UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

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

Commission File Number: 001-34963

LPL Investment Holdings Inc.

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

One Beacon Street, Boston, MA 02108
(Address of Principal Executive Offices) (Zip Code)

(617) 423-3644
(Registrant’s telephone number, including area code)

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

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
þ Yes     o No

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

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

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

The number of shares of Common Stock, par value $0.001 per share, outstanding as of July 26, 2011 was 107,828,819.

 

 

TABLE OF CONTENTS

Item Number		Page
PART I — FINANCIAL INFORMATION
1. Financial Statements
Condensed Consolidated Statements of Operations (unaudited)			1
Condensed Consolidated Statements of Financial Condition (unaudited)			2
Condensed Consolidated Statements of Stockholders’ Equity (unaudited)			3
Condensed Consolidated Statements of Cash Flows (unaudited)			4
Notes to Condensed Consolidated Financial Statements (unaudited)			6
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
3. Quantitative and Qualitative Disclosures About Market Risk			47
4. Controls and Procedures			49
PART II — OTHER INFORMATION			51
1. Legal Proceedings			51
1A. Risk Factors			51
2. Unregistered Sales of Equity Securities and Use of Proceeds			51
3. Defaults Upon Senior Securities			51
4. Removed and Reserved			51
5. Other Information			51
6. Exhibits			51
SIGNATURES			53
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

WHERE YOU CAN FIND MORE INFORMATION

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

     On our internet website, http://www.lpl.com, we post the following recent filings as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. Hard copies of all such filings are available free of charge by request via email (investor.relations@lpl.com), telephone (617) 897-4574, or mail (LPL Financial Investor Relations at One Beacon Street, 22nd Floor, Boston, MA 02108). The information contained or incorporated on our website is not a part of this Quarterly Report on Form 10-Q.

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

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     Item 2 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of this Quarterly Report on Form 10-Q contain forward-looking statements (regarding future financial position, budgets, business strategy, projected costs, plans, objectives of management for future operations, and other similar matters) that involve risks and uncertainties. Forward-looking statements can be identified by words such as “anticipates”, “expects”, “believes”, “plans”, “predicts”, and similar terms. Forward-looking statements are not guarantees of future performance and there are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements including, but not limited to, changes in general economic and financial market conditions, fluctuations in the value of assets under management, effects of competition in the financial services industry, changes in the number of our financial advisors and institutions and their ability to effectively market financial products and services, the effect of current, pending and future legislation and regulation and regulatory actions. In particular, you should consider the numerous risks outlined in Part I, Item IA— “Risk Factors” in our 2010 Annual Report on Form 10-K filed with the SEC.

     Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. You should not rely upon forward-looking statements as predictions of future events. Unless required by law, we will not undertake and we specifically disclaim any obligation to release publicly the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of events, whether or not anticipated. In that respect, we wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
REVENUES:
Commissions		$	459,882			$	420,169			$	911,759			$	809,141
Advisory fees			264,289				215,146				508,376				421,476
Asset-based fees			90,504				77,436				180,327				148,886
Transaction and other fees			68,755				68,132				142,504				135,495
Interest income, net of operating interest expense			5,110				4,906				10,252				9,777
Other			5,456				4,372				14,647				8,792
Net revenues			893,996				790,161				1,767,865				1,533,567
EXPENSES:
Commissions and advisory fees			624,687				547,296				1,219,365				1,052,158
Compensation and benefits			81,410				74,822				165,552				148,397
Promotional			14,789				11,294				34,325				25,644
Depreciation and amortization			18,407				22,110				36,572				47,700
Occupancy and equipment			12,394				11,745				27,919				23,763
Professional services			12,489				13,468				22,653				23,267
Brokerage, clearing and exchange			9,401				9,242				19,050				17,582
Communications and data processing			8,906				8,290				17,588				16,816
Regulatory fees and expenses			6,372				6,529				12,944				12,677
Travel and entertainment			3,218				3,224				7,021				5,620
Restructuring charges			4,814				4,622				5,351				8,571
Other			3,476				3,229				6,162				8,030
Total operating expenses			800,363				715,871				1,574,502				1,390,225
Non-operating interest expense			18,154				27,683				36,326				52,019
Loss on extinguishment of debt			—				37,979				—				37,979
Total expenses			818,517				781,533				1,610,828				1,480,223
INCOME BEFORE PROVISION FOR INCOME TAXES			75,479				8,628				157,037				53,344
PROVISION FOR INCOME TAXES			29,972				628				62,531				19,790
NET INCOME		$	45,507			$	8,000			$	94,506			$	33,554
EARNINGS PER SHARE (Note 13):
Basic		$	0.41			$	0.09			$	0.86			$	0.38
Diluted		$	0.40			$	0.08			$	0.82			$	0.33

See notes to unaudited condensed consolidated financial statements.

