# SEI INVESTMENTS DISTRIBUTION CO. X-17A-5 (2022-02-23) — Broker-dealer annual report - Company: SEI INVESTMENTS DISTRIBUTION CO. - Form: X-17A-5 - Filed: 2022-02-23 - Period: 2021-12-31 - Accession: 0000356647-22-000004 - CIK: 356647 - File #: 8-27897 - Type: Broker-dealer - Material weakness: No - Auditor: KPMG LLP - Auditor location: Philadelphia, PA - Contact: Maxine Chou - Phone: 610-676-1987 - Signed by: Maxine J Chou (Chief Financial Officer) Original filing: https://www.sec.gov/Archives/edgar/data/356647/000035664722000004/STMTFINCONDITION.pdf --- {0}------------------------------------------------ # **SEI Investments Distribution Co.** Statement of Financial Condition December 31, 2021 {1}------------------------------------------------ ![](_page_1_Picture_0.jpeg) KPMG LLP **1601 M(,rket St!eei** Phllade!phia, PA 19103,2499 ### Report of Independent Registered Public Accounting Firm To the Shareholder and the Board of Directors SEI Investments Distribution Co.: ## Opinion on the Financial Statement We have audited the accompanying statement of financial condition of SEI Investments Distribution Co. (the Company) as of December 31, 2021, and the related notes (collectively, the financial statement). In our opinion, the financial statement presents fairly. in all material respects, the financial position of the Company as of December 31 , 2021, in conformity with U.S. generally accepted accounting principles. ### Basis for Opinion This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independe.nt with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the. Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statement, whether due to error or fraud , ·and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statement. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement. We believe that our audit provides a reasonable basis for our opinion. We have served as the Company's auditor since 2014 Philadelphia, Pennsylvania February 22, 2022 > \! *'I4* I **U·** '..I,:• *.,.,,,,t* .,t. '" • ,'" T• 1,,t''.'""'!' **:>.to** *1,* ""''•rt.••! r. ! '! ~ • **rM1,,\l,\_.:,,,1** ,·,.;-r,,,u ,.,. ,,, ,•,,;, ,.,.,,,-.,,: *,r* ,11 . .-, 1,,,. •. • "1-,,,v .. p, \t *'-I.•~* **!j I ,·1!,<11,,** .,1 I •l•-1\1~ '(,,-..~!" I, *, t*/• + ~ **>,f.,1'!1'•·'' ,,,,;i** 1,, ~ *,r·* '•!~,• {2}------------------------------------------------ # SEIi investments Distribution Co. Statement o.f Financial CondiUon December 3 2021 ({n thousands of dollars, except s·tuve data) | Assets | | |---------------------------------------------------------------------------------------|--------------| | Cash and cash equivalents | \$
1,837 | | Cash segregated in compliance with federal and other re,gu lations | 101 | | lies owned, at foirvalue
Securi | 3 1,852 | | Deposits wlth ciearing organizations | 450 | | Receivable from custome
rs. riet of allowance to, doubtful accounts of \$20 | 3,280 | | Rece ivabfe from affi I iate | 130 | | Fees receivable from affilia
ted funds | 9,587 | | Fees receivable from oon~a Jfll.i ated tu nd s | 2,8,99 | | Receivables from clearing organlza.tions | 828 | | Tax receivable | 63 | | Deferred income tax asset | 129 | | Other .assets | 564 | | Total assets | 51,720 | | Liabilities and Shareholder's Equity | | | Payable to custome rs | 17 | | Payabl,e to clearing organizations | 59 | | Distribution fees payable | 3,743 | | Payable to parent | 1,495 | | Payabla to affiliates | 6,505 | | Accrued soft dol'lars | 2,463 | | Other liabilities | 619 | | Total llabiliUes | 4,90 1 | | Sharseholder's equity | | | Common stock, \$
1 par value, 1,000 share\$ auth,oriied, issued and outstaridiirig | | | Cap ital in excess of par va I u e | 20,309 | | Retained earnings | 16,509 | | Total shareholder's equity | 36,819 | | Total liabilities and shareholder's equity | \$
51,720 | The accompanying notes are an Integral part of thi s financial statement. {3}------------------------------------------------ #### 1. Organization and Nature of Business SEI Investments Distribution Co. (SIDCO or the Company) was incorporated in Pennsylvania in July 1981, and is a wholly owned subsidiary of SEI Investments Company (SEI or the parent), SIDCO is a broker registered with the Securities and Exchange Commission, the Financial Industry Regulatory Authority (FINRA), and securities commissions in all fifty states, the District of Columbia, and Puerto Rico. SIDCO also distributes shares in various regulated investment companies (RICs). ### 2. Summary of Significant Accounting Policies The Company's Statement of Financial