Table of Contents | | | |
TD AMERITRADE HOLDING CORPORATION
INDEX
| | | | | | | | Page No. | | | | | | | | | | Item 1. | | | | | | | | | | Item 1B. | | | | Item 2. | | | | Item 3. | | | | Item 4. | | | | | | | | | | | | Item 5. | | | | Item 6. | | | | Item 7. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Item 7A. | | | | Item 8. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Item 9. | | | | Item 9A. | | | | Item 9B. | | | | | | | | | | | | Item 10. | | | | | | | | | | | | | | | | | Item 12. | | | | | | | | | Item 13. | | | | | | | | | Item 14. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Item 10. | Directors, Executive Officers and Corporate Governance |
The following table provides information regarding our executive officers and directors as of January 15, 2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Class and Year In Which
Term Expires | | | | | | | | | Interim President and Chief Executive Officer, and Director | | | | | | | | | | | | | | | | | Interim Chief Financial Officer | | | | | | | | | | | | | | | | | Executive Vice President, Retail Distribution | | | | | | | | | | | | | | | | | Executive Vice President, Institutional Services | | | | | | | | | | | | | | | | | Executive Vice President, Trading and Education | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | Mr. Mitchell previously served on the Company’s board of directors from December 1996 to January 2006 and was reelected in November 2006. |
| (2) | Mr. Ricketts previously served on the Company’s board of directors from October 2011 to February 2014 and was reelected effective January 2015. |
| | | | | Mr. Bettino has managed his personal investment portfolio since December 2014. Previously, Mr. Bettino served as a special advisor to StarVest Partners, L.P., a New York-based venture capital firm focused on technology-enabled business services in the U.S., from 2006 to 2014. From 2001 to 2006, he served as a partner and managing director of Warburg Pincus LLC, where he was responsible for leading the firm’s investment activities in telecommunications and information technology. Mr. Bettino was a founding partner at Baker Capital from 1996 to 2001, a partner with Dillon Read Venture Capital from 1989 to 1996, and he held various management and technical positions with IBM from 1982 to 1989. Mr. Bettino has served on several private equity and venture capital backed corporate boards. Mr. Bettino holds a B.S. degree in electrical engineering from Rensselaer Polytechnic Institute and an M.B.A. from Harvard Business School. | Mr. Bettino is one of the six outside independent directors. Mr. Bettino brings significant technological and financial expertise to the board of directors, having more than 25 years of technology-focused, venture capital and private equity investing experience. | | | | | | Ms. Hailey gained experience inon-line businesses as the president, chief executive officer and chief financial officer of Famous Yard Sale, Inc., an online marketplace, from July 2012 to March 2014, and as chief financial officer of Gilt Groupe, Inc. from 2009 to 2010. Ms. Hailey spent ten years with L Brands, Inc. (formerly Limited Brands, Inc.), where she served as executive vice president and chief financial officer from 1997 to 2006, as executive vice president of corporate development from 2006 to 2007 and as a board member from 2001 to 2006. Previously, Ms. Hailey spent 13 years at PepsiCo, Inc. in various leadership positions, including vice president, headquarters finance, Pepsi-Cola Company and vice president, finance and chief financial officer of the Pepsi-Cola Fountain Beverage and USA Divisions, as well as holding positions in the marketing and human resources functions. In addition, Ms. Hailey held leadership roles at Pillsbury Company and RJR Nabisco Foods, Inc. Ms. Hailey serves as a director of Realogy Holdings Corp., where she is chair of the audit committee and a member of the nominating and corporate governance committee. She also serves as a director of W.W. Grainger, Inc., where she is chair of the audit committee and member of the board affairs and nominating committee. She was formerly a director of Avon Products, Inc. and the Federal Reserve Bank of Cleveland where she served as the chair of its audit committee. Ms. Hailey received an M.B.A. from Harvard Business School and a B.B.A. (summa cum laude) from the University of Georgia. | Ms. Hailey is one of the six outside independent directors. Ms. Hailey brings financial and operations experience to the board of directors, having worked in the consumer products industry in senior roles for more than 30 years. Ms. Hailey’s positions as chief financial officer, her current and prior service on the audit committees of other companies and as the audit chair of the Cleveland Federal Reserve Bank and her accounting and financial knowledge, also impart significant expertise to the board. |
| | | | | Mr. Moglia was elected chairman of the Company’s board of directors effective October 1, 2008. Mr. Moglia served as head football coach of Coastal Carolina University from December 2011 to January 2019, and from March 2014 to January 2019 he was chair of the athletics division, providing strategic oversight for the university’s athletic program. Since January 2019, he has served as chair of athletics and executive advisor to the president at Coastal Carolina University. He served as president and head coach of the Omaha Nighthawks of the United Football League during 2011. From March 2001 through September 2008 he served as the Company’s chief executive officer. Mr. Moglia joined the Company from Merrill Lynch, where he served as senior vice president and head of the investment performance and product group for Merrill’s private client division. He oversaw all investment products, as well as the firm’s insurance and 401(k) businesses. Mr. Moglia joined Merrill Lynch in 1984 and, by 1988, was the company’s top institutional sales person. In 1992 he became head of global fixed income institutional sales and in 1995 he ran the firm’s municipal division before moving to its private client division in 1997. Prior to entering the financial services industry, Mr. Moglia was the defensive coordinator for Dartmouth College’s football team. He coached various teams for 16 years, authored a book on football and wrote 11 articles that were published in national coaching journals. Mr.Moglia serves on the STRATCOM Consultation Committee and is a director for the National Italian American Foundation. Mr. Moglia received an M.S. in Economics from the University of Delaware and a B.A. in Economics from Fordham University. | Mr. Moglia is one of the six outside independent directors. Mr. Moglia has significant financial services and leadership experience, having served as the Company’s chief executive officer from March 2001 through September 2008 and as head of the investment performance and product group for Merrill Lynch’s private client division. His experience as our former chief executive officer provides him with insights that are useful in his current role as chairman of the board. | | | | | | Mr. Prezzano was employed with Eastman Kodak Company for over 30 years and served in various general management positions during that time, including as vice chairman of Eastman Kodak Company and chairman and president of Kodak’s greater China region, the positions that he held at the time of his retirement in 1996. Mr. Prezzano serves as a director of TD Bank, N.A. (wholly-owned subsidiary of TD) and a chairman of Roper Technologies, Inc. He was formerly a director of EnPro Industries, Inc., The Toronto-Dominion Bank andSnyder’s-Lance, Inc. Mr. Prezzano received a Bachelor’s degree and an M.B.A. from The Wharton School at the University of Pennsylvania. | Mr. Prezzano is one of the five directors currently designated by TD. He brings leadership skills and financial experience to the board of directors, having served as the vice chairman of Eastman Kodak Company. He brings insights to our board of directors through his service on other public company boards. |
| | | | | In connection with the Company’s entry into the merger agreement with the Charles Schwab Corporation (“Schwab”), Mr. Boyle became interim president and chief executive officer (“CEO”) of the Company. He joined the Company in July 2015 as executive vice president of finance and became chief financial officer in October 2015. Prior to joining the Company, Mr. Boyle served as controller of Banknorth Group, Inc. starting in 1997 and was named executive vice president and chief financial officer in 2004, where he was responsible for finance, accounting, treasury and tax functions. He remained in this role after Banknorth was acquired by TD Bank Group in 2007, until joining the Company in 2015. Prior to joining Banknorth, Mr. Boyle served as director of financial reporting for Barnett Banks, Inc. and served in a variety of accounting roles for Fleet Financial Group, Inc. and Arthur Anderson LLP. Mr. Boyle holds an M.S. in Accounting from the New York University Stern School of Business and a B.A. in Economics (cum laude) from Wake Forest University. | Mr. Boyle is the CEO of the Company. He has significant financial services and management experience, having worked in the financial services industry for over 30 years. | | | | | | Mr. Levitt was elected as a director of the Company on October 1, 2016. Mr. Levitt currently serves as chairman of the board for TD, a position he has held since 2011. Until 2015, Mr. Levitt served as vice-chair of Osler, Hoskin & Harcourt LLP, a law firm that he first joined in 1976 and became a partner of in 1979. In 1991, Mr. Levitt left Osler, Hoskin & Harcourt LLP to become president and subsequently chief executive officer of Imasco Limited, a Canadian consumer products and services company. Imasco was sold in 2000, and Mr. Levitt returned to Osler, Hoskin & Harcourt LLP in 2001. Mr. Levitt also serves as a director of Domtar Corporation, where he is the chair of the finance committee and a member of the human resources committee, and as a director of Stelco Holdings Inc., where he is the lead independent director and chair of the nominating, compensation and governance committee. He was formerly a director of Talisman Energy Inc. In 2014, Mr. Levitt was named as a recipient of the Institute of Corporate Directors Fellowship Awards, which annually recognizes individuals who have made outstanding contributions to corporate,not-for-profit and Crown corporation boards across Canada. He was appointed to the Order of Canada in 2015 for his work and support for the arts. Mr. Levitt holds a law degree from the University of Toronto, where he also completed his bachelor of applied science degree in civil engineering. | | | | | | Mr. Levitt is one of five directors currently designated by TD. He brings leadership skills and financial and operational experience to the board of directors, having served as the president and chief executive officer of Imasco Limited and vice-chair of Osler, Hoskin & Harcourt LLP. He brings insights to our board of directors through his service on other public company boards. |
| | | | | Ms. Maidment has served as a director of the Company since August 2010. Ms. Maidment was chief financial and administrative officer of Bank of Montreal (“BMO”) Financial Group, a financial services organization, from 2007 to 2009, and was responsible for all global finance operations, risk management, legal and compliance, tax, communications and mergers and acquisitions. From 2000 to 2007 she served as the chief financial officer of BMO Financial Group. Ms. Maidment held several executive positions with Clarica Life Insurance Company from 1988 to 2000, including chief financial officer. Ms. Maidment currently serves on the board of directors of TD. She was formerly a director of TransAlta Corporation. Ms. Maidment holds a Bachelor of Commerce degree from McMaster University and is a chartered professional accountant and a chartered accountant. In 2000, she was named a Fellow of the Institute of Chartered Professional Accountants of Ontario. | Ms. Maidment is one of the five directors currently designated by TD. She brings leadership skills and significant financial services experience to the board of directors, having most recently served as chief financial and administrative officer of BMO Financial Group. Her financial expertise and experience in risk management and compliance are important for her role as a member of the Audit Committee and Risk Committee. | | | | | | Mr. Masrani is group president and chief executive officer of TD Bank Group. Mr. Masrani has served in this position since November 2014. From July 2013 until his current appointment, Mr. Masrani served as chief operating officer of TD Bank Group. Mr. Masrani served as group head, U.S. personal and commercial banking of TD Bank Group and president and chief executive officer of TD Bank US Holding Company and TD Bank, N.A. (a wholly-owned subsidiary of TD) from 2008 until 2013. From 2003 to 2008, he served as vice chairman and chief risk officer of TD Bank Group. Mr. Masrani joined TD Bank Group in 1987 as a commercial lending trainee and during his tenure with TD Bank Group he has served in various leadership positions, including senior vice president and chief executive officer of TD Waterhouse Investor Services in Europe, senior vice president of corporate finance andco-head in Europe, vice president and country head for India and vice president and head of corporate banking for Canada. Mr. Masrani is a director of TD and certain subsidiaries of TD, including TD Bank, N.A. and TD Bank USA, N.A. Mr. Masrani holds a Bachelor of Administrative Studies degree from York University and an M.B.A. from the Schulich School of Business, York University. | Mr. Masrani is one of the five directors currently designated by TD. He brings significant leadership skills and operational and financial services experience to the board of directors, having served in several leadership positions with TD Bank Group. |
| | | | | Ms. Miller has served as the chief executive officer of Akim, Inc., an investment management and consulting firm, since 1997. Prior to joining Akim, Inc., Ms. Miller served as the vice chairman and chief financial officer of Barnes & Noble, Inc. She has also held senior investment banking and corporate finance positions with Morgan Stanley & Co. and Rothschild, Inc., respectively. Ms. Miller currently serves as a director of TD. She was formerly a director of Coach, Inc. from 2001 to 2014, Barnes & Noble, Inc. from 1995 to 2012, and Inditex, S.A. from 2001 to 2016, where she was chair of the audit and control committee. Ms. Miller received an M.S. in chemistry and chemical engineering from Cornell University and a B.S. from the University of Toronto. | Ms. Miller is one of the five directors currently designated by TD. She brings leadership skills and financial experience to the board of directors based on her experience as chief executive officer of Akim, Inc. and chief financial officer of Barnes & Noble, Inc. She brings insights to our board of directors through her service on other public company boards, having served as audit committee chair of five prior boards and as lead director of Coach, Inc. for ten years. | | | | | | Mr. Mitchell is a principal at CNH Partners, LLC, an investment management firm, which heco-founded in 2001. Mr. Mitchell served as a director of the Company from December 1996 until January 2006 and served as a member of the Company’s board of advisors in 1993. He was reelected as a director in November 2006. Mr. Mitchell has served as Adjunct Professor of Finance at Booth Business School, University of Chicago during 2017-2019. Previously, he was a finance professor at Harvard Business School from 1999 to 2003 and was a finance professor at the Graduate School of Business, University of Chicago from 1990 to 1999. Mr. Mitchell was a senior financial economist for the Securities and Exchange Commission from 1987 to 1990. He was a member of the Nasdaq quality of markets committee from 2003 to 2005. He was a member of the economic advisory board of NASD from 1995 to 1998. Mr. Mitchell received a Ph.D. in Applied Economics and an M.A. in Economics from Clemson University and received a B.B.A. (summa cum laude) in Economics from the University of Louisiana at Monroe. | Mr. Mitchell is one of the six outside independent directors. He brings significant financial experience and extensive knowledge of the Company and the brokerage industry, serving as a principal andco-founder of an investment management firm and as a director of the Company since 1996. |
| | | | | Mr. Ricketts has served as a director of Chicago Baseball Holdings, LLC since October 2009. Mr. Ricketts has managed his personal investment portfolio since 2001 and has been a managingco-owner of JBE Riding Group LLC, a bicycle retailer and service provider, since 2009. Previously, Mr. Ricketts served as corporate secretary and director of business development for the Company. He also served as the special assistant to the president for Knight Capital Group, Inc. and assisted with its initial public offering. Mr. Ricketts received a B.A. in economics from Loyola University Chicago. Todd M. Ricketts is the son of J. Joe Ricketts, founder of the Company. Mr. Ricketts is one of the six outside independent directors. He brings business management and financial experience to the board of directors through his entrepreneurial and financial services industry experience. | | | | | | Mr. Tessler has been chairman of the board and chief executive officer of International Financial Group, Inc., an international merchant banking firm, since 1987. He previously served as a director of Steel Partners Holdings L.P., chairman of the board of Epoch Holding Corporation (formerly J Net Enterprises), chief executive officer of J Net Enterprises,co-chairman andco-chief executive officer of Data Broadcasting Corporation (now known as Interactive Data Corporation), chairman of Enhance Financial Services Group, Inc. and chairman and principal stockholder of Great Dane Holdings. Mr. Tessler is the lead independent director and chair of both the finance and the nominating and governance committees of L Brands, Inc. Mr. Tessler also serves as chairman of Imperva, Inc. and previously served as a director of BioCardia, Inc. He is a governor emeritus of the Boys & Girls Clubs of America. Mr. Tessler holds a B.A. from Cornell University and an L.L.B. from Cornell University Law School. Mr. Tessler is one of the six outside independent directors. He brings leadership skills and operational and financial services experience to the board of directors, having served as chief executive officer of J Net Enterprises andco-chief executive officer of Data Broadcasting Corporation. He brings insights to our board of directors through his service on other public company boards. |
joined the Company in July1996. Prior to serving as the interim chief financial officer, Mr. Peterson was the Company’s managing director of analysis, planning and reporting from 2016 to 2019. Prior to that, he served as director of analysis, planning and reporting for the Company’s retail and institutional business from 2005 to 2016. Mr. Peterson served in several other roles at the Company including as a senior analyst and manager in finance from 2001 to 2005 and as a broker and in several other leadership positions from 1996 to 2001. Mr. Peterson holds a B.S. in Business with a concentration in Finance from Wayne State College and completed the Emerging CFO program at the Stanford Graduate School of Business. joined the Company in September 2017 following the closing of the Company’s acquisition of Scottrade Financial Services, Inc. (“Scottrade”) and was appointed executive vice president of retail distribution in the same month. In this role, he is responsible for the Company’s branch network, investor service and sales call centers, guidance solutions and investment products. Prior to joining the Company, Mr. deSilva was president of Scottrade from 2016 to 2017 where he led the retail and institutional divisions. Prior to joining Scottrade in 2016, he was the president and chief operating officer of UMB Financial Corp., a financial services company, a position he held from 2004 to 2015. Before that, from 1987 to 2004, Mr. deSilva worked at Fidelity Investments, where he served in several leadership positions including senior vice president/general manager of Fidelity Retail and senior vice president of Fidelity Brokerage Company. Mr. deSilva holds a B.A. in Management from the University of Massachusetts Dartmouth. was appointed president of Institutional Services and named executive vice president of the Company in February 2012. In his role as president of Institutional Services, he oversees all institutional business functions, including the Company’s independent investment advisor services, self-directed 401(k) and retirement trust businesses. Mr. Nally also oversees the Company’s brokerage and clearing operations. Mr. Nally joined the Company upon its acquisition of TD Waterhouse in January 2006. From January 2006 until his current appointment, he was responsible for TD Ameritrade Institutional Sales, where he led his team to develop new advisor relationships and deliver a value added practice management solution to assist registered investment advisors in achieving their strategic business objectives. Prior to January 2006, Mr. Nally spent 12 years at TD Waterhouse in various leadership positions, including as senior vice president of TD Waterhouse Institutional, Brokerage Services. Over his tenure, he has held multiple management positions in various key areas of the business, including responsibility for trading, fixed income, advisor relations, client service, advisor technology, account services and operations for more than 7,000 independent registered investment advisors that custody assets with TD Ameritrade Institutional. Mr. Nally graduated from Rider University with a degree in Finance, he completed the Securities Industry Institute program, sponsored by SIFMA, at the Wharton School, and he completed executive education coursework at the Stanford Graduate School of Business. He was recognized as one of Investment Advisor Magazine’s top 25 most influential people (2012 and 2014) and Investment News’ 2013 Power 20 list of financial industry leaders. He also holds several financial services industry securities licenses. joined the Company upon its acquisition of thinkorswim in July 2009 and was appointed senior vice president of the Trader Group in July 2010. In November 2015, he was named executive vice president of the Company. In this role, Mr. Quirk leads development of strategies, products and the trading applications for retail traders and investors at TD Ameritrade. He is also responsible for the Company’s investor education businesses. Prior to his current role, he was responsible for the development of new trading tools and technology enhancements for the Company’s trading platform. Mr. Quirk played a major role in the successful acquisition and integration of thinkorswim by TD Ameritrade. Mr. Quirk joined thinkorswim in July 2007, where he served in various leadership positions. In prior leadership roles, Mr. Quirk led the Chicago division of Van der Moolen USA and was a partner at SCMS LLC for several years. Mr. Quirk began his trading career at the Chicago Mercantile Exchange and Chicago Board Options Exchange (CBOE) in 1987. While at the CBOE, Mr. Quirk served on the CBOE Index Market Performance Committee and the Arbitration Committee. Mr. Quirk is a recognized industry expert on trading technology and retail trading behavior and is a regular contributor to various media outlets including Barron’s, CNBC, Fox Business, the Wall Street Journal and CNBC Asia. Mr. Quirk holds a Bachelor’s Degree in Risk, Insurance and Marketing from the University of Wisconsin. He also holds several industry licenses. Board Meetings and Committees The board of directors conducts its business through meetings of the board, actions taken by written consent in lieu of meetings and the actions of its committees. Thenon-employee members and the independent members of our board of directors regularly meet in executive session without management present. These directors select a presiding director at these meetings on anad-hoc basis. The board of directors has a policy requiring the separation of the roles of CEO and chairman of the board because the board of directors believes it improves the ability of the board to exercise its oversight role. Mr. Hockey served as the CEO during fiscal year 2019 and for the beginning of fiscal year 2020. In connection with the Company’s entry into the merger agreement with Schwab, Mr. Hockey stepped down as CEO and Mr. Boyle was appointed as the interim CEO, with primary responsibility for operational leadership and strategic direction of the Company. Mr. Moglia serves as chairman of the board, facilitating the board’s oversight of management, promoting communication between management and the board and engaging with shareholders. Key responsibilities of
the chairman include: setting the agenda for board meetings in consultation with other directors, the CEO, and the corporate secretary, facilitating the annual CEO performance evaluation, serving as a liaison between the board and senior management, conducting annual board interviews as part of the annual board evaluation process, and setting and maintaining board culture. The separation of the roles of CEO and chairman of the board does not affect risk oversight, which is the responsibility of the board of directors, primarily overseen by the Risk Committee. During the fiscal year ended September 30, 2019, the board of directors held ten meetings. During fiscal year 2019, each incumbent director attended at least 75% of the aggregate number of meetings of the board of directors and meetings of the committees of the board of directors on which he or she served during the period in which he or she served, if any. Although the Company does not have a formal policy regarding director attendance at our annual meeting of stockholders, directors are encouraged to attend. All directors of the Company at the time of the 2019 annual meeting of stockholders attended the 2019 annual meeting of stockholders. The board of directors has established six standing committees: Audit, H.R. and Compensation, Corporate Governance, Outside Independent Directors,Non-TD Directors, and Risk. The committee members are identified in the following table: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Outside
Independent
Directors | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The functions performed by the Audit Committee are described in the Audit Committee charter and include: (1) overseeing the Company’s internal accounting controls and controls over financial reporting, including assessment of legal and compliance matters, (2) appointment of the Company’s independent registered public accounting firm, reviewing the appointment of the Managing Director, General Auditor and assessing their performance on an ongoing basis, (3) reviewing the Company’s financial statements and audit issues and overseeing the financial and regulatory reporting processes and related risks, (4) performing other oversight functions as requested by the board of directors and (5) reporting its activities to the board of directors. The Audit Committee charter is available on the Company’s website atunder the governance section. All current Audit Committee members are independent as defined in the applicable listing standards of The Nasdaq Stock Market. The board of directors has determined that each Audit Committee member has sufficient knowledge in financial and auditing matters to serve on the committee and has designated Mses. Maidment, Hailey, and Miller, and Mr. Bettino as audit committee financial experts as defined by the SEC. The Company’s Audit Committee met ten times during fiscal year 2019.
H.R. and Compensation Committee Item 11 — Compensation Committee Report. Corporate Governance Committee non-employee directors by annually reviewing the market practice fornon-employee director compensation for companies in its peer group, which this year was accomplished in consultation with Semler Brossy Consulting Group, LLC (“Semler Brossy”), an independent compensation consultant retained by the Compensation Committee. Semler Brossy assessed whether the Company’snon-employee director compensation program continues to be competitive with the market for qualified directors, incorporates best practices and aligns the interests of ournon-employee directors with the long-term interests of our shareholders. The Company’s Corporate Governance Committee met four times during fiscal year 2019. The Corporate Governance Committee charter and the Corporate Governance Guidelines are available on the Company’s website atunder the governance section.Outside Independent Directors Committee Written communications submitted by stockholders pursuant to the Company’s Stockholder Communications Policy recommending the nomination of a person to be a member of the Company’s board of directors will be forwarded to the chair of the OID Committee for consideration. The OID Committee will consider director candidates who have been identified by other directors or the Company’s stockholders, but it has no obligation to recommend such candidates for nomination, except as may be required by contractual obligation of the Company. Stockholders who submit director recommendations must include the following: (1) a detailed resume outlining the candidate’s knowledge, skills and experience, (2) aone-page summary of the candidate’s attributes, including a statement as to why the candidate is an excellent choice for the board of directors, (3) a detailed resume of the stockholder submitting the director recommendation and (4) the number of shares held by the stockholder, including the dates such shares were acquired. The OID Committee charter establishes the following guidelines for identifying and evaluating candidates for selection to the board of directors: | 1. | Decisions for recommending candidates for nomination are based on merit, qualifications, performance, character and integrity and the Company’s business needs and will comply with the Company’s antidiscrimination policies and federal, state and local laws. |
| 2. | The composition of the entire board of directors will be taken into account when evaluating individual directors, including: the diversity, depth and breadth of knowledge, skills, experience and background represented on the board of directors; the need for financial, business, financial industry, public company and other experience and expertise on the board of directors and its committees; and the need to have directors work cooperatively to further the interests of the Company and its stockholders. |
| 3. | Candidates will be free of conflicts of interest that would interfere with their ability to discharge their duties as a director. |
| 4. | Candidates will be willing and able to devote the time necessary to discharge their duties as a director and shall have the desire and purpose to represent and advance the interests of the Company and stockholders as a whole. |
| 5. | Any other criteria as the OID Committee may determine. |
Notwithstanding any provision to the contrary in the OID Committee charter, when the Company is legally required by contractual obligation to provide third parties with the right to nominate directors (including pursuant to the Stockholders Agreement, discussed under Item 12 — Stockholders Agreement), the selection and nomination of such directors is not subject to the committee’s review and recommendation process. The OID Committee charter is available on the Company’s website atunder the governance section. Non-TD Directors Committee Non-TD Directors Committee is composed of all of the directors not designated by TD. The purpose of this committee is to make determinations relating to any acquisition by the Company of a competing business (as defined in the Stockholders Agreement) owned by TD. TheNon-TD Directors Committee did not meet during fiscal year 2019.. The Risk Committee was formed for the purpose of assisting the board of directors in its oversight responsibilities relating to the identification, monitoring and assessment of the key risks of the Company, including the significant policies, procedures and practices employed in risk management. The Risk Committee met six times during fiscal year 2019. The Risk Committee charter is available on the Company’s website atunder the governance section. Strategic Development Committee The Company has a code of business conduct and ethics that applies to all employees and the board of directors. A copy of this code is publicly available on the Company’s website atunder the governance section and as Exhibit 14 of the Company’s quarterly report on Form10-Q filed with the SEC on February 4, 2011.
Stockholder Communications Policy Stockholders and interested parties may communicate with any member of the board of directors, including the chair of any committee, an entire committee or the independent directors or all directors as a group, by sending written communications to: TD Ameritrade Holding Corporation 6940 Columbia Gateway Drive A stockholder must include his, her or its name and address in any such written communication and indicate whether he, she or it is a Company stockholder. The corporate secretary will compile all communications, summarize lengthy, repetitive or duplicative communications and forward them to the appropriate director or directors. Complaints regarding accounting, internal controls or auditing will be forwarded to the chair of the Audit Committee. The corporate secretary will not forward to directorsnon-substantive communications or communications that appear to pertain to personal grievances, but will instead forward them to the appropriate department within the Company for resolution. The corporate secretary will retain a copy of such communications for review by any director upon his or her request. Communications from a Company employee or agent will be considered stockholder communications under this policy if made solely in his or her capacity as a stockholder. No communications from a Company director or officer will be considered stockholder communications under this policy. In addition, proposals submitted by stockholders for inclusion in the Company’s annual proxy statement, and proposals submitted by stockholders for presentation at the Company’s annual meeting of stockholders, will not be considered stockholder communications under this policy. Written communications submitted by stockholders recommending the nomination of a person to be a member of the Company’s board of directors will be forwarded to the chair of the OID Committee.
Compensation Discussion and Analysis This section is an executive summary of fiscal year 2019 compensation for our CEO, our chief financial officer (“CFO”) and each of our other three most highly compensated executive officers employed at the end of fiscal year 2019. We refer to these individuals as our named executive officers (“NEOs”). The following lists our NEOs for fiscal year 2019 and the positions they held during fiscal year 2019: Tim Hockey, President and CEO Stephen J. Boyle, Executive Vice President, CFO Peter J. deSilva, Executive Vice President, Retail Distribution Thomas A. Nally, Executive Vice President, Institutional Services Steven M. Quirk, Executive Vice President, Trading and Education On July 22, 2019, the Company announced that Mr. Hockey would be stepping down from his role as president, CEO and as a member of the board, effective upon the date that his successor commences employment, but in no event later than February 29, 2020. In connection with such transition, the Company and Mr. Hockey entered into a transition agreement modifying certain terms of his employment arrangements, as discussed further below. Further, on November 25, 2019, in connection with the pending acquisition of the Company by Schwab, the Company announced the appointment of Mr. Boyle as the interim president and CEO and Jon C. Peterson as the interim CFO. Per his transition agreement, Mr. Hockey will continue service with the Company until February 29, 2020, as a senior advisor to Mr. Boyle in his capacity as interim president and CEO. For more information on the Schwab transaction, please refer to Item 12 — Change in Control. Executive Compensation Program Highlights for Fiscal Year 2019 At the Company’s 2019 annual stockholder meeting, fiscal year 2018 NEO compensation was approved on anon-binding advisory basis, with more than 99% support for thesay-on-pay proposal, a similar level of support as the previous year. Taking the strong vote results into account, in conjunction with stockholder views expressed directly to the Company, the Compensation Committee decided to maintain the same core principles for the fiscal year 2019 executive compensation program. As such, consistent with the Company’s executive compensation principles and strong commitment to pay for performance, the majority of our NEOs’ fiscal 2019 total compensation packages required achievement ofpre-set annual performance objectives. Though the core principles of the compensation program remain unchanged, following a review of the incentive plan design and its alignment with our business strategy, the Committee identified an opportunity to update several of the performance measures and relative metric weightings in the annual incentive plan to further align incentives with business strategy. Detail on these updates may be found on page 24. Additionally, since fiscal 2016, our long-term incentive program has consisted entirely of performance-based RSUs that vest three years after grant, the final value of which is contingent upon three-year total shareholder return (“TSR”) performance relative to the New York Stock Exchange Archipelago (“NYSE Arca”) Securities Broker/Dealer Index. For fiscal 2019, in consideration of the anticipated acquisition of the Company by Schwab, the Compensation Committee decided to deliver long-term incentive awards in the form of service-based RSUs in order to effectively and appropriately drive performance and retention in the coming months given that the anticipated acquisition timing presents significant challenges to the operation of a normative three-year performance period with an incentive outcome based largely on fundamental Company performance. Detail on these updates may be found on page 26.
Our CEO’s and other NEOs’ targeted total annual compensation (i.e., base salary, target cash incentive and target equity incentive) for fiscal year 2019 was heavily weighted toward elements that were subject to performance objectives: Fiscal Year 2019 Named Executive Officer Target Total Annual Compensation(1) | | | | | NEO Average (Excluding CEO)(2) |  | |  |
| (1) | Target cash incentive and target equity incentive are amounts established by the Compensation Committee based on performance under the Management Incentive Plan (“MIP”) during fiscal year 2019. Any equity awards under the fiscal year 2019 MIP were granted following the completion of the fiscal year 2019 performance period, in early fiscal year 2020. These elements required achievement of performance goals before they could be paid or granted. |
| (2) | Each element of compensation comprising the target total annual compensation for the NEOs, other than the CEO, is based on the average among the NEOs (other than Mr. Hockey). |
Key Performance Highlights and Pay for Performance Results for Fiscal Year 2019 The Company’s results for the fiscal year ended September 30, 2019 include the following: Record net new client assets of approximately $93 billion, a year-over-year growth rate of 7 percent Record average client trades per day of approximately 862,000, up 6 percent year over year Record net revenues of $6 billion, up 10 percent year over year Ending client assets of approximately $1.3 trillion, up 2 percent year over year $3.96 in GAAP earnings per diluted share, up 53 percent year over year, on net income of $2.21 billion $4.13 innon-GAAP earnings per diluted share, up 24 percent year over year. For a discussion of this measure and a reconciliation to the related GAAP measure, refer to Appendix A As further described below, the corporate performance component of the MIP consisted of the following metrics and weightings: 40%non-GAAP earnings per share, 25% client experience, 20% revenue and market share, and 15% other strategic themes. The Committee reviewed the Company’s performance againstpre-established targets and objectives for each of these metrics. Consistent with the Company’s commitment to its pay for performance philosophy under its executive compensation program, the Company’s strong performance in fiscal year 2019 resulted in funding of the corporate performance component at 107.1% of target, and the final individual incentive payouts under the MIP to our NEOs ranged from 105.7% to 111.0%.
Executive Compensation Governance Highlights Consistent with our guiding principles underlying our executive compensation program, we observe the following practices: | | | ☑ Review executive compensation in comparison to peer group | | ☑ Employ double-trigger vesting accelerationchange-in-control provisions | | | | ☑ Measure, manage and reward based on performance goals that drive our short- and long-term business strategy | | ☑ Prohibit repricing stock options without stockholder approval | | | | ☑ Maintain a pay mix that is heavily performance-based | | ☑ Prohibit hedging of stock | | | | ☑ Maintain stock ownership guidelines for executives | | ☑ Prohibit pledging of stock | | | | ☑ Maintain a clawback policy | | ☑ No golden parachute excise taxgross-ups to executives | | | | ☑ Conduct annual risk assessments of our executive compensation policies and practices | | | | | | ☑ Hold an annual shareholdersay-on-pay advisory vote | | ☑ No supplemental executive retirement plans (SERPs) | | | | ☑ Engage an independent compensation consultant that reports directly to our Compensation Committee | | | | | | ☑ Permit use of negative discretion to decrease incentive compensation | | |
Compensation-related Agreements and Plans The Compensation Discussion and Analysis and the executive compensation tables below are based in part on the Company’s agreements with Messrs. Hockey, Boyle, and deSilva, and the terms of the MIP and the Company’s stockholder-approved Long-Term Incentive Plan (the “LTIP”). Please refer to the following agreements and plan documents for the complete terms. | | | | | | | | | | | | | | Quarterly Report on Form10-Q filed on February 4, 2018, Exhibit 10.1 Annual Report on Form10-K filed on November 15, 2019, Exhibit 10.4 | | | | | | | | | | | Quarterly Report on Form10-Q filed on May 7, 2015, Exhibit 10.1 | | | | | | | Item 15. | | | | | Annual Report on Form10-K filed on November 17, 2017, Exhibit 10.12 | | | | | | | | | | | | | 116Form8-K filed on February 24, 2016, Exhibit 10.1Form8-K filed on May 20, 2019, Exhibit 10.2 |
Unless otherwise indicated, references to "we," "us," "our," "Company," or "TD Ameritrade" mean TD Ameritrade Holding Corporation and its subsidiaries, and references to "fiscal" mean the Company's fiscal year ended September 30. References to the "parent company" mean TD Ameritrade Holding Corporation.
PART I
Item 1. Business
Organization
The Company was established as a local investment banking firm in 1971 and began operations as a retail discount securities brokerage firm in 1975. The parent company is a Delaware corporation.
Operations
We are a leading provider of securities brokerage services and related technology-based financial services to retail clients and independent registered investment advisors ("RIAs"). We provide our services to individual retail investors and traders and to RIAs predominantly through the Internet, a national branch network and relationships with RIAs. We use our platform to offer brokerage services to retail investors and traders under a simple, low cost structure and brokerage custodial services to RIAs.
We have beenorganized the remainder of this report as follows: | 1. | Role of the Compensation Committee and Board in setting executive compensation |
| 2. | Role of compensation consultants and management in our process |
| 3. | Guiding principles for senior executive compensation policies and decisions |
| 4. | Peer group of companies used to inform compensation decisions |
| 5. | Elements of compensation, how each is determined and how each fits into the Company’s compensation objectives |
| 7. | Risk assessment of compensation programs |
| 8. | Stock ownership guidelines and anti-hedging and anti-pledging policy |
| 9. | Change in control and severance provisions |
| 10. | Certain tax treatment of senior executive compensation |
| 11. | Description of certain compensation-related actions taken since the end of fiscal year 2019. |
1. Role of the Compensation Committee and Board The Compensation Committee is composed ofnon-employee directors of the board. No member of the Compensation Committee during fiscal year 2019 was an innovator in electronic brokerage services since enteringemployee of the retail securities brokerage business in 1975. We believe that we wereCompany or any of its subsidiaries at the first brokerage firm to offer the following products and services to retail clients: touch-tone trading; trading over the Internet; mobile trading; unlimited, streaming, free real-time quotes; extended trading hours; direct access to market destinations; commitmenttime of his service on the speed of order execution and trading of select securities 24 hours a day, five days a week. Over the years the number of brokerage accounts, RIA relationships, average daily trading volume and total assets in client accounts have substantially increased. We have also built, and continue to invest in, a proprietary trade processing platform that is both cost-efficient and highly scalable, significantly lowering our operating costs per trade. In addition, we have made significant investments in building the TD Ameritrade brand. Strategy
We intend to capitalize on the growth and consolidationCompensation Committee. Each member of the retail brokerage industry in the United States and leverage our low-cost infrastructureCompensation Committee during fiscal year 2019 was intended to grow our market share and profitability. Our long-term growth objective is to increase our market share of total assets in client accounts, while maintainingqualify as a leadership position in client trading, by providing a best-in-class client experience. We strive to enhance the client experience by providing asset management products and services, enhanced trading tools and capabilities and a superior, proprietary, single-platform system to support RIAs. The key elements of our strategy are as follows:“non-employee | | • | Focus on brokerage services. We continue to focus on attracting retail investors and traders and RIAs to our brokerage services. This focused strategy is designed to enable us to maintain our low operating cost structure while offering our clients outstanding products and services. We primarily route orders for execution of client trades on an agency, rather than on a principal, basis, although we maintain an inventory of fixed income securities to meet client demand.
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| | • | Provide a comprehensive investor solution. We continue to expand our suite of diversified investment products and services to best serve investors' needs. We help clients make investment decisions by providing investment tools, guidance, education and objective third-party research.
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| | • | Continue to be a leader in the RIA industry. We provide RIAs with comprehensive brokerage and custody services supported by our robust integrated technology platform, customized personal service and practice management solutions.
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| | • | Leverage our infrastructure to add incremental revenue. Through our proprietary technology, we deliver a robust online experience for retail investors and traders, providing speed, reliability and quality trade execution services. The scalable capacity of our trading system allows us to process a significant number of additional transactions while incurring minimal additional fixed costs.
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| | • | Continue to be a low-cost provider of quality services. We achieve low operating costs per trade by creating economies of scale, utilizing our proprietary transaction-processing systems, continuing to automate processes and locating much of our operations in low-cost areas. This low fixed-cost infrastructure gives us significant financial flexibility. In addition, our bank deposit account arrangements with The Toronto-Dominion Bank ("TD") and other third-party financial institutions enable our clients to invest in an FDIC-insured deposit product without the need for us to establish the significant levels of capital that would be required to maintain our own bank charter.
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| | • | Continue to differentiate our offerings through innovative technologies and service enhancements. We have been an innovator in our industry for over 40 years. We continually strive to provide our clients with the ability to customize their investing and trading experience with our suite of products and services and ongoing new initiatives. We provide our clients greater choice by offering features and functionality to meet their specific needs.
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| | • | Leverage the TD Ameritrade brand. We believe that we have a superior brand identity and that our advertising has established TD Ameritrade as a leading brand in the retail brokerage market.
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| | • | Continue to evaluate opportunities for growth through acquisitions. When evaluating potential acquisitions, we look for transactions that will give us operational leverage, technological leverage, increased market share or other strategic opportunities.
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Products and Services
We are committed to providing and enhancing a best-in-class client experience. Our products and services include:
| | • | Common and preferred stock. Clients can purchase common and preferred stocks, American Depository Receipts and closed-end funds traded on any United States exchange or quotation system.
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| | • | Exchange-Traded Funds ("ETFs"). Our ETF Market Center offers our clients more than 2,300 ETFs from leading providers, providing exposure to many asset classes and diverse investment strategies.
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| | • | Mutual funds. Clients can compare and select from a portfolio of over 13,000 mutual funds from leading fund families, including a broad range of no-transaction-fee funds. Clients can also easily exchange funds within the same mutual fund family.
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| | • | Options. We offer a full range of option trades, including complex and multi-leg option strategies.
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| | • | Futures. We offer futures trades, as well as options on futures, in a wide variety of commodities, stock indices and currencies.
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| | • | Foreign exchange. We offer access to trading in over 75 different currency pairs.
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| | • | Fixed income. We offer our clients access to a variety of Treasury, corporate, government agency and municipal bonds, as well as certificates of deposit.
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| | • | Annuities. We offer access to competitively priced fixed and variable annuities provided by highly-rated insurance carriers.
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| | • | Education. We offer our clients a suite of free education for beginner, intermediate and advanced investors that is designed to teach investors how to approach the selection process for investment securities and actively manage their investment portfolios.
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| | • | New and secondary issue securities. We offer primary and secondary offerings of fixed income securities, closed-end funds, common stock and preferred stock.
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| | • | Margin lending. We extend credit to clients who maintain margin accounts. Portfolio margin, which bases margin requirements on the net exposure of all positions in an account rather than just on individual positions, is also available for certain qualifying accounts with net liquidating values of at least $125,000.
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| | • | Cash management services. Through third-party banking relationships, we offer FDIC-insured deposit accounts and money market mutual funds to our clients as cash sweep alternatives. Through these relationships, we also offer free standard checking, free online bill pay and ATM services with unlimited ATM fee reimbursements at any machine nationwide.
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| | • | U.S. Market access in Asia. We offer clients in Singapore and Hong Kong access to U.S. markets and the ability to trade stocks, ETFs, options, futures and options on futures.
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We provide our clients with an array of channels to access our products and services. These include the Internet, our network of retail branches, mobile trading applications, chatbot, interactive voice response and registered representatives via telephone.
Prior to October 3, 2019, we earned commissions and transaction fees on client trades in common and preferred stock, certain ETFs, exchange-traded notes, closed-end funds, options, futures, foreign exchange, mutual funds, fixed income securities and annuities. Effective October 3, 2019, we introduced: (1) $0 commissions on online exchange-listed stock, ETF (domestic and Canadian) and option trades and (2) a fee of $0.65 per contract on listed stock and ETF option trades with no additional exercise and assignment fees. Order routing revenue generated from payments and/or rebates received from market centers is a component of commissions and transaction fees. Margin lending, securities borrowed and loaned transactions and client cash generate net interest revenue. Cash management services generate bank deposit account fees. Fees earned from mutual funds, investment program fees and referrals generate investment product fee revenues. Other revenues include proxy income, solicit and tender fees and other fees charged for ancillary services provided to clients. The following table presents the percentage of net revenues contributed by each class of similar services during the last three fiscal years:
| | | | | | | | | | | | | | Percentage of Net Revenues Fiscal Year Ended September 30, | | Class of Service | | 2019 | | 2018 | | 2017 | | Commissions and transaction fees | | 33.3 | % | | 36.1 | % | | 37.6 | % | | Bank deposit account fees | | 28.5 | % | | 28.3 | % | | 30.1 | % | | Net interest revenue | | 25.5 | % | | 23.3 | % | | 18.8 | % | | Investment product fees | | 9.7 | % | | 10.2 | % | | 11.5 | % | | Other revenues | | 3.0 | % | | 2.1 | % | | 2.0 | % | | Net revenues | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Client Service and Support
We strive to provide the best client service in the industry, as measured by speed of response time to telephone calls, turnaround time responding to client inquiries and client satisfaction with the account relationship. We are committed to delivering a meaningful investing experience to our diverse client base.
We endeavor to optimize our client service by:
assuring prompt response to client service calls through adequate staffing with properly trained and motivated personnel in our client service departments, a majority of whom hold the Financial Industry Regulatory Authority ("FINRA") Series 7 license; tailoring client service to the particular expectations of clients; and expanding our use of technology to provide automated responses to the most typical inquiries generated in the course of clients' trading, investing and related activities.
We provide client service and support through the following means:
| | • | Websites. Our websites provide information on how to use our services, a variety of self-service capabilities and an in-depth education center that includes a selection of online investing courses. Clients also have access to a virtual agent, enabling them to ask questions about our products, tools and services, as well as access to live agents through chat capabilities.
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| | • | Branches. We offer a nationwide network of retail branch offices, with more than 275 retail branches located in 47 states and the District of Columbia.
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| | • | Email. Our operating standards require a response within 24 hours of receipt of the email, but we strive to respond within four hours after receiving the original message.
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| | • | Telephone. We provide a toll-free number that connects to advanced call handling systems, which provide automated processing of calls. Our systems also allow linkage between caller identification and the client
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database to give the client service representative immediate access to the client's account data when the call is received. Client service representatives are available 24 hours a day, seven days a week.
| | • | Mobile app. Support on the TD Ameritrade Mobile Trader App allows clients to text with a trading specialist for immediate answers to questions or share their screens for help.
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| | • | TTY services for the hearing impaired. We provide sign language and oral interpreters and/or other auxiliary aids and services free of charge for the hearing impaired.
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Technology and Information Systems
Our technological capabilities and systems are central to our business and are critical to our goal of providing the best execution at the best value for our clients. Our operations require reliable, scalable systems that can handle complex financial transactions for our clients with speed and accuracy. We maintain sophisticated and proprietary technology that automates securities transactions. Our ability to effectively leverage and adopt new technology to improve our services is a key component of our success.
We continue to make investments in technology and information systems. We have spent a significant amount of resources to increase capacity and improve speed, reliability and security. To provide for system continuity during potential power outages, we have equipped our data centers with uninterruptible power supply units and back-up generators. We invest annually in our cybersecurity capabilities and utilize the industry standard, National Institute of Standards and Technology framework, as well as leading risk mitigation approaches to benchmark ourselves and to continually enhance client and systems protection.
Advertising and Marketing
We intend to continue to grow and increase our market share by advertising online, on television, in print, on our own websites and utilizing various forms of social media. We invest heavily in advertising programs designed to bring greater brand recognition to our services, and we intend to continue to aggressively advertise. From time to time, we may choose to increase our advertising to targeted groups of investors or increase or decrease our advertising in response to market conditions.
Advertising for retail clients is generally conducted through digital, search and social media, financial news networks and other television and cable networks. We also place print advertisements in a broad range of business publications. Advertising for institutional clients is significantly less than for retail clients and is generally conducted through highly-targeted media.
To monitor the success of our various marketing efforts, we utilize a media mix model that uses robust data to analyze the return on investment of our marketing expenses. This model also supports decisions on spending levels and helps us determine the point at which we begin to experience diminishing returns. Additionally, our advanced data and analytics capabilities enable a more targeted, personalized experience for prospective and existing clients. How we share client information is disclosed in our privacy statement.
All of our securities brokerage-related communications with the public are regulated by FINRA. All of our futures and foreign exchange brokerage-related communications with the public are regulated by the National Futures Association ("NFA").
Clearing Operations
Our subsidiary, TD Ameritrade Clearing, Inc. ("TDAC"), provides clearing and execution services for our securities brokerage business. Clearing services include the confirmation, receipt, settlement, delivery and record-keeping functions involved in processing securities transactions. TDAC:
maintains client accounts;
extends credit in margin accounts to clients;
engages in securities lending and borrowing;
settles securities transactions with clearinghouses such as The Depository Trust & Clearing Corporation ("DTCC") and The Options Clearing Corporation ("OCC");
settles commissions and transaction fees;
prepares client trade confirmations and statements;
performs designated cashiering functions (including delivery and receipt of funds and securities to and from clients);
possesses, controls and safeguards funds and securities in client accounts;
processes cash sweep transactions to and from bank deposit accounts and money market mutual funds;
transmits tax accounting information to clients and to the applicable tax authorities; and
forwards prospectuses, proxy materials and other shareholder information to clients.
We contract with external providers for futures clearing. We also contract with an external provider to facilitate foreign exchange trading for our clients.
Competition
We believe that the principal determinants of success in the retail brokerage market are brand recognition, size of client base and client assets, ability to attract new clients and client assets, client trading activity, efficiency of operations, technology infrastructure and advancements and access to financial resources. We also believe that the principal factors considered by clients in choosing a brokerage firm are reputation, client service quality, price, convenience, product offerings, quality of trade execution, platform capabilities, innovation and overall value. Based on our experience, focus group research and the success we have enjoyed to date, we believe that we presently compete successfully in each of these categories.
The market for brokerage services, particularly electronic brokerage services, continues to evolve and is highly competitive. We experience significant competition and expect this competitive environment to continue. We encounter direct competition from numerous other brokerage firms, many of which provide online brokerage services. These competitors include E*TRADE Financial Corporation, The Charles Schwab Corporation and Fidelity Investments. We also encounter competition from the broker-dealer affiliates of established full-commission brokerage firms, such as Merrill Lynch and Morgan Stanley, as well as from banks, mutual fund sponsors, online wealth management services (including so-called "robo-advisors") and other financial institutions and organizations, some of which provide online brokerage services.
Regulation
The securities, futures and foreign exchange industries are subject to extensive regulationdirector” under federal and state law. Our broker-dealers, TD Ameritrade, Inc. and TDAC, are required to register with the U.S. Securities and Exchange Commission ("SEC") and to be members of FINRA and the Municipal Securities Rulemaking Board ("MSRB"). Our futures commission merchant ("FCM") and forex dealer member ("FDM") subsidiary, TD Ameritrade Futures & Forex LLC ("TDAFF"), is registered with the Commodity Futures Trading Commission ("CFTC") and is a member of, and the corresponding services functions are regulated by, the NFA. Our broker-dealer subsidiaries are subject to the requirements ofrule16b-3 under the Securities Exchange Act of 1934 (the "Exchange Act"“1934 Act”) relatingand as an “outside director” under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”).The Compensation Committee reviews, assesses and approves all compensation and benefits for executive officers and, in consultation with the Risk Committee, reviews compensation-related risks. The board of directors evaluates the performance of the CEO and reviews and provides input on the Compensation Committee’s compensation recommendation. The Compensation Committee then approves the CEO’s compensation. The CEO and the Compensation Committee together assess the performance of each of the other NEOs and then the Compensation Committee approves final recommendations from the CEO. 2. Role of Compensation Consultants and Management Beginning in May 2018, the Compensation Committee retained Semler Brossy as its independent compensation consultant to broker-dealers, including,assist the Compensation Committee in its oversight of the design and operation of the Company’s executive compensation programs. During fiscal year 2018 as well as fiscal year 2019, Semler Brossy advised the Compensation Committee on best practices for executive compensation and governance, among other things, minimum net capital requirements underactivities. Semler Brossy worked directly with the SEC Uniform Net Capital Rule (Rule 15c3-1), best execution requirementsCompensation Committee (and not on behalf of management) to assist the Compensation Committee in satisfying its responsibilities. Semler Brossy performed no other consulting or other services for client trades under SEC guidelinesthe Company. The Compensation Committee also requests the attendance at its meetings of any members of management that it deems appropriate or advisable. Typically, and FINRA rulesfor fiscal year 2019, the Compensation Committee received input from the CEO to assess the individual performance of the NEOs other than the CEO and segregationregarding plan design and objective setting. The Compensation Committee has delegated to our CEO the authority to increase the compensation of, client funds underand grant equity awards to, any employee participating in the SEC Customer Protection Rule (Rule 15c3-3), administeredMIP, except for executive officers and any other employees whose total target compensation equals or exceeds $1 million per year, subject in each case to any increase or grant being (1) within the budget previously approved by the SECCompensation Committee, and FINRA. TDAFF(2) in accordance with the terms of the applicable compensation plan. The objective of the executive compensation plans is subject to regulations underattract, retain and motivate high-performing executives to create sustainable long-term value for stockholders. To achieve this objective, the Commodity Exchange Act, administered byCompany and the CFTCCompensation Committee used the following guiding principles when evaluating executive compensation policies and NFA, including CFTC Regulations 1.17 and 5.7, which requiredecisions: Alignment with the maintenance of minimum adjusted net capital, and CFTC Regulation 1.20, which requires segregation of client funds.Company’s Business Strategy Net capital rules are designed to protect clients, counterparties and creditors by requiring a broker-dealer, an FCM or an FDM to have sufficient liquid resources available to satisfy its financial obligations. Net capitalExecutive compensation is a measure of a broker-dealer's, an FCM's or an FDM's readily available liquid assets, reduced by its total liabilities other than approved subordinated debt. Under the SEC Uniform Net Capital Rule, a broker-dealer may not repay any subordinated borrowings, pay cash dividends or make any unsecured advances or loans to its parent company or employees if such payment would result in a net capital amount below required levels. A broker-dealer is required to provide noticelinked to the SECachievement of specific short- and FINRA if its net capital is below certain required levels. Likewise,long-term strategic business objectives and the Company’s overall performance.
Compensation plans are linked to key business drivers that support long-term stockholder value creation. Alignment with Stockholders’ Interests The interests of executives are appropriately aligned with those of stockholders over the long-term through policy and plan design. Stock ownership guidelines are used to more closely align the interests of executives with those of stockholders over the long term. As an FCM and
an FDM, such as TDAFF, must provide noticetotal compensation consists of equity-based awards to more closely align the CFTC if its adjusted net capital amounts are below required levels.
Certaininterests of the executive with those of our subsidiaries are also registered as investment advisors under the Investment Advisers Act of 1940. We are also subjectstockholders, to regulationaid in all 50 states, the District of Columbiaretention and Puerto Rico, including registration requirements. TD Ameritrade Trust Company is chartered in the state of Maine as a state-regulated non-depository trust company. TD Ameritrade Singapore Pte. Ltd. is licensed by the Monetary Authority of Singapore and TD Ameritrade Hong Kong Ltd. is licensed by the Securities and Futures Commission of Hong Kong.to focus executives on sustainable long-term performance.
In its capacity as a securities clearing firm, TDAC is a member of the DTCC and the OCC, each of which is registered as a clearing agency with the SEC. As a member of these clearing agencies, TDAC is required to comply with the rules of such clearing agencies, including rules relating to possession or control of client funds and securities, margin lending and execution and settlement of transactions.
Margin lending activities are subject to limitations imposed by regulations of the Federal Reserve System and FINRA. In general, these regulations provide that, in the event of a significant decline in the value of securities collateralizing a margin account, we are required to obtain additional collateral from the borrower or liquidate security positions.
Because TD owns more than 25% of our common stock, we are considered a non-bank subsidiary of TD under the Bank Holding Company Act of 1956 (the "BHC Act"). As a result, we are subject to the supervision and regulation of the Federal Reserve. These banking regulations limit the activities and the types of businesses that we may conduct and the types of companies we may acquire. Under these regulations, the Federal Reserve could impose significant limitations on our current business and operations. TD is currently regulated as a "financial holding company" under the BHC Act, which allows TD and us to engage in a much broader set of activities than would otherwise be permitted under the BHC Act.
We are subject to a number of state, federal and foreign laws applicable to companies conducting business on the Internet that address client privacy, system security and safeguarding practices and the use of client information.
For additional, important information relating to government regulation, please review the information set forth under the heading "Risk Factors Relating to the Regulatory and Legislative Environment" in Item 1A — Risk Factors.
Our business activities expose usCompensation plan design should not create an incentive for excessive risk-taking and each plan is reviewed on at least an annual basis to various risks. Identifying and measuring our risksdetermine that it is criticaloperating as intended. Incentive compensation is subject to our ability to manage risk within acceptable tolerance levels in order to minimize the effect on our business, results of operations and financial condition. Our management team is responsible for managing risk. It is overseen by our board of directors, primarily through the board's Risk Committee. We use risk management processes and have policies and procedures for identifying, measuring and managing risks, including establishing threshold levels for our most significant risks. Our risk management, compliance, internal audit, and legal departments assist in identifying and managing risks. Our management team's Enterprise Risk Committee ("ERC") is responsible for reviewing risk exposures and risk mitigation. Subcommittees of the ERC have been established to assist in identifying and managing specific areas of risk.
Our business exposes us to the following broad categories of risk:
Operational Risk — Operational risk is the risk of loss resulting from inadequate or failed internal processes or controls, human error or misconduct, systems and technology problems or from external events. It also involves compliance with regulatory and legal requirements. Operational risk is the most prevalent form of riskforfeiture in our risk profile. We manage operational risk by establishing policies and procedures to accomplish timely and efficient processing, obtaining periodic internal control attestations from management and conducting internal audit reviews to evaluate the effectiveness of internal controls.
Cybersecurity Risk— Cybersecurity risk is the risk of a malicious technological attack intended to impact the confidentiality, availability, or integrity of our systems and data, including, but not limited to, sensitive client data. Our technology and security teams rely on a layered system of preventive and detective technologies, practices, and
policies to detect, mitigate, and neutralize cybersecurity threats. In addition to the ERC, our management team's Security Executive Oversight Committee regularly assesses our cybersecurity risks and mitigation efforts. Cyber attacks can also result in financial and reputational risk.
Market Risk — Market risk is the risk of loss resulting from adverse movements in market factors, such as asset prices, foreign exchange rates and interest rates. Our market risk related to asset prices is mitigated by us routing client trades for execution, primarily on an agency rather than on a principal basis, and our maintenance of fixed-income securities to meet client requirements. Interest rate risk is our most prevalent form of market risk. For more information about our interest rate risk and how we manage it, see Item 7A — Quantitative and Qualitative Disclosures About Market Risk.
Credit Risk — Credit risk is the risk of loss resulting from failure of obligors to honor their payment obligations. Our exposure to credit risk mainly arises from client margin lending and leverage activities, securities lending activities and other counterparty credit risks. For more information about our credit risk and how we manage it, see Item 7A – Quantitative and Qualitative Disclosures About Market Risk.
Liquidity Risk — Liquidity risk is the risk of loss resulting from the inability to meet current and future cash flow needs. We actively monitor our liquidity position at the holding company and at the broker-dealer and FCM/FDM subsidiary levels. For more information, see Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.
Strategic Risk — Strategic risk is the risk of loss arising from ineffective business strategies, improper implementation of business strategies, or lack of responsiveness to changes in the business and competitive environment. Our executive management is responsible for establishing an appropriate corporate strategy intended to create value for stockholders, clients and employees, with oversight by our board of directors. Our management is responsible for defining the priorities, initiatives and resources necessary to execute the strategic plan, the success of which is regularly evaluated by the board of directors.
Reputational Risk — Reputational risk is the risk arising from possible negative perceptions, whether true or not, of the Company among our clients, counterparties, stockholders, suppliers, employees and regulators. The potential for either enhancing or damaging our reputation is inherent in almost all aspects of business activity. We manage this risk through our commitment to a set of core values that emphasize and reward high standards of ethical behavior, maintaining a culture of compliance and by being responsive to client and regulatory requirements.
Risk is inherent in our business, and therefore, despite our efforts to manage risk, there can be no assurance that we will not sustain unexpected losses. For a discussion of the factors that could materially affect our business, financial condition or future results of operations, see Item 1A — Risk Factors.
Intellectual Property Rights
Our success and ability to compete are significantly dependent on our intellectual property. We rely on copyright, trade secret, trademark, domain name, patent and contract laws to protect our intellectual property and have utilized the various methods available to us, including filing applications for patents and trademark registrationsaccordance with the United States Patentclawback policy.
Clear relationships should exist between executive compensation and Trademark Officeperformance. Compensation should reward both corporate and entering into written licensesindividual performance. Total compensation includes a meaningful variable component that is linked to key business objectives and other technology agreements with third parties. Our patented and patent pending technologies include stock indexing and investor education technologies, as well as innovative trading and analysis tools. Our trademarks include both our primary brand, TD Ameritrade (including the "TD" name through a trademark license agreement with TD), as well as brands for other products and services. Company’s overall performance. A substantial portion of variable compensation is awarded in the form of equity-based awards. Equity awards are generally granted based on the achievement of annual performance goals and are subject to service-based or service and performance-based vesting. The Compensation Committee has the ability to exercise negative discretion to reduce incentive compensation. Competitive data on market compensation, adjusted to reflect scope of responsibility or other factors specific to the executive, is considered when establishing compensation targets. The Company operates in the highly competitive financial services sector, with a leadership position in retail securities brokerage services. The overall compensation program is designed to closely align the interests of executives with those of our intellectual property is protectedstockholders and be competitive with the compensation practices of financial services companies with characteristics similar to the Company.
