News Column

OPPENHEIMER HOLDINGS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 1, 2014

The Company's condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Reference is also made to the Company's consolidated financial statements and notes thereto found in its Annual Report on Form 10-K for the year ended December 31, 2013. The Company engages in a broad range of activities in the securities industry, including retail securities brokerage, institutional sales and trading, investment banking (both corporate and public finance), research, market-making, trust services and investment advisory and asset management services. Its principal subsidiaries are Oppenheimer & Co. Inc. ("Oppenheimer") and Oppenheimer Asset Management Inc. ("OAM"). As of June 30, 2014, the Company provided its services from 96 offices in 25 states located throughout the United States, offices in Tel Aviv, Israel, Hong Kong and Beijing, China, London, England, St. Helier, Isle of Jersey and Geneva, Switzerland. Client assets administered by the Company as of June 30, 2014 totaled approximately $89.1 billion. The Company provides investment advisory services through OAM and Oppenheimer Investment Management Inc. ("OIM") and Oppenheimer's Fahnestock Asset Management, Alpha and OMEGA Group divisions. At June 30, 2014, client assets under management totaled approximately $26.5 billion. The Company provides trust services and products through Oppenheimer Trust Company of Delaware. The Company provides discount brokerage services through Freedom Investments, Inc. ("Freedom") and through BUYandHOLD division. Through OPY Credit Corp., the Company offers syndication as well as trading of issued corporate loans. Oppenheimer Multifamily Housing & Healthcare Finance, Inc. ("OMHHF") is engaged in FHA insured commercial mortgage origination and servicing. At June 30, 2014, the Company employed 3,546 employees (3,396 full-time and 150 part-time), of whom approximately 1,370 were financial advisers.



Critical Accounting Estimates

The Company's accounting policies are essential to understanding and interpreting the financial results reported in the condensed consolidated financial statements. The significant accounting policies used in the preparation of the Company's condensed consolidated financial statements are summarized in Note 2 to the Company's consolidated financial statements and notes thereto found in its Annual Report on Form 10-K for the year ended December 31, 2013. Certain of those policies are considered to be particularly important to the presentation of the Company's financial results because they require management to make difficult, complex or subjective judgments, often as a result of matters that are inherently uncertain. During the three months ended June 30, 2014, there were no material changes to matters discussed under the heading "Critical Accounting Estimates" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2013.



Business Environment

The securities industry is directly affected by general economic and market conditions, including fluctuations in volume and price levels of securities and changes in interest rates, inflation, political events, investor confidence, investor participation levels, legal and regulatory, accounting, tax and compliance requirements and competition, all of which have an impact on commissions, firm trading, fees from accounts under investment management as well as fees for investment banking services, investment and interest income as well as on liquidity. Substantial fluctuations can occur in revenue and net income due to these and other factors. For a number of years, the Company has offered auction rate securities ("ARS") to its clients. A significant portion of the market in ARS 'failed' because, in the tight credit market in and subsequent to 2008, dealers were no longer willing or able to purchase the imbalance between supply and demand for ARS. These securities have auctions scheduled on either a 7, 28 or 35 day cycle. Clients of the Company own ARS in their individual accounts. The absence of a liquid market for these securities presents a significant problem to clients continuing to own ARS and, as a result, to the Company. It should be noted that this is a failure of liquidity and not a default. These securities in almost all cases have not failed to pay interest or principal when due. These securities are fully collateralized for the most part and, for the most part, remain good credits. The Company did not act as an auction agent for ARS. Interest rates on ARS typically reset through periodic auctions. Due to the auction mechanism and generally liquid markets, ARS historically were categorized as Level 1 in the fair value hierarchy. Beginning in February 2008, uncertainties in the credit markets resulted in substantially all of the ARS market experiencing failed auctions. Once the auctions failed, the ARS could no longer be valued using observable prices set in the auctions. The Company has used less observable determinants of the fair value of ARS, including the strength in the underlying credits, announced issuer redemptions, completed issuer redemptions, and announcements from issuers regarding their intentions with respect to their outstanding ARS. The Company has also developed an internal methodology to discount for the lack of liquidity and non-performance risk of the failed auctions. Due to 54



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liquidity problems associated with the ARS market, ARS that lack liquidity are setting their interest rates according to a maximum rate formula.

The Company sought financing from a number of sources, without success, to try to find a means for all its clients to find liquidity from their ARS holdings. It seems likely that liquidity will ultimately come from issuer redemptions, which to date, combined with purchases by the Company have reduced client holdings by 91%. There can be no assurance that the Company will be successful in finding a liquidity solution for all its clients' ARS. See "Risk Factors - The Company may continue to be adversely affected by the failure of the Auction Rate Securities Market" appearing in Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2013 and "Factors Affecting 'Forward-Looking Statements'" herein. Recent events have caused increased review and scrutiny of the methods utilized by financial service companies to finance their short term requirements for liquidity. The Company utilizes commercial bank loans, securities lending, and repurchase agreements to finance its short term liquidity needs (See "Liquidity"). All repurchase agreements and reverse repurchase agreements are collateralized by short term U.S. Government obligations and U.S. Government Agency obligations. The Company is focused on growing its private client and asset management businesses through strategic additions of experienced financial advisers in its existing branch system and employment of experienced money management personnel in its asset management business. In addition, the Company is committed to the improvement of its technology capability to support client service and the expansion of its capital markets capabilities while addressing the issue of managing its expenses.



Regulatory and Legal Environment

The brokerage business is subject to regulation by, among others, the SEC, the CFTC ("Commodity Futures Trading Commission") and FINRA in the United States, the Financial Conduct Authority ("FCA") in the United Kingdom, the Jersey Financial Services Commission ("JFSC") in the Isle of Jersey, the Securities and Futures Commission in Hong Kong ("SFC"), and various state securities regulators in the United States. In addition, Oppenheimer Israel (OPCO) Ltd. operates under the supervision of the Israeli Securities Authority. Events of a decade ago surrounding corporate accounting and other activities leading to investor losses resulted in the enactment of the Sarbanes-Oxley Act and have caused increased regulation of public companies. The financial crisis of 2008-9 accelerated this trend. New regulations and new interpretations and enforcement of existing regulations have created increased costs of compliance and increased investment in systems and procedures to comply with these more complex and onerous requirements. The SEC has increased their enforcement activities with an intent to bring more actions against firms and individuals for violations of existing rules as well as for conduct that stems from violations of new interpretations of existing rules and to assert significant penalties in connection with such activities. Various states are imposing their own regulations that make compliance more difficult and more expensive to monitor. In July 2010, Congress enacted extensive legislation entitled the Wall Street Reform and Consumer Protection Act ("Dodd Frank") in which it mandated that the SEC and other regulators conduct comprehensive studies and issue new regulations based on their findings to control the activities of financial institutions in order to protect the financial system, the investing public and consumers from issues and failures that occurred in the 2008-9 financial crisis. All relevant studies have not yet been completed, but they are widely expected to extensively impact the regulation and practices of financial institutions including the Company. The changes are likely to significantly reduce leverage available to financial institutions and to increase transparency to regulators and investors of risks taken by such institutions. It continues to be impossible to predict the nature and impact of such rulemaking. In addition, new rules have been adapted to regulate and/or prohibit proprietary trading for certain deposit taking institutions, control the amount and timing of compensation to "highly paid" employees, create new regulations around financial transactions with consumers requiring the adoption of a uniform fiduciary standard of care of broker-dealers and investment advisers providing personalized investment advice about securities to retail customers, increase the disclosures provided to clients, and create a tax on securities transactions. The Consumer Financial Protection Bureau has stated its intention to implement new rules affecting the interaction between financial institutions and consumers. In addition, the U.S. Department of Labor is poised to propose its own rules for financial institutions surrounding their fiduciary duty to retirement plans which could have significant negative implications for the industry's relationships with this broad group of clients including individuals holding Individual Retirement Accounts ("IRA"). In December 2012, France began applying a 0.2% transaction tax on financial transactions in American Depository Receipts of French companies that trade on U.S. exchanges. Italy implemented its own financial transaction tax in March 2013. The imposition of financial transaction taxes are likely to impact the jurisdiction in which securities are traded and the "spreads" demanded by market participants in order to make up for the cost of any such tax. Such a tax may be implemented throughout the European Union. Recent publicity around "high speed trading" has created suggestions by legislators to create a financial transaction tax in the U.S. to inhibit such trading. FINRA has proposed a data collection system (CARDS- Comprehensive Automated Risk Data System) that would collect data on virtually every transaction involving clients and process and retain the information. It is possible that client reaction to this information collection will drive client activity to non-broker dealers, and have a detrimental impact on the 55



