LPLA 10-Q Quarterly Report Sept. 30, 2014

LPL FINANCIAL HOLDINGS INC.

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10-Q 1 lpla2014093010-q.htm FORM 10-Q LPLA 2014.09.30 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)



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

For the quarterly period ended September 30, 2014



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: 001-34963

LPL Financial Holdings Inc.

(Exact name of registrant as specified in its charter)



Delaware	20-3717839
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

75 State Street, Boston, MA 02109

(Address of Principal Executive Offices) (Zip Code)

(617) 423-3644

(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. x Yes o 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). x Yes o No

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer x	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

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

The number of shares of Common Stock, par value $0.001 per share, outstanding as of October 27, 2014 was 98,808,921 .

TABLE OF CONTENTS



Item Number	Page

PART I — FINANCIAL INFORMATION

1. Financial Statements (unaudited)

Condensed Consolidated Statements of Income (unaudited)	1

Condensed Consolidated Statements of Comprehensive Income (unaudited)	2

Condensed Consolidated Statements of Financial Condition (unaudited)	3

Condensed Consolidated Statements of Stockholders’ Equity (unaudited)	4

Condensed Consolidated Statements of Cash Flows (unaudited)	5

Notes to Condensed Consolidated Financial Statements (unaudited)	7

2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

3. Quantitative and Qualitative Disclosures About Market Risk	45

4. Controls and Procedures	49

PART II — OTHER INFORMATION	50

1. Legal Proceedings	50

1A. Risk Factors	50

2. Unregistered Sales of Equity Securities and Use of Proceeds	50

3. Defaults Upon Senior Securities	51

4. Mine Safety Disclosures	51

5. Other Information	51

6. Exhibits	52

SIGNATURES	53

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly, and current reports, proxy statements and other information required by the Securities Exchange Act of 1934, as amended ( “ Exchange Act ” ), with the Securities and Exchange Commission ( “ SEC ” ). You may read and copy any document we file with the SEC at the SEC’s public reference room located at 100 F Street, N.E., Washington, D.C. 20549, U.S.A. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our SEC filings are also available to the public from the SEC’s internet site at http://www.sec.gov .

On our internet site, http://www.lpl.com , we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: our annual reports on Form 10-K, our proxy statements, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. Hard copies of all such filings are available free of charge by request via email ( investor.relations@lpl.com ), telephone (617) 897-4574, or mail (LPL Financial Investor Relations at 75 State Street, 24th Floor, Boston, MA 02109). The information contained or incorporated on our website is not a part of this Quarterly Report on Form 10-Q.

When we use the terms “ LPLFH, ” “ we, ” “ us, ” “ our ” and the “ Company, ” we mean LPL Financial Holdings Inc., a Delaware corporation, and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Statements in Item 2 - “ Management's Discussion and Analysis of Financial Condition and Results of Operations ” and other sections of this Quarterly Report on Form 10-Q regarding the Company's future financial and operating results, growth, business strategies, plans, liquidity, future share repurchases, and future dividends, including statements regarding projected savings, projected expenses, and anticipated improvements to the Company's operating model, services, and technology as a result of the Service Value Commitment, as well as any other statements that are not related to present facts or current conditions or that are not purely historical, constitute forward-looking statements. These forward-looking statements are based on the Company's historical performance and its plans, estimates, and expectations as of October 30, 2014 . The words “ anticipates, ” “ believes, ” “ expects, ” “ may, ” “ plans, ” “ predicts, ” “ will ” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Forward-looking statements are not guarantees that the future results, plans, intentions, or expectations expressed or implied by the Company will be achieved. Matters subject to forward-looking statements involve known and unknown risks and uncertainties, including economic, legislative, regulatory, competitive, and other factors, which may cause actual financial or operating results, levels of activity, or the timing of events, to be materially different than those expressed or implied by forward-looking statements. Important factors that could cause or contribute to such differences include: changes in general economic and financial market conditions, including retail investor sentiment; fluctuations in the value of brokerage and advisory assets; fluctuations in levels of net new advisory assets and the related impact on fee revenue; effects of competition in the financial services industry; changes in the number of the Company's financial advisors and institutions, and their ability to market effectively financial products and services; changes in interest rates and fees payable by banks participating in the Company's cash sweep program, including the Company's success in negotiating agreements with current or additional counterparties; changes in the growth of the Company’s fee-based business; the effect of current, pending and future legislation, regulation and regulatory actions, including disciplinary actions imposed by federal and state securities regulators and self-regulatory organizations; the costs of settling and remediating issues related to pending or future regulatory matters; the Company's success in integrating the operations of acquired businesses; execution of the Company's plans related to the Service Value Commitment, including the Company's ability to successfully transform and transition business processes to third party service providers; the Company's success in negotiating and developing commercial arrangements with third party service providers that will enable the Company to realize the service improvements and efficiencies expected to result from the Service Value Commitment; the performance of third party service providers to which business processes are transitioned from the Company; the Company's ability to control operating risks, information technology systems risks, cybersecurity risks, and sourcing risks; and the other factors set forth in Part I, “ Item 1A. Risk Factors ” in the Company's 2013 Annual Report on Form 10-K, as may be amended or updated in our Quarterly Reports on Form 10-Q. Except as required by law, the Company specifically disclaims any obligation to update any forward-looking statements as a result of developments occurring after the date of this quarterly report, even if its estimates change, and you should not rely on statements contained herein as representing the Company's views as of any date subsequent to the date of this quarterly report.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Unaudited)

(In thousands, except per share data)



	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
REVENUES:
Commission	$	520,388	$	527,419	$	1,590,139	$	1,521,390
Advisory	340,369		299,101		998,016		878,421
Asset-based	121,283		107,447		354,494		318,718
Transaction and fee	94,674		93,799		276,284		271,808
Interest income, net of interest expense	4,727		4,509		14,279		13,343
Other	7,793		20,937		36,182		43,248
Total net revenues	1,089,234		1,053,212		3,269,394		3,046,928
EXPENSES:
Commission and advisory	746,001		724,835		2,242,206		2,086,075
Compensation and benefits	106,290		102,310		317,459		299,317
Promotional	36,669		36,807		93,581		85,276
Depreciation and amortization	24,519		21,432		70,618		61,451
Occupancy and equipment	19,043		16,568		62,922		49,649
Professional services	38,174		18,955		82,736		47,588
Brokerage, clearing and exchange	12,090		11,360		36,594		32,958
Communications and data processing	11,476		11,017		32,598		31,401
Regulatory fees and other	8,476		8,234		25,437		23,339
Restructuring charges	9,928		6,482		26,473		19,851
Other	8,218		20,547		25,958		37,116
Total operating expenses	1,020,884		978,547		3,016,582		2,774,021
Non-operating interest expense	12,897		13,363		38,651		38,190
Loss on extinguishment of debt	—		—		—		7,962
Total expenses	1,033,781		991,910		3,055,233		2,820,173
INCOME BEFORE PROVISION FOR INCOME TAXES	55,453		61,302		214,161		226,755
PROVISION FOR INCOME TAXES	22,181		23,671		84,663		89,316
NET INCOME	$	33,272	$	37,631	$	129,498	$	137,439
EARNINGS PER SHARE (NOTE 12)
Earnings per share, basic	$	0.33	$	0.36	$	1.29	$	1.30
Earnings per share, diluted	$	0.33	$	0.36	$	1.26	$	1.29
Weighted-average shares outstanding, basic	100,052		104,271		100,519		105,670
Weighted-average shares outstanding, diluted	101,834		105,705		102,384		106,934

See notes to unaudited condensed consolidated financial statements.

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(In thousands)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
NET INCOME	$	33,272		$	37,631		$	129,498		$	137,439
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on cash flow hedges, net of tax expense (benefit) of ($63), ($155), $863, and ($155) for the three and nine months ended September 30, 2014 and 2013, respectively	(101		)	(250		)	1,361			(250		)
Reclassification adjustment for realized gain on cash flow hedges included in net income, net of tax expense of $85, $0, $113, and $0 for the three and nine months ended September 30, 2014 and 2013, respectively	(135		)	—			(180		)	—
Total other comprehensive income (loss), net of tax	(236		)	(250		)	1,181			(250		)
TOTAL COMPREHENSIVE INCOME	$	33,036		$	37,381		$	130,679		$	137,189

See notes to unaudited condensed consolidated financial statements.

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Financial Condition

(Unaudited)

(Dollars in thousands, except par value)



	September 30, 2014			December 31, 2013
ASSETS
Cash and cash equivalents	$	459,494		$	516,584
Cash and securities segregated under federal and other regulations	418,507			512,351
Receivables from:
Clients, net of allowance of $1,237 at September 30, 2014 and $588 at December 31, 2013	342,304			373,675
Product sponsors, broker-dealers and clearing organizations	178,439			174,070
Others, net of allowance of $9,383 at September 30, 2014 and $7,091 at December 31, 2013	281,411			272,018
Securities owned:
Trading — at fair value	12,926			8,964
Held-to-maturity	9,345			6,853
Securities borrowed	8,327			7,102
Income taxes receivable	25,404			—
Fixed assets, net of accumulated depreciation and amortization of $300,823 at September 30, 2014 and $263,321 at December 31, 2013	207,413			189,059
Debt issuance costs, net of accumulated amortization of $10,991 at September 30, 2014 and $7,751 at December 31, 2013	13,040			16,281
Goodwill	1,365,838			1,361,361
Intangible assets, net of accumulated amortization of $295,332 at September 30, 2014 and $266,285 at December 31, 2013	440,526			464,522
Other assets	155,193			139,991
Total assets	$	3,918,167		$	4,042,831
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Drafts payable	$	135,095		$	194,971
Payables to clients	565,221			565,204
Payables to broker-dealers and clearing organizations	38,315			43,157
Accrued commission and advisory expenses payable	143,024			135,149
Accounts payable and accrued liabilities	287,219			301,644
Income taxes payable	—			4,320
Unearned revenue	68,817			73,739
Securities sold, but not yet purchased — at fair value	18			211
Senior secured credit facilities	1,526,967			1,535,096
Deferred income taxes, net	90,119			89,369
Total liabilities	2,854,795			2,942,860
Commitments and contingencies
STOCKHOLDERS’ EQUITY:
Common stock, $.001 par value; 600,000,000 shares authorized; 118,124,141 shares issued at September 30, 2014 and 117,112,465 shares issued at December 31, 2013	118			117
Additional paid-in capital	1,346,701			1,292,374
Treasury stock, at cost — 18,187,765 shares at September 30, 2014 and 15,216,301 shares at December 31, 2013	(655,822		)	(506,205		)
Accumulated other comprehensive income	1,296			115
Retained earnings	371,079			313,570
Total stockholders’ equity	1,063,372			1,099,971
Total liabilities and stockholders’ equity	$	3,918,167		$	4,042,831

See notes to unaudited condensed consolidated financial statements.

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(In thousands)



				Additional Paid-In Capital							Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Stockholders' Equity
	Common Stock					Treasury Stock
	Shares	Amount				Shares		Amount
BALANCE — December 31, 2012	115,714	$	116	$	1,228,075	9,422		$	(287,998	)	$	—		$	199,827		$	1,140,020
Net income and other comprehensive loss, net of tax expense											(250		)	137,439			137,189
Treasury stock purchases						4,910		(184,318		)							(184,318		)
Cash dividends on common stock														(48,672		)	(48,672		)
Stock option exercises and other	1,140	1		27,623		(19	)	663						(98		)	28,189
Share-based compensation				17,330													17,330
Excess tax benefits from share-based compensation				1,919													1,919
BALANCE — September 30, 2013	116,854	$	117	$	1,274,947	14,313		$	(471,653	)	$	(250	)	$	288,496		$	1,091,657

BALANCE — December 31, 2013	117,112	$	117	$	1,292,374	15,216		$	(506,205	)	$	115		$	313,570		$	1,099,971
Net income and other comprehensive income, net of tax expense											1,181			129,498			130,679
Issuance of common stock to settle restricted stock units, net	40	1				13		(674		)							(673		)
Treasury stock purchases						2,990		(150,021		)							(150,021		)
Cash dividends on common stock														(72,104		)	(72,104		)
Stock option exercises and other	972			24,141		(31	)	1,078						115			25,334
Share-based compensation				22,649													22,649
Excess tax benefits from share-based compensation				7,537													7,537
BALANCE — September 30, 2014	118,124	$	118	$	1,346,701	18,188		$	(655,822	)	$	1,296		$	371,079		$	1,063,372

See notes to unaudited condensed consolidated financial statements.

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)



	Nine Months Ended September 30,
	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	129,498		$	137,439
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Noncash items:
Depreciation and amortization	70,618			61,451
Amortization of debt issuance costs	3,241			3,285
Share-based compensation	22,649			17,330
Loss on disposal of fixed assets	1,282			154
Excess tax benefits related to share-based compensation	(7,666		)	(1,919		)
Provision for bad debts	2,124			1,911
Deferred income tax provision	585			(9,850		)
Loss on extinguishment of debt	—			7,962
Net changes in estimated fair value of contingent consideration obligations	—			4,131
Loan forgiveness	20,326			1,001
Closure of NestWise	—			9,294
Other	2,057			731
Changes in operating assets and liabilities:
Cash and securities segregated under federal and other regulations	93,844			149,390
Receivables from clients	30,723			28,447
Receivables from product sponsors, broker-dealers and clearing organizations	(4,369		)	368
Receivables from others	(31,195		)	(14,472		)
Securities owned	(3,999		)	(1,373		)
Securities borrowed	(1,225		)	(1,168		)
Other assets	(8,534		)	625
Drafts payable	(59,876		)	(24,981		)
Payables to clients	17			(211,422		)
Payables to broker-dealers and clearing organizations	(4,842		)	(29,988		)
Accrued commission and advisory expenses payable	7,875			142
Accounts payable and accrued liabilities	(11,580		)	13,697
Income taxes receivable/payable	(22,187		)	(1,896		)
Unearned revenue	(4,922		)	1,666
Securities sold, but not yet purchased	(193		)	(48		)
Net cash provided by operating activities	$	224,251		$	141,907

Continued on following page

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows - Continued

(Unaudited)

(In thousands)



	Nine Months Ended September 30,
	2014			2013
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	$	(69,830	)	$	(40,787	)
Purchase of intangible assets	(9,000		)	—
Proceeds from disposal of fixed assets	7,123			—
Purchase of securities classified as held-to-maturity	(6,749		)	(2,495		)
Proceeds from maturity of securities classified as held-to-maturity	4,250			5,900
Deposits of restricted cash	(6,049		)	(1,500		)
Release of restricted cash	141			613
Purchases of minority interest investments	—			(2,500		)
Net cash used in investing activities	(80,114		)	(40,769		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of senior secured credit facilities	(8,129		)	(863,869		)
Proceeds from senior secured credit facilities	—			1,078,957
Payment of debt issuance costs	—			(2,461		)
Payment of contingent consideration	(3,300		)	—
Tax payments related to settlement of restricted stock units	(673		)	—
Repurchase of common stock	(150,021		)	(175,722		)
Dividends on common stock	(72,104		)	(48,672		)
Excess tax benefits related to share-based compensation	7,666			1,919
Proceeds from stock option exercises and other	25,334			28,189
Net cash (used in) provided by financing activities	(201,227		)	18,341
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS	(57,090		)	119,479
CASH AND CASH EQUIVALENTS — Beginning of period	516,584			466,261
CASH AND CASH EQUIVALENTS — End of period	$	459,494		$	585,740
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid	$	38,877		$	38,433
Income taxes paid	$	109,805		$	100,999
NONCASH DISCLOSURES:
Fixed assets acquired under build-to-suit lease	$	8,114		$	9,088
Discount on proceeds from senior secured credit facilities recorded as debt issuance costs	$	—		$	4,893
Pending settlement of treasury stock purchases	$	—		$	8,596

See notes to unaudited condensed consolidated financial statements.

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Organization and Description of the Company

LPL Financial Holdings Inc. ( “ LPLFH ” ), a Delaware holding corporation, together with its consolidated subsidiaries (collectively, the “ Company ” ) provides an integrated platform of brokerage and investment advisory services to independent financial advisors and financial advisors at financial institutions (collectively “ advisors ” ) in the United States of America. Through its custody and clearing platform, using both proprietary and third-party technology, the Company provides access to diversified financial products and services enabling its advisors to offer independent financial advice and brokerage services to retail investors (their “ clients ” ).

2 . Summary of Significant Accounting Policies

Basis of Presentation — The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ( “ SEC ” ). These unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. These adjustments are of a normal recurring nature. The Company’s results for any interim period are not necessarily indicative of results for a full year or any other interim period.

The unaudited condensed consolidated financial statements do not include all information and notes necessary for a complete presentation of results of income, comprehensive income, financial position, and cash flows in conformity with generally accepted accounting principles in the United States of America ( “ GAAP ” ). Accordingly, these financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the related notes for the year ended December 31, 2013 , contained in the Company’s Annual Report on Form 10-K as filed with the SEC.

The Company’s significant accounting policies are included in Note 2 . Summary of Significant Accounting Policies , in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. There have been no significant changes to these accounting policies during the first nine months of 2014.

Consolidation — These unaudited condensed consolidated financial statements include the accounts of LPLFH and its subsidiaries. Intercompany transactions and balances have been eliminated. Equity investments in which the Company exercises significant influence but does not exercise control and is not the primary beneficiary are accounted for using the equity method.

Use of Estimates — The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. These estimates are based on the information that is currently available and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results could vary from these estimates.

Reportable Segment — The Company's internal reporting is organized into two service channels: Independent Advisor Services and Institution Services. These service channels qualify as individual operating segments and are aggregated and viewed as one reportable segment due to their similar economic characteristics, products and services, production and distribution processes, and regulatory environment.