The Committee references a peer group of similar companies when reviewing executive compensation. The peer group in effect in fiscal year 2018 consisted of the following: Fiscal Year 2018 Peer Group | | | | | | | | | | Ameriprise Financial, Inc. | | | | | | | | | | Broadridge Financial Solutions, Inc. | | | | | | | | | | Charles Schwab Corporation | | Intercontinental Exchange, Inc. | | Raymond James Financial, Inc. | | | | | | | | | | T. Rowe Price Group, Inc. | | | | | | | | | | | | | | | | E*TRADE Financial Corporation | | LPL Financial Holdings Inc. | | |
For fiscal year 2019, the Committee requested that Semler Brossy conduct an independent review of the peer group. The criteria for reviewing and determining the companies comprising the peer group for fiscal year 2019 were industry, market capitalization, revenue, geography, organizational complexity and competition for talent. Based on this review, SEI Investments and Stifel Financial Corporation were added to the peer group and Comerica Incorporated and Fifth Third Bancorp were removed, effective November 2018. The Compensation Committee agreed with Semler Brossy’s assessment that the two companies that were removed, as regional banks, were not as well-aligned with the Company’s businesses; the two additions were chosen for having relatively stronger business alignment with the Company. As part of its review, Semler Brossy also presented to the Compensation Committee the lists of companies comprising peer groups identified by trade secrets.proxy advisors with respect to the Company and public companies that include the Company in their peer groups. The source code and object codepeer group was updated as part of the process for considering the fiscal year 2019 executive compensation program. The peer group for fiscal year 2019 consisted of the following: Fiscal Year 2019 Peer Group | | | | | | | | | | Ameriprise Financial, Inc. | | Intercontinental Exchange, Inc. | | Raymond James Financial, Inc. | | | | | | Broadridge Financial Solutions, Inc. | | | | | | | | | | Charles Schwab Corporation | | | | Stifel Financial Corporation | | | | | | | | LPL Financial Holdings Inc. | | T. Rowe Price Group, Inc. | | | | | | E*TRADE Financial Corporation | | | | | | | | | | | | | | |
With input from Semler Brossy, the Committee reviewed peer group composition again for fiscal year 2020; no changes were made to the group above. 5. Elements of Compensation Target Total Compensation Target total annual compensation for our proprietary softwareNEOs consists of: (1) base salary and (2) incentive compensation awarded under the MIP, which is comprised of cash and equity. Each of these elements of compensation, as well as the compensation package as a whole, is intended to enable the Company to remain competitive in attracting and retaining talented individuals. While base salaries are also protectedprovided to reward executives on aday-to-day basis for their time and services, the incentive compensation links the executives’ compensation to the achievement of the Company’s business strategy and stockholders’ interests. For fiscal year 2019 compensation, these target total compensation levels were developed using applicable methodsmarket data from our peer group and other financial services compensation data obtained from human resources consulting firms, such as McLagan and Willis Towers Watson. The market data considered as part of intellectual property protectionthe competitive review reflect executive responsibilities that were similar to the responsibilities of our executive officers, where available. While the Compensation Committee did not target a specific percentile or otherwise benchmark any key elements of the NEOs’ compensation to the market data, it did review a range of market data and general protections affordedgenerally compared compensation to confidential information. the market median.
During late fiscal year 2018, Semler Brossy reviewed the market compensation information prepared by management and confirmed the market data as an appropriate point of reference in setting target total compensation for fiscal year 2019. A significant portion of each executive’s target total compensation is performance-based or “at risk.” The “at risk” portion includes the annual cash incentive and the annual equity incentive, which are awarded on the basis of performance during the year. If the Company’s or individual’s performance is below target, “at risk” compensation may decrease. Conversely, if the Company’s or individual’s performance is above target, “at risk” compensation may increase. The equity incentive compensation target is established so that a meaningful portion of total compensation is awarded as equity that vests subject to continued service or service and performance-based conditions. The target mix between cash and equity is based on target total compensation level, with the portion that is awarded as equity generally increasing as target total compensation increases. This practice, combined with stock ownership guidelines, promotes retention and focuses executives on executing business strategies, sustaining performance and growing value for stockholders over the long term. Each NEO had target total annual compensation for fiscal year 2019 as follows: Fiscal Year 2019 Target Total Annual Compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Target Total
Annual
Compensation
($) | | | Performance-based Portion of Target | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | % |
| (1) | Mr. Hockey’s target total incentive compensation for fiscal year 2019 was increased from $6.5 million to $7.5 million, which continued to consist of 30% cash and 70% equity. |
| (2) | Mr. Boyle’s base salary was increased from $450,000 to $500,000, and his target total incentive compensation was increased from $1.75 million to $2 million, which continued to consist of 50% cash and 50% equity. |
| (3) | Mr. deSilva’s target total incentive compensation was increased from $2 million to $2.15 million, which continued to consist of 50% cash and 50% equity. |
| (4) | Mr. Nally’s base salary was increased from $500,000 to $650,000. |
| (5) | Mr. Quirk’s base salary was increased from $450,000 to $500,000, and his target total incentive compensation was increased from $1.55 million to $2.1 million, which continued to consist of 50% cash and 50% equity. |
The increases in target compensation for fiscal year 2019 were determined by the Compensation Committee after considering a number of factors. Specifically, for each individual the Compensation Committee reviewed the market data for the role, the individual’s performance and potential shifts in the role’s scope and responsibilities. Adjustments were generally intended to more closely align target compensation levels with market pay for comparable positions. Consistent with the Company’s overall compensation principles, a large percentage of the total compensation package is awarded only after performance objectives set by the Compensation Committee have been met. In addition, the performance-based portion of target total annual compensation is divided between the cash incentive and the equity incentive. A greater proportion of the incentive is delivered in equity for more senior executives. For our CEO, 30% of his total incentive is paid in cash and 70% is paid in equity. For our other NEOs, 50% of their incentive is paid in cash and 50% is paid in equity. Any equity awards that are granted are scheduled to vest subject to continued service or service and performance-based conditions. Annual Incentive Award under the MIP Our MIP, reviewed and approved by the Compensation Committee, supports our pay for performance philosophy, with the objective of driving the business strategy for which each executive is most responsible and which is critical for sustaining the long-term growth of the Company.
Through the equity component of the plan, detailed below, we promote closer alignment of each executive’s interests to the long-term growth of the Company. Based onpre-established targets for non-GAAP earnings per share (“EPS”), revenue and market share, client experience, and other strategic themes, the Compensation Committee believes that the design provides for a balanced assessment of short- and long-term performance.
In fiscal year 2018, the Compensation Committee requested that management and Semler Brossy conduct a review of the existing incentive program design for fiscal 2019. As a result of that review, the Compensation Committee approved several updates to the metrics and weighting for the annual incentives to more fully align compensation with the Company’s strategic objectives. The fiscal year 2019 incentive funding formula emphasized key short-term, quantitative results and further supported the delivery of a superior client experience. The Compensation Committee intended the new design to emphasize critical drivers of the Company’s longer-term strategic and financial success (client experience and other strategic themes) and measures of the Company’s short-term operational success(non-GAAP EPS, revenue and market share). The incentive funding formula the Compensation Committee approved for the MIP for fiscal year 2019 is illustrated in the following diagram. Specifically, the following changes were made to the metrics for the fiscal year 2019 program: The individual performance component was shifted from a modifier to a discrete metric, weighted 20% for the CEO and 30% for all other NEOs; the remaining portion of the MIP is based on achievement of corporate metrics and objectives, which was based 40% onnon-GAAP EPS, 25% on client experience, 20% on revenue and market share metrics, and 15% on other strategic themes. The weighting ofnon-GAAP EPS as a key metric of short-term earning was reduced overall, though it remains the largest component of corporate objectives. Client experience and absolute revenue were added to the corporate objectives as discrete metrics. Net new assets (or NNA), which is our policyincluded as a metric under revenue and market share, is now measured on the basis of market share, rather than on absolute results, as had been the case in prior years. Qualitative strategic themes were also shifted from a modifier to entera discrete metric to reinforce the importance of strategic themes to long-term strategy. Strategic themes for fiscal year 2019 include goals around organizational agility and efficiency, associate experience, and increased competitiveness through innovation. Though the metrics and weightings have been updated, the incentive program maintains the same fundamental principles and overall structure as prior years. These metrics were all intended to incentivize management to drive Company performance in closer alignment with long-term stockholder interests. As with fiscal year 2018, the incentive program for fiscal year 2019 reserved for the Compensation Committee its right to reduce the payout percentage initially determined by the achievement of the corporate performance goals. In addition, the program retained the Compensation Committee’s ability to exercise further negative discretion to reduce or eliminate incentive payments to executives.
Fiscal Year 2019 MIP Incentive Funding Formula At the end of fiscal 2019, the Committee reviewed management’s progress on each of the four corporate performance metrics(non-GAAP EPS, revenue and market share, client experience and other strategic themes). The Committee evaluated the Company’s performance against rigorous,pre-established financial targets and qualitative objectives, as applicable for each metric. It then approved the table below, resulting in a corporate funding percentage of 107.1% of target. The performance goals and corresponding funding percentages for each of these measures are summarized below: | Fiscal Year 2019 Management Incentive Plan; Corporate Performance Percentage |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | $ | | | | | | % | | | | % | | | | | % | | | | | | | | | | | | | | % | | | | % | • Absolute Revenue ($b) (1) | | | | % | | | | | | | | $ | | | | | | % | | | | % | | | | | % | | | | | | | | | | % | | | | % | | | | % | | | | | % | | | | | | | | | | % | | | | % | | | | % | • NNA Share - Institutional | | | | % | | | | | | | | | | % | | | | % | | | | % | | | | | % | | | | | | | | | | | | | | % | | | | % | | | | | % | | | | | | | | | | % | | | | % | | | | % | | | | | % | | | | | | | | | | | | | | % | | | | % | | | | | % | | | | | | | | | | | | | | % | | | | % | | | | | % | | | | | | | | | | | | | | % | | | | % | | | | | % | | | | | | | | | | | | | | % | | | | % | | | | | % | | | | | | | | | | | | | | % | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | +/- 20% Committee Discretion | | | | % | | | | | | | | | | | % | | | | | | |
| (1) | The Company’s non-GAAP diluted EPS, an important measure of our financial performance, weighted at 40% of the corporate performance metrics under the MIP, was adjusted downward by the Compensation Committee to $4.08 (from $4.13) to account for items that were not reflective of operational performance such as unplanned accounting policy adjustments and interest rates changes. Similarly, revenue was adjusted from $6.016b to $5.928b. The Compensation Committee determined it was appropriate to make a downward adjustment to better reflect the results delivered to stockholders and preserve the intent of thepre-established performance goals, which were set before the occurrence of these unplanned events. |
| (2) | Total funding capped at 150%. In addition, the Compensation Committee reserves the right to reduce total to 0%. |
| (3) | Below threshold performance results in 0% payout. |
After the performance goals are measured, the Compensation Committee may use negative discretion to reduce the payout. No negative discretion was used during fiscal year 2019, resulting in a final performance percentage of 107.1% for the corporate portion of the MIP. A portion of each executive officer’s final payout also is subject to an evaluation of individual performance against preset goals and objectives for the fiscal year: 20% for the CEO, and 30% for other NEOs. Final performance is determined by the Compensation Committee for the CEO, and by the Committee with input from the CEO for other NEOs. For Mr. Hockey, the transition agreement entered into confidentialitybetween the Company and intellectual property ownership agreementshim during fiscal year 2019 (discussed further below) in connection with our employeeshis transition from the CEO role, provided for his individual performance for fiscal year 2019 to be deemed satisfied in full at 100% target achievement. One of the key factors considered in determining the fiscal year 2019 achievement for each of the other NEOs was the demonstrated contributions toward the team effort critical for supporting a seamless and confidentialitysuccessful transition of the CEO. In recognition of these efforts during fiscal year 2019, the individual performance percentage for fiscal year 2019 for each NEO other than Mr. Hockey was determined to be 120%. The final payout percentage is capped at 150% of the NEO’s target annual incentive opportunity, and noncompetition agreementsexcept with our independent contractorsrespect to Mr. Hockey’s fiscal year 2019 annual incentive opportunity, as specified in his transition agreement, the Compensation Committee further retained the discretion to lower any
individual officer’s payout to zero for a given year. Following the completion of fiscal year 2019, the Compensation Committee determined the payout of annual incentive compensation as depicted in the chart below: Fiscal Year 2019 Management Incentive Plan Individual and business partnersFinal Performance Percentage | | | | | | | | | | | | | | | | | | | | | | | | Corporate
Performance
Weighting | | | Corporate
Achievement as a
Percent of Target | | | Individual
Component
Weighting | | | Individual
Achievement as a
Percent of Target | | | Total Payout
as a Percent of
Target | | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | % | | | | % | | | | % | | | | % |
Long-Term Incentive Awards under the MIP As described above under “Elements of Compensation,” apre-set portion of the annual incentive award earned under the MIP is granted in equity under the LTIP. Equity awards are used to motivate, reward and retain key executives and to control accessalign their interests more closely to those of stockholders. Equity awards are granted under the MIP to the extent that thepre-established performance measures under the MIP have been achieved. As described above under “Fiscal Year 2019 MIP Incentive Funding Formula,” equity incentives may be initially funded (i.e., granted) between 0% and distribution150% of target. For fiscal year 2019, the equity incentives were granted as restricted stock units (“RSUs”). These RSUs are scheduled to vest inone-third annual installments and were not subject to aTSR-related performance criteria. This approach varied from fiscal year 2018, whereby upon completion of the fiscal year 2018 incentive program, our NEOs were granted PRSUs that vest subject to a three-year cliff vesting period, and are further adjusted up or down by up to 20% based on the Company’s cumulative three-year TSR relative to the components of the NYSE Arca Securities Broker/Dealer Index (as determined at the time of grant). When the Compensation Committee approved the grants of PRSUs for fiscal year 2018, it believed that this equity incentive design further aligned the long-term interests of executives with those of our intellectual property.stockholders. For fiscal year 2019, the Compensation Committee’s decision to approve RSU grants included consideration of the proposed acquisition of the Company by Schwab. The Compensation Committee recognized that the anticipated acquisition timing presents significant challenges to the operation of a normative three-year performance period with an incentive outcome based largely on fundamental Company performance. Accordingly, the Compensation Committee eliminated the TSR goal for the fiscal year 2019 equity incentives. EmployeesIn addition to granting RSUs under the MIP for fiscal year 2019 performance, the Compensation Committee also granted discretionary,one-time RSU awards to Messrs. Nally and Quirk (as discussed further below under “Actions Since End of Fiscal Year 2019”). These RSU grants were awarded in order to further strengthen the retention incentives for these executive officers in consideration of the previously planned CEO transition. The RSUs are scheduled to vest over three years in equal, annual installments.RSU and PRSU awards are automatically increased by the number of units equivalent to the value of any cash dividends paid while the awards are outstanding (based on the target amount of the award). Dividend equivalent units (“DEUs”) are subject to the same vesting schedule as the underlying award. The vesting of these awards may accelerate upon certain events, as described under “Potential Payments Upon Termination or Change in Control” later in this section.
The following table sets forth total cash and equity compensation earned by our NEOs for fiscal year 2019 performance. Total Actual Cash and Equity Compensation | (1) | Mr. Boyle deferred 100% of this amount pursuant to the Company’s Executive Deferred Compensation Program. |
| (2) | These equity incentive awards were granted in fiscal year 2020. As a result, they are not included in the Summary Compensation Table or the Grants of Plan-based Awards and Outstanding Equity Awards at Fiscal Year-End tables later in this section. |
Scottrade Appreciation Right Award Prior to our acquisition of Scottrade, Mr. deSilva received from Scottrade a Scottrade Appreciation Right Award (“SAR award”), that provided for the potential to earn certain cash bonuses. During fiscal year 2019, Mr. deSilva’s SAR award paid out a total of $724,938, which consisted of amounts that became payable based on certain performance results in 2016 and 2017 and that vested in part in fiscal year 2019 based on continued employment. As of September 30, 2019, we had 9,226 full-time equivalent employees. Nonethe remaining unvested amounts under Mr. deSilva’s SAR award totaled $423,548. The unvested amount vested on December 31, 2019, due to Mr. deSilva’s continued employment with the Company through the vesting date, as described in further detail below under “Potential Payments Upon Termination or Change in Control.” Upon joining TD Ameritrade, Mr. deSilva no longer accrues future payments under his SAR award. Other Key Changes During Fiscal Year 2019 On July 22, 2019, Mr. Hockey and the board of directors agreed that Mr. Hockey would step down as president, CEO and as a member of the board, effective upon the earlier of February 29, 2020 (the “transition date”) or the date that his successor commences employment. In order to help ensure a smooth transition, the Company and Mr. Hockey entered into a transition agreement on July 22, 2019, modifying certain terms of Mr. Hockey’s employment agreement previously entered into between the Company and Mr. Hockey. Subsequent to the fiscal year end, on November 25, 2019, in connection with the Company’s entry into the merger agreement with Schwab, the Company announced the appointment of Mr. Boyle as the interim president and CEO. Mr. Hockey has transitioned to a role as senior advisor to the Company, which includes providing transition services as a special advisor to Mr. Boyle through the transition date. While Mr. Hockey remains employed during the transition period, he will continue to receive his base salary at the current rate of $1 million per year. Mr. Hockey will not participate in the MIP for fiscal 2020, as his employment will be terminating, pursuant to his transition agreement, before the fiscal year’s end. His compensation for fiscal 2020 is specified in his transition agreement, as described further below. The terms of Mr. Hockey’s transition agreement modifying his employment arrangements with the Company are provided in further detail below under “Potential Payments Upon Termination or Change in Control.” Certain key changes that have occurred after fiscal year 2019, including the transition of our employeesCEO, are described further below under “Actions Since End of Fiscal Year 2019.” We maintain a clawback policy that applies to certain incentive compensation provided to our NEOs, including compensation under the MIP and LTIP. The MIP permits the “clawback” of any cash incentive awards, and the Company’s equity agreements permit the clawback of awards granted pursuant to the MIP and LTIP if the Compensation Committee determines, within three years of the grant date of the award, that certain conduct has occurred. Generally, under the terms of the clawback policy, an executive who is covered byinvolved in fraud or willful misconduct that results in a collective bargaining agreement. We believerestatement of the Company’s financial statements or who commits an act of fraud, negligence or breach of fiduciary duty resulting in material loss, damage or injury to the Company can be required to: (1) forfeit and transfer to the Company, at no cost to the Company, any unvested equity awards and any shares of common stock issued in connection with vested equity awards and (2) repay to the Company any cash incentive awarded under the MIP or any gain realized from the disposition of any such shares of common stock awarded under the LTIP. The Compensation Committee, together with the Risk Committee, assessed the Company’s incentive compensation plans and concluded that our relations with our employees are good.
Websitescompensation plans and Social Media Disclosure
From time to time, the Company may use its website and/or Twitter as distribution channels of material information. The Company's Code of Business Conduct and Ethics, financial data and other important information regarding the Company is accessible through and posted on the Company's website at www.amtd.com and its Twitter account @TDAmeritradePR. We ask that interested parties visit or subscribe to newsfeeds at www.amtd.com/news-and-stories to automatically receive email alerts and other information, including the most up-to-date corporate financial information, presentation announcements, transcripts and archives. The website to access the Company's Twitter account is https://twitter.com/TDAmeritradePR. Website links provided in this report, although correct when published, may change in the future. We make available free of charge on our website at www.amtd.com/investor-relations/sec-filings our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, as soon as reasonably practicable after we electronically file such material with or furnish it to the SEC. Our SEC filings are also available on the SEC's website at http://www.sec.gov.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the following factors, which could materially affect our business, financial condition, future results of operations or stock price, and many of which we cannot control. Although the risks described below are those that we believe are the most significant, these are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currentlypractices do not deemcreate risks that are reasonably likely to be material also may materially affect our business, financial condition, future results of operations or stock price.
Risk Factors Relating to Our Business Operations
Economic, social and political conditions and other securities industry risks could adversely affect our business.
Substantially all of our revenues are derived from our securities brokerage business, which generates asset-based revenues and transaction-based revenues. Like other securities brokerage businesses, we are directly affected by economic, social and political conditions, broad trends in business and finance and changes in volume and price levels of securities transactions. Events in global financial markets in recent years resulted in substantial market volatility and increased client trading volume, but any sustained downturn in general economic conditions or U.S. equity markets could result in reduced client trading volume and order routing revenues. Severe market fluctuations or weak economic conditions could reduce our trading volume and net revenues and adversely affect our profitability.
Our exposure to interest rate risk could adversely affect our profitability.
As a fundamental part of our securities brokerage business, we invest in interest-earning assets and are obligated on interest-bearing liabilities. In addition, we earn fees on our FDIC-insured deposit account arrangements with TD Bank USA, N.A., TD Bank N.A. and with other third-party financial institutions, which are subject to interest rate risk. Continued uncertainty resulting from U.S. fiscal and political matters have impacted and may continue to impact the U.S. and global economies. The direction and level of interest rates are important factors in our profitability.
A falling interest rate environment generally results in our earning a smaller net interest spread. Conversely, a rising interest rate environment generally results in our earning a larger net interest spread.
Our most prevalent form of interest rate risk is referred to as "gap" risk. This risk occurs when the interest rates we earn on assets change at a different frequency or amount than the interest rates we pay on liabilities. For example, in a low (but rising) interest rate environment, sharp increases in short-term interest rates could result in net interest spread compression if the yield paid on interest-bearing client balances were to increase faster than our earnings on interest-earning assets. If we are unable to effectively manage our interest rate risk, changes in interest rates could have adverse effects on our profitability.
Inability to meet the funding needs of our securities brokerage operations for any reason would have a material adverse effect on our business.the Company. Management assessed all of the Company’s executive, sales and broad-based compensation plans to determine if any provisions or practices create undesired or unintentional risk of a material nature. This risk assessment process included a review of plan design, including business drivers and performance measures. Incentive compensation plan design varies across business units based on differing goals established for business units. Incentive compensation targets are reviewed annually and adjusted as necessary.
Maintaining adequate liquidity is crucial to our securities brokerage operations, including key functions such as transaction settlement8. Stock Ownership Guidelines and margin lending. We are subject to cash depositAnti-Hedging and collateral requirements with clearinghouses such as the DTCCAnti-Pledging Policy The Compensation Committee and the OCC,board of directors strongly believe that senior executives should own a significant amount of Company
common stock. This provides a direct and continuing alignment of financial interests between executives and stockholders. The stock ownership guidelines for the NEOs are as follows: ten times base salary for the CEO, and five times base salary for all other NEOs. These executive officers are not permitted to sell any equity interest in the Company until they meet their respective stock ownership guidelines, after which may fluctuate significantlythe CEO must obtain prior approval from timethe Compensation Committee and all other senior executives must obtain prior approval from the CEO. In determining whether the stock ownership guidelines have been met, the Company considers any stock held without restrictions, unvested RSUs and PRSUs, vested but unexercised in-the-money stock options, deferred compensation that is scheduled to timesettle based on the natureprice of the Company’s common stock and sizecommon stock held under the Company’s 401(k) plan. All NEOs for fiscal 2019, with the exception of our clients'Mr. deSilva, who joined the company in September 2017, met the stock ownership guidelines as of the end of fiscal year 2019. The Company’s trading activity. We satisfy our liquidity needs primarilypolicy, which applies to all officers, employees, contractors and temporary or agency associates, prohibits anyone subject to the policy from working capitalentering into hedging or pledging transactions involving the Company’s common stock. The trading policy specifically prohibits any short sales and cash generated by client activity, as well as external financing. engaging in strategies using options on Company securities. 9. Change in Control and Severance Provisions Our liquidity needssenior executive team has been instrumental to support interest-earning assets are primarily met by client cash balances or financing created from our securities lending activities. A reductionthe success of funds available from these sources may require usthe Company, and we believe it is important to seek other potentially more expensive forms of financing, such as borrowings on our revolving credit facilities. Factors which may adversely affect our liquidity positions include subsidiaries having temporary liquidity demands dueprovide certain benefits to timing differences between brokerage transaction settlements and the availability of segregated cash balances, fluctuations in cash held in client accounts, a dramatic increase in our margin lending activities, increased regulatory capital requirements, changes in regulatory guidance or interpretations, other regulatory changes or a loss of market or client confidence resulting in unanticipated withdrawals of client funds.
Reduction in our liquidity could, in itself, reduce client confidence in us, which would resultthem in the transferevent of client assets and accounts, or could cause us to fail to satisfy our liquidity requirements. Also, while our regulated subsidiaries currently satisfy regulatory capital requirements, any failure to do so would curtail their operations and their ability to pay dividends to the parent company, which would reduce our liquidity and adversely affect our ability to repay debt and return capital to stockholders. We would then need to provide additional funding to such subsidiaries.
Our liquidity could be constrained if we are unable to obtain financing on acceptable terms, or at all, due to a varietycertain qualifying terminations of unforeseen market disruptions. During periods of disruption in the credit and capital markets, borrowing costs may increase and potential sources of external financing may be reduced or even eliminated. In addition, a significant downgrade in our credit ratings could increase our borrowing costs and limit our access to the credit and capital markets. Inability to meet our funding needs on a timely basis would have a material adverse effect on our business.
Our exposure to credit risk with clients and counterparties could result in losses.
We extend margin credit and leverage to clients, which are collateralized by client cash and securities. We also borrow and lend securitiesemployment, including in connection with a change in control. We believe that the interests of our broker-dealer business. A significantstockholders are best served if the interests of senior management are closely aligned with them, and providing change in control benefits should minimize any reluctance of senior management to pursue change in control transactions that may be in the best interest of our stockholders. Equity awards under the MIP generally will vest upon certain qualifying terminations of employment by the Company within a specified period after a change in control. Our executive officers are not automatically entitled to any single-trigger vesting acceleration
upon a change in control. Rather, our employment arrangements and our executive compensation practices (described later in this section under “Potential Payments Upon Termination or Change in Control”) require a termination of employment under specified circumstances in connection with or following a change in control for any vesting acceleration to apply. We utilize this dual-trigger change in control provision because we believe that triggering vesting acceleration simply because a change in control has occurred is not in the Company’s or stockholders’ best interests. The pending acquisition by Schwab will, if consummated, constitute a “change in control” under the terms of the LTIP and certain employment arrangements with our NEOs, as discussed further below under “Potential Payments Upon Termination or Change in Control.” The Company also provides severance benefits in the event of certain qualifying terminations of employment outside of the context of a change in control. The Company believes that these arrangements provide assurances of specified transition and/or severance benefits to our executive officers whose termination of employment may be triggered at any time. These benefits are intended to secure our executive officers’ continued dedication to their work, notwithstanding the possibility of termination of employment, and provides the executive officers with an incentive to continue employment with us. In determining executive compensation, the Compensation Committee considers the possible tax consequences to the Company and to its executives. To maintain maximum flexibility in designing compensation programs, the Compensation Committee, while considering tax deductibility as one of its factors in determining compensation, does not limit compensation to those levels or types of compensation that are intended to be deductible. Certain compensation previously paid to executive officers under the MIP, and certain equity awards that previously vested, were and are intended to be fully deductible under the “performance-based” compensation exception (discussed below) previously provided by Section 162(m) of the Code. As a result of the Tax Cuts and Jobs Act of 2017 (the “Act”), for tax years beginning after December 31, 2017, Section 162(m) of the Code limits to $1 million the federal income tax
deduction the Company can receive for annual individual compensation paid to certain current and former executive officers, subject to a transition rule for written binding contracts in effect on November 2, 2017, and not materially modified after that date. Prior to the Act, Section 162(m)’s deduction limit included an exception for “performance-based” compensation that permitted qualifying compensation to be deductible even if it exceeded the $1 million limit. Significant aspects of the Company’s compensation programs were designed to permit (but not require) compensation to qualify for this performance-based exception. To accomplish this, the Company previously asked shareholders to approve equity and incentive compensation plans that included limitations and provisions required to be included under Section 162(m). Now that the performance-based compensation exception is no longer available, the Company no longer includes specific Section 162(m)-related limitations or provisions or request shareholder approval for this purpose, and generally will not attempt to meet the requirements previously included in our plans related to the now eliminated performance-based exception as there is no tax benefit from doing so. 11. Actions Since End of Fiscal Year 2019 Fiscal Year 2019 RSUs Granted in Fiscal Year 2020 The table below summarizes the RSUs granted to our NEOs since the end of fiscal year 2019, which represent the portion of the annual incentive award earned under the MIP for fiscal year 2019 and granted in the form of RSUs. These grants were made in fiscal year 2020 and therefore are not included in the Summary Compensation Table or the Grants of Plan-based Awards and Outstanding Equity Awards at FiscalYear-End tables set forth below. Fiscal Year 2020 RSUs Granted for Fiscal Year 2019 MIP Performance | | | | | | | | | | | | | | | | Fiscal 2019 Equity Incentive | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The number of RSUs granted was determined by dividing the dollar amount earned by $45.66, the average of the high and low price of the Company’s common stock for the 20 trading days ended December 5, 2019. These awards are scheduled to vest over three years in equal, annual installments. The grant date fair value for accounting purposes was determined using the volume weighted average price of the Company’s common stock on the grant date. The per share grant date fair value on December 5, 2019, was $50.99. On December 20, 2019, the vesting of Mr. Boyle’s RSU award was accelerated in full in connection with the anticipated acquisition of the Company by Schwab. In addition, the Compensation Committee approved the grant of RSUs covering 5,476 shares of the Company’s common stock (valued at $250,000 and with a grant date fair value of $279,209) to each of Messrs. Nally and Quirk. These RSUs are scheduled to vest over three years in equal, annual installments. These awards were granted as retention incentives, in light of the announcement relating to the CEO’s transition. The per share grant date fair value of these awards on December 5, 2019 was $50.99.
Fiscal Year 2020 Target Total Annual Compensation Adjustments The Compensation Committee discussed with our net revenuesCEO the target total annual compensation for fiscal year 2020 of our NEOs (other than the CEO). The Compensation Committee also reviewed the market data and assessments of performance for each NEO. In light of the transition agreement entered into between the Company and the CEO, the Compensation Committee did not determine target total annual compensation for the CEO. After considering individual performance, scope of role and responsibility within the organization and the competitiveness of our NEOs’ compensation compared to the market data, the Compensation Committee approved the fiscal year 2020 target total annual compensation for each NEO (other than the CEO) as follows: Fiscal Year 2020 Target Total Annual Compensation | (1) | Mr. Boyle’s base salary was increased by $50,000, and his annual target incentive compensation was increased from $2 million for fiscal year 2019 to $2.15 million for fiscal year 2020, which continues to consist of 50% cash and 50% equity. |
| (2) | Mr. deSilva’s annual target incentive compensation was increased from $2.15 million for fiscal year 2019 to $2.35 million for fiscal year 2020, which continues to consist of 50% cash and 50% equity. |
| (3) | Mr. Nally’s annual target incentive compensation was increased from $2.15 million for fiscal year 2019 to $2.35 million for fiscal year 2020, which continues to consist of 50% cash and 50% equity. |
| (4) | Mr. Quirk’s base salary was increased by $50,000, and his annual target compensation was increased from $2.1 million for fiscal year 2019 to $2.25 million for fiscal year 2020, which continues to consist of 50% cash and 50% equity. |
Key Management Changes in Fiscal Year 2020 In connection with the Company’s entry into the merger agreement with Schwab, Mr. Hockey stepped down from his role as president and CEO and as a member of the board, and Mr. Boyle was appointed the interim president and CEO and a member of the board. As of the date of this Amendment No. 1, the compensation arrangements for Mr. Boyle in his role as interim president and CEO have not yet been finalized. Pursuant to Mr. Hockey’s transition agreement, Mr. Hockey will serve in the role of senior advisor through February 29, 2020. In addition, as of the same date, Jon C. Peterson, formerly the Company’s managing director of analysis, planning and reporting, was appointed as the interim CFO of the Company. While serving in such role, Mr. Peterson will receive an additionalbi-weekly cash compensation payment of $27,000.
| Compensation Committee Report This report is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to the liabilities of Section 18 of the 1934 Act and the report shall not be deemed to be incorporated by reference into any prior or subsequent filing by the Company under the Securities Act of 1933 or the 1934 Act. The H.R. and Compensation Committee has reviewed and discussed the “Compensation Discussion and Analysis” with TD Ameritrade’s management. Based on that review and those discussions, the H.R. and Compensation Committee recommended to the board of directors that the Compensation Discussion and Analysis section be included in TD Ameritrade’s Annual Report on Form10-K for its 2019 fiscal year. Wilbur J. Prezzano, Chairman |
Compensation Committee Interlocks and Insider Participation Messrs. Prezzano, Levitt, Mitchell and Tessler served as members of the Compensation Committee during fiscal 2019. Mr. Bettino was appointed to the Compensation Committee in July 2019. During fiscal 2019, there were no Compensation Committee interlocks and no insider participation in Compensation Committee decisions that were required to be reported under the rules and regulations of the 1934 Act.
Summary Compensation Table for Fiscal Years 2019, 2018 and 2017 The following table provides compensation information during fiscal years 2019, 2018 and 2017 for Mr. Hockey, our CEO during those fiscal years, Mr. Boyle, our CFO during those fiscal years, and our other three most highly compensated executive officers who were serving as executive officers as of September 30, 2019. We refer to these individuals as our NEOs. Mr. deSilva became an NEO beginning in fiscal year 2018. In accordance with SEC rules, the compensation described in this table does not include medical or group life insurance received by the NEOs that is derived from interestavailable generally to all salaried employees of the Company and certain perquisites and other personal benefits received by the NEOs that in the aggregate do not exceed $10,000. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-Equity Incentive Plan Compensation (3) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interim President and CEO (formerly Executive Vice President, CFO) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (4) | | | | | | | | | Executive Vice President, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Executive Vice President, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (1) | | | | | | | | | | | | | | | | | Executive Vice President, | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | The amount includes an additional payout of accrued paid time off of $19,231. |
| (2) | The amounts in the column represent the aggregate grant date fair value calculated in accordance with ASC Topic 718 for equity awards granted during the fiscal year. These amounts do not necessarily correspond to the actual value recognized by our NEOs. For a discussion of the underlying assumptions used and for further discussion of the Company’s accounting for its equity compensation plans, see the following sections of the Company’s Form 10-K for the fiscal year ended September 30, 2019: |
| * | Part II - Item 8 - Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements |
| - | Note 1. Nature of Operations and Summary of Significant Accounting Policies—Stock-based Compensation |
| - | Note 14. Stock-based Compensation |
The amounts in the Stock Awards column for fiscal year 2019 represent the grant date fair value of PRSUs based on margin loans. By permitting clientsthe probable outcome of the performance conditions to purchase securities on margin and exercise leverage with options and futures positions, wewhich the PRSUs are subject to risks inherent in extending credit, especially during periods of rapidly declining markets in whichsubject. The following table shows the value of the collateralPRSUs at the grant date assuming that the highest level of performance conditions will be achieved (equivalent to 120% of the award), subject to adjustment with respect to any related DEUs: | (3) | The amounts in the Non-Equity Incentive Plan Compensation column for fiscal year 2019 include the cash component of the annual incentive awards earned under the MIP. |
| (4) | The amount includes (a) the cash component of the annual incentive award earned under the MIP of $1,192,928, and (b) cash bonus payments that were paid under Mr. deSilva’s SAR award pursuant to the terms of the Scottrade Appreciation Right Award dated January 1, 2016, consisting of (i) $301,390 that was paid during fiscal year 2019, representing one-third of the amount that Mr. deSilva became eligible to receive based on performance achieved for Scottrade’s fiscal year 2016 and prior to the closing of the Company’s acquisition of Scottrade that occurred in the Company’s fiscal year 2017, and (ii) $423,548 that was paid during fiscal year 2019, representingone-third of the amount that Mr. deSilva became eligible to receive based on performance achieved with respect to Scottrade’s fiscal year 2017 and prior to the closing of the Company’s acquisition of Scottrade, in each case of both (i) and (ii), subject to Mr. deSilva’s continued employment with the Company (as the successor to Scottrade) through the applicable vesting dates in fiscal year 2019. |
| (5) | The amounts in this column are summarized in the following table: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Income and Employment Taxes Reimbursed (a) | | | Employer Cash
Contributions | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (a) | The amount of taxes reimbursed by the Company for fiscal year 2019 relate to: Company-paid tax preparation services ($9,900), home security ($601) and an award in the form of points redeemable for a non-cash consumer good (a“non-cash award”) ($11) for Mr. Hockey; housing reimbursement ($65,650) and anon-cash award ($3) for Mr. Boyle; anon-cash award ($5) for Mr. deSilva; home security ($31) and anon-cash award ($5) for Mr. Nally; and anon-cash award ($4) for Mr. Quirk. |
| (b) | The fiscal year 2019 amounts consisted of a non-cash award for each NEO, as well as tax preparation services and home security for Mr. Hockey, housing reimbursement ($63,980) for Mr. Boyle, and home security for Mr. Nally. |
Grants of Plan-based Awards During Fiscal Year 2019 The following table summarizes equity awards granted to our NEOs in fiscal year 2019 under our LTIP andnon-equity incentive plan awards granted to our NEOs in fiscal year 2019 under our MIP. Equity awards granted in fiscal year 2020 for services rendered in fiscal year 2019 are summarized in the Compensation Discussion and Analysis under the heading “Actions Since End of Fiscal Year 2019.”
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Estimated Possible Payouts Under Non-Equity Incentive Plan Awards (1) | | | Estimated Future Payouts Under Equity Incentive Plan Awards (2) | | | | | | | | | | Approval Date of Stock Awards | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | Represents the cash incentive component of the fiscal year 2019 annual incentives payable to the NEO pursuant to the MIP. |
| (2) | Represents the equity component of the fiscal year 2018 annual incentives payable pursuant to the MIP in the form of PRSUs. PRSUs (including any related DEUs), which were granted under the LTIP, are scheduled to vest in full on the three-year anniversary of the grant date based upon achievement of specified performance criteria, subject to the NEO’s service with the Company through such date. The performance criteria relate to the Company’s cumulative three-year TSR relative to certain components of the NYSE Arca Securities Broker/Dealer Index determined at the time of grant. The actual number of PRSUs that may become eligible to vest as a result of performance will range from a minimum of 80% to a maximum of 120% of the PRSUs (including any related DEUs). |
Outstanding Equity Awards at FiscalYear-end September 30, 2019 The following table provides information on the holdings of stock option and stock awards by our NEOs as of September 30, 2019, the last day of fiscal year 2019. This table includes unexercised and vested or unvested option awards, unvested RSUs and unvested DEUs associated with the outstanding RSU awards. The vesting schedule is shown for each grant in the footnotes to the table, provided that the awards may be subject to earlier vesting as discussed further below under “Potential Payments Upon Termination or Change in Control.” The market value of the stock awards is based on $46.70, the closing market price of the Company’s common stock on September 30, 2019 (the last business day of fiscal year 2019). | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Market
Value of
Shares or
Units of
Stock That
Have Not
Vested | | | Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other
Rights
That Have
Not Vested | | | Equity
Incentive
Plan
Awards:
Market
Value or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights That
Have Not
Vested | | | | | | | | | (1) | | | | (1)(2) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (3) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (4) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (4) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (4) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (4) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (4) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (4) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (4) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (4) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (5) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (6) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (4) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (4) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (4) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (4) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (4) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (4) |
| (1) | These nonqualified stock options vested in four, equal installments on January 21, 2017, 2018, 2019 and 2020, subject to Mr. Hockey’s continued employment with the Company or service as a member of the board of directors through such dates. |
| (2) | In certain circumstances, the awards are eligible for continued vesting or vesting acceleration as described further below in the section titled “Potential Payments Upon Termination or Change in Control.” |
| (3) | These RSUs were scheduled to vest in full on the five-year anniversary of the grant date, subject to Mr. Hockey’s continued employment or other service with the Company through such date, but will accelerate vesting in full upon his separation following completion of his transition services per the terms of his transition agreement. |
| (4) | These PRSUs are shown based on target number of shares subject to the PRSUs (including any DEUs based on such target number). PRSUs are scheduled to vest (or vested, as applicable) in full on the three-year anniversary of the grant date based upon achievement of specified performance criteria (over a three fiscal year performance period), subject to the NEO’s employment or other service with the Company through such vesting date. The performance criteria relate to the Company’s cumulative TSR, relative to the cumulative TSR of each of the component companies of the NYSE Arca Securities Broker/Dealer Index determined at the time of grant. The actual number of PRSUs (including any related DEUs) that may become eligible to vest as a result of performance will range from a minimum of 80% to a maximum of 120% of the PRSUs. |
| (5) | These RSUs are scheduled to vest in full on the three-year anniversary of the grant date, subject to the NEO’s continued employment with the Company through such date. |
| (6) | These RSUs are scheduled to vest in full on the five-year anniversary of the grant date, subject to the NEO’s continued employment with the Company through such date. |
Option Exercises and Stock Vested During Fiscal Year 2019 The following table summarizes stock awards that vested for our NEOs during fiscal year 2019. | | | | | | | | | | | | | | | | Number of Shares
Acquired on Vesting | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nonqualified Deferred Compensation for Fiscal Year 2019 The following table summarizes deferred compensation for our NEOs during fiscal year 2019 that is nottax-qualified. | (1) | Represents $32,334 in dividends earned during fiscal year 2019 on the deferred stock units and the value of any increase or decrease in the stock price of the shares. Mr. Boyle previously deferred certain portions of the cash component of his annual incentive award payable to him under the MIP for fiscal years 2017 and 2016, which were converted into 18,076 deferred stock units and 10,334 deferred stock units, respectively, during fiscal years 2018 and 2017, respectively. The deferred stock units are scheduled to be paid to Mr. Boyle in ten annual installments upon the termination of his employment but would be distributed in full within thirty days of a change in control event as per the terms of the Executive Deferred Compensation Program. |
| (2) | The amounts earned for Mr. Boyle’s deferred stock units were not subject to any above-market or preferential earnings during fiscal year 2019 or any prior year reported in the Summary Compensation Table. |
| (3) | Represents $92,014 in dividends earned during fiscal year 2019 on the deferred stock units and the value of any increase or decrease in the stock price of the shares. Mr. Boyle was granted RSUs covering 79,767 shares on July 8, 2015, which vested in full on July 8, 2018. A total of 82,294 vested shares (which include DEUs but are net of shares used to satisfy any applicable tax withholdings at vesting) otherwise issuable under the RSUs have been deferred until the earliest of the termination of Mr. Boyle’s employment, his death, or his disability. The deferred stock units are scheduled to be paid to Mr. Boyle in ten, annual installments upon the termination of his employment other than due to his death or disability, with the first installment paid shortly after the termination of his employment and remaining installments paid on each of the next nine anniversaries of the termination. The number of shares of Company common stock to be paid in each installment is equal to the total number of deferred stock units (including DEUs), divided by the number of remaining installments to be paid. In the event that Mr. Boyle dies or becomes disabled during his employment, the deferred stock units instead will be issued in lump sum shortly following the date of the death or disability. |
| (4) | The aggregate balance at fiscal year end 2019 represents the value of 29,642 deferred stock units of Company common stock based on $46.70 per share, the closing market price of the Company’s common stock on September 30, 2019 (the last business day of fiscal year 2019). Mr. Boyle previously deferred 50% of the cash component of his annual incentive award payable to him under the MIP for fiscal year 2016, which was converted into 10,334 deferred stock units. An amount of $342,900, representing the deferred portion of the annual incentive award payable in cash to Mr. Boyle under the MIP for fiscal year 2016 was included in the Summary Compensation Table for fiscal year 2016 under the column titled Non-Equity Incentive Plan Compensation. These deferred stock units are subject to the Company’s Executive Deferred Compensation Program. Under this program, participants may elect to defer up to 100% of their annual incentive earned under the MIP or such other compensation that the program administrator may permit. The program also permits discretionary contributions by the Company, although no Company contributions were made in fiscal year 2019. Deferred stock units under the program are eligible for DEUs, which generally are calculated by multiplying the dividend amount per share by the number of deferred stock units of the participant, divided by the closing price of the Company’s common stock on the dividend payment date. The program will provide for earlier, lump sum distribution in the event of change in control or should Mr. Boyle become disabled while employed with the Company, and also permits distributions in connection with an unforeseeable emergency. |
| (5) | The aggregate balance at fiscal year end 2019 represents the value of 84,573 shares of Company common stock deferred under the RSU described in footnote (3) above (including DEUs earned on the deferred stock units, which also remain deferred), based on $46.70 per share, the closing market price of the Company’s common stock on September 30, 2019 (the last business day of fiscal year 2019). The grant date fair value of this RSU award was included in the Summary Compensation Table for fiscal year 2015 in the amount of $2,881,535, under the column titled Stock Awards. |
Potential Payments Upon Termination or Change in Control Introduction and Overview The Company has entered into employment agreements with Messrs. Hockey, Boyle and deSilva. During fiscal year 2019, the Company also entered into a transition agreement with Mr. Hockey. Messrs. Nally and Quirk do not have employment agreements. The employment agreements and certain compensation plans and award agreements require the Company to provide compensation and benefits to the executives in the event of certain qualifying terminations of employment, including in connection with a change in control of the Company.
Compensation Plans and Award Agreements Management Incentive Plan and Long-Term Incentive Plan Under the MIP, in the event of death or disability prior to the payment of a scheduled award, compensation will be paid to the executive’s estate or other authorized person. The LTIP provides that in the event of a change in control, unless determined otherwise by the administrator of the LTIP, in the event a successor to the Company does not assume or substitute or replace outstanding awards of options, RSUs and PRSUs, those awards will vest in full. The RSU and PRSU award agreements generally provide for settlement as soon as practicable upon the vesting of the award, except in limited circumstances for purposes of complying with any applicable laws (such as requirements relating to deferred compensation). Some of the terms under these award agreements are further modified by certain other agreements entered into with the NEO, as described further below, including a transition agreement entered into between the Company and Mr. Hockey during fiscal year 2019. See the section titled “Summary Table—Potential Payments Upon Termination or Change in Control for additional information regarding the applicable provisions in the event a hypothetical triggering event were to have occurred on the last day of fiscal year 2019. The option, RSU and PRSU award agreements provide for the following treatment of NEOs’ awards upon death, disability, retirement, termination without cause, resignation for good reason, and change in control (and with respect to Mr. Hockey’s equity awards, as further modified by his transition agreement as discussed further below): | | | | | | | | | | | PRSU award vests based on target performance. | | | | | | RSU award vests in full (other than with respect to Mr. Hockey’s RSUs granted January 21, 2016). PRSU award remains outstanding and eligible to vest based on actual performance. | | | | Termination by the Company without cause | | Mr. Hockey’s RSU award granted January 21, 2016, vests in full, and other RSUs held by an NEO vest as to a prorated portion based on the number of full, 12-month periods of service completed during the vesting period. PRSUs for which performance already has been measured and met will vest in full. For PRSUs for which performance has not yet been measured, those PRSUs will remain outstanding and eligible to vest based on actual performance as to 100% with respect to Mr. Hockey, or 33% (if termination occurs at least one year after grant), 67% (if termination occurs at least two years after grant), or 100% (if termination occurs at least three years after grant), with respect to other NEOs. Mr. Hockey’s option award will continue to vest in accordance with its vesting schedule without regard to any continued employment or director service requirement. | | | | Resignation by the executive for good reason | | Mr. Hockey’s RSUs granted January 21, 2016, vests in full. Mr. deSilva’s RSUs will vest as to a prorated portion based on the number of full, 12-month periods of service completed during the vesting period. Mr. Hockey’s PRSUs will remain outstanding and eligible to vest based on actual performance. Mr. deSilva’s PRSUs for which performance already has been measured and met will vest as to a prorated portion based on the number of full, 12-month periods of service completed during the vesting period. His PRSUs for which performance has not yet been measured will remain outstanding and eligible to vest based on actual performance as to 33% (if termination occurs at least one year after grant), 67% (if termination occurs at least two years after grant), or 100% (if termination occurs at least three years after grant). Mr. Hockey’s options will continue to vest in accordance with their vesting schedule without regard to any continued employment or director service requirement. | | | | | | RSU award vests in full following termination by the Company without cause that occurs within 24 months after a change in control. For PRSU awards, the performance period will end upon the change in control and actual performance will be measured at that time. PRSUs for which performance is deemed met will be scheduled to vest, after the change in control, on the three-year anniversary of the grant date subject to continued service. Upon termination of service due to death, disability or retirement, such PRSUs will accelerate vesting in full. With respect to Mr. Hockey, upon resignation for good reason, or termination of employment by the Company other than for cause, such PRSUs will accelerate vesting in full. With respect to Mr. deSilva, upon resignation for good reason or termination of employment by the Company other than for cause, in each case within 12 months after the change in control, such PRSUs will continue to vest in accordance with its vesting schedule. With respect to other NEOs, upon termination of employment by the Company other than for cause, 33% (if termination occurs at least one year after grant), 67% (if termination occurs at least two years after grant), or 100% (if termination occurs at least three years after grant) of such PRSUs will accelerate vesting. In connection with the pending acquisition by Schwab, the Company amended the terms of the PRSU agreements to provide for full acceleration of vesting in the event of a termination without cause following a change in control. | | | | Conditions to Receipt of Accelerated Vesting Benefit | | Under the RSU and PRSU award agreements, non-solicitation and non-competition covenants for a period of 12 months (or 24 months, in the case of Mr. Hockey and Mr. Boyle), following termination of employment with the Company, and with respect to Mr. Hockey’s PRSU award agreement, a release of claims in favor of the Company pursuant to his employment agreement. Upon termination other than due to death or disability, the portion of Mr. Boyle’s RSU award granted July 8, 2015, that accelerates vesting will be paid out in annual installments over a 9-year period following termination. |
Certain Definitions Under RSU, PRSU and Option Award Agreements and LTIP Under the LTIP, “change in control” generally means the occurrence of any of the following: The date any person (or more than one person acting as a group) acquires ownership of Company common stock that, together with common stock held by us could fall belowsuch person (or group), constitutes more than 50% of the amounttotal fair market value or voting power of Company common stock, but other than circumstances in which: additional common stock is acquired by any one person (or more than one person acting as a group) considered to own more than 50% of the total fair market value or voting power of Company common stock, or Company stockholders continue to retain substantially the same proportions of their ownership of the total fair market value or voting power of Company common stock of fifty percent (50%) or more of the total fair market value or voting power of common stock of the Company or of the ultimate parent entity of the Company, such event will not be considered a change in control; or The date that the board of directors determines that any person (or more than one person acting as a group, but other than any person or group considered to effectively control the Company) acquires or has acquired during a12-month period at least 50% of the total voting power of Company common stock, or a majority of members of the board of directors is replaced over a12-month period by directors whose appointment or election is not endorsed by a majority of the members of the board of directors before the appointment or election; or The date that any person (or more than one person acting as a group) acquires or has acquired during a12-month period assets from the Company that have a total gross fair market value of at least 50% of the total fair market value of all Company assets, but other than a transfer: (i) to an entity controlled by the Company’s stockholders immediately after the transfer; or (ii) of assets to a Company stockholder in exchange for or with respect to Company common stock, or to an entity, at least 50% of the total value or voting power of which is owned by the Company or to a person (or more than one person acting as a group) that owns at least 50% of the total value or voting power of all outstanding Company common stock, or to an entity owned by such person (referenced in the immediately preceding clause) as to at least 50% of its total value or voting power. Transactions also are required to qualify as a change in control within the meaning of Code section 409A in order to constitute a change in control under the LTIP. Under the RSU and PRSU award agreements, a change in control will not be deemed to occur, for purposes of the treatment described in the award agreement in connection with a change in control, if TD Bank Financial Group acquires the Company’s outstanding shares of common stock or substantially all of the Company’s assets. The pending acquisition by Schwab will, if consummated, constitute a “change in control” under the terms of the LTIP and certain employment arrangements with our NEOs. Under the PRSU award agreements, “retirement” generally means a termination by the Company of the executive’s employment with the Company other than for cause, death or disability after the executive has attained at least age 55 and at least ten years of continuous service with the Company. With respect to Mr. Hockey, if Mr. Hockey had served as CEO for at least five years, then the term “retirement” under his PRSUs will have the same meaning as under his employment agreement. Mr. Hockey had not yet met the requirements for having remained the Company’s CEO for such period during fiscal year 2019. Under the RSU award agreements (other than for Mr. Hockey), “retirement” generally means a termination by the Company of the executive’s employment with the Company other than for cause after the executive has attained age 55 and at least ten years of continuous service with the Company. Under the RSU and PRSU award agreements (other than with respect to Mr. Hockey’s awards), “cause” generally means: failure to substantially perform the executive’s duties as an employee, other than due to illness, injury or disability; willfully engaging in conduct which is materially injurious to the Company;
misconduct involving serious moral turpitude, or any conviction of, or plea of no contest to, a criminal offense arising out of a client's indebtedness. breach of trust, embezzlement or fraud committed against the Company by the executive in the course of his employment with the Company; any violation of thenon-solicitation ornon-competition covenants under the award agreement; or any other action that might be considered gross misconduct under the Company’s applicable associate handbook. Under Mr. Hockey’s RSU, PRSU and option award agreements, “cause” and “good reason” generally have the same meaning as provided in Mr. Hockey’s employment agreement. Company Severance Practices In addition, in accordance with regulatory guidelines, we collateralize borrowingsthe Company’s executive compensation practices, unless otherwise specified in an employment agreement, NEOs will generally receive the following severance benefits upon any termination by the Company without cause including following a change in control: (a) four weeks of base salary for each completed year of service (or minimum of 12 weeks), up to a maximum of 104 weeks, (b) four weeks of annual cash incentive for each completed year of service, up to a maximum of 104 weeks, calculated based on target performance, (c) continued Company-paid employer portion of premium costs for medical and dental coverage for a period equal to one month for each completed year of service (or minimum of six months), up to a maximum of 18 months, and (d) eligibility to receive the cash portion of annual incentive, based on actual performance and prorated for the period of the fiscal year that the NEO remained employed. These severance benefits are subject to a release of claims in favor of the Company, andnon-competition andnon-solicitation obligations for a period typically lasting 24 months following termination of employment.Employment Agreements of Named Executive Officers President and CEO — Tim Hockey On November 9, 2015, Mr. Hockey entered into an employment agreement under which he became the Company’s president effective January 2, 2016, and CEO effective October 1, 2016. On July 22, 2019, Mr. Hockey entered into a transition agreement with the Company that modified certain terms of his employment with the Company. Below is a brief summary of certain terms of his employment agreement, as well as the changes specified under his transition agreement. Severance benefits under his employment agreement and transition agreement are summarized further below under the section titled “Summary Table — Potential Payments Upon Termination or Change in Control.” Employment Agreement and Transition Agreement | | | | | | | Employment Agreement Terms | | Summary of Modifications to Mr. Hockey’s Employment Terms Pursuant to his Transition | | | President, effective January 2, 2016 CEO, effective October 1, 2016 | | If Mr. Hockey’s successor commences employment as President and CEO before February 29, 2020 (referred to as the transition date), Mr. Hockey will transition to the role of senior advisor to the Company On November 25, 2019, the Company announced Mr. Boyle’s appointment as the interim President and CEO and Mr. Hockey’s transition to his role as senior advisor | | | | | | | | Initial term of five years commencing January 2, 2016 • Annual re-appointment as CEO by the approval of at least two-thirds of the board of directors during the initial term or renewal thereof | | Effective as of July 22, 2019, Mr. Hockey’s transition agreement provides that his employment would end no later than the transition date With the appointment of Mr. Boyle as interim president and CEO, Mr. Hockey stepped down from his role as president and CEO, and transitioned to a senior advisor role as described above |
| | | | | | | Employment Agreement Terms | | Summary of Modifications to Mr. Hockey’s Employment Terms Pursuant to his Transition | | | • Automatic renewal for additional terms of one-year each after the initial term• Written notice of non-renewal may be provided by the Company or Mr. Hockey at least six months before expiration• Written notice of voluntary retirement by Mr. Hockey at least six months before his resignation | | | | | | | | | | $750,000 per year, and increased by the Compensation Committee to $1,000,000 beginning with fiscal year 2017 | | $1,000,000 per year during his employment through the transition date | | | | | | | | Participation in MIP with initial annual cash incentive target of $1,575,000 for fiscal year 2016. Annual cash incentive target of $2,250,000 for fiscal year 2019 | | Annual cash incentive for fiscal year 2019 payable in the normal course in November 2019, with the amounts determined based on actual performance against thepre-established goals (with the individual component of the goals deemed achieved at 100% of target levels) | | | | | | | | | | A lump sum transition payment of $3,540,000 as compensation for fiscal year 2020 | | | | | | | | • Equity component of annual incentive award under the MIP with a target of $3,675,000 for fiscal year 2016, and increased by the Compensation Committee to $4,025,000 beginning with fiscal year 2017• RSU award covering 158,533 shares granted on January 21, 2016, and scheduled to vest in full on January 21, 2021, subject to continued service with the Company through such date• Stock option award covering 503,247 shares granted on January 21, 2016, and scheduled to vest in four equal installments on January 21, 2017, 2018, 2019 and 2020, subject to continued employment with the Company or service as a member of the board of directors through the applicable dates | | Mr. Hockey would be entitled to receive a PRSU award with the target number of shares of Company common stock subject to the award determined based on actual performance of the applicable goals under the fiscal year 2019 MIP, but with the individual component of the goals deemed achieved at 100% of target levels On December 5, 2019, Mr. Hockey was granted an RSU award covering 121,512 shares in lieu of the PRSU award | | | | | | | | Mr. Hockey is entitled to fly on private aircraft when traveling on Company-related business at the expense of the Company | | | | | | | | | | Mr. Hockey is entitled to Company-paid car service transportation to and from work, and when traveling by ground transportation on Company-related business or to the extent important for security purposes | | | | | | | | | | Tax preparation services paid by the Company in years where Mr. Hockey’s employment income is recognized in both Canada and the United States | | The Company will reimburse Mr. Hockey for tax preparation services for his 2019 and 2020 tax years |
| | | | | | | Employment Agreement Terms | | Summary of Modifications to Mr. Hockey’s Employment Terms Pursuant to his Transition | | | If benefits provided to Mr. Hockey constitute “parachute payments” within the meaning of Section 280G of the Code and are subject to the excise tax imposed by Section 4999 of the Code, then severance benefits may be paid in a lesser amount that would result in no portion being subject to the excise tax, if such reduction would result in the receipt, on an after-tax basis, of a greater amount of severance benefits | | | | | | | | | | | | The Company will reimburse Mr. Hockey for legal fees incurred by him relating to his separation and transition matters, up to a maximum of $75,000 | | | | | | Conditions to Receipt of Termination | | As a condition to Mr. Hockey receiving severance payments, he is required to enter into a release of claims and is required to abide by non-competition, non-solicitation and (except in the case of voluntary retirement after five years of becoming the Company’s CEO) mutual non-disparagement covenants and share ownership requirements. The non-competition, non-solicitation and non-disparagement covenants and the share ownership requirements cover a period of two years from the date of termination | | In connection with a termination of his employment due to the transition, the release of claims that Mr. Hockey would be required to enter into as a condition of receiving severance payments will be a mutual release of claims with the Company, his non-solicitation obligations with respect to Company employees and customers will extend through July 22, 2021 (rather than for a period of two years from the date of termination), and the non-disparagement obligations will be mutual and will apply for an indefinite period |
Certain Definitions Under Mr. Hockey’s Employment Agreement “Good reason” generally means Mr. Hockey’s resignation within 30 days following the expiration of any Company cure period following the occurrence of one or more of the following, without Mr. Hockey’s written consent: a significant reduction of Mr. Hockey’s duties, position, or responsibilities, relative to his duties, position, or responsibilities in effect immediately prior to such reduction; a material reduction in the kind or level of employee benefits to which Mr. Hockey is entitled immediately prior to such reduction with the result that his overall benefits package is significantly reduced, other than aone-time reduction that also is applied to substantially all other executive officers of the Company and that reduces the level of employee benefits by a percentage reduction of 10% or less; a reduction in Mr. Hockey’s base salary or annual MIP incentive award as in effect immediately prior to such reduction, other than aone-time reduction that also is applied to substantially all other executive officers of the Company and whichone-time reduction reduces any of the base salary, target annual incentive, or annual award by a percentage reduction of 10% or less in the aggregate; a material change in the geographic location of Mr. Hockey’s primary office location, other than to a facility or location less than 25 miles from his primary office location; the failure of the Company to obtain the assumption of his employment agreement by a successor; and absent cause, the board of directors’ failure tore-appoint Mr. Hockey as CEO on an annual basis. In order to resign for “good reason,” Mr. Hockey is required to deliver written notice to the Company within 90 days of the event constituting good reason and provide the Company with a reasonable cure period of at least 30 days and not more than 90 days following the date of written notice. “Cause” generally means the occurrence of any of the following: conviction of, or plea of nolo contendere to, a felony that the board of directors reasonably believes has had or will have a material detrimental effect to the Company’s reputation or business;
any act of personal dishonesty by Mr. Hockey in connection with his responsibilities as an employee of the Company with the intention or reasonable expectation that such action may result in his substantial personal enrichment; a breach of any fiduciary duty owed to the Company that has a material detrimental effect on the Company’s reputation or business; willful, substantial and continuing failure to perform the reasonable duties of Mr. Hockey’s position for a period of at least 30 days following written notice from the board of directors which describes the basis for the board of directors’ belief that he has not substantially performed his reasonable duties for reasons other than illness or incapacity; being found liable in any SEC or other civil or criminal securities law action or entering any cease and desist order with respect to such action (regardless of whether or not he admits or denies liability); willful misconduct, gross negligence, fraud or embezzlement, in each case that results in substantial, material harm to the Company; (1) obstructing or impeding, (2) endeavoring to influence, obstruct or impede, or (3) failing to materially cooperate with, any investigation authorized by depositing cashthe board of directors or securitiesany governmental or self-regulatory entity; however, failure to waive attorney-client privilege relating to communications with lenders. Sharp changesMr. Hockey’s own attorney in market valuesconnection with any such investigation will not constitute cause; and disqualification or bar by any governmental or self-regulatory authority from serving in the capacity contemplated by his employment agreement or his loss of substantial amountsany governmental or self-regulatory license that is reasonably necessary for him to perform his responsibilities to the Company if (1) the disqualification, bar or loss continues for more than 30 days and (2) during that period the Company uses its good faith efforts to cause the disqualification or bar to be lifted or the license replaced. “Change in control” generally has the same meaning as provided under the LTIP. Executive Vice President, Chief Financial Officer— Stephen J. Boyle On March 25, 2015, Mr. Boyle entered into a term sheet agreement to become the Company’s executive vice president, finance effective July 1, 2015, and CFO effective October 1, 2015. Below is a brief summary of securitiescertain terms of his agreement. On November 25, 2019, the Company announced Mr. Boyle’s appointment as the interim president and CEO. As of the date of this Amendment No. 1, the compensation arrangements for Mr. Boyle in his role as interim president and CEO have not yet been finalized. Severance benefits under Mr. Boyle’s term sheet agreement are summarized further below under the section titled “Summary Table — Potential Payments Upon Termination or Change in Control.” | | | | | | | | | | | Executive Vice President, Finance, effective July 1, 2015 Executive Vice President, CFO, effective October 1, 2015 Interim President and CEO, effective November 20, 2019 | | | | | | Initially $400,000 per year; fiscal year 2019 salary of $500,000 per year | | | | | | Participation in MIP with annual cash incentive target of $675,000 initially; fiscal year 2019 annual cash incentive target of $1,000,000 | | | | | | • RSU award covering 79,767 shares granted July 8, 2015, and scheduled to vest in full on July 8, 2018, subject to continued employment with the Company through such date• Equity component of annual incentive award under the MIP with a target of $675,000 initially; fiscal year 2019 equity component of annual incentive award under the MIP with a target of $1,000,000 | | | | | | Company-paid monthly housing allowance forone-bedroom work apartment and reimbursement for related taxes for the benefit | | | | | | As a condition to Mr. Boyle receiving severance payments, he is required to enter into a release of claims and is required to abide by non-competition and non-solicitation covenants for a period of two years from the date of termination |
Certain Definitions Under Mr. Boyle’s Term Sheet “Cause” generally means the occurrence of any of the following: the failure by partiesMr. Boyle to substantially perform his duties, other than due to illness, injury or disability, which failure continues for ten days following receipt of notice from the Company specifying such failure; the willful engaging by Mr. Boyle in conduct which is materially injurious to the borrowing transactionsCompany, monetarily or otherwise; misconduct involving serious moral turpitude to honor their commitments could have adverse effects on our revenues and profitability. We also engage in financial transactions with counterparties, including securities sold under agreements to repurchase,the extent that expose us to credit losses in the event counterparties cannot meet their obligations. Wereasonable judgment of the Company, Mr. Boyle’s credibility or reputation no longer conforms to the standard of the Company’s executives; or Mr. Boyle’s breach of any restrictive covenants to which he is subject. “Change in control” generally means the occurrence of any of the following: The date any person (or more than one person acting as a group) acquires ownership of Company common stock that, together with common stock held by such person (or group), constitutes more than 50% of the total fair market value or voting power of Company common stock, but other than circumstances in which: additional common stock is acquired by any one person (or more than one person acting as a group) considered to own more than 50% of the total fair market value or voting power of Company common stock; or The date that the board of directors determines that any person (or more than one person acting as a group, but other than any person or group considered to effectively control the Company) acquires or has acquired during a12-month period 50% or more of the total voting power of Company common stock, or a majority of members of the board of directors is replaced over a12-month period by directors whose appointment or election is not endorsed by a majority of the members of the board of directors before the appointment or election; or The date that any person (or more than one person acting as a group) acquires or has acquired during a12-month period assets from the Company that have policies and procedures designeda total gross fair market value of at least 50% of the total fair market value of all Company assets, but other than a transfer: (i) to manage credit risk, but our policies and procedures mayan entity controlled by the Company’s stockholders immediately after the transfer; or (ii) of assets to a Company stockholder in exchange for or with respect to Company common stock, or to an entity, at least 50% of the total value or voting power of which is owned by the Company, or to a person (or more than one person acting as a group) that owns at least 50% of the total value or voting power of all outstanding Company common stock, or to an entity owned by such person (referenced in the immediately preceding clause) as to at least 50% of its total value or voting power. The pending acquisition by Schwab will, if consummated, constitute a change in control. However, the acquisition by TD Bank Group of Company common stock or substantially all of the Company’s assets will not be fully effective.considered a change in control. We needPresident, Retail Distribution — Peter J. deSilva Mr. deSilva entered into a term sheet, effective September 18, 2017, to introduce new products and services and updatebecome the Company’s President, Retail Distribution. Below is a brief summary of certain terms of his agreement. Severance benefits under his term sheet are summarized further below under the section titled “Summary Table —Potential Payments Upon Termination or enhance existing products and servicesChange in Control.”
