# UBS FINANCIAL SERVICES INC. X-17A-5 (2021-03-01) — Broker-dealer annual report - Company: UBS FINANCIAL SERVICES INC. - Form: X-17A-5 - Filed: 2021-03-01 - Period: 2020-12-31 - Accession: 0000200565-21-000002 - CIK: 200565 - File #: 8-16257 - Material weakness: No - Auditor: Ernst & Young LLP - Auditor location: New York, NY - Contact: Earl Lafontant - Phone: 201-352-8336 - Signed by: Ralph Mattone (Chief Financial Officer) Original filing: https://www.sec.gov/Archives/edgar/data/200565/000020056521000002/fixedsonotes2.pdf --- {0}------------------------------------------------ ## Notes to Consolidated Statement of Financial Condition Year Ended December 31, 2020 *(Amoums in Thousands of Dollars)* ### **1. Organization** UBS Financial Services Inc. ("UBSFSI") is registered as a broker-dealer with the Securities and Exchange Commission ("SEC"), a futures commission merchant with the Commodity Futures Trading Conunission ("CFTC") and Lhe ational Futures Association and is a member of various exchanges and the Financial lndustry Regulatory Authority ("FTNRA"). UBSFSl's business activities include securities and commodities brokerage, investment advisory and asset management services to serve the investment, cash management, financial planning and borrowing needs of individual and instirutional clients. UBSFSI is a wholly owned subsidiary of UBS Americas Jnc. ("UBS Americas") which is a wholly owned subsidiary of UBS Americas Holding LLC ("UBSAHL''). UBSAHL was established in order to become the intem1ediate holding company for all United States subsidiaries of UBS Group AG ("UBS" or "Group") pursuant to the rules enacted for foreign banks in the United States. UBSAflL js a wholly owned subsidiary of UBS AG which is a wholly owned subsidiary of UBS. #### **2. Summary of Significant Accounting Policies** ### **Principles of Consolidation and Basis of Presentation** The consolidated statement of financial condition includes tbe accounts of UBSFSI and its wl10lly owned subsidiaries (col.lecrively, the "Company"). the largest of which is UBS Financial Services Incorporated of Puerto Ri,co ("UBSFSTPR"). All material intercompany balances and transactions bave been eliminated. UBSFSI consolidates entities in which UBSFSI has a controlling financial interest. UBSFSI detemlines whether it has a contro!Ling financial interest in an enricy by first evaluating whether the entity is a voting interest entity or a variable interest entity ( 11VfE11). At December 31 . 2020, the Company does not have any interests in VIEs. The consolidated statement of financial condition is prepared in conformity with accounting principles generally accepted in the United States, which requjres management to make judgments and assumptions that affect the amounts reported in the consolidated statement of financial condition and accompanying notes. Actual results could differ from those estimates. Management makes estimates regarding valuations of certain assets and liabilities. expected credit losses, the outcome of litigation, the carrying amount of goodwill and other intangible {1}------------------------------------------------ ## Notes to Consolidated Statement of foinancial Condition (contjnued) December 31 . 2020 *(Amowus in Thousands of Dollars)* ## **2. Summary of Significant Accounting Policies (continued)** assets, certain accruals and other matters that affect the reported amounts and disclosures of contingencies in the Company's consolidated statement of financia1 condition. The spread of the corooavirus disease (COVID-19) pandemic and the governmental measures taken to contain the pandemic have significantly adversely affected, and will likely continue to adversely affect, global economic conditions, resulting in meaningful contraction in the global economy, substantial volatility in the financial markets, increased unemployment, increased credit and counterparty risk, and operational challenges such as the temporary closures of businesse.s, sheltering-in-place directives and increased remote work protocols. Governments and central banks around the world have reacted to the economic crisis caused by the pandemic by implementing stimulus and liquidity programs and cutting interest rates, though it is unclear whether these or future actions wiJI be successful in countering the economic disruption. ff the pandemic is prolonged or the actions of governments and central banks are unsuccessful, the adverse impact on the global economy will deepen. and our results of operations and tinaocia1 condition in future periods may be adversely affected. In the short-term the Company may benefit from bigber transaction volumes and increased volatiliry, although continuation of these trends is uncenain. #### **Cash and Cash Equivalents** Cash and cash equivalents are defined *as* highly liquid investments, with an original maturity of three months or less when purchased. At December 31. 2020. the Company had no cash equivalents. #### **Financial Instruments** Financial instruments owned, financial instruments owned and pledged *as* collateral (December 31. 2020, SO), and financial instrun1ents sold, not yet purchased, are stated at fair value and recorded on a trade date basis. Fair value is determjned by quoted market prices, when available. If quoted market prices are not available, fair value is determined using pricing models which incorporate management's best estimates of critical assumptions, which take into account time value, volatility and other faclors WJderlving the securities . ., V {2}------------------------------------------------ ## Notes to Consolidated Statement of foinancial Condition (contjnued) December 31. 2020 *(Amowus in Thousands of Dollars)* ## **2. Summary of Significant Accounting Policie.s (continued)** Financial Accounting Standards Board *C'F* ASE") Accounting Standards Codification f'ASC") 820. '"fair Value Measurements- ("ASC 820"). defines fair value, establishes a framework for measuring fair value, and establishes a fair value hierarchy which prioritizes the inputs to valuation techniques. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal marke~ the most advantageous market for the asset or liability. Valuation techniques. as specified by ASC 820, are used to measure fair value. The Company's fair value and valuation model governance strncture includes numerous controls and procedural safeguards tbat are intended to maximize the quaJity of fair value measurements reported in tbe consolidated statement of financial condition. ln carrying out vaJuati.on responsibilities, the businesses are required to consider the availability and quality of external market information and to provide justification and rationale for their fair value estimates. Independent price verification of financial instruments measured at fair value is undertaken by UBS's valuation control group. The objective of the independent price verification process is to independently corroborate the business's estimates of fair value against observable market information. By benchmarking the business's fair value estimates with observable market information, the degree of valuation uncertainty embedded in these measurements can be assessed and managed as requfred i11 the governance framework. As a result of the valuation controls employed, valuation adjustments may be made to the business's estimate of fair value. All financial instruments at fair value are categorized into one of three fair value hierarchy levels, based upon tbe lowest level input that is significant to the financial instrument's fair value measurement in its entirety: Level l : Quoted market prices (unadjusted) in active markets for identical assets or liabilities that the Company can access at the measurement date. Level 2: VaJuation techniques for which all significant inputs are or are based on observable market data. Level 3: Valuation techniques which include significant inputs that are not based on observable market data. The following is a description of the valuation techniques applied to the Company's maJor categories of assets and liabilities measured at fair value: {3}------------------------------------------------ ## Notes to Consolidated Statement of foinancial Condition (contjnued) December 3 1. 2020 *(Amowus in Thousands of Dollars)* ## **2. Summary of Significant Accounting Policies (continued)** (J.S. *Government securities and agency obliga1io11s:* U.S. Government securities are generally actively traded and are valued using quoted market prices. Where market prices are not available, these securities are valued against yield curves implied from similar issuances. Agency obligations are comprised of agency-issued debt. on-callable agency-issued debt securities are generally valued using quoted market prices. Callable agency-issued debt securities are valued by benchmarking model-derived prices to quoted market prices and trade data for identical or comparable securities. *Equities:* Equity securities *are* primarily traded on public stock exchanges where quoted prices are reacLily and regularly available. Equity securities not traded on a public stock exchange are valued using observable inputs. Unlisted equity securities and private equity investments are recorded initially at the acquisition cost, which is considered the best indication of fair value\_ Subsequent adjustments to recorded amounts are based on current and projected financial performance, recent financing activities, economic and market conditions, market comparable. market liquidity, sales restrictions and other factors. *Mutual fimds:* Mutual funds are generally valued using quoted market prices or valuation techniques which use observable inputs if not traded in an ac6ve market. ln some instances, signjficant inputs are not based on observable market data. *Corporate debt obligations:* Corporate bonds are priced at fair market value, based on recent trades or broker and dealer quotes. In cases where no directly comparable price is available, the bonds are priced against yields derived from other securities by the same issuer or valued using simflar securities adjusting for seniority, maturity and liquidity. For illiquid securities, credit modeling may be used, which considers the foatures of the s@curity and discounted cash flows using observable or implied credit spreads and prevailing interest rates. *S1a1e and municipal obligations:* These securities are comprised of bonds issued by states and municipalities. These financial instruments are priced based on recent trades or broker and dealer quotes. *Certificates of deposit and money market funds:* These financial instmments have short and long term maturities and carry interest rates that approximate market. Certificates of deposit are valued at amortized cost plus interest which approximates fair vaJue. *Mortgage-hacked ob/iga,ions:* Mortgage-backed obligations represent agency mortgage passthrough pool securities and collareralized mongage obligations (''CMO"). Pass-through pools are valued using quoted market prices or prices of comparable securities after considering collateral characteristics, historical performance and also pricing benchmark securities. Agency CMOs are structured deals backed by specific pools of collateral and are valued based on {4}------------------------------------------------ ## Notes to Consolidated Statement of foinancial Condition (contjnued) December 31 . 2020 *(Amowus in Thousands of Dollars)* ## **2. Summary of Significant Accounting Policies (continued)** available trades or marker comparnble securities. Both asset classes require a view around forward interest rates, prepayments and other macro variables. *Brokerage receivables and payables:* These assets and liabilities represeat callable, on demand balances whereby the fair value is determined based on the value of the underlying balance due (refer to Note 5). #### **CoUateralized Agreements** Securities purchased under agreements to resell C'resale agreemenrs") and sec~•riries sold under agreements to repurchase ("repurchase agreements") are generally collateralized by U.S. government securities. They are accounted for as financing transactioas at their contractual amounts, plus accrued interest which represents an1ounts at which the securities will be subsequentJy resold or repurchased. For resale agreements, it is Company policy to obtain collateral in the form of securities, with fair value in excess of the original principal amount loaned. The Company is required to deliver securities to counterparties in order to collateralize repurchase agreements. The risk related to a decline in the market value of collateral (pledged or received) is managed by setting appropriate market-based haircuts. On a daily basis, the Company monitors the fair value of the securities purchased and sold under these agreements. Should the fair value of the securities purchased decline, or the fair value of securities sold increase, additional collateral is requested or excess collateral is returned when deemed appropriate to maintain contractual margin protection. The Company manages credit exposure arising from resale and repurchase agreements by, in appropriate circumstances, entering into master netting agreements and collateral agreements with counterparties that provide the Company, in the event of a counterparty default (such as bankruptcy or a counterparty's failure to pay or perfonn), with rhe right to net a counterparty's rights and obligarions under such agreement and liquidate and set off collateral held by tbe Company against the net amount owed by the coumerparty. The Company presents repurchase agreements and resale agreements on a net basis when the requirements of FASB ASC 210-20- 45-11 "Balance Sheet - Offsetting: Repurchase and Reverse Repurchase Agreements" are met. Securities borrowed and securities loaned transactions are recorded at the amount of cash advanced or received in connection w ith the transaction. Securities borrowed transactions require the Company to deposit cash or other collateral with the lender. With respect to securities loane~ the Company receives collateral~ principally cash. The initial collateral advanced or received has {5}------------------------------------------------ ## Notes to Consolidated Statement of foinancial Condition (contjnued) December 31 , 2020 *(Amowus in Thousands of Dollars)* ## **2. Summary of Significant Accounting Policies (continued)** a fair value equal co or greater than the fair value of the securities borrowed or loaned. The Company monitors tbe fair value of the securities borrowed and loaned on a daily basjs and requests additional collateral or returns excess collateral, as appropriate. Accmed interest income and expense on these transactions are reflected in dividends and interest receivable and payable on the consolidated statement of financial condition. #### **PrincipaJ Transactions** When acting as a principal, the Company enters into a transacdon in its own name and for its own account. As a principal, the Company bas beneficial ownership of and legal title to the assets. Transactions in which securities flow through the Company's inventory are considered principal transactions. The Company assumes both credit risk and market risk from the inception of the transaction. Amounts receivable and payable for principal transactions that have not reached their contractual settlement date are recorded as receivables from and payables to brokers, dealers and clearing organizations in the consolidated statement of financial condition. #### **Leases** The Company predominantly enters into operating lease contracts, or contracts that include lease components, as a lessee of real estate, inclucling operations offices and sales offices. At December 31, 2020, the Company has no finance leases. The Company identifies non-lease componenrs of a contract and accounts for them separately from lease components. When the Company enters into an operating lease arrangement it recognizes a lease liability and corresponding right-of-use (''RoU11 ) asset at the commencement of the lease, the \_point at which the Company acquires control of the physical use of the asset. Lease liabilities are presented within Other liabilit1es and accrued expenses and RoU assets are presented w itbjn office equipment and leasehold improvements in the consolidated statement of financial condition. The lease liability is measured based on the present value of the lease payments over the lease te~ discounted using Company's unseciired borrowing rate given the rate implicit in a lease is generally not observable to the lessee. The RoU asset is recorded at an amount equal to the lease liability but is adjusted for rent prepayments, initial direct costs, any costs to refurbish the leased asset or lease incentives received. The lease liability is accreted over the lease tern, using the effective interest method based on the unsecured borrowing rate at commencement. The RoU asset is adjusted for the difference between the straight-line amortization cost for the period (including amortization of initial direct costs) and the periodic accretion of the lease liability. {6}------------------------------------------------ ## Notes to Consolidated Statement of foinancial Condition (contjnued) December 31 . 2020 *(Amowus in Thousands of Dollars)* ## **2. Summary of Significant Accounting Policies (continued)** Lease payments generally include fixed payments and variable payments that depend on an index (such as an inflation inde1.} When the lease contains aa extension or tem1ination option that the Company considers reasonably certain to be exercised, the expected rental payments or costs of termination are included within the lease payments used to measure the lease liability. The Company does not typically enter into leases with purchase options or residual value guarantees. ### **Depreciation and Amortization** The Company depreciates office equipment using the straight-line method over estimated useful lives of three to ten years. Leasehold improvements are amortized over the lesser of the estimated usefol life of the asset or the remaining tenn of the lease. At December 31, 2020, office equipmeru and leasehold improvements include \$173,784 related to internally generated computer software which are under development and not ready to use ## Income Taxe,S Toe Company is included in the consolidated federal income tax rerum and certain combined state and local tax returns of UBS Americas. Ia addition~ the Company files stand-alone returns in other state, local and foreign jurisdictions. Federal, state, local and foreign taxes are provided for on a separate return basis. In accordance with the provisions of FASB ASC 740, ·'Income Taxes" ("ASC 740" ). deferred tax assets and liabilities are recognized for the future tax effect of differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and Liab11Ittes are measured usmg enacted tax rates expected to be in eftect during the year in which the basis differences reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in earnings in the period that includes the enactment date. ln the event it is more likely than not that a deferred tax asset will not be realized, a valuation allowance is recorded. ASC 740 also sets out a coosisleol framework to determine lhe appropriate level of tax reserves to maintain for uncertain tax positions. This interpretation uses a two-step approach wherein a tax benefit is recognized if a position is more likely thail not tc be sustained. The amount of the be11efit is then measured to be the highest tax benefit that is greater than 50% likely to be realized. ### **GoodwilJ and Intangible Assets** Goodwill represents the excess of the cost of an acquisition over the fair value of the Company,s share of net identifiable assets of the acquired entity at the date of acquisition. Goodwill is not amortized but is tested, at least annually, for impairment in accordance with FASB ASC 350, {7}------------------------------------------------ ## Notes to Consolidated Statement of foinancial Condition (contjnued) December 31. 2020 *(Amowus in Thousands of Dollars)* ## **2. Summary of Significant Accounting Policies (continued)** "Intangibles- Goodwill and Other". l11e Company has the option to first assess qualita1ive factors to determine wllether the existence of events or circumstances leads to a detennination that it is more Likely than not that the fair value of a reporting unit is less than its carrying amount. If after the qualitative assessment the Company determines it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then performing the two-step impairment test is not required. However, if the Company concludes otherwise, then it is required to perform the first step of the two-step impairment test. The Company has an unconditional option to bypass the qualitative assessment for any reporting w1it in any period and proceed directly to performing the first step of the two step goodwill impairment test. The Company may resume performing the qualitative assessment in any subsequent period. The first step, used to identify potential impairment, involves comparing each reporting unit's fair value to its carrying value includjng goodwill and intangible assets. *1f* the fair value of a reporting unit exceeds its carrying value, applicable goodwill and intangible assets is considered not to be impaired. If the carrying value exceeds fair value, there is an indkarion of impairmem and the second step is performed co measure the amount of impairment At December 3 1, 2020, the Company's goodwill primarily relates to the acquisitions of P iper Jaffrey Companies and McDonaM Investments in September 2006 and Febmary 2007. respectively. Intangible assets are recorded at cost, wbjcb represents the fair value of the acquired intangible assets at the date of acquisition and are amortized over three to seven years. At December 31 , 2020, the Company held Sl ,466 of intangible assets, net of accumulated amortiz.ation of SI 252. The Company tests intangible assets, at least annually, for impairment by assessing whether the carrying value of the finite life intangible asset exceeds its fair value, based upon its future expecled casb nows. #### **Share-based and Other Deferred Compensation Plans** UBS bas established several share-based compensation plans that are settled in UBS's equity instruments or ao amount that is based on the value of such instrnments. These awards are generally subject to conditions that require employees to complete a specified period of service and, for performance shares, to satisfy specified performance conditions. For equity-settled instrumeors, fair value is determined at the date of grant and is not re-measured unless its terms are modified such tbat the fair value immediately after modification exceeds the fair value immediately prior to modification. For cash-settled awards, fair value is re-measured at each reporting date such that the cumulative expense recognized equals the cash distributed. {8}------------------------------------------------ ## Notes to Consolidated Statement of foinancial Condition (contjnued) December 31. 2020 *(Amowus in Thousands of Dollars)* ## **2. Summary of Significant Accounting Policies (continued)** UBS has established deferred compensation plans that are senled io cash or financial instruments other than UBS equity instruments, tile amount of whicl1 may be fixed or may vary based on the achievement of specified performance conditions or the value of specified underlying assets. #### **Receivables from Clients and Allowance for Loan Losses** Receivables from clients consist of non-purpose loans (the "Loans") (see ote 7). The Company repons Loans due from clients at the outstanding principal amount adjusted for any charge offs or allowances for doubtful accounts. Loans are generally p laced on non-accrual sranis at the point when a maintenance call is not satisfied by the borrower. Any accrned interest receivable related to a Loan tbar is placed on non-accrual status is added to the principal amount due. Payments received while a Loan is on non-accrual status are recorded as a reduction of principal. If the borrower has demonstrated over a period of time, the ability to make periodic interest and principal payments as scheduled. the loan \.\rill be returned ro accrual status\_ lnterest income on loans is calculated by applying the contractual interest rate to the daily balances of the outstanding principal amount. See accounting developments section below, for details on measuren1.enr of allowance for loan losses. #### **Accounting Developments** #### **Adopted io 2020** In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13. "Financial Instruments - Credit Losses" (Topic 326) Measurement of Credit Losses on Financial lnstruments (the ''ASU" or " standard"). Subsequently, the FASB issued ASU 20 18- 19, to clarify that receivables arising from operating leases are within tbe scope of the lease accounting standard. Further, the FASB issued ASU No. 20 19-04, ASU No. 2019-05, ASU 2019-to, ASU 2019- 11, ASU 2020-02 and ASU 2020-03 to provide additional guidance on the standard. The amendments replace the accounting under the existing incurred loss model and introduce a new credit loss model; the Current Expected Credit Losses ("CECL") model, whjch requires earlier recognition of credir losses when compared to the existing incurred loss approach. The CECL model requires the measurement of expected credjt losses for financial assets measured at amortized cost, net investments in leases, and certain off-balance-sheet {9}------------------------------------------------ ## Notes to Consolidated Statement of foinancial Condition (contjnued) December 31 . 