Fair Value of Financial Instruments — The Company’s financial assets and liabilities are carried at fair value or at amounts that, because of their short-term nature, approximate current fair value, with the exception of its held-to-maturity securities and indebtedness. The Company carries its held-to-maturity securities and indebtedness at amortized cost. The Company measures the implied fair value of its debt instruments using trading levels obtained from a third-party service provider. Accordingly, the debt instruments qualify as Level 2 fair value measurements. See Note 4 . Fair Value Measurements , for additional detail regarding the Company’s fair value measurements. As of September 30, 2014 , the carrying amount and fair value of the Company’s indebtedness was approximately $1,527.0 million and $1,513.1 million , respectively. As of December 31, 2013 , the carrying amount and fair value was approximately $1,535.1 million and $1,533.3 million , respectively.

Recently Issued Accounting Pronouncements

There are no recent accounting pronouncements that would impact the Company's condensed consolidated statements of income, comprehensive income, financial condition, or cash flows.

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

3 . Restructuring

In February 2013, the Company committed to an expansion of its Service Value Commitment (the “ Program ” ), an ongoing effort to position the Company's people, processes, and technology for sustainable long-term growth while improving the service experience of its advisors and delivering efficiencies in its operating model. The Program is expected to be completed in 2015.

The Company estimates total charges in connection with the Program will approach $65.0 million . These expenditures are comprised of outsourcing and other related costs, technology transformation costs, employee severance obligations and other related costs, as well as non-cash charges for impairment of certain fixed assets related to internally developed software.

The following table summarizes the balance of accrued expenses and the changes in the accrued amounts for the Program as of and for the nine months ended September 30, 2014 (in thousands):



	Accrued Balance at December 31, 2013		Costs Incurred		Payments			Accrued Balance at September 30, 2014		Cumulative Costs Incurred to Date		Total Expected Restructuring Costs
Outsourcing and other related costs	$	1,424	$	5,045	$	(6,106	)	$	363	$	20,326	$	26,000
Technology transformation costs	1,753		15,954		(14,252		)	3,455		25,223		27,000
Employee severance obligations and other related costs	820		4,363		(1,595		)	3,588		6,821		11,000
Asset impairments	—		—		—			—		842		1,000
Total	$	3,997	$	25,362	$	(21,953	)	$	7,406	$	53,212	$	65,000

4 . Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Inputs used to measure fair value are prioritized within a three-level fair value hierarchy. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.

There have been no transfers of assets or liabilities between these fair value measurement classifications during the nine months ended September 30, 2014 .

The Company’s fair value measurements are evaluated within the fair value hierarchy, based on the nature of inputs used to determine the fair value at the measurement date. At September 30, 2014 , the Company had the following financial assets and liabilities that are measured at fair value on a recurring basis:

Cash Equivalents — The Company’s cash equivalents include money market funds, which are short term in nature with readily determinable values derived from active markets.

Securities Owned and Securities Sold, But Not Yet Purchased — The Company ' s trading securities consist of house account model portfolios established and managed for the purpose of benchmarking the performance of its fee-based advisory platforms and temporary positions resulting from the processing of client transactions. Examples of these securities include money market funds, U.S. treasury obligations, mutual funds, certificates of deposit, and traded equity and debt securities.

The Company uses prices obtained from independent third-party pricing services to measure the fair value of its trading securities. Prices received from the pricing services are validated using various methods including comparison to prices received from additional pricing services, comparison to available quoted market prices, and

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

review of other relevant market data including implied yields of major categories of securities. In general, these quoted prices are derived from active markets for identical assets or liabilities. When quoted prices in active markets for identical assets and liabilities are not available, the quoted prices are based on similar assets and liabilities or inputs other than the quoted prices that are observable, either directly or indirectly. For certificates of deposit and treasury securities, the Company utilizes market-based inputs, including observable market interest rates that correspond to the remaining maturities or the next interest reset dates. At September 30, 2014 , the Company did not adjust prices received from the independent third-party pricing services.

Other Assets — The Company’s other assets include: (1) deferred compensation plan assets that are invested in money market and other mutual funds, which are actively traded and valued based on quoted market prices; (2) certain non-traded real estate investment trusts and auction rate notes, which are valued using quoted prices for identical or similar securities and other inputs that are observable or can be corroborated by observable market data; and (3) cash flow hedges, which are measured using quoted prices for similar cash flow hedges, taking into account counterparty credit risk and the Company's own non-performance risk.

Accounts Payable and Accrued Liabilities — The Company's accounts payable and accrued liabilities include contingent consideration liabilities that are measured using Level 3 inputs.

The following table summarizes the Company’s financial assets and financial liabilities measured at fair value on a recurring basis at September 30, 2014 (in thousands):



	Level 1		Level 2		Level 3		Total
At September 30, 2014:
Assets
Cash equivalents	$	109,742	$	—	$	—	$	109,742
Securities owned — trading:
Money market funds	310		—		—		310
Mutual funds	7,497		—		—		7,497
Equity securities	250		—		—		250
Debt securities	—		69		—		69
U.S. treasury obligations	4,800		—		—		4,800
Total securities owned — trading	12,857		69		—		12,926
Other assets	71,145		4,709		—		75,854
Total assets at fair value	$	193,744	$	4,778	$	—	$	198,522
Liabilities
Securities sold, but not yet purchased:
Equity securities	$	8	$	—	$	—	$	8
Debt securities	—		10		—		10
Total securities sold, but not yet purchased	8		10		—		18
Accounts payable and accrued liabilities	—		—		527		527
Total liabilities at fair value	$	8	$	10	$	527	$	545

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

The following table summarizes the Company’s financial assets and financial liabilities measured at fair value on a recurring basis at December 31, 2013 (in thousands):



	Level 1		Level 2		Level 3		Total
At December 31, 2013:
Assets
Cash equivalents	$	254,032	$	—	$	—	$	254,032
Securities owned — trading:
Money market funds	170		—		—		170
Mutual funds	7,291		—		—		7,291
Equity securities	103		—		—		103
U.S. treasury obligations	1,400		—		—		1,400
Total securities owned — trading	8,964		—		—		8,964
Other assets	47,539		3,072		—		50,611
Total assets at fair value	$	310,535	$	3,072	$	—	$	313,607
Liabilities
Securities sold, but not yet purchased:
Mutual funds	$	63	$	—	$	—	$	63
Equity securities	127		—		—		127
Debt securities	—		10		—		10
Certificates of deposit	—		11		—		11
Total securities sold, but not yet purchased	190		21		—		211
Accounts payable and accrued liabilities	—		—		39,293		39,293
Total liabilities at fair value	$	190	$	21	$	39,293	$	39,504

Changes in Level 3 Recurring Fair Value Measurements

As of December 31, 2013, the Company had a contingent consideration obligation related to the acquisition of National Retirement Partners, Inc. ( “ NRP ” ). This obligation was based on the achievement of certain revenue-based targets for the twelve-month period ended November 30, 2013, in aggregate for those advisors joining LPL Financial LLC ( “ LPL Financial ” ) subsequent to the NRP acquisition for whom retirement plans comprise a significant part of their business. As of December 31, 2013, the Company had finalized the determination of the amount of contingent consideration to be paid to the former shareholders of NRP, resulting in a total payment of $39.3 million , which was made on February 19, 2014.

The Company determines the fair value for its contingent consideration obligations using an income approach whereby the Company assesses the probability and timing of the achievement of the applicable milestones, which are based on contractually negotiated financial or operating targets that vary by acquisition transaction, such as revenues, gross margin, EBITDA, and assets under custody. The contingent payments are estimated using a probability weighted, multi-scenario analysis of expected future performance of the acquired businesses. The Company then discounts these expected payment amounts to calculate the fair value as of the valuation date. The Company's management evaluates the underlying projections and other related factors used in determining fair value each period and makes updates when there have been significant changes in management's expectations.

The principal significant unobservable input used in the valuations of the Company's contingent consideration obligations is a risk-adjusted discount rate. Whereas management's underlying projections adjust for market penetration and adoption rates, the discount rate is risk-adjusted for key factors such as advisor attrition, advisor recruitment, expenses and overhead costs, average client assets, revenue generation of client assets, and credit risk. An increase in the discount rate will result in a decrease in the fair value of contingent consideration. Conversely, a decrease in the discount rate will result in an increase in the fair value of contingent consideration.

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

5 . Held-to-Maturity Securities

The Company holds certain investments in securities, primarily U.S. government notes, which are recorded at amortized cost because the Company has both the intent and the ability to hold these investments to maturity. Interest income is accrued as earned. Premiums and discounts are amortized using a method that approximates the effective yield method over the term of the security and are recorded as an adjustment to the investment yield.

The amortized cost, gross unrealized loss or gain, and fair value of securities held-to-maturity were as follows (in thousands):



	September 30, 2014			December 31, 2013
Amortized cost	$	9,345		$	6,853
Gross unrealized loss	(28		)	(58		)
Fair value	$	9,317		$	6,795

At September 30, 2014 , the securities held-to-maturity were scheduled to mature as follows (in thousands):



	Within one year		After one but within five years		After five but within ten years		Total
U.S. government notes — at amortized cost	$	3,849	$	4,996	$	500	$	9,345
U.S. government notes — at fair value	$	3,850	$	4,982	$	485	$	9,317

6 . Derivative Financial Instruments

In May 2013, in conjunction with its Service Value Commitment program, the Company entered into a long-term contractual obligation (the “ Agreement ” ) with a third-party provider to enhance the quality, speed, and cost of processes by outsourcing certain functions. The Agreement enables the third-party provider to use the services of its affiliates in India to provide services to the Company and provides for the Company to settle the cost of its contractual obligation to the third-party provider in U.S. dollars each month. However, the Agreement provides that on each annual anniversary date of the signing of the Agreement, the price for services (denominated in U.S. dollars) is to be adjusted for the then-current exchange rate between the U.S. dollar ( “ USD ” ) and the Indian rupee ( “ INR ” ). The Agreement provides that, once an annual adjustment is calculated, there are no further modifications to the amounts paid by the Company to the third-party provider for fluctuations in the exchange rate between the USD and the INR until the reset on the next anniversary date of the signing of the Agreement.

The third-party provider bore the risk of currency movement from the date of signing the Agreement until the reset on the first anniversary of its signing, and bears such risk during each period until the next annual reset date. The Company bears the risk of currency movement at each of the annual reset dates following the first anniversary.

To mitigate foreign currency risk arising from these annual anniversary events, the Company entered into four non-deliverable foreign currency contracts, all of which have been designated as cash flow hedges. The first cash flow hedge, with a notional amount of 560.4 million INR, or $8.5 million , settled in June 2014. The Company received a settlement of $1.0 million that will be reclassified out of accumulated other comprehensive income and recognized in net income ratably over a 12-month period ending May 31, 2015 to match the timing of the underlying hedged item.

The details related to the remaining non-deliverable foreign currency contracts at September 30, 2014 are as follows (in millions, except foreign exchange rate):



	Settlement Date	Hedged Notional Amount (INR)	Contractual INR/USD Foreign Exchange Rate	Hedged Notional Amount (USD)
Cash flow hedge #2	6/2/2015	560.4	69.35	$	8.1
Cash flow hedge #3	6/2/2016	560.4	72.21	7.8
Cash flow hedge #4	6/2/2017	560.4	74.20	7.5
Total hedged amount				$	23.4

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

The fair value of the derivative instruments, included in other assets in the unaudited condensed consolidated statements of financial condition, were as follows (in thousands):



	September 30, 2014		December 31, 2013
Cash flow hedges	$	1,549	$	187

7 . Goodwill and Other Intangible Assets

Goodwill and intangible assets were a result of various acquisitions. See Note 9 . Goodwill and Other Intangible Assets , in the Company's 2013 Annual Report on Form 10-K for a discussion of the components of goodwill and additional information regarding intangible assets.

. Debt

Senior Secured Credit Facilities — On May 13, 2013, the Company entered into the First Amendment and Incremental Assumption Agreement ( “ Credit Agreement ” ) with its wholly owned subsidiary, LPL Holdings, Inc., and other parties thereto. The Credit Agreement amended the Company ' s previous credit agreement, which was dated March 29, 2012. See Note 17. Subsequent Events , for details regarding the amendment of the Credit Agreement.

The Credit Agreement provides for a term loan A ( “ Term Loan A ” ), a term loan B ( “ Term Loan B ” ), and a revolving credit facility ( “ Revolving Credit Facility ” ). Term Loan A had an initial principal amount of $459.4 million maturing on March 29, 2017; Term Loan B had an initial principal amount of $1,083.9 million maturing on March 29, 2019; and the Revolving Credit Facility has a borrowing capacity of $250.0 million maturing on March 29, 2017.

At the time the Company entered into the Credit Agreement, all mandatory payments required under Term Loan A were prepaid, with the remaining principal and accrued interest due upon maturity. Term Loan B includes quarterly payments at an annual rate of 1.0% of principal per year, with the remaining principal and accrued interest due upon maturity.

Borrowings under Term Loan A and Term Loan B bear interest at a base rate equal to a LIBOR based rate (the “Eurodollar Rate”) plus the applicable interest rate margin, or an alternative base rate (“ABR”) plus the applicable interest rate margin. The Eurodollar Rate with respect to Term Loan B shall in no event be less than 0.75%. The ABR is equal to the greatest of (a) the prime rate in effect on such day; (b) the effective federal funds rate in effect on such day plus 0.50%; (c) the Eurodollar Rate plus 1.00%; or (d) solely in the case of Term Loan B, 1.75%. The Company may repay outstanding loans under its Credit Agreement at any time without premium or penalty, other than customary “ breakage ” costs with respect to Eurodollar Rate loans.

As of September 30, 2014 , borrowings under the term loans bore interest at the Eurodollar Rate with an applicable interest rate margin of 2.50% . The Company’s outstanding borrowings were as follows (dollars in thousands):



		September 30, 2014					December 31, 2013
	Maturity	Balance		Interest Rate			Balance		Interest Rate
Senior secured term loans:
Term Loan A	3/29/2017	$	459,375	2.65	%	(1)	$	459,375	2.67	%	(3)
Term Loan B	3/29/2019	1,067,592		3.25	%	(2)	1,075,721		3.25	%	(4)
Total borrowings		1,526,967					1,535,096
Less current portion		10,839					10,839
Long-term borrowings — net of current portion		$	1,516,128				$	1,524,257

_____________________


(1)	As of September 30, 2014 , the Eurodollar Rate for Term Loan A was 0.15% .


(2)	As of September 30, 2014 , the elected LIBOR was less than 0.75% ; as a result, the Eurodollar Rate for Term Loan B was 0.75% .


(3)	As of December 31, 2013 , the Eurodollar Rate for Term Loan A was 0.17% .


(4)	As of December 31, 2013 , the elected LIBOR was less than 0.75% ; as a result, the Eurodollar Rate for Term Loan B was 0.75% .

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

As of September 30, 2014 , the Revolving Credit Facility was being used to support the issuance of $21.5 million of irrevocable letters of credit for the construction of the Company's San Diego office building and other items, with an applicable interest rate margin of 2.50% . The remaining available balance of $228.5 million was undrawn at September 30, 2014 .

The Credit Agreement subjects the Company to certain financial and non-financial covenants. As of September 30, 2014 , the Company was in compliance with such covenants.

Bank Loans Payable — The Company maintains three uncommitted lines of credit. Two of the lines have unspecified limits, which are primarily dependent on the Company’s ability to provide sufficient collateral. The third line has a $200.0 million limit, and allows for both collateralized and uncollateralized borrowings. The lines have not been utilized in 2014 , but were utilized in 2013 ; however, there were no balances outstanding at September 30, 2014 or December 31, 2013 .

The following summarizes borrowing activity in the revolving and uncommitted line of credit facilities (dollars in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Average balance	$	—		$	80		$	—		$	4,637
Weighted-average interest rate	—		%	1.50		%	—		%	1.80		%

9 . Commitments and Contingencies

Leases — The Company leases office space and equipment under various operating leases. These leases are generally subject to scheduled base rent and maintenance cost increases, which are recognized on a straight-line basis over the period of the leases. Total rental expense for all operating leases was approximately $6.5 million and $4.8 million for the three months ended September 30, 2014 and 2013 , respectively, and $23.5 million and $14.7 million for the nine months ended September 30, 2014 and 2013 , respectively.

In March 2014 the Company entered into a lease agreement for additional office space in Charlotte, North Carolina with a lease commencement date of March 1, 2014 and an expiration date of February 28, 2017 . Future minimum payments for this lease commitment are $0.2 million , $1.0 million , $1.1 million , and $0.2 million , for the years 2014, 2015, 2016, and 2017, respectively.

Service Contracts — The Company is party to certain long-term contracts for systems and services that enable back office trade processing and clearing for its product and service offerings.

Guarantees — The Company occasionally enters into certain types of contracts that contingently require it to indemnify certain parties against third-party claims. The terms of these obligations vary and, because a maximum obligation is not explicitly stated, the Company has determined that it is not possible to make an estimate of the amount that it could be obligated to pay under such contracts.

The Company’s subsidiary, LPL Financial, provides guarantees to securities clearing houses and exchanges under their standard membership agreements, which require a member to guarantee the performance of other members. Under these agreements, if a member becomes unable to satisfy its obligations to the clearing houses and exchanges, all other members would be required to meet any shortfall. The Company’s liability under these arrangements is not quantifiable and may exceed the cash and securities it has posted as collateral. However, the potential requirement for the Company to make payments under these agreements is remote. Accordingly, no liability has been recognized for these transactions.

Loan Commitments — From time to time, LPL Financial makes loans to its advisors, primarily to newly recruited advisors to assist in the transition process, which may be forgivable. Due to timing differences, LPL Financial may make commitments to issue such loans prior to actually funding them. These unfunded commitments are generally contingent upon certain events occurring, including but not limited to the advisor joining LPL Financial. LPL Financial had no such significant unfunded commitments at September 30, 2014 .

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Legal Proceedings & Regulatory Matters — The Company maintains insurance coverage for certain legal proceedings, including those involving client claims. With respect to client claims, the estimated losses on the majority of pending matters are less than the applicable deductibles of the insurance policies. The Company is also subject to extensive regulation and supervision by U.S. federal and state agencies and various self-regulatory organizations. The Company and its advisors periodically engage with such agencies and organizations, in the context of examinations or otherwise, to respond to inquiries, informational requests, and investigations. From time to time, such engagements result in regulatory complaints or other matters, the resolution of which can include fines and other remediation.

