FOCUS Report Suntrust Investment Services, Inc.

X-17A-5 [Paper] - FOCUS Report

Published: 2008-03-20 17:56:07
Submitted: 2008-02-29
Period Ending In: 2007-12-31
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                          Section                             UNITED STATES                                                        OMB Number: 3235.0123
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                                                  SECURITIES AND EXCHANGE COMMISSION                                               Expires: February 28, 2010
                     FEB 2 g 2008                                   WASHINGTON, D. C. 20549                                        Estimated average burden
                                                                                                                                   hours per response.... 12.00
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                    Washington, DC                          ANNUAL AUDITED REPORT                                                      sEC rLe NumBEr:
                           103                                       . FORM X—17A—5                    >                           3—35355
                                                                             PART III

                                                                               FACING PAGE
                                  Information Required of Brokers and Dealers Pursuant to Section 17 of the
                                         Securities Exchange Act of 1934 and Rule 17a—5 Thereunder

       REPORT FOR THE PERIOD BEGINNING                 010107                                                 AND ENDING_         123107
                                                      MM/DDIYY                                                                    MM/DDIYY


                                                           A. REGISTRANT IDENTIFICATION
      NAME OF BROKER—DEALER:
                                                                                                                                       OFFICIAL USE ONLY

                                                     SunTrust Investment Services, Inc.
                                                                                                                                             FIRM IDNO

      ADDRESS OF PRINCIPAL PLACE OF BUSINESS: (Do not use P. 0. Box No.)



                                                     303 Peachtree Center Avenue
                                                                               (No. and Street)

                                                      Atlanta                      GA                                              30303
                                                          (City)                 (State)                                           (Zip Code)

      NAME AND TELEPHONE NUMBER OF PERSON TO CONTACT IN REGARD TO THIS REPORT


                                                     Christy Lee                                                   404—813—5494

                                                          B. ACCOUNTANT IDENTIFICATION

      INDEPENDENT PUBLIC ACCOUNTANT whose opinion is contained in the Report®

                                                     Emst & Young LLP
                                                             (Name—if individual, state last,first, middle name)

                                       55 Ivan Allen Blvd, Suite 1000                       Atlanta                GA pnnflmqp'D
                                                  (Address)                                 (Ciy)                  (Suey * _Giptee —

      Check One:                                                                                                          MAR 2 ll Zflflflfi
                (X )        Certified Public Accountant
                (     )     Public Accountant                                                                               FHOMSON
                (__)       Accountant not residentin United States or any of its possessions.                              F!NANCIAL

                                                                               FOR OFFICIAL USE ONLY




      *Claims for exemption from the requirement that the annual report be covered by the opinion of an independentpublic accountant
      must be supported by a statementoffacts and circumstances relied on as the basis for the exemption, See section 240.17a—5(c)(2).

                                                   Potential persons who are to respond to the collection of
      SEC 1410 (06—02)                           information contained in this form are not required to respond
                                                unless the form displays a currently valid OMB control number.                                                    ‘Q(


                                                                                     OATH OR AFFIRMATION

                                             I,      Christy Lee,           swear (or affirm) that, to the best of my knowledge and belief the accompanying
      financial statement and supporting schedules pertaining to the firm of                                           SunTrust Investment Services, Inc. , as of
      December 31, 2007,                 are true and correct. 1 further swear ( or affirm) that neither the company nor any
      partner, proprietor, principal officer or director has any proprietary interest in any account classified solely as that
      of a customer, except as follows:
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                                                      DEBORAH CARTER                                                   Signature
                                                           Notary Public
                                                      Doug:s County
                                                      ftale                                                     Chief Financial Officer
                                 My                            Expires Dec 7, 2009                                         Tile



                                                            Notmry Public




      This report ** contains (check all applicable boxes):
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        (     ) (a) Facing Page.
                               me be beobeobe e be