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business of the Company. If and when enacted, such regulations will likely increase compliance costs and reduce returns earned by financial service providers and intensify compliance overall. It is difficult to predict the nature of the final regulations and their impact on the business of the Company.

Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships with, Hedge Funds and Private Equity Funds (the "Volcker Rule") was published by the U.S. Federal Reserve Board as required by Dodd-Frank in 2011. The Volcker Rule is intended to restrict U.S. banks and other financial institutions that accept deposits from conducting proprietary trading activities, as well as investing in hedge funds and private equity funds for their own account. The intent of the Volcker Rule is to reduce risk to the capital of such institutions through reducing speculation and risk-taking with bank capital. The draft form of the proposed rule was exposed for comment until February 13, 2012 and is scheduled to become effective on July 21, 2015 (subject to possible additional delays). There may be additional changes to the requirements of the Volcker Rule and it is impossible to determine the rule's impact on market liquidity and on the liquidity of issued sovereign debt in Europe and Asia. The Company believes that the Volcker Rule will not directly affect its operations, but indirect effects cannot be predicted with any certainty. Additionally, the Federal Reserve in conjunction with other U.S regulatory organizations has analyzed the U.S. financial system and the impact that might result from the failure of one or more "Strategically Important Financial Institutions" ("SIFI"). To date, less than 50 such institutions have been identified and will be made subject to special regulations including the requirement to create a plan for their orderly demise in the event of a failure. Oppenheimer has not been identified as a SIFI. There can be no assurance that this list will not grow to include more SIFI institutions. This requirement may have broader implications for the capital markets as capital becomes less available. The identification process has not been completed and is subject to appeal by the affected institutions. The Company has no reason to believe that it will be identified as a SIFI. Recent revelations concerning the potential manipulation of LIBOR ("London Interbank Offered Rate") during the period from 2008-2010 make it likely that more regulation surrounding the fixing of interest rates on commercial bank loans and reference rates on derivatives can be expected. Similar investigations are underway with respect to the setting of foreign exchange rates over a broad time period and there is no way to predict the outcome of these investigations. The rules and requirements that were created by the passage of the Patriot Act, and the anti-money laundering regulations (AML) in the U.S. and similar laws in other countries that are related, have created significant costs of compliance and can be expected to continue to do so. FinCEN ("Financial Crimes Enforcement Network") has heightened their review of activities of broker-dealers where heretofore their focus had been on commercial banks. This increased focus is likely to lead to significantly higher levels of enforcement and higher fines and penalties on broker dealers. Regulators have expanded their views of the requirements of the Patriot Act and the amount of diligence required by financial institutions of both their foreign and domestic clients. Pursuant to FINRA Rule 3130 (formerly NASD Rule 3013 and NYSE Rule 342), the chief executive officers ("CEOs") of regulated broker-dealers (including the CEO of Oppenheimer) are required to certify that their companies have processes in place to establish and test supervisory policies and procedures reasonably designed to achieve compliance with federal securities laws and regulations, including applicable regulations of self-regulatory organizations. The CEO of the Company is required to make such a certification on an annual basis and did so in March 2014. On July 30, 2013, the SEC adopted final amendments to the financial responsibility rules ("FRRs") and reporting rules under SEC Rule 17a-5 ("Reporting Rule") for broker-dealers. The final amendments to the FRRs make changes to the rules related to proprietary accounts for broker-dealers, special reserve deposits with banks, bank sweep programs, deductions from net worth, solvency requirements, the SEC's ability to restrict withdrawals of capital, books and records requirements, and notifications to regulators. The effective date for the FRRs was October 21, 2013. The effectiveness of certain provisions of the final amendments was extended to March 3, 2014. The Reporting Rule will require all broker-dealers to file a new unaudited quarterly Form Custody report which will provide information around custodial practices and was effective December 31, 2013. In addition, the new reporting rules provide significant changes to annual reporting of broker-dealers by eliminating the internal control report referred to as the Material Inadequacy letter, providing for a new Compliance Report asserting the effectiveness of internal controls for compliance with net capital, customer reserve formula, quarterly security count, and customer account statements. Also, the new reporting rules make changes to the audit and attestation requirements for auditor reporting from American Institute of Certified Public Accountants ("AICPA") standards to Public Company Accounting Oversight Board ("PCAOB") standards as well as provide the SEC with access to auditors and audit workpapers. These rules are effective for fiscal years ending on or after June 1, 2014.



On May 14, 2013, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) released an updated version of its Internal Control - Integrated Framework (the "2013 Framework"), which supersedes the original framework that

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was developed in 1992 (the "1992 Framework"). Most public companies, including the Company, adopted the 1992 Framework as a basis for their compliance with the Sarbanes-Oxley Act of 2002 and the primary objective in updating and enhancing the framework was to address the significant changes to the business and operating environments. The 2013 Framework is effective on December 15, 2014.



Other Regulatory Matters

For several quarters, Oppenheimer has been responding to information requests from the Enforcement Staff of FINRA regarding Oppenheimer's policies and procedures in relation to, and the activities of several financial advisers concerning, the sale of low-priced securities. On August 5, 2013, FINRA issued an order accepting an offer of settlement submitted by Oppenheimer without admitting or denying the recitation of facts and violative conduct set forth in the order (the "Order"). The Order states that from August 2008 through September 2010 seven brokers in five branch offices of Oppenheimer permitted the sale of low priced securities ("penny stocks") that were neither registered or exempt from registration under the Securities Act and Oppenheimer's supervisory system failed to prevent such violations. In addition, FINRA determined Oppenheimer failed to follow up on specific red flags relating to the sale of penny stocks and Oppenheimer's AML program failed to detect suspicious activity related to penny stock sales. FINRA determined this activity violated FINRA Rule 2010, 2110 and 3310. As a result, Oppenheimer was censured and paid a total fine of $1,425,000. Oppenheimer also agreed to retain an independent consultant to conduct a review of its policies, systems, procedures and training relating to the receipt or purchase and subsequent sale of penny stocks, the supervision of Foreign Financial Institutions ("FFIs") and its anti-money laundering procedures related to FFIs and the handling of movement of securities. The independent consultant completed its review and filed its report with Oppenheimer and FINRA in January 2014. On June 23, 2011, Oppenheimer received notice of an investigation by the SEC pursuant to which the SEC requested information from the Company regarding the sale of a number of low-priced securities effected primarily through several former Oppenheimer financial advisers and purchases and sales of low-priced securities through one Oppenheimer customer account. The issues and facts surrounding this investigation are, in the Company's view, largely duplicative of the matter that was settled by Oppenheimer with FINRA in August 2013 described above. On July 16, 2013, the Company received a "Wells Notice" from the SEC requesting that Oppenheimer make a written submission to the SEC to explain why Oppenheimer should not be charged with violations of the Exchange Act in relation to its sales of low-priced securities on behalf of a former customer of the firm. The Company submitted a Wells response on August 19, 2013. In October 2010, Oppenheimer received notice of an investigation by the SEC related to the trading of low-priced securities by one former financial advisor in one of Oppenheimer's branch offices and the supervision related thereto. Both branch and headquarters personnel, including members of senior management, have provided on-the-record testimony in connection with the investigation.