In accordance with applicable accounting guidance, the Company establishes an accrual for legal proceedings and regulatory matters when it is both probable that a loss has been incurred and the amount of loss can be reasonably estimated. Where it is not probable that a loss has been incurred, but at least reasonably possible that a loss has been incurred, a disclosure of fact is made when the underlying loss or range of losses can also be reasonably estimated. Assessing the probability of a loss occurring and the amount of any loss related to a legal proceeding or regulatory matter is inherently difficult, requiring significant and complex judgments. The Company's assessment process considers a variety of factors and assumptions, which may include the procedural status of the matter and any recent developments; prior experience and the experience of others in similar matters; the size and nature of potential exposures; available defenses; the progress of fact discovery; the opinions of counsel and experts regarding potential exposures; potential opportunities for settlement and the status of any settlement discussions; and potential insurance coverage and indemnification, if available. The Company monitors these matters for new developments and re-assesses the likelihood that a loss will occur and the estimated range or amount of loss, if those amounts can be reasonably determined. Due to these considerations, the Company may have exposure to losses that are not yet predictable or cannot yet be reasonably estimated in amounts that exceed those that have been accrued.

As of September 30, 2014 , the Company had accrued a liability of $23.0 million for potential remediation of regulatory matters. As of September 30, 2014 , management believes, based on available information and consideration the factors above, that the results of pending legal proceedings and regulatory matters, in the aggregate, will not have a material adverse effect on the Company’s financial condition, but may be material to operating results for any particular period.

Other Commitments — As of September 30, 2014 , the Company had received collateral primarily in connection with client margin loans with a market value of approximately $379.8 million , which it can re-pledge, loan, or sell. Of these securities, approximately $31.9 million were client-owned securities pledged to the Options Clearing Corporation as collateral to secure client obligations related to options positions. As of September 30, 2014 there were no restrictions that materially limited the Company's ability to re-pledge, loan, or sell the remaining $347.9 million of client collateral.

Trading securities on the unaudited condensed consolidated statements of financial condition includes $2.4 million and $1.4 million pledged to clearing organizations at September 30, 2014 and December 31, 2013 , respectively.

Brokerage, clearing, and custody services are provided by LPL Financial on a fully disclosed basis. LPL Financial also has a multi-year agreement to provide its investment advisory programs, platforms, technology, and additional processing and related services to the advisors of the broker-dealer subsidiary of a large global insurance company and the clients of such advisors at specified service levels. Failures by LPL Financial to meet certain specified service levels may result in service level credits against future fees payable by or give rise to a termination right for such broker-dealer. Termination fees may be payable by a terminating or breaching party depending on the specific cause of termination.

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

10 . Stockholders' Equity

Dividends

The payment, timing, and amount of any dividends are subject to approval by the Board of Directors as well as certain limits under the Company's credit facilities. Cash dividends per share of common stock and total cash dividends paid on a quarterly basis were as follows for the periods indicated (in millions, except per share data):



	2014				2013
	Dividend per Share		Total Cash Dividend		Dividend per Share		Total Cash Dividend
First quarter	$	0.24	$	24.1	$	0.135	$	14.4
Second quarter	$	0.24	$	24.0	$	0.135	$	14.4
Third quarter	$	0.24	$	24.0	$	0.19	$	19.9

Share Repurchases

The Board of Directors has approved several share repurchase programs pursuant to which the Company may repurchase its issued and outstanding shares of common stock from time to time. Repurchased shares are included in treasury stock on the unaudited condensed consolidated statements of financial condition. Purchases may be effected in open market or privately negotiated transactions, including transactions with affiliates, with the timing of purchases and the amount of stock purchased generally determined at the discretion of the Company's management within the constraints of the Credit Agreement and general liquidity needs.

For the three months ended September 30, 2014 and 2013 , the Company had the following activity under its approved share repurchase programs (in millions, except share and per share data):



					Three Months Ended September 30,
					2014					2013
Approval Date	Authorized Repurchase Amount		Amount Remaining at September 30, 2014		Shares Purchased	Weighted-Average Price Paid Per Share		Total Cost		Shares Purchased	Weighted-Average Price Paid Per Share		Total Cost
September 27, 2012	$	150.0	$	—	—	$	—	$	—	759,786	$	38.40	$	29.2
May 28, 2013	$	200.0	—		—	—		—		2,566,630	37.94		97.3
February 10, 2014	$	150.0	67.9		531,426	47.06		25.0		—	—		—
			$	67.9	531,426	$	47.06	$	25.0	3,326,416	$	38.04	$	126.5

For the nine months ended September 30, 2014 and 2013 , the Company had the following activity under its approved share repurchase programs (in millions, except share and per share data):



					Nine Months Ended September 30,
					2014					2013
Approval Date	Authorized Repurchase Amount		Amount Remaining at September 30, 2014		Shares Purchased	Weighted Average Price Paid Per Share		Total Cost		Shares Purchased	Weighted Average Price Paid Per Share		Total Cost
September 27, 2012	$	150.0	$	—	—	$	—	$	—	2,343,651	$	37.10	$	87.0
May 28, 2013	$	200.0	—		1,306,288	52.00		67.9		2,566,630	37.94		97.3
February 10, 2014	$	150.0	67.9		1,683,424	48.77		82.1		—	—		—
			$	67.9	2,989,712	$	50.18	$	150.0	4,910,281	$	37.54	$	184.3

See Note 14 . Related Party Transactions , for details regarding the repurchase of shares from related parties.

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

11 . Share-Based Compensation

Certain employees, advisors, institutions, officers, and directors of the Company participate in various long-term incentive plans, which provide for granting stock options, warrants, restricted stock awards, and restricted stock units. Stock options and warrants generally vest in equal increments over a three - to five -year period and expire on the ten th anniversary following the date of grant. Restricted stock awards and restricted stock units generally vest over a two - to four -year period.

On November 17, 2010, the Company adopted a 2010 Omnibus Equity Incentive Plan (the “ 2010 Plan ” ), which provides for the granting of stock options, warrants, restricted stock awards, restricted stock units, and other equity-based compensation. The 2010 Plan serves as the successor to the 2005 Stock Option Plan for Incentive Stock Options, the 2005 Stock Option Plan for Non-qualified Stock Options, the 2008 Advisor and Institution Incentive Plan, the 2008 Stock Option Plan and the Director Restricted Stock Plan (collectively, the “ Predecessor Plans ” ). Upon adoption of the 2010 Plan, awards were no longer made under the Predecessor Plans; however, awards previously granted under the Predecessor Plans remain outstanding until exercised or forfeited.

There are 12,055,945 shares authorized for grant under the 2010 Plan. As of September 30, 2014 , there were 6,292,812 shares reserved for issuance upon exercise or conversion of outstanding awards granted under the 2010 Plan.

Stock Options and Warrants

The following table presents the weighted-average assumptions used in the Black-Scholes valuation model by the Company in calculating the fair value of its employee, officer, and director stock options that have been granted during the nine months ended September 30, 2014 :



Expected life (in years)	6.02
Expected stock price volatility	44.25		%
Expected dividend yield	1.77		%
Risk-free interest rate	2.17		%
Fair value of options	$	20.51

The fair value of each stock option or warrant awarded to advisors and financial institutions is estimated on the date of the grant and revalued at each reporting period using the Black-Scholes valuation model with the following weighted-average assumptions used during the nine months ended September 30, 2014 :



Expected life (in years)	5.86
Expected stock price volatility	33.70		%
Expected dividend yield	2.08		%
Risk-free interest rate	1.92		%
Fair value of options	$	21.73

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

The following table summarizes the Company’s stock option and warrant activity for the nine months ended September 30, 2014 :



	Number of Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (In thousands)
Outstanding — December 31, 2013	7,016,521		$	28.45
Granted	748,353		54.21
Exercised	(960,961	)	25.12
Forfeited	(376,378	)	35.19
Outstanding — September 30, 2014	6,427,535		$	31.56	6.63	$	93,163
Exercisable — September 30, 2014	3,319,409		$	27.10	5.42	$	62,892

The following table summarizes information about outstanding stock options and warrants at September 30, 2014 :



	Outstanding				Exercisable
Range of Exercise Prices	Total Number of Shares	Weighted- Average Remaining Life (Years)	Weighted- Average Exercise Price		Number of Shares	Weighted- Average Exercise Price
$2.38	17,382	0.67	$	2.38	17,382	$	2.38
$15.84 - $23.02	1,313,120	4.71	21.42		1,250,803	21.34
$23.41 - $30.00	1,631,196	5.97	28.11		926,796	27.62
$31.60 - $32.33	1,624,929	7.90	31.87		493,184	31.94
$34.01 - $39.60	1,162,060	6.40	34.58		625,729	34.50
$45.89 - $54.81	678,848	9.44	54.26		5,515	54.81
	6,427,535	6.63	$	31.56	3,319,409	$	27.10

The Company recognizes share-based compensation for stock options awarded to employees, officers, and directors based on the grant date fair value over the requisite service period of the award, which generally equals the vesting period. The Company recognized share-based compensation related to the vesting of these awards of $3.8 million and $2.5 million during the three months ended September 30, 2014 and 2013 , respectively, and $11.4 million and $9.8 million during the nine months ended September 30, 2014 and 2013 , respectively, which is included in compensation and benefits expense on the unaudited condensed consolidated statements of income. As of September 30, 2014 , total unrecognized compensation cost related to non-vested stock options granted to employees, officers, and directors was $25.3 million , which is expected to be recognized over a weighted-average period of 2.28 years.

The Company recognizes share-based compensation for stock options and warrants awarded to its advisors and to financial institutions based on the fair value of the awards at each reporting period. The Company recognized share-based compensation of $1.1 million and $1.6 million during the three months ended September 30, 2014 and 2013 , respectively, and $5.9 million and $5.9 million for during the nine months ended September 30, 2014 and 2013 , respectively, related to the vesting of stock options and warrants awarded to its advisors and financial institutions, which is classified within commission and advisory expense on the unaudited condensed consolidated statements of income. As of September 30, 2014 , total unrecognized compensation cost related to non-vested stock options and warrants granted to advisors and financial institutions was $12.2 million , which is expected to be recognized over a weighted-average period of 2.52 years.

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Restricted Stock

The following summarizes the Company’s activity in its restricted stock awards and restricted stock units for the nine months ended September 30, 2014 :



	Restricted Stock Awards				Restricted Stock Units
	Number of Shares		Weighted-Average Grant-Date Fair Value		Number of Shares		Weighted-Average Grant-Date Fair Value
Nonvested at December 31, 2013	39,153		$	33.20	256,684		$	32.12
Granted	15,846		49.22		376,582		48.94
Vested	(9,300	)	32.26		(39,419	)	31.44
Forfeited	(4,550	)	32.96		(49,401	)	38.92
Nonvested at September 30, 2014	41,149		$	39.60	544,446		$	43.19

The Company recognizes share-based compensation for restricted stock awards and restricted stock units granted to its employees, officers, and directors based on the grant date fair value over the requisite service period of the award, which generally equals the vesting period. The Company recognized $1.7 million and $0.6 million of share-based compensation related to the vesting of these restricted stock awards and restricted stock units during the three months ended September 30, 2014 and 2013 , respectively, and $4.4 million and $1.6 million during the nine months ended September 30, 2014 and 2013 , respectively, which is included in compensation and benefits expense on the unaudited condensed consolidated statements of income. As of September 30, 2014 , total unrecognized compensation cost for restricted stock awards and restricted stock units granted to employees, officers, and directors was $13.0 million , which is expected to be recognized over a weighted-average remaining period of 2.29 years.

In the second quarter of 2014, the Company began granting restricted stock units to its advisors and to financial institutions. The Company recognizes share-based compensation for restricted stock units granted to its advisors and to financial institutions based on the fair value of the awards at each reporting period. The Company recognized share-based compensation of $0.4 million and $0.6 million related to the vesting of these restricted stock units during the three and nine months ended September 30, 2014 , which is classified within commission and advisory expense on the unaudited condensed consolidated statements of income. As of September 30, 2014 , total unrecognized compensation cost for restricted stock units granted to advisors and financial institutions was $4.3 million , which is expected to be recognized over a weighted-average remaining period of 2.62 years.

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

12 . Earnings Per Share

Basic earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the denominator is increased to include the number of additional shares of common stock that would have been outstanding if dilutive potential shares of common stock had been issued. The calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2014 and 2013 is as follows (in thousands, except per share data):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Net income	$	33,272	$	37,631	$	129,498	$	137,439

Basic weighted-average number of shares outstanding	100,052		104,271		100,519		105,670
Dilutive common share equivalents	1,782		1,434		1,865		1,264
Diluted weighted-average number of shares outstanding	101,834		105,705		102,384		106,934

Basic earnings per share	$	0.33	$	0.36	$	1.29	$	1.30
Diluted earnings per share	$	0.33	$	0.36	$	1.26	$	1.29

The computation of diluted earnings per share excludes stock options, warrants, and restricted stock units that are anti-dilutive. For the three months ended September 30, 2014 and 2013 , stock options, warrants, and restricted stock units representing common share equivalents of 1,478,016 shares and 3,075,389 shares, respectively, were anti-dilutive. For the nine months ended September 30, 2014 and 2013 , stock options, warrants, and restricted stock units representing common share equivalents of 1,344,782 shares and 3,744,198 shares, respectively, were anti-dilutive.

13 . Income Taxes

The Company’s effective income tax rate differs from the federal corporate tax rate of 35.0% , primarily as a result of state taxes, settlement contingencies, and expenses that are not deductible for tax purposes. These items resulted in effective tax rates of 40.0% and 38.6% for the three months ended September 30, 2014 and 2013 , respectively, and 39.5% and 39.4% for the nine months ended September 30, 2014 and 2013 , respectively. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

14 . Related Party Transactions

The Company has related party transactions with TPG Capital, one of the Company's significant stockholders, as well as certain portfolio companies of TPG Capital. During the nine months ended September 30, 2014 and 2013 the Company recognized revenue for services provided to these portfolio companies of $0.7 million and $0.4 million , respectively. During the nine months ended September 30, 2014 and 2013 , the Company incurred expenses for services provided by TPG Capital or these portfolio companies of $0.9 million and $0.4 million , respectively. As of September 30, 2014 and 2013 , receivables from related parties were $0.1 million . As of September 30, 2014 and 2013 , payables to related parties were $0.4 million and less than $0.1 million , respectively.

During the nine months ended September 30, 2013 , the Company incurred $0.8 million in expenses for services provided by Aplifi, Inc., a privately held technology company in which the Company held an equity interest until its sale in October 2013.

On February 12, 2014, the Company entered into a share repurchase agreement with an investment fund associated with TPG Capital, pursuant to which the Company repurchased 1.9 million shares of its common stock at a price of $52.00 per share, for total consideration of $100.0 million .

15 . Net Capital and Regulatory Requirements

The Company operates in a highly regulated industry. Applicable laws and regulations restrict permissible activities and investments and require compliance with various financial and customer-related regulations. The

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

consequences of noncompliance can include substantial monetary and non-monetary sanctions. In addition, the Company is also subject to comprehensive examinations and supervision by various governmental and self-regulatory agencies. These regulatory agencies generally have broad discretion to prescribe greater limitations on the operations of a regulated entity for the protection of investors or public interest. Furthermore, where the agencies determine that such operations are unsafe or unsound, fail to comply with applicable law, or are otherwise inconsistent with the laws and regulations or with the supervisory policies, greater restrictions may be imposed.

The Company’s registered broker-dealer, LPL Financial, is subject to the SEC’s Uniform Net Capital Rule (Rule 15c3-1 under the Exchange Act), which requires the maintenance of minimum net capital, as defined. Net capital and the related net capital requirement may fluctuate on a daily basis. LPL Financial is a clearing broker-dealer and had net capital of $109.2 million with a minimum net capital requirement of $6.7 million and net capital in excess of the minimum requirement of $102.5 million as of September 30, 2014 .

The Company's subsidiary, The Private Trust Company N.A. ( “ PTC ” ), operates in a highly regulated industry and is subject to various regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have substantial monetary and non-monetary impacts to PTC's operations.

As of September 30, 2014 and December 31, 2013 , LPL Financial and PTC met all capital adequacy requirements to which they were subject.

16 . Financial Instruments with Off-Balance-Sheet Credit Risk and Concentrations of Credit Risk

LPL Financial’s client securities activities are transacted on either a cash or margin basis. In margin transactions, LPL Financial extends credit to the advisor's client, subject to various regulatory and internal margin requirements, collateralized by cash or securities in the client’s account. As clients write options contracts or sell securities short, LPL Financial may incur losses if the clients do not fulfill their obligations and the collateral in the clients’ accounts is not sufficient to fully cover losses that clients may incur from these strategies. To control this risk, LPL Financial monitors margin levels daily and clients are required to deposit additional collateral, or reduce positions, when necessary.

LPL Financial is obligated to settle transactions with brokers and other financial institutions even if its advisors' clients fail to meet their obligation to LPL Financial. Clients are required to complete their transactions on the settlement date, generally three business days after the trade date. If clients do not fulfill their contractual obligations, LPL Financial may incur losses. In addition, the Company occasionally enters into certain types of contracts to fulfill its sale of when, as, and if issued securities. When, as, and if issued securities have been authorized but are contingent upon the actual issuance of the security. LPL Financial has established procedures to reduce this risk by generally requiring that clients deposit cash or securities into their account prior to placing an order.

LPL Financial may at times hold equity securities that are recorded on the unaudited condensed consolidated statements of financial condition at market value. While long inventory positions represent LPL Financial’s ownership of securities, short inventory positions represent obligations of LPL Financial to deliver specified securities at a contracted price, which may differ from market prices prevailing at the time of completion of the transaction. Accordingly, both long and short inventory positions may result in losses or gains to LPL Financial as market values of securities fluctuate. To mitigate the risk of losses, long and short positions are marked-to-market daily and are continuously monitored by LPL Financial.

