Commitments, Contingencies, and Other

9 Months Ended

Sep. 30, 2021

Commitments and Contingencies Disclosure [Abstract]

19. Commitments, Contingencies, and Other

Legal and Regulatory Matters

The Company is party to certain claims, suits and complaints arising in the ordinary course of business.

On July 14, 2021, StockCross entered into a Letter of Acceptance, Waiver, and Consent with FINRA in connection with alleged excessive trading and suitability violations by a registered representative of StockCross in a customer’s account, supervisory failures to comply with supervisory requirements relating to certain equity and options and stock lending transactions, and certain record keeping requirements. Pursuant to the consent, MSCO agreed to a censure, pay a fine of $250,000, and made an undertaking to retain an independent consultant to conduct a comprehensive review of MSCO’s compliance with suitability rules in connection with solicited equity and options transactions, as well as possession-or-control requirements in connection with the firm’s stock loan business.

On July 9, 2021, StockCross entered into a Consent Order with the California Department of Financial Protection and Innovation in connection with alleged supervisory failures relating to the sale of Unit Investment Trusts to six customers. Pursuant to the Consent Order, StockCross agreed to desist and refrain from violations of California law relating to supervision by broker-dealers, to make a payment of $100,000 to the California Department of Financial Protection and Innovation for administrative costs, and to offer restitution of commissions of approximately $315,000 in aggregate to the six customers.

The foregoing matters were related to activities that occurred prior to the Company’s acquisition of StockCross on January 1, 2020.

During the three months ended June 30, 2021, the Company booked an accrual of $250,000 for the FINRA fine and an accrual of $100,000 for the California administrative costs, which are both within the line item “Other general and administrative” in the statements of income. During the three months ended September 30, 2021, the Company made the payments for the above accruals and the six customers rejected the offer of restitutions.

As of September 30, 2021, all other legal matters are without merit or involve amounts which would not have a material impact on the Company’s results of operations or financial position.

Overnight Financing

The Company has an available line of credit for short term overnight demand borrowing of up to $15 million with BMO Harris Bank as of September 30, 2021. As of September 30, 2021, the Company had no outstanding loan balance with BMO Harris Bank and there are no commitment fees or other restrictions on this line of credit. As of December 31, 2020, in addition to the $15 million line of credit with BMO Harris Bank, MSCO had a $15 million line of credit with Texas Capital Bank, which MSCO did not renew as of September 30, 2021. The removal of this line of credit did not impact MSCO’s ability to meet its liquidity requirements. MSCO utilizes customer or firm securities as a pledge for short-term borrowing needs.

The interest expense for these credit lines was $0 for both the three months ended September 30, 2021 and 2020. The interest expense for these credit lines was $15,000 and $18,000 for the nine months ended September 30, 2021 and 2020, respectively. There were no fees associated with these credit lines for the three and nine months ended September 30, 2021 and 2020.

NFS Contract

Effective August 1, 2021, MSCO entered into an amendment to its clearing agreement with NFS that, among other things, extends the term of their arrangement for an additional four-year period commencing on August 1, 2021 and ending July 31, 2025. If the Company chooses to exit this agreement before the end of the contract term, the Company is under the obligation to pay an early termination fee upon occurrence pursuant to the table below:

Date of Termination		Early Termination Fee
Prior to August 1, 2022	$	8,000,000
Prior to August 1, 2023	$	7,250,000
Prior to August 1, 2024	$	4,500,000
Prior to August 1, 2025	$	3,250,000

For the three and nine months ended September 30, 2021, there has been no expense recognized for any early termination fees. The Company believes that it is unlikely it will have to make material payments related to this arrangement and has not recorded any contingent liability in the financial statements related to this arrangement.

-22-

General Contingencies

In the normal course of its business, the Company indemnifies and guarantees certain service providers against specified potential losses in connection with their acting as an agent of, or providing services to, the Company. The maximum potential amount of future payments that the Company could be required to make under these indemnifications cannot be estimated. However, the Company believes that it is unlikely it will have to make material payments under these arrangements and has not recorded any contingent liability in the financial statements for these indemnifications.

The Company provides representations and warranties to counterparties in connection with a variety of commercial transactions and occasionally indemnifies them against potential losses caused by the breach of those representations and warranties. The Company may also provide standard indemnifications to some counterparties to protect them in the event additional taxes are owed or payments are withheld, due either to a change in or adverse application of certain tax laws. These indemnifications generally are standard contractual terms and are entered into in the normal course of business. The maximum potential amount of future payments that the Company could be required to make under these indemnifications cannot be estimated. However, the Company believes that it is unlikely it will have to make material payments under these arrangements and has not recorded any contingent liability in the financial statements for these indemnifications.

The Company is self-insured with respect to employee health claims. The Company maintains stop-loss insurance for certain risks and has a health claim reinsurance limit capped at approximately $65,000 per employee as of September 30, 2021. The estimated liability for self-insurance claims is initially recorded in the year in which the event of loss occurs and may be subsequently adjusted based upon new information and cost estimates. Reserves for losses represent estimates of reported losses and estimates of incurred but not reported losses based on past and current experience. Actual claims paid and settled may differ, perhaps significantly, from the provision for losses. This adds uncertainty to the estimated reserves for losses. Accordingly, it is at least possible that the ultimate settlement of losses may vary significantly from the amounts included in the financial statements.

As part of this plan, the Company recognized expenses of $404,000 and $412,000 for the three months ended September 30, 2021 and 2020, respectively. As part of this plan, the Company recognized expenses of $1,054,000 and $962,000 for the nine months ended September 30, 2021 and 2020, respectively.

The Company had an accrual of $102,000 as of September 30, 2021, which represents the historical estimate of future claims to be recognized for claims incurred during the period.

The Company believes that its present insurance coverage and reserves are sufficient to cover currently estimated exposures, but there can be no assurance that the Company will not incur liabilities in excess of recorded reserves or in excess of its insurance limits.