                    (b) Statement of Financial Condition.
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                    (e) Statement of Income (Loss).
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                    (d) Statement of Changes in Financial Condition.
                                                     (e) Statement of Changes in Stockholders‘ Equity or Partners or Sole Proprietor‘s Capital.
                                                     (G) Statement of Changes in Liabilities Subordinated to Claims of Creditors.
                                                     (g) Computation of Net Capital.
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                                                     (b)     Computation for Determination of Reserve Requirements Pursuant to Rule 15¢3—3.
                                                     (i)     Information Relating to the Possession or control Requirements Under Rule 15c3—3.
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                                                     6       A Reconciliation, including appropriate explanation, of the Computation of Net Capital Under Rule 15c3—1
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                                                             and the Computation for Determination of the Reserve Requirements under Exhibit A of Rule 15c3—3.
                                                     (k)     A Reconciliation between the audited and unaudited Statements of Financial Condition with respect to
                                                             methods of consolidation.
                                                     (1)     An Oath or Affirmation.
                                                     {m)     A copy of the SIPC Supplemental Report.
                                                     (n)     A report describing any material inadequacies found to exist or found to have existed since the date of
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                                                             the previous audit.

      ** For conditions ofconfidential treatmentofcertain portions ofthefiling see section 240.17a—5(e)(3).
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       FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION

       SunTrust Investment Services, Inc.
       (A wholly—owned subsidiary of SunTrust Banks, Inc.)
       Year Ended December 31, 2007
       With Reports of Independent Registered Public Accounting Firm
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       0802—0915036
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                                               SunTrust Investment Services, Inc.
                                      (A wholly—owned subsidiary of SunTrust Banks, Inc.)
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                                   Financial Statements and Supplementary Schedule
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                                                For the Year Ended December 31, 2007




                                                                    Contents
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        Report of Independent Registered PUbliG ACCOUNtIMG FIMM..................cseememeemermememnennennennennensence 1
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        Financial Statements
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        StateMENt Of FIM@NCiAL COMUIHION ................2.c2nn0eee ce menememennnnnennrrereerernnnnnenerreererrerernernennnrenncnceneen2
        StAtEMENE Of OPETANIOMS. ...............cce en meaceervererrerenennennennenseevenersrrerrerrervererrvcerrennenreecerererererrennnnens3
        Statement of Changes in Shareholder‘s Equity ...                                                                                    ...4
        StAtEMENt Of CASH FIOWS .............ccseceeeemmveeeneernenerererenrernnnneennrererrenrererennnnnnnnenrreeenrenennnnnnnnnnneeneneneeee 5
        NOtES t0 FIM&NCI@1 SH@H@MENES.....................lecenneveceveveenerreerevvennnnnnennerneeeseervernverrnnsneneensenenernevnevnnncncea 6
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        Supplemental Information

        Schedule I — Computation of Net Capital and Aggregate Indebtedness Pursuant to Rule 15c3—1
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          of the SECUTItiES N EXChANGE COMIMSSIOM.................c...ccsecceeeeeereereveennnnnnnnenerrerrenrrnerrennennecnens 15

        Supplementary Report of Independent Registered Public Accounting Firm on Internal Control
          Required by Rule 17a—5 of the Securities and Exchange COMMISSION .......................c.csscmlll.. 16
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        0802—0915036


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        ==.Il ERNST& YOUNG                                         a Ernst & Young LLP             & Phone: (404) 874—8300
                                                                     Suite 1000
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                                                                     55 Ivan Allen Jr. Boulevard
                                                                     Atlanta, Georgia 30308
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                          Report of Independent Registered Public Accounting Firm
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           To the Shareholder and Board of Directors of
           SunTrust Investment Services, Inc.

           We have audited the accompanying statement of financial condition of SunTrust Investment
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           Services, Inc. (the Company) as of December 31, 2007, and the related statements of operations,
           changes in shareholder‘s equity, and cash flows for the year then ended. These financial
           statements are the responsibility of the Company‘s management. Our responsibility is to express
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           an opinion on these financial statements based on our audit.

           We conducted our audit in accordance with auditing standards generally accepted in the
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           United States. Those standards require that we plan and perform the audit to obtain reasonable
           assurance about whether the financial statements are free of material misstatement. We were not
           engaged to perform an audit of the Company‘s internal control over financial reporting. Our
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           audit included consideration of internal control over financial reporting as a basis for designing
           audit procedures that are appropriate in the circumstances, but not for the purpose of expressing
           an opinion on the effectiveness of the Company‘s internal control over financial reporting.
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           Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
           evidence supporting the amounts and disclosures in the financial statements, assessing the
           accounting principles used and significant estimates made by management, and evaluating the
           overall financial statement presentation. We believe that our audit provides a reasonable basis for
           our opinion.

