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 incorporation or organization)		(I.R.S. Employer 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). o Yes o No (Registrant is not subject to the requirement of Rule 405 of Regulation S-T at this time)

     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 April 18, 2011 was 108,859,632.

 

 

TABLE OF CONTENTS

Item Number				Page
PART I. FINANCIAL INFORMATION					1
1.		Financial Statements			1
		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			27
3.		Quantitative and Qualitative Disclosures About Market Risk			51
4.		Controls and Procedures			54
PART II. OTHER INFORMATION					55
1.		Legal Proceedings			55
1A.		Risk Factors			55
2.		Unregistered Sales of Equity Securities and Use of Proceeds			55
3.		Defaults Upon Senior Securities			55
4.		Removed and Reserved			55
5.		Other Information			55
6.		Exhibits			55
SIGNATURES					56
EXHIBIT INDEX
EX-31.1
EX-31.2
EX-32.1
EX-32.2

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

(Unaudited)
(Dollars in thousands, except per share data)

		Three Months Ended
		March 31,
		2011				2010
REVENUES:
Commissions		$	451,877			$	388,972
Advisory fees			244,087				206,330
Asset-based fees			89,823				71,450
Transaction and other fees			73,749				67,363
Interest income, net of operating interest expense			5,142				4,871
Other			9,191				4,420
Net revenues			873,869				743,406
EXPENSES:
Commissions and advisory fees			594,678				504,862
Compensation and benefits			84,142				73,575
Promotional			19,536				14,350
Depreciation and amortization			18,165				25,590
Occupancy and equipment			15,525				12,018
Professional services			10,164				9,799
Brokerage, clearing and exchange			9,649				8,340
Communications and data processing			8,682				8,526
Regulatory fees and expenses			6,572				6,148
Travel and entertainment			3,803				2,396
Restructuring charges			537				3,949
Other			2,686				4,801
Total operating expenses			774,139				674,354
Non-operating interest expense			18,172				24,336
Total expenses			792,311				698,690
INCOME BEFORE PROVISION FOR INCOME TAXES			81,558				44,716
PROVISION FOR INCOME TAXES			32,559				19,162
NET INCOME		$	48,999			$	25,554
EARNINGS PER SHARE (Note 13):
Basic		$	0.44			$	0.29
Diluted		$	0.43			$	0.25

See notes to unaudited condensed consolidated financial statements.

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

(Unaudited)
(Dollars in thousands, except par value)

		March 31,				December 31,
		2011				2010
ASSETS
Cash and cash equivalents		$	596,584			$	419,208
Cash and securities segregated under federal and other regulations			279,726				373,634
Receivables from:
Clients, net of allowance of $661 at March 31, 2011 and $655 at December 31, 2010			295,872				271,051
Product sponsors, broker-dealers and clearing organizations			175,424				203,332
Others, net of allowances of $6,916 at March 31, 2011 and $6,796 at December 31, 2010			183,185				169,391
Securities owned:
Trading(1)			9,454				9,259
Held-to-maturity			11,660				9,563
Securities borrowed			11,799				8,391
Income taxes receivable			97,416				144,041
Fixed assets, net of accumulated depreciation and amortization of $284,235 at March 31, 2011 and $276,501 at December 31, 2010			76,850				78,671
Goodwill			1,304,499				1,293,366
Intangible assets, net of accumulated amortization of $182,263 at March 31, 2011 and $172,726 at December 31, 2010			562,340				560,077
Debt issuance costs, net of accumulated amortization of $15,379 at March 31, 2011 and $14,106 at December 31, 2010			22,438				23,711
Other assets			67,017				82,472
Total assets		$	3,694,264			$	3,646,167
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Drafts payable		$	165,511			$	182,489
Payables to clients			417,566				383,289
Payables to broker-dealers and clearing organizations			62,603				39,070
Accrued commissions and advisory fees payable			112,405				130,408
Accounts payable and accrued liabilities			133,486				154,586
Unearned revenue			60,428				53,618
Interest rate swaps			5,135				7,281
Securities sold but not yet purchased — at fair value			2,545				4,821
Senior credit facilities and subordinated notes			1,343,146				1,386,639
Deferred income taxes — net			125,523				130,211
Total liabilities			2,428,348				2,472,412
STOCKHOLDERS’ EQUITY:
Common stock, $.001 par value; 600,000,000 shares authorized; 108,841,017 shares issued and outstanding at March 31, 2011 and 108,714,757 shares issued and outstanding at December 31, 2010			109				109
Additional paid-in capital			1,093,559				1,051,722
Accumulated other comprehensive loss			(3,171	)			(4,496	)
Retained earnings			175,419				126,420
Total stockholders’ equity			1,265,916				1,173,755
Total liabilities and stockholders’ equity		$	3,694,264			$	3,646,167

See notes to unaudited condensed consolidated financial statements.

