# MORNINGSTAR INVESTMENT SERVICES LLC X-17A-5 (2020-03-02) — Broker-dealer annual report
- Company: MORNINGSTAR INVESTMENT SERVICES LLC
- Form: X-17A-5
- Filed: 2020-03-02
- Period: 2019-12-31
- Accession: 0001146203-20-000002
- CIK: 1146203
- File #: 8-53593
- Material weakness: No
- Auditor: KPMG LLP
- Auditor location: Chicago, IL
- Contact: D. Scott Schilling
- Phone: 312-696-6168
- Signed by: D. Scott Schilling (Financial and Operations Principal)
Original filing: https://www.sec.gov/Archives/edgar/data/1146203/000114620320000002/AuditReportNC.pdf
---
{0}------------------------------------------------
#### **Morningstar Investment Services LLC**
Statement of Financial Condition
December 31, 2019
(With Report of Independent Registered Public Accounting Firm Thereon)
{1}------------------------------------------------
UNITEDSTATES 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 | | |
# ANNUAL AUDITED REPORT FORM X-17A-5 PART III
SEC FILE NUMBER 8- 53593
# FACING PAGE Information Required of Brokers and Dealers Pursuant to Section 17 of the Securities Exchange Act of 1934 and Rule 17a-5 Thereunder
| REPORT FOR THE PERIOD BEGINNING | 01/01/19 | AND ENDING | 12/31/19 | | | |
|-----------------------------------------------------------------------------------------------|---------------------------------------------------------------------|---------------|--------------------------------|--|--|--|
| | MM/DD/YY | | MM/DD/YY | | | |
| A. REGISTRANT IDENTIFICATION | | | | | | |
| NAME OF BROKER-DEALER: | Morningstar Investment Services LLC | | OFFICIAL USE ONLY | | | |
| ADDRESS OF PRINCIPAL PLACE OF BUSINESS: (Do not use P.O. Box No.) | | FIRM I.D. NO. | | | | |
| | 22 West Washington Street | | | | | |
| | (No. and Street) | | | | | |
| Chicago | - | | 60602 | | | |
| (City) | (State) | | (Zip Code) | | | |
| NAME AND TELEPHONE NUMBER OF PERSON TO CONTACT IN REGARD TO THIS REPORT
D. Scott Schilling | | | | | | |
| | | | (Area Code - Telephone Number) | | | |
| | B. ACCOUNTANT IDENTIFICATION | | | | | |
| INDEPENDENT PUBLIC ACCOUNTANT whose opinion is contained in this Report* | | | | | | |
| | KPMG IIIP | | | | | |
| | (Name - if individual, state last, first, middle name) | | | | | |
| 200 East Randolph Street | Chicago | = | 60601 | | | |
| (Address) | (City) | (State) | (Zip Code) | | | |
| CHECK ONE: | | | | | | |
| 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)
> Potential persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number.
SEC 1410 (11-05) -----
{2}------------------------------------------------
# OATH OR AFFIRMATION
| D. Scott Schilling | swear swear (or affirm) that, to the best of | | | |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|
| my knowledge and belief the accompanying financial statement and supporting schedules pertaining to the firm of
Morningstar Investment Services LLC | | | | |
| December 31
of | 2019 are true and correct. I further swear (or affirm) that | | | |
| neither the company nor any partner, principal officer or director has any proprietary interest in any account
classified solely as that of a customer, except as follows: | | | | |
| | Signature | | | |
| | Financial and Operations Principal
Title | | | |
| Notary Public
This report ** contains (check all applicable boxes):
V (a) Facing Page.
V (b) Statement of Financial Condition.
(c) Statement of Income (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) Statement of Changes in Financial Condition.
(e) Statement of Changes in Stockholders' Equity or Partners' or Sole Proprietors' Capital.
(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.
(j) A Reconciliation, including appropriate explanation of Net Capital Under Rule 15c3-1 and the
Computation for Determination of the Reserve Requirements Under Exhibit A of Rule 15c3-3. | TANYA IGESS
OFFICIAL SEAL
Notary Public, State of Illinois
My Commission Expires
September 29, 2020
(k) A Reconciliation between the audited Statements of Financial Condition with respect to methods of | | | |
| consolidation.
(1) An Oath or Affirmation.
(m) A copy of the SIPC Supplemental Report.
** For conditions of confidential treatment of certain portions of this filing, see section 240.17a-5(e)(3). | (n) A report describing any material inadequacies found to exist or found to have existed since the date of the previous audit. | | | |
{3}------------------------------------------------
### **Morningstar Investment Services LLC**
Statement of Financial Condition
December 31, 2019
#### **Table of Contents**
| | Page |
|---------------------------------------------------------|------|
| Report of Independent Registered Public Accounting Firm | 1 |
| Statement of Financial Condition | 2 |
| Notes to Statement of Financial Condition | 3 |
{4}------------------------------------------------
KPMG LLP Aon Center Suite 5500 200 E. Randolph Street Chicago, IL 60601-6436
### **Report of Independent Registered Public Accounting Firm**
To the Shareholder and the Board of Directors Morningstar Investment Services LLC:
### *Opinion on the Financial Statement*
We have audited the accompanying statement of financial condition of Morningstar Investment Services LLC (the Company) as of December 31, 2019, 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, 2019, 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 independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statement, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statement. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall 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 2011.