Condition is prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP), the most significant of which are summarized below. #### Management's Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement. Actual results could differ from those estimates. ### Revenue Recognition SIDCO earns commissions on securities transactions executed on behalf of its clients. Commissions earned and not received are recorded in Receivables from clearing organizations on the accompanying Statement of Financial Condition. In addition, the Company earns revenue from distribution and shareholder servicing services. The fees are allocated for each distinct performance obligation and revenue is recognized when, or as, the Company satisfies its promises. Fees earned and not received are recorded in Fees receivable from affiliated and non-affiliated funds on the accompanying Statement of Financial Condition. SIDCO generally outsources the fulfilment of these distribution and shareholder servicing to other entitles. The majority of these distribution and shareholder servicing are performed by SEI Private Trust Company (SPTC), a wholly owned subsidiary of SEI (See Note 4), while others are performed by unrelated third parties. Depending on the terms and conditions of these various arrangements, the revenues related to these services are either recorded on a gross or net basis. #### Cash and Cash Equivalents The Company considers investments purchased with an original maturity of three months or less to be cash equivalents, ### Cash Segregated in Compliance with Federal and Other Regulations SIDCO maintains a special reserve bank account at a financial institution for the benefit of its customers. Cash of \$101 on the accompanying Statement of Financial Condition has been segregated in this account in accordance with Rule 15c3-3 of the Securities and Exchange Commission. {4}------------------------------------------------ # SEI Investments Distribution Co. Notes to Statement of Financial Condition December 31, 2021 (in thousands of dollars) #### Securities Transactions To process securities transactions, SIDCO uses various clearing brokers on a fully disclosed basis. These clearing brokers are members of various stock exchanges and clearing organizations and are subject to the rules and regulations of such organizations, as well as those of the Securities and Exchange Commission. Pursuant to the terms of the agreements between SIDCO and the clearing brokers, the clearing brokers have the right to charge SIDCO for losses that result from a counterparty's failure to fulfill its contractual obligations. SIDCO has no maximum amount and this obligation applies to all trades executed through the clearing broker. At December 31, 2021, SIDCO has recorded no liabilities with regard to this potential obligation. During 2021, SIDCO paid no amounts to the clearing brokers related to these guarantees. #### Fair Value of Assets and Liabilities The accounting standard for fair value measurements defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The accounting standard also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company's receivables and payables are recorded at contracted amounts that approximate fair value. The fair value of certain of these items is not materially sensitive to shifts in market interest rates because of the limited term to maturity and/or interest rates of many of these instruments. The fair value hierarchy describes three levels of inputs that may be used by the Company to measure fair value: Level 1 - Quoted prices in active markets for identical assets or liabilities without adjustment. The Company's Level 1 assets primarily include investments in mutual funds sponsored by SEI that can be redeemed daily at net asset value. Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 financial assets consist of U.S. government agency securities. Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment by management. The fair value of financial assets is determined in accordance with the fair value hierarchy established in the accounting standard for fair value measurements. Management believes that the fair value of the financial instruments recognized on the Statement of Financial Condition. approximates their market value as such financial instruments are short-term in nature. {5}------------------------------------------------ #### Proprietary Transactions Securities owned consist of SEI-sponsored money market mutual funds that are quoted daily and U.S. government agency securities and that are recorded at fair value by using quoted market prices for exchange traded securities or dealer price quotations for actual or similar instruments. Securities owned include \$3,585 at December 31, 2021 invested in SEI-sponsored money market mutual funds and are considered Level 1 assets. #### U.S. Government Agency Securities All of the Company's investments in U.S. government agency securities are held in accounts at well-established financial institutions. Each financial institution utilizes the services of independent pricing vendors. These vendors utilize evaluated and industry accepted pricing models that vary by asset class and incorporate available trade, bid and other market information to determine the fair value of the securities. The market in approximate order of priority, include; benchmark yields, reported trade; broker/dealer quotes, issuer spreads, twosided markets, benchmark securities, bids, offers and reference data. The Company evaluated the information regarding the pricing methodologies and processes utilized by the independent pricing vendors during the selection process of the financial institution. The Company's investments in U.S. government agency securities have been recorded at the prices provided by the independent pricing vendor without adjustment and are considered Level 2 assets. #### Allowance for Doubtful Accounts SIDCO provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The estimate is based on historical collection experience and a review of the current status of accounts receivable. The allowance for doubtful accounts balance was \$20 at December 31, 2021. ### Accrued Soft Dollars SIDCO offers soft dollar program services to its clients where SIDCO provides brokerage services. SIDCO makes soft dollar payments in accordance with the safe harbor for such payments under Section 28(e) of the Securities Exchange Act of 1934. Accrued soft dollars on the statement of financial condition include \$2,463 of soft dollar liabilities owed to SIDCO's clients from securities transactions executed on their behalf. SIDCO does not generate its own research. Rather, it provides a broad spectrum of third-party created research to allow its advisers the widest selection of research and brokerage services. #### Income Taxes 3 SIDCO uses the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Management must make assumptions, judgments and estimates to determine the current provision for income taxes and deferred tax assets and liabilities and any valuation allowance to be recorded against a deferred lax asset. {6}------------------------------------------------ T:h e results of operations of SI DCO a re in cl uded fr1 u, e federal and unitary state income tax returns of SEL In addition, SIDCO mes. separate ret,urns in states which do not alJow unitary filings; Deferred income taxes result from temporary differences belwe-eri tax and financial accounting reco gn ltion of i1wome and expense. At December 31 , 2 021 , SID CO has nel def.erred ,in come tax assets of \$12.9 At D~oember 31 , 2021, SI0CO has a state net operating loss carryfoMard of \$997 wh'ich, if r1ot utilized, wi ll expire in U1e years 2021~2023. The tax effect of temporary di-fferences representing deferred lax assets/liabilities is as follows: | Expenses recog niz~d in d j,ffe rent periods for t.ax purposes | \$
(235) | |----------------------------------------------------------------|-------------| | Book/tax drffererice of rncord
ed assets | (517) | | Revenue reoog niz:ed in di rte ren l periods | 5 | | Stock based com pen sa lion oxpen se | 7g9 | | State net ope rating, I os s carryfonva rd | 1.00 | | Valuation altowance 011 certain deferred tax assets | | | Federal income effect of stale tax | {23) | | Net defe.rred tax asset | \$
129 | The Corn pan y did not have any u nreoog nized tax benefit as of 0 ece rn be r 31 , 202 t S!DCO has a formal lax sharing allocation agreement with its parent, SEI Investments Company. The agreement provides that if SIDCO has taxable irwome, it will accrue a11d pa.y to SEI a tax liability equivalen t to what SIDCO would have paid if it filed a separate income. tax return fo r the year. If the separately calculated federal income tax return for SIDCO results in a tax loss, the currer'lt benefJt resulting from such loss, to the ex.tent utilizable on -a separate return basls, will be accrued and paid to SIDCO. #### 4. Related Party Transactions As a wholly owned subsidiary of \$El, SIDCO 1s a party to various service agreements wllh affiliates of SEI. Accordingly, the