Oppenheimer Holdings Inc: Form 10-Q for the period ended Mar 31, 2019

BACKGROUND

Oppenheimer Holdings Inc. (the "Company", "we", "our" or "us") 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, 2019, we provided our services from 94 offices in 24 states located throughout the United States, offices in Tel Aviv, Israel, Hong Kong, China, London, England, St. Helier, Isle of Jersey, Frankfurt, Germany and Geneva, Switzerland. Client assets administered as of March 31, 2019 totaled $87.5 billion. The Company provides investment advisory services through OAM and Oppenheimer Investment Management LLC ("OIM") and Oppenheimer's financial adviser direct programs. At March 31, 2019, client assets under management ("AUM") totaled $29.5 billion. We also provide trust services and products through Oppenheimer Trust Company of Delaware and discount brokerage services through Freedom Investments, Inc. ("Freedom"). Through OPY Credit Corp., we offer syndication as well as trading of issued syndicated corporate loans. At March 31, 2019, the Company employed 2,984 employees (2,920 full-time and 64 part-time), of whom 1,062 were financial advisers.

Outlook

We are focused on growing our private client and asset management businesses through strategic additions of experienced financial advisers in our existing branch system and employment of experienced money management personnel in our asset management business as well as deploying our capital for expansion through targeted acquisitions. In addition, we commit to the improvement of our technology capability to support client service and the expansion of our capital markets capabilities while addressing the issue of managing expenses.

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. We are committed to continuing to improve our technology capabilities to ensure compliance with industry regulations, support client service and expand our wealth management and capital markets capabilities. We recognize the importance of compliance with applicable regulatory requirements and are committed to performing rigorous and ongoing assessments of our compliance and risk management efforts investing in people and programs, and to providing a platform with first class investment ideas and services.

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. Our long-term intention is to pursue growth by acquisition where we can find a comfortable match in terms of corporate goals and personnel at a price that would provide our shareholders with incremental value. We review potential acquisition opportunities from time to time on the basis of fulfilling the Company's strategic goals, while evaluating and managing our existing businesses. The Company may use all or a portion of the net proceeds of its June 2017 refinancing for the acquisition of related businesses.

EXECUTIVE SUMMARY

The Company reported net income attributable to Oppenheimer Holdings Inc. of $11.2 million or $0.86 basic net income per share for the three months ended March 31, 2019 compared with net income attributable to Oppenheimer Holdings Inc. of $6.7 million or $0.51 basic net income per share for the three months ended March 31, 2018. Income before income taxes was $16.1 million for the three months ended March 31, 2019 compared with income before income taxes of $9.6 million for the three months ended March 31, 2018. Revenue for the three months ended March 31, 2019 was $251.8 million compared with revenue of $234.5 million for the three months ended March 31, 2018, an increase of 7.4%.

During the first quarter of 2019, the major stock indexes in the U.S. were up 13.1% rebounding from a 14% decline during the fourth quarter of 2018. This was the best first quarter performance in the equities markets in over a decade. The markets benefited from the Federal Reserve's decision to adopt a more dovish stance, indicating that they do not expect to further increase short-term interest rates in the near term. A continued strong economy, record low unemployment, the end of the government shutdown, as well as optimism around trade negotiations between the U.S. and China helped fuel the rally in the equities markets. Consumer spending continues to be driven by strong business and consumer confidence and is providing the impetus for a strong economy. Concerns around an imminent recession impacted long-term interest rates during the quarter. The 10-year Treasury yield began the quarter yielding 2.69% and fell to as low as 2.39% before ending the quarter at 2.41% indicating a flight to safety sentiment by investors.

