# RHODES SECURITIES, INC. X-17A-5 (2020-06-29) — Broker-dealer annual report - Company: RHODES SECURITIES, INC. - Form: X-17A-5 - Filed: 2020-06-29 - Period: 2020-04-30 - Accession: 0000812226-20-000003 - CIK: 812226 - File #: 8-37689 - Material weakness: No - Auditor: Moss Adams LLP - Auditor location: Dallas, TX - Contact: Marilyn Zehntner - Phone: 817-334-0455 - Signed by: J. Gordon Rhodes (Chief Executive Officer) Original filing: https://www.sec.gov/Archives/edgar/data/812226/000081222620000003/rhodesaudit20.pdf --- {0}------------------------------------------------ **UNITEDSTATES SECURITIESANDEXCHANGECOMMISSION Washington, D.C. 20549** **OMB APPROVAL OMB Number 3235-0123 Expires: August 31, 2020 Estimated average burden** ### **hoursperresponse 12.00 ANNUAL AUDITED REPORT FORM X-17A-5 PART III** | C
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| | | | | | | | | t. | | | | | | | | | | | {2}------------------------------------------------ #### **RHODES SECURITIES,INC. Contents** | M
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po | 14 | | | | {3}------------------------------------------------ # **MOSSADAMS Report ofIndependent Registered Public Accounting Firm** **To the Board of Directors Rhodes Securities, Inc.** #### *Opinionon the Financial Statements* **We have audited the accompanying statement of financial condition of Rhodes Securities, Inc. (the Company) as of April 30, 2020, the related statements of income, changes in stockholders' equity, and cash flows for the year then ended, and the related notes (collectively referred to as the** *financial statements).* **In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of April 30, 2020, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.** #### *Change inAccounting Principle* **As discussed in Note 1 to the financial statements, in 2019 the Company changed its method of accounting for leases due to the adoption of Accounting Standards Codification Topic No. 842.** #### *Basisfor Opinion* **These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are ^a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.** **We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are 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 statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on ^a test basis, evidence regarding the amounts and disclosures in the financial statements. 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 statements. We believe that our audit provides ^a reasonable basis for our opinion.** #### *Opinionon the Supplemental Information* **The information in Schedule I has been subjected to audit procedures performed in conjunction with the audit of the Company's financial statements. The information in Schedule I is the responsibility of the Company's management Our audit procedures include determining whether the information in Schedule I reconciles to the financial statements or the underlying accounting and other records, as applicable, and performing procedures to test the completeness and accuracy of the information presented in Schedule I. In forming our opinion on the information in Schedule I, we evaluated whether the information in Schedule I, including its form and content is presented in conformity with 17 C.F.R. §240.17a-5. In our opinion, the information in Schedule I is fairly stated in all material respects in relation to the financial statements as ^a whole.** */-MP* **Dallas, Texas June 26, 2020** **We have served as the Company's auditor since 2017.** {4}------------------------------------------------ #### **RHODES SECURITIES, INC. Statement of Financial Condition April 30, 2020** #### **ASSETS** | C
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7 | {8}------------------------------------------------ #### Note 1- Nature of Business and Summary of Significant Accounting Policies #### Nature of Business: Rhodes Securities,Inc.(Company) was organized in 1987 as ^a Texas corporation. The Company is registered with the Securities and Exchange Commission (SEC) as ^a broker-dealer in securities, and is ^a member of the Financial Industry Regulatory Authority (FINRA) and Securities Investor Protection Corporation (SIPC). The Company operates under the exemption provisions of SEC Rule 15c3-3(k)(2)(ii) of the Securities Exchange Act of 1934, and accordingly,is exempt from the remaining provisions of that Rule. The Company does not hold customer funds or securities and clears all transactions on behalf of customers on ^a fully disclosed basis through ^a clearing broker-dealer. The clearing broker-dealer carries the accounts of the customers and maintains and preserves all related books and records as are customarily kept by aclearing broker-dealer. The Company operates as an independent full service broker-dealer in securities with its main office located in Ft Worth, Texas. The Company supports registered representatives located throughout the United States whose customers are primarily individuals. #### Significant Accounting Policies: #### Recently Adopted Accounting Pronouncements On May 1, 2019, the Company adopted ASC Topic 842, *Leases* and has applied the effective date option and recognized ^a cumulative effect adjustment of \$269,993 in the period of adoption. There was no impact to opening retained earnings. We determine if an arrangement is ^a lease at inception. The operating lease right of use asset ("ROU") and the corresponding lease liability are reported separately on the Statement of Financial Condition. #### Leases On January 20, 2006, and subsequently amended most recently on March 30, 2016, the Company entered into one operating lease relating to our main office which expires on May 31, 2022. According to the terms of the lease agreement space was offered on an "as-is" basis with no option to