17 . Subsequent Events

On October 1, 2014, the Company entered into the Second Amendment, Extension and Incremental Assumption Agreement ( “ Amended Credit Agreement ” ) with its wholly owned subsidiary, LPL Holdings, Inc., and other parties thereto, which amended the Company ' s Credit Agreement, dated May 13, 2013. The Amended Credit Agreement extends the maturity date of Term Loan A and the Revolving Credit Facility to September 30, 2019, and increases the Revolving Credit Facility borrowing capacity to $400.0 million .

On October 1, 2014, the Company's Board of Directors approved an increase in the Company's share repurchase plan by $150.0 million to a total of $217.9 million .

LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

On October 28, 2014 , the Board of Directors declared a cash dividend of $0.24 per share on the Company's outstanding common stock to be paid on November 26, 2014 to stockholders of record on November 11, 2014 .

******

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are the nation's largest independent broker-dealer, a top custodian for registered investment advisors ( “ RIAs ” ), and a leading independent consultant to retirement plans. We provide an integrated platform of brokerage and investment advisory services to more than 13,900 independent financial advisors, including financial advisors at more than 700 financial institutions (our “ advisors ” ) across the country, enabling them to provide their retail investors ( “ clients ” ) with objective financial advice through a lower conflict model. We also support approximately 4,400 financial advisors who are affiliated and licensed with insurance companies that use our customized clearing, advisory platforms, and technology solutions.

Fortigent Holdings Company, Inc. and its subsidiaries ( “ Fortigent ” ) provide solutions and consulting services to RIAs, banks, and trust companies serving high-net-worth clients, while The Private Trust Company, N.A. ( “ PTC ” ) manages trusts and family assets.

Our singular focus is to provide our advisors with the front-, middle-, and back-office support they need to serve the large and growing market for independent investment advice. We believe we are the only company that offers advisors the unique combination of an integrated technology platform, comprehensive self-clearing services, and open-architecture access to leading financial products, all delivered in an environment unencumbered by conflicts from product manufacturing, underwriting, or market making.

For over 20 years, we have served the independent advisor market. We currently support the largest independent advisor base and we believe we have the fourth largest overall advisor base in the United States based on the information available as of the date this Quarterly Report on Form 10-Q has been issued. Through our advisors, we are also one of the largest distributors of financial products in the United States. Our scale is a substantial competitive advantage and enables us to more effectively attract and retain advisors. Our unique business model allows us to invest in more resources for our advisors, increasing their revenues and creating a virtuous cycle of growth. We have 3,397 employees, with primary offices in Boston, Charlotte, and San Diego.

Our Sources of Revenue

Our revenues are derived primarily from fees and commissions from products and advisory services offered by our advisors to their clients, a substantial portion of which we pay out to our advisors, as well as fees we receive from our advisors for the use of our technology, custody, clearing, trust, and reporting platforms. We also generate asset-based revenues through our platform of over 11,000 financial products from a broad range of product manufacturers. Under our self-clearing platform, we custody the majority of client assets invested in these financial products, for which we provide statements, transaction processing, and ongoing account management. In return for these services, mutual funds, insurance companies, banks, and other financial product manufacturers pay us fees based on asset levels or number of accounts managed. We also earn interest from margin loans made to our advisors’ clients.

We track recurring revenue, a characterization of net revenue and a statistical measure, which we define to include our revenues from asset-based fees, advisory fees, trailing commissions, cash sweep programs, and certain other fees that are based upon accounts and advisors. Because certain recurring revenues are associated with asset balances, they will fluctuate depending on the market values and current interest rates. These asset balances, specifically related to advisory and asset-based revenues, have a correlation of approximately 60% to the fluctuations of the overall market, as measured by the S&P 500 index. Accordingly, our recurring revenue can be negatively impacted by adverse external market conditions. However, recurring revenue is meaningful to us despite these fluctuations because it is not dependent upon transaction volumes or other activity-based revenues, which are more difficult to predict, particularly in declining or volatile markets.

The table below summarizes the sources of our revenue, the primary drivers of each revenue source, and the percentage of each revenue source that represents recurring revenue:



			Nine Months Ended September 30, 2014
	Sources of Revenue	Primary Drivers	Total (millions)	% of Total Net Revenue	% Recurring
Advisor-driven revenue with ~85%-90% payout ratio	Commission	- Transactions - Brokerage asset levels	$1,590	49%	44%
Advisor-driven revenue with ~85%-90% payout ratio	Advisory	- Advisory asset levels	$998	31%	99%
Attachment revenue retained by us	Asset-Based - Cash Sweep Fees - Sponsorship Fees - Record Keeping	- Cash balances - Interest rates - Client asset levels - Number of accounts	$354	11%	97%
	Transaction and Fee - Transactions - Client (Investor) Accounts - Advisor Seat and Technology	- Client activity - Number of clients - Number of advisors - Number of accounts - Number of premium technology subscribers	$276	8%	64%
	Other	- Margin account balances - Alternative investment transactions	$51	1%	34%
	Total Net Revenue		$3,269	100%	68%
	Total Recurring Revenue		$2,228	68%

Commission and Advisory Revenues. Commission and advisory revenues both represent advisor-generated revenue, generally 85-90% of which is paid to advisors.

Commission Revenues. We generate two types of commission revenues: transaction-based sales commissions and trailing commissions. Transaction-based sales commission revenues, which occur whenever clients trade securities or purchase various types of investment products, primarily represent gross commissions generated by our advisors. The levels of transaction-based sales commission revenues can vary from period to period based on the overall economic environment, number of trading days in the reporting period, and investment activity of our advisors' clients. We earn trailing commission revenues (a commission that is paid over time, such as 12(b)-1 fees) primarily on mutual funds and variable annuities held by clients of our advisors. Trailing commission revenues are recurring in nature and are earned based on the market value of investment holdings in trail-eligible assets.

Advisory Revenues. Advisory revenues primarily represent fees charged on our corporate RIA platform provided through LPL Financial LLC ( “ LPL Financial ” ) to clients of our advisors based on the value of advisory assets. Advisory fees are typically billed to clients quarterly, in advance, and are recognized as revenue ratably during the quarter. The value of the assets in an advisory account on the billing date determines the amount billed, and accordingly, the revenues earned in the following three month period. The majority of our accounts are billed using values as of the last business day of each calendar quarter. Advisory revenues collected on our corporate RIA platform generally average 1.1% of the underlying assets, and can range anywhere from 0.5% to 3.0%.

In addition, we support independent RIAs who conduct their advisory business through separate entities by establishing their own RIA ( “ Independent RIAs ” ) pursuant to the Investment Advisers Act of 1940, rather than through LPL Financial. The assets held under these investment advisory accounts custodied with LPL Financial are included in our advisory and brokerage assets, net new advisory assets, and advisory assets under custody metrics. The advisory revenue generated by an Independent RIA is earned by the Independent RIA, and accordingly is not included in our advisory

revenue. However, we charge administrative fees to Independent RIAs for clearing and custody of these assets based on the value of assets within these advisory accounts. The administrative fees collected on our Independent RIA platform vary and can reach a maximum of 0.6% of the underlying assets.

Furthermore, we support certain financial advisors at broker-dealers affiliated with insurance companies through our customized advisory platforms and charge fees to these advisors based on the value of assets within these advisory accounts.

Asset-Based Revenues. Asset-based revenues are comprised of fees from cash sweep programs, our sponsorship programs with financial product manufacturers, and omnibus processing and networking services. Pursuant to contractual arrangements, uninvested cash balances in our advisors’ client accounts are swept into either insured deposit accounts at various banks or third-party money market funds, for which we receive fees, including administrative and recordkeeping fees based on account type and the invested balances. We receive fees from certain financial product manufacturers in connection with sponsorship programs that support our marketing and sales-force education and training efforts. Our omnibus processing and networking revenues represent fees paid to us in exchange for administrative and record-keeping services that we provide to clients of our advisors. Omnibus processing revenues are paid to us by mutual fund product sponsors and are based on the value of custodied assets in advisory accounts and the number of brokerage accounts in which the related mutual fund positions are held. Networking revenues on brokerage assets are correlated to the number of positions we administer and are paid to us by mutual fund and annuity product manufacturers.

Transaction and Fee Revenues. Revenues earned from transactions and fees primarily consist of transaction fees and ticket charges, subscription fees, Individual Retirement Account ( “ IRA ” ) custodian fees, contract and license fees, conference fees, and other client account fees. We charge fees to our advisors and their clients for executing certain transactions in brokerage and fee-based advisory accounts. We earn subscription fees for various services provided to our advisors and on IRA custodial services that we provide for their client accounts. We charge administrative fees to our advisors and fees to advisors who subscribe to our reporting services. We charge fees to financial product manufacturers for participating in our training and marketing conferences. In addition, we host certain advisor conferences that serve as training, sales, and marketing events, for which we charge a fee for attendance.

Other Revenues. Other revenues include marketing allowances received from certain financial product manufacturers, primarily those who offer alternative investments, such as non-traded real estate investment trusts and business development companies, mark-to-market gains or losses on assets held by us for the advisors' non-qualified deferred compensation plan and our model portfolios, revenues from our Retirement Partners program, interest income from client margin accounts and cash equivalents, net of operating interest expense, and other items.

Our Operating Expenses

Production Expenses. Production expenses are comprised of the following: base payout amounts that are earned by and paid out to advisors based on commission and advisory revenues earned on each client's account (collectively, commission and advisory revenues earned by LPL Financial are referred to as gross dealer concessions, or “ GDC ” ); production bonuses earned by advisors based on the levels of commission and advisory revenues they produce; the recognition of share-based compensation expense from equity awards granted to advisors and financial institutions based on the fair value of the awards at each reporting period; a mark-to-market gain or loss on amounts designated by advisors as deferred commissions in a non-qualified deferred compensation plan at each reporting period; and brokerage, clearing, and exchange fees. Our production payout ratio is calculated as production expenses, excluding brokerage, clearing, and exchange fees, divided by GDC.

We characterize components of production payout, which consists of all production expenses except brokerage, clearing, and exchange fees, as either GDC sensitive or non-GDC sensitive. Base payout amounts and production bonuses earned by and paid to advisors are characterized as GDC sensitive because they are variable and highly correlated to the level of our commission and advisory revenues in a particular reporting period. Payout characterized as non-GDC sensitive includes share-based compensation expense from equity awards granted to advisors and financial institutions based on the fair value of the awards at each reporting period, and mark-to-market gains or losses on amounts designated by advisors as deferred commissions in a non-qualified deferred compensation plan. Non-GDC sensitive payout is correlated

either to market movement or to the value of our stock. We believe that discussion of production payout, viewed in addition to, and not in lieu of, our production expenses, provides useful information to investors regarding our payouts to advisors.

Compensation and Benefits Expense. Compensation and benefits expense includes salaries and wages and related employee benefits and taxes for our employees (including share-based compensation), as well as compensation for temporary employees and consultants.

General and Administrative Expenses. General and administrative expenses include promotional, occupancy and equipment, professional services, communications and data processing, regulatory fees, and other expenses. General and administrative expenses also include expenses for our hosting of certain advisor conferences that serve as training, sales, and marketing events.

Depreciation and Amortization Expense. Depreciation and amortization expense represents the benefits received for using long-lived assets. Those assets consist of intangible assets established through our acquisitions, as well as fixed assets, which include internally developed software, hardware, leasehold improvements, and other equipment.

Restructuring Charges. Restructuring charges primarily represent expenses incurred as a result of our expansion of our Service Value Commitment announced in 2013 (see Note 3 . Restructuring , within the notes to unaudited condensed consolidated financial statements).

Other Expenses. Other expenses represent charges incurred arising from the shutdown of our subsidiary NestWise, which ceased operations in the third quarter of 2013 (the “ NestWise Closure ” ). The assets and liabilities acquired through the 2012 acquisition of Veritat Advisors Inc. ( “ Veritat ” ) were held at NestWise as a result of a merger of Veritat into NestWise. In connection with the NestWise Closure, we determined that a majority of the assets held at NestWise, consisting primarily of goodwill and fixed assets, had no future economic benefit. Accordingly, the carrying values of goodwill and fixed assets were derecognized during the third quarter of 2013. Additionally, we revised our estimate of the potential payment obligation to the former shareholders of Veritat, which resulted in a $7.8 million decrease in the estimated fair value of the contingent consideration obligation during the third quarter of 2013.

How We Evaluate Our Business

We focus on several business and key financial metrics in evaluating the success of our business relationships and our resulting financial position and operating performance. Our business and key financial metrics are as follows:



	September 30,
	2014		2013		% Change
Business Metrics
Advisors	13,910		13,563		2.6	%
Advisory and brokerage assets (in billions)(1)	$	464.8	$	414.7	12.1	%
Advisory assets under custody (in billions)(2)(3)	$	169.5	$	141.1	20.1	%
Net new advisory assets (in billions)(4)	$	13.5	$	10.7	26.2	%
Insured cash account balances (in billions)(3)	$	16.9	$	17.3	(2.3	)%
Money market account balances (in billions)(3)	$	7.1	$	8.2	(13.4	)%



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Financial Metrics
Revenue growth from prior period	3.4		%	16.1		%	7.3		%	12.1		%
Recurring revenue as a % of net revenue(5)	70.2		%	64.0		%	68.1		%	65.0		%
Net income (in millions)	$	33.3		$	37.6		$	129.5		$	137.4
Earnings per share (diluted)	$	0.33		$	0.36		$	1.26		$	1.29
Non-GAAP Measures:
Gross margin (in millions)(6)	$	331.1		$	317.0		$	990.6		$	927.9
Gross margin as a % of net revenue(6)	30.4		%	30.1		%	30.3		%	30.5		%
Adjusted EBITDA (in millions)	$	108.9		$	120.3		$	378.6		$	387.2
Adjusted EBITDA as a % of net revenue	10.0		%	11.4		%	11.6		%	12.7		%
Adjusted EBITDA as a % of gross margin(6)	32.9		%	37.9		%	38.2		%	41.7		%
Adjusted Earnings (in millions)	$	48.8		$	59.6		$	181.6		$	193.6
Adjusted Earnings per share (diluted)	$	0.48		$	0.56		$	1.77		$	1.81

_______________

(1)

Advisory and brokerage assets are comprised of assets that are custodied, networked, and non-networked and reflect market movement in addition to new assets, inclusive of new business development and net of attrition. Set forth below are other client assets at September 30, 2014 and 2013 , including retirement plan assets, and certain trust and high-net-worth assets, that are custodied with third-party providers and therefore excluded from advisory and brokerage assets (in billions):



	September 30,
	2014		2013
Retirement plan assets(a)	$	76.2	$	56.6
Trust assets(b)	$	3.0	$	12.0
High-net-worth assets(c)	$	83.9	$	69.3

_______________________

(a)

Retirement plan assets are held in retirement plans that are supported by advisors licensed with LPL Financial. At September 30, 2014 and 2013 , our retirement plan assets represent assets that are custodied with 36 third-party providers and 30 third-party providers, respectively, of retirement plan administrative services who provide reporting feeds. We estimate the total assets in retirement plans supported to be between $110.0 billion and $120.0 billion at September 30, 2014 and between $80.0 billion and $95.0 billion at September 30, 2013 . If we receive reporting feeds in the future from providers for whom we do not currently receive feeds, we intend to include and identify such additional assets in this metric. Since September 30, 2013 , we began receiving reporting feeds from 7 such providers, which accounted for $6.6 billion of the $19.6 billion increase in retirement plan assets.


(b)	Represents trust assets that are on the wealth management platform of the Concord Trust and Wealth Solutions division of LPL Financial ( “ Concord ” ).


(c)	Represents high-net-worth assets that are on the platform of performance reporting, investment research, and practice management services of Fortigent.


(2)	Advisory assets under custody are comprised of advisory assets under management in our corporate RIA platform and Independent RIA assets in advisory accounts custodied by us. See “ Results of Operations ” for a tabular presentation of advisory assets under custody.


(3)	Advisory assets under custody, insured cash account balances, and money market account balances are components of advisory and brokerage assets.


(4)	Represents net new advisory assets consisting of funds from new accounts and additional funds deposited into existing advisory accounts that are custodied in our fee-based advisory platforms, less account attrition and funds withdrawn from advisory accounts.


(5)	Recurring revenue, which is a characterization of net revenue and a statistical measure, is derived from sources such as advisory revenues, asset-based revenues, trailing commission revenues, revenues related to our cash sweep programs, interest earned on margin accounts, and technology and service revenues, and is not meant as a substitute for net revenues.


(6)	Gross margin is calculated as net revenues less production expenses. Because our gross margin amounts do not include any depreciation and amortization expense, we consider our gross margin amounts to be non-GAAP measures that may not be comparable to those of others in our industry.

Adjusted EBITDA

Adjusted EBITDA is defined as EBITDA (net income plus interest expense, income tax expense, depreciation, and amortization), further adjusted to exclude certain non-cash charges and other adjustments set forth below. We present Adjusted EBITDA because we consider it an important measure of our performance. Adjusted EBITDA is a useful financial metric in assessing our operating performance from period to period by excluding certain items that we believe are not representative of our core business, such as certain material non-cash items and other adjustments.

We believe that Adjusted EBITDA, viewed in addition to, and not in lieu of, our reported GAAP results, provides useful information to investors regarding our performance and overall results of operations for the following reasons:


•	because non-cash equity grants made to employees, officers, and directors at a certain price and point in time do not necessarily reflect how our business is performing at any particular time, share-based compensation expense is not a key measure of our operating performance; and


•	because costs associated with acquisitions and the resulting integrations, debt refinancing, and restructuring and conversions costs can vary from period to period and transaction to transaction, expenses associated with these activities are not considered a key measure of our operating performance.

We use Adjusted EBITDA:


•	as a measure of operating performance;


•	for planning purposes, including the preparation of budgets and forecasts;


•	to allocate resources to enhance the financial performance of our business;


•	to evaluate the effectiveness of our business strategies;


•	in communications with our Board of Directors (the “ Board ” ) concerning our financial performance; and


•	as a factor in determining employee and executive bonuses.

Adjusted EBITDA is a non-GAAP measure and does not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Adjusted EBITDA is not a measure of net income, operating income, or any other performance measure derived in accordance with GAAP.

Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:


•	Adjusted EBITDA does not reflect all cash expenditures, future requirements for capital expenditures or contractual commitments;


•	Adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs;


•	Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; and


•	Adjusted EBITDA can differ significantly from company to company depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments, limiting its usefulness as a comparative measure.

Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in our business. We compensate for these limitations by relying primarily on the GAAP results and using Adjusted EBITDA as supplemental information.

Set forth below is a reconciliation from our net income to Adjusted EBITDA, a non-GAAP measure, for the three and nine months ended September 30, 2014 and 2013 (in thousands):



	Three Months Ended September 30,					Nine Months Ended September 30,
	2014			2013		2014		2013
Net income	$	33,272		$	37,631	$	129,498	$	137,439
Non-operating interest expense	12,897			13,363		38,651		38,190
Provision for income taxes	22,181			23,671		84,663		89,316
Amortization of intangible assets	9,634			9,731		29,046		29,275
Depreciation and amortization of fixed assets	14,885			11,701		41,572		32,176
EBITDA	92,869			96,097		323,430		326,396
EBITDA Adjustments:
Employee share-based compensation expense(1)	5,550			2,957		16,087		11,405
Acquisition and integration related expenses(2)	(328		)	3,630		764		7,356
Restructuring and conversion costs(3)	9,958			7,340		26,606		20,925
Debt extinguishment costs(4)	—			—		—		7,968
Other(5)	829			10,259		11,667		13,198
Total EBITDA Adjustments	16,009			24,186		55,124		60,852
Adjusted EBITDA	$	108,878		$	120,283	$	378,554	$	387,248

__________________


(1)	Represents share-based compensation for equity awards granted to employees, officers, and directors. Such awards are measured based on the grant-date fair value and recognized over the requisite service period of the individual awards, which generally equals the vesting period.


(2)	Represents acquisition and integration costs resulting from various acquisitions, including changes in the estimated fair value of future payments, or contingent consideration, required to be made to former shareholders of certain acquired entities.


(3)	Represents organizational restructuring charges, conversion, and other related costs primarily resulting from the expansion of our Service Value Commitment.


(4)	Represents expenses incurred resulting from the early extinguishment and repayment of amounts outstanding under prior senior secured credit facilities and the establishment of new senior secured credit facilities.

(5)

Results for the three and nine months ended September 30, 2014 include approximately $0.6 million and $9.8 million , respectively, in parallel rent, property tax, common area maintenance expenses, and fixed asset disposals incurred in connection with our relocation to our San Diego office building. Results for the third quarter of 2013 include costs related to our decision to cease operations of our subsidiary NestWise LLC (the "NestWise Closure"), consisting of the derecognition of $10.2 million of goodwill, $6.9 million of fixed asset charges that were determined to have no future economic benefit, a $7.8 million decrease in the estimated fair value of contingent consideration as related milestones were not achieved, and severance

and termination benefits. Results for the nine months ended September 30, 2013 also include $2.7 million of severance and termination benefits related to a change in management structure. Other amounts include certain excise and other taxes.

Adjusted Earnings and Adjusted Earnings per share

Adjusted Earnings represents net income before: (a) employee share-based compensation expense, (b) amortization of intangible assets, (c) acquisition and integration related expenses, (d) restructuring and conversion costs, (e) debt extinguishment costs, and (f) other. Reconciling items are tax effected using the income tax rates in effect for the applicable period, adjusted for any potentially non-deductible amounts.

Adjusted Earnings per share represents Adjusted Earnings divided by weighted-average outstanding shares on a fully diluted basis.

We prepared Adjusted Earnings and Adjusted Earnings per share to eliminate the effects of items that we do not consider indicative of our core operating performance.

We believe that Adjusted Earnings and Adjusted Earnings per share, viewed in addition to, and not in lieu of, our reported GAAP results provide useful information to investors regarding our performance and overall results of operations for the following reasons:


•	because non-cash equity grants made to employees, officers, and directors at a certain price and point in time do not necessarily reflect how our business is performing, the related share-based compensation expense is not a key measure of our current operating performance;


•	because costs associated with acquisitions and related integrations, debt refinancing, and restructuring and conversions can vary from period to period and transaction to transaction, expenses associated with these activities are not considered a key measure of our operating performance; and

•

because amortization expenses can vary substantially from company to company and from period to period depending upon each company’s financing and accounting methods, the fair value and average expected life of acquired intangible assets and the method by which assets were acquired, the amortization of intangible assets obtained in acquisitions is not considered a key measure in comparing our operating performance.

We use Adjusted Earnings for internal management reporting and evaluation purposes. We also believe Adjusted Earnings and Adjusted Earnings per share are useful to investors in evaluating our operating performance because securities analysts use them as supplemental measures to evaluate the overall performance of companies, and our investor and analyst presentations, which are generally available to investors through our website, include references to Adjusted Earnings and Adjusted Earnings per share.

Adjusted Earnings and Adjusted Earnings per share are not measures of our financial performance under GAAP and should not be considered as an alternative to net income or earnings per share or any other performance measure derived in accordance with GAAP, or as an alternative to cash flows from operating activities as a measure of our profitability or liquidity.

Although Adjusted Earnings and Adjusted Earnings per share are frequently used by securities analysts and others in their evaluation of companies, they have limitations as analytical tools, and you should not consider Adjusted Earnings and Adjusted Earnings per share in isolation, or as substitutes for an analysis of our results as reported under GAAP. In particular you should consider:


•	Adjusted Earnings and Adjusted Earnings per share do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;


•	Adjusted Earnings and Adjusted Earnings per share do not reflect changes in, or cash requirements for, our working capital needs; and


•	other companies in our industry may calculate Adjusted Earnings and Adjusted Earnings per share differently than we do, limiting their usefulness as comparative measures.

Management compensates for the inherent limitations associated with using Adjusted Earnings and Adjusted Earnings per share through disclosure of such limitations, presentation of our financial statements in accordance with GAAP, and reconciliation of Adjusted Earnings to the most directly comparable GAAP measure, net income.

The following table sets forth a reconciliation of net income to the non-GAAP measures Adjusted Earnings and Adjusted Earnings per share for the three and nine months ended September 30, 2014 and 2013 (in thousands, except per share data):



	Three Months Ended September 30,					Nine Months Ended September 30,
	2014			2013		2014			2013
Net income	$	33,272		$	37,631	$	129,498		$	137,439
After-Tax:
EBITDA Adjustments(1)
Employee share-based compensation expense(2)	3,666			2,153		10,778			8,255
Acquisition and integration related expenses(3)	(703		)	2,240		(33		)	3,186
Restructuring and conversion costs	6,114			4,529		16,336			12,911
Debt extinguishment costs	—			—		—			4,916
Other(4)	509			6,993		7,164			8,806
Total EBITDA Adjustments	9,586			15,915		34,245			38,074
Amortization of intangible assets(1)	5,915			6,004		17,834			18,063
Adjusted Earnings	$	48,773		$	59,550	$	181,577		$	193,576
Adjusted Earnings per share(5)	$	0.48		$	0.56	$	1.77		$	1.81
Weighted-average shares outstanding — diluted	101,834			105,705		102,384			106,934

__________________


(1)	Generally, EBITDA Adjustments and amortization of intangible assets have been tax effected using a federal rate of 35.0% and the applicable effective state rate, which was 3.6% and 3.3%, net of the federal tax benefit, for the periods ended September 30, 2014 and 2013 , respectively, except as noted below.

(2)

Represents the after-tax expense of non-qualified stock options for which we receive a tax deduction upon exercise, restricted stock awards and restricted stock units for which we receive a tax deduction upon vesting, and the full expense impact of incentive stock options granted to employees that qualify for preferential tax treatment and conversely for which we do not receive a tax deduction. Share-based compensation expense for vesting of incentive stock options was $0.7 million and $0.9 million for the three months ended September 30, 2014 and 2013 , respectively, and $2.3 million and $3.2 million for the nine months ended September 30, 2014 and 2013 , respectively.


(3)	Represents the after-tax expense of acquisition and related costs for which we receive a tax deduction.

(4)

Results for the three and nine months ended September 30, 2013 include the after-tax expense of severance and termination benefits and derecognition of fixed assets related to the NestWise Closure, for which we received a tax deduction, as well as the full expense impact of the derecognition of $10.2 million of goodwill and the $7.8 million decrease in the estimated fair value of contingent consideration related to the NestWise Closure, for which we did not receive a tax deduction. Other amounts include the after-tax expense of excise and other taxes.


(5)	Represents Adjusted Earnings, a non-GAAP measure, divided by weighted-average number of shares outstanding on a fully diluted basis. Set forth below is a reconciliation of earnings per share on a fully diluted basis, as calculated in accordance with GAAP, to Adjusted Earnings per share:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Earnings per share — diluted	$	0.33	$	0.36	$	1.26	$	1.29
After-Tax:
EBITDA Adjustments per share	0.09		0.14		0.33		0.35
Amortization of intangible assets per share	0.06		0.06		0.18		0.17
Adjusted Earnings per share	$	0.48	$	0.56	$	1.77	$	1.81

Service Value Commitment

The Program

In February 2013, we committed to an expansion of our Service Value Commitment (the “ Program ” ), an ongoing effort to position us for sustainable long-term growth by improving the service experience of our advisors and delivering efficiencies in our operating model. After assessing our information technology delivery, governance, organization, and strategy, we committed to undertake a course of action to reposition our labor force and invest in technology, human capital, marketing, and other key areas to enable future growth.

The Program is expected to be completed in 2015, and we estimate total charges of $65.0 million for technology transformation costs, outsourcing and other related costs, employee severance obligations and other related costs, and non-cash charges for impairment of certain fixed assets related to internally developed software.

We expect to incur approximately $38.4 million of expense during 2014, of which we had incurred $25.4 million as of September 30, 2014 , consisting of: $5.0 million for outsourcing and other services such as parallel processing provided by outside consultants; $16.0 million for the implementation of foundational changes to our technology platform and outsourcing of our disaster recovery facilities; and $4.4 million for employee severance and termination benefits related to positions that were outsourced as of September 30, 2014 , within accounting, data reconciliation, operations, and insurance processing. We remain focused on the next wave of outsourced functions in the remainder of 2014, including additional opportunities in compliance and back office processing activities. By 2015, we expect annual pre-tax savings to approach $30.0 million. See Note 3 . Restructuring , within the notes to unaudited condensed consolidated financial statements for additional information regarding the Program.

Derivative Financial Instruments

During the second quarter of 2013, and in conjunction with the Program, we entered into a long-term contractual obligation (the “ Agreement ” ) with a third-party provider to enhance the quality, speed, and cost of our processes by outsourcing certain functions. The Agreement enables the third-party provider to use the services of its affiliates in India to provide services to us and provides that we settle the cost of our contractual obligation to the third-party provider each month in U.S. dollars. However, the Agreement provides that on each annual anniversary date of the signing of the Agreement, the price for services (as denominated in U.S. dollars) is to be adjusted for the then-current exchange rate between the U.S. dollar and the Indian rupee. Once an annual adjustment is calculated, there are no further modifications to the amounts paid by us to the third-party provider for fluctuations in the exchange rate until the reset on the next anniversary date of the signing of the Agreement. The third-party provider bore the risk of currency movement from the date of signing the Agreement until the reset on the first anniversary of its signing, and bears the risk during each period until the next annual reset date. We bear the risk of currency movement at each of the annual reset dates following the first anniversary.

Upon completion of the Program, we estimate annual costs for our long-term contractual obligation with the third-party provider to be approximately $10.0 million. We use derivative financial instruments consisting solely of non-deliverable foreign currency contracts, all of which have been designated as cash flow hedges. These instruments are operating effectively as intended and our use of them has mitigated foreign currency risk arising from a substantial portion of our contract obligation with the third-party provider arising from annual anniversary adjustments. We will continue to assess the effectiveness of our use of cash flow hedges to mitigate risk from foreign currency contracts.

See Note 6 . Derivative Financial Instruments , within the notes to unaudited condensed consolidated financial statements for additional information regarding our derivative financial instruments.

Acquisitions, Integrations, and Divestitures

From time to time we undertake acquisitions or divestitures outside the ordinary course of business based on opportunities in the competitive landscape. These activities are part of our overall growth strategy, but can distort comparability when reviewing revenue and expense trends for periods presented. There have been no material acquisitions, integrations, or divestitures during the nine months ended September 30, 2014 . See our 2013 Annual Report on Form 10-K for 2013 activity.

Economic Overview and Impact of Financial Market Events

Our business is directly and indirectly sensitive to several macroeconomic factors, primarily in the United States. One of these factors is the current and expected future level of short-term interest rates, particularly overnight rates. The Federal Reserve remained highly accommodative in the third quarter of 2014, extending, but

continuing to wind down, its bond buying program while maintaining a 0.0% to 0.25% target range for the federal funds rate. At its September policy meeting, the Federal Reserve reaffirmed its rate policy and stated that it would continue to assess labor markets, inflation levels, financial developments, and general economic conditions to determine how long to keep the federal funds target rate near zero. It also restated that rates would be held near zero for a “considerable time” after it ended its bond purchase program, which did end in late October 2014. The Federal Reserve has underscored that it would take a balanced approach once it began to raise rates and that it could keep rates below what members would consider normal in the longer term if conditions warranted, even if inflation and labor markets were near levels consistent with its mandate.

As a result of the accommodative monetary policy, interest rates, including the rate on overnight funds, remain low on a historical basis, with the average federal funds effective rate for the third quarter of 2014 at 9 basis points. The lower interest rate environment and fee compression, resulting from contract repricing in order to keep yields on our cash sweep programs competitive, has had a negative impact on our profitability on our cash sweep programs, and fee compression is expected to increase further in 2015 and 2016. Additionally, we’ve seen decreasing levels of demand for fixed income and fixed annuity products as investors move to equity and alternative products.

Another macro-economic factor affecting our business is the valuation of equity securities across the various markets in the United States. The S&P 500 index closed the quarter at 1,972 , up 0.6% from its close on June 30, 2014, the seventh consecutive quarter of positive returns, and reflected a 6.7% year-to-date gain through September 30, 2014. Investor confidence remained stable as the market showed signs of incremental economic growth despite volatility and continued tapering of the Federal Reserve’s bond buying program. Consumer spending rebounded toward the end of the summer while September marked the sixth consecutive month of job gains, and the third quarter also included strong performance by the U.S. dollar. While the market demonstrated impressive resilience through the third quarter, lingering economic worries remain about geopolitical concerns, Federal Reserve monetary policy, U.S. and global growth rates, and policy uncertainty in Washington, D.C.

Results of Operations

The following discussion presents an analysis of our results of operations for the three and nine months ended September 30, 2014 and 2013 . Where appropriate, we have identified specific events and changes that affect comparability or identification or monitoring of trends, and where possible and practical, have quantified the impact of such items.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014		2013		% Change		2014		2013		% Change
	(In thousands)
Revenues
Commission	$	520,388	$	527,419	(1.3	)%	$	1,590,139	$	1,521,390	4.5	%
Advisory	340,369		299,101		13.8	%	998,016		878,421		13.6	%
Asset-based	121,283		107,447		12.9	%	354,494		318,718		11.2	%
Transaction and fee	94,674		93,799		0.9	%	276,284		271,808		1.6	%
Other	12,520		25,446		(50.8	)%	50,461		56,591		(10.8	)%
Net revenues	1,089,234		1,053,212		3.4	%	3,269,394		3,046,928		7.3	%
Expenses
Production	758,091		736,195		3.0	%	2,278,800		2,119,033		7.5	%
Compensation and benefits	106,290		102,310		3.9	%	317,459		299,317		6.1	%
General and administrative	122,056		102,834		18.7	%	323,232		265,075		21.9	%
Depreciation and amortization	24,519		21,432		14.4	%	70,618		61,451		14.9	%
Restructuring charges	9,928		6,482		53.2	%	26,473		19,851		33.4	%
Other	—		9,294		(100.0	)%	—		9,294		(100.0	)%
Total operating expenses	1,020,884		978,547		4.3	%	3,016,582		2,774,021		8.7	%
Non-operating interest expense	12,897		13,363		(3.5	)%	38,651		38,190		1.2	%
Loss on extinguishment of debt	—		—		*		—		7,962		(100.0	)%
Total expenses	1,033,781		991,910		4.2	%	3,055,233		2,820,173		8.3	%
Income before provision for income taxes	55,453		61,302		(9.5	)%	214,161		226,755		(5.6	)%
Provision for income taxes	22,181		23,671		(6.3	)%	84,663		89,316		(5.2	)%
Net income	$	33,272	$	37,631	(11.6	)%	$	129,498	$	137,439	(5.8	)%

Revenues

Commission Revenues

The following table sets forth our commission revenue, by product category, included in our unaudited condensed consolidated statements of income for the three months ended September 30, 2014 and 2013 (in thousands):



	Three Months Ended September 30,
	2014		2013		$ Change			% Change
Variable annuities	$	206,382	$	189,401	$	16,981		9.0	%
Mutual funds	153,875		135,992		17,883			13.2	%
Alternative investments	41,911		81,193		(39,282		)	(48.4	)%
Fixed annuities	36,631		35,772		859			2.4	%
Equities	26,624		32,429		(5,805		)	(17.9	)%
Fixed income	21,165		21,352		(187		)	(0.9	)%
Insurance	20,293		19,125		1,168			6.1	%
Group annuities	13,350		12,019		1,331			11.1	%
Other	157		136		21			15.4	%
Total commission revenue	$	520,388	$	527,419	$	(7,031	)	(1.3	)%

The following table sets forth our commission revenue, by sales-based and trailing commission revenue, for the three months ended September 30, 2014 and 2013 (in thousands):



	Three Months Ended September 30,
	2014		2013		$ Change			% Change
Sales-based	$	278,375	$	319,526	$	(41,151	)	(12.9	)%
Trailing	242,013		207,893		34,120			16.4	%
Total commission revenue	$	520,388	$	527,419	$	(7,031	)	(1.3	)%

Commission revenue decreased by $7.0 million , or 1.3% , for the three months ended September 30, 2014 compared with the same period in 2013 , due primarily to a decrease in alternative investments, namely non-traded real estate investment trusts (“REITs”). Activity in the third quarter of 2013, benefited from liquidity events in several large REITs that allowed for reinvestment into the same type of investments. This resulted in third quarter 2013 alternative investment commissions being much higher than previous or subsequent periods.

