UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended September 30, 2010

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-52609

LPL Investment Holdings Inc.

(Exact name of registrant as specified in its charter)

Delaware		20-3717839
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

(Address of Principal Executive Offices) (Zip Code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes      o No

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes      o No

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o
		(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes      þ No

     The number of shares of Common Stock, par value $0.001 per share, outstanding as of October 20, 2010 was 94,249,753.90.

 

 

 

TABLE OF CONTENTS

 

WHERE YOU CAN FIND MORE INFORMATION

We are required to file annual, quarterly and current reports and other information required by the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission, or SEC. You may read and copy any document we file with the SEC at the SEC’s public reference room located at 100 F Street, N.E., Washington, D.C. 20549, U.S.A. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our SEC filings are also available to the public from the SEC’s internet site at http://www.sec.gov.

When we use the terms “LPLIH”, “we”, “us”, “our”, and the “Company” we mean LPL Investment Holdings Inc., a Delaware corporation, and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q in Item 2 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in other sections includes forward-looking statements (regarding the Company’s future financial condition, results of operations, business strategy, financial needs and other similar matters) that involve risks and uncertainties. Forward-looking statements can be identified by words such as “anticipates”, “expects”, “believes”, “plans”, “predicts”, and similar terms. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements including, but not limited to, changes in general economic and financial market conditions, fluctuations in the value of advisory and brokerage assets, effects of competition in the financial services industry, changes in the number of our financial advisors and institutions and their ability to effectively market financial products and services, the effect of current, pending and future legislation and regulation and regulatory actions. In particular, you should consider the numerous risks outlined in “Risk Factors” in the Company’s Registration Statement on Form S-1, filed on June 4, 2010, as amended.

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. You should not rely upon forward-looking statements as predictions of future events. We will not undertake and we specifically disclaim any obligation to release publicly the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of events, whether or not anticipated. In that respect, we wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income
(Unaudited)
(Dollars in thousands, except per share data)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
REVENUES:
Commissions		$	385,273			$	370,249			$	1,194,414			$	1,084,900
Advisory fees			212,344				182,141				633,820				507,509
Asset-based fees			81,599				70,894				230,485				201,287
Transaction and other fees			70,243				68,764				205,738				191,711
Interest income, net of operating interest expense			5,105				4,992				14,882				15,379
Other			5,400				5,286				14,192				13,835
Net revenues			759,964				702,326				2,293,531				2,014,621
EXPENSES:
Commissions and advisory fees			517,266				472,960				1,569,424				1,363,583
Compensation and benefits			74,627				66,337				223,024				198,156
Depreciation and amortization			19,772				26,924				67,472				81,596
Promotional			23,497				24,492				49,141				50,108
Professional services			14,683				10,002				37,950				26,939
Occupancy and equipment			12,979				13,207				36,742				37,469
Brokerage, clearing and exchange			8,362				8,222				25,944				24,118
Communications and data processing			7,693				8,809				24,509				26,352
Regulatory fees and expenses			6,038				7,106				18,715				18,022
Restructuring charges			1,863				42,219				10,434				41,695
Travel and entertainment			3,908				2,171				9,528				6,269
Other			3,750				1,640				11,801				11,003
Total operating expenses			694,438				684,089				2,084,684				1,885,310
Non-operating interest expense			19,511				24,626				71,530				76,599
Loss on extinguishment of debt			—				—				37,979				—
Loss (gain) on equity method investment			3				96				(18	)			264
Total expenses			713,952				708,811				2,194,175				1,962,173
INCOME (LOSS) BEFORE PROVISION FOR (BENEFIT FROM) INCOME TAXES			46,012				(6,485	)			99,356				52,448
PROVISION FOR (BENEFIT FROM) INCOME TAXES			19,868				(5,029	)			39,658				23,526
NET INCOME (LOSS)		$	26,144			$	(1,456	)		$	59,698			$	28,922
EARNINGS (LOSS) PER SHARE (Note 12):
Basic		$	0.30			$	(0.02	)		$	0.68			$	0.33
Diluted		$	0.26			$	(0.02	)		$	0.59			$	0.29

See notes to unaudited condensed consolidated financial statements.

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Financial Condition
(Unaudited)
(Dollars in thousands, except par value)

		September 30,				December 31,
		2010				2009
ASSETS
Cash and cash equivalents		$	442,547			$	378,594
Cash and securities segregated under federal and other regulations			243,949				288,608
Receivables from:
Clients, net of allowance of $1,474 at September 30, 2010 and $792 at December 31, 2009			274,598				257,529
Product sponsors, broker-dealers and clearing organizations			184,352				171,900
Others, net of allowances of $8,652 at September 30, 2010 and $6,159 at December 31, 2009			159,128				139,317
Securities owned:
Trading(1)			18,561				15,361
Held-to-maturity			10,582				10,454
Securities borrowed			5,732				4,950
Fixed assets, net of accumulated depreciation and amortization of $267,831 at September 30, 2010 and $239,868 at December 31, 2009			74,273				101,584
Goodwill			1,293,366				1,293,366
Intangible assets, net of accumulated amortization of $163,499 at September 30, 2010 and $136,177 at December 31, 2009			569,303				597,083
Debt issuance costs, net of accumulated amortization of $12,833 at September 30, 2010 and $15,724 at December 31, 2009			24,984				16,542
Other assets			63,521				61,648
Total assets		$	3,364,896			$	3,336,936
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Drafts payable		$	144,669			$	125,767
Payables to clients			408,245				493,943
Payables to broker-dealers and clearing organizations			26,420				18,217
Accrued commissions and advisory fees payable			121,008				110,040
Accounts payable and accrued liabilities			183,599				175,742
Income taxes payable			24,017				24,226
Interest rate swaps			9,665				17,292
Securities sold but not yet purchased — at market value			2,680				4,003
Senior credit facilities and subordinated notes			1,390,132				1,369,223
Deferred income taxes — net			127,126				147,608
Total liabilities			2,437,561				2,486,061
STOCKHOLDERS’ EQUITY:
Common stock, $.001 par value; 200,000,000 shares authorized; 94,246,414 shares issued and outstanding at September 30, 2010 of which 7,405,811 are restricted, and 94,214,762 shares issued and outstanding at December 31, 2009 of which 7,423,973 are restricted			87				87
Additional paid-in capital			690,194				679,277
Stockholder loans			(52	)			(499	)
Accumulated other comprehensive loss			(5,874	)			(11,272	)
Retained earnings			242,980				183,282
Total stockholders’ equity			927,335				850,875
Total liabilities and stockholders’ equity		$	3,364,896			$	3,336,936