           In our opinion, the financial statements referred to above present fairly, in all material respects,
           the financial position of SunTrust Investment Services, Inc. at December 31, 2007, and the
           results of its operations and its cash flows for the year then ended in conformity with U.S.
           generally accepted accounting principles.

           Our audit was conducted for the purpose of forming an opinion on the basic financial statements
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           taken as a whole. The information contained in Schedule I is presented for purposes of additional
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           analysis and is not a required part of the basic financial statements, but is supplementary
           information required by rule 17a—5 under the Securities Exchange Act of 1934. Such information
           has been subjected to the auditing procedures applied in our audit of the basic financial
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           statements and, in our opinion, is fairly stated in all material respects in relation to the basic
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           financial statements taken as a whole.
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                                                                               T        ~f¢-7a~7     4LPA
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           February 26, 2008
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           08020915036

                                             A member firm of Emnst & Young Global Limited
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                            SunTrust Investment Services, Inc.
                      (A wholly—owned subsidiary of SunTrust Banks, Inc.)

                                 Statement of Operations

                                Year Ended December 31, 2007



 Revenues
Commissions                                                                 $ 234,872,147
Trading gains, net of losses                                                     23,291,120
Investment management income                                                     42,969,454
Interest income                                                                   3,139,203
                                                                                304,271,924
Expenses
Compensation and benefits                                                       174,066,706
Clearing expenses                                                                26,705,542
Occupancy and equipment                                                           1,534,341
Legal, consulting, and examination fees                                           4,347,192
Office expense                                                                    1,200,875
Computer services                                                                 3,166,066
Other expenses                                                                    5,485,463
Expense to affiliate                                                             24,594,421
Total expenses excluding taxes                                                  241,100,606

Income before taxes                                                              63,171,318
Income tax expense                                                              (23,821,635)
Net income                                                                  $    39,349,683

 The accompanying notes are an integral part ofthesefinancial statements.




0802—0915036


                            SunTrust Investment Services, Inc.
                     {A wholly—owned subsidiary of SunTrust Banks, Inc.)

                     Statement of Changes in Shareholder‘s Equity


                                   Common        Additional       Retained
                                    Stock      Paid—in Capital    Earnings         Total

 Balance, January 1, 2007      $      52,125   $ 91,657,273      $ 51,594,307 $143,303,704
   Distribution to Parent                  —         .    —       (50,000,000)  (50,000,000)
   Net income                                              —       39,349,683     39,349,683
 Balance, December 31, 2007 _$        52,125   $ 91,657,273 $ 40,943,989        $132,653,387

 The accompanying notes are an integral part ofthesefinancial statements.




0802—0915036


                                SunTrust Investment Services, Inc.
                         (A wholly—owned subsidiary of SunTrust Banks, Inc.)

                                       Statement of Cash Flows

                                            December 31, 2007



Cash flows from operating activities
Net income                                                                     $39,349,683
Adjustments to reconcile net income to net cash from operating activities:
  Depreciation and amortization                                                  1,492,816
  Deferred tax benefit                                                            (264,242)
  (Increase) decrease in operating assets:
      Securities owned                                                           4,211,759
    Commissions receivable                                                       1,036,445
    Other intangible assets                                                        507,728
    Other assets                                                                 3,102,196
  (Increase) decrease in operating liabilities:
    Accrued compensation and benefits                                             4,120,955
    Accrued expenses other                                                        1,081,045
    Income taxes liability                                                         (475,777)
    Intercompany payable                                                         (4,809,488)
    Other liabilities                                                              (144,662)
Net cash from operating activities                                              49,208,458

Cash flows used in investing activities
Purchases ofpremises and equipment                                              (1,489,161)
Net cash used in investing activities                                           (1,489.161)
Cash flows used in financing activities
Distribution to Parent                                                         (50,000,000)
Net cash used in investing activities                                          (50,000,000)
Net decrease in cash and equivalents                                            (2,280,703)
Cash and cash equivalents, beginning of year                                    84,829,162
Cash and cash equivalents, end of year                                            >    >


Supplemental cash flow information
Cash paid for income taxes to Parent                                            26,988,183

The accompanying notes are an integral part ofthese financial statements.




0802—0915036


                             SunTrust Investment Services, Inc.
                      (A wholly—owned subsidiary of SunTrust Banks, Inc.)

