# WEDBUSH SECURITIES INC. X-17A-5 (2021-08-30) — Broker-dealer annual report - Company: WEDBUSH SECURITIES INC. - Form: X-17A-5 - Filed: 2021-08-30 - Period: 2021-06-30 - Accession: 0000105264-21-000012 - CIK: 105264 - File #: 8-12987 - Material weakness: Yes - Auditor: Ernst & Young LLP - Auditor location: Los Angeles, CA - Contact: Daniel E. Billings - Phone: 213-688-8000 - Signed by: Gary L. Wedbush and Daniel E. Billings (President and Chief Financial Officer) Original filing: https://www.sec.gov/Archives/edgar/data/105264/000010526421000012/WS_Fin_Cond_2021-06-30__.pdf --- {0}------------------------------------------------ ![](_page_0_Picture_0.jpeg) Statement of Financial Condition and Report of Independent Registered Public Accounting Firm (SEC Identification No. 8-12987) June 30, 2021 {1}------------------------------------------------ #### UNITEDSTATES SECURITIESANDEXCHANGECOMMISSION Washington, D.C. 20549 hours per response.. . . . . 12.00 8 SEC FILE NUMBER # ANNUAL AUDITED REPORT FORM X-17A-5 PART III | | | OFFICIAL USE ONLY | |-----------------------------------------------|--|-------------------| | | | FIRM I.D. NO. | | | | | | | | | | | | | | | | | | | | | | | | | | if individual, state last, first, middle name | | | | | | | | | | | | FOR OFFICIAL USE ONLY | | | | | | | *\*Claims for exemption from the requirement that the annual report be covered by the opinion of an independent public accountant must be supported by a statement of facts and circumstances relied on as the basis for the exemption. See Section 240.17a-5(e)(2)* > Potential persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number. {2}------------------------------------------------ - - - - - - - - - - - - - - *For conditions of confidential treatment of certain portions of this filing, see section 240.17a-5(e)(3).* *.* {3}------------------------------------------------ # **Wedbush Securities Inc.** Table of Contents For the Year Ended June 30, 2021 |
| Page | |-------------------------------------------------------------------------------|------| | Report
of
Independent
Registered
Public
Accounting
Firm
| 3 | | Statement
of
Financial
Condition
| 4 | | Notes
to
Statement
of
Financial
Condition
| 5 | {4}------------------------------------------------ ![](_page_4_Picture_0.jpeg) Ernst & Young LLP 725 South Figueroa Street Los Angeles, CA 90017 Tel: +1 213 977 3200 ey.com #### **Report of Independent Registered Public Accounting Firm** To the Shareholder and the Board of Directors of Wedbush Securities Inc. #### **Opinion on the Financial Statement** We have audited the accompanying statement of financial condition of Wedbush Securities Inc. (the "Company") as of June 30, 2021 and the related notes (the "financial statement"). In our opinion, the financial statement presents fairly, in all material respects, the financial position of the Company at June 30, 2021, in conformity with U.S. generally accepted accounting principles. #### **Basis for Opinion** This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statement based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("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 the financial statement is free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statement, 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 statement. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. We have served as the Company's auditor since 2019. August 30, 2021 {5}------------------------------------------------ # **Wedbush Securities Inc.** Statement of Financial Condition As of June 30, 2021 | (In thousands, except share data) | | |--------------------------------------------------------------------------------------|-----------------| | Assets | | | Cash and cash equivalents | \$74,649 | | Cash and securities segregated for the benefit of clients |
2,567,717 | | Receivables | | | Brokers, dealers and clearing organizations |
426,277 | | Clients, net | 1,128,223 | | Other | 44,364 | | Collateralized agreements | | | Securities borrowed | 3,074,830 | | Securities purchased under agreements to resell |
738,877 | | Financial instruments owned, at fair value, including securities pledged of \$29,400 |
64,242 | | Other assets | 63,966 | | Total assets | \$8,183,145 | | | | | Liabilities and shareholder's equity | | | ShortͲterm financing | \$180,000 | | Payables | | | Brokers, dealers and clearing organizations |
75,883 | | Clients | 3,848,289 | | Collateralized financing | | | Securities loaned | 2,895,696 | | Securities sold under repurchase agreements |
702,289 | | Financial instruments sold, not yet purchased, at fair value |
7,368 | | Other liabilities | 156,871 | | Subordinated loan | 25,000 | | Total liabilities | 7,891,396 | | Shareholder's equity | | | Common shares, \$0.10 stated value; authorized 20,000,000 shares; | | | 7,000,000 shares issued and outstanding |
700 | | Additional paidͲin capital | 14,701 | | Retained earnings | 276,348 | | Total shareholder's equity | 291,749 | | Total liabilities and shareholder's equity | \$
8,183,145 | See accompanying notes to statement of financial condition {6}------------------------------------------------ # Notes to Statement of Financial Condition June 30, 2021 # **(1) Organization** Wedbush Securities Inc. (the Company) is an investment firm headquartered in Los Angeles, California, that provides brokerage, clearing, investment banking, equity research, public finance, fixed income, futures and commodities,sales and trading, and asset managementservicesto individual and institutional clients predominately located in the United States of America. The Company is dually registered as a securities brokerͲdealer with the U.S. Securities and Exchange Commission (SEC) and a futures commission merchant (FCM) with the Commodity Futures Trading Commission (CFTC). The Company is a clearing member of the New York Stock Exchange and Chicago Mercantile Exchange, as well as otherstock and commodity exchanges. The Company is also a registered investment advisor with the SEC and is a member of the Financial Industry Regulatory Authority (FINRA). The Company's direct parent and sole stockholder is Wedbush Financial Services, LLC (WFS), a Delaware limited liability company. WFS is wholly owned by Wedbush Capital (WedCap). # **(2) Summary of Significant Accounting Policies** # *(a) Basis of Presentation* The Company follows accounting principles generally accepted in the United States of America (U.S. GAAP), as established by the Financial Accounting Standards Board (FASB), to ensure consistent reporting of financial condition. The U.S. dollar is the functional currency of the Company. # *(b) Use of Estimates* In preparing the Statement of Financial Condition, management is required to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the Statement of Financial Condition during the reported period*.