See notes to unaudited condensed consolidated financial statements.

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(Dollars in thousands)

														Accumulated
						Additional								Other								Total
		Common				Paid-In				Stockholder				Comprehensive				Retained				Stockholders’
		Stock				Capital				Loans				Income (Loss)				Earnings				Equity
BALANCE — December 31, 2008		$	87			$	670,897			$	(936	)		$	(15,498	)		$	135,762			$	790,312
Comprehensive income:
Net income																			28,922				28,922
Unrealized gain on interest rate swaps, net of tax expense of $1,793															3,163								3,163
Total comprehensive income																							32,085
Exercise of stock options							258																258
Tax benefits from share-based compensation							147																147
Stockholder loans											443												443
Share-based compensation							4,965																4,965
Repurchase of 10,000 shares of common stock							(181	)															(181	)
BALANCE — September 30, 2009		$	87			$	676,086			$	(493	)		$	(12,335	)		$	164,684			$	828,029
BALANCE — December 31, 2009		$	87			$	679,277			$	(499	)		$	(11,272	)		$	183,282			$	850,875
Comprehensive income:
Net income																			59,698				59,698
Unrealized gain on interest rate swaps, net of tax expense of $2,229															5,398								5,398
Total comprehensive income																							65,096
Exercise of stock options							56																56
Tax benefits from share-based compensation							272																272
Stockholder loans											447												447
Share-based compensation							10,121																10,121
Issuance of 20,000 shares of common stock							468																468
BALANCE — September 30, 2010		$	87			$	690,194			$	(52	)		$	(5,874	)		$	242,980			$	927,335

See notes to unaudited condensed consolidated financial statements.

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)

		Nine Months Ended
		September 30,
		2010				2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	59,698			$	28,922
Adjustments to reconcile net income to net cash provided by operating activities:
Noncash items:
Depreciation and amortization			67,472				81,596
Amortization of debt issuance costs			3,623				2,807
Impairment of fixed assets			840				—
Loss on extinguishment of debt			37,979				—
Share-based compensation			10,121				4,965
Provision for bad debts			3,682				2,953
Deferred income tax provision			(22,711	)			(21,678	)
Impairment of intangible assets			—				17,873
Loan forgiveness			3,932				—
Other			(79	)			(165	)
Changes in operating assets and liabilities:
Cash and securities segregated under federal and other regulations			44,659				71,986
Receivables from clients			(17,804	)			21,551
Receivables from product sponsors, broker-dealers and clearing organizations			(12,452	)			54,910
Receivables from others			(26,234	)			(30,965	)
Securities owned			(3,284	)			(4,868	)
Securities borrowed			(782	)			(1,028	)
Other assets			2,548				(3,341	)
Drafts payable			18,902				(51,203	)
Payables to clients			(85,698	)			(72,082	)
Payables to broker-dealers and clearing organizations			8,203				(355	)
Accrued commissions and advisory fees payable			10,968				2,129
Accounts payable and accrued liabilities			5,498				(74	)
Income taxes payable			63				4,626
Securities sold but not yet purchased			(1,323	)			(1,104	)
Net cash provided by operating activities			107,821				107,455

See notes to unaudited condensed consolidated financial statements.

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows — (Continued)
(Unaudited)
(Dollars in thousands)

		Nine Months Ended
		September 30,
		2010				2009
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		$	(10,934	)		$	(6,403	)
Proceeds from the disposal of fixed assets			—				135
Purchase of securities classified as held-to-maturity			(5,392	)			(3,746	)
Proceeds from maturity of securities classified as held-to-maturity			5,200				3,700
Deposits of restricted cash			(4,121	)			(12,759	)
Release of restricted cash			2,971				—
Net cash used in investing activities			(12,276	)			(19,073	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior credit facilities			566,700				—
Redemption of subordinated notes			(579,563	)			—
Net repayment of revolving line of credit			—				(56,500	)
Repayment of senior credit facilities			(9,091	)			(6,318	)
Payment of debt issuance costs			(7,181	)			—
Payment of deferred transaction costs			(3,253	)			—
Repayment of stockholder loans			—				462
Proceeds from stock options exercised			56				258
Excess tax benefits from share-based compensation			272				147
Issuance of common stock			468				—
Repurchase of common stock			—				(181	)
Net cash used in financing activities			(31,592	)			(62,132	)
NET INCREASE IN CASH AND CASH EQUIVALENTS			63,953				26,250
CASH AND CASH EQUIVALENTS — Beginning of period			378,594				219,239
CASH AND CASH EQUIVALENTS — End of period		$	442,547			$	245,489
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid		$	73,994			$	61,997
Income taxes paid		$	62,804			$	41,420
NONCASH DISCLOSURES:
Capital expenditures purchased through short-term credit		$	2,436			$	105
Increase in unrealized gain on interest rate swaps, net of tax expense		$	5,398			$	3,163
Discount on proceeds from senior credit facilities recorded as debt issuance costs		$	13,300			$	—

See notes to unaudited condensed consolidated financial statements.