renew or extend beyond the end of the lease term. The ROU asset represents our right to use the underlying asset tor the lease term and toe lease liability represents our obligation to make lease payments arising from toe lease. Any future operating lease ROU asses and liabilities will be recognized at commencement date based on toe present value of lease payments over toe lease term. Our operating lease did not provide an implicit rate, we used our annual estimated incremental borrowing rate of 4.00% at May 1, 2019,based on toe estimated rate of interest for collateralized borrowing over ^a similar term of the lease payments at commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. {9}------------------------------------------------ #### Brokerage Commissions The Company buys and sells securities on behalf of its customers. Each time ^a customer enters into ^a buy or sell transaction, the Company charges ^a commission. Commissions and related clearing expenses are recorded on the trade date (the date that the Company fills the trade order by finding and contracting with ^a counterparty and confirms the trade with the customer). The Company believes that the performance obligation is satisfied on the trade date because that is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon and the risks and rewards of ownership have been transferred to the customer. #### Distribution Fees - Mutual Funds and Insurance and Annuity Products The Company earns revenue for selling mutual funds, variable annuities and insurance products. The performance obligation is satisfied at the time of each individual sale. A portion of the revenue is based on ^a fixed rate applied, as ^a percentage, to amounts invested at the time of sale. The remaining revenue is recognized over the time the client owns the investment or holds the contract and is generally earned based on ^a fixed rate applied, as ^a percentage, to the net asset value of the fund, or the value of the insurance policy or annuity contract. The ongoing revenue is not recognized at the time of sale because it is variably constrained due to factors outside the Company's control including market volatility and client behavior (such as how long clients hold their investment, insurance policy or annuity contract). The revenue will not be recognized until it is probable that ^a significant reversal will not occur. #### Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actualresults could differ from those estimates. #### Fair Value of Financial Instruments Substantially all of the Company's financial asset and liability amounts reported in the statement of financial condition are short term in nature and approximate fair value. #### Property and Equipment Property and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are provided for using the straight-line method over the estimated useful lives of 4 to 7 years. {10}------------------------------------------------ #### Note 1- Nature of Business and Summary of Significant AccountingPolicies, continued #### Contract Balances The Company's timing of revenue recognition may differ from the timing of customer payments. When there is an unconditional right to payment, according to the terms of the contract the Company records ^a receivable. For receivables with unsatisfied performance obligations, the Company records deferred revenue until the performance obligations are satisfied. Receivables with no outstanding performance obligations are recognized as revenue upon issuance of the related invoice. The Company had receivables related to contracts from customers of \$358,551 and \$357,567 at April 30, 2019 and at April 30, 2020, respectively. The Company had no deferred revenue related to unrecognized engagement fees where the performance obligations have not yet been satisfied at April 30, 2019 and at April 30, 2020,respectively. #### Income Taxes Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of assets and liabilities for financial and income tax reporting. Deferred tax assets and liabilities represent future tax return benefits and consequences of those differences,which will either be taxable or deductible when foe assets and liabilities are recovered or settled. Tax benefits associated with uncertain tax positions are recognized in the period in which one of the following conditions is satisfied: (1) foe more likely than not recognition threshold is satisfied; (2) foe position is ultimately settled through negotiation or litigation; or (3) the statute of limitations for foe taxing authority to examine and challenge foe position has expired. Tax benefits associated with an uncertain tax position are derecognized in foe period in which foe more likely than not recognition threshold is no longer satisfied. Any potential interest and penalty associated with ^a tax contingency, should one arise, would be included as ^a component of income tax expense in the period in which the assessment arises. The Company is subject to state income taxes. #### Note 2 - Net Capital Requirements The Company is subject to foe SEC Uniform Net Capital Rule (SEC Rule 15c3-1), which requires foe maintenance of minimum net capital and requires that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1. Rule 15c3-1 also provides that equity capital may not be withdrawn or cash dividends paid if the resulting net capital ratio would exceed 10 to 1. At April 30,2020, the Company had net capital of \$184,583, which was \$134,583 in excess of its required net capital of \$50,000. The Company's net capital ratio was 2.31 to 1. #### Note 3- Transactions with Clearing Broker-Dealer The Company has an agreement with ^a clearing broker-dealer to provide clearing, execution and other related securities services. Clearing charges are incurred at ^a fixed rate multiplied by the number of tickets traded by foe Company. The agreement requires foe Company to maintain ^a minimum of \$75,000 in ^a deposit account with the clearing broker-dealer. {11}------------------------------------------------ #### Note 4 - Property and Equipment Property and equipment consists of the following: | F