Increases in trailing revenues for mutual funds and variable and group annuities reflects improved investor engagement and strong market conditions, resulting in the increase of the underlying assets.

The following table sets forth our commission revenue, by product category, included in our unaudited condensed consolidated statements of income for the nine months ended September 30, 2014 and 2013 (dollars in thousands):



	Nine Months Ended September 30,
	2014		2013		$ Change			% Change
Variable annuities	$	611,286	$	597,925	$	13,361		2.2	%
Mutual funds	456,839		423,289		33,550			7.9	%
Alternative investments	148,285		168,001		(19,716		)	(11.7	)%
Fixed annuities	126,187		77,544		48,643			62.7	%
Equities	82,245		88,889		(6,644		)	(7.5	)%
Fixed income	65,591		65,814		(223		)	(0.3	)%
Insurance	57,615		60,993		(3,378		)	(5.5	)%
Group annuities	41,571		38,229		3,342			8.7	%
Other	520		706		(186		)	(26.3	)%
Total commission revenue	$	1,590,139	$	1,521,390	$	68,749		4.5	%

The following table sets forth our commission revenue, by sales-based and trailing commission revenue, for the nine months ended September 30, 2014 and 2013 (dollars in thousands):



	Nine Months Ended September 30,
	2014		2013		$ Change			% Change
Sales-based	$	893,628	$	917,042	$	(23,414	)	(2.6	)%
Trailing	696,511		604,348		92,163			15.2	%
Total commission revenue	$	1,590,139	$	1,521,390	$	68,749		4.5	%

Commission revenue increased by $68.7 million , or 4.5% , for the nine months ended September 30, 2014 compared with the same period in 2013 , due primarily to an increase in sales-based activity for fixed annuities and increases in trailing revenues for mutual funds and variable and group annuities. Such growth reflects improved investor engagement and strong market conditions, resulting in the increase of the underlying assets.

Fixed annuity sales-based commissions have risen, despite historically low interest rates, as investors have sought income streams with minimal risk to principal. Commissions from fixed annuities also include commissions earned on indexed annuities.

The decrease in alternative investments was due primarily to activity in the nine months ended September 30, 2013, in which commission revenues benefited from liquidity events in several large REITs that allowed for reinvestment into the same type of investments. This resulted in the nine months ended September 30, 2013, alternative investment commissions being much higher than previous or subsequent periods.

Advisory Revenues

The following table summarizes the activity within our advisory assets under custody for the three and nine months ended September 30, 2014 and 2013 (in billions):



	Three Months Ended September 30,					Nine Months Ended September 30,
	2014			2013		2014		2013
Balance - Beginning of period	$	167.3		$	132.4	$	151.6	$	122.1
Net new advisory assets	4.8			4.0		13.5		10.7
Market impact and other	(2.6		)	4.7		2.2		8.3
Balance - End of period	$	169.5		$	141.1	$	167.3	$	141.1

Net new advisory assets for the three and nine months ended September 30, 2014 and 2013 have only a limited impact on advisory fee revenue for those respective periods, given the comparatively large assets at the beginning of each period. Rather, net new advisory assets are anticipated to be a larger driver of advisory revenue

in future reporting periods. Net new advisory assets were $4.8 billion for the three months ended September 30, 2014 , resulting from the continued shift by our existing advisors from brokerage towards more advisory business.

Advisory revenue for a particular quarter is predominately driven by the prior quarter-end advisory assets under management. Advisory revenues increased by $41.3 million , or 13.8% , for the three months ended September 30, 2014 compared to the same period in 2013 . The growth in advisory revenue is due to net new advisory assets resulting from increased investor engagement and strong advisor productivity, newly recruited advisors that were added in the second quarter of 2014, as well as market gains as represented by higher levels of the S&P 500 index on the applicable billing dates in 2014 compared to 2013. The S&P 500 index closed at 1,960 on June 30, 2014, which is a 22.0% increase over the close of 1,606 on June 30, 2013.

The Independent RIA model has continued to attract advisors as they seek the freedom to run their business in a manner that best enables them to meet their clients' needs. This continued shift of advisors to the Independent RIA platform (for which we custody assets but do not earn advisory revenues for managing such assets) has caused the rate of revenue growth of advisory assets under management to lag behind the rate of growth of advisory assets under custody. Advisory revenues do not include fees for advisory services charged by Independent RIA advisors to their clients. Accordingly, there is no corresponding payout. However, there are administrative fees charged to Independent RIA advisors including custody and clearing fees, based on the value of assets.

Advisory revenues increased by $119.6 million , or 13.6% , for the nine months ended September 30, 2014 compared with the same period in 2013 . This growth is attributable to the same net new advisory asset flows and shift of advisors toward more advisory business that has impacted our quarterly performance, and to a positive market impact for the nine months ended September 30, 2014 .

The following table summarizes the composition of our advisory assets under custody as of September 30, 2014 and 2013 (in billions):



	September 30,
	2014		2013		$ Change		% Change
Advisory assets under management	$	123.1	$	111.8	$	11.3	10.1	%
Independent RIA assets in advisory accounts custodied by LPL Financial	46.4		29.3		17.1		58.4	%
Total advisory assets under custody	$	169.5	$	141.1	$	28.4	20.1	%

Growth of the Independent RIA assets in advisory accounts custodied by LPL Financial has outpaced the growth in advisory assets under management. This growth is consistent with the industry trend as more advisors shift their business toward the Independent RIA model.

Asset-Based Revenues

Asset-based revenues increased by $13.8 million , or 12.9% , to $121.3 million for the three months ended September 30, 2014 compared with the same period in 2013 . Revenues for sponsorship programs and record-keeping services, which are largely based on underlying asset values, increased due to the impact of the higher average market indices on the value of such underlying assets and net new sales of eligible assets. The S&P 500 index for the three months ended September 30, 2014 averaged 1,976 , an increase of 18.0% over the average in the prior-year period. Asset-based revenues also include revenues from our cash sweep programs, which decreased by $4.1 million , or 14.0% , to $25.2 million for the three months ended September 30, 2014 from $29.3 million for the three months ended September 30, 2013 . The decrease in our cash sweep revenues is a result of fee compression resulting from contract repricing and a decrease of 7.9% in average assets in our cash sweep programs, which were $23.3 billion and $25.3 billion for the three months ended September 30, 2014 and 2013 , respectively.

Asset-based revenues increased by $35.8 million , or 11.2% , to $354.5 million for the nine months ended September 30, 2014 compared with the same period in 2013 . Revenues for record-keeping services and from product sponsors, which are each largely based on underlying asset values, increased due to the impact of the higher average market indices on the value of such underlying assets and net new sales of eligible assets. The S&P 500 index for the nine months ended September 30, 2014 averaged 1,905 , an increase of 19.0% over the average in the prior year period. Asset-based revenues also include revenues from our cash sweep programs, which decreased by $17.9 million , or 19.5% , to $73.9 million for the nine months ended September 30, 2014 from

$91.8 million for the nine months ended September 30, 2013 . The decrease is due to fee compression that resulted from a repricing of certain contracts that underlie our cash sweep programs, a year-over-year 3 basis point decline in the average federal funds effective rate to 0.08% for the nine months ended September 30, 2014 , and a decrease of 2.1% in average assets in our cash sweep programs, which were $23.6 billion and $24.1 billion for the nine months ended September 30, 2014 and 2013 , respectively.

Transaction and Fee Revenues

Transaction and fee revenues increased by $0.9 million , or 0.9% , for the three months ended September 30, 2014 compared with the same period in 2013 , which were driven primarily by higher trade volumes in certain advisory accounts and an increase in the average number of advisors.

Transaction and fee revenues increased by $4.5 million , or 1.6% , for the nine months ended September 30, 2014 compared with the same period in 2013 , which were driven primarily by higher trade volumes in certain advisory accounts and a 2.8% increase in the average number of advisors.

Other Revenues

Other revenues decreased by $12.9 million , or 50.8% , to $12.5 million for the three months ended September 30, 2014 compared with the same period in 2013 . The primary contributor to such decrease for the three months ended September 30, 2014 was alternative investment marketing allowances received from product sponsor programs, which decreased by $9.8 million compared to the same period in 2013 , driven primarily by decreased sales of alternative investments. Other revenue includes gains or losses on assets held for the advisor non-qualified deferred compensation plan. Losses were $1.8 million for the three months ended September 30, 2014 , compared to gains of $1.6 million for the three months ended September 30, 2013 . The gains or losses on assets held for the advisor non-qualified deferred compensation plan were offset by increases or decreases in non-GDC sensitive production expenses as noted below.

Other revenues decreased by $6.1 million , or 10.8% , to $50.5 million for the nine months ended September 30, 2014 compared to 2013 . The primary contributor to such decrease for the nine months ended September 30, 2014 was alternative investment marketing allowances received from product sponsor programs, which decreased by $3.7 million compared to the same period in 2013 , driven primarily by decreased sales of alternative investments. Other revenue includes gains or losses on assets held for the advisor non-qualified deferred compensation plan. Gains were $0.8 million for the nine months ended September 30, 2014 , compared to gains of $4.3 million for the same period in 2013 . The gains or losses on assets held for the advisor non-qualified deferred compensation plan were offset by the increases or decreases in non-GDC sensitive production expenses as noted below.

Expenses

Production Expenses

The following table shows our production payout ratio for the three and nine months ended September 30, 2014 and 2013 :



	Three Months Ended September 30,				Change	Nine Months Ended September 30,				Change
	2014		2013		Change	2014		2013		Change
Base payout rate	83.50	%	84.14	%	(64 bps)	83.86	%	84.04	%	(18 bps)
Production based bonuses	3.18	%	3.14	%	4 bps	2.41	%	2.45	%	(4 bps)
GDC sensitive payout	86.68	%	87.28	%	(60 bps)	86.27	%	86.49	%	(22 bps)
Non-GDC sensitive payout	(0.01	)%	0.42	%	(43 bps)	0.41	%	0.44	%	(3 bps)
Total Payout Ratio	86.67	%	87.70	%	(103 bps)	86.68	%	86.93	%	(25 bps)

Production expenses increased by $21.9 million , or 3.0% , for the three months ended September 30, 2014 compared with the same period in 2013 . The increase correlates with our commission and advisory revenues, which increased by 4.1% during the same period. Our GDC sensitive payout ratio was 86.68% for the three months ended September 30, 2014 , compared to 87.28% for the prior-year period. The base payout rate decreased by 64 basis points in part due to the growth of our advisory platform, which on average has a lower base rate than our brokerage platform. The decrease in non-GDC sensitive payout is attributable to decreased advisor share-based

compensation for the three months ended September 30, 2014 compared to the same period in 2013 correlating to market movement in our stock and the advisor non-qualified deferred compensation plan as noted above.

Production expenses increased by $159.8 million , or 7.5% , for the nine months ended September 30, 2014 compared with the same period in 2013 . The increase correlates with our commission and advisory revenues, which increased by 7.8% during the same period. Our production payout was 86.68% for the nine months ended September 30, 2014 , compared to 86.93% for the prior year period. The decrease in non-GDC sensitive payout ratio is attributable to decreased advisor share-based compensation correlating to market movement in our stock and production expenses related to the advisor non-qualified deferred compensation plan as noted above.

Compensation and Benefits Expense

Compensation and benefits expense increased by $4.0 million , or 3.9% , for the three months ended September 30, 2014 compared with the same period in 2013 . This was primarily driven by a 9.4% increase in our average number of full-time employees from 3,094 for the three months ended September 30, 2013 to 3,386 for the three months ended September 30, 2014 , to support business growth and investments in staffing related to service and compliance.

Compensation and benefits expense increased by $18.1 million , or 6.1% , for the nine months ended September 30, 2014 compared with the same period in 2013 . Our average number of full-time employees increased 10.2% from 3,012 for the nine months ended September 30, 2013 to 3,320 for the nine months ended September 30, 2014 , due to higher staffing levels to support investments in staffing related to service and compliance and increased levels of advisor and client activities.

General and Administrative Expenses

General and administrative expenses increased by $19.2 million , or 18.7% , to $122.1 million for the three months ended September 30, 2014 compared with the same period in 2013 . The primary driver behind the increase was an increase of $19.2 million for professional services. The increase in professional services includes the estimated costs of the investigation, settlement, and resolution of regulatory matters.

General and administrative expenses increased by $58.2 million , or 21.9% , to $323.2 million for the nine months ended September 30, 2014 compared with the same period in 2013 . The primary drivers behind the increase were increases of $35.1 million for professional services, $8.3 million for business development and promotional expenses, and $9.8 million for parallel rent, property tax, common area maintenance expenses, and fixed asset disposals incurred in connection with the relocation to our San Diego office building. The increase in professional services includes the estimated costs of the investigation, settlement, and resolution of regulatory matters.

Depreciation and Amortization Expense

For the three and nine months ended September 30, 2014 , depreciation and amortization increased by $3.1 million , or 14.4% , and $9.2 million , or 14.9% , respectively, compared with the same periods in 2013 . The increases were due primarily to capital assets placed into service during the latter half of 2013 related to the San Diego office building and capitalized software.

Restructuring Charges

Restructuring charges increased by $3.4 million , or 53.2% , and $6.6 million , or 33.4% , for the three and nine months ended September 30, 2014 , respectively, compared with the same periods in 2013 . These charges relate primarily to consulting fees paid to support our technology transformation as well as employee severance obligations and other related costs and non-cash charges for impairment incurred through our expansion of our Service Value Commitment. Refer to Note 3 . Restructuring , within the notes to unaudited condensed consolidated financial statements for additional details regarding this matter.

Other Expenses

Other expenses for the three and nine months ended September 30, 2013 include the derecognition of fixed assets of $6.9 million and goodwill of $10.2 million, incurred as a result of the NestWise Closure, which ceased operations during the third quarter of 2013. The assets were from the 2012 acquisition of Veritat by NestWise, and were determined to have no future economic benefit. Additionally, we revised our estimate of the potential payment obligation to the former shareholders of Veritat, which resulted in a $7.8 million decrease in the estimated fair value of contingent consideration during the three and nine months ended September 30, 2013.

Interest Expense

Interest expense represents non-operating interest expense for our senior secured credit facilities. Interest expense decreased by $0.5 million , or 3.5% , for the three months ended September 30, 2014 compared with the same period in 2013 . Additionally, interest expense increased by $0.5 million , or 1.2% , for the nine months ended September 30, 2014 , compared with the same periods in 2013 . The changes in interest expense for the 2014 periods are due to changes in the level of outstanding indebtedness following the amendment to the credit agreement in May 2013.

Loss on Extinguishment of Debt

Losses from the extinguishment of debt totaled $8.0 million for the nine months ended September 30, 2013. In May 2013, we refinanced and amended our previous credit agreement and effectively increased our borrowing by approximately $236.1 million, with net proceeds used primarily for working capital requirements and other general corporate purposes. Accordingly, we wrote off $8.0 million of unamortized debt issuance costs that had no future economic benefit related to our prior credit agreement.

Provision for Income Taxes

We estimate our full-year effective income tax rate at the end of each reporting period. This estimate is used in providing for income taxes on a year-to-date basis and may change in subsequent interim periods. The tax rate in any quarter can be affected positively and negatively by adjustments that are required to be reported in the quarter in which resolution of the item occurs. The effective income tax rates reflect the impact of state taxes, settlement contingencies, and expenses that are not deductible for tax purposes.

During the three months ended September 30, 2014 , we recorded income tax expense of $22.2 million , compared with $23.7 million in the prior year period. Our effective income tax rate was 40.0% and 38.6% for the three months ended September 30, 2014 and 2013 , respectively.

During the nine months ended September 30, 2014 , we recorded income tax expense of $84.7 million , compared with $89.3 million in the prior year period. Our effective income tax rate was 39.5% and 39.4% for the nine months ended September 30, 2014 and 2013 , respectively.

Liquidity and Capital Resources

Senior management establishes our liquidity and capital policies. These policies include senior management’s review of short- and long-term cash flow forecasts, review of monthly capital expenditures, and daily monitoring of liquidity for our subsidiaries. Decisions on the allocation of capital are based on, among other things, projected profitability and cash flow, risks of the business, regulatory capital requirements, and future liquidity needs for strategic activities. Our Treasury department assists in evaluating, monitoring, and controlling the business activities that impact our financial condition, liquidity, and capital structure and maintains relationships with various lenders. The objectives of these policies are to support the executive business strategies while ensuring ongoing and sufficient liquidity. Cash requirements and liquidity needs are primarily funded through our cash flow from operations and our capacity for additional borrowing.

A summary of changes in our cash flow is provided as follows (in thousands):



	Nine Months Ended September 30,
	2014			2013
Net cash flows provided by (used in):
Operating activities	$	224,251		$	141,907
Investing activities	(80,114		)	(40,769		)
Financing activities	(201,227		)	18,341
Net (decrease) increase in cash and cash equivalents	(57,090		)	119,479
Cash and cash equivalents — beginning of period	516,584			466,261
Cash and cash equivalents — end of period	$	459,494		$	585,740

Net cash provided by or used in operating activities includes net income adjusted for non-cash expenses. Operating assets and liabilities include balances related to settlement and funding of client transactions, receivables from product sponsors, and accrued commissions and advisory expenses due to our advisors. Operating assets and liabilities that arise from the settlement and funding of transactions by our advisors’ clients are the principal

cause of changes to our net cash from operating activities and can fluctuate significantly from day to day and period to period depending on overall trends and clients' behaviors.

Net cash provided by operating activities for the nine months ended September 30, 2014 and 2013 totaled $224.3 million and $141.9 million , respectively. The change in cash flows between periods primarily reflects the impact of client trading and settlement activity and represented a net source of funds of $50.1 million in 2014 , compared to a net use of funds of $90.8 million in 2013 . Cash flows from operating activities for 2014 also included uses of cash for an increase in receivables from others of $31.2 million and a total change of $22.2 million in income taxes receivable and payable. The net use of funds in 2013 was offset by net income of $137.4 million , depreciation and amortization of $61.5 million , and unamortized debt issuance costs of $8.0 million , which were written off as a charge to earnings stemming from our May 2013 debt refinancing.

