Special Cautionary Notice Regarding Forward-Looking Statements

This quarterly report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1934, as amended. These forward-looking statements may relate to such matters as anticipated financial performance, future revenue or earnings, business prospects, projected ventures, new products, anticipated market performance, and similar matters. We caution you that a variety of factors could cause our actual results to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. These risks and uncertainties, many of which are beyond our control, include, but are not limited to (1) trading volume in the securities markets; (2) volatility of the securities markets and interest rates;
(3) changes in regulatory requirements that could affect the demand for our services or the cost of doing business; (4) general economic conditions, both domestic and foreign, especially in the regions where we do business; (5) changes in the rate of inflation and related impact on securities markets; (6) competition from existing financial institutions and other new participants in the securities markets; (7) legal developments affecting the litigation experience of the securities industry; (8) successful implementation of technology solutions; (9) changes in valuations of our trading and warrant portfolios resulting from mark-to-market adjustments; (10) dependence on key personnel; (11) demand for our services; and (12) litigation and securities law liabilities. See "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008. The Company does not undertake to publicly update or revise any forward-looking statements.

The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and their related notes.

Overview

The Company is a holding company that, through its subsidiaries and affiliates, provides wealth management and capital markets services to a large and diversified group of clients and customers, including individuals, corporations, and financial institutions. A summary of these services follows:

Our Wealth Management segment provides investment advisory, wealth and investment management, and financial planning services to high net worth and mass affluent individuals and institutions, including investment strategies and alternatives, tax efficient estate and financial planning, trusts, and agent/fiduciary investment management services, throughout their financial life cycle, as well as private client brokerage services. In addition, we provide specialized asset management products and services in specific investment styles to corporations and institutions both through internal marketing efforts and externally through formal sub-advisory relationships and other distribution arrangements with third parties.

Our Capital Markets segment provides investment banking, institutional equity and fixed income brokerage, and prime brokerage services to institutional clients.

Investment Banking includes capital raising, public offerings, and private placements of equity and debt securities, financial advisory services, including advice on mergers, acquisitions and restructurings, and merchant banking services.

Institutional Brokerage provides institutional equity and fixed income brokerage and institutional research to a broad array of institutions throughout North America, Europe, and Asia, including banks, retirement funds, mutual funds, endowments, investment advisors, and insurance companies.

Prime Brokerage Services provides trade execution, clearing, bookkeeping, reporting, securities borrowing, financing, research, and fund raising to hedge fund clients.

We are exposed to volatility and trends in the general securities market and the economy and we are currently facing difficult market and economic conditions. Due to the downturn in the market and the economic recession that began during the second half of 2008, client assets declined during the last half of 2008 and into the first quarter of 2009. However, during the second quarter of 2009, the market began to improve and client assets have recovered resulting in, among other things, higher fee and commission revenue. Client assets under management or advisement were as follows:

                      Client Assets(1)
                       (in millions)

December 31, 2007    $           11,344
March 31, 2008                   11,342
June 30, 2008                    10,979
September 30, 2008               10,290
December 31, 2008                 8,627
March 31, 2009                    8,501
June 30, 2009                     9,534
September 30, 2009               10,595

(1)Client assets include the gross value of assets under management directly or via outside managers and assets held in brokerage accounts for clients by outside clearing firms.

Fiscal year 2008 and the first quarter of 2009 was a very challenging environment for the capital markets given the unprecedented events on Wall Street that led to increased uncertainty and turmoil in the United States economy and global financial markets. We made the necessary adjustments to our business and adapted to the current environment. We focused on the following items:

† preserving capital and retaining key people in order to emerge as a strong player once market stability returns;

† reducing compensation and non-compensation expenses in order to operate on a positive cash basis;

† closing offices that have been unprofitable;

† exiting business units that are subject to revenue and profit volatility; and

† acquiring wealth management businesses that enhance or complement our existing franchise value.

