(Corrects to say that the cash sweep arrangement between TD Ameritrade and TD Bank is not governed by the shareholder agreement between the two)
By Jed Horowitz
NEW YORK, Dec 5 (Reuters) - TD Ameritrade Holdings, the largest discount brokerage firm by daily trades it executes, has modified its agreement with Toronto Dominion Bank, its largest shareholder, in order to give the broker more leeway to do stock buybacks and to extend the relationship between the two for five years.
Currently, if the Canadian bank’s ownership of TD Ameritrade common stock rises above 45 percent because of a share repurchase, it must sell down its stake “as soon as practicable.” As of Sept. 30, TD Bank owned 42 percent of the U.S. brokerage firm’s common stock.
Under an amendment that goes into effect on Jan. 24, 2016, the bank agreed to use “reasonable efforts to sell or dispose” of stock that brings it over the 45 percent limit, but “has no absolute obligation” to do so, according to a Thursday morning filing from TD Ameritrade with the Securities and Exchange Commission.
The filing could encourage buying of the brokerage stock, since buybacks tend to temporarily boost share prices. The brokerage firm has made no buybacks this year.
The earnings of TD Ameritrade and other large discount brokers are highly dependent on rising interest rates, and investors have been buying TD Ameritrade shares in anticipation of a change in Federal Reserve policy. The Fed is widely expected to scale back the pace of its bond purchases in coming months, which could push interest rates higher.
Shares of TD Ameritrade have risen 88 percent over the last 12 months, including reinvested dividends.
TD Ameritrade and TD Bank have extensive business relationships, including reduced fees to the broker when it sweeps customer unused cash into bank deposit accounts, that are not affected by the shareholder agreement.
The amended agreement also extends the shareholders’ agreement with the bank by five years to Jan. 24, 2021. It was set to expire in January 2016. The stockholders agreement with firm founder Joe Ricketts, however, expires in January 2016, meaning he will not be able to designate directors for the firm’s board. Ricketts and his family own about 67 million shares of TD stock.
The amended agreement also allows the bank to deduct from its ownership total up to 2 percent of securities it holds for clients or in other capacities “in the ordinary course of business.” The exemption under the current agreement is 1 percent. The bank also agreed to sell down the “ordinary securities” to 1 percent of outstanding shares within six months.
The new agreement also obligates the bank as of January 2016 to vote the so-called ordinary shares, if they exceed 1 percent of outstanding stock, and any excess stock over 45 percent, in the same proportion as all shareholders on corporate governance matters submitted for a vote.
Shares of discount brokers were down slightly in early morning trading on Thursday. TD Ameritrade’s shares were off 16 cents, or 0.6 percent, to $28.51 on the New York Stock Exchange. Shares of Toronto Dominion Bank were down 1.8 percent.
Reporting By Jed Horowitz; Editing by Chris Reese