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Financial Condition

		June 30,				December 31,
		2011				2010
ASSETS
Cash and cash equivalents		$	681,471			$	419,208
Cash and securities segregated under federal and other regulations			225,888				373,634
Receivables from:
Clients, net of allowance of $656 at June 30, 2011 and $655 at December 31, 2010			288,185				271,051
Product sponsors, broker-dealers and clearing organizations			160,345				203,332
Others, net of allowances of $7,356 at June 30, 2011 and $6,796 at December 31, 2010			187,285				169,391
Securities owned:
Trading(1)			9,740				9,259
Held-to-maturity			11,651				9,563
Securities borrowed			11,550				8,391
Income taxes receivable			18,060				144,041
Fixed assets, net of accumulated depreciation and amortization of $292,384 at June 30, 2011 and $276,501 at December 31, 2010			81,274				78,671
Goodwill			1,329,234				1,293,366
Intangible assets, net of accumulated amortization of $191,949 at June 30, 2011 and $172,726 at December 31, 2010			558,488				560,077
Debt issuance costs, net of accumulated amortization of $16,652 at June 30, 2011 and $14,106 at December 31, 2010			21,165				23,711
Other assets			78,453				82,472
Total assets		$	3,662,789			$	3,646,167
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Drafts payable		$	137,787			$	182,489
Payables to clients			414,808				383,289
Payables to broker-dealers and clearing organizations			37,139				39,070
Accrued commissions and advisory fees payable			111,336				130,408
Accounts payable and accrued liabilities			161,676				154,586
Unearned revenue			64,078				53,618
Interest rate swaps			2,836				7,281
Securities sold but not yet purchased — at fair value			4,061				4,821
Senior credit facilities			1,339,653				1,386,639
Deferred income taxes — net			125,959				130,211
Total liabilities			2,399,333				2,472,412
STOCKHOLDERS’ EQUITY:
Common stock, $.001 par value; 600,000,000 shares authorized; 110,125,404 shares issued at June 30, 2011 and 108,714,757 shares issued and outstanding at December 31, 2010			110				109
Additional paid-in capital			1,123,739				1,051,722
Treasury stock, at cost — 2,283,854 shares at June 30, 2011 and 0 shares at December 31, 2010			(79,568	)			—
Accumulated other comprehensive loss			(1,751	)			(4,496	)
Retained earnings			220,926				126,420
Total stockholders’ equity			1,263,456				1,173,755
Total liabilities and stockholders’ equity		$	3,662,789			$	3,646,167

See notes to unaudited condensed consolidated financial statements.

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity

																										Accumulated
										Additional																Other								Total
			Common Stock							Paid-In				Treasury Stock								Stockholder				Comprehensive				Retained				Stockholders’
			Shares			Amount				Capital				Shares				Amount				Loans				Loss				Earnings				Equity
BALANCE — December 31, 2009			94,215			$	87			$	679,277				—			$	—			$	(499	)		$	(11,272	)		$	183,282			$	850,875
Comprehensive income:
Net income																															33,554				33,554
Unrealized gain on interest rate swaps, net of tax expense of $1,761																											4,673								4,673
Total comprehensive income																																			38,227
Exercise of stock options			26								51																								51
Excess tax benefits from share-based compensation											226																								226
Stockholder loans																							448												448
Share-based compensation											7,568																								7,568
Issuance of common stock			20								468																								468
BALANCE — June 30, 2010			94,261			$	87			$	687,590				—			$	—			$	(51	)		$	(6,599	)		$	216,836			$	897,863
BALANCE — December 31, 2010			108,715			$	109			$	1,051,722				—			$	—			$	—			$	(4,496	)		$	126,420			$	1,173,755
Comprehensive income:
Net income																															94,506				94,506
Unrealized gain on interest rate swaps, net of tax expense of $1,700																											2,745								2,745
Total comprehensive income																																			97,251
Treasury stock purchases															(2,284	)			(79,568	)															(79,568	)
Exercise of stock options			1,410				1				6,971																								6,972
Excess tax benefits from share-based compensation											55,847																								55,847
Share-based compensation											9,199																								9,199
BALANCE — June 30, 2011			110,125			$	110			$	1,123,739				(2,284	)		$	(79,568	)		$	—			$	(1,751	)		$	220,926			$	1,263,456

See notes to unaudited condensed consolidated financial statements.

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

		Six Months Ended
		June 30,
		2011				2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	94,506			$	33,554
Adjustments to reconcile net income to net cash provided by operating activities:
Noncash items:
Depreciation and amortization			36,572				47,700
Amortization of debt issuance costs			2,546				2,350
Excess tax benefits from share-based compensation			(55,847	)			(226	)
Share-based compensation			9,199				7,568
Impairment of fixed assets			—				840
Loss on extinguishment of debt			—				37,979
Provision for bad debts			799				281
Deferred income tax provision			(5,952	)			(17,519	)
Impairment of intangible assets			1,716				—
Lease abandonment			414				—
Loan forgiveness			756				2,788
Other			245				552
Changes in operating assets and liabilities:
Cash and securities segregated under federal and other regulations			147,746				31,358
Receivables from clients			(17,135	)			(8,558	)
Receivables from product sponsors, broker-dealers and clearing organizations			42,987				1,692
Receivables from others			(18,675	)			(9,759	)
Securities owned			(231	)			(3,250	)
Securities borrowed			(3,159	)			3,297
Other assets			(17,397	)			(5,877	)
Drafts payable			(44,702	)			6,471
Payables to clients			31,519				(76,140	)
Payables to broker-dealers and clearing organizations			(1,931	)			6,664
Accrued commissions and advisory fees payable			(19,072	)			11,191
Accounts payable and accrued liabilities			(26,716	)			(9,057	)
Unearned revenue			10,460				9,090
Income taxes receivable/payable			181,828				(18,553	)
Securities sold but not yet purchased			(760	)			(1,412	)
Net cash provided by operating activities			349,716				53,024

See notes to unaudited condensed consolidated financial statements.