The Company believes that the SEC may file one or more enforcement actions against Oppenheimer in connection with the two immediately preceding paragraphs. As a result the Company recorded significant charges against earnings in each of the first two quarters of 2014 related to these two matters. See Note 11 of Notes to financial statements.

In February, 2014, Oppenheimer received notice of an investigation by, and a request for information from, a division of the United States Department of the Treasury ("FinCEN") relating to potential violations of the Bank Secrecy Act and the regulations promulgated thereunder related primarily to, in the Company's view, the FINRA and SEC matters discussed immediately above. Oppenheimer provided information it believes is responsive to the FinCEN request for information in March of 2014. The Company believes that FinCEN may file an action or issue an assessment against the Company related to their investigation. The Company recorded a $12.0 million charge against earnings in the second quarter of 2014 related to the aforementioned SEC and FinCEN matters. As of June 30, 2014, the Company believes it is fully reserved against potential liability arising out of the SEC and FinCEN matters. For several quarters Oppenheimer has been responding to information requests from FINRA regarding the sale of leveraged and inverse exchange traded funds ("ETFs"). Several Oppenheimer employees have provided on-the-record testimony in connection with the investigation. In May 2014 Oppenheimer received a "Wells Notice" from FINRA requesting that Oppenheimer make a written submission to explain why Oppenheimer should not be charged with violations of FINRA rules relating to the supervision of one former financial advisor and associated charges related to alleged deficient supervisory systems, late FINRA U/4/U/5 filings and record retention. Oppenheimer has not to date filed a Wells response. 57



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Oppenheimer is continuing to cooperate with the investigating entities.

In February 2010, Oppenheimer finalized settlements with the Regulators concluding investigations and administrative proceedings by the Regulators concerning Oppenheimer's marketing and sale of ARS. Pursuant to the settlements with the Regulators, Oppenheimer agreed to extend offers to repurchase ARS from certain of its clients subject to certain terms and conditions. In addition to the settlements with the Regulators, Oppenheimer has also reached settlements of and received adverse awards in legal proceedings with various clients where the Company is obligated to purchase ARS. Pursuant to completed Purchase Offers (as defined) under the settlements with the Regulators and client related legal settlements and awards to purchase ARS, as of June 30, 2014, the Company purchased and holds (net of redemptions) approximately $99.4 million in ARS from its clients. As of June 30, 2014, the Company did not have any outstanding ARS purchase commitments related to the settlements with the Regulators. In addition, the Company is committed to purchase another $20.2 million from clients through 2016 under legal settlements and awards. The Company also held $150,000 in ARS in its proprietary trading account as of June 30, 2014 as a result of the failed auctions in February 2008. The ARS positions that the Company owns and are committed to purchase primarily represent auction rate preferred securities issued by closed-end funds and, to a lesser extent, municipal auction rate securities which are municipal bonds wrapped by municipal bond insurance and student loan auction rate securities which are asset-backed securities backed by student loans. The Company's clients held at Oppenheimer approximately $147.1 million of ARS at June 30, 2014, exclusive of amounts that 1) were owned by Qualified Institutional Buyers ("QIBs"), 2) were transferred to the Company after February 2008, 3) were purchased by clients after February 2008, or 4) were transferred from the Company to other securities firms after February 2008. See "Off-Balance Sheet Arrangements" herein for additional details.



Other Matters

The Company operates in all state jurisdictions in the United States and is thus subject to regulation and enforcement under the laws and regulations of each of these jurisdictions. The Company has been and expects that it will continue to be subject to investigations and some or all of these may result in enforcement proceedings as a result of its business conducted in the various states. As part of its ongoing business, the Company records reserves for legal expenses, judgments, fines and/or awards attributable to litigation and regulatory matters. In connection therewith, the Company has maintained its legal reserves at levels it believes will resolve outstanding matters, but may increase or decrease such reserves as matters warrant. In accordance with applicable accounting guidance, the Company establishes reserves for litigation and regulatory matters when those matters present loss contingencies that are both probable and reasonably estimable. When loss contingencies are not both probable and reasonably estimable, the Company does not establish reserves. See "Legal Proceedings" herein. Business Continuity The Company is committed to an on-going investment in its technology and communications infrastructure including extensive business continuity planning and investment. These costs are on-going and the Company believes that current and future costs will exceed historic levels due to business and regulatory requirements. The Company built a new data center in 2010 which is housed in a location different than its headquarters. The move to new headquarters in 2012 required additional outlays for business continuity purposes although considerable savings have begun to be realized by the availability of independent electric generating capacity for the entire building which will support the Company's infrastructure and occupancy. The fourth quarter of 2012 was impacted by Superstorm Sandy which occurred on October 29, 2012 causing the Company to vacate its then two principal offices in downtown Manhattan and displaced 800 of the Company's employees including substantially all of its capital markets, operations and headquarters staff for in excess of 30 days. The Company continues to review both internally and with its landlords and vendors the infrastructure necessary to withstand a similar event in light of the issues that arose in the fall of 2012.



Cybersecurity

The Company has been focused for many years on the issues of maintaining the security of its clients' data, access to its data processing environment, and its data processing facilities. Recent examples of vulnerabilities by other companies which have resulted in loss of client data and fraudulent activities by both domestic and foreign entities have caused the Company to 58



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review its security policies and procedures and to take additional actions to protect its network and its information. Such threats are ongoing and the Company believes that increased resources will need to be dedicated to this effort in the future.

Outlook

The Company's long-term plan is to continue to expand existing offices by hiring experienced professionals as well as expand through the purchase of operating branch offices from other broker dealers or the opening of new branch offices in attractive locations, thus maximizing the potential of each office and the development of existing trading, investment banking, investment advisory and other activities. Equally important is the search for viable acquisition candidates. As opportunities are presented, it is the long-term intention of the Company to pursue growth by acquisition where a comfortable match can be found in terms of corporate goals and personnel at a price that would provide the Company's stockholders with incremental value. The Company may review potential acquisition opportunities, and will continue to focus its attention on the management of its existing business. In addition, the Company is committed to improving its technology capabilities to support client service and the expansion of its capital markets capabilities.



