Financial Northeastern Securities

Transcription

1 Financial Northeastern Securities 2014 Due Diligence Information Financial Northeastern Corporation FNC Insurance Services, Inc. Financial Northeastern Securities, Inc. Member FINRA, SIPC All securities offered through Financial Northeastern Securities, Inc. Companies related by Common Owners 1

2 Financial Northeastern Securities 2014 Due Diligence Information Table of Contents SECTION PAGE 1 I Financial Northeastern Securities Corporate Résumé I Financial Northeastern Securities 2013 Audited Financial Statements...5 Independent Auditors Report...8 Financial Statements...10 Statement of Financial Condition...10 Statement of Income...11 Statement of Changes in Stockholders Equity...12 Statement of Cash Flows...13 Notes to Financial Statements...14 Annual AML Audit...22 Annual Red Flags Rule Certification I J.P. Morgan Clearing Corp. (Clearing Firm) December 31, 2013 Financial Statements Report of Independent Auditors...27 Statement of Financial Condition...28 Notes to the Statement of Financial Condition I Strength of J.P. Morgan Clearing Corp. and Protection of Client Assets I Financial Northeastern Securities Evidence of SIPC Insurance I Financial Northeastern Securities Registration Statement I Financial Northeastern Securities Bailment Agreement

3 Financial Northeastern Securities Corporate Résumé 3

4 Financial Northeastern Corporation Incorporated: May 4, 1984 Specializing in obtaining the best available rates in federally insured jumbo CDs issued by institutions nationwide. Terms ranging from 30 days to 20 years. Financial Northeastern Securities, Inc. Incorporated: January 17, 1985 Business: Full Service Broker/Dealer Clearing: Fully disclosed through J.P. Morgan Clearing Corp. FINRA member firm offering government and fixed-income securities, mutual funds, equities and retirement plan services. Clients investing over $4 billion annually. Bank Funding and CD Underwriting Division issued over $100 billion over the last 6 years for federally insured institutions. FNC Insurance Services Incorporated: October 22, 1996 Business: Insurance Product Sales Multi-product provider, offering competitively priced insurance products, including Annuities, and 401k products. Clientele: Credit Unions Banks and Savings & Loans Corporations Government Agencies Individuals Municipal Agencies Trust Departments Educational Institutions Hospitals Non-Profit Organizations Client Services: Deposit Funding Using Federally Insured CDs Investment Transactions Product Line: Certificates of Deposit Mortgage Backed Securities Government Agency Issues US Treasuries Municipal and Corporate Bonds Options Zero Coupon Bonds Traditional and Roth IRA s Preferred Stocks Fixed and Variable Annuities Mutual Funds Unit Investment Trusts Equities 401(k)s Money Market, Debit Cards and Check Writing* References available upon request Securities offered through Financial Northeastern Securities, Inc., a registered broker/dealer *Dreyfus Service Corporation 4

5 Financial Northeastern Securities 2013 Audited Financial Statements 5

6 Financial Northeastern Securities, Inc. Financial Statements December 31,

7 Financial Northeastern Securities, Inc. Table of Contents December 31, 2013 Page Independent Auditors Report 1 Financial Statements Statement of Financial Condition 3 Statement of Income 4 Statement of Changes in Stockholders Equity 5 Statement of Cash Flows 6 Notes to Financial Statements 7 7

8 Independent Auditors Report Stockholders Financial Northeastern Securities, Inc. Report on the Financial Statements We have audited the accompanying financial statements of Financial Northeastern Securities, Inc., which comprise the statement of financial condition as of December 31, 2013, and the related statements of income, changes in stockholders equity, and cash flows for the year then ended that are filed pursuant to Rule 17a-5 under the Securities Exchange Act of Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 1 8

9 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Financial Northeastern Securities, Inc. as of December 31, 2013, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Clark, New Jersey February 21,