We are pleased with the performance of the business during the first quarter of 2019. Although our results were aided by a strong equities market, the firm's core businesses performed well and we believe that the strong underlying economic landscape will continue to provide support for the growth objectives of the firm. After the sharp sell-off in the equities markets during the fourth quarter of 2018, our asset management fees for the first quarter, which are based on asset values at December 31, 2018, declined 5.0%. The significant increase in equity asset values in the first quarter of 2019 will favorably impact our asset management fees for the second quarter of 2019. Our investment banking business performed well as a result of increased fees from advisory assignments and despite a significant decline in underwriting income. Our operating results continue to benefit from the present level of short-term interest rates as we continue to realize the effect of interest rate hikes in 2018.

Our institutional equities commission business showed improvement during the first quarter of 2019 as a result of an increase in volatility which drove greater activity by institutional counterparties. However, our retail transaction-based business declined during the period reflecting an ongoing secular reduction in portfolio turnover as our clients continue to move to more passive investment strategies. We continue to be optimistic about our investment banking business for 2019, particularly as we foresee a strong pipeline for initial public offerings as private equity investments enter the public markets. Finally, we are encouraged by the decline in legal and regulatory costs as many of the investments in our compliance efforts are realized.

RESULTS OF OPERATIONS

The following table and discussion summarizes the changes in the major revenue and expense categories for the three months ended March 31, 2019 compared with the same period in 2018:

(Expressed in thousands)

First Quarter 2019

Revenue

Commission revenue was $79.4 million for the three months ended March 31, 2019, a decrease of 4.8% compared with $83.4 million for the three months ended March 31, 2018 due to lower transaction-based revenue in the retail business, offset by higher levels of turnover in client portfolios and improved market penetration during the three months ended March 31, 2019.

Advisory fees were $73.6 million for the three months ended March 31, 2019, a decrease of 5.0% compared with $77.5 million for the three months ended March 31, 2018 due to a lower level of AUM.

Investment banking revenue decreased 0.6% to $28.0 million for the three months ended March 31, 2019 compared with $28.2 million for the three months ended March 31, 2018.

Bank deposit sweep income was $34.0 million for the three months ended March 31, 2019, an increase of 34.3% compared with $25.3 million for the three months ended March 31, 2018 due to higher short-term interest rates during the three months ended March 31, 2019.

Interest revenue was $12.7 million for the three months ended March 31, 2019, an increase of 4.1% compared with $12.2 million for the three months ended March 31, 2018 due primarily to an increase in interest revenue on margin extended to customers during the three months ended March 31, 2019.

Principal transactions revenue was $11.4 million for the three months ended March 31, 2019, an increase of 319.6% compared with $2.7 million for the three months ended March 31, 2018 due to higher trading income from taxable fixed income and public finance and municipal trading.

Other revenue was $12.5 million for the three months ended March 31, 2019, an increase of 145.1% compared to $5.1 million for the three months ended March 31, 2018 due primarily to the increase in cash surrender value of the Company's life insurance policies.

Expenses

Compensation and related expenses (including salaries, production and incentive compensation, share-based compensation, deferred compensation, and other benefit-related items) totaled $160.4 million during the three months ended March 31, 2019, an increase of 4.7% compared with the three months ended March 31, 2018. The increase was due to higher salary, deferred and share-based compensation expenses, partially offset by lower production-related compensation costs during the three months ended March 31, 2019. Compensation and related expenses as a percentage of revenue was 63.7% during the three months ended March 31, 2019 compared with 65.3% during the three months ended March 31, 2018.

Non-compensation expenses were $75.4 million during the three months ended March 31, 2019, an increase of 5.0% compared with $71.8 million during the three months ended March 31, 2018 primarily due to higher interest costs and communication and technology costs partially offset by lower legal and regulatory costs during the three months ended March 31, 2019.

The effective income tax rate from continuing operations for the three months ended March 31, 2019 was 30.3% unchanged compared with 30.3% for the three months ended March 31, 2018. The effective rate reflects the Company's estimate of the annual effective tax adjusted for uncertain discrete items.