2020 *(Amowus in Thousands of Dollars)* #### **2. Summary of Significant Accounting Policies (continued}** credit exposures based on bistorical experience, current conditious and reasonable and supponable forecasts over the remaining contractual life of tbe financial assets, considering expected prepayments as appropriate. The overall estimate of the allowance for credit losses is based on both quantitative and qualitative considerations. The a llowance for credit losses is expected to increase under CECL and additional income statement volatility is anticipated due to the recognition of expected credit losses over the contractual life of the financial assets and off balance sheet credit exposures. The Company applied the practicaJ expedient provided in the ASU to collateralized agreements secured by collateral maintenance provisions. Entities may apply this practical expedient for assets secured by collateral if they reasonably expect the borrower or the counterparty to continue to replenish the collateral to meet the requirements of the contracts. As such, under the practical expedient, entities may elect to measure the allowance for expected credit losses by comparing the amorti2ed cost basis of the financial asset with the fair value of collateral at the measurement date. This approach may result in an estimate of zero expected credit losses. If the fair value of the collateraL however, faJls below the amortized cost of the loan, the allowance for crectit losses is limited to the difference between the fair value of the collateral and the amortized cost of the loan at the reporting date. For certain financial assets measured at amortized cost (e.g., cash equivalents and receivables from brokers, dealers and clearing organizations), the Company has concluded that there are de minimus expected credit losses based on the nature and contractual life or expected life of the financial assets and immaterial historic and expected losses. No allowance for credit losses is recognized on accrued interest receivable that is presented separately from the related financiaJ assets because it is the Company's policy to write off accmed interest receivable aga.i11si iuleresl im:orne wLe11 U1e related financial asset is place1 ') and discounting of cash flows to the reponing date. - The PD represents the likelihood of termination over the remaining Life of the loan. - The LG D represents an estimate of the loss at the time of a potential termination occurring during the life of the loan. - The EAD represents an estimate of the exposure to creclit risk at the time of a potential default occurring during the life of the loan. PDs and LGDs used in the CECL calculation consider a range of scenarios (upside. baseline, mild downside, downside) to capture material. non-linearity and asymmetries, and scenario weights are applied ro reflect a likelihood of their occurrence. CECL is measured over the contractual life, considering expected prepayments where appropriate. The significant macroeconomic variables leveraged by the **CECL** model for financial advisor loans are the **S&J>** 500 and the CBOE Volatility Index (VIX), which is a measure of expected price fluctuations in the S&P *500* Index options over the next 30 days. In combination, these two macroeconomic variables are considered to be significant in the determination of the financial performance of the advisor and, therefore, provide an indication of the ability to repay the obligation in accordance with its contractual tem1s. Where it is determined that a financia1 asset does not share similar risk characteristics with any other financial assets, including when it is probable that the Company will be unable to collect the ful1 payment of principal and interest on the instrument when due, CECL is measured on an individual basis using a discounted cash flow approach. The Company adopted the ASU on its required effective date of January l, 2020. As a result of the adoption, the allowance for credit losses increased by approximately \$41666 (net of tax \$1 ,641) with a corresponding decrease to the opening balance of retained earnings. The increase was due to t.he recognition of incremental lifetime expected credit losses on the Company's portfolio of loans to its financiaJ advisors. Jn January 2017. the f ASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment". ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating step 2 from the goodwill impainnent test. Under step 2 of the goodwill impainnent test, a goodwill impairment loss was measured by comparing the implied fair value of a reporting {11}------------------------------------------------ ## Notes to Consolidated Statement of foinancial Condition (contjnued) December 31. 2020 *(Amowus in Thousands of Dollars)* ### **2. Summary of Significant Accounting Policies (continued)** unit's goodwill with the carrying amount of that goodwill. Instead, the goodwill impainnent test will require an irnpainnent loss to the extent the carrying amount of a reponing unit exceeds its fair va lue. The Company adopted the standard as of its mandatory effective date on January I. 2020 on a prospective basis. As ASU 2017-04 is applied on a prospective basis, the adoption of the ASU did not have an impact on the Company's consolidated statement of financial condition. Jn August 2018, the F ASB issued ASU 20 18-13, "Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement". The amendments remove. modify and add certain disclosure requirements in ASC Topic 820, "Fair Value Measurement". The Company adopted the standard on its mandatory effective date on January 1, 2020. The impact of the Company's adoption was limited to changes in the Company's financial statement disclosures regarding fair value measurement, primarily those disclosures related to disclosure of the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements, when applicable. As these amendments relate to disclosures, the adoption did not have an impact on the Company's consolidated statement of financial condition. ln ovember 2019 the F ASB issued ASU 2019-08, Compensation- Stock Compensation (Topic 7 J 8) and Revenue from Conrracts wi.Lh Customers (Topic 606): Codification Improvements- Share-Based Consideration Payable to a Customer. The amendments require entities to measure and classify (on the balance sheet) share-based payments to customers by applying the guidance in Topic 718 Compensation- Stock Compensation. As a result, the amount recorded as a reduc6on in revenue would be measured based on the grant-date fair value of the share-based payment. The Company adopted the standard as ofirs effective date on January 1, 2020 and adoption did not have a material impact on the Company's consolidated statement of financial condition. In December 20191 the FASB issued ASU 20 I 9- l 2l Income Taxes (Topic 740) v,ihicb provides guidance that simplifies the accounting for income taxes by eliminating certain exceptions to ASC 740 related to1 among other things, the approach for intra-period ta."< allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences, and other codification improvements. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company early adopted the ASU. on January 1, 2020. The adoption of the ASU did not have an impact on Company's consolidated statement of financial condition. {12}------------------------------------------------ ## Notes to Consolidated Statement of foinancial Condition (contjnued) December 31 . 2020 *(Amowus in Thousands of Dollars)* ## **2. Summary of Significant Accounting Policies (continued)** #### **Pending Adoption** lo July 2018, the FASB issued ASU 2018-14 "Disclosure Requirements for Defined Benefit Plans". ASU 20 I 8-14 contains several amendments to the disclosure requirements for employers that sponsor defined benefit pension and other post-retirement p lans. Several disclosure requirements that are no longer considered cost beneficial are removed~ specific disclosure requirements are clarified, and L-ertain disclosures are added. The Company adopted ASU 20 l 8- 14 on its mandatory effective dare of January I, 2021. The adoption of ASU 2018-14 is not expected to have a material impact on the Company's consolidated statement of financial condition. In January 2020, the F ASB issued ASU 2020-01 ''lnvestments-Equity Securities Topic 321 lnvest:Juent Equity Method and Joint Ventures Topic 323 and derivatives and hedgtng Topic 815. which addresses two accoun6ng issues: (1) application of the measurement alternative under Topic 321 in correlation with the transition into and out of the equity method under ASC Topic 323 and (2) the measurement of certain forward contracts and purchased options to acquire equity securities. The ASU clarifies that an entity applying the measurement alternative under Topic 321 that must transition to the equity method under Topi.c 323 because of an observable transaction will remeasure its investment immediately before transition, whereas an entity applying the equity method under ASC Topic 323 that must transition to ASC Topic 321 because of an observable transaction will remeasure its investment immediately after transition. The ASU also clarifies that certain forward contracts or p11rchased call options to acquire equity securities general ly will be measured using tbe fair vaJue principles of ASC Topic 321 before settlement or exercise. The Company adopted the ASU on its effectjve date of January 1, 2021 . The adoption of the ASU is nor expected to have a materiaJ impact on the Company's conso.lidared statement of financial condition. Cn March, 2020, the FASB reJeased ASU 2020-04, Facilitation of tbe Effects of Reference Rate Refom1 on Financial Reporting, in response to operational challenges likely to arise in accounting for contract modifications and hedge accounting due to regulatory reform initiatives to replace various Jnterbank Offered Rate (IBOR). The amendments in this ASU provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The Company may elect {13}------------------------------------------------ ## Notes to Consolidated Statement of foinancial Condition (contjnued) December 31 . 2020 *(Amowus in Thousands of Dollars)* ## **2. Summary of Significant Accounting Policies (continued)** to apply the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subs€quent to March 12. 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the consolidated statement of financial condition is available to be issued. The Company bas not adopted the amendments for contract modifications and is presently evaluating the effect of the ASU, and expects no material impact to its consolidated statement of financial condition. The Company may elect to apply the amendments in the ASU to eugible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020 and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. UBS Group has established a cross-divisional, cross-regional governance structure and change program to address the scale and complexity of the transition to alternative reference rates (ARRs) and is currently assessing the implications of the JBOR rransition on the Company's consolidated statement of financial condition. In October 2020, the F ASB released ASU 2020-08, "Codification Improvements to Subtopic 310-20, Receivables-Nonrefundab1e f ees and Other Costs", to provide targeted improvements for the amortization of certain purchased callable debt securities held at a premium. The Company adopted ASU 2020-08 on its effective date of January 1, 2021 . The adoption of ASU 2020-08 is not ex.pect.ed to have a material impact on the Company's consolidated statement of financial condition. {14}------------------------------------------------ ## Notes to Consolidated Statement of Financial Condition (continued) December 31, 2020 (Amounts in Thousands of Dollars) ### 3. Fair Value Measurement At December 31, 2020, the fair value hierarchy classification of financial assets and liabilities measured at fair value is summarized below: | | | Level I | | Level 2
Level 3 | | | Total | | |---------------------------------------------------|---|------------|---|--------------------|----|---------|-------|------------| | Financial instruments owned, at fair value | | | | | | | | | | U.S. Government securities and agency obligations | S | 123 | ਟ | | 6 | | S | 123 | | Equities | | રેલિક | | 8682 | | 64.085 | | 73335 | | Munral funds | | 238.998 | | | | 8.607 | | 247,605 | | Corporate debt obligations | | | | 2,429 | | | | 2,429 | | State and muncipal obligations | | | | 308 345 | | | | 308,345 | | Mortgage-hacked obligations | | | | 3,309 | | | | 3,309 | | Total | | 2 23,682 2 | | 322,765 | 15 | 72,692 | | \$ 635,146 | | | | Level 1 | | Level 2 | | Level 3 | | Total | | Financial assets designated at fair value | | | | | | | | | | Brokerage receivables | | | | \$ 4,863,201 | 8 | | | S 4863,201 | | | | | | | | | | | | Financial instruments sold, not vet purchased, at fair value
S
U.S. Government securities and agency obligations
Equities | 24.295 | A | | 8 | | S | | |------------------------------------------------------------------------------------------------------------------------------------|--------|-----|---------|---|---|---|--------| | | | | | | | | | | | | | | | | | 24.295 | | | | 151 | 19 | | = | | 170 | | Corporate debt obligations | | | 1416 | | | | 1.416 | | State and mune pal obligations | | | 670 | | - | | 670 | | Mutual Funds | | | 17 | | | | 17 | | Certificates of deposit and money market lunds | | | 100 | | | | 100 | | Mortgage-backed obligations | | | 19 | | | | | | Total | 24,446 | 2 | 2.241 S | | | | 26.687 | | Financial liabilities designated at fair value | | |------------------------------------------------|--| | Brokerage payables | | | | S 7 205 963 S | | - \$ 7.205.963 | |--|---------------|--|----------------| Level 1 Level 2 Level 3 Total {15}------------------------------------------------ ## Notes to Consolidated Statement of foinancial Condition (contjnued) December 31. 2020 *(Amowus in Thousands of Dollars)* #### **3. Fair VaJoe Measurement (continued)** Fair value of the brokerage receivables and brokerage payables approximate amortized cost wbicb generally represents tbe balance due or balance owed. Financial instruments sold, not yet purchased, at fair value represents obligations of the Company to deliver the specified securities at contracted prices and, thereby, requires the Company to purchase the securities in the market al prevailing prices. The Company's ultimate obligation to satisfy the sale of securities sold, not yet p urchased may exceed the amount reflected in the consolidated statement of financial condition. Transfers of financial instruments owned and financial instruments sold, not yet purchased between the fair value levels are recognized as of June 30 and December 3 1 each year. During the year ended December 31, 2020, the Company transferred equity securities of \$2 L575 from Level 2 to Level 3, because of lack of observable market data, resulting from a decrease in market activity for the securities. The Company is the primary liquidity provider in the market for a number of closed-end mutual funds (the "Funds") invested in Puerto Rico municipal securities. These Funds use leverage, which is currently provided through repurchase agreements between tbe Funds and UBSFSIPR. Since 2013, the Pueno Rico market bas experienced a downturn and liquidity issues became prevalent with the Funds. The Company also bolds equity investments in privately held companies to facilitate its business activities. The fair value of these Funds and equity investments is based on valuation techniques for which significant inputs are not based on observable market data. {16}------------------------------------------------ ## Notes to Consolidated Statement of Financial Condition (continued) December 31, 2020 (Amounts in Thousands of Dollars) #### 3. Fair Value Measurement (continued) The following table provides information on the valuation techniques, significant unobservable inputs and the range of values for those inputs for financial instruments owned, at fair value, categorized as Level 3 in the fair value hierarchy at December 31, 2020. The range of values presented in the below table is representative of the lowest level of input that is significant to the financial instruments' fair value. The disclosure below also includes qualitative information on the sensitivity of the fair value measurements to changes in the significant unobservable inputs. Weighted averages of unobservable inputs are calculated based on the fair value of the respective instrument. | | Financial