10 Financial Northeastern Securities, Inc. Statement of Financial Condition December 31, 2013 Assets Assets Cash and cash equivalents $ 13,916,743 Receivables from customers, net 1,803,308 Investments, at fair value 2,391,286 Property and equipment, net 147,070 Other assets 140,518 Total assets $ 18,398,925 Liabilities and Stockholders' Equity Liabilities Accounts payable and accrued expenses $ 570,339 Dividends payable 350,000 Investments sold, not yet purchased, at fair value 25,209 Due to affiliate 17,505 Payable to clearing broker 5,281 Total liabilities 968,334 Stockholders' Equity Common stock, no par value, 2,500 shares authorized, 20 shares issued and outstanding 1,000 Paid-in capital 3,077,130 Retained earnings 14,352,461 Total stockholders' equity 17,430,591 Total liabilites and stockholders' equity $ 18,398,

11 Financial Northeastern Securities, Inc. Statement of Income Year Ended December 31, 2013 Revenues Principal transactions $ 11,090,385 Underwriting of certificates of deposit 5,163,832 Spread sales on certificates of deposit 1,101,515 Commissions 988,637 Other income 226,856 Interest income 46 Total revenues 18,571,271 Expenses Employee compensation and benefits 11,518,658 Floor brokerage, exchange, and clearance fees 1,287,340 Other general and administrative expenses 1,515,802 Communications and data processing 336,760 Rent expense 350,524 Total expenses 15,009,084 Net income $ 3,562,

12 Financial Northeastern Securities, Inc. Statement of Changes in Stockholders' Equity Year Ended December 31, 2013 Common Stock Paid-in Capital in Excess of Retained Shares $ Amount Stated Value Earnings Totals Balance, beginning of year Net income Distributions to stockholders Balance, end of year 20 $ 1,000 $ 3,077,130 $ 13,956,974 $ 17,035, ,562,187 3,562, (3,166,700) (3,166,700) 20 $ 1,000 $ 3,077,130 $ 14,352,461 $ 17,430,

13 Financial Northeastern Securities, Inc. Statement of Cash Flows Year Ended December 31, 2013 Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense Unrealized gain on investments Realized loss on investments Changes in operating assets and liabilities: Decrease in: Receivables from customers, net Due from/to affiliate Investments Other assets Increase (decrease) in: Accounts payable and accrued expenses Payable to clearing broker Dividends payable Investments sold, not yet purchased Net cash provided by operating activities Investing Activities Purchases of property and equipment Disposal of property and equipment Net cash used in investing activities Financing Activities Distributions to stockholders' Net cash used in financing activities Net Increase in Cash and Cash Equivalents Cash and Cash Equivalents, Beginning Cash and Cash Equivalents, Ending $ $ 3,562, ,783 (15,324) 53 19,644 46,416 1,295,176 43,428 32,986 (10,359) 110,000 (36,632) 5,160,358 (71,232) 10,220 (61,012) (3,166,700) (3,166,700) 1,932,646 11,984,097 13,916,

14 Financial Northeastern Securities, Inc. Notes to Financial Statements December 31, Nature of Business Financial Northeastern Securities, Inc. (the Company ) is a full-service broker-dealer that serves institutional investors, credit unions, and individual investors located throughout the United States. The Company is registered under the Securities and Exchange Act of 1934, and is a member of the Financial Industry Regulatory Authority ( FINRA ). The Company s operations consist primarily of engaging in principal transactions and underwriting certificates of deposit. The Company is a fully disclosed broker-dealer and clears all securities transactions through an unaffiliated clearing broker. Therefore, the Company is exempt from Securities and Exchange Commission ( SEC ) Rule 15c3-3. The Company does not carry customer accounts and is not required to make the periodic computation of reserve requirements for the exclusive benefit of customers. The Company has evaluated subsequent events for recognition or disclosure through February 21, 2014, the date the financial statements were available to be issued. 2. Summary of Significant Accounting Policies Basis of Accounting The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America, which requires the use of the accrual method of accounting. Under this accounting method, revenues are recognized when earned and expenses are recognized when incurred. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Estimates are based on several factors including the facts and circumstances available at the time the estimates are made, historical experience, risk of loss, general economic conditions and trends, and the assessment of the probable future outcome. Some of the more difficult, subjective and significant estimates include determinations of the useful lives of assets, allowance for doubtful accounts, present value assumptions and fair value of investments. Estimates and assumptions are reviewed periodically, and the effects of changes, if any, are reflected in the statement of income in the period that they are determined. Actual results could differ from those estimates. Cash and Cash Equivalents For purposes of the statement of financial condition and statement of cash flows, the Company considers all highly liquid investments, consisting mostly of certificates of deposit, which are readily convertible into known amounts of cash and have a maturity of three months or less when acquired to be cash equivalents. 7 14