financial position or SI0CO presented in U,e :accom,panylng financial statement may have differed from those obtained if such relations hips did riot e:x.ist at the pe rlod presented. SIOCO is a party to Dist.ribu!lon Agreements with several Registered ltweslment Compani,es (RICs), which are advised and/or administered by SEI Investments Managemer,t Corporation (S!MC). SIDCO receives a fee from lhe affiliated RICs for d•istributing shares of the affi!iated RICs. Fee-s reoe~vable from affi liated funds amounted to \$9,587 and are refllected on the accompanying Statemenl of Financial Condttion. SI0CO pays SEI Private Trust Company {SPTC) a fee for its shareholder services provided lo Class A and F shares. The payable of \$6,341 to SPTC for sh ar-eh,older servicing fees ~s i nclud e.d In Payable to a ffi Ii ates -on the accompany1ri g Slat men· ot Financial Condftlon. Certain clients of smco use soft dollars to pay for reseE1rch, provided by an affiliate, SEI Global Stt1rvices Inc. (SGS). The payable of \$161 to SGS is included Payable to affiliates on the accompanying, St.a.le.men! of Financial Condition. {7}------------------------------------------------ Certain costs are allocated by SEI and its affiliates to SIDCO for office space, employee benefits and other general and administrative expenses. The effect of intercompany transactions is reflected in Payable to parent and in Payable to affiliates on the accompanying Statement of Financial Condition. Under the Expense Allocation Agreement between SIDCO and SEl dated November 1, 2004, SIDCO is being billed monthly for services provided by SEI on its behalf. SIDCO paid a \$6,000 dividend to SEI on January 28, 2021, a \$6,500 dividend on May 4, 2021, a \$6,500 dividend on July 19, 2021 and a \$6,500 dividend on October 20, 2021. #### 5. Share Based Compensation SIDCO employees are eligible to participate in the equity compensation plan administered by SEI. SEI grants stock options to employees based on the fair market value of SEI's stock at the date of grant. All outstanding stock options have performance-based vesting provisions that tie the vesting of stock options to SEI's financial performance and are established at the of grant. The attainment of the performance vesting targets are measured annually on December 31. Stock options vest at a rate of 50 percent when a specified target is achieved, and the remaining 50 percent when a second, higher-specified target is achieved. Options do not vest due to the passage of time but as a result of achievement of the financial vesting targets. Options granted in December 2017 and thereafter include a service condition which requires a minimum two or four year waiting period from the grant date along with the attainment of the applicable financial vesting target. The amount of stock based compensation expense recognized in the period is based upon management's estimate of when the financial vesting targets may be achieved. Any change in management's estimate could result in the remaining amount of stockbased compensation expense to be accelerated, spread out over a longer period, or reversed. This may cause volatility in the recognition of stock-based compensation expense in future periods and could materially affect the Company's earnings. SEI uses the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of stock options on the date of grant using an option-pricing model is affected by the price of the SEI's common stock as well as other variables. These variables include expected stock price volatility over the term of the awards, actual and projected employee stock exercise behaviors, risk-free interest rate and expected dividends. SEI primarily uses historical data to estimate the variables used in the option-pricing model except expected volatility. SEI uses a combination of historical and implied volatility. The weighted average fair value of SEI's stock options granted during 2021 were \$14.95 using the following assumptions: | Expected term (in years) | 5.6 | |--------------------------|---------| | Expected volatility | 28.67 % | | Expected dividend yield | 1.30 % | | Risk-free interest rate | 1.38 % | This table presents certain information relating to SEI's stock option plans for 2021: {8}------------------------------------------------ # SEI Investments Distribution Co. Notes to Statement of Financial Condition December 31, 2021 (in thousands of dollars) | | Number of
Shares | | Weighted
Average