* The most important of these estimates and assumptions relate to fair value measurements. Although these and other estimates and assumptions are based on the best available information, actual results could differ materially from these estimates. On March 11, 2020, the World Health Organization designated the spread of coronavirus (COVIDͲ 19) as a pandemic. The global economy has recovered considerably since its decline last spring, but there is still a high degree of economic uncertainty resulting from the COVIDͲ19 pandemic, as well as a new federal government administration. As a result, volatility of both brokerage revenues and investment banking revenues could continue. In response to the COVIDͲ19 pandemic, the Company has enhanced its policies, procedures and operations to protect the integrity and continuity of its business and the health and safety of employees and is continuously monitoring the situation. #### *(c) Fair Value* The Company accountsfor itsfinancial instruments at fair value in accordance with FASB Accounting Standards Codification (ASC) 820, *Fair Value Measurements* (ASC 820). The Company's financial instruments owned and financial instruments sold, not yet purchased are carried at fair value and recorded on a tradeͲdate basis. All other financial assets and liabilities have a carrying value that {7}------------------------------------------------ approximates fair value. These financial instruments are short term in nature, bear interest at current market rates or are subject to daily repricing. # *(d) Cash and Cash Equivalents* Cash and cash equivalents are comprised of on demand deposits and highly liquid investments with original maturities of 90 days or less at the date of origination. Cash on deposit with financial institutions, may, at times, exceed federal insurance limits. # *(e) Cash and Securities Segregated for the Benefit of Clients* Cash and securities segregated for the benefit of clients consist of cash, cash equivalents, and securitiessegregated under the Commodity Exchange Act (CEA) and in special reserve bank accounts for the exclusive benefit of customers and proprietary accounts of broker dealers under Rule 15c3Ͳ 3 of the Securities and Exchange Act of 1934. # *(f) Collateralized Agreements and Financings* Collateralized agreements consist of securities borrowed and securities purchased under agreements to resell (resale agreements). Collateralized financings consist of securities loaned and securities sold under agreements to repurchase (repurchase agreements). Where the requirements of ASC 210Ͳ20, *Balance Sheet Offsetting* (ASC 210Ͳ20), are met, collateralized agreements and collateralized financings are presented on a netͲbyͲcounterparty basis in the Statement of Financial Condition. ## **Securities Borrowed and Securities Loaned Transactions** Securities borrowed and securities loaned transactions are recorded at the contract value of cash collateral advanced or received, plus accrued interest. Contract values approximate fair value as they are subject to daily repricing. If recorded at fair value under ASC 820, Securities borrowed and securities loaned would be reported within either Level 1 or Level 2. Refer to Note 6 "Financial Instruments" for Level 1 and Level 2 classification. Collateral in the form of cash is exchanged for securities borrowed, and is received for securities loaned, based on the approximate fair value of the related securities. The cash collateral is adjusted daily to reflect changes in the current value of the underlying securities. #### **Resale and Repurchase Agreements** Resale and repurchase agreements are recorded at their contracted amounts. Contract values approximate fair value as they are subject to daily repricing. If recorded at fair value under ASC 820, Resale and repurchase agreements would be reported within either Level 1 or Level 2. Refer to Note 6 "Financial Instruments" for Level 1 and Level 2 classification. Resale agreements require the Company to deposit cash with the seller and to take possession of the purchased securities. Repurchase agreementsrequire the buyer to deposit cash with the Company and to take possession of the sold securities. The fair value of the securities sold or purchased plus accrued coupon is generally in excess of the cash received or provided. The Company monitors the fair value of resale and repurchase agreements on a daily basis, with additional cash or securities obtained or posted as necessary. {8}------------------------------------------------ # *(g) Receivables from and Payables to Clients* Receivables from and payables to clients include amounts due or held on cash and margin transactions. Receivables from clients are generally fully secured by securities held in the clients' accounts. Collateral is required to be maintained at specified minimum levels at all times. The collateral is not reflected in the Statement of Financial Condition. The Company establishes an allowance for credit losses against receivables when collectability is not reasonably assured. Factors considered by management in determining the amount of the allowance include past experience, future expectations of performance, degree of concentration and quality of collateral. Receivables are presented net of allowance. The allowance as of June 30, 2021 was \$1.6 million. #### *(h) Credit Losses* The Company accounts for credit losses on financial assets measured at an amortized cost basis in accordance with FASB ASC 326Ͳ20, *Financial Instruments – Credit Losses*(ASC 326). ASC 326 requires the Company to estimate expected credit losses over the life of itsfinancial assets as of the reporting date based on relevant information about past events, current conditions, and reasonable and supportable forecasts. Management monitors the adequacy of these estimates through periodic evaluations against actual trends experienced. The Company determined that the financial assets in scope were primarily related to notes receivable from employees. The Company reviews chargeͲoff experience factors, contractual delinquency, historical collection rates, and other information to make the necessary judgments as to credit losses expected. The Company's chargeͲoff policy is based on a note by note review. Refer to Note 16 "Related Party Transactions" for additional allowance information. In evaluating secured financing receivables (resale agreements and securities borrowed transactions), the Company applies the practical expedient based on the collateral maintenance provisions in estimating an allowance for credit losses. Credit losses are not recognized for secured financing receivables where the underlying collateral's fair value is equal to or exceeds the asset's amortized cost basis. In cases where