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows — (Continued)

		Six Months Ended
		June 30,
		2011				2010
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		$	(12,500	)		$	(3,652	)
Purchase of securities classified as held-to-maturity			(3,782	)			(2,008	)
Proceeds from maturity of securities classified as held-to-maturity			1,650				3,350
Acquisitions (Note 3)			(37,184	)			—
Deposits of restricted cash			(3,040	)			(3,016	)
Release of restricted cash			18,546				2,605
Net cash used in investing activities			(36,310	)			(2,721	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of senior credit facilities			(46,986	)			(5,598	)
Proceeds from senior credit facilities			—				566,700
Redemption of subordinated notes			—				(579,563	)
Payment of debt issuance costs			—				(7,181	)
Payment of deferred transaction costs			—				(1,259	)
Purchase of treasury stock			(66,976	)			—
Proceeds from stock options exercised			6,972				51
Excess tax benefits from share-based compensation			55,847				226
Issuance of common stock			—				468
Net cash used in financing activities			(51,143	)			(26,156	)
NET INCREASE IN CASH AND CASH EQUIVALENTS			262,263				24,147
CASH AND CASH EQUIVALENTS — Beginning of period			419,208				378,594
CASH AND CASH EQUIVALENTS — End of period		$	681,471			$	402,741
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid		$	36,362			$	54,436
Income taxes paid		$	29,870			$	56,201
NONCASH DISCLOSURES:
Pending settlement of treasury stock purchases		$	12,592			$	—
Capital expenditures purchased through short-term credit		$	3,506			$	1,224
Increase in unrealized gain on interest rate swaps, net of tax expense		$	2,745			$	4,673
Discount on proceeds from senior credit facilities recorded as debt issuance costs		$	—			$	13,300

See notes to unaudited condensed consolidated financial statements.

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Organization and Description of the Company

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

2. Basis of Presentation

     Quarterly Reporting — The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. These adjustments are of a normal recurring nature. The Company’s results for any interim period are not necessarily indicative of results for a full year or any other interim period. Certain reclassifications were made to previously reported amounts in the unaudited condensed consolidated financial statements and notes thereto to make them consistent with the current period presentation.

     The unaudited condensed consolidated financial statements do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles in the United States of America (“GAAP”). Accordingly, these financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the related notes for the year ended December 31, 2010, contained in the Company’s Annual Report on Form 10-K as filed with the SEC. The Company has evaluated subsequent events up to and including the date these unaudited condensed consolidated financial statements were issued.

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

     Use of Estimates — The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. On an on-going basis, the Company evaluates estimates, including those related to revenue and related expense recognition, asset impairment, valuation of accounts receivable, valuation of financial derivatives, contingencies and litigation, valuation and recognition of share-based payments and income taxes. These accounting policies are stated in the notes to the audited consolidated financial statements for the year ended December 31, 2010, contained in the Annual Report on Form 10-K as filed with the SEC. These estimates are based on the information that is currently available and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results could vary from these estimates under different assumptions or conditions and the differences may be material to the unaudited condensed consolidated financial statements.

     Reportable Segment — The Company’s internal reporting is organized into three service channels; Independent Advisor Services, Institution Services and Custom Clearing Services, which are designed to enhance the services provided to its advisors and financial institutions. These service channels qualify as individual operating segments, but are aggregated and viewed as one single reportable segment due to their similar economic characteristics, products and services, production and distribution process, regulatory environment and quantitative thresholds.

     Fair Value of Financial Instruments — The Company’s financial assets and liabilities are carried at fair value or at amounts that, because of their short-term nature, approximate current fair value, with the exception of its indebtedness. The Company carries its indebtedness at amortized cost and measures the implied fair value of its debt instruments using trading levels obtained from a third-party service provider. As of June 30, 2011, the carrying amount and fair value of the Company’s indebtedness was approximately $1,340 million and $1,342 million, respectively. As of December 31, 2010, the carrying amount and fair value were approximately $1,387 million and $1,390 million, respectively. See Note 5 for additional detail regarding the Company’s fair value measurements.

     Acquisitions — The Company accounts for acquisitions as business combinations, and recognizes, separately from goodwill, assets acquired and liabilities assumed at their respective fair values as of the acquisition date. Goodwill as of the acquisition date 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.

     Recently Issued Accounting Pronouncements — Recent accounting pronouncements or changes in accounting pronouncements during the six months ended June 30, 2011, as compared to the recent accounting pronouncements described in the Company’s 2010 Annual Report on Form 10-K, that are of significance, or potential significance, to the Company are discussed below.

     In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, Fair Value Measurement (Topic 820)—Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”), which clarifies the wording and disclosures required in Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement (“ASC 820”), to converge with those used in International Financial Reporting Standards. The update explains how to measure and disclose fair value under ASC 820. However, the FASB does not expect the changes in this standard’s update to alter the current application of the requirements in ASC 820. The provisions of ASU 2011-04 are effective for public entities prospectively for interim and annual periods beginning after December 15, 2011, and early adoption is prohibited. Therefore, ASU 2011-04 is effective for the Company during the first quarter of fiscal 2012. The Company does not expect ASU 2011-04 to have a material effect on its results of operations, financial condition, and cash flows.

     In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (ASC Topic 220)—Presentation of Comprehensive Income (“ASU 2011-05”), which amends current comprehensive income guidance by eliminating the option to present the components of other comprehensive income as part of the statement of stockholders’ equity. Instead, the Company must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. ASU 2011-05 will be effective for public companies during the interim and annual periods beginning after December 15, 2011, with early adoption permitted. The Company does not anticipate the adoption of ASU 2011-05 to have an impact on its results of operations, financial condition, or cash flows as the only requirement is a change in the format of the current presentation.

3. Acquisitions

     National Retirement Partners, Inc.

     On July 14, 2010, the Company announced a definitive agreement pursuant to which it would acquire certain assets of National Retirement Partners, Inc. (“NRP”). NRP’s advisors offer products and consulting, design and investment services to retirement plan sponsors and participants and comprehensive financial services to high net worth individuals. This strategic acquisition further enhances the capabilities and presence of the Company in the group retirement space.

     On February 9, 2011, the transaction closed. The Company paid $17.2 million at the closing of the transaction. As of June 30, 2011, $3.7 million remains in an escrow account subject to adjustment pursuant to the terms of the asset purchase agreement. Such amount has been classified by the Company as restricted cash and is included in other assets on the unaudited condensed consolidated statements of financial condition.