Net cash used in investing activities for the nine months ended September 30, 2014 and 2013 totaled $80.1 million and $40.8 million , respectively. The net cash used in 2014 primarily consisted of $78.8 million in capital expenditures and the purchase of intangible assets. The net cash used in 2013 included $40.8 million in capital expenditures.

Net cash used in financing activities for the nine months ended September 30, 2014 totaled $201.2 million . Net cash provided by financing activities for the nine months ended September 30, 2013 totaled $18.3 million . Cash flows used in financing activities in 2014 primarily consisted of $150.0 million for repurchases of common stock and $72.1 million for cash dividends paid, partially offset by $25.3 million in proceeds from stock option exercises. Cash flows provided by financing activities in 2013 include $1,079.0 million in proceeds from the issuance on senior debt, $863.9 million to pay down term loans under our senior secured credit facility, $175.7 million for repurchases of common stock, and $48.7 million of cash dividends paid.

We believe that based on current levels of operations and anticipated growth, cash flow from operations, together with other available sources of funds, which includes three uncommitted lines of credit available and the revolving credit facility available through our credit agreement, will be adequate to satisfy our working capital needs, the payment of all of our obligations, and the funding of anticipated capital expenditures for the foreseeable future. In addition, we have certain capital adequacy requirements due to our registered broker-dealer entity and bank trust subsidiaries and have met all such requirements and expect to continue to do so for the foreseeable future. We regularly evaluate our existing indebtedness based on a number of factors, including our capital requirements, future prospects, contractual restrictions, the availability of refinancing on attractive terms, and general market conditions. Notwithstanding the foregoing, see the Risks Related to our Debt section within Part I, “ Item 1A. Risk Factors ” in our 2013 Annual Report on Form 10-K for more information about the risks associated with our debt obligations and their potential effect on our liquidity.

Share Repurchases

The Board has periodically approved share repurchase programs pursuant to which we may repurchase issued and outstanding shares of our common stock. Purchases may be effected in open market or privately negotiated transactions, including transactions with our affiliates, with the timing of purchases and the amount of stock purchased generally determined at our discretion within the constraints of our credit agreement and general liquidity needs.

For the three months ended September 30, 2014 and 2013 , we had the following activity under our approved share repurchase programs (in millions, except share and per share data):



					Three Months Ended September 30,
					2014					2013
Approval Date	Authorized Repurchase Amount		Amount Remaining at September 30, 2014		Shares Purchased	Weighted-Average Price Paid Per Share		Total Cost		Shares Purchased	Weighted-Average Price Paid Per Share		Total Cost
September 27, 2012	$	150.0	$	—	—	$	—	$	—	759,786	$	38.40	$	29.2
May 28, 2013	$	200.0	—		—	—		—		2,566,630	37.94		97.3
February 10, 2014	$	150.0	67.9		531,426	47.06		25.0		—	—		—
			$	67.9	531,426	$	47.06	$	25.0	3,326,416	$	38.04	$	126.5

For the nine months ended September 30, 2014 and 2013 , we had the following activity under our approved share repurchase programs (in millions, except share and per share data):



					Nine Months Ended September 30,
					2014					2013
Approval Date	Authorized Repurchase Amount		Amount Remaining at September 30, 2014		Shares Purchased	Weighted Average Price Paid Per Share		Total Cost		Shares Purchased	Weighted Average Price Paid Per Share		Total Cost
September 27, 2012	$	150.0	$	—	—	$	—	$	—	2,343,651	$	37.10	$	87.0
May 28, 2013	$	200.0	—		1,306,288	52.00		67.9		2,566,630	37.94		97.3
February 10, 2014	$	150.0	67.9		1,683,424	48.77		82.1		—	—		—
			$	67.9	2,989,712	$	50.18	$	150.0	4,910,281	$	37.54	$	184.3

On February 12, 2014, we entered into a share repurchase agreement with an investment fund associated with TPG Capital, pursuant to which we repurchased 1.9 million shares of our common stock at a price of $52.00 per share, for total consideration of $100.0 million .

On October 1, 2014, the Board approved an increase in our share repurchase plan by $150.0 million to a total of $217.9 million .

Dividends

The payment, timing, and amount of any dividends are subject to approval by our Board as well as certain limits under our credit facilities. Cash dividends per share of common stock and total cash dividends paid quarterly were as follows for the periods indicated (in millions, except per share data):



	2014				2013
	Dividend per Share		Total Cash Dividend		Dividend per Share		Total Cash Dividend
First quarter	$	0.24	$	24.1	$	0.135	$	14.4
Second quarter	$	0.24	$	24.0	$	0.135	$	14.4
Third quarter	$	0.24	$	24.0	$	0.19	$	19.9

On October 28, 2014 , the Board declared a cash dividend of $0.24 per share on our outstanding common stock to be paid on November 26, 2014 to all stockholders of record on November 11, 2014 .

Operating Capital Requirements

Our primary requirement for working capital relates to funds we loan to our advisors’ clients for trading conducted on margin and funds we are required to maintain at clearing organizations to support these clients’ trading activities. We have several sources of funds that enable us to meet increases in working capital requirements that relate to increases in client margin activities and balances. These sources include cash and cash equivalents on hand, cash and securities segregated under federal and other regulations, and proceeds from re-pledging or selling client securities in margin accounts. When a client purchases securities on margin or uses securities as collateral to borrow from us on margin, we are permitted, pursuant to the applicable securities industry regulations, to re-pledge, loan, or sell securities that collateralize those margin accounts. As of September 30, 2014 , we had received collateral primarily in connection with client margin loans with a fair value of approximately $379.8 million , which can be re-pledged, loaned, or sold. Of these securities, approximately $31.9 million had been pledged to the Options Clearing Corporation as collateral to secure certain client obligations related to options positions. As of September 30, 2014 there were no restrictions that materially limited our ability to re-pledge, loan, or sell the remaining $347.9 million of client collateral.

Our other working capital needs are primarily related to regulatory capital requirements at our broker-dealer and bank trust subsidiaries and software development, which we have satisfied in the past from internally generated cash flows.

Notwithstanding the self-funding nature of our operations, we may sometimes be required to fund timing differences arising from the delayed receipt of client funds associated with the settlement of client transactions in securities markets. These timing differences are funded either with internally generated cash flow or, if needed, with

funds drawn on our uncommitted lines of credit at our broker-dealer subsidiary LPL Financial, or under our revolving credit facility.

Our registered broker-dealer, LPL Financial, is subject to the SEC’s Uniform Net Capital Rule, which requires the maintenance of minimum net capital. LPL Financial computes net capital requirements under the alternative method, which requires firms to maintain minimum net capital, as defined, equal to the greater of $250,000 or 2.0% of aggregate debit balances arising from client transactions. At September 30, 2014 , LPL Financial's excess net capital was $102.5 million .

LPL Financial also acts as an introducing broker for commodities and futures. Accordingly, its trading activities are subject to the National Futures Association's ( “ NFA ” ) financial requirements and it is required to maintain net capital that is in excess of or equal to the greatest of NFA's minimum financial requirements. The NFA was designated by the Commodity Futures Trading Commission as LPL Financial's primary regulator for such activities. Currently, the highest NFA requirement is the minimum net capital calculated pursuant to the SEC's Uniform Net Capital Rule.

In addition to the minimum net capital requirements, the SEC and FINRA have established “ early warning ” capital requirements for broker-dealers that, when exceeded, limit certain activities of the broker-dealer. Early warning requirements provide advance warning that a firm's net capital is dropping toward its minimum requirement, allowing time for initiation of corrective action. For LPL Financial, an early warning level is reached if its net capital falls below 5.0% of aggregate debit balances. At September 30, 2014 , LPL Financial's net capital was $109.2 million and its early warning requirement was $16.8 million . LPL Financial typically maintains net capital in excess of the early warning level to maintain its ability to grow its business, demonstrate the stability of its operations, and provide a safeguard in the event of sustained levels of market volatility.

LPL Financial's ability to pay dividends greater than 10% of its excess net capital during any 35-day rolling period requires approval from FINRA. In addition, payment of dividends is restricted if LPL Financial's net capital would be less than the FINRA early warning requirement of 5.0% of aggregate debit balances.

Our subsidiary, PTC, is also subject to various regulatory capital requirements. Failure to meet the respective minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have substantial monetary and non-monetary impacts on PTC's operations.

Debt

On May 13, 2013, we entered into the First Amendment and Incremental Assumption Agreement ( “ Credit Agreement ” ) with our wholly owned subsidiary, LPL Holdings, Inc., and other parties thereto. The Credit Agreement amended our previous credit agreement, dated as of March 29, 2012. See Note 17. Subsequent Events , within the notes to unaudited condensed consolidated financial statements, for details regarding the amendment of the Credit Agreement.

The Credit Agreement includes a term loan A ( “ Term Loan A ” ), a term loan B, which had an initial principal amount of $459.4 million maturing on March 29, 2017; ( “ Term Loan B ” ), which had an initial principal amount of $1,083.9 million maturing on March 29, 2019; and the revolving credit facility ( “ Revolving Credit Facility ” ), which had an initial borrowing capacity of $250.0 million maturing on March 29, 2017.

In addition, we maintain three uncommitted lines of credit at LPL Financial. Two of the lines have unspecified limits and are primarily dependent on our ability to provide sufficient collateral. The third line had a $200.0 million limit at September 30, 2014 and December 31, 2013 , and allows for both collateralized and uncollateralized borrowings. The lines were utilized in 2013 ; however, there were no balances outstanding at September 30, 2014 or December 31, 2013 .

While our term loans are unhedged as of September 30, 2014 , the risk of variability on our floating interest rate is partially mitigated by our cash sweep programs and client margin loans, which carry floating interest rates, as well as fees received from our cash sweep programs. At September 30, 2014 , our receivables from our advisors’ clients for margin loan activity were approximately $271.3 million, and the balance of deposits in the cash sweep programs was $24.0 billion .

Interest Rate and Fees

Borrowings under Term Loan A and Term Loan B bear interest at a base rate equal to either a LIBOR based rate (the “ Eurodollar Rate ” ) plus the applicable interest rate margin, or an alternative base rate ( “ ABR ” ) plus the applicable interest rate margin. The Eurodollar Rate with respect to Term Loan B shall in no event be less than 0.75%. The ABR is equal to the greatest of (a) the prime rate in effect on such day; (b) the effective federal funds

rate in effect on such day plus 0.50% ; (c) the Eurodollar Rate plus 1.00% ; or (d) solely in the case of Term Loan B, 1.75% .

As of September 30, 2014 , borrowings under the term loans bear interest at the Eurodollar Rate with an applicable interest rate margin of 2.50% . Borrowings under our Revolving Credit Facility bear interest with an applicable interest rate margin of 2.50% . The applicable interest rate margin on Term Loan A and the Revolving Credit Facility could change depending on our total leverage ratio.

In addition to paying interest on outstanding principal under the Credit Agreement, we are required to pay a commitment fee to the lenders under the Revolving Credit Facility in respect of the unutilized commitments thereunder. The commitment fee rate at September 30, 2014 was 0.50% for our Revolving Credit Facility, but is subject to change depending on our leverage ratio. We must also pay customary letter of credit fees.

Prepayments

The Credit Agreement requires us to prepay outstanding amounts under our senior secured term loan facility subject to certain exceptions, with:


•	100% of the net cash proceeds of all non-ordinary course asset sales or other dispositions of property (including insurance recoveries), if we do not reinvest or commit to reinvest those proceeds in assets to be used in our business or to make certain other permitted investments within 15 months as long as such reinvestment is completed within 180 days;


•	100% of the net cash proceeds of any incurrence of debt, other than proceeds from debt permitted under the Credit Agreement; and


•	solely in the case of Term Loan B, 50% (percentage will be reduced to 0% if our total leverage ratio is 3.00 to 1.00 or less) of our annual excess cash flow (as defined in the Credit Agreement) adjusted for, among other things, changes in our net working capital (as of September 30, 2014 our total leverage ratio was 2.56 ).

Mandatory prepayments in respect of the incurrence of any debt can be applied by us to scheduled installments of principal of Term Loan A and Term Loan B in any order at our direction. Any other mandatory prepayments described above will be applied to scheduled installments of principal of Term Loan A and Term Loan B in direct order. We may voluntarily repay outstanding term loans under the Credit Agreement at any time without premium or penalty, other than customary “ breakage ” costs with respect to Eurodollar Rate loans.

Amortization

At the time we entered into the Credit Agreement, we prepaid all mandatory payments required under Term Loan A with the remaining principal and accrued interest due upon maturity. Term Loan B includes quarterly payments at an annual rate of 1.0% of principal per year with the remaining principal and accrued interest due upon maturity. Any outstanding principal under the Revolving Credit Facility will be due upon maturity.

Guarantee and Security

The loans under the Credit Agreement are secured primarily through pledges of the capital stock in certain of our subsidiaries.

Certain Covenants and Events of Default

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


•	incur additional indebtedness;


•	engage in mergers or consolidations;


•	pay dividends and distributions or repurchase our capital stock;


•	make investments, loans, or advances; or


•	engage in certain transactions with affiliates.

Our Credit Agreement prohibits us from paying dividends and distributions or repurchasing our capital stock except for limited purposes, including, but not limited to payments in connection with: (i) redemption, repurchase, retirement, or other acquisition of our equity interests from present or former officers, managers, consultants, employees and directors upon the death, disability, retirement, or termination of employment of any such person or otherwise in accordance with any stock option or stock appreciation rights plan, any management or employee stock ownership plan, stock subscription plan, employment termination agreement or any employment agreements

or stockholders’ agreement, in an aggregate amount not to exceed $10.0 million in any fiscal year plus the amount of cash proceeds from certain equity issuances to such persons, and the amount of certain key-man life insurance proceeds, (ii) franchise taxes, general corporate and operating expenses not to exceed $3.0 million in any fiscal year, and fees and expenses related to any unsuccessful equity or debt offering permitted by the Amended Credit Agreement, (iii) tax liabilities to the extent attributable to our business and our subsidiaries and (iv) dividends and other distributions in an aggregate amount not to exceed the sum of (a) the greater of $250,000,000 or 6.75% of our consolidated total assets, (b) the available amount (as defined in the Credit Agreement), (c) the available equity amount (as defined in the Credit Agreement), and (d) the incremental dividend amount (as defined in the Credit Agreement). Notwithstanding the foregoing, we may make unlimited dividends and distributions provided that after giving pro forma effect thereto, our total leverage ratio does not exceed 2.0. As of September 30, 2014 , we have the ability to make dividends and distributions or repurchase our capital stock totaling $359.6 million, subject to approval by the Board.

The share repurchase programs approved in September 2012, May 2013, and February 2014 were authorized by the Board pursuant to item (iv) above. Any future declarations of quarterly cash dividends will be authorized pursuant to item (iv) above.

In addition, our financial covenant requirements include a total leverage ratio test and an interest coverage ratio test. Each of our financial ratios is measured at the end of each fiscal quarter. Our Credit Agreement provides us with a right to cure in the event we fail to comply with our leverage ratio test or our interest coverage ratio test. We must exercise this right to cure within ten days of the delivery of our quarterly certificate calculating the financial ratios for that quarter.

The leverage ratio test and interest coverage ratio test use a Credit Agreement Adjusted EBITDA, which starts with Adjusted EBITDA and then excludes the recognition of share-based compensation expense from equity awards granted to advisors and financial institutions based on the fair value of the awards at each reporting period as well as other items, including employee severance costs, employee signing costs, and employee retention or completion bonuses.

Our covenant requirements and actual ratios as of September 30, 2014 and December 31, 2013 were as follows:



	September 30, 2014		December 31, 2013
Financial Ratio	Covenant Requirement	Actual Ratio	Covenant Requirement	Actual Ratio
Leverage Test (Maximum)	4.25	2.56	4.25	2.34
Interest Coverage (Minimum)	3.00	10.44	3.00	10.91

As of September 30, 2014 and December 31, 2013 we were in compliance with all of our covenant requirements.

Off-Balance Sheet Arrangements

We enter into various off-balance-sheet arrangements in the ordinary course of business, primarily to meet the needs of our advisors’ clients. These arrangements include firm commitments to extend credit. For information on these arrangements, see Note 9 . Commitments and Contingencies and Note 16 . Financial Instruments with Off-Balance-Sheet Credit Risk and Concentrations of Credit Risk , within the notes to unaudited condensed consolidated financial statements.

Contractual Obligations

In March 2014 we entered into a lease agreement for additional office space in Charlotte, North Carolina with a lease commencement date of March 1, 2014 and an expiration date of February 28, 2017 . Future minimum payments for this lease commitment are $0.2 million , $1.0 million , $1.1 million , and $0.2 million , for the years 2014, 2015, 2016, and 2017, respectively.

In the three months ended September 30, 2014 there have been no material changes in our contractual obligations, other than in the ordinary course of business, from those above or disclosed in our 2013 Annual Report on Form 10-K. See Note 8 . Debt and Note 9 . Commitments and Contingencies , within the notes to unaudited condensed consolidated financial statements, as well as the Contractual Obligations section within Part II, “

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in our 2013 Annual Report on Form 10-K, for further detail on operating lease obligations and obligations under noncancelable service contracts.

Fair Value of Financial Instruments

We use fair value measurements to record certain financial assets and liabilities at fair value and to determine fair value disclosures.

We use prices obtained from an independent third-party pricing service to measure the fair value of our trading securities. We validate prices received from the pricing service using various methods, including comparison to prices received from additional pricing services, comparison to available market prices and review of other relevant market data including implied yields of major categories of securities.

At September 30, 2014 , we did not adjust prices received from the independent third-party pricing service. For certificates of deposit and treasury securities, we utilize market-based inputs including observable market interest rates that correspond to the remaining maturities or next interest reset dates.