the collateral's fair value does not equal or exceed the amortized cost basis, the allowance for credit losses, if any, is limited to the difference between the fair value of the collateral at the reporting date and the amortized cost basis of the financial assets. As such, generally, no allowance for credit losses is held against these secured financing receivables. The Company's receivables from brokers, dealers, and clearing organizations generally do not give rise to material credit risk and have a remote probability of default either because of their shortͲ term nature or due to the credit protection framework inherent in the design and operations of brokers, dealers and clearing organizations. As such, generally, no allowance for credit losses is held against these receivables. #### *(i) Exchange Memberships* The Company's exchange memberships, which provide the Company with the right to conduct business on the exchanges, are recorded at cost or, if other than temporary impairment in value has occurred, at a value that reflects management's estimate of the impairment. There were no {9}------------------------------------------------ # Notes to Statement of Financial ConditionͲcontinued June 30, 2021 exchange membership impairments at June 30, 2021. Exchange memberships are included in Other assets in the Statement of Financial Condition. #### *(j) Leases* The Company determines if an arrangement is a lease or contains a lease at inception. Under ASC 842, *Leases* (ASC 842), the Company recognizes in the Statement of Financial Condition a liability to make lease payments and a rightͲtoͲuse asset representing its right to use the underlying asset for the lease term. ROU assets and lease liabilities for leases with a lease term greater than 12 months are included in Other assets and Other liabilities, respectively, on the Statement of Financial Condition. The ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As the Company's leases do not provide an implicit rate, the Company uses an incremental borrowing rate (IBR) based on the information available at commencement date to calculate the present value of lease payments. The IBR approximates the rate of interest on a collateralized borrowing over a similar term an amount equal to the lease payments in a similar economic environment. # *(k) Revenue Recognition* Commissions and other fees revenues and related expenses are recorded on a tradeͲdate basis as transactions occur and primarily include commissions earned from wealth management, correspondent and institutional clients. Under clearing agreements, the Company clears trades for clients and retains a portion of the commission for its services. Commissions and remittal to the client are recorded on a net basis. The Company recognizes interest income on an accrual basis. Revenues from investment banking are recognized when the services related to the underlying transaction are completed under the terms of the engagement. Underwriting revenues are presented gross of related expenses. Asset management fees are recognized monthly as earned and are based on the value of the assets in the clients' accounts at the end of the prior quarter. Securities services revenues include correspondent trading and equity research fees. Additionally, securities services include per account fees such as revenues from feeͲbased accounts and IRA fees, which are recognized into income as earned over the term of the contract. The Company's financial instruments are carried at fair value and recorded on a tradeͲdate basis. Additional information regarding revenue recognition isincluded in Note 8 "Revenue from Contracts with Customers." #### *(l) Income Taxes* The Company computes tax provisions in accordance with ASC 740, *Income Taxes* (ASC 740), on a modified separate return method. Deferred tax assets and liabilities are recognized for temporary {10}------------------------------------------------ # Notes to Statement of Financial ConditionͲcontinued June 30, 2021 differences between the financial reporting and tax basis of the Company's assets and liabilities. Deferred taxes are adjusted to reflect the tax rates at which future taxable amounts will likely be settled or realized. The effects of tax rate changes on future deferred tax liabilities and deferred tax assets, as well as other changes in income tax laws, are recognized in the period during which such changes are enacted. The Company follows guidance under ASC 740, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions. Under ASC 740, the Company determines whether it is more likely than not that an income tax position will be sustained upon examination by tax authorities. ASC 740 prescribes a recognition threshold and a measurement attribute for the financialstatement recognition and measurement of tax positions taken or expected to be taken in a tax return. Sustainable income tax positions are measured to determine the amount of benefit to be recognized in the Statement of Financial Condition based on the largest amount of benefit that is more likely than not to be realized upon ultimate settlement. # *(m) Foreign Currency Translation* Assets and liabilities denominated in nonͲU.S. dollar currencies are translated at exchange rates at the end of a period. # *(n) Recent Accounting Developments* # **Financial Instruments – Credit Losses** In June 2016, the FASB issued ASU No. 2016Ͳ13, *Financial InstrumentsоCredit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments*. The new guidance broadensthe information that an entity must consider in developing its estimated credit losses expected to occur over the remaining life of assets measured either collectively or individually to include historical experience, current conditions and reasonable and supportable forecasts. The amendments replace the existing incurred credit loss model with the current expected credit losses (CECL) model. The Company adopted this guidance on July 1, 2020. #### **Fair Value Measurement Disclosure Framework** In August, 2018, the FASB issued ASU 2018Ͳ13, *Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement*. The amendments remove, modify and add certain disclosure requirements to improve the effectiveness of disclosure requirements on fair value measurement. The objective of the disclosure requirements is to provide users of the financial statement with information about assets and liabilities measured at fair value in the statement of financial condition or disclosed in the notes to the financial statement pertaining to: (1) The valuation techniques and inputs that a reporting entity uses to arrive at its measures of fair value, including judgments and assumptions that the entity makes; (2) the uncertainty in the fair value measurements as of the reporting date; (3) how changes in fair value