# Oppenheimer Holdings Inc: Form 10-Q for the period ended Sep 30, 2017

- Company: [Oppenheimer Holdings Inc](/companies/opy.md) (CIK 791963)
- Form: 10-Q
- Filed: 2017-10-27
- Accepted by EDGAR: Oct 27, 2017, 08:55 ET
- Period: 2017-09-30
- Accession: 0000791963-17-000020
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/791963/000079196317000020/opy-9302017x10xq.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/791963/000079196317000020/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2017-07-01 to 2017-09-30 | $226.2m | us-gaap:Revenues |
| Revenue | 9 months, 2017-01-01 to 2017-09-30 | $655.4m | us-gaap:Revenues |
| Interest expense | 3 months, 2017-07-01 to 2017-09-30 | $6.5m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2017-01-01 to 2017-09-30 | $18.7m | us-gaap:InterestExpense |
| Income tax | 3 months, 2017-07-01 to 2017-09-30 | $4.4m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2017-01-01 to 2017-09-30 | $2.5m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-07-01 to 2017-09-30 | $7.8m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2017-01-01 to 2017-09-30 | $1.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2017-07-01 to 2017-09-30 | $0.57 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2017-01-01 to 2017-09-30 | $0.12 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2017-07-01 to 2017-09-30 | $0.59 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2017-01-01 to 2017-09-30 | $0.12 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2017-07-01 to 2017-09-30 | 13,763,516 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2017-01-01 to 2017-09-30 | 13,790,136 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Capital expenditure | 9 months, 2017-01-01 to 2017-09-30 | $3.5m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2017-01-01 to 2017-09-30 | $4.4m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2017-01-01 to 2017-09-30 | $7.5m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2017-09-30 | $44.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2017-09-30 | $2.51bn | us-gaap:Assets |
| Total liabilities | at 2017-09-30 | $2.00bn | us-gaap:Liabilities |
| Long-term debt | at 2017-09-30 | $198.8m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2017-09-30 | $504.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 80,527 characters.

The Company's condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Reference is also made to the Company's consolidated financial statements and notes thereto found in its Annual Report on Form 10-K for the year ended December 31, 2016.

The Company engages in a broad range of activities in the financial services industry, including retail securities brokerage, institutional sales and trading, investment banking (both corporate and public finance), research, market-making, trust services and investment advisory and asset management services. Its principal subsidiaries are Oppenheimer & Co. Inc. ("Oppenheimer") and Oppenheimer Asset Management Inc. ("OAM"). As of September 30, 2017, the Company provided its services from 93 offices in 24 states located throughout the United States, and offices in Tel Aviv, Israel, Hong Kong, China, London, England, St. Helier, Isle of Jersey and Geneva, Switzerland. Client assets administered by the Company as of September 30, 2017 totaled approximately $82.8 billion. The Company provides investment advisory services through OAM and Oppenheimer Investment Management LLC and Oppenheimer's Fahnestock Asset Management, Alpha and OMEGA Group divisions. As of September 30, 2017, client assets under management totaled $27.2 billion. The Company provides trust services and products through Oppenheimer Trust Company of Delaware. The Company provides discount brokerage services through Freedom Investments, Inc. Through OPY Credit Corp., the Company offers syndication as well as trading of issued syndicated corporate loans. Oppenheimer Multifamily Housing & Healthcare Finance, Inc. ("OMHHF") was formerly engaged in Federal Housing Administration ("FHA")-insured commercial mortgage origination and servicing. During 2016, the Company sold substantially all of the assets of OMHHF and ceased its operations. As of September 30, 2017, the Company employed 3,002 employees (2,949 full-time and 53 part-time), of whom approximately 1,117 were financial advisers.

### Critical Accounting Policies

The Company's accounting policies are essential to understanding and interpreting the financial results reported on the condensed consolidated financial statements. The significant accounting policies used in the preparation of the Company's condensed consolidated financial statements are summarized in Note 2 to the Company's consolidated financial statements and notes thereto found in its Annual Report on Form 10-K for the year ended December 31, 2016. Certain of those policies are considered to be particularly important to the presentation of the Company's financial results because they require management to make difficult, complex or subjective judgments, often as a result of matters that are inherently uncertain.

During the three months ended September 30, 2017, there were no material changes to matters discussed under the heading "Critical Accounting Polices" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

### Business Environment

The securities industry is directly affected by general economic and market conditions, including fluctuations in volume and price levels of securities and changes in interest rates, inflation, political events, investor confidence, investor participation levels, legal and regulatory, accounting, tax and compliance requirements and competition, all of which have an impact on commissions, firm trading, fees from accounts under investment management as well as fees for investment banking services, and investment and interest income as well as on liquidity. Substantial fluctuations can occur in revenue and net income due to these and other factors.

The Company is focused on growing its private client and asset management businesses through strategic additions of experienced financial advisers in its existing branch system and employment of experienced money management personnel in its asset management business. In addition, the Company is committed to the improvement of its technology capability to support client service and the expansion of its capital markets capabilities while addressing the issue of managing its expenses.

### Regulatory and Legal Environment

The brokerage business is subject to regulation by, among others, the Securities and Exchange Commission (the "SEC"), the Commodities Futures Trading Commission, the National Futures Association, the Municipal Securities Rulemaking Board and the Financial Industry Regulatory Authority ("FINRA") in the United States, the Financial Conduct Authority in the United Kingdom, the Jersey Financial Services Commission in the Isle of Jersey, the Securities and Futures Commission in Hong Kong, and various state securities regulators in the United States. In addition, Oppenheimer Israel (OPCO) Ltd. ("OIL") operates under the supervision of the Israeli Securities Authority. Past events surrounding corporate accounting and other activities leading to investor losses resulted in the enactment of the Sarbanes-Oxley Act of 2002 and have caused increased regulation of public companies. The financial crisis of 2008-9 accelerated this trend. New regulations and new interpretations and enforcement of existing regulations have created increased costs of compliance and increased investment in systems and procedures to comply with these more complex and onerous requirements. The SEC and FINRA have increased their enforcement activities with the intent to bring more actions against firms and individuals with increased fines and sanctions for violations of existing rules as well as for conduct that stems from violations of new interpretations of existing rules. Various states are imposing their own regulations that make compliance more difficult and more expensive to monitor.

In July 2010, Congress enacted extensive legislation entitled the Wall Street Reform and Consumer Protection Act (the "Dodd Frank Act") in which it mandated that the SEC and other regulators conduct comprehensive studies and issue new regulations based on their findings to control the activities of financial institutions in order to protect the financial system, the investing public and consumers from issues and failures that occurred in the 2008-9 financial crisis. This effort has extensively impacted the regulation and practices of financial institutions including the Company. The changes have significantly reduced leverage available to financial institutions and increased transparency to regulators and investors of risks taken by such institutions. New rules have been adopted to regulate and/or prohibit proprietary trading for certain deposit taking institutions, control the amount and timing of compensation to "highly paid" employees, create new regulations around financial transactions with retirement plans due to the adoption of a uniform fiduciary standard of care of broker-dealers and investment advisers providing personalized investment advice about securities to such plans, increase the disclosures provided to clients, and in some European jurisdictions create a tax on securities transactions. The Consumer Financial Protection Bureau has stated its intention to implement new rules affecting the interaction between financial institutions and consumers. Other rules may be enacted which may impact the Company. Recent announcements make it appear increasingly likely that the rules surrounding financial institutions may change in the U.S., including changes to the Dodd Frank Act.

In April 2016, the U.S. Department of Labor ("DOL") finalized its definition of fiduciary under the Employee Retirement Income Security Act (ERISA) through the release of new rules and changes to interpretations of six prohibited transaction exemptions which together set a new standard for the treatment and effects of advice given to retirement investors. Under this new rule, investment advice given to an employee benefit plan or an individual retirement account ("IRA") is considered fiduciary advice. As a result, financial service providers and advisers who provide investment advice will be required to meet "conflict of interest" standards, which is likely to limit commission-based compensation in favor of fee-based compensation plans. The rules will also limit the ability to render advice which may encourage the transfer of retirement assets from 401(k) and similar plans as well as pension plans to rollover IRA plans sponsored by financial service providers.