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

(Unaudited)
(Amounts in thousands)

																		Accumulated
										Additional								Other								Total
		Common Stock								Paid-In				Stockholder				Comprehensive				Retained				Stockholders’
		Shares				Amount				Capital				Loans				Loss				Earnings				Equity
BALANCE—December 31, 2009			94,215			$	87			$	679,277			$	(499	)		$	(11,272	)		$	183,282			$	850,875
Comprehensive income:
Net income																							25,554				25,554
Unrealized gain on interest rate swaps, net of tax expense of $384																			2,658								2,658
Total comprehensive income																											28,212
Exercise of stock options											9																9
Stockholder loans															448												448
Share-based compensation											3,145																3,145
Issuance of common stock			20								468																468
BALANCE—March 31, 2010			94,235			$	87			$	682,899			$	(51	)		$	(8,614	)		$	208,836			$	883,157
BALANCE — December 31, 2010			108,715			$	109			$	1,051,722			$	—			$	(4,496	)		$	126,420			$	1,173,755
Comprehensive income:
Net income																							48,999				48,999
Unrealized gain on interest rate swaps, net of tax expense of $821																			1,325								1,325
Total comprehensive income																											50,324
Exercise of stock options			126								1,022																1,022
Excess tax benefits from share-based compensation											35,967																35,967
Share-based compensation											4,848																4,848
BALANCE — March 31, 2011			108,841			$	109			$	1,093,559			$	—			$	(3,171	)		$	175,419			$	1,265,916

See notes to unaudited condensed consolidated financial statements.

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

(Unaudited)
(Dollars in thousands)

		Three Months Ended
		March 31,
		2011				2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	48,999			$	25,554
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Noncash items:
Depreciation and amortization			18,165				25,590
Amortization of debt issuance costs			1,273				1,111
Excess tax benefits from share-based compensation			(35,967	)			—
Share-based compensation			4,848				3,145
Provision for bad debts			321				2,169
Deferred income tax provision			(5,509	)			(9,787	)
Lease abandonment			414				(80	)
Loan forgiveness			371				1,627
Other			(125	)			(1	)
Changes in operating assets and liabilities:
Cash and securities segregated under federal and other regulations			93,908				(21,803	)
Receivables from clients			(24,827	)			(15,237	)
Receivables from product sponsors, broker-dealers and clearing organizations			27,908				(37,071	)
Receivables from others			(14,477	)			(10,339	)
Securities owned			41				(101	)
Securities borrowed			(3,408	)			1,640
Other assets			(1,145	)			(574	)
Drafts payable			(16,978	)			8,980
Payables to clients			34,277				(83,735	)
Payables to broker-dealers and clearing organizations			23,533				5,224
Accrued commissions and advisory fees payable			(18,003	)			3,772
Accounts payable and accrued liabilities			(31,288	)			5,919
Unearned revenue			6,810				(4,826	)
Income taxes receivable/payable			82,592				14,492
Securities sold but not yet purchased			(2,276	)			(1,691	)
Net cash provided by (used in) operating activities			189,457				(86,022	)

See notes to unaudited condensed consolidated financial statements.

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows — (Continued)
(Unaudited)
(Dollars in thousands)

		Three Months Ended
		March 31,
		2011				2010
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		$	(3,292	)		$	(1,463	)
Purchase of securities classified as held-to-maturity			(2,767	)			(2,008	)
Proceeds from maturity of securities classified as held-to-maturity			650				2,100
Acquisition of National Retirement Partners Inc.			(16,674	)			—
Deposits of restricted cash			(500	)			(2,454	)
Release of restricted cash			17,006				50
Net cash used in investing activities			(5,577	)			(3,775	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank loans payable			—				40,000
Repayment of senior credit facilities			(43,493	)			(2,106	)
Payment of debt issuance costs			—				(2,407	)
Proceeds from stock options exercised			1,022				9
Excess tax benefits from share-based compensation			35,967				—
Issuance of common stock			—				468
Net cash (used in) provided by financing activities			(6,504	)			35,964
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			177,376				(53,833	)
CASH AND CASH EQUIVALENTS — Beginning of period			419,208				378,594
CASH AND CASH EQUIVALENTS — End of period		$	596,584			$	324,761
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid		$	18,178			$	9,595
Income taxes paid		$	479			$	14,796
NONCASH DISCLOSURES:
Capital expenditures purchased through short-term credit		$	3,515			$	560
Increase in unrealized gain on interest rate swaps, net of tax expense		$	1,325			$	2,658

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.