measurements affect an entity's performance and cash flows. The ASU is effective for all entities for fiscal years beginning after December 15, 2019, including interim periods therein. The Company adopted this guidance effective July 1, 2020. The {11}------------------------------------------------ # Notes to Statement of Financial ConditionͲcontinued June 30, 2021 adoption of this ASU did not have a material effect on the Company's Statement of Financial Condition. #### **Income Taxes** In December 2019, the FASB issued ASU 2019Ͳ12, *Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes*. The amendments simplify the accounting for income tax by removing certain exceptions to the general principles in Topic 740. The amendments also clarify and amend existing guidance to improve consistent application. The ASU is effective for fiscal years beginning after December 15, 2020. The Company adopted this guidance effective July 1, 2020. The adoption of this ASU did not have a material effect on the Company's Statement of Financial Condition. #### **(3) Cash and Securities Segregated for the Benefit of Clients** The following is a disaggregation of Cash and securities segregated for the benefit of clients as of June 30, 2021 under 15c3Ͳ3 (in thousands): | Total cash and securities segregated for the benefit of clients under SEC rule 15c3Ͳ3
| \$
1,563,881 | |-------------------------------------------------------------------------------------------|-----------------| | Securities segregated for regulatory purposes |
106,987 | | Cash segregated for regulatory purposes | \$1,456,894 | At June 30, 2021, assets segregated or held in separate accounts under CEA regulations are as follows (in thousands): | Total assets segregated or held in separate accounts under CEA
| \$
1,149,280 | |--------------------------------------------------------------------|-----------------| | Receivables from brokers, dealers and clearing organizations |
145,443 | | Securities segregated for regulatory purposes |
574,973 | | Cash segregated for regulatory purposes | \$428,863 | #### **(4) Receivables from and Payables to Brokers, Dealers and Clearing Organizations** Amounts receivable from and payable to brokers, dealers and clearing organizations result from the Company's normal trading and clearing activities and consist of the following as of June 30, 2021 (in thousands): | Total payablesto brokers, dealers and clearing organizations | \$
75,883 | |--------------------------------------------------------------------|---------------| | Trade date settlement payable, net | 9,684 | | Amount due to brokers, dealers and clearing organizations |
40,301 | | Securities failed to receive | \$25,898 | | Total receivables from brokers, dealers and clearing organizations | \$
426,277 | | Deposits with clearing organizations |
129,206 | | Amounts due from brokers, dealers and clearing organizations |
251,886 | | Securities failed to deliver | \$45,185 | Securities failed to deliver and failed to receive represent the contractual value of securities that have not been delivered or received on or after the settlement date. {12}------------------------------------------------ # **(5) Collateralized Agreements and Financing** The Company enters into collateralized agreements and financing transactions in order to, among other things, finance client activities, acquire securities to cover short positions and finance certain of the Company's assets. In many cases, the Company is permitted to deliver, repledge or otherwise use these financial instruments as collateral for repurchase agreements, securities lending transactions, to meet margin requirements at clearing organizations or to facilitate short sales of clients and the Company. At June 30, 2021, the approximate value, excluding the impact of netting, of financial instrumentsreceived as collateral by the Company, in connection with resale agreements and securities borrowed, that the Company was permitted to sell or repledge was \$4.3 billion. Securities financing transactions are exposed to credit and liquidity risk. To manage these risks, the Company monitors the fair value of the underlying securities on a daily basis, with additional cash or securities obtained or posted as collateral as necessary. Additionally, the Company, where appropriate, enters into master netting agreements with counterparties that provide the Company, in the event of a counterparty default, with the right to net the counterparty's rights and obligations under such agreements and liquidate and set off collateral held by the Company against the net amount owed by the counterparty. The following table summarizes the contract value and fair value of the securities obtained from or given to counterparties as collateral on collateralized agreements and financing as of June 30, 2021 (in thousands): | | | Fair Value | | | |--|-----------|----------------------------------------|-------------|--| | | | | | | | | 3,074,830 | | \$2,931,061 | | | | 738,877 | | \$737,819 | | | | | | | | | | 2,895,696 | | \$2,802,662 | | | | 702,289 | | \$703,033 | | | | | Contract Value
\$
\$
\$
\$ | | | The following tables present the carrying value of collateralized financings by class of collateral pledged and remaining contractual maturity as of June 30, 2021 (in thousands): | | Repurchase agreements | Securities loaned | |---------------------------------------|-----------------------|-----------------------| | U.S. government and agency securities | \$
702,289 | \$
Ͳ | | Municipal securities | Ͳ | 18,016 | | Corporate debt securities | Ͳ | 60,238 | | Equity securities | Ͳ | 2,817,442 | | Total | | \$702,289 \$2,895,696 | | | | | | | Repurchase agreements | | | | | | |--------------------|-----------------------|-----------------------|--|--|--|--| | Overnight and open | \$
702,289 | \$2,895,696 | | | | | | Total
| | \$702,289 \$2,895,696 | | | | | {13}------------------------------------------------ # Notes to Statement of Financial ConditionͲcontinued June 30, 2021 In accordance with ASC 210Ͳ20, the Company offsets financial assets and financial liabilities in the Statement of Financial Condition where there is a legally enforceable right to set off the recognized amounts and other offsetting requirements are met. The following table presents information about the offsetting of these instruments and related collateral amounts as of June 30, 2021 (in thousands): | | Gross Amount | | Amounts Offset in
the Statement of
Financial Condition
(a) | | Net Amounts
Presented in the
Statement of
Financial Condition | | Collateral
Received or
Pledged
(b) | | Net Amount