BUSINESS SEGMENTS

The table below presents information about the reported revenue and income (loss) before income taxes of the Company's reportable business segments for the three months ended March, 2019 and 2018:

(Expressed in thousands)

49

Private Client

Private Client reported revenue of $163.5 million for the first quarter of 2019, 6.1% higher than the first quarter of 2018 due to higher bank deposit sweep income and an increase in the cash surrender value of Company-owned life insurance partially offset by lower retail commissions and asset management fees during the first quarter of 2019. Income before income taxes was $42.8 million for the first quarter of 2019, an increase of 6.7% compared with the first quarter of 2018 due to the aforementioned items partially offset by higher interest costs and communications and technology costs during the first quarter of 2019.

• Client assets under administration were $87.5 billion at March 31, 2019, compared with $80.1 billion at December 31, 2018, an increase of 9.2%
• Financial adviser headcount was 1,062 at the end of the first quarter of 2019, down from 1,082 at the end of the first quarter of 2018. The decline in financial adviser headcount since the first quarter of 2018 has resulted from the Company's emphasis on adviser productivity as well as retirements.
• Retail commissions were $47.1 million for the first quarter of 2019, a decrease of 7.9% from the first quarter of 2018.
• Advisory fee revenue on traditional and alternative managed products was $57.0 million for the first quarter of 2019, a decrease of 5.1% from the first quarter of 2018 (see Asset Management below for further information). The decrease in advisory fees was due to a decrease in assets under management ("AUM") at December 31, 2018 as a result of the sell-off in the equities markets during the fourth quarter of 2018.
• Bank deposit sweep income was $34.0 million for the first quarter of 2019, an increase of 34.3% compared with $25.3 million for the first quarter of 2018 due to higher short-term interest rates during the first quarter of 2019.

Asset Management

Asset Management reported revenue of $16.6 million for the first quarter of 2019, 6.0% lower than the first quarter of 2018 due to lower AUM at December 31, 2018, which is the basis for advisory fees earned during the first quarter of 2019, as a result of the sell-off in the equities markets during the fourth quarter of 2018. Income before income taxes was $2.2 million for the first quarter of 2019, a decrease of 39.7% compared with the first quarter of 2018 due to lower AUM at December 31, 2018.

• Advisory fee revenue on traditional and alternative managed products was $16.6 million for the first quarter of 2019, a decrease of 4.4% from the first quarter of 2018 primarily due to lower AUM at December 31, 2018.
• Advisory fees are calculated based on the value of client AUM at the end of the prior quarter which totaled $26.7 billion at December 31, 2018 ($28.3 billion at December 31, 2017) and are allocated between the Private Client and Asset Management business segments.
• AUM increased 4.6% to $29.5 billion at March 31, 2019, near all-time highs, compared with $28.2 billion at March 31, 2018 which is the basis for advisory fee billings for the second quarter of 2019. The increase in AUM was comprised of asset appreciation of $0.8 billion and a positive net contribution of assets of $0.5 billion.

The following table provides a breakdown of the change in assets under management for the three months ended March 31, 2019:

(Expressed in millions)

(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. Valuation is based on collateral requirements for a series of contracts representing the investment strategy.

Capital Markets

Capital Markets reported revenue of $71.0 million for the first quarter of 2019, 15.3% higher than the first quarter of 2018 due to higher investment banking fees and principal transactions revenue. Loss before income taxes was $2.6 million for the first quarter of 2019, a decrease of 56.3% compared with loss before income taxes of $6.1 million for the first quarter of 2018.

• Institutional equities commissions increased 1.4% to $23.5 million for the first quarter of 2019 compared with the first quarter of 2018 due to higher levels of turnover in client portfolios and improved market penetration by the Company.
• Advisory fees earned from investment banking activities increased 77.7% to $16.7 million for the first quarter of 2019 compared with $9.4 million for the first quarter of 2018 due to an increase in mergers and acquisitions activity during the first quarter of 2019.
• Equities underwriting fees decreased 45.2% to $7.5 million for the first quarter of 2019 compared with the first quarter of 2018 due primarily to the U.S. government shutdown which limited access to the equities markets during the first quarter of 2019.
• Revenue from taxable fixed income increased to $16.5 million during the first quarter of 2019 from $12.1 million during the first quarter of 2018 due to higher trading income in taxable fixed income products as a result of institutional investors reacting to greater volatility in the fixed income markets as a result of sharply declining interest rates.
• Revenue from public finance and municipal trading increased to $5.2 million during the first quarter of 2019 from $2.4 million during the first quarter of 2018 due to higher fixed income advisory fees as well as higher municipal trading income during the first quarter of 2019.