The DOL rules provide for a Best Interest Contract ("BIC") exemption, which would, under certain circumstances, allow advisers to continue to receive commissions under a contract with a retirement investor. However, there is no exemption available for sophisticated investors and a financial institution's failure to maintain and comply with the required anti-conflict of interest rules will result in a loss of the relief afforded by the BIC exemption and potential legal and regulatory sanctions. The Company presently expects to continue commission-based activity.

The new fiduciary standard definitions for investment advice were effective on June 9, 2016 with an applicable date for compliance that was originally scheduled for April 10, 2017. On April 7, 2017, the DOL delayed compliance with the new rule until June 9, 2017. The rules became applicable on that date. Full compliance with the BIC and other exemptions was delayed until January 1, 2018. In August 2017, the DOL terminated the comment period on a proposal to extend the January 1, 2018 date until July 1, 2019. It is not clear whether the extension will be granted.

Various sections of the Dodd-Frank Act and DOL rules are currently under review by the Trump administration. These rules may be subject to proposed changes and/or elimination.

Some forms of compensation traditionally associated with the recruiting of financial advisers and the ability of financial advisers to have clients transfer their IRA and retirement accounts have been impacted by the DOL Rules. The fiduciary rule also has implications for long term incentive programs designed to reward financial advisers for increasing their business and their assets under management and administration. The Company has reviewed its business and operating models in light of these new rules as they have brought significant structural and operational changes to the Company and are likely to have an impact on revenues derived from retirement accounts and the desirability of servicing such accounts except when they are participating in fixed fee based programs. Under the new rules, fiduciaries are subject to personal liability for losses resulting from a breach of their duties. The SEC has announced its intention to adopt a fiduciary standard and accompanying rules for securities accounts; however, no details have been announced around either any such rules or the timing of any such adoption.

Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships with, Hedge Funds and Private Equity Funds (the "Volcker Rule") was published by the U.S. Federal Reserve Board as required by the Dodd-Frank Act in 2011. The Volcker Rule is intended to restrict U.S. banks and other financial institutions that accept deposits from conducting proprietary trading activities, as well as investing in hedge funds and private equity funds for their own account. The intent of the Volcker Rule is to reduce risk to the capital of such institutions through reducing speculation and risk-taking with bank capital. The Volcker Rule became effective on July 21, 2015. The U.S. Treasury Department has recently proposed that it will announce changes to the requirements of the Volcker Rule. No details on proposed changes have been issued. The Company believes that the Volcker Rule will not directly affect its operations, but indirect effects cannot be predicted with any certainty. Additionally, the Federal Reserve in conjunction with other U.S. regulatory organizations has analyzed the U.S. financial system and the impact that might result from the failure of one or more "Strategically Important Financial Institutions" ("SIFI"). To date, less than 50 such institutions have been identified and will be made subject to special regulations including the requirement to create a plan for their orderly demise in the event of a failure. Oppenheimer has not been identified as a SIFI. There can be no assurance that this list will not grow to include more SIFI institutions. The Company has no reason to believe that it will be identified as a SIFI. But, this requirement may have broader implications for the capital markets as capital becomes less available in various markets and markets become increasingly volatile.

The adoption of rules under Basel II have resulted in a number of large international banks adopting new business models which have included the abandonment of a variety of securities related businesses deemed to present excessive risks and requiring substantial capital that was not justified by the related returns. In addition, the European Commission recently adopted several acts under the revised Markets in Financial Instruments Directive (known as "MIFID II") that would prevent broker-dealers from "bundling" the cost of research together with trading commissions. The long term effects of these changes on the markets and on competition are impossible to predict. MIFID II becomes effective in the United Kingdom and in Europe in 2018 and is already having an impact on the manner in which business is being conducted in Europe. The ability to be compensated for equity research activities has been reduced and more institutional clients are making those payments that are available through cash payments rather than transaction based commissions.

In June 2016, in a referendum to consider the United Kingdom's continued participation in the European Common Market ("EC"), the United Kingdom voted in favor of withdrawing from the EC ("Brexit"). The British government instituted Rule 50 on March 30, 2017 thereby beginning a two-year period during which Great Britain will define its status effective with its departure from the EC. Brexit has created significant uncertainty in both the United Kingdom and in the other member states around its economic impact and the operating requirements for businesses located in the United Kingdom after the effective date which has led to fluctuations in the value of the British Pound based on news surrounding Brexit. The Company has a London-based business and the ability for it to passport its employees into the EU, post-Brexit, is in considerable doubt. In addition, a number of its London-based employees do not hold British passports and their continued employment in London is also in doubt. Given the lack of clarity on the ultimate impact of the Brexit vote, the Company cannot determine what, if any, impact this change may make on its operations, both inside and outside the United Kingdom.

The rules and requirements that were created by the passage of the Patriot Act, and the anti-money laundering regulations (AML) in the U.S. and similar laws in other countries that are related, have created significant costs of compliance and can be expected to continue to do so. FinCEN ("Financial Crimes Enforcement Network") has heightened their review of activities of broker-dealers where heretofore their focus had been on commercial banks. This increased focus is likely to lead to significantly higher levels of enforcement and higher fines and penalties on broker-dealers. Regulators have expanded their views of the requirements of the Patriot Act, as well as their views of the enforcement of the provisions of the Bank Secrecy Act and the Foreign Corrupt Practices Act with respect to the amount of diligence and on-going monitoring required by financial institutions of both their foreign and domestic clients and their activities. As a result, the Company has increased staffing, made additional investments in its due diligence systems, upgraded its monitoring systems and significantly revised its AML policies and procedures. In May 2016, FinCEN's proposed rule on customer due diligence was finalized with an effective date of May 11, 2018.

The Trump Administration has announced its intention to ease the regulatory burden on businesses. There can be no assurance that such easing will in fact take place or that it will have a favorable impact on financial service providers such as the Company.

Pursuant to FINRA Rule 3130, the chief executive officers ("CEOs") of regulated broker-dealers (including the CEO of Oppenheimer) are required to certify that their companies have processes in place to establish and test supervisory policies and procedures reasonably designed to achieve compliance with federal securities laws and regulations, including applicable regulations of self-regulatory organizations. The CEO of the Company is required to make such a certification on an annual basis and did so in March 2017.

In September 2015, FINRA released Regulatory Notice 15-33 which provides guidance on effective liquidity risk management strategies. Based on the guidelines, broker-dealers are expected to rigorously evaluate their liquidity needs related to both market wide stress and idiosyncratic stresses, devote sufficient resources to measuring risks applicable to its business and report the results of measurement to senior management. This would include a review of whether those risks might be based on historical events that have affected the firm or other firms and stresses that could occur but have not yet been observed. Additionally, based on the guidelines, every broker-dealer needs to consider developing contingency plans for addressing those risks so that the firm will have sufficient liquidity to operate after the stress occurs while continuing to protect all customer assets, conduct stress tests and other reviews to evaluate the effectiveness of the contingency plans, have a training plan for its staff and have tested the processes on which it intends to rely if such stresses occur. The Company has reviewed these guidelines and has enhanced its liquidity risk management practices to better align with the guidance provided in Regulatory Notice 15-33.

### Other Regulatory Matters

On January 27, 2015, the SEC approved an Offer of Settlement from Oppenheimer and issued an Order Instituting Administrative and Cease and Desist Proceedings (the "SEC Order"). Pursuant to the SEC Order, Oppenheimer was ordered to (i) cease and desist from committing or causing any violations of the relevant provisions of the federal securities laws; (ii) be censured; (iii) pay to the SEC $10.0 million comprised of $4.2 million in disgorgement, $753,500 in prejudgment interest and $5.1 million in civil penalties; and (iv) retain an independent consultant to review Oppenheimer's policies and procedures relating to anti-money laundering and Section 5 of the Securities Act of 1933.

Pursuant to the SEC Order, Oppenheimer made a payment of $5.0 million to the SEC on February 17, 2015 and made a second payment of $5.0 million to the SEC on January 26, 2017.

On February 19, 2015, the board of directors formed a Special Committee in order to engage an independent law firm to conduct a review of Oppenheimer and OAM's broker-dealer and investment adviser compliance processes and related internal controls and governance processes and provide recommendations to the Special Committee. On February 19, 2015, the Special Committee agreed to engage an independent law firm to conduct the aforementioned review. On April 22, 2015, the Special Committee agreed to retain Kalorama Partners LLC ("Kalorama") to act as the independent law firm. In July 2015, the Company created a Compliance Committee made up of independent directors to oversee the Company's compliance with applicable rules and regulations. In May 2017, the Board approved the assumption of the duties of the Special Committee by the Compliance Committee and the dissolution of the Special Committee. As part of its engagement of Kalorama, the Company agreed that the recommendations of Kalorama would be shared with the SEC. Moreover, Oppenheimer and OAM agreed to adopt the recommendations made by Kalorama for the FINRA IC and Additional IC Reports discussed below, subject to a process for any recommendations found by the Company to be impractical or overly burdensome.