Instruments
Owned | Valuation
Technique | Significant
Unobservable
Imputs | Range of Input
Values (Weighted
Average) | |--------------|-----------------------------------|----------------------------------------|---------------------------------------|------------------------------------------------| | Mutual funds | 58.607 | Internally
developed model | Discount rates | 15% - 42% (34%) | | Equities | 864 085 | Relative value to
market comparable | Price | | #### Financial assets and liabilities not measured at fair value Other financial assets and liabilities are recorded by the Company at their contract values and include cash and cash equivalents, cash and securities segregated and on deposit for federal and other regulations, resale and repurchase agreements, securities borrowed and securities loaned, receivables from and payables to (i) clients, (ii) brokers, dealers and clearing organizations, (iii) affiliated companies, (iv) dividend and interest, (v) fees and other receivables, and (vi) subordinated debt. All financial assets and liabilities carried at contract amounts that either have short-term maturities (one year or less) or bear market interest rates are carried at amounts that approximate fair value. The carrying value of loans included in receivable from clients approximate fair value as these loans re-price daily, there is no stated maturity date and no historical losses {17}------------------------------------------------ ## Notes to Consolidated Statement of Financial Condition (continued) December 31, 2020 (Amounts in Thousands of Dollars) #### 3. Fair Value Measurement (continued) The following table represents the carrying value, fair value, and fair value hierarchy category of certain financial assets and liabilities that are not recorded at fair value in the Company's consolidated statement of financial condition. The following table excludes all non-financial assets and liabilities. | | Carrying Value | Fair Value | (Level 1) | | (Level 2) (Level 3) | |---------------------------------------------------------------------|----------------|------------|----------------|-----------|---------------------| | Financial Assets: | | | | | | | Cash and cash equivalents | S
1.162,440 | 1,162,440 | ﮯ
1.167 440 | | 5 | | Cash and securities segregated and on deposit for federal and other | | | | | | | regulations | 2981 266 | 2,981,566 | 391 035 | 2,590,531 | | | Securities purchased under agreements to resell | 356.069 | 356.069 | | 356,069 | | | Securities borrowed | 1.289.467 | 1.289.467 | | 1.289.467 | | | Receivables from clients | 252,686 | 252,686 | | 252,686 | | | Recentables - Brokers, dealers and clearing organizations | 1,909,706 | 1,909,706 | | 1.909.706 | | | Receivables - Dividends and interest | 3,288 | 3288 | | 3,288 | | | Receivables - Fees and other | 194372 | 194372 | | 194,372 | | | Receivables from athhated companies | 895,007 | 895.007 | | 895,007 | | | Financial I rabilities: | Carrying Value | Fair Value | (Level I) | (Level 2) | (Level 3) | | Securities loaned | 177,725 | 177,725 | | 177,725 | | | Payables from chents | 1.072.432 | 1,072,452 | | 1,072,432 | | | Payables - Brokers, dealers and clearing organizations | 120,371 | 120371 | | 120,371 | | | Payables- Dividends and interest | 141 | 741 | | 741 | | | Payables to athliated compames | 1,147,754 | 1,147,754 | | 1,147,754 | | | Subordmated Irabilities | 880,000 | 880,000 | | 880,000 | | #### 4. Collateralized Agreements The Company enters into reverse repurchase agreements, securities borrowed and securities loaned transactions to, among other things, acquire securities to cover short positions and settle other securities obligations, to accommodate customers' needs and for the Company's financing transactions. {18}------------------------------------------------ ## Notes to Consolidated Statement of Financial Condition (continued) December 31, 2020 (Amounts in Thousands of Dollars) #### 4. Collateralized Agreements (continued) #### Secured Financing Transactions-Maturities and Collateral Pledged The following tables present gross obligations, prior to any netting as shown below, for securities loaned transactions by remaining contractual maturity and class of collateral pledged as of December 31, 2020. | | | Remaining Contractual Maturity | | | | | | | | | |-------------------|----|--------------------------------|--------------------------------|--|------------|--|-----------------|--|--|-------------| | | | and Open | Overnight Less than 30
days | | 30-90 days | | Over 90
days | | | Total | | Securities loaned | ે. | 177,725 | | | | | . S | | | · S 177.725 | | Total | | \$ 177.725 | | | | | . 3 | | | · 5 177.725 | #### Secured Financing by the Class of Collateral Pledged | Securities loaned | | |-------------------|------------| | Equities | \$ 177,725 | | Total | \$ 177.725 | The Company does not have any transactions accounted for as a sale that results in the Company retaining substantially all of the exposure to the economic returns of the transferred asset. #### Offsetting of Collateral Agreements The Company manages credit risk by entering into netting agreements with counterparties. These netting agreements generally enable the counterparties to offset liabilities against assets received in the event that the counterparty to the transaction is unable to fulfill its contractual obligation. The Company offsets these financial assets and financial liabilities on the consolidated statement of financial condition only when it has an enforceable legal right to offset the respective recognized amounts and intends to settle on a net basis. {19}------------------------------------------------ ## Notes to Consolidated Statement of Financial Condition (continued) December 31. 2020 (Amounts in Thousands of Dollars) #### 4. Collateralized Agreements (continued) The following table presents information regarding the offsetting of financial assets and liabilities. | | Gross
Amounts | | | Amounts
Offset in the
Statement of
Financial
Condition | | Net Amounts
Presented in the
Statement of
Financial
Condition | Gross Amounts
not offset in the
Statement of
Financial
Condition (-) | | Net
Amount | | |-----------------------------------------------------|------------------|------------|---|--------------------------------------------------------------------|---|---------------------------------------------------------------------------|----------------------------------------------------------------------------------|---------------|---------------|-----------| | Financial assets | | | | | | | | | | | | Securities borrowed | | \$ 1289467 | ਉ | | S | 1289.467 | S | (1,289,467) S | | | | Securities purchased under agreements to resell 13) | | 356,069 | | | | 356,069 | | (356,069) | | | | Financial liabilities | | | | | | | | | | | | Securities loaned | | 177.725 | | | | 177,725 | | (172,870) | 8 | ર્વ જિરેસ | (1) Balance excludes \$2,590,531 in securities purchased under agreements to resell that are segregated pursuant to the Customer Protection Rule and are included in cash and securities segregated and on deposit for federal and other regulations on the consolidated statement of financial condition. (2) Amounts relate to master netting agreements and collateral agreements which have been determmed by the Company to be legally enforceable in the event of default and where certain other criteria are not met in accordance with applicable offsetting account guidance ASC 210-20-45-11. (3) In some cases, collateral exchanged with a counterparty exceeds the net asset or liability balance with that counterparty. In such cases, the amounts reported in this column are limited to the related asset or liability with the counterparty. In the normal course of business, the Company receives margin securities and obtains securities under agreements to resell and securities borrowed on terms which permit it to re-pledge or resell the securities to others. At December 31, 2020, the Company obtained and had available securities with a fair value of approximately \$8,158,722 on such terms, of which approximately \$3,621,242 have been either pledged or otherwise transferred to others in connection with the Company's financing activities, to satisfy commitments under short sales, or for deposits made to clearing organizations. {20}------------------------------------------------ ## Notes to Consolidated Statement of Financial Condition (continued) December 31, 2020 (Amounts in Thousands of Dollars) #### 5. Financial Assets and Financial Liabilities Designated at Fair value Financial assets and financial liabilities designated at fair value consist of brokerage receivables and payables. These assets and liabilities represent callable, on-demand balances including margin loans ("Margin Loans"), client cash debits, free cash credits and secured credits (short sale proceeds). The balances reported represent an aggregation of cash receivables and payables that form a single unit of account at the client level. The business model for these accounts is similar to any current or on-demand accounts, with clients using the account to house subscriptions, redemptions and billed amounts. Fair value is determined based on value of the underlying balance which approximates amortized cost. Due to the on-demand nature of its underlying, these receivables and payables are designated as Level 2. Clients' securities and commodities transactions are recorded on a settlement date basis. For Margin Loan transactions, the Company will make a loan to a client for purposes of financing the purchase of securities. These transactions are conducted through margin accounts. The client is required to post collateral in excess of the margin loan and the collateral must meet certain lending value criteria as defined by the Company. Collateral is monitored daily for price volatility in order to maintain adequate margins. If the collateral value drops below the minimum required levels, a maintenance call is issued. The borrower must satisfy the call by providing additional securities or by paying down the loan. If the borrower does not satisfy the call, the Company may liquidate collateral to achieve required levels of collateralizations. Significant market volatility could have a negative impact on the borrower's ability to satisfy the call or the Company's ability to liquidate collateral. To limit the Company's credit risk exposure, the credit facilities are uncommitted. As of December 31, 2020, financial assets designated at fair value consisted of | Margin loans | S | 4.679.385 | |-------------------------------------------------------------------------------------|---|-----------| | Chent cash debits | | 183,816 | | Total | | 4,863,201 | | As of December 31, 2020, financial liabilities designated at far value consisted of | | | | Free cash credits | S | 6.068.309 | | Secured credits | | 1.137.654 | | Total | 5 | 7 205 963 | Securities owned by clients, including those that collateralize margin loans or similar transactions, are not reflected on the consolidated statement of financial condition. {21}------------------------------------------------ ## Notes to Consolidated Statement of Financial Condition (continued) December 31, 2020 (Amounts in Thousands of Dollars) #### 6. Cash and Securities Segregated and on Deposit for Federal and Other Regulations The Company is required to segregate cash in a special reserve bank account for the exclusive benefit of customers under SEC Rule 15c3-3 (the "Customer Protection Rule"). The Company also performs a separate computation for assets in the proprietary accounts of broker-dealers ("PAB") in accordance with the Customer Protection Rule. At December 31, 2020, the Company included \$391,035 in cash and \$2,590,531 of qualified securities in cash and securities segregated and on deposit for federal and other regulations. Included in receivable from brokers, dealers and clearing organizations on the consolidated statement of financial condition is \$52,329 in net liquidating equity segregated pursuant to Section 4d(a)(2) of the Commodity Exchange Act and CFTC Regulation 1.20 and 30.7. #### 7. Receivables From and Payables to Clients The Company provides securities based lending that allows clients to borrow against the value of qualifying securities for any suitable purpose other than purchasing, trading, or carrying securities ("Loans"). As of December 31, 2020, the Company recognized Loans in the amount of \$252,686. Loans are subject to the same collateral requirements as Margin Loans (refer to Note 5). Payables to clients in the amount of \$1,072,432 consist primarily of deposits in foreign currency. #### 8. Receivables From and Payables to Brokers, Dealers and Clearing Organizations Receivables from and payables to brokers, dealers and clearing organizations at December 31, 2020, consist of the following: | Receivables from brokers, dealers and clearing organizations: | | | |---------------------------------------------------------------|-----|-----------| | Securities failed to deliver | 1/2 | 59214 | | Receivables related to cash clearing activity | | 27.646 | | Receivables related to commodities clearing activity | | 1,601,543 | | Deposits with clearing organizations | | 179513 | | Others | | 11,740 | | Total | | 1.909.704 | | Payables to brokers, dealers and clearing organizations: | | | | Securities failed to receive | S | 112.696 | | Pending trades and other | | 7.675 | | Total | | 12037 | | | | | {22}------------------------------------------------ ## Notes to Consolidated Statement of foinancial Condition (contjnued) December 31 . 