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

1.  Organization and Description of the Company

LPL Investment Holdings Inc. (“LPLIH”), a Delaware holding corporation, together with its consolidated subsidiaries (collectively, the “Company”) provides an integrated platform of proprietary technology, brokerage and investment advisory services to independent financial advisors and financial advisors at financial institutions (collectively “advisors”) in the United States. Through its proprietary technology, custody and clearing platforms, the Company provides access to diversified financial products and services enabling its advisors to offer independent financial advice and brokerage services to retail investors (their “clients”).

2.  Basis of Presentation

Quarterly Reporting — The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. These adjustments are of a normal recurring nature. The Company’s results for any interim period are not necessarily indicative of results for a full year or any other interim period. Certain reclassifications were made to previously reported amounts in the unaudited condensed consolidated financial statements and notes thereto to make them consistent with the current period presentation.

The unaudited condensed consolidated financial statements do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles in the United States of America (“GAAP”). Accordingly, these financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the related notes for the year ended December 31, 2009, contained in the Company’s Annual Report on Form 10-K as filed with the SEC. The Company has evaluated subsequent events up to and including the date these unaudited condensed consolidated financial statements were issued.

Consolidation — These unaudited condensed consolidated financial statements include the accounts of LPLIH and its subsidiaries. Intercompany transactions and balances have been eliminated. Equity investments in which the Company exercises significant influence but does not exercise control and is not the primary beneficiary are accounted for using the equity method.

Use of Estimates — The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. On an on-going basis, the Company evaluates estimates, including those related to revenue and related expense recognition, asset impairment, valuation of accounts receivable, contingencies and litigation, and valuation and recognition of share-based payments. These accounting policies are stated in the notes to the audited consolidated financial statements for the year ended December 31, 2009, contained in the Annual Report on Form 10-K as filed with the SEC. These estimates are based on the information that is currently available and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results could vary from these estimates under different assumptions or conditions and the differences may be material to the unaudited condensed consolidated financial statements.

Reportable Segment — The Company’s internal reporting is organized into three business channels; Independent Advisor Services, Institution Services and Custom Clearing Services, which are designed to enhance the services provided to its advisors. These channels qualify as individual operating segments, but are aggregated and viewed as one single reportable segment due to their similar economic characteristics, products and services, production and distribution process, regulatory environment and quantitative thresholds.

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

Fair Value of Financial Instruments — The Company’s financial assets and liabilities are carried at fair value or at amounts that, because of their short-term nature, approximate current fair value, with the exception of its indebtedness. The Company carries borrowings on its senior secured credit facilities and unsecured subordinated notes at amortized cost. As of September 30, 2010, the carrying amount and fair value of these borrowings were approximately $1,390 million and $1,371 million, respectively. As of December 31, 2009, the carrying amount and fair value were approximately $1,369 million and $1,278 million, respectively. See Note 4 for additional detail regarding the Company’s fair value measurements.

Recently Issued Accounting Pronouncements — Recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2010, as compared to the recent accounting pronouncements described in the Company’s 2009 Annual Report on Form 10-K, that are of significance, or potential significance, to the Company are discussed below.

In January 2010, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements (ASU 2010-6). ASU 2010-6 requires new disclosures regarding significant transfers into and out of Level 1 and Level 2 fair value measurements and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 fair value measurements. This ASU also clarifies existing disclosures of inputs and valuation techniques for Level 2 and Level 3 fair value measurements. ASU 2010-6 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosure of activity within Level 3 fair value measurements, which is effective for fiscal years beginning after December 15, 2010 and for interim periods within those years. The adoption of ASU 2010-6 did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

3.  Restructuring

Strategic Business Review Initiative

On December 29, 2008, the Company committed to an organizational restructuring plan intended to reduce its cost structure and improve operating efficiencies, which resulted in a reduction in its overall workforce of approximately 250 employees. In accordance with Accounting Standards Codification Topic 420, Accounting for Costs Associated with Exit or Disposal Activities, the Company has recorded severance and one-time involuntary termination benefit accruals in accounts payable and accrued liabilities within the unaudited condensed consolidated statements of financial condition. The Company completed this initiative and expects to pay all costs by April 2011.

The following table summarizes the balance of accrued expenses related to the strategic business review and the changes in the accrued amounts as of and for the nine months ended September 30, 2010 (in thousands):

		Accrued Balance												Accrued Balance				Cumulative
		at December 31,				Costs								at September 30,				Costs Incurred
		2009				Incurred(1)				Payments				2010				to Date(2)
Severance and benefits		$	1,996			$	43			$	(1,209	)		$	830			$	14,548

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

Consolidation of Affiliated Entities Initiative

On July 10, 2009, the Company committed to a corporate restructuring plan that consolidated the operations of Mutual Service Corporation (“MSC”), Associated Financial Group, Inc., Associated Securities Corp., Inc. (“Associated”), Associated Planners Investment Advisory, Inc. and Waterstone Financial Group, Inc. (“WFG”) (together, the “Affiliated Entities”) with LPL Financial Corporation (“LPL Financial”). This restructuring was effected to enhance service offerings to advisors while also generating efficiencies. The Company expects total costs associated with the initiative to be approximately $73.7 million. The Company has incurred the majority of these costs and anticipates recognizing the remaining costs by December 2013; however, adjustments may occur due to estimates of abandoned lease obligations with terms that extend through 2018.