Results of Operations

The Company reported a net loss attributable to Oppenheimer Holdings Inc. of 1.6 million or $(0.11) per share for the second quarter of 2014 compared with net income attributable to Oppenheimer Holdings Inc. of $2.8 million or $0.21 per share for the second quarter of 2013. Second quarter 2014 operating results were significantly impacted by a charge in the amount of $12.0 million ($8.4 million after-tax or $0.61 per share) related to two regulatory matters emanating from transactions in low-priced securities. Revenue for the second quarter of 2014 was $249.7 million compared with $243.8 million in the second quarter of 2013, an increase of 2.4%. The following table and discussion summarizes the changes in the major revenue and expense categories for the three months ended June 30, 2014 compared to the same period in 2013: (Expressed in thousands) Three Months Ended June 30, 2014



Six Months Ended June 30, 2014

Amount Change % Change Amount Change % Change Revenue Commissions $ (8,378 ) (6.7 ) $ (5,820 ) (2.4 ) Advisory fees 9,850 16.3 21,335 18.2 Investment banking 4,232 18.8 19,308 47.1 Interest (558 ) (4.3 ) (539 ) (2.1 ) Principal transactions, net 4,262 56.6 (2,638 ) (11.3 ) Other (3,549 ) (22.7 ) (9,765 ) (30.6 ) Total revenue 5,859 2.4 21,881 4.5 Expenses Compensation and related expenses (155 ) (0.1 ) 12,586 3.9 Communications and technology 1,518 9.5 2,388 7.5 Occupancy and equipment costs (1,234 ) (7.2 ) (3,402 ) (9.8 ) Clearing and exchange fees (269 ) (4.3 ) (419 ) (3.4 ) Interest (2,731 ) (38.2 ) (4,429 ) (31.6 ) Other 14,268 45.2 22,299 38.2 Total expenses 11,397 4.8 29,023 6.2 Income (loss) before income taxes (5,538 ) (97.6 ) (7,142 ) (57.7 ) Income tax provision (1,219 ) (46.7 ) (2,350 ) (43.3 ) Net income (loss) for the period (4,319 ) * (4,792 ) (68.9 ) Net income attributable to non-controlling interest, net of tax 83 38.1 49 10.9 Net income (loss) attributable to Oppenheimer Holdings Inc. $ (4,402 ) * $ (4,841 ) (74.4 ) * Not comparable 59



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Commission revenue was $116.1 million for the second quarter of 2014, a decrease of 6.7% compared with $124.4 million for the second quarter of 2013.

Advisory fees were $70.4 million for the second quarter of 2014, an increase of 16.3% compared with $60.6 million for the second quarter of 2013. The increase was primarily due to increased fees earned on managed products. Assets under management increased 14.3% from $22.4 billion to $26.5 billion from March 31, 2013 to March 31, 2014, which contributed to the aforementioned advisory fee increase as these fees are calculated based on the market value at the end of the prior period. Investment banking revenue increased 18.8% to $26.8 million for the second quarter of 2014 compared with $22.6 million for the second quarter of 2013. The increase was due to increased fees from mergers and acquisition activity and from equity underwritings (25 offerings in the second quarter of 2014 compared to 24 offerings in the prior year quarter). Interest revenue was $12.5 million for second quarter of 2014, a decrease of 4.3% compared with $13.1 million for the second quarter of 2013. The decrease is primarily attributable to a decrease of $1.5 million in interest from lower holdings of reverse repurchase agreements. The decrease was partially offset by the increase of $1.0 million in interest earned on customer margin loans. Principal transactions revenue increased 56.6% to $11.8 million during the second quarter of 2014 compared with the second quarter of 2013. The increase was due to higher equities trading profits and the income recognized on loan commitments issued in the Commercial Mortgage Banking business this period compared to the prior year period. Other revenue was $12.1 million for the second quarter of 2014, a decrease of 22.7% compared to $15.6 million for the second quarter of 2013. The decrease was due to lower fees earned from loan originations (9 loans originated in the second quarter of 2014 compared to 18 loans originated in the prior year quarter).



Expenses

Compensation and benefits (including salaries, production and incentive compensation, share-based compensation, deferred compensation, and other benefit-related items) totaled $159.9 million during the second quarter of 2014, roughly flat when compared to the second quarter of 2013. Increases in salary expense offset decreases in deferred and incentive compensation obligations during the second quarter of 2014. Compensation as a percentage of revenue was 64.0% during the second quarter of 2014 compared to 65.6% during the second quarter of 2013. The decrease in compensation as a percentage of revenue was largely attributable to increased revenues during the 2014 period. Non-compensation expenses were $89.7 million during the second quarter of 2014, an increase of 14.8% compared to $78.2 million during the same period last year due to increases in legal and regulatory costs. The increase in legal and regulatory costs largely reflects an increase in reserves of $12.0 million during the second quarter of 2014 related to two regulatory matters. The second quarter of 2014 was also negatively impacted by the costs associated with the early retirement of the Company's Senior Secured Notes in April 2014 (call premium and write-off of debt issuance costs) totaling $3.5 million.



Year-to-date 2014

Revenue

Commission revenue was $238.2 million for the six months ended June 30, 2014, a decrease of 2.4% compared with $244.0 million for the same period of 2013.

Advisory fees were $138.6 million for the six months ended June 30 2014, an increase of 18.2% compared with $117.3 million for the same period of 2013. The increase was primarily due to increased fees earned on managed products. Asset under management increased 21.1% from $20.9 billion to $25.3 billion, from December 31, 2012 to December 31, 2013 and 14.3% from $22.4 billion to $25.6 billion from March 31, 2013 to March 31, 2014, which contributed to the aforementioned advisory fee increase as these fees are calculated based on the market value at the end of the prior period. 60



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Investment banking revenue increased 47.1% to $60.3 million for the six months ended June 30, 2014 compared with $41.0 million for the same period of 2013. The increase was due to increased fees from mergers and acquisition activity and from equity underwritings (52 offerings for the first six months of 2014 compared to 48 offerings in the same period in 2013).



Interest revenue was $24.9 million for the six months ended June 30, 2014, a decrease of 2.1% compared with $25.5 million for the same period in 2013.

Principal transactions revenue was $20.6 million for the six months ended June 30, 2014, a decrease of 11.3% compared with $23.2 million for the same period in 2013. The overall decrease was due to reduced trading profits in corporate and government securities, offset by the higher equities trading profits and income recognized on loan commitments from the Commercial Mortgage Banking Business. Other revenue was $22.2 million for the six months ended June 30, 2014. a decrease of 30.6% compared with $31.9 million for the same period in 2013. The decrease was due to the decrease in the value of assets underlying the deferred compensation plan and the lower fees earned from loan originations (18 loans originated in the first six months of 2014 compared to 38 loans originated in the same period in 2013). Expenses Compensation and benefits (including salaries, production and incentive compensation, share-based compensation, deferred compensation, and other benefit-related items) totaled $331.8 million during the six months ended June 30, 2014, an increase of 3.9% over the six months ended June 30, 2013. Compensation as a percentage of revenue was 65.7% during the six month period ended June 30, 2014 compared to 66.1% during the six month period ended June 30, 2013. The decrease in compensation as a percentage of revenue was largely attributable to increased revenues during the 2014 period. Non-compensation expenses were $167.8 million during the six month ended June 30, 2014, an increase of 10.9% compared with $151.2 million for the same period in 2013 which is primarily due to the increase in legal and regulatory costs. The increase in legal and regulatory costs largely reflects an increase in reserves of $19.7 million during the six months ended June 30, 2014 related to two regulatory matters. The second quarter of 2014 was also negatively impacted by the costs associated with the early retirement of the Company's Senior Secured Notes in April 2014 (call premium and write-off of debt issuance costs) totaling $3.5 million. The table below presents information about the reported revenue and net income before taxes of the Company's reportable business segments for the three and six months ended June 30, 2014 and 2013: (Expressed in thousands) For the Three Months Ended June 30, For the Six Months Ended June 30, 2014 2013 % Change 2014 2013 % Change Revenue Private Client $ 145,344$ 143,278 1.4 $ 293,164$ 286,647 2.3 Asset Management 25,032 22,006 13.8 49,642 42,962 15.5 Capital Markets 72,217 67,904 6.4 150,098 133,035 12.8 Commercial Mortgage Banking 6,958 9,477 (26.6 ) 11,830 17,543 (32.6 ) Corporate/Other 138 1,165 (88.2 ) 123 2,789 (95.6 ) 249,689 243,830 2.4 504,857 482,976 4.5 Income (Loss) before income taxes Private Client $ 7,560$ 15,698 (51.8 ) $ 17,868$ 33,025 (45.9 ) Asset Management 8,353 7,402 12.8 16,036 13,945 15.0 Capital Markets 7,082 972 628.6 18,266 4,505 305.5 Commercial Mortgage Banking 3,605 2,276 58.4 5,454 5,154 5.8 Corporate/Other (26,464 ) (20,674 ) (28.0 ) (52,379 ) (44,242 ) (18.4 ) $ 136 $ 5,674 (97.6 ) $ 5,245$ 12,387 (57.7 ) 61