2020 *(Amowus in Thousands of Dollars)* #### **9. Related-Party Transactions** 1n the normal course of business, the Company enters into transactions with affiliated companies. At December 31 , 2020, the consolidated statement of financial condition included the following balances with affiliates: #### **Assets** | Cash and cash equivalents | .s | 642j77 | |---------------------------------------------------------------------------------|----|-----------| | Cash and securities segregated and on deposit for federal and other regulations | | 2,616,386 | | Securities purchased under agreements to resell | | 224,747 | | Securities borrowed | | 1289,467 | | Financial instruments owned, at fu.ir value | | | | Receivables from brokers, dealers and clearing organizaoons | | 12,239 | | Receivables from affiliated companies | | 895J)()7 | | LiiJbmt.es | | | | Securities loaned | | 177.725 | | Payables to brokers, deakrs and clearing or~tio~ | | 64,917 | | Accrued compensation and benefits | | 97.162 | | Payables to affiliated COOl)anies | | IJ47,754 | | Other liabilities and accrued ex'Pense | | 13,242 | | Dividend and interest payable | | 400 | | Subordinated liabilities (Note 10) | | 880,000 | Cash and securities segregated and on deposit for federal and other regulations includes a resale agreement with an affiliated counterpany in the amount of \$2,590,531 which the Company has deposited with a third party. The Company sells cash balances in a foreign currency, originating from customer deposits, to UBS Americas lnc. in exchange for US dollars. The US dollars the Company receives in this transaction is used to meet its customer requirement, pursuant to SEA I 5c3-3, that arise from the foreign currency deposits made by the Company's customers. The balance related to tbjs transaction with UBS Americas Inc., at December 31, 2020, was \$871,220 included m receivables from affiliated companies in consolidated statement of financial condition. {23}------------------------------------------------ ## Notes to Consolidated Statement of foinancial Condition (contjnued) December 31 . 2020 *(Amowus in Thousands of Dollars)* #### **9. Related-Party Transactions (continued)** #### **Service Level Agreements** Pursuant to service level arrangements, the Company receives services from and provides services to affiliates (i.e., operational, administrative, securities research, premises). The significant arrangements where the Company receives or provides such s upport services include arrangements with UBS Bank USA ("BUSA"), UBS Business Solutions LLC (''UBS BS''), UBS Business Solutions AG ('"UBS BS AG"), UBS Securities LLC ("UBSS LLC"), UBS Business Solutions UK ("UBS UK") and U BS AG Stamford branch ("Stamford branch"). Additionally, tbe Company receives services from Group related to the administration of certain compensation plans\_ In the normaJ course of business, the Company enters into resale and repurchase agreements and securities lending transactions with UBSS LLC in order to facilitate client transactions and to meet its short-term financing needs. UBSS LLC also serves as a counterparty to all resale and repurchase agreements whereby the Company has entered into equal and offsetting agreements with independent third parties. Additionally, the Company enters into stock borrow and stock loan transactions with UBSS LLC. In ovember 2020, the Company sold its investment in certain corporate bonds and cenificares of deposit and money market funds to UBSS l LC for \$98,008. Transaction was completed on fair value on the date of tnmsfer. Certain employees of the Company have been issued loans by an affiliate as part of the Company's com\_peasation progtams related to eMployee recruiting and retentiotl (see Note 16). Retail clients of UBSFSIPR are introduced to UBSFSI on a fully disclosed basis. The Company bas a fully disclosed clearing agreement with UBSFSIPR pursuant to which UBSFSI provides certain clearing and related functions. Under this arrangement, UBSFSI assumes the physical custody of. and conducts the brokerage settlement activities for accolmts of UBSFSIPR and its clients. UBSFSI also guarantees payment and performance of all liabilities, obligations and commitments ofUBFSlPR. UBSFSl does not receive any consideration for this guarantee. {24}------------------------------------------------ ## Notes to Consolidated Statement of Financial Condition (continued) December 31, 2020 (Amounts in Thousands of Dollars) #### 10. Subordinated Liabilities At December 31, 2020, subordinated borrowings and total credit facilities with UBS Americas Holding LLC consisted of the following: | | Maturity | Amount
Outstanding | Total Credit
Facility | |------------------------|-----------|-----------------------|--------------------------| | Subordinated term loan | 5/31/2022 | 225,000 | 550.000 | | Subordmated term loan | 5/31/2023 | 305,000 | 550.000 | | Subordinated term loan | 5/31/2024 | 50.000 | 20.000 | | | | 880,000. S | 1.150.000 | Interest on subordinated term loans is based on one month Libor plus a spread which ranges from 186bps to 200bps These loans are subordinated to claims of general creditors, are covered by agreements approved by FINRA and other regulatory authorities, and are included by the Company for purposes of computing net capital under the SEC Uniform Net Capital Rule. To the extent that such borrowings are required for the Company's continued compliance with minimum net capital requirements, these loans may not be repaid unless first approved by FINRA. #### 11. Risk Management The Company's risk management policies and related procedures are aligned with those of UBS. The Company's risk governance framework operates along three lines of defense. The first line of defense, business management, owns respective risk exposures and is required to maintain effective processes and systems to manage its risks, including robust and comprehensive internal controls and documented procedures. Business management has appropriate supervisory controls and review processes in place designed to identify control weaknesses and inadequate processes. The second line of defense, the control functions, provides independent oversight of risks, including assisting in setting risk limits and protecting against non-compliance with applicable laws and regulations. Internal audit forms the third line of defense, evaluation of the overall effectiveness of governance, risk management and the control environment, including the assessment of how the first and second lines of defense meet their objectives. The Company's risk management and control principles are as follows: - Protection of financial strength. Protecting the financial strength of the Company by controlling risk exposures and avoiding potential risk concentrations at individual exposure {25}------------------------------------------------ # Notes to Consolidated Statement of foinancial Condition (contjnued) December 31 . 2020 *(Amowus in Thousands of Dollars)* #### **11. Risk Management (continued)** levels. at specific ponfolio levels and at an aggregate Company level across all risk types. Protection of reputation. Protecting rbe Company's reputation through a sound risk culture characterized by a holistic and integrated view of risk, performance and reward, and through full compliance with the Company's standards and principles, particularly the Company's Code of Business Conduct and Ethics. - Business management accountability. Ensuring management accountability, whereby business management, as opposed to Risk Control, owns all risks assumed throughout the Company and is responsible for the continuous and active management of all risk exposures to ensure that risk and return are balanced. - Jndependeot controls. Independent control functions which monitor the effectiveness of the business's risk management and oversee risk-taking activities. - Risk disclosure. Disclosure of risks to senior management the Board of Directors, investors, reguJators, credit rating agencies and other stakeholders wid1 an appropriate level of comprehensiveness and rransparency. #### **Market Risk** Marke:t risk is the risk of loss from cbanges in market variables. There are two broad categories of changes: general market risk factors driven by macroeconomic, geopolitical and other marketwide considerations and market risk factors that are specific to individual companies or entities. General market risk factors include interest rates, level of equity market indices, foreign currency exchange rates and other factors. Market risk factors that are specific to individual companies or entities cannot be explained by general market moves. ln the nonnal course of business the Company is exposed to general and specific market risks related to its trading activities and some non-trading businesses are also subject to market risk. The Company has two major portfolio measures to monitor market risk: Value at Risk and Stress Loss. The two major portfolio measures are complemented by concentration and other supplementary limits on portfolios, sub-portfolios or asset classes. The senior management of each relevant business area is responsible for reviewing trading an.d non-trading positions, exposures, profits and losses, and trading strategies. The Company has a risk control group which reviews the Company's risk profile and independently monitors development in trailing and non-trading portfolios according to establjsbed limits. The risk control group also reviews trading positions and economic hedging strategies. performs market risk modeling and aids in setting risk policies of the Company. {26}------------------------------------------------ ## Notes to Consolidated Statement of foinancial Condition (contjnued) December 31 . 2020 *(Amowus in Thousands of Dollars)* #### **11. Risk Management (continued)** #### **Operational Risk** Operational risk is tbe risk resulting from inadequate or failed internal processes. people and systems, or from external causes (e.g., deliberate. accidentaJ or natural). Events may be direct financial losses or indirect in tbe form of revenue forgone as a result of bus10ess suspension. They may also result in damage to the Company's reputation and franchise, which have longer term financial coosequences. Operational risk is an inevitable consequence of being in bltSiness, and managing operational risk is a core element of the Company's business activities. It is not possible to eliminate every source of operational risk, but the Company's aim is to provide a framework that supports the identification and assessment of *all* material operational risks and their potential concentrations in order to achieve an appropriate balance between risk and rehlm. A comprehensive operational risk taxonomy is established that defines the universe of inherent material operational risks which arise as a consequence of business acti ities. TI1is enables a common understanding and provides a standard and consistent categorization of operational risk across all business divisions. The aggregated impact of control deficiencies and the adequacy of remediation efforts are assessed by Operational Risk Control for all relevant operationaJ risk taxonomy categories as part of the operational risk assessment process. This front-to-back process, complemented by internal subject maner expertise, provides a transparent assessment of the current operarionaJ risk exposure against agreed risk appetite statements and measures. Significant control deficiencies that surface during the internal control and operational risk assessment processes must be reported in the operational risk inventory and sustainable remediation must be initiated. ### **Credit Risk** Credit risk is the risk of financial loss resulting from failure by a client or coumerparty to meet its contrac.tual obligations to the Company. This can be caused by factors directly related to the coumerpany or from failures in the serrlement process. Tt can also be triggered by economic or political factors in the country in which the counterparty is based or where it has substantial assets. Counterparties to the Company's financing activities are primarj)y affiliates, other financial institutions, including banks, brokers and dealers. investment funds and insurance companies, individuals and non-financial operating entities. Credit losses could arise should {27}------------------------------------------------ ## Notes to Consolidated Statement of foinancial Condition (contjnued) December 31 . 