# Oppenheimer Holdings Inc: Form 10-Q for the period ended Mar 31, 2018

- Company: [Oppenheimer Holdings Inc](/companies/opy.md) (CIK 791963)
- Form: 10-Q
- Filed: 2018-04-27
- Accepted by EDGAR: Apr 27, 2018, 08:46 ET
- Period: 2018-03-31
- Accession: 0000791963-18-000010
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/791963/000079196318000010/opy-3312018x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/791963/000079196318000010/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-01-01 to 2018-03-31 | $218.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Interest expense | 3 months, 2018-01-01 to 2018-03-31 | $9.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2018-01-01 to 2018-03-31 | $2.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-01-01 to 2018-03-31 | $6.7m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-01-01 to 2018-03-31 | $0.48 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-01-01 to 2018-03-31 | $0.51 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-01-01 to 2018-03-31 | 13,977,492 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2018-01-01 to 2018-03-31 | −$27.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2018-01-01 to 2018-03-31 | $2.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2018-01-01 to 2018-03-31 | $1.5m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 3 months, 2018-01-01 to 2018-03-31 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2018-03-31 | $42.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2018-03-31 | $2.53bn | us-gaap:Assets |
| Total liabilities | at 2018-03-31 | $2.00bn | us-gaap:Liabilities |
| Long-term debt | at 2018-03-31 | $198.9m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2018-03-31 | $530.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 74,656 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, 2017.

The Company engages in a broad range of activities in the securities industry, including retail securities brokerage, institutional sales and trading, market-making, research, investment banking (both corporate and public finance), investment advisory and asset management services and trust services. Its principal subsidiaries are Oppenheimer & Co. Inc. ("Oppenheimer") and Oppenheimer Asset Management Inc. ("OAM"). As of March 31, 2018, the Company provided its services from 92 offices in 24 states located throughout the United States, 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 March 31, 2018 totaled $84.9 billion. The Company provides investment advisory services through OAM and Oppenheimer Investment Management LLC ("OIM") and Oppenheimer's Fahnestock Asset Management, Alpha and OMEGA Group divisions. At March 31, 2018, client assets under management ("AUM") totaled $28.2 billion. The Company provides trust services and products through Oppenheimer Trust Company of Delaware Inc. The Company provides discount brokerage services through Freedom Investments, Inc. ("Freedom"). Through OPY Credit Corp., the Company offers syndication as well as trading of issued syndicated corporate loans. At March 31, 2018, the Company employed 2,973 employees (2,913 full-time and 60 part-time), of whom 1,082 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, 2017. 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 March 31, 2018, 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, 2017.

### 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.

### Corporate Tax Reform

On December 22, 2017, the Federal government enacted Public Law 115-97, commonly referred to as the Tax Cuts and Jobs Act ("TCJA"). The TCJA makes broad and complex changes to the U.S. tax code, including, but not limited to: (1) reducing the U.S. Federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) a new provision designed to tax global intangible low-taxed income ("GILTI"), which allows for the possibility of using foreign tax credits ("FTCs") and a deduction of up to 50 percent to offset the income tax liability (subject to some limitations); (5) limitations on the use of FTCs to reduce the U.S. income tax liability; (6) eliminating the corporate alternative minimum tax ("AMT") and changing how existing AMT credits can be realized; (7) creating the base erosion anti-abuse tax, a new minimum tax; (8) limitations on the deductibility of certain executive compensation; (9) creating a new limitation on deductible interest expense; (10) eliminating the deductibility of entertainment expenses; and (11) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017. See note 11 to the condensed consolidated financial statements in Item 1 for further discussion.

### Regulatory and Legal Environment

The Company's 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 ("FCA") 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. operates under the supervision of the Israeli Securities Authority. Past events surrounding corporate accounting and other activities leading to investor losses caused increased regulation of public companies. Certain legislators continue to publicly advocate that the SEC has not taken adequate enforcement action against firms and individuals. 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. 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 not applicable to the Company. In 2016, the U.S. Department of Labor ("DOL") adopted 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 and increased the disclosures provided to clients. 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 DOL finalized its definition of fiduciary under the Employee Retirement Income Security Act 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 rule, investment advice given to an employee benefit plan or an individual retirement account ("IRA") would be considered fiduciary advice. As a result, financial service providers and advisers who provide investment advice would be required to meet "conflict of interest" standards which are likely to limit commission-based compensation in favor of flat-fee compensation plans. The rules will also in all likelihood discourage 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 some circumstances, allow advisers to continue to receive commissions under a contract with a retirement investor. However, there would be 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 to offer commission-based activity to retirement accounts.