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Private Client

Private Client reported revenue of $145.3 million for the second quarter of 2014, 1.4% higher than the second quarter of 2013 due to an increase in the Company's fee-based business offset by lower transaction-based business. Income before income taxes was $7.6 million, a decrease of 51.8% compared with the second quarter of 2013, primarily due to increases in legal and regulatory costs during the second quarter of 2014 as discussed above. Client assets under administration were $89.1 billion at June 30, 2014 compared to $80.1 billion at June 30, 2013, an increase of 11.2% and a record for the Company. Financial Advisor headcount was 1,370 at the end of the second quarter of 2014, down from 1,402 at the end of the second quarter of 2013 reflecting the Company's increased focus on financial advisor productivity. Retail commissions were $73.8 million for the second quarter of 2014, a decrease of 9.8% from the prior year quarter. Advisory fee revenue on traditional and alternative managed products was $46.5 million for the second quarter of 2014, an increase of 19.3% over the prior year quarter (see Asset Management below for further information). Money market fees were reduced by waivers in the amount of $7.6 million during the second quarter of 2014 versus waivers of $7.2 million during the second quarter of 2013.



Asset Management

Asset Management reported revenue of $25.0 million for the second quarter of 2014, 13.8% higher than the second quarter of 2013. Income before income taxes was $8.4 million, an increase of 12.8% compared with the second quarter of 2013, as a result of increased fees earned on managed products. Advisory fee revenue on traditional and alternative managed products was $23.4 million for the second quarter of 2014, an increase of 13.3% over the prior year quarter. Asset management fees are calculated based on client assets under management ("AUM") at the end of the prior quarter which totaled $25.6 billion at March 31, 2014 ($22.4 billion at March 31, 2013) and are allocated to the Private Client and Asset Management Divisions. AUM increased 17.8% to $26.5 billion at June 30, 2014, a



record for

the Company, compared to $22.5 billion at June 30, 2013, which is the basis for advisory fee billings for the third quarter of 2014. The increase in AUM was comprised of asset appreciation of $3.0 billion and net new assets of $1.0 billion. The following table provides a breakdown of the change in assets under management for the three months ended June 30, 2014: (Expressed in millions) For the Three Months Ended June 30, 2014 Beginning Appreciation Ending Balance Contributions Redemptions (Depreciation) Balance Fund Type Traditional (1) $ 21,482 $ 585 $ (365 ) $ 633 $ 22,335 Institutional Fixed Income (2) 1,240 3 (20 ) 43 1,266 Alternative Investments: - Hedge funds (3) 2,450 114 (31 ) (57 ) 2,476 Private Equity Funds (4) 443 - - (16 ) 427 $ 25,615 $ 702 $ (416 ) $ 603 $ 26,504



(1) Traditional investments include third party advisory programs, Oppenheimer

financial advisor managed and advisory programs, and Oppenheimer Asset Management taxable and tax-exempt portfolio management strategies.



(2) Institutional fixed income provides solutions to institutional investors

including: Taft-Hartley Funds, Public Pension Funds, Corporate Pension

Funds, and Foundations and Endowments. (3) Hedge funds represent single manager hedge fund strategies in areas including hedged equity, technology and financial services, and multi-manager and multi-strategy fund of funds.



(4) Private equity funds represent private equity fund of funds including

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Capital Markets

Capital Markets reported revenue of $72.2 million for the second quarter of 2014, 6.4% higher than the second quarter of 2013 due to increased fees from equity underwritings and from mergers and acquisitions activity. Income before income taxes was $7.1 million for the second quarter of 2014, an increase of 628.6% compared with income before income taxes of $972,000 for the second quarter of 2013. Institutional equities commissions were $28.3 million for the second quarter of 2014, an increase of 7.3% compared with the prior year period. Advisory fees from investment banking activities increased 13.6% to $9.0 million in the second quarter of 2014 compared with the prior year period. Equity underwriting fees increased 13.1% or $1.3 million to $11.0 million for the second quarter of 2014 compared with the prior year period. Revenue from Taxable Fixed Income decreased 15.1% to $18.1 million for the second quarter of 2014 compared with the prior year period. Public Finance and Municipal Trading revenue was flat at $6.1 million for the second quarter of 2014 compared with the prior year period. Commercial Mortgage Banking Commercial Mortgage Banking reported revenue of $7.0 million for the second quarter of 2014, 26.6% lower than the second quarter of 2013, due to a decrease in the dollar volume of loans originated during the 2014 period. Income before income taxes was $3.6 million, an increase of 58.4% compared with the second quarter of 2013, due to write-offs of mortgage servicing rights related to loan refinancings that took place during the second quarter of 2013. Loan origination fees for the second quarter of 2014 were $870,000, a decrease of 58.6% compared with the prior year period, as the Company originated 9 commercial loans (18 in the second quarter of 2013) with an aggregate principal loan balance of $44.9 million ($165.9 million in the second quarter of 2013). Net servicing revenue for the second quarter of 2014 was $1.4 million compared with $1.2 million for the comparable period in 2013. Principal loan balances related to servicing activities



totaled $4.0

billion at June 30, 2014, up 9.8% from June 30, 2013.



Liquidity and Capital Resources

Total assets at June 30, 2014 increased by 3.1% from December 31, 2013. The Company satisfies its need for short-term funds from internally generated funds and collateralized and uncollateralized borrowings, consisting primarily of bank loans, stock loans, uncommitted lines of credit, and warehouse facilities. The Company finances its trading in government securities through the use of repurchase agreements. The Company's longer-term capital needs are met through the issuance of the Notes (see "Refinancing" below). The amount of Oppenheimer's bank borrowings fluctuates in response to changes in the level of the Company's securities inventories and customer margin debt, changes in notes receivable from employees, investment in office facilities, and changes in stock loan balances and financing through repurchase agreements. Oppenheimer has arrangements with banks for borrowings on a fully-collateralized basis. At June 30, 2014, the Company had $147.2 million of such borrowings outstanding compared to outstanding borrowings of $118.2 million at December 31, 2013. The Company also has some availability of short-term bank financing on an unsecured basis. Volatility in the financial markets and ongoing concerns about the speed and degree of economic recovery has had an adverse effect on the availability of credit through traditional sources. As a result of concerns around financial markets generally and the strength of counterparties specifically, lenders have reduced and, in some cases, ceased to provide funding on both a secured and unsecured basis to financial service providers. The Company's overseas subsidiaries, Oppenheimer Europe Ltd. and Oppenheimer Investments Asia Limited, are subject to local regulatory capital requirements, which restrict the Company's ability to utilize this capital for other purposes. The regulatory capital for Oppenheimer Europe Ltd. and Oppenheimer Investments Asia Limited requirements were $3.4 million and $387,000, respectively, at December 31, 2013. See Note 12 for further details. The liquid assets at Oppenheimer Europe Ltd. are primarily comprised of money market funds and to a lesser extent cash deposits in bank accounts. The liquid assets at Oppenheimer Investments Asia Limited are primarily comprised of investments in U.S. Treasuries and to a lesser extent cash and money market funds. Any restrictions on transfer of these liquid assets from Oppenheimer Europe Ltd. and Oppenheimer Investments Asia Limited to the Company or its other subsidiaries would be limited by the regulatory capital requirements. 63