Components of Revenue and Expenses

Revenue. Our revenue is comprised primarily of (1) fees from asset-based advisory services, asset management, and financial planning services, (2) commission revenue from wealth advisory, prime and institutional brokerage transactions, (3) investment banking revenue from corporate finance fees, merger and acquisition fees, and merchant banking fees, and (4) principal transactions. We also earn interest on cash held and receive dividends from the equity and fixed income securities held in our corporate capital accounts, earn fees through the sale of insurance products, and have realized and unrealized gains (or losses) on securities in our inventory account.

Expenses. Our expenses consist of (1) compensation and benefits, (2) floor brokerage, exchange, and clearance fees, and (3) other expenses. Compensation and benefits have both a variable component, based on revenue production, and a fixed component. The variable component includes institutional and retail sales commissions, bonuses, overrides, and other incentives. Wealth advisory and institutional commissions are based on competitive commission schedules. Employees of the investment banking group and the research group receive a salary and discretionary bonuses as compensation. The fixed component includes administrative and executive salaries, payroll taxes, employee benefits, and temporary employee costs. Compensation and benefits is our largest expense item and includes wages, salaries, and benefits. During the third quarter of 2009, compensation and benefits represented 62.7% of total expenses and 60.6% of total revenue, compared to 67.3% of total expenses and 63.2% of total revenue during the third quarter of 2008. During the first nine months of 2009, compensation and benefits represented 60.1% of total expenses and 65.1% of total revenue, compared to 65.3% of total expenses and 58.0% of total revenue for the same period in 2008. For the three months ended September 30, 2009, the decrease in compensation and benefits as a percentage of total revenue is principally due to a decrease in revenue in our prime brokerage services division which has a higher payout than our other business lines. For the nine months ended September 30, 2009, the increase in compensation and benefits as a percentage of total revenue is principally due to an increase in revenue in our prime brokerage services division. For the nine months ended September 30, 2009, the decrease in compensation and benefits as a percentage of expenses is principally due to $14.9 million of goodwill and other intangible assets impairment charges recognized in the first quarter of 2009.

Floor brokerage, exchange, and clearance fees include clearing and trade execution costs associated with the retail, prime, and institutional brokerage business at SMH. SMH clears its transactions through several clearing firms, including Pershing, an affiliate of The Bank of New York Mellon, Goldman Sachs Execution & Clearing, L.P., Ridge Clearing & Outsourcing Solutions, Inc., First Clearing Corporation, and J.P. Morgan Clearing Corp.

Other expenses include (1) communications and data processing expenses, such as third-party systems, data, and software providers, (2) occupancy expenses, such as rent and utility charges for facilities, (3) interest expense, (4) goodwill and other intangible assets impairment charges, (5) amortization of other intangible assets, and (6) other general and administrative expenses.

Results of Operations

Three Months Ended September30, 2009 Compared to Three Months Ended September 30, 2008

Total revenue was $47.9 million for the third quarter of 2009 compared to $46.0 million for the same quarter in 2008, an increase of $1.9 million, or 4.0%, reflecting increases of $1.7 million in principal transactions revenue and $914,000 in interest revenue partially offset by declines of $221,000 in revenue from investment advisory and related services and $613,000 in investment banking revenue. Total expenses for the third quarter of 2009 increased $3.0 million, or 7.0%, to $46.2 million from $43.2 million in the same quarter of the previous year reflecting increased communications and data processing costs, interest expense, and other general and administrative expenses. Equity in income of limited partnerships decreased to $1.8 million for the third quarter of 2009 compared to $43.3 million for the third quarter of 2008, reflecting the sale of our interests in Salient Partners, L.P. and Endowment Advisers, L.P. in the third quarter of 2008. Income from continuing operations, net of income taxes, was $1.2 million, or $0.04 per diluted common share, for the third quarter of 2009 compared to $29.2 million, or $1.04 per diluted common share, for the third quarter of 2008.

