LPL Financial Annual Report 2021

Plain-text annual report

2021 ANNUAL REPORT LPL Financial Holdings Inc. LPL 2021 Annual Report AT LPL FINANCIAL, WE EXIST TO SERVE FINANCIAL ADVISORS*— THEIR GREATNESS IS OUR GOAL. Founded on the principle that the ﬁrm should work for the advisor, and not the other way around, we continue to believe that advisors are driving the future of ﬁnancial advice. And we’re committed to advancing the industry by keeping those advisors at the forefront. At LPL, independence means that advisors have the freedom they deserve to choose the business model, services, and technology resources that allow them to run their perfect practice. And they have the freedom to manage their client relationships, because they know their clients best. With access to LPL’s expertise and support, advisors across the nation are empowered to run successful businesses and deliver personalized ﬁnancial advice to investors. Simply put, we take care of our advisors, so they can take care of their clients. * Throughout this Annual Report, the terms “ﬁnancial advisors” and “advisors” are used to refer to registered representatives and/or investment advisor representatives affiliated with LPL Financial LLC. Securities and advisory services offered through LPL Financial LLC, an SEC-registered broker-dealer and investment advisor. Member FINRA/SIPC. LPL Financial LLC and its affiliated companies provide ﬁnancial services only from the United States. We routinely disclose information that may be important to shareholders in the “Investor Relations” or “Press Releases” section of our website. LPL 2021 Annual Report A Message from the PRESIDENT & CEO Dear Fellow Shareholder, In 2021, we delivered another year of solid business and ﬁnancial outcomes at LPL. These results were driven by a combination of thoughtful strategy, strong execution, and our mission-driven culture. Looking ahead, we believe that this focus continues to position us well to serve our clients and drive proﬁtable growth for our shareholders. Before I turn to our performance and progress in 2021, I ﬁrst want to recognize our advisors and institutions for the extraordinary work they have continued to do for their clients. Their commitment, care, and advice has helped millions of Americans make well-informed decisions during a complex and uncertain time—they are an inspiration. I also want to thank our employees for their hard work and dedication. By executing with excellence, they help us continue to make progress on our strategic plan, as well as live into our mission: taking care of our advisors, so they can take care of their clients. TOTAL ADVISORY & BROKERAGE ASSETS* ($ billions) $903 $1,206 $764 $615 $628 2017 2018 2019 2020 2021 2021 Performance Looking at our business results, total assets reached a new high of $1.2 trillion, which was up 34% from a year ago. This increase was primarily driven by continued organic growth and our acquisition of Waddell & Reed’s wealth management business, complemented by equity market appreciation. Total organic net new assets were $119 billion, translating to a 13% growth rate, up from 7% in 2020. This increase was driven by continued strength across all three channels of growth: new store sales, same store sales, and retention. Regarding our ﬁnancial results, we continued to drive solid outcomes through a combination of expense discipline and a record level of organic net new assets. As a result, earnings per share prior to amortization of intangible assets and acquisition costs was $7.02, up 9% year-over-year2. $2,455 $2,172 $2,103 GROSS PROFIT* ($ millions) $1,948 $1,555 2017 2018 2019 2020 2021 Strategic Context As a reminder, our long-term vision is to become the leader across the entire advisor-centered marketplace. For us, this means being the best at empowering advisors to deliver advice to their clients and be great operators of their business. Doing this well gives us a sustainable path to industry leadership across advisor experience, organic growth, and market share. To execute on our strategy, we have organized our work into four strategic plays, which not only serve as an execution framework, but also provide color on where and how we’re investing. A Message from the President & CEO, continued LPL 2021 Annual Report STRATEGIC PLAY 1 Meeting advisors where they are in the evolution of their business In 2021, we remained focused on winning in our traditional independent and institutional markets, while also leveraging new affiliation models to expand our addressable markets to ~$26 trillion*. In addition, ongoing enhancements to our platform and the efficacy of our Business Development team continued to increase our win rates and expand the depth and breadth of our pipeline. With respect to our new affiliation models—Strategic Wealth, Employee, and an enhanced RIA custody offering—we recruited approximately $89 billion of assets in 2021. In each of these models, we continue to see growing demand and expanding pipelines, which position them for increased contributions to organic growth. Additionally, large ﬁnancial institutions served as a new source of recruiting, and demand and pipeline in this market has continued to build. NUMBER OF ADVISORS** 19,876 16,109 16,464 17,287 15,210 2017 2018 2019 2020 2021 STRATEGIC PLAY 2 Providing capabilities that help advisors differentiate and win their clients. With that in mind, over the past two years we have transformed our service model into an omni-channel client care model, including voice, chat, and digital support. As we move forward, we are continuing to ﬁne-tune our omni-channel model to drive additional efficiency and an enhanced experience for our advisors. STRATEGIC PLAY 4 Helping advisors run successful businesses The ﬁnal area we are investing is focused on helping advisors run the most successful businesses in the independent marketplace. One of the key components of this play is our portfolio of Business Solutions, which helps advisors more effectively operate their businesses, so they can focus on serving their clients and grow their practices—for example, CFO, CMO, and Admin Solutions. Over 2021, Business Solutions continued to demonstrate a strong value proposition, more than doubling our subscription base year-over- year to approximately 3,000 subscriptions. EPS Prior to intangible Assets and Acquisition Costs2 $7.02 $6.46 $7.17 $560 $473 $460 NET INCOME* ($ millions) $5.33 $2.84 $439 $239 2017 2018 2019 2020 2021 We’re also focused on providing capabilities and solutions that help advisors differentiate in the marketplace and drive efficiency in their practices. This work is organized across three key areas: (cid:131) Enriching the end-client experience with expanded digital solutions that increase personalization and self-service (cid:131) Enhancing our wealth management platforms to help advisors provide their clients with differentiated advice, products, and pricing (cid:131) Advancing ClientWorks, our core operating platform, with additional digitized workﬂows to help advisors operate more efficiently and increase their scalability to serve more clients Lastly, while working with advisors on our evolving suite of Business Solutions, we also identiﬁed a new category of opportunity that will help advisors deliver comprehensive ﬁnancial advice and planning solutions more effectively. In that spirit, we’ve launched a paraplanning solution, and we’re incubating several additional solutions, including tax planning and high-net-worth services. We look forward to sharing more information with you about these capabilities over 2022. As we look ahead, we remain focused on executing our strategy to help our advisors and institutions differentiate and win in the marketplace. We believe that this will help us continue to increase our market leadership and drive long-term shareholder value. STRATEGIC PLAY 3 Creating an industry-leading service experience, at scale Thank you for investing in LPL. Sincerely, Sincerely Regarding the advisor service experience, our aspiration is deliver an industry-leading service model that delights advisors and Dan Arnold, President & CEO *Amounts shown in all charts are as of or for the indicated year ended. **Source: LPL estimates as of YE 2021, based on Cerulli Lodestar data. 2021 FINANCIAL HIGHLIGHTS CONSOLIDATED STATEMENTS OF INCOME DATA Total revenue (in thousands) 1 Total expense (in thousands) 1 Income before provision for income taxes (in thousands) 1 Net income (in thousands) 1 PER SHARE DATA Earnings per diluted share 1 EPS prior to amortization of intangible assets and acquisition costs 1, 2 Weighted average diluted shares outstanding (in thousands) 1 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DATA Cash and cash equivalents (in thousands) 3 Total assets (in thousands) 3 Total debt, net (in thousands) 3, 4 OTHER FINANCIAL AND OPERATING DATA Gross proﬁt (in thousands) 1, 5 EBITDA (in thousands) 1, 6 Number of advisors 3 Total advisory and brokerage assets (in billions) 3 Advisory assets (in billions) 3 Average number of full-time employees 1 2021 2020 2019 2018 2017 $ 7,720,830 $ 5,871,640 $ 5,624,856 $ 5,188,400 $ 4,281,481 $ 7,119,501 $ 601,329 $ 459,866 $ 5.63 $ 7.02 81,742 $ 5,245,567 $ 4,883,021 $ 4,595,763 $ 3,916,911 $ 626,073 $ 741,835 $ 592,637 $ 364,570 $ 472,640 $ 559,880 $ 439,459 $ 238,863 $ 5.86 $ 6.46 80,702 $ 6.62 $ 7.17 84,624 $ 4.85 $ 5.33 90,619 $ 2.59 $ 2.84 92,115 $ 495,246 $ 7,991,600 $ 2,814,044 $ 808,612 $ 590,209 $ 511,096 $ 811,136 $ 6,596,162 $ 5,880,238 $ 5,477,468 $ 5,358,751 $ 2,345,414 $ 2,398,818 $ 2,371,808 $ 2,385,022 $ 2,454,717 $ 2,103,308 $ 2,172,225 $ 1,947,670 $ 1,554,835 $ 936,431 19,876 $ 1,206.4 $ 643.2 5,283 $ 908,929 $ 1,032,949 $ 865,568 $ 593,959 17,287 $ 903.1 $ 461.2 4,560 16,464 $ 764.4 $ 365.8 4,327 16,109 $ 628.1 $ 282.0 4,007 15,210 $ 615.1 $ 273.0 3,469 1 Amounts shown are for the indicated year ended. 2 EPS prior to amortization of intangible assets and acquisition costs, a non-GAAP ﬁnancial measure, is deﬁned as adjusted net income, which is deﬁned as net income plus the after-tax impact of amortization of other intangibles and acquisition costs, divided by the weighted average number of diluted shares outstanding for the applicable period. We present adjusted net income and EPS prior to amortization of intangible assets and acquisition costs because we believe these metrics can provide investors with useful insight into our core operating performance by excluding non-cash items and acquisition costs that we do not believe impact our ongoing operations. Adjusted net income and EPS prior to amortization of intangible assets and acquisition costs are not measures of our ﬁnancial performance under GAAP and should not be considered as alternatives to net income, EPS or any other performance measure derived in accordance with GAAP. The following is a reconciliation of net income and EPS to adjusted net income and EPS prior to amortization of intangible assets and acquisition costs for the periods presented above: 3 Amounts shown are as of the indicated year ended. Total assets for periods prior to 2020 have not been updated to reﬂect investments in fractional shares held in customer brokerage accounts resulting from the dividend reinvestment program that the Company offers. 4 Corporate debt and other borrowings, net consists of our senior secured term loan, senior unsecured subordinated notes, and borrowings outstanding under our revolving credit facility and unsecured, uncommitted lines of credit, net of debt issuance costs and unamortized premiums. 5 Gross proﬁt, a non-GAAP ﬁnancial measure, is calculated as total revenue less advisory and commission expense and brokerage, clearing, and exchange expense. All other expense categories, including depreciation and amortization of property and equipment and amortization of other intangibles, are considered general and administrative in nature. Because our gross proﬁt amounts do not include any depreciation and amortization expense, we consider our gross proﬁt amounts to be non-GAAP ﬁnancial measures that may not be comparable to those of others in our industry. Below is a calculation of annual gross proﬁt for the periods presented above: 2021 2020 2019 2018 2017 Amount Per Share Amount Per Share Amount Per Share Amount Per Share Amount Per Share $460 $5.63 $473 $5.86 $560 $6.62 $439 $4.85 $239 $2.59 IN MILLIONS Total Revenue Advisory and commission expense Brokerage, clearing and exchange expense Gross proﬁt 2021 2020 2019 2018 2017 $7,721 $5,872 $5,625 $5,188 $4,281 5,180 86 3,697 3,388 71 64 3,178 63 2,670 57 $2,455 $2,103 $2,172 $1,948 $1,555 79 0.97 67 0.83 65 0.76 60 0.66 38 0.41 6 EBIDTA, a non-GAAP ﬁnancial measure, is deﬁned as net income plus interest expense on 76 0.93 - 0.00 - 0.00 - 0.00 - 0.00 (41) (0.51) (19) (0.23) (18) (0.21) (17) (0.19) (15) (0.16) borrowings, provision for income taxes, depreciation and amortization, and amortization of other intangibles. We present EBITDA because we believe that it can be a useful ﬁnancial metric in understanding our earnings from operations. EBITDA is not a measure of our ﬁnancial performance under GAAP and should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP. $574 $7.02 $521 $6.46 $607 $7.17 $482 $5.33 $262 $2.84 The following is a reconciliation of net income to EBITDA for the periods presented above: $ In millions, except per share data Net income / earnings per diluted share Amortization of other intangibles Acquisition costs Tax beneﬁt Adjusted net income* Diluted share count 82 81 85 91 92 *Adjusted net income / EPS prior to amortization of intangible assets and acquisition costs Numbers may be rounded to the nearest thousand, million, or billion. IN MILLIONS Net Income Interest expense on borrowings Provision for income taxes Depreciation and amortization Amortization of other intangibles 2021 $460 104 142 151 79 2020 $473 106 153 110 67 2019 $560 130 182 96 65 2018 $439 125 153 88 60 2017 $239 107 126 84 38 EBITDA $936 $909 $1,033 $866 $594 Numbers may be rounded to the nearest thousand, million, or billion. FORM 10-K LPL Financial Holdings Inc. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2021 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ☒ ☐ Commission File Number 001-34963 LPL Financial Holdings Inc. (Exact name of registrant as specified in its charter) (State or othett r jurisdiction of incoii rporation or organiza rr n tion) Delaware 20-3717839 (( ( I.R.S. Employer Identification No.) 4707 Executive Drive, San Diego, California dd (Address of Prinrr cipal Executive Offices) 92121 (Zip Code) (800) 877-7210 (Registrant rr ’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class ( ) Trading Symbol(s) g y g Name of Each Exchange on Which Registered g Common Stock — $0.001 par value per share LPLA The Nasdaq Global Select Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o No x Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or forff 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. YesYY x No o Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or forff to submit such files). Yes x No o such shorter period that the registrant was required Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer Non-accelerated filer x o Accelerated filer o Smaller reporting company Emerging growth company ☐ ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effeff ctiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. x Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes x No As of June 30, 2021, the aggregate market value of the voting stock held by non-affiliates of the registrant was $10.8 billion. For purposes of this information, the outstanding shares of Common Stock owned by directors and executive offiff cers of the registrant were deemed to be shares of the voting stock held by affiliate s. ff The number of shares of Common Stock, par value $0.001 per share, outstanding as of February 16, 2022 was 79,969,381. Portions of the definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders are incorporated by reference into Part III. DOCUMENTS INCORPORATED BY REFERENCE TABLE OF CONTENTS PART I Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1 Item 1A Risk Factors Item 1B Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 2 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 3 Item 4 Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Information about our Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART II Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Item 6 Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Glossary of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Business Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Our Sources of Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Significant Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Key Performance Metrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisitions, Integrations and Divestitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Economic Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt and Related Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contractual Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Critical Accounting Policies and Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 7A Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 8 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9A Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9B Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART III Item 10 Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 11 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 13 Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . Item 14 Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 15 Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 16 Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART IV Page 1 12 29 29 29 29 30 34 35 35 38 38 38 38 39 40 44 44 45 50 53 54 54 56 61 103 103 105 105 105 105 105 105 105 108 109 i WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly, and current reports, proxy statements and other informff Exchange Act of 1934, as amended (“Exchange Act”), with the Securities and Exchange Commission (“SEC”). Our SEC filings are available to the public on the SEC’s website at SEC.govg . ation required by the Securities We post the following filings to LPL.com 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. Copies of all such filings are available free of charge by request via email (investor.relations@lpl.com Street, 22nd Floor, Boston, MA 02109). The informat this Annual Report on Form 10-K. ), telephone ((617) 897-4574) or mail (LPL Financial Investor Relations at 75 State ion contained or incorporated on our website is not a part of @ p ff We may use our website as a means of disclosing material informat ion and for complying with our disclosure obligations under Regulation Fair Disclosure promulgated by the SEC. These disclosures are included on our website in the “Investor Relations” or “Press Releases” sections. Accordingly, investors should monitor these portions of our website, in addition to following the Company’s press releases, SEC filings, public conference calls and webcasts. ff When we use the terms “LPLFH”, “LPL”, “we”, “us”, “our” and “the Company”, we mean LPL Financial a Delaware corporation, and its consolidated subsidiaries, taken as a whole, unless the context otherwise Holdings Inc., indicates. tt tt ii SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Statements in Part 2, Item 7 - “Management’s Discussion and Analysis of Financial Conditiontt Operations” and other sections of this Annual Report on Form 10-K regarding: and Resultstt of • • • • the Company’s future financial and operating results, outlook, growth, plans, business strategies, liquidity and future share repurchases, including statements regarding future resolution of regulatory matters, legal proceedings and related costs; the Company’s future revenue and expense; future affiliat the expected onboarding of advisors, institutions, and assets in connection with our acquisition and recruitment activity; ion models and capabilities; ff • market and macroeconomic trends; • projected savings and anticipated improvements to the Company’s operating model, services and technologies as a result of its investments, initiatives, programs and/or acquisitions; expected impacts of the coronavirus disease 2019 (“COVID-19”) pandemic on the Company’s business; and any other statements that are not related to present facts or current conditions or that are not purely historical, constitute forward-looking statements. • • and its plans, estimates and These forward-looking statements are based on the Company’s historical performance expectations as of February 22, 2022. The words “anticipates,” “believes,” “expects,” “may,” “plans,” “predicts,” “will” and similar expressions are intended to identifyff 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 differe that could cause or contribute to such diffeff forward-looking statements, although not all forward-looking nt from those expressed or implied by forward-looking statements. Important factors rences include: rr ff ff • • • • • • changes in general economic and financial market conditions, including retail investor sentiment; changes in interest rates and fees payable by banks participating in the Company’s client cash programs, including the Company’s success in negotiating agreements with current or additional counterparties; the Company’s strategy and success in managing client cash program fees; fluctuations in the levels of advisory and brokerage assets, including net new assets, and the related impact on revenue; effects of competition in the financial services industry; the success of the Company in attracting and retaining financial advisors and institutions, and their ability to market effect ively financial products and services; ff ii • • • • • • • • • • • • ff ff ngs; ory organizations; of current, pending and future legislation, regulation and regulatory actions, including disciplinary whether retail investors served by newly-recruited advisors choose to move their respective assets to new accounts at the Company; changes in growth and profitability of the Company’s fee-based offeri ff the effect actions imposed by federal and state regulators and self-regulat the cost of settling and remediating issues related to regulatory matters or legal proceedings, including actual costs of reimbursing customers for losses in excess of our reserves; changes made to the Company’s services and pricing, including in response to competitive developments and current, pending and future legislation, regulation and regulatory actions, and the effect changes may have on the Company’s gross profit streams and costs; execution of the Company’s capital management plans, including its compliance with the terms of the Company’s amended and restated credit agreement (“Credit Agreement”) and the indentures governing the Company’s senior unsecured notes (the “Indentures”); the price, the availability and trading volumes of shares of the Company’s common stock, which will affect the timing and size of future share repurchases by the Company, if any; execution of the Company’s plans and its success in realizing the synergies, expense savings, service improvements or efficiencies plans and technology initiatives; the performance ff the Company’s ability to control operating risks, information technology systems risks, cybersecurity risks and sourcing risks; the effect ff the other factors set forth in Part I, “Item 1A. Risk Factors.” of third-party service providers to which business processes have been transitioned; expected to result from its investments, initiatives and acquisitions, expense s of the COVID-19 pandemic, including efforts to contain it; and that such ff ff ff ff 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 Annual Report on Form 10-K, 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 Annual Report on Form 10-K. iii Item 1. Business Overvirr ew PART I LPL serves the advisor-mediated advice marketplace as the nation’s largest independent broker-dealer, a leading investment advisory firm, and a top custodian. We support nearly 20,000 financial advisors, including advisors at approximately 800 institution-based investment programs and at approximately 500 registered investment adviser (“RIA”) firms nationwide, providing the front-, middle- and back-officeff growing market for comprehensive financial advice from an advisor. We offer technology, brokerage and advisory platforms, digital capabilities, clearing and compliance services, business solutions, and strategic growth resources to help our clients run their perfect practices. a customizable platform of integrated support our clients need to serve the large and ff We are steadfast in our commitment to the advisor-centered model and the belief that Americans deserve access to personalized guidance from a financial advisor. We believe advisors should have the freedom to manage their client relationships because they know their clients best. We believe investors achieve better outcomes when working with a financial advisor. We strive to make it easy for advisors to do what is best for their clients by promoting freedom and choice through access to a wide range of diligently evaluated non-proprietary products while protecting advisors and clients. We believe that we are the only company that offers comprehensive self-clearing services, and curated access to a wide range of non-proprietary products all delivered in an environment unencumbered by conflicts from product manufacturing, the unique combination of an integrated technology platform, underwriting, and market-making. ff f LPL Financial Holdings Inc., which is the parent company of our business, was incorporated in Delaware in 2005. The Company’s most significant wholly owned subsidiaries are described below: • • • • • • • LPL Holdings, Inc. is a direct subsidiary of LPL Financial Holdings Inc. and is an intermediate holding company of our business. LPL Financial LLC (“LPL Financial”) is a clearing broker-dealer and an investment adviser that clears and settles customer transactions. Fortigent Holdings Company, Inc. and its subsidiaries (“Fortigent”) provide solutions and consulting services to RIAs, banks and trust companies serving high-net-worth clients. LPL Insurance Associates, Inc. (“LPLIA”) operates as a brokerage general agency that offers disability insurance products and services. ff life and AWAA Subsidiary, Inc. is a holding company for AdvisoryWorld and Blaze Portfolioff AdvisoryWorld offers modeling, to both the Company’s advisors and external clients in the wealth management industry. Blaze provides an advisor-facing trading and portfolio rebalancing platform. technology products, including proposal generation, investment analytics and portfolio Systems LLC (“Blaze”). ff The Private Trust Company, N.A. (“PTC”) provides trust administration, investment management oversight and Individual Retirement Account (“IRA”) custodial services. LPL Employee Services, LLC is a holding company for Allen & Company of Florida, LLC (“Allen & Company”), an RIA. Our Strategy At LPL, our mission is to take care of our advisors, so they can take care of their clients. Our vision is to become the leader across the advisor-centered marketplace by empowering advisors to deliver great advice to their clients and be great operators of their businesses. In order to achieve this vision, our strategy is to meet advisors and institutions where they are in the evolution of their businesses, provide capabilities to help advisors different drive efficiency ff clients, and help advisors run the most successful businesses in the market. in their practices, create an industry-leading service experience that delights advisors and their iate and ff Our Business Advisor Relationships Our business is dedicated exclusively to our advisors; we are not a market-maker nor do we offer banking or underwriting services. We offeff independent financial advisors and financial institutions that we support to offeff investment r no proprietary products of our own, and, as a result, we enable the r their clients lower-conflict advice. ff 1 We work alongside advisors to navigate complex market and regulatory environments and strive to empower them to create the best outcomes for investors. In addition, we make meaningful investments in technology and services to support the growth, productivity and effiff ciency of advisors across a broad spectrum of business models as their practices evolve. Our advisors are a community of diverse, entrepreneurial financial services professionals who support approximately 7.2 million client accounts. They build long-term relationships with their clients in communities across the United States by guiding them through the complexities of investment decisions, retirement solutions, financial planning, and wealth management. Our services are designed to support the evolution of our advisors’ businesses over time and to adapt as our advisors’ needs change. We believe we offeff r a compelling economic value proposition to independent advisors, which is a key factor in our ability to attract and retain advisors and their practices. The independent channels pay advisors a greater share of advisory fees and brokerage commissions than the captive channels — generally 80-100% compared to 30-50% for captive channels. Our independent financial advisors are business owners who, unlike their captive counterparts, also have the opportunity to build equity in their own businesses. Furthermore, we believe that our technology and service platforms enable our advisors to operate their practices with a greater focus on serving investors at a lower cost than other independent advisors. We serve nearly 20,000 advisors that average over 20 years in the industry, which generally allows us to focus on supporting and enhancing our advisors’ businesses without needing to provide basic training or subsidizing advisors who are new to the industry. Our flexible business platform allows our advisors to choose the most appropriate business model to support their clients whether they conduct brokerage business, offer services on our corporate RIA platform, or provide fee-based services through their own RIA practices. brokerage and fee-based ff The majority of our advisors are independent practitioners who are primarily located in rural and suburban areas and, as such, are viewed as local providers of independent advice. Many of our advisors operate under their own business name, and we may assist these advisors with their branding, marketing and promotion and regulatory review. We also support advisors who are our employees through our independent employee advisor affiff liation model. Advisors licensed with LPL Financial as registered representatives and/or as investment advisory representatives are able to conduct both commission-based business on our brokerage platform and fee-based business on our corporate RIA platform, respectively. In order to be licensed with LPL Financial, advisors must be approved through our assessment process, which includes a review of each advisor’s education, experience and compliance history, among other factors. Approved advisors become registered with LPL Financial and enter into a representative agreement that establishes the duties and responsibilities of each party. Pursuant to the representative agreement, each advisor makes a series of representations, including that the advisor will disclose to all clients and prospective clients that the advisor is acting as LPL Financial’s registered representative or investment advisory representative, that all orders for securities will be placed through LPL Financial, that the advisor will sell only products that LPL Financial has approved, and that the advisor will comply with LPL Financial policies and procedures as well as securities rules and regulations. These advisors also agree not to engage in any outside business activity without prior approval from us and not to act in competition with us. LPL Financial also supports nearly 500 independent RIA firms that conduct their business through separate registered investment advisor firms (“Hybrid RIAs”) with over 5,400 advisors who conduct their advisory business through these separate entities, rather than through LPL Financial. Hybrid RIAs operate pursuant to the Investment Advisers Act of 1940, as amended (the “Advisers Act”), or their respective states’ investment advisory licensing rules. These Hybrid RIAs engage us for technology, clearing and custody services, as well as access to our investment platforms. Advisors associated with Hybrid RIAs retain 100% of their advisory fees, and in return, we charge separate fees for custody, trading, administrative and support services. In addition, some financial advisors associated with Hybrid RIAs carry their brokerage license with LPL Financial and access our fully-integrated brokerage platform under standard terms. We believe we are the market leader in providing support to over 2,800 financial advisors at approximately 800 financial institutions nationwide. The core capabilities of these institutions may not include investment and financial planning services, or they may find the technology, infrastructure and regulatory requirements of supporting such services to be cost-prohibitive. For these institutions, we provide their financial advisors with the infrastructure and services they need to be successful, allowing the institutions to focus more attention and capital on their core businesses. We also provide support to approximately 3,700 additional financial advisors who are affiliat insurance companies. These arrangements allow us to provide outsourced customized clearing, advisory platforms ed and licensed with ff 2 and technology solutions that enable the financial advisors at these insurance companies to offeff services to their client base in an effiff cient manner. r a breadth of Our Value Proprr osition We are dedicated to making it easy for advisors to do what is best forff platform enable us to provide advisors with the capabilities they need, and the service they expect, at a compelling price. We are dedicated to continuously improving the processes, systems and resources we leverage to meet these needs. their clients. Our scale and self-clearing ff We support our advisors by providing front-, middle- and back-offiff ce solutions through our distinct value proposition: integrated technology solutions, comprehensive clearing and compliance services, consultative practice management programs and training, business solutions and planning and advice services, and in-house research. The comprehensive and increasingly automated nature of our offering enables our advisors to focus on their clients while successfully and efficient ly managing the complexities of running their own practice. ff ff Integrated Technology Solutions tt We provide our technology and service to advisors through an integrated technology platform that is cloud-based and web-accessible. Our technology offerings are designed to permit our advisors to effeff ctively manage all critical aspects of their businesses in an efficient automate time-consuming processes, such as account opening and management, document imaging, transaction execution, and account rebalancing, in an effort manner while remaining responsive to their clients’ needs. We continue to to improve our advisors’ efficiency and accuracy. ff ff ff ff Comprehensive Clearing and Complill anii ce Services r a simplified We provide custody and clearing services for the majority of our advisors’ transactions, and seek to offeff and streamlined advisor experience with expedited processing capabilities. Our self-clearing platform enables us to control client data, more efficient ultimately enhance the service experience for our advisors and their clients. Our self-clearing platform also enables us to serve a wide range of advisors, including those associated with Hybrid RIAs. ly process and report trades, facilitate platform development, reduce costs and ff We continue to make substantial investments in our compliance function to provide our advisors with a strong framework through which to understand and operate within regulatory guidelines, as well as guidelines that we establish. Protecting the best interests of investors and our advisors is imperative to us. As the financial industry and regulatory environment evolve and become more complex, we have made a long-term commitment to enhancing our risk management and compliance structure, as well as our technology-based compliance and risk management tools, in order to further enhance the overall effect iveness and scalability of our control environment. ff Our team of risk and compliance employees assists our advisors through: • training and advising advisors on new products, new regulatory guidelines, compliance and risk management tools, security policies and procedures and best practices; advising on sales practice activities and facilitating the supervision of activities by branch managers; conducting technology-enabled surveillance of trading activities and sales practices; • • • monitoring of registered investment advisory activities for advisors on our corporate RIA platform; and • s and advising on how to strengthen compliance procedures. inspecting branch officeff Practice Management Programs rr and Training Our practice management programs are designed to help financial advisors in independent practices and financial institutions, as well as all levels of financial institution leadership, enhance and grow their businesses. Our experience gives us the ability to benchmark the best practices of successful advisors and develop customized recommendations to meet the specific needs of an advisor’s business and market, and our scale allows us to ff dedicate a team of experienced professionals to this effort. Our practice management and training services include: • • personalized business consulting that helps eligible advisors and program leadership enhance the value and operational efficiency of their businesses; ff advisory and brokerage consulting and financial planning to support advisors in growing their businesses through our broad range of products and fee-based offerings and wealth management services; ff • marketing strategies, including campaign templates, to enable advisors to build awareness of their services and capitalize on opportunities in their local markets; 3 • • • succession planning and an advisor loan program for advisors looking to either sell their own or buy another practice; transition services to help advisors establish independent practices and migrate client accounts to us; and in-person and virtual training and educational programs on topics including technology, use of advisory platforms and business development. Business Solutions tt and Planning and Advice Services LPL Business Solutions provides business support to advisors in areas critical to the operation of their practices, such as marketing, accounting and transaction support. The LPL Business Solutions portfolio includes professional services and business optimizer offeri ngs, including CFO Solutions, Marketing Solutions, and Admin Solutions, are digital and employee-powered solutions that provide practice management expertise to increase practice-level growth and operational effici Solutions, Remote Officff e Solutions, Resilience Plans and Assurance Plans, are digital solutions that provide risk mitigation and business continuity services to support practice operations and succession planning. ngs. Professional services offeri ency. Business optimizer offeri ngs, including M&A ff ff ff ff Planning and Advice Services were launched in January of 2022 to enhance and expand our different portfolio in support of our vision to become the leader across the advisor-centered marketplace. The focus of Planning and Advice Services is helping advisors deliver comprehensive advice and creating advice capacity. We are expanding our portfolio of services to address new advisor needs while also enhancing our existing solutions to deliver an industry-leading customer experience. iated services ff In-House Research We provide our advisors with integrated access to comprehensive research on a broad range of investments and market analysis on macro-economic events, capital markets assumptions and strategic and tactical asset allocation. Our research team provides advice that is designed to empower our advisors to provide their clients with thoughtful advice in a timely manner, including the creation of discretionary portfolios for which we serve as a portfolio manager, available through our turnkey advisory asset management platforms. with our product risk management group to review the financial products offered includes third-party asset manager search, selection and monitoring services for both traditional and alternative strategies across all investment access points (exchange-traded funds, mutual funds, separately managed accounts, unified managed accounts and other products and services). We believe not providing proprietary products or investment banking services better enables us to provide research that is unbiased. Our research team actively works through our platforms. This ff ff Our Prorr duct and Solutiontt Access We do not manufacture any financial products. Instead, we provide our advisors with curated access to a broad range of commission, fee-based, cash and money market products and services. The sales and administration of these products are facilitated through our technology solutions, which allow our advisors to access client accounts, product information, asset allocation models, investment recommendations, and economic insight, as well as to performff trade execution. Commission-Based Productstt Commission-based products include those for which we and our advisors receive an upfront commission and, for certain products, a trailing commission. Our brokerage offerings ff equities, fixed income, alternative investments, retirement and 529 education savings plans and insurance. We regularly review the structure and fees of our commission-based products in the context of retail investor preferences and the changing regulatory environment, as well as the competitive landscape. As of December 31, 2021, the total brokerage assets in commission-based products were $$563.2 bil include variable and fixed annuities, mutual funds, lion . Fee-Based Platforms ff u and Support LPL Financial has various fee-based platforms that provide centrally managed or customized solutions from which advisors can choose to meet the investment needs of their clients, including wrap-fee programs, mutual fund asset allocation programs, an advisor-enhanced digital advice program, advisory programs offered investment advisor firms, financial planning services and retirement plan consulting services. The fee structure of our platforms enables our advisors to provide their clients with higher levels of service, while establishing a recurring revenue stream for the advisor and for us. Our fee-based platforms provide access to mutual funds, exchange- traded funds, stocks, bonds, certain option strategies, unit investment trusts and institutional money managers and by third-party ff 4 no-load multi-manager variable annuities. As of December 31, 2021, the total advisory assets under custody in these platforff ms, through both our corporate RIA platform and Hybrid platform, were $$643.2 bil lion . Client Cash Programs ff insured bank sweep vehicles and money market programs, which enable our advisors to manage their We offer clients’ cash balances. As of December 31, 2021, the total assets in our client cash programs, which are held within advisory and brokerage accounts, were $$57.3 bil lion . tt Other Services We provide a number of tools and services that enable advisors to maintain and grow their practices. Through our subsidiary PTC, we provide custodial services to trusts for estates and families. Under our model, an advisor may provide a trust with investment management services, while administrative services for the trust are provided by PTC. We also offeff brokerage services, consultation and advice to retirement plan sponsors using LPL Financial. We offeff generation, investment analytics and portfolio modeling capabilities to both our advisors and external clients in the wealth management industry and provide an advisor-facing trading and portfolio rebalancing platform. r retirement solutions for commission- and fee-based services that allow advisors to provide r proposal Our Financial Model Our overall financial performance ff is a function of the following: • Our revenue stems from diverse sources, including advisor-generated advisory and commission fees, as well as other asset-based fees from product sponsors, recordkeeping, networking services, client cash balances, service and fee revenue, transaction revenue and revenue for other ancillary services that we provide. Revenue is not concentrated by advisor, product or geography. For the year ended December 31, 2021, no single relationship with our independent advisor practices, banks, credit unions or insurance companies accounted for more than 2% of our advisory and commission revenue, and no single advisor accounted for more than 1% of our advisory and commission revenue. • • The largest variable component of our cost base, advisor payout percentages, is directly linked to revenue generated by our advisors. A portion of our revenue is not asset-based or correlated with the equity financial markets. Service and fee revenue includes service solutions, IRA custodian fees, contract and licensing fees, and other client account fees. Service and fee revenue from Business Solutions is based on recurring subscription fees. We charge separate fees to RIAs for technology, clearing, administrative, oversight and custody services, which may vary. In addition, we host certain advisor conferences that serve as training, education, sales and marketing events for which we charge sponsors a fee. • Our operating model is scalable and is capable of delivering expanding profit margins over time. • We have managed our capital requirements and expenditures such that we have been able to both invest in our business and return capital to shareholders. Our Competitive Strengths Market Leadersh dd ip Position and Significff ant Scale We are the established leader in the independent advisor market, which is our core business focus. We use our scale and position as an industry leader to champion the independent business model and the rights of our advisors and their clients. Our scale enables us to benefit from the following dynamics: • • • Continual tt management support, which further improves the productivity of our advisors. — We actively reinvest in our comprehensive technology platform and practice Reinvestment tt Economies of Scale — As one of the largest distributors of financial products in the United States, we have been able to obtain attractive economics from product sponsors. Payout Rates to Advisors — As one of the largest U.S. broker-dealers by number of advisors, we believe that we offer our advisors the highest average payout rates in our industry. ff The combination of our ability to reinvest in our business and maintain highly competitive payout rates has enabled us to attract and retain advisors. This, in turn, has driven our growth and led to a continuous cycle of reinvestment that reinforces our established scale advantage. ff 5 Comprehensive Solutions We differentiate through the combination of our capabilities across research, technology, risk management, and practice management. LPL makes meaningful investments to support the growth, productivity and effici advisors across a broad spectrum of models as their practices evolve. Our focus is working alongside advisors to navigate complex environments in order to create the best outcomes for their clients. ency of ff r a compelling value proposition to independent financial advisors and financial institutions. This We believe we offeff value proposition is built upon the delivery of our services through our scale, independence, and integrated technology, the sum of which we believe is not replicated in the industry. As a result, we believe that we do not have any direct competitors that offer our business model at the scale at which we offer not have any proprietary manufactu ff management products and other financial products as direct competitors. red financial products, we do not view firms that manufacture it. For example, because we do asset ff ff ff We provide comprehensive solutions to financial institutions, such as regional banks, credit unions, and insurance companies that seek to provide a broad array of services for their clients. We believe many institutions find the technology, infrastructure, and regulatory requirements associated with delivering financial advice to be cost- prohibitive. The solutions we provide enable financial advisors at these institutions to deliver their services on a cost-effective basis. Flexibi liii ty of Our Busines ii ii s Model Our business model allows our advisors the freedom to choose how they conduct their business, subject to certain regulatory parameters, which has helped us attract and retain advisors from multiple channels, including wirehouses, regional broker-dealers and other independent broker-dealers. Our platform can accommodate a variety of independent advisor business models, including independent financial advisors and RIAs, as well as employee advisors. The flexibility of our business model enables our advisors to select their preferred affiliat ion model and product mix as their business evolves and preferences change within the market or their client base all within an environment that allows that evolution with minimal interruption for their business and their clients. ff In addition, our business model provides advisors with a multitude of customizable service and technology offerings that allow them to increase their efficiency , focus on their clients and grow their practice. For example, LPL Business Solutions provides business support to advisors in areas critical to the operation of their practices, such as marketing, accounting and transaction support. ff ff Our Sources of Growth Increasingii Produ rr ctivityvv xx of Existi ngii ii Advisor Base We believe the productivity of our advisors has the potential to increase over time as we continue to develop solutions designed to enable them to add new clients, manage more of their clients’ investable assets, and expand their existing practices with additional advisors. We expect to facilitate these productivity improvements by helping our advisors better manage their practices in an increasingly complex external environment, which we believe has the potential to result in the assets per advisor growing over time. Business Solutions and Planning and Advice Services are a source of organic growth as a larger share of advisors adopts these service solutions. Attractingii New Assets to Our Platfo ll rm We intend to grow the assets served by our platforff m across traditional markets and through new affiff liation models. Ongoing investment in and enhancement to our platform and support teams is leading to increased win rates and an expanded pipeline. We are also experiencing strong momentum from our new advisor affiliat ion models, which are attracting prospects. Finally, we have opened up a new market with our newest large financial institution affilff iation model. The relationships with M&T Bank Corporation (“M&T Bank”) and BMO Harris Financial Advisors (“BMO Harris”) that we began during 2021, the expected onboarding of CUNA Brokerage Services, Inc. (“CBSI”), and the related investments in the institutional platform are generating interest from new institutional clients. ff Competition We compete with a variety of financial firms to attract and retain experienced and productive advisors. These financial firms operate in various channels and markets: • Within the independent broker-dealer channel, the industry is highly fragmented and comprised primarily of regional firms that rely on third-party custodians and technology providers to support their operations. 