15 Financial Northeastern Securities, Inc. Notes to Financial Statements December 31, 2013 Concentration of Credit Risk The Company places its cash and cash equivalents with three financial institutions that have offices located in New Jersey and New York. Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents. The Company's cash and cash equivalents are placed with high credit quality financial institutions. At times, such balances may exceed federally insured limits of $250,000 per financial institution for interest bearing accounts and is unlimited for non-interest bearing accounts. The Company has not experienced any losses in such accounts, and it believes it is not exposed to any significant credit risk on cash and cash equivalents. Customer Receivables Accounts receivable from customers, which are commissions earned, are recorded at the present value of estimated cash flows on the date the receivables were established. The Company receives collections on its customer receivables based on the length of the certificates of deposit. The present value discounts on the customer receivables are computed using assumptions made by management of the Company regarding the market and ultimate collectability of the receivables. Uncollectible accounts receivable are charged to operations during the period they are determined to be uncollectible. It is management's policy to review the outstanding accounts receivable from its customers and write-off any uncollectible accounts as they arise, which is not materially different from an allowance method. The Company wrote-off $0 during 2013 and at December 31, 2013, there was no allowance for doubtful accounts. Customer receivables consist of the following: Receivables due in less than one year $ 940,098 Receivables due in more than one year 885,945 Less discounts to present value (ranging from 1% to 2%) (22,735) Investments Total $ 1,803,308 The Company s investments are comprised of certificates of deposit and marketable securities. Investments in certificates of deposit and marketable securities are bought and held principally for the purpose of selling them in the near term and are classified as trading securities. Trading securities are measured at fair value in the accompanying statement of financial condition. The Company uses the specific identification method in determining realized gains and losses reflected in revenues under selling groups and other in the statement of income. The unrealized gains and losses are also reflected in revenues under selling groups and other in the statement of income. 8 15

16 Financial Northeastern Securities, Inc. Notes to Financial Statements December 31, 2013 Property and Equipment Property and equipment is stated at cost less accumulated depreciation. Expenditures for maintenance, repairs and betterments which do not materially prolong the normal useful life of an asset are charged to operations as incurred. Purchases of property and equipment and additions and betterments which substantially extend the useful life of the asset are capitalized at cost. Upon sale or other disposition of assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss, if any, is reflected in the statement of income. The Company provides for depreciation as follows: Asset Estimated Useful Life Principle Method Furniture and fixtures 7 years Straight-line Office equipment 3-10 years Straight-line Payable to Clearing Broker The Company clears all securities transactions through an unaffiliated clearing broker on a fully disclosed basis. The amount payable to the clearing broker relates to these transactions and is collateralized by securities owned by the Company. Revenue Recognition from Securities Transactions The Company s revenue is derived from several classes of services summarized as follows: Underwriting of Certificates of Deposit Revenue Underwriting revenues are derived from underwriting services provided on the purchase of certificates of deposit and are recorded in accordance with the terms of the respective underwriting agreements. Principal Transactions Revenue Principal transactions revenue is derived from the mark up or mark down on securities purchased and re-sold by the Company. Principal transactions and the related revenue are recorded on a settlement-date basis, which is not materially different from trade-date basis. Spread Sales on Certificates of Deposit Revenue Spread Sales on certificates of deposit is derived from the interest rate of a particular certificate of deposit sold to a customer. The customer receives a portion of the interest income based upon the net rate quoted, the difference between the net and gross rate represents the fee the Company earns. Revenue is recognized on a settlement-date basis, which is not materially different from trade-date basis. 9 16