Critical Accounting Policies and Estimates

In the notes to our consolidated financial statements and in “

Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations ” included in our 2013 Annual Report on Form 10-K, we have disclosed those accounting policies that we consider to be significant in determining our results of operations and financial condition. There have been no material changes to those policies that we consider to be significant since the filing of our 2013 Annual Report on Form 10-K. The accounting principles used in preparing our unaudited condensed consolidated financial statements conform in all material respects to GAAP.

Recently Issued Accounting Pronouncements

There are no recent accounting pronouncements that would impact our condensed consolidated statements of income, comprehensive income, financial condition, or cash flows.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market Risk

We maintain trading securities owned and securities sold, but not yet purchased in order to facilitate client transactions, to meet a portion of our clearing deposit requirements at various clearing organizations, and to track the performance of our research models. These securities include mutual funds, debt securities issued by the U.S. government, money market funds, corporate debt securities, certificates of deposit, and equity securities.

Changes in the value of our trading inventory may result from fluctuations in interest rates, credit ratings of the issuer, equity prices, and the correlation among these factors. We manage our trading inventory by product type. Our activities to facilitate client transactions generally involve mutual fund activities, including dividend reinvestments. The balances are based on pending client activities that which are monitored by our Client Support Services department. Because these positions arise from pending client transactions, there are no specific trading or position limits. Positions held to meet clearing deposit requirements consist of U.S. government securities. The amount of securities deposited depends upon the requirements of the clearing organization. The level of securities deposited is monitored by the settlement area within our Client Support Services department. Our research department develops model portfolios that are used by advisors in developing client portfolios. We currently maintain approximately 190 accounts based on model portfolios. At the time a portfolio is developed, we purchase the securities in that model portfolio in an amount equal to the account minimum for a client. Account minimums vary by product and can range from $10,000 to $250,000 per model. We utilize these positions to track the performance of the research department. The limits on this activity are established at the inception of each new model.

At September 30, 2014 , the fair value of our trading securities owned were $12.9 million . Securities sold, but not yet purchased were immaterial at September 30, 2014 . The fair value of securities included within other assets were $75.9 million at September 30, 2014 . See Note 4 . Fair Value Measurements , within the notes to unaudited condensed consolidated financial statements for information regarding the fair value of trading securities owned, securities sold, but not yet purchased and other assets associated with our client facilitation activities. See Note 5 . Held-to-Maturity Securities , within the notes to unaudited condensed consolidated financial statements for information regarding the fair value of securities held to maturity.

We do not enter into contracts involving derivatives or other similar financial instruments for trading or proprietary purposes.

We also have market risk on the fees we earn that are based on the market value of advisory and brokerage assets, assets on which trailing commissions are paid, and assets eligible for sponsor payments.

Interest Rate Risk

We are exposed to risk associated with changes in interest rates. As of September 30, 2014 , all of the outstanding debt under our Credit Agreement, $1.5 billion , was subject to floating interest rate risk. While our senior secured term loans are subject to increases in interest rates, we do not believe that a short-term change in interest rates would have a material impact on our income before taxes.

The following table summarizes the impact of increasing interest rates on our interest expense from the variable portion of our debt outstanding at September 30, 2014 (in thousands):



	Outstanding at Variable Interest Rates		Annual Impact of an Interest Rate Increase of
			10 Basis		25 Basis		50 Basis		100 Basis
Senior Secured Term Loans			Points		Points		Points		Points
Term Loan A	$	459,375	$	459	$	1,148	$	2,297	$	4,594
Term Loan B	1,067,592		—		—		429		5,237
Variable Rate Debt Outstanding	$	1,526,967	$	459	$	1,148	$	2,726	$	9,831

See Note 8 . Debt , within the notes to unaudited condensed consolidated financial statements for additional information regarding variable interest rate and applicable interest rate margin on our outstanding borrowings.

We offer our advisors and their clients two primary cash sweep programs that are interest rate sensitive: our insured cash programs and money market sweep vehicles involving multiple money market fund providers. Our insured cash programs use multiple non-affiliated banks to provide up to $1.5 million ($3.0 million in joint accounts) of FDIC insurance for client deposits custodied at the banks. While clients earn interest for balances on deposit in the insured cash programs, we earn a fee. Our fees from the insured cash programs are based on prevailing interest rates in the current interest rate environment. Changes in interest rates and fees for the insured cash programs are monitored by our fee and rate setting committee (the “ FRS committee ” ), which governs and approves any changes to our fees. By meeting promptly after interest rates change, or for other market or non-market reasons, the FRS committee balances financial risk of the insured cash programs with products that offer competitive client yields. However, as short-term interest rates hit lower levels, the FRS committee may be compelled to set lower fees.

The average Federal Reserve effective federal funds rate ( “ FFER ” ) for the three months ended September 30, 2014 was 0.09% . The following table reflects the approximate annual impact to asset-based revenues on our insured cash programs (assuming that client balances at September 30, 2014 remain unchanged) of an upward or downward change in short-term interest rates of one basis point (dollars in thousands):



Federal Reserve Effective Federal Funds Rate	Annualized Increase or Decrease in Asset-Based Revenues per One Basis Point Change
0.00% - 0.25%		$	1,700
0.26% - 1.25%		800
1.26% - 2.60%		700

The actual impact to asset-based revenues, including a change in the FFER of greater than 2.60%, may vary depending on the FRS committee's strategy in response to a change in interest rate levels, the significance of a change and actual balances at the time of such change.

Credit Risk

Credit risk is the risk of loss due to adverse changes in a borrower’s, issuer’s, or counterparty’s ability to meet its financial obligations under contractual or agreed upon terms. Credit risk includes the risk that collateral posted with LPL Financial by clients to support margin lending or derivative trading is insufficient to meet client’s contractual obligations to LPL Financial. We bear credit risk on the activities of our advisors’ clients, including the execution, settlement, and financing of various transactions on behalf of these clients.

These activities are transacted on either a cash or margin basis. Our credit exposure in these transactions consists primarily of margin accounts, through which we extend credit to advisors' clients collateralized by cash (for

purposes of margin lending, cash is not used as collateral) and securities in the client’s account. Under many of these agreements, we are permitted to re-pledge, loan, or sell these securities held as collateral and use these securities to enter into securities lending arrangements or to deliver to counterparties to cover short positions.

As our advisors execute margin transactions on behalf of their clients, we may incur losses if clients do not fulfill their obligations, the collateral in the client’s account is insufficient to fully cover losses from such investments, and our advisors fail to reimburse us for such losses. Our losses on margin accounts were immaterial and did not exceed $0.1 million during the nine months ended September 30, 2014 and 2013 . We monitor exposure to industry sectors and individual securities and perform analyses on a regular basis in connection with our margin lending activities. We adjust our margin requirements if we believe our risk exposure is not appropriate based on market conditions.

We are subject to concentration risk if we extend large loans to or have large commitments with a single counterparty, borrower, or group of similar counterparties or borrowers (e.g. in the same industry), or if we accept a concentrated position as collateral for a margin loan. Receivables from and payables to clients and stock borrowing and lending activities are conducted with a large number of clients and counterparties and potential concentration is carefully monitored. We seek to limit this risk through careful review of the underlying business and the use of limits established by senior management, taking into consideration factors including the financial strength of the counterparty, the size of the position or commitment, the expected duration of the position or commitment, and other positions or commitments outstanding.

Operational Risk

Operational risk is defined as the risk of loss from the failure of internal controls, people, processes, procedures, or third parties. We operate in diverse markets and are reliant on the ability of our employees and systems, as well as third-party service providers and their systems, to process a large number of transactions effectively. These risks are less direct and quantifiable than credit and market risk, but managing them is critical, particularly in a rapidly changing environment with increasing transaction volumes and in light of increasing reliance on third-party service providers and electronic data processing and communications systems. In the event of a breakdown, unauthorized access, or improper operation of systems or improper action by employees, advisors, or third-party service providers, we could suffer financial loss, data loss, regulatory sanctions and damage to our reputation. Business continuity plans exist for critical systems, and redundancies are built into the systems as deemed appropriate. In order to mitigate and control operational risk, we have developed and continue to enhance specific policies and procedures that are designed to identify and manage operational risk at appropriate levels throughout our organization and within various departments. These control mechanisms attempt to ensure that operational policies and procedures are being followed and that our employees and advisors operate within established corporate policies and limits. Notwithstanding the foregoing, please consult the Risks Related to our Technology section within Part I, “ Item 1A. Risk Factors ” in our 2013 Annual Report on Form 10-K for more information about the risks associated with our technology, including risks related to security, and the potential related effects on our operations.

Regulatory and Legal Risk

The regulatory environment in which we operate is discussed in detail within Part I, “

Item 1, Business Section ” in our 2013 Annual Report on Form 10-K. In recent quarters, and during the period presented in this Quarterly Report on Form 10-Q, we have observed regulators broaden the scope, frequency, and depth of their examinations to include greater emphasis on the quality and consistency of the industry’s execution of policies and procedures. Please consult the Risks Related to Our Regulatory Environment section within Part I, “ Item 1A. Risk Factors ” in our 2013 Annual Report on Form 10-K for more information about the risks associated with operating within our regulatory environment, and the potential related effects on our operations.

Risk Management

We employ an enterprise risk management ( “ ERM ” ) framework that is intended to address key risks and responsibilities, enable us to execute our business strategy, and protect our firm and its franchise. Our framework is designed to promote clear lines of risk management accountability and a structured escalation process for key risk information and events.

Our risk management governance approach includes our Board and certain of its committees; the Risk Oversight Committee of LPL Financial (the “ ROC ” ) and its subcommittees; the Internal Audit department and the Governance, Risk and Compliance (the “ GRC ” ) department of LPL Financial; and business line management. We

regularly reevaluate and, when necessary, modify our processes to improve the identification and escalation of risks and events.

Audit Committee of the Board . In addition to its other responsibilities, the Audit Committee of the Board (the “ Audit Committee ” ) reviews our policies with respect to risk assessment and risk management, as well as our major financial risk exposures and the steps management has undertaken to control them. The Audit Committee provides reports to the Board at each of the Board’s regularly scheduled quarterly meetings.

Compensation and Human Resources Committee of the Board . In addition to its other responsibilities, the Compensation and Human Resources Committee of the Board assesses whether our compensation arrangements encourage inappropriate risk-taking, and whether risks arising from our compensation arrangements are reasonably likely to have a material adverse effect on the Company.

Risk Oversight Committee of LPL Financial . The Audit Committee has mandated that the ROC oversee our risk management activities, including those of our subsidiaries. As of October 30, 2014 , the Chief Risk Officer of LPL Financial serves as chair, and an Executive Vice President, Deputy General Counsel of LPL Financial serves as vice chair, of the ROC, which generally meets on a monthly basis with ad hoc meetings as necessary. As of October 30, 2014 , each member of the Management Committee of LPL Financial and the three other Managing Directors (Managing Director, Chief Investment Officer; Managing Director, Independent Advisor Services; and Managing Director, Institution Services) serve on the ROC. Additional members of the Company’s senior management team are also included as ex-officio members, representing the key control areas of the Company. These individuals include, but are not limited to, the Chief Compliance Officer, Brokerage; the Chief Compliance Officer, Advisory; the Chief Information Security Officer; and the Chief Privacy Officer of LPL Financial. Participation in the ROC by senior officers is intended to ensure that the ROC covers the key risk areas of the Company, including its subsidiaries, and that the ROC thoroughly reviews significant matters relating to risk priorities, policies and control procedures and related exceptions, certain new and complex products and business arrangements, transactions with significant risk elements, and identified emerging risks.

The chair of the ROC provides reports to the Audit Committee at each of the Audit Committee’s regularly scheduled quarterly meetings and, as necessary or requested, to the Board. The reports generally cover topics addressed by the ROC at its meetings since the immediately preceding report. If warranted, matters of material risk are escalated to the Audit Committee or Board more frequently.

Subcommittees of the Risk Oversight Committee . The ROC has established multiple subcommittees that cover key areas of risk. The subcommittees meet regularly and are responsible for keeping the ROC informed and escalating issues in accordance with the Company’s escalation policies. The responsibilities of such subcommittees include, for example, oversight of the approval of new and complex investment products offered to advisors’ clients; oversight of the Company’s investment advisory business; issues and trends related to advisor compliance and examination findings; whistle-blower hotline allegations; and oversight of disclosures related to our financial reporting.

Internal Audit Department. The Internal Audit department provides independent verification of the effectiveness of the Company’s internal controls by conducting risk assessments and audits designed to identify and cover important risk categories. The Internal Audit department provides regular reports to the ROC and reports to the Audit Committee at least as often as quarterly.

Control Groups . The GRC department provides compliance oversight and guidance, and conducts various risk and other assessments to address regulatory and firm-specific risks and requirements. The GRC department reports to the Chief Risk Officer, who reviews the results of the firm’s risk management process with the ROC, the Audit Committee and the Board as necessary. We also consider the Internal Audit department to be a control group.

Business Line Management. Each business line is responsible for managing its risk, and business line management is responsible for keeping senior management, including the members of the ROC, informed of operational risk and escalating risk matters (as defined by the Company’s escalation policies). We regularly conduct firm-wide escalation training for our employees. Certain business lines, including Client Support Services and Business Technology Services, have dedicated personnel with responsibilities for monitoring and managing risk-related matters. Business lines are subject to oversight by the control groups, and the Finance, Legal, Business Technology Services and Human Capital departments also execute certain control functions and report matters to the ROC, Audit Committee, and Board, as appropriate.

In addition to the ERM framework, we have written policies and procedures that govern the conduct of business by our advisors, employees, and the terms and conditions of our relationships with product manufacturers. Our client and advisor policies address the extension of credit for client accounts, data and physical security,

compliance with industry regulation and codes of ethics to govern employee and advisor conduct, among other matters.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our Disclosure Committee, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective.

Change in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the third quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

On May 14, 2013, the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") issued an updated version of its Internal Control - Integrated Framework (the "2013 Framework"). Originally issued in 1992 (the "1992 Framework"), the framework helps organizations design, implement, and evaluate the effectiveness of internal control concepts and simplify their use and application. The 1992 Framework remains available during the transition period, which extends to December 15, 2014, after which time COSO will consider it superseded by the 2013 Framework. As of September 30, 2014, the Company continues to utilize the 1992 Framework during the transition to the 2013 Framework, which will be completed by the end of 2014.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

See Note 9. Commitments and Contingencies , within the notes to unaudited condensed consolidated financial statements for disclosure of matters related to regulatory matters.

Item 1A. Risk Factors

There have been no material changes in the information regarding the Company’s risks, as set forth under Part I, “ Item 1A. Risk Factors ” in the Company’s 2013 Annual Report on Form 10-K, except for the risk factor “ Anti-takeover provisions in our certificate of incorporation and bylaws could prevent or delay a change in control of our Company, ” which was revised to reflect the declassification of the Board that occurred during the quarter ending June 30, 2014 and which revised risk factor was set forth in Part II, “

Item 1A. Risk Factors ” in the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2014.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The table below sets forth information regarding repurchases on a monthly basis during the three months ended September 30, 2014 :



Period	Total Number of Shares Purchased	Weighted Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs(1)	Approximate Dollar Value of Shares That May Yet Be Purchased Under the Programs
July 1, 2014 through July 31, 2014	44,624	$	47.95	44,624	$	90,788,355
August 1, 2014 through August 31, 2014	486,802	$	46.98	486,802	$	—
September 1, 2014 through September 30, 2014	—	$	—	—	$	67,927,079
July 1, 2014 through September 30, 2014	531,426	$	47.06	531,426	$	67,927,079

____________________


(1)	See Note 10 . Stockholders' Equity , within the notes to unaudited condensed consolidated financial statements for additional information.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits



3.1			Amended and Restated Certificate of Incorporation (previously filed as Exhibit 3.1 to the registration statement on Form S-1 (File Number 333-167325) on July 9, 2010, and incorporated herein by reference)
3.2			Certificate of Ownership and Merger (previously filed as Exhibit 3.1 to the Current Report on Form 8-K (File Number 001-34963) on June 19, 2012, and incorporated herein by reference)
3.3			Certificate of Amendment to the Amended and Restated Certificate of Incorporation (previously filed as Exhibit 3.1 to the Current Report on Form 8-K (File Number 001-34963) on May 9, 2014, and incorporated herein by reference)
3.4			Fifth Amended and Restated Bylaws (previously filed as Exhibit 3.1 to the Current Report on Form 8-K (File Number 001-34963) on March 12, 2014 and incorporated herein by reference)
10.1			Second Amendment, Extension and Incremental Assumption Agreement dated October 1, 2014, among Holdings, LPL Holdings, Inc., the other Credit Parties signatory thereto, the several Lenders and Additional Lenders parties thereto, Bank of America, N.A., as Administrative Agent, Collateral Agent, Letter of Credit Issuer and Swingline Lender, J.P.Morgan Chase Bank, N.A., as future administrative agent and the other parties thereto*
10.2			First Amendment to Stockholders' Agreement dated September 24, 2014, by and between LPL Financial Holdings, Inc. and TPG Partners IV, L.P.*
31.1			Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)*
31.2			Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)*
32.1			Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2			Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

101.INS			XBRL Instance Document
101.SCH			XBRL Taxonomy Extension Schema
101.CAL			XBRL Taxonomy Extension Calculation
101.LAB			XBRL Taxonomy Extension Label
101.PRE			XBRL Taxonomy Extension Presentation
101.DEF			XBRL Taxonomy Extension Definition

____________________



*	Filed herewith.

SIGNATURES

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



		LPL Financial Holdings Inc.
Date:	October 30, 2014	By:	/s/ MARK S. CASADY
			Mark S. Casady
			Chairman and Chief Executive Officer

Date:	October 30, 2014	By:	/s/ DAN H. ARNOLD
			Dan H. Arnold
			Chief Financial Officer

TABLE OF CONTENTS

Part I Financial Information Item 1. Financial Statements (unaudited)Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 7. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 7-management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 1A. Risk Factors Item 1, Business Section Item 4. Controls and Procedures Part II Other Information Item 1. Legal Proceedings Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information Item 6. Exhibits

LPLA 10-Q Quarter ended Sept. 30, 2014