     The Company may be required to pay future consideration to former shareholders of NRP that is contingent upon the achievement of certain revenue-based milestones in the third year following the acquisition. There is no maximum amount of contingent consideration; however, as of the acquisition date, the Company estimates the total fair value of contingent

consideration to be $5.3 million. At the acquisition date, $2.0 million of the contingent liability had been paid in advance and the remainder of $3.3 million was recorded within accounts payable and accrued liabilities on the unaudited condensed consolidated statements of financial condition. Including the provisional contingent consideration, the total consideration for the acquisition was $24.2 million. Transaction costs associated with the Company’s acquisition of NRP totaling $4.3 million were expensed as incurred through other expense in the unaudited condensed consolidated statements of operations. Of these transaction costs, $2.0 million were incurred during the six months ending June 30, 2011.

     Concord Capital Partners, Inc.

     On April 20, 2011, the Company announced its intent to acquire all of the outstanding common stock of Concord Capital Partners, Inc. (“Concord Wealth Management” or “CCP”) and certain of its subsidiaries. Concord Wealth Management is an industry leader in providing technology and open architecture investment management solutions for trust departments of financial institutions. Through this acquisition, the Company will have the ability to support both the brokerage and trust business lines of current and prospective financial institutions. The acquisition will also create new expansion opportunities such as giving the Company the ability to custody personal trust assets within banks across the country.

     On June 22, 2011, the transaction closed. The Company paid $20.0 million at the closing of the transaction, net of cash acquired. As of June 30, 2011, $2.3 million remains in an escrow account to be paid to former shareholders of Concord Wealth Management in accordance with the terms of the stock purchase agreement. Such amount has been classified by the Company as restricted cash and is included in other assets on the unaudited condensed consolidated statements of financial condition.

     The Company may be required to pay future consideration that is contingent upon the achievement of certain gross margin-based milestones for the year ended December 31, 2013. The maximum amount of contingent consideration is $15.0 million. The Company estimates the total fair value of the contingent consideration as $11.5 million at the acquisition date, which has been recorded within accounts payable and accrued liabilities on the unaudited condensed consolidated statements of financial condition. Including the provisional contingent consideration, the total consideration for the acquisition was approximately $33.8 million. During the six months ending June 30, 2011, the Company incurred transaction costs associated with its acquisition of Concord Wealth Management totaling $0.4 million which were recorded as other expense in the unaudited condensed consolidated statements of operations.

     The Company is in the process of finalizing the purchase allocations and the value of contingent considerations for NRP and CCP; therefore, the provisional measures of goodwill, intangibles, fixed assets, and contingent consideration are subject to change.

     Set forth below is a reconciliation of assets acquired and liabilities assumed during the six months ended June 30, 2011 (in thousands):

		CCP				NRP				Total
Goodwill		$	23,294			$	12,574			$	35,868
Accounts receivable			770				—				770
Other assets			190				—				190
Intangibles			7,550				11,800				19,350
Fixed assets(1)			3,950				—				3,950
Accounts payable and accrued liabilities			(1,993	)			(190	)			(2,183	)
Net assets acquired		$	33,761			$	24,184			$	57,945

     Set forth below is supplemental cash flow information for the six months ended June 30, 2011 (in thousands):

		CCP				NRP				Total
Cash payments, net of cash acquired		$	19,969			$	17,215			$	37,184
Cash placed in escrow			2,250				3,669				5,919
Contingent consideration			11,542				3,300				14,842
Total purchase price		$	33,761			$	24,184			$	57,945

     The Company preliminarily allocated the estimated purchase price to specific amortizable intangible asset categories as follows (dollars in thousands):

	Amortization Period				Amount Assigned
CCP
Client relationships		15.0 years				$	7,550
NRP
Client relationships		11.0 years					4,730
Advisor relationships		9.0 years					4,080
Product sponsor relationships		4.0 years					2,990
Total intangible assets acquired from NRP						$	11,800

     Pro-forma information related to the acquisitions was not included because the impact on the Company’s unaudited condensed consolidated statements of operations, financial condition and cash flows was not considered to be material.

4. Restructuring

     Consolidation of UVEST Financial Services Group, Inc.

     On March 14, 2011, the Company committed to a corporate restructuring plan to consolidate the operations of UVEST Financial Services Group, Inc. (“UVEST”) with LPL Financial LLC, (“LPL Financial”). The restructuring plan was effected to enhance the Company’s service offering, while also generating efficiencies. In connection with the consolidation, certain registered representatives currently associated with UVEST will move to LPL Financial through a transfer of their licenses. The transfers are expected to commence in the third quarter of 2011 and to be completed in December 2011. Following the transfer of registered representatives and client accounts to LPL Financial, all registered representatives and client accounts that transferred shall be associated with LPL Financial and all of the Company’s security business will be done through a single broker-dealer. In addition, UVEST will terminate its clearing relationship with a third-party clearing firm.

     The Company estimates total expenditures associated with the initiative to be approximately $52.7 million over of the course of the restructuring plan. These expenditures are comprised of advisor retention and related benefits, contract termination fees, technology costs, non-cash charges for the impairment of intangible assets resulting from advisor attrition and other expenses principally relating to the conversion and transfer of registered representatives and client accounts from UVEST to LPL Financial.

     The following table summarizes the balance of accrued expenses and the changes in the accrued amounts as of and for the six months ended June 30, 2011 (in thousands):

		Accrued																Accrued				Total
		Balance at																Balance at				Expected
		December 31,				Costs												June 30,				Restructuring
		2010				Incurred(1)				Payments				Non-cash				2011				Costs
Conversion and transfer costs		$	—				$2,544				$(2,114	)		$	—				$ 430				$ 28,650
Contract termination fees			—				394				—				—				394				11,400
Advisor retention and related benefits			—				325				(305	)			(20	)			—				7,000
Asset impairments			—				1,716				—				(1,716	)			—				5,600
Total		$	—				$4,979				$(2,419	)		$	(1,736	)			$ 824				$ 52,650

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.