| | | | | | | | | | | President, Retail Distribution | | | | | | | | | | | | Participation in MIP with annual cash incentive target of $1,000,000 initially; fiscal year 2019 annual cash incentive target of $1,075,000 | | | | | | • RSU award covering 11,434 shares granted September 20, 2017, scheduled to vest on September 20, 2020, and RSU award covering 11,434 shares granted September 20, 2017, scheduled to vest on September 20, 2022, in each case subject to continued employment with the Company through such date• Equity component of annual incentive award under the MIP with a target of $1,000,000 initially; fiscal year 2019 equity component of annual incentive award under the MIP with a target of $1,075,000 | | | | | | As a condition to Mr. deSilva receiving severance payments, he is required to enter into a separation and release of claims agreement and is required to abide by non-competition and non-solicitation covenants for a period of two years from the date of termination |
Certain Definitions Under Mr. deSilva’s Term Sheet “Cause” generally means the occurrence of any of the following: the failure by Mr. deSilva to remain competitive.substantially perform his duties, other than due to illness, injury or disability, which failure continues for ten days following receipt of notice from the Company specifying such failure; We compete
the willful engaging by Mr. deSilva in a technology-intensive industry characterized by rapid innovation. Our future success depends in part on our abilityconduct which is materially injurious to introduce new products and servicesthe Company, monetarily or update or enhance our existing products and services. In addition,otherwise; misconduct to the adoption of new Internet, networking or telecommunications technologies or other technological changes could require us to incur substantial expenditures to update, enhance or adapt our services or infrastructure. There are significant technical and financial costs and risksextent that in the developmentreasonable judgment of newthe Company, Mr. deSilva’s credibility or enhanced products and services, includingreputation no longer conforms to the risk that we might be unable to effectively use new technologies, adapt our services to emerging industry standards or develop, introduce and market updated, enhanced or new products and services. An
inability to develop new products and services, or to update or enhance existing offerings, could have adverse effects on our business and results of operations.
Our clearing operations expose us to liability for errors in clearing functions.
Our broker-dealer subsidiary, TDAC, provides clearing and execution services for our securities brokerage business. Clearing and execution services include the confirmation, receipt, settlement and delivery functions involved in securities transactions. Clearing brokers also assume direct responsibilitystandard appropriate for the possessionCompany’s executives; or control
Mr. deSilva’s breach of client securitiesany restrictive covenants to which he is subject. “Change in control” generally has the same meaning as provided under the LTIP. Mr. deSilva entered into a SAR award agreement dated January 1, 2016, with Scottrade (before our acquisition of Scottrade). The SAR award agreement provided that, for each of calendar years 2016 and other assets and2017, Mr. deSilva would become eligible to receive a cash bonus determined based on Scottrade’s consolidatedpre-tax earnings. Cash bonus amounts are paid in three, equal, annual installments, with the clearingfirst installment paid on the last day of client securities transactions. However, clearing brokers also must rely on third-party clearing organizations, such as the DTCC and the OCC,applicable year of performance, in settling client securities transactions. Clearing securities firms, such as TDAC, areeach case subject to substantially more regulatory oversight and examination than introducing brokers that rely on others to perform clearing functions. Errors in performing clearing functions, including clerical and other errors related toMr. deSilva’s continued employment through the handlingend of funds and securities held by us on behalfthe applicable year. In the event of clients, could lead to regulatory fines and civil penalties as well as losses and liability in related legal proceedings brought by clients and others. A default by a large financial institution could adversely affect financial markets and our business.
The commercial soundnesstermination of many financial institutions are closely interrelatedMr. deSilva’s employment as a result of credit, trading, clearinghis death or disability, or termination by Scottrade or any of its affiliates (including the Company) without cause, any cash bonuses that have not yet vested under the SAR award based on Mr. deSilva’s continued employment, will accelerate vesting in full and other relationships among the institutions. For example, increased centralization of trading activities through clearing houses and clearing agencies has occurred and may continuebecome payable to occur in the future. This is driven by market forces and legal measures and may increase our concentration of risk with respecthim. During fiscal year 2019, Mr. deSilva became eligible to these entities. As a result of this connectedness, concerns about, or a default or threatened default by, one institution can lead to significant market-wide liquidity and credit problems, defaults and losses by others. Sometimes referred to as "systemic risk," this phenomenon may adversely affect financial intermediaries such as clearing houses, clearing agencies, exchanges, banks and securities firms with which we interact daily and could therefore negatively impact our business. Our membership agreements with the DTCC and OCC may require us to contribute capital to the clearing agencies if one or more other members default on their obligations.
Aggressive competition could reduce our market share, revenues and profits.
The market for electronic securities brokerage services is continually evolving and is intensely competitive. The securities brokerage industry has experienced significant consolidation, which may continue in the future, likely increasing competitive pressures in the industry. Consolidation could enable other firms to offer a broader range of products and services than we do, or offer them on better terms, such as higher interest rates paid on cash held in client accounts. We expect this intensely competitive environment to continue in the future. We face direct competition from numerous securities brokerage firms, including E*TRADE Financial Corporation, The Charles Schwab Corporation and Fidelity Investments. We also encounter competition from the broker-dealer affiliates of established full-commission brokerage firms, such as Merrill Lynch and Morgan Stanley, as well as from banks, mutual fund sponsors, online wealth management services (including so-called "robo-advisors") and other financial institutions and organizations, some of which provide online brokerage services. Some of our competitors have greater financial, technical, marketing and other resources, offer a wider range of services and financial products, and have greater name recognition and a more extensive client base than we do. Others offer a narrower range of products and services but benefit from a lower cost structure than we have. We believe that the general financial success of companies within the securities brokerage industry will continue to attract new competitors to the industry, such as software development companies, insurance companies, providers of online financial information and others. These companies may provide a more comprehensive suite of services than we do or offer services at lower prices. Increased competition could have adverse effects on our business such as reducing our market share, revenues and profits.
Our ability to compete successfully in the securities brokerage industry depends on a number of factors, such as:
maintaining and expanding our market position;
attracting and retaining customers;
providing easy to use and innovative financial products and services;
our reputation and the market perception of our brand and overall value;
maintaining competitive pricing;
competing in a concentrated competitive landscape;
optimizing our costs of doing business;
the effectiveness of our technology (including cybersecurity defenses), products and services;
deploying a secure and scalable technology and back office platform;
complying with the differences in regulatory oversight regimes;
attracting new employees and retaining our existing employees; and
general economic and industry trends, including customer demand for financial products and services.
Our competitive position within the industry could be adversely affected if we were unable to address these factors adequately.
Information system failures, delays and capacity constraints could harm our business.
We receive, and process trade orders through a variety of electronic channels, including the Internet, mobile trading applications and our interactive voice response system. These methods of trading are heavily dependent on the integrity of the electronic systems supporting them. Our systems and operations are vulnerablewas paid, an amount equal to damage or interruption from natural disasters, power loss, human error, execution error, errors in models (such as those used for asset management, risk management, stress testing and compliance), employee misconduct, unauthorized trading, external fraud, cyber attacks, terrorist attacks, capacity constraints, software flaws, events impacting key vendors, phishing or other attempted unauthorized access, computer viruses, distributed denial of service ("DDOS") attacks, spurious spam attacks, ransomware, intentional acts of vandalism and similar events. It could take several hours or more to restore full functionality following any of these events. Extraordinary trading volumes could cause our computer systems to operate at an unacceptably slow speed or even fail. Extraordinary Internet traffic caused by DDOS, spam attacks or extreme market volatility could cause our website or other trading applications to be unavailable or slow to respond.
We may not be able to project accurately the rate, timing or cost of any increases in our business or to expand and upgrade our systems and infrastructure to accommodate any increases in a timely manner. While we have made significant investments in the reliability and scalability of our systems and added hardware and services to address extraordinary Internet traffic, there can be no assurance that our systems will be sufficient to handle extraordinary circumstances. Systems failures and delays could occur and could cause, among other things, unanticipated disruptions in service to our clients, substantial losses to our clients, slower system response time resulting in transactions not being processed as quickly as our clients desire, decreased levels of client service and client satisfaction and harm to our reputation. Slowness or unavailability may not impact all trading channels evenly, and some trading channels may be impacted while others are not. Social media and media reports may conflate one channel being unavailable with all channels being unavailable. Should our operations be disrupted, we might need to make significant unbudgeted investments to upgrade, repair or replace our technology infrastructure and might not be able to make such investments on a timely basis. As a result of these technological, operational and financial issues, we could suffer unexpected losses, reputational damage and/or regulatory action.
We are also dependent on the integrity and performance of securities exchanges, clearing houses and other intermediaries to which client orders are routed for execution and settlement. Systems failures and constraints and transaction errors at such intermediaries could result in delays and erroneous or unanticipated execution prices, cause substantial losses for us and our clients and subject us to claims from our clients for damages.
Further, a cybersecurity intrusion could occur and persist for an extended period of time without detection, and any investigation of a cybersecurity intrusion could require a substantial amount of time. During all this time we might not know the extent of the harm or how best to remediate it, and errors or omissions could be repeated or compounded before being discovered and remediated, all of which could aggravate the costs and consequences of the intrusion. A cybersecurity intrusion could result in misappropriation of our information or client information, destruction or obfuscation of information, inability to access or use information or impairment of the integrity of information, all of which could result in us being unable to perform our obligations to our clients, which could result in regulatory action and risk of claims for damages from clients.$724,938.
As our business model relies heavily on our clients' use of their own personal computers, mobile devices and the Internet, our business and reputation could be harmed by security breaches of our clients and third parties. Computer viruses and other attacks on our clients' personal computer systems, home networks and mobile devices or against the third-party networks and systems of Internet and mobile service providers could create losses for our clients even without any breach in the security of our systems and could thereby harm our business and our reputation. As part of our asset protection guarantee, we may reimburse our clients for losses in their accounts caused by a breach of security of our clients' own computers (through no fault of the client). Such reimbursements may not be covered by applicable insurance and could have an adverse effect on our business, financial condition and results of operations. The occurrence of any of these events could have adverse effects on our business, financial condition and results of operations. There is no guarantee that we will be able to maintain, expand and upgrade our systems and infrastructure to meet future requirements and mitigate future risks on a timely basis or that we will be able to retain all of the skilled information technology employees that we need.
Failure to protect client data or prevent breaches of our information systems could expose us to liability or reputational damage.
We are dependent on information technology networks and systems to securely process, transmit and store electronic information and to communicate among our locations and with our clients and vendors. As the breadth and complexity of this infrastructure continue to grow, the potential risk of security breaches and cyber attacks increases. Developing and enhancing new products and services, which is necessary for us to remain competitive, may involve the use or creation of new technologies, exposes us to cybersecurity and privacy risks that cannot be completely anticipated and increases the risk of security breaches and cyber attacks. As a financial services company, we are continuously subject to cyber attacks, DDOS and ransomware attacks, malicious code and computer viruses by activists, hackers, organized crime, foreign state actors and other third parties. Such breaches could lead to shutdowns or disruptions of our systems, account takeovers and unauthorized gathering, monitoring, misuse, loss, total destruction and disclosure of data and confidential information of ours, our clients, our employees or other third parties, or otherwise materially disrupt our or our clients' or other third parties' network access or business operations. In addition, vulnerabilities of our external service providers and other third parties could pose security risks to client information. The secure transmission of confidential information over public networks is also a critical element of our operations. Despite our efforts to assure the integrity of our systems, we may not be able to anticipate or to implement effective preventive measures against all security breaches, especially because the techniques that are used change frequently or are not recognized until launched and because security attacks can originate from a wide variety of sources. Data security breaches may also result from non-technical means (such as employee misconduct).
We, along with the financial services industry in general, have experienced losses related to clients' login and password information being compromised, generally caused by attacks capturing credentials directly from clients themselves, through phishing attacks, clients' use of non-secure public computers or vulnerabilities of clients' private computers and mobile devices. In 2007, we discovered and eliminated unauthorized code from our computer systems that had allowed an unauthorized third party to retrieve client email addresses, names, addresses and phone numbers from an internal database. Following the incident, we incurred significant remediation costs. In addition, in 2013, Scottrade Financial Services, Inc., which we acquired in September 2017, experienced a database breach. We are aware of subsequent attempts by other attackers to penetrate our systems using similar techniques and similar attacks against other financial institutions. Although we have taken steps to reduce the risk of such threats, our risk and exposure to a cyber attack or related breach remains heightened due to the evolving nature of these threats, our plans to continue to implement mobile access solutions to serve our clients, our routine transmission of sensitive information to third parties, the current global economic and political environment, external extremist parties and other developing factors. If a cyber attack or similar breach were to occur, we could suffer damage to our reputation and incur significant remediation costs and losses.
In providing services to clients, we manage, utilize and store sensitive and confidential client data, including personal data. As a result, we are subject to numerous laws and regulations designed to protect this information, such as U.S. federal and state laws and foreign regulations governing the protection of personally identifiable information. These laws and regulations are increasing in complexity and number, change frequently and sometimes conflict. If any person, including any of our employees, negligently disregards or intentionally breaches our established controls with respect to client data, or otherwise mismanages or misappropriates that data, we could be subject to significant monetary damages, regulatory enforcement actions, fines and/or criminal prosecution in one or more jurisdictions.
Unauthorized disclosure of sensitive or confidential client data, whether through systems failure, employee negligence, fraud or misappropriation, could damage our reputation and cause us to lose clients. Similarly, unauthorized access to or through our information systems, whether by our employees or third parties, including a cyber attack by third parties who may deploy viruses, worms or other malicious software programs, could result in negative publicity, significant remediation costs, legal liability, regulatory fines, financial responsibility under our asset protection guarantee to reimburse clients for losses in their accounts resulting from unauthorized activity in their accounts (through no fault of the client) and damage to our reputation and could have adverse effects on our results of operations.
Any actual or perceived breach of the security of our technology, or media reports of perceived security vulnerabilities of our systems or the systems of our third-party service providers, could damage our reputation, expose us to the risk of litigation and liability, disrupt our operations, increase our costs with respect to investigations and remediations, reduce our revenues as a result of the theft of intellectual property, and otherwise adversely affect our business. Further, any actual or perceived security breach or cyber attack directed at other financial institutions or financial services companies, whether or not we are impacted, could lead to a general loss of customer confidence in the use of technology to conduct financial transactions, which could negatively impact us. The occurrence of any of these events could have adverse effects on our business and results of operations.
If any person, including any of our employees, negligently disregards or intentionally breaches our established controls with respect to client or employee data, or otherwise mismanages or misappropriates that data, we could be subject to significant monetary damages, regulatory enforcement actions, fines and criminal prosecutions.
Although we maintain insurance coverage that we believe is reasonable, prudent and adequate for the purpose of our business, it might be insufficient in type or amount to protect us against all losses and costs stemming from security breaches, cyber attacks and other types of unlawful activity or any resulting disruptions from such events.
We also face risk related to external fraud involving the misappropriation and use of clients' user names, passwords or other personal information to gain access to their accounts. This could occur from the compromise of clients' personal electronic devices or as a result of a data security breach at an unrelated company where clients' personal information is taken and then made available to fraudsters. This risk has grown in recent years due to the increased sophistication and activities of organized crime and other external parties, including foreign state-sponsored parties. Losses in client accounts reimbursed under our asset protection guarantee against unauthorized account activity (through no fault of the client) could have adverse effects on our business, financial condition and results of operations.
Our investment advisory services subject us to additional risks that could result in liability for client losses, fines, penalties and other adverse effects.
We provide investment advisory services to investors through our SEC-registered investment advisors, TD Ameritrade, Inc., TD Ameritrade Investment Management, LLC and TradeWise Advisors, Inc. ("TradeWise"). TD Ameritrade, Inc. offers AdvisorDirect,® a service that refers a client to an independent RIA on the TD Ameritrade institutional platform. TD Ameritrade Investment Management, LLC manages an investment portfolio, through its Essential, Selective or Personalized Portfolios services, based on an investor's objectives, time horizon and risk tolerance. TradeWise provides an option advisory subscription service for self-directed investors. The risks associated with these investment advisory activities include those arising from possible conflicts of interest, unsuitable investment recommendations, inadequate due diligence, inadequate disclosure and fraud. Realization of these risks could lead to liability for client losses, regulatory fines, civil penalties and harm to our reputation and business.
Mergers and acquisitions in which we might engage involve risks that could adversely affect our business.
As part of our growth strategy, we regularly consider, and from time to time engage in, discussions and negotiations regarding transactions, such as mergers, acquisitions and other business combinations within our industry. The purchase price for possible acquisitions of businesses and technologies might be paid in cash, through the issuance of common stock or other securities, borrowings or a combination of these methods.
Business combinations entail numerous risks, including:
difficulties in the integration of acquired operations, services and products, which can impact retention of client accounts;
failure to achieve expected synergies;
diversion of management's attention from other business concerns;
assumption of unknown material liabilities of acquired companies, which could become material or subject us to litigation or regulatory risks;
amortization of acquired intangible assets, which could reduce future reported earnings; and
potential loss of clients or key employees.
We cannot be certain that we will be able to identify, consummate and successfully integrate business combinations, and no assurance can be given with respect to the timing, likelihood or business effect of any possible transaction. For example, we could begin negotiations that we subsequently decide to suspend or terminate for a variety of reasons. Also, business combinations are typically subject to closing conditions, including regulatory approvals and the absence of a material adverse change. Therefore, if and when we enter into a business combination agreement, there can be no guarantee that the transaction will close when expected, or at all. If a material transaction does not close, our stock price could decline.
Nevertheless, opportunities arise from time to time that we choose to evaluate. Any transactions that we pursue and consummate would involve these risks and uncertainties, as well as others. The risks of a business combination could result in the failure of the anticipated benefits of that particular combination to be realized, which in turn could have adverse effects on our business, financial condition, results of operations and prospects.
At our risk, we rely on external service providers to perform certain key functions.
We rely on a number of external service providers for certain key technology, processing, service and support functions. These include the services of other broker-dealers, market makers, exchanges and clearinghouses to execute and settle client orders. We contract with external providers for futures and foreign exchange clearing. External content providers provide us with financial information, market news, charts, option and stock quotes, research reports and other fundamental data that we offer to clients. These service providers face technological, operational and security risks of their own. A significant failure by any of them, such as improper use or disclosure of our confidential client, employee or Company information, could interrupt our business, subject us to losses and harm our reputation. Also, our external service providers may rely on others, including subcontractors or cloud computing service providers, to provide services to us, subject to similar risks.
We evaluate external service providers to verify that they can support the stability of our operations and systems. There is no assurance, however, that we will not experience business interruption or loss due to an act or omission of such a service provider. Any significant failures or security breaches by or of our external service providers or their subcontractors, including any actual or perceived cyber attacks, security breaches, fraud, phishing attacks, acts of vandalism, information security breaches and computer viruses that could result in unauthorized access, misuse, loss or destruction of data, interruption in service or other similar events, could interrupt our business, cause us to incur losses, subject us to fines or litigation and harm our reputation. An interruption in or the cessation of service by any external service provider and our inability to make alternative arrangements in a timely manner could have a material impact on our ability to offer products and services, cause us to incur losses, and could lead to a general loss of customer confidence in our security measures and technology infrastructure.
There is no assurance that our external service providers or their subcontractors will be able to continue to provide these services to meet our current needs in an efficient, cost-effective manner or that they will be able to adequately expand their services to meet our needs in the future. Some external service providers have assets located outside the United States that are integral to their service to us. Their ability to continue providing these services is subject to the risks of unfavorable political, economic, legal and other developments such as social or political instability, changes in government policies or changes in laws and regulations.
An interruption in or the cessation of service by an external service provider as a result of systems failure, capacity constraint, financial constraint or other financial problem, unanticipated trading market closure or for any other
reason, coupled with our possible inability to make alternative arrangements in a smooth and timely manner, could have adverse effects on our business, financial condition and results of operations. In this connection, we could incur significant additional costs to implement enhanced protective measures and technology, to investigate and remediate vulnerabilities or other exposures or to make required notifications. Switching to an alternative service provider might require a transition period and result in less efficiency.
Employee misconduct, which can be difficult to detect and deter, could harm our reputation and subject us to significant legal liability.
There have been numerous highly-publicized cases of fraud and other misconduct by financial services industry employees. Our employees could engage in misconduct that adversely affects our business. The precautions that we take to detect and deter employee misconduct might not be effective. If one or more of our employees were to improperly access, use or disclose confidential information or engage in other misconduct, we could be subject to regulatory sanctions and suffer serious harm to our financial condition, reputation, client relationships and prospects of attracting additional clients.
Our risk management practices may leave us exposed to unidentified or unanticipated risk.
Our management team is responsible for managing risk, using risk management processes, policies and procedures to identify, measure and manage risks. The risk committee of our board of directors assists the board in its oversight responsibilities relating to the identification, monitoring and assessment of the key risksPending Acquisition of the Company includingby Schwab
The pending acquisition by Schwab, if consummated, will constitute a change in control under the significant policies, procedures and practices employed in risk management. Our risk management methods, however, may not identify future risk exposures and may not be completely effective in mitigating our key risks. Furthermore, our risk management methods may not properly identify and mitigate the aggregation of risks across our organization or the interdependency of our risk mitigation efforts. In addition, some of our risk management methods are based on assumptions that could prove to be inaccurate. Failure to manage risk effectively could adversely affect our business, financial condition and results of operations. The expected phase-out of LIBOR could negatively impact our net interest income and could have other adverse effects.
Certainterms of the indenturesLTIP, Mr. Hockey’s employment agreement, and credit agreements governing our outstanding indebtedness for borrowed money reference LIBOR as the benchmark rate to determineterms sheets of Messrs. Boyle and deSilva. In accordance with the applicable interest rateSEC rules, the disclosures below under “Summary Table—Potential Payments Upon Termination or payment amount. We also use LIBORChange in some of our financial models. If LIBOR is discontinued after 2021 as expected, there will be uncertainty or differences in the calculation of the applicable interest rate or payment amount, dependingControl” are not based on the terms of the governing instruments,merger agreement with Schwab. As provided in further detail in the merger agreement, in connection with the merger, each outstanding and workunexercised option held by our NEOs will be requiredassumed by Schwab and become an option to transitionpurchase shares of voting common stock of Schwab (“Schwab common stock”), on the same terms and conditions as applied to the option immediately before the completion of the merger, except that the number of shares of Schwab common stock subject to such option and theper-share exercise price will be appropriately adjusted in a manner intended to reflect the merger. Each outstanding RSU award held by our NEOs will be assumed by Schwab and become a restricted stock unit award covering shares of Schwab common stock, on the same terms and conditions as applied to the award immediately before the completion of the merger, except that the number of shares of Schwab common stock subject to such award will be appropriately adjusted in a manner intended to reflect the merger. Each outstanding PRSU award held by our NEOs will be
converted into a restricted stock unit award covering Schwab common stock, with the number of shares of Company common stock earned to be determined based on the greater of (x) the actual level of achievement of the applicable performance goals as determined by the Compensation Committee prior to the completion of the merger using the new benchmark ratesinformation available as of the latest practicable date before the completion of the merger and (y) the target level, but with the number of shares of Schwab common stock subject to implement necessary changessuch award appropriately adjusted in a manner intended to our financial models. This could result in different financial performance for previously booked transactions and may impact our existing transaction data, products, systems, operations and pricing processes. The calculation of interest rates underreflect the replacement benchmarks could also impact our net interest income.merger. In addition, LIBOR may perform differently duringon December 20, 2019, the phase-out period thanvesting of Mr. Boyle’s RSU award granted to him on December 5, 2019, was accelerated in full in order to mitigate the past which could resultadverse tax consequences applicable under Sections 280G and 4999 of the Code to Mr. Boyle’s change in different interestcontrol related payments on our outstanding indebtedness. Risk Factors Relating toand benefits in connection with the Regulatory and Legislative Environment
New and changing laws, rules, regulations and guidance may have continuing negative impacts on our business and financial results.
New laws, rules, regulations and guidance, or changes in the interpretation and enforcement of existing federal, state, foreign and self-regulatory organization ("SRO") laws, rules, regulations and guidance may directly affect our business and the profitabilityanticipated acquisition of the Company by Schwab.
Summary Table—Potential Payments Upon Termination or Change in Control The following table summarizes potential payments upon termination or change in control for the operationNEOs who were serving as executive officers as of specificSeptember 30, 2019. Each of the NEOs will be entitled to receive change in control benefits only if his employment is terminated in connection with or following a change in control. “Cause” and “good reason,” where applicable, are defined above in the summary of employment agreement for Mr. Hockey and term sheets for Messrs. Boyle and deSilva and any applicable award agreements. Except as specifically indicated in the footnotes to the table below, we used the following assumptions in calculating the amounts included in the table and discussion below: As required by SEC rules, we assume the triggering event causing the payment occurred on September 30, 2019, the last business lines. day of our last completed fiscal year, and the price per share of the common stock of the Company was $46.70, the closing market price on that date. We treat all amounts of base salary and annual cash incentive that were earned and accrued, including unused vacation, as of the date of the triggering event as paid immediately prior to the triggering event. These payments and benefits are payable by the Company (or its successor as applicable, in the case of any payments and benefits occurring after a change in control). | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Termination without cause or resignation for good reason (including following a change in control), or continued employment through February 29, 2020 (4) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Termination without cause (including following a change in control), retirement | | | | | | | | | | | | | | | | | | | | (10) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Termination without cause within 24 months after a change in control | | | | | | | | | | | | | | | | | | | | | | | | | | | Termination without cause | | | | | | | | | | | | (8) | | | | (8) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Resignation for good reason within 12 month after a change in control | | | | | | | | | | | | | | | | | | | | | | | | | | | Resignation for good reason | | | | | | | | | | | | (8) | | | | (8) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Termination without cause within 24 months after a change in control | | | | | | | | | | | | | | | | | | | | (11) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Termination without cause | | | | | | | | | | | | | | | | (8) | | | | (11) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Termination without cause, retirement | | | | | | | | | | | | | | | | | | | | (11) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | Under Mr. Hockey’s employment agreement, Mr. Hockey will receive a lump sum cash payment equal to (a) 24 months of his base salary and (b) 24 months of his average annual cash incentive payments for the prior two years, vesting acceleration with respect to all time-based RSUs, and continue vesting in any options, PRSUs (based on actual performance), and other RSUs without regard to continued service requirements. Further, his options will remain outstanding for the remainder of its term. The amount under Other Benefits and Perquisites for Mr. Hockey includes the estimated employer portion of premium costs for the continuation of medical and dental coverage under COBRA for a period of two years after the termination date that he would receive under his employment agreement, the estimated amount of reimbursements for tax preparation services for his tax years 2019 and 2020, and reimbursement for legal fees incurred by Mr. Hockey relating to his separation and transition matters, up to a maximum of $75,000. |
| (2) | As of September 30, 2019, of the NEOs, only Messrs. Boyle and Quirk were eligible for retirement with respect to the retirement-related vesting benefits under the RSU and PRSU award agreements. Under Mr. Hockey’s employment agreement, if Mr. Hockey had resigned due to his voluntary retirement after the five-year anniversary of his becoming the Company’s CEO, then he would have received continued vesting of his options and PRSUs without regard to any continued service requirement, and his options would have remained exercisable for the remaining portion of its original term. Mr. Hockey had not yet met the requirements for having remained the Company’s CEO for such period during fiscal year 2019. |
| (3) | Under Mr. deSilva’s term sheet, Mr. deSilva will receive continued payments of base salary for 12 months and a lump sum cash bonus payment of $1,075,000 (which is the cash portion of his annual incentive at target). Mr. deSilva’s SAR award agreement provides that in the event of Mr. deSilva’s death or disability, or a termination of his employment without cause, any cash bonus amount that has accrued under the SAR award (but for which the continued employment requirement has not yet been satisfied) will become payable to him in full. |
| (4) | Under Mr. Hockey’s transition agreement, Mr. Hockey would receive a cash payment of $3,540,000, payable in 2020, and a PRSU award with the target number of shares of Company common stock subject to the award determined based on actual performance of the applicable goals under the fiscal year 2019 MIP but with the individual component of the goals deemed achieved at 100% of target levels. Mr. Hockey’s actual award granted on December 5, 2019, was granted in the form of RSUs and covers 121,512 shares of Company common stock. |
| (5) | During the period of his transition services under his transition agreement and so long as his employment does not terminate for cause or due to his death or disability, and he did not resign without good reason, Mr. Hockey would receive his annual cash incentive for fiscal year 2019, payable in the normal course based on actual performance under the fiscal year 2019 MIP but with the individual component of the goals deemed achieved at 100% of target levels. Pursuant to Mr. Hockey’s employment agreement, had his employment terminated due to death or disability, Mr. Hockey would have received a prorated portion (if any) of his cash incentive based on actual performance, for the year of termination of employment. Mr. Hockey’s actual cash incentive earned for the full fiscal year 2019 was $2,377,800. |
| (6) | Other than with respect to Messrs. Hockey and deSilva, the amounts represent the cash severance payments under Messrs. Boyle’s term sheet agreement or minimum cash severance payments with respect to the other NEOs under the Company’s executive compensation practices, in each case consisting of (a) four weeks of base salary for each completed year of service up to a maximum of 104 weeks and (b) four weeks of annual cash incentive for each completed year of service calculated based on target performance up to a maximum of 104 weeks. The Company’s executive compensation practices also provide for prorated payment of the cash portion of the NEO’s annual incentive based on actual performance. The actual cash incentive earned for the full fiscal year 2019 by each of Messrs. Nally and Quirk was $1,192,928 and $1,165,185, respectively. |
| (7) | RSU awards accelerate vesting as described further above except, with respect to Mr. Hockey, as specified in his employment agreement (as described in the footnote above), or with respect to Mr. Boyle, as specified in his term sheet agreement. Mr. Boyle’s term sheet agreement contemplates that RSU awards will vest: (i) upon a termination by the Company without cause, as to a prorated portion based on the number of full, 12-month periods of service completed during the vesting period, or (ii) upon a termination within 12 months after a change in control, in full. However, Mr. Boyle is eligible for retirement under the applicable RSU award agreements. Accordingly, upon any termination by the Company without cause, his RSU awards will vest in full. Mr. Quirk also is eligible for retirement under the applicable RSU award agreements. Accordingly, upon any termination by the Company without cause, his RSU awards will vest in full. |
| (8) | Vesting occurs on a prorated basis, as described further above. |
| (9) | Amounts represent PRSU awards at target levels. Amounts include the PRSU awards granted to NEOs on November 22, 2016, November 29, 2017, and December 5, 2018. Under the terms and conditions of the applicable PRSU award agreements, PRSU awards are treated as described further above. To the extent PRSUs remain outstanding and eligible to vest based on actual performance after the termination of the NEO’s employment, the amounts shown assume actual performance satisfies the applicable performance criteria at target. However, any vesting based on actual performance may range from 80% to 120% of target, depending on the extent of achievement of the applicable performance criteria. |
| (10) | Under Mr. Boyle’s term sheet agreement, this represents the estimated employer portion of premium costs for the continuation of medical, vision and dental coverage under COBRA for a period of 12 months after employment termination. |
| (11) | The amounts represent the estimated employer portion of premium costs for the continuation of medical, vision and dental coverage under COBRA for each of Messrs. Nally and Quirk, based on the Company’s executive compensation practices providing for this benefit over a period equal to one month for each completed year of service, with a minimum of 6 months and a maximum of 18 months. As of September 30, 2019, Messrs. Nally and Quirk had completed 25 and 12 years of service, respectively. |
In addition, new and changing laws, rules, regulation and guidance could result in limitations onaccordance with Item 402(u) of RegulationS-K under the linesSecurities Act of business1933, as amended, we conduct, modificationsare providing the ratio of the annual total compensation of our CEO to the annual total compensation of our business practices, more stringent capital and liquidity requirements or other costs and could limit our ability to return capital to stockholders.median employee. | The annual total compensation of our median employee, excluding our CEO, for our fiscal year 2019 was $83,718. | | The annual total compensation of our CEO for our fiscal year 2019 was $9,772,730. | | The ratio of the annual total compensation of our CEO to that of our median employee for our fiscal year 2019 was estimated to be 116.7 to 1. |
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), enactedmedian employee generally is the employee whose annual total compensation is at the midpoint of our employees, ranked in 2010, required many federal agencies to adopt new rules and regulations applicable toorder of their compensation amounts. We usedW-2 compensation as the financial services industry and calledcompensation measure for many studies regarding various industry practices. In particular, the Dodd-Frank Act gavedetermining our median employee, as permitted by the SEC discretion to adopt rules regarding standardsrules. We reviewed theW-2 compensation information for the approximately 9,400 individuals who, for purposes of conduct for broker-dealers providing investment advice to retail customers.
The U.S. DepartmentSeptember 30, 2019, the last day of Labor ("DOL") enacted regulations changing the definition of who is an investment advice fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA)our fiscal year 2019, were employed by us and how such advice can be provided to account holders in retirement accounts such as 401(k) plans and Individual Retirement Arrangements (IRAs). The DOL's final rule defining the term "fiduciary" and exemptions related to itwere located in the contextU.S., excluding our CEO.
We excluded all of ERISAour approximately 21 employees who are located outside of the U.S., including approximately 8 employees in Hong Kong, 1 employee in India and retirement accounts12 employees in Singapore. Ournon-U.S. employees constituted less than 5% of our estimated total of 9,421 employees as of September 30, 2019. Based onW-2 compensation information, we identified a small subset of employees whose compensation was vacatedclosest to or constituted the medianW-2 compensation amount. We then calculated the fiscal year 2019 annual total compensation of each employee in June 2018 by the U.S. Court of Appeals for the Fifth Circuit. The SEC and several states then proposed heightened standard of conduct regulations,subset in a manner consistent with the SEC adopting such regulationsrules for determining the compensation of our NEOs disclosed in June 2019.the Summary Compensation Table. The employee whose annual total compensation was at the median of the subset was selected as the median employee whose annual total compensation was compared to the annual total compensation of our CEO for purposes of the ratio set forth above. We did not make any cost of living adjustments. The rulesfollowing table summarizesnon-employee director compensation for calendar year 2019 under the terms of the TD Ameritrade Holding Corporation 2006 Directors Incentive Plan: | | | | | | Chairman of the Board Annual Retainer | | | | | | | | | | | | | | | | | | Annual Committee Chair Fees(1) | | $25,000 for chairs of Audit and Risk Committees $15,000 for chairs of Governance, Compensation, and OID Committees | Annual Committee Member Fees(1)(3) | | $10,000 for Audit and Risk Committees $5,000 for Governance, Compensation, and OID Committees |
| (1) | Excludes Chairman of the Board. |
| (2) | Increased from $130,000 for calendar year 2018 to $145,000 for calendar year 2019. |
| (3) | Excludes Committee Chairs. |
As part of its annual review of director compensation, the Corporate Governance Committee requested that Semler Brossy conduct an independent review of the Company’s non-employee director compensation program in early fiscal 2019. Semler Brossy conducted an in-depth assessment of each element of compensation and interpretations adoptedof the compensation program structure in comparison to the companies in the fiscal year 2018 peer group used for executive compensation purposes. Semler Brossy’s review found that the cash compensation paid to our non-employee directors was consistent generally with the median paid in our peer group, but the amount of our equity retainer was below the fiscal year 2018 peer group median. The amount of equity retainer had not been increased since 2010. Following the recommendation of the Corporate Governance Committee, on November 16, 2018, the board of directors approved a $15,000 increase in the annual equity retainer for our non-employee directors (other than the chairman), from $130,000 to $145,000. This increase resulted in bringing the annual equity retainer to approximately the peer group median.
Non-employee directors may also receive, at the discretion of the Corporate Governance Committee and approved by the SECboard of directors, payment of additionalnon-employee director compensation when special circumstances warrant. In 2019, Ms. Hailey received $120,000, Mr. Mitchell received $120,000 and Mr. Tessler received $160,000 in June 2019 include Regulation Best Interest andconsideration for their work as members (and in the new Form CRS Relationship Summary, which are intended to enhance the quality and transparencycase of retail investors' relationships with broker-dealers and investment advisers. Regulation Best Interest enhances the broker-dealer standard of conduct beyond existing suitability obligations, requiring compliance with disclosure, care, conflict of interest and compliance obligations. The regulation requires that a broker-dealer or natural person who is an associated personMr. Tessler, as Chairman) of the broker-dealer shall actStrategic Development Committee in connection with the pending acquisition by Schwab.2006 Directors Incentive Plan The 2006 Directors Incentive Plan is designed to: fairly compensatenon-employee directors for work required of a company the size and complexity of TD Ameritrade and align directors’ interests with the long-term interests of stockholders. The annual cash retainer, the committee chair and membership fees are paid in advance at the beginning of each calendar year. Under the 2006 Directors Incentive Plan, anynon-employee director is permitted to defer any or all of the cash or equity award. Investment earnings on amounts deferred in the best interestform of stock units are based on the fluctuations in the underlying common stock of the retail customerCompany. Deferred cash awards earn interest at the time it makes a recommendationprime rate as reported by The Wall Street Journal. The number of RSUs under the annual equity grant is calculated by using the average of the high and low price of the Company’s common stock for the 20 trading days prior to the grant date. RSU awards vest completely on the first anniversary of the grant date and are settled by issuing one share of Company common stock for each RSU granted. RSUs do not have any voting rights. RSUs receive the benefit of any securities transaction or investment strategy involving securities, prioritizing the interestsdividends on common stock of the customer above any interestsCompany in the form of additional DEUs that are subject to the same vesting schedule as the original RSUs on which the dividends are paid. In the event of the broker-dealerdeath or disability of anon-employee director or a change in control of the Company, the RSUs will vest and be settled in common stock of the Company. Non-employee directors are reimbursed for reasonable expenses incurred in connection with attending meetings of the board of directors. The Company also indemnifies and provides liability insurance for its associated persons. Amongdirectors and officers.For calendar year 2019, Mr. Moglia was compensated pursuant to anon-employee chairman term sheet. Under the term sheet, Mr. Moglia earns a total annual retainer of $400,000. The term sheet also provides for administrative support equivalent to that provided to a senior executive, including secretarial assistance, office, and certain other things, this requiresequipment. Mr. Moglia’s 2019 annual retainer was paid 50% in cash and 50% in the broker-dealer to mitigate conflictsform of interest arising from financial incentives in selling securities products. The compliance date for Regulation Best Interest andRSUs. For the provisions of thenon-employee chairman term sheet, see Exhibit 10.2 of the Company’s Annual Report on Form CRS is June 30, 2020.10-K It is unclear whether Regulation Best Interest will have any preemptive effect on similar existing or forthcoming state-level standard of conduct regulations. These regulations may have a material impact on the provision of investment services to retail investors, including imposing additional compliance, reporting and operational requirements, which could negatively affect our business. These regulations also continue to subject us to an increased risk of class actions and other litigation and regulatory risks. It is not certain what the scope of future rulemaking or interpretive guidance fromfiled with the SEC and other regulatory agencies may be, howon November 18, 2011.
As part of the courts and regulators might interpret these rules and what impact this will haveannual review of director compensation, the Corporate Governance Committee asked Semler Brossy, the Compensation Committee’s independent compensation consultant, to review Mr. Moglia’s compensation in his role as chairman. Semler Brossy’s review found that Mr. Moglia’s compensation was consistent generally with the median compensation fornon-executive chairman within our fiscal year 2019 peer group. (For more information on our compliance costs, business, operationspeer group, refer to “Compensation Discussion and profitability. Analysis – Executive Summary.”) The SEC has adopted National Market System (NMS) Rule 610T to conduct a transaction fee pilot (the “Pilot”) designed to generateCorporate Governance Committee considered the data that will help the SEC analyze the effects of exchange transaction fee and rebate pricing models on order routing behavior, execution quality, and market quality generally. Data from the Pilot will be used to facilitate an empirical evaluation of whether the exchange transaction-based fee and rebate structure is operating effectively to further statutory goals and whether there is a need for any potential regulatory action in this area. In March 2019, the SEC issued an order issuing a stay on parts of Rule 610T and the Pilot pending a court decision regarding certain petitions filedprovided by the New York Stock Exchange, Nasdaq and Cboe Global Markets, Inc. for review and further order of the SEC. Any changes arising from the Pilot,Semler Brossy, as well as other potential regulatory actions, may impact certainMr. Moglia’s responsibilities as chairman of the board of directors (including serving as a liaison between the board and senior management and conducting annual board interviews as part of the annual board evaluation process) and his unique insight and experience as our remuneration arrangements with respectformer chief executive officer. In light of this review, the Corporate Governance Committee continues to payment for order flowbelieve that the annual retainer amount is appropriate and rebate structure and may impose additional technological, operational and compliance costs on us and creates uncertainty with regard to their effects. Our profitability could also be affected by new or modified laws that impact the business and financial communities generally, includingmade no changes to the laws governing banking, the securities market, fiduciary duties, conflicts of interest, taxation, electronic commerce, client privacy and security of client data. As existing laws are modified and new laws are implemented, we may incur significant additional costs and have to expend a significant amount of time to develop and integrate appropriate systems and procedures to ensure initial and continuing compliance with such laws. These additional costs could have adverse effects on our profitability.calendar year 2020 retainer amount.
Failure to comply with net capital requirements could adversely affect our business.Director Compensation Table for Fiscal Year 2019 The SEC, FINRA, CFTC, NFAtable below provides information on compensation fornon-employee directors who served during fiscal year 2019. Compensation information for Mr. Hockey, who was a NEO and various other regulatory agencies have stringentserved as an employee director of the Company during fiscal year 2019, is disclosed in the Summary Compensation Table under “Executive Compensation and Related Information.”
| | | | | | | | | | | | | | | | | | | | | | | | Fees Earned or Paid in Cash (1) | | | | | | Nonqualified Deferred Compensation Earnings (5) | | | All Other Compensation (6) ($) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (2) | | | | | | | | | | | | | | | | (2) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | The amounts in this column represent, other than with respect to Messrs. Bettino and Ricketts, amounts paid in cash for retainers and fees for services provided by our non-employee directors for fiscal year 2019 (consisting of the amount of the retainers and fees corresponding to the applicable portions of calendar years 2018 and 2019 that comprised fiscal year 2019). For Mr. Bettino, the amount in this column represents the dollar amount of retainers and fees earned for services provided in fiscal year 2019 that were deferred in the form of 2,042 deferred stock units. For Mr. Ricketts, the amount in this column represents the dollar amount of retainers and fees earned for services provided in fiscal year 2019 that Mr. Ricketts elected to receive in the form of cash and 1,457 shares of Company common stock. For each of Ms. Hailey, Mr. Mitchell and Mr. Tessler, the amounts in this column include fees paid during fiscal 2019 in the amount of $60,000, $60,000, and $80,000, respectively, and one quarter of the fees paid in December 2019 in the amount of $15,000, $15,000 and $20,000, respectively, in consideration for his or her work during fiscal 2019 in connection with the pending acquisition by Schwab. Mr. Masrani, an employee of TD, elected during fiscal year 2019 not to receive compensation for services provided as anon-employee director both in fiscal year 2019, and generally on an ongoing basis. |
| (2) | The combined value of Mr. Moglia’s cash and equity compensation remained unchanged from calendar year 2018 to calendar year 2019. His annual cash compensation for fiscal year 2019 reflects the applicable portions of Mr. Moglia’s calendar years 2018 and 2019 annual cash retainers allocated to services he provided as a director during fiscal year 2019. For calendar year 2019, Mr. Moglia was paid such compensation 50% as an annual cash retainer of $200,000 and 50% as an equity award. For calendar year 2018, Mr. Moglia did not receive any equity awards for his services. Instead, the value of any equity awards he otherwise would have received for such calendar year 2018 services were paid entirely in cash. As a result, his annual cash retainer for calendar year 2018 was $400,000 and his equity compensation was $0. The amount shown in the table above being greater than $200,000 is attributable to the additional amount that he received for calendar year 2018 as cash compensation for the forgone equity compensation. |
| (3) | The following table summarizes, as of September 30, 2019, the aggregate number of outstanding deferred stock units and RSUs, including DEUs associated with the outstanding deferred stock units and RSU awards, held by the individuals who served as our non-employee directors during fiscal year 2019. Outstanding stock-based awards for Mr. Hockey, who is a NEO and served as an employee director of the Company during fiscal 2019, are summarized in the Outstanding Equity Awards at September 30, 2019, table under “Executive Compensation and Related Information.” |
| | | | | | | | | | | | Deferred Stock Unit
Awards | | | Restricted Stock Unit
Awards | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (4) | The amounts in this column represent the aggregate grant date fair value calculated in accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 718,Compensation — Stock Compensation non-employee directors during fiscal year 2019. In fiscal year 2019, the RSUs granted as 2019 annual equity grants on February 20, 2019, as noted in the main table above, had a grant date fair value of $146,735. |
| (5) | The amounts in this column represent above market interest calculated under SEC rules as the interest credited under the plan to the director minus the interest that would have been credited using 120% of the long-term, quarterly applicable federal rate as prescribed under Internal Revenue Code Section 1274(d) for the month in which the applicable interest under the plan was determined. |
| (6) | The amount in this column represents reimbursement for post-retirement medical coverage. In connection with Mr. Moglia’s transition to chairman of our board of directors from CEO in 2008, Mr. Moglia became eligible, pursuant to his employment agreement then in effect, to receive post-retirement medical coverage for him, his spouse and any eligible dependents for his life (and his spouse’s life if she survives him), with the coverage secondary to his Medicare benefits. To receive this benefit, Mr. Moglia agreed to a release of claims in favor of the Company and non-competition, non-solicitation andnon-disparagement obligations for a specified period (which has been satisfied) following employment termination. |
The vesting terms of the equity awards described above are subject to acceleration upon the earlier consummation of the pending acquisition by Schwab. As provided in further detail in the merger agreement between the Company and Schwab, each RSU award granted under the 2006 Directors Incentive Plan (together with respectany related DEUs and deferred stock units) outstanding as of immediately before the completion of the merger will vest, and be cancelled and converted into the right to receive the maintenancemerger consideration (as defined below) as if such RSU award had been settled in shares of specific levelsCompany common stock immediately before the completion of net capitalthe merger. For further details, refer to Item 11 — Compensation Discussion and Analysis — Pending Acquisition of the Company by securities broker-dealers, FCMs and FDMs. Net capital is a measure of a broker-dealer's, an FCM's or an FDM's readily available liquid assets, reduced by its total liabilities other than approved subordinated debt. Our broker-dealer and FCM/FDM subsidiariesSchwab. Non-employee Director Stock Ownership GuidelinesUnder the Company’snon-employee director stock ownership guidelines,non-employee directors receiving compensation are required to complyown shares of the Company’s common stock with net capital requirements. If we failthe value described below, no later than the five-year anniversary of becoming a director of the Company. Shares counted toward this calculation include common stock beneficially owned by the director and vested and unvested RSUs. As of September 30, 2019, the last day of our fiscal year 2019, allnon-employee directors with more than five years of service with the Company who are receiving compensation for their services as a director have met this guideline. | | | | | | | | | | | | | | | | | | | Multiple of 2019 Cash
Retainer | | | Multiple of 2019 Total
Retainer | | | | $ | | | | | | | | | | | | | $ | | | | | | | | | | |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Stock Ownership of Certain Beneficial Owners and Management As of January 15, 2020, there were 540,641,190 shares of common stock issued and outstanding. The following table sets forth, as of January 15, 2020, the beneficial ownership of the Company’s common stock by each of the NEOs, by current directors, by each person believed by the Company to maintainbeneficially own more than 5% of the required net capital,Company’s common stock and by all current executive officers and directors of the SECCompany as a group. Shares of common stock subject to options that are exercisable within 60 days of January 15, 2020 are deemed beneficially owned by the person holding such options and are treated as outstanding for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage of ownership of any other person. RSUs held by our directors and officers and PRSUs held by our officers are included below, but do not have voting rights until the units vest and the underlying shares are distributed. Deferred stock units held by our directors and officers are included below, but do not have voting rights until the underlying shares are distributed to the holder pursuant to his or her deferral election. The business address of each of the CFTC could suspend or revoke our registration,Company’s directors and FINRA or the NFA could expel us from membership, which could ultimately lead to our liquidation, or they could impose censures, fines or other sanctions. If the net capital rules are changed or expanded, or if there is an unusually large charge against net capital, then our operations that require capital could be limited, and weexecutive officers is: TD Ameritrade Holding Corporation, 200 South 108th Avenue, Omaha, Nebraska 68154. | | | | | | | | | | | | | | | | | Directors and Executive Officers | | | | | | | | | Joseph H. Moglia, (1) Chairman | | | | | | | | | Tim Hockey, (2) Senior Advisor (formerly President and CEO) | | | | | | | | | Stephen J. Boyle, (3) Interim President and CEO, Director (formerly Executive Vice President, CFO) | | | | | | | | | Peter J. deSilva, (4) Executive Vice President, Retail Distribution | | | | | | | | | Thomas A. Nally, (5) Executive Vice President, Institutional Services | | | | | | | | | Steven M. Quirk, (6) Executive Vice President, Trading and Education | | | | | | | | | Lorenzo A. Bettino, (7) Director | | | | | | | | | V. Ann Hailey, (8) Director | | | | | | | | | Brian M. Levitt, (9) Director | | | | | | | | | Karen E. Maidment, (10) Director | | | | | | | | | Bharat B. Masrani, Director | | | | | | | | | Irene R. Miller, (11) Director | | | | | | | | | Mark L. Mitchell, (12) Director | | | | | | | | | Wilbur J. Prezzano, (13) Director | | | | | | | | | Todd M. Ricketts, (14) Director | | | | | | | | | Allan R. Tessler, (15) Director | | | | | | | | | All current Directors and Executive Officers as a group (16) (16 persons) | | | | | | | | | | | | | | | | | | The Toronto-Dominion Bank (17) Toronto, Ontario, Canada M5K IA2 | | | | | | | | % | T. Rowe Price Associates, Inc. (18) | | | | | | | | % | J. Joe Ricketts, (19) Founder 1395 S. Platte River Drive | | | | | | | | % |
| * | Less than 1% of the issued and outstanding shares. |
may not be able to pay dividends or make stock repurchases. A large operating loss or charge against net capital could have adverse effects on our ability to maintain or expand our business.