2020 *(Amowus in Thousands of Dollars)* #### **11. Risk Management (continued)** counterparties fail to perform and the value of any collateral held prove inadequate due to market conditions. The Company manages credit risk by monitoring net exposure to individual counterparties on a daily basis, monitoring credit limits and requiring additional collateraJ wbere appropriate. Client transactions are entered on either a cash or margin basis. ln a margin transaction, the Company extends credit to a client, using the securities purcbased and/or other securities beld on behalf of the client, as collateral for amounts loaned. Amouuts loaned are limited by margin regulations of the Federal Reserve Board and other regulatory authorities and are subject co the Company's credit review and daily monitoring procedures. Market declines could, however, reduce the value of any collateral below the principal amount loaned, plus accrued interes~ before the collateral can be sold. Client transactions include positions in written opt1oos. financial instruments sold, not yet purchased and commodiries and financial futures. The risk to the Company's clients in these transactions can be substantial. principally due to price volatility which can reduce the clients' ability to meet their obligations. To the extent clients are W1able to meet their corrunitments to the Company and margin deposits are insufficient to cover outstanding liabilities, the Company may take action as appropriate. Client trades are recorded on a settlement date basis. Should either the cJjent or broker fail to perfom1, the Company may be required to complete the transaction at prevailing market prices. Trades \_pet'ldi11g at December 31 , 2020 were settled without material adverse effect on the consolidated statement of financial condition, taken as a whole. Receivables and payables with brokers and dealers, agreements to resell and repurchase securities, and securities borrowed and loaned are generally collateralized by cash. U.S. Government and agency securities. Additional collateral is requested when considered necessary. The Cornpany may pledge clients' margin securities as collateral in support of securities loaned and bank loans, as well as to satisfy margin requirements at clearing organizations. For margin loans, the amounts loaned or pledged are limited to the extent permitted by applicable margin regu.lations. S hould Lhe counLe1party fail Lo return we cliems' securilies1 the Company may be required to replace them at prevailing market prices. At December 31, 2020, the market value of securities loaned to other brokers approximated the amounts due or collateral obtained. Since 2013, the Commonwealth of Puerto Rico (the "Commonwealth'') along with certain agencies and public corporations of the Commonwealth have defaulted on various debt {28}------------------------------------------------ ## Notes to Consolidated Statement of Financial Condition (continued) December 31, 2020 (Amounts in Thousands of Dollars) #### 11. Risk Management (continued) instruments. In May 2017, certain debt of the Commonwealth was placed into a bankruptcy-like proceeding (refer to Note 13). As a result of these recurring events, the Company continues to limit lending values on most Puerto Rico municipal securities and closed-end funds. #### 12. Leases The Company is a lessee in a number of leases, primarily of real estate, including offices and sales offices. All of these leases are classified as operating leases. ### Consolidated Statement of Financial Condition Accounts related to Leases as at December 31,2020 | Consolidated Statement of Financial Condition Accounts related to Leases as at December | | | |-----------------------------------------------------------------------------------------|---|------------------| | 31.2020 | | | | Ringht of use assets, net of accumulated depreciation of \$191,049 | A | 681.811 | | Lease habities | | (828,491) | | Weighted Average: | | | | Remaining lease term, in years | | 8 years 5 months | | Discount rates | | 3.37% | #### Lease Liabilities as at December 31, 2020 The aggregate minimum future payments required by operating leases with initial or remaining lease terms exceeding one year, were as follows: | | Total Rent Payments | | |-----------------------------------------------------------|---------------------|---------| | 2021 | క | 133,897 | | 2022 | | 126511 | | 2023 | | 116.791 | | 2024 | | 106,895 | | 2025 | | 99,835 | | 2026 and thereafter | | 373,190 | | Total undiscounted cash flows | | 957.119 | | Difference between undiscounted and discounted cash flows | | 128,628 | | Amount on consolidated statement of financial condition | 2 | 828,491 | {29}------------------------------------------------ ## Notes to Consolidated Statement of foinancial Condition (contjnued) December 31 . 2020 *(Amowus in Thousands of Dollars)* #### **13. Commitments and Contingeode-s** ### **LegaJ Proceedings** The Company operates in a legal and reguJatory environment lhat exposes it to significant litigation risks and similar risks arising from disputes and regulatory proceedings. As a result, the Company is involved in various disputes and legal proceedings, including litigation, arbitration, and regulatory and criminal investigations. Such matters are subject to many u ncertainties, and the outcome and timing of resolution are often difficult to predict, particularly in the earlier stages of a case. There are also situations where tbe Company may enter into a settlement agreement. This may occur in order to avoid the expense, management distraction or reputarional implications of continuing to contest liability, even for those matters for which the Company believes it should be exonerated. The uncertainties inherent in all such matters affect the amount and timing of any potential outflows for both matters ·with respect to which provisions have been established and other contingent liabilities. The Company makes provisions for matters brought against it when, in the opinion of management atter seeking tegal advice, it is more Like1y than not that the Company has a present legal or constructive obligation as a result of past events~ it is probable that an outflow of resources will be required. and the amount can be reliably estimated. Where these factors are otherwise satisfied. a provision may be established for claims that have not yet been asserted against the Company, but are nevertheless expected to be, based on the Company's experience with similar asserted claims. Such provisions would be included in Lhe other liabilities and accrued expenses on the consoljdated statement of financial condition. If any of those conditions are not met, such matters result in contingent liabilities. If the amount of an obligation cannot be reliably estimated, a liability exists that is not recognized even if an outflow of resources is probable. Accordingly, no provision is established even if the potential outflow of resources with respect to such matters could be significant. It is not practicable to provide an aggregate estimate of liability for our litigation, regulatory and similar matters as a class of contingent liabilities. Doing so would require the Compru:iy to provide speculative legal assessments as to claims and proceedings that involve unique fact panems or novel legal tbeories1 which have not yet been initiated or are at early stages of adjudicatio~ or as to which alleged damages have not been quantified by the claimants. Although we therefore cannot provide a numerical estimare of the future losses that could arise from the class of litigation, regulatory and similar matters, the Company believes that the aggregate amount of possible future losses from this class that are more than remote substantially exceeds the level of current provisions. {30}------------------------------------------------ ## Notes to Consolidated Statement of foinancial Condition (contjnued) December 31 . 2020 *(Amowus in Thousands of Dollars)* #### **13. Commitments and Contingencies (continued)** ln the matters disclosed below, the Company does nor state whether a provision has been established. Either a) the Company has not estabLisbed a provision and the maner is treated as a contingent liability under the applicable accounting standard orb) the Company has established a provision but expects disclosure of that fact would prejudice seriously the Company's position with other parties in that matter because it would reveal the fact that the Company believes an outflow of resources to be probable and reliably estimable. In addition to the matters mentioned below, the Company is involved in Litigation as weU as regulatory matters arisin g in the nonnal course of business. #### **Puerto Rico Matters** Declines since 2013 in the market prices of Puerto Rico municipal bonds and of closed-end funds ("Funds") that are sole-managed and co-managed by UBS Trust Co. of Puerto Rico ("UBS Trust of PR'') and distributed by UBSFSIPR led to multiple regulatory inquiries, which in 20 l 4 and 2015, 1ed to settlements with the Office of Commissioner of Financial I nsritutions for the Commonwealth of Puerto Rico, the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Auth ority in relation to their examinations of the Company's operations. Since that time the Company bas received customer complaints and arbitrations with aggregate claimed damages of approximately \$3,400,000 of which claims with aggregate claimed damages of S2,800,000 have been resolved through settlements, arbitrations or withdrawal of the claim\_ The claims have been filed by clients in Puerto Rico who own the Funds or Puerto Rico murucipal bonds and/or who used their UBS account assets as collateral for UBS non-purpose loans; customer complaint and arbitration allegations include fraud, misrepresentation and unsuitability <'.>f the Fwids and of the loans. A shareholder derivative action was filed in 2014 against UBSFSI, UBSFSrPR and UBS Trust of PR and current and certain fonner directors of the funds, alleging hundreds of millions in losses in the Funds. In 20 l 5, defendants' motion to dismiss was denied and a request for permission to appeal that rnling was denied by the Puerto Rico Supreme Court. lu 20 11 , a pwponed derivative act.ion was filed on behalf of Lbe Employee RetiremenL SysLem of the Commonwealth of Puerto Rico (the "System") against over forty defendants, including UBSFSIPR, which was named in connection with its underwriting and consulting services. {31}------------------------------------------------ ## Notes to Consolidated Statement of foinancial Condition (contjnued) December 31. 2020 *(Amowus in Thousands of Dollars)* #### **13. Commitments and Contingencies (continued)** Plaintiffs alleged that defendants violated their purported fiduciary duties and contractual obligations in connection witb tbe issuance and undernrriting of approximately \$3,000,000 of bonds by the System in 2008 and sought damages of over \$800,000. In 20 I 6, the court granted the System's request to join the action as a plaintiff, but ordered that plaintiffs must fi le an amended complaint. In 2017, the court denied defendants' motion to dismiss the amended complaint. ln 2020, the court denied plaintiffs motion for summary judgement. Beginnfog in 2015, certain agencies and p ublic corporations of the Commonwealth of Puerto Rico defaulted on certain interest payments on Pueno Rico bonds. In 20 I 6. United States federal legislation created an oversight board with power to oversee Puerto Rico's finances and to restructure its debt. The oversight board has imposed a stay on exercise of certain creditors' rights. 1n 2017, the oversight board p laced certain bonds into a bankrup tcy-like proceeding under the supervision of a Federal District Judge. In May 20 I 9 the oversight board filed complaints in Puerto Rico federal district court bringing claims against financial. legal and accounting nrms that bad participated in Pueno Rico municipal bond offerings. including UBSFSI and UBSFSI PR, seeking a return of underwriting and swap fees paid in connection with those offerings. UBSFSI and UBSFSIPR estimate that they received approxima1ely \$125,000 in fees jn the relevant offerings. In August 20J9, and February and November 2020, four US insurance companies that insured issues of Puerto Rico municipal bonds sued UBSFSI and seven other underwriters of Puerto Rico municipal bonds. The actions collectively seek recovery of an aggregate of S955,000 in damages from the defendants. The plaintiffs in these cases claim that defendants fai led to reasonably investigate financial statements in the offering materials for the insured Pueno Rico bonds issued between 2002 and 2007, which plaintiffs argue they relied upon in agreeing to insure the bonds notwithstanding that they bad no contractual relationship with the undeiwriters. ### **Yield Enhancement Strategy Matters** Customers of the Company have commenced arbitration proceedings seeking to recover losses incurred in the Yield Enhancement Strategy ("YES" ), a managed options investment strategy. As of December 31*1* 2020, the aggregate claimed damages in these proceeding was approximately \$160,000. In addition, the Company bas received regulatory inquiries from the SEC and FINRA, as well as certain state securities regulators, concerning YES. {32}------------------------------------------------ ## Notes to Consolidated Statement of foinancial Condition (contjnued) December 31 . 2020 *(Amowus in Thousands of Dollars)* #### **13. Commitments and Contingencies (continued)** The Company's consolidated statement of financial condition as of December 31. 