                                Notes to Financial Statements

                                       December 31, 2007



1. Organization

SunTrust Investment Services, Inc. (the Company or STIS) is a registered broker—dealer with the
Securities and Exchange Commission and the Financial Industry Regulatory Authority. The
Company is a wholly owned subsidiary of SunTrust Bank Holding Company, which is a wholly
owned subsidiary of SunTrust Banks, Inc. (the Parent or STI). The Company acts as an
introducing broker—dealer offering full—service and discount brokerage services in various equity
and debt securities, mutual funds, unit investment trusts, insurance and annuity products, and
individual retirement accounts primarily to retail customers of SunTrust Bank, which is a
subsidiary of SunTrust Bank Holding Company that provides deposit, credit, trust and
investment services.

2. Summary of Significant Accounting Policies

Accounting Policies Recently Adopted and Pending Accounting Pronouncements

On January 1, 2007 the Company adopted FASB Interpretation No. (FIN 48), Accounting for
Uncertainty in Income Taxes, an interpretation of FAS 109, Accounting for Income Taxes.
FIN 48 provides a single model to address accounting for uncertainty in tax positions by
prescribing a minimum recognition threshold a tax position is required to meet before being
recognized in the financial statements. FIN48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting in interim periods, disclosure and
transition. The adoption of FIN 48 did not have a material impact on the Company‘s financial
position, result of operations or cash flows and did not result in unrecognized tax benefits being
recorded. In connection with its adoption of FIN 48, the Company elected to classify interest and
penalties related to tax positions as a component of income tax expense.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157),
which clarifies how companies should measure fair value when companies are required by US
GAAP to use a fair value measure for recognition or disclosure. In February 2007, the FASB
issued SFAS No.159, The Fair Value Option for Financial Assets and Financial Liabilities.
SFAS No. 159 permits companies to elect on an instrument—by—instrument basis to fair value
certain financial assets and financial liabilities with changes in fair value recognized in earnings
as they occur. The Company elected to early adopt the provisions of these statements effective
January 1, 2007. The adoption of these standards did not have an impact on the financial results
of STIS.




0802—0915036                                                                                      6


                            SunTrust Investment Services, Inc.
                      (A wholly—owned subsidiary of SunTrust Banks, Inc.)

                        Notes to Financial Statements (continued)




2. Summary of Significant Accounting Policies (continued)

Revenue Recognition

The Company places all trades through an unaffiliated clearing broker. The clearing broker
collects the gross brokerage commissions from customers and remits the net brokerage
commissions to the Company based on agreed—upon terms. Revenues are recorded on a trade—
date basis.

The Company recognizes fee income earned from the trading activity associated with STI‘s
mutual fund group, STI Classic Funds. This fee income is comprised of other service fees, which
are recorded as commissions in the accompanying statement of operations.

Secondary trading transactions and related gains and losses are recorded on a trade—date basis.

Securities Owned

Securities owned primarily consist of U.S. Treasury securities. These securities are carried at
market value with gains and losses recognized currently in the statement of operations.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could vary from those estimates; however,
in the opinion of management, such variances would not be material.

Customer Accounts

The clearing broker maintains all customers‘ accounts, receives cash on purchases, and
distributes cash on sales. The Company records a receivable from the clearing broker for its
share of commissions, net of expenses associated with the commissions.




0802—0915036
                                                                                                  7


                             SunTrust Investment Services, Inc.
                      (A wholly—owned subsidiary of SunTrust Banks, Inc.)

                         Notes to Financial Statements (continued)




2. Summary of Significant Accounting Policies (continued)

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation. Depreciation is
calculated using the straight—line method over the assets‘ estimated useful lives. Maintenance
and repairs are charged to expense as incurred and improvements are capitalized.

Cash and Cash Equivalents

The Company has defined cash and cash equivalents as highly liquid investments with original
maturities of less than three months that are not held for sale in the ordinary course of business.

Income Taxes

The Company is included in the consolidated federal income tax return of the Parent. The
Company provides for federal income taxes as if it were filing a separate return and pays for its
pro rata share of the consolidated current tax liability or receives a refund for any current tax
benefit. Payments to tax authorities are made by the Parent.
For the Company, the significant differences in the tax and financial statement bases of its assets
or liabilities are primarily related to pension and benefit related items. Deferred income taxes are
provided when income and expenses are recognized in different years for financial and tax
reporting purposes. The net deferred tax liability totaled $1,055,619 at December 31, 2007.