Extensive regulation and regulatory uncertainties could harm our business.
| (1) | Consists of 110,000 shares held by Mr. Moglia directly and 3,661 RSUs. |
| (2) | Consists of 503,247 shares issuable upon the exercise of options exercisable within 60 days of January 15, 2020, 293,452 RSUs and 218,121 PRSUs. |
| (3) | Consists of 17,127 shares held by Mr. Boyle directly, 115,084 shares held for the benefit of Mr. Boyle in a deferred compensation account under the Company’s Executive Deferred Compensation Program and 41,965 PRSUs. |
| (4) | Consists of 28,946 shares held by Mr. deSilva directly, 29,234 RSUs and 26,127 PRSUs. |
| (5) | Consists of 93,050 shares held by Mr. Nally directly, 31,603 RSUs and 61,165 PRSUs. |
| (6) | Consist of 30,807 shares held by Mr. Quirk directly, 30,995 RSUs and 39,318 PRSUs. |
| (7) | Consists of 11,272 shares held by Mr. Bettino directly, 2,654 RSUs and 6,649 stock units held in a deferred compensation account for Mr. Bettino. |
| (8) | Consists of 1,528 shares held by Ms. Hailey directly, 2,654 RSUs and 8,365 stock units held in a deferred compensation account for Ms. Hailey. |
| (9) | Consists of 5,000 shares held by Mr. Levitt directly, 2,654 RSUs and 9,222 stock units held in a deferred compensation account for Mr. Levitt. |
| (10) | Consists of 3,582 shares held by Ms. Maidment directly, 2,654 RSUs and 65,882 stock units held in a deferred compensation account for Ms. Maidment. |
| (11) | Consists of 9,519 shares held by Ms. Miller directly and 2, 654 RSUs. |
| (12) | Consists of 27,457 shares held by Mr. Mitchell directly, 2,654 RSUs and 29,025 stock units held in a deferred compensation account for Mr. Mitchell. |
| (13) | Consists of 65,813 shares held by Mr. Prezzano directly, 2,654 RSUs and 50,385 stock units held in a deferred compensation account for Mr. Prezzano. |
| (14) | Consists of 179,985 shares held by Mr. Todd M. Ricketts directly, 2,654 RSUs, 8,059 shares held by Mr. Ricketts’ spouse and 271,714 shares held in trusts for the benefit of Mr. Ricketts’ spouse and children. |
| (15) | Consists of 65,010 shares held by Mr. Tessler directly, 2,654 RSUs and 10,000 shares held by International Financial Group, Inc. Mr. Tessler is chairman, chief executive officer and sole stockholder of International Financial Group, Inc. |
| (16) | Includes 944,588 shares of common stock, 301,013 RSUs and PRSUs and 284,612 stock units held in deferred compensation accounts. |
| (17) | Based on Schedule 13D/A filed on November 27, 2019 by The Toronto-Dominion Bank, TD Group US Holdings LLC, a wholly-owned subsidiary of The Toronto-Dominion Bank, and TD Luxembourg International Holdings S.à.r.l., a wholly-owned subsidiary of TD Group US Holdings LLC. |
| (18) | Based on a Form 13G/A filed on January 10, 2020 by T. Rowe Price Associates, Inc. T. Rowe Price Associates, Inc. claimed sole voting authority with respect to 16,125,891 shares and no voting authority with respect to 42,819,149 shares. These securities are owned by various individual and institutional investors, for which T. Rowe Price Associates, Inc. serves as investment advisor with power to direct investments and/or sole voting power to vote the securities. For purposes of the 1934 Act, T. Rowe Price Associates, Inc. is deemed to be a beneficial owner of such securities; however, T. Rowe Price Associates, Inc. expressly disclaims that it is, in fact, the beneficial owner of such securities. |
| (19) | Based on Schedule 13G filed on February 14, 2019 by Mr. J. Joe Ricketts. Does not include 13,873,725 shares held by Mr. Ricketts’ spouse, Marlene M. Ricketts, of which Mr. Ricketts disclaims beneficial ownership. |
The securities industry isproposed acquisition by Schwab will, if consummated, constitute a change in control. On November 24, 2019, the Company entered into an Agreement and Plan of Merger (the “merger agreement”) with Schwab, a Delaware corporation. Upon the terms and subject to extensive regulation by federal, state, international government and self-regulatory agencies, and financial services companies are subject to regulations covering all aspectsthe conditions of the securities business. The costsmerger agreement, a wholly owned subsidiary of Schwab will merge with and uncertainties relatedinto the Company (the “merger”), with the Company surviving as a wholly owned subsidiary of Schwab. Pursuant to complyingthe merger agreement, upon the closing of the merger, each share of Company common stock will be converted into the right to receive 1.0837 shares of Schwab common stock (the “merger consideration”); provided, however, that if the merger consideration issuable to TD Bank and its affiliates, together with these regulations continue to increase. Regulations are intended to ensure the integrityany other shares of financial markets, appropriate capitalization of broker-dealers, FCMsSchwab common stock then owned by TD Bank and FDMs and the protection of clients and their assets. These regulations often serve to limit our business activities through capital, client protection and market conduct requirements, as well as restrictions on the activities that we are authorized to conduct. Federal, state and foreign regulators, and SROs, among other things, can censure, fine, issue cease-and-desist orders to, suspend or expel a regulated entity or any of its officers or employees. Despite our efforts to comply with applicable legal requirements, there areaffiliates, would equal a number of risks, including in areas where applicable laws or regulations may be unclear or where regulators could revise their previous guidance, and we could failshares of Schwab common stock exceeding 9.9% (or such lower percentage of shares of Schwab common stock as the Federal Reserve Board permits TD Bank to establish and enforce procedures to comply with applicable legal requirements and regulations, which could have adverse effects on our business. Past turmoilacquire in the financial markets has contributed to changes in laws and regulations, heightened scrutinymerger consistent with a determination that TD Bank does not control Schwab for purposes of the conduct of financial services firms and increasing penalties for violations of applicable laws and regulations. We may be adversely affected by new laws or regulations, changes in the interpretation of existing laws or regulations or more rigorous enforcement. The new laws and regulations may be complex, and we may not have the benefit of regulatory or federal interpretations to guide us in compliance. Changes in laws and regulations or new interpretations of existing laws and regulations also can have adverse effects on our methods and costs of doing business. We also may be adversely affected by other regulatory changes related to suitability of financial products, supervision, sales practices, application of fiduciary standards, best execution and market structure, which could limit the Company's business. Because TD, among other things, owns more than 25% of our common stock, we are considered a non-bank subsidiary of TD under the Bank Holding Company Act of 1956, (the "BHC Act"). Asas amended, or the Home Owners’ Loan Act of 1933, as amended) of the issued and outstanding shares of Schwab common stock as of immediately following the closing of the merger, then TD Bank will receive one share of nonvoting common stock of Schwab in lieu of each such excess share of Schwab common stock. The merger agreement, as may be amended from time to time, was filed with the SEC on November 27, 2019, as Exhibit 2.1 to the Company’s Current Report on Form8-K. The stockholder vote to approve the merger will be held at a result, underSpecial Meeting of Stockholders. Consummation of the BHC Act, we aremerger remains subject to certain customary closing conditions, including the supervisionreceipt of applicable regulatory approvals and regulationapproval by the stockholders of both companies. Assuming timely satisfaction of the Federal Reserve. These banking regulations limitnecessary closing conditions, we anticipate that the activities andmerger will be completed in the typessecond half of businesses that we may conduct andcalendar 2020. Concurrently with entering into the types of companies we may acquire, and under these regulationsshare purchase agreement related to the Federal Reserve could impose significant limitations on our current business and operations. TD is currently regulated as a "financial holding company" under the BHC Act, which allows TD and us to engage in a much broader set of activities than would otherwise be permitted under the BHC Act. Any failureCompany’s acquisition of TD to maintain its status as a financial holding company could result in substantial limitations onWaterhouse, the Company, certain of our activities. Financial services firms are subject to numerous actual or perceived conflicts of interest, as to which regulatorsRicketts stockholders and SROs have increased their scrutiny. Addressing conflicts of interest is a complexTD entered into the Stockholders Agreement. The Stockholders Agreement contains certain governance arrangements and difficult undertaking. Our business and reputation could be harmed if we were to fail, or appear to fail, to address conflicts appropriately.
In addition, we use the Internet as a major distribution channel to provide services to our clients. A number of regulatory agencies have adopted regulations regarding client privacy, system security and safeguarding practices and the use of client information by service providers. Additional laws and regulationsprovisions relating to the Internet and safeguarding practices could be adopted in the future, including laws related to access, identity theft and regulations regarding the pricing, taxation, content and quality of products and services delivered over the Internet. Complying with these laws and regulations may be expensive and time-consuming and could limit our ability to use the Internet as a distribution channel, which would have adverse effects on our business and profitability.
While we maintain systems and procedures designed to ensure that we comply with applicable laws and regulations, violations could still occur. In addition, some legal and regulatory frameworks provide for the imposition of fines or penalties for non-compliance even though the non-compliance was inadvertent or unintentional and even though systems and procedures reasonably designed to prevent violations were in place at the time. There may be other negative consequences resulting from a finding of non-compliance, including restrictions on certain activities. Such a finding may also damage our reputation and our relationships with regulators and could restrict the ability of institutional investment managers to invest in our securities.
We are subject to litigation and regulatory investigations and proceedings and may not always succeed in defending against them.
As a participant in the financial services industry, we face substantial litigation and regulatory risks. We are subject to arbitration claims and lawsuits in the ordinary course of our business, as well as class actions and other significant litigation. We also are the subject of inquiries, investigations and proceedings by regulators, other government agencies and SROs. Even if and when we succeed in defending against these actions, the defense may be costly to us.
The SEC, FINRA and other SROs and state securities commissions, among other things, can censure, fine, issue cease-and-desist orders or suspend or expel a broker-dealer or any of its officers or employees. Similarly, state attorneys general can bring legal actions on behalf of the citizens of their states to assure compliance with state laws. Regulatory agencies in countries outside of the U.S. have similar authority. The ability to comply with applicable laws and rules is dependent in part on the establishment and maintenance of a reasonable compliance function. Failure to establish and enforce reasonable compliance procedures, even if unintentional, can subject us to significant losses or disciplinary or other actions.
Actions brought against us may result in settlements, awards, injunctions, fines, penalties and other results adverse to us. Predicting the outcome of such matters is inherently difficult, particularly where claims are brought on behalf of various classes of claimants or by a large number of claimants, when claimants seek substantial or unspecified damages or when investigations or legal proceedings are at an early stage. A substantial judgment, settlement, fine or penalty could be material to our operating results or cash flows for a particular period, depending on our results for that period, or could cause us significant reputational harm, which could harm our business prospects. In market downturns, the volume of legal claims and amount of damages sought in litigation and regulatory proceedings against financial services companies have historically increased.
We also are subject to litigation claims from third parties alleging infringement of their intellectual property rights. Such litigation can require the expenditure of significant resources, regardless of whether the claims have merit. If we were found to have infringed a third-party patent or other intellectual property right, then we could incur substantial liability and in some circumstances could be enjoined from using the relevant technology or providing related products and services, which could have adverse effects on our business and results of operations.
Risk Factors Relating to Owning Our Stock
TD exercises significant influence over us.
As of September 30, 2019, TD owned approximately 43% of our outstanding common stock. As a result, TD generally has the ability to significantly influence the outcome of any matter submitted to a vote of our stockholders and, as a result of its significant share ownership in TD Ameritrade, TD may have the power, subject to applicable law, to significantly influence actions that might be favorable to TD but not necessarily favorable to our other stockholders.
The stockholders agreement provides that TD may designate five of the twelve memberscomposition of our board of directors, stock ownership, transfers by TD, voting and various other matters. On December 4, 2013, the Company entered into Amendment No. 5 to the Stockholders Agreement, which extended the term of the Stockholders Agreement until January 24, 2021 and provided that, as of January 24, 2016, the Ricketts stockholders would cease to be parties to the Stockholders Agreement and subject to any of its terms (the “Ricketts Cessation”).
Governance of TD Ameritrade. The Stockholders Agreement provides that the board of directors of the Company consists of twelve members, up to five of whom may be designated by TD, one of whom is the CEO of the Company and the remainder of whom are outside independent directors. The outside independent directors are nominated by the OID Committee, subject to TD’s right to reject such nominees on a reasonable basis. The number of directors designated by TD depends on it maintaining specified ownership thresholds of common stock and may increase or decrease from time to time based on those ownership thresholds, but will never exceed five. In 2013, the Ricketts stockholders’ ownership decreased, resulting in a decrease in the number of directors that they were entitled to designate from two to one. The vacancy created by this decrease was filled by Mr. Bettino, an outside independent director, in accordance with the terms of the Stockholders Agreement. In May 2014, Mr. Moglia met the requirements for independence and was designated as an outside independent director. On December 22, 2015, Mr. Todd M. Ricketts was elected as a member of the board of directors as an outside independent director, effective February 18, 2016, obviating the requirement under the Stockholders Agreement that Mr. Ricketts resign from the board of directors immediately prior to the 2016 annual meeting of stockholders in connection with the Ricketts Cessation.
The Stockholders Agreement provides, subject to applicable laws and certain conditions and exceptions, that the Company shall cause each committee of its board of directors to consist of two of the directors designated by TD, and three outside independent directors. These levels of committee representation are subject to adjustment from time to time based on TD'sTD’s maintenance of specified ownership positions in TD Ameritrade. As of September 30, 2019, based on its ownership positions,thresholds. TD has agreed to vote its shares of common stock in favor of, and the right to designate five membersCompany agreed that it would solicit votes in favor of, our board of directors. Accordingly, TD is able to significantly influenceeach director nominated for election in the outcome of all matters that come before our board.manner provided for in the Stockholders Agreement. TD is permitted under the stockholders agreement to exercise voting rights ononly with respect to up to 45% of ourthe outstanding shares of common stock until termination of the stockholders agreement (JanuaryCompany for the remaining term of the Stockholders Agreement. Under the Stockholders Agreement (beginning January 24, 2021). If our2016) if the Company’s stock repurchases cause TD'sTD’s ownership percentage to exceed 45%, TD is required toshall use reasonable efforts to sell or dispose of such excess stock, subject to TD'sTD’s commercial judgment as to the optimal timing, amount and method of sales with a view to maximizing proceeds from such sales. TD has no absolute obligation to reduce its ownership percentage to 45% by the termination of the stockholders agreement.Stockholders Agreement. However, prior to and following the termination of the stockholders agreement,Stockholders Agreement, TD is required towill either not vote any such excess stock or, at the discretion of the Company, vote any such excess stock on any matter in the same proportions as all the outstanding shares of stock held by holders other than TD and its affiliates are voted. In no event may TD Ameritradethe Company repurchase shares of its common stock that would result in TD'sTD’s ownership percentage exceeding 47%. There is no restriction on the number of shares TD may own following the termination of the stockholders agreement.
The ownership position and governance rights ofStockholders Agreement also provides that TD could also discourage a third party from proposing a change of control or other strategic transaction concerning TD Ameritrade. As a result, our common stock could trade at prices that dowill not, reflect a "takeover premium" to the same extent as do the stocks of similarly situated companies that do not have a stockholder with an ownership interest as large as TD's ownership interest. We have extensive relationships and business transactions with TD and some of its affiliates, which if terminated or adversely modified could have a material adverse effect on our business, financial condition and results of operations.
The insured deposit account agreement between us and affiliates of TD accounts for a significant portion of our revenue. This agreement enables our clients to invest in an FDIC-insured (up to specified limits) deposit product without the need for us to establish the significant levels of capital that would be required to maintain our own bank charter. During fiscal year 2019, net revenues related to this agreement accounted for approximately 27% of our net revenues. This percentage is expected to increase in fiscal year 2020 as a result of the decrease in commissions and transaction fees on client trades. The termination or adverse modification of this agreement without replacing it on comparable terms with different counterparties, which may not be available, could have a material adverse effect on our business, financial condition and results of operations. If this agreement were terminated or adversely modified and we were permitted to establish our own bank charter for purposes of offering an FDIC-insured deposit product, we would be required to establish and maintain significant levels of capital within a bank subsidiary. We would also be subject to various other risks associatedcertain exceptions, solicit proxies with banking, including credit riskrespect to common stock. Notwithstanding the limitations on loans and investments, liquidity risk associated with bank balance sheet management, operational risks associated with banking systems and infrastructure and additional regulatory requirements and supervision.
When conflicts of interest arise betweenTD’s ownership described above, the Stockholders Agreement permits TD Ameritrade and TD, they might be resolved into make a manner that adversely affects our business, financial condition or results of operations.non-public Conflicts of interest may arise between us and TD in areas relatingproposal to a variety of past, ongoing and future relationships and contracts, including corporate opportunities, potential acquisitions or financing transactions, sales or other dispositions by TD of its interests in TD Ameritrade and the exercise by TD of its influence over our management and affairs. Some of the directors on our board are also officers or directors of TD or its subsidiaries. Service as a director or officer of both TD Ameritrade and TD or its other subsidiaries could create conflicts of interest when such directors or officers are faced with decisions that could have materially different implications for us and for TD. Our amended and restated certificate of incorporation contains provisions relating to the avoidance of direct competition between us and TD. In addition, a committee of our board consisting of outside independent directors reviews and approves or ratifies transactions with TD and its affiliates. There can be no assurance that any of the foregoing potential conflicts would be resolved in a manner that does not adversely affect our business, financial condition or results of operations. In addition, the provisions of the stockholders agreement related to non-competition are subject to numerous exceptions and qualifications and may not prevent us and TD from competing with each other to some degree.
The terms of the stockholders agreement, our charter documents and Delaware law could inhibit a takeover that stockholders may consider favorable.
Provisions in the stockholders agreement between TD and the Company, our certificate of incorporation and bylaws and Delaware law will make it difficult for any party to acquire control of us in a transaction not approved by the requisite number of directors. These provisions include:
the presence of a classified board of directors;
the ability of the board of directors to acquire additional shares pursuant to a tender offer or merger for 100% of the outstanding voting securities of the Company and to complete such a transaction, subject to the approval of independent directors and holders of a majority of the outstanding shares of common stock not affiliated with TD.
Right to Purchase Securities. TD has the right to purchase up to its respective proportionate share of future issuances of common stock, other than in connection with the Company stock issued as consideration in an acquisition by the Company. If the Company proposes to issue and determineshares as consideration in an acquisition, the termsCompany will discuss in good faith with TD alternative structures in which a portion of preferred stock;such shares would be sold to TD, with the proceeds of such sale used to fund the acquisition. advance notice requirements for inclusion of stockholder proposals at stockholder meetings; and
The Stockholders Agreement further provides that if the anti-takeover provisions of Delaware law. These provisions could delay, deter or prevent a change of control or changeCompany engages in management that might provide stockholdersdiscussions with a premiumthird party that could result in the acquisition by such party of 25% of the voting securities or consolidated assets of the Company, the Company must offer TD the opportunity to participate in parallel discussions with the market price of their common stock.Company regarding a comparable transaction.
The market priceStockholders Agreement generally prohibits TD from transferring shares of our common stock, has experienced,absent approval of the OID Committee, to any holder of 5% or more of the outstanding shares of the Company, subject to certain exceptions. As long as TD and may continuethe Company constitute the same audit client, TD agreed not to experience, substantial volatility.engage the auditor of the Company, and the Company agreed not to engage the auditors of TD, to provide certainnon-audit services. Subject to confidentiality and nondisclosure obligations and as long as it owns at least 15% of the outstanding shares of common stock, TD is entitled to access information regarding the Company’s business, operations and plans as it may reasonably require to appropriately manage and evaluate its investment in the Company and to comply with its obligations under U.S. securities markets in general, have been and areCanadian laws. Obligation to Repurchase Shares. If the Company issues shares of its common stock pursuant to any compensation or similar program or arrangement, then the Company will, subject to substantial price volatility. The price of our common stock has been knowncertain exceptions, use its reasonable efforts to decrease substantially and quickly. Among the factors that may affect our stock price are the following: speculation in the investment community or the press about, or actual changes in, our competitive position, organizational structure, executive team, operations, financial condition, financial reporting and results, effectiveness of cost reduction initiatives, or strategic transactions;
the announcement of new products, services, acquisitions, or dispositions by us or our competitors;
the pricing structure for products and services offered to customers by us or our competitors;
our exposure to changes in prevailing interest rates;
sales ofrepurchase a substantialcorresponding number of shares of ourits common stock by (i) TD or (ii) J. Joe Ricketts, our founder, and certain members of his family and trusts held for their benefit, who currently have registration rights covering approximately 234 million shares and 52 million shares, respectively, of our common stock; and
increases or decreases in revenue or earnings, changes in earnings estimates by the investment community, changes in the interest rate environmentopen market within 120 days after any such issuance.
Non-Competition Covenants.Subject to specified exceptions, the Stockholders Agreement generally provides that TD and its affiliates may not participate in or in market expectations regarding the interest rate environment and variations between estimated financial results and actual financial results. Changesown any portion of a business engaged in the stock market generally or as it concerns our industry, as well as geopolitical, economic,business of providing securities brokerage services in the U.S. to retail traders, individual investors and business factors unrelated to us, may also affect our stock price.
Because the market price of our common stock can fluctuate significantly, we could become the object of securities class action litigation, which could result in substantial costs andregistered investment advisors. If TD acquires indirectly a diversion of management's attention and resources and could have adverse effects on ourcompeting business and the price of our common stock.
We are restricted by the terms of our revolving credit facilities and senior notes.
Our senior unsecured revolving credit facilities contain various covenants and restrictions that may, in certain circumstances and subject to carveouts and exceptions, which may be material, limit our ability to:
create liens;
incur additional indebtedness;
change the nature of our business;
merge or consolidate with another entity;
sell all or substantially all of our assets; and
conduct transactions with affiliates.
Under our revolving credit facilities, we are also required to maintain compliance with a maximum consolidated leverage ratio covenant (not to exceed 3.00:1.00) and a minimum consolidated interest coverage ratio covenant (not less than 4.00:1:00). TDAC is required to maintain compliance with a minimum consolidated tangible net worth covenant and our broker-dealer and FCM/FDM subsidiaries are required to maintain compliance with minimum regulatory net capital covenants.
Our senior unsecured notes contain various covenants and restrictions that may, in certain circumstances and subject to carveouts and exceptions, which may be material, limit our ability to:
create liens;
merge or consolidate with another entity; and
sell all or substantially all of our assets.
As a result of the covenants and other restrictions contained in our revolving credit facilities and our senior unsecured note indentures, we are limited in how we conduct our business. We cannot guarantee that we will be able to remain in compliance with these covenants and other restrictions or be able to obtain waivers for noncompliance in the
future. Failure to comply with the covenants and other restrictions contained in our debt instruments could have material adverse effects on our financial condition and business by impairing our ability to continue financing our business.
Of particular significance, we could be forced to repay immediately and in full any outstanding borrowings under our revolving credit facilities and our senior unsecured notes if we were to breach our covenants and not cure our breach, even if we could otherwise satisfy our debt service obligations. Also, if we experience a change of control, as defined in our revolving credit facilities, we could be required to repay in full all loans outstanding thereunder, plus accrued interest and fees.
Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition, our results of operations and our ability to receive dividend payments from our subsidiaries, which are subject to business, economic and competitive conditions, regulatory requirements and other factors beyond our control. If our cash flows and capital resources were insufficient to fund our debt service obligations, then we could be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures might not succeed and might not permit us to satisfy our scheduled debt service obligations. In addition, the terms of our existing or future debt instruments could restrict us from adopting some of these alternatives.
Any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to obtain additional financing. In addition, any future indebtedness could be at a higher interest rate or include covenants that are more restrictive than our current covenants.
Our corporate debt level may limit our ability to obtain additional financing.
As of September 30, 2019 we had approximately $3.55 billion of long-term debt, consisting of:
$600 million of variable-rate Senior Notes with principal due in full on November 1, 2021;
$750 million of 2.950% Senior Notes with principal due in full on April 1, 2022;
$400 million of 3.750% Senior Notes with principal due in full on April 1, 2024;
$500 million of 3.625% Senior Notes with principal due in full on April 1, 2025;
$800 million of 3.300% Senior Notes with principal due in full on April 1, 2027; and
$500 million of 2.750% Senior Notes with principal due in full on October 1, 2029.
Our ability to meet our cash requirements, including our debt repayment obligations, is dependent upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are or may be beyond our control. We cannot provide assurance that our business will generate sufficient cash flows from operations to fund our cash requirements. If we are unable to meet our cash requirements from operations, we would be required to obtain alternative financing. The degree to which we may be leveraged as a result of its acquisition of anon-competing business, TD must offer to sell the indebtedness we have incurred could materiallycompeting business to the Company at its appraised fair value determined in accordance with the terms of the Stockholders Agreement. If the Company decides not to purchase the competing business, TD must use commercially reasonable efforts to divest the competing business within two years. TD and adversely affect our ability to obtain financing for working capital, acquisitions or other purposes, could make us more vulnerable to industry downturns and competitive pressures or could limit our flexibility in planning for, or reacting to, changes and opportunities in our industry, which may place us at a competitive disadvantage. There can be no assurance that we would be able to obtain alternative financing, that any such financing would be on acceptable terms or that we would beits affiliates are permitted to do so under the terms of existing financing arrangements. In the absenceStockholders Agreement to own a passive investment representing less than 2% of such financing, our ability to respond to changinga class of equity securities of a competing business and economic conditions, make future acquisitions, react to adverse operating results, meet our debt repayment obligations or fund required capital expenditures could be materially and adversely affected.Our business, financial position, and resultsso long as the class of operations could be harmed by adverse rating actions by credit rating agencies.
If our counterparty credit ratingequity securities is traded on a national securities exchange in the U.S. or the credit ratingsToronto Stock Exchange. TD also is permitted to engage in certain activities in the ordinary course of our outstanding indebtedness are downgraded,its banking and securities businesses. In addition, the Company has agreed that it will not hold or if rating agencies indicate thatacquire control of a downgrade may occur, then perceptionsbank or similar depository institution except (1) as a result of our financial strength could be damaged and oura business financial condition and results of operations could be adversely affected. A downgrade would havecombination transaction approved by the
effect of increasing our incremental borrowing costs and could decrease the availability of funds for borrowing. A downgrade also could adversely affect our relationships with clients.
Our future ability to pay regular dividends to holders of our common stock is subject to the discretion of our Company’s board of directors and will be limitedinvolving an entity not more than 75% of whose consolidated revenues were generated by our abilityone or more insured depository institutions and as to generate sufficient earningswhich (a) TD has elected to acquire such entity’s insured depository institutions at a price mutually agreed between the Company and cash flows.
PaymentTD, (b) the Company divests or causes the seller to divest completely such insured depository institution before closing, or (c) TD otherwise consents to the business combination transaction with such entity, or (2) in the event that TD does not hold control of future dividends will be at the discretion of our board of directors and will depend upon a number of factorsany bank or similar depository institution that the board deems relevant, including future earnings, the success of our business activities, capital and liquidity requirements, the general financial condition and future prospects of our business and general business conditions. If we are unable to generate sufficient earnings and cash flows from our business, then we may not beis able to pay dividends on our common stock. Even with sufficient earnings and cash flows from our business, our board of directors might exercise its discretion by not declaring dividends, although failure to declare and pay dividends could adversely affect the price of our common stock.
In addition, our ability to pay dividends is subject to statutory and regulatory limitations. In particular, our ability to pay dividends depends on the ability of our subsidiaries to pay dividends. In this connection, some of our subsidiaries are subject to requirements of the SEC, FINRA, the CFTC, the NFA and other regulators relating to liquidity, capital standards and the use of client funds and securities, which may limit funds available for the payment of dividends to the parent company.
Future sales of equity securities could adversely affect the market price of our common stock and result in dilution.
Our certificate of incorporation authorizes our board of directors to issue additional shares of common stock and to issue shares of preferred stock, without stockholder approval. We could issue additional equity securities to raise additional capital or for other purposes. The issuance of additional equity securities could dilute the interests of the holders of our common stock (including TD, except to the extent that TD exercises its right under the stockholders agreement to maintain its proportionate share of our common stock) and could adversely affect the market price of that stock.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our Company-owned corporate headquarters facility is located in Omaha, Nebraska and provides more than 500,000 square feet of building space. Our headquarters facility has earned Leadership in Energy and Environmental Design (LEED) Platinum Certification, the highest level of distinction awarded by the U.S. Green Building Council. We also lease approximately 80,000 square feet of building space on property adjacent to the headquarters for administrative and operational facilities. These leases expire in 2020. We own additional administrative and operational facilities located in St. Louis, Missouri and Southlake, Texas, which provide a total of approximately 600,000 square feet of building space.
We currently lease approximately 195,000 square feet of building space for an additional operation center in Jersey City, New Jersey. During fiscal year 2019, we entered into a new lease of approximately 210,000 square feet of building space in Jersey City, New Jersey. We plan to transition the existing operation center in Jersey City to the new location upon the expiration of the current lease in 2020. We lease smaller administrative and operational facilities in California, Colorado, Illinois, Maryland, Massachusetts, Michigan, Texas and Utah. We own one data center facility, located in Richardson, Texas and we lease two data center facilities located in New Jersey. We also lease more than 275 retail branch offices, located in 47 states and the District of Columbia. We believe that our facilities are suitable and adequate to meet our needs.
Item 3. Legal Proceedings
For information regarding legal proceedings, see Note 16 — Commitments and Contingencies – "Legal and Regulatory Matters" under Item 8, Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
| | Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Price Range of Common Stock
Our common stock trades on the Nasdaq Global Select Market under the symbol "AMTD." The closing sale price of our common stock as reported on the Nasdaq Global Select Market on November 1, 2019 was $39.21 per share. As of that date there were 576 holders of record of our common stock based on information provided by our transfer agent. The number of stockholders of record does not reflect the number of individual or institutional stockholders that beneficially own our stock because most stock is held in the name of nominees. Based on information available to us, we believe there are approximately 106,000 beneficial holders of our common stock.
Dividends
We declared and paid a $0.30 per share and a $0.21 per share quarterly cash dividend on our common stock during each quarter of fiscal years 2019 and 2018, respectively. We recently declared a $0.31 per share quarterly cash dividend for the first quarter of fiscal 2020. We are scheduled to pay the quarterly cash dividend on November 19, 2019 to all holders of record of our common stock as of November 5, 2019. The payment of any future dividends will be at the discretion of our board of directors and will depend upon a number of factors that the board of directors deems relevant, including future earnings, the success of our business activities, capital requirements, the general financial condition and future prospects of our business and general business conditions.
Our ability to pay cash dividends on our common stock is also dependent on the ability of our subsidiaries to pay dividends to the parent company. Some of our subsidiaries are subject to requirements of the SEC, FINRA, the CFTC, the NFA and other regulators relating to liquidity, capital standards and the use of client funds and securities, which may limit funds available for the payment of dividends to the parent company. See Item 7, Management's Discussion and Analysis of Results of Operations and Financial Condition — "Liquidity and Capital Resources" for further information.
Securities Authorized for Issuance Under Equity Compensation Plans
Information about securities authorized for issuance under the Company's equity compensation plans is contained in Item 12 — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Performance Graph
The following Company common stock performance information is not deemed to be "soliciting material" or to be "filed" with the SEC or subject to the SEC's proxy rules or to the liabilities of Section 18 of the Exchange Act and shall not be deemed to be incorporated by reference into any prior or subsequent filing by the Company under the Securities Act of 1933, as amended, or the Exchange Act.
The following graph and table set forth information comparing the cumulative total return through the end of the Company's most recent fiscal year from a $100 investment on September 30, 2014 in the Company's common stock, a broad-based stock index and the stocks comprising an industry peer group.
| | | | | | | | | | | | | | | | Period Ended | | Index | 9/30/14 | 9/30/15 | 9/30/16 | 9/30/17 | 9/30/18 | 9/30/19 | | TD Ameritrade Holding Corporation | 100.00 |
| 97.06 |
| 109.83 |
| 154.84 |
| 170.21 |
| 153.97 |
| | S&P 500 | 100.00 |
| 99.39 |
| 114.72 |
| 136.07 |
| 160.44 |
| 167.27 |
| | Peer Group | 100.00 |
| 100.65 |
| 112.14 |
| 158.44 |
| 181.33 |
| 156.01 |
|
The Peer Group is comprised of the following companies that have significant retail brokerage operations:
E*TRADE Financial Corporation
The Charles Schwab Corporation
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
ISSUER PURCHASES OF EQUITY SECURITIES
| | | | | | | | | | | | | | | | Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Maximum Number of Shares that May Yet Be Purchased Under the Program | | July 1, 2019 — July 31, 2019 | | 1,676,765 |
| | $ | 51.14 |
| | 1,636,846 |
| | 5,765,029 |
| | August 1, 2019 — August 31, 2019 | | 2,827,815 |
| | $ | 51.30 |
| | 2,826,865 |
| | 2,938,164 |
| | September 1, 2019 — September 30, 2019 | | 1,386,392 |
| | $ | 48.01 |
| | 1,383,955 |
| | 31,554,209 |
| | Total — Three months ended September 30, 2019 | | 5,890,972 |
| | $ | 50.48 |
| | 5,847,666 |
| | 31,554,209 |
|
On November 20, 2015, our board of directors authorized the repurchase of up to 30 million shares of our common stock. We disclosed this authorization on November 20, 2015 in our annual report on Form 10-K. On September 11, 2019, our board of directors authorized the repurchase of up to an additional 30 million shares of our common stock. We disclosed this authorization in our Form 8-K filed on October 21, 2019. These programs were the only stock repurchase programs in effect and no programs expired during the fourth quarter of fiscal 2019.
During the quarter ended September 30, 2019, 43,306 shares were repurchased primarily from employees for income tax withholding in connection with distributions of stock-based compensation.
Item 6. Selected Financial Data
| | | | | | | | | | | | | | | | | | | | | | | | | Fiscal Year Ended September 30, | | | | 2019 | | 2018* | | 2017 | | 2016 | | 2015 | | | | (In millions, except per share amounts) | | Consolidated Statements of Income Data: | | | | | | | | | | | | Net revenues | | $ | 6,016 |
| | $ | 5,452 |
| | $ | 3,676 |
| | $ | 3,327 |
| | $ | 3,247 |
| | Operating income | | 3,001 |
| | 1,998 |
| | 1,466 |
| | 1,318 |
| | 1,325 |
| | Net income | | 2,208 |
| | 1,473 |
| | 872 |
| | 842 |
| | 813 |
| | Earnings per share — basic | | $ | 3.98 |
| | $ | 2.60 |
| | $ | 1.65 |
| | $ | 1.59 |
| | $ | 1.50 |
| | Earnings per share — diluted | | $ | 3.96 |
| | $ | 2.59 |
| | $ | 1.64 |
| | $ | 1.58 |
| | $ | 1.49 |
| | Weighted average shares outstanding — basic | | 555 |
| | 567 |
| | 529 |
| | 531 |
| | 543 |
| | Weighted average shares outstanding — diluted | | 557 |
| | 569 |
| | 531 |
| | 534 |
| | 547 |
| | Dividends declared per share | | $ | 1.20 |
| | $ | 0.84 |
| | $ | 0.72 |
| | $ | 0.68 |
| | $ | 0.60 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | As of September 30, | | | | 2019 | | 2018 | | 2017* | | 2016 | | 2015 | | | | (In millions) | | Consolidated Balance Sheet Data: | | | | | | | | | | | | Cash and cash equivalents | | $ | 2,852 |
| | $ | 2,690 |
| | $ | 1,472 |
| | $ | 1,855 |
| | $ | 1,978 |
| | Investments available-for-sale, at fair value | | 1,668 |
| | 484 |
| | 746 |
| | 757 |
| | — |
| | Total assets | | 43,786 |
| | 37,520 |
| | 38,627 |
| | 28,818 |
| | 26,375 |
| | Long-term debt and other borrowings | | 3,594 |
| | 2,535 |
| | 2,652 |
| | 1,817 |
| | 1,800 |
| | Stockholders' equity | | 8,700 |
| | 8,003 |
| | 7,247 |
| | 5,051 |
| | 4,903 |
|
* The growth in our Consolidated Balance Sheet as of September 30, 2017 and Statement of Income for the fiscal year ended 2018 was primarily due to our acquisition of Scottrade on September 18, 2017.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
This discussion contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words "may," "could," "would," "should," "believe," "expect," "anticipate," "plan," "estimate," "target," "project," "intend" and similar words or expressions. In particular, forward-looking statements contained in this discussion include our expectations regarding: the effect of client trading activity on our results of operations; the effect of changes in interest rates on our net interest spread; the amount of net revenues; the impact of reducing commissions on our online exchange-listed stock, exchange traded funds ("ETF") (domestic and Canadian) and option trades; the amounts of total operating expenses, amortization of acquired intangible assets and advertising expense; our effective income tax rate; our capital and liquidity needs and our plans to finance such needs; and our plans to return capital to stockholders through cash dividends and share repurchases.
The Company's actual results could differ materially from those anticipated in such forward-looking statements. Important factors that may cause such differences include, but are not limited to: economic, social and political conditions and other securities industry risks; interest rate risks; liquidity risks; client and counterparty credit risks; clearing function risks; systemic risk; aggressive competition; information system risks, network security risks; investment advisory services risks; merger and acquisition risks; external service provider risks; employee misconduct risks; LIBOR phase-out risks; new laws, rules, regulations and regulatory guidance affecting our business; net capital requirements; extensive regulation and regulatory uncertainties; and litigation, investigations and proceedings involving our business. We also are subject to other risks, uncertainties and assumptions set forth under Item 1A — Risk Factors of this Form 10-K, as well as the risk that our risk management practices may leave us exposed to unidentified or unanticipated risks. The forward-looking statements contained in this report speak only as of the date on which they were made. We undertake no obligation to publicly update or revise such statements, whether as a result of new information, future events or otherwise, except to the extent required by the federal securities laws.
Glossary of Terms
In discussing and analyzing our business, we utilize several metrics and other terms that are defined in the following Glossary of Terms. Italics indicate other defined terms that appear elsewhere in the Glossary. The term "GAAP" refers to U.S. generally accepted accounting principles.
Asset-based revenues — Revenues consisting of (1) bank deposit accountfees, (2) net interest revenue and (3) investment product fees. The primary factors driving our asset-based revenues are average balances and average rates. Average balances consist primarily of average client bank deposit account balances, average client margin balances, average segregated cash balances, average client credit balances, average fee-based investment balances and average securities borrowing and securities lending balances. Average rates consist of the average interest rates and fees earned and paid on such balances.
Average client trades per day — Total trades divided by the number of trading days in the period. This metric is also known as daily average revenue trades ("DARTs").
Average commissions per trade— Total commissions and transaction fee revenues as reported on our consolidated financial statements, less order routing revenue, divided by total trades for the period. Commissions and transaction fee revenues primarily consist of trading commissions, order routing revenue and markups on riskless principal transactions in fixed-income securities.
Basis point — When referring to interest rates, one basis point represents one one-hundredth of one percent.
Bank deposit account fees — Revenues generated from a sweep program that is offered to eligible clients of the Company whereby clients' uninvested cash is swept to FDIC-insured (up to specified limits)offer money market deposit accounts at affiliated and non-affiliated third-party financial institutions participating in the program.
Beneficiary accounts — Brokerage accounts managed by a custodian, guardian, conservator or trustee on behalf of one or more beneficiaries. Examples include accounts maintained under the Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA), guardianship, conservatorship and trust arrangements and pension or profit plan for small business accounts.
Brokerage accounts— Accounts maintained by us on behalf of clients for securities brokerage activities. The primary types of brokerage accounts are cash accounts, margin accounts, IRA accounts and beneficiary accounts. Futures accounts are sub-accounts associated with a brokerage account for clients who want to trade futures and/or options on futures. Forex accounts are sub-accounts associated with a brokerage account for clients who want to engage in foreign exchange trading.
Cash accounts — Brokerage accounts that do not have margin account approval.
Client assets— The total value of cash and securities in brokerage accounts.
Client cash and money market assets — The sum of all client cash balances, including client credit balances and client cash balances swept into bank deposit accounts or money market mutual funds.
Client credit balances— Client cash held in brokerage accounts, excluding balances generated by client short sales on which no interest is paid. Interest paid on client credit balances is a reduction of net interest revenue. Client credit balances are included in "payable to clients" on our consolidated financial statements.
Client margin balances— The total amount of cash loaned to clients in margin accounts. Such loans are secured by client assets. Interest earned on client margin balances is a component of net interest revenue. Client margin balances are included in "receivable from clients, net" on our consolidated financial statements.
Commissions and transaction fees — Revenues earned on trading commissions, order routing revenue and markups on riskless principal transactions in fixed-income securities. Revenues earned on trading commissions includes client trades in common and preferred stock, ETFs, exchange-traded notes, closed-end funds, options, futures, foreign exchange, mutual funds and fixed income securities.
Consolidated duration — The weighted average remaining years until maturity of our spread-based assets. For purposes of this calculation, floating rate balances are treated as having a one-month duration. Consolidated duration is used in analyzing our aggregate interest rate sensitivity.
Daily average revenue trades ("DARTs")— Total trades divided by the number of trading days in the period. This metric is also known as average client trades per day.
EBITDA—EBITDA (earnings before interest, taxes, depreciation and amortization) is a non-GAAP financial measure. We consider EBITDA to be an important measure of our financial performance and of our ability to generate cash flows to service debt, fund capital expenditures and fund other corporate investing and financing activities. EBITDA is used as the denominator in the consolidated leverage ratio calculation for covenant purposes under our senior revolving credit facility. EBITDA eliminates the non-cash effect of tangible asset depreciation and amortization and intangible asset amortization. EBITDA should be considered in addition to, rather than as a substitute for, GAAP pre-tax income, net income and cash flows from operating activities.
Fee-based investment balances— Client assets invested in money market mutual funds, other mutual funds and our programs such as AdvisorDirect,® Essential Portfolios, Selective Portfolios and Personalized Portfolios on which we earn fee revenues. Fee revenues earned on these balances are included in "investment product fees" on our consolidated financial statements.
Forex accounts — Sub-accounts maintained by us on behalf of clients for foreign exchange trading. Each forex account must be associated with a brokerage account. Forex accounts are not counted separately for purposes of our client account metrics.
Funded accounts— All open client accounts with a total liquidation value greater than zero.
Futures accounts— Sub-accounts maintained by us on behalf of clients for trading in futures and/or options on futures. Each futures account must be associated with a brokerage account. Futures accounts are not counted separately for purposes of our client account metrics.
Insured Deposit Account — We are party to an Insured Deposit Account ("IDA") agreement with TD Bank USA, N.A. ("TD Bank USA"), TD Bank, N.A. and The Toronto-Dominion Bank ("TD"). Under the IDA agreement, TD Bank USA and TD Bank, N.A. (together, the "TD Depository Institutions") make available to our clients FDIC-insured (up to specified limits) money market deposit accounts as either designated sweep vehicles or as non-sweep deposit accounts. We provide marketing, recordkeeping and support services for the TD Depository Institutions with respect to the money market deposit accounts. In exchange for providing these services, the TD Depository
Institutions pay us an aggregate marketing fee based on the weighted average yield earned on the client IDA assets, less the actual interest paid to clients, a servicing fee to the TD Depository Institutions and the cost of FDIC insurance premiums. Fee revenues earned under this agreement are included in "bank deposit account fees" on our consolidated financial statements.
Interest-earning assets — Consist of client margin balances,segregated cash, deposits paid on securities borrowing and other cash and interest-earning investment balances.
Interest rate-sensitive assets— Consist of spread-based assets and client cash invested in money market mutual funds.
Investment product fees —Revenues earned on fee-based investment balances. Investment product fees consists of fees earned on client assets invested in money market mutual funds, other mutual funds and through investment programs such as AdvisorDirect,® Essential Portfolios, Selective Portfolios and Personalized Portfolios.Investment product fees also includes fees earned on client assets managed by independent registered investment advisors utilizing our trading and investing platforms.
IRA accounts (Individual Retirement Arrangements)— A personal trust account for the exclusive benefit of a U.S. individual (or his or her beneficiaries) that provides tax advantages in accumulating funds to save for retirement or other qualified purposes. These accounts are subject to numerous restrictions on additions to and withdrawals from the account, as well as prohibitions against certain investments or transactions conducted within the account. We offer traditional, Roth, Savings Incentive Match Plan for Employees (SIMPLE) and Simplified Employee Pension (SEP) IRA accounts.
Liquid assets — Liquid assets is a non-GAAP financial measure that we consider to be an important measure of our liquidity. Liquid assets may be utilized for general corporate purposes and is defined as the sum of (1) corporate cash and cash equivalents, (2) corporate investments, less securities sold under agreements to repurchase, and (3) our regulated subsidiaries' net capital in excess of minimum operational targets established by management. Corporate cash and cash equivalents includes cash and cash equivalents from our investment advisory subsidiaries. Liquid assets represents available capital, including any capital from our regulated subsidiaries in excess of established management operational targets. We include the excess capital of our regulated subsidiaries in the calculation of liquid assets, rather than simply including regulated subsidiaries' cash and cash equivalents, because capital requirements may limit the amount of cash available for dividend from the regulated subsidiaries to the parent company. Net capital in excess of minimum operational targets established by management is generally available for dividend from the regulated subsidiaries to the parent company. Liquid assets is based on more conservative measures of net capital than regulatory requirements because we generally manage to higher levels of net capital at our regulated subsidiaries than the regulatory thresholds require. Liquid assets should be considered as a supplemental measure of liquidity, rather than as a substitute for GAAP cash and cash equivalents.
Liquidation value— The net value of a client's account holdings as of the close of a regular trading session. Liquidation value includes client cash and the value of long security positions, less margin balances and the cost to buy back short security positions. It also includes the value of open futures, foreign exchange and options positions.
Margin accounts — Brokerage accounts in which clients may borrow from us to buy securities or for any other purpose, subject to regulatory and Company-imposed limitations.
Net interest margin ("NIM") — A measure of the net yield on our average spread-based assets. Net interest margin is calculated for a given period by dividing the annualized sum of bank deposit account fees and net interest revenue by average spread-based assets.
Net interest revenue — Net interest revenue is interest revenues less brokerage interest expense. Interest revenues are generated by charges to clients on margin balances maintained in margin accounts, the investment of cash from operations and segregated cash and interest earned on securities borrowing/securities lending. Brokerage interest expense consists of amounts paid or payable to clients based on credit balances maintained in brokerage accounts and interest incurred on securities borrowing/securities lending. Brokerage interest expense does not include interest on our non-brokerage borrowings.
Net new assets — Consists of total client asset inflows, less total client asset outflows, excluding activity from business combinations. Client asset inflows include interest and dividend payments and exclude changes in client
assets due to market fluctuations. Net new assets are measured based on the market value of the assets as of the date of the inflows and outflows.
Net new asset growth rate (annualized) — Annualized net new assets as a percentage of client assets as of the beginning of the period.
Non-GAAP Net Income and Non-GAAP Diluted EPS — Non-GAAP net income and non-GAAP diluted earnings per share ("EPS") are non-GAAP financial measures. We define non-GAAP net income as net income adjusted to remove the after-tax effect of amortization of acquired intangible assets and acquisition-related expenses. We consider non-GAAP net income and non-GAAP diluted EPS as important measures of our financial performance because they exclude certain items that may not be indicative of our core operating results and business outlook and may be useful in evaluating the operating performance of the business and facilitating a meaningful comparison of our results in the current period to those in prior and future periods. Amortization of acquired intangible assets is excluded because management does not believe it is indicative of our underlying business performance. Acquisition-related expenses are excluded as these costs are not representative of the costs of running our on-going business. Non-GAAP net income and non-GAAP diluted EPS should be considered in addition to, rather than as a substitute for, GAAP net income and GAAP diluted EPS.
Order routing revenue — Revenues generated from payments and/or rebates received from market centers. Order routing revenue is a component of transaction-based revenues.
Securities borrowing — We borrow securities temporarily from other broker-dealers in connection with our broker-dealer business. We deposit cash as collateral for the securities borrowed, and generally earn interest revenue on the cash deposited with the counterparty. We also incur interest expense for borrowing certain securities.
Securities lending — We loan securities temporarily to other broker-dealers in connection with our broker-dealer business. We receive cash as collateral for the securities loaned, and generally incur interest expense on the cash deposited with us. We also earn revenue for lending certain securities.
Securities sold under agreements to repurchase (repurchase agreements) —We sell securities to counterparties with an agreement to repurchase the same or substantially the same securities at a stated price plus interest on a specified date. We utilize repurchase agreements to finance our short-term liquidity and capital needs. Under these financing transactions, we receive cash from counterparties and provide U.S. Treasury securities as collateral.
Segregated cash — Client cash and investments segregated in compliance with Rule 15c3-3 of the Securities Exchange Act of 1934 (the Customer Protection Rule) and other regulations. Interest earned on segregated cash is a component of net interest revenue.
Spread-based assets — Client and brokerage-related asset balances, consisting of bank deposit account balances and interest-earning assets. Spread-based assets is used in the calculation of our net interest margin and our consolidated duration.
Total trades — Revenue-generating client securities trades, which are executed by our broker-dealer and FCM/FDM subsidiaries. Total trades are a significant source of our revenues. Such trades include, but are not limited to, trades in equities, options, futures, foreign exchange, mutual funds and debt instruments. Trades generate revenue from commissions, markups on riskless principal transactions in fixed income securities, transaction fees and/or order routing revenue.
Trading days — Days in which the U.S. equity markets are open for a full trading session. Reduced exchange trading sessions are treated as half trading days.
Transaction-based revenues — Revenues generated from client trade execution, consisting primarily of commissions, markups on riskless principal transactions in fixed income securities, transaction clearing fees and order routing revenue.
Financial Statement Overview
We provide securities brokerage and clearing services to our clients through our introducing and clearing broker-dealer subsidiaries. We also provide futures and foreign exchange trade execution services to our clients through our futures commission merchant ("FCM") and forex dealer member ("FDM") subsidiary. Substantially all of our net revenues are derived from our brokerage activities and clearing and execution services. Our primary focus is
serving retail investors and traders and independent registered investment advisors by providing services with straightforward, affordable pricing.
Our largest sources of revenues are asset-based revenues and transaction-based revenues. The primary factors driving our asset-based revenues are average balances and average rates. Average balances consist primarily of average client bank deposit account balances, average client margin balances, average segregated cash balances, average client credit balances, average fee-based investment balances and average securities borrowing and lending balances. Average rates consist of the average interest rates and fees earned and paid on such balances. The primary factors driving our transaction-based revenues are total client trades and average commissions per trade. Effective October 3, 2019, we reduced our online exchange-listed stock, exchange traded funds (ETF) (domestic and Canadian) and option trade commissions from $6.95 to $0 per trade (plus $0.65 per contract and no exercise or assignment fees on option trades). For information regarding the expected impact of these price reductions to our net revenues, see "Results of Operations" later in this section. We also receive order routing revenue, which results from arrangements we have with many market centers to receive cash payments and/or rebates in exchange for routing orders to these firms for execution. Order routing revenue is included in commissions and transaction fees on our consolidated financial statements.
Our largest operating expense generally is employee compensation and benefits. Employee compensation and benefits expense includes salaries, bonuses, stock-based compensation, group insurance, contributions to benefit programs, recruitment, severance and other related employee costs.
Clearing and execution costs include incremental third-party expenses that tend to fluctuate as a result of fluctuations in client accounts or trades. Examples of expenses included in this category are outsourced clearing services, statement and confirmation processing and postage costs and clearing expenses paid to the National Securities Clearing Corporation, option exchanges and other market centers. Communications expense includes telecommunications, other postage, news and quote costs. Occupancy and equipment costs include the costs of leasing and maintaining our office spaces, software licensing and maintenance costs and maintenance expenses on computer hardware and other equipment. Depreciation and amortization includes depreciation on property and equipment and amortization of leasehold improvements. Amortization of acquired intangible assets consists of amortization of amounts allocated to the value of intangible assets acquired in business acquisitions.
Professional services expense includes costs paid to outside firms for assistance with legal, accounting, technology, regulatory, marketing and general management issues. Advertising costs include production and placement of advertisements in various media, including online, television, print and email, as well as client promotion and development costs. Advertising expenses may fluctuate significantly from period to period. Other operating expenses include provision for bad debt losses, fraud and error losses, gains or losses on disposal of property, insurance expenses, travel expenses and other miscellaneous expenses. During fiscal year 2018, other operating expenses also included costs incurred related to the integration of Scottrade.
Interest on borrowings consists of interest expense on our long-term debt and other borrowings. Gain on business-related divestiture represents the gain realized on the sale of TD Ameritrade Trust Company's ("TDATC"), an indirect wholly-owned subsidiary of the Company, retirement plan custody and trust assets on June 28, 2019. Loss on sale of investments represents losses realized on corporate (non broker-dealer) investments.
Acquisition of Scottrade
On September 18, 2017, we completed our acquisition of the brokerage business of Scottrade. The transaction combined highly complementary franchises and added significant scale to our retail business with the addition of approximately 3.5 million funded client accounts, extended our leadership in trading, and expanded the size of our branch network.
For additional information regarding this acquisition, see Note 2 — Business Acquisition under Item 8. Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements requires us to make judgments and estimates that may have a significant impact upon our financial results. Note 1, under Item 8, Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements, of this Form 10-K contains a summary of our significant accounting policies, many of which require the use of estimates and assumptions. We believe that the following areas are particularly subject to management's judgments and estimates and could materially affect our results of operations and financial position.
Valuation of goodwill and acquired intangible assets
We test goodwill and our indefinite-lived acquired intangible asset for impairment on at least an annual basis, or whenever events occur or changes in circumstances indicate that the carrying values may not be recoverable. In performing the goodwill impairment tests, we utilize quoted market prices of our common stock to estimate the fair value of the Company as a whole. designated sweep vehicle or TD has indicated that it is not willing to offer such accounts to clients of the Company through a bank or similar depository institution it controls.
Termination of the Stockholders Agreement. The estimated fair value is then allocatedStockholders Agreement provides that the agreement terminates in its entirety, upon the earliest to our reporting unitoccur of (a) the consummation of a merger or tender offer where TD acquires 100% of the common stock, (b) January 24, 2021, (c) the date on which TD’s ownership of common stock falls below approximately 4% of the outstanding voting securities of the Company, (d) the commencement by a third party of a tender offer or exchange offer for not less than 25% of the Company’s common stock, unless the board of directors recommends against the offer and is comparedcontinues to take steps to oppose the offer, (e) the approval by the board of directors of a business combination that would result in another party owning more than 25% of the voting securities or consolidated assets of the Company or which would otherwise result in a change of control of the Company, or (f) the acquisition of more than 20% of the voting securities of the Company by a third party. For a period of up to one year following a termination under clause (d), (e) or (f) above, TD will be prohibited from acquiring shares of the Company’s common stock that would cause its aggregate ownership to exceed 45% except pursuant to a tender offer or merger for 100% of the outstanding shares of common stock approved by the holders of a majority of the Company’s outstanding shares of common stock (other than TD). In addition, during thatone-year period, the provisions of the Stockholders Agreement relating to the designation of directors and certain other provisions will remain in effect.
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Certain Relationships and Related Party Transactions Review and Approval of Related Party Transactions The board of directors has a Related Party Transactions Policy covering the review and approval or ratification of any transaction, arrangement or relationship involving the Company or any of its subsidiaries, with the carryinga value of $120,000 or more per fiscal year, in which any related party had, has or will have a direct or indirect material interest required to be disclosed under applicable SEC rules. Related parties are our directors, executive officers and any stockholder beneficially owning more than 5% of our common stock or any of their immediate family members. Under the reporting unit. No impairment charges have resulted from our goodwill impairment tests. To determine ifpolicy, the indefinite-lived intangible asset is impaired, we first assess certain qualitative factors. Based on this assessment,OID Committee reviews related party transactions and may approve or ratify them only if it is determined that more likely thanthey are in, or not inconsistent with, the fair valuebest interests of the indefinite-lived intangible asset is less thanCompany and its carrying amount, we performstockholders. When reviewing a quantitative impairment test. No impairment charges have resulted fromrelated party transaction, the indefinite-lived intangible asset impairment tests.
We review our finite-lived acquired intangible assets for impairment whenever events occur or changes in circumstances indicate thatOID Committee considers, among other factors determined to be appropriate, the carrying amount of such asset may not be recoverable. We evaluate recoverability by comparingfollowing factors (to the undiscounted cash flows associated with the assetextent relevant to the asset's carrying amount. We also evaluate the remaining useful lives of intangible assets each reporting period to determine if events or trends warrant a revision to the remaining period of amortization. We have had no events or trends that have warranted a material revision to the originally estimated useful lives.
Estimates of effective income tax rates, uncertain tax positions, deferred income taxes and related valuation allowances
We estimate our income tax expense based on the various jurisdictions where we conduct business. This requires us to estimate our current income tax obligations and to assess temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities. Temporary differences result in deferred income tax assets and liabilities. We must evaluate the likelihood that deferred income tax assets will be realized. To the extent we determine that realization is not "more likely than not," we establish a valuation allowance. Establishing or increasing a valuation allowance results in a corresponding increase to income tax expense in our consolidated financial statements. Conversely, to the extent circumstances indicate that a valuation allowance can be reduced or is no longer necessary, that portion of the valuation allowance is reversed, reducing income tax expense.
We must make significant judgments to calculate our provision for income taxes, our deferred income tax assets and liabilities and any valuation allowance against our deferred income tax assets. We must also exercise judgment in determining the need for, and amount of, any accruals for uncertain tax positions. Because the application of tax laws and regulations to many types of transactions is subject to varying interpretations, amounts reported in our consolidated financial statements could be significantly changed at a later date upon final determinations by taxing authorities.
Accruals for contingent liabilities
Accruals for contingent liabilities, such as legal and regulatory claims and proceedings, reflect an estimate of probable losses for each matter. In making such estimates, we consider many factors, including the progress of the matter, prior experience and the experience of others in similar matters, available defenses, insurance coverage, indemnification provisions and the advice of legal counsel and other experts. In many matters, such as those in which substantial or indeterminate damages or fines are sought, or where cases or proceedings are in the early stages, it is not possible to determine whether a loss will be incurred, or to estimate the range of that loss, until the matter
is close to resolution, in which case no accrual is made until that time. Because matters may be resolved over long periods of time, accruals are adjusted as more information becomes available or when an event occurs requiring a change. Significant judgment is required in making these estimates, and the actual cost of resolving a matter may ultimately differ materially from the amount accrued.
Results of Operations
Conditions in the U.S. equity markets significantly impact the volume of our clients' trading activity. There is a relationship between the volume of our clients' trading activity and our results of operations. We cannot predict future trading volumes in the U.S. equity markets. If client trading activity increases, we generally expect that it would have a positive impact on our results of operations. If client trading activity declines, we generally expect that it would have a negative impact on our results of operations.
Changes in average client balances, especially bank deposit account, margin, credit and fee-based investment balances, may significantly impact our results of operations. Changes in interest rates also significantly impact our results of operations. We seek to mitigate interest rate risk by aligning the average duration of our interest-earning assets with that of our interest-bearing liabilities. We cannot predict the direction of interest rates or the levels of client balances. If interest rates rise, we generally expect to earn a larger net interest spread. Conversely, a falling interest rate environment generally would result in us earning a smaller net interest spread.
Effective October 3, 2019, we reduced our online exchange-listed stock, ETFs (domestic and Canadian) and option trade commissions from $6.95 to $0 per trade (plus $0.65 per contract and no exercise or assignment fees on option trades). The expected impact of these price reductions on our net revenues for fiscal year 2020 is discussed later in this section.
Financial Performance Metrics
Net income, diluted earnings per share and EBITDA (earnings before interest, taxes, depreciation and amortization) are key metrics we use in evaluating our financial performance. Net income and diluted earnings per share are GAAP financial measures and EBITDA is a non-GAAP financial measure.
We consider EBITDA to be an important measure of our financial performance and of our ability to generate cash flows to service debt, fund capital expenditures and fund other corporate investing and financing activities. EBITDA is used as the denominator in the consolidated leverage ratio calculation for covenant purposes under the TD Ameritrade Holding Corporation senior revolving credit facility. EBITDA eliminates the non-cash effect of tangible asset depreciation and amortization and intangible asset amortization. EBITDA should be considered in addition to, rather than as a substitute for, GAAP pre-tax income, net income and cash flows from operating activities.
The following table sets forth net income in dollars and as a percentage of net revenues for the periods indicated, and provides reconciliations to EBITDA (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | Fiscal Year Ended September 30, | | | | 2019 | | 2018 | | 2017 | | | | $ | | % of Net Revenues | | $ | | % of Net Revenues | | $ | | % of Net Revenues | | Net income (GAAP) | | $ | 2,208 |
| | 36.7 | % | | $ | 1,473 |
| | 27.0 | % | | $ | 872 |
| | 23.7 | % | | Add: | | | | | | | | | | | | | | Depreciation and amortization | | 148 |
| | 2.5 | % | | 142 |
| | 2.6 | % | | 102 |
| | 2.8 | % | | Amortization of acquired intangible assets | | 125 |
| | 2.1 | % | | 141 |
| | 2.6 | % | | 79 |
| | 2.1 | % | | Interest on borrowings | | 144 |
| | 2.4 | % | | 99 |
| | 1.8 | % | | 71 |
| | 1.9 | % | | Provision for income taxes | | 721 |
| | 12.0 | % | | 414 |
| | 7.6 | % | | 522 |
| | 14.2 | % | | EBITDA (non-GAAP) | | $ | 3,346 |
| | 55.6 | % | | $ | 2,269 |
| | 41.6 | % | | $ | 1,646 |
| | 44.8 | % |
Fiscal Year Ended September 30, 2019 Compared to Fiscal Year Ended September 30, 2018
Our net income increased 50% for fiscal year 2019 compared to fiscal year 2018, primarily due to an increase in net revenues, a decrease in operating expenses and a $60 million gain on a business-related divestiture, partially offset by an increase in the effective income tax rate and interest on borrowings. The effective income tax rate was lower in the prior fiscal year primarily due to the impact from the enactment of the Tax Cuts and Jobs Act (the "Act") on December 22, 2017.