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The Company permanently reinvests eligible earnings of its foreign subsidiaries in such subsidiaries and, accordingly, does not accrue any U.S. income taxes that would arise if these earnings were repatriated. The unrecognized deferred tax liability associated with earnings of foreign subsidiaries, net of associated U.S. foreign tax credits, is estimated at $1.8 million for those subsidiaries with respect to which the Company would be subject to residual U.S. tax on cumulative earnings through 2013 were those earnings to be repatriated. The Company intends to continue to permanently reinvest the excess earnings of Oppenheimer Israel (OPCO) Ltd. in its own business and in the businesses in Europe and Asia to support business initiatives in those regions. On August 5, 2011, Standard & Poor's ("S&P") lowered its long term sovereign credit rating on the United States of America from AAA to AA+. Credit agencies have also reduced the credit ratings of various sovereign nations, including Italy and France. The negative impact of any future downgrade could adversely affect our credit ratings, as well as those of our clients and/or counterparties and could require us to post additional collateral on loans collateralized by U.S. Treasury securities. See Item 1A "Risk Factors - The recent downgrade of U.S. long term sovereign debt obligations and issues affecting the sovereign debt of European nations may adversely affect markets and our business" in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. In February 2010, Oppenheimer finalized settlements with the Regulators concluding investigations and administrative proceedings concerning Oppenheimer's marketing and sale of ARS. Pursuant to those settlements and settlements of legal proceedings, the Company has purchased and will, subject to the terms and conditions of the settlements, continue to purchase ARS on a periodic basis. The ultimate amount of ARS to be repurchased by the Company cannot be predicted with any certainty and will be impacted by redemptions by issuers and legal and other actions by clients during the relevant period which cannot be predicted. See "Off-Balance Sheet Arrangements" herein.



Additional settlements of regulatory matters could have an adverse effect on the Company's liquidity depending on the size and composition of any such settlement.

Refinancing

On April 12, 2011, the Company completed the private placement of $200.0 million in aggregate principal amount of 8.75% Senior Secured Notes due April 15, 2018 (the "Notes") at par. Interest on the Notes is payable semi-annually on April 15th and October 15th. Proceeds from the private placement were used to retire the Senior Secured Credit Note due 2013 ($22.4 million) and the Subordinated Note due 2014 ($100.0 million) and for other general corporate purposes. The private placement resulted in the fixing of the interest rate over the term of the Notes compared to the variable rate debt that was retired and an extension of the debt maturity dates as described above. The Notes were non-callable until April 2014. The cost to issue the Notes was approximately $4.6 million which was capitalized in the second quarter of 2011 and is amortized over the period of the Notes. The indenture for the Notes contains covenants which place restrictions on the incurrence of indebtedness, the payment of dividends, sale of assets, mergers and acquisitions and the granting of liens. The Notes provide for events of default including nonpayment, misrepresentation, breach of covenants and bankruptcy. The Company's obligations under the Notes are guaranteed, subject to certain limitations, by the same subsidiaries that guaranteed the obligations under the Senior Secured Credit Note and the Subordinated Note which were retired. These guarantees may be shared, on a senior basis, under certain circumstances, with newly incurred debt outstanding in the future. At June 30, 2014, the Company was in compliance with all of its covenants.



On July 12, 2011, the Company's Registration Statement on Form S-4, filed to register the exchange of the Notes for fully registered Notes, was declared effective by the SEC. The Exchange Offer was completed in its entirety on August 9, 2011.

On April 4, 2012, the Company's Registration Statement on Form S-3 filed to enable the Company to act as a market maker in connection with the Notes was declared effective by the SEC.

On June 5, 2013, Moody's Corporation affirmed the Company's 'B2' Corporate Family rating and 'B2' rating on the Notes. On March 26, 2014, S&P affirmed the Company and its Notes "B" rating and revised its outlook on the Notes with a positive outlook from stable outlook. On April 15, 2014, the Company retired early a total of $50.0 million (25%) of the Notes. The Company redeemed $45.0 million aggregate principal amount of the outstanding Notes at a redemption price equal to 106.563% of the principal amount of the Notes, plus accrued and unpaid interest. In addition, the Company retired the $5.0 million aggregate principal amount of the Notes that it held. Upon completion of the redemption and retirement on April 15, 2014, $150.0 million aggregate principal 64



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amount of the Notes remains outstanding. The retirement of the Notes will reduce the Company's interest costs by $3.9 million annually beginning in the second quarter of 2014. Interest expense for the three and six months ended June 30, 2014 on the Notes was $3.4 million and $7.7 million, respectively ($4.3 million and $8.5 million, respectively, for the three and six months ended June 30, 2013).



Liquidity

For the most part, the Company's assets consist of cash and assets which can be readily converted into cash. Receivable from brokers, dealers and clearing organizations represents deposits for securities borrowed transactions, margin deposits or current transactions awaiting settlement. Receivable from customers represents margin balances and amounts due on transactions awaiting settlement. The Company's receivables are, for the most part, collateralized by marketable securities. The Company's collateral maintenance policies and procedures are designed to limit the Company's exposure to credit risk. Securities owned, with the exception of the ARS, are mainly comprised of actively trading, readily marketable securities. The Company advanced $3.3 million in forgivable notes to employees (which are inherently illiquid) for the three months ended June 30, 2014 ($2.6 million for the three months ended June 30, 2013) as upfront or backend inducements. The amount of funds allocated to such inducements will vary with hiring activity. The Company satisfies its need for short-term liquidity from internally generated funds, collateralized and uncollateralized bank borrowings, stock loans and repurchase agreements and warehouse facilities. Bank borrowings are collateralized by firm and customer securities. In addition, letters of credit are issued in the normal course of business to satisfy certain collateral requirements in lieu of depositing cash or securities.



The Company does not repatriate the earnings of its foreign subsidiaries. Foreign earnings are permanently reinvested for the use of the foreign subsidiaries and therefore these foreign earnings are not available to satisfy the domestic liquidity requirements of the Company.

The Company obtains short-term borrowings primarily through bank call loans. Bank call loans are generally payable on demand and bear interest at various rates not exceeding the broker call rate. At June 30, 2014, bank call loans were $147.2 million ($118.2 million at December 31, 2013 and $219.8 million at June 30, 2013). The average bank loan outstanding for the three months and six months ended June 30, 2014 was $153.3million and $138.9 million, respectively ($160.7 million and $190.9 million for the three months and six months ended June 30, 2013). The largest bank loan outstanding for the three months and six months ended June 30, 2014 was $234.8 million and $247.9 million, respectively ($270.0 million and $392.3 million for the three and six months ended June 30, 2013, respectively). The average weighted interest rate on bank call loans applicable on June 30, 2014 was 1.27%. At June 30, 2014, securities loaned balances totaled $203.6 million ($211.6 million at December 31, 2013 and $234.9 million at June 30, 2013). The average daily securities loan balance for the three and six months ended June 30, 2014 was $247.5 million and $232.8 million, respectively ($226.4 million and $210.3 million for the three and six months ended June 30, 2013, respectively). The largest stock loan balance for both the three and six months ended June 30, 2014 was $293.4 million ($273.2 million for both the three and six months ended June 30, 2013). The Company finances its government trading operations through the use of securities purchased under agreements to resell ("reverse repurchase agreements") and securities sold under agreements to repurchase ("repurchase agreements"). Except as described below, repurchase and reverse repurchase agreements, principally involving government and agency securities, are carried at amounts at which securities subsequently will be resold or reacquired as specified in the respective agreements and include accrued interest. Repurchase and reverse repurchase agreements are presented on a net-by-counterparty basis, when the repurchase and reverse repurchase agreements are executed with the same counterparty, have the same explicit settlement date, are executed in accordance with a master netting arrangement, the securities underlying the repurchase and reverse repurchase agreements exist in "book entry" form and certain other requirements are met. Certain of the Company's repurchase agreements and reverse repurchase agreements are carried at fair value as a result of the Company's fair value option election. The Company elected the fair value option for those repurchase agreements and reverse repurchase agreements that do not settle overnight or have an open settlement date. The Company has elected the fair value option for these instruments to more accurately reflect market and economic events in its earnings and to mitigate a potential imbalance in earnings caused by using different measurement attributes (i.e. fair value versus carrying value) for certain assets and liabilities. At June 30, 2014, the fair value of the reverse repurchase agreements and repurchase agreements were $250.0 million and $nil, respectively. 65