The provision for income taxes, included in the accompanying statement of operations, differs
from the federal statutory rate of 35% primarily due to a provision for state taxes.

On January 1, 2007, the Company adopted FIN 48. The Company elected to classify interest and
penalties related to tax positions as a component of income tax expense. No uncertain tax
benefits have been recognized. Since no unrecognized tax benefits have being recorded, no
corresponding interest or penalties have been accrued. The Company continually evaluates the
unrecognized tax benefits associated with its uncertain tax positions. The Company does not
expect a significant change in its unrecognized tax benefits within 12 months of this reporting
date. The Company is a member of a group of corporations that files a consolidated income tax
return in the United States federal jurisdiction. The Company also files income tax returns in




0802—0915036                                                                                      8


                            SunTrust Investment Services, Inc.
                      (A wholly—owned subsidiary of SunTrust Banks, Inc.)


                        Notes to Financial Statements (continued)




2. Summary of Significant Accounting Policies (continued)

various state jurisdictions as either a member of a consolidated group or as a separate company.
The federal returns of the consolidated group (of which the Company is a member) for tax years
through 1998 have been examined by the Internal Revenue Service (IRS) and no issues
applicable to the Company are still in dispute. The Federal returns of the consolidated group for
tax years 1999 through 2004 are currently under examination by the IRS. Generally, the state
jurisdictions in which the Company files income tax returns are subject to examination for a
period from three to seven years after returns are filed.

Goodwill

Under the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, the Company
completed its annual review of goodwill prior to December 31, 2007, and determined there was
no impairment of goodwill as of that date. The Company reviews goodwill on an annual basis for
impairment and as events occur or circumstances change that would more likely than not reduce
the fair value below its carrying amount.

3. Net Capital Requirements

Regulatory provisions require the Company to maintain minimum net capital, as defined. At
December 31, 2007, the Company was in compliance with the net capital requirements of
Rule 15c3—1 of the Securities Exchange Act of 1934. At December 31, 2007, the Company had
net capital, as defined, of $68,475,901, which was $67,235,850 in excess of the required net
capital of $1,240,051. The Company‘s ratio of aggregate indebtedness to net capital was 0.27:1
at December 31, 2007, which is below the 15:1 maximum allowed.

4. Customer Reserve Exemption

At December 31, 2007, the Company qualified for exemption, as provided in Rule 15c3—3,
subparagraph (k)(2) of the Securities Exchange Act of 1934.




0802—0015036
                                                                                               9


                               SunTrust Investment Services, Inc.
                       (A wholly—owned subsidiary of SunTrust Banks, Inc.)

                            Notes to Financial Statements (continued)




5. Related—Party Transactions

During the period ended December 31, 2007, the Company engaged in various transactions with
the Parent and its affiliates. Balances with respectto related parties at December 31, 2007 are:

     Cash and cash equivalents                                               $ 15,135,391
     Cash and securities segregated under Federal and other regulations              18,631
     Income taxes receivable from Parent                                          1,139,330
     Commissions                                                                  2,174,735
     Expense to affiliate                                                        24,594421

Commissions represents Capital Markets (CM) income from the sale of various SunTrust
Robinson Humphrey CM products and referral fees from the SunTrust Private Wealth and
Mortgage lines of business. Expense to affiliate is generated from the use of STI‘s internal
services and corporate real estate.

6. Commitments and Contingencies

The Company leases certain office facilities under non—cancelable leases that expire through
2012, some of which have stated rate increases. Minimum rental commitments on non—
cancelable leases for each of the following years ending December 31 are as follows:



     2008                                                                    $      209,819
     2009                                                                          185,502
     2010                                                                          191,067
     2011                                                                          196,799
     2012                                                                          100,348
     Thereafter                                                                          —
     Total minimum lease payments                                            $     883,535

Rental expense for the year ended December 31, 2007, was $245,756.




0802—0915036
        5                                                                                     10


                             SunTrust Investment Services, Inc.
                      (A wholly—owned subsidiary of SunTrust Banks, Inc.)