17 Financial Northeastern Securities, Inc. Notes to Financial Statements December 31, 2013 Commission Revenue Commission revenues are derived from investment transactions where the Company acts as agent and are recognized on a settlement-date basis, which is not materially different from trade-date basis. Selling Groups Revenue Participation Revenue derived from participation in a selling group of corporate note programs and various other corporate underwritings is recognized in accordance with the terms of the respective note programs. Income Taxes As an S corporation, the Company is not subject to federal, New Jersey and Florida corporate income taxes. The individual shareholders are responsible for the payment of income taxes on the Company s earnings. Accordingly, there is no provision for federal, New Jersey, and Florida income tax in the accompanying financial statements, however, Ohio and the City of Dublin, Ohio are subject to corporate income taxes. The Company has adopted Financial Accounting Standards Board ("FASB") authoritative accounting guidance for uncertainty in income taxes and evaluated its tax positions. The adoption had no effect on the Company's financial statements. As of December 31, 2013, the Company did not have any open tax positions. The Company's federal income tax returns are no longer subject to examination by the federal taxing authority for the years before The Company's New Jersey, Ohio and Florida income tax returns are no longer subject to examination by those taxing authorities for the years before 2007 or 2008, depending on the state requirements. Distributions and Dividends Payable The Company reimburses its stockholders for the individual income tax liability that will be incurred by the stockholders as a result of the S corporation earnings. As of December 31, 2013, dividends payable was $350,000. During 2013, the Company distributed $2,816,700 to its stockholders toward the individual tax liabilities and other cash distributions. Commissions Expense Commissions are paid to various brokers based upon a percentage of sales on the settlement date and are paid at the end of the month following the settlement date

18 Financial Northeastern Securities, Inc. Notes to Financial Statements December 31, Property and Equipment Property and equipment consists of the following: Furniture and fixtures $ 34,841 Office equipment 717,656 Total 752,497 Less accumulated depreciation and amortization 605,427 Net $ 147,070 Depreciation expense for 2013 was $112, Investments The Company measures its investments at fair value. Fair value is defined as the price that would be received to sell an asset or the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The framework that the authoritative guidance establishes for measuring fair value includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs used in determining valuations into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows: Level 1 - Fair value is based on unadjusted quoted prices in active markets that are accessible to the Plan for identical assets. These generally provide the most reliable evidence and are used to measure fair value whenever available. Level 2 - Fair value is based on significant inputs, other than Level 1 inputs, that are observable either directly or indirectly for substantially the full term of the asset through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets, quoted market prices in markets that are not active for identical or similar assets, and other observable inputs. Level 3 - Fair value would be based on significant unobservable inputs. Examples of valuation methodologies that would result in Level 3 classification include option pricing models, discounted cash flows, and other similar techniques