(c) | |-------------------------------------------------|--------------|-----------|---------------------------------------------------------------------|-----------|------------------------------------------------------------------------|-------------|---------------------------------------------|---------------|-------------------| | Collateralized agreements | | | | | | | | | | | Securities borrowed | \$ | 3,074,830 | | \$
Ͳ | | \$3,074,830 | | \$2,931,061 | \$143,769 | | Securities purchased under agreements to resell | \$ | 1,258,449 | | \$519,572 | | \$738,877 | | \$737,819 | \$1,058 | | Collateralized financing | | | | | | | | | | | Securities loaned | \$ | 2,895,696 | | \$
Ͳ | | \$2,895,696 | | \$2,802,662 | \$93,034 | | Securities sold under repurchase agreements | \$ | 1,221,861 | | \$519,572 | | \$702,289 | | \$
702,289 | \$
Ͳ | (a) Amounts relate to master netting agreements and collateral agreements which have been determined by the Company to be legally enforceable in the event of default and where certain other criteria are met in accordance with applicable offsetting accounting guidance. There are no amounts which were eligible for netting pursuant to ASC Subtopic 210Ͳ20 that the Company did not net. (b) Securities collateral is reflected at fair value, but has been limited to the net exposure on the Statement of Financial Condition in order to exclude any overͲcollateralization. (c) Includes amounts subject to enforceable master netting agreements that have not met the requirements for offsetting in accordance with applicable accounting guidance but are eligible for offsetting to the extent an event of default has occurred. # **(6) Financial Instruments** The Company's financial instruments that are carried at fair value include Financial instruments owned, Securities segregated for the benefit of clients and Financial instruments sold, not yet purchased. #### *(a) Fair Value of Financial Instruments* Fair value is defined under ASC 820 as the price that would be received to sell an asset, or would be paid to settle a liability (i.e., the exit price) in an orderly transaction between market participants at the measurement date. ASC 820 establishes a fair value hierarchy that prioritizes inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to the use of observable inputs and lowest priority to the use of unobservable inputs by requiring that the most observable inputs that are significant to the determination of the fair value of the asset or liability be used when available. Observable inputs are based on market pricing data obtained from sources independent of the Company. Unobservable inputs reflect the Company's judgment about the assumptions market participants would use in pricing the asset or liability. The three levels of the fair value hierarchy based on observability of inputs are as follows: Level 1 – Valuations based on unadjusted quoted prices available in active markets for identical assets or liabilities. Level 2 – Valuations based on quoted pricesin marketsthat are not active, or for which allsignificant inputs are considered observable, either directly or indirectly. {14}------------------------------------------------ # Notes to Statement of Financial ConditionͲcontinued June 30, 2021 Level 3 – Valuations based on inputs that are unobservable and have little to no market activity. Significant judgment by management is required for valuation of these financial instruments. In some instances, an instrument may fall into more than one level of the fair value hierarchy. In such instances, the instrument's level within the fair value hierarchy is based on the lowest of the three levels (with Level 3 being the lowest) that is significant to the fair value measurement. The Company's assessment of the significance of an input requires judgment and considers factors specific to the instrument. # *(b) Valuation Technique* Financial instruments owned, Financial instruments sold, not yet purchased, and securities segregated that are reported as Level 1 are based on unadjusted quotes for closing prices from national securities exchanges as well as reported bid and offer quotes from parties trading the security. If quoted prices are not available, fair values are obtained from pricing services or broker quotes, and are reported as Level 2. Other securities reported as Level 3 are initially valued at the transaction price, which is considered to be the best initial estimate of fair value. Subsequent to the transaction date, the Company uses other methodologies to determine fair value, such as due diligence reviews, other analytical procedures and earningsͲbased measures. During the year ended June 30, 2021, there were no changes to the valuation techniques employed by the Company in determining fair value. {15}------------------------------------------------ # *(c) Detail of Financial Instruments* The following table presents financial instruments at fair value as of June 30, 2021 (in thousands): | | | | | | | Balance at | |---------------------------------------------------------|--|---------------|---------|-------------|---------|---------------| | | | Level 1 | Level 2 | | Level 3 | June 30, 2021 | | Assets | | | | | | | | Financial instruments owned | | | | | | | | U.S. government and agency securities | | \$Ͳ | | \$
1,567 | \$
Ͳ | \$1,567 | | Municipal securities | | Ͳ | | 40,184 |
Ͳ | 40,184 | | Corporate debt securities | | Ͳ | |
521 |
Ͳ | 521 | | Equity securities | |
21,306 | |
Ͳ |
Ͳ | 21,306 | | Derivatives | |
664 | |
Ͳ |
Ͳ | 664 | | Total financial instruments owned | | \$
21,970 | \$ | 42,272 | \$
Ͳ | \$64,242 | | Securities segregated for the benefit of clients | | | | | | | | U.S. governmentsecurities | | \$
681,959 | | \$
Ͳ | \$
Ͳ | \$681,959 | | Total securities segregated forthe benefit of clients | | \$
681,959 | | \$
Ͳ | \$
Ͳ | \$681,959 | | Liabilities | | | | | | | | Financial instruments sold, not yet purchased | | | | | | | | U.S. government and agency securities | | \$
2,286 | | \$
Ͳ | \$
Ͳ | \$2,286 | | Corporate debt securities | | Ͳ | |
39 |
Ͳ | 39 | | Equity securities | |
4,983 | |
Ͳ |
Ͳ | 4,983 | | Derivatives | |
60 | |
Ͳ |
Ͳ | 60 | | Total financial instruments sold, not yet purchased
| | \$7,329 | | \$
39 | \$
Ͳ | \$7,368 | Included in Financial instruments owned is \$29.4 million ofsecurities pledged as collateral to various counterparties. Transfers between fair value classifications occur when there are changes in pricing observability levels. There were no transfers between levels during the year ended June 30, 2021. The following is a summary of changes in fair value of other securities that have been classified as Level 3 during the year ended June 30, 2021 (in thousands): | | Balance at
June 30, 2020 | Net
Gains/(Losses) | | Purchases | Sales and
Distributions | Balance at
June 30, 2021 | |-----------------------|-----------------------------|-----------------------|---------|-----------|----------------------------|-----------------------------| | Othersecurities | | | | | | | | Equity securities