CRITICAL ACCOUNTING POLICIES

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, 2018.

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 those statements and notes thereto found in its Annual Report on Form 10-K for the year ended December 31, 2018. 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, 2019, 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, 2018.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2019, total assets increased by 12.8% from December 31, 2018. 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. We finance our trading in government securities through the use of securities sold under agreements to repurchase ("repurchase agreements"). We met our 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, 2019, the Company had no such borrowings outstanding compared to outstanding borrowings of $15.0 million at December 31, 2018. 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 our ability to utilize their capital for other purposes. The regulatory capital requirements for Oppenheimer Europe Ltd. and Oppenheimer Investments Asia Limited were $4.4 million and $382,000, respectively, at March 31, 2019. 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 regulatory capital requirements.

The Company permanently reinvests eligible earnings of its foreign 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 the outside basis difference of its foreign subsidiaries is estimated at $3.1 million for those subsidiaries. We have 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, we will continue to review our historical treatment of these earnings to determine whether our historical practice will continue or whether a change is warranted.

Refinancing

On June 23, 2017, in a private offering, we issued $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, we completed an exchange offer in which we 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"). We 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. We used a portion of the net proceeds from the offering of the Unregistered Notes to redeem in full our 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 10 to the condensed consolidated financial statements appearing in Item 1 for further discussion.

On April 23, 2019, Moody's Corporation affirmed the Company's 'B2' Corporate Family rating and 'B1' rating on the Notes and changed its outlook to positive. On August 24, 2018, S&P affirmed the Company's 'B+' Corporate Family rating and 'B+' 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. Our receivables are, for the most part, collateralized by marketable securities. Our collateral maintenance policies and procedures are designed to limit our exposure to credit risk. Securities owned, with the exception of the ARS, are mainly comprised of actively trading readily marketable securities. We advanced $3.7 million in forgivable notes (which are inherently illiquid) to employees for the three months ended March 31, 2019 ($5.4 million for the three months ended March 31, 2018) as upfront or backend inducements to continue employment. The amount of funds allocated to such inducements will vary with hiring activity.

We satisfy our 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, in most cases, collateralized by firm and customer securities.

We obtain short-term borrowings primarily through bank call loans. Bank call loans are generally payable on demand and bear interest at various rates. At March 31, 2019, the company did not have any bank call loans (the Company had $15.0 million at December 31, 2018 and $147.4 million at March 31, 2018). The average daily bank loan outstanding for the three months ended March 31, 2019 was $15.8 million ($96.3 million for the three months ended March 31, 2018). The largest daily bank loan outstanding for the three months ended March 31, 2019 was $76.9 million ($180.3 million for the three months ended March 31, 2018). The average weighted interest rate on bank call loans applicable on March 31, 2019 was 3.36%.

At March 31, 2019, securities loan balances totaled $232.4 million ($146.8 million at December 31, 2018 and $174.6 million at March 31, 2018). The average daily securities loan balance for the three months ended March 31, 2019 was $218.3 million ($192.9 million for the three months ended March 31, 2018). The largest daily stock loan balance for the three months ended March 31, 2019 was $249.1 million ($221.4 million for the three months ended March 31, 2018).

We finance our 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 our repurchase agreements and reverse repurchase agreements are carried at fair value as a result of the Company's fair value option election. We elected the fair value option for those repurchase agreements and reverse repurchase agreements that do not settle overnight or have an open settlement date. We have 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, 2019, we did not have any repurchase agreements and reverse repurchase agreements that do not settle overnight or have an open settlement date.