Revenue from investment advisory and related services decreased to $19.4 million in the third quarter of 2009 from $19.6 million in the same quarter of 2008 as a result of a decrease in client assets. Commission revenue decreased to $13.1 million in the third quarter of 2009 from $13.2 million for the same period in 2008 as a result of a decrease in trading volume in the Wealth Management segment. Investment banking revenue decreased to $3.4 million during the third quarter of 2009 from $4.0 million in the same period of 2008 due to a decrease of $1.6 million in advisory fees earned partially offset by an increase in management income. Principal transactions revenue increased from $5.2 million for the third quarter of 2008 to $6.8 million for the third quarter of 2009 as the result of an increase of $1.7 million in the sale of fixed income products. Interest and dividend income increased to $2.5 million in the third quarter of 2009 from $1.6 million in the same period last year as a result of interest earned on notes receivable received in connection with the sale of our interests in Salient Partners, L.P. and Endowment Advisers, L.P. Other income increased from $2.4 million during the third quarter of 2008 to $2.6 million during the same period in 2009 reflecting an increase of $476,000 in hedge fund servicing revenue and third-party marketing fees partially offset by a decrease of $170,000 in insurance commissions.

During the three months ended September 30, 2009, employee compensation and benefits decreased to $29.0 million from $29.1 million in the same period last year. During the three months ended September 30, 2009, floor brokerage, exchange, and clearance fees decreased to $1.5 million from $1.6 million in the same period last year due to a decrease in clearance fees in the institutional brokerage division. Communications and data processing costs increased to $3.0 million in the third quarter of 2009 compared to $2.5 million in the same period last year due to higher clearing firm service fees resulting from the increase in trading volume. Occupancy costs increased to $3.8 million in the third quarter of 2009 compared to $3.4 million in the third quarter of 2008 due to the acquisition of an additional 66% membership interest in EFA on April 1, 2009 and the expansion of the prime brokerage division with the hiring of the principals of The Washington Research Group in the first quarter of 2009. Interest expense increased to $1.3 million for the third quarter of 2009 compared to $400,000 in the third quarter of 2008 due to (i) the imputed interest associated with an incentive compensation payable resulting from the sale of our interests in Salient Partners, L.P. and Endowment Advisers, L.P., (ii) the funding of a credit facility during the second quarter of 2009, and (iii) costs associated with the acquisition of the additional 66% membership interest in EFA. Other general and administrative expenses increased to $7.1 million during the third quarter of 2009 from $6.1 million in the third quarter of last year due to an increase of $1.1 million in advertising expense at Edelman.

Our effective tax rate was 42.3% for the three months ended September 30, 2009 compared to 38.0% for the three months ended September 30, 2008. The effective tax rate exceeds the federal statutory income tax rate primarily as a result of state income taxes and certain nondeductible expenses.

During the first quarter of 2009, the Company closed three retail offices. This decision was made due to the offices' inability to achieve sufficient revenues to offset their costs. As a result, we recorded a net loss from discontinued operations, which consists of operating losses, of $355,000 and $238,000 for the three months ended September 30, 2009 and 2008, respectively.

Results by Segment

Wealth Management

                                                             Three Months Ended September 30,
                                                                2009                  2008
                                                                      (in thousands)

Revenue                                                    $        26,359       $        26,328

Income from continuing operations before income taxes      $         7,425       $        56,692

The turmoil in the global financial markets over the past year has caused equity prices to decline to levels not seen in many years. That market-driven value decline has carried over to our client portfolios. As the fees and commissions that we charge for managing client assets is based, to a large degree, on the size of our client portfolios, we have seen a significant drop in commissions revenue from the third quarter of 2008 to the comparable 2009 period. On April 1, 2009, the Company increased its ownership of EFA from 10% to 76% which required a change in our method of accounting for EFA's results to consolidation from the equity method. Revenue from wealth management increased to $26.4 million from $26.3 million and income from continuing operations before income taxes decreased to $7.4 million from $56.7 million. Commission revenue decreased to $2.9 million from $3.8 million reflecting a decline in shares traded by the firm's retail clients due to the uncertainty in the financial markets. Interest income increased to $2.0 million from $712,000 as a result of interest earned on notes receivable received in connection with the sale of our interests in Salient Partners, L.P. and Endowment Advisers, L.P. on August 29, 2008. Total expenses increased to $19.3 million from $16.5 million due to higher employee compensation and occupancy costs associated with the EFA acquisition. Equity in income of limited partnerships decreased to $356,000 from $46.8 million. The decrease in equity in income of limited partnerships is attributable to the sale of our interests in Salient Partners, L.P. and Endowment Advisers, L.P. in 2008.