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36 | Depreciation and amortization expense totaled \$ 6,548 for foe year and is reflected in foe accompanying statement of income as occupancy and equipment costs. #### Note 5 - Income Taxes The provisionforincome taxes consists of foe following: | C
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09 | {12}------------------------------------------------ #### Note 6 - Defined Contribution Plan The Company has ^a qualified 401(k) profit sharing plan which covers all employees meeting certain eligibility requirements. Eligible employees may make elective contributions not to exceed statutory limits and the Company may make discretionary matching and profit sharing contributions. Employee contributions vest immediately and Company contributions are on ^a 6 year vesting schedule. The Company made discretionary matching and profit sharing contributions of \$130,494 and incurred administrative fees totaling \$2,375 for the yearendedApril 30, 2020. #### Note 7 - Off-Balance-Sheet Risk and Concentration of Credit Risk As discussed in Note 1, the Company's customers' securities transactions are introduced on ^a folly disclosed basis with its clearing broker-dealer. The clearing broker-dealer carries foe accounts of foe customers of foe Company and is responsible for execution, collection and payment of funds, and receipt and delivery of securities relative to customer transactions. Off-balance-sheet risk exists with respect to these transactions due to foe possibility that customers may be unable to fulfill their contractual commitments wherein foe clearing broker-dealer may charge any losses incurred to foe Company. The Company seeks to minimize this risk through procedures designed to monitor the credit worthiness of its customers and that customer transactions are executed properly by foe clearing broker-dealer. The Company has commissions receivable and ^a clearing deposit due from and held by its clearing broker-dealer of \$357,567 and \$75,000, respectively, totaling \$432,567, which represents approximately 52% of foe Company's total assets. #### Note 8 - Commitments and Contingencies #### Commitments The Company leases office facilities in Fort Worth, TX under ^a noncancelable operating lease expiring in May 2022. The lease requires foe Company to pay its pro rata share of certain operating expenses in excess of ^a specified amount. The Company also teases two copiers under ^a noncancelable operating lease, expiring in December, 2021. Future minimum lease commitments follow for each of foe years ending April 30; | 1
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5 | Lease expense for the yearrelating to office facilities was \$97,408,and was \$8,571 relating to foe copiers. {13}------------------------------------------------ #### Note 9 - Related Party Transactions The Company and Rhodes Investment Advisors,Inc.(RIA),arelated party registered investment advisor and insurance sales company, are under common control, and the existence of that control creates operating results and financial position significantly different than if the companies were autonomous. The Company earned and reported \$600,019 in variable annuity commissions received by RIA during the year through dual licensed registered representatives with RIA. Investment advisory fees received by the Company during Hie year from its clearing broker-dealer, totaling approximately \$2.3 million, were earned and reported as revenue of RIA. The Company has ^a Services Agreement (Agreement) with RIA, effective July 2007. The Agreement is for ^a one year term, automatically renews on ^a year to year basis unless terminated by either party on 30 days notice prior to expiration of an annual term. Under the Agreement the Company is to provide office facilities, personal property and support services. The Company invoices RIA monthly tor toe expenses allocated and support services provided. The amounts invoiced and billed were not consummated on terms equivalent to arms length transactions and fluctuate on ^a monthly basis. The total amount billed to RIA under this Agreement were approximately \$293,000 tor the year ended April 30,2020 and have been reported as expense reimbursements or reductions of various expenses in toe statement of income. The Company is the common paymasterfor RIA's registered representatives. The Company generally settles toe amounts due to or from RIA monthly and at April 30,2020 no money was due to the Company from RIA. #### Note 10-SubsequentEvents In March, 2020, the World Health Organization declared toe outbreak of ^a novel coronavirus (COVID-19) as ^a pandemic, which continues to spread globally.While toe disruption is currently expected to be temporary,there is uncertainty around the duration.Therefore, the effects upon our business,results of operations,cash flows and financial position cannot be reasonably estimated at this time. Management has evaluated toe Company's events and transactions that occurred subsequent to April 30, 2020, through June 26, 2020,the date the financials were available to be issued, and determined that no additional financial statement recognition or disclosure is necessary. {14}------------------------------------------------ #### **Schedule I** #### **RHODES SECURITIES, INC. Supplemental Information Pursuant to Rule 17a-5 As of April 30, 2020** | C
