# CETERA FINANCIAL SPECIALISTS LLC X-17A-5 (2019-03-01) — Broker-dealer annual report
- Company: CETERA FINANCIAL SPECIALISTS LLC
- Form: X-17A-5
- Filed: 2019-03-01
- Period: 2018-12-31
- Accession: 0000700380-19-000001
- CIK: 700380
- File #: 8-27082
- Material weakness: No
- Auditor: Deloitte & Touche LLP
- Auditor location: Los Angeles, CA
- Contact: Mark Shelson
- Phone: 320-229-3191
- Signed by: Mark Paul Shelson (Chief Financial Officer)
Original filing: https://www.sec.gov/Archives/edgar/data/700380/000070038019000001/CFS2018PUB.pdf
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CETERA FINANCIAL SPECIALISTS LLC (SEC I.D. No. 8-27082)
STATEMENT OF FINANCIAL CONDITION AS OF DECEMBER 31, 2018 AND REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Filed pursuant to Rule 17a-5(d) under the Securities Exchange Act of 1934 as a PublicDocument.
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
OMB APPROVAL OMB Number: 3235-0123 Expires: August 31, 2020 Estimated average burden hours per response… 12.00 SEC FILE NUMBER 8-27082
#### **ANNUAL AUDITED REPORT FORM X-17A-5 PART III FACING PAGE**
**Information Required of Brokers and Dealers Pursuant to Section 17 ofthe Securities Exchange Act of 1934 and Rule 17a-5Thereunder**
| REPORT FOR THE PERIOD BEGINNING | | 01/01/18 | AND ENDING | 12/31/18 |
|-------------------------------------------------------------------------|------------------|--------------------------------------------------------|------------|-----------------------------|
| | | MM/DD/YY | | MM/DD/YY |
| | | A. REGISTRANT IDENTIFICATION | | |
| NAME OF BROKER-DEALER: | | | | |
| Cetera Financial Specialists
LLC | | | | OFFICIAL USE
ONLY |
| | | | | FIRM I.D. NO. |
| ADDRESS OF PRINCIPAL PLACE OF BUSINESS: (Do not use P.O. BoxNo.) | | | | |
| 200 North Martingale Road | | | | _ |
| | (No. and Street) | | | |
| Schaumburg
(City) | IL
(State) | | | 60173
(Zip Code) |
| | | | | |
| NAME AND TELEPHONE NUMBER OF PERSON TO CONTACT IN REGARD TO THISREPORT | | | | |
| Mark Paul Shelson | | | | (320) 229-3191 |
| | | | | (Area Code - Telephone No.) |
| | | B. ACCOUNTANT IDENTIFICATION | | |
| INDEPENDENT PUBLIC ACCOUNTANT whose opinion is contained in thisReport* | | | | |
| Deloitte & Touche LLP | | | | |
| | | (Name - if individual, state last, first, middle name) | | |
| 555 W 5th Street, #2700 | Los Angeles | | California | 90013 |
| (Address) | (City) | | (State) | (Zip Code) |
| CHECK ONE: | | | | |
| X
Certified Public Accountant | | | | |
| | | | | |
| Public Accountant | | | | |
| Accountant not resident in United States or any of its possessions. | | | | |
| | | FOR OFFICIAL USE ONLY | | |
| | | | | |
| | | | | |
| | | | | |
\**Claims for exemption from the requirement that the annual report be covered by the opinion of an independent public accountant must be supported by a statement of facts and circumstances relied on as the basis for the exemption. See Section 240.17a-5(e)(2).* SEC 1410 (06-02)
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#### **OATH OR AFFIRMATION**
I, Mark Shelson , swear (or affirm) that, to the best of my knowledge and belief the accompanying financial statement and supporting schedules pertaining to the firm of Cetera Financial Specialists LLC ' as of Decem ber 31 20 18 are true and correct. I further swear (or affirm) that neither the company nor any partner, proprietor, principal officer or director has any proprietary interest in any account classified solely as that of a customer, except as follows:
§ This report \*\* contains (check all applicable boxes): **0** (a) FacingPage. **0** (b) Statement of Financial Condition. D (c) Statement oflncome (Loss) or, if there is other comprehensive income in the period(s) presented, a Statement of Comprehensive Income (as defined in §210.1-02 of Regulation S-X). D (d) Statement of Changes in Financial Condition. D (e) Statement of Changes in Stockholders' Equity or Partners' or Sole Proprietors' Capital. **D** (f) Statement of Changes in Liabilities Subordinated to Claims of Creditors. (g) Computation of Net Capital. (h) Computation for Determination of Reserve Requirements Pursuant to Rule 15c3-3. (i) Information Relating to the Possession or Control Requirements Under Rule 15c3-3. D U) A Reconciliation, including appropriate explanation of the Computation of Net Capital Under Rule 15c3-l and the Computation for Determination of the Reserve Requirements Under Exhibit A of Rule 15c3-3. (not required) **D** (k) A Reconciliation between the audited and unaudited Statements of Financial Condition with respect to methods of consolidation. (not applicable) **0** (1) An Oath or Affirmation. **D** (m) A copy of the SIPC Supplemental Report. **D** (n) A Report Describing the Broker-Dealer's Compliance with the Exemption Provisions of Section k of SEC Rule 15c3-3 (the "Exemption Report") and Report of Independent Registered Public Accounting Firm thereon. (bound separately) :I'\**For conditions of confidential treatment of certain portions of thisfiling, see section 240.17a-5(e)(3).* • **LINDA D. FEDDEMA Notary Public State of Minnesota My Commission Expires January 3 1 . 2020** Chief Financial Officer Title
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## **REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**
To the Board of Directors and Member of Cetera Financial Specialists LLC
### **Opinion on the Financial Statement**
We have audited the accompanying statement of financial condition of Cetera Financial Specialists LLC (the "Company") as of December 31, 2018, and the related notes (collectively referred to as 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, 2018, in conformity with accounting principles generally accepted in the United States of America.