Our EBITDA increased 47% for fiscal year 2019 compared to fiscal year 2018, primarily due to an increase in net revenues, a decrease in operating expenses excluding depreciation and amortization and a $60 million gain on a business-related divestiture.
Our diluted earnings per share increased 53% to $3.96 for fiscal year 2019 compared to $2.59 for fiscal year 2018, due to higher net income and a 2% decrease in the weighted average diluted shares outstanding as a result of our stock repurchase program. Details regarding our fiscal year 2020 expectations for net revenues and expenses are presented later in this discussion.
Fiscal Year Ended September 30, 2018 Compared to Fiscal Year Ended September 30, 2017
Our net income increased 69% for fiscal year 2018 compared to fiscal year 2017, primarily due to an increase in net revenues and a lower effective tax rate, primarily due to the enactment of the Act on December 22, 2017. These increases were partially offset by increases in operating expenses and interest on borrowings, and an $11 million loss on sale of investments during fiscal year 2018. Net revenues and operating expenses increased primarily due to the Scottrade acquisition.
Our EBITDA increased 38% for fiscal year 2018 compared to fiscal year 2017, primarily due to an increase in net revenues, partially offset by an increase in operating expenses excluding depreciation and amortization, and an $11 million loss on sale of investments during fiscal year 2018.
Our diluted earnings per share increased 58% to $2.59 for fiscal year 2018 compared to $1.64 for fiscal year 2017, primarily due to higher net income, partially offset by a 7% increase in the weighted average diluted shares outstanding as a result of the issuance of our common stock in connection with the Scottrade acquisition.
Operating Metrics
Our largest sources of revenues are asset-based revenues and transaction-based revenues. For fiscal year 2019, asset-based revenues and transaction-based revenues accounted for 64% and 33% of our net revenues, respectively. Asset-based revenues consist of (1) bank deposit account fees, (2) net interest revenue and (3) investment product fees. The primary factors driving our asset-based revenues are average balances and average rates. Average balances consist primarily of average client bank deposit account balances, average client margin balances, average segregated cash balances, average client credit balances, average fee-based investment balances and average securities borrowing and lending balances. Average rates consist of the average interest rates and fees earned and paid on such balances. The primary factors driving our transaction-based revenues are total trades and average commissions per trade. We also consider client account and client asset metrics, although we believe they are generally of less significance to our results of operations for any particular period than our metrics for asset-based and transaction-based revenues.
Asset-Based Revenue Metrics
We calculate the return on our bank deposit account balances and our interest-earning assets using a measure we refer to as net interest margin. Net interest margin is calculated for a given period by dividing the annualized sum of bank deposit account fees and net interest revenue by average spread-based assets. Spread-based assets consist of average bank deposit account balances and average interest-earning assets, which include client margin balances, segregated cash, deposits paid on securities borrowing and other cash and interest-earning investment balances. The following table sets forth net interest margin and average spread-based assets (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | Fiscal Year | | '19 vs. '18
Increase/
(Decrease) | | '18 vs. '17
Increase/
(Decrease) | | | | 2019 | | 2018 | | 2017 | | | Average bank deposit account balances | | $ | 112,716 |
| | $ | 116,695 |
| | $ | 93,922 |
| | $ | (3,979 | ) | | $ | 22,773 |
| | Average interest-earning assets | | 32,242 |
| | 30,849 |
| | 25,316 |
| | 1,393 |
| | 5,533 |
| | Average spread-based balances | | $ | 144,958 |
| | $ | 147,544 |
| | $ | 119,238 |
| | $ | (2,586 | ) | | $ | 28,306 |
| | Bank deposit account fee revenue | | $ | 1,717 |
| | $ | 1,541 |
| | $ | 1,107 |
| | $ | 176 |
| | $ | 434 |
| | Net interest revenue | | 1,533 |
| | 1,272 |
| | 690 |
| | 261 |
| | 582 |
| | Spread-based revenue | | $ | 3,250 |
| | $ | 2,813 |
| | $ | 1,797 |
| | $ | 437 |
| | $ | 1,016 |
| | Average yield — bank deposit account fees | | 1.50 | % | | 1.30 | % | | 1.16 | % | | 0.20 | % | | 0.14 | % | | Average yield — interest-earning assets | | 4.69 | % | | 4.07 | % | | 2.69 | % | | 0.62 | % | | 1.38 | % | | Net interest margin (NIM) | | 2.21 | % | | 1.88 | % | | 1.49 | % | | 0.33 | % | | 0.39 | % |
The following tables set forth key metrics that we use in analyzing net interest revenue, which is a component of net interest margin (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | Interest Revenue (Expense) Fiscal Year | | '19 vs. '18
Increase/
(Decrease) | | '18 vs. '17
Increase/
(Decrease) | | | | 2019 | | 2018 | | 2017 | | | Segregated cash | | $ | 123 |
| | $ | 95 |
| | $ | 49 |
| | $ | 28 |
| | $ | 46 |
| | Client margin balances | | 1,075 |
| | 920 |
| | 482 |
| | 155 |
| | 438 |
| | Securities lending/borrowing, net | | 248 |
| | 222 |
| | 139 |
| | 26 |
| | 83 |
| | Other cash and interest-earning investments | | 98 |
| | 42 |
| | 22 |
| | 56 |
| | 20 |
| | Client credit balances | | (11 | ) | | (7 | ) | | (2 | ) | | (4 | ) | | (5 | ) | | Net interest revenue | | $ | 1,533 |
| | $ | 1,272 |
| | $ | 690 |
| | $ | 261 |
| | $ | 582 |
|
| | | | | | | | | | | | | | | | | | | | | | | Average Balance Fiscal Year | | '19 vs. '18
%
Change | | '18 vs. '17
%
Change | | | | 2019 | | 2018 | | 2017 | | | Segregated cash | | $ | 5,511 |
| | $ | 6,832 |
| | $ | 8,282 |
| | (19 | )% | | (18 | )% | | Client margin balances | | 20,651 |
| | 19,812 |
| | 12,542 |
| | 4 | % | | 58 | % | | Securities borrowing | | 1,125 |
| | 925 |
| | 1,004 |
| | 22 | % | | (8 | )% | | Other cash and interest-earning investments | | 4,955 |
| | 3,280 |
| | 3,488 |
| | 51 | % | | (6 | )% | | Interest-earning assets | | $ | 32,242 |
| | $ | 30,849 |
| | $ | 25,316 |
| | 5 | % | | 22 | % | | Client credit balances | | $ | 19,286 |
| | $ | 20,438 |
| | $ | 16,182 |
| | (6 | )% | | 26 | % | | Securities lending | | 2,825 |
| | 2,888 |
| | 2,004 |
| | (2 | )% | | 44 | % | | Interest-bearing liabilities | | $ | 22,111 |
| | $ | 23,326 |
| | $ | 18,186 |
| | (5 | )% | | 28 | % |
| | | | | | | | | | | | | | | | | | | | Average Yield (Cost) Fiscal Year | | '19 vs. '18 Net Yield Increase/ (Decrease) | | '18 vs. '17 Net Yield Increase/ (Decrease) | | | | 2019 | | 2018 | | 2017 | | | Segregated cash | | 2.20 | % | | 1.37 | % | | 0.58 | % | | 0.83 | % | | 0.79 | % | | Client margin balances | | 5.14 | % | | 4.58 | % | | 3.79 | % | | 0.56 | % | | 0.79 | % | | Other cash and interest-earning investments | | 1.94 | % | | 1.26 | % | | 0.63 | % | | 0.68 | % | | 0.63 | % | | Client credit balances | | (0.06 | )% | | (0.03 | )% | | (0.01 | )% | | (0.03 | )% | | (0.02 | )% | | Net interest revenue | | 4.69 | % | | 4.07 | % | | 2.69 | % | | 0.62 | % | | 1.38 | % |
The following table sets forth key metrics that we use in analyzing investment product fee revenues (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | Fiscal Year | | '19 vs. '18
Increase/
(Decrease) | | '18 vs. '17
Increase/
(Decrease) | | | | 2019 | | 2018 | | 2017 | | | Average fee-based investment balances | | $ | 273,728 |
| | $ | 252,503 |
| | $ | 185,123 |
| | $ | 21,225 |
| | $ | 67,380 |
| | Average yield—investment product fees | | 0.21 | % | | 0.22 | % | | 0.23 | % | | (0.01 | )% | | (0.01 | )% | | Investment product fee revenue | | $ | 586 |
| | $ | 557 |
| | $ | 423 |
| | $ | 29 |
| | $ | 134 |
|
Transaction-Based Revenue Metrics
The following table sets forth several key metrics regarding client trading activity, which we utilize in measuring and evaluating performance and the results of our operations:
| | | | | | | | | | | | | | | | | | | | | | | Fiscal Year | | '19 vs. '18
%
Change | | '18 vs. '17
%
Change | | | | 2019 | | 2018 | | 2017 | | | Total trades (in millions) | | 215.11 |
| | 202.78 |
| | 127.68 |
| | 6 | % | | 59 | % | | Average client trades per day | | 862,158 |
| | 811,110 |
| | 510,710 |
| | 6 | % | | 59 | % | | Trading days | | 249.5 |
| | 250.0 |
| | 250.0 |
| | 0 | % | | 0 | % | | Average commissions per trade | | $ | 7.02 |
| | $ | 7.45 |
| | $ | 8.33 |
| | (6 | )% | | (11 | )% | | Order routing revenue (in millions) | | $ | 492 |
| | $ | 458 |
| | $ | 320 |
| | 7 | % | | 43 | % |
Client Account and Client Asset Metrics
The following table sets forth certain metrics regarding client accounts and client assets, which we use to analyze growth and trends in our client base:
| | | | | | | | | | | | | | | | | Fiscal Year | | | | 2019 | | 2018 | | 2017 | | Funded accounts (beginning of year) | | 11,514,000 |
| | 11,004,000 |
| | 6,950,000 |
| | Funded accounts (end of year) | | 11,971,000 |
| | 11,514,000 |
| | 11,004,000 |
| | Percentage change during year | | 4 | % | | 5 | % | | 58 | % | | Client assets (beginning of year, in billions) | | $ | 1,297.5 |
| | $ | 1,118.5 |
| | $ | 773.8 |
| | Client assets (end of year, in billions) | | $ | 1,327.7 |
| | $ | 1,297.5 |
| | $ | 1,118.5 |
| | Percentage change during year | | 2 | % | | 16 | % | | 45 | % | | Net new assets (in billions) | | $ | 93.1 |
| | $ | 92.3 |
| | $ | 80.1 |
| | Net new assets growth rate | | 7 | % | | 8 | % | | 10 | % |
Consolidated Statements of Income Data
The following table summarizes certain data from our Consolidated Statements of Income for analysis purposes (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | Fiscal Year | | '19 vs. '18
%
Change | | '18 vs. '17
%
Change | | | | 2019 | | 2018 | | 2017 | | | Revenues: | | | | | | | | | | | | Transaction-based revenues: | | | | | | | | | | | | Commissions and transaction fees | | $ | 2,002 |
| | $ | 1,969 |
| | $ | 1,384 |
| | 2 | % | | 42 | % | | Asset-based revenues: | | | | | | | | | | | | Bank deposit account fees | | 1,717 |
| | 1,541 |
| | 1,107 |
| | 11 | % | | 39 | % | | Net interest revenue | | 1,533 |
| | 1,272 |
| | 690 |
| | 21 | % | | 84 | % | | Investment product fees | | 586 |
| | 557 |
| | 423 |
| | 5 | % | | 32 | % | | Total asset-based revenues | | 3,836 |
| | 3,370 |
| | 2,220 |
| | 14 | % | | 52 | % | | Other revenues | | 178 |
| | 113 |
| | 72 |
| | 58 | % | | 57 | % | | Net revenues | | 6,016 |
| | 5,452 |
| | 3,676 |
| | 10 | % | | 48 | % | | Operating expenses: | | | | | | | | | | | | Employee compensation and benefits | | 1,322 |
| | 1,555 |
| | 962 |
| | (15 | )% | | 62 | % | | Clearing and execution costs | | 209 |
| | 189 |
| | 149 |
| | 11 | % | | 27 | % | | Communications | | 155 |
| | 179 |
| | 131 |
| | (13 | )% | | 37 | % | | Occupancy and equipment costs | | 267 |
| | 302 |
| | 181 |
| | (12 | )% | | 67 | % | | Depreciation and amortization | | 148 |
| | 142 |
| | 102 |
| | 4 | % | | 39 | % | | Amortization of acquired intangible assets | | 125 |
| | 141 |
| | 79 |
| | (11 | )% | | 78 | % | | Professional services | | 294 |
| | 303 |
| | 260 |
| | (3 | )% | | 17 | % | | Advertising | | 298 |
| | 293 |
| | 254 |
| | 2 | % | | 15 | % | | Other | | 197 |
| | 350 |
| | 92 |
| | (44 | )% | | 280 | % | | Total operating expenses | | 3,015 |
| | 3,454 |
| | 2,210 |
| | (13 | )% | | 56 | % | | Operating income | | 3,001 |
| | 1,998 |
| | 1,466 |
| | 50 | % | | 36 | % | | Other expense (income): | | | | | | | | | | | | Interest on borrowings | | 144 |
| | 99 |
| | 71 |
| | 45 | % | | 39 | % | | Gain on business-related divestiture | | (60 | ) | | — |
| | — |
| | N/A |
| | N/A |
| | Loss on sale of investments | | — |
| | 11 |
| | — |
| | (100 | )% | | N/A |
| | Other, net | | (12 | ) | | 1 |
| | 1 |
| | N/A |
| | 0 | % | | Total other expense (income) | | 72 |
| | 111 |
| | 72 |
| | (35 | )% | | 54 | % | | Pre-tax income | | 2,929 |
| | 1,887 |
| | 1,394 |
| | 55 | % | | 35 | % | | Provision for income taxes | | 721 |
| | 414 |
| | 522 |
| | 74 | % | | (21 | )% | | Net income | | $ | 2,208 |
| | $ | 1,473 |
| | $ | 872 |
| | 50 | % | | 69 | % | | Other information: | | | | | | | | | | | | Effective income tax rate | | 24.6 | % | | 21.9 | % | | 37.4 | % | | | | | | Average debt outstanding | | $ | 3,553 |
| | $ | 2,743 |
| | $ | 2,093 |
| | 30 | % | | 31 | % | | Effective interest rate incurred on borrowings | | 4.01 | % | | 3.59 | % | | 3.40 | % | | | | |
Fiscal Year Ended September 30, 2019 Compared to Fiscal Year Ended September 30, 2018
Net Revenues
Net revenues increased 10% to $6.02 billion during fiscal year 2019. We expect net revenues to decrease to between $4.9 billion and $5.3 billion during fiscal year 2020, primarily due to our reduction in trade commission pricing during the first quarter of fiscal year 2020, decreases in the target range for the federal funds rate during the fourth quarter of fiscal year 2019 and further potential decreases in the interest rate environment during fiscal year 2020. Effective October 3, 2019, we reduced our online exchange-listed stock, exchange traded funds (ETF) (domestic and Canadian) and option trade commissions from $6.95 to $0 per trade (plus $0.65 per contract and no exercise or assignment fees on option trades). This reduction in trade commission pricing is expected to decrease net revenues by approximately $880 million to $960 million per fiscal year.
Commissions and transaction fees increased 2% to $2.00 billion, primarily due to increased client trading activity, partially offset by lower average commissions per trade. Average client trades per day increased 6% to 862,158 for fiscal year 2019 compared to 811,110 for fiscal year 2018. Order routing revenue increased 7% to $492 million due to higher trading volumes. Average commissions per trade decreased to $7.02 from $7.45, primarily due to a higher percentage of our clients' trades receiving reduced commission rates as a result of continued price competition in the industry and lower average contracts per trade on options and futures trades.
Asset-based revenues increased 14% to $3.84 billion for fiscal year 2019, primarily due to an increase of 33 basis points in net interest margin to 2.21%. The increase in net interest margin was primarily due to the Federal Open Market Committee increasing the target range for the federal funds rate by 100 basis points during fiscal year 2018 and by 25 basis points during the first quarter of fiscal year 2019, partially offset by a decrease of 50 basis points during the fourth quarter of fiscal year 2019. The increase in net interest margin was also due to the impact of higher average client margin balances, which earn a larger net interest spread.
Bank deposit account fees increased 11% to $1.72 billion, primarily due to an increase of 20 basis points in the average yield earned on the bank deposit account balances, partially offset by a 3% decrease in average client bank deposit account balances. The average yield earned on bank deposit account balances increased primarily due to floating-rate investment balances within the Insured Deposit Account ("IDA") portfolio benefiting from the federal funds net rate increases during fiscal years 2018 and 2019, as described above, investments being reinvested at higher rates upon maturity and the favorable impact from the removal of the FDIC surcharge in October 2018. These increases were partially offset by higher interest rates paid to clients. The decrease in average client bank deposit account balances is primarily due to clients investing in other asset classes.
Net interest revenue increased 21% to $1.53 billion, primarily due to increases in the average yields earned on client margin balances, segregated cash and other cash and interest-earning investments, a 4% increase in average client margin balances and a $26 million increase in net interest revenue from our securities borrowing/lending program. These increases were partially offset by a 19% decrease in average segregated cash balances. The increases in the average yields earned are primarily due to the federal funds net rate increases during fiscal years 2018 and 2019, as described above.
Investment product fees increased 5% to $586 million, primarily due to a net increase in average fee-based investment balances and an increase in average yields earned on certain investment products. The favorable impact from the increase in balances was partially offset by decreased balances in higher yielding investment products. The average yield earned on fee-based investment balances decreased by 1 basis point, as average balance increases were primarily in investment products which earn lower yields.
Other revenues increased 58% to $178 million, primarily due to a $49 million increase in revenue as a result of the adoption of the new revenue recognition standard (ASU 2014-09) on October 1, 2018 and increased fees from processing corporate securities reorganizations.
Operating Expenses
Total operating expenses decreased 13% to $3.02 billion during fiscal year 2019, primarily due to $445 million of acquisition-related expenses incurred during the prior fiscal year. We expect total operating expenses to decrease to between $2.8 billion and $3.0 billion for fiscal year 2020.
Employee compensation and benefits expense decreased 15% to $1.32 billion, primarily due to $235 million of severance and other employment benefits related to the Scottrade integration during the prior fiscal year, partially offset by an increase to expense of $10 million during fiscal year 2019 as a result of the adoption of the new revenue recognition standard (ASU 2014-09) on October 1, 2018. The average number of full-time equivalent employees decreased to 9,420 for fiscal year 2019 compared to 9,728 for fiscal year 2018.
Clearing and execution costs increased 11% to $209 million, primarily due to an increase to expense of $21 million as a result of the adoption of the new revenue recognition standard.
Communications expense decreased 13% to $155 million, primarily due to decreased costs for quotes and market information and telecommunications resulting from the integration of the Scottrade business during the prior fiscal year.
Occupancy and equipment costs decreased 12% to $267 million, primarily due to decreased costs resulting from the integration of the Scottrade business during the prior fiscal year, including decreased expenses attributed to software maintenance, facilities expenses related to leased facilities and equipment repairs and maintenance.
Amortization of acquired intangible assets decreased 11% to $125 million, primarily due to certain acquired intangible assets becoming fully amortized. We expect amortization of acquired intangible assets to decrease to between $115 million to $120 million for fiscal year 2020.
Professional services expense decreased 3% to $294 million, primarily due to increased usage of consulting and contract services associated with the Scottrade integration during the prior fiscal year.
Advertising expense increased 2% to $298 million. We expect advertising expense to range from $250 million to $300 million for fiscal year 2020. We generally adjust our level of advertise spending in relation to stock market activity and other market conditions in an effort to maximize new client relationships and net new assets.
Other operating expenses decreased 44% to $197 million, primarily due to increased costs during the prior fiscal year, consisting of $172 million of costs related to the Scottrade integration, mainly comprised of contract terminations, and an increase in the provision for bad debt of $56 million related to market volatility during the prior fiscal year. These increased costs during the prior fiscal year were partially offset by increased costs during fiscal year 2019, including $28 million as a result of the adoption of the new revenue recognition standard, a $20 million net legal settlement and costs related to the closure of 80 retail branch locations.
Other Expense (Income) and Income Taxes
Interest on borrowings increased 45% to $144 million, primarily due to a 30% increase in average debt outstanding and an increase of 42 basis points in the average effective interest rate incurred on our borrowings. On October 30, 2018, we issued $600 million of variable-rate Senior Notes due November 1, 2021 and $400 million of 3.75% Senior Notes due April 1, 2024. We also issued $500 million of 2.75% Senior Notes due on October 1, 2029 on August 13, 2019. For more information regarding these debt issuances, see "Long-term Debt and Other Borrowings" later in this section.
Gain on business-related divestiture consists of a gain from the sale of TDATC's retirement plan custody and trust assets.
Other non-operating income for fiscal year 2019 primarily consists of a $14 million favorable legal settlement, partially offset by a prepayment premium on long-term debt.
Our effective income tax rate was 24.6% for fiscal year 2019, compared to 21.9% for fiscal year 2018. The effective income tax rate for fiscal year 2019 included $16 million of favorable adjustments related to state income tax matters and a $4 million income tax benefit resulting from the vesting of equity-based compensation. These items had a favorable impact on our earnings for fiscal year 2019 of approximately $0.04 per share. The effective income tax rate for the prior fiscal year included a net favorable adjustment of $71 million related to the remeasurement of the Company's deferred income tax balances as it pertains to the Act, a $5 million income tax benefit resulting from the change in accounting for income taxes related to equity-based compensation under ASU 2016-09, $12 million of favorable resolutions of state income tax matters and a $30 million favorable benefit resulting from accelerating certain deductions, including acquisition-related exit costs, to leverage higher 2017 pre-enactment tax rates. The effective income tax rate was also impacted by a $9 million unfavorable remeasurement of uncertain tax positions related to certain federal incentives. These items had a net favorable impact on the Company's earnings for fiscal
year 2018 of approximately $0.19 per share. We estimate our effective income tax rate to be between 24% and 26% for fiscal year 2020, excluding the effect of any adjustments related to remeasurement or resolution of uncertain tax positions and federal incentives. However, we expect to experience some volatility in our quarterly and annual effective income tax rate because current accounting rules for uncertain tax positions require that any change in measurement of a tax position taken in a prior tax year be recognized as a discrete event in the period in which the change occurs. We also anticipate the potential for increased volatility in our future quarterly effective income tax rate from the accounting for income taxes related to equity-based compensation, which requires the income tax effects of exercised or vested stock-based awards to be treated as discrete items in the period in which they occur.
Fiscal Year Ended September 30, 2018 Compared to Fiscal Year Ended September 30, 2017
Net Revenues
Commissions and transaction fees increased 42% to $1.97 billion, primarily due to the addition of approximately 3.5 million funded accounts as a result of the Scottrade acquisition on September 18, 2017, partially offset by lower average commissions per trade for fiscal year 2018 compared to fiscal year 2017. Average client trades per day increased 59% to 811,110 for fiscal year 2018 compared to 510,710 for fiscal year 2017. Order routing revenue increased 43% to $458 million due to higher trading volumes. Average commissions per trade decreased to $7.45 from $8.33, primarily due to our reduction in client pricing for online equity and option trades during the second quarter of fiscal 2017 and a higher percentage of equity trades, which earn somewhat lower average commissions per trade than option and futures trades. Effective March 6, 2017, we reduced our online equity and ETF trade commissions from $9.99 to $6.95 per trade and also lowered options pricing to $6.95 per trade (plus $0.75 per contract).
Asset-based revenues increased 52% to $3.37 billion for fiscal year 2018, primarily due to increases in average spread-based assets, net interest margin earned on spread-based assets and average market fee-based investment balances. The growth in average spread-based and market fee-based investment balances is primarily due to the Scottrade acquisition and our success in attracting net new client assets. Net interest margin increased 39 basis points to 1.88% during fiscal year 2018, primarily due to the Federal Open Market Committee increasing the target range for the federal funds rate by 75 basis points (to between 1.00% and 1.25%) during fiscal year 2017 and by 100 basis points (to between 2.00% to 2.25%) during fiscal year 2018. The increase in net interest margin was also due to the impact of higher average client margin balances, which earn a larger net interest spread.
Bank deposit account fees increased 39% to $1.54 billion, primarily due to a 24% increase in average bank deposit account balances and an increase of 14 basis points in the average yield earned on the bank deposit account assets. The growth in the average bank deposit account balances is primarily due to the Scottrade acquisition and our success in attracting net new client assets. The average yield earned on bank deposit account assets increased primarily due to floating-rate investment balances within the IDA portfolio benefiting from the federal funds rate increases during fiscal years 2017 and 2018, as described above, partially offset by higher interest rates paid to clients.
Net interest revenue increased 84% to $1.27 billion due to a 58% increase in average client margin balances, primarily due to the Scottrade acquisition, increases in the average yields earned on client margin balances, segregated cash and other cash and interest-earning investments as a result of the federal funds rate increases during fiscal years 2017 and 2018, as described above, and an $83 million increase in net interest revenue from our securities borrowing/lending program.
Investment product fees increased 32% to $557 million, primarily due to a 37% increase in average market fee-based investment balances. The increase in market fee-based investment balances is primarily due to the Scottrade acquisition and growth in our advised solutions products.
Other revenues increased 57% to $113 million, primarily due to favorable fair market value adjustments on investments held by our broker-dealer subsidiaries and increases in fees related to processing corporate securities reorganizations, proxy services and other fee revenue associated with additional accounts and transaction processing volumes resulting from the Scottrade acquisition.
Operating Expenses
Employee compensation and benefits expense increased 62% to $1.56 billion, primarily due to $235 million of severance and other employment benefits related to the Scottrade integration, an increase in average headcount related to the Scottrade acquisition and our strategic growth initiatives, and annual merit increases. The average number of full-time equivalent employees increased to 9,728 for fiscal year 2018 compared to 6,661 for fiscal year 2017.
Clearing and execution costs increased 27% to $189 million, primarily due to increased costs associated with additional accounts and transaction processing volumes resulting from the Scottrade acquisition.
Communications expense increased 37% to $179 million, primarily due to the Scottrade acquisition, resulting in increased costs for quotes and market information associated with additional accounts and transaction processing volumes and costs for telecommunications.
Occupancy and equipment costs increased 67% to $302 million, primarily due to additional costs associated with the Scottrade business, including increased expenses related to leased facilities, software licensing and software maintenance.
Depreciation and amortization increased 39% to $142 million, primarily due to depreciation on assets recorded in the Scottrade acquisition, placing our new Southlake, Texas operations center in service during December 2017, and technology infrastructure upgrades.
Amortization of acquired intangible assets increased 78% to $141 million, primarily due to amortization of the client relationships intangible asset recorded in the Scottrade acquisition.
Professional services expense increased 17% to $303 million, primarily due to higher usage of consulting and contract services related to operational and technology-related initiatives and in connection with the Scottrade integration, partially offset by lower costs associated with legal matters.
Advertising expense increased 15% to $293 million, primarily due to the Scottrade acquisition and due to increased advertising during professional and collegiate sporting events.
Other operating expenses increased 280% to $350 million, primarily due to $172 million of costs related to the Scottrade integration, mainly comprised of contract terminations, a net increase in the provision for bad debt of $56 million related to market volatility during fiscal year 2018 and additional expenses associated with the Scottrade business.
Other Expense and Income Taxes
Interest on borrowings increased 39% to $99 million, primarily due to a 31% increase in average debt outstanding and an increase of 19 basis points in the average effective interest rate incurred on our borrowings. On April 27, 2017, we issued $800 million of 3.300% Senior Notes due April 1, 2027 to finance a portion of the cash consideration paid in connection with the Scottrade acquisition.
Our effective income tax rate was 21.9% for fiscal year 2018, compared to 37.4% for fiscal year 2017. The effective income tax rate for fiscal year 2018 included an estimated net favorable adjustment of $71 million related to the remeasurement of the Company's deferred income tax balances as it pertains to the Act, a $5 million income tax benefit resulting from the change in accounting for income taxes related to equity-based compensation under ASU 2016-09, $12 million of favorable resolutions of state income tax matters and a $30 million favorable benefit resulting from accelerating certain deductions, including acquisition-related exit costs, to leverage higher 2017 pre-enactment tax rates. The effective income tax rate was also impacted by a $9 million unfavorable remeasurement of uncertain tax positions related to certain federal incentives. These items had a net favorable impact on our earnings for fiscal year 2018 of approximately $0.19 per share. The Act was enacted on December 22, 2017, reducing the U.S. federal corporate income tax rate from 35% to 21%.
Liquidity and Capital Resources
We have established liquidity and capital policies to support the successful execution of business strategies to meet operational needs and to satisfy applicable regulatory requirements under both normal and modeled stressed conditions. Our liquidity management policies are designed to mitigate the potential risk that we may be unable
to meet current and future cash flow needs. Management of our liquidity is accomplished by (1) daily monitoring of our cash flow needs at TD Ameritrade Holding Corporation (the "Parent") and its operating subsidiaries, and (2) performing periodic liquidity stress testing related to market and company-specific liquidity stress events in order to identify and plan for liquidity risk exposures.
We have historically financed our liquidity and capital needs primarily through the use of funds generated from subsidiary operations and from short-term borrowings. We have also issued common stock and long-term debt to finance mergers and acquisitions and for other corporate purposes. Our liquidity needs during fiscal year 2019 were financed primarily from our subsidiaries' earnings, cash on hand and borrowings. We plan to finance both our ordinary capital and liquidity needs in fiscal year 2020 primarily from our subsidiaries' earnings, cash on hand and borrowings.
Parent Company
The Parent conducts substantially all of its business through its operating subsidiaries, principally its broker-dealer and futures commission merchant ("FCM")/forex dealer member ("FDM") subsidiaries. Dividends from our subsidiaries are an important source of liquidity for the Parent. Some of our subsidiaries are subject to requirements of the Securities and Exchange Commission ("SEC"), the Financial Industry Regulatory Authority ("FINRA"), the Commodity Futures Trading Commission ("CFTC"), the National Futures Association ("NFA") and other regulators relating to liquidity, capital standards and the use of client funds and securities, which may limit funds available for the payment of dividends to the Parent.
During fiscal year 2019, we returned $1.67 billion, or approximately 72% of our non-GAAP net income (net income excluding amortization of intangible assets and acquisition-related expenses) to our stockholders through cash dividends and stock repurchases. During fiscal 2020, we plan to (1) return at least 90% of our non-GAAP net income to our stockholders through cash dividends and stock repurchases, (2) pay a quarterly cash dividend of at least $0.31 per share, and (3) repurchase a minimum of 15 million shares of our common stock. For more information about our dividends and stock repurchases, see "Cash Dividends" and "Stock Repurchase Programs" later in this section.
On October 30, 2018, we sold, through a public offering, $600 million aggregate principal amount of unsecured variable-rate senior notes due November 1, 2021 (the "2021 Notes") and $400 million aggregate principal amount of unsecured 3.750% senior notes due April 1, 2024 (the "2024 Notes"). We are using the net proceeds from the issuance of the 2021 Notes and the 2024 Notes for general corporate purposes and to augment liquidity. On August 13, 2019, we sold, through a public offering, $500 million aggregate principal amount of unsecured 2.750% senior notes due October 1, 2029 (the "2029 Notes"). We utilized the proceeds from the issuance of the 2029 Notes, together with cash on hand, to repay the $500 million aggregate principal amount and prepayment premium under our 5.600% senior notes (the "2019 Notes"), which were scheduled to mature on December 1, 2019. For additional details, see Note 11 Long-term Debt and Other Borrowings under Item 8, Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements.
The Parent may make loans of cash or securities under committed and/or uncommitted lines of credit with each of its primary broker-dealer and FCM/FDM subsidiaries in order to provide liquidity. Liquidity could be used to fund increases in our subsidiaries' deposit requirements with clearinghouses, and to provide operating liquidity for client trading and investing activity in the normal course of business and during times of market volatility. Committed facilities of $1.25 billion and uncommitted facilities of $600 million under the Parent's intercompany credit agreements were available to its primary broker-dealer and FCM/FDM subsidiaries as of September 30, 2019. For more information about these credit agreements, see "Long-term Debt and Other Borrowings — Intercompany Credit Agreements" later in this section.
Broker-dealer and Futures Commission Merchant/Forex Dealer Member Subsidiaries
Our broker-dealer and FCM/FDM subsidiaries are subject to regulatory requirements that are intended to ensure their liquidity and general financial soundness. Under the SEC's Uniform Net Capital Rule (Rule 15c3-1 under the Securities Exchange Act of 1934, or the "Exchange Act"), our broker-dealer subsidiaries are required to maintain, at all times, at least the minimum level of net capital required under SEC Rule 15c3-1. For our clearing broker-dealer subsidiary, the minimum net capital level is determined by a calculation described in SEC Rule 15c3-1 that is primarily based on the broker-dealer's "aggregate debits," which primarily consist of client margin balances at
the clearing broker-dealer. Since our aggregate debits may fluctuate significantly, our minimum net capital requirements may also fluctuate significantly from period to period. The Parent may make cash capital contributions to our broker-dealer and FCM/FDM subsidiaries, if necessary, to meet minimum net capital requirements.
Each of our broker-dealer subsidiaries may not repay any subordinated borrowings, pay cash dividends or make any unsecured advances or loans to its parent company or employees if such payment would result in a net capital amount of less than (1) 5% of aggregate debit balances or (2) 120% of its minimum dollar requirement. TD Ameritrade Futures & Forex LLC ("TDAFF"), our FCM and FDM subsidiary, must provide notice to the CFTC if its adjusted net capital amounts to less than (1) 110% of its risk-based capital requirement under CFTC Regulation 1.17, (2) 150% of its $1.0 million minimum dollar requirement, or (3) 110% of $20.0 million plus 5% of all liabilities owed to forex clients in excess of $10.0 million. These broker-dealer, FCM and FDM net capital thresholds, which are specified in Rule 17a-11 under the Exchange Act and CFTC Regulations 1.12 and 5.6, are typically referred to as "early warning" net capital thresholds.
The following tables summarize our broker-dealer and FCM/FDM subsidiaries' net capital and adjusted net capital, respectively, as of September 30, 2019 (dollars in millions):
| | | | | | | | | | | | | | | | | Net Capital | | Early Warning Threshold | | Net Capital in Excess of Early Warning Threshold | | TD Ameritrade Clearing, Inc. | | $ | 3,188 |
| | $ | 1,232 |
| | $ | 1,956 |
| | TD Ameritrade, Inc. | | $ | 289 |
| | $ | 0.3 |
| | $ | 288 |
|
| | | | | | | | | | | | | | | | | Adjusted Net Capital | | Early Warning Threshold | | Adjusted Net Capital in Excess of Early Warning Threshold | | TD Ameritrade Futures & Forex LLC | | $ | 140 |
| | $ | 25 |
| | $ | 115 |
|
Our clearing broker-dealer subsidiary, TD Ameritrade Clearing, Inc. ("TDAC"), engages in activities such as settling client securities transactions with clearinghouses, extending credit to clients through margin lending, securities lending and borrowing transactions and processing client cash sweep transactions to and from bank deposit accounts and money market mutual funds. These types of broker-dealer activities require active daily liquidity management.
Most of TDAC's assets are readily convertible to cash, consisting primarily of cash and investments segregated for the exclusive benefit of clients, receivables from clients and receivables from brokers, dealers and clearing organizations. Cash and investments segregated for the exclusive benefit of clients may be held in cash, reverse repurchase agreements (collateralized by U.S. government debt securities), U.S. Treasury securities, U.S. government agency mortgage-backed securities and other qualified securities. Receivables from clients consist of margin loans, which are demand loan obligations secured by readily marketable securities. Receivables from brokers, dealers and clearing organizations primarily arise from current open transactions, which usually settle or can be settled within a few business days.
TDAC is subject to cash deposit and collateral requirements with the Depository Trust & Clearing Corporation ("DTCC") and the Options Clearing Corporation ("OCC"), which may fluctuate significantly from time to time based on the nature and size of our clients' trading activity.
The following table sets forth TDAC's cash and investments deposited with clearing organizations for the clearing of client equity and option trades (dollars in millions):
| | | | | | | | | | | | | September 30, | | | | 2019 | | 2018 | | TD Ameritrade Clearing, Inc. | | $ | 703 |
| | $ | 585 |
|
Liquidity needs for TDAC relating to client trading and margin borrowing are met primarily through cash balances in client brokerage accounts and through lending and pledging of client margin securities. Cash balances in client brokerage accounts not used for client trading and margin borrowing activity are not generally available for other
liquidity purposes and must be segregated for the exclusive benefit of clients under Rule 15c3-3 of the Exchange Act.
Cash balances in client brokerage accounts are summarized in the following table (dollars in billions):
| | | | | | | | | | | | | September 30, | | | | 2019 | | 2018 | | TD Ameritrade Clearing, Inc. | | $ | 26.8 |
| | $ | 22.5 |
|
Cash and investments segregated in special reserve bank accounts for the exclusive benefit of clients under SEC Rule 15c3-3 are summarized in the following table (dollars in billions):
| | | | | | | | | | | | | September 30, | | | | 2019 | | 2018 | | TD Ameritrade Clearing, Inc. | | $ | 8.4 |
| | $ | 2.9 |
|
For general liquidity needs, TDAC currently maintains two senior unsecured committed revolving credit facilities with an aggregate principal amount of $1.45 billion. TDAC also utilizes secured uncommitted lines of credit for short-term liquidity needs. These facilities are described under "Long-term Debt and Other Borrowings"later in this section.
In addition, we have established intercompany credit agreements under which the broker-dealer and FCM/FDM subsidiaries may borrow from the Parent. The Parent's intercompany credit agreements with TDAC provides for a committed revolving loan facility of $1.20 billion and an uncommitted revolving loan facility of $300 million. The intercompany credit agreements are described under "Long-Term Debt and Other Borrowings – Intercompany Credit Agreements" later in this section.
Liquid Assets
Liquid assets is a non-GAAP financial measure that we consider to be an important measure of our liquidity. We include the excess capital of our regulated subsidiaries in the calculation of liquid assets, rather than simply including the regulated subsidiaries' cash and cash equivalents, because capital requirements may limit the amount of cash available for dividend from the regulated subsidiaries to the parent company. Excess capital, as defined below, is generally available for dividend from the regulated subsidiaries to the parent company. Liquid assets should be considered as a supplemental measure of liquidity, rather than as a substitute for GAAP cash and cash equivalents.
Liquid assets may be utilized for general corporate purposes and is definedas the sum of (1) corporate cash and cash equivalents, (2) corporate investments, less securities sold under agreements to repurchase, and (3) our regulated subsidiaries' net capital in excess of minimum operational targets established by management. Corporate cash and cash equivalents includes cash and cash equivalents from our investment advisory subsidiaries. Liquid assets is based on more conservative measures of net capital than regulatory requirements because we generally manage to higher levels of net capital at our regulated subsidiaries than the regulatory thresholds require.
The following table sets forth a reconciliation of cash and cash equivalents, which is the most directly comparable GAAP measure, to liquid assets (dollars in millions):
| | | | | | | | | | | | | | | | | | | September 30, | | Change | | | | | 2019 | | 2018 | | | Cash and cash equivalents (GAAP) | | $ | 2,852 |
| | $ | 2,690 |
| | $ | 162 |
| | Less: Non-corporate cash and cash equivalents | | (2,478 | ) | | (2,307 | ) | | (171 | ) | | Corporate cash and cash equivalents | | 374 |
| | 383 |
| | (9 | ) | | Corporate investments | | 1,668 |
| | 386 |
| | 1,282 |
| | Excess regulatory net capital over management targets | | 859 |
| | 296 |
| | 563 |
| | Liquid assets (non-GAAP) | | $ | 2,901 |
| | $ | 1,065 |
| | $ | 1,836 |
|
The changes in liquid assets are summarized as follows (dollars in millions):
| | | | | | | | | | Liquid assets as of September 30, 2018 | | $ | 1,065 |
| | Plus: | | EBITDA(1) | | 3,346 |
| | | | Proceeds from issuance of long-term debt | | 1,498 |
| | | | Net decrease in cash collateral pledged to interest rate swap counterparties | | 156 |
| | | | Other changes in working capital and regulatory net capital | | 106 |
| | | | Other investing activities, net | | 20 |
| | | | Change in net capital related to daily futures client cash sweep | | 7 |
| | Less: | | Purchase of treasury stock | | (969 | ) | | | | Income taxes paid | | (683 | ) | | | | Payment of cash dividends | | (667 | ) | | | | Principal payment on long-term debt | | (500 | ) | | | | Purchase of property and equipment | | (199 | ) | | | | Interest paid | | (154 | ) | | | | Net payments on securities sold under agreements to repurchase | | (96 | ) | | | | Purchase of treasury stock for income tax withholding on stock-based compensation | | (14 | ) | | | | Payment of debt issuance costs | | (12 | ) | | | | Payment of prepayment premium on long-term debt | | (3 | ) | | Liquid assets as of September 30, 2019 | | $ | 2,901 |
|
| | (1) | See "Financial Performance Metrics" earlier in this section for a description of EBITDA.
|
Long-term Debt and Other Borrowings
The following is a summary of our long-term debt and other borrowings. For additional details, see Note 11 — Long-term Debt and Other Borrowings under Item 8, Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements.
Senior Notes — As of September 30, 2019, we had $3.55 billion aggregate principal amount of unsecured Senior Notes (together, the "Senior Notes"). Key information about the Senior Notes outstanding is summarized in the following table (dollars in millions):
| | | | | | | | | | | Description | | Date Issued | | Maturity Date | | Aggregate Principal | | Interest Rate | | 2021 Notes | | October 30, 2018 | | November 1, 2021 | | $600 | | Variable | | 2022 Notes | | March 4, 2015 | | April 1, 2022 | | $750 | | 2.950% | | 2024 Notes | | October 30, 2018 | | April 1, 2024 | | $400 | | 3.750% | | 2025 Notes | | October 17, 2014 | | April 1, 2025 | | $500 | | 3.625% | | 2027 Notes | | April 27, 2017 | | April 1, 2027 | | $800 | | 3.300% | | 2029 Notes | | August 13, 2019 | | October 1, 2029 | | $500 | | 2.750% |
Fair Value Hedging —We are exposed to changes in the fair value of our fixed-rate Senior Notes resulting from interest rate fluctuations. To hedge a vast majority of this exposure, we entered into fixed-for-variable interest rate swaps on each of the 2022 Notes, 2025 Notes, 2027 Notes and 2029 Notes (together, the "Hedged Senior Notes"). Each fixed-for-variable interest rate swap has a notional amount and a maturity date matching the aggregate principal amount and maturity date, respectively, for each of the respective Hedged Senior Notes. During September 2019, we paid in full the outstanding principal under the 2019 Notes and the interest rate swap on the 2019 Notes was terminated.
The interest rate swaps effectively change the fixed-rate interest on the Hedged Senior Notes to variable-rate interest. Underwhether the terms of the interest rate swap agreements, we receive semi-annual fixed-rate interest payments based on the same rates applicablerelated party transaction are fair to the Hedged Senior Notes,Company and make quarterly variable-rate interest payments based on three-month LIBOR plus (1) 0.9486% for the swap on the 2022 Notes, (2) 1.1022% for the swap on the 2025 Notes, (3) 1.0340% for the swap on the 2027 Notes and (4) 1.2000% for the swap on the 2029 Notes. As of September 30, 2019, the weighted average effective interest rate on the aggregate principal balance of the Senior Notes was 3.27%.
Lines of Credit — TDAC utilizes secured uncommitted lines of credit for short-term liquidity. Under these secured uncommitted lines, TDAC borrows on either a demand or short-term basis from two unaffiliated banks and pledges client margin securities as collateral. Advances under the secured uncommitted lines are dependent on TDAC having acceptable collateral as determined by each secured uncommitted credit agreement. At September 30, 2019, theno less favorable than terms of the secured uncommitted credit agreements do not specify borrowing limits. The availability of TDAC's secured uncommitted lines is subject to approval by the individual banks each time an advance is requested and may be denied. There were no borrowings outstanding under the secured uncommitted lines of credit as of September 30, 2019.
Securities Sold Under Agreements to Repurchase (repurchase agreements) —Under repurchase agreements, we receive cash from the counterparty and provide U.S. government debt securities as collateral. Our repurchase agreements generally mature between 30 and 90 days followingthat would apply if the transaction date anddid not involve a related party;
whether there are accounted for as secured borrowings. There were no borrowings outstanding under repurchase agreements as of September 30, 2019. TD Ameritrade Holding Corporation Senior Revolving Credit Facility — The Parent has access to a senior unsecured committed revolving credit facility in the aggregate principal amount of $300 million (the "Parent Revolving Facility"). The maturity date of the Parent Revolving Facility is April 21, 2022. There were no borrowings outstanding under the Parent Revolving Facility as of September 30, 2019.
TD Ameritrade Clearing, Inc. Senior Revolving Credit Facilities —TDAC has access to two senior unsecured committed revolving credit facilities with an aggregate principal amount of $1.45 billion, consisting of a $600 million (the "$600 Million Revolving Facility") and an $850 million (the "$850 Million Revolving Facility") senior revolving facility. TDAC entered into the $850 Million Revolving Facility on May 16, 2019, replacing its prior $850 million senior unsecured committed revolving credit facility, which matured on the same date. The maturity dates of the $600 Million Revolving Facility and the $850 Million Revolving Facility are April 21, 2022 and May 14, 2020, respectively. There were no borrowings outstanding under the TDAC senior revolving facilities as of September 30, 2019.
Intercompany Credit Agreements — The Parent has entered into credit agreements with each of its primary broker-dealer and FCM/FDM subsidiaries, under which the Parent may make loans of cash or securities under committed and/or uncommitted lines of credit. Key information about the committed and/or uncommitted lines of credit is summarized in the following table (dollars in millions):
| | | | | | | | | Borrower Subsidiary | | Committed Facility | | Uncommitted Facility(1) | | Termination Date | | TD Ameritrade Clearing, Inc. | | $1,200 | | $300 | | March 1, 2022 | | TD Ameritrade, Inc. | | N/A | | $300 | | March 1, 2022 | | TD Ameritrade Futures & Forex LLC | | $45 | | N/A | | August 11, 2021 |
| | (1) | The Parent is permitted, but under no obligation, to make loans under uncommitted facilities. |
There were no borrowings outstanding under the intercompany credit agreements as of September 30, 2019.
Stock Repurchase Programs
On November 20, 2015, our board of directors authorized the repurchase of up to 30 million shares of our common stock. During fiscal year 2019, we repurchased approximately 19.8 million shares at a weighted average purchase price of $50.40 per share. From the inception of this stock repurchase authorization through September 30, 2019, we have repurchased approximately 28.4 million shares at a weighted average purchase price of $48.25 per share.
As of September 30, 2019, we had approximately 1.6 million shares remaining under the November 20, 2015 stock repurchase authorization. On September 11, 2019, our board of directors authorized the repurchase of up to an additional 30 million shares of our common stock.
Cash Dividends
The following table summarizes dividends declared per quarter on our common stock for the fiscal years indicated:
| | | | | | | | | | | | | | | | | 2019 | | 2018 | | 2017 | | Dividends declared per quarter | | $ | 0.30 |
| | $ | 0.21 |
| | $ | 0.18 |
|
The following table summarizes the total dividends paid on our common stock for the fiscal years indicated (dollars in millions):
| | | | | | | | | | | | | | | | | 2019 | | 2018 | | 2017 | | Dividends paid | | $ | 667 |
| | $ | 477 |
| | $ | 379 |
|
We declared a $0.31 per share cash dividend on our common stock for the first quarter of fiscal year 2020, which is payable on November 19, 2019 to all holders of record of our common stock as of November 5, 2019.
Off-Balance Sheet Arrangements
We enter into guarantees and other off-balance sheet arrangements in the ordinary course of business primarily to meet the needs of our clients and to manage our asset-based revenues. For information on these arrangements, see the following sections under Item 8, Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements: "General Contingencies" and "Guarantees" in Note 16 — Commitments and Contingencies and "Insured Deposit Account Agreement" in Note 23 — Related Party Transactions. Bank deposit account fees, generated from the IDA agreement and other sweep arrangements with non-affiliated third-party depository financial institutions, account for a significant percentage of our net revenues (29% of our net revenues for the fiscal year ended September 30, 2019). These sweep arrangements enable our clients to invest in FDIC-insured (up to specified limits) deposit products without the needreasons for the Company to establishenter into the significant levelsrelated party transaction;
whether the related party transaction would impair the independence of capital thatan outside director; and whether the related party transaction would be required to maintain our own bank charter.
Contractual Obligations
The following table summarizes our contractual obligations as of September 30, 2019 (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | Total | | Payments Due by Period (Fiscal Years): | | | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years | | Contractual Obligations | | 2020 | | 2021-22 | | 2023-24 | | After 2024 | Long-term debt obligations(1) | | $ | 4,191 |
| | $ | 119 |
| | $ | 1,563 |
| | $ | 545 |
| | $ | 1,964 |
| | Operating lease obligations | | 476 |
| | 72 |
| | 119 |
| | 94 |
| | 191 |
| Purchase obligations(2) | | 197 |
| | 128 |
| | 47 |
| | 9 |
| | 13 |
| Income taxes payable(3) | | 222 |
| | 222 |
| | — |
| | — |
| | — |
| | Total | | $ | 5,086 |
| | $ | 541 |
| | $ | 1,729 |
| | $ | 648 |
| | $ | 2,168 |
|
| | (1) | Represents scheduled principal payments, estimated interest payments and commitment fees pursuant to the Senior Notes, the interest rate swaps and the revolving credit facilities. Actual amounts of interest may vary depending on changes in variable interest rates associated with the interest rate swaps. |
| | (2) | Purchase obligations primarily relate to agreements for goods and services such as professional services, software, employee compensation and benefits, telecommunications, market information and advertising and marketing. |
| | (3) | A significant portion of our income taxes payable as of September 30, 2019 consists of liabilities for uncertain tax positions and related interest and penalties. The timing of payments, if any, on liabilities for uncertain tax positions cannot be predicted with reasonable accuracy. |
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk generally represents the risk of loss that may result from the potential change in the value of a financial instrument as a result of fluctuations in interest rates and market prices. We have established policies, procedures and internal processes governing our management of market risks in the normal course of our business operations.
Market-related Credit Risk
Two primary sources of credit risk inherent in our business are (1) client credit risk related to margin lending and leverage and (2) counterparty credit risk related to securities lending and borrowing. We manage client margin lending and leverage risk by requiring clients to maintain margin collateral in compliance with regulatory and internal guidelines. The risks associated with margin lending and leverage increase during periods of rapid market movements, or in cases where leverage or collateral is concentrated and market movements occur. We monitor required margin levels daily and, pursuant to such guidelines, require our clients to deposit additional collateral, or to reduce positions, when necessary. We continuously monitor client accounts to detect excessive concentration, large orders or positions, patterns of day trading and other activities that may indicate increased risk to us. We manage risks associated with our securities lending and borrowing activities by requiring credit approvals for counterparties, by monitoring the market value of securities loaned and collateral values for securities borrowed on a daily basis and requiring additional cash as collateral for securities loaned or return of collateral for securities borrowed when necessary, and by participating in a risk-sharing program offered through the Options Clearing Corporation.
We are party to interest rate swaps related to our long-term debt, which are subject to counterparty credit risk. Credit risk on derivative financial instruments is managed by limiting activity to approved counterparties that meet a minimum credit rating threshold and by entering into credit support agreements, or by utilizing approved central clearing counterparties registered with the Commodity Futures Trading Commission. Our interest rate swaps require daily collateral coverage, in the form of cash or U.S. Treasury securities, for the aggregate fair value of the interest rate swaps.
Interest Rate Risk
As a fundamental part of our brokerage business, we invest in interest-earning assets and are obligated on interest-bearing liabilities. In addition, we earn fees on our bank deposit account arrangements and on money market mutual funds, which are subject to interest rate risk. Changes in interest rates could affect the interest earned on assets differently than interest paid on liabilities. A rising interest rate environment generally results in us earning a larger net interest spread. Conversely, a falling interest rate environment generally results in us earning a smaller net interest spread.
Our most prevalent formpresent an improper conflict of interest rate risk is referred to as "gap" risk. Gap risk occurs when the interest rates we earn on assets change at a different frequencyfor any director or amount than the interest rates we pay on liabilities. For example, in a low interest rate environment, sharp increases in short-term interest rates could result in net interest spread compression if the yields paid on interest-bearing client balances were to increase faster than our earnings on interest-earning assets. We seek to mitigate interest rate risk by aligning the average duration of interest-earning assets with that of interest-bearing liabilities. As of September 30, 2019, our consolidated duration was 1.7 years. We have an Asset/Liability Committee serve as the governance body with the responsibility of managing interest rate risk, including gap risk.
We use net interest simulation modeling techniques to evaluate the effect that changes in interest rates might have on pre-tax income. Our model includes all interest-sensitive assets and liabilitiesexecutive officer of the Company, and interest-sensitive assets and liabilities associated with bank deposittaking into account arrangements. The simulations involve assumptions that are inherently uncertain and, as a result, cannot precisely predict the impact that changes in interest rates will have on pre-tax income. Actual results may differ from simulated results due to differences in timing and frequency of rate changes, changes in market conditions and changes in management strategy that lead to changes in the mix of interest-sensitive assets and liabilities.
The simulations assume that the asset and liability structure of our Consolidated Balance Sheet and client bank deposit account balances would not be changed as a result of a simulated change in interest rates. The resultssize of the simulations based on our financial position as of September 30, 2019 indicate that a gradual 1% (100 basis points) increase in interest rates over a 12-month period would result in a range of approximately $160 million to $245 million higher pre-tax income and a gradual 1% (100 basis points) decrease in interest rates over a 12-month period would result in a range of approximately $250 million to $290 million lower pre-tax income, depending largely ontransaction, the extent and timing of possible increases in payment rates on client cash balances and interest rates charged on client margin balances.
Other Market Risks
Substantially all of our revenues and financial instruments are denominated in U.S. dollars. We generally do not enter into derivative transactions, except for hedging purposes.
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of TD Ameritrade Holding Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of TD Ameritrade Holding Corporation (the Company) as of September 30, 2019 and 2018, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 2019, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, theoverall financial position of the Company at September 30, 2019 and 2018, anddirector, executive officer or related party, the results of its operations and its cash flows for each of the three years in the period ended September 30, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 30, 2019, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated November 15, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to errordirect or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
| | | | | | Uncertain Tax Positions | | | | Description of the Matter | | The Company has uncertain tax positions as discussed in Note 12 to the consolidated financial statements. Uncertainty in a tax position may arise as tax laws are subject to interpretation. The Company uses significant judgment in (1) determining if the tax position is more likely than not to be sustained upon examination, based on the technical merits of the position and (2) measuring the amount of tax benefit that qualifies for recognition. As of September 30, 2019, the Company had unrecognized tax benefits of $193 million for uncertain tax positions. | | | | | | Auditing management's estimate of the amount of tax benefit related to the Company's uncertain tax positions that qualified for recognition involved especially challenging auditor judgment because management's estimate required significant judgment in evaluating the technical merits of the positions, including interpretations of applicable tax laws and regulations. | | | | How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company's accounting process for uncertain tax positions. For example, this included controls over the Company's assessment of the technical merits of tax positions and management's process to measure the benefit of those tax positions that qualified for recognition. | | | | | | We involved our tax professionals to assess the technical merits of the Company's tax positions. Our audit procedures included, among others, assessing the positions the Company has taken on its tax returns to evaluate the completeness and accuracy of the underlying data, inspecting correspondence with the relevant tax authorities, and evaluating third-party advice obtained and used by the Company in assessing the technical merits of its tax positions. Additionally, we evaluated management's application of the applicable tax laws and regulations based on relevant case law and tax authority interpretations. For example, we evaluated the appropriateness of the jurisdictions and statutes of limitations used to determine the amount of tax benefit recognized based on where the Company conducts business and the applicable tax laws and regulations, and tested the completeness and accuracy of the data used by the Company, including the mathematical accuracy of the Company's calculations. |
/s/ ERNST & YOUNG LLP
We have served as the Company's auditor since 2005.
New York, New York
November 15, 2019
TD AMERITRADE HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
As of September 30, 2019 and 2018 | | | | | | | | | | | | | 2019 | | 2018 | | | | (In millions) | | ASSETS | | Cash and cash equivalents | | $ | 2,852 |
| | $ | 2,690 |
| | Cash and investments segregated and on deposit for regulatory purposes | | 8,684 |
| | 3,185 |
| | Receivable from brokers, dealers and clearing organizations | | 2,439 |
| | 1,374 |
| | Receivable from clients, net | | 20,618 |
| | 22,616 |
| | Receivable from affiliates | | 112 |
| | 151 |
| | Other receivables, net | | 305 |
| | 304 |
| | Securities owned, at fair value | | 532 |
| | 156 |
| | Investments available-for-sale, at fair value | | 1,668 |
| | 484 |
| | Property and equipment at cost, net | | 837 |
| | 792 |
| | Goodwill | | 4,227 |
| | 4,227 |
| | Acquired intangible assets, net | | 1,204 |
| | 1,329 |
| | Other assets | | 308 |
| | 212 |
| | Total assets | | $ | 43,786 |
| | $ | 37,520 |
| | LIABILITIES AND STOCKHOLDERS' EQUITY | | Liabilities: | | | | | | Payable to brokers, dealers and clearing organizations | | $ | 3,308 |
| | $ | 2,980 |
| | Payable to clients | | 27,067 |
| | 22,884 |
| | Accounts payable and other liabilities | | 884 |
| | 896 |
| | Payable to affiliates | | 5 |
| | 45 |
| | Other borrowings | | — |
| | 96 |
| | Long-term debt | | 3,594 |
| | 2,439 |
| | Deferred income taxes | | 228 |
| | 177 |
| | Total liabilities | | 35,086 |
| | 29,517 |
| | Stockholders' equity: | | | | | | Preferred stock, $0.01 par value, 100 million shares authorized; none issued | | — |
| | — |
| | Common stock, $0.01 par value, one billion shares authorized; 670 million shares issued; 2019 — 544 million shares outstanding; 2018 — 563 million shares outstanding | | 7 |
| | 7 |
| | Additional paid-in capital | | 3,452 |
| | 3,379 |
| | Retained earnings | | 8,580 |
| | 7,011 |
| Treasury stock, common, at cost: 2019 — 126 million shares; 2018 — 107 million shares | | (3,380 | ) | | (2,371 | ) | | Deferred compensation | | — |
| | 4 |
| | Accumulated other comprehensive income (loss) | | 41 |
| | (27 | ) | | Total stockholders' equity | | 8,700 |
| | 8,003 |
| | Total liabilities and stockholders' equity | | $ | 43,786 |
| | $ | 37,520 |
|
See notes to consolidated financial statements.