The Company paid charges related to the conversion and transfer of certain advisors associated with the Affiliated Entities and their client accounts. Following the completion of these transfer activities, the registered representatives and client accounts that transferred are associated with LPL Financial. In 2009, as a condition for the regulatory approval of the transfer, the Affiliated Entities were required to deposit $12.8 million into escrow accounts pending the resolution of certain matters, of which $7.3 million was released. During the nine months ended September 30, 2010, the Company was required to deposit an additional $4.1 million into the escrow accounts and $3.0 million has been released.

The Company paid charges related to early termination costs associated with certain contracts held by the Affiliated Entities. Additionally, the Company recorded accruals for employee related costs, including severance and one-time involuntary termination benefits that will be recognized ratably over the employees’ remaining service period.

The Company recognized charges related to the early termination and partial abandonment of certain lease arrangements offset by estimates for sub-lease efforts. The Company anticipates additional costs of approximately $0.1 million related to the abandonment of the remaining office space, which can not be fully estimated until the date of abandonment. The Company also recorded non-cash charges for the impairment of fixed assets associated with abandoned lease arrangements.

The following table summarizes the balance of accrued expenses and the changes in the accrued amounts as of and for the nine months ended September 30, 2010 (in thousands):

		Accrued																Accrued				Cumulative				Total
		Balance at																Balance at				Costs				Expected
		December 31,				Costs												September 30,				Incurred				Restructuring
		2009				Incurred				Payments				Non-cash				2010				to Date				Costs
Severance and benefits		$	2,759			$	2,113			$	(3,569	)		$	(456	)		$	847			$	11,549			$	11,549
Lease and contract termination fees			7,458				2,352				(3,195	)			80				6,695				18,271				18,402
Asset impairments			—				840				—				(840	)			—				20,764				20,764
Conversion and transfer costs			304				5,086				(1,843	)			(3,422	)			125				18,969				22,988
Total		$	10,521			$	10,391			$	(8,607	)		$	(4,638	)		$	7,667			$	69,553			$	73,703

4.  Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Inputs used to measure fair value are prioritized within a three-level fair value hierarchy. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

•

Level 1 — Quoted prices in active markets for identical assets or liabilities.

•

Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

•

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The Company’s fair value measurements are evaluated within the fair value hierarchy, based on the nature of inputs used to determine the fair value at the measurement date. At September 30, 2010, the Company had the following financial assets and liabilities that are measured at fair value on a recurring basis:

Cash Equivalents — The Company’s cash equivalents include money market funds, which are short term in nature with readily determinable values derived from active markets.

Securities Segregated Under Federal and Other Regulations — The Company’s segregated accounts contain U.S. treasury securities that are short term in nature with readily determinable values derived from quoted prices in active markets.

Securities Owned and Securities Sold But Not Yet Purchased — The Company’s securities owned consist of house account model portfolios for the purpose of benchmarking the performance of its fee based advisory platforms and temporary positions resulting from the processing of client transactions. Examples of these securities include money market funds, U.S. treasuries, mutual funds, certificates of deposit, traded equity securities and debt securities.

The Company uses prices obtained from independent third-party pricing services to measure the fair value of its securities owned. Prices received from the pricing services are validated using various methods including comparison to prices received from additional pricing services, comparison to available quoted market prices and review of other relevant market data including implied yields of major categories of securities. In general, these quoted prices are derived from active markets for identical assets or liabilities. When quoted prices in active markets for identical assets and liabilities are not available, the quoted prices are based on similar assets and liabilities or inputs other than the quoted prices that are observable, either directly or indirectly. For certificates of deposit and treasury securities, the Company utilizes market-based inputs including observable market interest rates that correspond to the remaining maturities or the next interest reset dates. At September 30, 2010, the Company did not adjust prices received from the independent third-party pricing services.

Other Assets — The Company’s other assets include deferred compensation plan assets that are invested in money market funds and mutual funds which are actively traded and valued based on quoted market prices in active markets.

Interest Rate Swaps — The Company’s interest rate swaps are not traded on a market exchange; therefore, the fair values are determined using externally developed valuation models which include assumptions about the London Interbank Offered Rate (“LIBOR”) yield curve at interim reporting dates as well as counterparty credit risk and the Company’s own non-performance risk.

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

There have been no transfers of assets or liabilities between fair value measurement classifications during the nine months ended September 30, 2010. The following tables summarize the Company’s financial assets and financial liabilities measured at fair value on a recurring basis (in thousands):

		Quoted
		Prices in
		Active				Significant
		Markets for				Other				Significant
		Identical				Observable				Unobservable
		Assets				Inputs				Inputs				Fair Value
		(Level 1)				(Level 2)				(Level 3)				Measurements
At September 30, 2010:
Assets
Cash equivalents		$	296,865			$	—			$	—			$	296,865
Securities segregated under federal and other regulations			242,022				—				—				242,022
Securities owned — trading:
Money market funds			113				—				—				113
Mutual funds			7,248				—				—				7,248
Debt securities			—				360				—				360
U.S. treasury obligations			10,799				—				—				10,799
Certificates of deposit			—				41				—				41
Total securities owned — trading			18,160				401				—				18,561
Other assets			15,550				—				—				15,550
Total assets at fair value		$	572,597			$	401			$	—			$	572,998
Liabilities
Securities sold but not yet purchased:
Mutual funds		$	2,434			$	—			$	—			$	2,434
Certificates of deposit			—				225				—				225
Equity securities			4				—				—				4
Debt securities			—				17				—				17
Total securities sold but not yet purchased			2,438				242				—				2,680
Interest rate swaps			—				9,665				—				9,665
Total liabilities at fair value		$	2,438			$	9,907			$	—			$	12,345