     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 June 30, 2011, the Company had the following financial assets and liabilities that are measured at fair value on a recurring basis:

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

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

     The Company uses prices obtained from independent third-party pricing services to measure the fair value of its trading securities. Prices received from the pricing services are validated using various methods including comparison to prices received from additional pricing services, comparison to available quoted market prices and 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 June 30, 2011, the Company did not adjust prices received from the independent third-party pricing services.

     Other Assets — The Company’s other assets include deferred compensation plan assets that are invested in money market funds and mutual funds which are actively traded and valued based on quoted market prices in active markets.

     Accounts Payable and Accrued Liabilities — The Company’s accounts payable and accrued liabilities include contingent consideration from its acquisitions. See Note 3 for more information regarding the acquisitions and related contingent consideration.

     Interest Rate Swaps — The Company’s interest rate swaps are not traded on a market exchange; therefore, the fair values are determined using models which include assumptions about the London Interbank Offered Rate (“LIBOR”) yield curve at interim reporting dates as well as counterparty credit risk and the Company’s own non-performance risk.

     There have been no transfers of assets or liabilities between fair value measurement classifications during the six months ended June 30, 2011.

     The following table summarizes the Company’s financial assets and financial liabilities measured at fair value on a recurring basis at June 30, 2011 (in thousands):

	Quoted
	Prices in
	Active					Significant
	Markets for					Other				Significant
	Identical					Observable				Unobservable
	Assets					Inputs				Inputs				Fair Value
	(Level 1)					(Level 2)				(Level 3)				Measurements
At June 30, 2011:
Assets
Cash equivalents		$	516,357			$	—			$	—			$	516,357
Securities owned — trading:
Money market funds			529				—				—				529
Mutual funds			7,399				—				—				7,399
Equity securities			74				—				—				74
Debt securities			—				838				—				838
U.S. treasury obligations			900				—				—				900
Total securities owned — trading			8,902				838				—				9,740
Other assets			22,819				—				—				22,819
Total assets at fair value		$	548,078			$	838			$	—			$	548,916
Liabilities
Securities sold but not yet purchased:
Mutual funds		$	3,313			$	—			$	—			$	3,313
Equity securities			162				—				—				162
Debt securities			—				135				—				135
Certificates of deposit			—				451				—				451
Total securities sold but not yet purchased			3,475				586				—				4,061
Interest rate swaps			—				2,836				—				2,836
Accounts payable and accrued liabilities			—				—				15,111				15,111
Total liabilities at fair value		$	3,475			$	3,422			$	15,111			$	22,008

     Certain assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value measurement in certain circumstances, for example, when evidence of impairment exists. During the second quarter of 2011, the Company recorded an asset impairment charge of $1.7 million for certain intangible assets that were determined to have no estimated fair value (See Note 7). The fair value was determined based on the loss of future expected cash flows for institutional relationships that were not retained as a result of the Company’s ongoing consolidation of UVEST with LPL Financial. The Company has determined that the impairment qualifies as a Level 3 measurement under the fair value hierarchy.

Changes in Level 3 Recurring Fair Value Measurements

     Set forth below is a reconciliation of contingent consideration classified as accounts payable and accrued liabilities on the unaudited condensed consolidated statements of financial condition and measured at fair value on a recurring basis using significant unobservable inputs (Level 3). Contingent consideration is measured by discounting, to present value, the contingent payments expected to be made based on the Company’s estimates of certain financial targets expected to result from the acquisitions.

Six Months Ended June 30, 2011 (in thousands):

Fair value at December 31, 2010		$	—
Issuances of contingent consideration			16,842
Total unrealized losses included in earnings			269
Payments			(2,000	)
Fair value at June 30, 2011		$	15,111

     The following table summarizes the Company’s financial assets and financial liabilities measured at fair value on a recurring basis at December 31, 2010 (in thousands):

	Quoted
	Prices in
	Active				Significant
	Markets for				Other				Significant
	Identical				Observable				Unobservable
	Assets				Inputs				Inputs				Fair Value
	(Level 1)				(Level 2)				(Level 3)				Measurements
At December 31, 2010:
Assets
Cash equivalents		$	279,048			$	—			$	—			$	279,048
Securities owned — trading:
Money market funds			316				—				—				316
Mutual funds			7,300				—				—				7,300
Equity securities			17				—				—				17
Debt securities			—				516				—				516
U.S. treasury obligations			1,010				—				—				1,010
Certificates of deposit			—				100				—				100
Total securities owned — trading			8,643				616				—				9,259
Other assets			17,175				—				—				17,175
Total assets at fair value		$	304,866			$	616			$	—			$	305,482
Liabilities
Securities sold but not yet purchased:
Mutual funds		$	4,563			$	—			$	—			$	4,563
Equity securities			204				—				—				204
Debt securities			—				54				—				54
Total securities sold but not yet purchased			4,767				54				—				4,821
Interest rate swaps			—				7,281				—				7,281
Total liabilities at fair value		$	4,767			$	7,335			$	—			$	12,102

6. Held-to-Maturity Securities

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

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

						Gross
		Amortized				Unrealized
		Cost				Gains				Fair Value
At June 30, 2011:
U.S. government notes		$	11,651				$  50			$	11,701
At December 31, 2010:
U.S. government notes		$	9,563				$  69			$	9,632

     The maturities of securities held-to-maturity at June 30, 2011 were as follows (in thousands):

		Within 1 Year				1-3 Years				Total
U.S. government notes — at amortized cost			$    7,373				$    4,278			$	11,651
U.S. government notes — at fair value			$    7,394				$    4,307			$	11,701