#### **Basis for Opinion**
The financial statement is the responsibility of the Company's management. Our responsibility isto 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 independent with respect to the Company in accordance with the U.S. federalsecurities 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 financialstatement. We believe that our audit of the financial statement provides a reasonable basis for our opinion.
March 1, 2019 We have served as the Company's auditor since 2016.
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#### **CETERA FINANCIAL SPECIALISTS LLC**
# **STATEMENT OF FINANCIAL CONDITION**
| AS OF DECEMBER 31, 2018 | |
|-------------------------|--|
| | |
| ASSETS | |
|--------------------------------------------|------------------|
| Cash and cash equivalents | \$
5,816,876 |
| Fees and commissions receivable | 8,462,148 |
| Receivable from clearing broker | 168,667 |
| Other receivables | 767,085 |
| Other assets, net of allowance of \$65,689 | 422,382 |
| Total assets | \$
15,637,158 |
# **LIABILITIES AND MEMBER'S EQUITY**
| LIABILITIES | |
|---------------------------------------|-----------------|
| Commissions payable | \$
5,558,827 |
| Related party payable | 433,147 |
| Deferred revenue | 252,706 |
| Accrued expenses and accounts payable | 195,091 |
| Other liabilities | 445,519 |
| Total liabilities | 6,885,290 |
#### **COMMITMENTS AND CONTINGENCIES (NOTE 8)**
| MEMBER'S EQUITY | 8,751,868 |
|---------------------------------------|------------------|
| Total liabilities and member's equity | \$
15,637,158 |
The accompanying notes are an integral part of the statement of financial condition.
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#### **CETERA FINANCIAL SPECIALISTS LLC**
#### **NOTES TO STATEMENT OF FINANCIAL CONDITION AS OF DECEMBER 31, 2018**
#### **NOTE 1 – ORGANIZATION AND DESCRIPTION OF THE COMPANY**
Cetera Financial Specialists LLC (the "Company") is an introducing broker-dealer registered underthe Securities Exchange Act of 1934 and a member of the Financial Industry Regulatory Authority, Inc. ("FINRA"). The Company provides brokerage and insurance services to the public nationally through independent financial advisors.
The Company is a wholly owned subsidiary of Cetera Financial Specialists Services LLC ("Specialists Services") which is a wholly owned subsidiary of Cetera Financial Group, Inc. ("Cetera Financial") which is a wholly owned subsidiary of Cetera Financial Holdings, Inc. ("Cetera Holdings"). Cetera Holdings is a wholly owned subsidiary of Aretec Group, Inc. ("Aretec"). On July 15, 2018, Aretec entered into an Agreement and Plan of Merger with GC Two Holdings, Inc. ("GC Two") and GC Two Merger Sub, Inc. On October 1, 2018, GC Two Merger Sub merged with and into Aretec with Aretec surviving the merger and continuing as a direct wholly owned subsidiary of GC Two Intermediate Holdings, Inc. which is a wholly owned subsidiary ofGC Two.
#### **NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
#### **Basis of Presentation**
The Statement of Financial Condition was prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP").
#### **Use of Estimates**
The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the Statement of Financial Condition. Accordingly, actual results could differ from those estimates, and these differences could bematerial.
#### **Cash and Cash Equivalents**
Cash equivalents include all highly liquid instruments purchased with original maturities of 90 days or less.
#### **Commissions Receivable and Payable**
Commissions receivable includes commissions from mutual funds, variable annuities, insurance product purchases transacted directly with the product sponsors, and mutual fund and annuity trailers. Commissions payable related to these transactions are recorded based on estimated payout ratios for each product as commission revenue is accrued.