| \$
10,835 | | \$1,624 | \$1,414 | \$
(13,873) | \$
Ͳ | #### *(d) Risks Related to Financial Instruments* In the normal course of business, the Company isinvolved in the execution,settlement and financing of various client and principal securities transactions. Client activities are transacted on a cash, margin or deliveryͲversusͲpayment basis. Securities transactions are subject to the risk of counterparty nonperformance. However, transactions are collateralized by the underlying security, thereby reducing the associated risk to changes in the fair value of the security through settlement date, or to the extent of margin balances. {16}------------------------------------------------ The Company has sold securities that it does not currently own and will therefore be obligated to purchase such securities at a future date. The Company has recorded these obligations in the Statement of Financial Condition at June 30, 2021, at fair values of the related securities and will incur a loss if the fair values of the related securities increase subsequent to June 30, 2021. The Company also executes client transactions in the purchase and sale of commodity futures contracts (including options on futures contracts), substantially all of which are transacted on a margin basissubject to individual exchange regulations. Such transactions may expose the Company to significant offͲbalanceͲsheet risk in the event margin requirements are notsufficient to fully cover losses that clients may incur. In the event the client fails to satisfy its obligations, the Company may be required to purchase or sell futures contracts at prevailing market prices in order to fulfill the client's obligations. The Company controls the risk by monitoring margin collateral levels on a daily basis for compliance with regulatory and Company guidelines, and requires additional collateral when necessary. The Company requires a client to deposit additional margin collateral, or reduce positions, if it is determined that the client's activities may be subject to aboveͲnormal market risks. #### **(7) Credit Risk** The Company is engaged in securities and commodity clearing activities in which counterparties primarily include clearing organizations, brokerͲdealers and futures commission merchants. In the event counterparties do not fulfill their obligations, the Company may be exposed to credit risk. The risk of default depends on the creditworthiness of the counterparty. It is the Company's policy to review the credit standing of each counterparty. The Company may require counterparties to submit additional collateral when deemed necessary. #### **(8) Revenues from Contracts with Customers** The timing of revenue recognition may differ from the timing of payment by customers. The Company records a receivable when revenue is recognized prior to payment and the Company has an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, the Company records deferred revenue until the performance obligations are satisfied. The Company had receivables, primarily investment banking receivables, related to revenues from contracts with customers of \$11.2 million and \$16.1 million at June 30, 2021 and June 30, 2020, respectively, in Other receivablesin the Statement of Financial Condition. The Company had no significant allowance related to these receivables during the year ended June 30, 2021. The Company had deferred revenue from contracts with customers of \$0.8 million at June 30, 2021 and \$0.5 million at June 30, 2020, respectively, in Other liabilities in the Statement of Financial Condition. #### **(9) Leases** The Company has operating leases mainly related to rental premises with remaining lease terms expiring in the years ranging from 2021 to 2032, exclusive of renewal and termination options. Some of the leases include renewal options and tenant improvement allowances. The Company's measurement of the ROU assets and operating lease liabilities does not include payments associated with those options since it is not reasonably certain that the Company will exercise those options. The lease agreements do not contain material variable lease payments, buyout options, residual value guarantees or restrictive covenants. The Company also has equipment finance leases expiring in the years ranging from 2022 to 2024. {17}------------------------------------------------ The following table provides the amounts of lease assets and liabilities on the Statement of Financial Condition for the year ended June 30, 2021 (in thousands): | Assets | | |-----------------------------|--------------| | Operating lease assets | \$
33,317 | | Finance lease assets |
673 | | Total lease assets | \$
33,990 | | | | | Liabilities | | | Operating lease liabilities | \$
38,659 | | Finance lease liabilities |
681 | | Total lease liabilities | \$
39,340 | The following table presents the supplemental cash flow information related to leases for the year ended June 30, 2021 (in thousands): | Cash paid for amountsincluded in the measurement of lease liabilities | | | | | | | |-----------------------------------------------------------------------|----|-------|--|--|--|--| | Operating cash flows for operating leases | \$ | 8,330 | | | | | | Financing cash flows for finance leases
| | \$489 | | | | | The following table presents maturity of the Company's operating and finance lease liabilities as of June 30, 2021 (in thousands, except for weighted averages): | | Operating Leases | Finance Leases | | | |--------------------------------------------------|------------------|----------------|------|--| | 2022 | \$9,082 | \$452 | | | | 2023 | 7,236 | 223 | | | | 2024 | 7,827 | 20 | | | | 2025 |
6,764 |
Ͳ | | | | 2026 |
4,442 |
Ͳ | | | | Thereafter |
13,858 |
Ͳ | | | | Total lease payments | \$
49,209 | \$695 | | | | Less: imputed interest |
(10,550) | (14) | | | | Present value of lease liabilities | \$
38,659 | \$681 | | | | Weighted average remaining lease term (in years) | 7.4 | | 1.6 | | | Weighted average discount rate
| 6.7% | | 2.6% | | #### **(10) Income Taxes** The Company is included in the filing of WedCap's consolidated tax return for federal tax purposes and in WedCap's combined returns for certain states where such filing is required or permitted. The Company is also a party to a tax allocation agreement with WedCap. The Company has adopted the modified separate return approach, whereby the Company calculates its corresponding tax amounts in accordance with the current enacted tax laws and rates while also considering those tax attributes that are realized or {18}------------------------------------------------ # Notes to Statement of Financial ConditionͲcontinued June 30, 2021 realizable by WedCap and corresponding consolidated or combined group. The Company believes its adopted modified separate return approach is systematic and rational and has been consistently applied. The Company had no material unrecognized tax benefits. WedCap is no longer subject to U.S. federal examinations for the years before June 30, 2019, and, with a few exceptions, to state and local tax examinations for the years before June 30, 2017. Included in Other receivablesin the Statement of Financial Condition are net income taxesreceivable from WedCap of \$6.3 million at June 30, 2021. The Company recognizes deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. | Deferred tax assets | | |-------------------------------------|-------------| | Accrued expenses not yet deductible | \$