                        Notes to Financial Statements (continued)




7. Guarantees to Third Parties

The Company uses a common third party clearing broker to clear and execute customers‘
securities transactions and to hold customer accounts. Under the agreement with the clearing
broker, the Company agrees to indemnify the clearing broker for losses that result from a
customer‘s failure to fulfill its contractual obligations. As the clearing broker‘s rights to charge
the Company have no maximum amount, the Company believes that the maximum potential
obligation cannot be estimated. However, to mitigate exposure, the Company may seek recourse
from the customer through cash or securities held in the defaulting customer‘s account. For the
year ended December 31, 2007, the Company experienced no net losses as a result of the
indemnity.

8. Fair Values of Financial Instruments

The Company‘s financial instruments, which are included in the accompanying statement of
financial condition, are either carried at quoted market prices or are short—term in nature, As a
result, the carrying amounts reported approximate their estimated fair values at December 31,
2007. The securities owned primarily represent U.S. Treasury Notes and are valued using quoted
prices in active markets and are classified as "Level 1" assets in accordance with SFAS No. 157.
The total amount of income relating to the securities owned for the period included in the
statement of operations is $255,000.

9. Employee Benefits

The Company participates in the pension and other employee benefit plans of STI for the benefit
of substantially all employees of the Company. In addition, certain management employees
participate in incentive—based compensation plans of STI Costs of the pension plan are
computed under the projected unit credit method, and the plan is funded using the aggregate
actuarial cost method. Benefit information is not available from the actuary for individual
subsidiaries of STL The Company‘s contributions to the pension and other employee benefit
plans and incentive based compensation plans were $14,181,165 and $111,788,541, respectively,
all of which is included in compensation and benefits expense in the accompanying statement of
operations.

The Parent provides stock—based awards through the SunTrust Banks, Inc. 2004 Stock Plan
(Stock: Plan) under which the Parent‘s Compensation Committee has the authority to grant stock
options and restricted stock to key employees of the Company. Stock options are granted at a
price which is no less than the fair market value of a share of SunTrust common stock on the
grant date and may be either tax—qualified incentive stock options or non—qualified stock options.



0802—0915036                                                                                     11


                              SunTrust Investment Services, Inc.
                       (A wholly—owned subsidiary of SunTrust Banks, Inc.)

                         Notes to Financial Statements (continued)




9. Employee Benefits (continued)

Stock options typically vest over three years and generally have a maximum contractual life of
ten years. Upon option exercise, shares are issued to employees from treasury stock.

Shares of restricted stock may be granted to employees and directors and typically cliff vest after
three years. Restricted stock grants may be subject to one or more objective, employment,
performance, or other forfeiture conditions as established by the Compensation Committee at the
time of grant. Any shares of restricted stock that are forfeited will again become available for
issuance under the stock plan. An employee or director has the right to vote the shares of
restricted stock after grant until they are forfeited or vested. Compensation cost for restricted
stock is equal to the fair market value of the shares at the date of the award and is amortized to
compensation expense over the vesting period. Dividends are paid on awarded but unvested
restricted stock.

The fair value of each stock option award is estimated on the date of grant, by the Parent, using a
Black—Scholes valuation model that uses assumptions noted in the following table. Expected
volatility is based on the historical volatility ofthe Parent‘s stock, using daily price observations
over the expected term of the stock options. The expected term represents the period of time that
stock options granted are expected to be outstanding and is derived from historical data which is
used to evaluate patterns such as stock option exercise and employee termination. The Company
did not perform a separate analysis of expected term for the Company‘s participants, but the
Company expects differences in expected term between Company participants and Parent
participants to have an immaterial impact on the fair value of the options granted. The expected
dividend yield is based on recent dividend history, given that yields are reasonably stable. The
risk—free interest rate is the U.S. Treasury yield curve in effect at the time of grant.

The weighted average fair value of options granted during 2007 was $16.72 per share. The fair
value of each option grant is estimated on the date of grant using the Black—Scholes option
pricing model with the following assumptions:


     Expected dividend yield                                                            3.01%
     Expected stock price volatility                                                  20.07
     Risk—free interest rate (weighted average)                                         4.10
     Expected life of options                                                          6 years




0802—0915036                                                                                      12


                              SunTrust Investment Services, Inc.
                       (A wholly—owned subsidiary of SunTrust Banks, Inc.)