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

		Quoted
		Prices in
		Active				Significant
		Markets for				Other				Significant
		Identical				Observable				Unobservable
		Assets				Inputs				Inputs				Fair Value
		(Level 1)				(Level 2)				(Level 3)				Measurements
At December 31, 2009:
Assets
Cash equivalents		$	223,665			$	—			$	—			$	223,665
Securities segregated under federal and other regulations			279,579				—				—				279,579
Securities owned — trading:
Money market funds			181				—				—				181
Mutual funds			6,694				—				—				6,694
Equity securities			11				—				—				11
Debt securities			—				425				—				425
U.S. treasury obligations			7,797				—				—				7,797
Certificates of deposit			—				253				—				253
Total securities owned — trading			14,683				678				—				15,361
Other assets			12,739				—				—				12,739
Total assets at fair value		$	530,666			$	678			$	—			$	531,344
Liabilities
Securities sold but not yet purchased:
Mutual funds		$	3,773			$	—			$	—			$	3,773
U.S. treasury obligations			5				—				—				5
Equity securities			7				—				—				7
Certificates of deposit			—				123				—				123
Debt securities			—				95				—				95
Total securities sold but not yet purchased			3,785				218				—				4,003
Interest rate swaps			—				17,292				—				17,292
Total liabilities at fair value		$	3,785			$	17,510			$	—			$	21,295

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

5.  Held-to-Maturity Securities

The Company holds certain investments in securities including U.S. government notes. The Company has both the intent and the ability to hold these investments to maturity and classifies them as such. Interest income is accrued as earned. Premiums and discounts are amortized using a method that approximates the effective yield method over the term of the security and are recorded as an adjustment to the investment yield.

The amortized cost, gross unrealized gains and fair value of securities held-to-maturity were as follows (in thousands):

						Gross
		Amortized				Unrealized
		Cost				Gains				Fair Value
At September 30, 2010:
U.S. government notes		$	10,582			$	91			$	10,673
At December 31, 2009:
U.S. government notes		$	10,354			$	49			$	10,403
Certificate of deposit			100				—				100
Total		$	10,454			$	49			$	10,503

The maturities of securities held-to-maturity at September 30, 2010 were as follows (in thousands):

		Within 1 Year				1-3 Years				Total
U.S. government notes — at amortized cost		$	5,059			$	5,523			$	10,582
U.S. government notes — at fair value		$	5,071			$	5,602			$	10,673

6.  Intangible Assets

The components of intangible assets as of September 30, 2010 and December 31, 2009 are as follows (in thousands):

		Gross								Net
		Carrying				Accumulated				Carrying
		Value				Amortization				Value
At September 30, 2010:
Definite-lived intangible assets:
Advisor and financial institution relationships		$	458,424			$	(110,437	)		$	347,987
Product sponsor relationships			231,930				(52,312	)			179,618
Trust client relationships			2,630				(751	)			1,879
Total definite-lived intangible assets		$	692,984			$	(163,500	)		$	529,484
Indefinite-lived intangible assets:
Trademark and trade name											39,819
Total intangible assets										$	569,303
At December 31, 2009:
Definite-lived intangible assets:
Advisor and financial institution relationships		$	458,424			$	(91,586	)		$	366,838
Product sponsor relationships			231,930				(43,482	)			188,448
Trust client relationships			2,630				(652	)			1,978
Trademarks and trade names			457				(457	)			—
Total definite-lived intangible assets		$	693,441			$	(136,177	)		$	557,264
Indefinite-lived intangible assets:
Trademark and trade name											39,819
Total intangible assets										$	597,083

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

Total amortization expense of intangible assets was $9.3 million and $27.8 million for the three and nine months ended September 30, 2010, respectively, and $9.8 million and $29.7 million for the three and nine months ended September 30, 2009, respectively. Amortization expense for each of the fiscal years ended December 2010 (remainder) through 2014 and thereafter is estimated as follows (in thousands):

2010 — remainder		$	9,226
2011			36,840
2012			36,548
2013			35,927
2014			35,927
Thereafter			375,016
Total		$	529,484

7.  Income Taxes

The Company’s effective income tax rate differs from the federal corporate tax rate of 35%, primarily as a result of state taxes, settlement contingencies and expenses that are not deductible for tax purposes. These items resulted in effective tax rates of 43.2% and 77.5% for the three months ended September 30, 2010 and 2009, respectively, and 39.9% and 44.9% for the nine months ended September 30, 2010 and 2009, respectively. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

8.  Indebtedness

Senior Secured Credit Facilities — Term Loans — On May 24, 2010, the Company entered into a Third Amended and Restated Credit Agreement (the “Amended Credit Agreement”). The Amended Credit Agreement amends and restates the Company’s Second Amended and Restated Credit Agreement, dated as of June 18, 2007. Pursuant to the Amended Credit Agreement, the Company established a new term loan tranche of $580.0 million maturing on June 28, 2017 (the “2017 Term Loans”) and recorded $16.6 million in debt issuance costs that are capitalized in the unaudited condensed consolidated statements of financial condition. The Company also extended the maturity of a $500.0 million tranche of its term loan facility to June 25, 2015 (the “2015 Term Loans”), with the remaining $317.1 million tranche of the term loan facility maturing on the original maturity date of June 28, 2013 (the “2013 Term Loans”).