In March 2018, the U.S. 5th Circuit Court of Appeals found that the DOL did not have the jurisdiction to adopt the aforementioned rules. The ruling created additional uncertainty around the adoption of fiduciary or other standards applying to customer accounts generally and retirement assets in particular. The DOL has until May 8, 2018 to appeal the ruling. Commentators have stated that to the extent the ruling is not appealed the rules will be rendered unenforceable. The ultimate outcome of the enforceability and effect of the rules are not clear.

On April 18, 2018, the SEC announced its proposed "Regulation Best Interest," a package of rulemakings and interpretations that address customers' relationships with investment advisors and broker-dealers. Regulation Best Interest would replace the DOL fiduciary standard with an intermediate standard applicable to all customers of broker-dealers and investment advisors. Regulation Best Interest is subject to public review and comment until July 17, 2018. It is too soon to predict whether and in what form the SEC will adopt Regulation Best Interest, the effect it may have on broker-dealers and investment advisors generally, the specific effect it has on the Company's broker-dealer and investment management businesses, and the effect it has on the Company’s competitive position in the financial services industry. The Company does not expect the DOL to appeal the 5th Circuit ruling.

During 2017, the Company reviewed its business and operating models in light of the DOL fiduciary rules and made significant structural and operational changes to the Company's broker-dealer and investment management businesses. For example, Oppenheimer no longer confirms sales of underwritten securities to IRA accounts. The changes have had a negative impact on revenues derived from retirement accounts and the desirability of servicing such accounts, except when they are participating in fixed fee based programs. The Company will again review its business and operating models in light of the 5th Circuit ruling and the proposed Regulation Best Interest and may make further structural and operational changes in light of the vacated DOL fiduciary rule and in anticipation of the SEC adopting a version of Regulation Best Interest.

The European Commission recently adopted several acts under the revised Markets in Financial Instruments Directive (known as "MiFID II") that would prevent broker-dealers operating in the European Union ("EU") from "bundling" the cost of research together with trading commissions. These rules became effective on January 3, 2018. The ability of the Company to be compensated for equity research activities has been reduced and institutional clients are required to make payments for research through cash payments rather than transaction-based commissions. MiFID II is already having an impact on the manner in which business is being conducted in the United Kingdom and in Europe. The long term effects of these changes on securities markets and on competition in the EU are impossible to predict.

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 and the EU will define their relationship effective with Great Britain's 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. The value of the British Pound fell based on news surrounding Brexit. The Company has a London-based business and the ability for it to passport its employees to conduct a financial services business in 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 post Brexit relationship between Great Britain and the EU, the Company cannot determine what, if any, impact Brexit may have on its operations, both inside and outside the United Kingdom.

The anti-money laundering ("AML") rules and requirements that were created by the passage of the USA Patriot Act in the U.S. and similar laws in other countries have created significant costs of compliance and can be expected to continue to do so. The U.S. Financial Crimes Enforcement Network ("FinCEN") has heightened its review of the activities of broker-dealers. 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 USA 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 significantly increased its AML 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 ("CDD Rule") was finalized with an effective date of May 11, 2018. FINRA has recently announced the expansion of AML regulations to include the collection and analysis of other types of client activity. The CDD and associated rules are significantly more intrusive on the activities of U.S.-based clients and will have the effect of increasing the costs associated with opening new accounts and creating new business relationships.

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, that it will have a favorable impact on financial service providers such as the Company, or that it will effect positively the Company's competitive position.

Pursuant to FINRA Rule 3130, the chief executive officers ("CEOs") of member 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 2018.

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 evaluate rigorously their potential liquidity needs related to both market wide stress and idiosyncratic stresses, devote sufficient resources to measuring risks applicable to their businesses and report the results of measurement to senior management. The reporting requirement includes a review of risks that are based on historical events and stresses that could occur but have not yet been observed. Additionally, based on the guidelines, every broker-dealer must 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 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 in light of the guidance provided in Regulatory Notice 15-33.