7. Goodwill and Intangible Assets

     A summary of the activity in goodwill is presented below (in thousands):

Balance at December 31, 2010		$	1,293,366
Acquisition of CCP (Note 3)			23,294	(1)
Acquisition of NRP (Note 3)			12,574	(1)
Balance at June 30, 2011		$	1,329,234

     During the second quarter ended June 30, 2011, and in conjunction with the corporate restructuring plan to consolidate UVEST, certain institutional relationships were determined to have no future economic benefit. Accordingly, the Company has recorded an intangible asset impairment charge of $1.7 million. The impairment was determined based upon the attrition of institutions and their related revenue streams during the period of consolidation. The Company has recorded the intangible asset impairment as a restructuring charge (See Note 4) and has classified as such on the unaudited condensed consolidated statements of operations.

     The components of intangible assets as of June 30, 2011 and December 31, 2010 are as follows (dollars in thousands):

		Weighted				Gross								Net
		Average Life				Carrying				Accumulated				Carrying
		Remaining				Value				Amortization				Value
At June 30, 2011:
Definite-lived intangible assets:
Advisor and financial institution relationships			13.8			$	460,788			$	(129,410	)		$	331,378
Product sponsor relationships			14.4				234,920				(61,453	)			173,467
Client relationships			13.4				14,910				(1,086	)			13,824
Total definite-lived intangible assets						$	710,618			$	(191,949	)		$	518,669
Indefinite-lived intangible assets:
Trademark and trade name															39,819
Total intangible assets														$	558,488
At December 31, 2010:
Definite-lived intangible assets:
Advisor and financial institution relationships						$	458,424			$	(116,687	)		$	341,737
Product sponsor relationships							231,930				(55,255	)			176,675
Client relationships							2,630				(784	)			1,846
Total definite-lived intangible assets						$	692,984			$	(172,726	)		$	520,258
Indefinite-lived intangible assets:
Trademark and trade name															39,819
Total intangible assets														$	560,077

     Total amortization expense of intangible assets was $9.7 million and $9.3 million for the three months ended June 30, 2011, and 2010, respectively, and $19.2 million and $18.5 million for the six months ended June 30, 2011, and 2010, respectively. Amortization expense for each of the fiscal years ended December 31, 2011 (remainder) through 2015 and thereafter is estimated as follows (in thousands):

2011 — remainder		$	19,819
2012			39,190
2013			38,329
2014			38,053
2015			37,172
Thereafter			346,106
Total		$	518,669

8. Income Taxes

     The Company’s effective income tax rate differs from the federal corporate tax rate of 35%, primarily as a result of state taxes, settlement contingencies and expenses that are not deductible for tax purposes. These items resulted in effective tax rates of 39.7% and 7.3% for the three months ended June 30, 2011 and 2010, respectively, and 39.8% and 37.1% for the six months ended June 30, 2011 and 2010, respectively. The reduction in the Company’s effective tax rate for the three months ended June 30, 2010 is primarily related to a change in California’s income sourcing rules that took effect on January 1, 2011.

     Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. As a result of certain realization requirements of ASC Topic 718, Compensation—Stock Compensation, deferred tax assets and liabilities exclude certain federal and state net operating loss carryforwards and other federal credit carryforwards that arose directly from tax deductions related to equity compensation in excess of share-based compensation recognized for financial reporting. During the six months ended June 30, 2011, the Company recorded an increase in additional paid-in capital of $42.8 million, as some of these tax carryforwards were used to reduce income taxes payable. To the extent that the Company utilizes the remaining tax attributes in the future to reduce income taxes payable, the Company will record an increase to additional paid-in capital of $12.4 million.

9. Indebtedness

     Senior Secured Credit Facilities — Term Loans — On May 24, 2010, the Company entered into a Third Amended and Restated Credit Agreement (the “Amended Credit Agreement”). The Amended Credit Agreement amended and restated the Company’s Second Amended and Restated Credit Agreement, dated as of June 18, 2007. Pursuant to the Amended Credit Agreement, the Company established a new term loan tranche of $580.0 million maturing on June 28, 2017 (the “2017 Term Loans”) and recorded $16.6 million in debt issuance costs that are capitalized in the unaudited condensed consolidated statements of financial condition. The Company also extended the maturity of a $500.0 million tranche of its term loan facility to June 25, 2015 (the “2015 Term Loans”), with the remaining $317.1 million tranche of the term loan facility maturing on the original maturity date of June 28, 2013 (the “2013 Term Loans”).

     The applicable margin for borrowings with respect to the (a) 2013 Term Loans is currently 0.75% for base rate borrowings and 1.75% for LIBOR borrowings and could change depending on the Company’s credit rating; (b) 2015 Term Loans is currently 1.75% for base rate borrowings and 2.75% for LIBOR borrowings, and (c) 2017 Term Loans is currently 2.75% for base rate borrowings and 3.75% for LIBOR borrowings. The LIBOR Rate with respect to the 2015 Term Loans and the 2017 Term Loans shall in no event be less than 1.50%.

     Borrowings under the Company’s senior secured term loan facilities bear interest at a base rate equal to either one, two, three, six, nine or twelve-month LIBOR plus the applicable margin, or an alternative base rate (“ABR”) plus the applicable margin. The ABR is equal to the greater of the prime rate or the effective federal funds rate plus 1/2 of 1.00% for the 2013 Term Loans and the greater of the prime rate, effective federal funds rate plus 1/2 of 1.00%, or 2.50% for the 2015 Term Loans and the 2017 Term Loans. The senior secured credit facilities are subject to certain financial and nonfinancial covenants. As of June 30, 2011 and December 31, 2010, the Company was in compliance with such covenants. The Company may voluntarily repay outstanding loans under its senior secured credit facilities at any time without premium or penalty, other than customary “breakage” costs with respect to LIBOR loans.