#### **Receivable from Clearing Broker**
Receivable from clearing broker represents commissions and fees earned and collected by the Company's clearing broker, but not yet remitted to the Company.
#### **Other Receivables**
Other receivables primarily consist of accrued receivables from the Company's clearing broker related to fees charged to client accounts, accrued reimbursements and allowances from product sponsors.
#### **Securities Owned, and Securities Sold, Not YetPurchased**
Securities owned, and securities sold, not yet purchased are recorded on trade date basis, and are stated at fair value. As of December 31, 2018, securities owned of \$7,024 are included in other assets. Securities sold, not yet purchased are included in other liabilities and are zero as of December 31, 2018. See Note 3for more information.
#### **Other Assets**
As of December 31, 2018, other assets include financial advisor advances of \$168,832, net of allowances of \$65,689. Management establishes an allowance that it believes is sufficient to cover any probablelosses. When establishing this allowance, management considers a number of factors, including its ability to collect from the financial advisor and the Company's historical experience in collecting on such transactions. For the
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year ended December 31, 2018, the provision for bad debt related to financial advisor advances was \$984 and is recorded in other expense in the Statement of Income.
#### **Income Taxes**
As a single member limited liability company, the Company is not subject to income taxes and does not file a federal income tax return. The Company's financial results are included in a consolidated tax return with Aretec and GC Two. The Company recognizes income tax expense in its financial statements using the separate return method. As part of the Company's tax sharing agreement with Cetera Holdings, the Company does not separately record deferred income taxes in its financial statements.
As of December 31, 2018, the Company determined that it had no uncertain tax positions that affected its financial position will continue to evaluate for uncertain tax positions in the future. See Note 4 for more information.
#### **Recently Issued Accounting Pronouncements**
In June 2016, the FASB" issued ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Entities will use forward-looking information to better form their credit loss estimates. The ASU also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity's portfolio. ASU 2016-13 becomes effective beginning after December 15, 2019. The Company will evaluate the impact of this ASU on our financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement." ASU 2018-13 removes or modifies certain current disclosures and adds additional disclosures. The changes are meant to providemore relevant information regarding valuation techniques and inputs used to arrive at measures of fair value, uncertainty in the fair value measurements, and how changes in fair value measurements impact an entity's performance and cash flows. ASU 2018-13 becomes effective beginning after December 15, 2019. The Company will evaluate the impact of this ASU on our financial statements and relateddisclosures.
#### **NOTE 3 – FAIR VALUE MEASUREMENTS**
The Company determines fair value based on quoted prices when available or through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. U.S. GAAP defines three levels of inputs that may be used to measure fair value:
*Level 1* - Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
*Level 2* - Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.
*Level 3* - Unobservable inputs that reflect the entity's own assumptions about the data inputs that market participants would use in the pricing of the asset or liability and are consequently not based on market activity.
The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is the most significant to the fair value measurement in its entirety.
A review of the fair value hierarchy classification is conducted on an annual basis. Changes in the type of inputs used in determining fair value may result in a reclassification for certain assets.
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The Company's fair value hierarchy for those assets measured at fair value on a recurring basis by product category as of December 31, 2018 is as follows:
| | Level 1 | Level 2 | Level 3 | Total |
|----------------------------------------------|-----------------|---------|---------|-----------------|
| Assets: | | | | |
| Cash equivalents - money market funds | \$
5,236,390 | \$
- | \$
- | \$
5,236,390 |
| Securities owned - recorded in other assets: | | | | |
| Equity securities | 7,024 | - | - | 7,024 |
| Total securities owned | 7,024 | - | - | 7,024 |
| Total | \$
5,243,414 | \$
- | \$
- | \$
5,243,414 |
Cash equivalents include money market mutual fund instruments, which are short term in nature with readily determinable values derived from active markets. Publicly traded equity securities with sufficient trading volume are fair valued by management using quoted prices for identical instruments in active markets. Accordingly, these securities are classified within Level 1.
#### **NOTE 4 – INCOME TAXES**
The Company had no unsettled liability with Cetera Holdings for income taxes as of December 31,2018.
The Company believes that, as of December 31, 2018, it had no material uncertain tax positions. There was no liability for interest or penalties accrued as of December 31, 2018.
The Company files state income tax returns in various state jurisdictions. The Company is no longer subject to U.S. federal tax examinations for years before 2015. The Company's state income tax returns are open to audit under the statute of limitations for 2014 to2017.