On January 8, 2018, FINRA released for comment Regulatory Notice 18-02 "Liquidity Reporting and Notification" which would require member firms to notify FINRA no more than 48 hours after specified events that may signal an adverse change in liquidity risk. This notice would also require members to file a new Supplemental Liquidity Schedule ("SLS") detailing the largest customer and counterparty exposures as a supplement to the FOCUS Report. On the new SLS, member firms would report information related to specified financing transactions and other sources or uses of liquidity. The information would include among other things, financing terms, collateral types and large counterparties.

### 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, LLP ("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 Report 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 the near future. The Company believes the changes made were responsive to the recommendations made by Kalorama.

On December 15, 2016, the Company's agreement with Kalorama expired by its terms, and as of the current date has not been renewed, although Kalorama had not yet delivered the reports required by the SEC. In May and June 2017, Kalorama delivered five additional reports. Two of those reports were rendered in connection with the January 2015 SEC Order, while another report was rendered in connection with Oppenheimer's 2015 settlement with the SEC in connection with the SEC's Municipalities Continuing Disclosure Cooperation ("MCDC", collectively the "Required Reports") initiative and two additional reports not arising out of any regulatory order (the "Additional IC Reports"). Each of the reports has been reviewed by the Company, including the Compliance Committee. The Required Reports and 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 significant number of the recommendations made in the Required Reports and 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 Required Reports and 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 Required Reports and 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, the Required Reports and the Additional IC Reports and may continue to incur additional expenses related thereto.

Since August 2014, Oppenheimer has been responding to information requests from the SEC 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. A number of Oppenheimer employees have provided on-the-record testimony in connection with the SEC inquiry. Oppenheimer is continuing to cooperate with the SEC inquiry.

Since September 2016, Oppenheimer has been responding to information requests from FINRA (including FINRA's Enforcement Division) regarding the supervision of Oppenheimer’s sale of unit investment trusts from 2011 to 2015. The Company understands that the inquiry is part of a larger targeted examination or "sweep" examination involving many other brokerage firms. Oppenheimer is continuing to cooperate with the FINRA inquiry.

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. 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 97%. There can be no assurance that the Company will be successful in finding a liquidity solution for its clients' remaining ARS. See "Risk Factors — The Company may continue to be adversely affected by the failure of the Auction Rate Securities Market" in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 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 March 31, 2018, the Company purchased and holds (net of redemptions) approximately $88.5 million in ARS from its clients. As of March 31, 2018, the Company had $5.0 million in outstanding ARS purchase commitments related to the settlements with the Regulators. In addition, the Company is committed to purchase another $11.0 million from clients through 2020 under legal settlements and awards.

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 $42.3 million of ARS at March 31, 2018 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.

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" in Part II, Item 1and note 12 to the condensed consolidated financial statements in Part I, Item 1.

### 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 previously the case.

### 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 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. There is no guarantee that in the event of a significant business disruption that the Company's business continuity plans will be successful in restoring operations in a timely manner.

### Cybersecurity

For many years, the Company has sought to maintain the security of its clients' data, limit access to its data processing environment, and protect its data processing facilities. See "Risk Factors — The Company may be exposed to damage to its business or its reputation by cybersecurity incidents" in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2017. Recent examples of vulnerabilities by other companies and the government that have resulted in loss of client data and fraudulent activities by both domestic and foreign actors have caused the Company continually to review its security policies and procedures and to take additional actions to protect its network and its information.

Given the importance of the protection of client data, regulators have developed increased oversight of cybersecurity planning and protections that broker-dealers and other financial service providers have implemented. Such planning and protection are subject to the SEC's and FINRA's oversight and examination on a periodic or targeted basis. The Company expects that regulatory oversight will intensify, as a result of publicly announced data breaches by other organizations involving tens of millions of items of personally identifiable information. The Company continues to implement protections and adopt procedures to address the risks posed by the current information technology environment. The Company has significantly increased the resources dedicated to this effort and believes that further increases may be required in the future, in anticipation of increases in the sophistication and persistency of such attacks. There can be no guarantee that the Company's cybersecurity efforts will be successful in discovering or preventing a security breach.

### Outlook

The Company recognizes the importance of compliance with applicable regulatory requirements and has committed to performing rigorous and ongoing assessments of its compliance and risk management efforts, to investing in people and programs, and to providing a platform with first class investment ideas and services. The Company is committed to continuing to improve its technology capabilities to ensure compliance with industry regulations, support client service and expand its wealth management and 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, and to continue to grow and develop the existing trading, investment banking, investment advisory and other divisions.