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At June 30, 2014, the gross balances of reverse repurchase agreements and repurchase agreements were $314.8 million and $881.4 million, respectively. The average daily balance of reverse repurchase agreements and repurchase agreements on a gross basis for the three months ended June 30, 2014 was $386.9 million and $921.4 million, respectively ($3.8 billion and $4.3 billion, respectively, for the three months ended June 30, 2013). The largest amount of reverse repurchase agreements and repurchase agreements outstanding on a gross basis during the three months ended June 30, 2014 was $832.4 million and $1.3 billion, respectively ($7.1 billion and $7.7 billion, respectively, for the three months ended June 30, 2013).



At June 30, 2014, the notional value of the repo-to-maturity was $nil. The average balance for the repo-to-maturity for the three months ended June 30, 2014 was $nil. At June 30, 2014, the gross leverage ratio was 5.8.

OMHHF, which is engaged in commercial mortgage origination and servicing, has obtained an uncommitted warehouse facility line through PNC Bank ("PNC") under which OMHHF pledges Federal Housing Administration ("FHA")-guaranteed mortgages for a period averaging 15 business days and PNC table funds the principal payment to the mortgagee. At June 30, 2014, OMHHF had $14.3 million outstanding under the warehouse facility line at a variable interest rate of 1 month LIBOR plus a spread. Interest expense for the three and six months ended June 30, 2014 was $74,800 and $225,400, respectively ($149,200 and $291,300, respectively, for the three and six months ended June 30, 2013). OMHHF also receives funding from its immediate parent company. As discussed in "Other Regulatory Matters" and "Results of Operations" above, the Company's operating results during the first and second quarters of 2014 have been significantly impacted by charges associated with regulatory matters. Any settlement of these matters with the regulators and any payment(s) due will have to be funded by the Company out of the results of operations for any such period, cash held and available for such payment, credit available under the Company's uncommitted bank lines, changes in the holdings of the Company on its balance sheet and the amount that is ultimately due to be paid and the timing of any such payment. The settlement of these or other regulatory matters could have an adverse effect on the Company's liquidity depending on the size, composition and timing of any such settlement. Liquidity Management The Company manages its need for liquidity on a daily basis to ensure compliance with regulatory requirements. The Company's liquidity needs may be affected by market conditions, increased inventory positions, business expansion and other unanticipated occurrences. In the event that existing financial resources do not satisfy the Company's needs, the Company may have to seek additional external financing. The availability of such additional external financing may depend on market factors outside the Company's control. The Company regularly reviews its sources of liquidity and financing and conducts internal stress analysis to determine the impact on the Company of events that could remove sources of liquidity or financing and to plan actions the Company could take in the case of such an eventuality. The Company's reviews have resulted in plans that the Company believes would result in a reduction of assets through liquidation that would significantly reduce the Company's need for external financing. Funding Risk (Expressed in thousands) For the Six Months Ended June 30, 2014 2013 Cash used in operating activities $ (13,390 )$ (105,879 ) Cash used in investing activities (2,185 ) (11,687 ) Cash (used in) provided by financing activities (17,545 ) 88,298 Net decrease in cash and cash equivalents $ (33,120 )



$ (29,268 )

Management believes that funds from operations, combined with the Company's capital base and available credit facilities, are sufficient for the Company's liquidity needs in the foreseeable future. (See "Factors Affecting 'Forward-Looking Statements'").

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Other Matters

On May 27, 2014, the Company paid cash dividends of $0.11 per share of Class A and Class B Stock totaling approximately $1.5 million from available cash on hand.



On July 31, 2014, the Board of Directors declared a regular quarterly cash dividend of $0.11 per share of Class A and Class B Stock payable on August 29, 2014 to stockholders of record on August 15, 2014.

The book value of the Company's Class A and Class B Stock was $38.46 at June 30, 2014 compared to $37.29 at June 30, 2013, based on total outstanding shares of 13,618,806 and 13,596,463, respectively.



The diluted weighted average number of shares of Class A and Class B Stock outstanding for the three months ended June 30, 2014 was 13,618,174 compared to 14,068,368 outstanding for the same period in 2013.

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Off-Balance Sheet Arrangements

In February 2010, Oppenheimer finalized settlements with the Regulators concluding investigations and administrative proceedings by the Regulators concerning Oppenheimer's marketing and sale of ARS. Pursuant to the settlements with the Regulators, Oppenheimer agreed to extend offers to repurchase ARS from certain of its clients subject to certain terms and conditions more fully described below. In addition to the settlements with the Regulators, Oppenheimer has also reached settlements of and received adverse awards in legal proceedings with various clients where the Company is obligated to purchase ARS. Pursuant to completed Purchase Offers (as defined) under the settlements with Regulators and client related legal settlements and awards to purchase ARS, as of June 30, 2014, the Company purchased and holds (net of redemptions) approximately $99.4 million in ARS from its clients. In addition, the Company is committed to purchase another $20.2 million from clients through 2016 under legal settlements and awards. The Company's purchases of ARS from its clients holding ARS eligible for repurchase will, subject to the terms and conditions of the settlements with the Regulators, continue on a periodic basis. Pursuant to these terms and conditions, the Company is required to conduct a financial review every six months, until the Company has extended Purchase Offers to all Eligible Investors (as defined), to determine whether it has funds available, after giving effect to the financial and regulatory capital constraints applicable to the Company, to extend additional Purchase Offers. The financial review is based on the Company's operating results, regulatory net capital, liquidity, and other ARS purchase commitments outstanding under legal settlements and awards (described below). There are no predetermined quantitative thresholds or formulas used for determining the final agreed upon amount for the Purchase Offers. Upon completion of the financial review, the Company first meets with its primary regulator, FINRA, and then with representatives of the NYAG and other regulators to present the results of the review and to finalize the amount of the next Purchase Offer. Various offer scenarios are discussed in terms of which Eligible Investors should receive a Purchase Offer. The primary criteria to date in terms of determining which Eligible Investors should receive a Purchase Offer has been the amount of household account equity each Eligible Investor had with the Company in February 2008. Once various Purchase Offer scenarios have been discussed, the regulators, not the Company, make the final determination of which Purchase Offer scenario to implement. The terms of settlements provide that the amount of ARS to be purchased during any period shall not risk placing the Company in violation of regulatory requirements. Outside of the settlements with the Regulators, the Company has also reached various legal settlements with clients and received unfavorable legal awards requiring it to purchase ARS. The terms and conditions including the ARS amounts committed to be purchased under legal settlements are based on the specific facts and circumstances of each legal proceeding. In most instances, the purchase commitments are in increments and extend over a period of time. At June 30, 2014, no ARS purchase commitments related to legal settlements extended past 2016. To the extent the Company receives an unfavorable award, the Company usually must purchase the ARS provided for by the award within 30 days of the rendering of the award. The ultimate amount of ARS to be repurchased by the Company under both the settlements with Regulators and the legal settlements and awards cannot be predicted with any certainty and will be impacted by redemptions by issuers, the Company's financial and regulatory constraints, and legal and other actions by clients during the relevant period, which also cannot be predicted. The Company also held $150,000 in ARS in its proprietary trading account as of June 30, 2014 as a result of the failed auctions in February 2008. The ARS positions that the Company owns and are committed to purchase primarily represent auction rate preferred securities issued by closed-end funds and, to a lesser extent, municipal auction rate securities which are municipal bonds wrapped by municipal bond insurance and student loan auction rate securities which are asset-backed securities backed by student loans. At June 30, 2014, the amount of ARS held by the Company that was below investment grade was $4.1 million and the amount of ARS that was unrated was $2.0 million. 68