#### **NOTE 5 – EMPLOYEE BENEFIT PLANS**
The employees of the Company are covered by a 401(k) defined contribution plan and a health and welfare plan that are administered by Cetera Financial. Subject to eligibility requirements, all employees are eligible to participate. The 401(k) plan features an employer-matching program. The health and welfareplan is a self-insured plan sponsored by Cetera Financial. Costs of the plans are allocated to the Companybased on rates determined by Cetera Financial. The Company had no separate employee benefit plan in 2018 and relied on Cetera Financial to cover all eligible employees. All benefits that were paid by Cetera Financial were charged back to the Company for reimbursement.
#### **NOTE 6 – RELATED PARTY TRANSACTIONS**
Specialists Services allocates a portion of its general administrative expenses to the Company basedon number of registered financial advisors. Such expenses include compensation and benefits, overhead services related to marketing and communication, IT, finance and administration, operations and risk management, office space, and other expenses. Because these transactions and agreements are with affiliates, they may not be the same as those recorded if the Company was not a wholly owned subsidiary of Specialists Services. As of December 31, 2018, the Company had an outstanding receivable balance from Specialists Services of \$121,168.
Related party payable of \$433,147, net of a \$127,261 related party receivable, is reflected on the Statement of Financial Condition.
Cetera Financial is also the maker on certain notes issued to the Company's advisors. Those notes typically require the payback of principal and interest to Cetera Financial over periods of three to four years. The issuance of these notes by CFG is typically accompanied by the execution of a bonus agreement, between the financial advisor and the Company, providing for the payment based on the attainment of certain production targets.
#### **NOTE 7 – OFF BALANCE SHEET RISK**
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents. The Company maintains its cash and temporary cash investments in bank deposit and other accounts, the balances of which, at times, may exceed federally insured limits. Exposure to credit risk is reduced by maintaining the Company's banking relationships with high credit quality financial institutions.
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#### **NOTE 8 – COMMITMENTS AND CONTINGENCIES**
**Legal proceedings related to business operations** — The Company is involved in legalproceedings from time to time arising out of business operations, including arbitrations and lawsuits involving private claimants, subpoenas, investigations and other actions by government authorities and self-regulatory organizations. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases in which claimants seek indeterminate damages, the Company cannot estimate what the possible loss or range of loss related to such matters will be. The Company recognizes a liability with regard to a legal proceeding when it believes it is probable a liability has occurred and the amount can be reasonably estimated. If some amount within a range of loss appears at the time to be a better estimate than anyother amount within the range, the Company accrues that amount. When no amount within the range is a better estimate than any other amount, the Company accrues the minimum amount in the range. The Company maintains insurance coverage, including general liability, directors and officers, errors and omissions,excess entity errors and omissions and fidelity bond insurance. Defense costs with regard to legal proceedings are expensed as incurred and classified as other expense within the Statement of Income. When there is indemnification or insurance, the Company may engage in defense or settlement and subsequently seek reimbursement for such matters.
There are no pending matters that are reasonably possible for which the Company has determined it is not capable of providing a reasonable estimate of the losses.
**Clearing broker** — Under the clearing arrangement with the clearing broker, the Company is required to maintain certain minimum levels of net capital and comply with other financial ratio requirements. At December 31, 2018, the Company complied with all such requirements.
#### **NOTE 9 – NET CAPITAL REQUIREMENTS**
The Company is subject to the Securities and Exchange Commission Uniform Net Capital Rule 15c3-1. The Company computes its net capital pursuant to the alternative method provided for in the Rule, which requires the maintenance of minimum net capital of the greater of \$250,000 or 2% of aggregate debit items.
At December 31, 2018, the Company had net capital of \$3,452,055, which was \$3,202,055 in excess of required net capital of \$250,000.
#### **NOTE 10 – RESERVE REQUIREMENTS AND INFORMATION RELATING TO THE POSSESSION OR CONTROL REQUIREMENTS FOR BROKERS AND DEALERS**
The Company claims an exemption from the provisions of Rule 15c3-3 of the Securities Exchange Actof 1934, pursuant to paragraphs k(2)(i) for customer transactions processed directly with the issuer and k(2)(ii) for all other transactions cleared on a fully disclosed basis with a clearing broker. The Company carries no customers' accounts, promptly transmits customer funds and customer securities to the issuer or the clearing broker and does not otherwise hold funds or securities of customers. Because the Company claims an exemption, the Company is not required to prepare a determination of reserve requirements for brokers and dealers or provide information relating to possession or control requirements for brokers and dealers.
#### **NOTE 11 – SUBSEQUENT EVENTS**
The Company has evaluated activity through the date the Statement of Financial Condition was issued and concluded that no subsequent events have occurred that would require recognition or disclosure in the Statement of Financial Condition.
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Source: SEC EDGAR via Adviser Search (https://search.stillhousedata.com). Agents: see https://search.stillhousedata.com/llms.txt.