The Company is also reviewing its full service business model to determine the opportunities available to build or acquire closely related businesses in areas where competitors have shown some success. Equally important is the search for viable acquisition candidates. The Company's long-term intention is to pursue growth by acquisition where it can find a comfortable match in terms of corporate goals and personnel at a price that would provide the Company's stockholders with incremental value. The Company reviews potential acquisition opportunities from time to time, while evaluating and managing its existing businesses. The Company 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. The Company may use all or a portion of the net proceeds of its June 2017 refinancing for the acquisition of related businesses.

### Results of Operations

The Company reported net income attributable to Oppenheimer Holdings Inc. of $6.7 million or $0.51 basic net income per share for the first quarter of 2018 compared with a net loss attributable to Oppenheimer Holdings Inc. of $4.8 million or $0.36 basic net loss per share for the first quarter of 2017. Income before income taxes from continuing operations was $9.6 million for the first quarter of 2018 compared with a loss before income taxes from continuing operations of $7.0 million for the first quarter of 2017. Revenue from continuing operations for the first quarter of 2018 was $234.5 million compared with revenue from continuing operations of $213.3 million for the first quarter of 2017, an increase of 10.0%.

The following table and discussion summarizes the changes in the major revenue and expense categories for the three months ended March 31, 2018 compared with the same period in 2017:

*(Expressed in thousands)*

| Revenue | Amount Change | % Change |
| --- | ---: | ---: |
| Commissions | $(3,310) | (3.8) |
| Advisory fees | 8,139 | 11.7 |
| Investment banking | 10,189 | 56.5 |
| Bank deposit sweep income | 11,171 | 79.1 |
| Interest | 1,662 | 15.7 |
| Principal transactions, net | (2,647) | (49.3) |
| Other | (3,935) | (43.5) |
| Total revenue | 21,269 | 10.0 |
| **Expenses** |  |  |
| Compensation and related expenses | 9,226 | 6.4 |
| Communications and technology | 982 | 5.5 |
| Occupancy and equipment costs | 156 | 1.0 |
| Clearing and exchange fees | 242 | 4.1 |
| Interest | 3,607 | 67.3 |
| Other | (9,594) | (29.8) |
| Total expenses | 4,619 | 2.1 |
| Income (Loss) before income taxes from continuing operations | 16,650 | \* |
| Income taxes | 4,603 | \* |
| **Net income (loss) from continuing operations** | 12,047 | \* |
| **Discontinued operations** |  |  |
| Income from discontinued operations | (976) | (100.0) |
| Income taxes | (389) | (100.0) |
| **Net income from discontinued operations** | (587) | (100.0) |
| **Net income (loss)** | 11,460 | \* |
| Less net income attributable to non-controlling interest, net of tax | (92) | (95.8) |
| **Net income (loss) attributable to Oppenheimer Holdings Inc.** | $11,552 | \* |

\* Percentage not meaningful.

### Revenue

Commission revenue was $83.4 million for the three months ended March 31, 2018, a decrease of 3.8% compared with $86.7 million for the three months ended March 31, 2017 due to lower transaction-based revenues in both the retail and institutional businesses during the three months ended March 31, 2018.

Advisory fees were $77.5 million for the three months ended March 31, 2018, an increase of 11.7% compared with $69.4 million for the three months ended March 31, 2017 due to a higher level of AUM.

Investment banking revenue increased 56.5% to $28.2 million for the three months ended March 31, 2018 compared with $18.0 million for the three months ended March 31, 2017 due to higher equity underwriting fees as well as higher merger and

acquisition advisory fees during the three months ended March 31, 2018.

Bank deposit sweep income was $25.3 million for the three months ended March 31, 2018, an increase of 79.1% compared with $14.1 million for the three months ended March 31, 2017 due to higher short-term interest rates during the three months ended March 31, 2018.

Interest revenue was $12.2 million for the three months ended March 31, 2018, an increase of 15.7% compared with $10.6 million for the three months ended March 31, 2017 due primarily to an increase in interest revenue on margin extended to customers during the three months ended March 31, 2018.

Principal transactions revenue decreased 49.3% to $2.7 million for the three months ended March 31, 2018 compared with $5.4 million for the three months ended March 31, 2017 due to lower trading income from corporate and municipal bonds during the three months ended March 31, 2018.

Other revenue was $5.1 million for the three months ended March 31, 2018, a decrease of 43.5% compared to $9.1 million for the three months ended March 31, 2017 due to changes in the cash surrender value of Company-owned life insurance during the three months ended March 31, 2018.