The applicable margin for borrowings with respect to the (a) 2013 Term Loans is currently 0.75% for base rate borrowings and 1.75% for LIBOR borrowings and could change depending on the Company’s credit rating; (b) 2015 Term Loans is currently 1.75% for base rate borrowings and 2.75% for LIBOR borrowings, and (c) 2017 Term Loans is currently 2.75% for base rate borrowings and 3.75% for LIBOR borrowings. The LIBOR Rate with respect to the 2015 Term Loans and the 2017 Term Loans shall in no event be less than 1.50%.

Borrowings under the Company’s senior secured term loan facilities bear interest at a base rate equal to either one, two, three, six, nine or twelve-month LIBOR plus the applicable margin, or an alternative base rate (“ABR”) plus the applicable margin. The ABR is equal to the greater of the prime rate or the effective federal funds rate plus ¹/2 of 1.00% for the 2013 Term Loans and the greater of the prime rate, effective federal funds rate plus ¹/2 of 1.00%, or 2.50% for the 2015 Term Loans and the 2017 Term Loans. The senior secured credit facilities are subject to certain financial and nonfinancial covenants. As of September 30, 2010 and December 31, 2009, the Company was in compliance with such covenants.

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

The Company may voluntarily repay outstanding loans under its senior secured credit facilities at any time without premium or penalty, other than customary “breakage” costs with respect to LIBOR loans.

Senior Secured Credit Facilities — Revolving Line of Credit — On January 25, 2010, the Company amended its senior secured credit facilities to increase the revolving credit facility from $100.0 million to $218.2 million, $10.0 million of which is being used to support the issuance of an irrevocable letter of credit for its subsidiary, The Private Trust Company, N.A. (“PTC”). As a result of the amendment, the Company paid $2.8 million in debt issuance costs, which have been capitalized within the unaudited condensed consolidated statements of financial condition and are being amortized as additional interest expense over the expected term of the related debt agreement. The Company also extended the maturity of a $163.5 million tranche of the revolving credit facility to June 28, 2013, while the remaining $54.7 million tranche retains its original maturity date of December 28, 2011. The tranche maturing in 2013 is priced at LIBOR + 3.50% with a commitment fee of 0.75%. The tranche maturing in 2011 maintains its previous pricing of LIBOR + 2.00% with a commitment fee of 0.375%. There was no outstanding balance on the revolving credit facility at September 30, 2010 and December 31, 2009.

Senior Unsecured Subordinated Notes — On May 24, 2010, the Company gave notice of redemption of all of its outstanding senior unsecured subordinated notes due 2015 (the “2015 Notes”), representing an aggregate principal amount of $550.0 million. The redemption price of the 2015 Notes was 105.375% of the outstanding aggregate principal amount, or approximately $579.6 million, plus accrued and unpaid interest thereon up to but not including June 22, 2010 (the “Redemption Date”). The Company redeemed the 2015 Notes on the Redemption Date and accordingly, recorded the charge as a loss on debt extinguishment within its unaudited condensed consolidated statements of income. None of the 2015 Notes remain outstanding. The Company used the proceeds from the 2017 Term Loans under its Amended Credit Agreement and additional cash on hand to finance the redemption. The aggregate cash payment for the redemption, including accrued and unpaid interest, was approximately $610.4 million.

Prior to the Redemption Date, the Company had $550.0 million of senior unsecured subordinated notes due December 15, 2015 bearing interest at 10.75% per annum. The interest payments were payable semiannually in arrears.

Bank Loans Payable — The Company maintains two uncommitted lines of credit. One line has an unspecified limit, and is primarily dependent on the Company’s ability to provide sufficient collateral. The other line has a $150.0 million limit and allows for both collateralized and uncollateralized borrowings. Both lines were utilized in 2010 and 2009; however, there were no balances outstanding at September 30, 2010 or December 31, 2009.

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

The Company’s outstanding borrowings were as follows (in thousands):

						September 30, 2010								December 31, 2009
										Interest								Interest
		Maturity				Balance				Rate				Balance				Rate
Senior secured term loan:
Hedged with interest rate swaps			6/28/2013			$	210,000				2.04	%(1)		$	400,000				2.00	%(6)
Unhedged:
2013 Term Loans			6/28/2013				105,532				2.04	%(2)			419,223				2.00	%(7)
2015 Term Loans			6/25/2015				497,500				4.25	%(3)			—
2017 Term Loans			6/28/2017				577,100				5.25	%(4)			—
Senior unsecured subordinated notes			(5)				—								550,000				10.75	%
Total borrowings							1,390,132								1,369,223
Less current borrowings (maturities within 12 months)							13,971								8,424
Long-term borrowings — net of current portion						$	1,376,161							$	1,360,799

The following summarizes borrowing activity in the revolving and uncommitted line of credit facilities (in thousands):

		Three Months								Nine Months
		Ended								Ended
		September 30,								September 30,
		2010				2009				2010				2009
Average balance outstanding		$	89			$	44,559			$	2,766			$	75,276
Weighted-average interest rate			1.00	%			2.32	%			1.16	%			2.41	%

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

The minimum calendar year payments and maturities of the senior secured borrowings as of September 30, 2010 are as follows (in thousands):

2010 — remainder		$	3,493
2011			13,971
2012			13,971
2013			319,197
2014			10,800
Thereafter			1,028,700
Total		$	1,390,132

9.  Interest Rate Swaps

An interest rate swap is a financial derivative instrument whereby two parties enter into a contractual agreement to exchange payments based on underlying interest rates. The Company uses interest rate swap agreements to hedge the variability on its floating rate senior secured term loan. The Company is required to pay the counterparty to the agreement fixed interest payments on a notional balance and in turn, receives variable interest payments on that notional balance. Payments are settled quarterly on a net basis.