In August 2015, Kalorama delivered a report as a result of a settlement reached by Oppenheimer with FINRA in a matter unrelated to the SEC matter discussed above (the "FINRA IC Report"). The FINRA IC Report was critical of the Company's governance practices, its management and its compliance program at the time of the review in 2015. The Company adopted and has implemented all of the recommendations made by Kalorama except for several technology projects that the Company expects to complete in 2017. The Company believes the changes made were responsive to the criticisms and recommendations made by Kalorama.

On December 15, 2016, the Company's agreement with Kalorama expired by its terms, although Kalorama had not yet delivered the reports required by the SEC. In May and June 2017, Kalorama delivered five additional reports, including two reports in connection with the January 2015 SEC Order, another report in connection with Oppenheimer's 2015 settlement with the SEC in connection with the SEC's Municipalities Continuing Disclosure Cooperation ("MCDC") initiative and two additional reports not arising out of any regulatory order (collectively, the "Additional IC Reports"). Each of the reports is currently being reviewed by the Company, including the Compliance Committee. The Additional IC Reports repeat a number of the criticisms regarding the Company's governance practices, its management and its compliance programs and include a substantial number of recommendations, a number of which appear in the FINRA IC Report. The Company believes it has already adopted and implemented a number of the recommendations made in the Additional IC Reports and expects that it will adopt and implement most of the remaining recommendations. However, there can be no assurances that the Company will be able to implement all of the recommendations as set forth in the Additional IC Reports and, to the extent the Company does not implement or provide a satisfactory alternative method of implementation, the Company may be exposed to further SEC or other regulatory enforcement action. Furthermore, implementation of the remaining recommendations included in the Additional IC Reports or any recommendations made in any additional reports may be costly and time consuming, may divert management's attention from operating the Company's business and may have an adverse effect on the Company. The Company has incurred a significant amount of expenses in connection with the preparation of the FINRA IC Report and the Additional IC Reports and may continue to incur additional expenses related thereto.

Since early 2014, Oppenheimer has been responding to information requests from FINRA regarding the supervision of one of its former financial advisers who was indicted by the United States Attorney's Office for the District of New Jersey in March 2014 on allegations of insider trading. In August 2014, Oppenheimer received information requests from the SEC regarding supervision of the same financial adviser. A number of Oppenheimer employees have provided on-the-record testimony in connection with the SEC inquiry. Oppenheimer is continuing to cooperate with both the FINRA and SEC inquiries.

For a number of years, the Company offered auction rate securities ("ARS") to its clients. A significant portion of the market in ARS 'failed' because, in the tight credit market in and subsequent to 2008, dealers were no longer willing or able to purchase the imbalance between supply and demand for ARS. These securities have auctions scheduled on either a 7, 28 or 35 day cycle. Beginning in February 2008, uncertainties in the credit markets resulted in substantially all of the ARS market experiencing failed auctions. Certain clients of the Company continue to hold ARS in their individual or corporate accounts.

Once the auctions failed, the ARS could no longer be valued using observable prices set in the auctions. The Company has also developed an internal methodology to discount for the lack of liquidity and non-performance risk of the failed auctions. Due to liquidity problems associated with the ARS market, ARS that lack liquidity are setting their interest rates according to a maximum rate formula defined in their registration statements.

The Company has sought financing from a number of sources, with limited success, in order to try to find a means for all its clients to find liquidity from their ARS holdings. It seems likely that liquidity will ultimately come from issuer redemptions and tender offers which, to date, combined with purchases by the Company have reduced client holdings by approximately 96%. There can be no assurance that the Company will be successful in finding a liquidity solution for all its clients' ARS. See "Risk Factors – The Company may continue to be adversely affected by the failure of the Auction Rate Securities Market" appearing in Exhibit 99.1 of the Company's Current Report on Form 8-K filed on June 7, 2017 and "Factors Affecting 'Forward-Looking Statements'" herein.

In February 2010, Oppenheimer finalized settlements with the Regulators concluding investigations and administrative proceedings by the Regulators concerning Oppenheimer's marketing and sale of ARS. Pursuant to the settlements with the Regulators, Oppenheimer agreed to extend offers to repurchase ARS from certain of its clients subject to certain terms and conditions. In addition to the settlements with the Regulators, Oppenheimer has also reached settlements of and received adverse awards in legal proceedings with various clients where the Company is obligated to purchase ARS. Pursuant to completed Purchase Offers (as defined) under the settlements with the Regulators and client related legal settlements and awards to purchase ARS, as of September 30, 2017, the Company purchased and holds (net of redemptions) approximately $109.0 million in ARS from its clients. As of September 30, 2017, the Company had $5.0 million of outstanding ARS purchase commitments related to the settlements with the Regulators. In addition, the Company is committed to purchase another $10.5 million from clients through 2020 under legal settlements and awards. See "Legal Proceedings" herein.

The ARS positions that the Company owns and is committed to purchase primarily represent auction rate preferred securities issued by closed-end funds and, to a lesser extent, municipal auction rate securities which are municipal bonds wrapped by municipal bond insurance and student loan auction rate securities which are asset-backed securities backed by student loans.

The Company's clients held at Oppenheimer approximately $54.8 million of ARS as of September 30, 2017 exclusive of amounts that 1) were owned by Qualified Institutional Buyers ("QIBs"), 2) were transferred to the Company after February 2008, 3) were purchased by clients after February 2008, or 4) were transferred from the Company to other securities firms after February 2008. See "Off-Balance Sheet Arrangements" herein for additional details.

### Other Matters

The Company operates in all state jurisdictions in the United States and is thus subject to regulation and enforcement under the laws and regulations of each of these jurisdictions. The Company has been and expects that it will continue to be subject to investigations and some or all of these may result in enforcement proceedings as a result of its business conducted in the various states. In particular, many states have become more aggressive and have imposed larger fines in connection with state registration violations than was heretofore the case.

As part of its ongoing business, the Company records reserves for legal expenses, judgments, fines and/or awards attributable to litigation and regulatory matters. In connection therewith, the Company has maintained its legal reserves at levels it believes will resolve outstanding matters, but may increase or decrease such reserves as matters warrant. In accordance with applicable accounting guidance, the Company establishes reserves for litigation and regulatory matters when those matters present loss contingencies that are both probable and reasonably estimable. When loss contingencies are not both probable and reasonably estimable, the Company does not establish reserves. See "Legal Proceedings" herein.

### Business Continuity

The Company is committed to an on-going investment in its technology and communications infrastructure including extensive business continuity planning and investment. These costs are on-going and the Company believes that current and future costs will exceed historic levels due to business and regulatory requirements. The Company maintains a data center which is housed in a location different from its headquarters. The move to new headquarters in 2012 required additional outlays for business continuity purposes although considerable savings have begun to be realized by the availability of independent electric generating capacity for the entire building which will support the Company's infrastructure and occupancy. The Company continues to review the adequacy of its remote data center and anticipates that, over the next few years, it may make a determination to move the center to a more remote location than where it currently resides.

The fourth quarter of 2012 was impacted by Superstorm Sandy which occurred on October 29, 2012 causing the Company to vacate its two principal offices in downtown Manhattan and displacing 800 of the Company's employees including substantially all of its capital markets, operations and headquarters staff for in excess of 30 days. The Company continues to review, both internally and with vendors, the infrastructure necessary to withstand a similar event in light of the issues that arose in the fall of 2012.

### Cybersecurity

The Company has been focused for many years on the issues of maintaining the security of its clients' data, access to its data processing environment and its data processing facilities. Recent examples of vulnerabilities by other companies and the government which have resulted in loss of client data and fraudulent activities by both domestic and foreign actors have caused the Company to review its security policies and procedures and to take additional actions to protect its network and its information. Such threats are ongoing.