5,122 | | Deferred rent credit and other |
1,247 | | Amortization of bookͲtax difference |
977 | | Restricted stock awards |
586 | | State taxes |
260 | | Other |
610 | | Total deferred tax assets | \$
8,802 | | Deferred tax liabilities | | | Unrealized gains | \$
(704) | | Depreciation |
(67) | | Total deferred tax liabilities | (771) | | Net deferred tax assets | \$
8,031 | Temporary differences and carryforwards, which give rise to deferred tax assets and liabilities, consist of the following as of June 30, 2021 (in thousands): Net deferred tax assets are included in Other assetsin the Statement of Financial Condition. The Company has reviewed its deferred tax assets to assess whether a valuation allowance should be established. Management believes that it is more likely than not that the deferred tax assets will be realized. Accordingly, no valuation allowance has been established. Utilization of the deferred tax asset is dependent on generating sufficient taxable income at the Company and WedCap. # **(11) Net Capital Requirement** The Company is subject to the SEC's Uniform Net Capital Rule 15c3Ͳ1, which requires the maintenance of minimum net capital. The Company has elected to use the alternative method permitted by the rule, which requires the maintenance of minimum net capital equal to the greater of \$1.0 million or 2% of aggregate debit balances arising from client transactions. {19}------------------------------------------------ As an FCM, the Company is also subject to the net capital requirements of the CFTC Regulation 1.17 and requirements of the National Futures Association, and is required to maintain adjusted net capital equivalent to 8% of customer and noncustomer risk maintenance margin requirements on all positions. These CFTC regulations also prohibit a brokerͲdealer from repaying subordinated borrowings, paying cash dividends, making loans to its affiliates or employees, or otherwise entering into transactions, which would result in a reduction of its total net capital to less than 150% of its required minimum capital. The Company's ability to make capital and certain other distributions is subject to the rules and regulations of various exchanges, clearing organizations and other regulatory agencies, which may have capital requirements that are greater than the applicable selfͲregulatory organizations. The Company, as a dually registered brokerͲdealer and FCM, is required to maintain net capital in excess of the greater of the SEC or CFTC minimum net capital requirements. At June 30, 2021, the Company had net capital of \$206.1 million that was 14% of aggregate debit items and \$158.4 million in excess of the \$47.7 million required minimum net capital at that date. # **(12) ShortͲTerm Financing** The Company hasthe ability to obtain committed unsecured shortͲterm borrowings primarily through the issuance of promissory notes. Under these agreements, the Company can borrow on demand up to a maximum of \$180.0 million unsecured at interest rates determined on the date of each borrowing, and reset daily. At June 30, 2021, there were \$180.0 million of shortͲterm borrowings outstanding under this credit line at an average interest rate of 3.60%. The Company also has the ability, through arrangements with multiple banks, to obtain uncommitted shortͲterm borrowings. Under these agreements, the Company can borrow on demand up to a maximum of \$390.0 million secured and \$10.0 million unsecured at interest rates determined on the date of each borrowing, and reset daily. At June 30, 2021, there were no shortͲterm borrowings outstanding under these credit lines. The Company has an additional uncommitted secured credit line at interest rates determined on the date of each borrowing, and reset daily. At June 30, 2021, there were no shortͲterm borrowings outstanding under this secured credit line. The loan agreements contain various financial covenants. The Company was in compliance with all such covenants for the year ended June 30, 2021. ### **(13) Subordinated Loan** On January 29, 2021, WFS funded \$25.0 million to the Company under a Subordinated Loan agreement at an interest rate of 5.5% with a maturity of January 29, 2024. The Subordinated Loan was approved by FINRA on January 29, 2021 as a satisfactory subordination agreement which is allowable in the computation of Net Capital. The outstanding loan balance as of June 30, 2021 was \$25.0 million. #### **(14) Benefit Plan** The Company has a trusteeͲdirected defined contribution retirement plan qualified under Section 401(k) of the Internal Revenue Code that also covers employees of affiliated companies. Annual employer discretionary contributions vest on a graduated scale based on completed years of service. At June 30, {20}------------------------------------------------ # Notes to Statement of Financial ConditionͲcontinued June 30, 2021 2021, employer contributions payable to the plan were \$3.4 million and are included in Other liabilities in the Statement of Financial Condition. #### **(15) Contingencies and Guarantees** # *(a) Contingencies* # *Employee Classification Matter* This matter is a class action complaint for damages, injunctive relief and restitution initially brought by a former employee. The class includes generally all current and former California commissioned based employees, paid monthly, who, in the period within four years of the filing of the complaint in 2015, were allegedly misclassified as exempt employees under the California Labor Code. The Company previously prevailed in a court trial. In November 2020, the court of appeals reversed the trial court decision. The case was remanded back to the trial court in February 2021. Discovery is proceeding and a trial date has not been scheduled. Although the outcome of the matter is uncertain, the Company has accrued a loss contingency based on an analysis of commissionͲbased employees in the class and the Company's assessment of likelihood of prevailing in all aspects of the complaint. # *Other Matters* The Company is subject to various proceedings and claims arising primarily