### Expenses

Compensation and related expenses (including salaries, production and incentive compensation, share-based compensation, deferred compensation, and other benefit-related items) totaled $153.1 million during the three months ended March 31, 2018, an increase of 6.4% compared with the three months ended March 31, 2017. Higher production-related, incentive, and share-based compensation expenses were partially offset by lower deferred compensation costs during the three months ended March 31, 2018. Compensation and related expenses as a percentage of revenue was 65.3% during the three months ended March 31, 2018 compared with 67.5% during the three months ended March 31, 2017.

Non-compensation expenses were $71.8 million during the three months ended March 31, 2018, a decrease of 6.0% compared with $76.4 million during the three months ended March 31, 2017 primarily due to a charge related to a value-added tax assessment levied by the Israel VAT Authority in the three months ended March 31, 2017 as well as lower legal and regulatory costs partially offset by higher interest costs during the three months ended March 31, 2018.

The effective income tax rate from continuing operations for the three months ended March 31, 2018 was 30.3% (tax expense) compared with 24.0% (tax benefit) for the three months ended March 31, 2017 and reflects the Company's estimate of the annual effective tax rate adjusted for certain discrete items. The low estimated effective tax rate for the three months ended March 31, 2018 is due to the lower Federal tax rate of 21% (versus 35%) as a result of the passage of the TCJA in December 2017 offset by foreign income inclusion and larger non-deductible expenses related to items such as entertainment, fringe benefits, regulatory fines and penalties, and limitations around the deductibility of executive compensation under the TCJA.

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 months ended March 31, 2018 and 2017:

*(Expressed in thousands)*

| Revenue | For the Three Months Ended March 31, 2018 | 2017 | % Change |
| --- | ---: | ---: | ---: |
| Private Client | $154,094 | $137,389 | 12.2 |
| Asset Management | 17,644 | 18,666 | (5.5) |
| Capital Markets | 61,529 | 55,903 | 10.1 |
| Corporate/Other | 1,263 | 1,303 | (3.1) |
| Total | 234,530 | 213,261 | 10.0 |
| **Income (Loss) before income taxes** |  |  |  |
| Private Client | 40,162 | 28,762 | 39.6 |
| Asset Management | 3,718 | 3,711 | 0.2 |
| Capital Markets | (6,057) | (12,614) | (52.0) |
| Corporate/Other | (28,198) | (26,884) | 4.9 |
| Total | $9,625 | $(7,025) | \* |

\* Percentage not meaningful.

### Private Client

Private Client reported revenue of $154.1 million for the first quarter of 2018, 12.2% higher than the first quarter of 2017 due to increased advisory fee revenue from higher AUM, higher fees earned on client deposits in the FDIC-insured bank deposit program, and higher margin interest revenue during the first quarter of 2018. Income before income taxes was $40.2 million for the first quarter of 2018, an increase of 39.6% compared with the first quarter of 2017 due to the increases in revenue referred to above during the first quarter of 2018.

- Client assets under administration were $84.9 billion at March 31, 2018 compared with $86.9 billion at December 31, 2017, a decrease of 2.3%.
- Financial adviser headcount was 1,082 at the end of the first quarter of 2018, down from 1,159 at the end of the first quarter of 2017. The decline in financial adviser headcount since the first quarter of 2017 has resulted from the Company's attention to adviser productivity. The decline in headcount also has been impacted by retirements and normal attrition.
- Retail commissions were $51.1 million for the first quarter of 2018, a decrease of 1.4% from the first quarter of 2017 due to reduced transaction volumes from retail investors during the first quarter of 2018.
- Advisory fee revenue on traditional and alternative managed products was $60.1 million for the first quarter of 2018, an increase of 16.9% from the first quarter of 2017 (see Asset Management below for further information). The increase in advisory fees was due to the increase in the value of AUM.
- Bank deposit sweep income was $25.3 million for the first quarter of 2018, an increase of 79.1% compared with $14.1 million for the first quarter of 2017 due to higher short-term interest rates during the first quarter of 2018.

### Asset Management

Asset Management reported revenue of $17.6 million for the first quarter of 2018, 5.5% lower than the first quarter of 2017 due to a change in the method of reporting management fees earned through an investment adviser of alternative investments during the first quarter of 2018. Income before income taxes was $3.7 million for the first quarter of 2018, an increase of 0.2% compared with the first quarter of 2017.