At March 31, 2019, the gross balances of reverse repurchase agreements and repurchase agreements were $101.1 million and $369.1 million, respectively. The average daily balance of reverse repurchase agreements and repurchase agreements on a gross basis for the three months ended March 31, 2019 was $101.1 million and $369.0 million, respectively ($99.0 million and $675.0 million, respectively, for the three months ended March 31, 2018). The largest amount of reverse repurchase agreements and repurchase agreements outstanding on a gross basis during the three months ended March 31, 2019 was $228.2 million and $891.0 million, respectively ($335.2 million and $894.0 million, respectively, for the three months ended March 31, 2018).

At March 31, 2019, the gross leverage ratio was 4.6.

Liquidity Management

We manage our need for liquidity on a daily basis to ensure compliance with regulatory requirements. Our 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 our liquidity needs, we may have to seek additional external financing. The availability of such additional external financing may depend on market factors outside our control.

We regularly review our sources of liquidity and financing and conduct 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. Our reviews have resulted in plans that we believe 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)

Management believes that funds from operations, combined with our capital base and available credit facilities, are sufficient for our 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 we rely to back away from providing funding to the securities industry. Such a development might impact our ability to finance our day-to-day activities or increase the costs to acquire funding. We may or may not be able to pass such increased funding costs on to our clients.

OFF-BALANCE SHEET ARRANGEMENTS

Information concerning our off-balance sheet arrangements is included in note 7 to the condensed consolidated financial statements appearing in Item 1. Such information is hereby incorporated by reference. Also, see "Risk Factors — The Company may continue to be significantly 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, 2018 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, 2019:

(Expressed in thousands)

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

(2) Includes interest liability of $88.0 million.

(3) Obligation includes legally binding minimum lease payments for leases signed but not yet commenced.

(4) See note 10 to the condensed consolidated financial statements appearing in Item 1 for additional information.

(5) Includes interest payable of $54.0 million through maturity.

(6) See note 12 to the condensed consolidated financial statements appearing in Item 1 for additional information.

CYBERSECURITY

For many years, we have sought to maintain the security of our clients' data, limit access to its data processing environment, and protect our data processing facilities. See "Risk Factors — The Company may be exposed to damage to its business or its reputation by cybersecurity incidents" as further described in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2018. 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 us to continuously review our security policies and procedures and to take additional actions to protect our network and our 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. We expect 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. We continue 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 our cybersecurity efforts will be successful in discovering or preventing a security breach.

REGULATORY MATTERS AND DEVELOPMENTS

Regulation Best Interest (U.S.)

On April 18, 2018, the SEC announced its proposed "Regulation Best Interest," a package of rulemakings and interpretations that address customers' relationships with investment advisers and broker-dealers. Regulation Best Interest would enact an intermediate standard requiring advisers and broker-dealers to act in the clients' "best interest" at all times. The proposed rules would require substantially greater record keeping than is currently the case. The rules would be applicable to all customers of broker-dealers and investment advisers. The public comment period applicable to Regulation Best Interest expired on August 7, 2018. The SEC has indicated its intention to move forward with a final rule proposal in the fall of 2019. 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 advisers generally, the specific effect it will have on the Company's broker-dealer and investment management businesses, and the effect it will have on the Company’s competitive position in the financial services industry.

We are reviewing our business and operating models in light of the proposed Regulation Best Interest and may make further structural and operational changes to those previously made in light of the vacated DOL Fiduciary Rules and in anticipation of the SEC adopting a version of proposed Regulation Best Interest.

MiFID II (Europe)

The European Commission recently adopted several acts under the revised Markets in Financial Instruments Directive (known as "MiFID II") that 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. Our ability 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 has had an impact on the manner in which business is being conducted in the United Kingdom ("UK") and in Europe with a noticeable reduction in the availability of equity research particularly in relation to smaller issuers. The long term effects of these changes on global securities markets and on competition in the EU and UK are impossible to predict.