6 • Wirehouses tend to consist of large nationwide firms with multiple lines of business that have a focus on the highly competitive high-net-worth investor market. • • Competition for advisors also includes regional firms that primarily focus on specific client niches or geographic areas. Independent RIA firms, which are registered with the SEC or through their respective states’ investment advisory regulator and not through a broker-dealer, may choose from a number of third-party firms to provide custodial services. Our advisors compete for clients with financial advisors of brokerage firms, banks, insurance companies, asset management, and investment advisory firms. In addition, they also compete with a number of firms offering to-investor online financial services and discount brokerage services. ff direct- Human Capital Our success depends on our ability to attract, hire, retain and develop highly-skilled professionals in a variety of specialties, including finance, technology, compliance, business development, cybersecurity and management. Workforcerr As of December 31, 2021, we had approximately 5,900 full-time employees. Talent Management and Culture Due to the complexity of our business, we compete for talent with other companies, both inside and outside of our industry, and in multiple geographical areas in the United States. In 2021, our human capital efforts further developing our culture of service that emphasizes taking care of our advisors, so they can take care of their clients. To that end, we seek employees who are approachable, proactive, collaborative, agile and innovative, and who share our commitment to excellence, integrity and service. focused on ff Compensationtt and Benefitsff ff that is committed to our culture, we strive to offer To maintain a high-caliber, values-driven workforce including compensation, benefits and recognition programs that position our company as an employer of choice. Our compensation is designed to be performance based and competitive in the markets in which we compete. We closely monitor industry trends and practices to ensure we are able to attract and retain the personnel who are critical to our success. We also monitor internal pay equity to help ensure that our compensation practices are fair and equitable across our organization. Our company’s senior leaders have an opportunity to receive a portion of their compensation in Company equity, and, subject to a cap, we match the contributions of all of our employees to our retirement savings plan to help support their long-term financial goals. We also offeff purchase plan that enables eligible employees to acquire an ownership interest in our company at a discount to prevailing market prices. r an employee stock total rewards, ff ff To help our employees feel supported, we offer an array of benefits intended to meet the diverse needs of our employees and their eligible dependents. From healthcare to holidays, our aim is to help our employees enjoy happy and healthy lifestyles, while maintaining good work-life balance. Our benefits, which are overseen by our Total Rewards team in partnership with our Corporate Communications, Finance, Payroll, and Human Capital teams, are available to all full-time employees and part-time employees working at least 30 hours per week. Our benefits packages are comprehensive and available to over 99% of our workforce. Our health and welfare benefits include, among other things: medical coverage; dental and vision coverage; healthcare and dependent-care flexible spending accounts, Health Savings Accounts, the LPL Live Well employee wellbeing program, an Employee Assistance Program, including counseling and work/life services for employees and their families; accident and critical illness coverage; lifef and accidental death and dismemberment insurance, as well as short-term and long- term disability insurance; and an on-site cafeteria. ff Training and Development We believe in our employees’ potential and provide training and development opportunities intended to maximize ff their performance work, we provide a robust new-hire experience, as well as extensive ongoing training for our employees to acquaint and professional growth. To ensure that new employees integrate into our culture and their daily 7 them with our business. We require all of our employees to complete courses in key regulatory areas, such as insider trading and anti-money laundering compliance, and we offer opportunities for professional development through training sessions and cross-departmental workshops. In addition, we have a mentorship program that pairs newer employees with more experienced professionals, giving mentees access to experience, expertise and guidance as they chart their career paths. ff Employee Safetyt We aim to provide a safe, inclusive environment for our employees where they feel engaged in our business, supported in who they are and empowered to succeed. We are committed to providing a workplace that is free from violence, harassment and other unsafe or disruptive conditions and require our personnel to attend regular training sessions and workshops on those topics. To promote safety during the COVID-19 pandemic, starting in March 2020, we expanded our work-from-home policy that enables our employees to work remotely. For our essential workers, we introduced additional hospital-grade disinfectants and maximized outdoor air intake and air filtration. We adopted a Te Po ylicy that provides all workers with up to 14 fsufffer fff protocol, which now fofffers g challenges, employee-t established the LPL CCare Fund, an and unavoidable ffinancial hardships as a result mporary COCOVID-19 SSick Time yhey are sick an /d/or have COCOVID, so th yey do not te when ill. We also extended our Leaves fof Absence ydaycare o-employee rel fof a natural disaster or epidemic yby pro learning ffor their children and dependents. In addition, the LPL Financial Foundation personal leaves fof absence to support emp yloyees with mental health concerns, gwage loss due to an absence, and so th yey remain fofff-si facing unexpected f ief ffund created to help employees facing and/or distance tax-free ggrants. y viding g ydays fof ffull ypay fif t g y y y / fff f fff Diversity,t Equityt and Inclusion We believe that well-being is more than just physical safety and that our employees should feel welcome and supported as who they are. We seek to foster diversity and a culture of inclusivity. Our employee-led resource groups focus on the needs, concerns and experiences of various diverse groups and help leaders drive business outcomes. In addition, our professional s have focused on improving the diversity development and recruitment effort of our employee population, including through targeted outreach to and collaborations with organizations that serve diverse populations. ff ff Continuous improvement is a pillar of our culture, and we regularly solicit employee feedback on the effecti and quality of our support programs and their level of engagement with our business. We use this feedback to improve our programs and processes and informff decisions about our business. In addition, we closely monitor employee turnover, both in the aggregate and in key subcategories such as diversity and levels in the Company, to evaluate our effeff ctiveness in retaining critical personnel. veness ff We are committed to an inclusive work environment to encourage and cultivate diversity of thought and ideas within the Company. We sponsor Employee Resource Groups to leverage the individual talents, perspectives and experiences of our employees to position us for continued growth and success. Regulation ff b to extensive regulation by U.S. federal, state, and international government The financial services industry is subject agencies as well as various self-regulat ory organizations. We seek to participate in the development of significant rules and regulations that govern our industry. We have been investing in our compliance functions to monitor our adherence to the numerous legal and regulatory requirements applicable to our business. Compliance with all applicable laws and regulations, only some of which are described below, involves a significant investment in time and resources. Any new laws or regulations applicable to our business, any changes to existing laws or regulations, or any changes to the interpretations or enforff cement of those laws or regulations may affeff ct our operations and/or financial condition. Broker-Dealer Regulatioll n LPL Financial is a broker-dealer registered with the SEC, a member of the Financial Industry Regulatory Authority (“FINRA”) and other self-regulatory organizations, and a participant in various clearing organizations including the Depository Trust Company, the National Securities Clearing Corporation, and the Options Clearing Corporation. LPL Financial is registered as a broker-dealer in each of the 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. The rules of the Municipal Securities Rulemaking Board, which are enforced by the SEC and FINRA, apply to the municipal securities activities of LPL Financial. ff 8 ff ngs, publication of research reports, use and safekeeping of clients’ funds and Broker-dealers are subject to rules and regulations covering all aspects of the securities business, including sales and trading practices, public offeri securities, capital adequacy, recordkeeping and reporting, the conduct of directors, offiff cers and employees, qualification and licensing of supervisory and sales personnel, marketing practices, supervisory and organizational procedures intended to ensure compliance with securities laws, and to prevent improper trading on material nonpublic informat ion, limitations on extensions of credit in securities transactions, clearance and settlement procedures, and rules designed to promote high standards of commercial honor and just and equitable principles of trade. Broker-dealers are also subject to state securities laws and regulated by state securities administrators in those jurisdictions where they do business. Applicable laws, rules, and regulations may be subject to varying interpretations and change from time to time. ff Regulators make periodic examinations and inquiries of us and review annual, monthly, and other reports on our operations and financial condition. Regulatory actions brought against us alleging violations of applicable laws, rules, and regulations could result in censures, penalties and fines, settlements, disgorgement of profits, restitution to customers, remediation or the issuance of cease-and-desist orders. Such actions could also result in the restriction, suspension or expulsion from the securities industry of us or our financial advisors, officers employees. We also may incur substantial expenses, damage to our reputation, or similar adverse consequences in connection with any such actions by the SEC, FINRA, the U.S. Department of Labor (“DOL”) or state securities regulators, regardless of the outcome. or ff LPL Financial’s margin lending is regulated by the Federal Reserve Board’s restrictions on lending in connection with client purchases and short sales of securities, and FINRA rules also require LPL Financial to impose maintenance requirements based on the value of securities contained in margin accounts. In many cases, our margin policies are more stringent than these rules. On June 30, 2020, the SEC’s new standard of conduct applicable to retail brokerage accounts (“Reg BI”) became applicable. Reg BI requires that broker-dealers act in the best interest of retail customers without placing their own financial or other interests ahead of the customer’s and imposes new obligations related to disclosure, duty of care, conflicts of interest and compliance. Certain state securities and insurance regulators have also adopted, proposed or are considering adopting similar laws and regulations. On December 18, 2020, the DOL finalized a new Prohibited Transaction Exemption 2020-02 (“PTE 2020-02”) that expands instances where an investment advice fiduciary can receive additional compensation on transactions as a result of fiduciary recommendation to a plan covered by the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), IRA or other account covered by Section 4975 of the Internal Revenue Code of 1986, as amended (the “Code”). Compliance with these provisions has increased our compliance costs. Moreover, to the extent new rules or regulations affect operations, financial condition, liquidity and capital requirements of financial institutions with which we do business, those institutions may seek to pass on increased costs, reduce their capacity to transact, or otherwise present inefficiencies examinations and enforcement on us, the financial industry and the economy cannot be known at this time. It is unclear how and whether other regulators, including banking regulators, and state securities and insurance regulators, may respond to or attempt to ff enforce in their interactions with us. As industry compliance practices and regulatory approaches to guidance, continue to develop, the ultimate impact that these new rules or regulations will have similar issues addressed by Reg BI and PTE 2020-02. the ff ff ff Investment Advisovv ll r Regulation As investment advisors registered with the SEC, our subsidiaries LPL Financial, Allen & Company and Fortigent, LLC are subject to the requirements of the Advisers Act, and the regulations promulgated thereunder, including examination by the SEC’s staff.ff Such requirements relate to, among other things, fiduciary duties to clients, performance advertising, limitations on agency cross and principal transactions between the advisor and advisory clients, recordkeeping and reporting requirements, disclosure requirements, and general anti-fraud provisions. ive compliance program, solicitation arrangements, conflicts of interest, fees, maintaining an effect ff ff The SEC is authorized to institute proceedings and impose sanctions for violations of the Advisers Act and associated regulations. Investment advisors also are subject to certain state securities laws and regulations. Failure to comply with the Advisers Act or other federal and state securities laws and regulations could result in investigations, censures, penalties and fines, settlements, disgorgement of profits, restitution to customers, remediation, the issuance of cease-and-desist orders or the termination of an investment advisor’s registration. We also may incur substantial expenses, damage to our reputation or similar adverse consequences in connection with such actions, regardless of the outcome. 9 Retiremen ii t Planll Services Regulatioll n Certain subsidiaries, including LPL Financial, LPL Employee Services, LLC, PTC, Fiduciary Trust Company of New Hampshire and LPLIA, are subject to ERISA, and Section 4975 of Code, and to regulations promulgated under ERISA or the Code, insofarff as the subsidiaries provide services with respect to plan clients, or otherwise deal with plan clients, plan participants and retirement, health and educational accounts that are subject to ERISA or Section 4975 of the Code. ERISA imposes certain duties on persons who are “fiduciaries” (as defined in Section 3(21) of ERISA) and prohibits certain transactions involving plans subject to ERISA and fiduciaries or other service providers to such plans. Non-compliance with or breaches of these provisions may expose an ERISA fiduciary or other service provider to liability under ERISA, which may include monetary and criminal penalties as well as equitable remedies for the affecte in Section 4975(e)(1), which include, for example, IRAs and certain Keogh plans) and service providers, including fiduciaries (as defined in Section 4975(e)(3)), to such plans. Section 4975 imposes excise taxes for violations of these prohibitions. d plan. Section 4975 of the Code prohibits certain transactions involving “plans” (as defined ff ff reinstated its “five-part test” defining fiduciary “investment advice” under ERISA On June 29, 2020, the DOL officially and the Code (the “Five-Part Test”). Under this test, providing non-discretionary investment advice or recommendations with respect to a covered account can cause a person to be a fiduciary under ERISA and/or the Code if the advice is provided for a fee, on a regular basis, and subject to a mutual understanding that the advice will be personalized to the needs of the advice recipient and used as a primary basis for an investment decision. This action formally implemented the Fifth Circuit’s decision in 2019 to vacate the DOL’s 2016 “fiduciary rule,” which had significantly expanded the scope of activities that could otherwise result in fiduciary status under ERISA and Section 4975 of the Code. On December 18, 2020, the DOL finalized PTE 2020-02, providing broad exemptive relief for receiving variable or transaction-based compensation, and certain other “prohibited transactions,” in connection with fiduciary investment advice to investors using covered accounts. The preamble to this exemption also included the DOL’s new and expanded interpretation of when providing a rollover recommendation (or potentially other recommendations) could result in fiduciary status under the historic Five-Part Test. This new interpretation, as well as other guidance issued by the DOL in connection with this interpretation, is the subject b challenging the DOL’s authority to issue it. We operate our business in compliance with a number of DOL prohibited transaction exemptions, including PTE 2020-02, where applicable. However, as industry compliance practices and regulatory approaches to guidance, examinations and enforcement continue to develop, and the outcomes of ff litigation remain pending, the ultimate impact that these new rules or regulations will have on us, the financial industry and the economy cannot be known at this time. In addition, it is unclear how and whether the DOL and other regulators, including the SEC, FINRA, banking regulators, and the state securities and insurance regulators may respond to, or enforce elements of the Five Part Test and PTE 2020-02 rules or interpretations. of multiple litigations in federal district courts ff The DOL issued a new exemption for “fiduciary” investment advice under ERISA and Section 4975 of the Code with a compliance date of February 1, 2022. The DOL also signaled its intent to further amend the definition of “fiduciary” under ERISA and the Code and certain of its existing prohibited transaction exemptions, which we expect, if completed, to result in increased legal, compliance, information technology and other costs and could lead to a greater risk of client lawsuits and enforcement of any future DOL regulations and changes on our retirement plan business cannot be anticipated or planned for but may have further impacts on our products and services and results of operations. activity by the DOL and other regulators. The effect ff ff Commodities and Futures Regulation ll LPL Financial is registered as an introducing broker with the Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association (“NFA”). products to ADM Investor Services, Inc. (“ADM”), and all commodities accounts and related client positions are held by ADM. LPL Financial is regulated by the CFTC and the NFA.FF Violations of the rules of the CFTC and the NFAFF could result in remedial actions including fines, registration terminations or revocations of exchange memberships. LPL Financial introduces commodities and futures FF Trust Regulation ll ff trust, investment management oversight and custodial services for estates Through our subsidiary, PTC, we offer and families. PTC is chartered as a non-depository national banking association. As a limited purpose national bank, PTC is regulated and regularly examined by the Officeff of the Comptroller of the Currency (“OCC”). PTC files reports with the OCC within 30 days after the conclusion of each calendar quarter. Because the powers of PTC are limited to providing fiduciary services and investment advice, it does not have the power or authority to accept deposits or make loans. For this reason, trust assets under PTC’s management are not insured by the FDIC. 10 Because of its limited purpose, PTC is not a “bank” as defined under the Bank Holding Company Act of 1956. Consequently, neither its immediate parent, PTC Holdings, Inc., nor its ultimate parent, LPLFH, is regulated by the Board of Governors of the Federal Reserve System as a bank holding company. However, PTC is subject to regulation by the OCC and to various laws and regulations enforced of control restrictions and regulations governing fiduciary duties, conflicts of interest, self-dealing laundering. For example, the Change in Bank Control Act of 1978, as implemented by OCC supervisory policy, imposes restrictions on parties who wish to acquire a controlling interest in a limited purpose national bank such as PTC or the holding company of a limited purpose national bank such as LPLFH. In general, an acquisition of 10% or more of our common stock, or another acquisition of “control” as defined in OCC regulations, may require OCC approval. These laws and regulations are designed to serve specific bank regulatory and supervisory purposes and are not meant for the protection of PTC, PTC Holdings, Inc., LPLFH, or their stockholders. by the OCC, such as capital adequacy, change , and anti-money ff ff ll Regulatory Capital Requirements The SEC, FINRA, the CFTC, and the NFAFF have stringent rules and regulations with respect to the maintenance of specific levels of net capital by regulated entities. The net capital rule under the Exchange Act requires a broker- dealer to maintain a minimum net capital and applies certain discounts to the value of its assets based on the liquidity of such assets. LPL Financial is also subject to the NFAFF ’s financial requirements and is required to maintain net capital that is in excess of or equal to the greatest of the NFA’FF s minimum financial requirements. Under these requirements, LPL Financial is currently required to maintain minimum net capital that is in excess of or equal to the minimum net capital calculated and required pursuant to the Exchange Act’s net capital rule. The SEC, FINRA, the CFTC, and the NFAFF impose rules that require notification when net capital falls below certain predefined criteria. These broker-dealer capital rules also dictate the ratio of debt to equity in regulatory capital composition and constrain the ability of a broker-dealer to expand its business under certain circumstances. If a broker-dealer fails to maintain the required net capital, then certain notice requirements to the regulators are required, and the broker-dealer may be subject to suspension or revocation of registration by the applicable regulatory agency, and suspension or expulsion by these regulators ultimately could lead to the broker-dealer’s liquidation. Additionally, the net capital rule and certain FINRA rules impose requirements that may have the effect of ff prohibiting a broker-dealer from distributing or withdrawing capital and require prior notice to the SEC and FINRA for certain capital withdrawals. LPL Financial, which is subject to net capital rules, has been and currently is in compliance with those rules and has net capital in excess of the minimum requirements. b Anti-Money Launderinrr g and Sanctions Complianll ce The USA PATRAA IOT Act of 2001, which amended the Bank Secrecy Act, contains anti-money laundering and financial transparency laws and mandates the implementation of various regulations applicable to broker-dealers, futures commission merchants, and other financial services companies. Financial institutions subject to these requirements generally must have an anti-money laundering program in place, which includes monitoring for and reporting suspicious activity, implementing specialized employee training programs, designating an anti-money laundering compliance officer addition, sanctions administered by the United States Offiff ce of Foreign Asset Control prohibit U.S. persons from doing business with blocked persons and entities or certain sanctioned countries. We have established policies, procedures and systems designed to comply with these regulations and work continuously to improve and strengthen our regulatory compliance mechanisms. , and annually conducting an independent test of the effecti veness of its program. In ff ff Securityt and Privacyc ff Regulatory activity in the areas of privacy and data protection continues to grow worldwide and is generally being driven by the growth of technology and related concerns about the rapid and widespread dissemination and use of ion. To the extent they are applicable to us, we informat must comply with federal and state informf ation-related laws and regulations in the United States, including the Gramm-Leach-Bliley Act of 1999, SEC Regulation S-P,P the Fair Credit Reporting Act of 1970, as amended, and Regulation S-ID as well as the California Consumer Privacy Act and further potential federal and state requirements. ion and general concerns about the security of that informat ff ff Trademarks Access Overlay®, BlazePortfolio®, BranchNet®, CLIENTWORKS®, Fortigent®, LPL®, LPL Career Match®, LPL Financial (& Design)®, Manager Access Network®, Manager Access Select®, OMP® and SPONSORWORKS® are our registered trademarks, and ADVISORYWO FLORIDA, LLC, and THE PRIVATVV E TRUST COMPANYPP RLD, CLIENTWORKS CONNECTED, ALLEN & COMPANYPP ,YY N.A. (& Design) are among our service marks. OF RR 11 Item 1A. Risk Factors Risk Factor Summary Our business, operations and financial results are subject providing the following summary of risk factors to enhance readability of our risk factor disclosure. Material risks that may adversely affect our business, operations and financial results include, but are not limited to, the following: to varying degrees of risk and uncertainty. We are b ff Risks Related to Our Business and Industryy • We depend on our ability to attract and retain experienced and productive advisors, and we are subject to competition in all aspects of our business. • Our financial condition and results of operations may be adversely affect ff ed by market fluctuations and other economic factors. • • Significant interest rate changes could affect ff our profitability and financial condition. Any damage to our reputation could harm our business and lead to a loss of revenue and net income. • Our business is subject to risks related to litigation, arbitration claims and regulatory actions. • There are risks inherent in the independent broker-dealer business model. • We rely on third-party service providers, including off-shore ff providers, to performff technology, processing and support functions, and our operations are dependent on financial intermediaries that we do not control. • Lack of liquidity or access to capital could impair our business and financial condition. • Our business could be materially adversely affecte ff d as a result of the risks associated with acquisitions and investments. • Our risk management policies and procedures may not be fully effecti ff ve in mitigating our risk exposure in all market environments or against all types of risks. • We face competition in attracting and retaining key talent. • The securities settlement process exposes us to risks related to adverse movements in price. • Our indebtedness could adversely affect ff our financial condition and may limit our ability to use debt to fund future capital needs. • • Restrictions under our Credit Agreement and the Indentures governing our senior unsecured notes (the “Notes”) may prevent us from taking actions that we believe would be in the best interest of our business. Provisions of our Credit Agreement and the Indentures could discourage an acquisition of us by a third- party. • Our insurance coverage may be inadequate or expensive. • • • • Poor service or performance such services or products may cause clients of our advisors to withdraw their assets on short notice. of the financial products that we offeff r or competitive pressures on pricing of ff ff rers of financial products could harm our relationship A loss of our marketing relationships with manufactu with our advisors and, in turn, their clients. Changes in U.S. federal income tax law could make some of the products distributed by our advisors less attractive to clients. fff The fefffect gglobal ffinancial markets, and material adverse fefffect economy and ymay disrupt our operations and our advisors' operations, which could have a on our business, ffinancial condition and results fof operations. s fof the outbreak fof COCOVID-19 have economy, SU.S. ed the gglobal ively fafffect gnegat y y y fff fff Risks Related to Our Regulatory Environment g y • • Any failure to comply with applicable federal or state laws or regulations exposes us to litigation and regulatory actions, which could increase our costs or negatively affect Regulatory developments could adversely affect business less profitable. our business by increasing our costs or making our our reputation. ff ff • We are subject to various regulatory requirements, which, if not complied with, could result in the restriction of the conduct or growth of our business. • Failure to comply with ERISA regulations and certain tax-qualified plan laws and regulations could result in penalties against us. 12 Risks Related to Our Technologygy • We rely on technology in our business, and technology and execution failures could subject us to losses, litigation and regulatory actions. • Our informat ff ion technology systems may be vulnerable to security risks. • • • • A cyber-attack or other security breach of our technology systems or those of our advisors or third-party vendors could subject us to significant liability and harm our reputation. Failure to comply with the complex privacy and data protection laws and regulations to which we are subject could result in adverse action from regulators. Failure to maintain technological capabilities, flaws in existing technology, difficult ies in upgrading our technology platforff m or the introduction of a competitive platforff m could have a material adverse effect business. ff ff on our Inadequacy or disruption of our business continuity and disaster recovery plans and procedures in the event of a catastrophe could adversely affect our business. ff Risks Related to Ownership of Our Common Stock p • The price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for our investors. • We are a holding company and rely on dividends, distributions and other payments, advances and transfers of funds from our subsidiaries to meet our debt service and other obligations. • Our future ability to pay regular dividends to holders of our common stock or repurchase shares are subject earnings and to the discretion of our board of directors and will be limited by our ability to generate sufficient cash flows. ff Risks Related to Our Business and Industry e We depend competition in allll aspects of our busines on our abilityll to attract and retain exper s. xx ii ienrr ced and prodrr uctivevv advisors, and we are subject to We derive a large portion of our revenue from commissions and fees generated by our advisors. Our ability to attract and retain experienced and productive advisors has contributed significantly to our growth and success, and our strategic plan is premised upon continued growth in the number of our advisors and the assets they serve. If we fail to attract new advisors or to retain and motivate our current advisors, replace our advisors who retire, or assist our retiring advisors with transitioning their practices to existing advisors, or if advisor migration away from wirehouses to independent channels slows, our business may suffer. The market for experienced and productive advisors is highly competitive, and we devote significant resources to attracting and retaining well-qualified advisors. In attracting and retaining advisors, we compete directly with a variety of financial institutions such as wirehouses, regional broker-dealers, banks, insurance companies and other independent broker-dealers. If we are not successful in retaining highly qualified advisors, we may not be able to recover the expense involved in attracting and training these individuals. There can be no assurance that we will be successful in our effort s to attract and retain the advisors needed to achieve our growth objectives. ff More broadly, we are subject to competition in all aspects of our business from: • • • • • • brokerage and investment advisory firms, including national and regional firms, as well as independent RIA firms; asset management firms; commercial banks and thrift institutions; insurance companies; other clearing/custodial technology companies; and investment firms offeff ring so-called “robo” advice solutions. Many of our competitors have substantially greater resources than we do and may offeff and financial products across more markets. Some of our competitors operate in a diffeff than we do, which may give them certain competitive advantages in the services they offer our competitors only provide clearing services and consequently would not have any supervision or oversight liability relating to actions of their financial advisors. We believe that competition within our industry will intensifyff as a r a broader range of services rent regulatory environment . For example, certain of ff 13 result of consolidation and acquisition activity and because new competitors face few barriers to entry, which could adversely affect our ability to recruit new advisors and retain existing advisors. ff If we fail to continue to attract highly qualified advisors, or if advisors licensed with us leave us to pursue other opportunities, we could face a significant decline in market share, commission and fee revenue or net income. We could face similar consequences if current or potential clients of ours, including current clients that use our outsourced customized clearing, advisory platforms or technology solutions, decide to use one of our competitors rather than us. If we are required to increase our payout of commissions and fees to our advisors in order to remain competitive, our net income could be significantly reduced. Our finanii other economic factors. cial condition and results of operatiorr ns may be adversel vv yl affeff cted by market fluctuations and Significant downturns and volatility in equity and other financial markets have had and could continue to have an adverse effect on our financial condition and results of operations. ff General economic and market factors can affect market levels or market volatility can: ff our commission and fee revenue. For example, a decrease in • • • reduce new investments by advisors’ new and existing clients in financial products that are linked to the equity markets, such as variable life insurance, variable annuities, mutual funds and managed accounts; reduce trading activity, thereby affect ff ing our brokerage commission revenue and our transaction revenue; reduce the value of advisory and brokerage assets, thereby reducing advisory fee revenue, trailing commission revenue and asset-based fee revenue; and • motivate clients to withdraw funds from their accounts, thereby reducing advisory and brokerage assets, advisory fee revenue and asset-based fee revenue. Other more specific trends may also affect changes in the mix of products preferred associated with such products depending on whether investors gravitate towards or away from such products. The timing of such trends, if any, and their potential impact on our financial condition and results of operations are beyond our control. our financial condition and results of operations, including, for example, by investors may result in increases or decreases in our fee revenue ff ff In addition, because certain of our expenses are fixed, our ability to reduce them in response to market factors over short periods of time is limited, which could negatively impact our profitability. Significff ant interesrr t rate changes could affeff ct our profrr itff abtt ilityt and financialii condition. Our revenue is exposed to interest rate risk primarily from changes in fees payable to us from banks participating in our client cash programs, which are generally based on prevailing interest rates. Our revenue from our client cash programs has declined in the past as a result of a low interest rate environment, and our revenue may decline in the future due to decreases in interest rates, decreases in client cash balances or mix shiftsff among the current or future bank sweep vehicles and money market programs that we offer . The Federal Reserve’s federal funds rate was near zero throughout 2021, and there is no assurance that it will not maintain a low-interest rate environment for a significant period of time. Our revenue from our client cash programs also depends on our success in placing deposits and negotiating favorable terms in agreements with third-party banks and money market fund providers participating in our programs, as well as our success in offeff ring competitive products, program fees and interest rates payable to clients. The expiration of contracts with favorable pricing terms, less favorable terms in future contracts, the inability to place deposits with third-party sweep banks, or changes in money market programs that we offer could result in declines in our revenue. A sustained low interest rate environment may also have a negative ff impact upon our ability to negotiate contracts with new banks or renegotiate existing contracts on comparable terms with banks participating in our client cash programs. If interest rates do not rise, or if balances or yields in our client cash programs decrease, future revenue from our client cash programs may be lower than expected. ff Any damage to our reputation could harm our busines ii s and lead to a loss of revenue and net income. We have spent many years developing our reputation for integrity and client service, which is built upon our support for our advisors through: enabling technology, comprehensive clearing and compliance services, practice management programs and training and in-house research. Our ability to attract and retain advisors and employees is highly dependent upon external perceptions of our level of service, business practices and financial condition. Damage to our reputation could cause significant harm to our business and prospects and may arise from numerous sources, including: 14 • • • • litigation or regulatory actions; failing to deliver acceptable standards of service and quality, including technology or cybersecurity failures; compliance failures; and unethical behavior and the misconduct of employees, advisors or counterparties. Negative perceptions or publicity regarding these matters could damage our reputation among existing and potential advisors and employees, and could lead advisors to terminate their agreements with us, which they generally have the right to do unilaterally upon short notice. Adverse developments with respect to our industry may also, by association, negatively impact our reputation or result in greater regulatory or legislative scrutiny or litigation against us. These occurrences could lead to loss of revenue and lower net income. Our business is subject to risks related ll i to litigatio n, arbirr tration claims and regulatory ll actions. From time to time, we have been subjected to and are currently subject to legal and regulatory proceedings arising out of our business operations, including lawsuits, arbitration claims, governmental subpoenas and regulatory, governmental and self-regulat well as other actions and claims. Many of our legal claims are initiated by clients of our advisors and involve the purchase or sale of investment securities, but other claims and proceedings may be, and have been, initiated by state-level and federal regulatory authorities and SROs, including the SEC, FINRA and state securities regulators. ory organization (“SRO”) inquiries, investigations and enforcement proceedings, as ff ff The outcomes of any such legal or regulatory proceedings, including inquiries, investigations and enforcement proceedings by the SEC, FINRA, DOL and state securities regulators, are difficult such a matter could result in substantial legal liability, censures, penalties and fines, disgorgement of profits, restitution to customers, remediation, the issuance of cease-and-desist orders, or injunctive or other equitable relief against us. Further, such negative outcomes individually or in the aggregate may cause us significant reputational harm and could have a material adverse effect on our ability to recruit or retain financial advisors, or our results of operations, cash flows or financial condition. to predict. A negative outcome in ff ff ff We may face liabilities for deficiencies or failures in our compliance systems and programs, as well as actual or alleged breaches of legal duties to our advisors’ clients, including in respect of issues related to the financial products we make available in our curated product platformff our advisors provide to their clients, which are subject to various standards of care, including in some cases fiduciary obligations. or the investment advice or securities recommendations In addition, the administration of client accounts involves functions such as recordkeeping and accounting, security pricing, corporate actions, and account reconciliations that are complex and rely on tools and resources to support these operational processes. Failure to properly performff these tools, could subject us to regulatory sanctions, penalties or litigation and result in reputational damage, and liability to clients. Moreover, new and developing state and federal regulatory requirements with respect to standards of care and other obligations, as discussed under “Risks Related to Our Regulatory Environment” below, may introduce new grounds for legal claims or enforcement actions against us in the future, including, in particular with respect to our brokerage services. We may also become subject to claims, allegations and legal proceedings related to employment matters, including wage and hour, discrimination or harassment claims, or matters involving others’ intellectual property or other proprietary rights, including infringement or misappropriation claims. operational tasks or errors in the design or function of ff There are risks inherent rr in the indepee ndentdd broker-dealdd er business model. Compared to wirehouses and other employee model broker-dealers, we generally offer operating their businesses with regard to product offeri supervisory models. Our approach may make it more challenging for us to comply with our supervisory and regulatory compliance obligations, particularly in light of our limited on-site supervision and the complexity of certain advisor business models. advisors wider choice in technology and ngs, outside business activities, officeff ff ff Misconduct and errors by our employees and our advisors could be diffiff cult for us to detect and could result in violations of law by us, regulatory sanctions, or serious reputational or financial harm. Although we have designed policies and procedures to comply with applicable laws, rules, regulations and interpretations, we cannot always prevent or detect misconduct and errors by our employees and our advisors, and the precautions we take to prevent and detect these activities may not be effect typically not our direct employees and some of whom tend to be located in small, decentralized offices, additional challenges, particularly in the case of complex products or supervision of outside business activities. In technology, we addition, although we provide our advisors with requirements and recommendations for their officeff cannot fully control or monitor the extent of their implementation of our requirements and recommendations. ive in all cases. Prevention and detection among our advisors, who are present ff ff 15 ff Accordingly, we cannot assure that our advisors’ technology meets our standards, including with regard to informat advisors will not lead to a material adverse effect sufficient ion security and cybersecurity. We also cannot assure that misconduct or errors by our employees or ff to cover such misconduct or errors. on our business, or that our errors and omissions insurance will be ff We rely on third-pa off-sh rty service providvv ers, and support functions, and our operations are dependentdd includingii dd ff ii dd ore provid rr ers, to perform technology, processingii on financialii intermediaridd .ll es that we do not controlrr We rely on outsourced service providers to performff example, we have an agreement with Refinitiv US LLC, under which it provides us key operational support, including data processing services for securities transactions and back officeff use of third-party service providers may decrease our ability to control operating risks and informat systems risks. processing support (“BETAHost ff certain technology, processing and support functions. For TT ion technology ”). Our Any significant failures by BETAHost or our other service providers could cause us to sustain serious operational disruptions and incur losses and could harm our reputation. These third-party service providers are also susceptible to operational and technology vulnerabilities, including cyber-attacks, security breaches, ransomware, fraud, phishing attacks and computer viruses, which could result in unauthorized access, misuse, loss or destruction of data, an interruption in service or other similar events that may impact our business. ff ff , cost-effect ive manner, if at all, or that they will be able to adequately expand their services to meet our We cannot assure that our third-party service providers will be able to continue to provide their services in an efficient needs and those of our advisors. An interruption in or the cessation of service by a third-party service provider and our inability to make alternative arrangements in a timely manner could cause a disruption to our business and could have a material impact on our ability to serve our advisors and their clients. In addition, we cannot predict the costs or time that would be required to find an alternative service provider. We have transitioned certain business and technology processes to off-shore ff related risks described above. For example, we rely on several off-sho locations, for functions related to cash management, account transfers, information technology infrastructure and support and document indexing, among others. To the extent third-party service providers are located in foreign jurisdictions, we are exposed to risks inherent in such providers conducting business outside of the United States, including international economic and political conditions, and the additional costs associated with complying with foreign laws and fluctuations in currency values. providers, which has increased the re service providers, operating in multiple ff We expect that our regulators would hold us responsible for any deficiencies in our oversight and control of our third-party relationships and for the performance of such third parties. If there were deficiencies in the oversight and control of our third-party relationships, and if our regulators held us responsible for those deficiencies, our business, ff reputation and results of operations could be adversely affecte d. ff In addition, certain aspects of our operations are dependent on third-party financial institutions that we do not control, such as clearing agents, securities exchanges, clearing houses and other financial intermediaries. Any failure of these intermediaries, or any interruption in their operations, either on a widespread or individual basis, could adversely affect event of such failure or interruption, there is no guarantee that we would be able to find adequate and cost-effecti replacements on a timely basis, if at all. our ability to execute transactions, service our clients and manage our exposure to risk. In the ve ff ff Like us, these intermediaries are exposed to risks related to fluctuations and volatility in the financial markets and broader economy, as well as specific operational risks related to their business, such as those related to technology, security and the prevailing regulatory environment. Because we rely on these intermediaries, we share indirect exposure to these risks. If these risks were to materialize, or if there was a widespread perception that they could materialize, our business, reputation and results of operations could be adversely affecte d. ff Lack of liquiditdd yt or access to capital could impair our business ii and financialii conditidd on. Liquidity, or ready access to funds, is essential to our business. We expend significant resources investing in our business, particularly with respect to our technology and service platforms. In addition, we must maintain certain levels of required capital. As a result, reduced levels of liquidity could have a significant negative effect potential conditions that could negatively affect our liquidity include: ff ff on us. Some • • illiquid or volatile markets; diminished access to debt or capital markets; 16 • • • unforeseen cash or capital requirements; regulatory penalties or fines, settlements, customer restitution or other remediation costs; or adverse legal settlements or judgments. The capital and credit markets continue to experience varying degrees of volatility and disruption. In some cases, the markets have exerted downward pressure on