     On January 31, 2011, the Company repaid $40.0 million of term loans under its senior secured credit facilities using net proceeds received in its initial public offering, which was completed in the fourth quarter of 2010, as well as other cash on hand.

     Senior Secured Credit Facilities — Revolving Line of Credit — On January 25, 2010, the Company amended its senior secured credit facilities to increase the revolving credit facility from $100.0 million to $218.2 million, $10.0 million of which is being used to support the issuance of an irrevocable letter of credit for its subsidiary, The Private Trust Company, N.A. (“PTC”). As a result of the amendment, the Company paid $2.8 million in debt issuance costs, which have been capitalized within the unaudited condensed consolidated statements of financial condition and are being amortized as additional interest expense over the expected term of the related debt agreement. The Company also extended the maturity of a $163.5 million tranche of the revolving credit facility to June 28, 2013, while the remaining $54.7 million

tranche retains its original maturity date of December 28, 2011. The tranche maturing in 2013 is priced at LIBOR + 3.50% with a commitment fee of 0.75%. The tranche maturing in 2011 maintains its previous pricing of LIBOR + 2.00% with a commitment fee of 0.375%. There was no outstanding balance on the revolving facility at June 30, 2011 or December 31, 2010.

     Bank Loans Payable — The Company maintains three uncommitted lines of credit. Two of the lines have an unspecified limit, and are primarily dependent on the Company’s ability to provide sufficient collateral. The other line has a $150.0 million limit and allows for both collateralized and uncollateralized borrowings. The lines were utilized in 2011 and 2010; however, there were no balances outstanding at June 30, 2011 or December 31, 2010.

     The Company’s outstanding borrowings were as follows (in thousands):

						June 30, 2011								December 31, 2010
										Interest								Interest
		Maturity				Balance				Rate				Balance				Rate
Senior secured term loan:
Hedged with interest rate swaps			6/28/2013			$	65,000				2.00	%(1)		$	210,000				2.05	%(5)
Unhedged:
2013 Term Loans			6/28/2013				239,074				1.94	%(2)			104,739				2.01	%(6)
2015 Term Loans			6/25/2015				479,435				4.25	%(3)			496,250				4.25	%(7)
2017 Term Loans			6/28/2017				556,144				5.25	%(4)			575,650				5.25	%(8)
Total borrowings							1,339,653								1,386,639
Less current borrowings (maturities within 12 months)							13,971								13,971
Long-term borrowings — net of current portion						$	1,325,682							$	1,372,668

     The average balance outstanding in the revolving and uncommitted line of credit facilities was approximately six thousand dollars and forty thousand dollars for the three months ended June 30, 2011 and 2010, respectively, and approximately six thousand dollars and $4.1 million for the six months ended June 30, 2011 and 2010, respectively. The weighted-average interest rate was 0.82% and 1.50% for the three months ended June 30, 2011, and 2010, respectively, and 1.16% and 1.16% for the six months ended June 30, 2011, and 2010, respectively.

     The minimum calendar year payments and maturities of the senior secured borrowings as of June 30, 2011 are as follows (in thousands):

2011 — remainder		$	6,986
2012			13,971
2013			310,117
2014			10,800
2015			467,735
Thereafter			530,044
Total		$	1,339,653

10. Interest Rate Swaps

     An interest rate swap is a financial derivative instrument whereby two parties enter into a contractual agreement to exchange payments based on underlying interest rates. The Company uses interest rate swaps to hedge the variability on its floating rate senior secured term loan. The Company is required to pay the counterparty to the agreement fixed interest payments on a notional balance and in turn, receives variable interest payments on that notional balance. Payments are settled quarterly on a net basis.

     At June 30, 2011, the Company has an interest rate swap with a notional balance of $65.0 million and a fair value of $2.8 million that carries a fixed pay rate of 4.85% and has a variable receive rate of 0.25%, with a maturity date of June 30, 2012. The effective rate from March 31, 2011 through June 29, 2011 was 0.31%, and the rate resets on the last day of the period. The Company had another interest rate swap with a notional balance of $145.0 million that matured on June 30, 2011.

     The interest rate swap qualifies for hedge accounting and has been designated by the Company as a cash flow hedge against specific payments due on its senior secured term loan. As of June 30, 2011, the Company assessed the interest rate swap as being highly effective and expects it to continue to be highly effective. Accordingly, the changes in fair value of the interest rate swap have been recorded as other comprehensive loss, with the fair value included as a liability on the Company’s unaudited condensed consolidated statements of financial condition. The Company has recorded net unrealized gains of $4.4 million and $6.4 million for the three months ended June 30, 2011 and 2010, respectively, and $6.6 million and $9.5 million for the six months ended June 30, 2011 and 2010, respectively, to accumulated other comprehensive loss related to the change in fair value. The Company has reclassified $2.4 million and $4.3 million to interest expense from accumulated other comprehensive loss for the three months ended June 30, 2011, and 2010, respectively. For the six months ended June 30, 2011, and 2010, respectively, the Company reclassified $4.8 million and $8.7 million to interest expense from accumulated other comprehensive loss. Based on current interest rate assumptions and assuming no additional interest rate swap agreements are entered into, the Company expects to reclassify $3.0 million or $1.8 million after tax, from other comprehensive loss as additional interest expense over the next 12 months.

11. Commitments and Contingencies

     Leases — The Company leases certain office space and equipment at its headquarter and other locations under various operating leases. These leases are generally subject to scheduled base rent and maintenance cost increases, which are recognized on a straight-line basis over the period of the leases.

