of partnership interests

 

 

(159

)

 

 

(153

)

Distributions from partnership capital

 

 

(218

)

 

 

(157

)

Net cash used in financing activities

 

 

(320

)

 

 

(246

)

Net decrease in cash, cash equivalents and restricted cash

 

 

(457

)

 

 

(176

)

 

 

 

 

 

 

 

 

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH:

 

 

 

 

 

 

 

 

Beginning of period

 

 

8,537

 

 

 

9,572

 

End of period

 

$

8,080

 

 

$

9,396

 

 

See Note 10 for additional cash flow information.

 

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

 

5


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements, continued

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in millions)

 

 

NOTE 1 – INTRODUCTION AND BASIS OF PRESENTATION

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

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

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

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

There have been no material changes to the Partnership’s significant accounting policies or disclosures of recently issued accounting standards as described in Part II, Item 8 – Financial Statements and Supplementary Data – Note 1 of the Partnership's Annual Report, except as disclosed in Note 2 herein.  The results of operations for the three month period ended March 30, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018.  These unaudited Consolidated Financial Statements should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and notes thereto included in the Annual Report.


 

6


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements, continued

 

NOTE 2 – RECENTLY ADOPTED ACCOUNTING STANDARDS

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), a comprehensive new revenue recognition standard that supersedes nearly all existing revenue recognition guidance.  The objective of ASU 2014-09 is for a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  In August 2015, the FASB deferred the effective date of ASU 2014-09 to the first quarter of 2018.  An entity can elect to adopt ASU 2014-09 using one of two methods, either full retrospective adoption to each prior reporting period, or modified retrospective adoption by recognizing the cumulative effect of adoption at the date of initial application.  Effective January 1, 2018, the Partnership adopted ASU 2014-09 using the modified retrospective method.  As a result of adoption, there was no cumulative impact to Partnership capital as of January 1, 2018, no impact to total revenue for the quarter ended March 30, 2018 and no impact to the consolidated statements of financial condition as of March 30, 2018.  There was a presentation change that did not impact the timing or amount of total revenue, net revenue or income before allocations to partners.  See Note 3 for additional information.

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

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230) – Restricted Cash, a consensus of the FASB Emerging Issues Task Force (“ASU 2016-18”).  ASU 2016-18 requires restricted cash to be included within cash and cash equivalents on the Consolidated Statements of Cash Flows.  The Partnership's restricted cash represents cash segregated in special reserve bank accounts for the benefit of U.S. clients pursuant to the Customer Protection Rule 15c3-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act").  The Partnership adopted ASU 2016-18 on a retrospective basis during the first quarter of 2018, which resulted in including restricted cash of $7,063, $7,691, $8,370 and $8,525 as of March 30, 2018, December 31, 2017, March 31, 2017 and December 31, 2016, respectively, to the cash and cash equivalents balances on the Consolidated Statements of Cash Flows.

 

NOTE 3 – REVENUE

 

Revenue Recognition.  The Partnership's revenue is recognized based on contracts with clients, mutual fund companies, insurance companies and other product providers.  As a full-service brokerage firm, Edward Jones provides clients with custodial services, including safekeeping of client funds, collecting and disbursing funds from a client's account, and providing trade confirmations and account statements.  The Partnership does not charge a separate fee for these services.  Revenue is generally recognized in the same manner for both the U.S. and Canada segments.  The Partnership classifies its revenue into the following categories:

 

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

 


 

7


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements, continued

 

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

 

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

 

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

 

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

 

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

 

8


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements, continued

 

As of March 30, 2018 and December 31, 2017, $379 and $346, respectively, of the receivable from clients balance and $280 and $279, respectively, of the receivable from mutual funds, insurance companies and other balance related to revenue contracts with customers.  The following table shows the Partnership's disaggregated revenue information.  See Note 8 for segment information.

 

 

 

Three Months Ended March 30, 2018

 

 

Three Months Ended March 31, 2017

 

 

 

U.S.

 

 

Canada

 

 

Total

 

 

U.S.

 

 

Canada

 

 

Total

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fee revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-based fee revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advisory programs fees

 

$

982

 

 

$

13

 

 

$

995

 

 

$

685

 

 

$

9

 

 

$

694

 

Service fees

 

 

305

 

 

 

22

 

 

 

327

 

 

 

298

 

 

 

18

 

 

 

316

 

Other asset-based fees

 

 

131

 

 

 

 

 

 

131

 

 

 

105

 

 

 

 

 

 

105

 

Total asset-based fee revenue

 

 

1,418

 

 

 

35

 

 

 

1,453

 

 

 

1,088

 

 

 

27

 

 

 

1,115

 

Account and activity fee revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholder accounting services

   fees

 

 

109

 

 

 

 

 

 

109

 

 

 

105

 

 

 

 

 

 

105

 

Other account and activity fee

   revenue

 

 

59

 

 

 

4

 

 

 

63

 

 

 

64

 

 

 

3

 

 

 

67

 

Total account and activity fee

   revenue

 

 

168

 

 

 

4

 

 

 

172

 

 