Given the importance of protection of client data, regulators have developed increased oversight of cybersecurity planning and protections which have been put in place by broker-dealers and other financial service providers. Such planning and protection are subject to oversight and examination on a periodic or targeted basis by the SEC and FINRA. Such oversight is expected to intensify, given recent data breaches by other organizations, that have been announced involving tens of millions of individuals' personally identifiable information. The Company continues to adopt procedures to address the risks posed by the current environment. The Company has significantly increased the resources dedicated to this effort and believes that further increases will be required in the future, as the sophistication and persistency of such attacks increase.

### Outlook

The Company recognizes the increased focus on compliance with the regulatory requirements of our industry, and we must continue to perform a rigorous and ongoing assessment of our compliance and risk management efforts, invest in people and programs, all while continuing to provide a platform with first class investment ideas and services. The Company is committed to improving its technology capabilities to ensure compliance with industry regulations, support client service and expand its capital markets capabilities. The Company's long-term growth plan is to continue to expand existing offices by hiring experienced professionals as well as expand through the purchase of operating branch offices from other broker-dealers or the opening of new branch offices in attractive locations, thus maximizing the potential of each office and the development of existing trading, investment banking, investment advisory and other activities.

The Company is also reviewing its full service business model to determine the opportunities available for closely related business models in areas where competitors have shown some success. Equally important is the search for viable acquisition candidates. As opportunities are presented, it is the long-term intention of the Company to pursue growth by acquisition where a comfortable match can be found in terms of corporate goals and personnel at a price that would provide the Company's stockholders with incremental value. The Company may review potential acquisition opportunities and will continue to focus its attention on the management of its existing business and has disposed and may continue, from time to time, to dispose of businesses that are no longer strategic to its business operations or which have limited opportunities for growth. In June 2017, the Company refinanced its outstanding indebtedness and may under some circumstances utilize a portion of the money raised in excess of the pay-down of its previous bond issue for the acquisition of related businesses.

### Results of Operations

The Company reported net income attributable to Oppenheimer Holdings Inc. of $7.8 million or $0.59 basic net income per share for the third quarter of 2017 compared with a net loss attributable to Oppenheimer Holdings Inc. of $712,000 or $0.05 basic net loss per share for the third quarter of 2016. Income before income taxes from continuing operations was $11.8 million for the third quarter of 2017 compared with a loss before income taxes from continuing operations of $1.8 million for the third quarter of 2016. Net income from discontinued operations was $461,000 for the third quarter of 2017 compared with net income from discontinued operations of $413,000 for the third quarter of 2016. Revenue from continuing operations for the third quarter of 2017 was $226.2 million compared with revenue from continuing operations of $211.8 million for the third quarter of 2016, an increase of 6.8%. Revenue from discontinued operations for the third quarter of 2017 was $785,000 compared with revenue from discontinued operations of $1.8 million for the third quarter of 2016.

The following table and discussion summarizes the changes in the major revenue and expense categories for the three and nine months ended September 30, 2017 compared with the same period in 2016:

*(Expressed in thousands)*

| Revenue | For the Three Months Ended September 30, 2017 Amount Change | % Change | For the Nine Months Ended September 30, 2017 Amount Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Commissions | $(12,388) | (13.8) | $(38,243) | (13.4) |
| Advisory fees | 6,877 | 10.2 | 16,939 | 8.5 |
| Investment banking | 3,660 | 18.0 | 5,803 | 11.3 |
| Interest | 1,661 | 14.7 | 6 | — |
| Principal transactions, net | 213 | 4.3 | (3,307) | (17.3) |
| Other | 14,393 | 80.7 | 35,333 | 77.1 |
| Total revenue | 14,416 | 6.8 | 16,531 | 2.6 |
| **Expenses** |  |  |  |  |
| Compensation and related expenses | (218) | (0.2) | (3,899) | (0.9) |
| Communications and technology | 580 | 3.4 | 1,367 | 2.6 |
| Occupancy and equipment costs | 379 | 2.5 | 925 | 2.1 |
| Clearing and exchange fees | (264) | (4.5) | (1,614) | (8.5) |
| Interest | 1,813 | 38.7 | 4,184 | 28.8 |
| Other | (1,512) | (5.3) | (1,994) | (2.2) |
| Total expenses | 778 | 0.4 | (1,031) | (0.2) |
| Income (Loss) before income taxes from continuing operations | 13,638 | \* | 17,562 | \* |
| Income taxes | 5,176 | \* | 9,654 | \* |
| **Net income (loss) from continuing operations** | 8,462 | \* | 7,908 | \* |
| **Discontinued operations** |  |  |  |  |
| Income from discontinued operations | (119) | (13.4) | (13,763) | (88.2) |
| Income taxes | (167) | (35.2) | (5,502) | (88.2) |
| **Net income from discontinued operations** | 48 | 11.6 | (8,261) | (88.2) |
| **Net income (loss)** | 8,510 | \* | (353) | (16.4) |
| Less net income attributable to noncontrolling interest, net of tax | 9 | 13.6 | (1,347) | (88.2) |
| **Net income (loss) attributable to Oppenheimer Holdings Inc.** | $8,501 | \* | $994 | 158.0 |

\* Percentage not meaningful.

### Third Quarter 2017

### Revenue

Commission revenue was $77.6 million for the third quarter of 2017, a decrease of 13.8% compared with $90.0 million for the third quarter of 2016 due to reduced transaction volumes from retail and institutional investors and a lower financial adviser headcount during the third quarter of 2017.

Advisory fees were $74.3 million for the third quarter of 2017, an increase of 10.2% compared with $67.5 million for the

third quarter of 2016 due to a higher level of client assets under management.

Investment banking revenue increased 18.0% to $23.9 million for the third quarter of 2017 compared with $20.3 million for the third quarter of 2016 due to higher equity and debt underwriting fees partially offset by lower merger and acquisition advisory fees during the third quarter of 2017.

Interest revenue was $13.0 million for third quarter of 2017, an increase of 14.7% compared with $11.3 million for the third quarter of 2016. The increase is attributable to an increase in interest revenue on margin extended to customers offset by a decrease in interest earned on U.S. Government and Agency securities during the third quarter of 2017.

Principal transactions revenue increased 4.3% to $5.1 million for the third quarter of 2017 compared with $4.9 million for the third quarter of 2016 due to higher income from fixed income trading during the third quarter of 2017.

Other revenue was $32.2 million for the third quarter of 2017, an increase of 80.7% compared to $17.8 million for the third quarter of 2016. The increase is primarily due to higher fees earned on client deposits in the FDIC-insured bank deposit program and a favorable arbitration award during the third quarter of 2017.

### Expenses

Compensation and related expenses (including salaries, production and incentive compensation, share-based compensation,

deferred compensation, and other benefit-related items) totaled $142.1 million during the third quarter of 2017, roughly flat compared with the third quarter of 2016. Lower production-related expenses were offset by higher incentive and share-based compensation costs during the third quarter of 2017. Compensation and related expenses as a percentage of revenue was 62.8% during the third quarter of 2017 compared with 67.2% during the third quarter of 2016.

Non-compensation expenses were $72.3 million during the third quarter of 2017, an increase of 1.4% compared with $71.3 million during the third quarter of 2016 due to higher interest and external portfolio manager expenses partially offset by lower legal and regulatory costs during the third quarter of 2017.

The effective income tax rate from continuing operations for the third quarter of 2017 was 37.4% compared with 41.5% for the third quarter of 2016 and reflects the Company's estimate of the annual effective tax rate adjusted for certain discrete items.

### Year-to-date 2017

### Revenue

Commission revenue was $248.2 million for the nine months ended September 30, 2017, a decrease of 13.4% compared with $286.4 million for the nine months ended September 30, 2016 due to reduced transaction volumes from retail and institutional

investors and a lower financial adviser headcount during the nine months ended September 30, 2017.

Advisory fees were $216.5 million for the nine months ended September 30, 2017, an increase of 8.5% compared with $199.6 million for the nine months ended September 30, 2016. Assets under management increased 2.9% from $24.1 billion to $24.8 billion from December 31, 2015 to December 31, 2016, and 7.4% from $24.3 billion to $26.1 billion from June 30, 2016 to June 31, 2017, which contributed to the aforementioned advisory fee increase as the fees are calculated quarterly based on the market value at the end of the previous period.