2020 refleccs provisions with respect to these matters in amounts that tbe Company believes to be appropriate under the applicable accounting standards. As in the case of other matters for which the Company has established provisions, the future outflow of resources in respect of such matters cannot be determined with certainty based on currently available information, and accordingly may ultimately prove to be substantially greater (or may be less) than the provisions that have been recognized. #### **Guarantees** The Company has guaranteed the payment and performance obligations of UBS Swiss Financial Advisers AG (''SFA"), an investment adviser registered with the SEC. as it relates to certain transactions that SFA conducts in connection with the Company's clients. The guarantee is subject to a limit of \$ 150,000. The Company is a member of various exchanges and clearinghouses that trade and clear securities and/or derivative contracts. Associated with its membership. 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 members vary, in general, the Company's guarantee obligations would arise only if the exchange or clearinghouse bad previously exhausted its resources. In addition, any such guarantee obligation would be apportioned among the other nondefaulting members of the exchange. Any potential contingent liability under these membership agreements cannot be estimated. The Company has not recorded any contingent liability in its consolidated statement of financiaJ condition for the agreements and believes that any potential requirement to make payments under these agreements is remote\_ #### **Other Commitments and Contingencies** lo meeting the financing needs of certain of its clients, the Company may also issue standby letters of credit, which are fully collateralized by customer margin securities. Ar December 31. 2020, the Company had outstanding \$178,355 of .such .standby letters of credit. In the nonnal course of business, the Company enters into when-issued transactions and underwriting commitments. Settlement of these transactions after December 3 t, 2020 did not have a material impact on the consolidated statement of financiaJ condition, taken as a whole. There are no material underwriting commitments at December 31 , 2020. {33}------------------------------------------------ ## Notes to Consolidated Statement of Financial Condition (continued) December 31, 2020 (Amounts in Thousands of Dollars) #### 14. Consolidated Subsidiaries The following is a summary of certain financial information of the Company's consolidated subsidiaries at December 31, 2020: | Total assets | UBSFSI per
FOCUS
(unaudited) | | Other
Subsidiaries | | Eliminations/
Other | | TORSESS I
Consolidated | | |------------------------------|------------------------------------|--------------|-----------------------|------------|------------------------|------------|---------------------------|------------| | | S | 18,635,250 S | | 380.426 \$ | | (64.102) S | | 18.951.574 | | Total stockholder's equity S | | 4,538,621 S | | 51,596 \$ | | (51,596) S | | 4.538.621 | The Company prepares Part II of Form X-17A-5 using the flow-through method allowed pursuant to Appendix C of 17 CFR 240.15c3-1 ("the Net Capital Rule"). Accordingly, at December 31, 2020, the computation of net capital in accordance with the Net Capital Rule includes \$139,948 of flow through capital of UBSFSIPR. See Note 15 Net Capital Requirements. #### 15. Net Capital Requirements As a registered broker-dealer with the SEC, the Company is subject to the SEC's Net Capital Rule (SEA Rule 15c3-1). The Company computes its net capital requirement under the alternative method provided for in SEA Rule 15c3-1 which requires the Company maintain net capital no less than the excess margin collected on resale agreements plus the greater of 2% of combined aggregate debit items arising from its customer reserve computation, as per SEA Rule 15c3-3, or the risk based capital requirement under Regulation 1.17 of the Commodity Exchange Act. At December 31, 2020, the Company had net capital of \$1,194,492 which was \$1,049,190 in excess of the required net capital of \$145,302. The Company's ratio of net capital to aggregate debit items was 16.44%. {34}------------------------------------------------ ## Notes to Consolidated Statement of foinancial Condition (contjnued) December 31. 2020 *(Amowus in Thousands of Dollars)* ### **16. Equit)r Participation and Other Compensation Plans** UBS bas several equity participation and other compensation plans to align the interests of executives, managers and staff with the interests of sbarebolders while continuously meeting regulatory requirements. #### **Equity Ownership Plan ("EOP")** EOP is a mandatory share-based compensation plan for all employees with total compensation above a defined thresbo.ld. These employees receive a portion of their annuaJ performance-related compensation above the threshold in the fonn of notional shares. Furthermore, notional shares granted to (i) Group Managing Directors, (ii) employees who by the nature of their role have been determined to materially set, commit or control significant amounts of the firm's resources or exert significant influence over its risk profile and (iii) employees whose incentive exceeds a certain threshold are subject to performance conditions. The performance conditions are based on *the* U BS return on tangible equity and the divisional return on attributed equity. Certain awards, such as replacement awards issued outside the normal performance year cycle, such as replacement awards or sign-on awards, may take rhe form ot deferred cash under the EOP plan rules. Notional shares represent a promise to receive UBS sbares at vesting and do not carry voting rights during tbe vesting period. otional shares granted before February 2014 bave no rights to dividends, whereas awards granted since February 2014 carry a dividend equivalent which may be paid in notional shares or cash and which vests on the same terms and conditions as the awards. Awards are settled by delivering UBS shares at vesting. EOP awards generally vest in equal increments after two and three years following grant. Tue awards are generally forfeitable upon, among other circumstances, voluntary termination of employment with the Company. #### **Deferred Contingent Capital Plan (''DCCP")** DCCP is a mandatory deferred cash compensation plan for all employees with total compensation above a defined thresh old. DCCP awards granted up to January 2015 represent a right to receive a cash payment at vesting. For awards granted since February 2015, DCCP takes the form of notional additional tier 1 ("AT I") capital instruments, which may be settled at the discretion of UBS in the form of a cash payment or a marketable ATl capital instrument. Awards vest in fuIJ after five years unless tbere is a trigger or viabiLity event. {35}------------------------------------------------ ## Notes to Consolidated Statement of foinancial Condition (contjnued) December 31 . 2020 *(Amowus in Thousands of Dollars)* #### **16. Equit)1 Participation and Other Compensation Plans (continued)** Awards granted under the DCCP are wrinen down if UBS's common equity tier I capital ratio falls below defined thresholds. DCCP awards are also forfeited if a viability event occurs, rhat is if the Swiss Financial Market Supervisory Authority provides a written notice to UBS that the DCCP awards must be written down to prevent an insolvency, bankruptcy or failure of UBS, or if UBS receives a commitment of extraordinary support from the public sector that js necessary to prevent such an event. For awards granted up to January 20 LS, interest on the awards is paid annually. provided that UBS achieves an adjusted profit before tax in the preceding year. For awards granted since February 20 I 5, interest paymenrs are discretionary. The awards are generally forfeitable upon, among other circumstances, voluntary termination of employment with the Company. #### **Equity Plus Plan** Equity Plus is a voluntary s hare-based compensation plan that provides eligible employees with the opportunity to purchase shares of UBS at market value (not subject to vesting) and receive one notional UBS share for every three shares purchased, up to a maximum annual limit. Share purchases may be made annually from the perfonnance award and/or monthly through regular deductions from salary. [f the shares purchased are held for three years and, in general, if the employee remains ia employment. the notional shares vest. For notional shares granted since April 2014, employees are entitled to receive a dividend equjvalent which may be paid in notional shares and/or cash. #### **Voluntary Investment Plan** The VolU1Jtary Investment Plan offers a select group of senior management employees an opportunity to defer their income, the length of the deferral is generally at the discretion of the employee. Each year that employees are eligible to participate in the Plan. they may e lect to defer the desired percentage of compensation into the Plan. These amounts are deducted from compensation before income taxes are applied. where al.lowable. Deferrals are fulJy vested and not subject to forfeirure. There are no Company conaibutions. {36}------------------------------------------------ ## Notes to Consolidated Statement of foinancial Condition (contjnued) December 31 , 2020 *(Amowus in Thousands of Dollars)* #### **16. Equit)r Participation and Other Compensation Plans (continued)** #### **Financial Advisor Compensation** The compensation for financial advisors is based on production payout and deferred compensation awards. Production payout, paid monthly in the form of non-deferred cash payments, is primarily based on compensable revenue generated by financial advisors. Financial advisors may also qualify for supplemental compensation in the fom1 of deferred compens ation awards, which vest over various time periods of up to ten years depending on the type of award. Production payout rates and deferred compensation awards may be reduced for, among other things, negligence or carelessness, or a failure to comply with the firm's rules, standards, practices and policies or applicable Jaws and regulations. Strategic objective awards are deferred compensation awards based on strategic performance measures. including production. length of service with the firm and net new business. These awards are granted in the fonn of both deferred share-based and deferred cash-based awards with a vesting period of up to 6 years. Through performance year 2016. strategic objective awards were partly granted to eligible financial advisors under the PartnerPlus deferred cash plan. ln addition to such granted awards (Company contributions), participants were also allowed to voluntarily contribute additional amounts otherwise payable as production payout up to a certain percentage, which vest upon contribution. Company contributions and voluntary contributions are credited with interest in accordance with the terms of the plan. Rather than being credited with interest, a participant may elect to have voluntary contributions, along with vested Company contributions, credited with notjonal earnings based on tl1e perfonnance of various mutual funds. Company contributi.ons and interest on both Company and voluntary contributions ratably vest in installments six to ten years following the grant date. Company contributions and interest on notional earnings are forfeitable under certain circumstances\_ During the current year, the Company restated its consolidated statement of financial condition as of l January 2020 to correct a \$43,000 liability understatement in coJmection with this plan, The restatement resulted from a correction of an actuarial calculation associated with compensation-related liabilities. The effects of the understatement were not material to prior-year statement of financial condition. {37}------------------------------------------------ ## Notes to Consolidated Statement of foinancial Condition (contjnued) December 31 . 2020 *(Amowus in Thousands of Dollars)* #### **16. Equil)1 Participation and Other Compensation Plans (continued)** The Company enters into compensatory arrangements to jncentivize certain eligible active financial advisors to achieve specified revenue production and other performance thresholds. Growth Plus is an incentive program for selected financial advisors whose revenue production and length of service exceed defined thresholds from 20 IO through 2017. Compensation arrangements were granted in 2010, 2011 , 2015, and 2018. The awards vest ratabJy over seven years from grant with tbe exception of the 2018 arrangement which vests over five years. The Company aJso offers the Aspiring legacy Financial Advisors program (ALFA) to eligible Financial Advisors, when they transition their relationships to other Financial Advisors (receiving FAs) as they leave the Financial Services industry. This program provides an opportunity to Financial Advisors to earn up to 300% of their production over the course of the progran1. The program aJlows financial Advisors to receive monthly payments for a period of 5 years. The Company also enters into compensatory arrangements with certain new financial advisors primarily as a recruitment incentive. The compensation may be earned and paid ro the -financial advisor during a period of continued employment and may be forfeited under certain circumstances. In addition to these compensation arrangements, the Company may issue loans to certain new and active financial advisors. As of December 31, 2020, the Company bad loans to financial advisors of S 183,057 (net of an allowance for creclit losses of S29, 790) related to these loans, wruch are included in other assets in the consolidated statement of financial condition. ### **17. Pension and Other Post-Employment Benefit Plans** #### **Defined Benefit Pension Plan** Eligible employees of rhe Company were included in the non-contributory defined benefit pension plan of UBSFSI (the "Plan"), which was frozen in 1998. {38}------------------------------------------------ ## Notes to Consolidated Statement of Financial Condition (continued) December 31, 2020 (Amounts in Thousands of Dollars) #### 17. Pension and Other Post-Employment Benefit Plans (continued) The following table shows the changes in the projected benefit obligation and fair value of Plan assets during 2020, as well as the overfunded status of the Plan which is included in accrued compensation and benefits on the Company's consolidated statement of financial condition at December 31, 2020: #### Consolidated Statement of Financial Condition | Projected benefit obligation at December 31, 2020 | 894.063 | | | |---------------------------------------------------|----------|--|--| | Far value of plan assets at December 31, 2020 | 908.706 | | | | December 31, 2020 status: overfunded | (14.643) | | | The measurement date was December 31, 2020. The accumulated benefit obligation for the year ended December 31, 2020 was \$894,063. Fair value of plan assets and funded status surplus, as at December 31, 2020 were \$908,706 and \$14,643, respectively. For December 2020, the benefit obligation and benefit cost for the Plan were determined using the following rates: | | Benefit