Chicago, Illinois March 2, 2020
{5}------------------------------------------------
#### **Morningstar Investment Services LLC Statement of Financial Condition December 31, 2019**
| Assets | |
|------------------------------------------------------------------------------|-------------------|
| Cash | \$
24,306,351 |
| Fees receivable, less allowance for doubtful accounts of \$24,500 | 5,011,881 |
| Loan to Ultimate Parent | 83,300,000 |
| Interest receivable on loan to Ultimate Parent | 6,089,737 |
| Other assets | 39,533 |
| Total assets | \$
118,747,502 |
| | |
| Liabilities and Shareholder's Equity | |
| Accounts payable and accrued expenses | \$
2,797,664 |
| Due to Parent | 494,095 |
| Due to Ultimate Parent | 303,602 |
| Total liabilities | 3,595,361 |
| | |
| Shareholder's equity: | |
| Common stock - \$0.01 par value; 10,000 shares authorized; 100 shares issued | 1 |
| Additional paid-in capital | 24,141,450 |
| Retained earnings | 91,010,690 |
| Total shareholder's equity | 115,152,141 |
| Total liabilities and shareholder's equity | \$
118,747,502 |
| | |
See accompanying notes to financial statements.
{6}------------------------------------------------
#### **Morningstar Investment Services LLC Notes to 6WDWHPHQWRI)LQDQFLDO&RQGLWLRQ December 31, 2019**
# **1. General**
#### **a.** *Basis of Presentation*
The accompanying statement of financial condition includes the accounts of Morningstar Investment Services LLC (the Company, we, our). Morningstar, Inc., a publicly traded company, is the ultimate owner of the Company. Morningstar, Inc. and its subsidiaries (collectively, the Ultimate Parent) are affiliates of the Company.
Effective December 31, 2015, the Ultimate Parent merged together two wholly owned, registered investment adviser subsidiaries, Morningstar Associates, LLC and Ibbotson Associates, Inc., and renamed the surviving entity, Morningstar Investment Management LLC (MIM, the Parent). In conjunction with and simultaneous to this merger, the Parent elected to reorganize the structure of the Company, into a limited liability company (i.e., Morningstar Investment Services LLC) and transferred ownership of that limited liability company to MIM in the form of a capital contribution.
#### **b.** *Nature of Operations*
The Company, a Delaware limited liability company effective from January 1, 2016, is a securities broker/dealer and investment adviser registered with the Securities and Exchange Commission (the SEC) and is a member of Financial Industry Regulatory Authority, Inc. (FINRA) and Securities Investors Protection Corporation (SIPC). The Company provides portfolio-management services for financial advisors and intermediaries. In accordance with the terms of the Company's limited liability company agreement, the Company will continue in perpetuity, unless terminated earlier by decision of the sole member, which is the Parent. The Parent currently has no plans to terminate the Company's limited liability company agreement.
# **2. Summary of Significant Accounting Policies**
#### **a.** *Management's Use of Estimates*
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAAP) 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 statement of financial condition. Actual results could differ from those estimates.
#### *b. Cash*
The Company has a cash balance of \$24,306,351 as of December 31, 2019. The Company holds its cash with a high quality federally insured institution. Cash balances with the institution may be in excess of federally insured limits. The Company has not realized any losses in such accounts and believes it is not exposed to any significant credit risk*.*
{7}------------------------------------------------
#### **0RUQLQJVWDU,QYHVWPHQW6HUYLFHV//& 1RWHVWR6WDWHPHQWRI)LQDQFLDO&RQGLWLRQ 'HFHPEHU**
#### *c. Fees Receivable*
Fees receivable represent advisory fees and shareholder servicing fees due from third parties and are recorded at their net realizable value. We maintain an allowance for doubtful accounts based on our estimate of the probable losses of fees receivable.
As of December 31, 2019, the Company had \$5,011,881 of fees receivable, net of \$24,500 of allowance for doubtful accounts. The Company has not realized any impairment losses on receivables during 2019 or in prior periods.
#### *d. Due to Ultimate Parent and Due to Parent*
Due to Ultimate Parent and Due to Parent include amounts due to the Ultimate Parent and Parent, respectively, which relate to intercompany agreements. See Note 5, Related-Party Transactions, for additional information about these balances.
#### *e. Income Taxes*
The Company has elected to be treated as a disregarded entity for federal and state income tax purposes effective from January 1, 2016. As a disregarded entity, the Company's taxable income is included in the respective income tax returns of the Ultimate Parent. Therefore, the liability for payment of federal and state income tax on the Company's earnings is the responsibility of Ultimate Parent, rather than the Company. Accordingly, no liability for U.S. federal and state income taxes will be recorded in the Company's financial statements.