availability of liquidity and credit capacity for businesses similar to ours. Without sufficient . business would suffer liquidity, we could be required to limit or curtail our operations or growth plans, and our ff ff 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 under our revolving credit facility, the committed revolving credit facility at our broker-dealer subsidiary, LPL Financial, or uncommitted lines of credit. We may also need access to capital in connection with the growth of our business, through acquisitions or otherwise. ff In the event current resources are insuffici as bank debt. The availability of additional financing will depend on a variety of factors such as: ent to satisfyff our needs, we may need to rely on financing sources such ff • market conditions; • • • • • the general availability of credit; the volume of trading activities; the overall availability of credit to the financial services industry; our credit ratings and credit capacity; and the possibility that our lenders could develop a negative perception of our long- or short-term financial prospects as a result of industry- or company-specific considerations. Similarly, our access to funds may be impaired if regulatory authorities or rating organizations take negative actions against us. Disruptions, uncertainty or volatility in the capital and credit markets may also limit our access to capital required to operate our business. Such market conditions may limit our ability to satisfy statutory capital requirements, generate commission, fee and other market-related revenue to meet liquidity needs and access the capital necessary to grow our business. As such, we may be forced to delay raising capital, issue different types of capital than we would otherwise, less effeff ctively deploy such capital, or bear an unattractive cost of capital, which could decrease our profitability and significantly reduce our financial flexibility. ff Our business could be materiallyll adversely affected and invesvv tments. ff as a result of the risks associated withtt acquisiti ii ons We have made acquisitions and investments in the past and may pursue further acquisitions and investments in the on future. These transactions are accompanied by risks. For instance, an acquisition could have a negative effect our financial and strategic position and reputation, or the acquired business could fail to further our strategic goals. We can provide no assurances that advisors who join LPL Financial through acquisitions or investments in advisor practices will remain at LPL Financial. Moreover, we may not be able to successfully integrate acquired businesses into ours, and therefore we may not be able to realize the intended benefits from an acquisition. We may have a lack of experience in new markets, products or technologies brought on by the acquisition, and we may have an initial dependence on unfamiliar supply or distribution partners. An acquisition may create an impairment of relationships with customers or suppliers of the acquired business or our advisors or suppliers. All of these and other potential risks may serve as a diversion of our management’s attention from other business concerns, and any of these factors could have a material adverse effect on our business. ff ff Our riskii management policies and proceduresrr may not be fullyll effecti all market environmii ents or against allll types of risks. ff ve in mitigatin i g our riskii exposurerr in ff ff We have adopted policies and procedures to identify, monitor and manage our operational risk. These policies and procedures, however, may not be effecti ve and may not be adapted quickly enough to respond effecti changed circumstances. Some of our compliance and risk evaluation functions depend upon informat systems, informat otherwise accessible by us. In some cases, however, that informat up-to-date. Also, because many of our advisors work in decentralized offices, challenges may exist, including with regard to advisor officeff In addition, our existing systems, policies and procedures, and staffingff significant increase in our advisor population. Any such increase could require us to increase our costs, including ion regarding markets, clients or other matters that are ion may not be available, accurate, complete or ff ion provided by others and public informat technology, vendors and informat additional risk management levels may be insufficient vely to ion technology ion security practices. to support a ff ff ff ff ff ff 17 ff informat ion technology costs, in order to maintain our compliance and risk management obligations, or strain our existing policies and procedures as we evolve to support a larger advisor population. If our systems, policies and procedures are not effect ive, or if we are not successful in capturing risks to which we are or may be exposed, we may suffer effect harm to our reputation or be subject to litigation or regulatory actions that could have a material adverse on our business and financial condition. ff ff ff We face competititt on in attractingii and retaini ii ngii key talent. Our success depends upon the continued services of our key senior management personnel, including our executive officers employment agreement. The loss of one or more of our key senior management personnel, and the failure to recruit a suitable replacement or replacements, could have a material adverse effect and senior managers. Each of our executive officers is an employee at will, and none has an on our business. ff ff ff Moreover, our success and future growth depends upon our ability to attract and retain qualified employees. There is significant competition for qualified employees in the financial services industry, and we may not be able to retain our existing employees or fill new positions or vacancies created by expansion or turnover. The loss or unavailability of these individuals could have a material adverse effect on our business. ff The securirr ties settlement process rr exposes us to risksii related ll to adverse movements in price. rr LPL Financial provides clearing services and trade processing for our advisors and their clients and certain financial institutions. Broker-dealers that clear their own trades are subject to substantially more regulatory requirements than brokers that outsource these functions to third-party providers. Errors in performing clearing functions, including clerical, technological and other errors related to the handling of funds and securities held by us on behalf of our advisors’ clients, could lead to censures, fines or other sanctions imposed by applicable regulatory authorities, as well as losses and liabilities in related lawsuits and proceedings brought by our advisors’ clients and others. Any unsettled securities transactions or wrongly executed transactions may expose our advisors and us to losses resulting from adverse movements in the prices of such securities. ff Our indebtedness could adverselyl affeff ct our financial conditidd on and may limit future capital needs. ii our abilityll to use debt to fund At December 31, 2021, we had total indebtedness of $2.8 billion, of which $1.1 billion is subject to floating interest rates. Our level of indebtedness could increase our vulnerability to general adverse economic and industry conditions. It could also require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes. In addition, our level of indebtedness may limit our flexibility in planning for changes in our business and the industry in which we operate and limit our ability to borrow additional funds. If interest rates increase, our interest expense would increase because borrowings under our Credit Agreement are based on variable interest rates. ff If our cash flows and capital resources are insufficient liquidity problems and could be forced to sell assets, seek additional capital or seek to restructure or refinance our indebtedness. These alternative measures may not be successful or feasible. Our Credit Agreement restricts our ability to sell assets. Even if we could consummate those sales, the proceeds that we realize from them may not be adequate to meet any debt service obligations then due. Furthermore, if an event of default were to occur with respect to our Credit Agreement or other future indebtedness, our creditors could, among other things, accelerate the maturity of our indebtedness. to fund our debt service obligations, we could face substantial Our Credit Agreement and the Indentures governing our Notes permit us to incur additional indebtedness. Under our Credit Agreement we have the right to request additional commitments for new term loans, new revolving credit commitments and increases to then-existing term loans and revolving credit commitments subject to certain limitations. Although the Credit Agreement and the Indentures contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial. Also, these restrictions do not prevent us from incurring obligations that do not constitute “indebtedness” as defined in the Credit Agreement or the Indentures. To the extent new debt or other obligations are added to our currently anticipated debt levels, the substantial indebtedness risks described above would increase. A credit rating downgrade would not impact the terms of our repayment obligations under the Credit Agreement or the Indentures. However, any such downgrade would negatively impact our ability to obtain comparable rates and terms on any future refinancing of our debt and could restrict our ability to incur additional indebtedness. In addition, 18 if such downgrade were to occur, or if ratings agencies indicated that a downgrade may occur, perceptions of our financial strength could be damaged, which could affect investors, clients and counterparties that do business with us. our client relationships and decrease the number of ff Restrictions under our Creditdd Agreement and the Indenturesrr takingii actions that we believe would be in the best interest of our business. governing our Notes may prevent us from Our Credit Agreement and the Indentures contain customary restrictions on our activities, including covenants that may restrict us from: • • • • incurring additional indebtedness or issuing disqualified stock or preferred ff stock; declaring dividends or other distributions to stockholders; repurchasing equity interests; redeeming indebtedness that is subordinated in right of payment to certain debt instruments; • making investments or acquisitions; • • • • • • creating liens; selling assets; guaranteeing indebtedness; engaging in certain transactions with affiliat ff es; entering into agreements that restrict dividends or other payments from subsidiaries; and consolidating, merging or transferring all or substantially all of our assets. These restrictions may prevent us from taking actions that we believe would be in the best interest of our business. d which may be affecte Our ability to comply with these restrictive covenants will depend on our future performance, by events beyond our control. If we violate any of these covenants and are unable to obtain waivers, we would be in default under our Credit Agreement or the Indentures, as applicable, and payment of the indebtedness could be accelerated. Acceleration of our indebtedness under our Credit Agreement or the Indentures may permit acceleration of indebtedness under other agreements that contain cross-default or cross-acceleration provisions. If our indebtedness is accelerated, we may not be able to repay that indebtedness or borrow suffiff cient funds to refinance it. Even if we are able to obtain new financing, it may not be on commercially reasonable terms or on terms that are acceptable to us. If our indebtedness is in default for any reason, our business could be materially and adversely affect favorable to holders of our common stock and may make it more difficult strategy and compete against companies that are not subject ed. In addition, complying with these covenants may also cause us to take actions that are not ff for us to successfully execute our business to such restrictions. b ff ff ff sioii ns of our Credit Agreement and the Indentures could discii ourage an acquisitio ii n of us by a third-dd rr Provi rr party. Certain provisions of our Credit Agreement and the Indentures could make it more difficult third-party to acquire us, and any of our future debt agreements may contain similar provisions. Upon the occurrence of certain transactions constituting a change of control, all indebtedness under our Credit Agreement may be accelerated and become due and payable and noteholders will have the right to require us to repurchase the Notes at a purchase price equal to 101% of the principal amount of the Notes plus accrued and unpaid interest, if any, to but not including the purchase date. A potential acquirer may not have suffiff cient financial resources to purchase our outstanding indebtedness in connection with a change of control. or more expensive for a ff Our insurance coverag vv e may be inadequate or expensive. We are subject to claims in the ordinary course of business. These claims may involve substantial amounts of money and involve significant defense costs. It is not always possible to prevent or detect activities giving rise to claims, and the precautions we take may not be effect ive in all cases. ff , excess- Securities Investor Protection Corporation (“SIPC”), business interruption, cyber and data We maintain voluntary and required insurance coverage, including, among others, general liability, property, director and officer ff breach, errors and omissions and fidelity bond insurance. We have self-insurance through a wholly-owned captive insurance subsidiary. While we endeavor to self-insure and purchase coverage that is appropriate based on our assessment of our risk, we are unable to predict with certainty the frequency, nature or magnitude of claims for direct or consequential damages. Assessing the probability of a loss occurring and the timing and amount of any loss related to a regulatory matter or a legal proceeding is inherently diffiff cult, and there for certain potential liabilities ff ff 19 are particular uncertainties and complexities involved when assessing the adequacy of loss reserves for potential liabilities that are self-insured by our captive insurance subsidiary. In addition, certain types of potential claims for damages cannot be insured. Our business may be negatively affect ed if in the future some or all of our insurance proves to be inadequate or unavailable to cover our liabilities related to legal or regulatory matters. Such negative consequences could include additional expense and financial loss, which could be significant in amount. In addition, insurance claims may harm our reputation or divert management resources away from operating our business. ff Poor service or performance of the finanii such services or products may cause clients of our advisovv cial products that we offer rs to withdrawdd or competitivevv pressu res on pricinrr their assets on short notice. rr ff g of ff of the financial products that we offeff r, the emergence of new financial products or services from Clients of our advisors have control over their assets that are served under our platforms. Poor service or performance others, harm to our reputation or competitive pressures on pricing of such services or products may result in the loss of clients. In addition, we must monitor the pricing of our services and financial products in relation to competitors and periodically may need to adjust commission and fee rates, interest rates on deposits and margin loans and other fee structures to remain competitive. Competition from other financial services firms, such as reduced or zero commissions to attract clients or trading volume, direct-to-investor online financial services, including so-called “robo” advice, or higher deposit rates to attract client cash balances, could result in pricing pressure or otherwise adversely impact our business. The decrease in revenue that could result from such an event could have a material adverse effect on our business. ff A loss of our markrr ekk tingii with our advisovv rs and, in turn, their clienll ts. relationshipsii with manufacturers of financial prorr ducts could harm our relation ll ship b offeff Our curated product platformff rs no proprietary financial products. To help our advisors meet their clients’ needs with suitable investment options, we have relationships with many of the industry-leading providers of financial and insurance products. We have sponsorship agreements with some manufacturers of fixed and variable annuities, mutual funds and ETFs that, subject ff manufacturer upon notice. If we lose our relationships with one or more of these manufacturers, ff our advisors and, in turn, their clients, and our business, may be materially adversely affect certain variable annuity product sponsors have ceased offeri ng and issuing new variable annuity contracts. If this ff trend continues, we could experience a loss in the revenue currently generated from the sale of such products. In addition, certain features of such contracts have been eliminated by variable annuity product sponsors. If this trend continues, the attractiveness of these products would be reduced, potentially reducing the revenue we currently generate from the sale of such products. to the survival of certain terms and conditions, may be terminated by the ed. As an example, our ability to serve Changes in U.S. federal dd attractive to clients. income tax law could make some of the prorr ducts distri ii buii ted by our advisovv rs less Some of the financial products distributed by our advisors, such as variable annuities, enjoy favorable treatment under current U.S. federal income tax law. Changes in U.S. federal income tax law, in particular with respect to variable annuity products, or with respect to tax rates on capital gains or dividends, could make some of these products less attractive to clients and, as a result, could have a material adverse effect operations, cash flows, or financial condition. on our business, results of ff The ffeffects fof the outbreakrr fof COCOVID-VV 19 havevv gglobal ffinancial markets, and mayy disrupt our operations and our advisor materialii adverse fefffect on our businii ess, ffinii ancialii conditdd iontt gnegativ yelyvv fff ii and results off operations. ffaffected the gglobal economyy, tt s'rr operatrr ions SU.S. econo ymy and , which could havevv a The onggoingg COCOVID-19 pandemic has caused signif ffinancial markets. The spread fof COCOVID-19 and fefffort cancellation fof events and travel, business shutdowns, reduction in business activityy and ffinancial transactions, labor short gages, increased instabilityy. Impacts on our business could be ffol unemployment, sup yply chain interruptions and overall economic and ffinancial market wide-rang ging, and material impacts are possible, significant disruption in the international and SU.S. economies and s to contain it have resulted in illness, quarantines, including the lowing: g g g y fff • • Emp yloyees contracti gng COCOVID-19, business operations including unavailabilityy fof g ykey personnel ne cessary to conduct our y prolonged downturn in equityy and other ffinancial markets, which would AA asset-based and trai gling commission revenue g 20 adversely fafffect y fff our advisory, y • • • • • • AA sustained low interest rate environment, which would reduce revenue ffrom our client cash included in asset-based revenue gprograms Reductions in our service levels or ope working remot yely g rating fefffect g fff iveness as a substantial jmajorityy fof our employees are y ff f Failure fof our securities ransomware or malicious ycyber activityy informat g ion tech gy clearing and custo ydy ffunctions, as a result fof ext raordinary y nology ysystems, which could result in interruptions or errors in ff fperf orming g trading volumes, malware, g Disruptions in tech nology, gy cluding fofff-sho g vendors, in fff processing or support ffunctions as our outsourced service providers or other re providers, experience disruptions in their business operations g Reduction in our abilityy to recruit advisors or otherwise execute our ggrowth plans due to travel restrictions, limitations on interpersonal contact and ch allengi gng macro-economic conditions g CClosure fof our fofffices fff or the fofffices fff fof our advisors fff s to contain it have also resulted in increased volatilityy. The ffurther spread fof The COCOVID-19 pandemic and fefffort COCOVID-19 and attempts to curtail it yby limit ging interpersonal activityy, incl instabilityy in domestic and international ffinancial markets and materi yally disrupt ggeneral economic and ffinancial activityy. SignSign fificant disruptions in ffinancial markets could result in a decline in demand ffor the products and services fofffere ffinancial results and ggrowth strategygy. d yby our advisors to their clients, or their abilityy to provide them, which would uding business activityy, mayy increase ively impact our and their gnegat g y fff y g previously resulted and In addition, an overall decline in equityy market prices will ggenerallyy reduce the value fof assets, which has ymay in the ffuture result in a reduction in the ffees and tr COCOVID-19 pandemic, the Federal Reserve reduced the ffederal ffunds rate, which remained near zero 2021. Lower interest rates reduce our revenue ffrom our client cash ffavorable terms in ffuture gagreements with banks and y and these fefffefff cts are ailing commissions we are entitled to receive. Moreover, in response to the economic ffallout ffrom the throughout g gnegotiate gprograms, our abilityy to money market ffund providers that participate in our likely to continue ffor as longg as interest rates remain suppressed. advisory and advisory ffees, asset-based gprograms and ymay fafffect brokerage y y g y fff gdegrees fof limitations on travel and social interaction. In The COCOVID-19 pandemic could also jjeopardize our abili yty to re yly on our outsourced service providers, includingg those that operate fofff-fff shore. As COCOVID-19 has spread, ggovernments in the United SStates and around the world, includingg in jjurisdictions where our service providers have operations, have ffrom time to time imposed or encouraged va y g rying g partial or complete closure fof businesses, the disruptions that these closures have caused, and are there can be no gguarantee that theyy will be fefffect cost-effffective. In addition, fif business closures are operations to avoid interruption gnegative fefffect ymany cases this has resulted in the yrely on. While we have taken steps to minimize seeking to avoid interruptions to our critical operations, will be sustained or fmodifyyff our ymay become more limited or costlyy. Anyy interruption to our operations could have a prolonged or become more widespread, our abilityy to including some that we g on our reputation and results fof operations. ive, or, fif theyy are fefffect ive, that such fefffect g g fff fff fff fff significant interruptions to our critical services, there can be no yrely on capabilities that we put into place to support these plans. While we believe that these plans We implemented gsign fificant elements fof our business continuityy plans in response to the COCOVID-19 pandemic, and we continue to and their implementation have helped avoid signif assurance that theyy will be able to do so on a sustained or uninterrupted basis, and reliance on such plans could expose our business to other operational risks. For example, while we have taken steps to ensure that our remote- work solutions are reliable and secure, esp gorage and disposal ecially those related to the ha fof sensitive personal or co fnfidential ffunction as intended, or that th yey will be complet yely fefffect ycybersecurityy incidents. In addition, there can be no assurance that the third parties that provide and maintain some fof these solutions will be able to do so on a sustained and uninterrupted basis. Because we do not control these third parties, we are operations. operations could direct yly or indirect yly result in ycybersecurityy incidents, interruptions to our business, and fefffect g ion, there can be no assurance that these solutions will be used or yAny compromise, ffailure, or interruption in the availabili yty fof the solutions that support our remote-work subject to the limitations, defficiencies and vulnerabilities fof their services, products, and ive in prevent ging interruptions in our services or s on our reputation and results fof operations. ndling, transmission, st gnegative informat y ff f fff fff j 21 Risks Related to Our Regulatory Environment Any failure to complyl with applpp icall ll regulatory actions, which could increase our costs or negatively affect our reputation. ble federalrr or state lawsww or regulations exposes us to litigatio i n and Our business, including securities and investment advisory services, is subject federal and state laws, rules and regulations. Our subsidiary LPL Financial is: b to extensive regulation under both • • • • • registered as a broker-dealer with the SEC, each of the 50 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands; registered as an investment adviser with the SEC; a member of FINRA and various other SROs, and a participant in various clearing organizations, including the Depository Trust Company, the National Securities Clearing Corporation and the Options Clearing Corporation; regulated by the DOL relative to its servicing of retirement plan accounts subject to ERISA and the Code; and regulated by the CFTC with respect to the futures and commodities trading activities it conducts as an introducing broker. ff The primary self-regulat or of LPL Financial’s broker-dealer activity is FINRA. LPL Financial is also subject to state laws, including state “blue sky” laws, and the rules of the Municipal Securities Rulemaking Board for its municipal securities activities. The CFTC has designated the NFAFF as LPL Financial’s primary regulator for futures and commodities trading activities. The SEC, FINRA, DOL, the CFTC, the OCC, various securities and futures exchanges and other United States and state-level governmental or regulatory authorities continuously review legislative and regulatory initiatives and may adopt new or revised laws, regulations or interpretations. There can be no assurance that other federal or state agencies will not attempt to further regulate our business or that specific interactions with foreign countries or foreign nationals will not trigger regulation in non-U.S. law in particular circumstances. These legislative and regulatory initiatives may affeff ct the way in which we conduct our business and may make our business model less profitable. Our ability to conduct business in the jurisdictions in which we currently operate depends on our compliance with the laws, rules and regulations promulgated by federal regulatory bodies and the regulatory authorities in each of the states and other jurisdictions in which we do business. Our ability to comply with all applicable laws, rules and regulations and interpretations is largely dependent on our establishment and maintenance of compliance, audit and reporting systems and procedures, as well as our ability to attract and retain qualified compliance, audit, supervisory and risk management personnel. We cannot assure you that our systems and procedures are, or have been, effect ff informat robust ff level of compliance. Regulators have in the past raised, and may in the future raise, concerns with respect to the quality, consistency or oversight of our compliance systems and programs and our past or future compliance with applicable laws, rules and regulations. As of the date of this Annual Report on Form 10-K, we have a number of pending regulatory matters. ive in complying with all applicable laws, rules and regulations and interpretations. In particular, the diversity of ff ion security environments in which our services are offered makes it difficult to ensure a uniformly ff Violations of laws, rules or regulations and settlements in respect of alleged violations have in the past resulted in, and could in the future result in, legal liability, censures, penalties and fines, disgorgement of profits, restitution to customers, remediation, the issuance of cease-and-desist orders or injunctive or other equitable relief against us, which individually or in the aggregate could negatively impact our financial results or adversely affect our ability to attract or retain financial advisors and institutions. Depending on the nature of the violation, we may be required to ff offer restitution or remediation to customers, and the costs of doing so could exceed our loss reserves. ff ff We have established a captive insurance subsidiary that underwrites insurance for various regulatory and legal risks, although self-insurance coverage is not available for all matters. The availability of coverage depends on the nature of the claim and the adequacy of reserves, which depends in part on historical claims experience, including the actual timing and costs of resolving matters that begin in one policy period and are resolved in a subsequent period. Assessing the probability of a loss occurring and the timing and amount of any loss related to a regulatory matter or a legal proceeding is inherently difficult 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; potential opportunities for settlement and the status of any settlement discussions; and requires complex judgments, which may include the ff 22 as well as the potential for insurance coverage and indemnification, if available. There are particular uncertainties and complexities involved when assessing the adequacy of loss reserves for potential liabilities that are self-insured by our captive insurance subsidiary. As a result, actual self-insurance ff which case coverage may not be available, and we could incur material additional expense. liabilities could exceed our loss reserves, in ff Regulator ll business less profitab rr le. yrr developments could advevv rsrr ely affeff ct our busines ii s by increasingii our costs or makingii our ff ed by rules and regulations that impact the business and financial communities Our profitability could be affect generally and, in particular, our advisors and their clients, including changes to the interpretation or enforcement of laws governing standards of care applicable to investment advice and recommendations, taxation, the classification of our independent advisors as independent contractors rather than our employees, trading, electronic commerce, privacy, data protection and anti-money laundering. Failure to comply with these rules and regulations could subject us to regulatory actions or litigation and it could have a material adverse effect operations, cash flows or financial condition. on our business, results of ff ff ff of existing laws, rules or New laws, rules and regulations, or changes to the interpretation or enforcement regulations, could also result in limitations on the lines of business we conduct or plan to conduct, modifications to our current or future business practices, compressed margins, increased capital requirements and additional costs. For example, the SEC’s Reg BI, which requires broker-dealers and their associated persons to act in the best interest of their retail customers when making securities recommendations and establishes a number of new compliance and disclosure obligations for broker-dealers, became applicable on June 30, 2020. Nevada and Massachusetts enacted statutes that impose fiduciary standards and other obligations on broker-dealers and investment advisers operating in their states. Other states have adopted or are considering adopting a best interest standard applicable to broker-dealers or the sale of certain annuity and insurance products. The DOL issued PTE 2020-02 with a new and expanded interpretation of fiduciary status. We expect that these developments could negatively impact our results, including by increasing our expenditures related to legal, compliance, and informat technology and could result in other costs, including greater risks of client lawsuits and enforcement regulators. These changes may also affect compensation that we and our advisors receive in connection with such products and services. the array of products and services we offer ff activity by to clients and the ff ff ff ion It is unclear how and whether other regulators, including the SEC, FINRA, the DOL, banking regulators and other state securities and insurance regulators may respond to, or enforce elements of, these new regulations, or develop their own similar laws and regulations. The impacts, degree and timing of the effect of these laws and future regulations on our business cannot now be anticipated or planned for, and may have further impacts on our products and services and the results of operations. Please consult the “Retirement tt section within Part I, “Item 1. Business” for specific informat related exemptions and their potential impact on our operations. ion about risks associated with DOL regulations and Plan Services Regulation” ff tt ff In addition, the Dodd-Frank Act enacted wide-ranging changes in the supervision and regulation of the financial industry designed to provide for greater oversight of financial industry participants, reduce risk in banking practices and in securities and derivatives trading, enhance public company corporate governance practices and executive compensation disclosures and provide for greater protections to individual consumers and investors. Certain elements of the Dodd-Frank Act remain subject to implementing regulations that are yet to be adopted by the applicable regulatory agencies. Compliance with these provisions could require us to review our product and service offerings Dodd-Frank Act affect with which we do business, those institutions may seek to pass on increased costs, reduce their capacity to transact, or otherwise present ineffici will have on us, the financial industry and the economy cannot be known until all such applicable regulations called for under the Dodd-Frank Act have been finalized and implemented. for potential changes and would likely result in increased compliance costs. Moreover, to the extent the s the operations, financial condition, liquidity and capital requirements of financial institutions encies in their interactions with us. The ultimate impact that the Dodd-Frank Act ff ff ff y employment, includingg those related to the Americans with Disabilities Act, are Likewise, ffederal and state standards prohibit ging discrimination on the basis fof disabilityy in public accommodations and number of public spaces, including web-based applications, to be made accessible to the disabled. AAs a result, we could be required to make tech accommodations ffor, disabled persons. This adaptation fof our websites and web-based applications and materials could result in increased costs and ymply with ffederal or state standards could result in li gtigation, fmodifications to our internet-based applications or to our other client- or ad nologies, includingg our website, to provide enhanced or accessible service to, or make reasonable ymay fafffefff ct the products and services we provide. Failure to co including class action lawsuits. evolving to require an acing f g visor-f g g g increasing g 23 In sum, our profitability may be adversely affect various federal, state and self-regulatory organizations to which we are subject. The effeff ct of these regulatory developments on our business cannot now be anticipated or planned forff , but may have further impacts on our products and services and results of operations. ed by current and future rulemaking and enforcement ff ff activity by the We are subjecb restriction of the conduct or growrr t to various regulator requireme yrr rr ii th of our busines ll s. ntstt , whicww h, if not compliedll with, could result in the The business activities that we may conduct are limited by various regulatory agencies. Our membership agreement with FINRA may be amended by application to include additional business activities. This application process is time-consuming and may not be successful. As a result, we may be prevented from entering new potentially profitable businesses in a timely manner, or at all. In addition, as a member of FINRA, we are subject to certain regulations regarding changes in control. FINRA Rule 1017 generally provides, among other things, that FINRA approval must be obtained in connection with any transaction resulting in a 25% or more change in our ownership that results in one person or entity directly or indirectly owning or controlling 25% or more of us. Similarly, the OCC imposes advance approval requirements for a change of control, and control is presumed to exist if a person acquires 10% or more of our common stock. These regulatory approval processes can result in delay, increased costs or impose additional transaction terms in connection with a proposed change of control, such as capital contributions to the regulated entity. As a result of these regulations, our future efforts additional capital may be delayed or prohibited. to sell shares or raise ff In addition, the SEC, FINRA, the CFTC, the OCC and the NFAFF have extensive rules and regulations with respect to capital requirements. As a registered broker-dealer, LPL Financial is subject to Rule 15c3-1 (“Net Capital Rule”) under the Exchange Act, and related requirements of SROs. The CFTC and the NFAFF also impose net capital requirements. The Net Capital Rule specifies minimum capital requirements that are intended to ensure the general soundness and liquidity of broker-dealers. Because our holding companies are not registered broker-dealers, they are not subject to the Net Capital Rule. However, the ability of our holding companies to withdraw capital from our broker-dealer subsidiary could be restricted, which in turn could limit our ability to repay debt, redeem or purchase shares of our outstanding stock or pay dividends. A large operating loss or charge against net capital could adversely affect our ability to expand or even maintain our present levels of business. b ff re to complyl with ERISASS regulations and certainrr Failuii penalties against us. tax-qualifi ll ed planll laws and regulation ll s could result in b to ERISA and Section 4975 of the Code, and to regulations promulgated As discussed above, we are subject thereunder, insofar as we provide services with respect to plan clients, or otherwise deal with plans, participants and certain types of investment/savings accounts that are subject to ERISA or the Code. ERISA imposes certain duties on persons who are “fiduciaries” (as defined in Section 3(21) of ERISA and the DOL’s Five-Part Test and PTE 2020-02 rules or interpretations) and prohibits certain transactions involving plans subject to ERISA and fiduciaries or other service providers to such plans. Non-compliance with or breaches of these provisions may expose an ERISA fiduciary or other service provider to liability under ERISA, which may include monetary and criminal penalties as well as equitable remedies for the affect transactions involving “plans” (as defined in Section 4975(e)(1)), which include, for example, IRAs and certain Keogh plans and other qualified savings accounts, and service providers, including fiduciaries (as defined in Section 4975(e)(3)), to such plans. Section 4975 also imposes excise taxes for violations of these prohibitions. Our failure to comply with ERISA and the Code could result in significant penalties against us that could have a material adverse on our business or severely limit the extent to which we could act as fiduciaries for or provide services to effect these plans. ed plan. Section 4975 of the Code prohibits certain ff ff Risks Related to Our Technology We relyl on technology in our business, and technology and execution failures could subjecb litigation and regulatory actions. t us to losses, Our business relies extensively on electronic data processing, storage and communications systems. In addition to and enables firms better serving our advisors and their clients, the effect like ours to reduce costs and support our regulatory compliance and reporting functions. Our continued success will depend, in part, upon our ability to: ive use of technology increases efficiency ff ff • continue to invest significant resources on our technology systems in order to meet industry and regulatory standards, consumer preferences and the effort s of threat actors to penetrate our systems; ff 24 • • • • • successfully maintain and upgrade the capabilities of our systems; address the needs of our advisors and their clients by using technology to provide products and services that satisfy their demands while ensuring the security of the data involving those products and services; use technology effect ff ively and securely to support our regulatory compliance and reporting functions; comply with the changing landscape of laws and regulations that govern protection of personally identifiable informat ion; and ff retain skilled informat ff ion technology employees. Extraordinary trading volumes, malware, ransomware or attempts by hackers to introduce large volumes of fraudulent transactions into our systems, beyond reasonably foreseeable spikes in volumes, could cause our computer systems to operate at an unacceptably slow speed or even fail. Failure of our systems, which could result from these or other events beyond our control, or an inability or failure to effect implement new technology-driven products or services, could result in financial losses, unanticipated disruptions in our service, liability to our advisors or advisors’ clients, compliance failures, regulatory sanctions and damage to our reputation. ively upgrade those systems or ff ff ff ff ion in our ion of advisors and their clients, as well as them as circumstances warrant, our Our operations rely on the secure processing, storage and transmission of confidential and other informat computer systems and networks, including personally identifiable informat our employees. Although we take protective measures and endeavor to modifyff computer systems, software and networks are to some degree vulnerable to unauthorized access, human error, computer viruses, denial-of-service attacks, malicious code, spam attacks, phishing, ransomware or other forms of social engineering and other events that could impact the security, reliability, confidentiality, integrity and availability of our systems. To the extent third parties, such as product sponsors, also retain similarity sensitive informat about our advisors or their clients, their systems may face similar vulnerabilities. We are not able to protect against these events completely given the rapid evolution of new vulnerabilities, the complex and distributed nature of our systems, our interdependence on the systems of other companies and the increased sophistication of potential attack vectors and methods against our systems. In particular, advisors work in a wide variety of environments, and although we require minimum security by policy, we cannot ensure the consistent compliance with these policies across all of our advisors, or that our policy will be adequate to address the evolving threat environment. If one or more of these events occur, they could jeopardize our own, our advisors’ or their clients’, or our counterparties’ confidential and other informf networks, or otherwise cause interruptions or malfunctions in our own, our advisors’ or their clients’, our counterparties’, or third parties’ operations. As a result, we could be subject to litigation, client loss, reputational harm, regulatory sanctions and financial losses that are either not insured or are not fully covered through any insurance we maintain. If any person, including any of our employees or advisors, negligently disregards or intentionally breaches our established controls with respect to client data, or otherwise mismanages or misappropriates that data, we could also be subject to significant monetary damages, regulatory enforcement actions, fines and/or criminal prosecution in one or more jurisdictions. ation processed, stored in and transmitted through our computer systems and ion ff ff Our information technologygg systems may be vulnerable to security risks. ff ff ion, including personally identifiable informat The secure transmission of confidential informat networks is a critical element of our operations. As part of our normal operations, we maintain and transmit confidential informat informat outside of and storing or processing data within our network are increasing based on escalating and malicious cyber activity, including activity that originates outside of the United States from criminal elements and hostile nation- states. ion relating to our business operations. The risks related to transmitting data and using service providers ion about clients of our advisors, our advisors and our employees, as well as proprietary ion, over public ff ff ff Cybersecurity requires ongoing investment and diligence against evolving threats and is subject to federal and state regulation relating to the protection of confidential informat resources to modifyff our protective measures, to investigate and remediate vulnerabilities or other exposures, to make required notifications, or to update our technologies, websites and web-based applications to comply with industry and regulatory standards, but we may not have adequate personnel, financial or other resources to fully ly govern, manage meet these threats and evolving standards. We will also be required to effeff ctively and efficient and ensure timely evolutions in our systems, including in their design, architecture and interconnections as well as their organizational and technical protections. The SEC has proposed new cybersecurity regulations for investment advisers, and other new regulations may be promulgated by relevant federal and state authorities at any time and compliance with regulatory expectations may become increasingly complex as more state regulatory authorities ion. We may be required to expend significant additional ff 25 issue or amend regulations, which sometimes conflict, governing handling of confidential informat within their jurisdiction. Several states have promulgated cybersecurity requirements that impact our compliance obligations. Compliance with these regulations also could be costly and disruptive to our operations, and we cannot provide assurance that the impact of these regulations would not, either individually or collectively, be material to our business. ion by companies ff Our application service provider systems maintain and process confidential data on behalf of advisors and their clients, some of which is critical to our advisors’ business operations. If our application service provider systems are disrupted or fail for any reason, or if our systems or facilities are infiltrated or damaged by unauthorized persons or malicious computer code, we or our advisors could experience data loss, operational disruptions, financial loss, harm to reputation, regulatory violations, class action and commercial litigation and significant business interruption or loss. In addition, vulnerabilities of our external service providers or within our software supply chain could pose security risks to client information. If any such disruption or failure, real or perceived, occurs, we or our advisors may be exposed to unexpected liability, advisors or their clients may withdraw assets, our reputation may be tarnished and there could be a material adverse effect cybersecurity attack directed at other financial institutions or financial services companies, whether or not we are targeted, could lead to a general loss of customer confidence in the use of technology to conduct financial transactions, which could negatively impact us, including the market perception of the effecti measures and technology infrastructure. The occurrence of any of these events may have a material adverse effect on our business or results of operations. on our business. Further, any actual or perceived breach or veness of our security ff ff ff ff Our own informat ion technology systems are to some degree vulnerable to unauthorized access and other security risks. We rely on our advisors and employees to comply with our policies and procedures to safeguard confidential data, but disloyal or negligent insiders pose risks. The failure of our advisors and employees to comply with such policies and procedures, either intentionally or unintentionally, could result in the loss or wrongful use of their clients’ confidential informat policies and procedures, persons who circumvent security measures or bypass authentication controls could infiltrate or damage our systems or facilities and wrongfully use our confidential informat informat informat applications or technology assets. Such activity could, among other things: ion or cause interruptions or malfunctions in our operations. Cyber-attacks can be designed to collect ion, manipulate, destroy or corrupt data, applications, or accounts and to disable the functioning or use of ion. In addition, even if we and our advisors comply with our ion or other sensitive informat ion or clients’ confidential ff ff ff ff ff • • • • • • • • seriously damage our reputation; allow competitors or hackers access to our proprietary business informat ff ion; subject us to liability for a failure to safeguard client data; result in the termination of relationships with our advisors; subject us to regulatory sanctions or obligations, based on state law or the authority of the SEC and FINRA ff to enforce regulations regarding business continuity planning or cybersecurity; subject us to litigation by consumers, advisors or other business partners that may suffer result of such activity; ff damages as a result in inaccurate financial data reporting; and require significant capital and operating expenditures to investigate and remediate a breach. As malicious cyber activity escalates, including activity that originates outside of the United States, the risks we face relating to transmission of data and our use of service providers outside of our network, as well as the storing or processing of data within our network, intensify.ff While we maintain cyber liability insurance, this insurance does not cover certain types of potential losses and, for covered losses, may not be sufficient in amount to protect us against all such losses. ff A cyber-attack or other vendors could subject us to signi security breach rr ificant liabii tt ilityll and harm our reputation. of our technologygg systems or those of our advisors or third-party In the course of operations, we share sensitive corporate and personal data with vendors, third parties and other financial