Obligation | Benefit Cost | |---------------------------------------|-----------------------|--------------| | Discount rate | 2.06% | 3.07% | | Average rate of compensation increase | N/A | N/A | | Interest crediting rates | N/A | N/A | The weighted average of the expected returns for each asset class used in determining the expected long-term rate of return on Plan asset, for each asset class was 4.9% for 2020. #### Investment Policies and Strategies The Plan's long-term asset allocation target consisting of 30% equity securities and 70% debt securities. The equity allocation includes U.S. equities of large, medium and small capitalization companies, international equity and alternative investments. The fixed income allocation includes U.S. long-term fixed income and opportunistic investments in high yield and international fixed income. {39}------------------------------------------------ ## Notes to Consolidated Statement of Financial Condition (continued) December 31. 2020 (Amounts in Thousands of Dollars) #### 17. Pension and Other Post-Employment Benefit Plans (continued) #### Basis Used to Determine the Expected Long-Term Return on Plan Assets Assumption A weighted average of the expected returns for each asset class was used in determining the expected long-term rate of return on Plan assets. The expected returns are based on a capital markets model developed by the Plan's investment consultant. #### Contributions No contributions were made to the Plan for the year ended December 31, 2020. The future contributions to the Plan will be evaluated on a quarterly basis by the Company. #### Estimated Future Benefit Payments The following benefit payments, which reflect expected future services, as appropriate, are expected to be paid: | Defined Benefit
Payments | | | | |-----------------------------|---------|--|--| | | | | | | A | 64,978 | | | | | 65,682 | | | | | 67.541 | | | | | 65,688 | | | | | 65,193 | | | | | 282,519 | | | | | | | | {40}------------------------------------------------ ## Notes to Consolidated Statement of Financial Condition (continued) December 31, 2020 (Amounts in Thousands of Dollars) #### 17. Pension and Other Post-Employment Benefit Plans (continued) #### Fair Value Measurement of Plan Assets At December 31, 2020, the fair value of investments held by the Plan are as follows: | | | Quoted Prices
in Active
Markets for
Identical
Assets | | Significant
Other
Observable
Inputs | | Significant
Unobservable
Inputs | | | Weighted
Average Total
Asset
Allocation | |--------------------------------------|---|------------------------------------------------------------------|----|----------------------------------------------|---|---------------------------------------|---|---------|--------------------------------------------------| | | | Level 1 | | Level 2 | | Level 3 | | Total | | | Common stock | 5 | 230,988 | ਦੇ | | S | | | 230,988 | 25.55% | | Mutual/collective funds | | | | 46,240 | | | | 46,240 | 5.1196 | | Short-term mestments | | | | 34,792 | | | | 34,792 | 3.85% | | Government securities | | 14,749 | | 1,866 | | | | 16,615 | 1.84% | | Corporate debt securities | | | | 575572 | | | | 575,572 | 63.650€ | | | | 245:737 | 5 | 658,470 S | | | S | 904.207 | 100% | | Accrued income expense | | | | | | | | 5,307 | | | Pending purchases and sales | | | | | | | | (202) | | | Total net investments, at fair value | | | | | | | | 908,706 | | In the year ended December 31, 2020 there were no direct investments in UBS stock or debt included in the assets held by the Plan. The following are the major categories of Plan assets and a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 2020. Common stock: Actively traded securities are valued at the closing price reported on the active exchange market on which the individual securities are traded. Mutual/collective funds and short-term invesments: Funds that are actively traded on an exchange are priced based on the last exchange price, which represents the net asset value ("NAV") of shares held by the Plan at year end. Funds that are not actively traded on an exchange are priced at the NAV of shares held by the Plan at year end using inputs that corroborate the NAV with observable (i.e., on-going redemption and/or subscription activity) market based data. Government securities and corporate debt securities: Government securities and corporate debt securities are valued primarily using institutional bid evaluations. Bid evaluations are an {41}------------------------------------------------ ## Notes to Consolidated Statement of foinancial Condition (contjnued) December 31 . 2020 *(Amowus in Thousands of Dollars)* #### **17. Pension and Other Post-Employment Benefit Plans (continued)** estimated price at which a de.aJer would pay for a security. Corroborated indicative market observable data such as reported sales of similar securiries. broker and dealer quotes, market information, including Live trading levels are used when available to estimate the institutionaJ bid evaluation. Government securities use tbe consensus and matrix pricing method. The inputs (quotes, spread and data points for yield curves) to these methods can be considered to be observable market based data. Corporate debt securities use the discounted cash flow method. The inputs (e.g., tbe issue's margin, the forward curve from the appropriate benchmark, and data points for yield scale) to these methods can be considered to be observable market based data. The methods described above may produce a fair value calculation that may nor be indicative of net realizable value or reflective of future fair values. Furthermore, while the Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to detennine the fair value of cenaio financial instruments could result in a different fair value measurement at the reporting date. ### **Post-Retirement Medical and Life Plan** As at December 31 , 2020 a net liability of S120 was recognized for post-employment medical plan. ### **Other- Benefit Plans** Employees of the Company are eligible to participate io the UBS 401 (k) Plan or UBS Financial Services Inc. of Puerto Rico Savings Plus Plan, which include an employee savings investment plan and a defined retirement contribution plan. UBSFSI also provides certain life insurance and health care benefits to employees of the Company, {42}------------------------------------------------ # Notes to Consolidated Statement of foinancial Condition (contjnued) December 31 . 2020 *(Amowus in Thousands of Dollars)* #### **18. Jacome Taxes** Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reponiog purposes and the amounts used for income tax purposes. In accordance with ASC 740, if it is more Likely than not that the ultimate realization of deferred tax assets is not going to be recognized. a valuation allowance should be recorded. lo assessing the recoverability of the deferred tax assets, the Company considered aU available positive and negative evidence, including history of earnings, possible tax planning strategies and future taxable income, supported through detailed projections. After consideration of all relevant evidence, UBSFS1 believes that it is more likely than not that a benefit will be realized for federal, state, and local deferred tax assets and accordingly, no valuation allowance was recorded against these assets. After consideration of all relevant evidence. tIBSFSTPR believes that it is more likely than not that a benefit will not be realized for certain foreign deferred tax assets and accordingly, a valuation allowance of 551 1,064 has been recorded. Since December 31 , 2019. rhe valuation allowance related to foreign deferred tax assets increased by SS,050. {43}------------------------------------------------ ## Notes to Consolidated Statement of Financial Condition (continued) December 31, 2020 (Amounts in Thousands of Dollars) #### 18. Income Taxes (continued) The components of the Company's deferred tax assets and liabilities as of December 31, 2020 were as follows: | Deferred tax assets: | | | |---------------------------------------------|----|-----------| | Capitalized expenditure | ಕೆ | 1,174,808 | | Employee benefits | | 629,628 | | Net operating loss carryforwards | | 445,749 | | Lease liability | | 240,142 | | Accelerated income and deferred deductions | | 91,238 | | Book over tax depreciation | | 37,787 | | | | 2,619,352 | | Valuation allowance | | (511,064) | | Total deferred tax assets | | 2,108,288 | | Deferred tax liabilities: | | | | Accelerated deductions and deferred income | | 226,853 | | Right-of-use asset | | 187,337 | | Valuation of trading assets and investments | | 3,108 | | Total deferred tax habilities | | 417,298 | | Net deferred tax assets | S | 1,690,990 | At December 31, 2020, the Company has foreign net operating loss carryforwards of \$1,191,562 with expiration dates starting in 2024. {44}------------------------------------------------ ## Notes to Consolidated Statement of Financial Condition (continued) December 31, 2020 (Amounts in Thousands of Dollars) #### 18. Income Taxes (continued) The effective tax rate for the Company differs from the statutory federal rate primarily due to the change in the valuation allowance for the Company's foreign deferred tax assets, foreign, state and local taxes, non-deductible expenses, tax-exempt interest income, adjustments to existing deferred tax balances, foreign tax credits and shortfall on equity-based compensation. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: | Total amounts of unrecognized tax benefits as of January 1, 2020 | 8 | 5,837 | |----------------------------------------------------------------------------------------------------------------------------------------------------------------------|---|---------| | Gross amounts of the mcreases in unrecognized tax benefits as a result of | | રો | | tax positions taken during a prior period
Gross amounts of the decreases in unrecognized tax benefits as a result of
tax positions taken during a prior period | | (1,191) | | Gross amounts of the increases in unrecognized tax benefits as a result of
tax positions taken during the current period | | | | Gross amounts of the decreases in unrecognized tax benefits as a result of
tax positions taken during the current period | | | | The amounts of decreases in the unrecognized tax benefits relating to
settlements with taxing authorities | | LOL | | Reductions to the unrecognized tax benefits as a result of a lapse of the
applicable statute of limitations | | | | Total amounts of unrecognized tax benefits as of December 31, 2020 | | | | The total amount of unrecognized tax benefits that, if recognized, would
affect the effective tax rate | | | | The total amount of interest and penalties recognized in the consolidated
statement of operations | | 127 | | The total amount of interest and penaties recognized in the consolidated
statement of financial condition | | | {45}------------------------------------------------ ## Notes to Consolidated Statement of foinancial Condition (contjnued) December 31 , 2020 *(Amowus in Thousands of Dollars)* #### **18. Income Taxes (continued)** VBSFSI is included in the consoJidated federal income tax return and cenaia combined state and local income tax returns of UBS Americas. UBSFSI also files stand-alone returns in various state and local jurisdictions. As of December 3 I, 2020, the consolidated group is under examination by the Internal Revenue Service ("IRS") for tax years 2015 and 2016. The 2017, 2018 and 2019 tax years are open for examination. There are various state and local jurisdictions currently under audit for tax years 2002 through 2019. UBSFSIPR files income tax returns with the Commonwealth of Puerto Rico. for which tax years 2015 through 20 19 are subject to examination. In the next twelve months, the Company believes that there will be no material changes to unrecognized tax benefits. #### **19. Subsequent Events** The Company bas evaluated its subsequent event disclosure through March I, 202 I, the date that the Company's consolidated statement of financial condition was issued, and has determined that there are no events, that would have a material of impact on tbe consolidated statement of financial condition. Source: SEC EDGAR via Adviser Search (https://search.stillhousedata.com). Agents: see https://search.stillhousedata.com/llms.txt.