19 Financial Northeastern Securities, Inc. Notes to Financial Statements December 31, 2013 As of December 31, 2013, investments include various certificates of deposit maturing at dates through 2020 at interest rates ranging from 0.00% to 4.75%. These items were measured using the following inputs at December 31, 2013: Level 1 Level 2 Level 3 Total Assets Certificates of Deposit $ 2,379,346 $ - $ - $ 2,379,346 Equity Securities 11, ,940 Total $ 2,391,286 $ - $ - $ 2,391,286 Following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in methodologies as of December 31, Certificates of Deposit are valued based upon quoted prices from an active market on which the investment is traded. Equity Securities are valued at the closing price reported on the active market on which the individual security is traded. The following schedule summarizes the investment return included in other income for 2013 on the statement of income: Unrealized gains (losses) $ 15,324 Realized gains (losses) (53) Total $ 15,271 At December 31, 2013, the Company did not have any assets or liabilities whose fair value was measured using a Level 2 or Level 3 input. 5. Net Capital Requirement The Company is subject to the Securities and Exchange Commission Uniform Net Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net capital and requires that the ratio of aggregate indebtedness to net capital, both as defined, shall not exceed 15 to 1. Rule 15c3-1 also provides that equity may not be withdrawn or cash dividends paid if the resulting net capital ratio would exceed 10 to 1. At December 31, 2013, the Company had net capital of $15,297,616, which was $15,197,616 in excess of its required net capital of $100,000. The Company s net capital ratio was to

20 Financial Northeastern Securities, Inc. Notes to Financial Statements December 31, Off-Balance Sheet Risk The security transactions of the Company s customers are introduced on a fully disclosed basis with a clearing broker-dealer. The Company holds no customer funds or securities. The clearing broker-dealer is responsible for execution, collection of and payment of funds, and receipt and delivery of securities relative to customer transactions. Off-balance-sheet risk exists with respect to these transactions due to the possibility that customers may be unable to fulfill their contractual commitments wherein the clearing broker-dealer may charge any related losses to the Company. The Company seeks to minimize this risk through procedures designed to monitor the creditworthiness of its customers and to ensure that the clearing broker-dealer executes customer transactions properly. 7. Related Party Transactions Pursuant to an administrative annual cost sharing agreement, renewable on a year-to-year basis, the Company shares the cost of overhead expenses with an affiliated company through common ownership, Financial Northeastern Corporation (the Affiliate ), based on relative sales levels. The shared overhead expenses pertain to rent, employee compensation and benefits, professional fees, utilities, travel and other miscellaneous expenses. As of December 31, 2013, the affiliate owed the Company $17,505 toward 2013 shared costs. The Company incurred shared costs of $2,802,289 for 2013 from the Affiliate representing 94% of the total expenses to be allocated. 8. Commitments and Contingencies Operating Lease The Affiliate of the Company and the Company have entered into various operating leases for office space located in Florida, New Jersey and Ohio through 2016, 2017 and 2018, respectively. The Affiliate and the Company have options to renew its office leases. Minimum annual lease payments subsequent to December 31, 2013 are as follows: Years ending December 31: 2014 $ 340, , , , ,522 Thereafter - Total $ 1,325,655 Rent expense charged to the Company under operating leases was $350,524 during As described in Note 7, an agreement is in place whereby the Affiliate shares the cost relative to the office space leases with the Company

21 Financial Northeastern Securities, Inc. Notes to Financial Statements December 31, Pension Plans Defined Contribution Pension Plan The Company is a participating employer of a 401K plan that allows for pre-tax employee contributions and a discretionary employer match in addition to a discretionary employer profit sharing contribution. Eligible employees to benefit from employer contributions must meet certain age and service requirements. Full vesting is reached in year three after 33% vesting each in years one and two. Total expense for the defined contribution pension plan for 2013 was $297,717. Supplemental Executive Retirement Plan The Affiliate established a non-qualified deferred compensation program and a Supplemental Executive Retirement Plan (SERP) in 2004, both of which were amended and restated effective January 1, Effective January 1, 2010, the Company has suspended contributions to the SERP Plan

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24 Financial Northeastern Securities J.P. Morgan Clearing Corp. (Clearing Firm) December 31, 2013 Financial Statements 24

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45 Financial Northeastern Securities Strength of J.P. Morgan Clearing Corp. and Protection of Client Assets 45