institutions. We also rely upon software and data feeds from various third parties. Despite the measures we have taken and may in the future take to address and mitigate cybersecurity, privacy and technology risks, we cannot be certain that our systems and networks will not be subject some level of due diligence beforeff uncover administrative, technical or electronic gaps or flaws in their processes or systems. In the past we have ion security with our vendors, which have led to notification costs and experienced limited breaches of informat reputational harm with regulators, current and potential advisors, and advisors’ clients, and we may experience sharing sensitive data with third-party vendors, this due diligence may not to successful attacks. Although we conduct b ff 26 similar or more significant events in the future. Future data security incidents involving individual and regulatory notifications could lead to litigation involving other financial institutions, class actions, regulatory investigations or other harm. Data security incidents within the financial services industry are increasing, and threat actors continue to find novel ways to attack the security environments of LPL and of our advisors. In light of the diversity of our advisors’ security environments and the increasing sophistication of malicious actors, an attack could occur and persist for an extended period of time without detection. We expect that any investigation of a cyber-attack could take substantial amounts of time, and that there may be extensive delays beforeff cases, the nature of the attack may be such that full and reliable informff time we would not necessarily know the extent of the harm or how best to remediate it, and certain errors or actions could be repeated or compounded beforeff the costs and consequences of such an attack. they are discovered and remediated, all of which would further increase we obtain full and reliable inforff mation. In some ation may never be available. During such These incidents could involve operational disruptions, notification costs, ransom payments, and reputational harm, investigations, litigation and fines with regulators as well as litigation, financial disputes, and reputational harm with current and potential advisors and advisors’ clients. Failure to comply with the complex privacy subjecb t could result in adverse action from regulators. rr and data protection laws and regulation ll s to which we arerr ff ion, including client and employee informat Many aspects of our business are subject to comprehensive legal requirements concerning the collection, use and sharing of personal informat ion. This includes rules adopted pursuant to ff the Gramm-Leach-Bliley Act and an ever-increasing number of state laws and regulations, such as the California Consumer Privacy Act. We continue our efforts to safeguard the data entrusted to us in accordance with the applicable laws and our internal data protection policies, including taking steps to reduce the potential for the improper use or disclosure of personal informat protection on both a domestic and international level to assess requirements and impacts on our business operations. Further developments could negatively impact our business and operations. ion. We continue to monitor regulations related to data privacy and ff ff ff ii Failure to maintain technology platfor ll our business. technological capabiliii ties, flawsww in existing mrr or the introduction of a competitivevv platform ii ll technology, difficulties in upgradindd g our could have a materiarr l adversrr e effect ff on We believe that our future success will depend in part on our ability to anticipate and adapt to technological advancements required to meet the changing demands of our advisors and their clients. We depend on highly specialized and, in many cases, proprietary technology to support our business functions, including among others: • • • • • • securities trading and custody; portfolioff management; performance reporting; customer service; accounting and internal financial processes and controls; and regulatory compliance and reporting. Our continued success depends on our ability to effeff ctively adopt new or adapt existing technologies to meet changing client, industry and regulatory demands. The emergence of new industry standards and practices could render our existing systems obsolete or uncompetitive. There cannot be any assurance that another company will not design a similar or better platforff m that renders our technology less competitive. ff ion technology systems or capabilities, or offer Maintaining competitive technology requires us to make significant capital expenditures, both in the near term and longer-term. There cannot be any assurance that we will have suffiff cient resources to adequately update and expand our informat ff devices that may be preferred by our advisors and/or their clients, nor can there be any assurance that any upgrade or expansion effort advisors or their clients. The process of upgrading and expanding our systems has at times caused, and may in the future cause, us to suffer system degradations, outages and failures. If our technology systems were to fail and we were unable to recover in a timely way, we would be unable to fulfill critical business functions, which could lead to a loss of advisors and could harm our reputation. A breakdown in advisors’ systems could have similar effects. technological breakdown could also interfere with our ability to comply with financial reporting and other regulatory requirements, exposing us to disciplinary action and to liability to our advisors and their clients. Security, stability ly timely, successful, secure and accepted by our current and prospective our services on the personal and mobile computing s will be sufficient A ff ff ff ff 27 and regulatory risks also exist because parts of our infrastructure and software are beyond their manufacturer’s stated end of life. We are working to mitigate such risks through additional controls and increased modernization spending, although we cannot provide assurance that our risk mitigation efforts ve, in whole or in part. will be effecti ff ff Inadequacy or disruii event of a catastrophe could advevv rsrr ely affeff ct our busines ptiu on of our business continuity and disaster rerr covevv ryrr plans s. ii ll and prorr cedures in the We have made a significant investment in our infrastructure, and our operations are dependent on our ability to protect the continuity of our infrastructure against damage from catastrophe or natural disaster, breach of security, ransomware attack, human error, loss of power, computer and/or telecommunications failure, or other natural or man-made events. A catastrophic event could have a direct negative impact on us by adversely affecti advisors, employees or facilities, or an indirect impact on us by adversely affect overall economy. While we have implemented business continuity and disaster recovery plans and maintain business interruption insurance, it is impossible to fully anticipate and protect against all potential catastrophes. In addition, we depend on the adequacy of the business continuity and disaster recovery plans of our third-party service providers, including off-shore business continuity and disaster recovery plans and procedures, or those of our third-party service providers, were disrupted or unsuccessful in the event of a catastrophe, we could experience a material adverse interruption of our operations. service providers, in order to prevent or mitigate service interruptions. If our ing the financial markets or the ng our ff ff ff Risks Related to Ownership of Our Common Stock The pricerr losses for our investors. of our common stock may be volatil ll e and fluctuate substantially,l which could result in substantial The market price of our common stock may fluctuate substantially due to the following factors (in addition to the other risk factors described in this Item 1A): • • • • • • • • • • • • • • actual or anticipated fluctuations in our results of operations, including with regard to interest rates or revenue associated with our client cash programs or key business lines; variance in our financial performance ff from the expectations of equity research analysts; conditions and trends in the markets we serve; announcements of significant new services or products by us or our competitors; additions or changes to key personnel; the commencement or outcome of litigation or arbitration proceedings; the commencement or outcome of regulatory actions, including settlements with the SEC, FINRA, DOL or state securities regulators; changes in market valuation or earnings of our competitors; the trading volume of our common stock; future sales of our equity securities; changes in the estimation of the future size and growth rate of our markets; legislation or regulatory policies, practices or actions, including developments related to the “best interest” and “fiduciary” standards of care; political developments; and general economic conditions. In addition, the equity markets in general have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance d. These broad market and industry factors may materially harm the market price of our common stock irrespective of our operating performance. company’s securities, securities class action litigation has often been instituted against the affecte type of litigation could result in substantial costs and a diversion of our management’s attention and resources. In addition, in the past, following periods of volatility in the overall market and the market price of a of the particular companies affecte d company. This ff ff ff ff We arerr a holding company and relyl on dividenddd of funds fromrr our subsidiardd iesrr to meet our debt service and other obligatio ns. tt i ii s,dd distri buii tions and other payments, advances and transfers We have no direct operations and derive all of our cash flow from our subsidiaries. Because we conduct our operations through our subsidiaries, we depend on those entities for dividends and other payments or distributions 28 to meet any existing or future debt service and other obligations. The deterioration of the earnings from, or other available assets of, our subsidiaries forff distributions to us. In addition, FINRA regulations restrict dividends in excess of 10% of a member firm’s excess net capital without FINRA’sAA prior approval. Compliance with this regulation may impede our ability to receive dividends from our broker-dealer subsidiary. any reason could limit or impair their ability to pay dividends or other Our futuff subject to the discii earnings and cash flows.ww re abiliii ty to pay regular dividends to holdersdd retion of our board orr rr f dirdd ecto of our common stock or repur rr chase d by our abilitll y t rs and willii be limite e ii t o generate sufficient shares are Our board of directors declared quarterly cash dividends on our outstanding common stock in 2021 and has from time to time authorized us to repurchase shares of the Company’s issued and outstanding shares of common stock. The declaration and payment of any future quarterly cash dividend or any additional repurchase authorizations will be subject to the board of directors’ continuing determination that the declaration of future dividends or repurchase of our shares are in the best interests of our stockholders and are in compliance with our Credit Agreement, the Indentures and applicable law. Such determinations will depend upon a number of factors that the board of directors deems relevant, including future earnings, the success of our business activities, capital requirements, alternative uses of capital, the general financial condition and future prospects of our business and general business conditions. The future payment of dividends or repurchases of shares will also depend on our ability to generate earnings and cash flows. If we are unable to generate sufficff ient earnings and cash flows from our business, we may not be able to pay dividends on our common stock or repurchase additional shares. In addition, our ability to pay cash dividends on our common stock and repurchase shares is dependent on the ability of our subsidiaries to pay dividends, including compliance with limitations under our Credit Agreement and the Indentures. Our broker-dealer subsidiary is subject to requirements of the SEC, FINRA, the CFTC and other regulators relating to liquidity, capital standards and the use of client funds and securities, which may limit funds available forff the payment of dividends to us. Item 1B. Unresolved Staff Comments None. Item 2. Properties A summary of our significant locations at December 31, 2021 is shown in the following table: Location Fort Mill, South Carolina San Diego, California Boston, Massachusetts Austin, Texas Overland Park, Kansas Approximate Square Footage Lease Expiration 452,000 420,000 69,000 58,000 30,000 2036 2029 2023 2029 2023 We also lease smaller administrative and operational officeff believe that our existing properties are adequate forff additional space will be available as needed. s in various locations throughout the United States. We the current operating requirements of our business and that Item 3. Legal Proceedings From time to time, we have been subjected to and are currently subject to legal and regulatory proceedings arising out of our business operations, including lawsuits, arbitration claims, and inquiries, investigations and enforcement proceedings initiated by the SEC, FINRA and state securities regulators, as well as other actions and claims. ff For a discussion of legal proceedings, see Note 14 - Commitment consolidated financial statements and Part I, “Item 1A. Risk Factors” in this Annual Report on Form 10-K. nd Contingencies within the notes to the s att tt Item 4. Mine Safety Disclosures Not applicable. 29 Information about our Executive Offiff cers The following table provides certain information about each of the Company’s executive offiff cers as of the date this Annual Report on Form 10-K has been filed with the SEC: Name Dan H. Arnold Matthew J. Audette Matthew Enyedi Edward Fandrey Greg Gates Sallie R. Larsen ff Michelle Oroschakoff Dayton Semerjian Richard Steinmeier George B. White(1) ______ ____ ____ ____ ____ ____ ____ ____ ____ Ageg Position 57 47 48 46 44 68 6 0 57 48 53 President and Chief Executive Officer ff Chief Financial Officer ff Managing Director, Business Solutions Managing Director, Divisional President, Advisor Solutions Managing Director, Chief Technology & Information Officer ff Managing Director, Chief Human Capital Officer ff Managing Director, Chief Legal Officer ff Managing Director, Chief Customer Care Officer ff Managing Director, Divisional President, Business Development Managing Director, Investor and Investment Solutions, Chief Investment Officer ff (1) Mr. White will be retiring from the Company in March 2022. 30 Executive Offiff cers Dan H. Arnol rr d — President and Chief Executive Officff er r from June 2012 to March 2015 and was responsible for formulating financial Mr. Arnold has served as our chief executive offiff cer since January 2017. He has served as our president since March 2015 with responsibility for our primary client-facing functions and long-term strategy for growth. Mr. Arnold served as our chief financial officeff policy, leading our capital management effort functions. Prior to 2012, he was managing director, head of strategy, with responsibility for long-term strategic planning for the firm, product and platforff m development and strategic investments, including acquisitions. He has also served as divisional president of our Institution Services. Mr. Arnold joined our Company in January 2007 following our acquisition of UVEST Financial Services Group, Inc. (“UVEST”). Prior to joining us, Mr. Arnold worked at UVEST for 13 years serving most recently as president and chief operating officer . From April 2015 to July 2018, he served on the board of directors of the Securities Industry and Financial Markets Association (“SIFMA”). Mr. Arnold earned a B.S. in electrical engineering from Auburn University and holds an M.B.A. in finance from Georgia State University. iveness of the organization’s financial s and ensuring the effect ff ff ff Matthew J. Audette — Chief Finanii cial Officer ff Mr. Audette is our chief financial officer . He is responsible for the Company’s core financial functions including: financial planning and analysis, controllership, tax, internal audit, treasury, corporate development and investor relations. Prior to joining LPL Financial in 2015, Mr. Audette served as executive vice president and chief financial officer of E*TRADE Financial Corporation (E*TRADE”). During his 16 years with E*TRADE, he was a key contributor in the growth of the franchise, leading a variety of corporate transactions and capital activities. Mr. Audette began his career in the financial services practice at KPMG. Mr. Audette earned a Bachelor of Science in accounting from Virginia Polytechnic Institute and State University, popularly known as Virginia Tech. ff Matthew Enyedidd — Managingii Directo ii r, Business Solutions Mr. Enyedi has served as managing director, business solutions of LPL Financial since November 2020. He is responsible for developing and deploying a suite of automated professional services to LPL Financial advisors, and aligning them with the firm’s other programs that support advisors as business owners. From January to November 2020, Mr. Enyedi served as managing director, national sales of LPL Financial, overseeing an integrated group of product and platforff m sales consultants focused on helping financial advisors and institutions navigate and grow in an increasingly complex financial services landscape. Prior to his promotion to managing director, Mr. Enyedi served as executive vice president, national sales from March 2015 to January 2020. In that role, he led the firm’s data analytics and business intelligence effoff rts, and oversaw a team focused on providing front- and middle-officeff capabilities to help advisors grow their businesses and reach new segments of clients. He was also previously responsible for teams supporting LPL Financial’s RIA custody and high-net-worth solutions. Mr. Enyedi joined LPL Financial in 2003 and has also served as senior vice president, vice president, corporate strategy and assistant vice president of advisory consulting. Prior to joining the firm, he worked as a financial advisor with UBS PaineWebber. Mr. Enyedi received a B.A. in speech communication and business administration from the University of San Diego. He also holds the Certified Investment Management Analyst® designation from the Haas School of Business at the University of California, Berkeley. ff Edwardrr Fandrey — Managingii Director, Divisional Presi rr dent, Advisor Solutions Mr. Fandrey has served as managing director, divisional president, advisor solutions of LPL Financial since January 2021. In this role, he is responsible for leading LPL Financial’s strategic plan to expand engagement with advisors, partnering with them to utilize the firm’s evolving affiliat ion models, optimally leverage its tools and capabilities, and fully support their growth initiatives and other business needs. Prior to joining LPL Financial, he served as vice president of the Financial Services business at Microsoftff Corporation from 2016 to 2021, where he led an organization of sales, support, technology and customer success professionals driving client-centric digital transformation across leading banks, insurance companies, hedge funds and capital markets firms. Mr. Fandrey joined Microsoftff in 2000 and held various leadership roles including chief of staffff for Worldwide Sales and Marketing. He earned his bachelor’s degree in psychology from the State University of New York at Albany and has multiple technology and developer certifications. ff 31 Gregrr Gates — Managing Dirii ecrr tor, Chief Technology & Informff ationtt Offiff cer ff ff informat ion technology organization responsible for delivering technology solutions and market- ff that enable positive, compelling experiences for LPL Financial advisors and employees. Mr. Gates Mr. Gates has served as managing director, chief technology & information officer of LPL Financial since July 2021. In this role he is responsible for managing all aspects of the firm’s technology and systems applications. He leads a high-performing ff leading platforms joined LPL in 2018 with nearly two decades of senior-level management experience focused on the application of technology to solve business challenges on a global scale. Before joining LPL Financial, Mr. Gates led product management and engineering teams at PayPal from 2011 to 2018, focusing on internal technology platforms, merchant and consumer experiences, risk and security, and global operations. Prior to that, at Bank of America he led a number of technology organizations, culminating in leadership of Bank of America’s Contact Center Technology from 2002 to 2011. Mr. Gates earned his bachelor’s degree in biomedical engineering from Vanderbilt University in 1999, and has successfully completed multiple leadership, continuing education, and certification programs from several organizations. Salliell R. Larsen — Managingii Director, Chief Human Capital Officer ff Ms. Larsen is managing director, chief human capital officer of LPL Financial. She is responsible for overseeing ff executive communication, human resources, talent development, corporate real estate, total rewards and talent acquisition, advisor and employee learning and development and diversity and inclusion. Ms. Larsen joined us in of Finance, where she served as the chief human resources May 2012 from the Federal Home Loan Bank/Officeff officer resources for Capital One Financial Corporation, senior vice president of human resources for Marriott International and vice president of human resources and communications for TRW Inc. Ms. Larsen earned a M.A. in communications from Purdue University, a B.A. in sociology from California executive leadership coaching from Georgetown University. from November 2009 to April 2012. In earlier roles, Ms. Larsen was a managing vice president of human Lutheran University and a certificate in ff ff Michelle Oroscha rr koff — Managingii Directo ii r, Chief Legal Officer ff Ms. Oroschakoffff is managing director, chief legal offiff cer of LPL Financial. She is responsible for company-wide legal and government relations matters, risk management processes and controls, compliance and governance, and has a leading role in LPL Financial’s ongoing focus on enhancing the corporate risk profile. Ms. Oroschakoffff has more than 20 years of financial services industry experience in legal, compliance and risk management. She joined LPL Financial as managing director, chief risk officer chief legal and risk officer recently served as managing director and global chief risk offiff cer of the firm’s Global Wealth Management Group from 2011 to 2013. Previously, while with Morgan Stanley, she served as chief administrative officer from 2010 to 2011, as well as chief compliance officer a variety of legal and compliance roles at Morgan Stanley, including associate general counsel and head of the firm’s San Francisco litigation department. She also served as the general counsel for a large and successful RIA firm where she became familiar with the independent model. She also serves on the SIFMA Compliance and Legal Executive Committee. Ms. Oroschakoffff earned a B.A. in English literature from the University of Oregon and a J.D., with honors, from the University of Michigan. from 2006 to 2010. Earlier in her career, Ms. Oroschakoffff spent 11 years in in September 2013 from Morgan Stanley, and was promoted to in June 2017. She became chief legal officer in June 2018. At Morgan Stanley, she most ff ff ff ff Dayton Semerjianjj — Managingii Directo rr r, Chief Customer Care Officer ff Mr. Semerjian has served as managing director, chief customer care officer He is responsible for LPL Financial’s customer satisfaction and client-centric efforts Operations, LPL Financial’s largest business unit. Beforeff and senior vice president for Global Customer Success at CA Technologies Inc., which he joined in 2005 when the firm acquired Concord Communication Inc. At Concord, he was executive vice president of marketing and strategic alliances. Mr. Semerjian also gained experience leading firms in adopting new service models that focus on improving the customer experience at scale through leadership roles at Intel Corp., Nation Street Inc. and Corente Inc., which was acquired by Oracle. Mr. Semerjian received a B.B.A. in marketing and management from the University of Massachusetts and an M.B.A. from Harvard Business School. He was also awarded an advanced certificate of executive management by the MIT Sloan School of Management. of LPL Financial since February 2019. and leads Service, Trading and joining LPL Financial, Mr. Semerjian was general manager ff 32 Richard Steinmeier — Managingii Directo ii r, Divisivv onal Presi rr dent, Business Development Mr. Steinmeier has served as managing director and divisional president, business development of LPL Financial since August 2018. In this role, he has responsibility for recruiting new financial advisors and institutions to LPL Financial and to existing advisor practices, as well as exploring new markets and merger and acquisition opportunities. Prior to joining LPL Financial, Mr. Steinmeier served as managing director, head of digital strategy and platforms for UBS Wealth Management Americas from September 2017 to August 2018 and as managing Segment and Wealth Advice Center from August 2012 to September 2017. director, head of the Emerging Affluent Prior to UBS, Mr. Steinmeier held a variety of leadership roles at Merrill Lynch, most recently as managing director of the Merrill Edge Advisory Center from February 2009 to August 2012. Prior to joining Merrill Lynch, he served as an engagement manager at McKinsey & Company from 2002 to 2006. Mr. Steinmeier earned a B.S. in economics from the Wharton School at the University of Pennsylvania and an M.B.A. from Stanfordff University. ff George B. White — ManaM ging Direii ctor, Invesvv tor and Invesvv tment Solutions tt , Chief Invesvv tment Offiff cer Mr. White has served as managing director, investor and investment solutions and chief investment officer ff Financial since January 2017. He served as managing director, research, and chief investment officer December 2016. Mr. White is responsible for the strategic direction and continued growth of LPL Financial’s research, marketing, products and investment platforms. Prior to joining us in November 2007, Mr. White served as a managing director and director of research for Wachovia Securities for 10 years. Mr. White was also an investment analyst for Mercer Investment Consulting where he provided investment advice to institutional clients. He started his financial services career on the buy side of the business as a research analyst for Thompson, Siegel, and Walmsley, a value-oriented asset manager. Mr. White received a B.B.A. from the College of William and Mary. from 2009 to of LPL ff 33 Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of PART II Equity Securities Market Information Our common stock is traded on the Nasdaq Global Select Market under the symbol “LPLA.” The closing sale price as of December 31, 2021 was $160.09 per share. As of that date, there were 1,023 common stockholders of record based on informat number of individual or institutional stockholders that beneficially own the Company’s stock because most stock is held in the name of nominees. ion provided by our transfer agent. The number of stockholders of record does not reflect the ff Performance Graph The following graph compares the cumulative total stockholder return (rounded to the nearest whole dollar) of the Company’s common stock, the Standard & Poor’s 500 Financial Sector Index and the Dow Jones U.S. Financial Services Index for the last five years. The graph assumes a $100 investment at the closing price on December 31, 2016 and reinvestment of the dividends on the respective dividend payment dates without commissions. This graph does not forecast future perforr rmance of the Company’s stock. l e u a V $500 $450 $400 $350 $300 $250 $200 $150 $100 $50 $0 12/31/16 03/31/17 06/30/17 09/30/17 12/30/17 03/31/18 06/30/18 09/30/18 12/31/18 03/31/19 06/30/19 09/30/19 12/31/19 03/31/20 06/30/20 09/30/20 12/31/20 03/31/21 06/30/21 09/30/21 12/31/21 Date LPLA S&P 500 Financial Sector Index Dow Jones U.S. Financial Services Index 34 Dividend Policy The payment, amount and timing of any future dividends will be subject to the discretion of our board of directors and will depend on a number of factors, including future earnings and cash flows, capital requirements, alternative uses of capital, general business conditions, our future prospects, contractual restrictions and covenants and other factors that our board of directors may deem relevant. Our Credit Agreement and the Indentures governing the Notes contain restrictions on our activities, including paying dividends on our capital stock. For an explanation of these restrictions, see “Item 7. Management’s Discussion and Analysis of Financial Conditiontt Operations tt member firm’s excess net capital without FINRA’sAA prior approval, potentially impeding our ability to receive dividends from LPL Financial. ” In addition, FINRA regulations restrict dividends in excess of 10% of a - Debt and Related Covenants.tt and Results ott f Securities Authorized for Issuance Under Equity Compensation Plans The table below sets forth informat issuance as of December 31, 2021: ff ion on compensation plans under which our equity securities are authorized for Plan category Equity compensation plans approved by security holders Total Purchases of Equity Securities by the Issuer Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans 1,204,420 $ 1,204,420 $ 45.65 45.65 14,787,930 14,787,930 The table below sets forth information regarding share repurchases, reported on a trade date basis, during the three months ended December 31, 2021: Period Total Number of Shares Purchased Weighted- Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Programs Approximate Dollar Value of Shares That May Yet Be Purchased Under the Program (millions)(1) October 1, 2021 through October 31, 2021 — $ — November 1, 2021 through November 30, 2021 239,641 $ 166.12 December 1, 2021 through December 31, 2021 63,330 $ 161.02 Total 302,971 — $ 239,641 $ 63,330 $ 302,971 309.8 270.0 259.8 (1) On November 13, 2018, the Board of Directors authorized an increase to the Company’s existing share repurchase program to authorize the repurchase of up to $1.0 billion of its issued and outstanding common shares. See Note 15 - Stockholders’ Equity, within the notes to the consolidated financial statements for additional information. The repurchases may be executed from time to time, subject to general business and market conditions and other investment opportunities, through open market purchases or privately negotiated transactions, including transactions with affiliates, with the timing of purchases and the amount of shares purchased generally determined at the discretion of the Company within the constraints of the Credit Agreement, the Indentures, applicable laws and consideration of the Company’s general liquidity needs. Item 6. Reserved GLOSSARY OF TERMS Adjusted Net Income: A non-GAAP financial measure defined as net income plus the after-tax impact of amortization of other intangibles and acquisition costs. Basis Point: One basis point equals 1/100th of 1%. CFTC: The Commodity Futures Trading Commission. 35 Core G&A: A non-GAAP financial measure defined as total expense excluding the following expenses: advisory and commission; depreciation and amortization; interest expense on borrowings; brokerage, clearing and exchange; amortization of other intangibles; loss on extinguishment of debt; promotional; acquisition costs; employee share- based compensation; and regulatory charges. Corporate Cash: The sum of cash and equivalents from the following: (1) cash held at the Parent (as defined herein), (2) excess cash at LPL Financial per the Credit Agreement, which is the net capital held at LPL Financial in excess of 10% of its aggregate debits, or five times the net capital required in accordance with Exchange Act Rule 15c3-1, and (3) other available cash, which includes cash and equivalents held at The Private Trust Company, N.A., in excess of Credit Agreement capital requirements, and cash and equivalents held at non-regulated subsidiaries. Credit Agreement: The Company’s amended and restated credit agreement. Credit Agreement EBITDA: The equivalent of “Consolidated EBITDA,” as defined in the Credit Agreement, which is Consolidated Net Income (as defined in the Credit Agreement) plus interest expense, tax expense, depreciation and amortization, and is further adjusted to exclude certain non-cash charges and other adjustments (including unusual or non-recurring charges) and gains, and to include future expected cost savings, operating expense reductions or other synergies from certain transactions. Dodd-Frank Act: The Dodd-Frank Wall Street Reform and Consumer Protection Act. DOL: The United States Department of Labor. DTC: The Depository Trust Company. EBITDA: A income taxes, depreciation and amortization, and amortization fof other int gangibles. fdefined as net income plus interest expense on Gnon-GAAP ffinancial measure borrowings, provision ffor g ERISA: The Employee Retirement Income Security Act of 1974. EPS Prior to Amortization of Intangible Assets and Acquisition Costs: A non-GAAP financial measure defined as Adjusted Net Income divided by the weighted average number of diluted shares outstanding for the applicable period. FINRA: The Financial Industry Regulatory Authority. GAAP: Accounting principles generally accepted in the United States of America. Gross Profit: Non-GAAP financial measure defined as total revenue less advisory and commission expense and brokerage, clearing and exchange fees. Indentures: Refers to the indentures governing the Company’s senior unsecured notes. Leverage Ratio: A financial metric from our Credit Agreement that is calculated by dividing Credit Agreement net debt, which equals consolidated total debt less Corporate Cash, by Credit Agreement EBITDA. NSCC: The National Securities Clearing Corporation. NFA: The National Futures Association. OCC: The Officeff of the Comptroller of the Currency. RIA: Registered investment advisor. SEC: The U.S. Securities and Exchange Commission. 36 SIPC: The Securities Investor Protection Corporation. SRO: Self-regulatory organization. Uniform Net Capital Rule: Refers to Rule 15c3-1 under the Securities Exchange Act of 1934, which specifies minimum capital requirements that are intended to ensure the general financial soundness and liquidity of broker- dealers at all times. 37 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ii ii of our financial conditiontt statett mentstt and the notes to those consolidated financial The followinww g discussion consolidated financial Financial Statementstt and Supplementary forward-lookingii statementstt those set forth under “Risk Factors” and elsewhere in this Annual Report on Form 10-K,KK our actual resultstt may diffii erff materially from those anticipat heading “Special included in “Item 8. Data” of this Annual Report on Form 10-K.KK This discussion contains As a result of many factors, such as ed in these forward-looking statements.tt Please also refer to the sectiontt should be read in conjunctiontt stt tt statement u that involve significant Note Regarding Forward-Looking Statements.” and resultstt of operations tt risks and uncertaint ies. withtt our under S ff tt t tt tt t ii Business Overview We are a leader in the retail financial advice market and the nation’s largest independent broker-dealer. We serve independent financial advisors and financial institutions, providing them with the technology, research, clearing and compliance services and practice management programs they need to create and grow their practices. We enable them to provide personalized financial guidance to millions of American families seeking wealth management, retirement planning, financial planning and asset management solutions. Please consult Part I, “Item 1. Business” for additional informat ion related to our business activities. ff Our Sources of Revenue Our revenue is derived primarily from fees and commissions from products and advisory services offered 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 revenue through our insured bank sweep vehicles, money market programs and the access we provide to a variety of product providers with the following product lines: by our ff • Alternative Investments • Annuities • Exchange Traded Products • Insurance Based Products • Mutual Funds • Retirement Plan Products • Separately Managed Accounts • Structured Products • Unit Investment Trusts ff platform, we custody the majority of client assets invested in these financial products, for Under our self-clearing which we provide statements, transaction processing and ongoing account management. In return for these services, mutual funds, insurance companies, banks and other financial product sponsors pay us fees based on asset levels or number of accounts managed. We also earn interest from margin loans made to our advisors’ clients. A portion of our revenue is not asset-based or correlated with the equity financial markets. We regularly review various aspects of our operations and service offerings, including our policies, procedures and platforms, in response to marketplace developments. We seek to continuously improve and enhance aspects of our operations and service offeri and regulatory developments. For example, we regularly review the structure and fees of our products and services, including related disclosures, in the context of the changing regulatory environment and competitive landscape for advisory and brokerage accounts. ngs in order to position our advisors for long-term growth and to align with competitive ff ff Significant Events Completed the acquisition of Waddeld lll & Reed Financial, Inc. and surparr ssed $1.0 trilrr lill on in assets On April 30, 2021 we completed the acquisition of the wealth management business of Waddell & Reed Financial Inc. (the “Waddell & Reed Acquisition”). Concurrent with the closing of the Waddell & Reed Acquisition, we surpassed $1.0 trillion in total advisory and brokerage assets. We completed the onboarding of $71.2 billion of client assets representing 99% of assets from the Waddell & Reed Acquisition during the third quarter of 2021. Generated $118.8 billii ioll n of orgarr nic net new assets We generated $118.8 billion of organic net new assets during 2021, which included the onboarding of approximately $35.0 billion of combined total assets from M&T Bank and BMO Harris to our platform. This translated to an annual organic net new asset growth rate of 13.2%. We also signed an agreement with CBSI to join our platform. CBSI 38 supports over 500 advisors serving approximately $32 billion in brokerage and advisory assets, which we expect to onboard during 2022. Business Solutions subscripti ll annualized run rate basis ii ons morerr than doubled,dd drivingii revenue of approximatel ii yl $28 millioll n on an Total active and contracted Business Solutions subscriptions more than doubled to end the year at 3,022, driving revenue of approximately $28 million on an annualized run rate basis. Refinanii ced our highi est cost debt, increased rr capacity under our Credit rr Agreement, and issued senior notes On March 15, 2021, we took advantage of the low interest rate environment to issue $900.0 million in aggregate principal amount of 4.00% senior unsecured notes due in 2029 (“2029 Senior Notes”). We used the proceeds from the 2029 Senior Notes to redeem our existing 5.75% senior unsecured notes due in 2025 (“2025 Senior Notes”), reduced our annual interest expense by $13.0 million, and created additional borrowing capacity under our Credit Agreement, which was increased to $1.0 billion. Additionally, on May 18, 2021, we issued $400.0 million in aggregate principal amount of 4.375% senior unsecured notes due in 2031 (“2031 Senior Notes”). Proceeds from the 2031 Senior Notes were used to repay borrowings under the Credit Agreement, which were used to finance the Waddell & Reed Acquisition. Earned a spot on the Fortune 500 list ll In June 2021 the Company earned a spot in the Fortune 500 ranking for 2021 based on our revenue of $5.9 billion for the year ended December 31, 2020, placing us on the list of largest U.S. companies as ranked by revenue. Resumed share repurchases during the thirdii quarter of 2021 and repurchased $90.0 millii ioll n of shares We resumed share repurchases during the third quarter of 2021 with an initial focff us on repurchasing amounts to offset million. dilution. We repurchased 579,771 shares during the third and fourth quarters of 2021 for a total of $90.0 ff Executive Summary Financial ii Highlights Results for the year ended December 31, 2021 included net income of $459.9 million, or $5.63 per diluted share, which compares to $472.6 million, or $5.86 per diluted share, for the year ended December 31, 2020. Asset Growt rr htt Trends Total advisory and brokerage assets served were $1.2 trillion at December 31, 2021, up 33.6% from $903.1 billion at December 31, 2020. Total net new assets were $190.0 billion for the year ended December 31, 2021, compared to $60.2 billion for the same period in 2020. Net new advisory assets were an inflow of $123.5 billion for the year ended December 31, 2021, compared to $52.1 billion in 2020. Advisory assets were $643.2 billion, or 53.3% of total advisory and brokerage assets served, at December 31, 2021, up 39.5% from $461.2 billion at December 31, 2020. Net new brokerage assets were an inflow of $66.6 billion for the year ended December 31, 2021, compared to $8.1 billion in 2020. Brokerage assets were $563.2 billion at December 31, 2021, up 27.4% from $441.9 billion at December 31, 2020. Gross Profit rr Trends rr Gross profit, a non-GAAP financial measure, was $2,454.7 million for the year ended December 31, 2021, an increase of 16.7% from $2,103.3 million for the year ended December 31, 2020. See the “Key Performance section for additional informat ion on gross profit. ff ff Metrics” Common Stock Dividends and Share Repurchases During the year ended December 31, 2021, we paid shareholders cash dividends of $80.1 million and repurchased 579,771 of our outstanding shares for a total of $90.0 million. VV COVID-19 Response In response to the COVID-19 pandemic, we have taken measures to protect the health and safety of our employees, as well as the stability and continuity of our operations. For example, we have equipped and enabled a 39 substantial majority of employees to work remotely, enhanced cleaning protocols throughout our corporate offices, and worked closely with our vendors to maintain service continuity throughout the market volatility and increased operational volumes that have occurred from time to time during the pandemic. We also made extra support available to our advisors by extending service hours and providing additional resources to enable them to deliver differe ff Part I, “Item 1A. Risk Factors”rr ntiated services to their clients. Please consult the “Risks Related to our Business and Industry” ion about the risks associated with COVID-19. for more informat ff tt section within Key Performance Metrics We focus on several key metrics in evaluating the success of our business relationships and our resulting financial position and operating performance. Our key operating, business and financial metrics are as follows: ff As of and for the Years Ended December 31, 2021 2020 $ 643.2 563.2 $ 1,206.4 53.3% $ $ $ $ $ $ $ 123.5 66.6 190.0 89.4 29.4 118.8 19.4 % 13.2% 30.0 9.3 39.3 16.1 1.9 18.0 57.3 69.1 $ $ $ $ $ $ $ $ $ 461.2 441.9 903.1 51.1% 52.1 8.1 60.2 49.6 6.6 56.2 13.6 % 7.4% 37.3 8.2 45.5 1.5 1.9 3.4 48.9 34.3 Operating Metrics (dollars in billions)(1) Advisory and Brokerage Assets g y Advisory assets(2)(3) Brokerage assets(2)(4) Total Advisory and Brokerage Assets(2) Advisory assets as a % of total Advisory and Brokerage Assets Net New Assets Net new advisory assets(5) Net new brokerage assets(6) Total Net New Assets(7) Organic Net New Assets g (7) Net new organic advisory assets Net new organic brokerage assets Total Organic Net New Assets Organic advisory net new assets annualized growth(7)(8) Total organic net new assets annualized growth(7)(8) Client Cash Balances(2) Insured cash account Deposit cash account Total Bank Sweep Balances Money market account Purchased money market funds Total Money Market Balances Total Client Cash Balances Net buy (sell) activity(9) 40 Business and Financial Metrics (dollarsll in millions) Advisors - period end Average total assets per advisor(10) Employees - period end Share repurchases Dividends Leverage ratio(11) Financial Metrics (dollars in millions, except per share data) Total revenue Net income Earnings per share (“EPS”), diluted Non-GAAP Financial Metrics (dollars in millions, except per share data) EPS prior to amortization of intangible assets and acquisition costs(12) Gross profit(13) EBITDA(14) EBITDA as a % of Gross profit Core G&A(15) ______ ____ ____ ____ ____ ____ ____ ____ ____ As of and for the Years Ended December 31, 2021 2020 19,876 60.7 $ 5,919 17,287 52.2 4,756 90.0 80.1 2.26 $ $ 150.0 79.1 2.16 $ $ $ Years Ended December 31, 2021 2020 $ 7,720.8 $ 5,871.6 $ $ $ 459.9 5.63 7.02 $ $ $ 472.6 5.86 6.46 $ 2,454.7 $ 2,103.3 $ 936.4 38.1% $ 1,058.2 $ $ 908.9 43.2% 925.1 (1) (2) (3) (4) (5) (6) (7) (8) (9) Totals may not foot due to rounding. Advisory and brokerage assets consist 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. Client cash balances are also included in total advisory and brokerage assets. Advisory assets consist of total advisory assets under custody at LPL Financial and Waddell & Reed, LLC (“Waddell & Reed”). Please a tabular presentation of advisory assets. consult the “Results of Operations” section forf Brokerage assets consist of brokerage assets serviced by advisors licensed with LPL Financial. Net new advisory assets consist of total client deposits into custodied advisory accounts less total client withdrawals from custodied advisory accounts, plus dividends, plus interest, minus advisory fees. We consider conversions from and to brokerage accounts as deposits and withdrawals, respectively. Net new brokerage assets consist of total client deposits into brokerage accounts less total client withdrawals from brokerage accounts, plus dividends, plus interest. We consider conversions from and to advisory accounts as deposits and withdrawals, respectively. Total net new assets include $71.2 billion of assets related to the Waddell & Reed Acquisition during the year ended December 31, 2021. Total net new assets during the year ended December 31, 2020 include $2.5 billion of net new assets related to the acquisition of E.K. Riley Investments, LLC (“E.K. Riley”) and $1.5 billion of net new assets related to the acquisition of Lucia Securities, LLC (“Lucia”). Organic net new assets and related growth rates exclude these assets in both periods. Calculated as annualized current period organic net new assets divided by preceding period assets in their respective categories of advisory assets or total advisory and brokerage assets. Represents the amount of securities purchased less the amount of securities sold in client accounts custodied with LPL Financial and Waddell & Reed. Reported activity does not include any other cash activity, such as deposits, withdrawals, dividends received or fees paid. (10) Calculated based on the end-of-period total advisory and brokerage assets divided by end-of-period advisor count. 41 (11) The leverage ratio is a financial metric from our Credit Agreement and is calculated by dividing Credit Agreement net debt, which equals consolidated total debt plus corporate cash, by Credit Agreement EBITDA. Credit Agreement EBITDA, a non-GAAP measure, is defined by the Credit Agreement as “Consolidated EBITDA,” which is Consolidated Net Income (as defined in the Credit Agreement) plus interest expense on borrowings, provision forff adjusted to exclude certain non-cash charges and other adjustments (including unusual or non-recurring charges) and gains, and to include future expected cost savings, operating expense reductions or other synergies from certain transactions. Please consult the “Debt and Related Covenants” section forff more information. Below is a reconciliation of corporate debt and other borrowings to Credit Agreement net debt and net income to EBITDA and Credit Agreement EBITDA (in millions): income taxes, depreciation and amortization, and amortization of other intangibles, and is further Credit Agreement Net Debt Reconciliation s Corporate debt and other borrowing Corporate cash Credit Agreement Net Debt(†) EBITDA and Credit Agreement EBITDA Reconciliation Net income Interest expense on borrowings Provision forff income taxes Depreciation and amortization Amortization of other intangibles EBITDA(†) Credit Agreement Adjustments: Employee share-based compensation expense Advisor share-based compensation expense M&A accretion(16) Loss on extinguishment of debt Acquisition costs and other Credit Agreement EBITDA(†) Leverage Ratio (†) Totals may not foof t due to rounding. $ $ $ $ $ December 31, 2021 2020 2,838.6 (237.0) 2,601.6 $ $ 2,359.3 (279.9) 2,079.4 Years Ended December 31, 2021 2020 459.9 $ 104.4 141.5 151.4 79.3 936.4 41.8 2.3 53.6 24.4 92.1 $ $ 472.6 105.8 153.4 109.7 67.4 908.9 31.7 2.3 — — 18.3 961.2 $ 1,150.7 $ December 31, 2021 2020 2.26 2.16 (12) EPS prior to amortization of intangible assets and acquisition costs is a non-GAAP financial measure defined as adjusted net income, a non-GAAP financial measure defined as net income plus the after-tax impact of amortization of other intangibles and acquisition costs, the applicable period. The Company presents adjusted net divided by the weighted average number of diluted shares outstanding forf income and EPS prior to amortization of intangible assets and acquisition costs because management believes that these metrics can provide investors with useful insight into the Company’s core operating perforr rmance by excluding non-cash items and acquisition costs that management does not believe impact the Company’s ongoing operations. Adjusted net income and EPS prior to amortization of intangible assets and acquisition costs are not measures of the Company's financial performance under GAAP and should not be considered as alternatives to net income, earnings per diluted share or any other performance measure derived in accordance with GAAP. Below is a reconciliation of net income and earnings per diluted share to adjusted net income and EPS prior to amortization of intangible assets and acquisition costs for the periods presented (in millions, except per share data): Adjusted net income / EPS prior to amortization of intangible assets and acquisition costs Reconciliation Net income / earnings per diluted share Amortization of other intangibles Acquisition costs(17) Tax benefit Years Ended December 31, 2021 2020 Amount Per Share Amount Per Share $ 459.9 $ 79.3 76.4 5.63 0.97 0.93 $ 472.6 $ 67.4 — 5.86 0.83 — (41.4) (0.51) (18.9) (0.23) Adjusted net income / EPS prior to amortization of intangible assets and acquisition costs(†) $ Weighted-average shares outstanding, diluted (†) Totals may not foot due to rounding. 