TD AMERITRADE HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended September 30, 2019, 2018 and 2017
| | | | | | | | | | | | | | | | | 2019 | | 2018 | | 2017 | | | | (In millions, except per share amounts) | | Revenues: | | | | | | | | Transaction-based revenues: | | | | | | | | Commissions and transaction fees | | $ | 2,002 |
| | $ | 1,969 |
| | $ | 1,384 |
| | Asset-based revenues: | | | | | | | | Bank deposit account fees | | 1,717 |
| | 1,541 |
| | 1,107 |
| | Net interest revenue | | 1,533 |
| | 1,272 |
| | 690 |
| | Investment product fees | | 586 |
| | 557 |
| | 423 |
| | Total asset-based revenues | | 3,836 |
| | 3,370 |
| | 2,220 |
| | Other revenues | | 178 |
| | 113 |
| | 72 |
| | Net revenues | | 6,016 |
| | 5,452 |
| | 3,676 |
| | Operating expenses: | | | | | | | | Employee compensation and benefits | | 1,322 |
| | 1,555 |
| | 962 |
| | Clearing and execution costs | | 209 |
| | 189 |
| | 149 |
| | Communications | | 155 |
| | 179 |
| | 131 |
| | Occupancy and equipment costs | | 267 |
| | 302 |
| | 181 |
| | Depreciation and amortization | | 148 |
| | 142 |
| | 102 |
| | Amortization of acquired intangible assets | | 125 |
| | 141 |
| | 79 |
| | Professional services | | 294 |
| | 303 |
| | 260 |
| | Advertising | | 298 |
| | 293 |
| | 254 |
| | Other | | 197 |
| | 350 |
| | 92 |
| | Total operating expenses | | 3,015 |
| | 3,454 |
| | 2,210 |
| | Operating income | | 3,001 |
| | 1,998 |
| | 1,466 |
| | Other expense (income): | | | | | | | | Interest on borrowings | | 144 |
| | 99 |
| | 71 |
| | Gain on business-related divestiture | | (60 | ) | | — |
| | — |
| | Loss on sale of investments | | — |
| | 11 |
| | — |
| | Other, net | | (12 | ) | | 1 |
| | 1 |
| | Total other expense (income) | | 72 |
| | 111 |
| | 72 |
| | Pre-tax income | | 2,929 |
| | 1,887 |
| | 1,394 |
| | Provision for income taxes | | 721 |
| | 414 |
| | 522 |
| | Net income | | $ | 2,208 |
| | $ | 1,473 |
| | $ | 872 |
| | Earnings per share — basic | | $ | 3.98 |
| | $ | 2.60 |
| | $ | 1.65 |
| | Earnings per share — diluted | | $ | 3.96 |
| | $ | 2.59 |
| | $ | 1.64 |
| | Weighted average shares outstanding — basic | | 555 |
| | 567 |
| | 529 |
| | Weighted average shares outstanding — diluted | | 557 |
| | 569 |
| | 531 |
|
See notes to consolidated financial statements.
TD AMERITRADE HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended September 30, 2019, 2018 and 2017
| | | | | | | | | | | | | | | | | 2019 | | 2018 | | 2017 | | | | (In millions) | | Net income | | $ | 2,208 |
| | $ | 1,473 |
| | $ | 872 |
| | Other comprehensive income (loss), before tax: | | | | | | | | Investments available-for-sale: | | | | | | | | Unrealized gain (loss) | | 86 |
| | (12 | ) | | (9 | ) | | Reclassification adjustment for realized loss included in net income | | — |
| | 11 |
| | — |
| | Net change in investments available-for-sale | | 86 |
| | (1 | ) | | (9 | ) | | Cash flow hedging instruments: | | | | | | | | Reclassification adjustment for portion of realized loss amortized to net income | | 4 |
| | 5 |
| | 4 |
| | Total other comprehensive income (loss), before tax | | 90 |
| | 4 |
| | (5 | ) | | Income tax effect | | (22 | ) | | (2 | ) | | 2 |
| | Total other comprehensive income (loss), net of tax | | 68 |
| | 2 |
| | (3 | ) | | Comprehensive income | | $ | 2,276 |
| | $ | 1,475 |
| | $ | 869 |
|
See notes to consolidated financial statements.
TD AMERITRADE HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended September 30, 2019, 2018 and 2017
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total Common Shares Outstanding | | Total
Stockholders'
Equity | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Treasury Stock | | Deferred Compensation | | Accumulated Other Comprehensive Income (Loss) | | | | (In millions) | | Balance, September 30, 2016 | | 526 |
| | $ | 5,051 |
| | $ | 6 |
| | $ | 1,670 |
| | $ | 5,518 |
| | $ | (2,121 | ) | | $ | — |
| | $ | (22 | ) | | Net income | | — |
| | 872 |
| | — |
| | — |
| | 872 |
| | — |
| | — |
| | — |
| | Other comprehensive loss, net of tax | | — |
| | (3 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (3 | ) | | Common stock dividends ($0.72 per share) | | — |
| | (379 | ) | | — |
| | — |
| | (379 | ) | | — |
| | — |
| | — |
| | Issuance of common stock | | 11 |
| | 400 |
| | — |
| | 400 |
| | — |
| | — |
| | — |
| | — |
| | Acquisition of Scottrade Financial Services, Inc. | | 28 |
| | 1,262 |
| | 1 |
| | 1,261 |
| | — |
| | — |
| | — |
| | — |
| | Repurchases of common stock for income tax withholding on stock-based compensation | | (1 | ) | | (27 | ) | | — |
| | — |
| | — |
| | (27 | ) | | — |
| | — |
| | Common stock issued for stock-based compensation, including tax effects | | 3 |
| | 34 |
| | — |
| | 2 |
| | — |
| | 32 |
| | — |
| | — |
| | Deferred compensation | | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | Stock-based compensation | | — |
| | 36 |
| | — |
| | 36 |
| | — |
| | — |
| | — |
| | — |
| | Balance, September 30, 2017 | | 567 |
| | 7,247 |
| | 7 |
| | 3,369 |
| | 6,011 |
| | (2,116 | ) | | 1 |
| | (25 | ) | | Net income | | — |
| | 1,473 |
| | — |
| | — |
| | 1,473 |
| | — |
| | — |
| | — |
| | Other comprehensive income, net of tax | | — |
| | 2 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | Common stock dividends ($0.84 per share) | | — |
| | (477 | ) | | — |
| | — |
| | (477 | ) | | — |
| | — |
| | — |
| | Repurchases of common stock | | (5 | ) | | (255 | ) | | — |
| | — |
| | — |
| | (255 | ) | | — |
| | — |
| | Future treasury stock purchases under accelerated stock repurchase agreement | | — |
| | (31 | ) | | — |
| | (31 | ) | | — |
| | — |
| | — |
| | — |
| | Repurchases of common stock for income tax withholding on stock-based compensation | | — |
| | (17 | ) | | — |
| | — |
| | — |
| | (17 | ) | | — |
| | — |
| | Common stock issued for stock-based compensation, including tax effects | | 1 |
| | — |
| | — |
| | (19 | ) | | — |
| | 19 |
| | — |
| | — |
| | Deferred compensation | | — |
| | 1 |
| | — |
| | — |
| | — |
| | (2 | ) | | 3 |
| | — |
| | Stock-based compensation | | — |
| | 60 |
| | — |
| | 60 |
| | — |
| | — |
| | — |
| | — |
| | Adoption of Accounting Standards Update 2018-02 | | — |
| | — |
| | — |
| | — |
| | 4 |
| | — |
| | — |
| | (4 | ) | | Balance, September 30, 2018 | | 563 |
| | $ | 8,003 |
| | $ | 7 |
| | $ | 3,379 |
| | $ | 7,011 |
| | $ | (2,371 | ) | | $ | 4 |
| | $ | (27 | ) |
See notes to consolidated financial statements.
TD AMERITRADE HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total Common Shares Outstanding | | Total
Stockholders'
Equity | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Treasury Stock | | Deferred Compensation | | Accumulated Other Comprehensive Income (Loss) | | | | (In millions) | | Balance, September 30, 2018 | | 563 |
| | $ | 8,003 |
| | $ | 7 |
| | $ | 3,379 |
| | $ | 7,011 |
| | $ | (2,371 | ) | | $ | 4 |
| | $ | (27 | ) | | Net income | | — |
| | 2,208 |
| | — |
| | — |
| | 2,208 |
| | — |
| | — |
| | — |
| | Other comprehensive income, net of tax | | — |
| | 68 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 68 |
| | Common stock dividends ($1.20 per share) | | — |
| | (667 | ) | | — |
| | — |
| | (667 | ) | | — |
| | — |
| | — |
| | Repurchases of common stock | | (20 | ) | | (969 | ) | | — |
| | 31 |
| | — |
| | (1,000 | ) | | — |
| | — |
| | Repurchases of common stock for income tax withholding on stock-based compensation | | — |
| | (14 | ) | | — |
| | — |
| | — |
| | (14 | ) | | — |
| | — |
| | Common stock issued for stock-based compensation, including tax effects | | 1 |
| | — |
| | — |
| | (5 | ) | | — |
| | 5 |
| | — |
| | — |
| | Deferred compensation | | — |
| | (4 | ) | | — |
| | — |
| | — |
| | — |
| | (4 | ) | | — |
| | Stock-based compensation | | — |
| | 47 |
| | — |
| | 47 |
| | — |
| | — |
| | — |
| | — |
| | Adoption of Accounting Standards Update 2014-09 (Note 22) | | — |
| | 28 |
| | — |
| | — |
| | 28 |
| | — |
| | — |
| | — |
| | Balance, September 30, 2019 | | 544 |
| | $ | 8,700 |
| | $ | 7 |
| | $ | 3,452 |
| | $ | 8,580 |
| | $ | (3,380 | ) | | $ | — |
| | $ | 41 |
|
See notes to consolidated financial statements.
TD AMERITRADE HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 2019, 2018 and 2017
| | | | | | | | | | | | | | | | | 2019 | | 2018 | | 2017 | | | | (In millions) | | Cash flows from operating activities: | | | | | | | | Net income | | $ | 2,208 |
| | $ | 1,473 |
| | $ | 872 |
| | Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | | Depreciation and amortization | | 148 |
| | 142 |
| | 102 |
| | Amortization of acquired intangible assets | | 125 |
| | 141 |
| | 79 |
| | Deferred income taxes | | 26 |
| | (24 | ) | | (11 | ) | | Gain on business-related divestiture | | (60 | ) | | — |
| | — |
| | Loss on sale of investments | | — |
| | 11 |
| | — |
| | Stock-based compensation | | 47 |
| | 60 |
| | 36 |
| | Provision for doubtful accounts on client and other receivables | | 13 |
| | 69 |
| | 6 |
| | Other, net | | 25 |
| | 18 |
| | 12 |
| | Changes in operating assets and liabilities: | | | | | | | | Investments segregated and on deposit for regulatory purposes | | (16 | ) | | 831 |
| | 1,521 |
| | Receivable from brokers, dealers and clearing organizations | | (1,065 | ) | | (40 | ) | | 23 |
| | Receivable from clients, net | | 1,985 |
| | (5,536 | ) | | (2,079 | ) | | Receivable from/payable to affiliates, net | | (1 | ) | | (79 | ) | | (5 | ) | | Other receivables, net | | (7 | ) | | (129 | ) | | 41 |
| | Securities owned, at fair value | | (376 | ) | | 347 |
| | (135 | ) | | Other assets | | (18 | ) | | (39 | ) | | (5 | ) | | Payable to brokers, dealers and clearing organizations | | 328 |
| | 476 |
| | 110 |
| | Payable to clients | | 4,183 |
| | (2,223 | ) | | (196 | ) | | Accounts payable and other liabilities | | 75 |
| | (20 | ) | | 31 |
| | Net cash provided by (used in) operating activities | | 7,620 |
| | (4,522 | ) | | 402 |
| | Cash flows from investing activities: | | | | | | | | Purchase of property and equipment | | (199 | ) | | (229 | ) | | (197 | ) | | Proceeds from sale of property and equipment | | — |
| | 12 |
| | — |
| | Cash received from business-related divestiture | | 62 |
| | — |
| | — |
| | Cash paid in business acquisition, net of cash and cash equivalents acquired | | — |
| | (4 | ) | | (1,288 | ) | | Restricted cash and restricted cash equivalents acquired in business acquisition | | — |
| | — |
| | 2,374 |
| | Purchase of short-term investments | | (1 | ) | | (1 | ) | | (66 | ) | | Proceeds from sale and maturity of short-term investments | | 1 |
| | 66 |
| | 4 |
| | Purchase of investments available-for-sale, at fair value | | (1,394 | ) | | (392 | ) | | — |
| | Proceeds from sale of investments available-for-sale, at fair value | | 299 |
| | 643 |
| | — |
| | Other, net | | 20 |
| | (3 | ) | | — |
| | Net cash provided by (used in) investing activities | | (1,212 | ) | | 92 |
| | 827 |
|
See notes to consolidated financial statements.
TD AMERITRADE HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)
| | | | | | | | | | | | | | | | | 2019 | | 2018 | | 2017 | | | | (In millions) | | Cash flows from financing activities: | | | | | | | | Proceeds from issuance of long-term debt | | $ | 1,498 |
| | $ | — |
| | $ | 798 |
| | Payment of debt issuance costs | | (12 | ) | | (3 | ) | | (8 | ) | | Principal payments on long-term debt | | (500 | ) | | — |
| | (385 | ) | | Reimbursement (payment) of prepayment premium on long-term debt | | (3 | ) | | 2 |
| | (54 | ) | | Proceeds from senior revolving credit facilities | | 1,800 |
| | 3,225 |
| | — |
| | Principal payments on senior revolving credit facilities | | (1,800 | ) | | (3,225 | ) | | — |
| | Net proceeds from (payments on) securities sold under agreements to repurchase | | (96 | ) | | (1 | ) | | 97 |
| | Payment of cash dividends | | (667 | ) | | (477 | ) | | (379 | ) | | Proceeds from issuance of common stock | | — |
| | — |
| | 400 |
| | Proceeds from exercise of stock options | | — |
| | — |
| | 23 |
| | Purchase of treasury stock | | (969 | ) | | (255 | ) | | — |
| | Purchase of treasury stock for income tax withholding on stock-based compensation | | (14 | ) | | (17 | ) | | (27 | ) | | Payment for future treasury stock purchases under accelerated stock repurchase agreement | | — |
| | (31 | ) | | — |
| | Net cash provided by (used in) financing activities | | (763 | ) | | (782 | ) | | 465 |
| | Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents | | 5,645 |
| | (5,212 | ) | | 1,694 |
| | Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of year | | 4,548 |
| | 9,760 |
| | 8,066 |
| | Cash, cash equivalents, restricted cash and restricted cash equivalents at end of year | | $ | 10,193 |
| | $ | 4,548 |
| | $ | 9,760 |
| | Supplemental cash flow information: | | | | | | | | Interest paid | | $ | 154 |
| | $ | 118 |
| | $ | 59 |
| | Income taxes paid | | $ | 683 |
| | $ | 352 |
| | $ | 483 |
| | Noncash investing activities: | | | | | | | | Issuance of common stock in acquisition | | $ | — |
| | $ | — |
| | $ | 1,261 |
|
See notes to consolidated financial statements.
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended September 30, 2019, 2018 and 2017
1. Nature of Operations and Summary of Significant Accounting Policies
Basis of Presentation — The consolidated financial statements include the accounts of TD Ameritrade Holding Corporation (the "Parent"), a Delaware corporation, and its wholly-owned subsidiaries (collectively, the "Company"). Intercompany balances and transactions have been eliminated.
Nature of Operations — The Company provides securities brokerage services, including trade execution, clearing services and margin lending, through its broker-dealer subsidiaries; futures and foreign exchange trade execution services through its futures commission merchant ("FCM") and forex dealer member ("FDM") subsidiary; and bundled retirement plan solutions to plan sponsors and their advisors through its state-chartered trust company subsidiary. The Company also provides cash sweep and deposit account products through third-party relationships, including relationships with affiliates. On June 28, 2019, pursuant to an Asset Purchase Agreement, TD Ameritrade Trust Company ("TDATC"), an indirect wholly-owned subsidiary of the Company, sold its retirement plan custody and trust assets. The sale of the retirement plan custody and trust assets resulted in a $60 million gain, which is included in gain on business-related divestiture on the Consolidated Statements of Income.
The Company's broker-dealer subsidiaries are subject to regulation by the Securities and Exchange Commission ("SEC"), the Financial Industry Regulatory Authority ("FINRA") and the various exchanges in which they maintain membership. The Company's FCM/FDM subsidiary is subject to regulation by the Commodity Futures Trading Commission ("CFTC") and the National Futures Association ("NFA"). Dividends from the Company's broker-dealer, FCM/FDM and trust company subsidiaries are a source of liquidity for the Parent. Requirements of the SEC, FINRA and CFTC relating to liquidity, net capital standards and the use of client funds and securities may limit funds available for the payment of dividends from the broker-dealer and FCM/FDM subsidiaries to the holding company. State regulatory requirements may limit funds available for the payment of dividends from the trust company subsidiary to the holding company.
Use of Estimates — The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents — The Company considers temporary, highly-liquid investments with an original maturity of three months or less to be cash equivalents.
Cash and Investments Segregated and on Deposit for Regulatory Purposes — Cash and investments segregated and on deposit for regulatory purposes consists primarily of qualified deposits in special reserve bank accounts for the exclusive benefit of clients under Rule 15c3-3 of the Securities Exchange Act of 1934 (the "Exchange Act") and other regulations. Funds can be held in cash, reverse repurchase agreements, U.S. Treasury securities, U.S. government agency mortgage-backed securities and other qualified securities. Reverse repurchase agreements (securities purchased under agreements to resell) are treated as collateralized financing transactions and are carried at amounts at which the securities will subsequently be resold, plus accrued interest. The Company's reverse repurchase agreements are collateralized by U.S. government debt securities and generally have a maturity of seven days. Cash and investments segregated and on deposit for regulatory purposes also includes amounts that have been segregated or secured for the benefit of futures clients according to the regulations of the CFTC governing futures commission merchants.
Securities Borrowed and Securities Loaned — Securities borrowed and securities loaned transactions are recorded at the amount of cash collateral provided or received. Securities borrowed transactions require the Company to provide the counterparty with collateral in the form of cash. The Company receives collateral in the form of cash for securities loaned transactions. For these transactions, the fees earned or incurred by the Company are recorded as net interest revenue on the Consolidated Statements of Income. The related interest receivable from and the
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
brokerage interest payable to broker-dealers are included in other receivables and in accounts payable and other liabilities, respectively, on the Consolidated Balance Sheets.
Receivable from/Payable to Clients — Receivable from clients primarily consists of margin loans to securities brokerage clients, which are collateralized by client securities, and is carried at the amount receivable, net of an allowance for doubtful accounts that is primarily based on the amount of unsecured margin balances. Payable to clients primarily consists of client cash held in brokerage accounts and is carried at the amount of client cash on deposit. The Company earns interest revenue and pays interest expense on its receivable from client and payable to client balances, respectively. The interest revenue and expense are included in net interest revenue on the Consolidated Statements of Income.
Securities Owned — Securities owned by our broker-dealer subsidiaries are recorded on a trade-date basis and carried at fair value, and the related changes in fair value are generally included in other revenues on the Consolidated Statements of Income.
Investments Available-for-sale — Investments available-for-sale are carried at fair value and unrealized gains and losses, net of deferred income taxes, are reflected as a component of accumulated other comprehensive income (loss) on the Consolidated Balance Sheets. Realized gains and losses on investments available-for-sale are determined on the specific identification method and are reflected on the Consolidated Statements of Income.
Property and Equipment — Property and equipment is recorded at cost, net of accumulated depreciation and amortization, except for land, which is recorded at cost. Depreciation is provided using the straight-line method over the estimated useful service lives of the assets, which range from seven to 40 years for buildings and building components and three to seven years for all other depreciable property and equipment. Leasehold improvements are amortized over the lesser of the economic useful life of the improvement or the term of the lease.
Software Development — From the date technological feasibility has been established until beta testing is complete, software development costs are capitalized and included in property and equipment. Once the product is fully functional, such costs are amortized in accordance with the Company's normal accounting policies. Software development costs that do not meet capitalization criteria are expensed as incurred.
Goodwill — The Company has recorded goodwill for purchase business combinations to the extent the purchase price of each completed acquisition exceeded the fair value of the net identifiable assets of the acquired company. The Company tests goodwill for impairment on at least an annual basis and more frequently as events occur or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. In performing the impairment tests, the Company utilizes quoted market prices of the Company's common stock to estimate the fair value of the Company as a whole. The estimated fair value is then allocated to the Company's reporting unit and is compared with the carrying value of the reporting unit. NaN impairment charges have resulted from the impairment tests.
Amortization of Acquired Intangible Assets — Acquired intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives, ranging from 11 to 23 years. The acquired intangible asset associated with a trademark license agreement is not subject to amortization because the term of the agreement is considered to be indefinite.
Long-Lived Assets and Acquired Intangible Assets — The Company reviews its long-lived assets and finite-lived acquired intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If based on that review, changes in circumstances indicate that the carrying amount of such assets may not be recoverable, the Company evaluates recoverability by comparing the undiscounted cash flows associated with the asset to the asset's carrying amount. The Company also evaluates the remaining useful lives of intangible assets to determine if events or trends warrant a revision to the remaining period of amortization. Long-lived assets classified as "held for sale" are reported at the lesser of carrying amount or fair value less cost to sell. As of September 30, 2019 and 2018, the Company had $7 million and $36 million of assets classified as held for sale, respectively, which are included in other assets on theConsolidated Balance Sheets.
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company tests its indefinite-lived acquired intangible asset for impairment on at least an annual basis and more frequently as events occur or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. To determine if the indefinite-lived intangible asset is impaired, the Company first assesses certain qualitative factors. Based on this assessment, if it is determined that more likely than not the fair value of the indefinite-lived intangible asset is less than its carrying amount, the Company performs a quantitative impairment test. NaN impairment charges have resulted from the impairment tests.
Securities Sold Under Agreements to Repurchase — Transactions involving sales of securities under agreements to repurchase (repurchase agreements) are treated as collateralized financing transactions. Under repurchase agreements, the Company receives cash from counterparties and provides U.S. Treasury securities as collateral. These agreements are carried at amounts at which the securities will subsequently be repurchased, plus accrued interest, and the interest expense incurred by the Company is recorded as interest on borrowings on the Consolidated Statements of Income. See "General Contingencies" in Note 16, Commitments and Contingencies, for a discussion of the potential risks associated with repurchase agreements and how the Company mitigates those risks.
Income Taxes — The Company files a consolidated U.S. income tax return with its subsidiaries on a calendar year basis, combined returns for state tax purposes where required and certain of its subsidiaries file separate state income tax returns where required. Deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be settled or realized. Uncertain tax positions are recognized if they are more likely than not to be sustained upon examination, based on the technical merits of the position. The amount of tax benefit recognized is the largest amount of benefit that is greater than 50% likely of being realized upon settlement. The Company recognizes interest and penalties, if any, related to income tax matters as part of the provision for income taxes on the Consolidated Statements of Income.
Capital Stock — The authorized capital stock of the Company consists of a single class of common stock and one or more series of preferred stock as may be authorized for issuance by the Company's board of directors. Voting, dividend, conversion and liquidation rights of the preferred stock would be established by the board of directors upon issuance of such preferred stock.
Stock-Based Compensation — The Company measures and recognizes compensation expense based on estimated grant date fair values for all stock-based payment arrangements. Stock-based compensation expense is based on awards expected to vest and therefore is reduced for estimated forfeitures. Forfeitures are estimated at the time of grant based on the Company's historical forfeiture experience and revised in subsequent periods if actual forfeitures differ from those estimates.
Deferred Compensation — During fiscal year 2018, the Company's common stock held in a rabbi trust pursuant to a Company deferred compensation plan was recorded at the fair value of the stock at the time it was transferred to the rabbi trust and was classified as treasury stock. The corresponding deferred compensation liability was recorded as a component of stockholders' equity on the Consolidated Balance Sheet.
During the fourth quarter of fiscal year 2019, the Company amended the deferred compensation plan to allow participants to diversify their investments within the plan; as such, the corresponding deferred compensation obligation is recorded in accounts payable and other liabilities on the Consolidated Balance Sheet. To reflect changes in the fair value of the amount owed to the participants, the deferred compensation obligation is adjusted with a corresponding charge (or credit) to employee compensation and benefits expense on the Consolidated Statement of Income.
Transaction-based Revenues — Client trades are recorded on a settlement-date basis with such trades generally settling within one to two business days after the trade date. Revenues and expenses related to client trades, including order routing revenue and revenues from markups on riskless principal trades in fixed-income securities, are recorded on a trade-date basis. Revenues related to client trades are recorded net of promotional allowances. Securities owned by clients, including those that collateralize margin or similar transactions, are not reflected in the accompanying consolidated financial statements.
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Bank Deposit Account Fees — Revenues generated from a sweep program that is offered to eligible clients of the Company whereby clients' uninvested cash is swept to FDIC-insured (up to specified limits) money market accounts at affiliated and non-affiliated third-party financial institutions participating in the program. Bank deposit account fees includes revenues from the Insured Deposit Account ("IDA") agreement with TD Bank USA, N.A. ("TD Bank USA"), TD Bank, N.A. and The Toronto-Dominion Bank ("TD"). The IDA agreement is described further in Note 23, Related Party Transactions.
Net Interest Revenue — Net interest revenue primarily consists of income generated by interest charged to clients on margin balances, net interest revenue from securities borrowed and securities loaned transactions and interest earned on client cash, net of interest paid to clients on their credit balances.
Investment Product Fees — Investment product fee revenue consists of revenues earned on client assets invested in money market mutual funds, other mutual funds and certain investment programs. Investment product fees also includes fees earned on client assets managed by independent registered investment advisors utilizing the Company's trading and investing platforms.
Advertising — The Company expenses advertising costs the first time the advertising takes place. Client cash offers are also characterized as advertising expense, rather than as a reduction of revenue, because there is generally little or no cumulative revenue associated with an individual client earning a cash offer at the time the consideration is recognized in the Consolidated Statement of Income.
Derivatives and Hedging Activities — The Company occasionally utilizes derivative instruments to manage risks, which may include market price, interest rate and foreign currency risks. The Company does not use derivative instruments for speculative or trading purposes. Derivatives are recorded on the Consolidated Balance Sheets as assets or liabilities at fair value. Derivative instruments properly designated to hedge exposure to changes in the fair value of assets or liabilities are accounted for as fair value hedges. Derivative instruments properly designated to hedge exposure to the variability of expected future cash flows or other forecasted transactions are accounted for as cash flow hedges. The Company formally documents the risk management objective and strategy for each hedge transaction. Derivative instruments that do not qualify for hedge accounting are carried at fair value on the Consolidated Balance Sheets with unrealized gains and losses recorded currently on the Consolidated Statements of Income. Cash flows from derivative instruments accounted for as fair value hedges or cash flow hedges are classified in the same category on the Consolidated Statements of Cash Flows as the cash flows from the items being hedged. For additional information on the Company's fair value and cash flow hedging instruments, see Note 11, Long-term Debt and Other Borrowings.
Earnings Per Share — Basic earnings per share ("EPS") is computed by dividing net income by the weighted average common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, except when such assumed exercise or conversion would have an antidilutive effect on EPS. The difference between the numerator and denominator used in the Company's computation of basic and diluted earnings per share consists of common stock equivalent shares related to stock-based compensation. There were 0 material antidilutive awards for fiscal years 2019, 2018 and 2017.
Recently Adopted Accounting Pronouncements
ASU 2019-07– In July 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2019-07, Codification Updates to SEC Sections - Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates. The purpose of this ASU is to align guidance in various SEC sections of the FASB Accounting Standards Codification ("ASC") with the requirements of certain already effective SEC final rules. The ASU was effective during the Company's fourth quarter of fiscal year 2019. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ASU 2017-12– In September 2019, the Company early adopted ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, and standards which were issued subsequently to ASU 2017-12, for the purpose of providing codification improvements. These standards amend the guidance in ASC Topic 815, Derivatives and Hedging. The objectives of these ASUs are to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements through changes to both the designation and measurement guidance for qualifying hedging relationships and to the presentation of hedge results. In addition, the amendments in these ASUs make certain targeted improvements that are intended to simplify the application of the hedge accounting guidance in current GAAP. All transition requirements and elections under these ASUs were applied to hedging relationships existing on the date of adoption. The adoption of these standards did not have a material impact on the Company's consolidated financial statements.
ASU 2016-18– On October 1, 2018, the Company adopted ASU 2016-18, Restricted Cash, using a retrospective transition method to each period presented. This ASU amends the guidance in ASC Topic 230, Statement of Cash Flows, and is intended to reduce the diversity in the classification and presentation of changes in restricted cash on the statement of cash flows. The amendments within this ASU require that the reconciliation of the beginning-of-period and end-of-period cash and cash equivalents amounts shown on the statement of cash flows include restricted cash and restricted cash equivalents. If restricted cash and restricted cash equivalents are presented separately from cash and cash equivalents on the balance sheet, an entity is required to reconcile the amounts presented on the statement of cash flows to the amounts on the balance sheet. An entity is also required to disclose information regarding the nature of the restrictions. Under the retrospective transition method, the Company recorded a decrease of $6.4 billion and $0.3 billion in cash flows from operating activities for the fiscal years ended September 30, 2018 and 2017, respectively, and an increase of $2.4 billion in cash flows from investing activities for the fiscal year ended September 30, 2017, to reflect the reclassification of changes in restricted cash and restricted cash equivalents amounts from the operating and investing sections to the beginning-of-period and end-of-period cash, cash equivalents, restricted cash and restricted cash equivalents amounts within the Consolidated Statements of Cash Flows. See Note 3 for additional information regarding restricted cash and restricted cash equivalents.
ASU 2016-16 – On October 1, 2018, the Company adopted ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory. This ASU amends the guidance in ASC Topic 740, Income Taxes. The amendments in this ASU are intended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory by requiring an entity to recognize the income tax consequences when a transfer occurs, instead of when the asset is sold to a third party. The adoption of ASU 2016-16 did not have an impact on the Company's consolidated financial statements.
ASU 2014-09 – On October 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers, using a modified retrospective approach, which requires the standard be applied only to the most current period presented, with the cumulative effect of initially applying the standard recognized at the date of initial application. The new revenue recognition standard is intended to clarify the principles of recognizing revenue from contracts with customers and to improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards. This ASU supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance. Entities are required to apply the following steps when recognizing revenue under ASU 2014-09: (1) identify the contract(s) with a customer; (2) identify the performance obligationsdirector’s, executive officer’s or related party’s interest in the contract; (3) determinetransaction and the transaction price; (4) allocate the transaction price to the performance obligationsongoing nature of any proposed relationship.
Nothing in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. This ASU also requires additional disclosures related to the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. The adoption of this standard did not have a material impact on the Company's financial condition, results of operationspolicy supersedes or cash flows, as the satisfaction of performancemodifies any contractual rights or obligations under the new guidance is materially consistent with the Company's previous revenue recognition policies. However, the adoption of this standard did impact the Company by: (1) requiring the capitalization of sales commissions paid to employees for obtaining new contracts with clients and (2) accounting for revenues from certain contracts on a gross basis when the Company is acting as a principal, as compared to the prior guidance, which allowed for these contracts to be accounted for
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
on a net basis. For additional information on the Company's adoption of the amended guidance, see Note 22, Revenue Recognition. The new guidance does not apply to revenue associated with financial instruments, such as interest revenue, which is accounted for under other GAAP. Accordingly, net interest revenue was not impacted.
Recently Issued Accounting Pronouncements
ASU 2018-13 – In August 2018, the FASB issued ASU 2018-13, Disclosure Framework–Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this standard will remove, modify and add certain disclosures under ASC Topic 820, Fair Value Measurement, with the objective of improving disclosure effectiveness. ASU 2018-13 will be effective for the Company's fiscal year beginning October 1, 2020, with early adoption permitted. The transition requirements are dependent upon each amendment within this update and will be applied either prospectively or retrospectively. Since this update is intended to modify disclosures, the adoption of ASU 2018-13 is not expected to have a material impact on the Company's consolidated financial statements.
ASU 2017-04– In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which is intended to simplify the test for goodwill impairment by eliminating Step 2 from the goodwill impairment test, which measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. Under the amendments in this ASU, an entity should perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. When measuring the goodwill impairment loss, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered, if applicable. An entity will still have the option to perform the qualitative assessment for a reporting unit to determine if the quantitative test is necessary. ASU 2017-04 should be applied prospectively and will be effective for the Company's fiscal year beginning October 1, 2020, with early adoption permitted. The Company does not expect this ASU to have a material impact on its consolidated financial statements.
ASU 2016-13– In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The main objective of ASU 2016-13 is to provide financial statement users with more decision-useful information about an entity's expected credit losses on financial instruments and other commitments to extend credit at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to develop credit loss estimates. Subsequent to issuing ASU 2016-13, the FASB has issued additional standards for the purpose of clarifying certain aspects of ASU 2016-13, as well as providing codification improvements and targeted transition relief under the standard. The subsequently issued ASUs have the same effective date and transition requirements as ASU 2016-13. ASU 2016-13 will be effective for the Company's fiscal year beginning October 1, 2020, using a modified retrospective approach. Early adoption is permitted. The Company is currently assessing the impact this ASU will have on its consolidated financial statements.
ASU 2016-02– In February 2016, the FASB issued ASU 2016-02, Leases. This ASU supersedes the guidance in ASC Topic 840, Leases. Under ASU 2016-02, for lease arrangements exceeding a 12-month term, a lessee is required to recognizeprovided in the balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. ASU 2016-02 retains a distinction between finance and operating leases; however, the principal difference between the previous guidance and the new guidance is that lease assets and liabilities arising from operating leases are recognized on the balance sheet under the new guidance. On October 1, 2019, the Company adopted the new lease accounting guidance by applying the standard at the adoption date, recognizing a cumulative-effect adjustment to the opening balance of retained earnings. As a result, restated financial information and the additional disclosures required under the new standard will not be provided for the comparative periods presented. The Company elected a package of practical expedients available under the new guidance, which allows an entity to not reassess prior conclusions related to existing contracts containing leases, lease classification and initial direct costs. Upon the adoption of the lease standard, the Company recognized a right-of-use asset and a lease liability on the Consolidated Balance Sheet related to non-cancelableStockholders Agreement.
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
operating leases for certain facilities, including corporate offices, retail branches and data centers. At the date of adoption, the Company recognized a cumulative-effect adjustment to the opening balance of retained earnings of $1 million and the initial recognition and measurement of the right-of-use asset and lease liability was $347 million and $379 million, respectively, which were based on the present value of the Company's remaining operating lease payments. The present value was calculated utilizing secured incremental borrowing rates as of October 1, 2019. The secured incremental borrowing rates were based on the terms of the leases and the interest rate environment at the date of adoption. The adoption of this standard did not have a material impact on the Company's results of operations or cash flows.
2. Business Acquisition
On September 18, 2017, the Company completed its acquisition of Scottrade Financial Services, Inc. ("Scottrade"), pursuant to an Agreement and Plan of Merger (the "Acquisition"), among the Company, Rodger O. Riney, as Voting Trustee of the Rodger O. Riney Family Voting Trust U/A/D 12/31/2012 (the "Riney Stockholder"), and Alto Acquisition Corp., a wholly-owned subsidiary of the Company. Immediately prior to the closing of the Acquisition, pursuant to the terms and conditions set forth in a separate Agreement and Plan of Merger, TD Bank, N.A., a wholly-owned subsidiary of The Toronto-Dominion Bank ("TD"), acquired Scottrade Bank, which was a wholly-owned subsidiary of Scottrade, from Scottrade (the "Bank Merger") for approximately $1.37 billion in cash (the "Bank Merger Consideration"). Immediately prior to the closing of the Acquisition, the Company also issued 11,074,197 shares of the Company's common stock to TD at a price of $36.12 per share, or approximately $400 million, pursuant to a subscription agreement dated October 24, 2016 between the Company and TD. Immediately following the Bank Merger, the Acquisition was completed. The aggregate consideration paid by the Company for all of the outstanding capital stock of Scottrade consisted of 27,685,493 shares of the Company's common stock and $3.07 billion in cash (the "Cash Consideration"). The Cash Consideration was funded with the Bank Merger Consideration paid by TD Bank, N.A. to Scottrade, the proceeds received from the Company's issuance of the 3.300% Senior Notes on April 27, 2017, cash on hand and cash proceeds from the sale of the Company's common stock to TD, as described above.
The results of operations for Scottrade are included in the Company's consolidated financial statements from the date of Acquisition. The following unaudited pro forma financial information sets forth the results of operations of the Company as if the Acquisition had occurred on October 1, 2015, the beginning of the comparable fiscal year prior to the year of Acquisition. The unaudited pro forma results include certain adjustments for acquisition-related costs, depreciation, amortization of intangible assets, interest expense on acquisition financing, and related income tax effects, and do not reflect potential revenue enhancements, cost savings or operating synergies that the Company expects to realize after the Acquisition. The unaudited pro forma financial information is based on currently available information, is presented for informational purposes only, and is not indicative of future operations or results had the Acquisition been completed as of October 1, 2015 or any other date.
The following table summarizes the unaudited pro forma financial information for the fiscal year indicated (dollars in millions):
| | | | | | | | | 2017 | | | | (unaudited) | | Pro forma net revenues | | $ | 4,586 |
| | Pro forma net income | | $ | 921 |
| | Pro forma basic earnings per share | | $ | 1.62 |
| | Pro forma diluted earnings per share | | $ | 1.62 |
|
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
3. Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents
The Company's cash and cash equivalents is summarized in the following table (dollars in millions):
| | | | | | | | | | | | | September 30, | | | | 2019 | | 2018 | | Broker-dealer subsidiaries | | $ | 2,260 |
| | $ | 2,094 |
| | Corporate | | 366 |
| | 342 |
| | Trust company subsidiary | | 124 |
| | 124 |
| | Futures commission merchant and forex dealer member subsidiary | | 94 |
| | 89 |
| | Investment advisory subsidiaries | | 8 |
| | 41 |
| | Total | | $ | 2,852 |
| | $ | 2,690 |
|
Capital requirements may limit the amount of cash available for dividend from the broker-dealer, trust company and FCM/FDM subsidiaries to the Parent.
The following table provides a reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents reported within the Consolidated Balance Sheets to the total of the same amounts shown in the Consolidated Statements of Cash Flows (dollars in millions):
| | | | | | | | | | | | | September 30, | | | | 2019 | | 2018 | | Cash and cash equivalents | | $ | 2,852 |
| | $ | 2,690 |
| Restricted cash and restricted cash equivalents included in cash and investments segregated and on deposit for regulatory purposes | | 7,341 |
| | 1,858 |
| Total cash, cash equivalents, restricted cash and restricted cash equivalents shown in the Consolidated Statements of Cash Flows | | $ | 10,193 |
| | $ | 4,548 |
|
Amounts included in restricted cash and restricted cash equivalents consist primarily of qualified deposits in special reserve bank accounts for the exclusive benefit of clients under Rule 15c3-3 of the Exchange Act and other regulations. Restricted cash equivalents consists of highly-liquid investments with an original maturity of three months or less.
4. Cash and Investments Segregated and on Deposit for Regulatory Purposes
Cash and investments segregated and on deposit for regulatory purposes consists of the following (dollars in millions):
| | | | | | | | | | | | | September 30, | | | | 2019 | | 2018 | | U.S. government debt securities | | $ | 4,369 |
| | $ | 200 |
| | Cash in demand deposit accounts | | 2,304 |
| | 956 |
| | U.S. government agency mortgage-backed securities | | 1,318 |
| | 1,302 |
| | Reverse repurchase agreements (collateralized by U.S. government debt securities) | | 500 |
| | 500 |
| | Cash on deposit with futures commission merchants | | 168 |
| | 202 |
| | U.S. government debt securities on deposit with futures commission merchant | | 25 |
| | 25 |
| | Total | | $ | 8,684 |
| | $ | 3,185 |
|
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
5. Investments Available-for-Sale
The following tables present the amortized cost and fair value of available-for-sale securities (dollars in millions):
| | | | | | | | | | | | | | | | | | | September 30, 2019 | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Available-for-sale securities: | | | | | | | | | | U.S. Treasury securities | | $ | 1,591 |
| | $ | 77 |
| | $ | — |
| | $ | 1,668 |
|
| | | | | | | | | | | | | | | | | | | September 30, 2018 | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Available-for-sale securities: | | | | | | | | | | U.S. Treasury securities | | $ | 493 |
| | $ | — |
| | $ | (9 | ) | | $ | 484 |
|
As of September 30, 2018, the Company had pledged $98 million of available-for-sale securities as collateral for repurchase agreements.
The following table presents the contractual maturities of available-for-sale securities as of September 30, 2019 (dollars in millions):
| | | | | | | | | | | | | Amortized Cost | | Fair Value | | Available-for-sale U.S. Treasury securities: | | | | | | Due within one to five years | | $ | 581 |
| | $ | 615 |
| | Due within five to ten years | | 619 |
| | 639 |
| | Due after ten years | | 391 |
| | 414 |
| | Total available-for-sale U.S. Treasury securities | | $ | 1,591 |
| | $ | 1,668 |
|
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
6. Receivable from and Payable to Brokers, Dealers and Clearing Organizations
Amounts receivable from and payable to brokers, dealers and clearing organizations consist of the following (dollars in millions):
| | | | | | | | | | | | | September 30, | | | | 2019 | | 2018 | | Receivable: | | | | | | Deposits paid for securities borrowed | | $ | 1,864 |
| | $ | 803 |
| | Clearing organizations | | 545 |
| | 545 |
| | Broker-dealers | | 16 |
| | 14 |
| | Securities failed to deliver | | 14 |
| | 12 |
| | Total | | $ | 2,439 |
| | $ | 1,374 |
| | Payable: | | | | | | Deposits received for securities loaned | | $ | 3,189 |
| | $ | 2,914 |
| | Clearing organizations | | 89 |
| | 29 |
| | Securities failed to receive | | 29 |
| | 34 |
| | Broker-dealers | | 1 |
| | 3 |
| | Total | | $ | 3,308 |
| | $ | 2,980 |
|
7. Allowance for Doubtful Accounts on Receivables
The following table summarizes activity in the Company's allowance for doubtful accounts on client and other receivables for the fiscal years indicated (dollars in millions):
| | | | | | | | | | | | | | | | | 2019 | | 2018 | | 2017 | | Beginning balance | | $ | 54 |
| | $ | 11 |
| | $ | 9 |
| | Provision for doubtful accounts, net | | 4 |
| | 56 |
| | 2 |
| | Acquired in business acquisition | | — |
| | — |
| | 2 |
| | Write-off of doubtful accounts | | (19 | ) | | (13 | ) | | (2 | ) | | Ending balance | | $ | 39 |
| | $ | 54 |
| | $ | 11 |
|
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
8. Property and Equipment
Property and equipment consists of the following (dollars in millions):
| | | | | | | | | | | | | September 30, | | | | 2019 | | 2018 | | Buildings and building components | | $ | 478 |
| | $ | 462 |
| | Computer equipment | | 313 |
| | 326 |
| | Software | | 253 |
| | 178 |
| | Leasehold improvements | | 182 |
| | 176 |
| | Land | | 59 |
| | 61 |
| | Other property and equipment | | 100 |
| | 92 |
| | | | 1,385 |
| | 1,295 |
| | Less: Accumulated depreciation and amortization | | (548 | ) | | (503 | ) | | Property and equipment at cost, net | | $ | 837 |
| | $ | 792 |
|
9. Goodwill and Acquired Intangible Assets
The Company has recorded goodwill for business acquisitions to the extent the purchase price of each completed acquisition exceeded the fair value of the net identifiable tangible and intangible assets of each acquired company. The following table summarizes changes in the carrying amount of goodwill (dollars in millions):
| | | | | | | Balance as of September 30, 2017 | | $ | 4,213 |
| Purchase accounting adjustments(1) | | 14 |
| | Balance as of September 30, 2018 | | 4,227 |
| | Changes during period | | — |
| | Balance as of September 30, 2019 | | $ | 4,227 |
|
| | (1) | The purchasing accounting adjustments are primarily attributable to post-closing adjustments related to the Bank Merger Consideration, property acquired and liabilities assumed in the acquisition of Scottrade. The purchase price allocation was finalized during September 2018, one-year from the anniversary of the Acquisition. |
Acquired intangible assets consist of the following (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | September 30, | | | | 2019 | | 2018 | | | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Client relationships | | $ | 2,069 |
| | $ | (1,011 | ) | | $ | 1,058 |
| | $ | 2,183 |
| | $ | (1,003 | ) | | $ | 1,180 |
| | Technology and content | | 9 |
| | (9 | ) | | — |
| | 108 |
| | (108 | ) | | — |
| | Trade names | | 10 |
| | (10 | ) | | — |
| | 10 |
| | (7 | ) | | 3 |
| | Trademark license | | 146 |
| | — |
| | 146 |
| | 146 |
| | — |
| | 146 |
| | | | $ | 2,234 |
| | $ | (1,030 | ) | | $ | 1,204 |
| | $ | 2,447 |
| | $ | (1,118 | ) | | $ | 1,329 |
|
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Amortization expense on acquired intangible assets was $125 million, $141 million and $79 million for fiscal years 2019, 2018 and 2017, respectively. Estimated future amortization expense for acquired finite-lived intangible assets outstanding as of September 30, 2019 is as follows (dollars in millions):
| | | | | | | Fiscal Year | | Estimated Amortization Expense | | 2020 | | $ | 115 |
| | 2021 | | 105 |
| | 2022 | | 105 |
| | 2023 | | 77 |
| | 2024 | | 65 |
| | Thereafter (to 2035) | | 591 |
| | Total | | $ | 1,058 |
|
10. Exit Liabilities
As of September 18, 2017, the date of Acquisition, the Company began to incur costs in connection with actions taken to attain synergies from combining the operations of the Company and Scottrade. These costs, collectively referred to as "acquisition-related exit costs," include severance and other costs associated with consolidating facilities and administrative functions. As of September 30, 2018, substantially all of the acquisition-related exit costs had been incurred.
The following table summarizes activity in the Company's exit liabilities for the fiscal years ended September 30, 2019 and 2018, which are included in accounts payable and other liabilities on the Consolidated Balance Sheets (dollars in millions):
| | | | | | | | | | | | | | | | | Severance Pay and Other Employment Benefits | | Contract Termination and Other Costs | | Total | | Balance, September 30, 2017 | | $ | 138 |
| | $ | — |
| | $ | 138 |
| | Exit liabilities assumed - post closing adjustments | | — |
| | 9 |
| | 9 |
| | Costs incurred and charged to expense | | 235 |
| (1) | 213 |
| (2) | 448 |
| | Costs paid or otherwise settled | | (352 | ) | | (174 | ) | | (526 | ) | | Balance, September 30, 2018 | | 21 |
| | 48 |
| | 69 |
| | Adjustments | | (1 | ) | (1) | (2 | ) | (2) | (3 | ) | | Costs paid or otherwise settled | | (20 | ) | | (45 | ) | | (65 | ) | | Balance, September 30, 2019 | | $ | — |
| | $ | 1 |
| | $ | 1 |
|
| | (1) | Costs incurred and adjustments made for severance pay and other employment benefits are included in employee compensation and benefits on the Consolidated Statements of Income. |
| | (2) | Costs incurred and adjustments made for contract termination and other costs are primarily included in other operating expense and professional services on the Consolidated Statements of Income. |
There were 0 material exit costs incurred which were not associated with the Scottrade acquisition during fiscal years 2019, 2018 and 2017.
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the cumulative amount of acquisition related exit costs incurred by the Company related to the Scottrade acquisition as of September 30, 2019 (dollars in millions):
| | | | | | | | | | | | | | | | | Severance Pay and Other Employment Benefits | | Contract Termination and Other Costs | | Total | | Exit liabilities assumed in business acquisition | | $ | 100 |
| | $ | 9 |
| | $ | 109 |
| | Employee compensation and benefits | | 267 |
| | — |
| | 267 |
| | Clearing and execution costs | | — |
| | 1 |
| | 1 |
| | Communications | | — |
| | 1 |
| | 1 |
| | Occupancy and equipment costs | | — |
| | 7 |
| | 7 |
| | Professional services | | — |
| | 30 |
| | 30 |
| | Other operating expense | | — |
| | 171 |
| | 171 |
| | Other non-operating expense | | — |
| | 2 |
| | 2 |
| | Total | | $ | 367 |
| | $ | 221 |
| | $ | 588 |
|
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
11. Long-term Debt and Other Borrowings
Long-term debt and other borrowings consist of the following (dollars in millions):
| | | | | | | | | | | | | | | | | | | September 30, 2019 | | Face Value | | Unamortized Discounts and Debt Issuance Costs | | Fair Value Adjustment(1) | | Net Carrying Value | | Senior Notes: | | | | | | | | | | Variable-rate Notes due 2021 | | $ | 600 |
| | $ | (2 | ) | | $ | — |
| | $ | 598 |
| | 2.950% Notes due 2022 | | 750 |
| | (3 | ) | | 6 |
| | 753 |
| | 3.750% Notes due 2024 | | 400 |
| | (3 | ) | | — |
| | 397 |
| | 3.625% Notes due 2025 | | 500 |
| | (3 | ) | | 25 |
| | 522 |
| | 3.300% Notes due 2027 | | 800 |
| | (8 | ) | | 40 |
| | 832 |
| | 2.750% Notes due 2029 | | 500 |
| | (5 | ) | | (3 | ) | | 492 |
| | Total long-term debt | | $ | 3,550 |
| | $ | (24 | ) | | $ | 68 |
| | $ | 3,594 |
|
| | | | | | | | | | | | | | | | | | | September 30, 2018 | | Face Value | | Unamortized Discounts and Debt Issuance Costs | | Fair Value Adjustment(1) | | Net Carrying Value | | Other borrowings: | | | | | | | | | | Securities sold under agreements to repurchase | | $ | 96 |
| | $ | — |
| | $ | — |
| | $ | 96 |
| | Long-term debt: | | | | | | | | | | Senior Notes: | | | | | | | | | | 5.600% Notes due 2019 | | 500 |
| | (1 | ) | | 2 |
| | 501 |
| | 2.950% Notes due 2022 | | 750 |
| | (4 | ) | | (27 | ) | | 719 |
| | 3.625% Notes due 2025 | | 500 |
| | (3 | ) | | (17 | ) | | 480 |
| | 3.300% Notes due 2027 | | 800 |
| | (9 | ) | | (52 | ) | | 739 |
| | Subtotal - Long-term debt | | 2,550 |
| | (17 | ) | | (94 | ) | | 2,439 |
| | Total long-term debt and other borrowings | | $ | 2,646 |
| | $ | (17 | ) | | $ | (94 | ) | | $ | 2,535 |
|
(1) Fair value adjustments relate to changes in the fair value of the debt while in a fair value hedging relationship. See "Fair Value Hedging" below.
Fiscal year maturities on long-term debt outstanding at September 30, 2019 are as follows (dollars in millions):
| | | | | | | 2020 | | $ | — |
| | 2021 | | — |
| | 2022 | | 1,350 |
| | 2023 | | — |
| | 2024 | | 400 |
| | Thereafter | | 1,800 |
| | Total | | $ | 3,550 |
|
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Senior Notes — As of September 30, 2019 and 2018, the Company had $3.55 billion and $2.55 billion aggregate principal amount of unsecured Senior Notes (together, the "Senior Notes"), respectively. The Company's Senior Notes were each sold through a public offering. The fixed rate and variable rate Senior Notes pay interest semi-annually and quarterly, respectively, in arrears. Key information about the Senior Notes outstanding as of September 30, 2019 is summarized in the following table (dollars in millions):
| | | | | | | | | | | Description | | Date Issued | | Maturity Date | | Aggregate Principal | | Interest Rate | | 2021 Notes | | October 30, 2018 | | November 1, 2021 | | $600 | | Variable | | 2022 Notes | | March 4, 2015 | | April 1, 2022 | | $750 | | 2.950% | | 2024 Notes | | October 30, 2018 | | April 1, 2024 | | $400 | | 3.750% | | 2025 Notes | | October 17, 2014 | | April 1, 2025 | | $500 | | 3.625% | | 2027 Notes | | April 27, 2017 | | April 1, 2027 | | $800 | | 3.300% | | 2029 Notes | | August 13, 2019 | | October 1, 2029 | | $500 | | 2.750% |
During September of fiscal year 2019, the Company used the net proceeds from the issuance of the 2029 Notes, together with cash on hand, to repay the $500 million aggregate outstanding principal amount and a prepayment premium under its 2019 Notes, which were scheduled to mature on December 1, 2019. The Company is using the net proceeds from the issuance of the 2021 Notes and 2024 Notes for general corporate purposes and to augment liquidity. The Company used the proceeds from the issuance of the 2027 Notes during fiscal year 2017 to finance a portion of the cash consideration paid by the Company in its acquisition of Scottrade.
Under the terms of the Senior Notes, the Company may redeem the notes prior to maturity, in whole or in part, at any time prior to specified dates, at redemption prices equal to the greater of (1) 100% of the principal amount of the notes being redeemed, and (2) the sum of the present values of the remaining scheduled payments of principal and interest on the notes being redeemed, discounted to the date of redemption on a semi-annual basis at the comparable U.S. Treasury rate, plus set basis points and in each case, accrued and unpaid interest to the date of redemption. The Company may redeem the Senior Notes, in whole or in part, at any time on or after the specified dates, at a redemption price equal to 100% of the principal amount of the notes being redeemed and in each case, accrued and unpaid interest to the date of redemption. The Senior Notes are not required to be guaranteed by any of the Company's subsidiaries.
Lines of Credit — TD Ameritrade Clearing, Inc. ("TDAC"), a clearing broker-dealer subsidiary of the Company, utilizes secured uncommitted lines of credit for short-term liquidity. Under these secured uncommitted lines, TDAC borrows on either a demand or short-term basis from 2 unaffiliated banks and pledges client margin securities as collateral. Advances under the secured uncommitted lines are dependent on TDAC having acceptable collateral as determined by each secured uncommitted credit agreement. At September 30, 2019, the terms of the secured uncommitted credit agreements do not specify borrowing limits. The availability of TDAC's secured uncommitted lines is subject to approval by the individual banks each time an advance is requested and may be denied. There were 0 borrowings outstanding under the secured uncommitted lines of credit as of September 30, 2019 and 2018.
Securities Sold Under Agreements to Repurchase (repurchase agreements) — Under repurchase agreements, the Company receives cash from the counterparty and provides U.S. government debt securities as collateral. The Company's repurchase agreements generally mature between 30 and 90 days following the transaction date and are accounted for as secured borrowings. There were no borrowings outstanding under repurchase agreements as of September 30, 2019. The remaining contractual maturities of the repurchase agreements with outstanding balances as of September 30, 2018 were less than 30 days. The weighted average interest rate on the balances outstanding as of September 30, 2018 was 2.35%. See "General Contingencies" in Note 16 for a discussion of the potential risks associated with repurchase agreements and how the Company mitigates those risks.
Fair Value Hedging — The Company is exposed to changes in the fair value of its fixed-rate Senior Notes resulting from interest rate fluctuations. To hedge a vast majority of this exposure, the Company has entered into fixed-for-
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
variable interest rate swaps on each of the 2022 Notes, 2025 Notes, 2027 Notes and 2029 Notes (together, the "Hedged Senior Notes"). Each fixed-for-variable interest rate swap has a notional amount and a maturity date matching the aggregate principal amount and maturity date, respectively, for each of the respective Hedged Senior Notes. During September 2019, the Company paid in full the outstanding principal under the 2019 Notes and the interest rate swap on the 2019 Notes was terminated.
The interest rate swaps effectively change the fixed-rate interest on the Hedged Senior Notes to variable-rate interest. Under the terms of the interest rate swap agreements, the Company receives semi-annual fixed-rate interest payments based on the same rates applicable to the Hedged Senior Notes, and makes quarterly variable-rate interest payments based on three-month LIBOR plus (1) 0.9486% for the swap on the 2022 Notes, (2) 1.1022% for the swap on the 2025 Notes, (3) 1.0340% for the swap on the 2027 Notes and (4) 1.2000% for the swap on the 2029 Notes. As of September 30, 2019, the weighted average effective interest rate on the aggregate principal balance of the Senior Notes was 3.27%.
The interest rate swaps are accounted for as fair value hedges and qualify for the shortcut method of accounting. Changes in the payment of interest resulting from the interest rate swaps are recorded in interest on borrowings on the Consolidated Statements of Income. Changes in fair value of the interest rate swaps are completely offset by changes in fair value of the related notes, resulting in no effect on net income. The following table summarizes gains and losses resulting from changes in the fair value of interest rate swaps designated as fair value hedges and the hedged fixed-rate debt for the fiscal years indicated (dollars in millions):
| | | | | | | | | | | | | | | | | 2019 | | 2018 | | 2017 | | Gain (loss) on fair value of interest rate swaps | | $ | 162 |
| | $ | (117 | ) | | $ | (56 | ) | | Gain (loss) on fair value of hedged fixed-rate debt | | (162 | ) | | 117 |
| | 56 |
| | Net gain (loss) recorded in interest on borrowings | | $ | — |
| | $ | — |
| | $ | — |
|
Cash Flow Hedging – On January 17, 2014, the Company entered into forward-starting interest rate swap contracts with an aggregate notional amount of $500 million, to hedge against changes in the benchmark interest rate component of future interest payments resulting from an anticipated debt refinancing. The Company designated the contracts as a cash flow hedge of the future interest payments. Under cash flow hedge accounting, the swap contracts are carried at fair value until settlement and to the extent they are an effective hedge, any unrealized gains or losses are recorded in other comprehensive income (loss). Any ineffective portion of the unrealized gains or losses is immediately recorded into earnings. Upon settlement, any realized gain or loss that has been recorded in other comprehensive income (loss) is amortized into earnings over the term of the newly-issued fixed-rate debt.
On October 17, 2014, the Company sold $500 million of 2025 Notes as described under "Senior Notes" above, and paid approximately $45 million to settle the forward-starting interest rate swap contracts. As of September 30, 2019, the Company expects to amortize $4 million of pre-tax losses, that were reported in accumulated other comprehensive loss, into interest on borrowings on the Consolidated Statements of Income within the next 12 months.
Balance Sheet Impact of Hedging Instruments — The following table summarizes the classification and the fair value of outstanding derivatives designated as hedging instruments on the Consolidated Balance Sheets (dollars in millions):
| | | | | | | | | | | | | September 30, | | | 2019 | | 2018 | | Pay-variable interest rate swaps designated as fair value hedges: | | | | | | Other assets | | $ | 71 |
| | $ | 2 |
| | Accounts payable and other liabilities | | $ | (3 | ) | | $ | (96 | ) |
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The interest rate swaps are subject to counterparty credit risk. Credit risk is managed by limiting activity to approved counterparties that meet a minimum credit rating threshold, by entering into credit support agreements, or by utilizing approved central clearing counterparties registered with the CFTC. The interest rate swaps require daily collateral coverage, in the form of cash or U.S. Treasury securities, for the aggregate fair value of the interest rate swaps (including accrued interest). As of September 30, 2019 and 2018, the pay-variable interest rate swap counterparties had pledged $86 million and $10 million of collateral, respectively, to the Company in the form of cash. A liability for collateral pledged to the Company in the form of cash is recorded in accounts payable and other liabilities on the Consolidated Balance Sheets. As of September 30, 2019 and 2018, the Company had pledged $3 million and $82 million of collateral, respectively, to the pay-variable interest rate swap counterparties in the form of cash. An asset for collateral pledged to the swap counterparties in the form of cash is recorded in other receivables on the Consolidated Balance Sheets.
