TD Ameritrade 2018 Annual Report

TD AMERITRADE HOLDING CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 78 A reconciliation of the activity related to unrecognized tax benefits follows for the fiscal years indicated (dollars in millions): 2018 2017 2016 Beginning balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 152 $ 142 $ 154 Additions based on tax positions related to the current year . . . . . . . . . . . . . . . 35 28 30 Additions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 — 20 Reductions due to lapsed statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . (9) (7) (8) Reductions due to settlements with taxing authorities . . . . . . . . . . . . . . . . . . . . (3) (1) (21) Reductions for tax positions of prior years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) (10) (33) Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 181 $ 152 $ 142 The balance of unrecognized tax benefits as of September 30, 2018 was $181 million ($151 million net of the federal benefit on state matters), all of which, if recognized, would favorably affect the effective income tax rate in any future periods. The balance of unrecognized tax benefits as of September 30, 2017 was $152 million ($108 million net of the federal benefit on state matters), all of which, if recognized, would favorably affect the effective income tax rate in any future periods. The Company's income tax returns are subject to review and examination by federal, state and local taxing authorities. The Company's federal claims for refund for tax years 2012 through 2014 are being examined by the Internal Revenue Service. The federal returns for 2015 through 2017 remain open under the statute of limitations. The years open to examination by state and local government authorities vary by jurisdiction, but the statute of limitations is generally three to four years from the date the tax return is filed. It is reasonably possible that the gross unrecognized tax benefits as of September 30, 2018 could decrease by up to $77 million ($67 million net of the federal benefit on state matters) within the next 12 months as a result of settlements of certain examinations or expiration of the statute of limitations with respect to other tax filings. The Company recognized $4 million and $2 million of interest and penalties expense (net of the federal benefit) on the Consolidated Statements of Income for fiscal years 2018 and 2017, respectively, primarily due to accruals for unrecognized tax benefits. The Company recognized $17 million of net benefits for interest and penalties (net of the federal income tax effect) for fiscal year 2016, primarily due to favorable resolutions and remeasurement of uncertain tax positions. As of September 30, 2018 and 2017, accrued interest and penalties related to unrecognized tax benefits was $30 million and $26 million, respectively. 12. Capital Requirements The Company's broker-dealer subsidiaries are subject to the SEC Uniform Net Capital Rule (Rule 15c3-1 under the Exchange Act), administered by the SEC and FINRA, which requires the maintenance of minimum net capital, as defined. Net capital and the related net capital requirement may fluctuate on a daily basis. TDAC, the Company's clearing broker-dealer subsidiary, and TD Ameritrade, Inc., an introducing broker-dealer subsidiary of the Company, compute net capital under the alternative method as permitted by Rule 15c3-1. TDAC is required to maintain minimum net capital of the greater of $1.5 million, which is based on the type of business conducted by the broker- dealer, or 2%of aggregate debit balances arising fromclient transactions. TD Ameritrade, Inc.is required tomaintain minimum net capital of the greater of $250,000 or 2% of aggregate debit balances. In addition, under the alternative method, a broker-dealer may not repay any subordinated borrowings, pay cash dividends or make any unsecured advances or loans to its parent company or employees if such payment would result in net capital of less than (a) 5% of aggregate debit balances or (b) 120% of its minimum dollar requirement. TDAFF, the Company's FCM and FDM subsidiary registered with the CFTC, is subject to CFTC Regulations 1.17 and 5.7 under the Commodity Exchange Act, administered by the CFTC and the NFA. As an FCM, TDAFF is required to maintain minimum adjusted net capital under CFTC Regulation 1.17 of the greater of (a) $1.0 million or (b) its futures risk-based capital requirement, equal to 8% of the total risk margin requirement for all futures positions carried by the FCM in client and nonclient accounts. As an FDM, TDAFF is also subject to the net capital