574.1 $ 81.7 7.02 $ 521.1 $ 80.7 6.46 42 (13) Gross profit is a non-GAAP financial measure defined as total revenue less advisory and commission expense and brokerage, clearing and exchange expense. All other expense categories, including depreciation and amortization of property and equipment and amortization of other intangibles, are considered by management to be general and administrative in nature. Because our gross profit amounts do not include any depreciation and amortization expense, we consider our gross profit amounts to be non-GAAP financial measures that may not be comparable to those of others in our industry. We believe that gross profit amounts can provide investors with useful insight into our core operating performance before indirect costs that are general and administrative in nature. Below is a reconciliation of gross profit for the periods presented (in millions): Gross Profit Total revenue Advisory and commission expense Brokerage, clearing and exchange expense Gross Profit(†) ______ ____ ____ ____ ____ ____ ____ ____ ____ (†) Totals may not foof t due to rounding. Years Ended December 31, 2021 2020 $ $ 7,720.8 $ 5,180.1 86.0 5,871.6 3,697.1 71.2 2,454.7 $ 2,103.3 (14(14)) EBITDA is a non G-GAAP ffinancial measure depreciation and amortization, and amortization off other intanggibles. Th Ce Compa yny presents EBITDA because managgement believes that it can be a u fsefu fl financial metric in understandingg the CCompa yny’s earn ging fs from operations. EBITDA is not a measure fof the CCompanyy's ffinancial perfforr derived in accordance with GGAAP. Below is a reconciliation fof EBITDA to net income ffor the periods presented (in(in millions):ns): rmance under GGAAP and should not be considered as an alternative to net income or anyy other perfforr fdefined as net income plus interest expense on borrowinggs, provision ffor income taxes, rmance measure EBITDA Reconciliation Net income Interest expense on borrowings Provision forf income taxes Depreciation and amortization Amortization of other intangibles EBITDA(†) __ ________ __ __ ____ __ ____ ____ (†) Totals may not foot due to rounding. Years Ended December 31, 2021 2020 $ $ 459.9 $ 104.4 141.5 151.4 79.3 936.4 $ 472.6 105.8 153.4 109.7 67.4 908.9 (15) Core G&A is a non-GAAP financial measure defined as total expense less the following expenses: advisory and commission; depreciation and amortization; interest expense on borrowings; brokerage, clearing and exchange; amortization of other intangibles; loss on extinguishment of debt; promotional; acquisition costs; employee share-based compensation; and regulatory charges. Management presents Core G&A because it believes Core G&A reflects the corporate expense categories over which management can generally exercise a measure of control, compared with expense items over which management either cannot exercise control, such as advisory and commission expense, or which management views as promotional expense necessary to support advisor growth and retention, including conferences and transition assistance. Core G&A is not a measure of the Company’s total expense as calculated in accordance with GAAP. Below is a reconciliation of Core G&A against the Company’s total expense for the periods presented (in millions): Core G&A Reconciliation Total expense Advisory and commission Depreciation and amortization Interest expense on borrowings Brokerage, clearing and exchange Amortization of other intangibles Loss on extinguishment of debt Total G&A Promotional (ongoing)(17) Acquisition costs(17) Employee share-based compensation Regulatory charges Core G&A(†) ______ ____ ____ ____ ____ ____ ____ ____ ____ (†) Totals may not foof t due to rounding. Years Ended December 31, 2021 2020 $ 7,119.5 $ 5,180.1 151.4 104.4 86.0 79.3 24.4 1,493.9 288.0 76.4 41.8 29.4 $ 1,058.2 $ 5,245.6 3,697.1 109.7 105.8 71.2 67.4 — 1,194.4 208.3 — 31.6 29.4 925.1 (16) M&A accretion is an adjustment to reflect the annualized expected run rate EBITDA of an acquisition as permitted by the Credit Agreement for up to eight fiscal quarters following the close of the transaction. (17) Acquisition costs include the cost to setup, onboard and integrate acquired entities and primarily include $36.4 million of compensation and benefits expense, $18.7 million of professional services expense, $14.3 million of promotional expense, and other expenses that were incurred during the year ended December 31, 2021 that are included in the respective line items in the consolidated statements of income. 43 Acquisitions, Integrations and Divestitures We continuously assess the competitive landscape in connection with our capital allocation framework as we pursue acquisitions, integrations and divestitures. These activities are part of our overall growth strategy but can distort comparability when reviewing revenue and expense trends for periods presented. Our recent acquisitions include the following: • Waddell & Reed Financial, Inc. - In April 2021, we acquired the wealth management business of Waddell & Reed Financial, Inc. • • • Blaze Portfolioff advisor-facing trading and portfolio rebalancing platform. Systems LLC - In October 2020, we acquired Blaze, a technology company that provides an E.K. Riley Investments, LLC - In August 2020, we acquired business relationships with advisors from E.K. Riley, a broker-dealer and RIA. Lucia Securities, LLC - In August 2020, we acquired business relationships with advisors from Lucia, a broker-dealer and RIA. See Note 4 - Acquisitions tt , within the notes to the consolidated financial statements for further detail. Economic Overview and Impact of Financial Market Events Our business is directly and indirectly sensitive to several macroeconomic factors and the state of the United States financial markets. According to the most recent estimate from the U.S. Bureau of Economic Analysis, the U.S. economy grew at an annualized pace of 6.9% in the fourth quarter of 2021 after growing at an annualized pace of 2.3% in the third quarter of 2021. The equity markets were generally strong in 2021 with the S&P 500 and Russell 2000 and 3000 indices gaining year over year. Non-U.S. stocks continued to trail their U.S. counterparts and rising interest rates made it a challenging year for fixed income markets, contributing to a near flat return for the Bloomberg U.S. Aggregate Bond Index for the fourth quarter and a 1.6% loss for the year. Our business is also sensitive to current and expected short-term interest rates, which are largely driven by Federal Reserve (“Fed”) policy. At the January 2022 policy meeting, Fed policymakers maintained the target range for the federal funds rate at 0% to 0.25%. Fed officials also signaled they would make a decision on whether to raise the federal funds rate at the March 2022 meeting and announced an intent to end net asset purchases in early March. ff Please consult the “Risks Related to Our Business and Industry” section within Part I, “Item 1A. Risk Factors” for more informat ion about the risks associated with significant interest rate changes and the potential related effects ff on our profitability and financial condition. ff 44 Results of Operations dd A discussion of changes in our results ott this Aii year ended December 31, 2019 has been omitted fromrr 7. Management’s Discussion Conditiontt and Analysis of Financial ii fiscal year ended December 31, 2020, filedii on Form 10-K for thett iott ns duringii f operatrr ii the yeayy r ended December 31, 2020 compared to the nnual Report on Form 10-K, bKK ut may be found in “Item and Results ott with t tt f Operat ions” SEC on February 23, 2021. tt hett O in our Annual Report The following discussion presents an analysis of our results of operations for the years ended December 31, 2021 and 2020 (in thousands): Years Ended December 31, 2021 2020 % Change REVENUE Advisory Commission Asset-based Service and fee Transaction Interest income Other Total revenue EXPENSE Advisory and commission Compensation and benefits Promotional Occupancy and equipment Depreciation and amortization Interest expense on borrowings Brokerage, clearing and exchange Amortization of other intangibles Professional services Communications and data processing Loss on extinguishment of debt Other Total expense INCOME BEFORE PROVISION FOR INCOME TAXES PROVISION FOR INCOME TAXES NET INCOME $ 3,525,430 $ 2,327,519 2,378,683 1,906,560 1,148,067 1,044,517 411,761 156,336 28,577 71,976 357,722 148,349 29,412 57,561 7,720,830 5,871,640 5,180,090 3,697,147 741,003 302,285 185,531 151,428 104,414 86,023 79,260 73,231 60,296 24,400 609,257 208,250 166,389 109,732 105,765 71,185 67,358 57,067 52,399 — 131,540 101,018 7,119,501 601,329 141,463 5,245,567 626,073 153,433 $ 459,866 $ 472,640 51.5 % 24.8 % 9.9 % 15.1 % 5.4 % (2.8)% 25.0 % 31.5 % 40.1 % 21.6 % 45.2 % 11.5 % 38.0 % (1.3)% 20.8 % 17.7 % 28.3 % 15.1 % 100.0 % 30.2 % 35.7 % (4.0)% (7.8)% (2.7)% 45 Revenue Advisory Advisory revenue represents fees charged to advisors’ clients’ advisory accounts on our corporate RIA advisory platform and is based on a percentage of the market value of the eligible assets in the clients’ advisory accounts. We provide ongoing investment advice and act as a custodian, providing brokerage and execution services on transactions, and perform administrative services for these accounts. Advisory fees are primarily billed to clients in advance, on a quarterly basis, and are recognized as revenue ratably during the quarter. The performance obligation for advisory fees is considered a series of distinct services that are substantially the same and are satisfied daily. As the value of the eligible assets in an advisory account is susceptible to changes due to customer activity, this revenue includes variable consideration and is constrained until the date that the fees are determinable. The majority of our client accounts are on a calendar quarter and are billed using values as of the last business day of the preceding quarter. The value of the eligible assets in an advisory account on the billing date is adjusted for estimates of contributions and withdrawals to determine the amount billed, and accordingly, the revenue earned in the following three-month period. Advisory revenue collected on our corporate advisory platform is proposed by the advisor and agreed to by the client and averaged 1% of the underlying assets forff 2021. the year ended December 31, ff We also support Hybrid RIAs through our hybrid advisory platform, which allows advisors to engage us for technology, clearing and custody services, as well as access to the capabilities of our investment platforms. The assets held under a Hybrid RIA’sAA investment advisory accounts custodied with LPL Financial are included in total advisory assets and net new advisory assets. The advisory revenue generated by a Hybrid RIA is not included in our advisory revenue. We charge separate fees technology, clearing, administrative, oversight to Hybrid RIAs forff and custody services, which may vary and are included in our service and fee revenue in our consolidated statements of income. ff Advisory revenue is generated from advisory assets. The following table summarizes the composition of advisory assets forff the periods presented (in billions): Corporate platform advisory assets RIA platform advisory assets Total advisory assets December 31, 2021 2020 $ Change % Change $ $ 429.6 $ 291.9 $ 137.7 213.6 169.3 44.3 643.2 $ 461.2 $ 182.0 47.2 % 26.2 % 39.5 % Net new advisory assets are generated throughout the quarter, therefore, the full impact of net new advisory assets to advisory revenue is not realized in the same period. The folff assets forff lowing table summarizes activity impacting advisory the periods presented (in billions): Beginning balance at January 1 Net new advisory assets(1) Market impact(2) Ending balance at December 31 ______ ____ ____ ____ ____ ____ ____ ____ ____ Years Ended December 31, 2021 2020 $ $ 461.2 $ 123.5 58.5 643.2 $ 365.8 52.1 43.3 461.2 (1) (2) Net new advisory assets consist of total client deposits into custodied advisory accounts less total client withdrawals from advisory accounts, plus dividends, plus interest, minus advisory fees. We consider conversions from and to advisory accounts as deposits and withdrawals, respectively. Market impact is the diffeff implied growth or decline in asset balances due to market changes over the same period of time. rence between the beginning and ending asset balance less the net new asset amounts, representing the The growth in advisory revenue from 2020 to 2021 was due to increases in net new advisory assets resulting from our recruiting effort s, advisor productivity and acquisitions, as well as market gains as represented by higher levels of the S&P 500 Index. ff Commission We generate two types of commission revenue: (1) sales-based commissions that are recognized at the point of sale on the trade date and are based on a percentage of an investment product’s current market value at the time of purchase and (2) trailing commissions that are recognized over time as earned and are generally based on the 46 market value of investment holdings in trail-eligible assets. Sales-based commission revenue, which occurs when clients trade securities or purchase various types of investment products, primarily represents gross commissions generated by our advisors and 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 revenue primarily on mutual funds and variable annuities held by clients of our advisors. See Note 3 - Revenue, within the notes to the consolidated financial statements forff further detail regarding our commission revenue by product category. The following table sets forth the components of our commission revenue (dollars in thousands): Sales-based Trailing Total commission revenue Years Ended December 31, 2021 2020 $ Change % Change $ 974,055 $ 770,764 $ 203,291 1,404,628 1,135,796 268,832 $ 2,378,683 $ 1,906,560 $ 472,123 26.4 % 23.7 % 24.8 % The increase in sales-based commission revenue in 2021 compared to 2020 was primarily driven by increases in sales fof annuities, mutual ffunds and ffixed income products. The increase in trailing commission revenue in 2021 compared to 2020 was primarily due to the increase in value fof annuities and mutual ffunds as a result fof market increases. Commission revenue is generated from brokerage assets. The following table summarizes activity impacting brokerage assets forff the periods presented (in billions): Beginning balance at January 1 Net new brokerage assets(1) Market impact(2) Ending balance at December 31 ______ ____ ____ ____ ____ ____ ____ ____ ____ Years Ended December 31, 2021 2020 $ $ 441.9 $ 66.6 54.7 563.2 $ 398.6 8.1 35.2 441.9 (1) (2) Net new brokerage assets consist of total client deposits into brokerage accounts less total client withdrawals from brokerage accounts, plus dividends, plus interest. We consider conversions from and to brokerage accounts as deposits and withdrawals, respectively. Market impact is the diffeff implied growth or decline in asset balances due to market changes over the same period of time. rence between the beginning and ending asset balance less the net new asset amounts, representing the Asset-Based Asset-based revenue consists of fees from our client cash programs, fees from our sponsorship programs with financial product manufacturers, and fees from omnibus processing and networking services (collectively referred to as “recordkeeping”). Client cash revenue is generated on advisors’ clients’ cash balances in insured bank sweep accounts and money market programs. We also receive fees from certain financial product manufacturers connection with sponsorship programs that support our marketing and sales force education and training efforts. Compensation for these performance obligations are either a fixed fee, a percentage of the average annual amount of product sponsor assets held in advisors’ clients’ accounts, a percentage of new sales or a combination. Omnibus processing revenue is paid to us by mutual fund product sponsors or their affiff liates and is based on the value of mutual fund assets in accounts forff which the Company provides omnibus processing services and the number of accounts in which the related mutual fund positions are held. Networking revenue on brokerage assets is correlated to the number of positions we administer and is paid to us by mutual fund product sponsors and annuity product manufacturers. in ff ff f Asset-based revenue for the year ended December 31, 2021 increased yby $$103.6 millio cn ompared to 2020, primarily due to increases in revenue ffrom reco in client cash revenue. rdkeeping and sponsorship gprograms, parti yally fofffset g y fff yby a decrease Revenue for our recordkeeping and sponsorship programs for the year ended December 31, 2021, which is largely based on the market value of the underlying assets, increased compared to 2020 due to organic growth in our assets under management and the impact of market appreciation on the value of the underlying assets. Client cash revenue for the year ended December 31, 2021 decreased compared to 2020 due to the impact of a lower federal funds effecff December 31, 2021, our average client cash balances increased to $49.8 billion compared to $44.7 billion for the year ended December 31, 2020. by higher average client cash balances. For the year ended tive rate, partially offset ff 47 rr Service and Fee technology, clearing, administrative, oversight and custody services, which may vary. We host certain Service and fee revenue is generated from advisor and retail investor services, including technology, insurance, conferences, licensing, Business Solutions, IRA custodian, and other client account fees. We charge separate fees to RIAs forff advisor conferences that serve as training, education, sales and marketing events for which we charge sponsors a fee. Service and fee revenue for the year ended December 31, 2021 increased yby $54.0 million compared to 2020, primarily due to increases in contract and licensing fees, Business Solutions subscription fees, IRA custodian fees, conference fees, and other client account fees. Transaction Transaction revenue includes transaction charges generated in both advisory and brokerage accounts from products including mutual funds, ETFs, and fixed income products. Transaction revenue for the year ended December 31, 2021 increased by $$8.0 millio cn ompared to 2020, primarily due to increased transaction volume related to fixed income trading. tt Other Other revenue primarily includes unrealized gains and losses on assets held by us in our advisor non-qualified deferred compensation plan and model research portfolios and other miscellaneous revenue, which is not generated from contracts with customers. Other revenue for the year ended December 31, 2021 increased by $$14.4 millio cn ompared to 2020, primarily due to increases in realized and unrealized gains on assets held in our advisor non-qualified deferred compensation plan, which assets are based on the market performance advisors in the plan, partially offset deferred compensation plan. by a decrease in dividend income on assets held in our advisor non-qualified of the underlying investment allocations chosen by ff ff Expenxx se Advisory and Commission Advisory and commission expense consists of the following: payout amounts that are earned by and paid out to advisors and institutions based on advisory and commission revenue earned on each client’s account; production based bonuses earned by advisors and institutions based on the levels of advisory and commission revenue 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 grant date; and the deferred fee expense associated with mark-to-market gains or losses on the non-qualified deferred compensation plan offere d to our advisors. advisory and commission ff f The following table sets forth our payout rate, which is a statistical or operating measure: Payout rate Years Ended December 31, 2021 2020 Change 86.74 % 86.12 % 62 bps Our payout rate increased slightly for the year ended December 31, 2021 compared to 2020, primarily due to higher production bonus payouts and the impact of onboarding large financial institutions. Compensationtt and Benefitsff Compensation and benefits include salaries, wages, benefits, share-based compensation and related taxes for our employees, as well as compensation for temporary workers and contractors. The following average number of employees for the year ended December 31, 2021 as compared to 2020: table sets forth our ff Average number of employees Years Ended December 31, 2021 5,283 2020 4,560 % Change 15.9% Compensation and benefits for the year ended December 31, 2021 increased by $131.7 million compared to 2020, primarily due to an increase in salary and employee benefit expenses resulting from an increase in headcount. 48 Promotional Promotional expense includes business development costs related to advisor recruitment and retention, costs related to hosting certain advisory conferences that serve as training, sales and marketing events and other costs that support advisor business growth. For the year ended December 31, 2021 promotional expense increased by $94.0 million compared to 2020, to support transition assistance and retention, as well as increases in events. primarily due to increases in recruited assets and advisors that led to higgher costs f conference spend as we returned to in-person y Occupancy and Equipment Occupancy and equipment expense includes the costs of leasing and maintaining our officeff licensing and maintenance costs and maintenance expenses on computer hardware and other equipment. Occupancy and equipment expense for the year ended December 31, 2021 increased yby $$19.1 million compared to 2020, primarily due to increases in expenses related to software licenses and our technology portfolio. spaces, software Depreciationtt and Amortizati ii on Depreciation and amortization relates to the use of property and equipment, which includes internally developed software, hardware, leasehold improvements and other equipment. Depreciation and amortization for the year ended December 31, 2021 increased by $$41.7 million compared to 2020, primarily due to our continued investment in tech nology to support the int gegration fof Waddell && Reed, enhance our advisor platfform and end-client experience and support la grge ffinancial institution onboardi gng. gy Brokerage, Clearing and Exchange Brokerage, clearing and exchange fees include expenses originating from trading or clearing operations as well as any exchange membership fees. These fees fluctuate largely in line with the volume of sales and trading activity. Brokerage, clearing and exchange fees increased yby $$14.8 million fof r the year ended December 31, 2021 compared to 2020, primarily due to an increase in the volume of sales and trading activity. Amortiztt atiott n of Other Intangibles Amortization of other intangibles represents the benefits received for the use of long-lived intangible assets established through our acquisitions. Amortization of other intangibles for the year ended December 31, 2021 increased by $11.9 million compared to 2020, primarily due to increases in intangible assets resulting from the Waddell & Reed Acquisition on April 30, 2021, as well as amortization related to an acquisition during the fourth quarter of 2020. See Note 4 - Acquisitions informat and Note 9 - Goodwill and Other s, Net for additional Intangible ion. ff tt tt tt Proferr ssional Services Professional services expense includes costs paid to outside firms for assistance with legal, accounting, technology, regulatory, and general corporate matters, as well as non-capitalized costs related to service and technology enhancements. Professional services expense for the year ended December 31, 2021 increased yby $$16.2 million compared to 2020, primarily due to increases in non-capitalized costs related to the use of consultants. Communications tt and Datat Processing rr Communications and data processing expense consists primarily of the cost of voice and data telecommunication lines supporting our business, including connectivity to data centers, exchanges and markets, as well as customer statement processing and postage costs. Communications and data processing expenses for the year ended December 31, 2021 increased by $7.9 million compared to 2020, primarily due to increases in costs associated with client statement production due to growth in our advisors, which led to an increase in the customer base. 49 tt Loss on Extinguishme nt of Debt On March 15, 2021, we issued the 2029 Senior Notes and redeemed the 2025 Senior Notes. In connection with these transactions, we incurred a $24.4 million loss on extinguishment of debt for the year ended December 31, 2021. tt Other Expense Other expense includes the costs of the investigation, settlement and resolution of regulatory matters (including customer restitution and remediation), licensing fees, insurance, broker-dealer regulator fees, travel-related expenses and other miscellaneous expenses. Other expense will depend in part on the size and timing of resolving regulatory matters and the availability of self-insurance coverage, which depends in part on the amount and timing of resolving historical claims. Other expense for the year ended December 31, 2021 increased yby $$30.5 million compared to 2020 primarily due to costs related to Waddell & Reed transitional support and an increase in licensing fees. ff Provision for Income Taxes ive income tax rate was 23.5% and 24.5% forff ff Our effect decrease in our effecti from share-based compensation recognized during the year. ff ve tax rate for the year ended December 31, 2021 was primarily due to an increased benefit the years ended December 31, 2021 and 2020. The VV COVID-19 Impact On March 11, 2020, the World Health Organization designated the spread of COVID-19 as a pandemic. As of the date of this Annual Report on Form 10-K, the COVID-19 pandemic has had a significant impact on global financial markets, and we continue to monitor its effects on the overall economy and our operations. We are not yet able to determine the full impact of the pandemic; however, should it continue, there could be a material and adverse financial impact to our results of operations. Please consult the “Risks Related to our Business and Industry” section within Part I, “Item 1A. Risk Factors” for more informat ion about the risks associated with COVID-19. ff Liquidity and Capital Resources We have established liquidity and capital policies intended to support the execution of strategic initiatives, while meeting regulatory capital requirements and maintaining ongoing and sufficient liquidity. We believe liquidity is of critical importance to the Company and, in particular, to LPL Financial, our primary broker-dealer subsidiary. The objective of our policies is to ensure that we can meet our strategic, operational and regulatory liquidity and capital requirements under both normal operating conditions and under periods of stress in the financial markets. ff Liquiditydd Our liquidity needs are primarily driven by capital requirements at LPL Financial, interest due on our corporate debt and other capital returns to shareholders. Our liquidity needs at LPL Financial are driven primarily by the level and volatility of our client activity. Management maintains a set of liquidity sources and monitors certain business trends ent liquidity. We believe that based on current levels and market metrics closely in an effort of cash flows from operations and anticipated growth, together with available external liquidity sources, we have adequate liquidity to satisfyff our working capital needs, the payment of all of our obligations and the funding of anticipated capital expenditures for the foreseeable future. to ensure we have suffici ff ff Parent Company Liquidity LPL Holdings, Inc. (“Parent”), the direct holding company of our operating subsidiaries, considers its primary source of liquidity to be corporate cash. We define corporate cash as the sum of cash and equivalents from the following: (1) cash held at the Parent, (2) excess cash at LPL Financial per the Credit Agreement, which is the net capital held at LPL Financial in excess of 10% of its aggregate debits, or five times the net capital required in accordance with Exchange Act Rule 15c3-1, and (3) other available cash, which includes cash and equivalents held at PTC, in excess of Credit Agreement capital requirements, and cash and equivalents held at non-regulated subsidiaries. 50 We believe corporate cash is a useful measure of the Parent’s liquidity. The following table presents the components of corporate cash (in thousands): Corporate Cash Cash at Parent Excess cash at LPL Financial per Credit Agreement Other available cash Total Corporate Cash December 31, 2021 December 31, 2020 $ $ 202,407 $ 15,903 18,677 236,987 $ 201,385 67,574 10,960 279,919 Corporate cash is monitored as part of our liquidity risk management. We target maintaining $200.0 million in corporate cash, which covers approximately 24 months of principal and interest due on our corporate debt. The Company maintains additional liquidity through a $1.0 billion secured committed revolving credit facility. The Parent has the ability to borrow against the credit facility forff working capital and general corporate purposes. Dividends from and excess capital generated by LPL Financial are the primary sources of liquidity. Subject to regulatory approval or notification, capital generated by LPL Financial can be distributed to the Parent to the extent the capital levels exceed both regulatory requirements and internal capital thresholds. As of December 31, 2021, LPL Financial maintained excess regulatory capital of $15.9 million over Credit Agreement requirements. During the twelve months ended December 31, 2021 and 2020, LPL Financial paid dividends of $465.0 million and $635.0 million to the Parent, respectively. Cash requirements and liquidity needs are primarily funded through our cash flow from operations and our capacity for additional borrowing. We actively monitor changes to our liquidity needs caused by general business volumes and price volatility, including higher margin requirements of clearing corporations and exchanges, and stress scenarios involving a sustained market downturn and the persistence of current interest rates, which include the impacts of the COVID-19 pandemic. We believe that based on current levels of operations and anticipated growth, our cash flow from operations, together with other available sources of funds, which include six uncommitted lines of credit, the revolving credit facility established through our Credit Agreement and the committed revolving credit facility of LPL Financial, will provide us with adequate liquidity to satisfy our working capital needs, the payment of all of our obligations and the funding of anticipated capital expenditures for the foreseeable future. ff We regularly evaluate our existing indebtedness, including potential refinancing opportunities, 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. The earliest principal maturityy dat and our markets in the near-term. revolving credit ffacilities mature between 2022 and 2026, which makes us less dependent on capital our corporate debt is in 2026 fe forff g Share Repurchases We engage in share repurchase programs, which are approved by our Board of Directors, pursuant to which we may repurchase our issued and outstanding shares of common stock from time to time. Purchases may be effecte d in open market or privately negotiated transactions. Our current capital deployment framework remains focused on investing in organic growth first, pursuing acquisitions where appropriate, and returning excess capital to shareholders. In the first half of 2021, the majority of our capital deployment was focused on supporting organic growth and acquisitions. While we continue to see opportunities to deploy capital in this manner, we resumed share dilution. We repurchased $90.0 repurchases in the third quarter of 2021 with the initial focus on an amount to offset million, representing 579,771 shares, during the year ended December 31, 2021. The timing and amount of share repurchases, if any, is determined at our discretion within the constraints of our Credit Agreement, the Indentures, applicable laws and consideration of our general liquidity needs. See Note 15 - Stockholders’ Equityt , within the notes to the consolidated financial statements forff ion regarding our share repurchases. additional informat ff ff ff Common Stock Dividvv ends The payment, timing and amount of any dividends are subject to approval by the Board of Directors as well as certain limits under our Credit Agreement and the Indentures. See Note 15 - Stockholders’ Equityt , within the notes ff to the consolidated financial statements forff ion regarding our dividends. additional informat 51 LPL Financial Liquidity LPL Financial relies primarily on client payables to fund margin lending. LPL Financial maintains additional liquidity through external lines of credit totaling $575.0 million at December 31, 2021. LPL Financial also maintains a line of credit with the Parent. External Liquiditydd Sources The following table presents amounts outstanding and available under our external lines of credit at December 31, 2021 (in millions): Description Borrower Maturity Date Senior secured, revolving credit facility LPL Holdings, Inc. March 2026 Broker-dealer revolving credit facility LPL Financial LLC July 2024 Secured, uncommitted lines of credit LPL Financial LLC Unsecured, uncommitted lines of credit LPL Financial LLC Unsecured, uncommitted lines of credit LPL Financial LLC Unsecured, uncommitted lines of credit LPL Financial LLC Secured, uncommitted lines of credit LPL Financial LLC Secured, uncommitted lines of credit LPL Financial LLC March 2022 September 2022 September 2022 None None None (1) Outstanding balances were repaid in January 2022. Capital Resources $ $ $ $ $ $ $ Outstanding(1) 55 $ Available 945 300 75 40 50 75 unspecified unspecified $ — $ — $ 35 $ — $ — $ — — The Company seeks to manage capital levels in support of its business strategy of generating and effecti deploying capital forff the benefit of our shareholders. ff vely Our primary requirement forff working capital relates to funds we loan to our advisors’ clients forff margin and funds we are required to maintain for regulatory capital and reserves based on the requirements of our regulators and clearing organizations, which also consider client balances and 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 equivalents on hand, cash segregated under federal or other regulations, the committed revolving credit facility of LPL Financial and proceeds from repledging or selling client securities in margin accounts. When an advisor’s 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 repledge, loan or sell securities, up to 140% of the client’s margin loan balance, that collateralize those margin accounts. trading conducted on Our other working capital needs are primarily related to loans we are making to advisors and timing associated with receivables and payables, which we have satisfied in the past from internally generated cash flows. We may sometimes be required to fund timing differe with the settlement of client transactions in securities markets. These timing differences internally generated cash flows or, if needed, with funds drawn on our uncommitted lines of credit at LPL Financial or one of our revolving credit facilities. nces arising from the delayed receipt of client funds associated are funded either with ff ff 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 equal to the greater of $250,000 or 2% of aggregate debit balances arising from client transactions. At December 31, 2021, LPL Financial had net capital of $87.5 million with a minimum net capital requirement of $14.3 million. 52 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 5% of aggregate customer debit balances. LPL Financial also acts as an introducing broker for commodities and futures. Accordingly, its trading activities are subject to the NFAFF financial requirements and it is required to maintain net capital that is in excess of or equal to the greatest of NFA’FF s minimum financial requirements. The NFAFF was designated by the Commodity Futures Trading Commission as LPL Financial’s primary regulator for such activities. Currently, the highest NFAFF requirement is the minimum net capital calculated and required pursuant to the SEC’s Net Capital Rule. In April 2021, the Company acquired a broker-dealer as part of the Waddell & Reed Acquisition (the “Waddell & Reed broker-dealer”). The Waddell & Reed broker-dealer was required to maintain net capital of $250,000, which represents the greater of 2% of its aggregate debits or the minimum net capital requirement of $250,000. In December 2021 the SSECC and FINRA approved the Form BDW ffiled yby the Waddell && Reed broker-dealer, which terminated its broker-dealer jurisdictions on such date. jurisdict gregistration with FINRA, all other selff-reggulat yory gorganizations, the SSECC and all Our subsidiary, PTC, is also subject to various regulatory capital requirements. Failure to meet the respective minimum capital requirements can result in certain mandatory and discretionary actions by regulators that, if undertaken, could have substantial monetary and non-monetary impacts on PTC’s operations. Debt and Related Covenants The Credit Agreement and the Indentures contain a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to: • • • • incur additional indebtedness or issue disqualified stock or preferred stock; declare dividends, or other distributions to stockholders; repurchase equity interests; redeem indebtedness that is subordinated in right of payment to certain debt instruments; • make investments or acquisitions; • • • • • • create liens; sell assets; guarantee indebtedness; engage in certain transactions with affiff liates; enter into agreements that restrict dividends or other payments from subsidiaries; and consolidate, merge or transfer all or substantially all of our assets. Our Credit Agreement and the Indentures allow us to pay dividends and distributions or repurchase our capital stock only when certain conditions are met. In addition, our revolving credit facility requires us to be in compliance with certain financial covenants as of the last day of each fiscal quarter. The financial covenants require the calculation of Credit Agreement EBITDA, as defined in, and calculated by management in accordance with, the Credit Agreement. The Credit Agreement defines Credit Agreement EBITDA as “Consolidated EBITDA,” which is Consolidated Net Income (as defined in the Credit Agreement) plus interest expense, tax expense, depreciation and amortization, and is further adjusted to exclude certain non-cash charges and other adjustments (including unusual or non-recurring charges) and gains, and to include future expected cost savings, operating expense reductions or other synergies from certain transactions. 53 As of December 31, 2021, we were in compliance with both financial covenants, a maximum Consolidated Total Debt to Consolidated EBITDA Ratio (as defined in the Credit Agreement) or “Leverage Ratio” and a minimum Consolidated EBITDA to Consolidated Interest Expense Ratio (as defined in the Credit Agreement) or “Interest Coverage”. The breach of these financial covenants would be subject to certain equity cure rights. The required ratios under our financial covenants and actual ratios were as follows: Financial Ratio Leverage Ratio (Maximum) Interest Coverage (Minimum) December 31, 2021 Covenant Requirement Actual Ratio 5.0 3.0 2.26 12.40 See Note 11 - Corporate Debt and Other Borrowings, Net, within the notes to the consolidated financial statements for further detail regarding the Credit Agreement and the Indentures. Contractual Obligations The following table provides informat (in thousands): ff ion with respect to our commitments and obligations as of December 31, 2021 Operating leases(1) Finance leases(2) Purchase obligations(3) Corporate debt and other borrowings, net(4) Interest payments(5) Commitment and other fees(6) Payments Due by Period Total < 1 Year 1-3 Years 3-5 Years > 5 Years $ 167,437 $ 24,072 $ 45,777 $ 44,520 $ 53,068 259,744 174,705 2,838,600 640,981 14,761 8,802 75,452 45,700 91,657 3,802 17,303 88,145 21,400 182,725 7,299 17,914 10,947 1,071,500 179,349 3,660 215,725 161 1,700,000 187,250 — Total contractual cash obligations $ 4,096,228 $ 249,485 $ 362,649 $ 1,327,890 $ 2,156,204 ______ ____ ____ ____ ____ ____ ____ ____ ____ (1) (2) (3) (4) (5) (6) Represents future payments under operating leases. See Note 12 - Leases, within the notes to the consolidated financial statements for further detail. Represents future payments under finance leases. See Note 12 - Leases, within the notes to the consolidated financial statements for further detail. Includes future minimum payments under service, development and agency contracts, and other contractual obligations. See Note 14 - Commitments att cancelable service contracts. nd Contingencies, within the notes to the consolidated financial statements for further detail on obligations under non- Represents principal payments on our corporate debt and other borrowings. The Company repaid $90.0 million in January 2022, which related to amounts outstanding under our external lines of credit at December 31, 2021. See Note 11 - Corporate Debt and Other Borrowings, Net, within the notes to the consolidated financial statements for further detail. Represents interest payments under our Credit Agreement, which include a variable interest payment for our senior secured credit facilities and a fixed interest payment forff December 31, 2021 remain unchanged. See Note 11 - Corporr financial statements for further detail. senior unsecured notes. Variable interest payments assume the applicable interest rates at rate Debt and Other Borrorr wings, Net, within the notes to the consolidated Represents commitment fees for unused borrowings on the revolving credit facility under our Credit Agreement. See Note 11 - Corporr Debt and Other Borrowingww s, Net, within the notes to the consolidated financial statements for further detail. rate As of December 31, 2021, we have a liability forff in other liabilities in the consolidated statements of financial condition. This amount has been excluded from the contractual obligations table because we are unable to reasonably predict the ultimate amount or timing of future tax payments. unrecognized tax benefits of $57.0 million, which we have included Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with GAAP, which requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We believe that of our critical accounting policies, the folff lowing are noteworthy because 54 they require management to make estimates regarding matters that are uncertain and susceptible to change where such change may result in a material adverse impact on our financial position and reported financial results. Revenue Recognitiontt Revenue is recognized when control of the promised service is transferred to customers in an amount that reflects the consideration that we expect to be entitled to in exchange for those services. Management exercises judgment to estimate revenue accruals. In particular, our trailing commission revenue, included in commission revenue on the consolidated statements of income, is generally received in arrears and therefore requires our management to ff estimate accrued amounts based on revenue received in prior periods, market performance of each product type or sponsor. See Note 2 - Summary of Signif Policies and Note 3 - Revenue, ff icant within the notes to the consolidated financial statements for more details on our policies and disclosures related to revenue. and payment frequency Accountingtt i tt Commitment stt and Continii gencies Liabilities related to loss contingencies are recognized when we believe it is probable a liability has occurred and the amount can be reasonably estimated by management. We have established an accrual for those legal proceedings and regulatory matters for which a loss is both probable and the amount can be reasonably estimated. We also accrue for losses at our captive insurance subsidiary for those matters covered by self-insurance. Our captive insurance subsidiary records losses and loss reserve liabilities based on actuarially determined estimates of losses incurred, as well as specific reserves for proceedings and matters that are probable and estimable. Assessing the probability of a loss occurring and the timing and amount of any loss related to a legal proceeding or regulatory matter is inherently difficult ff additional informat Contingencie and requires management to make significant judgments. For ff icant ion, see Note 2 - Summary of Signif s - “Legal & Regulatory Matters,” within the notes to the consolidated financial statements. Policies and Note 14 - Commitment Accountingtt stt and ff tt tt i Valuationtt of Goodwill and Other tt Intangible tt s, Net Goodwill is recognized as a result of business combinations and is measured as the excess of the purchase price over the fair value of the net assets acquired. The valuation of goodwill and other intangibles, net requires management to apply judgment and assumptions when estimating future earnings and performance. Management also applies judgment when testing for impairment of goodwill and other indefinite-lived intangible assets, including estimating fair values. Goodwill and other indefinite-lived intangible assets are tested annually for impairment in the fourth fiscal quarter and between annual tests if certain events occur indicating that the carrying amounts may be impaired. ff Intangible assets that are deemed to have definite lives are amortized over their useful lives or the estimated period the intangible asset will provide economic benefit. Definite-lived intangible assets are reviewed for impairment when there is evidence that events or changes in circumstances indicate that the carrying amount may not be recoverable. For additional informat see Note 2 - Summary of Signif ff icant notes to the consolidated financial statements. ion on our policies and disclosures related to goodwill and other intangibles, net, s, Net within the Policies and Note 9 - Goodwill and Other Accountingtt Intangible ff t tt i Income Taxes ff In preparing the consolidated financial statements, we estimate income tax expense based on various jurisdictions where we conduct business. This requires management to estimate current tax obligations and to assess temporary differe nces between the financial statement carrying amounts and the tax basis of assets and liabilities. These ff temporary differe nces result in deferred tax assets and liabilities, which we must then assess the likelihood that the deferred tax assets will be realized. A valuation allowance is established to the extent that it is more likely than not that such deferred tax assets will not be realized. Changes in the estimate of tax assets and liabilities occur periodically due to changes in the tax rates, changes in the business operations, implementation of tax planning strategies, resolution with taxing authorities of issues where we had previously taken certain tax positions and newly enacted statutory, judicial and regulatory guidance. For more informat taxes, see Note 2 - Summary of Significant consolidated financial statements. Policies and Note 13 - Income Taxes, within the notes to the ion on our policies and disclosures related to Accountingtt ff ff 55 Recently Issued Accounting Pronouncements Refer to Note 2 - Summary of Signif ff icant statements forff are of significance, or potential significance, to us. Accountingtt i a discussion of recent accounting pronouncements or changes in accounting pronouncements that Policies, within the notes to the consolidated financial Item 7A Q. Quantitative an Qd Qualitative Disclosures About Market Risk Market Risk ff 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, to track the of our research models and in connection with our dividend reinvestment program. Trading securities performance are included in investment securities while securities sold, but not yet purchased are included in other liabilities on the consolidated statements of financial condition and can include mutual funds, debt securities and equity securities. Changes in the value of our trading securities may result from fluctuations in interest rates, credit ratings of the issuer, equity prices or a combination of these factors. In facilitating client transactions, our securities owned and securities sold, but not yet purchased generally involve mutual funds, including dividend reinvestments. Our positions held are based upon the settlement of client transactions, which are monitored by our Service, Trading and Operations (“Care”) department. rr 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 settlements group within our Care department. Our Research department develops model portfolios that are used by advisors in developing client portfolios. We maintain securities owned in internal accounts based on these model portfolios to track the performance Research department. At the time a portfolio is developed, we purchase the securities in that model portfolio in an amount equal to the account minimum, which varies by product. of our ff b In addition, we are subject can require customer trade corrections. We also bear market risk on the fees we earn that are based on the market value of advisory and brokerage assets, as well as assets on which trailing commissions are paid and assets eligible forff to market risk resulting from system incidents or interruptions and human error, which sponsor payments. As of December 31, 2021, the fair value of our trading securities was $$39.3 millio ,n and securities sold, but not yet purchased were not material. The fair value of securities included within other assets was $$623.3 million as of December 31, 2021. See Note 5 - Fair Vii statements forff other assets associated with our client facilitation activities. ation regarding the fair value of trading securities, securities sold, but not yet purchased and Measurementstt , within the notes to the consolidated financial informf alueVV Interest Rate Risk We are exposed to risk associated with changes in interest rates. As of December 31, 2021, $1.1 billion of our outstanding debt was subject to floating interest rate risk. While our senior secured term loan is 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 net income given revenue generated by our client cash balances, which is generally subject to the same, but off-ff setting, interest rate risk. The following table summarizes the impact of increasing interest rates on our interest expense from the variable portion of our debt outstanding, calculated using the projected average outstanding balance over the subsequent twelve-month period (in thousands): Corporate Debt and Other Borrowings Term Loan B ______ ____ ____ ____ ____ ____ ____ ____ ____ Outstanding Balance at December 31, 2021 Annual Impact of an Interest Rate (†) Increase of 100 Basis 10 Basis 50 Basis 25 Basis Points Points Points Points $ 1,048,600 $ 1,042 $ 2,605 $ 5,210 $ 10,419 (†) Our interest rate for TermTT of the selected periods the rates will be locked in at the then current rate. The effect table above. ff Loan B is locked in for one, two, three, six or twelve months as allowed under the Credit Agreement. At the end of these interest rate locks are not included in the 56 See Note 11 - Corporatrr e Debt and Other Borrowrr ion. for additional informat ff inww gs, Net, within the notes to the consolidated financial statements ff d our advisors and their clients two insured bank sweep vehicles and a money As of December 31, 2021, we offere market program, including money market accounts as well as the ability to participate in purchased money market funds, that are interest rate sensitive. Our sweep vehicles include an (1) insured cash account (“ICA”) for individuals, trusts, sole proprietorships and entities organized or operated to make a profit, such as corporations, partnerships, associations, business trusts and other organizations and (2) an insured deposit cash account (“DCA”) for advisory individual retirement accounts. While clients earn interest on deposits in ICA and DCA, we earn a fee. The fees we earn from cash held in ICAs are based primarily on prevailing interest rates in the current interest rate environment. The fees we earn from DCAs are calculated as a per account fee, and such fees increase as the federal funds target rate increases, subject to a cap. The fees we earn on cash balances in our advisors’ clients’ accounts in our money market program, including administrative and recordkeeping fees based on account type and the invested balances, are also sensitive to prevailing interest rates. Changes in interest rates and fees for the bank deposit sweep vehicles are monitored by our Rate Setting Committee (the “RSC”), which governs and approves any changes to our fees. By meeting promptly around the time of Federal Open Market Committee meetings, or for other market or non-market reasons, the RSC considers financial risk of the insured bank deposit sweep vehicles relative to other products into which clients may move cash balances. 