 

169

 

 

 

3

 

 

 

172

 

   Total fee revenue

 

 

1,586

 

 

 

39

 

 

 

1,625

 

 

 

1,257

 

 

 

30

 

 

 

1,287

 

Trade revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commissions

 

 

318

 

 

 

14

 

 

 

332

 

 

 

401

 

 

 

14

 

 

 

415

 

Principal transactions

 

 

31

 

 

 

1

 

 

 

32

 

 

 

41

 

 

 

1

 

 

 

42

 

Total trade revenue

 

 

349

 

 

 

15

 

 

 

364

 

 

 

442

 

 

 

15

 

 

 

457

 

Net interest and dividends revenue

 

 

45

 

 

 

2

 

 

 

47

 

 

 

39

 

 

 

1

 

 

 

40

 

Other revenue

 

 

4

 

 

 

2

 

 

 

6

 

 

 

11

 

 

 

2

 

 

 

13

 

Net revenue

 

$

1,984

 

 

$

58

 

 

$

2,042

 

 

$

1,749

 

 

$

48

 

 

$

1,797

 

 

 

 

 

9


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements, continued

 

NOTE 4 – FAIR VALUE

The Partnership's valuation methodologies for financial assets and financial liabilities measured at fair value and the fair value hierarchy are described in Part II, Item 8 – Financial Statements and Supplementary Data – Note 1 of the Partnership's Annual Report.  There have been no material changes to the Partnership's valuation methodologies since December 31, 2017.

The Partnership did not have any assets or liabilities categorized as Level III during the three and twelve month periods ended March 30, 2018 and December 31, 2017, respectively.  In addition, there were no transfers into or out of Levels I, II or III during these periods.

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

 

 

 

Financial Assets at Fair Value as of

 

 

 

March 30, 2018

 

 

 

Level I

 

 

Level II

 

 

Level III

 

 

Total

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

 

 

$

276

 

 

$

 

 

$

276

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments segregated under federal regulations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

1,998

 

 

$

 

 

$

 

 

$

1,998

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities owned:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds(1)

 

$

245

 

 

$

 

 

$

 

 

$

245

 

Government and agency obligations

 

 

3

 

 

 

 

 

 

 

 

 

3

 

Equities

 

 

2

 

 

 

 

 

 

 

 

 

2

 

Corporate bonds and notes

 

 

 

 

 

1

 

 

 

 

 

 

1

 

Total investment securities

 

$

250

 

 

$

1

 

 

$

 

 

$

251

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inventory securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal obligations

 

$

 

 

$

40

 

 

$

 

 

$

40

 

Equities

 

 

34

 

 

 

 

 

 

 

 

 

34

 

Mutual funds

 

 

7

 

 

 

 

 

 

 

 

 

7

 

Certificates of deposit

 

 

 

 

 

13

 

 

 

 

 

 

 

13

 

Corporate bonds and notes

 

 

 

 

 

3

 

 

 

 

 

 

3

 

Total inventory securities

 

$

41

 

 

$

56

 

 

$

 

 

$

97

 

 

(1)

The mutual funds balance consists primarily of securities held to economically hedge future liabilities related to the non-qualified deferred compensation plan.

 

10


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements, continued

 

 

 

 

Financial Assets at Fair Value as of

 

 

 

December 31, 2017

 

 

 

Level I

 

 

Level II

 

 

Level III

 

 

Total

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

 

 

$

275

 

 

$

 

 

$

275

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments segregated under federal regulations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasuries

 

$

2,399

 

 

$

 

 

$

 

 

$

2,399

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities owned:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds(1)

 

$

252

 

 

$

 

 

$

 

 

$

252

 

Government and agency obligations

 

 

3

 

 

 

 

 

 

 

 

 

3

 

Equities

 

 

2

 

 

 

 

 

 

 

 

 

2

 

Corporate bonds and notes

 

 

 

 

 

1

 

 

 

 

 

 

1

 

Total investment securities

 

$

257

 

 

$

1

 

 

$

 

 

$

258

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inventory securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal obligations

 

$

 

 

$

24

 

 

$

 

 

$

24

 

Equities

 

 

16

 

 

 

 

 

 

 

 

 

16

 

Mutual funds

 

 

4

 

 

 

 

 

 

 

 

 

4

 

Certificates of deposit

 

 

 

 

 

4

 

 

 

 

 

 

4

 

Corporate bonds and notes

 

 

 

 

 

2

 

 

 

 

 

 

2

 

Total inventory securities

 

$

20

 

 

$

30

 

 

$

 

 

$

50

 

 

 