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

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 March 31, 2011, the carrying amount and fair value of the Company’s indebtedness was approximately $1,343 million and $1,347 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.

Recently Issued Accounting Pronouncements — There were no recently issued accounting pronouncements or changes in accounting pronouncements during the three months ended March 31, 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.

3. Acquisition

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 $16.7 million at the closing of the transaction, including $2.0 million of contingent consideration that has been paid in advance, which was released from an escrow account established in December 2010. As of March 31, 2011, $3.6 million remains in an escrow account to be paid to shareholders of NRP within ninety days following the transaction closing. 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 revenue-based milestones in the third year following the acquisition. There is no maximum amount of contingent consideration; however, the Company currently expects to pay the shareholders of NRP and estimates the total fair value of the contingent consideration as $4.4 million. At March 31, 2011, $2.0 million of the contingent liability had been paid in advance and the remainder of $2.4 million 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 $22.7 million. Transaction costs associated with the Company’s acquisition of NRP totaling $3.5 million were expensed as incurred through other expense in the unaudited condensed consolidated statements of operations. Of these transaction costs $1.2 million were incurred during the three months ending March 31, 2011.

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

The Company has accounted for its acquisition of NRP as a business combination in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC Topic 805”), and has recorded assets acquired and liabilities assumed at their respective fair values as of the acquisition date. The Company is in the process of finalizing the purchase allocation and the value of contingent consideration, therefore the provisional measures of goodwill, intangibles and contingent consideration are subject to change. Pro forma information related to the acquisition 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.

Set forth below is a reconciliation of assets acquired and liabilities assumed (in thousands):

Goodwill		$	11,133
Intangibles			11,800
Accounts payable and accrued liabilities			(190	)
Total purchase price		$	22,743

Set forth below is supplemental cash flow information including cash paid, cash expected to be paid, contingent consideration and net assets acquired (in thousands):

Cash paid at closing		$	16,674
Cash expected to be paid within ninety days following the transaction			3,669
Contingent consideration			2,400
Net assets acquired		$	22,743

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

Amortizable intangible assets		Amortization Period				Amount Assigned
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						$	11,800

The fair value of the contingent consideration liability associated with the $4.4 million of potential payments was estimated by discounting, to present value, the contingent payments expected to be made based on the Company’s estimates of the revenues expected to result from the acquisition in the third year following acquisition. The Company determined the fair value of this obligation using internal revenue projections and external market factors. The Company applied a risk-adjusted discount factor, to derive the estimated fair value of the contingent consideration as of the acquisition date. This fair value measurement is based on significant management estimates and assumptions. In accordance with ASC Topic 805, the Company will re-measure this liability each reporting period and record changes in the fair value through accounts payable and accrued liabilities within the unaudited condensed consolidated statements of operations. Increases or decreases in the fair value of the contingent consideration liability can result from changes in discount periods and rates, as well as changes in the timing and amount of revenue estimates.

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

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. 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 be completed in stages, with the first stage commencing in June 2011, and the final stage to be completed by 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 costs associated with the initiative to be approximately $52.7 million over of the course of the restructuring plan. These charges are comprised of advisor retention and related benefits, contract termination fees, technology costs and other expenses principally relating to the conversion and transfer of registered representatives and client accounts from UVEST to LPL Financial. The Company also anticipates that it will record non-cash charges for the impairment of intangible assets resulting from advisor attrition.

The following table summarizes the balance of accrued expenses and the changes in the accrued amounts as of and for the three months ended March 31, 2011 (in thousands):

		Accrued																Accrued				Total
		Balance at																Balance at				Expected
		December 31,				Costs												March 31,				Restructuring
		2010				Incurred(1)				Payments				Non-cash				2011				Costs
Conversion and transfer costs		$	—			$	378			$	(315	)		$	—			$	63			$	28,650
Contract termination fees			—				161				—				—				161				11,400
Advisor retention and related benefits			—				104				(104	)			—				—				7,000
Asset impairments			—				—				—				—				—				5,600
Total		$	—			$	643			$	(419	)		$	—			$	224			$	52,650

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

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 March 31, 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 March 31, 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.