     Service Contracts — The Company is party to certain long-term contracts for systems and services that enable back office trade processing and clearing for its product and service offerings. One agreement, for clearing services, contains no minimum annual purchase commitment, but the agreement provides for certain penalties should the Company fail to maintain a certain threshold of client accounts.

     Future minimum payments under leases, lease commitments and other noncancellable contractual obligations with remaining terms greater than one year as of June 30, 2011 are as follows (in thousands):

2011 — remainder		$	15,348
2012			25,049
2013			15,948
2014			9,304
2015			7,030
Thereafter			7,693
Total(1)		$	80,372

     Total rental expense for all operating leases was $4.5 million and $4.1 million for the three months ended June 30, 2011 and 2010, respectively, and $8.6 million and $8.5 million for the six months ended June 30, 2011 and 2010, respectively.

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

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

     Loan Commitments — From time to time, the Company makes loans to its advisors, primarily to newly recruited advisors to assist in the transition process. Due to timing differences, the Company may make commitments to 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 the Company, and may be forgivable. The Company had no significant unfunded commitments at June 30, 2011.

     Litigation — The Company has been named as a defendant or respondent in various legal actions, including arbitrations. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases in which claimants seek substantial or indeterminate damages, the Company is unable to predict what the eventual loss or range of loss related to such matters will be. The Company recognizes a legal liability when it believes it is probable a liability has occurred and the amount can be reasonably estimated. Defense costs are expensed as incurred and classified as professional services within the unaudited condensed consolidated statements of operations. When there is indemnification or insurance for legal actions, the Company may defend or settle such matters and subsequently seek reimbursement.

     In connection with various acquisitions, and pursuant to the purchase and sale agreements, the Company has received third-party indemnification for certain legal proceedings and claims. These matters have been defended and paid directly by the indemnifying party.

     On October 1, 2009, the Company’s subsidiary, LPL Holdings, Inc. (“LPLH”), received written notice from a third-party indemnitor under a certain purchase and sale agreement asserting that it is no longer obligated to indemnify the Company for certain claims under the provisions of the purchase and sale agreement. The Company believed that this assertion was without merit and commenced litigation to enforce its indemnity rights. On March 31, 2011, the court entered judgment granting the Company’s motion for summary judgment in all respects, denied all counterclaims by the third party indemnitor and awarded attorney fees to the Company. On May 2, 2011, the third party indemnitor filed a notice of appeal.

     During the third quarter of 2010, the Company settled two arbitrations that involve activities covered under the third-party indemnification agreement described above. In connection with these settlements, the Company recorded a receivable from the indemnifying party of $8.9 million that has been fully reserved pending resolution of the litigation described above. The remaining claims outstanding for which the indemnifying party is disputing its obligation involve alleged damages that are not material to the Company’s unaudited condensed consolidated statements of financial condition, operations or cash flows.

     The Company believes, based on the information available at this time, after consultation with counsel, consideration of insurance, if any, and indemnifications provided by the third-party indemnitors, notwithstanding the assertions by an

indemnifying party noted in the preceding paragraphs, that the outcomes will not have a material adverse impact on unaudited condensed consolidated statements of financial condition, operations or cash flows.

     Other Commitments — As of June 30, 2011, the Company had received collateral primarily in connection with client margin loans with a market value of approximately $352.8 million, which it can sell or repledge. Of this amount, approximately $171.5 million has been pledged or sold as of June 30, 2011; $140.8 million was pledged to banks in connection with unutilized secured margin lines of credit, $14.6 million was pledged to the Options Clearing Corporation, and $16.1 million was loaned to the Depository Trust Company (“DTC”) through participation in its Stock Borrow Program. As of December 31, 2010, the Company had received collateral primarily in connection with client margin loans with a market value of approximately $326.9 million, which it can sell or repledge. Of this amount, approximately $167.4 million has been pledged or sold as of December 31, 2010; $145.8 million was pledged to banks in connection with unutilized secured margin lines of credit, $13.5 million was pledged to the Options Clearing Corporation, and $8.1 million was loaned to the DTC through participation in its Stock Borrow Program.

     LPL Financial provides a large global insurance company with brokerage, clearing and custody services on a fully disclosed basis; offers its investment advisory programs and platforms; and provides technology and additional processing and related services to its advisors and their clients. The agreements were entered into in 2006 with five year terms, subject to additional 24-month extensions upon mutual agreement by the parties. Termination fees may be payable by a terminating or breaching party depending on the specific cause of termination.

12. Share-Based Compensation

     Stock Options and Warrants

     Certain employees, advisors, institutions, officers and directors who contribute to the success of the Company participate in the 2010 Omnibus Equity Incentive Plan. Stock options and warrants generally vest in equal increments over a five-year period and expire on the 10th anniversary following the date of grant.

     The Company recognizes share-based compensation expense related to employee stock option awards based on the grant date fair value over the requisite service period of the award, which generally equals the vesting period. The Company recognized share-based compensation related to the vesting of employee stock option awards of $3.3 million and $2.3 million during the three months ended June 30, 2011 and 2010, respectively, and $7.1 million and $4.8 million during the six months ended June 30, 2011 and 2010, respectively, which is included in compensation and benefits on the unaudited condensed consolidated statements of operations. As of June 30, 2011, total unrecognized compensation cost related to non-vested share-based compensation arrangements granted was $46.2 million, which is expected to be recognized over a weighted-average period of 3.77 years.

     The following table presents the weighted-average assumptions used by the Company in calculating the fair value of its employee stock options with the Black-Scholes valuation model that have been granted during the six months ended June 30, 2011 and 2010:

		2011				2010
Expected life (in years)			6.50				6.50
Expected stock price volatility			48.61	%			50.30	%
Expected dividend yield			—				—
Fair value of options		$	17.54			$	12.31
Risk-free interest rate			2.58	%			2.79	%