- Advisory fee revenue on traditional and alternative managed products was $17.4 million for the first quarter of 2018, a decrease of 3.3% from the first quarter of 2017. Advisory fees are calculated based on the value of AUM at the end of the prior quarter which totaled $28.3 billion at December 31, 2017 ($24.8 billion at December 31, 2016) and are allocated to the Private Client and Asset Management business segments.
- AUM increased 9.3% to $28.2 billion at March 31, 2018 compared with $25.8 billion at March 31, 2017. AUM at March 31, 2018 is the basis for advisory fee billings for the second quarter of 2018. The increase in AUM was comprised of asset appreciation of $1.3 billion and net contributions of assets of $1.1 billion.

The following table provides a breakdown of the change in assets under management for the three months ended March 31, 2018:

*(Expressed in millions)*

| Fund Type | For the three months ended March 31, 2018 Beginning Balance Contributions | Redemptions |  | Appreciation (Depreciation) | Ending Balance |
| --- | ---: | ---: | ---: | ---: | ---: |
| Traditional (1) | $24,290 | $791 | $(509) | $(427) | $24,145 |
| Institutional Fixed Income (2) | 695 | 11 | (3) | (6) | 697 |
| Alternative Investments: |  |  |  |  |  |
| Hedge funds (3) | 2,590 | 90 | (155) | 97 | 2,622 |
| Private Equity Funds (4) | 185 | — | — | 1 | 186 |
| Portfolio Enhancement Program (5) | 521 | 4 | — | — | 525 |
|  | $28,281 | $896 | $(667) | $(335) | $28,175 |

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

### Capital Markets

Capital Markets reported revenue of $61.5 million for the first quarter of 2018, 10.1% higher than the first quarter of 2017 primarily due to higher equities underwriting and merger and acquisition advisory fees partially offset by lower institutional equities and fixed income commissions during the first quarter of 2018. Loss before income taxes was $6.1 million for the first quarter of 2018, compared with a loss before income taxes of $12.6 million for the first quarter of 2017 primarily due to a charge related to a value-added tax assessment levied by the Israel VAT Authority in the first quarter of 2017.

- Institutional equities commissions decreased 3.3% to $23.2 million for the first quarter of 2018 compared with the first quarter of 2017 as higher volatility during late January and early February of 2018 was not enough to offset lower client trading activity in March of 2018.
- Advisory fees from investment banking activities increased 23.6% to $8.9 million in the first quarter of 2018 compared with the first quarter of 2017 due to higher fees earned on completed mergers and acquisitions transactions during the first quarter of 2018.
- Equity underwriting fees increased 347.1% to $15.2 million for the first quarter of 2018 compared with the first quarter of 2017 due to the Company's increased focus on equity issuance leading to higher equity underwriting activity during the first quarter of 2018.
- Revenue from Taxable Fixed Income decreased 15.4% to $12.1 million for the first quarter of 2018 compared with the first quarter of 2017 due to concerns around a rising interest rate environment which led to decreased institutional fixed income activity during the first quarter of 2018.
- Public Finance and Municipal Trading revenue decreased 52.0% to $2.4 million for the first quarter of 2018 compared with the first quarter of 2017 due to lower municipal income trading revenue amid more volatile markets.

### Liquidity and Capital Resources

At March 31, 2018, total assets increased by 3.9% from December 31, 2017. 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 has met its longer-term capital needs through the issuance of the 6.75% Senior Secured Notes due 2022 (the "Notes") (see "Refinancing" below). Oppenheimer has arrangements with banks for borrowings on a fully-collateralized basis. 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. At March 31, 2018, the Company had $147.4 million of such borrowings outstanding compared to outstanding borrowings of $118.3 million at December 31, 2017. The Company also has some availability of short-term bank financing on an unsecured basis.

The Company's overseas subsidiaries, Oppenheimer Europe Ltd. and Oppenheimer Investments Asia Limited, are subject to local regulatory capital requirements that restrict the Company's ability to utilize their capital for other purposes. The regulatory capital requirements for Oppenheimer Europe Ltd. and Oppenheimer Investments Asia Limited were $6.5 million and $387,000, respectively, at March 31, 2018. In December 2017, Oppenheimer Europe Ltd. received approval from the FCA for a variation of permission to remove the limitation of "matched principal business" from the firm's scope of permitted businesses and become a "Full-Scope Prudential Sourcebook for Investment Firms (IFPRU) €730K" firm, effective in January 2018. In December 2017, the Company contributed additional capital of $7.0 million to Oppenheimer Europe Ltd. in order to facilitate this new permissioning. See note 13 to the condensed consolidated financial statements 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 is estimated at $3.0 million for those subsidiaries with respect to which the Company would be subject to residual U.S. tax on cumulative earnings through March 31, 2018 were those earnings to be repatriated. The Company has continued to reinvest permanently the excess earnings of Oppenheimer Israel (OPCO) Ltd. in its own business and in the businesses in Europe and Asia to support business initiatives in those regions. With the passage of the TCJA, the Company will review its historical treatment of these earnings to determine whether its historical practice will continue or whether a change is warranted.