#### *f. Accounting for Sabbatical Leave*
Full-time employees of the Company are eligible for six weeks of paid time off after four years of continuous service. In accordance with ASC 710-10-25, *Compensated Absenses*, the Company records a liability for employees' sabbatical benefits over the period employees earn the right for sabbatical leave. As of December 31, 2019, the Company had accrued \$345,456 for sabbatical earned by eligible employees which is included in accounts payable and accrued expenses on the statement of financial condition.
### **3. Net Capital Requirements**
The Company, as a registered broker dealer, is subject to the SEC's Uniform Net Capital Rule (Rule 15c3 1) and is required to maintain minimum net capital, as defined, equal to the greater of \$100,000 or 6 % of aggregate indebtedness, as defined.
At December 31, 2019, the Company had net capital, as defined, of \$20,710,990, which was \$20,471,299 greater than the required minimum net capital of \$239,691. The Company's ratio of aggregate indebtedness to net capital, as defined, was 0.17 to 1.
{8}------------------------------------------------
#### **0RUQLQJVWDU,QYHVWPHQW6HUYLFHV//& 1RWHVWR6WDWHPHQWRI)LQDQFLDO&RQGLWLRQ 'HFHPEHU**
# **4. Defined Contribution Plan**
Substantially all employees participate in the defined contribution 401(k) plan sponsored by the Ultimate Parent. The plan allows employees to voluntarily contribute pretax dollars up to a maximum amount allowable by the Internal Revenue Service. In 2019, we made matching contributions to our 401(k) program in the United States in an amount equal to 75 cents for every dollar of employee contributions up to a maximum of 7% of employee compensation in each pay period.
# **5. Related-Party Transactions**
#### **a.** *Intercompany Agreements*
The Company has relationships with the Ultimate Parent and the Parent in the form of intercompany agreements whereby the Company engages them to provide certain services and support.
#### *Intercompany Activity with Ultimate Parent*
Intercompany activities between the Company and the Ultimate Parent include, but are not limited to, infrastructure, personnel support, insurance, data, databases, investment research, and reports.
At December 31, 2019, the Company had a payable to the Ultimate Parent in the amount of \$303,602 with no intercompany receivable balance.
#### *Intercompany Activity with Parent*
Intercompany activities between the Company and the Parent include, but are not limited to, operational and client service support, and the construction and ongoing monitoring of portfolios.
At December 31, 2019, the Company had a payable to the Parent in the amount of \$494,095, with no intercompany receivable balance.
#### *b. Intercompany Loans*
The Company and the Ultimate Parent have an intercompany loan agreement. As of December 31 2019, the Company funded the Ultimate Parent \$83,300,000 in cash and recorded \$6,089,737 of related interest receivable on the loan.
The interest rate for 2019 was 3.72%. No interest is paid currently for this loan and interest earned during 2019 was \$2,784,610.65. The agreement automatically renews for an additional one year term on December 31 of each year, unless either party provides written notice of non-renewal at least 60 days prior to the expiry of the then-current term. The interest rate for this loan is agreed by both parties on an annual basis. The Ultimate Parent may terminate this agreement at any time without penalty by repaying the principal balance, together with all accrued interest.
{9}------------------------------------------------
#### **0RUQLQJVWDU,QYHVWPHQW6HUYLFHV//& 1RWHVWR6WDWHPHQWRI)LQDQFLDO&RQGLWLRQ 'HFHPEHU**
# **6. Recently Issued Accounting Pronouncements**
*Current Expected Credit Losses:* On June 16, 2016, the FASB issued ASU No. 2016-13, *Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments* (ASU No. 2016-13), which requires that expected credit losses relating to financial assets measured on an amortized cost basis and available-for-sale debt securities be recorded through an allowance for credit losses. ASU No. 2016-13 limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized credit losses if the fair value increases. On April 25, 2019, the FASB issued ASU No. 2019-04, *Codification Improvements* (ASU No. 2019-04), which clarifies certain aspects of accounting for credit losses. On May 15, 2019, the FASB issued ASU No. 2019-05, *Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief* (ASU No. 2019-05), which allows entities to elect the fair value option on certain financial instruments. The new standard became effective for us on January 1, 2020 and is to be applied as a cumulative-effect adjustment to retained earnings. We believe that the most notable impact of these standards relate to our processes around the assessment of the adequacy of our allowance for doubtful accounts on accounts receivable and the recognition of credit losses. We are evaluating the effect that ASU No. 2016-13, ASU No. 2019-04, and ASU No. 2019-05 will have on our financial statements and related disclosures.
### **7. Contingencies**
We are involved from time to time in regulatory examinations and investigations, legal proceedings and litigation that arise in the normal course of our business. While it is difficult to predict the outcome of any particular proceeding, we do not believe the result of any of these matters will have a material adverse effect on our business, operating results, or financial position.
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
### **8. Subsequent Events**
The Company evaluated its December 31, 2019 financial statements for subsequent events through March 2, 2020, the date that the financial statements were available to be issued. The Company is not aware of any subsequent events which would require recognition or disclosure in the financial statements.
Source: SEC EDGAR via Adviser Search (https://search.stillhousedata.com). Agents: see https://search.stillhousedata.com/llms.txt.