Investment banking revenue increased 11.3% to $57.3 million for the nine months ended September 30, 2017 compared with $51.5 million for the nine months ended September 30, 2016 due to higher debt and equity underwriting fees offset by lower merger and acquisition advisory fees during the nine months ended September 30, 2017.

Interest revenue was $36.3 million for the nine months ended September 30, 2017, flat compared with $36.3 million for the nine months ended September 30, 2016.

Principal transactions revenue decreased 17.3% to $15.8 million for the nine months ended September 30, 2017 compared with $19.1 million for the nine months ended September 30, 2016 due to lower income from fixed income trading and changes in the fair value of ARS partially offset by increases in the value of firm investments during the nine months ended September 30, 2017.

Other revenue was $81.1 million for the nine months ended September 30, 2017, an increase of 77.1% compared to $45.8 million for the nine months ended September 30, 2016. The increase is primarily due to higher fees earned on client deposits in the FDIC-insured bank deposit program, positive changes in the cash surrender value of Company-owned life insurance and a favorable arbitration award during the nine months ended September 30, 2017.

### Expenses

Compensation and related expenses (including salaries, production and incentive compensation, share-based compensation, deferred compensation, and other benefit-related items) totaled $428.6 million for the nine months ended September 30, 2017, a decrease of 0.9% compared to $432.5 million for the nine months ended September 30, 2016. The decrease was due to lower salaries and production-related expenses offset by higher incentive and deferred compensation expenses during the nine months ended September 30, 2017. Compensation and related expenses as a percentage of revenue was 65.4% during the nine months ended September 30, 2017 compared to 67.7% during the nine months ended September 30, 2016.

Non-compensation expenses were $223.6 million during the nine months ended September 30, 2017, an increase of 1.3% compared to $220.7 million for the nine months ended September 30, 2016 due to a value-added tax ("VAT") assessment levied by the Israel VAT Authority and higher interest expenses offset by lower legal and regulatory costs during the nine months ended September 30, 2017.

The table below presents information about the reported revenue and income (loss) before income taxes from continuing operations of the Company's reportable business segments for the three and nine months ended September 30, 2017 and 2016:

*(Expressed in thousands)*

| Revenue | For the Three Months Ended September 30, 2017 | 2016 | % Change | For the Nine Months Ended September 30, 2017 | 2016 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Private Client (1) | $147,428 | $127,835 | 15.3 | $425,069 | $376,737 | 12.8 |
| Asset Management (1) | 19,277 | 23,234 | (17.0) | 57,247 | 68,978 | (17.0) |
| Capital Markets | 58,808 | 60,703 | (3.1) | 168,418 | 187,292 | (10.1) |
| Corporate/Other | 707 | 32 | 2,109.4 | 4,631 | 5,827 | (20.5) |
|  | $226,220 | $211,804 | 6.8 | $655,365 | $638,834 | 2.6 |
| **Income (loss) before income taxes** |  |  |  |  |  |  |
| Private Client (1) | $36,950 | $20,137 | 83.5 | $93,763 | $50,799 | 84.6 |
| Asset Management (1) | 3,338 | 9,380 | (64.4) | 11,130 | 21,851 | (49.1) |
| Capital Markets | (1,639) | (1,103) | 48.6 | (25,235) | (3,856) | 554.4 |
| Corporate/Other | (26,821) | (30,224) | (11.3) | (76,492) | (83,190) | (8.1) |
|  | $11,828 | $(1,810) | (753.5) | $3,166 | $(14,396) | (122.0) |

(1) Effective January 1, 2017, the allocation of advisory fees between Private Client and Asset Management changed from 77.5% and 22.5% to 90.0% and 10.0%, respectively.

### Private Client

Private Client reported revenue of $147.4 million for the third quarter of 2017, 15.3% higher than the third quarter of 2016 due to increased advisory fee revenue from higher client assets under management, changes in the revenue allocation with the Asset Management segment (see below) and higher fees earned on client deposits in the FDIC-insured bank deposit program offset by lower retail commissions during the third quarter of 2017. The third quarter of 2017 was also positively impacted by an arbitration award and insurance proceeds, totaling $4.1 million. Income before income taxes was $37.0 million for the third quarter of 2017, an increase of 83.5% compared with the third quarter of 2016 due to the increases in revenue referred to above during the third quarter of 2017.

- Client assets under administration were $82.8 billion at September 30, 2017 compared with $77.2 billion at December 31, 2016, an increase of 7.3%.
- Financial adviser headcount was 1,117 at the end of the third quarter of 2017, down from 1,177 at the end of the third quarter of 2016. The decline in financial adviser headcount since the third quarter of 2016 has resulted from the Company's attention to adviser productivity leading to attrition for less productive financial advisers. The decline in headcount also has been impacted by retirements and normal attrition.
- Retail commissions were $48.1 million for the third quarter of 2017, a decrease of 11.6% from the third quarter of 2016 due to reduced transaction volumes from retail investors and a lower financial adviser headcount during the third quarter of 2017.
- Advisory fee revenue on traditional and alternative managed products was $55.2 million for the third quarter of 2017, an increase of 22.1% from the third quarter of 2016 (see Asset Management below for further information). The increase in advisory fees was due to the increase in the value of client assets under management ("AUM") and the change in the allocation of advisory fees between the Private Client and Asset Management segments, effective January 1, 2017, which contributed to an increase of $5.6 million in revenue in the Private Client segment.
- Fees earned on client cash deposits in the FDIC-insured bank deposit program were $21.1 million during the third quarter of 2017 versus $9.6 million for the third quarter of 2016. The increase was due primarily to higher short-term interest rates during the third quarter of 2017.

### Asset Management

Asset Management reported revenue of $19.3 million for the third quarter of 2017, 17.0% lower than the third quarter of 2016 primarily due to the change in revenue allocation (see below). Income before income taxes was $3.3 million for the third quarter of 2017, a decrease of 64.4% compared with the third quarter of 2016.

- Advisory fee revenue on traditional and alternative managed products was $19.1 million for the third quarter of 2017, a decrease of 14.3% from the third quarter of 2016. Advisory fees are calculated based on the value of AUM at the end of the prior quarter which totaled $26.1 billion at June 30, 2017 ($24.3 billion at June 30, 2016) and are allocated to the Private Client and Asset Management business segments. Advisory fees decreased $5.6 million due to the change in the allocation of advisory fees between the Private Client and Asset Management segments which became effective January 1, 2017.
- At September 30, 2017, AUM hit a record high of $27.2 billion, an increase of 10.6% compared with $24.6 billion at September 30, 2016. AUM at September 30, 2017 is the basis for advisory fee billings for the fourth quarter of 2017. The increase in AUM was comprised of asset appreciation of $1.7 billion and net contributions of assets of $0.9 billion.

The following table provides a breakdown of the change in assets under management for the three months ended September 30, 2017:

*(Expressed in millions)*

| Fund Type | For the Three Months Ended September 30, 2017 Beginning Balance | Contributions | Redemptions | Appreciation (Depreciation) | Ending Balance |
| --- | ---: | ---: | ---: | ---: | ---: |
| Traditional (1) | $22,347 | $824 | $(472) | $600 | $23,299 |
| Institutional Fixed Income (2) | 1,191 | 28 | (549) | 9 | 679 |
| Alternative Investments: |  |  |  |  |  |
| Hedge Funds (3) | 2,376 | 73 | (102) | 188 | 2,535 |
| Private Equity Funds (4) | 168 | — | — | (12) | 156 |
| Portfolio Enhancement Program (5) | — | 540 | — | — | 540 |
|  | $26,082 | $1,465 | $(1,123) | $785 | $27,209 |

(1) Traditional investments include third party advisory programs, Oppenheimer financial adviser managed and advisory programs, and Oppenheimer Asset Management taxable and tax-exempt portfolio management strategies.

(2) Institutional fixed income provides solutions to institutional investors including: Taft-Hartley Funds, Public Pension Funds, Corporate Pension Funds, and Foundations and Endowments.

(3) Hedge funds represent single manager hedge fund strategies in areas including hedged equity, technology and financial services, and multi-manager and multi-strategy fund of funds.

(4) Private equity funds represent private equity fund of funds including portfolios focused on natural resources and related assets.

(5) Portfolio enhancement program sells uncovered, far out-of-money puts and calls on the S&P 500 Index. The program is market neutral and un-correlated to the index.