46 INVESTOR SERVICES Protection of Client Assets J.P. Morgan has always placed a high priority on protecting the client assets Key components of the firm s commitment to protecting client assets include the following: J.P. Morgan Chase & Co. (the Bank) has built one of the strongest balance sheets in the industry and achieved some of the highest credit ratings among its peers from the leading rating agencies. Unique legal entity structure: J.P. Morgan Clearing Corp. (JPMCC) is a separately capitalized broker-dealer established for the express purpose of holding and financing all customer accounts and clearing and settling all customer transactions. S&P and Fitch have each rated JPMCC A+ as a Long-term issuer. The obligations of JPMCC are guaranteed by J.P. Morgan Securities LLC, whose long term debt has been rated A+ by Standard & Poor s, Aa3 by Moody s and A+ by Fitch Ratings. JPMCC s membership in the Securities Investor Protection Corporation (SIPC) provides protection for customer accounts. The Bank continuously focuses on upholding strong operational and risk controls and is dedicated to maintaining best-in-class risk management teams and technology. JPMCC has received SSAE 16 certification. This document provides an overview of the client asset protection rules and mechanisms applicable to JPMCC s clients. Overview of Client Asset Protection JPMorgan Chase & Co. Credit Ratings as of November 14, 2013 Moody s S&P Fitch Outlook Stable Negative Stable Commercial paper P-2 A-1 F1 Senior unsecured debt A3 A A+ Subordinated debt Baa1 A- A Trust Preferred Baa2 BBB BBB Preferred stock Ba1 BBB BBB- Fourth Quarter 2013 Financial Highlights Net income of $5.3 Billion with revenue of $24.1 Billion Basel I Tier 1 common of $149 Billion Basel I Tier 1 common ratio of 10.7%, up from 10.5% in prior quarter 46

47 Client assets are held in JPMCC, a well-capitalized entity JPMorgan Chase & Co. Senior unsecured: Moody's: A3 S&P: A Fitch: A+ Bank Chain J.P. Morgan Broker - Dealer Holdings Inc. JPMorgan Chase Bank, N.A. Custody Long-term issuer rating: Moody s: Aa3 S&P: A+ Fitch: A+ J.P. Morgan Securities LLC U.S. Broker-Dealer Investment Banking, Trading and Sales Long-term issuer rating: Moody's: Aa3 S&P: A+ Fitch: A+ Guaranteed Guaranteed J.P. Morgan Securities plc 2 UK Bank Long-term issuer rating: Moody s: Aa3 S&P: A+ Fitch: A+ J.P. Morgan Clearing Corp. 1 U.S. Broker-Dealer Securities processing, custody and financing for customers Long-term issuer rating: Moody's: Aa3 S&P: A+ Fitch: A+ Learn more about the Protection of Client assets and view JPMCC s statement of financial conditions: J.P. Morgan Securities LLC guarantees the obligations of J.P. Morgan Clearing Corp. 2 - J.P. Morgan Chase Bank, N.A. guarantees the obligations of J.P. Morgan Securities plc 47