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. We are subject to credit risk from certain loans extended to our advisors as well as the activities of our advisors’ clients during the execution, settlement and financing of various transactions on behalf of these clients. Credit risk from certain loans to advisors arises when we extend loans with repayment terms to facilitate advisors’ transition to our platform or to fund business development activities that are not repaid in full or on time. Credit risk also arises in respect of advisor loans when a forgivable loan converts to repayable upon advisor termination. ff Credit risk also arises when collateral posted with LPL Financial by clients to support margin lending or derivative trading is insufficient to meet clients’ contractual obligations to LPL Financial. 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 securities in the clients’ accounts. Under many of these agreements, we are permitted to sell, repledge or loan 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 to fully cover losses from such investments and their obligations, the collateral in the clients’ accounts is insufficient our advisors fail to reimburse us for such losses. Our losses on margin accounts were immaterial during the years ended December 31, 2021 and 2020. We monitor exposure to industry sectors and individual securities and performff 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. ff 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 monitored. We seek to limit this risk through 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 ff ion technology systems, as well as third-party service providers and their systems, to manage a large Operational risk is defined as the risk of loss resulting from failed or inadequate processes or systems, actions by people or external events. We operate in diverse markets and are reliant on the ability of our employees and informat volume of transactions and confidential informat ively and securely. These risks are less direct and quantifiable than credit and market risk, but managing them is critical, particularly in a rapidly changing operating environment with increasing transaction volumes and in light of increasing reliance on systems capabilities and performance, ion, including personally identifiable informat as well as third-party service providers. In the event of ff ion, effect ff ff ff 57 the breakdown, obsolescence or improper operation of systems, malicious cyber activity or improper action by employees, advisors or third-party service providers, we could suffer business disruptions, financial loss, data loss, regulatory sanctions and damage to our reputation. Although we have developed business continuity and disaster recovery plans, those plans could be inadequate, disrupted or otherwise unsuccessful in maintaining the competitiveness, stability, security or continuity of critical systems as a result of, among other things, obsolescence, improper operation, third-party dependencies or limitations of our current technology. ff In order to assist in the mitigation and control of operational risk, we have an operational risk framework that is designed to enable assessment and reporting on operational risk across the firm. This framework aims to ensure policies and procedures are in place and appropriately 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. Please consult the “Risks Related to Our Technology” and the “Risks Related to Our Business and Industry” sections within Part I, “Item 1A. Risk Factors” for more informat about the risks associated with our technology, including risks related to security, our risk management policies and procedures, and the potential related effects on our operations. ion tt ff ff Our senior management is monitoring developments in the COVID-19 pandemic and has implemented changes to our policies, procedures and operations to protect the integrity and continuity of our business and the health and safety of our employees. For example, we equipped and enabled a substantial majority of employees to work remotely, implemented enhanced cleaning protocols throughout our corporate offices vendors to maintain service continuity throughout the market volatility and increased operational volumes that have occurred from time to time during the pandemic. There can be no guarantee that our business continuity plans and the other efforts ve, or that there will not be material adverse effect about the risks associated with the COVID-19 pandemic. s on our results of operations. Please consult Part I, “Item 1A. Risk Factors” for more informat to manage the business implications of COVID-19 will be effecti and worked closely with our ion ff ff ff ff ff Regulatory and Legal Risk The regulatory environment in which we operate is discussed in detail within Part I, “Item 1. Business” of this Annual Report on Form 10-K. In recent years, and during the period presented in this Annual Report on Form 10-K, we have observed the SEC, FINRA, DOL and state regulators broaden the scope, frequency and depth of their examinations and inquiries to include greater emphasis on the quality, consistency and oversight of our compliance systems and programs. Please consult the “Risks Related to Our Regulatory Environment” and the “Risks Related to Our Business and Industry” ion about the risks associated with operating within our regulatory environment, pending regulatory matters and the potential related effects sections within Part I, “Item 1A. Risk Factors” for more informat on our operations. tt ff ff 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 Company and its franchise. Our framework is designed to promote clear lines of risk management accountability and a structured escalation process for key risk informat ion and events. ff ff model to manage risk throughout the organization. Primary ownership for risk vely We operate a three-lines-of-defense and control processes is with the business units and control owners, who are the “first line” of defense in effecti managing risks, and who are responsible for day-to-day compliance and risk management, including execution of desktop and supervisory procedures. These business units and certain control owners implement and execute controls to manage risk, execute risk assessments, identify emerging risks, and comply with risk management policies. The second line of defense consists of certain departments within Compliance, Legal and Risk (“CLR”) and ff provides risk oversight and monitoring. The third line of defense is independent verification of the effecti risk management practices and internal controls and is conducted by the Internal Audit department. veness of ff Our risk management governance approach includes the Board of Directors (the “Board”) and certain of its committees; our Risk Oversight Committee (the “ROC”) and its subcommittees; and our three-lines-of-defense model. We regularly reevaluate and, when necessary, modifyff our processes to improve the identification and escalation of risks and events. 58 Audit Committeett of the Boardrr 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 generally provides reports to the Board at each of the Board’s regularly scheduled quarterly meetings. Compensation and Human Resources Committee of the Boardrr 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. ff Riskii Oversighi t Committee of LPL Finaii ncial The Audit Committee has mandated that the ROC oversee our risk management activities, including those of our subsidiaries. The Chief Risk Offiff cer of LPL Financial serves as chair of the ROC, which generally meets on a monthly basis with additional ad hoc meetings as necessary. The members of the ROC include certain Managing Directors of LPL Financial, as well as other members of LPL Financial’s senior management team who serve as ex- officio members and represent key control areas of the Company. Participation in the ROC by senior offiff cers 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, control procedures and related exceptions, certain new and complex products and business arrangements, transactions with significant risk elements, and identified emerging risks. ff The Chief Legal Offiff cer provides updates on pertinent ROC discussions to the Audit Committee on a regular basis and, if necessary or requested, to the Board. Subcommittees of the Riskii Oversi vv ghi t Committee The ROC has established multiple subcommittees that cover key areas of risk. The subcommittees meet regularly and are responsible for keeping the ROC informf escalation policies. The responsibilities of such subcommittees include, for example, oversight of operational risk; oversight of the approval of new and complex investment products offered technology; and issues and trends related to advisor compliance. ed and escalating issues in accordance with the Company’s to advisors’ clients; oversight of the firm’s ff Internal Audit Department ff veness of the Company’s governance, risk management and internal controls by conducting risk assessments As the third line of defense, the Internal Audit department provides independent and objective assurance of the effecti and audits designed to identify and cover important risk categories. Internal Audit reports directly to the Audit Committee, which provides oversight of Internal Audit’s activities and approves its annual plan. The Internal Audit department provides regular updates to the ROC and reports to the Audit Committee at least quarterly. Controlrr Grourr psu The CLR department provides compliance oversight and guidance, and conducts various risk and other assessments to address regulatory and Company-specific risks and requirements. The CLR department includes the Chief Legal Officer Committee and the Board as necessary. Care and Technology each have risk management teams that identify, define and remediate risk-related items within their respective groups. Additionally, the Internal Audit department is a control group. , who reviews the results of the Company’s risk management process with the ROC, the Audit ff Business Lineii 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 defined by the Company’s escalation policies). We have conducted Company-wide escalation training for our employees. Business lines are subject to oversight by the control groups, and the Finance, CLR, Technology and Human Capital departments also execute certain control functions and report matters to the ROC, Audit Committee and Board as appropriate. of operational risk and escalating risk matters (as ff 59 Advisor Policies In addition to the ERM framework, we also have written policies and procedures that govern the conduct of ff 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 regulations and codes of conduct and ethics to govern employee and advisor conduct, among other matters. 60 Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm (PCAOB ID: 34) . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Income for the years ended December 31, 2021, 2020 and 2019 . . . . . . . . . . Consolidated Statements of Financial Condition as of December 31, 2021 and 2020 . . . . . . . . . . . . . . . . . . Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2021, 2020 and 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019 . . . . . . Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 1 - Organization and Description of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 2 - Summary of Significant Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 3 - Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 4 - Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 5 - Fair Value Measurements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 6 - Investment Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 7 - Receivables from and Payables to Brokers, Dealers and Clearing Organizations . . . . . . . . . . . Note 8 - Property and Equipment, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 9 - Goodwill and Other Intangibles, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 10 - Other Assets and Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 11 - Corporate Debt and Other Borrowings, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 12 - Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 13 - Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 14 - Commitments and Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 15 - Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 16 - Share-based Compensation, Employee Incentives and Benefit Plans . . . . . . . . . . . . . . . . . . . . Note 17 - Earnings per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 18 - Net Capital and Regulatory Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 19 - Financial Instruments with Off-Balance-Sheet Credit Risk and Concentrations of Credit Risk Note 20 - Subsequent Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 62 65 66 67 68 70 70 70 77 82 82 87 88 88 89 90 91 93 94 96 98 98 101 101 102 102 61 RE OPORT OOF INDEPENDENT GREG SISTERED PUBL CIC CACCOCOUNT GING FIRM To the stockholders and the Board of Directors of LPL Financial Holdings Inc. San Diego, California ff Opinion on the Financial Statements y g y companying consolidated statements fof ffinancial condition fof LPL Financial ompany")) as fof December 31, 2021 and 2020, the related consolidated statements fof We have audited the ac and subsidiaries (t(the C"C income, stockholders' equityy, and cash fflows, ffor each fof the three yyears in the period ended December 31, 2021, and the related notes (col present ffa yirly, in all material respects, the ffinancial position fof the CCompanyy as fof December 31, 2021 and 2020, and the results fof its operations and its cash fflows ffor each off the three yyears in the period ended December 31, 2021, in ff f conformit freferred to as the f"financial statements").s"). In our opinion, the ffinancial statements nerally accepted in the United SStates fof America. yy with account ging principles gge Holdings Inc. g (collect ively y y We have also audited, in accordance with the standards fof the Public Company SStates)s) (P(PCCAOOB),), the Company' criteria established in Internal Control OrgaOrganizations fof the Tr opinion on the Company' Company's internal control over ffinancial report ging. eadway CCommission and our report dated Fe y y tt — Integrated Framework (2013) issued byy the CCommittee fof SSp onsoring g bruary 22, 2022, expressed an unqualiffied Company's internal control over ffinancial report ging as fof December 31, 2021, based on Company Account ging Oversight Oversight Board (Unit (United Basis for Opinion Company's man gagement. OOur responsibil yity is to express an Company's ffinancial statements based on our audits. We are a public account ging ffirm reggistered with These ffinancial statements are the responsibilityy fof the Company' opinion on the Company' the CPCAOOB and are required to be independent with respect to the Company securities laws and the applicable rules and gregulations fof the SSecurities and CPC OAOB. Company in accordance with the U.SS. ffederal Exchange CCommission and the g We conducted our audits in accordance with the standards fof the CPCAOOB. Those standards require that we plan and pe frform the audit to obtain reasonable assurance about whether the ffinancial statements are ffree fof material misstatement, whether due to error or ffraud. OOur audits included performing material misstatement respond to those risks. SSuch procedures included exa disclosures in the ffinancial statements. OOur audits also included evaluat ging the account ging principles used and signif significant estimates made yby ma gnagement, as well as evaluatingg the overall presentation fof the ffinancial statements. We believe that our audits provide a reasonable basis ffor our opinion. rforming procedures to assess the risks fof ff orming g fperf regarding the amounts and g fof the ffinancial statements, whether due to error or ffraud, and procedures that g gmining, on a test basis, evidence CCritical Audit Matters The critical audit matters communicated below are matters ari statements that were communicated or required to be communicated to the audit committee and that (1)(1) relate to accounts or disclosures that are material to the ffinancial statements and (2)(2) involved our especiallyy yany subjective, or complex j on the ffinancial statements, taken as a whole, and we are not, yby communicat ging the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which judgments. The communication fof critical audit matters does not alter in gsing ffrom the current-period audit challengi gng, g yway our opinion fof the ffinancial they relate. g g y j Revenues - Trailingg CCommission Revenue Accrual — Reffer to Note 3 to the ffinancial statements tt CCritical Audit Matter Descriptiontt g g ailing commission revenues are ggenerallyy received in arrears and The CCompanyy’s tr accrued at yyear-end. The estimate is based on commission revenues received in prior periods, change ffactors based on market pe frformance and the payyment ffr sponsor. Because fof the volume fof investment product ytypes and sponsors and variabili yty in the correspondi gng ypayment ffrequencies, the CCo revenue estimate. equency ffor each investment product ytype and manual calculations and exercises j estimated and jadjusted judgment in determini gng the thereforeff f ff fperforms mpany y using g g y We identiffied the CCompanyy’s tr judgment judgments ne fefffort fff judgments related to the revenue accrual and evaluat ging the results fof those procedures. judgment ailing commission revenue accrual as a critical audit matter because fof the management to estimate the revenue accrual. This required an increased extent g rforming audit procedures to evaluate the inputs and and a ghigh deggree fof auditor jjudggment when performing cessary ffor g y fof audit 62 How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the inputs and judgments used by management to estimate the year-end accrual for trailing commission revenues included the following, among others: • We tested the design and effect ff iveness of internal controls over the accrual for trailing commission revenues, including those over the inputs and judgments used by management in the calculation of the accrual and the historical lookback analysis comparing monthly accruals to subsequent cash receipts • We compared management’s market performance data to external sources and challenged their methodology for potential management bias by evaluating the sensitivity of changes in market factors on the accrual • We compared the accrual to actual trailing commission revenue received subsequent to year-end • We tested the historical cash receipts used to estimate the year-end accrual by comparing them to bank statements • We evaluated the payment frequency assumption used by management in the estimation of the accrual for a sample of investment product types and sponsors by comparing the assumption to the actual cash receipts frequency • We tested the mathematical accuracy of the accrual Acquisition of Waddell & Reed Financial, Inc. — Refer to Notes 4 and 9 to the financial statements tt Critical Audit Matter Descriptiontt On April 30, 2021, the Company acquired the wealth management business of Waddell & Reed Financial, Inc. for $300 million. The Company accounted for the acquisition under the acquisition method of accounting for business combinations. Accordingly, the purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based on their respective fair values, including intangible assets of $122.7 million, comprised primarily of advisor relationships. Management used the income approach to estimate the fair value of the advisor relationship intangible assets, which included using the multi-period excess earnings method. The fair value determination of the advisor relationship intangible assets required management to make significant estimates and assumptions related to future net cash flows and the selection of the discount rate. Given the fair value determination of advisor relationship intangible assets requires management to make significant estimates and assumptions related to the forecasts of future net cash flows and the selection of the discount rate, performing audit procedures to evaluate the reasonableness of these estimates and assumptions required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists. ff ff How the Critical tt Audit Matter Was Addressed in the Audit Our audit procedures related to the forecasts of future net cash flows and the selection of the discount rate for the advisor relationship intangible assets included the following, among others: • We tested the design and effect ff iveness of internal controls over the valuation of the advisory relationship intangible assets, including management’s controls over forecasts of future net cash flows and selection of the discount rate and the valuation methodology used • We assessed the knowledge, skill, ability, and objectivity b of management’s valuation specialist and evaluated the work performed • When assessing the reasonableness of assumptions related to future net cash flows for advisor relationship intangible assets, we evaluated whether the assumptions used were reasonable considering the past performance acquisitions by the Company of the acquired company, the Company’s strategic plan going forward, and previous ff • With the assistance of our fair value specialists, we tested: ▪ the reasonableness of the income approach valuation methodology by assessing management’s application of the multi-period excess earnings method 63 ▪ ▪ the reasonableness of the discount rate by developing a range of independent estimates and comparing those to the discount rate selected by management the mathematical accuracy of the valuation by perfrr ormff ing a recalculation • We evaluated whether the estimated future cash flows were consistent with evidence obtained in other areas of the audit /s/ DELOITTE & TOUCHE LLP San Diego, California February 22, 2022 ff We have served as the Company's auditor since 2001. 64 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Consolidated Statements of Income (In thousands, except per share data) REVENUE Advisory Commission Asset-based Service and fee Transaction Interest income Other Total revenue EXPENSE Advisory and commission Compensation and benefits Promotional Occupancy and equipment Depreciation and amortization Interest expense on borrowings Brokerage, clearing and exchange Amortization of other intangibles Professional services Communications and data processing Loss on extinguishment of debt Other Total expense INCOME BEFORE PROVISION FOR INCOME TAXES PROVISION FOR INCOME TAXES NET INCOME EARNINGS PER SHARE Earnings per share, basic Earnings per share, diluted Weighted-average shares outstanding, basic Weighted-average shares outstanding, diluted Years Ended December 31, 2021 2020 2019 $ 3,525,430 $ 2,327,519 $ 2,378,683 1,148,067 411,761 156,336 28,577 71,976 1,906,560 1,044,517 357,722 148,349 29,412 57,561 1,982,869 1,892,407 1,165,979 357,844 122,484 46,508 56,765 7,720,830 5,871,640 5,624,856 5,180,090 3,697,147 3,388,186 741,003 302,285 185,531 151,428 104,414 86,023 79,260 73,231 60,296 24,400 131,540 7,119,501 601,329 141,463 609,257 208,250 166,389 109,732 105,765 71,185 67,358 57,067 52,399 — 101,018 5,245,567 626,073 153,433 $ $ $ 459,866 $ 472,640 $ 5.75 $ 5.63 $ 80,002 81,742 5.96 $ 5.86 $ 79,244 80,702 556,128 205,537 136,163 95,779 130,001 64,445 65,334 73,887 49,859 3,156 114,546 4,883,021 741,835 181,955 559,880 6.78 6.62 82,552 84,624 See notes to consolidated financial statements. 65 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Consolidated Statements of Financial Condition (In thousands, except share data) ASSETS Cash and equivalents Cash segregated under federal or other regulations Restricted cash Receivables from clients, net Receivables from brokers, dealers and clearing organizations Advisor loans, net Other receivables, net Investment securities Property and equipment, net Goodwill Other intangibles, net Other assets Total assets LIABILITIES: LIABILITIES AND STOCKHOLDERS’ EQUITY Client payables Payables to brokers, dealers and clearing organizations Accrued advisory and commission expenses payable Corporate debt and other borrowings, net Accounts payable and accrued liabilities Other liabilities Total liabilities Commitments and contingencies (Note 14) STOCKHOLDERS’ EQUITY: Common stock, $0.001 par value; 600,000,000 shares authorized; 128,758,086 shares and 127,585,764 shares issued at December 31, 2021 and 2020, respectively Additional paid-in capital Treasury stock, at cost — 48,768,145 shares and 48,115,037 shares at December 31, 2021 and 2020, respectively Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity See notes to consolidated financial statements. December 31, 2021 2020 $ $ $ $ $ $ 495,246 1,496,463 80,655 578,889 102,503 963,869 581,483 49,192 658,841 1,642,443 455,028 886,988 7,991,600 1,712,224 170,119 222,379 2,814,044 384,025 1,018,276 6,321,067 808,612 923,158 67,264 405,106 97,245 587,553 435,012 42,487 582,868 1,513,866 397,486 735,505 6,596,162 1,534,486 89,743 187,040 2,345,414 309,159 815,466 5,281,308 129 1,841,402 127 1,762,770 (2,498,600) 2,327,602 1,670,533 7,991,600 $ (2,391,062) 1,943,019 1,314,854 6,596,162 $ 66 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Consolidated Statements of Stockholders’ Equity (In thousands) BALANCE — December 31, 2018 124,910 $ 125 $1,634,337 39,821 $(1,730,535) $1,070,146 $ 974,073 Common Stock Shares Amount Additional Additional Paid-In P id I Capital p T reasury Stock S hares Amount Retained Earnings Total Stockholders’ Equity Cumulative effect of accounting change Net income Issuance of common stock to settle restricted stock units Treasury stock purchases Cash dividends on common stock - $1.00 per share Stock option exercises and other Share-based compensation BALANCE — December 31, 2019 Cumulative effeff ct of accounting change Net income Issuance of common stock to settle restricted stock units Treasury stock purchases Cash dividends on common stock - $1.00 per share Stock option exercises and other Share-based compensation BALANCE — December 31, 2020 Net income Issuance of common stock to settle restricted stock units Treasury stock purchases Cash dividends on common stock - $1.00 per share Stock option exercises and other Share-based compensation BALANCE — December 31, 2021 — — 366 — — 1,218 — 126,494 — — 417 — — 675 — 127,586 — 406 — — 766 — 128,758 $ $ $ — — — — — 1 — 126 — — — — — 1 — 127 — — — — 2 — 129 — — — — — 36,772 32,864 — — 75 — — 5,724 559,880 (5,863) 6,419 (500,370) — (55) — — 1,975 — — — (82,597) 1,414 — $1,703,973 — 46,260 — $(2,234,793) $1,554,567 (7,317) — $ — — — — 24,822 33,975 — 134 1,810 — (89) — — 472,640 (9,420) (150,036) — 3,187 — — — (79,097) 2,226 — 5,724 559,880 (5,863) (500,370) (82,597) 40,162 32,864 1,023,873 (7,317) 472,640 (9,420) (150,036) (79,097) 30,236 33,975 $1,762,770 48,115 $(2,391,062) $1,943,019 $ 1,314,854 — — — — 34,457 44,175 — 147 580 — (74) — — 459,866 459,866 (20,230) (90,011) — 2,703 — — — (80,095) 4,812 — (20,230) (90,011) (80,095) 41,974 44,175 $1,841,402 48,768 ) $(2,498,600) $2,327,602 ) ( ( $ 1,670,533 See notes to consolidated financial statements. 67 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) CASH FLOWS FROM OPERATINGAA ACTIVITIES: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Amortization of other intangibles Amortization of debt issuance costs Share-based compensation Provision for credit losses Deferred income taxes Loss on extinguishment of debt Loan forgiveness Other Changes in operating assets and liabilities: Receivables from clients, net Receivables from brokers, dealers and clearing organizations Advisor loans, net Other receivables, net Investment securities - trading Other assets Client payables Payables to brokers, dealers and clearing organizations Accrued advisory and commission expenses payable Accounts payable and accrued liabilities Other liabilities Operating lease assets Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures Acquisitions, net of cash acquired Purchases of securities classified as held-to-maturity Proceeds from maturities of securities classified as held-to-maturity Net cash used in investing activities Continued on following page Years Ended December 31, 2021 2020 2019 $ 459,866 $ 472,640 $ 559,880 151,428 79,260 5,733 44,175 9,168 18,464 24,400 151,427 (10,007) (174,236) (4,764) (526,677) (140,021) (8,732) (136,182) 177,703 80,376 29,771 12,390 211,819 (2,227) 453,134 (215,987) (245,913) (1,741) 5,000 (458,641) 109,732 67,358 5,384 33,975 5,824 (23,684) — 113,126 (12,673) 28,475 (57,372) (219,813) (18,480) 16,072 (126,641) 256,977 (2,259) 12,710 (6,585) 137,142 (1,967) 789,941 (155,532) (30,556) (6,511) 5,100 (187,499) 95,779 65,334 4,672 32,864 6,698 (18,615) 3,156 92,502 (11,421) (20,602) (1,863) (246,465) (49,185) (16,848) (93,627) 101,529 15,822 8,462 272 96,973 (1,446) 623,871 (156,389) (25,853) (3,745) 5,000 (180,987) 68 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving credit facilities Repayments of revolving credit facilities Repayment of senior secured term loans Repayment of senior unsecured notes Proceeds from senior unsecured notes Payment of debt issuance costs Make-whole premium on redemption of senior unsecured notes Payment of contingent consideration Tax payments related to settlement of restricted stock units Repurchase of common stock Dividends on common stock Proceeds from stock option exercises and other Principal payment of finance leases and obligations Net cash provided by (used in) financing activities NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS RESTRICTED CASH CASH AND EQUIVALENTS AND RESTRICTED CASH — Beginning of year AND RESTRICTED CASH — End of year CASH AND EQUIVALENTS SUPPLEMENTALTT DISCLOSURES OF CASH FLOW INFORMATION: AND VV VV AA VV Interest paid Income taxes paid Cash paid for amounts included in the measurement of operating lease liabilities Cash paid for amounts included in the measurement of finance lease liabilities NONCASH DISCLOSURES: Capital expenditures included in accounts payable and accrued liabilities Lease assets obtained in exchange for operating lease liabilities Property and equipment obtained in exchange for finance lease liabilities Cash and equivalents Cash segregated under federal or other regulations Restricted cash Years Ended December 31, 2021 2020 2019 1,585,000 1,806,000 523,000 (1,495,000) (10,700) (900,000) 1,300,000 (15,929) (1,851,000) (10,700) — — — (25,875) (8,941) (20,230) (90,011) (80,095) 41,974 (1,356) 278,837 — (10,000) (9,420) (150,036) (79,097) 30,236 (1,169) (275,186) (478,000) (411,250) — 400,000 (17,615) — — (5,863) (500,370) (82,597) 40,162 (692) (533,225) 273,330 1,799,034 $ 2,072,364 327,256 1,471,778 $ 1,799,034 (90,341) 1,562,119 $ 1,471,778 $ $ $ $ $ $ $ $ 103,689 144,556 22,355 9,716 $ $ $ $ 106,879 169,237 21,368 9,592 $ $ $ $ 126,949 213,339 19,117 9,079 21,373 3,602 $ $ — $ 12,186 7,968 $ $ — $ 13,736 108,879 1,453 December 31, 2021 495,246 $ 1,496,463 2020 808,612 923,158 $ 2019 590,209 822,697 80,655 67,264 58,872 Total cash and equivalents and restricted cash shown in the consolidated statements of cash flows $ 2,072,364 $ 1,799,034 $ 1,471,778 See notes to consolidated financial statements. 69 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 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. 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 offeff r personalized financial advice and brokerage services to retail investors (their “clients”). The Company’s most significant, wholly owned subsidiaries are described below: • • • • • • • LPL Holdings, Inc. (“LPLH” or “Parent”), a Massachusetts holding corporation, is an intermediate holding company and directly or indirectly owns 100% of the issued and outstanding common stock of all of LPLFH’s indirect subsidiaries, including a captive insurance subsidiary (the “Captive Insurance Subsidiary”) that underwrites insurance for various legal and regulatory risks of the Company. LPL Financial LLC (“LPL Financial”), with primary offices ff Boston, Massachusetts; and Austin, Texas, is a clearing broker-dealer and an investment adviser that principally transacts business as an agent for its advisors and financial institutions on behalf of their clients in a broad array of financial products and services. LPL Financial is licensed to operate in all 50 states, Washington D.C., Puerto Rico and the U.S. Virgin Islands. in San Diego, California; Fort Mill, South Carolina; ff Fortigent Holdings Company, Inc. and its subsidiaries provide solutions and consulting services to registered investment advisers (“RIAs”), banks and trust companies serving high-net-worth clients. LPL Insurance Associates, Inc. operates as an insurance brokerage general agency that offers disability insurance products and services for LPL Financial advisors. ff life and AWAA Subsidiary, Inc. is a holding company for AdvisoryWorld and Blaze Portfolio Systems LLC (“Blaze”). AdvisoryWorld offers modeling, to both the Company’s advisors and external clients in the wealth management industry. Blaze provides an advisor-facing trading and portfolio rebalancing platform. technology products, including proposal generation, investment analytics and portfolio ff PTC Holdings, Inc. (“PTCH”) is a holding company for The Private Trust Company, N.A. (“PTC”). PTC is chartered as a non-depository limited purpose national bank, providing a wide range of trust, investment management oversight, and custodial services for estates and families. PTC also provides Individual Retirement Account (“IRA”) custodial services for LPL Financial. Each member of PTCH’s Board of Directors meets the direct equity ownership interest requirements that are required by the Officeff Comptroller of the Currency (“OCC”). of the LPL Employee Services, LLC is a holding company for Allen & Company of Florida, LLC (“Allen & Company”), an RIA. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basisii of Presen rr tation These consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAPAA ”), which require the Company to make estimates and assumptions regarding the valuation of certain financial instruments, goodwill and other intangibles, allowance for credit losses on receivables, share-based compensation, accruals for liabilities, income taxes, revenue and expense accruals, and other matters that affect ff estimates under differe financial statements. the consolidated financial statements and related disclosures. Actual results could differ nt assumptions or conditions and the differences may be material to the consolidated from those ff ff 70 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Consolidated Financial Statement Presentation Changes Certain financial statement line items in the consolidated statements of income and the consolidated statements of financial condition have been reclassified to more closely align with industry practice and the Company’s business, and to better serve financial statement users. Prior period amounts have been reclassified to conformff to the current presentation as follows: • The consolidated statements of income have been reclassified as follows: ◦ ◦ The Company has disaggregated the activity previously reported in the Transaction and fee line item in Total revenue into its Service and fee and Transaction components; rr The Company has included Interest expense on borrowings and Loss on extinguishment of debt in Total expense. Previously, these amounts were presented after Total operating expense. • The consolidated statements of financial condition have been reclassified as follows: ◦ ◦ ◦ ◦ ◦ ◦ ◦ Receivables from product sponsors have been reclassified to Other receivables, net. These were previously included in Receivables from product sponsors, broker-dealers and clearing organizations; Advisor accounts receivable and institutional loans, net of related allowance have been reclassified to Advisor loans, net. These were previously included in Other receivables, net and Other assets, respectively; Trading and held-to-maturity securities, which were previously reported as discrete line items, were reclassified to Investment securities; Certain other financial statement line items which were previously reported as discrete line items, including securities borrowed, operating lease assets, and deferred income taxes, net have been reclassified to Other assets; Draftsff payable and Payables to clients, which were previously reported as discrete line items, were reclassified to Client payables; Liabilities related to the Company’s deferred compensation plans have been reclassified to Other liabilities. These were previously included in Accounts payable and accrued liabilities; Certain other financial statement line items which were previously reported as discrete line items, including income taxes payable, unearned revenue, securities sold, but not yet purchased, and lease liabilities have been reclassified to Other liabilities. These changes did not impact total assets, total liabilities, or total net income; however, the consolidated statements of cash flows have been updated to conformff to the current presentation on the statements of financial condition. ff The Company concluded that it should account for these shares as a In addition, during the year ended December 31, 2021, the Company concluded that it is acting in a principal capacity for fractional shares held in customer brokerage accounts resulting from the dividend reinvestment program (“DRIP”) that the Company offers. secured borrowing with underlying financial assets pledged as collateral, and as a result has corrected its consolidated statement of financial condition to include an asset and related liability of $72.6 million at December 31, 2020 to reflect the investments in fractional shares and the corresponding repurchase obligation in other assets and other liabilities, respectively. The Company also corrected its consolidated statements of cash flows for the years ended December 31, 2020 and December 31, 2019, respectively, to reflect the changes in the consolidated statements of financial condition related to this activity in prior years. As a result, the Company corrected the consolidated statements of cash flows to reflect an increase in the other assets line items and an offsett in the other liabilities line items of $13.8 million and $20.6 million for the years ended December 31, 2020 and December 31, 2019, respectively. This adjustment did not have an impact on earnings, earnings per share, retained earnings, or net cash provided by operating activities in prior periods. The Company has evaluated the impact of the error on previously issued consolidated financial statements and determined, based on consideration of quantitative and qualitative factors, that the impact of the error is immaterial. ing increase ff 71 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Consolidatiott n These consolidated financial statements include the accounts of LPLFH and its subsidiaries. Intercompany transactions and balances have been eliminated. ll Related Party Transactions In the ordinary course of business, the Company enters into related party transactions with beneficial owners of more than five percent of the Company’s outstanding common stock. Additionally, through its subsidiary LPL Financial, the Company provides services and charitable contributions to the LPL Financial Foundation, a tax- exempt charitable organization that provides volunteer and financial support within the Company’s local communities. The Company recognized revenue for services provided to these related parties of $6.1 million, $4.8 million and $4.1 million during the years ended December 31, 2021, 2020 and 2019, respectively. The Company incurred expense for services provided by these related parties of $2.2 million, $3.8 million and $3.2 million during the years ended December 31, 2021, 2020 and 2019, respectively. As of December 31, 2021 and 2020, receivables from and payables to related parties were not material. Reportable Segment Management has determined that the Company operates in one segment, given the similarities in economic characteristics between its operations and the common nature of its products and services, production and distribution process and regulatory environment. Revenue Recognition Revenue is recognized when control of the promised service is transferred to customers in an amount that reflects ion, the consideration the Company expects to be entitled to in exchange for those services. For additional informat see Note 3 - Revenue. ff Compensation and Benefits The Company records compensation and benefits expense for all cash and deferred compensation, benefits and related taxes as earned by its employees. Compensation and benefits expense also includes fees earned by temporary employees and contractors who performff employees. similar services to those performed by the Company’s ff Share-Based Compensation ff Certain employees, officers, directors, advisors and financial institutions participate in the Company’s various long- term incentive plans that provide for granting stock options, warrants, restricted stock awards, restricted stock units, deferred stock units and perfrr orff mance stock units. Stock options, warrants and restricted stock units generally vest in equal increments over a three-year period and expire on the tenth anniversary following the date of grant. Restricted stock awards and deferred stock units generally vest over a one-year period, and performance units generally vest in full at the end of a three-year performance period. stock ff ff The Company recognizes share-based compensation for equity awards granted to employees, officers directors as compensation and benefits expense on the consolidated statements of income. The fair value of stock options is estimated using a Black-Scholes valuation model on the date of grant. The fair value of restricted stock awards, restricted stock units and deferred stock units is equal to the closing price of the Company’s stock on the date of grant. The fair value of performance stock units is estimated using a Monte-Carlo simulation model on the date of grant. Share-based compensation is recognized over the requisite service period of the individual awards, which generally equals the vesting period. and ff The Company recognizes share-based compensation for equity awards granted to advisors and financial institutions as advisory and commission expense on the consolidated statements of income. The fair value of restricted stock units is equal to the closing price of the Company’s stock on the date of grant. Share-based compensation is recognized over the requisite service period of the individual awards, which generally equals the vesting period. 72 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company makes assumptions regarding the number of stock options, warrants, restricted stock awards, restricted stock units, deferred stock units and perfrr ormff assumption is ultimately adjusted to the actual forfeiture rate. As a result, changes in the forfeiture assumptions do not impact the total amount of expense ultimately recognized over the service period. Rather, different forfeiture assumptions would only impact the timing of expense recognition over the service period. See Note 16 - Share- Employee Incentives and Benefit PlanPP s, for additional inforff mation regarding share-based Based Compensation, compensation for equity awards granted. ance stock units that will be forfeited. The forfeiture tt ff Earningii s 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. Income Taxes ff nces result in deferred tax assets and liabilities. The Company then must assess the between the financial statement carrying amounts and the tax basis of assets and liabilities. In preparing the consolidated financial statements, the Company estimates income tax expense based on various jurisdictions where it conducts business. The Company needs to estimate current tax obligations and to assess temporary differences ff These temporary differe likelihood that the deferred tax assets will be realized. A valuation allowance is established to the extent that it is more likely than not that such deferred tax assets will not be realized. When the Company establishes a valuation allowance or modifies the existing allowance in a certain reporting period, it generally records a corresponding increase or decrease to tax expense in the consolidated statements of income. Management makes significant judgments in determining its provision for income taxes, deferred tax assets and liabilities and any valuation allowances recorded against the deferred tax assets. Changes in the estimate of these taxes occur periodically due to changes in the tax rates, changes in the business operations, implementation of tax planning strategies, resolution with taxing authorities of issues where the Company had previously taken certain tax positions, and newly enacted statutory, judicial and regulatory guidance. These changes could have a material effect consolidated statements of income, financial condition or cash flows in the period or periods in which they occur. Income tax credits are accounted for using the flow-through method as a reduction of income tax expense in the period they are generated. on the Company’s ff The Company recognizes the tax effeff cts of a position in the consolidated financial statements only if it is more likely than not to be sustained based solely on its technical merits; otherwise no benefits of the position are to be recognized. The more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. Moreover, each tax position meeting the recognition threshold is required to be measured as the largest amount that is greater than 50 percent likely to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. Cash and Equivalents Cash equivalents are highly liquid investments with an original maturity of 90 days or less that are not required to be segregated under federal or other regulations. The Company’s cash and equivalents are composed of interest and noninterest-bearing deposits, money market funds and U.S. government obligations. Cash Segregated Underdd Federal or Other Regulation ll s The Company’s broker-dealer subsidiary, LPL Financial, is required to maintain cash or qualified securities in a segregated reserve account for the exclusive benefit of its customers in accordance with Rule 15c3-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and other regulations. At December 31, 2021, this line item included approximately $100,000 of cash for the proprietary accounts of broker-dealers. Restricted Cash Restricted cash primarily represents cash held and for use by the Captive Insurance Subsidiary. 