TD Ameritrade Holding Corporation Senior Revolving Credit Facility — On April 21, 2017, the Parent entered into a credit agreement consisting of a senior unsecured committed revolving credit facility in the aggregate principal amount of $300 million (the "Parent Revolving Facility"). The maturity date of the Parent Revolving Facility is April 21, 2022. The obligations under the Parent Revolving Facility are not guaranteed by any subsidiary of Parent.
The applicable interest rate under the Parent Revolving Facility is calculated as a per annum rate equal to, at the option of the Parent, (1) LIBOR plus an interest rate margin ("Parent Eurodollar loans") or (2) (i) the highest of (x) the prime rate, (y) the federal funds effective rate (or, if the federal funds effective rate is unavailable, the overnight bank funding rate) plus 0.50% or (z) the eurodollar rate assuming a one-month interest period plus 1.00%, plus (ii) an interest rate margin ("ABR loans"). The interest rate margin ranges from 0.875% to 1.50% for Parent Eurodollar loans and from 0% to 0.50% for ABR loans, determined by reference to the Company's public debt ratings. The Parent is obligated to pay a commitment fee ranging from 0.08% to 0.20% on any unused amount of the Parent Revolving Facility, determined by reference to the Company's public debt ratings. There were 0 borrowings outstanding under the Parent Revolving Facility as of September 30, 2019 and 2018. As of September 30, 2019, the interest rate margin would have been 1.125% for Parent Eurodollar loans and 0.125% for ABR loans, and the commitment fee was 0.125%, each determined by reference to the Company's public debt ratings.
The Parent Revolving Facility contains negative covenants that limit or restrict, subject to certain exceptions, the incurrence of liens, indebtedness of subsidiaries, mergers, consolidations, transactions with affiliates, change in nature of business and the sale of all or substantially all of the assets of the Company. The Parent is also required to maintain compliance with a maximum consolidated leverage ratio covenant and a minimum consolidated interest coverage ratio covenant, and the Company's broker-dealer and FCM/FDM subsidiaries are required to maintain compliance with a minimum regulatory net capital covenant. The Company was in compliance with all covenants under the Parent Revolving Facility as of September 30, 2019.
TD Ameritrade Clearing, Inc. Senior Revolving Credit Facilities— TDAC has access to 2 senior unsecured committed revolving credit facilities with an aggregate principal amount of $1.45 billion, consisting of a $600 million (the "$600 Million Revolving Facility") and an $850 million (the "$850 Million Revolving Facility") senior revolving facility (together, the "TDAC Revolving Facilities"). TDAC entered into the $850 Million Revolving Facility on May 16, 2019, replacing its prior $850 million senior unsecured committed revolving credit facility, which matured on the same date. The maturity dates of the $600 Million Revolving Facility and the $850 Million Revolving Facility are April 21, 2022 and May 14, 2020, respectively.
The applicable interest rate under each of the TDAC Revolving Facilities is calculated as a per annum rate equal to, at the option of TDAC, (1) LIBOR plus an interest rate margin ("TDAC Eurodollar loans") or (2) the federal funds effective rate plus an interest rate margin ("Federal Funds Rate loans"). The interest rate margin ranges from 0.75% to 1.25% for both TDAC Eurodollar loans and Federal Funds Rate loans, determined by reference to the Company's public debt ratings. TDAC is obligated to pay commitment fees ranging from 0.07% to 0.175% and from 0.06% to 0.125% on any unused amounts of the $600 Million Revolving Facility and the $850 Million Revolving Facility, respectively, each determined by reference to the Company's public debt ratings. There were 0 borrowings outstanding under the TDAC Revolving Facilities as of September 30, 2019 and 2018. As of September 30, 2019, the interest rate margin under the TDAC Revolving Facilities would have been 1.00% for both TDAC Eurodollar
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
loans and Federal Funds Rate loans, determined by reference to the Company's public debt ratings. As of September 30, 2019, the commitment fees under the $600 Million Revolving Facility and the $850 Million Revolving Facility were 0.10% and 0.08%, respectively, each determined by reference to the Company's public debt ratings.
The TDAC Revolving Facilities contain negative covenants that limit or restrict, subject to certain exceptions, the incurrence of liens, indebtedness of TDAC, change in nature of business, mergers, consolidations, and the sale of all or substantially all of the assets of TDAC. TDAC is also required to maintain minimum consolidated tangible net worth and is required to maintain compliance with minimum regulatory net capital requirements. TDAC was in compliance with all covenants under the TDAC Revolving Facilities as of September 30, 2019.
Intercompany Credit Agreements— The Parent has entered into credit agreements with each of its primary broker-dealer and FCM/FDM subsidiaries, under which the Parent may make loans of cash or securities under committed and/or uncommitted lines of credit. Key information about the committed and/or uncommitted lines of credit is summarized in the following table (dollars in millions):
| | | | | | | | | Borrower Subsidiary | | Committed Facility | | Uncommitted Facility(1) | | Termination Date | | TD Ameritrade Clearing, Inc. | | $1,200 | | $300 | | March 1, 2022 | | TD Ameritrade, Inc. | | N/A | | $300 | | March 1, 2022 | | TD Ameritrade Futures & Forex LLC | | $45 | | N/A | | August 11, 2021 |
| | (1) | The Parent is permitted, but under no obligation, to make loans under uncommitted facilities. |
Loans under both the committed and uncommitted facilities bear interest at the same rate as borrowings under the TDAC Revolving Facilities and must be repaid with interest on or before the termination date.
There were 0 borrowings outstanding under any of the intercompany credit agreements as of September 30, 2019 and 2018.
12. Income Taxes
The Tax Cuts and Jobs Act (the "Act") was enacted on December 22, 2017, reducing the U.S. federal corporate income tax rate from 35% to 21%. The U.S. federal statutory income tax rate for companies with a fiscal year end of September 30, 2018, was a blended rate of 24.5% for fiscal year 2018.
Provision for income taxes is comprised of the following for the fiscal years indicated (dollars in millions):
| | | | | | | | | | | | | | | | | 2019 | | 2018 | | 2017 | | Current expense: | | | | | | | | Federal | | $ | 579 |
| | $ | 380 |
| | $ | 484 |
| | State | | 116 |
| | 58 |
| | 49 |
| | | | 695 |
| | 438 |
| | 533 |
| | Deferred expense (benefit): | | | | | | | | Federal | | 20 |
| | (32 | ) | | (11 | ) | | State | | 6 |
| | 8 |
| | — |
| | | | 26 |
| | (24 | ) | | (11 | ) | | Provision for income taxes | | $ | 721 |
| | $ | 414 |
| | $ | 522 |
|
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A reconciliation of the U.S. federal statutory income tax rate to the effective tax rate applicable to pre-tax income follows for the fiscal years indicated:
| | | | | | | | | | | | | | 2019 | | 2018 | | 2017 | | Federal statutory income tax rate | | 21.0 | % | | 24.5 | % | | 35.0 | % | | Statutory versus actual blended federal income tax rate | | — |
| | (1.3 | ) | | — |
| | State taxes, net of federal tax effect | | 3.7 |
| | 2.6 |
| | 2.8 |
| | Federal incentives | | — |
| | 0.4 |
| | (0.3 | ) | | Interest recorded on unrecognized tax benefits, net | | 0.2 |
| | 0.2 |
| | 0.2 |
| | Remeasurement of U.S. deferred income taxes | | — |
| | (3.8 | ) | | — |
| | Reversal of accruals for unrecognized tax benefits | | (0.3 | ) | | (0.4 | ) | | (0.4 | ) | | Share-based payment compensation | | (0.1 | ) | | (0.3 | ) | | — |
| | Disallowed executive compensation | | 0.2 |
| | — |
| | — |
| | Other | | (0.1 | ) | | — |
| | 0.1 |
| | | | 24.6 | % | | 21.9 | % | | 37.4 | % |
The Company's effective income tax rate for fiscal year 2019 was 24.6%, compared to 21.9% and 37.4% for fiscal years 2018 and 2017, respectively. The provision for income taxes for the fiscal year 2019 included $16 million of favorable adjustments related to state income tax matters and a $4 million income tax benefit resulting from the vesting of equity-based compensation. These items had a favorable impact on the Company's earnings for fiscal year 2019 of approximately $0.04 per share. The provision for income taxes for fiscal year 2018 included a net favorable adjustment of $71 million related to the remeasurement of the Company's deferred income tax balances as it pertains to the Act, a $5 million income tax benefit resulting from the change in accounting for income taxes related to equity-based compensation under ASU 2016-09, $12 million of favorable resolutions of state income tax matters and a $30 million favorable benefit resulting from accelerating certain deductions, including acquisition-related exit costs, to leverage higher 2017 pre-enactment tax rates. The effective income tax rate was also impacted by a $9 million unfavorable remeasurement of uncertain tax positions related to certain federal incentives. These items had a net favorable impact on the Company's earnings for fiscal year 2018 of approximately $0.19 per share. The provision for income taxes for fiscal year 2017 included $8 million of net favorable resolutions of state income tax matters and $4 million of favorable tax benefits for certain federal incentives. These items had a net favorable impact on the Company's earnings for fiscal year 2017 of approximately $0.02 per share.
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred tax assets (liabilities) are comprised of the following (dollars in millions):
| | | | | | | | | | | | | September 30, | | | | 2019 | | 2018 | | Deferred tax assets: | | | | | | Accrued and other liabilities | | $ | 82 |
| | $ | 78 |
| | Stock-based compensation | | 20 |
| | 19 |
| | Allowance for doubtful accounts | | 10 |
| | 14 |
| | Operating loss carryforwards | | 5 |
| | 2 |
| | Intangible assets, state tax benefit | | 1 |
| | 3 |
| | Unrecognized loss on cash flow hedging instruments | | — |
| | 9 |
| | Other deferred tax assets | | 6 |
| | — |
| | Gross deferred tax assets | | 124 |
| | 125 |
| | Less: Valuation allowance | | (4 | ) | | (2 | ) | | Net deferred tax assets | | 120 |
| | 123 |
| | Deferred tax liabilities: | | | | | | Acquired intangible assets | | (261 | ) | | (236 | ) | | Property and equipment | | (54 | ) | | (46 | ) | | Unrecognized gain on cash flow hedging instruments | | (13 | ) | | — |
| | Prepaid expenses | | (11 | ) | | (13 | ) | | Capitalized contract acquisition costs | | (7 | ) | | — |
| | Unrealized gain on investments | | (2 | ) | | (2 | ) | | Other deferred tax liabilities | | — |
| | (3 | ) | | Total deferred tax liabilities | | (348 | ) | | (300 | ) | | Net deferred tax liabilities | | $ | (228 | ) | | $ | (177 | ) |
At September 30, 2019, subsidiaries of the Company have approximately $79 million of separate state operating loss carryforwards. These carryforwards expire between fiscal years 2021 and 2038. Because the realization of the tax benefit from state loss carryforwards is dependent on certain subsidiaries generating sufficient state taxable income in future periods, as well as annual limitations on future utilization, the Company has provided a valuation allowance against the computed benefit in order to reflect the tax benefit expected to be realized.
A reconciliation of the activity related to unrecognized tax benefits follows for the fiscal years indicated (dollars in millions):
| | | | | | | | | | | | | | | | | 2019 | | 2018 | | 2017 | | Beginning balance | | $ | 181 |
| | $ | 152 |
| | $ | 142 |
| | Additions based on tax positions related to the current year | | 34 |
| | 35 |
| | 28 |
| | Additions for tax positions of prior years | | 3 |
| | 8 |
| | — |
| | Reductions due to lapsed statute of limitations | | (11 | ) | | (9 | ) | | (7 | ) | | Reductions due to settlements with taxing authorities | | (10 | ) | | (3 | ) | | (1 | ) | | Reductions for tax positions of prior years | | (4 | ) | | (2 | ) | | (10 | ) | | Ending balance | | $ | 193 |
| | $ | 181 |
| | $ | 152 |
|
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The balance of unrecognized tax benefits as of September 30, 2019 was $193 million ($160 million net of the federal benefit on state matters), all of which, if recognized, would favorably affect the effective income tax rate in any future periods. The balance of unrecognized tax benefits as of September 30, 2018 was $181 million ($151 million net of the federal benefit on state matters), all of which, if recognized, would favorably affect the effective income tax rate in any future periods. The Company's income tax returns are subject to review and examination by federal, state and local taxing authorities. The Company's federal claims for refund for tax years 2012 through 2014 and the federal returns for 2015 and 2016 are being examined by the Internal Revenue Service. The federal returns for 2015 through 2018 remain open to examination under the statute of limitations. The years open to examination by state and local government authorities vary by jurisdiction, but the statute of limitations is generally three to four years from the date the tax return is filed. It is reasonably possible that the gross unrecognized tax benefits as of September 30, 2019 could decrease by up to $73 million ($64 million net of the federal benefit on state matters) within the next 12 months as a result of settlements of certain examinations or expiration of the statute of limitations with respect to other tax filings.
The Company recognized $5 million, $4 million and $2 million of interest and penalties expense (net of the federal benefit) on the Consolidated Statements of Income for fiscal years 2019, 2018 and 2017, respectively, primarily due to accruals for unrecognized tax benefits. As of September 30, 2019 and 2018, accrued interest and penalties related to unrecognized tax benefits was $36 million and $30 million, respectively.
13. Capital Requirements
The Company's broker-dealer subsidiaries are subject to the SEC Uniform Net Capital Rule (Rule 15c3-1 under the Exchange Act), administered by the SEC and FINRA, which requires the maintenance of minimum net capital, as defined. Net capital and the related net capital requirements may fluctuate on a daily basis. TDAC, the Company's clearing broker-dealer subsidiary, and TD Ameritrade, Inc., an introducing broker-dealer subsidiary of the Company, compute net capital under the alternative method as permitted by SEC Rule 15c3-1. TDAC is required to maintain minimum net capital of the greater of $1.5 million, which is based on the type of business conducted by the broker-dealer, or 2% of aggregate debit balances arising from client transactions. TD Ameritrade, Inc.is required to maintain minimum net capital of the greater of $250,000 or 2% of aggregate debit balances arising from client transactions. In addition, under the alternative method, a broker-dealer may not repay any subordinated borrowings, pay cash dividends or make any unsecured advances or loans to its parent company or employees if such payment would result in net capital of less than (1) 5% of aggregate debit balances or (2) 120% of its minimum dollar requirement.
TD Ameritrade Futures & Forex LLC ("TDAFF"), the Company's FCM and FDM subsidiary registered with the CFTC, is subject to CFTC Regulations 1.17 and 5.7 under the Commodity Exchange Act, administered by the CFTC and the NFA. As an FCM, TDAFF is required to maintain minimum adjusted net capital under CFTC Regulation 1.17 of the greater of (1) $1.0 million or (2) its futures risk-based capital requirement, equal to 8% of the total risk margin requirement for all futures positions carried by the FCM in client and nonclient accounts. As an FDM, TDAFF is also subject to the net capital requirements under CFTC Regulation 5.7, which requires TDAFF to maintain minimum adjusted net capital of the greater of (1) any amount required under CFTC Regulation 1.17 as described above or (2) $20.0 million plus 5% of all foreign exchange liabilities owed to forex clients in excess of $10.0 million. In addition, an FCM and FDM must provide notice to the CFTC if its adjusted net capital amounts to less than (1) 110% of its risk-based capital requirement under CFTC Regulation 1.17, (2) 150% of its $1.0 million minimum dollar requirement, or (3) 110% of $20.0 million plus 5% of all foreign exchange liabilities owed to forex clients in excess of $10.0 million.
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Net capital and net capital requirements for the Company's broker-dealer subsidiaries are summarized in the following tables (dollars in millions):
| | | | | | | | | | | | | | | | | | TD Ameritrade Clearing, Inc. | | Date | | Net Capital | | Required Net Capital (2% of Aggregate Debit Balances) | | Net Capital in Excess of Required Net Capital | | Ratio of Net Capital to Aggregate Debit Balances | | September 30, 2019 | | $ | 3,188 |
| | $ | 493 |
| | $ | 2,695 |
| | 12.93 | % | | September 30, 2018 | | $ | 2,831 |
| | $ | 525 |
| | $ | 2,306 |
| | 10.79 | % |
| | | | | | | | | | | | | | | TD Ameritrade, Inc. | | Date | | Net Capital | | Required Net Capital (Minimum Dollar Requirement) | | Net Capital in Excess of Required Net Capital | | September 30, 2019 | | $ | 289 |
| | $ | 0.25 |
| | $ | 289 |
| | September 30, 2018 | | $ | 181 |
| | $ | 0.25 |
| | $ | 181 |
|
Adjusted net capital and adjusted net capital requirements for the Company's FCM and FDM subsidiary are summarized in the following table (dollars in millions):
| | | | | | | | | | | | | | | TD Ameritrade Futures & Forex LLC | | Date | | Adjusted Net Capital | | Required Adjusted Net Capital ($20 Million Plus 5% of All Foreign Exchange Liabilities Owed to Forex Clients in Excess of $10 Million) | | Adjusted Net Capital in Excess of Required Adjusted Net Capital | | September 30, 2019 | | $ | 140 |
| | $ | 23 |
| | $ | 117 |
| | September 30, 2018 | | $ | 129 |
| | $ | 23 |
| | $ | 106 |
|
The Company's non-depository trust company subsidiary, TDATC, is subject to capital requirements established by the State of Maine, which require TDATC to maintain minimum Tier 1 capital. TDATC's Tier 1 capital was $43 million and $39 million as of September 30, 2019 and 2018, respectively, which exceeded the required Tier 1 capital by $22 million and $18 million, respectively.
14. Stock-based Compensation
The Company has 2 stock incentive plans under which Company stock-based awards may be granted: the TD Ameritrade Holding Corporation Long-Term Incentive Plan (the "LTIP") and the 2006 Directors Incentive Plan (the "Directors Plan"). The LTIP authorizes the award of options to purchase common stock, common stock appreciation rights, restricted stock, restricted stock units, performance shares and performance units. Under the LTIP, 42,104,174 shares of the Company's common stock are reserved for issuance to eligible employees, consultants and non-employee directors. The Directors Plan authorizes the award of options to purchase common stock, common stock appreciation rights, restricted stock units and restricted stock. Under the Directors Plan, 1,830,793 shares of the Company's common stock are reserved for issuance to non-employee directors.
Stock options, except for replacement options granted in connection with business combinations, are granted by the Company with an exercise price not less than the fair market value of the Company's common stock on the grant date. Stock options generally vest over a one- to four-year period and expire 10 years after the grant date. Restricted stock units ("RSUs") are awards that entitle the holder to receive shares of Company common stock following a
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
vesting period. RSUs granted to employees generally vest after the completion of a three-year period or ratably over a three-year period. RSUs granted to non-employee directors generally vest over a one-year period. Performance-based restricted stock units ("PRSUs") are a form of RSUs in which the number of shares ultimately received depends on how the Company's total shareholder return compares to the total shareholder returns of companies in a selected performance peer group. PRSUs are subject to a three-year cliff vesting period. At the end of the performance period, the number of shares of common stock issued can range from 80% to 120% of target, depending on the Company's ranking in the performance peer group. Shares of common stock are issued following the end of the performance period.
Stock-based compensation expense was $47 million, $60 million and $36 million for fiscal years 2019, 2018 and 2017, respectively. The related income tax benefits were $12 million, $17 million and $14 million for fiscal years 2019, 2018 and 2017, respectively.
The following is a summary of option activity in the Company's stock incentive plans for the fiscal year ended September 30, 2019:
| | | | | | | | | | | | | | | | | | Number of Options (in thousands) | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value (in millions) | | Outstanding at beginning of year | | 503 |
| | $ | 27.97 |
| | | | | | Outstanding at end of year | | 503 |
| | $ | 27.97 |
| | 6.3 | | $ | 9 |
| | Exercisable at end of year | | 377 |
| | $ | 27.97 |
| | 6.3 | | $ | 7 |
|
The Company measures the fair value of stock options using a Black-Scholes-Merton valuation model as of the date of the grant. NaN options were granted during fiscal years 2019, 2018 and 2017. The total intrinsic value of options exercised during fiscal year 2017 was $26 million. NaN options were exercised during fiscal years 2019 and 2018. As of September 30, 2019, the total unrecognized compensation cost related to nonvested stock options awards was $0.2 million and was expected to be recognized over a weighted-average period of 0.3 years.
The Company measures the fair value of RSUs based upon the volume-weighted average market price of the underlying common stock as of the date of grant. The grant date fair value of PRSUs was determined based upon a Monte Carlo simulation model whereby the stock prices of the Company and the selected peer group companies were simulated using correlated Geometric Brownian motion paths in order to estimate the Company's total expected shareholder return rank within the peer group index and the corresponding percent of PRSUs that are estimated to be earned per the PRSU award agreement. RSUs and PRSUs are amortized over their applicable vesting period using the straight-line method, reduced by expected forfeitures.
The following is a summary of RSU activity in the Company's stock incentive plans for the fiscal year ended September 30, 2019:
| | | | | | | | | | | | Number of Units (in thousands) | | Weighted Average Grant Date Fair Value | | Nonvested at beginning of year | | 2,129 |
| | $ | 39.99 |
| | Granted | | 845 |
| | $ | 48.43 |
| | Vested | | (833 | ) | | $ | 32.43 |
| | Forfeited | | (157 | ) | | $ | 47.08 |
| | Nonvested at end of year | | 1,984 |
| | $ | 46.20 |
|
The weighted-average grant-date fair value of RSUs granted during fiscal years 2019, 2018 and 2017 was $48.43, $50.61 and $40.66, respectively. As of September 30, 2019, there was $34 million of estimated unrecognized compensation cost related to nonvested RSUs, which was expected to be recognized over a weighted average period
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of 1.8 years. The total fair value of RSUs that vested during fiscal years 2019, 2018 and 2017 was $43 million, $42 million and $70 million, respectively.
The following is a summary of PRSU activity in the Company's stock incentive plans for the fiscal year ended September 30, 2019:
| | | | | | | | | | | | Number of Units (in thousands) | | Weighted Average Grant Date Fair Value | | Nonvested at beginning of year | | 500 |
| | $ | 44.19 |
| | Granted | | 317 |
| | $ | 49.59 |
| | Nonvested at end of year | | 817 |
| | $ | 46.29 |
|
The weighted-average grant-date fair value of the PRSUs granted during the fiscal years 2019, 2018 and 2017 was $49.59, $49.50 and $39.48, respectively. As of September 30, 2019, there was $8 million of estimated unrecognized compensation cost related to nonvested PRSUs, which was expected to be recognized over a weighted average period of 1.5 years.
The fair value of PRSUs granted was estimated using a Monte Carlo simulation model with the following inputs for the fiscal years indicated:
| | | | | | | | | | | | | | 2019 | | 2018 | | 2017 | | Risk-free interest rate | | 2.77 | % | | 1.84 | % | | 1.34 | % | | Expected dividend yield | | 0 | % | | 0 | % | | 0 | % | | Expected volatility | | 28 | % | | 28 | % | | 27 | % | | Expected term (years) | | 2.8 |
| | 2.8 |
| | 2.9 |
|
The risk-free interest rate input was based on U.S. Treasury note yields with remaining terms comparable to the expected term input used in the valuation model. The expected dividend yield was selected to be 0 as the vesting condition is based on total shareholder return, which includes changes in price, plus reinvestment of dividends paid. The expected volatility was based on historical daily price changes for a period of time that corresponds with the expected term input used in the valuation model. The expected term input was based on the contractual remaining period of time until the award vests in accordance with the PRSU award agreement.
Although the Company does not have a formal policy regarding issuance of shares for stock-based compensation, such shares are generally issued from treasury stock. The stockholders agreement entered into in connection with the acquisition of TD Waterhouse Group, Inc. requires the Company to repurchase its common stock from time to time to offset dilution resulting from stock option exercises and other stock awards subsequent to the acquisition. As of September 30, 2019, the Company was not obligated to repurchase additional shares pursuant to the stockholders agreement. The Company cannot estimate the amount and timing of repurchases that may be required as a result of future stock issuances.
15. Employee Benefit Plans
The Company has a 401(k) and profit-sharing plan under which annual profit-sharing contributions are determined at the discretion of the board of directors. The Company also makes matching contributions pursuant to the plan document. Profit-sharing and matching contributions expense was $60 million, $53 million and $38 million for fiscal years 2019, 2018 and 2017, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
16. Commitments and Contingencies
Lease Commitments — The Company has various non-cancelable operating leases on facilities requiring annual payments as follows (dollars in millions):
| | | | | | | | | | | | | | | Fiscal Year | | Minimum Lease Payments | | Sublease Income | | Net Lease Commitments | | 2020 | | $ | 72 |
| | $ | (2 | ) | | $ | 70 |
| | 2021 | | 64 |
| | (1 | ) | | 63 |
| | 2022 | | 55 |
| | — |
| | 55 |
| | 2023 | | 49 |
| | — |
| | 49 |
| | 2024 | | 45 |
| | — |
| | 45 |
| | Thereafter (to 2033) | | 191 |
| | — |
| | 191 |
| | Total | | $ | 476 |
| | $ | (3 | ) | | $ | 473 |
|
A majority of the leases for the Company's branch offices contain provisions for renewal at the Company's option. Rental expense, net of sublease income, was approximately $76 million, $83 million and $54 million for fiscal years 2019, 2018 and 2017, respectively.
Legal and Regulatory Matters
Order Routing Matters — In 2014, 5 putative class action complaints were filed regarding TD Ameritrade, Inc.'s routing of client orders and 1 putative class action was filed regarding Scottrade, Inc.'s routing of client orders. NaN of the 6 cases were dismissed and the United States Court of Appeals, 8th Circuit, affirmed the dismissals in those cases that were appealed. The 1 remaining case is Roderick Ford (replacing Gerald Klein) v. TDAmeritrade Holding Corporation, et al., Case No. 8:14CV396 (U.S. District Court, District of Nebraska).In the remaining case, plaintiff alleges that, when routing client orders to various market centers, defendants did not seek best execution, and instead routed clients' orders to market venues that paid TD Ameritrade, Inc. the most money for order flow. Plaintiff alleges that defendants made misrepresentations and omissions regarding the Company's order routing practices. The complaint asserts claims of violations of Section 10(b) and 20 of the Exchange Act and SEC Rule 10b-5. The complaint seeks damages, injunctive relief, and other relief. Plaintiff filed a motion for class certification, which defendants opposed. On July 12, 2018, the Magistrate Judge issued findings and a recommendation that plaintiff's motion for class certification be denied. Plaintiff filed objections to the Magistrate Judge's findings and recommendation, which defendants opposed. On September 14, 2018, the District Judge sustained plaintiff's objections, rejected the Magistrate Judge's recommendation and granted plaintiff's motion for class certification. On September 28, 2018, defendants filed a petition requesting that the U.S. Court of Appeals, 8th Circuit, grant an immediate appeal of the District Court's class certification decision. The U.S. Court of Appeals, 8th Circuit, granted defendants' petition on December 18, 2018. Briefing on the appeal is complete. The Securities Industry and Financial Markets Association and the U.S. Chamber of Commerce have filed amicus curiae briefs in support of the Company's appeal. The Company intends to vigorously defend against this lawsuit and is unable to predict the outcome or the timing of the ultimate resolution of the lawsuit, or the potential loss, if any, that may result.
Aequitas Securities Litigation — An amended putative class action complaint was filed in the U.S. District Court for the District of Oregon in Lawrence Ciuffitelli et al. v. Deloitte & Touche LLP, EisnerAmper LLP, Sidley Austin LLP, Tonkon Torp LLP, TD Ameritrade, Inc., and Integrity Bank & Trust, Case No. 3:16CV580, on May 19, 2016. A second amended putative class action complaint was filed on September 8, 2017, in which Duff & Phelps was added as a defendant. The putative class includes all persons who purchased securities of Aequitas Commercial Finance, LLC and its affiliates on or after June 9, 2010. Other groups of plaintiffs have filed non-class action lawsuits in Oregon Circuit Court, Multnomah County, against these and other defendants. FINRA arbitrations have also been filed against TD Ameritrade, Inc. The claims in these actions include allegations that the sales of Aequitas
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
securities were unlawful, the defendants participated and materially aided in such sales in violation of the Oregon securities laws, and material misstatements and omissions were made. While the factual allegations differ in various respects among the cases, plaintiffs' allegations include assertions that: TD Ameritrade, Inc. customers purchased more than $140 million of Aequitas securities; TD Ameritrade, Inc. served as custodian for Aequitas securities; recommended and referred investors to financial advisors as part of its advisor referral program for the purpose of purchasing Aequitas securities; participated in marketing the securities; recommended the securities; provided assurances to investors about the safety of the securities; and developed a market for the securities. In the Ciuffitelli putative class action, plaintiffs allege that more than 1,500 investors were owed more than $600 million on the Aequitas securities they purchased. On August 1, 2018, the Magistrate Judge in that case issued findings and a recommendation that defendants' motions to dismiss the pending complaint be denied with limited exceptions not applicable to the Company. TD Ameritrade, Inc. and other defendants filed objections to the Magistrate Judge's findings and recommendation, which plaintiffs opposed. On September 24, 2018, the District Judge issued an opinion and order adopting the Magistrate Judge's findings and recommendation. In May 2019, TD Ameritrade, Inc. settled all of the non-class action claims then pending for an immaterial amount paid by its insurers. Plaintiffs and defendants Tonkon Torp and Integrity Bank entered into agreements to settle the claims in the Ciuffitelli case on a class basis for an aggregate amount of $14.6 million subject to Court approval. Following a mediation, on July 9, 2019, plaintiffs and the remaining defendants in the Ciuffitelli case reached an agreement to settle the claims on a class basis for $220 million subject to Court approval. If the Court approves the settlement, TD Ameritrade, Inc. will contribute $20 million and its insurers $12 million of the aggregate settlement amount. On July 15, 2019, the Magistrate Judge issued findings and a recommendation that the District Judge preliminarily approve the class settlements. On August 7, 2019, the District Judge issued an order adopting the Magistrate Judge's findings and recommendation on preliminary approval. A settlement hearing is scheduled for November 26, 2019. Except as described above, the Company is unable to predict the outcome or the timing of the ultimate resolution of this litigation, or the potential losses, if any, that may result.
Other Legal and Regulatory Matters — The Company is subject to a number of other lawsuits, arbitrations, claims and other legal proceedings in connection with its business. Some of these legal actions include claims for substantial or unspecified compensatory and/or punitive damages. In addition, in the normal course of business, the Company discusses matters with its regulators raised during regulatory examinations or otherwise subject to their inquiry. These matters could result in censures, fines, penalties or other sanctions. ASC 450, Loss Contingencies, governs the recognition and disclosure of loss contingencies, including potential losses from legal and regulatory matters. ASC 450 categorizes loss contingencies using three terms based on the likelihood of occurrence of events that result in a loss: "probable" means that "the future event or events are likely to occur;" "remote" means that "the chance of the future event or events occurring is slight;" and "reasonably possible" means that "the chance of the future event or events occurring is more than remote but less than likely." Under ASC 450, the Company accrues for losses that are considered both probable and reasonably estimable. The Company may incur losses in addition to the amounts accrued where the losses are greater than estimated by management, or for matters for which an unfavorable outcome is considered reasonably possible, but not probable.
The Company estimates that the aggregate range of reasonably possible losses in excess of amounts accrued is from $0 to $80 million as of September 30, 2019. This estimated aggregate range of reasonably possible losses is based upon currently available information for those legal and regulatory matters in which the Company is involved, taking into account the Company's best estimate of reasonably possible losses for those matters as to which an estimate can be made. For certain matters, the Company does not believe an estimate can currently be made, as some matters are in preliminary stages and some matters have no specific amounts claimed. The Company's estimate involves significant judgment, given the varying stages of the proceedings and the inherent uncertainty of predicting outcomes. The estimated range will change from time to time as the underlying matters, stages of proceedings and available information change. Actual losses may vary significantly from the current estimated range.
The Company believes, based on its current knowledge and after consultation with counsel, that the ultimate disposition of these legal and regulatory matters, individually or in the aggregate, is not likely to have a material adverse effect on the financial condition or cash flows of the Company. However, in light of the uncertainties involved in such matters, the Company is unable to predict the outcome or the timing of the ultimate resolution of
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
these matters, or the potential losses, fines, penalties or equitable relief, if any, that may result, and it is possible that the ultimate resolution of one or more of these matters may be material to the Company's results of operations for a particular reporting period.
Income Taxes
The Company's federal and state income tax returns are subject to examination by taxing authorities. Because the application of tax laws and regulations to many types of transactions is subject to varying interpretations, amounts reported in the consolidated financial statements could be significantly changed at a later date upon final determinations by taxing authorities.
General Contingencies
In the ordinary course of business, there are various contingencies that are not reflected in the consolidated financial statements. These include the Company's broker-dealer and FCM/FDM subsidiaries' client activities involving the execution, settlement and financing of various client securities, options, futures and foreign exchange transactions. These activities may expose the Company to credit risk and losses in the event the clients are unable to fulfill their contractual obligations.
The Company extends margin credit and leverage to its clients. In margin transactions, the Company extends credit to the client, subject to various regulatory and internal margin requirements, collateralized by cash and securities in the client's account. In connection with these activities, the Company also routes client orders for execution and clears client transactions involving the sale of securities not yet purchased ("short sales"). Such margin-related transactions may expose the Company to credit risk in the event a client's assets are not sufficient to fully cover losses that the client may incur. Leverage involves securing a large potential future obligation with a lesser amount of collateral. The risks associated with margin credit and leverage increase during periods of rapid market movements, or in cases where leverage or collateral is concentrated and market movements occur. In the event the client fails to satisfy its obligations, the Company has the authority to liquidate certain positions in the client's account(s) at prevailing market prices in order to fulfill the client's obligations. However, during periods of rapid market movements, clients who utilize margin credit or leverage and who have collateralized their obligations with securities may find that the securities have a rapidly depreciating value (or increasing value with respect to short positions) and may not be sufficient to cover their obligations in the event of liquidation. The Company seeks to mitigate the risks associated with its client margin and leverage activities by requiring clients to maintain margin collateral in compliance with various regulatory and internal guidelines. The Company monitors required margin levels throughout each trading day and, pursuant to such guidelines, requires clients to deposit additional collateral, or to reduce positions, when necessary.
The Company contracts with unaffiliated FCM, FDM and broker-dealer entities to clear and execute futures, options on futures and foreign exchange transactions for its clients. This can result in concentrations of credit risk with one or more of these counterparties. This risk is partially mitigated by the counterparties' obligation to comply with rules and regulations governing FCMs, FDMs and broker-dealers in the United States. These rules generally require maintenance of net capital and segregation of client funds and securities. In addition, the Company manages this risk by requiring credit approvals for counterparties and by utilizing account funding and sweep arrangement agreements that generally specify that all client cash in excess of futures funding requirements be transferred back to the clients' securities brokerage accounts at the Company on a daily basis.
The Company loans securities temporarily to other broker-dealers in connection with its broker-dealer business. The Company receives cash as collateral for the securities loaned. Increases in securities prices may cause the market value of the securities loaned to exceed the amount of cash received as collateral. In the event the counterparty to these transactions does not return the loaned securities, the Company may be exposed to the risk of acquiring the securities at higher prevailing market prices in order to satisfy its client obligations. The Company mitigates this risk by requiring credit approvals for counterparties, by monitoring the market value of securities loaned on a daily basis and requiring additional cash as collateral when necessary, and by participating in a risk-sharing program offered through the Options Clearing Corporation ("OCC").
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company borrows securities temporarily from other broker-dealers in connection with its broker-dealer business. The Company deposits cash as collateral for the securities borrowed. Decreases in securities prices may cause the market value of the securities borrowed to fall below the amount of cash deposited as collateral. In the event the counterparty to these transactions does not return the cash deposited, the Company may be exposed to the risk of selling the securities at prevailing market prices. The Company mitigates this risk by requiring credit approvals for counterparties, by monitoring the collateral values on a daily basis and requiring collateral to be returned by the counterparties when necessary, and by participating in a risk-sharing program offered through the OCC.
The Company transacts in reverse repurchase agreements (securities purchased under agreements to resell) in connection with its broker-dealer business. The Company's policy is to take possession or control of securities with a market value in excess of the principal amount loaned, plus accrued interest, in order to collateralize resale agreements. The Company monitors the market value of the underlying securities that collateralize the related receivable on resale agreements on a daily basis and may require additional collateral when deemed appropriate.
The Company utilizes securities sold under agreements to repurchase (repurchase agreements) to finance its short-term liquidity and capital needs. Under these agreements, the Company receives cash from the counterparties and provides U.S. Treasury securities as collateral, allowing the counterparties the right to sell or repledge the collateral. These agreements expose the Company to credit losses in the event the counterparties cannot meet their obligations. The Company mitigates this risk by requiring credit approvals for counterparties, by monitoring the market value of pledged securities owned on a daily basis and requiring the counterparties to return cash or excess collateral pledged when necessary.
The Company has accepted collateral in connection with client margin loans and securities borrowed. Under applicable agreements, the Company is generally permitted to repledge securities held as collateral and use them to enter into securities lending arrangements. The following table summarizes the fair values of client margin securities and stock borrowings that were available to the Company to utilize as collateral on various borrowings or for other purposes, and the amount of that collateral loaned or repledged by the Company (dollars in billions):
| | | | | | | | | | | | | September 30, | | | | 2019 | | 2018 | | Client margin securities | | $ | 28.6 |
| | $ | 31.4 |
| | Stock borrowings | | 1.9 |
| | 0.8 |
| | Total collateral available | | $ | 30.5 |
| | $ | 32.2 |
| | Collateral loaned | | $ | 3.2 |
| | $ | 2.9 |
| | Collateral repledged | | 4.6 |
| | 6.3 |
| | Total collateral loaned or repledged | | $ | 7.8 |
| | $ | 9.2 |
|
The Company is subject to cash deposit and collateral requirements with clearinghouses based on its clients' trading activity. The following table summarizes cash deposited with and securities pledged to clearinghouses by the Company (dollars in millions):
| | | | | | | | | | | | | | | | | September 30, | | Assets | | Balance Sheet Classification | | 2019 | | 2018 | | Cash | | Receivable from brokers, dealers and clearing organizations | | $ | 545 |
| | $ | 545 |
| | U.S. government debt securities | | Securities owned, at fair value | | 168 |
| | 50 |
| | Total | | $ | 713 |
| | $ | 595 |
|
The Company manages its sweep program through off-balance sheet arrangements with The Toronto Dominion Bank ("TD") and unaffiliated third-party depository financial institutions (together, the "Sweep Program Counterparties"). The sweep program is offered to eligible clients whereby the client's uninvested cash is swept into FDIC-insured (up to specified limits) money market deposit accounts at the Sweep Program Counterparties. The
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company earns revenue on client cash at the Sweep Program Counterparties based on the return of floating-rate and fixed-rate notional investments. The Company designates amounts and maturity dates for the fixed-rate notional investments within the sweep program portfolios, subject to certain limitations. In the event the Company instructs the Sweep Program Counterparties to withdraw a fixed-rate notional investment prior to its maturity, the Company may be required to reimburse the Sweep Program Counterparties for any losses incurred as a result of the early withdrawal. In order to mitigate the risk of potential loss due to an early withdrawal of fixed-rate notional investments, the Company maintains a certain level of short-term floating-rate investments within the sweep program portfolios to meet client cash demands. See "Insured Deposit Account Agreement" in Note 23 for a description of the sweep arrangement between the Company and TD.
Guarantees
The Company is a member of and provides guarantees to securities clearinghouses and exchanges in connection with client trading activities. Under related agreements, the Company is generally required to guarantee the performance of other members. Under these agreements, if a member becomes unable to satisfy its obligations to the clearinghouse, other members would be required to meet shortfalls. The Company's liability under these arrangements is not quantifiable and could exceed the cash and securities it has posted to the clearinghouse as collateral. However, the likelihood that the Company would be required to make payments under these agreements is considered remote. Accordingly, 0 contingent liability is carried on the Consolidated Balance Sheets for these guarantees.
The Company clears its clients' futures and options on futures transactions on an omnibus account basis through unaffiliated FCMs. The Company also contracts with an external provider to facilitate foreign exchange trading for its clients. The Company has agreed to indemnify these unaffiliated FCMs and the external provider for any loss that they may incur from the client transactions introduced to them by the Company.
See "Insured Deposit Account Agreement" in Note 23 for a description of the guarantees included in that agreement.
17. Fair Value Disclosures
Fair Value Measurement — Definition and Hierarchy
ASC 820-10, Fair Value Measurement, defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.
ASC 820-10 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability, and are developed based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Company's own assumptions about the assumptions other market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows:
Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. This category includes active exchange-traded funds, money market mutual funds, mutual funds and equity securities.
Level 2 — Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Such inputs include quoted prices in markets that are not active, quoted prices for similar assets and liabilities in active and inactive markets, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means. This category includes most debt securities, U.S. government agency mortgage-backed securities, which consist of Ginnie Mae Conventional Residential
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Mortgages and Ginnie Mae Home Equity Conversion Mortgages, and other interest-sensitive financial instruments.
Level 3 — Unobservable inputs for the asset or liability, where there is little, if any, observable market activity or data for the asset or liability.
The following tables present the Company's fair value hierarchy for assets and liabilities measured at fair value on a recurring basis as of September 30, 2019 and 2018 (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | September 30, 2019 | | | | Level 1 | | Level 2 | | Level 3 | | Fair Value | | Assets: | | | | | | | | | | Cash equivalents: | | | | | | | | | | Money market mutual funds | | $ | 2,486 |
| | $ | — |
| | $ | — |
| | $ | 2,486 |
| | Investments segregated and on deposit for regulatory purposes: | | | | | | | | | | U.S. government debt securities | | — |
| | 4,394 |
| | — |
| | 4,394 |
| | U.S. government agency mortgage-backed securities | | — |
| | 1,318 |
| | — |
| | 1,318 |
| | Subtotal - Investments segregated and on deposit for regulatory purposes | | — |
| | 5,712 |
| | — |
| | 5,712 |
| | Securities owned: | | | | | | | | | | U.S. government debt securities | | — |
| | 524 |
| | — |
| | 524 |
| | Other | | 2 |
| | 6 |
| | — |
| | 8 |
| | Subtotal - Securities owned | | 2 |
| | 530 |
| | — |
| | 532 |
| | Investments available-for-sale: | | | | | | | | | | U.S. government debt securities | | — |
| | 1,668 |
| | — |
| | 1,668 |
| | Other assets: | | | | | | | | | Pay-variable interest rate swaps(1) | | — |
| | 71 |
| | — |
| | 71 |
| | U.S. government debt securities | | — |
| | 1 |
| | — |
| | 1 |
| | Subtotal - Other assets | | — |
| | 72 |
| | — |
| | 72 |
| | Total assets at fair value | | $ | 2,488 |
| | $ | 7,982 |
| | $ | — |
| | $ | 10,470 |
| | Liabilities: | | | | | | | | | | Accounts payable and other liabilities: | | | | | | | | | Pay-variable interest rate swaps(1) | | $ | — |
| | $ | 3 |
| | $ | — |
| | $ | 3 |
|
| | (1) | See "Fair Value Hedging" in Note 11 for details.
|
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | September 30, 2018 | | | | Level 1 | | Level 2 | | Level 3 | | Fair Value | | Assets: | | | | | | | | | | Cash equivalents: | | | | | | | | | | Money market mutual funds | | $ | 2,373 |
| | $ | — |
| | $ | — |
| | $ | 2,373 |
| | Investments segregated and on deposit for regulatory purposes: | | | | | | | | | | U.S. government debt securities | | — |
| | 225 |
| | — |
| | 225 |
| | U.S. government agency mortgage-backed securities | | — |
| | 1,302 |
| | — |
| | 1,302 |
| | Subtotal - Investments segregated and on deposit for regulatory purposes | | — |
| | 1,527 |
| | — |
| | 1,527 |
| | Securities owned: | | | | | | | | | | U.S. government debt securities | | — |
| | 149 |
| | — |
| | 149 |
| | Other | | 1 |
| | 6 |
| | — |
| | 7 |
| | Subtotal - Securities owned | | 1 |
| | 155 |
| | — |
| | 156 |
| | Investments available-for-sale: | | | | | | | | | | U.S. government debt securities | | — |
| | 484 |
| | — |
| | 484 |
| | Other assets: | | | | | | | | | Pay-variable interest rate swaps(1) | | — |
| | 2 |
| | — |
| | 2 |
| | U.S. government debt securities | | — |
| | 1 |
| | — |
| | 1 |
| | Auction rate securities | | — |
| | — |
| | 1 |
| | 1 |
| | Subtotal - Other assets | | — |
| | 3 |
| | 1 |
| | 4 |
| | Total assets at fair value | | $ | 2,374 |
| | $ | 2,169 |
| | $ | 1 |
| | $ | 4,544 |
| | Liabilities: | | | | | | | | | | Accounts payable and other liabilities: | | | | | | | | | Pay-variable interest rate swaps(1) | | $ | — |
| | $ | 96 |
| | $ | — |
| | $ | 96 |
|
| | (1) | See "Fair Value Hedging" in Note 11 for details.
|
There were no transfers between any levels of the fair value hierarchy during the periods covered by this report.
Valuation Techniques
In general, and where applicable, the Company uses quoted prices in active markets for identical assets or liabilities to determine fair value. This pricing methodology applies to the Company's Level 1 assets and liabilities. If quoted prices in active markets for identical assets and liabilities are not available to determine fair value, then the Company uses quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable, either directly or indirectly. This pricing methodology applies to the Company's Level 2 assets and liabilities.
Level 2 Measurements:
Debt securities — Fair values for debt securities are based on prices obtained from an independent pricing vendor. The primary inputs to the valuation include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields and credit spreads. The Company validates the vendor pricing by periodically comparing it to pricing from another independent pricing
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
service. The Company has not adjusted prices obtained from the independent pricing vendor for any periods presented in the consolidated financial statements because no significant pricing differences have been observed.
U.S. government agency mortgage-backed securities — Fair values for mortgage-backed securities are based on prices obtained from an independent pricing vendor. The primary inputs to the valuation include quoted prices for similar assets in active markets and in markets that are not active, a market-derived prepayment curve, weighted average yields on the underlying collateral and spreads to benchmark indices. The Company validates the vendor pricing by periodically comparing it to pricing from two other independent sources. The Company has not adjusted prices obtained from the independent pricing vendor for any periods presented in the consolidated financial statements because no significant pricing differences have been observed.
Interest rate swaps — These derivatives are valued by the Company using a valuation model provided by a third-party service that incorporates interest rate yield curves, which are observable for substantially the full term of the contract. The valuation model is widely accepted in the financial services industry and does not involve significant judgment because most of the inputs are observable in the marketplace. Credit risk is not an input to the valuation because in each case the Company or counterparty has possession of collateral, in the form of cash or U.S. Treasury securities, in amounts equal to or exceeding the fair value of the interest rate swaps. The Company validates the third-party service valuations by comparing them to valuation models provided by the swap counterparties.
Level 3 Measurements:
The Company has no material assets or liabilities classified as Level 3 of the fair value hierarchy.
Fair Value of Financial Instruments Not Recorded at Fair Value
Receivable from/payable to brokers, dealers and clearing organizations, receivable from/payable to clients, receivable from/payable to affiliates, other receivables, accounts payable and other liabilities and certain other borrowings are short-term in nature and accordingly are carried at amounts that approximate fair value. These financial instruments are recorded at or near their respective transaction prices and historically have been settled or converted to cash at approximately that value (categorized as Level 2 of the fair value hierarchy).
Cash and investments segregated and on deposit for regulatory purposes includes reverse repurchase agreements (securities purchased under agreements to resell). Reverse repurchase agreements are treated as collateralized financing transactions and are carried at amounts at which the securities will subsequently be resold, plus accrued interest. The Company's reverse repurchase agreements generally have a maturity of seven days and are collateralized by securities in amounts exceeding the carrying value of the resale agreements. Accordingly, the carrying value of reverse repurchase agreements approximates fair value (categorized as Level 2 of the fair value hierarchy). Cash and investments segregated and on deposit for regulatory purposes also includes cash held in demand deposit accounts and on deposit with futures commission merchants, for which the carrying values approximate the fair value (categorized as Level 1 of the fair value hierarchy). See Note 4 for a summary of cash and investments segregated and on deposit for regulatory purposes.
Securities sold under agreements to repurchase (repurchase agreements) included within other borrowings — Under repurchase agreements the Company receives cash from the counterparties and provides U.S. Treasury securities as collateral. The obligations to repurchase securities sold are reflected as a liability on the Consolidated Balance Sheets. Repurchase agreements are treated as collateralized financing transactions and are carried at amounts at which the securities will subsequently be repurchased, plus accrued interest. The Company's repurchase agreements are short-term in nature and accordingly the carrying value is a reasonable estimate of fair value (categorized as Level 2 of the fair value hierarchy).
Long-term debt — As of September 30, 2019, the Company's Senior Notes had an aggregate estimated fair value, based on quoted market prices (categorized as Level 1 of the fair value hierarchy), of approximately $3.67 billion, compared to the aggregate carrying value of the Senior Notes on the Consolidated Balance Sheet of $3.59 billion. As of September 30, 2018, the Company's Senior Notes had an aggregate estimated fair value, based on quoted
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
market prices, of approximately $2.51 billion, compared to the aggregate carrying value of the Senior Notes on the Consolidated Balance Sheet of $2.44 billion.
18. Offsetting Assets and Liabilities
Substantially all of the Company's securities sold under agreements to repurchase (repurchase agreements), reverse repurchase agreements, securities borrowing and securities lending activity and derivative financial instruments are transacted under master agreements that may allow for net settlement in the ordinary course of business, as well as offsetting of all contracts with a given counterparty in the event of default by one of the parties. However, for financial statement purposes, the Company does not net balances related to these financial instruments.
The following tables present information about the potential effect of rights of setoff associated with the Company's recognized assets and liabilities as of September 30, 2019 and 2018 (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | September 30, 2019 | | | | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheet | | | | | | Gross Amounts of Recognized Assets and Liabilities | | Gross Amounts Offset in the Consolidated Balance Sheet | | Net Amounts Presented in the Consolidated Balance Sheet | | Financial Instruments(5) | | Collateral Received or Pledged (Including Cash)(6) | | Net Amount(7) | | Assets: | | | | | | | | | | | | | | Investments segregated and on deposit for regulatory purposes: | | | | | | | | | | | | | | Reverse repurchase agreements | | $ | 500 |
| | $ | — |
| | $ | 500 |
| | $ | — |
| | $ | (500 | ) | | $ | — |
| | Receivable from brokers, dealers and clearing organizations: | | | | | | | | | | | | | Deposits paid for securities borrowed(1) | | 1,864 |
| | — |
| | 1,864 |
| | (38 | ) | | (1,795 | ) | | 31 |
| | Other assets: | | | | | | | | | | | | | | Pay-variable interest rate swaps | | 71 |
| | — |
| | 71 |
| | (71 | ) | | — |
| | — |
| | Total | | $ | 2,435 |
| | $ | — |
| | $ | 2,435 |
| | $ | (109 | ) | | $ | (2,295 | ) | | $ | 31 |
| | Liabilities: | | | | | | | | | | | | | | Payable to brokers, dealers and clearing organizations: | | | | | | | | | | | | | Deposits received for securities loaned(2)(3) | | $ | 3,189 |
| | $ | — |
| | $ | 3,189 |
| | $ | (38 | ) | | $ | (2,821 | ) | | $ | 330 |
| | Accounts payable and other liabilities: | | | | | | | | | | | | | | Pay-variable interest rate swaps | | 3 |
| | — |
| | 3 |
| | (3 | ) | | — |
| | — |
| | Total | | $ | 3,192 |
| | $ | — |
| | $ | 3,192 |
| | $ | (41 | ) | | $ | (2,821 | ) | | $ | 330 |
|
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | September 30, 2018 | | | | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheet | | | | | | Gross Amounts of Recognized Assets and Liabilities | | Gross Amounts Offset in the Consolidated Balance Sheet | | Net Amounts Presented in the Consolidated Balance Sheet | | Financial Instruments(5) | | Collateral Received or Pledged (Including Cash) (6) | | Net Amount (7) | | Assets: | | | | | | | | | | | | | | Investments segregated and on deposit for regulatory purposes: | | | | | | | | | | | | | | Reverse repurchase agreements | | $ | 500 |
| | $ | — |
| | $ | 500 |
| | $ | — |
| | $ | (500 | ) | | $ | — |
| | Receivable from brokers, dealers and clearing organizations: | | | | | | | | | | | | | Deposits paid for securities borrowed(1) | | 803 |
| | — |
| | 803 |
| | (41 | ) | | (744 | ) | | 18 |
| | Other assets: | | | | | | | | | | | | | | Pay-variable interest rate swaps | | 2 |
| | — |
| | 2 |
| | (2 | ) | | — |
| | — |
| | Total | | $ | 1,305 |
| | $ | — |
| | $ | 1,305 |
| | $ | (43 | ) | | $ | (1,244 | ) | | $ | 18 |
| | Liabilities: | | | | | | | | | | | | | | Payable to brokers, dealers and clearing organizations: | | | | | | | | | | | | | Deposits received for securities loaned(2)(3) | | $ | 2,914 |
| | $ | — |
| | $ | 2,914 |
| | $ | (43 | ) | | $ | (2,544 | ) | | $ | 327 |
| Securities sold under agreements to repurchase(4) | | 96 |
| | — |
| | 96 |
| | (96 | ) | | — |
| | — |
| | Accounts payable and other liabilities: | | | | | | | | | | | | | | Pay-variable interest rate swaps | | 96 |
| | — |
| | 96 |
| | (82 | ) | | — |
| | 14 |
| | Total | | $ | 3,106 |
| | $ | — |
| | $ | 3,106 |
| | $ | (221 | ) | | $ | (2,544 | ) | | $ | 341 |
|
| | (1) | Included in the gross amounts of deposits paid for securities borrowed is $723 million and $462 million as of September 30, 2019 and 2018, respectively, transacted through a risk-sharing program with the OCC, which guarantees the return of cash to the Company. See "General Contingencies" in Note 16 for a discussion of the potential risks associated with securities borrowing transactions and how the Company mitigates those risks.
|
| | (2) | Included in the gross amounts of deposits received for securities loaned is $2.48 billion and $2.01 billion as of September 30, 2019 and 2018, respectively, transacted through a risk-sharing program with the OCC, which guarantees the return of securities to the Company. See "General Contingencies" in Note 16 for a discussion of the potential risks associated with securities lending transactions and how the Company mitigates those risks.
|
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | (3) | Substantially all of the Company's securities lending transactions have a continuous contractual term and, upon notice by either party, may be terminated within two business days. The following table summarizes the Company's gross liability for securities lending transactions by the class of securities loaned (dollars in millions): |
| | | | | | | | | | | | | September 30, | | | | 2019 | | 2018 | | Deposits received for securities loaned: | | | | | | Equity securities | | $ | 2,629 |
| | $ | 2,583 |
| | Exchange-traded funds | | 285 |
| | 223 |
| | Real estate investment trusts | | 181 |
| | 19 |
| | Closed-end funds | | 86 |
| | 74 |
| | Other | | 8 |
| | 15 |
| | Total | | $ | 3,189 |
| | $ | 2,914 |
|
| | (4) | The collateral pledged includes available-for-sale U.S. government debt securities at fair value. All of the Company's repurchase agreements have a remaining contractual maturity of less than 90 days and, upon default by either party, may be terminated at the option of the non-defaulting party. See "General Contingencies" in Note 16 for a discussion of the potential risks associated with repurchase agreements and how the Company mitigates those risks.
|
| | (5) | Amounts represent recognized assets and liabilities that are subject to enforceable master agreements with rights of setoff. |
| | (6) | Represents the fair value of collateral the Company had received or pledged under enforceable master agreements, limited for table presentation purposes to the net amount of the recognized assets due from or liabilities due to each counterparty. At September 30, 2019 and 2018, the Company had received total collateral with a fair value of $2.43 billion and $1.30 billion, respectively, and pledged total collateral with a fair value of $2.86 billion and $2.76 billion, respectively. |
| | (7) | Represents the amount for which, in the case of net recognized assets, the Company had not received collateral, and in the case of net recognized liabilities, the Company had not pledged collateral. |
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
19. Accumulated Other Comprehensive Income (Loss)
The following table presents the net change in fair value recorded for each component of other comprehensive income (loss) before and after income tax for the fiscal years indicated (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2019 | | 2018 | | 2017 | | | | Before Tax | | Tax Effect | | Net of Tax | | Before Tax | | Tax Effect | | Net of Tax | | Before Tax | | Tax Effect | | Net of Tax | | Investments available-for-sale: | | | | | | | | | | | | | | | | | | | | Unrealized gain (loss) | | $ | 86 |
| | $ | (21 | ) | | $ | 65 |
| | $ | (12 | ) | | $ | 3 |
| | $ | (9 | ) | | $ | (9 | ) | | $ | 4 |
| | $ | (5 | ) | Reclassification adjustment for realized loss included in net income (1) | | — |
| | — |
| | — |
| | 11 |
| | (4 | ) | | 7 |
| | — |
| | — |
| | — |
| | Net change in investments available-for-sale | | 86 |
| | (21 | ) | | 65 |
| | (1 | ) | | (1 | ) | | (2 | ) | | (9 | ) | | 4 |
| | (5 | ) | | Cash flow hedging instruments: | | | | | | | | | | | | | | | | | | | Reclassification adjustment for portion of realized loss amortized to net income (2) | | 4 |
| | (1 | ) | | 3 |
| | 5 |
| | (1 | ) | | 4 |
| | 4 |
| | (2 | ) | | 2 |
| | Net change in cash flow hedging instruments | | 4 |
| | (1 | ) | | 3 |
| | 5 |
| | (1 | ) | | 4 |
| | 4 |
| | (2 | ) | | 2 |
| | Other comprehensive income (loss) | | $ | 90 |
| | $ | (22 | ) | | $ | 68 |
| | $ | 4 |
| | $ | (2 | ) | | $ | 2 |
| | $ | (5 | ) | | $ | 2 |
| | $ | (3 | ) |
| | (1) | The before tax reclassification amount and related tax effect are included in loss on sale of investments and provision for income taxes, respectively, on the Consolidated Statements of Income. |
| | (2) | The before tax reclassification amounts and the related tax effects are included in interest on borrowings and provision for income taxes, respectively, on the Consolidated Statements of Income. |
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents after-tax changes in each component of accumulated other comprehensive income (loss) for the fiscal years indicated (dollars in millions):
| | | | | | | | | | | | | | | | | 2019 | | 2018 | | 2017 | | Investments available-for-sale: | | | | | | | | Beginning balance | | $ | (7 | ) | | $ | (5 | ) | | $ | — |
| | Other comprehensive income (loss) before reclassification | | 65 |
| | (9 | ) | | (5 | ) | | Amount reclassified from accumulated other comprehensive income (loss) | | — |
| | 7 |
| | — |
| | Current period change | | 65 |
| | (2 | ) | | (5 | ) | | Ending balance | | $ | 58 |
| | $ | (7 | ) | | $ | (5 | ) | | Cash flow hedging instruments: | | | | | | | | Beginning balance | | $ | (20 | ) | | $ | (20 | ) | | $ | (22 | ) | | Amount reclassified from accumulated other comprehensive income (loss) | | 3 |
| | 4 |
| | 2 |
| | Adoption of Accounting Standards Update 2018-02 | | — |
| | (4 | ) | | — |
| | Current period change | | 3 |
| | — |
| | 2 |
| | Ending balance | | $ | (17 | ) | | $ | (20 | ) | | $ | (20 | ) | | Total accumulated other comprehensive income (loss): | | | | | | | | Beginning balance | | $ | (27 | ) | | $ | (25 | ) | | $ | (22 | ) | | Current period change | | 68 |
| | (2 | ) | | (3 | ) | | Ending balance | | $ | 41 |
| | $ | (27 | ) | | $ | (25 | ) |
20. Segment and Geographic Area Information
The Company primarily operates in the securities brokerage industry and has no other reportable segments. Substantially all of the Company's revenues from external clients for the fiscal years ended September 30, 2019, 2018 and 2017 were derived from its operations in the United States.