Capital Markets

Investment Banking

                                                             Three Months Ended September 30,
                                                                2009                  2008
                                                                      (in thousands)

Revenue                                                    $         2,087       $         3,373

Loss from continuing operations before income taxes        $        (1,165 )     $        (1,033 )

Revenue from investment banking decreased to $2.1 million from $3.4 million and loss from continuing operations before income taxes increased to a loss of $1.2 million from a loss of $1.0 million. The revenue decline is due to a decrease of $1.6 million in advisory fees. Total expenses decreased to $3.3 million from $4.4 million due to a decrease of $812,000 in employee compensation.

Institutional Brokerage

                                                               Three Months Ended September 30,
                                                                 2009                     2008
                                                                        (in thousands)

Revenue                                                    $          5,602         $          5,039

Income from continuing operations before income taxes      $          1,002         $            828

Revenue from institutional brokerage increased to $5.6 million from $5.0 million and income from continuing operations before income taxes increased to $1.0 million from $828,000. Principal transaction revenue increased to $1.9 million from $1.3 million reflecting an increase of $1.1 million in revenue from the sale of fixed income products. Total expenses increased to $4.6 million from $4.2 million due to increased employee compensation related to the higher revenue.

Prime Brokerage Services

                                                                 Three Months Ended September 30,
                                                                    2009                  2008
                                                                          (in thousands)

Revenue                                                        $        12,566       $        14,116

Income (loss) from continuing operations before income taxes   $          (416 )     $         1,303

Revenue from prime brokerage services decreased to $12.6 million from $14.1 million and income (loss) from continuing operations before income taxes decreased to a loss of $416,000 from income of $1.3 million. Principal transactions revenue decreased to $3.9 million from $7.0 million reflecting a decrease of $2.9 million in proprietary trading revenue offset by an increase in revenue earned from the sale of fixed income products. Total expenses increased to $13.0 million from $12.8 million due to a $237,000 increase in occupancy costs.

Corporate Support and Other

                                                              Three Months Ended September 30,
                                                                2009                   2008
                                                                       (in thousands)

Revenue                                                    $         1,246       $          (2,842 )

Loss from continuing operations before income taxes        $        (3,463 )     $         (11,705 )

Revenue from corporate support and other increased to $1.2 million from $(2.8) million and the loss from continuing operations before income taxes decreased to $3.5 million from $11.7 million. Revenue from principal transactions, which consists of changes in the values of our investment portfolios, increased to $696,000 from a loss of $3.5 million. Total expenses increased to $6.1 million from $5.3 million due to interest costs associated with the Company's credit facility that was initially funded in the second quarter of 2009.

Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008

Total revenue was $144.1 million for the nine months ended September 30, 2009 compared to $138.8 million for the same period in 2008, an increase of $5.3 million, or 3.8%, reflecting an increase in principal transactions and interest revenue partially offset by a decrease in investment advisory and related services and commission revenue. Total expenses for the nine months ended September 30, 2009 increased $32.9 million, or 26.7%, to $156.2 million from $123.3 million in the same period of the previous year reflecting (i) compensation and other costs associated with the higher revenue, (ii) $14.9 million in goodwill and other intangible assets impairment charges recognized in the first quarter of 2009, and (iii) $1.4 million of compensation and interest costs associated with the acquisition of an additional 66% membership interest in EFA. Equity in income of limited partnerships decreased to $2.8 million for the nine months ended September 30, 2009 compared to $46.6 million for the same period in 2008, reflecting the sale of our interests in Salient Partners, L.P. and Endowment Advisers, L.P. in the third quarter of 2008. Income (loss) from continuing operations, net of income taxes, was $(8.4) million, or $(0.31) per diluted common share, for the nine months ended September 30, 2009 compared to $33.9 million, or $1.27 per diluted common share, for the same period in 2008.