                          Notes to Financial Statements (continued)




9. Employee Benefits (continued)

The Parent allocates stock option and restricted stock option expense to the Company. The
Company‘s stock option and restricted stock expense for 2007 was approximately $728,320 and
$137,604, respectively, which is also included in compensation and benefits expense in the
accompanying statement of operations. At December31, 2007, there was approximately
$1.6 million ofunrecognized stock—based compensation expense related to nonvested stock.

10. Income Taxes

The Company is included in the consolidated federal income tax return filed by the Parent.
Federal income taxes are calculated as if the Company filed a separate federal income tax return.
The Company files its own state tax returns. Payments to tax authorities are made by the Parent.
The current and deferred portions of the income tax expense (benefit) included in the statement
of operations as determined in accordance with SFAS No. 109, Accountingfor Income Taxes, are
as follows:

                                                                       2007
                                                                  (In Thousands)
                                                      Current         Deferred             Total

     Federal                                      $      20,983   $       (235)        $     20,748
     State                                                3,103            (29)               3,074
                                                  $      24.086 $         (264) $            23.822
A reconciliation of the expected income tax expense or income computed at the federal statutory
income tax rate and the Company‘s actual income tax expense as follows:

                                                                                        2007
                                                                                   (In Thousands)

     Income tax at federal statutory rate of 35%                                   $        22,110
     State income taxes, net of federal benefit                                              1,998
     Other                                                                                    (286)
     Total provision for income taxes                                              $        23,822




0802—0015036
                                                                                                      13


                           SunTrust Investment Services, Inc.
                    (A wholly—owned subsidiary of SunTrust Banks, Inc.)

                       Notes to Financial Statements (continued)




11. Litigation

In the normal course of business, the Company may become subject to litigation or claims. The
Company is not aware of any litigation or claims against the Company which would materially
affect its business and operations.




0802—0915036                                                                              14


               Supplemental Information




0802—0915036


                                SunTrust Investment Services, Inc.
                        (A wholly—owned subsidiary of SunTrust Banks, Inc.)

               Schedule i — Computation of Net Capital Under Rule 15c3—1
                      of the Securities and Exchange Commission

                                          December 31, 2007



Net capital
Total shareholder‘s equity                                                        $ 132,653,387

Deductions:
  Non—allowable assets:
    Fumniture, equipment, and leasehold improvements                  3,080,582
    Commissions receivable                                            4,473,425
    Goodwill                                                         42,706,365
    Prepaids and other assets                                        12,452,021
Total non—allowable assets                                                            (62,712,393)
Other deductions: Bond deductible in excess                                                (1,641)
Tentative net capital                                                                 69,939,353

Less: haircuts
  U.S. treasuries                                                       113,202
  Other short—term securities                                         1,350,250
Total haircuts                                                                        (1,463,452)
Net capital                                                                       $   68,475,901

Aggregate indebtedness:
   Accounts payable and accrued liabilities                                       $   17,545,157
  Income taxesliability                                                                1,055,619
Total aggregate indebtedness                                                      $   18,600,776

Percentage of aggregate indebtedness to net capital                                       2716%

Computation of basic net capital requirement
Minimum net capital requirement (6 2/3% of total aggregate
  indebtedness) (1)                                                               $__1,240,051

Minimum dollar net capital required (2)                                           $      250,000

Net capital requirement (greater of (1) or (2) above)                             $     1,240,051

Excess net capital over net capital requirement                                   $   67,235,850

Excess net capital at 1,000% (net capital less 10% of
  aggregate indebtedness)                                                         $65.375.772

There are no material differences between this computation and the
    Company‘s unaudited Form X—17A—5 as of December 31, 2007.


0802—0015036                                                                                    15


i’IERNST& YOUNG                                          @ Ernst & Young LLP             # Phone: (404) 874—8300
                                                           Suite 1000
                                                           55 Ivan Allen Jr. Boulevard
                                                            Atlanta, Georgia 30308




       Supplementary Report of Independent Registered Public Accounting Firm on
                  Internal Control Required by SEC Rule 17a—5(g)(1)

  Board of Directors
  SunTrust Investment Services, Inc.

  In planning and performing our audit of the financial statements of SunTrust Investment
  Services, Inc. (the Company), as of and for the year ended December 31, 2007, in accordance
  with auditing standards generally accepted in the United States, we considered its internal
  control over financial reporting (internal control), as a basis for designing our auditing
  procedures for the purpose of expressing our opinion on the financial statements, but not for the
  purpose of expressing an opinion on the effectiveness of the Company‘s internal control.
  Accordingly, we do not express an opinion on the effectiveness of the Company‘s internal
  control.