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(Expressed in thousand)

Auction Rate Securities Owned and Committed to Purchase at June



30, 2014

Valuation Product Principal Adjustment Fair Value Auction Rate Securities ("ARS") Owned (1) $ 99,380$ 6,832$ 92,548 ARS Commitments to Purchase Pursuant to: (2)(3) Settlements with the Regulators (4) - - - Legal Settlements and Awards (5) 20,212 1,514 18,698 Total $ 119,592$ 8,346$ 111,246



(1) Principal amount represents the par value of the ARS and is included in

securities owned in the condensed consolidated balance sheet at June 30,

2014. The valuation adjustment amount is included as a reduction to

securities owned in the condensed consolidated balance sheet at June 30,

2014.

(2) Principal amount represents the present value of the ARS par value that

the Company is committed to purchase at a future date. This principal

amount is presented as an off-balance sheet item. The valuation adjustment

amount is included in accounts payable and other liabilities on the condensed consolidated balance sheet at June 30, 2014.



(3) Specific ARS to be purchased under ARS Purchase Commitments are unknown

until beneficial owner selects the individual ARS to be purchased.

(4) Commitments to purchase under settlements with the Regulators at June 30,

2014. Eligible Investors for future buybacks under the settlements with the Regulators held approximately $110.6 million of ARS as of June 30, 2014. (5) Commitments to purchase under various legal settlements and awards with clients through 2016. Per the above table, the Company has recorded a valuation adjustment on its ARS owned and ARS purchase commitments of $8.3 million as of June 30, 2014. The valuation adjustment is comprised of $6.8 million which represents the difference between the principal value and the fair value of the ARS the Company owns as of June 30, 2014 and $1.5 million which represents the difference between the principal value and the fair value of the ARS the Company is committed to purchase under the settlements with the Regulators and legal settlements and awards. As of June 30, 2014, the Company did not have any outstanding ARS purchase commitments related to the settlements with Regulators. However, Eligible Investors for future buybacks under the settlements with Regulators held approximately $110.6 million of ARS as of June 30, 2014. Since the Company was not committed to purchase this amount as of June 30, 2014, there were no valuation adjustments booked to recognize the difference between the principal value and the fair value for this remaining amount.



Additional information concerning the Company's off-balance sheet arrangements is included in Note 5 to the condensed consolidated financial statements.

Contractual and Contingent Obligations

The Company had contractual obligations to make payments to CIBC in connection with the acquisition in the form of an earn-out to be paid in April 2013. The amount due of $25.0 million which is in dispute and is the subject of a breach of contract action filed by the Company has been placed in escrow pending the outcome of the dispute. On April 15, 2014, the Company retired early a total of $50.0 million (25%) of the Notes. The Company redeemed $45.0 million aggregate principal amount of the outstanding Notes at a redemption price equal to 106.563% of the principal amount of the Notes, plus accrued and unpaid interest. In addition, the Company retired the $5.0 million aggregate principal amount of the Notes that it held. Upon completion of the redemption and retirement on April 15, 2014, $150.0 million aggregate principal amount of the Notes remains outstanding. The retirement of the Notes will reduce the Company's interest costs by $3.9 million annually beginning in the second quarter of 2014. 69



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The following table sets forth the Company's contractual and contingent commitments as of June 30, 2014: (Expressed in millions)

Less than 1 More than Total year 1-3 Years 3-5 Years 5 Years Minimum rentals $ 289 $ 41 $ 69$ 56$ 123 Committed Capital 5 5 - - - Earn-Out (1) 25 25 - - - Senior Secured Notes (2) 202 13 26 163 - ARS Purchase Commitments (3) 20 15 5 - - Total $ 541 $ 99 $ 100$ 219$ 123 (1) As noted above in the Liquidity section, this amount has been placed in escrow pending the outcome of legal proceedings against CIBC.



(2) Includes interest payable of $52.5 million through maturity.

(3) Represents payments to be made pursuant to the ARS settlements entered

into with the Regulators in February 2010 as well as commitments to purchase ARS as a result of settlements with the Regulators and legal settlements and awards.



Inflation

Because the assets of the Company's brokerage subsidiaries are highly liquid, and because securities inventories are carried at current market values, the impact of inflation generally is reflected in the financial statements. However, the rate of inflation affects the Company's costs relating to employee compensation, rent, communications and certain other operating costs, and such costs may not be recoverable in the level of commissions or fees charged. To the extent inflation results in rising interest rates and has other adverse effects upon the securities markets, it may adversely affect the Company's financial position and results of operations.



Factors Affecting "Forward-Looking Statements"

From time to time, the Company may publish "Forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act or make oral statements that constitute forward-looking statements. These forward-looking statements may relate to such matters as anticipated financial performance, future revenues or earnings, business prospects, projected ventures, new products, anticipated market performance, and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company cautions readers that a variety of factors could cause the Company's actual results to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. These risks and uncertainties, many of which are beyond the Company's control, include, but are not limited to: (i) transaction volume in the securities markets, (ii) the volatility of the securities markets, (iii) fluctuations in interest rates, (iv) changes in regulatory requirements which could affect the cost and method of doing business and reduce returns, (v) fluctuations in currency rates, (vi) general economic conditions, both domestic and international, (vii) changes in the rate of inflation and the related impact on the securities markets, (viii) competition from existing financial institutions and other participants in the securities markets, (ix) legal developments affecting the litigation experience of the securities industry and the Company, including developments arising from the failure of the Auction Rate Securities markets, the trading of low-priced securities, stepped up enforcement efforts by the SEC, FinCEN and other regulators and the results of pending litigation involving the Company, (x) changes in federal and state tax laws which could affect the popularity of products sold by the Company or impose taxes on securities transactions, (xi) the effectiveness of efforts to reduce costs and eliminate overlap, (xii) war and nuclear confrontation as well as political unrest and regime changes, (xiii) the Company's ability to achieve its business plan, (xiv) corporate governance issues, (xv) the impact of the credit crisis and tight credit markets on business operations, (xvi) the effect of bailout, financial reform and related legislation including, without limitation, the Dodd-Frank Act and the Volcker Rule and the rules and regulations thereunder, (xvii) the consolidation of the banking and financial services industry, (xviii) the effects of the economy on the Company's ability to find and maintain financing options and liquidity, (xix) credit, operations, legal and regulatory risks, (xx) risks related to foreign operations, (xxi) risks related to the downgrade of U.S. long-term sovereign debt obligations and the sovereign debt of European nations, (xxii) risks related to the manipulation of LIBOR and concerns over high speed trading, (xxiii) the effects of Hurricane Sandy and the relocation of critical Company personnel, (xxiv) risks related to the lowering by S&P of its rating on the Company and on the Notes, and (xxv) risks related to Congressional gridlock, government shutdowns and threats of default by the federal government. There can be no assurance that the Company has correctly or completely identified and assessed all of the factors affecting the Company's business. The 70



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Company does not undertake any obligation to publicly update or revise any forward-looking statements. See Item 1A - "Risk Factors" appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.


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