### Capital Markets

Capital Markets reported revenue of $58.8 million for the third quarter of 2017, 3.1% lower than the third quarter of 2016 due to lower institutional equities and fixed income commissions offset by higher fees from investment banking activities during the third quarter of 2017. Loss before income taxes was $1.6 million for the third quarter of 2017, compared with a loss before income taxes of $1.1 million for the third quarter of 2016 due to the decreases in revenue referred to above offset by lower salaries and production-related compensation expenses during the third quarter of 2017.

- Institutional equities commissions decreased 14.0% to $21.5 million for the third quarter of 2017 compared with the third quarter of 2016 due to lower volatility and trading volumes in the equity markets.
- Advisory fees from investment banking activities decreased 47.7% to $6.8 million in the third quarter of 2017 compared with the third quarter of 2016 due to lower fees earned on completed mergers and acquisitions transactions during the third quarter of 2017.
- Equity underwriting fees increased 234.3% to $11.7 million for the third quarter of 2017 compared with the third quarter of 2016 due to the Company's increased focus on equity issuance and penetration in the healthcare and technology sectors leading to higher equity underwriting activity during the period.
- Revenue from Taxable Fixed Income decreased 7.6% to $13.3 million for the third quarter of 2017 compared with the third quarter of 2016 due to low volatility which led to decreased institutional fixed income activity during the third quarter of 2017.
- Public Finance and Municipal Trading revenue increased 16.7% to $3.5 million for the third quarter of 2017 compared with the third quarter of 2016.

### Liquidity and Capital Resources

At September 30, 2017, total assets increased by 12.1% from December 31, 2016 primarily due to increases in securities owned. The Company satisfies its need for short-term financing from internally generated funds and collateralized and uncollateralized borrowings, consisting primarily of bank call loans, stock loans, and uncommitted lines of credit. The Company finances its trading in government securities through the use of securities sold under agreements to repurchase ("repurchase agreements"). The Company's longer-term capital needs have been met through the issuance of the 6.75% Senior Secured Notes due 2022 (see "Refinancing" below). The amount of Oppenheimer's bank borrowings fluctuates in response to changes in the level of the Company's securities inventories and customer margin debt, changes in notes receivable from employees, investment in furniture, equipment and leasehold improvements, and changes in stock loan balances and financing through repurchase agreements. Oppenheimer has arrangements with banks for borrowings on a fully-collateralized basis. At September 30, 2017, the Company had $130.1 million of such borrowings outstanding compared to outstanding borrowings of $145.8 million at December 31, 2016. The Company also has some availability of short-term bank financing on an unsecured basis.

Volatility in the financial markets and ongoing concerns about the speed and degree of economic recovery has had an adverse effect on the availability of credit through traditional sources. As a result of concerns around financial markets generally and the strength of counterparties specifically, lenders have reduced and, in some cases, ceased to provide funding on both a secured and unsecured basis to financial service providers.

The Company's overseas subsidiaries, Oppenheimer Europe Ltd. and Oppenheimer Investments Asia Limited, are subject to local regulatory capital requirements which restrict the Company's ability to utilize this capital for other purposes. The regulatory capital requirements for Oppenheimer Europe Ltd. and Oppenheimer Investments Asia Limited were $4.0 million and $387,000, respectively, at September 30, 2017. See Note 12 to the condensed consolidated financial statements appearing in Item 1 for further details. The liquid assets at Oppenheimer Europe Ltd. are primarily comprised of cash deposits in bank accounts. The liquid assets at Oppenheimer Investments Asia Limited are primarily comprised of investments in U.S. Treasuries and cash deposits in bank accounts. Any restrictions on transfer of these liquid assets from Oppenheimer Europe Ltd. and Oppenheimer Investments Asia Limited to the Company or its other subsidiaries would be limited by the regulatory capital requirements.

The Company permanently reinvests eligible earnings of its foreign subsidiaries in such subsidiaries and, accordingly, does not accrue any U.S. income taxes that would arise if these earnings were repatriated. The unrecognized deferred tax liability associated with earnings of foreign subsidiaries, net of associated U.S. foreign tax credits, is estimated at $1.9 million for those subsidiaries with respect to which the Company would be subject to residual U.S. tax on cumulative earnings through September 30, 2017 were those earnings to be repatriated. The Company intends to continue to reinvest permanently the excess earnings of OIL in its own business and in the businesses in Europe and Asia to support business initiatives in those regions.

In February 2010, Oppenheimer finalized settlements with the Regulators concluding investigations and administrative proceedings concerning Oppenheimer's marketing and sale of ARS. Pursuant to those settlements and legal settlements and awards, the Company has purchased and will, subject to the terms and conditions of the settlements, continue to purchase ARS on a periodic basis. The ultimate amount of ARS to be repurchased by the Company cannot be predicted with any certainty and will be impacted by redemptions by issuers and legal and other actions by clients during the relevant period which cannot be predicted. See "Off-Balance Sheet Arrangements" herein.

Additional settlements of regulatory matters could have an adverse effect on the Company's liquidity depending on the size and composition of any such settlement.

### Refinancing

On June 23, 2017, the Company issued in a private offering $200.0 million aggregate principal amount of 6.75% Senior Secured Notes due 2022 (the "6.75% Notes") under an indenture at an issue price of 100% of the principal amount. On September 19, 2017, the Company completed an exchange offer in which the Company exchanged 99.8% of its unregistered 6.75% Notes for a like principal amount of notes with identical terms except that such new notes have been registered under the Securities Act of 1933, as amended (the "Notes"). The Company did not receive any proceeds in the exchange offer. The interest on the Notes is payable semi-annually on January 1st and July 1st, beginning January 1, 2018. The Company used a portion of the net proceeds from the offering of the Notes to redeem in full its 8.75% Senior Secured Notes due April 15, 2018 in the principal amount of $120.0 million, and pay all related fees and expenses related thereto. See Note 9 to the condensed consolidated financial statements appearing in Item 1 for further discussion.

On June 15, 2017, S&P upgraded the Company's 'B' Corporate Family rating and 'B' rating on the Notes to 'B+' with a stable outlook. On June 15, 2017, Moody's Corporation affirmed the Company's 'B2' Corporate Family rating and 'B1' rating on the Notes and affirmed its stable outlook.

### Liquidity

For the most part, the Company's assets consist of cash and cash equivalents and assets which can be readily converted into cash. Receivable from brokers, dealers and clearing organizations represents deposits for securities borrowed transactions, margin deposits or current transactions awaiting settlement. Receivable from customers represents margin balances and amounts due on transactions awaiting settlement. The Company's receivables are, for the most part, collateralized by marketable securities. The Company's collateral maintenance policies and procedures are designed to limit the Company's exposure to credit risk. Securities owned, with the exception of the ARS, are mainly comprised of actively trading, readily marketable securities. The Company advanced $4.6 million in forgivable notes to employees (which are inherently illiquid) for the three months ended September 30, 2017 ($1.8 million for the three months ended September 30, 2016) as upfront or backend inducements. The amount of funds allocated to such inducements will vary with hiring activity.

The Company satisfies its need for short-term liquidity from internally generated funds, collateralized and uncollateralized bank borrowings, stock loans and repurchase agreements and warehouse facilities. Bank borrowings are collateralized by firm and customer securities.

The Company does not repatriate the earnings of its foreign subsidiaries. Foreign earnings are permanently reinvested for the use of the foreign subsidiaries and therefore these foreign earnings are not available to satisfy the domestic liquidity requirements of the Company. The Trump Administration has announced its intention to propose changes to the rules surrounding the taxation of companies' non-U.S. earnings that would have the effect of making it more attractive to repatriate such earnings. There is no way of knowing if such rule changes will be adopted or, if so, if they will result in the Company repatriating its foreign earnings.

The Company obtains short-term borrowings primarily through bank call loans. Bank call loans are generally payable on demand and bear interest at various rates not exceeding the broker call rate. At September 30, 2017, bank call loans were $130.1 million ($145.8 million at December 31, 2016 and $132.0 million at September 30, 2016). The average daily bank loan outstanding for the three and nine months ended September 30, 2017 was $105.7 million and $137.9 million, respectively ($94.0 million and $101.1 million for the three and nine months ended September 30, 2016, respectively). The largest daily bank loan outstanding for the three and nine months ended September 30, 2017 was $230.4 million and $247.6 million, respectively ($170.3 million and $192.2 million for the three and nine months ended September 30, 2016, respectively). The average weighted interest rate on bank call loans applicable on September 30, 2017 was 2.17%.