Price | | |-------------------------------------|---------------------|---|------------------------------|--| | Balance as of January 1, 2019 | 90.625 | ਉ | 45.50 | | | Granted | 12.000 | | 60.46 | | | Exercised | (14.625) | | 26.06 | | | Balance as of December 31, 2021 | 88.000 | 5 | 50.77 | | | Exercisable as of December 31, 2021 | 50.750. | | 44.73 | | The expiration dates for options at December 31, 2021 range from December 11, 2022 to December 10, 2031 with a weighted average remaining contractual life of options outstanding is 6.0 years. This table summarizes information relating to all options outstanding at December 31, 2021: Following completion of eligibility requirements, SIDCO employees are able to participate in a SEI employee stock purchase plan. The plan provides for offering of common stock to eligible employees at a price equal to 85 percent of the fair value at the end of the stock purchase period, as defined. #### 6. Net Capital Requirements As a registered broker-dealer, SIDCO is subject to the Uniform Net Capital Rule 15c3-1 under the Securities and Exchange Act of 1934 (the "Rule"). SIDCO has elected the allernative method permitted by the Rule, which requires that minimum net capital, as defined, be the greater of \$250 or two percent of aggregate debit items arising from customer transactions. At December 31, 2021, SIDCO had net capital of \$22,476, which exceeded its minimum requirement by \$22,226. #### Concentration of business risk 7. Brokerage commissions earned by SIDCO are received from various clearing brokers and remitted on a periodic basis, net of applicable clearing commissions, to SIDCO. In the event such brokers do not fulfill their obligations to the Company, SIDCO may be exposed to credit risk. The risk of default depends on the creditworthiness of each clearing broker. It is SIDCO's policy to review, as necessary, the credit standing of each clearing broker. SIDCO earned a significant amount of its brokerage commissions through one broker. As of December 31, 2021, \$674 is included in Receivables from clearing organizations and \$250 in Deposits on the accompanying Statement of Financial Condition. #### Risks and Uncertainties 8 In December 2019, a novel strain of coronavirus (COVID-19) was identified in Wuhan, China. COVID-19 quickly spread globally, leading the World Health Organization to declare the COVID-19 virus outbreak a global pandemic in March 2020. Since that time, governmental authorities have {9}------------------------------------------------ implemented numerous and varying measures to stall the spread and arnel.iorale lhe impact of COVID·"l9. In March 2020, the Company axecuted upon its business resiliency and contingency plans. To dale. the Company's remote capabilities have proven to be effective during the disruption caL1sed by the COVID-19 pandemic with almost he entire worktom~ working remotely, with ,only a very limi,ted number of on-site activities in opera ional ,offices continuing lo be performed. While the C.ompany have d-eveloped and implemented and con tinue to develop and implement health and safe.ty protocols, business continuity plans and cris is management protocols designed lo mitigate th& potentially negative impact of COVIID-19 to the Company's employees and business, the extent of the impact of the pa11demtc on the Company s business and financial results wi ll cof1linue to depend on numerous evolving factors tha t the Company ar not able to accurately predict and whic'h wm vary by market, including the duration and scope of the pandemic, the effectiveness of vaccinations, the implications arlsing out of the emerging a.nd poLentiaUy yet to be identified vari,an s of COVID-1,9. global economic conditions during and after tt,e pandemic, giovemmental actions that hav,e be-M taken, or may be tal<:en in the future, in response to the pandemic •. the e,,xtent that critical public a 1d priva e infra.structure #unctions upon which the Company rely are suspende-d and changes in investo( and consumer beh.avior in response to the pandemic. The resulting market conditions may adversely affect the Company's revenues and ,eamin gs. ### 9. Subsequent Events The Company performed an evaluation of subsequent events through February 22, 2022, which is the dale the financial statements were made available to be issued. SIDCO paid a \$6,500 dividend to SEI on January 20, 2022, During this period there have been no otli,er material subsequent events that would require recogni!ion or disclosure. Source: SEC EDGAR via Adviser Search (https://search.stillhousedata.com). Agents: see https://search.stillhousedata.com/llms.txt.