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

Accounts Payable and Accrued Liabilities — The Company’s accounts payable and accrued liabilities include contingent consideration from the NRP acquisition. See Note 3 for more information regarding the acquisition 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 externally developed valuation 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 three months ended March 31, 2011.

The following table summarizes the Company’s financial assets and financial liabilities measured at fair value on a recurring basis at March 31, 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 March 31, 2011:
Assets
Cash equivalents		$	431,992			$	—			$	—			$	431,992
Securities owned — trading:
Money market funds			275				—				—				275
Mutual funds			7,558				—				—				7,558
Equity securities			94				—				—				94
Debt securities			—				400				—				400
U.S. treasury obligations			1,010				—				—				1,010
Certificates of deposit			—				117				—				117
Total securities owned — trading			8,937				517				—				9,454
Other assets			21,178				—				—				21,178
Total assets at fair value		$	462,107			$	517			$	—			$	462,624
Liabilities
Securities sold but not yet purchased:
Mutual funds		$	2,435			$	—			$	—			$	2,435
Equity securities			28				—				—				28
Debt securities			—				56				—				56
Certificates of deposit			—				26				—				26
Total securities sold but not yet purchased			2,463				82				—				2,545
Interest rate swaps			—				5,135				—				5,135
Total liabilities at fair value		$	2,463			$	5,217			$	—			$	7,680

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

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.

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

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 March 31, 2011:
U.S. government notes		$	11,660			$	53			$	11,713
At December 31, 2010:
U.S. government notes		$	9,563			$	69			$	9,632

The maturities of securities held-to-maturity at March 31, 2011 were as follows (in thousands):

		Within 1 Year				1-3 Years				Total
U.S. government notes — at amortized cost		$	7,385			$	4,275			$	11,660
U.S. government notes — at fair value		$	7,410			$	4,303			$	11,713

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 NRP (Note 3)			11,133	(1)
Balance at March 31, 2011		$	1,304,499

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

		Weighted				Gross								Net
		Average Life				Carrying				Accumulated				Carrying
		Remaining				Value				Amortization				Value
At March 31, 2011:
Definite-lived intangible assets:
Advisor and financial institution relationships			14.0			$	462,504			$	(123,023	)		$	339,481
Product sponsor relationships			14.7				234,920				(58,321	)			176,599
Client relationships			11.9				7,360				(919	)			6,441
Total definite-lived intangible assets						$	704,784			$	(182,263	)		$	522,521
Indefinite-lived intangible assets:
Trademark and trade name															39,819
Total intangible assets														$	562,340
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

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

Total amortization expense of intangible assets was $9.5 million and $9.3 million for the three months ended March 31, 2011 and 2010, respectively. Amortization expense for each of the fiscal years ended December 2011 (remainder) through 2015 and thereafter is estimated as follows (in thousands):

2011 — remainder		$	29,068
2012			38,395
2013			37,685
2014			37,597
2015			36,830
Thereafter			342,946
Total		$	522,521

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 39.9% and 42.9% for the three months ended March 31, 2011 and 2010, respectively. The decrease in the effective tax rate 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 three months ended March 31, 2011, the Company recorded an increase in additional paid-in capital of $36.0 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 $19.3 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

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

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 March 31, 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 March 31, 2011 or December 31, 2010.

Bank Loans Payable — The Company maintains two uncommitted lines of credit. One line has an unspecified limit, and is 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. Both lines were utilized in 2010 and 2009; however, there were no balances outstanding at March 31, 2011 or December 31, 2010.

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

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

						March 31, 2011								December 31, 2010
										Interest								Interest
		Maturity				Balance				Rate				Balance				Rate
Senior secured term loan:
Hedged with interest rate swaps			6/28/2013			$	210,000				2.06	%(1)		$	210,000				2.05	%(5)
Unhedged:
2013 Term Loans			6/28/2013				94,867				2.00	%(2)			104,739				2.01	%(6)
2015 Term Loans			6/25/2015				480,685				4.25	%(3)			496,250				4.25	%(7)
2017 Term Loans			6/28/2017				557,594				5.25	%(4)			575,650				5.25	%(8)
Total borrowings							1,343,146								1,386,639
Less current borrowings (maturities within 12 months)							13,971								13,971
Long-term borrowings — net of current portion						$	1,329,175							$	1,372,668

The average balance outstanding in the revolving and uncommitted line of credit facilities was approximately $6,000 and $8.2 million for the three months ended March 31, 2011 and 2010, respectively, with a weighted-average interest rate of 1.50% and 1.16%, respectively.