48 Protection of Customers of J.P. Morgan Clearing Corp. JPMorgan Chase & Co. (NYSE: JPM), is a leading global financial services firm with operations in more than 60 countries. The firm is a leader in investment banking, financial services for consumers, small business and commercial banking, financial transaction processing, asset management, and private equity. A component of the Dow Jones Industrial Average, JPMorgan Chase & Co. serves millions of consumers in the United States and many of the world s most prominent corporate, institutional and governmental clients under its J.P. Morgan and Chase brands. Information about the firm is available at Customers of J.P. Morgan Clearing Corp. ( JPMCC ) benefit from JPMCC s innovative structure as more fully described below. Additionally, JPMCC is regulated by and subject to the rules of the Securities and Exchange Commission ( SEC ) the New York Stock Exchange and the Financial Industry Regulatory Authority. In the unlikely event of a liquidation of JPMCC, losses of cash or securities in the securities accounts of each JPMCC Customer (as defined under the Securities Investor Protection Act of 1970 ( SIPA )) are protected by the Securities Investor Protection Corporation ( SIPC ). While SIPC does not protect accounts from losses related to fluctuations in the Market, as noted below, Customers under SIPA receive preferential treatment in any liquidation and are not treated as general creditors of a failed broker-dealer for purposes of SIPA. The Structure of JPMCC Provides Protection to Customers JPMCC is a separately capitalized, broker-dealer, guaranteed by its parent, established for the express purpose of holding and financing customer accounts and clearing and settling transactions. JPMCC does not make proprietary investments or engage in market making activities. SEC Rules and Regulations Provide Customer Protection (As used in the discussion in this paragraph of SEC rules and regulations, capitalized terms have the meanings assigned to them under the SEC rules and regulations.) JPMCC is a broker dealer registered with, and regulated by, the SEC. In compliance with the SEC rules and regulations for the protection of customers, JPMCC maintains all customers Fully Paid and Excess Margin securities as required under Rule 15c3-3(b) of the Securities Exchange Act of JPMCC maintains such securities in its possession or in a location that has the controls required by the SEC to protect such securities from claims of third parties, in conformity with the SEC rules. Based upon a formula prescribed in the SEC s rules, net Customer Free Credit Balances (if any), or the equivalent thereof in Qualified Securities, not required to be used for the settlement of Customer transactions or the financing of Customer margin debt are held by JPMCC in an account segregated for, in the words of the SEC rules, the exclusive benefit of Customers. As a result, such funds and Qualified Securities are not available for JPMCC s proprietary use. Compliance with SEC and similar rules are subject to review by the regulatory agencies that are charged with their enforcement. Membership in SIPC for Customers Accounts (As used in the discussion in this section of SIPA and SIPC, Customer and each other defined term has the meaning assigned to it under SIPA.) JPMCC is a member of SIPC, which was created by Congress to protect Customers of securities brokers and dealers and to promote public confidence in the securities markets in the United States. SIPC is not a U.S. government agency. Customers of a member of SIPC that fails financially are afforded special benefits under SIPA. These special benefits provided under SIPA are relevant only if the broker-dealer that carries a Customer s account fails and is liquidated under SIPA. Although there can be no assurance of what would occur in any specific situation if a member of SIPC fails, in a liquidation under SIPA, Customer accounts of a failed firm are intended to be transferred to another SIPC member firm. If that were to occur, the transfer would usually occur within a week of the failure. If their accounts are transferred, Customers may deal with their accounts after their transfer in the same manner as if their original broker-dealer had not failed. If a Customer s accounts are not transferred to another SIPC member firm, such Customer is entitled to receive the cash and securities in its accounts, minus any obligations the Customer owes to the failed broker-dealer. If there were not enough cash and securities to make distributions in full to all Customers, each Customer would receive a distribution, on a pro rata basis, of Customer Property held by the failed broker-dealer to the extent of the Net Equity that was in such Customer s accounts, determined as of the date of the filing of the petition with respect to the SIPC member. Customers are not considered general creditors of a failed broker-dealer with respect to Customer Property, and receive distributions from Customer Property ahead of general creditors. General creditors of the failed broker-dealer do not receive any Customer Property unless all Customers are first satisfied in full. If the distributions from Customer Property are not sufficient to satisfy Customers claims for the Net Equity in their accounts, SIPC protection would be available to satisfy Customer claims for any remaining shortfall in the Net Equity in their accounts, up to $500,000 per Customer (of which up to $250,000 may be for cash claims). The coverage described above covers losses of cash or securities from Customer accounts at JPMCC if it were to fail and be unable to meet its obligations to its Customers. The coverage does not cover any losses from changes in the market value of investments after a liquidation commences, from delays in the liquidation process, losses of assets not eligible for SIPC protection (such as futures, options on futures, foreign exchange transactions, commodity contracts, precious metals contracts, or any investment contracts that are not registered as securities) or losses incurred by persons that are not Customers under SIPA. 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49 It is a non-profit membership corporation which receives its funding from those brokers and dealers that are required by law to be SIPC members and from its own investments. A bank or brokerage firm that is a Customer and that is acting for its own trading account is entitled to participate in the preferential distribution of customer property in a SIPA liquidation, but it is not eligible for SIPC advances if there is a shortfall in such a liquidation. We hope that this summary has been useful. These matters are complex and it is not possible to address all issues in a very general summary such as this one. Should you have any questions regarding SIPC coverage, please consult your own legal counsel, or visit the SIPC web-site at Strong Operational and Risk Controls J.P. Morgan Clearing Corp. has strong, regularly audited operational controls. These audits were conducted by PricewaterhouseCoopers LLP and are summarized on our SSAE 16 report. Their description of controls is as of October 31, 2011, the information about the tests of operating effectiveness covers the year beginning November 1, 2011 through October 31, Certification represents a service organization has been through an in-depth audit of their control objectives and control activities, which often include controls over information technology and related processes. It is not considered to be an endorsement or recommendation by the auditor. A Type II report not only includes the service organization s description of controls, but also includes detailed testing of the service organization s controls over a minimum six month period. This report can be made available to you upon request. Best-in-class risk management team and technology. Experienced staff that is continually augmented by new hires from competitors. Integrated with firm-wide Credit, Risk and collateral management businesses. Ongoing investment in risk management technology. For more information, please contact your J.P. Morgan representative or visit: jpmorgan.com/investorservices 49