Revenue from investment advisory and related services decreased to $50.9 million for the nine months ended September 30, 2009 from $58.7 million in the same period in 2008 as a result of a decrease in client assets. Commission revenue decreased to $37.2 million for the nine months ended September 30, 2009 from $40.5 million for the same period in 2008 as a result of a decrease in trading volume in the Wealth Management segment. Investment banking revenue decreased to $9.4 million for the nine months ended September 30, 2009 from $10.5 million in the same period in 2008 due to a decrease of $3.1 million in advisory fees earned partially offset by an increase in sales credits received in investment banking transactions. Principal transactions revenue increased from $16.0 million for the nine months ended September 30, 2008 to $31.6 million for the same period in 2009 as the result of an increase in the sale of fixed income products. Interest and dividend income increased to $7.9 million for the nine months ended September 30, 2009 from $3.7 million in the same period last year as a result of interest earned on notes receivable received in connection with the sale of our interests in Salient Partners, L.P. and Endowment Advisers, L.P. Other income decreased from $9.3 million for the nine months ended September 30, 2008 to $7.1 million during the same period in 2009 reflecting a decrease of $1.7 million in hedge fund servicing revenue and third-party marketing fees.

During the nine months ended September 30, 2009, employee compensation and benefits increased to $93.8 million from $80.5 million in the same period last year due to the revenue growth in the prime brokerage services division. During the nine months ended September 30, 2009, floor brokerage, exchange, and clearance fees increased to $4.9 million from $4.3 million in the same period last year due to an increase of $677,000 in clearance fees in the prime brokerage services division. Communications and data processing costs increased to $8.6 million for the nine months ended September 30, 2009 from $8.2 million in the same period last year, primarily due to higher trading system fees. Occupancy costs were $10.7 million for the nine months ended September 30, 2009 compared to $9.2 million in the same period of 2008 due to the acquisition of an additional 66% membership interest in EFA on April 1, 2009 and the acquisitions of Leonetti and Miller-Green during the first nine months of 2008. Interest expense was $2.1 million for the nine months ended September 30, 2009 due to (i) $888,000 of imputed interest associated with an incentive compensation payable resulting from the sale of our interests in Salient Partners, L.P. and Endowment Advisers, L.P., (ii) $457,000 of interest related to the credit facility funded in 2009, and (iii) $666,000 of interest associated with the acquisition of an additional 66% membership interest in EFA on April 1, 2009. The Company recognized goodwill and other intangible assets impairment charges of $14.9 million for the nine months ended September 30, 2009. No such charge was recognized in the same period in 2008. Other general and administrative expenses increased to $20.2 million for the nine months ended September 30, 2009 from $20.0 million in the same period last year due to an increase of $1.6 million in advertising expense at Edelman partially offset by decreases in outside sales commissions and the provision for uncollectible accounts.

Our effective tax rate was 35.2% for the nine months ended September 30, 2009 compared to 38.4% for the nine months ended September 30, 2008. The effective tax rate exceeds the federal statutory income tax rate primarily as a result of state income taxes and certain nondeductible expenses.

During the first quarter of 2009, the Company closed three retail offices. This decision was made due to the offices' inability to achieve sufficient revenues to offset their costs. As a result, we recorded a net loss from discontinued operations, which consists of operating losses, of $2.0 million and $904,000 for the nine months ended September 30, 2009 and 2008, respectively.

Results by Segment

Wealth Management

                                                              Nine Months Ended September 30,
                                                                2009                  2008
                                                                      (in thousands)

Revenue                                                    $        72,098       $        80,137

Income from continuing operations before income taxes      $        17,870       $        80,941

The turmoil in the global financial markets over the past year has caused equity prices to decline to levels not seen in many years. That market-driven value decline has carried over to our client portfolios. As the fees and commissions that we charge for managing client assets is based, to a large degree, on the size of our client portfolios, we have seen a significant drop in revenue from the nine months ended September 30, 2008 to the comparable 2009 period. On April 1, 2009, the Company increased its ownership of EFA from 10% to 76% which required a change in our method of accounting for EFA's results to consolidation from the equity method. Revenue from wealth management decreased to $72.1 . . .