At September 30, 2017, securities loan balances totaled $179.2 million ($179.9 million at December 31, 2016 and $133.2 million at September 30, 2016). The average daily securities loan balance for the three and nine months ended September 30, 2017 was $170.4 million and $162.8 million, respectively ($149.9 million and $174.0 million for the three and nine months ended September 30, 2016, respectively). The largest daily stock loan balance for the three and nine months ended September 30, 2017 was $208.8 million ($177.7 million and $241.7 million for the three and nine months ended September 30, 2016, respectively).

The Company finances its government trading operations through the use of securities purchased under agreements to resell ("reverse repurchase agreements") and repurchase agreements. Except as described below, repurchase and reverse repurchase agreements, principally involving government and agency securities, are carried at amounts at which securities subsequently will be resold or reacquired as specified in the respective agreements and include accrued interest. Repurchase and reverse repurchase agreements are presented on a net-by-counterparty basis, when the repurchase and reverse repurchase agreements are executed with the same counterparty, have the same explicit settlement date, are executed in accordance with a master netting arrangement, the securities underlying the repurchase and reverse repurchase agreements exist in "book entry" form and certain other requirements are met.

Certain of the Company's repurchase agreements and reverse repurchase agreements are carried at fair value as a result of the Company's fair value option election. The Company elected the fair value option for those repurchase agreements and reverse repurchase agreements that do not settle overnight or have an open settlement date. The Company has elected the fair value option for these instruments to more accurately reflect market and economic events in its earnings and to mitigate a potential imbalance in earnings caused by using different measurement attributes (i.e. fair value versus carrying value) for certain assets and liabilities. As of September 30, 2017, the Company did not have any reverse repurchase agreements and repurchase agreements for which the fair value option was elected.

At September 30, 2017, the gross balances of reverse repurchase agreements and repurchase agreements were $241.6 million and $640.2 million, respectively. The average daily balance of reverse repurchase agreements and repurchase agreements on a gross basis for the three months ended September 30, 2017 was $200.4 million and $601.3 million, respectively ($281.3 million and $741.9 billion, respectively, for the three months ended September 30, 2016). The largest amount of reverse repurchase agreements and repurchase agreements outstanding on a gross basis during the three months ended September 30, 2017 was $303.4 million and $741.3 million, respectively ($432.0 million and $864.2 billion, respectively, for the three months ended September 30, 2016).

At September 30, 2017, the gross leverage ratio was 5.0

### Liquidity Management

The Company manages its need for liquidity on a daily basis to ensure compliance with regulatory requirements. The Company's liquidity needs may be affected by market conditions, increased inventory positions, business expansion and other unanticipated occurrences. In the event that existing financial resources do not satisfy the Company's needs, the Company may have to seek additional external financing. The availability of such additional external financing may depend on market factors outside the Company's control.

The Company regularly reviews its sources of liquidity and financing and conducts internal stress analysis to determine the impact on the Company of events that could remove sources of liquidity or financing and to plan actions the Company could take in the case of such an eventuality. The Company's reviews have resulted in plans that the Company believes would result in a reduction of assets through liquidation that would significantly reduce the Company's need for external financing.

### Funding Risk

*(Expressed in thousands)*

|  | For the Nine Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: |
| Cash used in operating activities | $(34,386) | $(23,955) |
| Cash (used in) provided by investing activities | (2,312) | 43,165 |
| Cash provided by financing activities | 16,579 | 16,470 |
| Net (decrease) increase in cash and cash equivalents | $(20,119) | $35,680 |

Management believes that funds from operations, combined with the Company's capital base and available credit facilities, are sufficient for the Company's liquidity needs in the foreseeable future. Changes in capital requirements under international standards that will impact the costs and relative returns on loans may cause banks including those with whom the Company relies to back away from providing funding to the securities industry. Such a development might impact the Company's ability to finance its day to day activities or increase the costs to acquire funding. The Company may or may not be able to pass such increased funding costs on to its clients. (See "Factors Affecting 'Forward-Looking Statements'".) In June 2017, the Company refinanced its outstanding indebtedness. See "Refinancing" above in this section.

### Other Matters

During the third quarter of 2017, the Company purchased and canceled 143,010 shares of Class A non-voting common stock ("Class A Stock") for a total consideration of $2.3 million pursuant to its share repurchase program.

On October 27, 2017, the board of directors declared a regular quarterly cash dividend of $0.11 per share of Class A Stock and Class B voting common stock ("Class B Stock") payable on November 24, 2017 to stockholders of record on November 10, 2017.

The book value of the Company's Class A Stock and Class B Stock was $38.48 at September 30, 2017 compared to $38.22 at December 31, 2016, based on total outstanding shares of 13,109,313 and 13,368,104, respectively.

The diluted weighted average number of shares of Class A Stock and Class B Stock outstanding for the three months ended September 30, 2017 was 13,763,516 compared to 13,366,863 outstanding for the same period in 2016.

### Off-Balance Sheet Arrangements

In February 2010, Oppenheimer finalized settlements with the Regulators concluding investigations and administrative proceedings by the Regulators concerning Oppenheimer's marketing and sale of ARS. Pursuant to the settlements with the Regulators, Oppenheimer agreed to extend offers to repurchase ARS from certain of its clients subject to certain terms and conditions more fully described below. At September 30, 2017, the Company had $5.0 million of outstanding ARS purchase commitments related to the settlements with the Regulators. In addition to the settlements with the Regulators, Oppenheimer has also reached settlements of and received adverse awards in legal proceedings with various clients where the Company is obligated to purchase ARS. Pursuant to completed Purchase Offers under the settlements with the Regulators and client related legal settlements and awards to purchase ARS, as of September 30, 2017, the Company purchased and holds (net of redemptions) approximately $109.0 million in ARS from its clients. In addition, the Company is committed to purchase another $10.5 million in ARS from clients through 2020 under legal settlements and awards.

The Company's purchases of ARS from its clients holding ARS eligible for repurchase will, subject to the terms and conditions of the settlements with the Regulators, continue on a periodic basis. Pursuant to these terms and conditions, the Company is required to conduct a financial review every six months, until the Company has extended Purchase Offers to all Eligible Investors to determine whether it has funds available, after giving effect to the financial and regulatory capital constraints applicable to the Company, to extend additional Purchase Offers. The financial review is based on the Company's operating results, regulatory net capital, liquidity, and other ARS purchase commitments outstanding under legal settlements and awards (described below). There are no predetermined quantitative thresholds or formulas used for determining the final agreed upon amount for the Purchase Offers. Upon completion of the financial review, the Company first meets with its primary regulator, FINRA, and then with representatives of the NYAG and other regulators to present the results of the review and to finalize the amount of the next Purchase Offer. Various offer scenarios are discussed in terms of which Eligible Investors should receive a Purchase Offer. The primary criteria to date in terms of determining which Eligible Investors should receive a Purchase Offer has been the amount of household account equity each Eligible Investor had with the Company in February 2008. Once various Purchase Offer scenarios have been discussed, the Regulators, not the Company, make the final determination of which Purchase Offer scenario to implement. The terms of settlements provide that the amount of ARS to be purchased during any period shall not risk placing the Company in violation of regulatory requirements.

Outside of the settlements with the Regulators, the Company has also reached various legal settlements with clients and received unfavorable legal awards requiring it to purchase ARS. The terms and conditions including the ARS amounts committed to be purchased under legal settlements are based on the specific facts and circumstances of each legal proceeding. In most instances, the purchase commitments are in increments and extend over a period of time. At September 30, 2017, no ARS purchase commitments related to legal settlements extended past 2020. To the extent the Company receives an unfavorable award, the Company usually must purchase the ARS provided for by the award within 30 days of the rendering of the award. The ultimate amount of ARS to be repurchased by the Company under both the settlements with the Regulators and the legal settlements and awards cannot be predicted with any certainty and will be impacted by redemptions by issuers, the Company's financial and regulatory constraints, and legal and other actions by clients during the relevant period, which also cannot be predicted.

The ARS positions that the Company owns and are committed to purchase primarily represent auction rate preferred securities issued by closed-end funds and, to a lesser extent, municipal auction rate securities which are municipal bonds wrapped by municipal bond insurance and student loan auction rate securities which are asset-backed securities backed by student loans. At September 30, 2017, the amount of ARS held by the Company that was below investment grade was $25,000 and the amount of ARS that was unrated was $25,000.