73 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Receivables from Clients, Net and Client Payables Receivables from clients include amounts due on cash and margin transactions. The Company extends credit to clients of its advisors to finance their purchases of securities on margin and receives income from interest charged on such extensions of credit. Client payables represent credit balances in client accounts arising from deposits of funds, proceeds from sales of securities and dividend and interest payments received on securities held in client accounts at LPL Financial. The Company pays interest on certain client payable balances. Receivables from clients are generally fully secured by securities held in the clients’ accounts. To the extent that margin loans and other receivables from clients are not fully collateralized by client securities, the Company establishes an allowance that it believes is sufficient allowance, the Company considers a number of factors, including its ability to collect from the client or the client’s advisor and its historical experience in collecting on such transactions. to cover any probable losses. When establishing this ff The following table reflects a roll-forff warr thousands): rd of the allowance for credit losses on receivables from clients (in Beginning balance — January 1 Impact of ASU 2016-13 adoption Provision for credit losses Charge-offs, ff net of recoveries Ending balance — December 31 vv Advisor Loans, Net December 31, 2021 2020 2019 $ 520 $ 115 $ 640 — 424 43 — 432 (27) — 130 (655) $ 987 $ 520 $ 115 Advisor loans, net includes loans made to advisors and financial institutions and other advisor fee receivables. The Company periodically extends credit to its advisors in the form of recruiting loans, commission advances and other loans. The decision to extend credit to an advisor is generally based on the advisor’s credit history and their ability to generate future revenue. Loans made in connection with recruiting can be either repayable or forgivable over terms generally up to ten years provided that the advisor remains licensed through LPL Financial. Forgivable loans are not repaid in cash and are amortized over the term of the loan. If an advisor terminates their arrangement with the Company prior to the loan maturity date, the remaining balance becomes repayable immediately. An allowance for credit losses is recorded at the inception of a repayable loan or upon advisor termination for forgivable loans using estimates and assumptions based on historical lifetime loss experience and expectations of future loss rates based on current facts. Advisor repayable loans, net totaled $191.2 million and $127.4 million as of December 31, 2021 and 2020. The following table reflects a roll-forward ff of the allowance for credit losses on advisor loans (in thousands): Beginning balance — January 1 Impact of ASU 2016-13 adoption Provision for credit losses Charge-offs, ff net of recoveries Ending balance — December 31 Other Receivables, Net December 31, 2021 2020 2019 $ 8,797 $13,461 $12,313 — 7,074 8,748 3,642 — 4,806 (4,296) (17,054) (3,658) $11,575 $ 8,797 $13,461 Other receivables, net primarily consist of receivables due from product sponsors and others, miscellaneous receivables and short-term secured loans to clients. An allowance for credit losses is recorded at inception using estimates and assumptions based on historical experience, current facts and other factors. Management monitors the adequacy of these estimates through periodic evaluations against actual trends experienced. 74 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The folff lowing table reflects a roll-forff warr rd of the allowance for credit losses on other receivables (in thousands): Beginning balance — January 1 Impact of ASU 2016-13 adoption Provision for credit losses Charge-offs, ff net of recoveries Ending balance — December 31 Investment Securities December 31, 2021 2020 2019 $ 1,068 $ 805 $ 866 — 1,670 1,097 1,610 — 365 (1,655) (2,444) (426) $ 1,083 $ 1,068 $ 805 Investment securities include trading and held-to-maturity securities. The Company also has securities which have been sold, but not yet purchased, which are reflected in other liabilities on the consolidated statements of financial condition. The Company generally classifies its investments in debt and equity instruments as trading securities, except for U.S. government notes held by its wholly owned subsidiary PTC, which are held to satisfy mff capital requirements of the OCC and classified as held-to-maturity securities because the Company has both the intent and the ability to hold these investments to maturity. The Company has not classified any investments as available-for-sale. inimum Securities classified as trading are carried at fair value, while securities classified as held-to-maturity are carried at amortized cost. 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 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 forff 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. identical assets and liabilities are not available, the quoted prices are based on similar assets and ff ive yield method over the term of the security and are recorded as an adjustment to the investment yield. The Interest income is accrued as earned. Premiums and discounts are amortized using a method that approximates the effect Company makes estimates about the fair value of investments and the timing for recognizing losses based on market conditions and other factors. If these estimates change, the Company may recognize additional losses. Realized and unrealized gains and losses on trading securities are recognized in other revenue on a net basis in the consolidated statements of income. ProPP perty at nd Equipment, Net Internally developed software, leasehold improvements, computers and software and furniture and equipment are recorded at historical cost, net of accumulated depreciation and amortization. Depreciation is recognized using the straight-line method over the estimated useful lives of the assets. The Company expenses software development costs as incurred during the preliminary project stage, while capitalizing costs at the point at which the conceptual formulation, design and testing of possible software project alternatives are complete and management authorizes and commits to funding the project capitalization are included in property and equipment and subsequently amortized over the estimated useful life of the software, which is generally 5 years. The Company does not capitalize pilot project future economic benefits are less than probable. Leasehold improvements are amortized over the lesser of their useful lives or the terms of the underlying leases. Computers and software are depreciated over a period of 3 to 5 years. Furniture and equipment are depreciated over a period of 3 to 7 years. Land is not depreciated. . The costs of internally developed software that qualify f s or projects forff which it believes that the ff orff o o Management reviews property and equipment forff indicate the carrying amount of the assets may not be recoverable. No mpi December 31, 2021, 2020 or 2019. impairment whenever events or changes in circumstances airment occurred for the years ended 75 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Acquisiti ii ons Accounting for business combinations requires the Company to make significant estimates and assumptions with respect to intangible assets, liabilities assumed and pre-acquisition contingencies. These assumptions include, but are not limited to, future expected cash flows and discount rates, and are based in part on historical experience, ion obtained from the management of the acquired companies. market data and informat ff When acquiring companies, the Company recognizes separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill is recognized for business combinations as of the acquisition date and is measured as the excess of consideration transferred and the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, these estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records to goodwill. Upon the adjustments to the assets acquired and liabilities assumed, with the corresponding offset conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of income. ff The Company also enters into asset acquisitions for single identifiable assets. Accounting for asset acquisitions requires the Company to make significant estimates and assumptions with respect to the useful life of the asset purchased. These assumptions are based in part on historical experience and market data. Goodwillii and Other Intangibl ii es, Net Goodwill and other indefinite-lived intangibles are tested annually for impairment in the fourth fiscal quarter and between annual tests if certain events occur indicating that the carrying amounts may be impaired. If a qualitative assessment is used and the Company determines that the fair value of a reporting unit or indefinite-lived intangible is more likely than not (i.e., a likelihood of more than 50%) less than its carrying amount, a quantitative impairment test will be performed. value, to the extent that it does not exceed the total carrying amount of goodwill. No impairment of goodwill or other indefinite-lived intangibles was recognized for the years ended December 31, 2021, 2020 or 2019. An impairment loss will be recognized if a reporting unit’s carrying amount exceeds its fair ff Intangibles that are deemed to have definite lives are amortized over their useful lives, generally ranging from 5 to 20 years. They are reviewed for impairment when there is evidence that events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount to the estimated undiscounted future cash flows expected to be generated. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the estimated fair value. There was no impairment of definite-lived intangibles recognized for the years ended December 31, 2021, 2020 or 2019. See Note 9 - Goodwill and Other ion regarding the Company’s goodwill and other intangibles. s, Net, for additional informat Intangible ff tt t Securitiett s Borrowed rr The Company borrows securities from other broker-dealers to make deliveries or to facilitate customer short sales. Securities borrowed, which are included in other assets in the consolidated statements of financial condition, are accounted for as collateralized borrowings and are recorded at the contract value, which represents the amount of cash provided for securities borrowed transactions (generally in excess of market values). The adequacy of the collateral deposited, which is determined by comparing the market value of the securities borrowed to the cash loaned, is continuously monitored and is adjusted when considered necessary to minimize the risk associated with this activity. As of December 31, 2021, the contract and collateral market values of borrowed securities were $10.0 million and $9.7 million, respectively. As of December 31, 2020, the contract and collateral market values of borrowed securities were $30.1 million and $29.1 million, respectively. Fractional Shares The Company acts in a principal capacity in respect of fractional shares resulting from the DRIP that is offered clients by aggregating dividends received by clients, executing purchases of whole shares, and allocating the whole shares to clients on a fractional basis based on the dividend amounts that are reinvested. Shares remaining after to ff 76 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements this process and fractional shares purchased by the Company in client liquidations are included in the Company’s inventory and reflected as investment securities on the Company’s consolidated statements of financial condition. Fractional shares that have been allocated to clients do not meet the criteria for sale accounting in ASC 860, Transfers and Servicing, and are accounted forff held by clients) with a corresponding investment in fractional shares. These are reflected in other assets and other liabilities, respectively, on the Company’s consolidated statements of financial condition. The Company has elected the fair value option to measure these financial assets and the corresponding repurchase obligation and determines fair value based on quoted prices in active markets. as a secured borrowing (repurchase obligation related to shares Debt Issuance Costs Debt issuance and amendment costs are capitalized and amortized as additional interest expense over the expected term of the related debt agreement. Debt issuance costs are presented as a direct deduction from the carrying amount of the related debt liability. Costs incurred while obtaining the revolving credit facility are included in other assets in the consolidated statements of financial condition and subsequently amortized ratably over the term of the revolving credit facility, regardless of whether there are any outstanding borrowings on the revolving credit facility. Leases Lease assets and lease liabilities are recognized based on the present value of the future lease payments over the lease term at the lease commencement date and reflected in other assets and other liabilities, respectively, on the consolidated statements of financial condition. The Company estimates its incremental borrowing rate based on informat informat ion available at the commencement date in determining the present value of future payments. For additional ion, see Note 12 - Leases. ff ff Commitments and Contingii encies The Company recognizes a liability for loss contingencies when it believes it is probable a liability has occurred and the amount can be reasonably estimated. If some amount within a range of loss appears at the time to be a better estimate than any other amount within the range, the Company accrues that amount. When no amount within the range is a better estimate than any other amount, however, the Company accrues the minimum amount in the range. The Company has established an accrual for those legal proceedings and regulatory matters for which a loss is both probable and the amount can be reasonably estimated. The Company also accrues for losses at its Captive Insurance Subsidiary for those matters covered by self-ff insurance. The Captive Insurance Subsidiary records losses and loss reserve liabilities based on actuarially determined estimates of losses incurred, but not yet reported to the Company as well as specific reserves for proceedings and matters that are probable and estimable. The Captive Insurance Subsidiary is funded by payments from the Company’s broker-dealer subsidiary and has cash reserves to cover losses, including $77.4 million in restricted cash at the Captive Insurance Subsidiary. Assessing the probability of a loss occurring and the timing and and requires management ff amount of any loss related to a legal proceeding or regulatory matter is inherently difficult to make significant judgments. For additional informat stt and Continii gencies - “Legal & ion, see Note 14 - Commitment Regulatory Matters.” ff tt Recently Issued or Adopted Accounting Pronrr ouncements There are no recently issued accounting pronouncements that would materially impact the Company’s consolidated financial statements and related disclosures. There are no new accounting pronouncements adopted during the year ended December 31, 2021 that materially impacted the Company’s consolidated financial statements and related disclosures. NOTE 3 - REVENUE Revenue is recognized when control of the promised services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. Revenue is analyzed to determine whether the Company is the principal (i.e., reports revenue on a gross basis) or agent (i.e., reports revenue on a net basis) in the contract. Principal or agent designations depend primarily on the control an entity has 77 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements over the product or service beforeff control include primary responsibility over perforff mance obligations, inventory risk beforeff transferred and discretion in establishing the price. control is transferred to a customer. The indicators of which party exercises the good or service is Advisory obligation for advisory fees is considered a series of distinct services that are substantially the Advisory revenue represents fees charged to advisors’ clients’ advisory accounts on the Company’s corporate RIA advisory platform and is based on a percentage of the market value of the eligible assets in the clients’ advisory accounts. The Company provides ongoing investment advice and acts as a custodian, providing brokerage and execution services on transactions, and performs administrative services for these accounts. Advisory fees are primarily billed to clients in advance, on a quarterly basis, and are recognized as revenue ratably during the quarter. The performance ff same and are satisfied daily. As the value of the eligible assets in an advisory account is susceptible to changes due to customer activity, this revenue includes variable consideration and is constrained until the date that the fees are determinable. The majority of our client accounts are on a calendar quarter and are billed using values as of the last business day of the preceding quarter. The value of the eligible assets in an advisory account on the billing date is adjusted for estimates of contributions and withdrawals to determine the amount billed, and accordingly, the revenue earned in the following three-month period. Advisory revenue collected on the Company’s corporate advisory platform is proposed by the advisor and agreed to by the client and averaged 1.0% of the underlying assets forff the year ended December 31, 2021. The Company also supports independent registered investment adviser firms through its corporate RIA platform, which allows advisors to engage the Company for technology, clearing and custody services, as well as access to the capabilities of the Company’s investment platforms. accounts custodied with LPL Financial are included in total advisory assets and net new advisory assets. The advisory revenue generated by a RIA is not included in the Company’s advisory revenue. The Company charges separate fees are included in service and fee revenue in the consolidated statements of income. to RIAs for technology, clearing, administrative, oversight and custody services, which may vary and The assets held under a RIA’sAA investment advisory ff ff Commissi ii on Commission revenue represents sales commissions generated by advisors for their clients’ purchases and sales of securities on exchanges and over-the-counter, as well as purchases of other investment products. The Company views the selling, distribution and marketing, or any combination thereof, of investment products to such clients as a ff single performance obligation to the product sponsors. The Company is the principal for commission revenue, as it is responsible for the execution of the clients’ purchases and sales, and maintains relationships with the product sponsors. Advisors assist the Company in performing obligations. Accordingly, total commission revenue is reported on a gross basis. its ff The following table presents total commission revenue disaggregated by product category (in thousands): Commission revenue Annuities Mutual funds Fixed income Equities Other Years Ended December 31, 2021 2020 2019 $ 1,210,899 $ 976,357 $ 1,000,806 768,168 126,543 131,975 141,098 590,074 88,714 126,920 124,495 589,411 102,391 79,446 120,353 Total commission revenue $ 2,378,683 $ 1,906,560 $ 1,892,407 78 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The Company generates two types of commission revenue: (1) sales-based commissions that are recognized at the point of sale on the trade date and are based on a percentage of an investment product’s current market value at the time of purchase and (2) trailing commissions that are recognized over time as earned and are generally based on the market value of investment holdings in trail-eligible assets. Sales-based commission revenue, which occurs when clients trade securities or purchase various types of investment products, primarily represents gross commissions generated by the Company’s advisors and can vary from period to period based on the overall economic environment, number of trading days in the reporting period and investment activity of the Company’s advisors’ clients. The Company earns trailing commission revenue primarily on mutual funds and variable annuities held by clients of the Company’s advisors. Trailing commission revenue is recognized over the time the client owns the investment or holds the contract and is generally earned based on a fixed rate applied. The ongoing revenue is not recognized at the time of sale because it is variably constrained due to factors outside the Company’s control including market volatility and the client's investment hold period. The revenue will not be recognized until it is probable that a significant reversal will not occur. The following table presents sales-based and trailing commission revenue disaggregated by product category (in thousands): Commission revenue Sales-based Annuities Mutual funds Fixed income Equities Other Total sales-based revenue Trailing Annuities Mutual funds Other Total trailing revenue Total commission revenue Asset-Based Years Ended December 31, 2021 2020 2019 $ 425,164 $ 327,412 $ 191,449 126,543 131,975 98,924 145,836 88,714 126,920 81,882 380,317 146,695 102,391 79,446 74,003 $ $ $ $ 974,055 $ 770,764 $ 782,852 785,735 $ 648,945 $ 576,719 42,174 444,238 42,613 620,489 442,716 46,350 1,404,628 2,378,683 $ $ 1,135,796 1,906,560 $ $ 1,109,555 1,892,407 Asset-based revenue consists of fees from the Company’s client cash programs, fees from our sponsorship programs with financial product manufacturers, and fees from omnibus processing and networking services (collectively referred to as “recordkeeping”). Client Cash Revenue Client cash revenue is earned daily and is generated based on advisors’ clients’ cash balances in insured bank sweep accounts and money market programs based on a rate applied, as a percentage, to the deposits placed. The Company receives fees based on account type and invested balances for administration and recordkeeping. These fees are earned and recognized over time on a net basis as the Company acts as an agent in these arrangements. The performance obligation with the financial institutions that participate in the sweep program is considered a series of distinct services that are substantially the same and are satisfied each day. 79 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Sponsorship rr Programs ff The Company receives fees from certain financial product manufacturers in connection with sponsorship programs that support the Company’s marketing and sales force education and training efforts. performance held in advisors’ clients’ accounts, a percentage of new sales or a combination of these. As the value of product sponsor assets held in advisors’ clients’ accounts is susceptible to unpredictable market changes, this revenue includes variable consideration and is constrained until the date that the fees are determinable. obligations is either a fixed fee, a percentage of the average annual amount of product sponsor assets Compensation for these ff Recordkeeping providing recordkeeping, account maintenance, reporting The Company generates revenue from fees it collects forff and other related services to product sponsors. This includes revenue from omnibus processing in which the Company establishes and maintains sub-account records for its clients to reflect the purchase, exchange and redemption of mutual fund shares, and consolidates clients’ trades within a mutual fund. Omnibus processing fees are paid to the Company by the mutual fund product sponsors or their affiliat mutual fund assets in accounts forff which the Company provides omnibus processing services and the number of accounts in which the related mutual fund positions are held. Recordkeeping also includes revenue from networking recordkeeping services. Networking revenue on brokerage assets are correlated to the number of positions or value of assets that the Company administers and are paid by mutual fund and annuity product manufacturers. Recordkeeping revenue is recognized over time as the Company fulfills its performance obligations. As recordkeeping fees are susceptible to unpredictable market changes that influence market value and fund positions, this revenue includes variable consideration and is constrained until the date that the fees are determinable. es and are based on the value of f ff The following table sets forth asset-based revenue disaggregated by product category (in thousands): Asset-based revenue Client cash Sponsorship programs Recordkeeping Years Ended December 31, 2021 2020 2019 $ 360,847 $ 481,388 $ 385,791 401,429 272,935 290,194 652,793 251,899 261,287 Total asset-based revenue $ 1,148,067 $ 1,044,517 $ 1,165,979 Service and Fee technology, clearing, administrative, oversight and custody services, which may vary. The Service and fee revenue is generated from advisor and retail investor services, including technology, insurance, conferences, licensing, Business Solutions, IRA custodian, and other client account fees. The Company charges separate fees to RIAs forff Company also hosts certain advisor conferences that serve as training, education, sales and marketing events forff which the Company collects a fee from sponsors. Service and fee revenue is recognized when the Company satisfies its performance service is provided once at an identifiable point-in-time or if the service is provided continually over the contract life. Performance services that are substantially the same and are satisfied each day over the contract term. The Company is the principal and recognizes service and fee revenues on a gross basis as it is primarily responsible forff respective services being provided, which is demonstrated by the Company’s ability to control the fee amounts charged to customers. obligations. Recognition varies from point-in-time to over time depending on whether the and fee revenue recognized over time are considered a series of distinct obligations for service delivering the rr rr ff 80 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The folff lowing table sets forth service and fee revenue disaggregated by recognition pattern (in thousands): Service and fee revenue Point-in-time(1) Over time(2) Total service and fee revenue ______ ____ ____ ____ ____ ____ ____ ____ ____ Years Ended December 31, 2021 2020 2019 $ $ 110,459 $ 85,451 $ 301,302 272,271 411,761 $ 357,722 $ 95,407 262,437 357,844 (1) (2) Service and fee revenue recognized at a point-in-time includes revenue such as confirmation fees, IRA termination fees, and conference fees. Service and fee revenue recognized over time includes revenue such as error and omission insurance fees, Business Solutions subscription fees, IRA custodian fees, and technology fees. Transaction ff Transaction revenue includes transaction charges generated by advisory and brokerage accounts from mutual funds, ETF, and fixed income products and is primarily recognized at a point-in-time. Point-in-time transaction revenue includes revenue from clearing and transaction charges and is recognized on a trade-date basis as the performance agreed upon and the risks and rewards of ownership have been transferred the principal and recognizes transaction revenue on a gross basis as it is primarily responsible forff respective services being provided, which is demonstrated by the Company’s ability to control the fee amounts charged to customers. obligation is satisfied when the underlying financial instrument or purchaser is identified, the pricing is to/from the customer. The Company is delivering the f Interest Income The Company earns interest income from client margin loans, advisor loans, cash segregated under federal or other regulations and cash equivalents. Other Other revenue primarily includes unrealized gains and losses on assets held by the Company forff qualified deferred compensation plan and model research portfolios, and other miscellaneous revenue, which is not generated from contracts with customers. its advisor non- Unearned Revenue ff The Company records unearned revenue when cash payments are received or due in advance of the Company’s performance obligations, including amounts which are refundable. The increase in the unearned revenue balance for the year ended December 31, 2021 compared to 2020 is primarily driven by cash payments received or due in advance of satisfying the Company’s perforff mance obligations, offset was included in the unearned revenue balance as of December 31, 2020. by $94.3 million of revenue recognized that ff The Company receives cash in advance for advisory services to be performed and conferences to be held in future periods. For advisory services, revenue is recognized as the Company provides the administration, brokerage and execution services over time to satisfy the performance obligations. For conference recognizes revenue as the conferences revenue, the Company are held. ff ff f 81 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 4 - ACQUISITIONS On April 30, 2021, the Company acquired the wealth management business of Waddell & Reed Financial, Inc. for $300.0 million in order to expand its addressable markets and complement organic growth. The Company accounted for the acquisition under the acquisition method of accounting for business combinations. At December 31, 2021, the Company had provisionally allocated $128.6 million of the purchase price to goodwill, $122.7 million to definite-lived intangible assets, $62.3 million to cash acquired, and the remainder to other assets acquired and liabilities assumed as part of the acquisition. The goodwill primarily includes the synergies expected to result from combining operations and onboarding advisors and assets to the Company’s platform and is deductible for tax purposes. The int gangible assets are comprised the income approach, which included usi gng the multi-period excess fuseful to make signif rate. See Note 9 - Goodwill and Othett flife fof approximat yely 9 yyears. The ffair value determination fof the advisor relationships required the CCompanyy significant estimates and assumptions related to ffuture net cash fflows and the selection fof the discount primarily fof advisor relationships, which were valued r Intangibles, Net, for additional informat earnings method, with a weigghted a using g g verage ion. g y ff On October 26, 2020, the Company acquired Blaze Portfolioff Systems LLC, a technology company that provides an advisor-facing trading and portfolio rebalancing platform. The Company paid $11.6 million at closing and agreed to a potential contingent payment of up to $4.0 million. On August 18, 2020, the Company acquired business relationships with advisors from E.K. Riley Investments, LLC (“E.K. Riley”) and Lucia Securities, LLC (“Lucia”), two unrelated broker-dealers and RIAs, for a combined $18.4 million. Both transactions had potential contingent payments. On August 1, 2019, the Company acquired Allen & Company, and under the transaction structure Allen & Company advisors and staffff became employees of the Company. The Company paid approximately $24.9 million at closing and made an additional contingent payment of $10.0 million in February 2020. The Company incurred $76.4 million of acquisition costs to setup, onboard and integrate the acquired entities during the year ended December 31, 2021. NOTE 5 - 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 years ended December 31, 2021 or 2020. 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 December 31, 2021 and 2020, 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. Trading Securitiestt house account model portfolios established and managed for the purpose of benchmarking the performance Sold, But Not Yet Purchased — The Company’s trading securities consist of and Securitiestt ff 82 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements of its fee-based advisory platforms and temporary positions resulting from the processing of client transactions. 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 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 December 31, 2021 and 2020, the Company did not adjust prices received from the independent third-party pricing services. Assets — The Company’s other assets include: (1) deferred compensation plan assets that are Other tt invested in money market and other mutual funds, which are actively traded and valued based on quoted market prices; and (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. Fractional Shares — The Company’s investment in fractional shares held by customers is reflected in other assets while the related purchase obligation for such shares is reflected in other liabilities. The Company uses prices obtained from independent third-party pricing services to measure the fair value of its investment in fractional shares held by customers and the related repurchase obligation. 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 review of other relevant market data including implied yields of major categories of securities. At December 31, 2021 and 2020, the Company did not adjust prices received from the independent third-party pricing services. Accountstt Payable and Accrued Liabilities — The Company’s accounts payable and accrued liabilities include contingent consideration liabilities that are measured using Level 3 inputs. Level 3 Recurringii Fair Value Measurements The Company determines the fair value for its contingent consideration obligations using a scenario-based approach whereby the Company assesses the expected number of future transactions. The contingent payment is estimated by applying a discount rate to the expected payment to calculate the fair value as of the valuation date. The Company evaluates the underlying projo ections and other related factors used in determining fair value each period and makes updates when there have been significant changes in management’s expectations. 83 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Recurring Fair Value Measurements The following table summarizes the Company’s financial assets and financial liabilities measured at fair value on a recurring basis (in thousands): December 31, 2021 Assets Cash equivalents Investment securities - trading: Money market funds Mutual funds Equity securities U.S. treasury obligations Total investment securities - trading Other assets: Deferred compensation plan Other investments Fractional shares - investment Total other assets Total assets at fair value Liabilities Accounts payable and accrued liabilities Other liabilities: Securities sold, but not yet purchased: Equity securities Debt securities Total securities sold, but not yet purchased Fractional shares - repurchase obligation Total other liabilities Total liabilities at fair value Level 1 Level 2 Level 3 Total $ 12,056 $ — $ — $ 12,056 123 19,112 440 19,599 39,274 499,548 — 114,574 614,122 665,452 — — — — — — 9,166 — 9,166 9,166 $ $ — — — — — — — — — — $ 123 19,112 440 19,599 39,274 499,548 9,166 114,574 623,288 674,618 — $ — $ 3,530 $ 3,530 467 — 467 114,574 115,041 115,041 $ — 105 105 — 105 105 $ — — — — — 3,530 $ 467 105 572 114,574 115,146 118,676 $ $ $ 84 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements lowing table summarizes the Company’s financial assets and financial liabilities measured at fair value on a The folff recurring basis (in thousands): December 31, 2020 Assets Cash equivalents Investment securities - trading: Money market funds Mutual funds Equity securities U.S. treasury obligations Total investment securities — trading Other assets: Deferred compensation plan Other investments Fractional shares - investment Total other assets Total assets at fair value Liabilities Accounts payable and accrued liabilities Other liabilities: Securities sold, but not yet purchased: Equity securities Debt securities Total securities sold, but not yet purchased Fractional shares - repurchase obligation Total other liabilities Total liabilities at fair value Level 1 Level 2 Level 3 Total $ 6,205 $ — $ — $ 6,205 125 9,137 492 19,498 29,252 371,202 — 72,591 443,793 479,250 — — — — — — 8,953 — 8,953 8,953 $ $ — — — — — — — — — — $ 125 9,137 492 19,498 29,252 371,202 8,953 72,591 452,746 488,203 — $ — $ 3,228 $ 3,228 203 — 203 72,591 72,794 72,794 $ — 3 3 — 3 3 $ — — — — — 3,228 $ 203 3 206 72,591 72,797 76,025 $ $ $ 85 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Fair Value of Financial Instruments Not Measured at Fair Value The following tables summarize the carrying values, fair values and fair value hierarchy level classification of financial instruments that are not measured at fair value (in thousands): December 31, 2021 Assets Cash and equivalents Cash segregated under federal or other regulations Restricted cash Receivables from clients, net Receivables from brokers, dealers and clearing organizations Advisor repayable loans, net(1) Other receivables, net Investment securities - held-to-maturity securities Other assets: Securities borrowed Other investments(2) Total other assets Liabilities Client payables Payables to brokers, dealers and clearing organizations Corporate debt and other borrowings, net ______ ____ ____ ____ ____ ____ ____ ____ ____ Carrying Value Level 1 Level 2 Level 3 Total Fair Value $ 483,190 $ 483,190 $ — $ — $ 483,190 1,496,463 80,655 578,889 1,496,463 80,655 — 102,503 191,242 581,483 9,918 9,958 4,595 14,553 — — — — — — — — — 578,889 102,503 — 581,483 9,915 9,958 4,595 14,553 — — — 1,496,463 80,655 578,889 — 176,864 — — — — — 102,503 176,864 581,483 9,915 9,958 4,595 14,553 $ 1,712,224 $ — $ 1,712,224 $ — $ 1,712,224 170,119 2,814,044 — — 170,119 2,885,536 — — 170,119 2,885,536 (1) (2) Includes repayable loans and forgivable loans which have converted to repayable upon advisor termination. Other investments include DTC common shares and Federal Reserve stock. December 31, 2020 Assets Cash and equivalents Cash segregated under federal or other regulations Restricted cash Receivables from clients, net of allowance Receivables from brokers, dealers and clearing organizations Advisor repayable loans, net(1) Other receivables, net Investment securities - held-to-maturity securities Other assets: Securities borrowed Other investments(2) Total other assets Liabilities Client payables Payables to brokers, dealers and clearing organizations Corporate debt and other borrowings, net ______ ____ ____ ____ ____ ____ ____ ____ ____ Carrying Value Level 1 Level 2 Level 3 Total Fair Value $ 802,407 $ 802,407 $ — $ — $ 802,407 923,158 67,264 405,106 97,245 127,432 435,012 13,235 30,130 5,799 35,929 923,158 67,264 — — — — — — — — — — 405,106 97,245 — 435,012 13,394 30,130 5,799 35,929 — — — — 115,898 — — — — — 923,158 67,264 405,106 97,245 115,898 435,012 13,394 30,130 5,799 35,929 $ 1,534,486 $ — $ 1,534,486 $ — $ 1,534,486 89,743 2,345,414 — — 89,743 2,402,441 — — 89,743 2,402,441 (1) (2) Includes repayable loans and forgivable loans which have converted to repayable upon advisor termination. Other investments include DTC common shares and Federal Reserve stock. 86 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 6 - INVESTMENT SECURITIES The Company’s investment securities include debt and equity securities that the Company has classified as trading securities, which are carried at fair value, as well as investments in U.S. government notes, which are held by The Private Trust Company, N.A. to satisfy minimum capital requirements of the OCC. These securities are recorded at amortized cost and classified as held-to-maturity as the Company has both the intent and ability to hold these investments to maturity. The following table summarizes investment securities (in thousands): Trading securities - at fair value: Money market funds Mutual funds Equity securities U.S. treasury obligations Total trading securities Held-to-maturity securities - at amortized cost: U.S. government notes Total held-to-maturity securities Total investment securities December 31, 2021 2020 $ $ $ $ $ 123 $ 19,112 440 19,599 39,274 9,918 9,918 49,192 $ $ $ $ 125 9,137 492 19,498 29,252 13,235 13,235 42,487 At December 31, 2021, the held-to-maturity securities were scheduled to mature as follows (in thousands): Within one year Afteff r one but within five years After five but within ten years After ten years Total U.S. government notes — at amortized cost $ U.S. government notes — at fair value $ 5,013 5,034 $ $ 4,905 4,881 $ $ — $ — $ — $ — $ 9,918 9,915 The Company realized gains of $2.0 million, $1.2 million and $54.6 million and losses of $1.0 million, $2.4 million and $54.6 million on trading securities sold during the years ended December 31, 2021, 2020 and 2019, respectively. 87 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 7 - RECEIVABLES FROM AND PAYABLES TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS Receivables from and payables to brokers, dealers, and clearing organizations were as follows (in thousands): Receivables: Receivables from clearing organizations Receivables from brokers and dealers Securities failed-to-deliver Total receivables Payables: Payables to clearing organizations Payables to brokers and dealers Securities failed-to-receive Total payables NOTE 8 - PROPERTY AND EQUIPMENT, NET December 31, 2021 2020 80,548 4,977 16,978 102,503 $ 89,838 2,550 4,857 97,245 20,112 $ 19,117 78,080 71,927 170,119 $ 50,528 20,098 89,743 $ $ $ The components of property and equipment, net were as follows at December 31, 2021 (in thousands): Internally developed software $ 716,179 $ (342,408) $ 373,771 Gross Carrying Value Accumulated Depreciation and Amortization Net Carrying Value Computers and software Buildings Leasehold improvements Furniture and equipment Land Construction in progress(1) 214,223 107,873 88,538 83,356 4,678 68,318 (167,573) (11,627) (36,988) (65,728) — — 46,650 96,246 51,550 17,628 4,678 68,318 Total property and equipment, net $ 1,283,165 $ ( (624,324) $ ( ) ) 658,841 ______ ____ ____ ____ ____ ____ ____ ____ ____ (1) Construction in progress includes internal software in development of $37.7 million at December 31, 2021. The components of property and equipment, net were as follows at December 31, 2020 (in thousands): Gross Carrying Value Accumulated Depreciation and Amortization Net Carrying Value Internally developed software $ 418,018 $ Computers and software Buildings Leasehold improvements Furniture and equipment Land Construction in progress(1) 195,800 107,895 88,135 83,365 4,678 174,974 (241,390) $ (151,792) (7,753) (31,202) (57,860) — — Total property and equipment, net $ 1,072,865 $ ( (489,997) $ ( ) ) ______ ____ ____ ____ ____ ____ ____ ____ ____ (1) Construction in progress includes internal software in development of $161.3 million at December 31, 2020. 176,628 44,008 100,142 56,933 25,505 4,678 174,974 582,868 88 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Depreciation and amortization was $151.4 million, $109.7 million and $95.8 million forff December 31, 2021, 2020 and 2019, respectively. the years ended NOTE 9 - GOODWILL AND OTHER INTANGIBLES, NET On April 30, 2021, the Company acquired the wealth management business of Waddell & Reed Financial, Inc. for $300.0 million. At December 31, 2021, the Company had provisionally allocated $128.6 million of the purchase price to goodwill, $122.7 million to definite-lived intangible assets, and the remainder to other assets acquired and liabilities assumed as part of the acquisition. The int gangible assets are comprised with a we gighted primarily fof advisor relationships ion. tt y9 years S. See Note 4 - AAcquisitions flife off approximat yely additional y f, forff average informat fuseful g ff f A summary of the activity impacting goodwill is presented below (in thousands): Balance at December 31, 2019 Goodwill acquired Balance at December 31, 2020 Goodwill acquired Balance at December 31, 2021 $ 1,503,648 10,218 1,513,866 128,577 $ 1,642,443 The components of other intangibles, net were as follows ff at December 31, 2021 (thousands): Definite-lived intangibles, net: Advisor and financial institution relationships Product sponsor relationships Client relationships Technology Trade names Weighted- Average Life Remaining (in years) Gross Carrying Value Accumulated Amortization Net Carrying Value 5.9 4.1 7.2 6.4 0.3 $ 806,531 $ (476,000) $ 330,531 234,086 45,623 19,040 1,200 (185,255) (23,379) (5,477) (1,160) 48,831 22,244 13,563 40 Total definite-lived intangible assets, net $ 1,106,480 $ ( (691,271) $ ( ) ) 415,209 Other indefinite-lived intangibles: Trademark and trade name Total other intangibles, net 39,819 $ 455,028 The components of other intangibles, net were as follows ff at December 31, 2020 (thousands): Definite-lived intangibles, net: Advisor and financial institution relationships Product sponsor relationships Client relationships Technology Trade names Total definite-lived intangibles, net Other indefinite-lived intangibles: Trademark and trade name Total other intangibles, net Weighted- Average Life Remaining (in years) Gross Carrying Value Accumulated Amortization Net Carrying Value 5.4 5.1 7.9 7.3 1.3 $ 670,542 $ (415,169) $ 255,373 234,086 44,810 19,040 1,200 (173,345) (19,237) (3,220) (1,040) 60,741 25,573 15,820 160 $ 969,678 $ ( (612,011) $ ( ) ) 357,667 39,819 $ 397,486 89 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Total amortization of other intangibles was $79.3 million, $67.4 million and $65.3 million for the years ended December 31, 2021, 2020 and 2019, respectively. Future amortization is estimated as follows ff (in thousands): 2022 2023 2024 2025 2026 Thereafter Total $ 83,735 79,566 78,794 70,420 32,164 70,530 $ 415,209 NOTE 10 - OTHER ASSETS AND OTHER LIABILITIES The components of other assets and other liabilities were as follows (dollars in thousands): December 31, 2021 2020 Other assets: Deferred compensation Fractional shares - investment(1) Prepaid assets Operating lease assets(2) Debt issuance costs, net Deferred income taxes, net(3) Other Total other assets Other liabilities: Deferred compensation Unearned revenue(4) Operating lease liabilities(2) Fractional shares - repurchase obligation(1) Finance lease liabilities(2) Other Total other liabilities ________ (1) _____ _____ _____ _____ _____ _____ _____ _____ See Note 2 - Summary of Significant Accounting Policll ___ $ 499,548 $ $ $ 114,574 115,018 95,075 7,303 5,648 49,822 886,988 $ 499,245 $ 160,926 130,304 114,574 106,067 7,160 $ 1,018,276 $ ies for further information. 371,202 72,591 100,448 101,921 6,052 24,112 59,179 735,505 372,395 95,328 139,377 72,591 107,424 28,351 815,466 (2) (3) (4) See Note 12 - Leases for further information. See Note 13 - Income Taxes for further information. See Note 3 - Revenue vv for further information. 