Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. TD AMERITRADE HOLDING CORP (1173431) 10-Q published on Jan 31, 2019 at 4:43 pm
Reporting Period: Dec 30, 2018
Lawsuit regarding Scottrade Acquisition — On April 6, 2017, a stockholder of the Company filed a stockholder derivative complaint regarding the acquisition of Scottrade by the Company and the acquisition of Scottrade Bank by TD. The suit filed in the Delaware Chancery Court is captioned Vero Beach Police Officers' Retirement Fund, derivatively on behalf of nominal defendant TD Ameritrade Holding Corp. v. Larry Bettino et al., C.A. No. 2017-0264-JRS. On December 18, 2017, the plaintiff filed an amended complaint. The suit named as defendants TD and the members of the Company's board of directors. It also named the Company as a nominal defendant. The complaint alleged that the Company's acquisition of Scottrade and TD's acquisition of Scottrade Bank were unfair from the perspective of the Company because TD Bank, N.A. acquired Scottrade Bank for an allegedly low price, which in turn caused the Company to pay an allegedly high price to acquire Scottrade. The complaint claimed that the Company's directors and TD, as the Company's alleged controlling stockholder, breached their fiduciary duties to the Company and its stockholders, and that TD aided and abetted the Company directors' breach of fiduciary duty and was unjustly enriched. The complaint sought a declaration that demand on the Company's board was excused as futile and sought corporate governance reforms, damages, interest and fees. On August 9, 2018, the parties submitted to the court for its approval a stipulation of settlement of this action. Under the settlement, TD and an insurer on behalf of the Company's directors agreed to make a settlement payment; plaintiff could apply for an award of attorneys' fees and expenses in an amount not to exceed 20% of the settlement payment; the balance of the settlement payment was to be paid to the Company; and the lawsuit would be dismissed and the claims released. Following a December 3, 2018 hearing, the court issued an order approving the settlement and the award of attorneys' fees and expenses and dismissed the case with prejudice. As a result of the settlement, the Company recorded $14 million in other non-operating income on the Condensed Consolidated Statements of Income for the three months ended December 31, 2018. The Company received the $14 million settlement payment in January 2019.
Transaction-based revenues primarily consists of trading commissions earned on trade execution, net of promotional allowances, and order routing revenue. The primary factors driving the Company's transaction-based revenues are total trades and average commissions per trade. Commission rates are based on rates established by the Company, which vary by type of trade. Transaction-based revenues are earned and recognized at a point in time, on a trade-date basis, as clients execute trades. These trades are generally settled and trading commissions are collected from the Company's clients within one to two business days after the trade date. Order routing revenues are generated from arrangements with market destinations to receive cash payments in exchange for routing trade orders to these firms for execution and are generally collected from the market destinations on a monthly basis. Securities owned by clients, including those that collateralize margin or similar transactions, are not reflected in the accompanying condensed consolidated financial statements.
Other revenues primarily include proxy income, solicit and tender fees and other fees charged for ancillary services provided by the Company to its clients. In addition, other revenues include fair market value adjustments and gains/losses associated with investments held by the Company's broker-dealer subsidiaries. Other revenues generated from investments is covered by various other areas of GAAP, is not within the scope of ASC 606 and is included in the table above to reconcile to net revenues disclosed within the Condensed Consolidated Statements of Income. Proxy fee income is earned and collected at a point in time when the Company distributes proxy statements to its clients on behalf of a registrant and the revenue is based on the volume of proxies distributed and the rate per unit charged to each registrant. Solicit and tender fees are earned and collected from clients at a point in time when the Company has satisfied its obligation to maintain its client accounts holding securities affected by corporate actions.
Other revenues increased 19% to $32 million, primarily due to a $12 million increase in revenue as a result of the adoption of the new revenue recognition standard (ASU 2014-09) on October 1, 2018. The amended guidance requires us to account for certain contract revenues on a gross basis when we are acting as a principal, as compared to prior revenue guidance, which allowed for these contracts to be accounted for on a net basis. This increase was partially offset by unfavorable fair market value adjustments to U.S. government debt securities held for investment purposes by our broker-dealer subsidiaries. For additional information regarding the impacts of the new revenue recognition standard, see Note 15 – Revenue Recognition under Item 1, Financial Statements – Notes to Condensed Consolidated Financial Statements.
Our effective income tax rate was 22.4% for the first quarter of fiscal year 2019, compared to 2.0% for the first quarter of the prior fiscal year. The effective income tax rate for the first quarter of fiscal year 2019 included $18 million of favorable adjustments related to state income tax matters. This item had a favorable impact on our earnings for the first quarter of fiscal year 2019 of approximately $0.03 per share. The effective rate for the first quarter of the prior fiscal year included an estimated net favorable adjustment of $68 million related to the remeasurement of our deferred income tax balances as it pertained to the Tax Cuts and Jobs Act, a $3 million income tax benefit resulting from the change in accounting for income taxes related to equity-based compensation under ASU 2016-09, $10 million of favorable resolutions of state income tax matters and a $6 million favorable benefit resulting from accelerating certain deductions, including acquisition-related exit costs, to leverage higher 2017 pre-enactment tax rates. The effective income tax rate for the first quarter of the prior fiscal year was also impacted by a $9 million unfavorable remeasurement of uncertain tax positions related to certain federal incentives. The Act was enacted on December 22, 2017, reducing the U.S. federal corporate income tax rate from 35% to 21%. These items had a net favorable impact on our earnings for the first quarter of the prior fiscal year of approximately $0.14 per share. We estimate our effective income tax rate to be approximately 25% for the remainder of fiscal year 2019, excluding the effect of any adjustments related to remeasurement or resolution of uncertain tax positions and federal incentives. However, we expect to experience some volatility in our quarterly and annual effective income tax rate because current accounting rules for uncertain tax positions require that any change in measurement of a tax position taken in a prior tax year be recognized as a discrete event in the period in which the change occurs. We also anticipate the potential for increased volatility in our future quarterly effective income tax rate from the accounting for income taxes related to equity-based compensation, which requires the income tax effects of exercised or vested stock-based awards to be treated as discrete items in the period in which they occur.