50 Financial Northeastern Securities Evidence of SIPC Insurance 50

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52 Financial Northeastern Securities Registration Statement 52

53 Organization Registration Status Organization CRD#: Organization SEC#: View IA Record Organization Name: FINANCIAL NORTHEASTERN SECURITIES, INC. Applicant Name: FINANCIAL NORTHEASTERN SECURITIES, INC. SEC Approved - 11/22/1985 FINRA Approved - 05/15/1987 NQX Terminated - 07/16/2009 AL Approved - 02/01/1988 AK Approved - 01/05/1988 AZ Approved - 05/20/1988 AR Approved - 02/08/1989 CA Approved - 07/06/1987 CO Approved - 08/10/1987 CT Approved - 02/09/1988 DE Approved - 07/30/1987 DC Approved - 02/03/1988 FL Approved - 01/07/1988 GA Approved - 08/14/1987 HI Approved - 03/10/1988 ID Approved - 01/01/1988 IL Approved - 01/04/1988 IN Approved - 01/01/1988 IA Approved - 01/22/1988 KS Approved - 01/04/1988 KY Approved - 01/01/1988 LA Approved - 01/04/1988 ME Approved - 07/21/1987 MD Approved - 08/10/1987 MA Approved - 12/28/1987 MI Approved - 02/03/1988 MN Approved - 09/15/1987 MS Approved - 11/09/1987 MO Approved - 01/01/1988 MT Approved - 06/29/1987 NE Approved - 01/01/1988 NV Approved - 07/01/1987 NH Approved - 04/22/1992 NJ Approved - 11/05/1986 NM Approved - 08/17/1987 NY Approved - 08/14/1987 NC Approved - 01/13/1988 ND Approved - 01/01/1988 OH Approved - 11/16/1987 OK Approved - 09/29/1987 OR Approved - 02/28/1988 PA Approved - 08/18/1987 PR Approved - 11/23/1992 RI Approved - 08/27/1987 SC Approved - 01/04/1988 SD Approved - 09/11/1987 TN Approved - 08/11/1987 TX Approved - 09/15/1987 UT Approved - 01/05/1988 VT Approved - 01/01/1988 VI Approved - 07/05/2013 VA Approved - 01/01/1988 WA Approved - 04/24/1989 WV Approved - 08/12/1987 WI Approved - 03/08/1988 WY Approved - 08/04/

54 Financial Northeastern Securities Bailment Agreement 54

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