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

The minimum calendar year payments and maturities of the senior secured borrowings as of March 31, 2011 are as follows (in thousands):

2011 — remainder		$	10,478
2012			13,971
2013			310,118
2014			10,800
2015			467,735
Thereafter			530,044
Total		$	1,343,146

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.

The following table summarizes information related to the Company’s interest rate swaps as of March 31, 2011 (in thousands):

							Variable
Notional			Fixed				Receive				Fair				Maturity
Balance			Pay Rate				Rate(1)				Value				Date
$145,000				4.83	%			0.31	%		$	(1,644	)		June 30, 2011
65,000				4.85	%			0.31	%			(3,491	)		June 30, 2012
$210,000											$	(5,135	)

The interest rate swaps qualify for hedge accounting and have been designated as cash flow hedges against specific payments due on the Company’s senior secured term loan. As of March 31, 2011, the Company assessed the interest rate swaps as being highly effective and expects them to continue to be highly effective. Accordingly, the changes in fair value of the interest rate swaps 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 $2.1 million and $3.0 million for the three months ended March 31, 2011 and 2010, respectively, to accumulated other comprehensive loss related to the change in fair value of its interest rate swap agreements. The Company has reclassified $2.4 million and $4.3 million to interest expense from accumulated other comprehensive loss for the three months ended March 31, 2011 and 2010, respectively. Based on current interest rate assumptions and assuming no additional interest rate swap agreements are entered into, the Company expects to reclassify $9.5 million or $5.7 million after tax, from other comprehensive loss as additional interest expense over the next 12 months.

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

11. Commitments and Contingencies

Leases — The Company leases certain office space and equipment at its headquarter 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 March 31, 2011 are as follows (in thousands):

2011 — remainder		$	23,526
2012			25,565
2013			16,486
2014			9,400
2015			7,157
Thereafter			7,908
Total(1)		$	90,042

Total rental expense for all operating leases was $4.2 million and $4.4 million for the three months ended March 31, 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 March 31, 2011.

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

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 November 20, 2009, LPLH and three of its affiliated broker-dealers filed suit to enforce the indemnitor’s performance pursuant to the provisions of the contract. In February 2010, these plaintiffs filed a motion for summary judgment with the court, which was opposed by the third party indemnitor. In May 2010, the court heard oral argument on the motion. In March 2011, the court granted the motion for summary judgment in all respects, denied all counterclaims by the third party indemnitor and awarded attorney fees to the plaintiffs. On March 31, 2011, the court entered judgment granting the motion for summary judgment in all respects, denied all counterclaims by the third party indemnitor and awarded attorney fees to the plaintiffs.

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 has recorded legal expenses of $8.9 million. These legal expenses have been included in professional services within the unaudited condensed consolidated statements of operations. The Company will seek to recover the costs associated with defending and settling these matters, plus other costs incurred on matters that the Company believes are subject to the indemnification. 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 March 31, 2011, the Company had received collateral primarily in connection with client margin loans with a market value of approximately $345.5 million, which it can sell or repledge. Of this amount, approximately $172.4 million has been pledged or sold as of March 31, 2011; $142.3 million was pledged to banks in connection with unutilized secured margin lines of credit, $15.8 million was pledged to the Options Clearing Corporation, and $14.3 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

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

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.

In August of 2007, pursuant to agreements with a large global insurance company, LPL Financial began providing brokerage, clearing and custody services on a fully disclosed basis; offering its investment advisory programs and platforms; and providing technology and additional processing and related services to its advisors and their clients. The terms of the agreements are five years, subject to additional 24-month extensions. Termination fees may be payable by a terminating or breaching party depending on the specific cause of termination.