The following table summarizes information related to the Company’s interest rate swaps as of September 30, 2010 (in thousands):

						Variable
Notional		Fixed				Receive				Fair				Maturity
Balance		Pay Rate				Rate(1)				Value				Date
$    145,000			4.83	%			0.29	%		$	(4,833	)		June 30, 2011
65,000			4.85	%			0.29	%			(4,832	)		June 30, 2012
$    210,000										$	(9,665	)

The interest rate swap agreements qualify for hedge accounting and have been designated as cash flow hedges against specific payments due on the Company’s senior secured term loan. As of September 30, 2010, the Company assessed the interest rate swap agreements as being highly effective and expects them to continue to be highly effective. Accordingly, the changes in fair value of the interest rate swaps have been recorded as other comprehensive loss, with the fair value included as a liability on the Company’s unaudited condensed consolidated statements of financial condition. The Company has reclassified $2.3 million and $10.9 million from other comprehensive loss as additional interest expense for the three and nine months ended September 30, 2010, respectively, and $2.7 million and $12.2 million for the three and nine months ended September 30, 2009, respectively. Based on current interest rate assumptions and assuming no additional interest rate swap agreements are entered into, the Company expects to reclassify $9.5 million or $5.7 million after tax, from other comprehensive loss as additional interest expense over the next 12 months.

10.  Commitments and Contingencies

Leases — The Company leases certain office space and equipment at its headquarter locations under various operating leases. These leases are generally subject to scheduled base rent and maintenance cost increases, which are recognized on a straight-line basis over the period of the leases.

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

Service Contracts — The Company is party to certain long-term contracts for systems and services that enable back office trade processing and clearing for its product and service offerings. One agreement, for clearing services, contains no minimum annual purchase commitment, but the agreement provides for certain penalties should the Company fail to maintain a certain threshold of client accounts.

Future minimum payments under leases, lease commitments and other non-cancellable contractual obligations with remaining terms greater than one year as of September 30, 2010 are as follows (in thousands):

Years ending December 31
2010 — remainder		$	7,847
2011			31,230
2012			24,635
2013			15,510
2014			8,765
Thereafter			15,065
Total(1)		$	103,052

Total rental expense for all operating leases was $4.3 million and $12.8 million for the three and nine months ended September 30, 2010, respectively, and $5.0 million and $15.3 million for the three and nine months ended September 30, 2009, respectively.

Guarantees — The Company occasionally enters into certain types of contracts that contingently require it to indemnify certain parties against third-party claims. The terms of these obligations vary and, because a maximum obligation is not explicitly stated, the Company has determined that it is not possible to make an estimate of the amount that it could be obligated to pay under such contracts.

The Company’s subsidiaries provide guarantees to securities clearing houses and exchanges under their standard membership agreements, which require a member to guarantee the performance of other members. Under these agreements, if a member becomes unable to satisfy its obligations to the clearing houses and exchanges, all other members would be required to meet any shortfall. The Company’s liability under these arrangements is not quantifiable and may exceed the cash and securities it has posted as collateral. However, the potential requirement for the Company to make payments under these agreements is remote. Accordingly, no liability has been recognized for these transactions.

Loan Commitments — From time to time, the Company makes loans to its advisors, primarily to newly recruited advisors to assist in the transition process. Due to timing differences, the Company may make commitments to issue such loans prior to actually funding them. These commitments are generally contingent upon certain events occurring, including but not limited to the advisor joining the Company, and may be forgivable. The Company had no significant unfunded commitments at September 30, 2010 and December 31, 2009.

Litigation — The Company has been named as a defendant in various legal actions, including arbitrations. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases in which claimants seek substantial or indeterminate damages, the Company cannot predict with certainty what the eventual loss or range of loss related to such matters will be. The Company recognizes a legal liability when it believes it is probable a liability has occurred and the amount can be reasonably estimated. Defense costs are expensed as incurred and classified as professional services within the unaudited condensed consolidated statements of income. When there is indemnification or insurance, the Company may engage in defense of settlement and subsequently seek reimbursement for such matters.

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

In connection with various acquisitions, and pursuant to the purchase and sale agreements, the Company has received third-party indemnification for certain legal proceedings and claims. These matters have been defended and paid directly by the indemnifying party.

On October 1, 2009, LPL Holdings, Inc., a subsidiary of the Company, received written notice from a third-party indemnitor under a certain purchase and sale agreement asserting that it is no longer obligated to indemnify the Company for certain claims under the provisions of the purchase and sale agreement. The Company believes that this assertion is without merit and has commenced litigation to enforce its indemnity rights. Such litigation remains pending in the court system.

During the third quarter of 2010, the Company settled two arbitrations that involve activities covered under the third-party indemnification agreement described above. In connection with these settlements, the Company has recorded legal expenses of $8.9 million during the nine months ended September 30, 2010, of which $5.6 million has been recorded in the third quarter of 2010. These legal expenses have been included in professional services within the unaudited condensed consolidated statements of income. The Company will seek to recover the costs associated with defending and settling these matters, plus other costs incurred on matters that the Company believes are subject to the indemnification. The remaining claims outstanding for which the indemnifying party is disputing its obligation involve alleged damages that are not material to the Company’s unaudited condensed consolidated statements of financial condition, income or cash flows.