NOTE 5 – PARTNERSHIP CAPITAL

The Partnership makes loans available to those general partners and, in limited circumstances, subordinated limited partners (in each case, other than members of the Executive Committee, as defined in the Partnership’s Nineteenth Amended and Restated Agreement of Registered Limited Liability Limited Partnership, dated June 6, 2014 (the “Partnership Agreement”)), who require financing for some or all of their Partnership capital contributions.  In limited circumstances a general partner may withdraw from the Partnership and become a subordinated limited partner while he or she still has an outstanding Partnership loan.  It is anticipated that, of the future general and subordinated limited partnership capital contributions (in each case, other than for Executive Committee members) requiring financing, the majority will be financed through Partnership loans.  Loans made by the Partnership to such partners are generally for a period of one year but are expected to be renewed and bear interest at the interest rate defined in the loan documents.  The Partnership recognizes interest income for the interest earned related to these loans.  The outstanding amount of Partnership loans is reflected as a reduction to total Partnership capital.  As of March 30, 2018 and December 31, 2017, the outstanding amount of Partnership loans was $381 and $297, respectively.  Interest income earned from these loans, which is included in interest and dividends in the Consolidated Statements of Income, was $4 and $3 for the three month periods ended March 30, 2018 and March 31, 2017, respectively.

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

 

 

 

Three Months Ended

 

 

 

March 30,

 

 

March 31,

 

 

 

2018

 

 

2017

 

Partnership loans outstanding at beginning of period

 

$

297

 

 

$

266

 

Partnership loans issued during the period

 

 

168

 

 

 

140

 

Repayment of Partnership loans during the period

 

 

(84

)

 

 

(71

)

Total Partnership loans outstanding

 

$

381

 

 

$

335

 

 

 

11


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements, continued

 

The minimum 7.5% annual payment on the face amount of limited partnership capital was $17 for both the three month periods ended March 30, 2018 and March 31, 2017, respectively.  These amounts are included as a component of interest expense in the Consolidated Statements of Income.

 

The Partnership filed a Registration Statement on Form S-8 with the U.S. Securities and Exchange Commission ("SEC") on January 17, 2014, to register $350 of Interests to be issued pursuant to the Partnership's 2014 Employee Limited Partnership Interest Purchase Plan (the "2014 Plan").  The Partnership previously issued approximately $298 of Interests under the 2014 Plan. The remaining $52 of Interests may be issued under the 2014 Plan at the discretion of the Partnership in the future.

 

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

   

 

NOTE 6 – NET CAPITAL REQUIREMENTS

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

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

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

 

 

 

March 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

U.S.:

 

 

 

 

 

 

 

 

Net capital

 

$

1,040

 

 

$

1,107

 

Net capital in excess of the minimum required

 

$

982

 

 

$

1,049

 

Net capital as a percentage of aggregate debit

   items

 

 

35.9

%

 

 

38.1

%

Net capital after anticipated capital withdrawals,

   as a percentage of aggregate debit items

 

 

19.0

%

 

 

21.6

%

 

 

 

 

 

 

 

 

 

Canada:

 

 

 

 

 

 

 

 

Regulatory risk-adjusted capital

 

$

47

 

 

$

50

 

Regulatory risk-adjusted capital in excess of the

   minimum required to be held by IIROC

 

$

47

 

 

$

42

 

 

Net capital and the related capital percentages may fluctuate on a daily basis.  In addition, Trust Co. was in compliance with its regulatory capital requirements as of March 30, 2018 and December 31, 2017.

 

12


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements, continued

 

NOTE 7 – CONTINGENCIES

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

The Partnership assesses its liabilities and contingencies utilizing available information.  The Partnership accrues for potential losses for those matters where it is probable that the Partnership will incur a potential loss to the extent that the amount of such potential loss can be reasonably estimated, in accordance with FASB ASC No. 450, Contingencies.  This liability represents the Partnership’s estimate of the probable loss at March 30, 2018, after considering, among other factors, the progress of each case, the Partnership's experience with other legal and regulatory matters and discussion with legal counsel, and is believed to be sufficient.  The aggregate accrued liability may be adjusted from time to time to reflect any relevant developments.

For such matters where an accrued liability has not been established and the Partnership believes a loss is both reasonably possible and estimable, as well as for matters where an accrued liability has been recorded but for which an exposure to loss in excess of the amount accrued is both reasonably possible and estimable, the current estimated aggregated range of additional possible loss is $0 to $9 as of March 30, 2018.  This range of reasonably possible loss does not necessarily represent the Partnership's maximum loss exposure as the Partnership was not able to estimate a range of reasonably possible loss for all matters.

Further, the matters underlying any disclosed estimated range will change from time to time, and actual results may vary significantly.  While the outcome of these matters is inherently uncertain, based on information currently available, the Partnership believes that its established liabilities at March 30, 2018 are adequate and the liabilities arising from such matters will not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Partnership.  However, based on future developments and the potential unfavorable resolution of these matters, the outcome could be material to the Partnership’s future consolidated operating results for a particular period or periods.

 


 

13


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements, continued

 

NOTE 8 – SEGMENT INFORMATION

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

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

 

 

 

Three Months Ended

 

 

 

March 30,

2018

 

 

March 31,

2017

 

Net revenue:

 

 

 

 

 

 

 

 

U.S.

 

$

1,984

 

 

$

1,749

 

Canada

 

 

58

 

 

 

48

 

Total net revenue

 

$

2,042

 

 

$

1,797

 

 

 

 

 

 

 

 

 

 

Pre-variable income (loss):