BREXIT (Europe and United Kingdom)

In June 2016, in a referendum to consider the UK's continued participation in the EU, the UK voted in favor of withdrawing from the EU ("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 EU. The two-year period has now expired and the EU and Great Britain agreed to extend the decision to October 31, 2019. BREXIT has created significant uncertainty in both the UK and in the other member states around its economic impact and the operating requirements for businesses located in the UK after the effective date. We have 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. To date, there has been no discernible progress on the post-BREXIT relationship between the EU and the UK. The British Parliament has passed resolutions which appear to eliminate the possibility of a “hard BREXIT” whereby the UK would leave the European Union with no agreement. It also appears that most countries remaining in the EU post-BREXIT will provide a period of time for rules affecting UK based firms to be enforced. Given the lack of clarity on the ultimate post-BREXIT relationship between Great Britain and the EU, we cannot fully determine what, if any, impact BREXIT may have on our operations, both inside and outside the UK. The Company has opened an office in Frankfurt, Germany in the EU for its investment banking business and it will be available in the eventuality that it is needed in order to continue to conduct a securities business in the EU post-BREXIT. Depending on the outcome of negotiations between UK and EU, we might need to relocate a portion of our business out of the UK to continue coverage of clients located in the EU. If a relocation was deemed necessary, the business would be moved to a location based in the EU.

Regulatory Environment

See the discussion of the regulatory environment in which we operate and the impact on our operations of certain rules and regulations in Item 1 “Business - Regulation” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Regulatory and Legal Environment” of Annual Report on Form 10-K for the year ended December 31, 2018.

Oppenheimer and many of its affiliates are each subject to various regulatory capital requirements. As of December 31, 2018, all of our active regulated domestic and international subsidiaries had net capital in excess of minimum requirements. See note 13 of the Notes to Condensed Consolidated Financial Statements in Item 1 for further information on regulatory capital requirements.

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, amongst other things, 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. In July 2015, the Company created a Compliance Committee made up of independent directors to oversee our compliance with applicable rules and regulations.

In May and June 2017, our initial independent consultant delivered to the Company reports in connection with the January 2015 SEC Order, and another report in connection with the SEC's Municipalities Continuing Disclosure Cooperation "MCDC Initiative " (collectively, the "Required Reports"). Each of the reports has been reviewed by the Company and the Compliance Committee. In June 2018, the SEC began an examination of the Company to review our assertions with respect to our fulfillment of our initial independent consultant's recommendations appearing in the Required Reports. That examination concluded in November of 2018. On October 29, 2018, the Company's initial independent consultant resigned. On February 1, 2019 we engaged successor independent consultants (“Successor IC’s”) to complete the review of the implementation of the recommendations made in the Required Reports. We expect to work with the Successor IC’s to finalize the implementation of the remaining recommendations highlighted by the SEC exam staff during the examination.

FACTORS AFFECTING "FORWARD-LOOKING STATEMENTS"

From time to time the Company may publish or make oral statements that constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995 which provides a safe harbor for 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 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: volumes and volatility in the securities markets, fluctuations in interest and/or currency rates, regulatory developments (general economic conditions, both domestic and international, competition in various forms legal developments including litigation and regulatory enforcement,developments arising from the failure of the Auction Rate Securities markets, changes in foreign, federal and state tax laws costs, including compensation expense, (war, terrorist acts, political unrest and health epidemics and other force majeure developments), corporate governance issues, financing liquidity credit, operational, legal and regulatory risks, risks related to foreign operations including risks related to the UK's decision to exit the EU or BREXIT, and potential cybersecurity threats, Forward looking statements are not guarantees and they involve risks, uncertainties, and assumptions. There can be no assurance that the Company has correctly or completely identified and assessed all of the factors affecting the Company's business. Investors should not rely unduly on any forward looking statements and should carefully consider the risks described in our filings with the SEC from time to time. 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, 2018.

During the three months ended March 31, 2019, 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, 2018.

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, 2019 that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.

During the three months ended March 31, 2019, 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, 2018.