21. Accelerated Stock Repurchase Agreements
On March 26, 2019, the Company entered into an agreement with an investment bank counterparty to purchase $350 million of its common stock under an accelerated stock repurchase transaction (the "March 2019 ASR Agreement"). Pursuant to the terms of the March 2019 ASR Agreement, the Company received an initial delivery of 5.6 million shares of its common stock on March 28, 2019 and received an additional 1.3 million shares upon settlement of the transaction on August 7, 2019. The Company ultimately repurchased a total of approximately 6.9 million shares under the March 2019 ASR Agreement at a net weighted average price of $50.84 per share.
On November 27, 2018, the Company entered into an agreement with an investment bank counterparty to purchase $60 million of its common stock under an accelerated stock repurchase transaction (the "November 2018 ASR Agreement"). Pursuant to the terms of the November 2018 ASR Agreement, the Company received an initial delivery of 0.9 million shares of its common stock on November 30, 2018 and received an additional 0.3 million shares upon settlement of the transaction on March 5, 2019. The Company ultimately repurchased a total of approximately 1.2 million shares under the November 2018 ASR Agreement at a net weighted average price of $52.12 per share.
On September 12, 2018, the Company entered into an agreement with an investment bank counterparty to purchase $150 million of its common stock under an accelerated stock repurchase transaction (the "September 2018 ASR Agreement"). Pursuant to the terms of the September 2018 ASR Agreement, the Company received an initial delivery of 2.2 million shares of its common stock on September 13, 2018 and received an additional 0.6 million shares upon settlement of the transaction on October 16, 2018. The Company ultimately repurchased a total of
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
approximately 2.8 million shares under the September 2018 ASR Agreement at a net weighted average price of $53.13 per share.
The Company treated the ASR agreements as forward contracts indexed to its own common stock. The forward contracts met all of the applicable criteria for equity classification, including the Company's right to settle in shares. The Company reflected the shares received from the investment bank counterparties as treasury stock as of the dates the shares were delivered, which resulted in reductions of the outstanding shares used to calculate the weighted average common shares outstanding for both basic and diluted earnings per share during the respective periods.
22. Revenue Recognition
On October 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (ASC Topic 606), and related ASUs using a modified retrospective approach for all contracts that were not completed as of October 1, 2018. The cumulative effect of the changes made to the Company's Consolidated Balance Sheet as of October 1, 2018 for the adoption of ASU 2014-09 were as follows (dollars in millions):
| | | | | | | | | | | | | | | | | Balance at September 30, 2018 | | Adjustments from Adoption of ASU 2014-09 | | Balance at October 1, 2018 | | Assets: | | | | | | | | Other assets | | $ | 212 |
| | $ | 37 |
| | $ | 249 |
| | Liabilities: | | | | | | | | Deferred income taxes | | 177 |
| | 9 |
| | 186 |
| | Stockholders' equity: | | | | | | | | Retained earnings | | 7,011 |
| | 28 |
| | 7,039 |
|
The modified retrospective transition method does not require the Company to recast the prior year financial statements; although, ASU 2014-09 requires the Company to provide additional disclosures for the amount by which each financial statement line item is affected by the adoption of the standard. The financial statement line items affected by the adoption of ASU 2014-09 are as follows (dollars in millions, except per share amounts):
| | | | | | | | | | | | | | | | | As of September 30, 2019 | | Consolidated Balance Sheet | | As Reported | | Balances Without Adoption of ASU 2014-09 | | Effect of Change Higher/(Lower) | | Assets: | | | | | | | | Other assets | | $ | 308 |
| | $ | 281 |
| | $ | 27 |
| | Liabilities: | | | | | | | | Deferred income taxes | | 228 |
| | 221 |
| | 7 |
| | Stockholders' equity: | | | | | | | | Retained earnings | | 8,580 |
| | 8,560 |
| | 20 |
|
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | For the Fiscal Year Ended September 30, 2019 | | Consolidated Statement of Income | | As Reported | | Balances Without Adoption of ASU 2014-09 | | Effect of Change Higher/(Lower) | | Revenues: | | | | | | | | Other revenues | | $ | 178 |
| | $ | 129 |
| | $ | 49 |
| | Operating expenses: | | | | | | | | Employee compensation and benefits | | 1,322 |
| | 1,312 |
| | 10 |
| | Clearing and execution costs | | 209 |
| | 188 |
| | 21 |
| | Other | | 197 |
| | 169 |
| | 28 |
| | Provision for income taxes | | 721 |
| | 723 |
| | (2 | ) | | Net income | | 2,208 |
| | 2,216 |
| | (8 | ) | | Earnings per share — diluted | | $ | 3.96 |
| | $ | 3.98 |
| | $ | (0.02 | ) |
The following table sets forth the disaggregation of the Company's revenue by major source (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | Fiscal Year | | '19 vs. '18 % Change | | '18 vs. '17 % Change | | | | 2019 | | 2018 | | 2017 | | | | Revenues: | | | | | | | | | | | | Transaction-based revenues: | | | | | | | | | | | | Commissions | | $ | 1,343 |
| | $ | 1,372 |
| | $ | 952 |
| | (2 | )% | | 44 | % | | Order routing revenue | | 492 |
| | 458 |
| | 320 |
| | 7 | % | | 43 | % | | Other | | 167 |
| | 139 |
| | 112 |
| | 20 | % | | 24 | % | | Total transaction-based revenues | | 2,002 |
| | 1,969 |
| | 1,384 |
| | | | | | Asset-based revenues: | | | | | | | | | | | | Bank deposit account fees | | 1,717 |
| | 1,541 |
| | 1,107 |
| | 11 | % | | 39 | % | | Net interest revenue | | 1,533 |
| | 1,272 |
| | 690 |
| | 21 | % | | 84 | % | | Investment product fees | | 586 |
| | 557 |
| | 423 |
| | 5 | % | | 32 | % | | Total asset-based revenues | | 3,836 |
| | 3,370 |
| | 2,220 |
| | | | | | Other revenues | | 178 |
| | 113 |
| | 72 |
| | 58 | % | | 57 | % | | Net revenues | | $ | 6,016 |
| | $ | 5,452 |
| | $ | 3,676 |
| | | | |
The amount of revenue recognized by the Company is measured based on the consideration specified in contracts with its clients. The Company recognizes revenue when a performance obligation is satisfied over time as the services are performed or at a point in time depending on the nature of the services provided as further discussed below.
Transaction-Based Revenues
Transaction-based revenues primarily consists of trading commissions earned on trade execution, net of promotional allowances, and order routing revenue. The primary factors driving the Company's transaction-based revenues are total trades and average commissions per trade. Commission rates are based on rates established by the Company, which vary by type of trade. The Company reduced certain commission rates effective October 3, 2019, see Note
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
26, Subsequent Event, for additional details. Transaction-based revenues are earned and recognized at a point in time, on a trade-date basis, as clients execute trades. These trades are generally settled and trading commissions are collected from the Company's clients within one to two business days after the trade date. Order routing revenues are generated from arrangements with market centers to receive cash payments and/or rebates in exchange for routing orders to these firms for execution and are generally collected from the market centers on a monthly basis. Securities owned by clients, including those that collateralize margin or similar transactions, are not reflected in the accompanying consolidated financial statements.
Asset-Based Revenues
Asset-based revenues consists of bank deposit account fees, net interest revenue and investment product fees. The primary factors driving the Company's asset-based revenues are average balances and average rates. Average balances consist primarily of average client bank deposit account balances, average client margin balances, average segregated cash balances, average client credit balances, average fee-based investment balances and average securities borrowing and lending balances. Average rates consist of the average interest rates and fees earned and paid on such balances.
Bank deposit account fees
Bank deposit account fees consists of revenues earned and recognized over time resulting from a sweep program that is offered to eligible clients of the Company whereby clients' uninvested cash is swept off-balance sheet to FDIC-insured (up to specified limits) accounts with Sweep Program Counterparties participating in the program. These revenues are based on the return of floating-rate and fixed-rate notional investments, less the actual interest paid to clients and other applicable fees. Bank deposit account fees are collected from the Sweep Program Counterparties on a monthly basis. See "Insured Deposit Account Agreement" in Note 23 for a description of the sweep arrangement between the Company and TD.
Net interest revenue
Net interest revenue, which is generated from financial instruments covered by various other areas of GAAP, is not within the scope of ASC 606 and is included in the table above to reconcile to net revenues disclosed within the Consolidated Statements of Income. Net interest revenue primarily consists of income generated by interest charged to clients on margin balances, net interest revenue from securities borrowed and securities loaned transactions and interest earned on client cash, net of interest paid to clients on their credit balances.
Investment product fees
Investment product fee revenue consists of revenues earned and recorded over time on client assets invested in money market mutual funds, other mutual funds and certain investment programs. Investment product fees also includes fees earned on client assets managed by independent registered investment advisors ("RIAs") utilizing the Company's trading and investing platforms. Investment product fees are collected from clients and RIAs on a monthly or quarterly basis. Primary revenue sources within investment product fees are described below.
The following table presents the significant components of investment product fees (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | Fiscal Year | | '19 vs. '18 % Change | | '18 vs. '17 % Change | | | | 2019 | | 2018 | | 2017 | | | | Investment product fees: | | | | | | | | | | | | Mutual fund service fees | | $ | 284 |
| | $ | 254 |
| | $ | 199 |
| | 12 | % | | 28 | % | | Investment program fees | | 271 |
| | 270 |
| | 209 |
| | 0 | % | | 29 | % | | Other | | 31 |
| | 33 |
| | 15 |
| | (6 | )% | | 120 | % | | Total investment product fees | | $ | 586 |
| | $ | 557 |
| | $ | 423 |
| | | | |
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Mutual fund service fees includes shareholder services fees and SEC Rule 12b-1 service and distribution fees. Shareholder services fees are earned on the Company's client assets invested in money market mutual funds and other mutual funds for record-keeping and administrative services provided to these funds. The Company earns SEC Rule 12b-1 service and distribution fees for marketing and distribution services provided to these funds. The fees earned are based on contractual rates applied to the average daily net asset value of eligible shares of a respective fund held by the Company's clients. Shareholder services fees are earned over time and collected from the funds on a monthly or quarterly basis. SEC Rule 12b-1 fees are also earned over time and collected from the funds on a monthly or quarterly basis, as the variable consideration of a transaction price is no longer constrained and the value of consideration can be determined as discussed previously.
Investment program fees are earned through fees charged to clients enrolled in product offerings which are actively managed by TD Ameritrade Investment Management, LLC, a wholly-owned subsidiary of the Company. These fees are earned over time and are based on contractual rates applied to asset balances held by the Company's clients in these product offerings. Certain program fees are based on quarter-end balances and are collected from clients in advance, at the beginning of each calendar quarter. Revenues collected on a quarterly basis, less refunds for clients ceasing participation in the program, are recognized during the quarter as performance obligations are satisfied. Other program fees are based on average daily asset balances and collected from clients on a monthly basis.
The Company also earns investment program fees through referral and asset-based program fees on its client assets managed by independent RIAs utilizing the Company's platform. These fees are earned based on contractual rates applied to the client's average daily asset balances under management. Referral fees are earned over time and collected from the independent RIAs on a monthly or quarterly basis, as the variable consideration of a transaction price is no longer constrained and the value of consideration can be determined as discussed previously. Asset-based program fees are also earned over time and collected from the independent RIAs on a monthly or quarterly basis.
Other Revenues
Other revenues primarily include proxy income, solicit and tender fees and other fees charged for ancillary services provided by the Company to its clients. In addition, other revenues include fair market value adjustments and gains/losses associated with investments held by the Company's broker-dealer subsidiaries. Other revenues generated from investments is covered by various other areas of GAAP, is not within the scope of ASC 606 and is included in the table above to reconcile to net revenues disclosed within the Consolidated Statements of Income. Proxy fee income is earned and collected at a point in time when the Company distributes proxy statements to its clients on behalf of a registrant and the revenue is based on the volume of proxies distributed and the rate per unit charged to each registrant. Solicit and tender fees are earned and collected from clients at a point in time when the Company has satisfied its obligation to maintain its client accounts holding securities affected by corporate actions.
Contract Balances
The following table presents the opening and closing balances of the Company's receivables from contracts with clients that are within the scope of ASC 606 on the Consolidated Balance Sheets (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | Contract Balances | | | | Receivable from Clients | | Receivable from Affiliates | | Other Receivables | | Total Receivables from Contracts with Clients | | Opening balance, October 1, 2018 | | $ | 16 |
| | $ | 7 |
| | $ | 115 |
| | $ | 138 |
| | Closing balance, September 30, 2019 | | 25 |
| | 7 |
| | 125 |
| | 157 |
| | Increase | | $ | 9 |
| | $ | — |
| | $ | 10 |
| | $ | 19 |
|
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The difference between the opening and closing balances of the Company's receivables from contracts with clients primarily results from the timing difference between the Company's performance and the client's payment. No other significant contract assets or liabilities exist as of September 30, 2019 and October 1, 2018.
Unsatisfied Performance Obligations
The Company does not have any unsatisfied performance obligations subject to a practical expedient election under ASC 606.
23. Related Party Transactions
Transactions with TD and its AffiliatesRelated Parties As a result of the Company's acquisition of TD Waterhouse Group, Inc. during fiscal year 2006, TD became an affiliate of the Company. TD owned approximately 43% of the Company's common stock as of September 30, 2019. Pursuant to the stockholders agreement between TD and the Company, TD has the right to designate 5 of the 12 members of the Company's board of directors. The Company transacts business and has extensive relationships with TD and certain of its affiliates. Transactions withThe following table describes transactions between the Company and related persons, including TD and its affiliates, are discussed and summarized below. Insured Deposit Account Agreement
Under the IDA agreement, TD Bank USA and TD Bank, N.A. (together, the "TD Depository Institutions") make available to clients offor fiscal year 2019, or any currently proposed transaction in which the Company FDIC-insured (upwas or is to specified limits) money market deposit accounts as either designated sweep vehiclesbe a participant, in which the amount involved exceeds or as non-sweep could reasonably be expected to exceed $120,000 and any related person had or will have a direct or indirect material interest.
| | | | | | | | | Names & Interests of Related Persons | | | | | | | U.S. bank subsidiaries of TD make available to clients of the Company FDIC-insured money market deposit accounts as either designated sweep vehicles or as non-sweep deposit accounts, and the Company provides marketing, recordkeeping and support services with respect to the money market deposit accounts. In exchange for providing | | million of bank deposit account fee revenue | | |
| | | | | | | | | these services, the Company is paid an aggregate marketing fee based on the weighted average yield earned on the client IDA assets, less the actual interest paid to clients, a servicing fee and the cost of FDIC insurance premiums. The Company and TD entered into Amendment No. 1 to the Insured Deposit Account Agreement to address the treatment of Scottrade brokerage accounts following the closing of the Agreement and Plan of Merger (the “Scottrade merger agreement”), dated as of October 24, 2016, by and among Scottrade, Rodger O. Riney, as Voting Trustee of the Rodger O. Riney Family Voting Trust U/A/D 12/31/2012, created under the Voting Trust Agreement dated December 31, 2012, as amended on January 21, 2016 and the Company. | | | | | | | | | | | | | | On April 6, 2017, a stockholder of the Company filed a stockholder derivative complaint regarding the acquisition of Scottrade by the Company and the acquisition of Scottrade Bank by TD. The suit named as defendants TD and the members of the Company’s board of directors. It also named the Company as a nominal defendant. The suit filed in the Delaware Chancery Court is captionedVero Beach Police Officers’ Retirement Fund derivatively on behalf of nominal defendant TD Ameritrade Holding Corp. v. Larry Bettino et al. | | million ofnon-operating revenue | | | | | | | | | | | | Certain mutual funds of a TD affiliate received distribution and marketing support from the Company. | | million of investment product fee revenue | | | | | | | | | | | | A wholly-owned subsidiary of TD promotes the brokerage services of TD Ameritrade, Inc., and another TD wholly-owned subsidiary referred existing brokerage clients to TD Ameritrade, Inc. | | | | | | | | | | | | | | TD Waterhouse Canada Inc. (“TDW Canada”), a wholly owned subsidiary of TD, uses the thinkorswim trading platform, and TD Ameritrade, Inc. provides the services to support the platform. | | | | | | | | | | | | | | TD Ameritrade Clearing, Inc. (“TDAC”), a wholly-owned subsidiary of the Company, provides certain order routing services to TDW Canada. | | million of other revenue, partially offset by $17.7 million of other expense | | | | | | | | | | | | TD Bank USA, N.A. (“TD Bank USA”), a wholly-owned subsidiary of TD, provides cash management services to clients of TD Ameritrade, Inc. | | million of clearing and execution costs | | | | | | | | | | | | TD Securities, Inc., an affiliate of TD, and the Company engage in securities borrowing and lending in connection with the Company’s brokerage business. | | million of net interest revenue | | | | | | | | | | | | TD Securities (USA) LLC (“TDS”), a wholly-owned subsidiary of TD, and TD Ameritrade, Inc., are party to a master selected dealer agreement to facilitate the distribution of initial public offering SEC registered securities to TD Ameritrade, Inc.’s clients. | | million in commissions and transaction fee revenue | | | | | | | | | | | | In connection with the closing of the Scottrade merger agreement on September 18, 2017, TD and the Company each provided the other with transition services. In addition, the Company agreed to reimburse TD for employment costs for up to 18 months for employees of Scottrade who perform transition services. | | | | |
| | | | | | | | Revolving Credit Facilities and Notes Offerings | | The Company entered into revolving credit agreements, consisting of senior unsecured revolving credit facilities in the aggregate principal amount of $1.75 billion, and an affiliate of TD participates as a lender on terms no more favorable than the terms of the other lenders participating in the credit agreements, including receiving an upfront fee percentage the same as those payable to the other lenders participating in the credit agreements, as well as certain customary expense reimbursement. The Company entered into underwriting agreements with respect to the offering and sale by the Company of $1.5 billion aggregate principal amount of the Company’s senior notes, and TDS participated in the offerings as a passive book runner on terms no more favorable than the terms of the other underwriters participating in the offering, including underwriting commissions the same as those payable to the other underwriters participating in the offerings. | | million of interest expense and million of capitalized debt issuance cost on senior notes. | | | | | | | | | | | | | Securities-based lending is an offering for the Company’s institutional and retail clients, that allows them to open a line of credit against their securities portfolio. An arrangement is in place for institutional clients for TD Bank, N.A. to lend against brokerage assets. | | | | | | | | | | | | | | | The Company and TD are parties to sublease agreements where the Company and TD sublease building space to each other for administrative and operational purposes. | | | | | | | | | | | | | | | Certain directors and executive officers, and members of their immediate families, maintain margin trading accounts with the Company, as permitted by applicable law. | | | | | | | | | | | | | | | The Company and TD are a party to a trademark license agreement that requires the Company to use the TD trademark and logo as part of the Company’s corporate identity. | | | | | | | | | | | | | | | In connection with the closing of Scottrade merger agreement on September 18, 2017, TD, and certain Ricketts stockholders entered into a registration rights agreement with certain customary registration rights with respect to their respective shares of Company common stock. | | | | |
| (1) | The Company is party to an insured deposit account (“IDA”) agreement, under which TD Bank USA and TD Bank, NA. (together, the “TD Depository Institutions”) make available to clients of the Company FDIC-insured (up to specified limits) money market deposit accounts as either designated sweep vehicles or as non-sweep deposit accounts. The Company provides marketing, recordkeeping and support services for the TD Depository Institutions with respect to the money market deposit accounts. In exchange for providing these services, the TD Depository Institutions pay the Company an aggregate marketing fee based on the weighted average yield earned on the client IDA assets, less the actual interest paid to clients, a servicing fee to the TD Depository Institutions and the cost of FDIC insurance premiums. |
The current IDA agreement became effective as of January 1, 2013 and had an initial term expiring July 1, 2018. It is automatically renewable for successive five-year terms, provided that it may be terminated by either the Company or the TD Depository Institutions by providing written notice of non-renewal at least two years prior to the initial expiration date or the expiration date of any subsequent renewal period. AsNotice of July 1, 2016, notice of non-renewal was not provided by either party;party, therefore the IDA agreement was automatically renewed for an additional five-yearfive- year term on July 1, 2018.
The fee earned on the IDA agreement is calculated based on 2two primary components: (1)(a) the yield on fixed-rate notional“notional” investments, based on prevailing fixed rates for identical balances and maturities in the interest rate swap market (generally LIBOR-based) at the time such investments were added to the IDA portfolio (including any adjustments required to adjust the variable rate leg of such swaps to a one-month reset frequency and the overall swap payment frequency to monthly) and (2)(b) the yield on floating-rate investments. As of September 30, 2019, the IDA portfolio was comprised of approximately 80% fixed-rate notional investments and 20% floating-ratefloating rate investments. The IDA agreement provides that the Company may designate amounts and maturity dates for the fixed-rate notional investments in the IDA portfolio, subject to certain limitations. For example, if the Company designates that $100 million of deposits be invested in5-year fixed-rate investments, and on the day such investment is confirmed by the TD Depository Institutions the prevailing fixed yield for the applicable5-year U.S. dollar LIBOR-based swaps is 1.45%, then the Company will earn a gross fixed yield of 1.45% on that portion of the portfolio (before any deductions for interest paid to clients, the servicing fee to the TD Depository Institutions and the cost of FDIC insurance premiums). In the event that (1) the federal funds effective rate is established at 0.75% or greater and (2) the rate on5-year 5-year U.S. dollar interest rate swaps is equal to or greater than 1.50% for 20 consecutive business days, then the rate earned by the Company on new fixed-rate notional investments will be reduced by 20% of the excess of the5-year 5-year U.S. dollar swap rate over 1.50%, up to a maximum of 0.10%.
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The yield on floating-rate investments is calculated daily based on the greater of the following rates published by the Federal Reserve: (1) the interest rate paid by Federal Reserve Banks on balances held in excess of required reserve balances and contractual clearing balances under Regulation D and (2) the daily effective federal funds rate. The interest rates paid to clients are set by the TD Depository Institutions and are not linked to any index. The servicing fee to the TD Depository Institutions under the IDA agreement is equal to 25 basis points on the aggregate average daily balance in the IDA accounts, subject to adjustment as it relates to deposits of less than or equal to $20 billion kept in floating-rate investments or in fixed-rate notional investments with a maturity of up to 24 months ("(“short-term fixed-rate investments"investments”). For such floating-rate and short-term fixed-rate investments, the servicing fee is equal to the difference of the interest rate earned on the investments less the FDIC premiums paid (in basis points), divided by two. The servicing fee has a floor of 3 basis points (subject to adjustment from time to time to reflect material changes to the TD Depository Institutions'Institutions’ leverage costs) and a maximum of 25 basis points. In the event the marketing fee computation results in a negative amount, the Company must pay the TD Depository Institutions the negative amount. This effectively results in the Company guaranteeing the TD Depository Institutions revenue equal to the servicing fee on the IDA agreement, plus the reimbursement of FDIC insurance premiums. The marketing fee computation under the IDA agreement is affected by many variables, including the type, duration, principal balance and yield of the fixed-rate and floating-rate investments, the prevailing interest rate environment, the amount of client deposits and the yield paid on client deposits. Because a negative marketing fee computation would arise only if there were extraordinary movements in many of these variables, the maximum potential amount of future payments the Company could be required to make under this arrangement cannot be reasonably estimated. Management believes the likelihood that the marketing fee calculation would result in a negative amount is remote. Accordingly, 0 contingent liability is carried on the Consolidated Balance Sheets for the IDA agreement. In the event the Company withdraws a notional investment prior to its maturity, the Company is required to reimburse the TD Depository Institutions an amount equal to the economic replacement value of the investment, as defined in the IDA agreement. See "General Contingencies" in Note 16 for a discussion of how the Company mitigates the risk of losses due Under Amendment No. 1 to the early withdrawalIDA agreement (“IDA Amendment”), which became effective on the closing of fixed-rate notional investments. In addition, the Company has variousScottrade merger agreement on September 18, 2017 with respect to Scottrade brokerage accounts, the parties will cause: (1) the funds of Scottrade clients held in other services agreementsmoney market sweep accounts prior to closing to be withdrawn and transactionsdeposited with TD’s money market deposit accounts within a specified number of days following closing or following the maturity date of the deposits (depending on the type of deposit), (2) new funds deposited by Scottrade clients after closing to be deposited with TD’s money market deposit accounts, (3) the existing funds of Scottrade clients in excess of the FDIC deposit insurance limits to be deposited into master accounts with TD, and (4) if the Company elects to sweep any uninsured deposits to a bank other than TD, the Company will sweep a certain amount of uninsured deposit accounts from its affiliates. The following tables summarize revenues and expenses resulting from transactionsother client accounts to TD for a period of time that term funds remain at Scottrade’s program banks. For the complete IDA Amendment agreement, see Exhibit 10.1 to the Company’s Quarterly Report on Form10-Q filed with TD and its affiliates for the fiscal years indicated (dollars in millions):SEC on August 7, 2018. | | | | | | | | | | | | | | | | | Description | | Statement of Income Classification | | Revenues from TD and its Affiliates | | 2019 | | 2018 | | 2017 | | Insured Deposit Account Agreement | | Bank deposit account fees | | $ | 1,602 |
| | $ | 1,426 |
| | $ | 1,101 |
| Order Routing Agreement(1) | | Other revenues | | 23 |
| | 4 |
| | 3 |
| | Other | | Various | | 20 |
| | 26 |
| | 22 |
| | Total revenues | | $ | 1,645 |
| | $ | 1,456 |
| | $ | 1,126 |
|
| | | | | | | | | | | | | | | | | Description | | Statement of Income Classification | | Expenses to TD and its Affiliates | | 2019 | | 2018 | | 2017 | Order Routing Agreement(1) | | Other expense | | $ | 18 |
| | $ | — |
| | $ | — |
| Canadian Call Center Services Agreement(2) | | Various | | — |
| | — |
| | 11 |
| | Other | | Various | | 8 |
| | 7 |
| | 6 |
| | Total expenses | | $ | 26 |
| | $ | 7 |
| | $ | 17 |
|
| (2) | | (1) | PriorFor additional information about the settlement, see Note 8 — Commitments and Contingencies, Legal and Regulatory Matters under Item 1, Financial Statements — Notes to fiscal year 2019,Condensed Consolidated Financial Statements to the Company accounted for revenues associatedCompany’s Quarterly Report on Form10-Q filed with the Order Routing Agreement between theSEC on January 31, 2019. |
| (3) | The Company and an affiliate of TD were parties to a transfer agency agreement and a shareholder services agreement pursuant to which certain mutual funds were made available as money market sweep or direct purchase options to Company clients. The Company performed certain distribution and marketing support services and acted as a transfer agent with respect to those funds. In consideration for offering the funds, performing the distribution and marketing support services and acting as a transfer agent, an affiliate of TD compensated the Company in accordance with the provisions of the agreements. The transfer agency agreement and the shareholder services agreement were terminated in fiscal 2019. |
| (4) | TD Ameritrade, Inc. is a party to a referral and strategic alliance agreement with TD Bank, N.A. and TD Wealth Management Services, Inc. (“TDWMS”), a wholly-owned subsidiary of TD. The strategic alliance agreement had an initial term of five years beginning February 1, 2010 and is automatically renewable for successive three-year terms, provided that it may be terminated by any party upon 180 days’ prior written notice. Under the agreement, TD Bank, N.A. promotes TD Ameritrade, Inc.’s brokerage services to its clients using a variety of marketing and referral programs and TDWMS referred its existing brokerage account clients to TD Ameritrade, Inc. while TDWMS discontinued its brokerage operations. TD Bank, N.A. clients that open brokerage accounts at TD Ameritrade, Inc. and TDWMS clients that elected to transfer their accounts to TD Ameritrade, Inc. are considered program clients. TD Ameritrade, Inc. retains a fee for providing brokerage services to the program clients, and the program’s net margin is shared equally between TD Ameritrade, Inc. and TD Bank, N.A. |
| (5) | On June 11, 2009, immediately following the closing of the Company’s acquisition of thinkorswim Group Inc. (“thinkorswim”), the Company completed the sale of thinkorswim Canada, Inc. (“thinkorswim Canada”) to TDW Canada. In connection with the sale of thinkorswim Canada, the Company and TDW Canada entered into a trading platform hosting and services agreement. The agreement had an initial term of five years beginning June 11, 2009 and automatically renews for additional periods of two years, unless either party provides notice of non-renewal to the other party at least 90 days prior to the end of the then-current term. Under the agreement, TDW Canada uses the thinkorswim trading platform and TD Ameritrade, Inc. provides the services to support the platform. In consideration for the performance by TD Ameritrade, Inc. of all its obligations under this agreement, TDW Canada pays TD Ameritrade, Inc., on a monthly basis, a fee based on average client trades per day and transactional revenues. |
| (6) | The order routing agreement automatically renews for successive one-year terms on October 31 of each year, provided that it may be terminated by either party upon 90 days’ prior written notice. Under the agreement, TDAC provides TDW Canada order routing services for U.S. equity and option orders to U.S. brokers and market centers with which TDW Canada has order execution arrangements. TDAC retains a percentage of the net basis throughorder routing revenue it receives on TDW Canada trades and remits the remainder to TDW Canada. |
| (7) | In exchange for cash management services provided by TD Bank USA to clients of TD Ameritrade, Inc., the Company pays service-based fees agreed upon by the parties. This agreement will continue in effect as long as the IDA agreement remains in effect, provided that it may be terminated by TD Ameritrade, Inc. without cause upon 60 days’ prior written notice to TD Bank USA. |
| (8) | In connection with its brokerage business, the Company engages in securities borrowing and lending with TD Securities, Inc. (“TDSI”). The transactions with TDSI are subject to the same collateral requirements as transactions with other revenues. Followingcounterparties. |
| (9) | TD Ameritrade, Inc. and TDS entered into a master selected dealers agreement to facilitate the adoptiondistribution of initial public offering SEC registered securities, including debt securities, warrants or other securities with payment of principal and interest, which may include securities issued by TD, to TD Ameritrade, Inc.’s clients. The Agreement provides for TDS, as lead agent or as lead orco-manager of an underwriting syndicate, to invite TD Ameritrade, Inc. to act as one of several selected dealers in a public offering. When invited to participate in an offering, TD Ameritrade, Inc. commits to purchase from TDS, an allocated amount of the new revenue recognition standard (ASU 2014-09)issue securities. The Agreement may be terminated by either party for any reason upon five business day’s written notice to the other party. As a selected dealer, TD Ameritrade, Inc. receives a selling concession on October 1, 2018,the securities it sells to its clients. The lead agent or lead orco-manager of the underwriting syndicate sets the selling concession for the offering. The pricing of the offering, including the selling concession, is based on the nature of the issuer, the features of the new issue offered, and market conditions. |
| (10) | The amount paid by each party is based on a cost-plus methodology for transition services provided. The agreement provides for customary termination rights, including for breach or if legally required. |
| (11) | For additional information about the revolving credit facilities, see Note 11 — Long-term Debt and Other Borrowings under Item 8, Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements to the Company’s Annual Report on Form 10-K filed with the SEC on November 15, 2019. As of September 30, 2019, the total lending commitment received from TD under these credit facilities was $221 million. During the fiscal year ended September 30, 2019, the Company began accounting for Order Routing Agreement revenues on a gross basis. The Company adoptedpaid approximately $1 million of debt issuance costs to an affiliate of TD in connection with the new guidance usingissuance of the modified retrospective approach,2021 Notes, 2024 Notes and 2029 Notes, which requiresis being amortized into interest expense over the standard to be applied only toterms of the most current periodrespective notes. |
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
presented; therefore, the prior periods have not been adjusted to reflect the current period presentation. See "Recently Adopted Accounting Pronouncements" in Note 1 for additional details regarding the amended guidance.
| (12) | This agreement establishes revenue sharing terms. While the Company will remain the custodian of pledged client securities, TD Bank maintains a senior security interest in the pledged securities and will underwrite the loans and provide the line of credit to clients. |
(2)(13) | Under these sublease agreements, the Company incurred $0.3 million of sub-lease rental income and recognized $0.3 million of occupancy and equipment costs during fiscal 2019. |
| (14) | Certain directors and executive officers, and members of their immediate families, maintain margin trading accounts with the Company as permitted by applicable law. Margin loans to these individuals were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than the normal risk of collectability or present other unfavorable features. |
| (15) | The Company notifiedand TD are a party to a trademark license agreement that requires the Company to use the TD trademark and logo as part of its intent to not extend or renew the Canadian Call Center Services Agreement and services under this agreement ended by September 30, 2017.Company’s corporate identity. The following is a summary of selected provisions of the trademark license agreement. |
The following table summarizes the classification and amount of receivables from and payables to TD and its affiliates on the Consolidated Balance Sheets resulting from related party transactions (dollars in millions):
| | | | | | | | | | | | | September 30, | | | | 2019 | | 2018 | | Assets: | | | | | | Receivable from affiliates | | $ | 112 |
| | $ | 151 |
| | Liabilities: | | | | | | Payable to brokers, dealers and clearing organizations | | $ | 44 |
| | $ | 47 |
| | Payable to affiliates | | 5 |
| | 7 |
| | Accounts payable and other liabilities | | 2 |
| | — |
|
PayablesThe Company is required to brokers, dealersuse the TD Ameritrade name in the U.S. as its exclusive corporate entity name and clearing organizations primarily relate to securities lending activity and are settled in accordance with customary contractual terms. Receivables from and payables touse the TD affiliates resulting from client cash sweep activity are generally settled in cash the next business day. Other receivables from and payables to affiliates of TD are generally settled in cash on a monthly basis.
As of September 30, 2018, payable to affiliates on the Consolidated Balance Sheet included $38 million of liabilities assumedlogo in connection with the acquisitionTD Ameritrade name in the U.S. in corporate identity and marketing materials.
The Company has a worldwide (except in Canada) license to use the name and trademark “TD” as part of Scottrade. These liabilities were settled during the first quartertrademark, service mark, trade name, corporate name or domain name “TD Ameritrade” in connection with the Company’s business of fiscal year 2019.providing securities brokerage services to retail traders, individual investors and registered investment advisors. TD has agreed not to use the TD mark or any trademarks, service marks, trade names, corporate names and domain names incorporating the TD mark in connection with any business or activity providing securities brokerage services to retail traders, individual investors and registered investment advisors in the U.S., as so restricted by the Stockholders Agreement.
TD alongand the Company jointly own the TD Ameritrade name. The Company has agreed to be responsible for the registration, maintenance and prosecution of any trademark applications and registrations for the TD Ameritrade name. The Company and TD have each agreed to be responsible for 50% of the costs and expenses associated with other financial institutions, is participatingthe registration, maintenance and prosecution of the TD Ameritrade trademark. The Company has agreed to indemnify TD for liability incurred by TD as a lenderresult of the Company’s (and any of its sublicensees’) breach of its obligations under the Parent Revolving Facilitytrademark license agreement. TD has agreed to indemnify the Company for liability incurred by the Company so long as the Company’s actions are in accordance with the terms of the trademark license agreement and the TDAC Revolving Facilities. ForCompany’s use of the TD Ameritrade name or the TD logo is in a jurisdiction where TD has trademark applications or registrations or is using or has used the TD trademark or logo. The trademark license agreement had an initial term of 10 years beginning June 22, 2005 and is automatically renewable for additional periods of 10 years, unless earlier terminated pursuant to the terms of the agreement. | (16) | Under the Registration Rights Agreement, each of TD and the Ricketts stockholders are entitled to certain customary demand registration, shelf takedown and piggyback registration rights with respect to their respective shares of Company common stock, subject to certain customary limitations (including minimum offering size and maximum number of demands and underwritten shelf takedowns within certain periods). |
Our common stock is listed on The Nasdaq Global Select Market. Under the rules of The Nasdaq Global Select Market, independent directors must comprise a majority of a listed company’s board of directors. In addition, the rules of The Nasdaq Global Select Market require that, subject to specified exceptions, each member of a listed company’s audit, compensation and nominating committees must be independent. Audit committee members must also satisfy the independence criteria set forth in Rule10A-3 under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Under the rules of The Nasdaq Global Select Market, a director will only qualify as an “independent director” if, in the opinion of that company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. To be considered independent for purposes of Rule10A-3, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit committee, the board of directors or any other board committee: (1) accept, directly or indirectly, any consulting, advisory or other compensatory fee from the listed company or any of its subsidiaries or (2) be an affiliated person of the listed company or any of its subsidiaries. Our board of directors has undertaken a review of its composition, the composition of its committees and the independence of our directors and considered whether any director has a material relationship with us that could compromise his or her ability to exercise independent judgment in carrying out his or her responsibilities. Based upon information regardingrequested from and provided by each director concerning his or her background, employment and affiliations, including family relationships, our board of directors has determined that Mses. Hailey, Maidment and Miller and Messrs. Bettino, Levitt, Mitchell, Moglia, Prezzano, Ricketts and Tessler are independent as defined in Nasdaq Rule 5605. Our board of directors also determined that Mses. Hailey, Maidment and Miller and Messrs. Bettino, Mitchell and Ricketts, who comprise our audit committee; Messrs. Bettino, Levitt, Mitchell, Ricketts and Tessler, who comprise our compensation committee; and Ms. Hailey and Messrs. Bettino, Mitchell, Ricketts and Tessler who comprise our Outside Independent Directors Committee, satisfy the Company's revolving facilities, see Note 11, Long-term Debtindependence standards for those committees established by applicable SEC rules and Other Borrowings. Asthe rules of The Nasdaq Global Select Market. In making this determination, our board of directors considered the relationships that eachnon-employee director has with us and all other facts and circumstances our board of directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by eachnon-employee director.
| Item 14. | Principal Accounting Fees and Services |
Fees Paid to Independent Auditor The following table presents fees billed by Ernst & Young LLP (“EY”) for professional audit services rendered related to the audits of the Company’s annual financial statements for the years ended September 30, 2019 and 2018, the total lending commitment received from TD under these credit facilities was $221 million and $257 million, respectively. During the fiscal year ended September 30, 2019, the Company paid approximately $1 million of debt issuance costsfees for other services rendered by EY during those periods. . Annual audit fees relate to an affiliate of TDservices rendered in connection with the issuanceaudit of the 2021 Notes, 2024 Notes and 2029 Notes, which is being amortized into interest expense overCompany’s financial statements included in the terms of Company’s Form10-K, the respective notes.
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
24. Condensed Financial Information (Parent Company Only)
The following tables present the Parent company's condensed balance sheets, statements of income and statements of cash flows. Because all other comprehensive income (loss) activity occurred on the Parent company for all periods presented, the Parent company's condensed statements of comprehensive income are not presented.
PARENT COMPANY ONLY
CONDENSED BALANCE SHEETS
As of September 30, 2019 and 2018
| | | | | | | | | | | | | 2019 | | 2018 | | | | (In millions) | | ASSETS | | | | | | Cash and cash equivalents | | $ | 206 |
| | $ | 151 |
| | Receivable from subsidiaries | | 15 |
| | 8 |
| | Investments available-for-sale, at fair value | | 1,668 |
| | 484 |
| | Investments in subsidiaries | | 10,464 |
| | 9,976 |
| | Other, net | | 126 |
| | 162 |
| | Total assets | | $ | 12,479 |
| | $ | 10,781 |
| | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | Liabilities: | | | | | | Accounts payable and other liabilities | | $ | 185 |
| | $ | 240 |
| | Payable to subsidiaries and affiliates | | — |
| | 3 |
| | Securities sold under agreements to repurchase | | — |
| | 96 |
| | Long-term debt | | 3,594 |
| | 2,439 |
| | Total liabilities | | 3,779 |
| | 2,778 |
| | Stockholders' equity | | 8,700 |
| | 8,003 |
| | Total liabilities and stockholders' equity | | $ | 12,479 |
| | $ | 10,781 |
|
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PARENT COMPANY ONLY
CONDENSED STATEMENTS OF INCOME
For the Years Ended September 30, 2019, 2018 and 2017
| | | | | | | | | | | | | | | | | 2019 | | 2018 | | 2017 | | | | (In millions) | | Net revenues | | $ | 69 |
| | $ | 52 |
| | $ | 31 |
| | Operating expenses | | 34 |
| | 21 |
| | 34 |
| | Operating income (loss) | | 35 |
| | 31 |
| | (3 | ) | | Other expense, net | | 129 |
| | 106 |
| | 71 |
| | Loss before income taxes and equity in income of subsidiaries | | (94 | ) | | (75 | ) | | (74 | ) | | Provision for (benefit from) income taxes | | (20 | ) | | 15 |
| | (22 | ) | | Loss before equity in income of subsidiaries | | (74 | ) | | (90 | ) | | (52 | ) | | Equity in income of subsidiaries | | 2,282 |
| | 1,563 |
| | 924 |
| | Net income | | $ | 2,208 |
| | $ | 1,473 |
| | $ | 872 |
|
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
PARENT COMPANY ONLY
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 2019, 2018 and 2017
| | | | | | | | | | | | | | | | | 2019 | | 2018 | | 2017 | | | | (In millions) | | Cash flows from operating activities: | | | | | | | | Net income | | $ | 2,208 |
| | $ | 1,473 |
| | $ | 872 |
| | Adjustments to reconcile net income to net cash flows provided by operating activities: | | | | | | | | Equity in income of subsidiaries | | (2,282 | ) | | (1,563 | ) | | (924 | ) | | Deferred income taxes | | (5 | ) | | 13 |
| | (12 | ) | | Dividends from subsidiaries | | 1,928 |
| | 1,030 |
| | 1,230 |
| | Loss on sale of investments | | — |
| | 11 |
| | — |
| | Stock-based compensation | | 47 |
| | 60 |
| | 36 |
| | Other, net | | 7 |
| | 9 |
| | 9 |
| | Changes in operating assets and liabilities: | | | | | | | | Receivable from subsidiaries | | (7 | ) | | (2 | ) | | 2 |
| | Other assets | | 88 |
| | (92 | ) | | — |
| | Accounts payable and other liabilities | | 42 |
| | 42 |
| | (67 | ) | | Payable to subsidiaries and affiliates | | (3 | ) | | (24 | ) | | (4 | ) | | Net cash provided by operating activities | | 2,023 |
| | 957 |
| | 1,142 |
| | Cash flows from investing activities: | | | | | | | | Investment in subsidiaries | | (110 | ) | | (425 | ) | | (15 | ) | | Loans made under intercompany credit agreements | | (300 | ) | | (175 | ) | | — |
| | Collections on intercompany credit agreements | | 300 |
| | 175 |
| | — |
| | Cash paid in business acquisition | | — |
| | (4 | ) | | (1,698 | ) | | Proceeds from sale of investments available-for-sale, at fair value | | 299 |
| | 643 |
| | — |
| | Purchase of investments available-for-sale, at fair value | | (1,394 | ) | | (392 | ) | | — |
| | Net cash used in investing activities | | (1,205 | ) | | (178 | ) | | (1,713 | ) | | Cash flows from financing activities: | | | | | | | | Proceeds from issuance of long-term debt | | 1,498 |
| | — |
| | 798 |
| | Payment of debt issuance costs | | (12 | ) | | (3 | ) | | (8 | ) | | Principal payments on long-term debt | | (500 | ) | | — |
| | (385 | ) | | Reimbursement (payment) of prepayment premium on long-term debt | | (3 | ) | | 2 |
| | (54 | ) | | Net proceeds from (payments on) securities sold under agreements to repurchase | | (96 | ) | | (1 | ) | | 97 |
| | Proceeds from Parent Senior Revolving Facility | | — |
| | 200 |
| | — |
| | Principal payments on Parent Senior Revolving Facility | | — |
| | (200 | ) | | — |
| | Payment of cash dividends | | (667 | ) | | (477 | ) | | (379 | ) | | Proceeds from issuance of common stock | | — |
| | — |
| | 400 |
| | Purchase of treasury stock | | (969 | ) | | (255 | ) | | — |
| | Purchase of treasury stock for income tax withholding on stock-based compensation | | (14 | ) | | (17 | ) | | (27 | ) | | Payment for future treasury stock under accelerated stock repurchase agreement | | — |
| | (31 | ) | | — |
| | Other, net | | — |
| | — |
| | 35 |
| | Net cash provided by (used in) financing activities | | (763 | ) | | (782 | ) | | 477 |
| | Net increase (decrease) in cash and cash equivalents | | 55 |
| | (3 | ) | | (94 | ) | | Cash and cash equivalents at beginning of year | | 151 |
| | 154 |
| | 248 |
| | Cash and cash equivalents at end of year | | $ | 206 |
| | $ | 151 |
| | $ | 154 |
| | Supplemental cash flow information: | | | | | | | | Interest paid | | $ | 120 |
| | $ | 94 |
| | $ | 50 |
| | Income taxes paid | | $ | 611 |
| | $ | 309 |
| | $ | 452 |
| | Noncash investing activities: | | | | | | | | Issuance of common stock in acquisition | | $ | — |
| | $ | — |
| | $ | 1,261 |
| | Assets transferred to a subsidiary, net | | $ | — |
| | $ | — |
| | $ | 15 |
|
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
25. Quarterly Data (Unaudited)
(Dollars in millions, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | For the Fiscal Year Ended September 30, 2019 | | | | First Quarter | | Second Quarter | | Third
Quarter | | Fourth
Quarter | | Net revenues | | $ | 1,516 |
| | $ | 1,451 |
| | $ | 1,491 |
| | $ | 1,558 |
| | Operating income | | $ | 796 |
| | $ | 705 |
| | $ | 720 |
| | $ | 780 |
| | Net income | | $ | 604 |
| | $ | 499 |
| | $ | 555 |
| | $ | 551 |
| | Basic earnings per share | | $ | 1.07 |
| | $ | 0.89 |
| | $ | 1.01 |
| | $ | 1.01 |
| | Diluted earnings per share | | $ | 1.07 |
| | $ | 0.89 |
| | $ | 1.00 |
| | $ | 1.00 |
|
| | | | | | | | | | | | | | | | | | | | | For the Fiscal Year Ended September 30, 2018 | | | | First Quarter | | Second Quarter | | Third Quarter | | Fourth
Quarter | | Net revenues | | $ | 1,257 |
| | $ | 1,415 |
| | $ | 1,382 |
| | $ | 1,398 |
| | Operating income | | $ | 336 |
| | $ | 396 |
| | $ | 631 |
| | $ | 635 |
| | Net income | | $ | 297 |
| | $ | 271 |
| | $ | 451 |
| | $ | 454 |
| | Basic earnings per share | | $ | 0.52 |
| | $ | 0.48 |
| | $ | 0.79 |
| | $ | 0.80 |
| | Diluted earnings per share | | $ | 0.52 |
| | $ | 0.48 |
| | $ | 0.79 |
| | $ | 0.80 |
|
Quarterly amounts may not sum to fiscal year totals due to rounding.
26. Subsequent Event
Effective October 3, 2019, the Company reduced its online exchange-listed stock, exchange traded funds (ETF) (domestic and Canadian) and option trade commissions from $6.95 to $0 per trade (plus $0.65 per contract and 0 exercise or assignment fees on option trades). The Company expects these changes to reduce net revenues by approximately $880 million to $960 million per fiscal year.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Management's Annual Report on Internal Control Over Financial Reporting
Management of TD Ameritrade Holding Corporation and its subsidiaries (the "Company") is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control over financial reporting is a process designed under the supervision of and effected by the Company's chief executive officer and chief financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparationquarterly reviews of financial statements included in the Company’s Forms10-Q and the audits of our subsidiaries required by regulation.. Audit-related services include fees for external purposesthird-party service organization internal control audit services, SEC registration statement services, benefit plan audits, consultation on accounting standards or transactions and business acquisitions. . EY did not provide tax services in accordance with U.S. generally accepted accounting principles.2019. . EY did not provide any services resulting in Other Fees during 2019. EY provided services related to third-party lifecycle management ($206,000) in 2018. The Company's internal control over financial reporting includes those policiesAudit Committee considers whether the provision of audit-related, tax and proceduresothernon-audit services are compatible with maintaining the auditor’s independence, and has determined such services for fiscal 2019 and 2018 were compatible.We have been advised by EY that (i) pertain toneither the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositionsfirm, nor any member of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation offirm, has any financial statementsinterest, direct or indirect, in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures ofany capacity in the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.its subsidiaries. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an assessment of the effectiveness of the Company's internal control over financial reporting as of September 30, 2019 based on framework established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on this assessment, management concluded that, as of September 30, 2019, the Company's internal control over financial reporting is effective.
The Company's internal control over financial reporting as of September 30, 2019 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their accompanying report which expresses an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of September 30, 2019. That opinion appears on the next page.
Report
Policy on Audit CommitteePre-Approval of Audit andNon-Audit Services of Independent Registered Public Accounting Firm ToThe Audit Committee is responsible for appointing, setting compensation and overseeing the Shareholderswork of the independent registered public accounting firm. The Audit Committee has established a policy regardingpre-approval of all audit and the Board of Directors of TD Ameritrade Holding Corporationnon-audit Opinion on Internal Control Over Financial Reporting
We have audited TD Ameritrade Holding Corporation's internal control over financial reporting as of September 30, 2019, based on criteria established in Internal Control — Integrated Framework issuedservices provided by the Committeeindependent registered public accounting firm.
On an ongoing basis, management communicates specific projects and categories of Sponsoring Organizationsservice for which the advance approval of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, TD Ameritrade Holding Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of September 30, 2019, based onAudit Committee is requested. The Audit Committee reviews these requests and advises management if the COSO criteria. We also have audited, in accordance withcommittee approves the standardsengagement of the Public Company Accounting Oversight Board (United States) (PCAOB),independent registered public accounting firm. No services are undertaken that are notpre-approved. On a periodic basis, management reports to the consolidated balance sheetsAudit Committee regarding the actual spending for such projects and services compared to the approved amounts. All of the Company as of September 30,services provided by our independent auditor in 2019 and 2018, including services related to audit, audit-related fees, tax fees and all other fees described above, were approved by the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 2019, and the related notes and our report dated November 15, 2019 expressed an unqualified opinion thereon.Audit Committee under itspre-approval policies.Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ ERNST & YOUNG LLP
New York, New York
November 15, 2019
65 Disclosure Controls and Procedures
Management, including the Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of the Company's disclosure controls and procedures as of September 30, 2019. Management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of September 30, 2019.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company's internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required to be furnished pursuant to this item is incorporated by reference from our definitive proxy statement for our 2020 annual meeting of stockholders to be filed with the SEC pursuant to Regulation 14A within 120 days after September 30, 2019 (the "Proxy Statement").
Item 11. Executive Compensation
The information required to be furnished pursuant to this item is incorporated by reference from the Proxy Statement.
| | Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required to be furnished pursuant to this item, with the exception of the equity compensation plan information presented below, is incorporated by reference from the Proxy Statement.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes, as of September 30, 2019, information about compensation plans under which equity securities of the Company are authorized for issuance:
| | | | | | | | | | | | | | | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | | | Plan Category | | (a) | | (b) | | (c) | | | Equity compensation plans approved by security holders | | 3,472,282 |
| (1) | $ | 27.97 |
| (2) | 4,535,223 |
| (3) |
| | (1) | Consists of 503,247 stock options, 1,983,716 restricted stock units, 817,071 performance restricted stock units, and 168,248 deferred stock units outstanding under the Company's stock incentive plans. |
| | (2) | The weighted average exercise price does not take into account awards that have no exercise price, such as restricted stock units and deferred stock units. |
| | (3) | The TD Ameritrade Holding Corporation Long-Term Incentive Plan (the "LTIP") and the 2006 Directors Incentive Plan (the "Directors Plan") authorize the issuance of shares of common stock as well as options. As of September 30, 2019, there were 3,749,085 shares and 786,138 shares remaining available for issuance pursuant to the LTIP and the Directors Plan, respectively. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required to be furnished pursuant to this item is incorporated by reference from the Proxy Statement.
Item 14. Principal Accounting Fees and Services
The information required to be furnished pursuant to this item is incorporated by reference from the Proxy Statement.
PART IV Item 15. Exhibits, Financial Statement Schedules| Item 15. | Exhibits, Financial Statement Schedules |
| (a) | Documents filed as part of this Report |
See Item 8, "Financial“Financial Statements and Supplementary Data. "”# | | | 2. | Financial Statement Schedules |
Consolidated Financial Statement Schedules have been omitted because the required information is not present, or not present in amounts sufficient to require submission of the schedules, or because the required information is provided in the Consolidated Financial Statements or Notes.
| | | | | Exhibit No. | | Description | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Insured Deposit Account Agreement, effective as of January 1, 2013, among TD Bank USA, N.A., TD Bank, N.A., The Toronto-Dominion Bank, TD Ameritrade, Inc., TD Ameritrade Clearing, Inc. and TD Ameritrade Trust Company (incorporated by reference to Exhibit 10.1 of the Company'sCompany’s quarterly report on Form 10-Q filed on August 7, 2018) |
| | | | | | | | | | | | | | | | | | | Amendment No. 1, dated as of October 24, 2016, to the Insured Deposit Account Agreement by and among TD Bank USA, N.A., TD Bank, N.A., TD Ameritrade, Inc., TD Ameritrade Clearing, Inc., TD Ameritrade Trust Company and solely for purposes of Sections 7(b), 14 and 15(c), The Toronto-Dominion Bank, effective as of January 1, 2013 (incorporated by reference to Exhibit 10.3 of the Company'sCompany’s Form 8-K filed on October 28, 2016) | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Exhibit No. | | Description | | | | | | | | | | | | | | | Credit Agreement, dated April 21, 2017, among TD Ameritrade Holding Corporation, the lenders party thereto, U.S. Bank National Association, as syndication agent, Barclays Bank PLC, TD Securities (USA) LLC and Wells Fargo Securities, LLC, as co-documentation agents and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 of the Company'sCompany’s Form 8-K filed on April 21, 2017) | | | | | | | | | | | Credit Agreement, dated April 21, 2017, among TD Ameritrade Clearing, Inc., the lenders party thereto, U.S. Bank National Association, as syndication agent, Barclays Bank PLC, TD Securities (USA) LLC and Wells Fargo Securities, LLC, as co-documentation agents and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.2 of the Company'sCompany’s Form 8-K filed on April 21, 2017) | | | | | | | | | | | First Amendment, dated May 17, 2018, to Credit Agreement, dated April 21, 2017, among TD Ameritrade Clearing, Inc., the lenders party thereto, U.S. Bank National Association, as syndication agent, Barclays Bank PLC, TD Securities (USA) LLC, Wells Fargo Securities, LLC, and Industrial and Commercial Bank of China Ltd., New York Branch, as co-documentation agents and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.2 of the Company'sCompany’s Form 8-K filed on May 21, 2018) | | | | | | | | | | | Credit Agreement, dated May 16, 2019, among TD Ameritrade Clearing, Inc., the lenders parties thereto, Wells Fargo Securities, LLC, Barclays Bank PLC, Citibank, N.A., JPMorgan Chase Bank, N.A., U.S. Bank National Association, TD Securities (USA) LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley Senior Funding, Inc., as joint bookrunners and joint lead arrangers, and Wells Fargo Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.1 of the Company'sCompany’s Form 8-K filed on May 20, 2019) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | 101.SCH | | | | Inline XBRL Taxonomy Extension SchemaInstance Document—the instance document does not appear in the Interactive Data File as its XBRL tags are embedded within the Inline XBRL document | | | | | | | 101.CAL | | | | Inline XBRL Taxonomy Extension CalculationSchema | | | | | | | 101.LAB | | | | Inline XBRL Taxonomy Extension LabelCalculation | | | | | | | 101.PRE | | | | Inline XBRL Taxonomy Extension PresentationLabel | | | | | | | 101.DEF | | | | Inline XBRL Taxonomy Extension Presentation | | | | | | | | | | Inline XBRL Taxonomy Extension Definition |
| | | | | | | | Cover page formatted as Inline XBRL and contained in Exhibit 101 |
| ^ | Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplementally to the Securities and Exchange Commission a copy of any omitted schedule upon request. | | |
| * | Management contracts and compensatory plans and arrangements required to be filed as exhibits under Item 15(b) of this report. | | |
| † | Confidential treatment has been granted with respect to the omitted portions of this Exhibit, which portions have been filed separately with the Securities and Exchange Commission. |
| # | Previously filed with our Annual Report on Form 10-K filed with the SEC on November 15, 2019. |
| ## | Previously furnished with our Annual Report on Form 10-K filed with the SEC on November 15, 2019. |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused Amendment No. 1 to this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 1527th day of November, 2019. | | | | TD AMERITRADE HOLDING CORPORATION | | | | | By: | | /s/ TIM HOCKEY | | | Tim Hockey | | | President, Chief Executive Officer and DirectorTD AMERITRADE HOLDING CORPORATION (Principal Executive Officer)
| | | | | | | /s/ STEPHEN J. BOYLE | | | Stephen J. Boyle | | | Executive Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on this 15th day of November, 2019.
| | | | /s/ JOSEPH H. MOGLIA | | /s/ IRENE R. MILLER | Joseph H. Moglia
Chairman of the Board
| | Irene R. Miller/s/ Stephen J. Boyle | | | | | | Interim President and Chief Executive Officer, and Director Director(Principal Executive Officer) | | | | | /s/ BHARAT B. MASRANI | | /s/ MARK L. MITCHELL | Bharat B. MasraniBy: Vice Chairman of the Board
| | Mark L. Mitchell/s/ Jon C. Peterson Director
| | | | /s/ LORENZO A. BETTINO | | /s/ WILBUR J. PREZZANO | Lorenzo A. Bettino
Director
| | Wilbur J. PrezzanoJon C. Peterson Director
| | | | /s/ V. ANN HAILEY | | /s/ TODD M. RICKETTS | V. Ann Hailey
Director
| | Todd M. RickettsInterim Chief Financial Officer Director(Principal Financial and Accounting Officer) |
TD AMERITRADE HOLDING CORPORATION RECONCILIATION OFNON-GAAP FINANCIAL MEASURES | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | | Amortization of acquired intangible assets | | | | | | | | | | | | | Acquisition-related expenses | | | | | | | | | | | | | Income tax effect of above adjustments | | | | ) | | | | ) | | | | ) | | | $ | | | | $ | | | | $ | | |
The term “GAAP” refers to generally accepted accounting principles in the United States. | | | /s/ BRIAN M. LEVITT | | /s/ ALLAN R. TESSLER | Brian M. Levitt
Director
| (1) | Allan R. TesslerNon-GAAP
diluted earnings per share (EPS) is aDirectornon-GAAP
| | | | /s/ KAREN E. MAIDMENT | | | | financial measure as defined by SEC Regulation G. Karen E. MaidmentNon-GAAP
EPS is adjusted to remove theDirectorafter-tax
| | effect of: (1) amortization of acquired intangible assets and (2) acquisition-related expenses associated with the Company’s business acquisitions. We consider non-GAAP diluted EPS as an important measure of our financial performance because it excludes certain items that may not be indicative of our core operating results and business outlook and may be useful in evaluating the operating performance of the business and facilitating a meaningful comparison of our results in the current period to those in prior and future periods. Amortization of acquired intangible assets is excluded because management does not believe it is indicative of our underlying business performance. Acquisition-related expenses are excluded as these costs are not representative of the costs of running the Company’son-going business.Non-GAAP diluted EPS should be considered in addition to, rather than as a substitute for, GAAP diluted EPS. |
| 