The Company believes, based on the information available at this time, after consultation with counsel, consideration of insurance, if any, and the indemnifications provided by the third-party indemnitors, notwithstanding the assertions by an indemnifying party noted in the preceding paragraph, that the outcome of such matters will not have a material adverse impact on unaudited condensed consolidated statements of financial condition, income or cash flows.

Other Commitments — As of September 30, 2010, the Company had received collateral primarily in connection with client margin loans with a market value of approximately $327.9 million, which it can sell or repledge. Of this amount, approximately $174.1 million has been pledged or sold as of September 30, 2010; $151.4 million was pledged to banks in connection with unutilized secured margin lines of credit, $12.3 million was pledged with client-owned securities to the Options Clearing Corporation, and $10.4 million was loaned to the Depository Trust Company (“DTC”) through participation in its Stock Borrow Program. As of December 31, 2009, the Company had received collateral primarily in connection with client margin loans with a market value of approximately $227.9 million, which it can sell or repledge. Of this amount, approximately $158.8 million has been pledged or sold as of December 31, 2009; $141.6 million was pledged to banks in connection with unutilized secured margin lines of credit, $10.0 million was pledged with client-owned securities to the Options Clearing Corporation, and $7.2 million was loaned to the DTC through participation in its Stock Borrow Program.

In August of 2007, pursuant to agreements with a large global insurance company, LPL Financial began providing brokerage, clearing and custody services on a fully disclosed basis; offering its investment advisory programs and platforms; and providing technology and additional processing and related services to its advisors and their clients. The terms of the agreements are five years, subject to additional 24-month extensions. Termination fees may be payable by a terminating or breaching party depending on the specific cause of termination.

11.  Share-Based Compensation

Certain employees, advisors, officers and directors who contribute to the success of the Company participate in various stock option plans. In addition, certain financial institutions participate in a warrant plan. Stock options and warrants generally vest in equal increments over a three- to five-year period and expire on the 10th anniversary following the date of grant.

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

The Company recognizes share-based compensation expense related to employee stock option awards based on the grant date fair value over the requisite service period of the award, which generally equals the vesting period. The Company recognized $7.6 million and $4.0 million of share-based compensation related to the vesting of employee stock option awards during the nine months ended September 30, 2010 and 2009, respectively, which is included in compensation and benefits on the unaudited condensed consolidated statements of income. As of September 30, 2010, total unrecognized compensation cost related to non-vested share-based compensation arrangements granted was $28.2 million, which is expected to be recognized over a weighted-average period of 3.44 years.

The Company recognizes share-based compensation expense for stock options and warrants awarded to its advisors and financial institutions based on the fair value of awards at each interim reporting period. The Company recognized $2.5 million and $1.0 million of share-based compensation during the nine months ended September 30, 2010 and 2009, respectively, related to the vesting of stock options and warrants awarded to its advisors and financial institutions, which is classified within commission and advisory expenses on the unaudited condensed consolidated statements of income. As of September 30, 2010, total unrecognized compensation cost related to non-vested share-based compensation arrangements granted was $10.1 million for advisors and financial institutions, which is expected to be recognized over a weighted-average period of 3.61 years.

The following table presents the weighted-average assumptions used by the Company in calculating the fair value of its stock options and warrants with the Black-Scholes valuation model that have been granted during the nine months ended September 30, 2010 and 2009:

		2010				2009
Expected life (in years)			6.51				6.84
Expected stock price volatility			50.30	%			50.98	%
Expected dividend yield			—				—
Annualized forfeiture rate			5.00	%			4.64	%
Fair value of options		$	12.33			$	11.79
Risk-free interest rate			2.79	%			2.77	%

The risk-free interest rates are based on the implied yield available on U.S. Treasury constant maturities in effect at the time of the grant with remaining terms equivalent to the respective expected terms of the options. The dividend yield of zero is based on the fact that the Company has no present intention to pay cash dividends. The Company estimates the expected term for its employee option awards using the simplified method in accordance with Staff Accounting Bulletin 110, Certain Assumptions Used in Valuation Methods, because the Company does not have sufficient relevant historical information to develop reasonable expectations about future exercise patterns. The Company estimates the expected term for stock options and warrants awarded to advisors and financial institutions using the contractual term. Expected volatility is calculated based on companies of similar growth and maturity and the Company’s peer group in the industry in which the Company does business because the Company does not have sufficient historical volatility data. The Company will continue to use peer group volatility information until historical volatility of the Company is available to measure expected volatility for future grants. In the future, as the Company gains historical data for volatility of its own stock and the actual term over which stock options and warrants are held, expected volatility and the expected term may change, which could substantially change the grant-date fair value of future awards of stock options and warrants and, ultimately, compensation recorded on future grants.

The Company has assumed an annualized forfeiture rate for its stock options and warrants based on a combined review of industry, employee and advisor turnover data, as well as an analytical review performed of historical pre-vesting forfeitures occurring over the previous year. The Company records additional expense if the actual forfeiture rate is lower than estimated and records a recovery of prior expense if the actual forfeiture is higher than estimated.

LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited) — (Continued)

The following table summarizes the Company’s activity in its stock option and warrant plans for the nine months ended September 30, 2010:

										Weighted-
										Average
						Weighted-				Remaining				Aggregate
		Number				Average				Contractual				Intrinsic
		of				Exercise				Term				Value
		Shares				Price				(Years)				(In thousands)
Outstanding — December 31, 2009			22,702,469			$	6.99
Granted			68,776				23.41
Exercised			(29,814	)			1.86
Forfeited			(187,505	)			21.96
Outstanding — September 30, 2010			22,553,926			$	6.92				4.25			$	486,672
Exercisable — September 30, 2010			18,704,480			$	3.61				3.40			$	465,586