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 fines, penalties and 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 Parent issued in a private offering $200.0 million aggregate principal amount of 6.75% Senior Secured Notes due 2022 (the "Unregistered Notes") under an indenture at an issue price of 100% of the principal amount. On September 19, 2017, the Parent completed an exchange offer in which the Parent exchanged 99.8% of its Unregistered 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 Parent 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 Parent 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 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 December 18, 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 that it can readily convert into cash. The receivable from brokers, dealers and clearing organizations represents deposits for securities borrowed transactions, margin deposits or current transactions awaiting settlement. The 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 $5.4 million in forgivable notes (which are inherently illiquid) to employees for the three months ended March 31, 2018 ($6.6 million for the three months ended March 31, 2017) as upfront or backend inducements to continue employment. 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 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 March 31, 2018, bank call loans were $147.4 million ($118.3 million at December 31, 2017 and $195.7 million at March 31, 2017). The average daily bank loan outstanding for the three months ended March 31, 2018 was $96.3 million ($141.1 million for the three months ended March 31, 2017). The largest daily bank loan outstanding for the three months ended March 31, 2018 was $180.3 million ($229.5 million for the three months ended March 31, 2017). The average weighted interest rate on bank call loans applicable on March 31, 2018 was 2.33%.

At March 31, 2018, securities loan balances totaled $174.6 million ($180.3 million at December 31, 2017 and $142.1 million at March 31, 2017). The average daily securities loan balance for the three months ended March 31, 2018 was $192.9 million ($154.5 million for the three months ended March 31, 2017). The largest daily stock loan balance for the three months ended March 31, 2018 was $221.4 million ($183.1 million for the three months ended March 31, 2017).

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. At March 31, 2018, the Company did not have any repurchase agreements and reverse repurchase agreements that do not settle overnight or have an open settlement date.

At March 31, 2018, the gross balances of reverse repurchase agreements and repurchase agreements were $99.0 million and $675.0 million, respectively. The average daily balance of reverse repurchase agreements and repurchase agreements on a gross basis for the three months ended March 31, 2018 was $99.0 million and $675.0 million, respectively ($240.7 million and $666.8 million, respectively, for the three months ended March 31, 2017). The largest amount of reverse repurchase agreements and repurchase agreements outstanding on a gross basis during the three months ended March 31, 2018 was $335.2 million and $894.0 million, respectively ($383.6 million and $812.9 million, respectively, for the three months ended March 31, 2017).

At March 31, 2018, the gross leverage ratio was 4.8

### 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 analyses 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 three months ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Cash used in operating activities | $(27,543) | $(41,986) |
| Cash used in investing activities | (3,096) | (1,550) |
| Cash provided by financing activities | 25,200 | 41,044 |
| Net decrease in cash and cash equivalents | $(5,439) | $(2,492) |

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'" herein.

### Other Matters

On April 27, 2018, the Board of Directors declared a regular quarterly cash dividend of $0.11 per share of Class A and Class B Stock payable on May 25, 2018 to stockholders of record on May 11, 2018.

The book value of the Company's Class A and Class B Stock was $40.04 at March 31, 2018 compared to $39.55 at December 31, 2017, based on total outstanding shares of 13,240,768 and 13,238,868, respectively.

The diluted weighted average number of shares of Class A and Class B Stock outstanding for the three months ended March 31, 2018 was 13,977,492 compared to 13,399,250 outstanding for the same period in 2017.