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a | | | | The above computation does not differ from the computation of net capital under Rule 15c3-1 as of April 30,2020 as filed by Rhodes Securities,Inc.on form X-17-A-5. Accordingly, no reconciliation is necessary. {15}------------------------------------------------ ![](_page_15_Picture_0.jpeg) # **Report of Independent Registered Public Accounting Firm** **To the Board of Directors Rhodes Securities, Inc.** **We have reviewed management'^s statements, included in the accompanying Rhodes Securities, Inc. Exemption Report, in which (1) Rhodes Securities, Inc. identified the following provisions of ¹⁷ ^C.F.R. §15c3-3(k) under which Rhodes Securities, Inc. claimed an exemption from ¹⁷ C.F.R. §240.15c3-3: (2)(ii) (the exemption provisions), and (2) Rhodes Securities, Inc. stated that Rhodes Securities, Inc. met the identified exemption provisions throughout the most recent fiscal year without exception. Rhodes Securities, Inc '^s management is responsible for compliance with the exemption provisions and its statements.** **Our review was conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States) and, accordingly, included inquiries and other required procedures to obtain evidence about Rhodes Securities, Inc. '^s compliance with the exemption provisions. ^A review is substantially less in scope than an examination, the objective of which is the expression of an opinion on management' ^s statements. Accordingly, we do not express such an opinion.** **Based on our review, we are not aware of any material modifications that should be made to management'^s statements referred to above for them to be fairly stated, in all material respects, based on the conditions set forth in paragraph (k)(2)(ii) of Rule ¹⁵c3-³ under the Securities Exchange Act of 1934.** *00# (jdfanJ LLP* **Dallas, Texas June 26, 2020** {16}------------------------------------------------ ![](_page_16_Picture_0.jpeg) **Rhodes Securities, Inc. (the "Company"]is ^a registered broker-dealer subject to Rule 17a-5 promulgated by the Securities and Exchange Commission (17 C.F.R. §240.17a-5, "Reports to be made by certain brokers and dealers"). This Exemption Report was prepared as required by ¹⁷ C.F.R. §240.17a-5(d)(l) and (4). To the best of its knowledge and belief, the Company states the following:** - **(1) The Company claimed an exemption from ¹⁷ C.F.R. §240.15c3-3 under the following provisions of 17 C.F.R. §240.15c3-3 (k):(2)(ii).** - **(2) The Company met the identified exemption provisions in 17 C.F.R. §240.15c3-3(k) throughout the most recent fiscal year without exception.** **Rhodes Securities, Inc.** **I, Gordon Rhodes,swear (or affirm) that, to my best knowledge and belief, this exemption report is true and correct.** **By:** **Title: CEO 06/26/2020** > **Fort Worth Club Building \* Suite 1000 306 West 7th Street •Fort Worth, Texas 76102-4905** **ph: 817.334.0455 • tf: 800.330.0455 \* fx: 817.334.0063 www.rhodessecurities.com** {17}------------------------------------------------ ![](_page_17_Picture_0.jpeg) # **Report of Independent Registered Public Accounting Firm on Applying Agreed-Upon Procedures** **To the Board of Directors Rhodes Securities, Inc.** **We have performed the procedures included in Rule ¹⁷a-5(e)(4) under the Securities Exchange Act of ¹⁹³⁴ and in the Securities Investor Protection Corporation (SIPC) Series ⁶⁰⁰ Rules, which are enumerated below and were agreed to by Rhodes Securities, Inc. (Company) and the SIPC, solely to assist you and the SIPC in evaluating the Company'^s compliance with the applicable instructions of the General Assessment Reconciliation (Form SIPC-7) for the year ended April ³⁰, ²⁰²⁰. Management of the Company is responsible for its Form SIPC-⁷ and for its compliance with those requirements. This agreed-upon procedures engagement was conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States) and in accordance with attestation standards established by the American Institute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibility of those parties specified in this report Consequently, we make no representation regarding the sufficiency of the procedures enumerated below either for the purpose for which this report has been requested or for any other purpose.** - **¹. Compared the listed assessment payments in Form SIPC-⁷ with respective cash disbursement records entries, noting no differences;** - **². Compared the total revenue amounts reported on the Annual Audited Report Form ^X-17A-⁵ Part III for the year ended April ³⁰, ²⁰²⁰, with the total revenue amounts reported in Form SIPC-⁷ for the year ended April ³⁰, ²⁰²⁰, noting no differences;** - **³. Compared any adjustments reported in Form SIPC-⁷ with supporting schedules and working papers, noting no differences;** - **⁴. Recalculated the arithmetical accuracy of the calculations reflected in Form SIPC-⁷ and in the related schedules and working papers supporting the adjustments, noting no differences; and;** - **⁵. Compared the amount of any overpayment applied to the current assessment with the Form SIPC-⁷ on which it was originally computed, noting no differences.** **We were not engaged to and did not conduct an examination or ^a review, the objective of which would be the expression of an opinion or conclusion, respectively, on the Company'^s compliance with the applicable instructions of the Form SIPC-⁷ for the year ended April ³⁰, ²⁰²⁰. Accordingly, we do not express such an opinion or conclusion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you.** **This report is intended solely for the information and use of the Company and the SIPC. and is not intended to be and should not be used by anyone other than these specified parties** *IMP* **Dallas, Texas June 26, 2020** {18}------------------------------------------------ | R
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