90 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 11 - CORPORATE DEBT AND OTHER BORROWINGS, NET The Company’s outstanding corporate debt and other borrowings, net were as follows (in thousands): Corporate Debt Term Loan B(1) 2025 Senior Notes(1) 2027 Senior Notes(1) 2029 Senior Notes(1) 2031 Senior Notes(1) Total Corporate Debt Plus: Unamortized Premium Less: Unamortized Debt Issuance Cost Corporate debt, net Other Borrowings December 31, 2021 December 31, 2020 Balance Applicable Margin Interest Rate Balance Applicable Margin Interest rate Maturity $ 1,048,600 LIBOR+175 bps 1.85 % $ 1,059,300 LIBOR+175 bps 1.90 % 11/12/2026 — 400,000 900,000 Fixed Rate Fixed Rate Fixed Rate 400,000 Fixed Rate — % 4.63 % 4.00 % 4.38 % 2,748,600 — (24,556) $ 2,724,044 900,000 400,000 — — 2,359,300 7,083 (20,969) $ 2,345,414 Fixed Rate Fixed Rate Fixed Rate Fixed Rate 5.75 % 9/15/2025 4.63 % 11/15/2027 — % 3/15/2029 — % 5/15/2031 Revolving Credit Facility(2) Unsecured, Uncommitted Lines of Credit Total other borrowings $ 55,000 ABR+25 bps 3.50 % Broker Base Rate+75 bps 35,000 90,000 1.00 % $ — — — Corporate Debt and Other Borrowings, Net $ 2,814,044 $ 2,345,414 ABR+25 bps Broker Base Rate+75 bps — % 3/15/2026 — % 9/30/2022 ________ (1) _____ _____ _____ _____ _____ _____ _____ _____ No leverage or interest coverage maintenance covenants. ___ (2) The alternate base rate (ABR) was the PRIME rate and reflects the interest rate incurred on the senior secured revolving credit facility on the outstanding balances as of December 31, 2021. The minimum calendar year payments and maturities of the corporate debt and other borrowings as of December 31, 2021 were as follows (in thousands): 2022 2023 2024 2025 2026 Thereafter Total $ 45,700 10,700 10,700 10,700 1,060,800 1,700,000 $ 2,838,600 91 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements lowing table presents amounts outstanding and available under the Company’s external lines of credit at The folff December 31, 2021 (in millions): Description Borrower Maturity Date Senior secured, revolving credit facility LPL Holdings, Inc. March 2026 Broker-dealer revolving credit facility LPL Financial LLC July 2024 Secured, uncommitted lines of credit LPL Financial LLC Unsecured, uncommitted lines of credit LPL Financial LLC Unsecured, uncommitted lines of credit LPL Financial LLC Unsecured, uncommitted lines of credit LPL Financial LLC Secured, uncommitted lines of credit LPL Financial LLC Secured, uncommitted lines of credit LPL Financial LLC March 2022 September 2022 September 2022 None None None (1) Outstanding balances were repaid in January 2022. Issuance of 2031 Senior Notes $ $ $ $ $ $ $ Outstanding(1) 55 $ Available 945 300 75 40 50 75 unspecified unspecified $ — $ — $ 35 $ — $ — $ — — LPLH raised $400.0 million in aggregate principal amount of 4.375% senior notes on May 18, 2021, which were issued at par (“2031 Senior Notes”). The Company used the proceeds from the issuance to repay borrowings made under the senior secured revolving credit facility related to the acquisition of the wealth management business of Waddell & Reed Financial, Inc. The 2031 Senior Notes are unsecured obligations, governed by an indenture, that will mature on May 15, 2031, and bear interest at the rate of 4.375% per year, with interest payable semi-annually. The Company may redeem all or part of the 2031 Senior Notes at any time prior to May 15, 2026 at 100% of the principal amount redeemed plus any accrued and unpaid interest thereon and a “make-whole” premium (subject to a customary “equity claw” that permits the Company to redeem up to 40% of the aggregate principal amount of the 2031 Senior Notes prior to May 15, 2024 with the proceeds of equity offerings at a redemption price equal to , the Company may redeem all or part of the 2031 Senior ff 104.375%, plus accrued and unpaid interest). Thereafter Notes at annually declining redemption premiums until May 15, 2029, at and after which date the redemption price will be equal to 100% of the principal amount redeemed plus any accrued and unpaid interest thereon. In connection with the issuance of the 2031 Senior Notes, the Company incurred $3.8 million in costs, which were capitalized as debt issuance costs included in other assets in the consolidated statements of financial condition. Issuance of 2029 Senior Notes LPLH raised $900.0 million in aggregate principal amount of 4.00% senior notes on March 15, 2021, which were issued at par (“2029 Senior Notes”). The Company used the proceeds from the issuance of the 2029 Senior Notes, along with existing corporate cash available, to redeem our existing 5.75% senior unsecured notes due in 2025. In connection with this redemption, the Company recognized $24.4 million as a loss on extinguishment of debt on the consolidated statements of income. The 2029 Senior Notes are unsecured obligations, governed by an indenture, that will mature on March 15, 2029, and bear interest at the rate of 4.00% per year, with interest payable semi-annually. The Company may redeem all or part of the 2029 Senior Notes at any time prior to March 15, 2024 at 100% of the principal amount redeemed plus any accrued and unpaid interest thereon and a “make-whole” premium (subject to a customary “equity claw” that permits the Company to redeem up to 40% of the aggregate principal amount of the 2029 Senior Notes prior to March 15, 2024 with the proceeds of equity offerings interest). Thereafter redemption premiums until March 15, 2026, at and after which date the redemption price will be equal to 100% of the principal amount redeemed plus any accrued and unpaid interest thereon. In connection with the issuance of the 2029 Senior Notes, the Company incurred $9.0 million in costs, which were capitalized as debt issuance costs in the consolidated statements of financial condition. , the Company may redeem all or part of the 2029 Senior Notes at annually declining at a redemption price equal to 104%, plus accrued and unpaid ff ff Credit Agreement On March 15, 2021, LPLFH and LPLH entered into a fifth amendment agreement (the “Amendment”) to the Company’s amended and restated credit agreement (“Credit Agreement”), which, among other things, increased the size of its senior secured revolving credit facility to $1.0 billion and extended its maturity date. In connection with the execution of the Amendment, the Company incurred $3.2 million in costs, which are capitalized as debt issuance costs in the consolidated statements of financial condition. The Credit Agreement subjects the Company to certain 92 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements financial and non-financial covenants. As of December 31, 2021, the Company was in compliance with such covenants. Parent Revolving Credit Facilityt Borrowings under the revolving credit facility bear interest at a rate per annum ranging from 125 to 175 basis points over the Eurodollar Rate or 25 to 75 basis points over the base rate, depending on the Consolidated Secured Debt to Consolidated EBITDA Ratio (as defined in the Credit Agreement). Broker-Dealer Revolving Credit Facilityt On July 31, 2019, LPL Financial, the Company’s broker-dealer subsidiary, entered into a committed, unsecured revolving credit facility that matures on July 31, 2024 and allows for a maximum borrowing of up to $300.0 million. Borrowings bear interest at a rate per annum ranging from 112.5 to 137.5 basis points over the Federal Funds Rate or Eurodollar Rate, depending on the Parent Leverage Ratio (each as defined in the broker-dealer credit b agreement). The broker-dealer credit agreement subject covenants. LPL Financial was in compliance with such covenants as of December 31, 2021. s LPL Financial to certain financial and non-financial tt Other rr External Lines of Credit LPL Financial maintained six uncommitted lines of credit as of December 31, 2021. Two of the lines have unspecified limits, which are primarily dependent on LPL Financial’s ability to provide sufficient collateral. The other four lines have a total limit of $275.0 million, one of which allows for collateralized borrowings while the other three allow for uncollateralized borrowings. There was $35 million outstanding under these lines of credit as of December 31, 2021 and no balances outstanding as of December 31, 2020. ff NOTE 12 - LEASES The Company determines if an arrangement is a lease or contains a lease at inception. The Company has operating and finance leases for corporate offices and equipment with remaining lease terms of 1 to 15 years, some of which include options to extend the lease for up to 20 years. For leases with renewal options, the lease term is extended to reflect renewal options the Company is reasonably certain to exercise. Operating lease assets and operating lease liabilities are recognized based on the present value of the future lease payments over the lease term at the commencement date. As most of the Company’s leases do not provide an implicit rate, the Company estimates its incremental borrowing rate based on informat commencement date in determining the present value of future payments. Lease expense for net present value of payments is recognized on a straight-line basis over the lease term. ion available at the ff Finance lease assets are included in property and equipment, net in the consolidated statements of financial condition and were $97.1 million and $102.2 million at December 31, 2021 and December 31, 2020, respectively. The components of lease expense were as follows (in thousands): Operating lease cost Finance lease cost: Amortization of right-of-use assets Interest on lease liabilities Total finance lease cost $ $ $ Years Ended December 31, 2021 2020 2019 19,712 $ 18,757 $ 17,610 5,150 $ 8,360 13,510 $ 5,141 $ 8,423 13,564 $ 4,786 8,387 13,173 93 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Supplemental weighted-average informat ff ion related to leases was as follows: Weighted-average remaining lease term (years): Finance leases Operating leases Weighted-average discount rate: Finance leases Operating leases December 31, 2021 2020 24.6 6.9 7.89 % 6.96 % 25.3 7.9 7.82 % 7.07 % Maturities fof lease liabilities as fof December 31, 2021 were a fs follows ff usands): (in(in thousands): 2022 2023 2024 2025 2026 Thereafter Total lease payments Less imputed interest Total NOTE 13 - INCOME TAXES Operating Leases Finance Leases $ $ 24,072 23,306 22,471 22,126 22,394 53,068 167,437 37,133 130,304 $ $ 8,802 8,576 8,727 8,879 9,035 215,725 259,744 153,677 106,067 The components of the provision for income taxes were as follows (in thousands): Current provision for income taxes: Federal State Total current provision for income taxes Deferred provision (benefit) for income taxes: Federal State Total deferred provision (benefit) for income taxes Provision for income taxes December 31, 2021 2020 2019 $ $ 96,389 26,610 122,999 14,446 4,018 18,464 141,463 $ $ 137,360 39,757 177,117 (17,991) (5,693) (23,684) 153,433 $ $ 156,378 44,192 200,570 (13,971) (4,644) (18,615) 181,955 94 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements lowing table reflects a reconciliation of the U.S. federal statutory income tax rates to the Company’s effective The folff income tax rates: Federal statutory income tax rates State income taxes, net of federal benefit Non-deductible expenses Share-based compensation Research and development credits Other Effective income tax rates ff Years Ended December 31, 2021 2020 2019 21.0 % 4.1 0.7 (2.7) (0.4) 0.8 23.5 % 21.0 % 4.4 0.3 (1.0) (0.3) 0.1 24.5 % 21.0 % 4.1 0.4 (1.4) (0.3) 0.7 24.5 % ff The Company’s effect certain state taxes, benefits from share-based compensation, and other permanent differences certain expenses. The decrease in the Company’s effective tax rate for the year ended December 31, 2021 was primarily due to an increased benefit from share-based compensation recognized during 2021. ive income tax rate differs from the federal corporate tax rate of 21.0% primarily as a result of in tax deductibility of ff Deferred income taxes reflect the net tax effect and liabilities for financial reporting purposes and the amounts used for income tax purposes. s of temporary differences ff ff between the carrying amounts of assets The components of the net deferred income taxes included in the consolidated statements of financial condition were as follows (in thousands): Deferred tax assets: Accrued liabilities Share-based compensation State taxes Operating lease liabilities Finance lease liabilities Provision for credit losses Forgivable loans Other Total deferred tax assets Deferred tax liabilities: Amortization of other intangibles Depreciation of property and equipment Operating lease assets Unrealized gains and losses Total deferred tax liabilities Deferred income taxes, net December 31, 2021 2020 $ 148,566 $ 120,638 16,597 5,654 35,182 28,647 3,691 17,369 4,604 15,890 5,537 37,632 28,519 2,810 13,158 4,069 260,310 228,253 (58,833) (147,659) (25,832) (22,338) (64,907) (97,612) (27,681) (13,941) (254,662) (204,141) $ 5,648 $ 24,112 The following table reflects a reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits, including interest and penalties (in thousands): Balance — beginning of year Increases for tax positions taken during the current year Reductions as a result of a lapse of the applicable statute of limitations and decreases in prior-year tax positions Balance — end of year 95 December 31, 2021 2020 2019 $ 54,435 $ 52,098 $ 46,287 15,637 8,053 9,314 (13,058) (5,716) (3,503) $ 57,014 $ 54,435 $ 52,098 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements At December 31, 2021 and 2020, there were $53.8 million and $48.1 million, respectively, of unrecognized tax benefits that if recognized, would favorably affect the effective income tax rate in any future periods. ff The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes within the consolidated statements of financial condition. At December 31, 2021 and 2020, the liability for unrecognized tax benefits included accrued interest of $7.5 million and $7.3 million, respectively, and penalties of $3.9 million and $4.4 million, respectively. The CCompa yny and its subsidiaries ffile ffederal and state income tax returns which are examinations yby the respective taxi gng authorities. The Company hrough 2011. The ta yx years off 2012 to 2016 and 2018 to 2020 remain open to examination in the matters ffo yr years t ffederal jjurisdiction. The tax yyears fof 2012 to 2020 remain open to examination in the state jjurisdictions. In the next 12 months it is reasonab yly possible that the CCompa yny $$9.3 million related to settlem ne ts and the statute of limitations expiration in federal and various state jurisdictions. Company has concluded al fl federal and state income tax ymay realize a reduction in unrecognized tax g subject to routine benefits off f g j NOTE 14 - COMMITMENTS AND CONTINGENCIES Service and Development Contracts The Company is party to certain long-term contracts for systems and services that enable back offiff ce trade processing and clearing for its product and service offerings. Future minimum payments under service, development and agency contracts, and other contractual obligations with initial terms greater than one year were as follows at December 31, 2021 (in thousands): 2022 2023 2024 2025 2026 Thereafter Total Guarantees $ 75,452 56,427 31,718 10,780 167 161 $ 174,705 The Company occasionally enters into contracts that contingently require it to indemnify cff 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. ertain parties against third- 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. exceed the cash and securities it has posted as collateral. However, the potential requirement forff make payments under these agreements is remote. Accordingly, no liability has been recognized for these transactions. The Company’s liability under these arrangements is not quantifiable and could the Company to f Loan Commitments From time to time, LPL Financial makes loans to its advisors, primarily to newly recruited advisors to assist in the nces, LPL Financial may make commitments to transition process, which may be forgivable. Due to timing differe issue such loans prior to actually funding them. These commitments are generally contingent upon certain events occurring, including but not limited to the advisor joining LPL Financial. LPL Financial had no significant unfunded loan commitments at December 31, 2021 or December 31, 2020. ff 96 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Legal and Regulatll ory Matters ff ff b . While the Company exercises significant and complex judgments to make certain to extensive regulation and supervision by U.S. federal and state agencies and various ory organizations. The Company and its advisors periodically engage with such agencies and The Company is subject self-regulat organizations, in the context of examinations or otherwise, to respond to inquiries, inforff mational requests and investigations. From time to time, such engagements result in regulatory complaints or other matters, the resolution of which has in the past and may in the future include fines, customer restitution and other remediation. Assessing the probability of a loss occurring and the timing and amount of any loss related to a legal proceeding or regulatory matter is inherently difficult estimates presented in its consolidated financial statements, there are particular uncertainties and complexities involved when assessing the potential outcomes of legal proceedings and regulatory matters. 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; or the potential opportunities for settlement and the status of any settlement discussions. The Company monitors these factors and assumptions 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. The Company has established an accrual for those legal proceedings and regulatory matters for which a loss is both probable and the amount can be reasonably estimated. Third-Party Insurance The Company maintains third-party insurance coverage for certain potential legal proceedings, including those involving certain client claims. With respect to such client claims, the estimated losses on many of the pending matters are less than the applicable deductibles of the insurance policies. Self-Insurarr nce ff The Company has self-insurance for certain potential liabilities through the Captive Insurance Subsidiary. Liabilities associated with the risks that are retained by the Company are not discounted and are estimated by considering, in part, historical claims experience, severity factors, and actuarial assumptions and estimates. The estimated accruals for these potential liabilities could be significantly affect assumptions and historical trends, so there are particular complexities and uncertainties involved when assessing the adequacy of loss reserves for potential liabilities that are self-insured. As of December 31, 2021 and 2020, these self-insurance liabilities were $67.2 million and $51.5 million, respectively, and are included in accounts payable and accrued liabilities in the consolidated statements of financial condition. The increase in self-insurance during the year ended December 31, 2021 was driven by $34.8 million of additional reserves for claims that had been incurred but not reported, which were partially offset by $19.1 million of payments made during the period. Self-insurance related charges are included in other expense in the consolidated statements of income for the years ended December 31, 2021, 2020 and 2019. ed if future occurrences and claims differ from such liabilities ff ff ff ff ff Other Commitments As of December 31, 2021, the Company had approximately $527.6 million of client margin loans that were collateralized with securities having a fair value of approximately $738.6 million that LPL Financial can repledge, loan or sell. Of these securities, approximately $81.0 million were client-owned securities pledged to the Options Clearing Corporation as collateral to secure client obligations related to options positions. As of December 31, 2021, there were no restrictions that materially limited the Company’s ability to repledge, loan or sell the remaining $657.6 million of client collateral. Investment securities on the consolidated statements of financial condition include $4.6 million and $4.5 million of trading securities pledged to the Options Clearing Corporation at December 31, 2021 and 2020, respectively, and $15.0 million of trading securities pledged to the National Securities Clearing Corporation at December 31, 2021 and 2020. 97 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 15 - STOCKHOLDERS’ EQUITY Dividenddd sdd The payment, timing, and amount of any dividends are subject to approval by the Company’s Board of Directors as well as certain limits under the Credit Agreement and Indentures. Cash dividends per share of common stock and total cash dividends paid on a quarterly basis were as follows (in millions, except per share data): 2021 2020 2019 Dividend per Share Total Cash Dividend Dividend per Share Total Cash Dividend Dividend per Share Total Cash Dividend $ $ $ $ 0.25 0.25 0.25 0.25 $ $ $ $ 20.0 20.0 20.1 20.0 $ $ $ $ 0.25 0.25 0.25 0.25 $ $ $ $ 19.7 19.7 19.8 19.8 $ $ $ $ 0.25 $ 0.25 $ 0.25 $ 0.25 $ 21.1 20.8 20.5 20.2 First quarter Second quarter Third quarter Fourth quarter Share Repurchases The Company engages in share repurchase programs, which are approved by the Board of Directors, 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 consolidated statements of financial condition. On November 13, 2018, the Board of Directors authorized an increase to the Company’s existing share repurchase program, enabling the Company to repurchase its issued and outstanding common stock from time to time. The Company suspended share repurchases in early 2020 in light of the business and financial uncertainties created by the COVID-19 pandemic. The Company resumed share repurchases in the third quarter of 2021 and during the year ended December 31, 2021 had repurchased 579,771 shares of common stock at a weighted-average price of $155.25 for a total of $90.0 million. As of December 31, 2021, the Company had $259.8 million remaining under the existing share repurchase program. Future share repurchases may be effecte 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 within the constraints of the Credit Agreement, the indentures, and the Company’s general working capital needs. d in open market or privately ff NOTE 16 - SHARE-BASED COMPENSATION, EMPLOYEE INCENTIVES AND BENEFIT PLANS ff stock units and other equity-based compensation to the Company’s employees, non-employee In May 2021, the Company adopted the 2021 Omnibus Equity Incentive Plan (the “2021 Plan”), which provides for the granting of stock options, warrants, restricted stock awards, restricted stock units, deferred stock units, performance directors and other service providers. The 2021 Plan serves as the successor to the Company’s 2010 Omnibus Equity Incentive Plan (the “2010 Plan”). Following the adoption of the 2021 Plan, the Company is no longer making grants under the 2010 Plan, and the 2021 Plan is the only plan under which equity awards are granted. However, awards previously granted under the 2010 Plan will remain outstanding until vested, exercised or forfeited, as applicable. There were 17,754,197 shares authorized for grant under the 2021 Plan and 14,787,930 shares remaining available for future issuance at December 31, 2021. 98 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Stock OptO ions tt and WarWW rarr ntstt The Company did not grant stock options or warrants during the years ended December 31, 2021 or December 31, 2020. The folff by the Company in calculating the fair value of its employee and officer lowing table presents the weighted-average assumptions used in the Black-Scholes valuation model stock options that have been granted: ff Expected life (in years) Expected stock price volatility Expected dividend yield Risk-free interest rate Fair value of options Year Ended December 31, 2019 5.43 35.80 % 1.49 % 2.47 % 24.41 $ The following table summarizes the Company’s stock option and warrant activity as of and for the year ended December 31, 2021: Outstanding — December 31, 2020 Granted Exercised Forfeited and Expired Outstanding — December 31, 2021 Exercisable — December 31, 2021 Exercisable and expected to vest — December 31, 2021 Number of Shares Weighted- Average Exercise Price 2,000,383 $ — $ (764,979) $ (30,984) $ 1,204,420 1,114,281 1,203,705 $ $ $ 45.57 — 44.96 57.58 45.65 43.07 45.63 Weighted- Average Remaining Contractual Term (Years) Aggregate Intrinsic Value (In thousands) 4.80 $ 4.61 $ 137,830 130,388 4.80 $ 137,771 The following table summarizes informat 2021: ff ion about outstanding stock options and warrants as of December 31, Range of Exercise Prices $19.85 - $25.00 $25.01 - $35.00 $35.01 - $45.00 $45.01 - $65.00 $65.01 - $75.00 $75.01 - $80.00 Outstanding Weighted- Average Remaining Life (Years) Weighted- Average Exercise Price 4.14 $ 0.88 $ 5.20 $ 2.79 $ 6.14 $ 7.12 $ 4.80 $ 19.85 29.38 39.48 48.88 65.50 77.53 45.65 Exercisable Number of Shares 305,650 137,384 249,596 81,565 192,415 147,671 1,114,281 $ $ $ $ $ $ $ Weighted- Average Exercise Price 19.85 29.38 39.48 48.88 65.50 77.53 43.07 Total Number of Shares 305,650 137,384 249,596 81,565 192,415 237,810 1,204,420 of $2.6 million, $4.4 million and $9.8 million during the years ended December 31, 2021, 2020 and The Company recognized share-based compensation related to the vesting of stock options awarded to employees ff and officers 2019, respectively. As of December 31, 2021, total unrecognized compensation cost related to non-vested stock options granted to employees and officers was $0.2 million, which is expected to be recognized over a weighted- average period of 0.17 years. ff 99 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Restricted Stock and Stock Units The following summarizes the Company’s activity in its restricted stock awards and stock units, which include restricted stock units, deferred stock units and perforr rmance stock units, for the year ended December 31, 2021: Restricted Stock Awards Stock Units Number of Shares Weighted- Average Grant-Date Fair Value Number of Shares Weighted- Average Grant-Date Fair Value 5,560 1,593 $ $ (6,102) $ — $ 1,051 1,051 $ $ 64.74 156.54 72.89 — 156.54 156.54 904,445 499,227 (404,862) (82,903) $ $ $ $ 915,907 (1) $ $ 805,492 78.62 143.92 80.47 109.47 110.61 114.94 Outstanding — December 31, 2020 Granted Vested Forfeited Outstanding — December 31, 2021 Expected to vest — December 31, 2021 ______ ____ ____ ____ ____ ____ ____ ____ ____ (1) Includes 72,442 vested and undistributed deferred stock units. ff stock units to its employees and officers. The Company grants restricted stock awards and deferred stock units to its directors and restricted stock units and performance subject to forfeiture; however, restricted stock awards are included in shares outstanding upon grant and have the same dividend and voting rights as the Company’s common stock. The Company recognized $37.2 million, $25.1 million and $18.2 million of share-based compensation related to the vesting of these restricted stock awards and stock units during the years ended December 31, 2021, 2020 and 2019, respectively. As of December 31, 2021, total unrecognized compensation cost for restricted stock awards and stock units was $51.4 million, which is expected to be recognized over a weighted-average remaining period of 1.92 years. Restricted stock awards and stock units must vest or are ff The Company also grants restricted stock units to its advisors and to financial institutions. The Company recognized share-based compensation of $2.3 million, $2.3 million and $3.0 million related to the vesting of these awards during the years ended December 31, 2021, 2020 and 2019, respectively. As of December 31, 2021, total unrecognized compensation cost for restricted stock units granted to advisors and financial institutions was $5.0 million, which is expected to be recognized over a weighted-average remaining period of 2.15 years. EmpEE loyeeyy Incentivesvv and Benefit Plans The Company participates in a 401(k) defined contribution plan sponsored by LPL Financial. All employees meeting minimum age and length of service requirements are eligible to participate. The Company has an employer matching program whereby employer contributions are made to the 401(k) plan, and employees are eligible forff matching contributions after completing six months of service. For eligible employees, the Company matches up to 75% of the first 8% of an employee’s designated deferral of their eligible compensation. The Company’s total cost related to the 401(k) plan was $20.9 million, $18.8 million and $16.2 million for the years ended December 31, 2021, 2020 and 2019, respectively, which is classified as compensation and benefits expense in the consolidated statements of income. The Company established its Employee Stock Purchase Plan (the “ESPP”) as a benefit to enable eligible employees to purchase common stock of LPLFH at a discount from the market price through payroll deductions, subject to limitations. The ESPP provides for a 15% discount on the market value of the stock at the lower of the grant date price (first day of the offering period) and the purchase date price (last day of the offering period). The Company recognized $2.0 million, $2.2 million and $1.8 million of share-based compensation related to the ESPP during the years ended December 31, 2021, 2020 and 2019, respectively. The Company’s 2012 Employee Stock Purchase Plan was replaced by its 2021 Employee Stock Purchase Plan in May 2021. The Company maintains a non-qualified deferred compensation plan for the purpose of attracting and retaining advisors who operate, for tax purposes, as independent contractors, by providing an opportunity forff participating advisors to defer receipt of a portion of their gross commissions generated primarily from commissions earned on the sale of various products. The deferred compensation plan has been fully funded to date by participant contributions. Plan assets are invested in mutual funds, which are held by the Company in a Rabbi Trust. The liability for benefits accrued under the non-qualified deferred compensation plan totaled $499.2 million and $372.4 100 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements million at December 31, 2021 and 2020, respectively, which is included in other liabilities in the consolidated statements of financial condition. The cash value of the related trust assets was $482.5 million and $361.1 million at December 31, 2021 and 2020, respectively, which is measured at fair value and included in other assets in the consolidated statements of financial condition. Certain employees of the Company participate in a non-qualified deferred compensation plan that permits participants to defer portions of their compensation and may receive a return based on the allocation of notional investments offered under the plan. Plan assets are held by the Company in a Rabbi Trust and accounted for in the manner described above. As of December 31, 2021, the Company has recorded assets of $17.1 million and liabilities of $17.1 million, which are included in other assets and other liabilities, respectively, in the consolidated statements of financial condition. As of December 31, 2020 , the Company had recorded assets of $10.1 million and liabilities of $10.1 million. NOTE 17 - 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 years noted was as follows (in thousands, except per share data): Net income Basic weighted-average number of shares outstanding Dilutive common share equivalents Diluted weighted-average number of shares outstanding Basic earnings per share Diluted earnings per share Years Ended December 31, 2021 2020 2019 $ 459,866 $ 472,640 $ 559,880 80,002 1,740 81,742 79,244 1,458 80,702 82,552 2,072 84,624 $ $ 5.75 5.63 $ $ 5.96 5.86 $ $ 6.78 6.62 The computation of diluted earnings per share excludes stock options, warrants and stock units that are anti- dilutive. For the years ended December 31, 2021, 2020 and 2019, stock options, warrants and stock units representing common share equivalents of 684 shares, 376,598 shares and 407,059 shares, respectively, were anti-dilutive. NOTE 18 - NET CAPITAL AND REGULATORY REQUIREMENTS The Company’s registered broker-dealer, LPL Financial, is subject under the Exchange Act), which requires the maintenance of minimum net capital. The net capital rules also provide that the broker-dealer’s capital may not be withdrawn if the resulting net capital would be less than minimum requirements. Additionally, certain withdrawals require the approval of the SEC and FINRA to the extent they exceed defined levels, even though such withdrawals would not cause net capital to be less than minimum requirements. Net capital and the related net capital requirement may fluctuate on a daily basis. LPL Financial is a clearing broker-dealer and, as of December 31, 2021, had net capital of $87.5 million, which was $73.2 million in excess of its minimum net capital requirement of $14.3 million. to the SEC’s Net Capital Rule (Rule 15c3-1 b In April 2021, the Company acquired the Waddell & Reed broker-dealer. The Waddell & Reed broker-dealer was required to maintain net capital of $250,000, which represents the greater of 2% of its aggregate debits or the minimum net capital requirement of $250,000. In December 2021 the SSECC and FINRA approved the Form BDW 101 LPL FINANCIAL HOLDINGS INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements ffiled yby the Waddell && Reed broker-dealer, which terminated gorganizations, the SSECC and all jjurisdictions. gregistration with FINRA, all other ff fself g-regulat yory The Company’s subsidiary, PTC, also 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 on PTC’s operations. As of December 31, 2021 and 2020, LPL Financial and PTC met all capital adequacy requirements to which they were subject. NOTE 19 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET CREDIT RISK AND CONCENTRATIONS OF CREDIT RISK r repayable loans to recruit or support the transition of an advisor to its platform. LPL rs forgivable loans for similar purposes that may convert to repayable loans upon advisor LPL Financial may offeff Financial also offeff termination. LPL Financial may incur losses if advisors do not fulfill their obligations with respect to these loans. To mitigate this risk, LPL Financial monitors the performance repayable loans. and creditworthiness of the advisor prior to offeff ring ff 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, which is collateralized by cash and 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 suffici LPL Financial monitors margin levels daily and clients are required to deposit additional collateral, or reduce positions, when necessary. ent to fully cover losses that clients may incur from these strategies. To control this risk, ff 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 two 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-issued securities. When-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 on both a long and short basis that are recorded on the 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 diffeff 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. r from market prices prevailing at the time of completion of NOTE 20 - SUBSEQUENT EVENTS On February 3, 2022, the Company announced that the Board of Directors declared a cash dividend of $0.25 per share on the Company’s outstanding common stock to be paid on March 29, 2022 to all stockholders of record on March 15, 2022. 102 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures ff Management, with the participation of our Chief Executive Officff er and Chief Financial Offiff cer, evaluated the effect iveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer covered by this report were effect and Chief Financial Offiff cer concluded that our disclosure controls and procedures as of the end of the period ive. ff ff Change in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting that occurred during the fourth quarter ended December 31, 2021, that have materially affect over financial reporting. ed, or are reasonably likely to materially affect , our internal control ff ff Management’s Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as the process designed by, or under the supervision of, our Chief Executive Officer ff and effect regarding the reliability of our financial reporting process and the preparation of our consolidated financial statements for external purposes in accordance with generally accepted accounting principles. ed by our board of directors, management and other personnel, to provide reasonable assurance and Chief Financial Offiff cer, ff Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on our consolidated financial statements. ff As of December 31, 2021, management conducted an assessment of the effecti – Integrated Framework (2013) issued by financial reporting based on the framework established in Internal Control the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has determined that our internal control over financial reporting as of December 31, 2021 was effect veness of our internal control over ive. ff ff tt Deloitte & Touche LLP,P our independent registered public accounting firm, has issued an audit report appearing on the following page on the effeff ctiveness of our internal control over financial reporting as of December 31, 2021. 103 RE OPORT OOF INDEPENDENT GREG SISTERED PUBL CIC CACCOCOUNT GING FIRM To the stockholders and the Board of Directors of LPL Financial Holdings Inc. San Diego, California ff Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of LPL Financial Holdings Inc. and subsidiaries (the “Company”) as of December 31, 2021, based on criteria established in Internal Control tt — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effecti December 31, 2021, based on criteria established in Internal Control COSO. ve internal control over financial reporting as of tt — Integrated Framework (2013) issued by ff We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2021, of the Company and our report dated February 22, 2022, expressed an unqualified opinion on those financial statements. Basis for Opinion ff iveness of internal control over financial reporting, included in the accompanying The Company’s management is responsible for maintaining effecti its assessment of the effect management's annual report on internal control over financial reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. ve internal control over financial reporting and for ff the audit to obtain reasonable assurance about whether effecti We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and performff was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effect considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. iveness of internal control based on the assessed risk, and performing ve internal control over financial reporting such other procedures as we ff ff ff Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. ff Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effect iveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. ff /s/ DELOITTE & TOUCHE LLP San Diego, California February 22, 2022 ff 104 Item 9B. Other Information None. Item 10. Directors, Executive Offiff cers and Corporate Governance PART III Other than the information relating to our executive officers ff the information required to be furnished pursuant to this item is incorporated by reference to the Company’s definitive proxy statement for the 2022 Annual Meeting of Stockholders, which the Company intends to file with the SEC within 120 days of the end of the fiscal year end to which this report relates. provided in Part I of this Annual Report on Form 10-K, Items 11, 12, 13 and 14. The information required by Items 11, 12, 13 and 14 is incorporated by reference to the Company’s definitive proxy statement for the 2022 Annual Meeting of Stockholders, which the Company intends to file with the SEC within 120 days of the end of the fiscal year end to which this report relates. Item 15. Exhibits and Financial Statement Schedules (a) Consolidated Finanii cial Statements and Schedules PART IV Data” of Our consolidated financial statements are included in “Item 8. Financial this Annual Report on Form 10-K. Other financial statement schedules have been omitted because they are not applicable, not material, or the informat Statementstt and Supplementary ion is otherwise included. u ff ii (b) Exhibits Exhibit No. 3.1 3.3 3.4 4.1 4.3 4.4 10.1 2 p Amended and Restated Certificate of Incorporation of LPL Investment Holdings Inc., dated November 23, 2010 (incorporated by reference to Amendment No. 2 to the Registration Statement on Form S-1 filed on July 9, 2010, File No. 333-167325). Description of Exhibit Certificate of Ownership and Merger Merging LPL Financial Holdings Inc. with and into LPL Investment Holdings Inc., dated June 14, 2012 (incorporated by reference to the Form 8-K filed on June 19, 2012, File No. 001-34963). Certificate of Amendment to the Amended and Restated Certificate of Incorporation of LPL Financial Holdings Inc., dated May 8, 2014 (incorporated by reference to the Form 8-K filed on May 9, 2014, File No. 001-34963). Fifth Amended and Restated Bylaws of LPL Financial Holdings Inc. (incorporated by reference to the Form 8-K filed on March 12, 2014, File No. 001-34963). Indenture, dated as of March 10, 2017, by and among LPL Holdings, Inc., the Guarantors listed thereto and U.S. Bank National Association, as Trustee (incorporated by reference to the Form 8-K filed on March 10, 2017, File No. 001-34963). First Supplemental Indenture, dated as of September 21, 2017, among LPL Holdings, Inc., certain subsidiaries of the Company as Guarantors and U.S. Bank National Association, as Trustee (incorporated by reference to the Form 8-K filed on September 21, 2017, File No. 001-34963). Indenture, dated as of November 12, 2019, among LPL Holdings, U.S. Bank National Association, as trustee, and certain subsidiaries of LPL Holdings, as guarantors (incorporated by reference to the Form 8-K filed on November 12, 2019, File No. 001-34963). Description of Registrant’s Securities (incorporated by reference to the Form 10-K filed on February 21, 2020 File No. 001-34963). Form of Indemnification Agreement (incorporated by reference to Amendment No. 2 to the Registration Statement on Form S-1 filed on July 9, 2010, File No. 333-167325). LPL Investment Holdings Inc. 2010 Omnibus Equity Incentive Plan (incorporated by reference to Amendment No. 2 to the Registration Statement on Form S-1 filed on July 9, 2010, File No. 333-167325). 105 Exhibit No. 10.3 4 5 10.6 10.7 10.8 10.9 10.10 10.11 12 10.13 10.14 10.15 10.16 10.17 10.18 10.19 10.20 10.21 Description of Exhibit p Form of Senior Management Stock Option Award granted under the LPL Investment Holdings Inc. 2010 Omnibus Equity Incentive Plan (incorporated by reference to the Form 10-K filed on February 26, 2013, File No. 001-34963). Form of Employee Restricted Stock Unit Award granted under the LPL Financial Holdings Inc. 2010 Omnibus Equity Incentive Plan (incorporated by reference to the Form 10-K filed on February 26, 2014, File No. 001-34963). Form of Employee Stock Option Award granted under the LPL Financial Holdings Inc. 2010 Omnibus Equity Incentive Plan (incorporated by reference to the Form 10-K filed on February 26, 2014, File No. 001-34963). Amended and Restated LPL Financial Holdings Inc. 2010 Omnibus Equity Incentive Plan (incorporated by reference to the Form 8-K filed on May 15, 2015, File No. 001-34963). Form of Employee Stock Option Award granted under the LPL Financial Holdings Inc. Amended and Restated 2010 Omnibus Equity Incentive Plan (incorporated by reference to the Form 10-K filed on February 24, 2017, File No. 001-34963). Form of Employee Restricted Stock Unit Award granted under the LPL Financial Holdings Inc. Amended and Restated 2010 Omnibus Equity Incentive Plan (incorporated by reference to the Form 10-K filed on February 24, 2017, File No. 001-34963). Form of Employee Performance Stock Unit Award granted under the LPL Financial Holdings Inc. Amended and Restated 2010 Omnibus Equity Incentive Plan (incorporated by reference to the Form 10-K filed on February 24, 2017, File No. 001-34963). LPL Financial Holdings Inc. 2012 Employee Stock Purchase Plan, as amended and restated, effective as of October 29, 2019 (incorporated by reference to the Form 10-K filed on February 23, 2021, File No. 001-34963). LPL Financial Holdings Inc. 2021 Omnibus Equity Incentive Plan (incorporated by reference to the Form 8-K filed on May 5, 2021, File No. 001-34963). LPL Financial Holdings Inc. 2021 Employee Stock Purchase Plan (incorporated by reference to the Form 8-K filed on May 5, 2021, File No. 001-34963). Form of Employee Restricted Stock Unit Award granted under the LPL Financial Holdings Inc. 2021 Omnibus Equity Incentive Plan (incorporated by reference to the Form 10-Q filed on August 3, 2021, File No. 001-34963). Form of Employee Performance Stock Unit Award granted under the LPL Financial Holdings Inc. 2021 Omnibus Equity Incentive Plan (incorporated by reference to the Form 10-Q filed on August 3, 2021, File No. 001-34963). LPL Financial Holdings Inc. Non-Employee Director Compensation Policy (incorporated by reference to the Form 10-K filed on February 21, 2020 File No. 001-34963). LPL Financial Holdings Inc. Non-Employee Director Deferred Compensation Plan (incorporated by reference to the Form 10-K filed on February 25, 2016, File No. 001-34963). LPL Financial Holdings Inc. Non-Employee Director Deferred Compensation Plan, as amended May 5, 2021.* LPL Financial Holdings Inc. Non-Employee Director Compensation Policy, as amended May 5, 2021.* LPL Financial LLC Executive Severance Plan, amended and restated as of February 23, 2017 (incorporated by reference to the Form 10-K filed on February 24, 2017, File No. 001-34963). Leave Letter Agreement between LPL Financial LLC and Scott Seese, dated February 25, 2021 (incorporated by reference to the Form 10-Q filed on November 2, 2021, File No. 001-34963). Credit Agreement, dated as of March 29, 2012, by and among LPL Investment Holdings Inc., LPL Holdings, Inc., the several lenders from time to time party thereto, and Bank of America, N.A. as Administrative Agent Collateral Agent, Letter of Credit Issuer, and Swingline Lender (incorporated by reference to the Form 8-K filed on April 2, 2012, File No. 001-34963). 106 bit No. 10.22 10.23 10.24 10.25 10.26 10.27 10.28 10.29 10.30 10.31 21.1 23.1 31.1 31.2 32.1 32.2 p Description of Exhibit First Amendment and Incremental Assumption Agreement, dated as of May 13, 2013, by and among LPL Financial Holdings Inc., LPL Holdings, Inc., certain subsidiaries of the Company, as Guarantors, the several lenders from time to time party thereto, and Bank of America, N.A. as Administrative Agent (incorporated by reference to the Form 8-K filed on May 13, 2013, File No. 001-34963). Second Amendment, Extension and Incremental Assumption Agreement, dated as of October 1, 2014, by and among LPL Financial Holdings Inc., LPL Holdings, Inc., certain subsidiaries of the Company as Guarantors, the lenders and additional lenders party thereto, Bank of America, N.A. as Administrative Agent and Current Agent and JP Morgan Chase Bank, N.A., as Future Agent (incorporated by reference to the Form 10-Q filed on October 30, 2014, File No. 001-34963). Third Amendment, Extension, and Incremental Assumption Agreement, dated as of November 20, 2015 by and among LPL Financial Holdings Inc., LPL Holdings, Inc., certain subsidiaries of the Company, as Guarantors, the lenders and additional lenders party thereto, and JPMorgan Chase Bank, N.A. as Administrative Agent (incorporated by reference to the Form 10-K filed on February 25, 2016, File No. 001-34963). Fourth Amendment Agreement, dated as of March 10, 2017, among LPL Financial Holdings Inc., LPL Holdings, Inc., certain subsidiaries of the Company, as Guarantors, the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, Bank of America, N.A., JPMorgan Chase bank, N.A. and Morgan Stanley Bank, N.A., as Letter of Credit Issuers and JPMorgan Chase Bank, N.A. and Morgan Stanley Bank, N.A., as Swingline Lenders (incorporated by reference to the Form 8-K filed on March 10, 2017, File No. 001-34963). Amendment Agreement, dated June 20, 2017, among LPL Holdings, Inc., LPL Financial Holdings Inc. and JPMorgan Chase Bank, N.A. as Administrative Agent (incorporated by reference to the Form 10-Q filed on August 1, 2017, File No. 001-34963). Second Amendment, dated as of September 21, 2017, among LPL Financial Holdings Inc., LPL Holdings Inc., certain subsidiaries of the Company, as Guarantors, the incremental lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, Bank of America, N.A., JPMorgan Chase bank, N.A. and Morgan Stanley Bank, N.A., as Letter of Credit Issuers and JPMorgan Chase Bank, N.A., Morgan Stanley Bank, N.A. and Goldman Sachs Bank USA, as Swingline Lenders (incorporated by reference to the Form 8-K filed on September 21, 2017, File No. 001-34963). Third Amendment, dated as of April 25, 2019, among LPL Financial Holdings Inc., LPL Holdings Inc., certain subsidiaries of the Company, as Guarantors, the incremental lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, Bank of America, N.A., JPMorgan Chase Bank, N.A. and Morgan Stanley Bank, N.A., as Letter of Credit Issuers and JPMorgan Chase Bank, N.A., Morgan Stanley Bank, N.A. and Goldman Sachs Bank USA, as Swingline Lenders (incorporated by reference to the Form 10-Q filed on July 30, 2019, File No. 001-34963). Fourth Amendment, dated as of November 12, 2019, among LPL Financial Holdings Inc., LPL Holdings Inc., certain subsidiaries of the Company, as Guarantors, the incremental lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, Bank of America, N.A., JPMorgan Chase Bank, N.A. and Morgan Stanley Bank, N.A., as Letter of Credit Issuers and JPMorgan Chase Bank, N.A., Morgan Stanley Bank, N.A. and Goldman Sachs Bank USA, as Swingline Lenders (incorporated by reference to the Form 8-K filed on November 12, 2019, File No. 001-34963). Fifth Amendment, dated March 15, 2021, among LPL Financial Holdings Inc., LPL Holdings, Inc., certain subsidiaries of the Company, as Subsidiary Guarantors (as defined therein), the Incremental Revolving Lenders (as defined therein), JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, letter of credit issuer and swingline lender, and the lenders and parties party thereto from time to time (incorporated by reference to the Form 8-K filed on March 15, 2021, File No. 001-34963). BETA Services First Amended and Restated Master Subscription Agreement, dated as of January 29, 2021, between LPL Financial LLC and Refinitiv US LLC (incorporated by reference to the Form 10-Q filed on May 4, 2021, File No. 001-34963).† List of Subsidiaries of LPL Financial Holdings Inc.* Consent of Deloitte & Touche LLP, independent registered public accounting firm.* Certification of the Chief Executive Officer pursuant to Rule 13a-14(a).* Certification of the Chief Financial Officer pursuant to Rule 13a-14(a).* 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.** 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.** 107 Exhibit No. Description of Exhibit p 101.SCH Inline XBRL Taxonomy Extension Schema* 101.CAL 101.DEF 101.LAB 101.PRE 104 Inline XBRL Taxonomy Extension Calculation* Inline XBRL Taxonomy Extension Definition* Inline XBRL Taxonomy Extension Label* Inline XBRL Taxonomy Extension Presentation* Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) ______ ____ ____ ____ ____ ____ ____ ____ ___ * Filed herewith. ** Furnished herewith. † Pursuant to 17 C.F.R. §§230.406 and 230.83, the confidential portions of this exhibit have been omitted and are marked accordingly. Item 16. Form 10-K Summary None. 108 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. S GSIGNATU SRES LPL Financial Holdings Inc. By: /s/ Dan H. Arnold Dan H. Arnold President and Chief Executive Officer ff Dated: February 22, 2022 Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the folff lowing persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature g Title Date /s/ Dan H. Arnold Dan H. Arnold /s/ Matthew J. Audette Matthew J. Audette /s/ Brent B. Simonich Brent B. Simonich /s/ Edward Bernard Edward Bernard /s/ Paulett Eberhart Paulett Eberhart /s/ William F. Glavin Jr. William F. Glavin Jr. /s/ Allison Mnookin Allison Mnookin /s/ Anne M. Mulcahy Anne M. Mulcahy /s/ James S. Putnam James S. Putnam /s/ Richard P. Schifter Richard P. Schifter /s/ Corey E. Thomas Corey E. Thomas President, Chief Executive Officer ff , and Director (Principal Executive Officff er) February 22, 2022 Chief Financial Officff er (Principal Financial Officeff r) February 22, 2022 Chief Accounting Officeff r (Principal Accounting Officeff r) February 22, 2022 Director February 22, 2022 Director February 22, 2022 Director February 22, 2022 Director February 22, 2022 Director February 22, 2022 Director February 22, 2022 Director February 22, 2022 Director February 22, 2022 109 CORPORATE INFORMATION Transfer Agent Computershare P.O. Box 505000 Louisville, KY 40233 Accounting Firm Deloitte & Touche LLP San Diego, CA Legal Counsel Ropes & Gray LLP Boston, MA Stock Listing & Trading Symbol LPL Financial Holdings Inc.’s common stock is listed on the Nasdaq Global Select Market under the trading symbol “LPLA.” Form 10-K A copy of our annual report on Form 10-K, ﬁled with the Securities and Exchange Commission, is available without charge by contacting our Investor Relations department. Annual Meeting LPL Financial Holding Inc.’s annual meeting of stockholders will be held at: 8:00 a.m. ET on May 18, 2022 LPL Financial 1055 LPL Way, Fort Mill, SC 29715 Board of Directors (AS OF 03/21/22) Dan H. Arnold President and Chief Executive Officer LPL Financial Holdings Inc. Edward C. Bernard Former Vice Chair and Vice President T. Rowe Price Group, Inc. H. Paulett Eberhart Chair and Chief Executive Officer HMS Ventures William F. Glavin, Jr. Former Chair and Chief Executive Officer OppenheimerFunds, Inc. Allison H. Mnookin Former Chief Executive Officer Quick Base, Inc. Anne M. Mulcahy Former Chair and Chief Executive Officer Xerox Corporation James S. Putnam Chair of the Board of Directors LPL Financial Holdings Inc. Richard P. Schifter Senior Advisor TPG Corey E. Thomas Chair and Chief Executive Officer Rapid7, Inc. Investor Relations Send requests for ﬁnancial information to: Chris Koegel Senior Vice President, Investor Relations LPL Financial 75 State Street, Floor 22 Boston, MA 02109 (617) 897-4574 | investor.relations@lpl.com LPL 2021 Annual Report AUSTIN LPL Financial 13620 N FM 620 Building C, Suite 200 Austin, TX 78717 SAN DIEGO LPL Financial 4707 Executive Drive San Diego, CA 92121 CAROLINAS LPL Financial 1055 LPL Way Fort Mill, SC 29715 BOSTON LPL Financial 75 State Street, Floor 22 Boston, MA 02109 (800) 877-7210 | lpl.com Securities and advisory services offered through LPL Financial LLC (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity. Prior periods have not been updated for fractional share activity. If your ﬁnancial professional is located at a bank or credit union, please note that the bank/credit union is not registered as a broker-dealer or investment advisor. Registered representatives of LPL may also be employees of the bank/credit union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, the bank/credit union. Securities and insurance offered through LPL or its affiliates are: Not Insured by FDIC/NCUA or Any Other Government Agency Not Bank/Credit Union Guaranteed Not Bank/Credit Union Deposits or Obligations May Lose Value IR-1014970-0122 Tracking # 1-05255966 LPL.COM

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