  Also, as required by rule 17a—5(g)(1) of the Securities and Exchange Commission (SEC), we
  have made a study of the practices and procedures followed by the Company, including
  consideration of control activities for safeguarding securities. The study included tests of such
  practices and procedures that we considered relevant to the objectives stated in rule 17a—5(g) in
  making the periodic computations of aggregate indebtedness (or aggregate debits) and net capital
  under rule 17a—3(a)(11) and for determining compliance with the exemptive provisions of rule
  15c3—3. Because the Company does not carry securities accounts for customers or perform
  custodial functions relating to customer securities, we did not review the practices and
  procedures followed by the Company in any of the following:

       1. Making quarterly securities examinations, counts, verifications, and comparisons and
          recordation of differences required by rule 17a—13

       2. Complying with the requirements for prompt payment for securities under Section 8 of
          Federal Reserve Regulation T of the Board of Governors of the Federal Reserve System

  The management of the Company is responsible for establishing and maintaining internal control
  and the practices and procedures referred to in the preceding paragraph. In fulfilling this
  responsibility, estimates and judgments by management are required to assess the expected
  benefits and related costs of controls and of the practices and procedures referred to in the
  preceding paragraph and to assess whether those practices and procedures can be expected to
  achieve the SEC‘s above—mentioned objectives. Two of the objectives of internal control and the
  practices and procedures are to provide management with reasonable but not absolute assurance
  that assets for which the Company has responsibility are safeguarded against loss from
  unauthorized use or disposition, and that transactions are executed in accordance with
  management‘s authorization and recorded properly to permit the preparation of financial
  statements in conformity with generally accepted accounting principles. Rule 17a—5(g) lists
  additional objectives of the practices and procedures listed in the preceding paragraph.


                                                                                                        16
  0802—0915036

                                  A member firm of Emnst & Young Global Limited


i’lERNST&YOUNG                                           & Ernst & Young LLP




  Because of inherent limitations in internal control and the practices and procedures referred to
  above, error or fraud may occur and not be detected. Also, projection of any evaluation of them
  to future periods is subject to the risk that they may become inadequate because of changes in
  conditions or that the effectiveness of their design and operation may deteriorate.

  A control deficiency exists when the design or operation of a control does not allow management
  or employees, in the normal course of performing their assigned functions, to prevent or detect
  misstatements on a timely basis. A significant deficiency is a control deficiency, or combination
  of control deficiencies, that adversely affects the entity‘s ability to initiate, authorize, record,
  process, or report financial data reliably in accordance with generally accepted accounting
  principles such that there is more than a remote likelihood that a misstatement of the entity‘s
  financial statements that is more than inconsequential will not be prevented or detected by the
  entity‘s internal control. A material weakness is a significant deficiency, or combination of
  significant deficiencies, that results in more than a remote likelihood that a material misstatement
  of the financial statements will not be prevented or detected by the entity‘s internal control.

  Our consideration of internal control was for the limited purpose described in the first and
  second paragraphs and would not necessarily identify all deficiencies in internal control that
  might be material weaknesses. We did not identify any deficiencies in internal control and
  control activities for safeguarding securities that we consider to be material weaknesses as
  defined above.

  We understand that practices and procedures that accomplish the objectives referred to in the
  second paragraph of this report are considered by the SEC to be adequate for its purposes in
  accordance with the Securities Exchange Act of 1934 and related regulations, and that practices
  and procedures that do not accomplish such objectives in all material respects indicate a material
  inadequacy for such purposes. Based on this understanding and on our study, we believe that the
  Company‘s practices and procedures, as described in the second paragraph of this report, were
  adequate at December 31, 2007, to meet the SEC‘s objectives.

  This report is intended solely for the information and use of the Board of Directors, management,
  the SEC, Financial Industry Regulatory Authority, and other regulatory agencies that rely on rule
   17a—5(g) under the Securities Exchange Act of 1934 in their regulation of registered brokers and
  dealers, and is not intended to be and should not be used by anyone other than these specified
  parties.




  February 26, 2008




  0802—0915036
                                                                                END                17

                                  A memberfirm of Emst & Young Global Limited



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