from securities business activities, including lawsuits, arbitration claims and regulatory matters. The Company is also involved in other reviews, investigations, and proceedings by governmental bodies and selfͲregulatory organizations regarding its business, which may result in adverse judgments, settlements, fines, penalties, injunctions and other relief. The Company is contesting the allegations in these claims, and believes there are meritorious defenses in each of these arbitrations, lawsuits and regulatory investigations. The Company accrues for a settlement when a liability is deemed probable and estimable in Other liabilities in the Statement of Financial Condition. At the present time, the Company does not expect the ultimate resolution of the matters described above to have a material adverse effect, beyond accrued loss contingencies, on the Company's Statement of Financial Condition. #### *(b) Guarantees* FASB ASC 460, *Guarantees* (ASC 460), requires the Company to disclose information about its obligations under certain guarantee arrangements. ASC 460 defines guarantees as contracts and indemnification agreements that contingently require a guarantor to make payments to the guaranteed party based on changesin an underlying factor (such asinterestrate or foreign exchange rate,security or commodity price, an index or the occurrence or nonoccurrence of a specified event) related to an asset, liability, or equity security of a guaranteed party. This guidance also defines guarantees as contracts that contingently require the guarantor to make payments to the {21}------------------------------------------------ guaranteed party based on another entity's failure to perform under an agreement, as well as indirect guarantees of the indebtedness of others. The Company is a member of various clearing organizations that clear derivative contracts. Associated with its memberships, the Company may be required to pay a proportionate share of the financial obligations of another member who may default on its obligations to the exchange or the clearinghouse. While the rules governing different exchange or clearinghouse memberships vary, in general the Company's guarantee obligations would arise only if the exchange or clearinghouse had previously exhausted its resources. The maximum potential payout under these membership agreements cannot be estimated. The Company has not recorded any contingent liabilities in the Statement of Financial Condition for these agreements and believes that any potential requirement to make payments under these agreements is remote and not material to the financial statement. The Company utilizes Fixed Income Clearing Corporation (FICC) for trade comparison, netting and settlement of fixed income securities. On November 15, 2018, a SEC rule change became effective providing FICC with a committed liquidity resource, Capped Contingency Liquidity Facility (CCLF). FICC will use a ruleͲbased approach to allocate CCLF obligations, with those netting members that place a higher liquidity burden on FICC responsible for a larger share of the CCLF. FICC apprises the Company of its share of the maximum funding need for CCLF on a monthly basis. The Company believes that it is unlikely it will have to be counterparty to potential CCLF repurchase transactions under this agreement and has not recorded any contingent liability in the Statement of Financial Condition for this SEC rule change. As of June 30, 2021, the Company had a current CCLF requirement, of \$13.7 million. #### **(16) RelatedͲParty Transactions** The Company enters into securities transactions and other transactions with related parties. At June 30, 2021, balances with such related parties were included in the Statement of Financial Condition as follows (in thousands): | Assets | | |---------------------|--------------| | ReceivablesͲclients | \$
3,419 | | ReceivablesͲother |
30,442 | | Total assets |
33,861 | | Liabilities | | | PayablesͲclients | \$
4,871 | | Other liabilities |
3,603 | | Subordinated loan |
25,000 | | Total liabilities | \$
33,474 | In the normal course of business, officers, directors, relatives of officers and directors, and affiliates may buy and sell securities through the Company. Receivables from and payables to affiliates, officers, directors and relatives are recorded within Receivables from clients, net and Payables to clients, respectively, in the Statement of Financial Condition. {22}------------------------------------------------ The Company has agreements with affiliates for other activities, including a tax sharing agreement with WedCap as described in Note 10 "Income Taxes." Unsettled amounts for these activities are recorded within Other receivables in the Statement of Financial Condition. Notesreceivable from employees are generally from recruiting activities and are noninterestͲbearing. The notes are typically forgiven over a period of three to eight years. Notes receivable from employees are included in Other receivables in the Statement of Financial Condition. Notes receivable from employees totaled \$18.3 million, net of allowance of \$5.0 million, at June 30, 2021. The following table presents the rollfoward of the allowance for the year ended June 30, 2021 (in thousands): | | | Balance at | | | | | | | Balance at | | |-------------------|---------------|------------|----------------------------|--------|--|-------------|--|---------------|------------|-----------| | | June 30, 2020 | | CECL Adoption
Provision | | | ChargeͲoffs | | June 30, 2021 | | | | | | | | | | | | | | | | Other receivables | \$ | (2,133) | | \$(88) | | \$(3,220) | | \$479 | | \$(4,962) | The Company remitted \$35.8 million of its excess distributable retained earnings as dividends during fiscal year 2021, which included cash dividends of \$3.0 million and nonͲcash dividends of \$32.8 million. The nonͲcash dividends were in the form of related party receivables of \$15.2 million, investments and other receivables of \$14.7 million, and WedCap Shares of \$3.0 million. The Company held a demand note from WedCap with an adjustable interest rate set at the published prime rate plus 1.5%. In June, 2021, the Company remitted total outstanding note balance of \$8.2 million to WFS as a non cash dividend leaving the Company with no outstanding balance as of June 30, 2021. # **(17) Subsequent Events** The Company has evaluated all events subsequent to June 30, 2021, up until the date the Statement of Financial Condition were issued, and, except as disclosed, has determined there were no events or transactions during said period that would require recognition or disclosure in the Statement of Financial Condition. Source: SEC EDGAR via Adviser Search (https://search.stillhousedata.com). Agents: see https://search.stillhousedata.com/llms.txt.