### 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. As of March 31, 2018, the Company had $5.0 million in 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 (as defined) under the settlements with the Regulators and client related legal settlements and awards to purchase ARS, as of March 31, 2018, the Company purchased and holds (net of redemptions) approximately $88.5 million in ARS from its clients. In addition, the Company is committed to purchase another $11.0 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 (as defined), 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 March 31, 2018, 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 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. At March 31, 2018, 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 March 31, 2018*

| Product | Principal | Valuation Adjustment Fair Value |  |
| --- | ---: | ---: | ---: |
| Auction Rate Securities Owned (1) | $88,525 | $1,175 | $87,350 |
| ARS Commitments to Purchase Pursuant to: (2)(3) |  |  |  |
| Settlements with the Regulators (4) | 5,000 | 75 | 4,925 |
| Legal Settlements and Awards (5) | 11,026 | 108 | 10,918 |
| Total | $104,551 | $1,358 | $103,193 |

(1) Principal amount represents the par value of the ARS and is included in securities owned on the condensed consolidated balance sheet at March 31, 2018. The valuation adjustment amount is included as a reduction to securities owned on the condensed consolidated balance sheet at March 31, 2018.

(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 March 31, 2018.

(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 March 31, 2018. Eligible Investors for future buybacks under the settlements with the Regulators held approximately $21.9 million of ARS as of March 31, 2018.

(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 $1.4 million as of March 31, 2018. The valuation adjustment is comprised of $1.2 million which represents the difference between the principal value and the fair value of the ARS the Company owned as of March 31, 2018 and $183,000 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. As of March 31, 2018, the Company had $5.0 million in outstanding ARS purchase commitments related to the settlements with the Regulators. Eligible Investors for future buybacks under the settlements with the Regulators held approximately $21.9 million of ARS as of March 31, 2018. Since the Company was not committed to purchase this amount as of March 31, 2018, 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 in Item 1. Such information is hereby incorporated by reference. Also, see "Risk Factors — The Company may continue to be adversely affected by the failure of the Auction Rate Securities Market" in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2017 as well as "Regulatory and Legal Environment — Other Regulatory Matters" herein for additional details.

### Contractual Obligations

The following table sets forth the Company's contractual obligations as of March 31, 2018:

*(Expressed in thousands)*

|  | Total | Less than 1 Year 1-3 Years | 3-5 Years |  | More than 5 Years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Operating Lease Obligations | $242,556 | $44,061 | $67,026 | $49,205 | $82,264 |
| Committed Capital | 1,400 | 1,400 | — | — | — |
| Senior Secured Notes (1)(2) | 260,788 | 13,500 | 27,000 | 220,288 | — |
| ARS Purchase Commitments (3) | 11,026 | 4,079 | 6,947 | — | — |
| Total | $515,770 | $63,040 | $100,973 | $269,493 | $82,264 |

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

(2) Includes interest payable of $60.8 million through maturity.

(3) See note 12 to the condensed consolidated financial statements 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, earnings, liabilities or expenses 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 remain within 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 that 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, (vii) changes in the rate of inflation and the related impact on the securities markets, (viii) competition from existing financial institutions, new entrants and other participants in the securities markets and financial services industry, (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 that could affect the popularity of products sold by the Company or impose taxes on securities transactions, (xi) enforcement of the DOL fiduciary rules and regulations and the adoption and implementation of the SEC's proposed "Regulation Best Interest" and other regulations in recent years, (xii) the effectiveness of the Company's efforts to reduce costs and manage compensation expense, (xiii) war, international police actions, terrorist acts and nuclear confrontation as well as political unrest and regime changes, health epidemics and economic crises in foreign countries, (xiv) the Company's ability to achieve its business plan, (xv) corporate governance issues, (xvi) the consolidation of the banking and financial services industry, (xvii) the effects of the economy on the Company's ability to find and maintain financing options and liquidity, (xviii) credit, operational, legal and regulatory risks, (xix) 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"), (xx) risks related to the downgrade of U.S. long-term sovereign debt obligations and the sovereign debt of European nations, (xxi) potential cybersecurity threats, (xxii) the effect of technological innovation on the financial services industry and business, (xxiii) risks related to the 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, (xxiv) 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, and (xxv) risks relate to trading wars. 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 "Risk Factors" in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

## Market risk

As filed, 207 characters.

During the three months ended March 31, 2018, 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, 2017.

## Controls and procedures

As filed, 2,986 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. 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 three months ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.

## Risk factors

As filed, 206 characters.

During the three months ended March 31, 2018, 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, 2017.

Filed Apr 27, 2018.
Source: SEC EDGAR, the filing index for accession 0000791963-18-000010. Last ingested by Listed: Nov 9, 2026, 19:54 ET. No prices; not investment advice.