*(Expressed in thousands)*

*Auction Rate Securities Owned and Committed to Purchase at September 30, 2017*

| Product | Principal | Valuation Adjustment | Fair Value |
| --- | ---: | ---: | ---: |
| Auction Rate Securities Owned (1) | $109,000 | $2,216 | $106,784 |
| ARS Commitments to Purchase Pursuant to: (2)(3) |  |  |  |
| Settlements with the Regulators (4) | 5,000 | 118 | 4,882 |
| Legal Settlements and Awards (5) | 10,523 | 158 | 10,365 |
| Total | $124,523 | $2,492 | $122,031 |

(1) Principal amount represents the par value of the ARS and is included in securities owned on the condensed consolidated balance sheet at September 30, 2017. The valuation adjustment amount is included as a reduction to securities owned on the condensed consolidated balance sheet at September 30, 2017.

(2) Principal amount represents the present value of the ARS par value that the Company is committed to purchase at a future date. This principal amount is presented as an off-balance sheet item. The valuation adjustment is included in accounts payable and other liabilities on the condensed consolidated balance sheet at September 30, 2017.

(3) Specific ARS to be purchased under ARS Purchase Commitments are unknown until the beneficial owner selects the individual ARS to be purchased.

(4) Commitments to purchase under settlements with the Regulators at September 30, 2017. Eligible Investors for future buybacks under the settlements with the Regulators held approximately $30.6 million of ARS as of September 30, 2017.

(5) Commitments to purchase under various legal settlements and awards with clients through 2020.

Per the above table, the Company has recorded a valuation adjustment on its ARS owned and ARS purchase commitments of $2.5 million as of September 30, 2017. The valuation adjustment is comprised of $2.2 million which represents the difference between the principal value and the fair value of the ARS the Company owned as of September 30, 2017 and $276,000 which represents the difference between the principal value and the fair value of the ARS the Company is committed to purchase under the settlements with the Regulators and legal settlements and awards. At September 30, 2017, the Company had $5.0 million of outstanding ARS purchase commitments related to the settlements with the Regulators. Eligible Investors for future buybacks under the settlements with the Regulators held approximately $30.6 million of ARS as of September 30, 2017. Since the Company was not committed to purchase this amount as of September 30, 2017, there were no valuation adjustments booked to recognize the difference between the principal value and the fair value for this remaining amount.

Additional information concerning the Company's off-balance sheet arrangements is included in Note 6 to the condensed consolidated financial statements appearing in Item 1 herein.

### Contractual and Contingent Obligations

The following table sets forth the Company's contractual obligations as of September 30, 2017:

*(Expressed in thousands)*

|  | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Operating Lease Obligations | $245,432 | $41,838 | $68,086 | $47,073 | $88,435 |
| Committed Capital | 1,401 | 1,401 | — | — | — |
| Senior Secured Notes (1)(2) | 267,838 | 13,238 | 27,000 | 227,600 | — |
| ARS Purchase Commitments (3) | 10,523 | — | 7,362 | 3,161 | — |
| Total | $525,194 | $56,477 | $102,448 | $277,834 | $88,435 |

(1) See Note 9 to the condensed consolidated financial statements appearing in Item 1 for additional information.

(2) Includes interest payable of $67.8 million through maturity.

(3) See Note 11 to the condensed consolidated financial statements appearing in Item 1 for additional information.

### Inflation

Because the assets of the Company's brokerage subsidiaries are highly liquid, and because securities inventories are carried at current market values, the impact of inflation generally is reflected in the financial statements. However, the rate of inflation affects the Company's costs relating to employee compensation, rent, communications and certain other operating costs, and such costs may not be recoverable in the level of commissions or fees charged. To the extent inflation results in rising interest rates and has other adverse effects upon the securities markets, it may adversely affect the Company's financial position and results of operations.

### Factors Affecting "Forward-Looking Statements"

From time to time, the Company may publish "Forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act or make oral statements that constitute forward-looking statements. These forward-looking statements may relate to such matters as anticipated financial performance, future revenues or earnings, business prospects, projected ventures, new products, anticipated market performance, and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company cautions readers that a variety of factors could cause the Company's actual results to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. These risks and uncertainties, many of which are beyond the Company's control, include, but are not limited to: (i) transaction volume in the securities markets, (ii) the volatility of the securities markets, (iii) fluctuations in interest rates, (iv) changes in regulatory requirements which could affect the cost and method of doing business and reduce returns, (v) fluctuations in currency rates, (vi) general economic conditions, both domestic and international, including fluctuating oil prices, (vii) changes in the rate of inflation and the related impact on the securities markets, (viii) competition from existing financial institutions and other participants in the securities markets, (ix) legal developments affecting the litigation experience of the securities industry and the Company, including developments arising from the failure of the Auction Rate Securities markets, the trading of low-priced securities, stepped up enforcement efforts by the SEC, FinCEN, FINRA and other regulators and the results of pending litigation and regulatory proceedings involving the Company, (x) changes in foreign, federal and state tax laws which could affect the popularity of products sold by the Company or impose taxes on securities transactions, (xi) applications and enforcement of the DOL retirement rules and regulations, (xii) the effectiveness of efforts to reduce costs and eliminate overlap, (xiii) war and nuclear confrontation as well as political unrest and regime changes, health epidemics and economic crisis in foreign countries, (xiv) the Company's ability to achieve its business plan, (xv) corporate governance issues, (xvi) the impact of the credit crisis and tight credit markets on business operations, (xvii) the effect of bailout, financial reform and related legislation, including, without limitation, the Wall Street Reform and the Dodd-Frank Act, the Volcker Rule and the rules and regulations thereunder and the new DOL rule (see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Regulatory and Legal Environment"), (xviii) the consolidation of the banking and financial services industry, (xix) the effects of the economy on the Company's ability to find and maintain financing options and liquidity, (xx) credit, operations, legal and regulatory risks, (xxi) risks related to foreign operations, including those in the United Kingdom which may be affected by Britain's June 23, 2016 referendum to exit the EU ("Brexit"), (xxii) risks related to the downgrade of U.S. long-term sovereign debt obligations and the sovereign debt of European nations, (xxiii) risks related to the manipulation of the London Interbank Offered Rate ("LIBOR") and concerns over high speed trading, (xxiv) potential cyber security threats, (xxv) the effect of technological innovation on our industry and business, (xxvi) risks related to changes by S&P Global Ratings ("S&P") or Moody's Investor Service, Inc. ("Moody's") of its rating on the Company and on the Company's long-term debt, and (xxvii) risks related to elections results, Congressional gridlock, government shutdowns and investigations, changes in or uncertainty surrounding regulations and threats of default by the federal government. There can be no assurance that the Company has correctly or completely identified and assessed all of the factors affecting the Company's business. The Company does not undertake any obligation to publicly update or revise any forward-looking statements. See Exhibit 99.1 – "Risk Factors" appearing in the Company's Current Report on Form 8-K filed on June 7, 2017.

## Market risk

As filed, 210 characters.

During the nine months ended September 30, 2017, there were no material changes to the information contained in Part II, Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

## Controls and procedures

As filed, 2,991 characters.

The Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rule 13a–15(e) of the Exchange Act. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report.

Management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the Company's disclosure controls and procedures or its internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision–making can be faulty and that break-downs can occur because of a simple error or omission. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based, in part, upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost–effective control system, misstatements due to error or fraud may occur and not be detected. The Company confirms that its management, including its Chief Executive Officer and its Chief Financial Officer, concluded that the Company's disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in its reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.

### Changes in Internal Control over Financial Reporting

There have been no changes in the Company's internal controls over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the nine months ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.

## Risk factors

As filed, 530 characters.

During the nine months ended September 30, 2017, there were no material changes to the information contained in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2016; provided, however, that the Company updated its Risk Factors in connection with the issuance of the Notes which may be found in Exhibit 99.1 to the Company's Current Report on Form 8-K filed with the SEC on June 7, 2017. There were no material changes to such information during the nine months ended September 30, 2017.

Filed Oct 27, 2017.
Source: SEC EDGAR, the filing index for accession 0000791963-17-000020. Last ingested by Listed: Nov 9, 2026, 19:54 ET. No prices; not investment advice.