12. Share-Based Compensation

Stock Option and Warrant Plans

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 three- to 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 $3.8 million and $2.5 million of share-based compensation related to the vesting of employee stock option awards during the three months ended March 31, 2011 and 2010, respectively, which is included in compensation and benefits on the unaudited condensed consolidated statements of operations. As of March 31, 2011, total unrecognized compensation cost related to non-vested share-based compensation arrangements granted was $49.9 million, which is expected to be recognized over a weighted-average period of 3.96 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 three months ended March 31, 2011 and 2010:

		2011				2010
Expected life (in years)			6.50				6.50
Expected stock price volatility			48.87	%			50.32	%
Expected dividend yield			—				—
Fair value of options		$	17.01			$	12.31
Risk-free interest rate			2.80	%			2.79	%

The Company recognizes share-based compensation expense for stock options and warrants awarded to its advisors and financial institutions based on the fair value of awards at each interim reporting period. The Company recognized $1.0 million and $0.6 million of share-based compensation during the three months ended March 31, 2011 and 2010, respectively, related to the vesting of stock options and warrants awarded to its advisors and financial institutions, which is classified within commission and advisory fees on the unaudited condensed consolidated statements of operations. As of March 31, 2011, total unrecognized compensation cost related to non-vested share-based compensation arrangements granted was $19.7 million for advisors and financial institutions, which is expected to be

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

recognized over a weighted-average period of 3.86 years.

The following table presents the weighted-average assumptions used by the Company in calculating the fair value of its advisor stock options and financial institution warrants with the Black-Scholes valuation model that have been granted during the three months ended March 31, 2011 and 2010:

		2011				2010
Expected life (in years)			9.82				10.0
Expected stock price volatility			49.54	%			54.11	%
Expected dividend yield			—				—
Fair value of options		$	23.10			$	19.76
Risk-free interest rate			3.50	%			3.88	%

The risk-free interest rates are based on the implied yield available on U.S. Treasury constant maturities in effect at the time of the grant with remaining terms equivalent to the respective expected terms of the options. The dividend yield of zero is based on the fact that the Company has no present intention to pay cash dividends. The Company estimates the expected term for its employee option awards using the simplified method in accordance with Staff Accounting Bulletin 110, Certain Assumptions Used in Valuation Methods, because the Company does not have sufficient relevant historical information to develop reasonable expectations about future exercise patterns. The Company estimates the expected term for stock options and warrants awarded to advisors and financial institutions using the contractual term. Expected volatility is calculated based on companies of similar growth and maturity and the Company’s peer group in the industry in which the Company does business because the Company does not have sufficient historical volatility data. The Company will continue to use peer group volatility information until historical volatility of the Company is available to measure expected volatility for future grants. In the future, as the Company gains historical data for volatility of its own stock and the actual term over which stock options and warrants are held, expected volatility and the expected term may change, which could substantially change the grant-date fair value of future awards of stock options and warrants and, ultimately, compensation recorded on future grants.

The Company has assumed an annualized forfeiture rate for its stock options and warrants based on a combined review of industry, employee and advisor turnover data, as well as an analytical review performed of historical pre-vesting forfeitures occurring over the previous year. The Company records additional expense if the actual forfeiture rate is lower than estimated and records a recovery of prior expense if the actual forfeiture is higher than estimated.

The following table summarizes the Company’s activity in its stock option and warrant plans for the three months ended March 31, 2011:

										Weighted-
										Average
						Weighted-				Remaining				Aggregate
		Number				Average				Contractual				Intrinsic
		of				Exercise				Term				Value
		Shares				Price				(Years)				(In thousands)
Outstanding — December 31, 2010			10,279,052			$	18.12
Granted			483,023				33.93
Exercised			(116,824	)			5.41
Forfeited			(132,143	)			27.16
Outstanding — March 31, 2011			10,513,108			$	18.88				6.58			$	178,028
Exercisable — March 31, 2011			5,163,811			$	10.02				4.39			$	133,195

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

The following table summarizes information about outstanding stock options and warrants:

		Outstanding												Exercisable
						Weighted-				Weighted-								Weighted-
		Total				Average				Average								Average
		Number of				Remaining				Exercise				Number of				Exercise
Range of Exercise Prices		Shares				Life (Years)				Price				Shares				Price
At March 31, 2011:
$1.35 — $2.38			3,259,175				2.71			$	1.68				3,259,175			$	1.68
$10.30 — $19.74			871,126				7.70				18.47				287,598				17.58
$21.60 — $22.08			2,001,600				8.18				22.02				511,940				21.94
$23.02 — $27.80			2,210,004				7.28				26.55				1,105,098				27.10
$30.00 — $34.61			2,171,203				9.75				34.14				—				—
			10,513,108				6.58			$	18.88				5,163,811			$	10.02