UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

 

 

Form 10-K

 

 

 

 

 

Commission file number 001-11123

 

NUVEEN INVESTMENTS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Registrant’s telephone number, including area code: (312) 917-7700

 

Securities registered pursuant to Section 12(b) of the Act: None.

 

Securities registered pursuant to Section 12(g) of the Act: None.

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes o     No þ

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

The registrant has no common equity held by non-affiliates.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

The number of shares of the registrant’s common stock outstanding as of the close of business on March 31, 2010 was 1,000, all of which are owned by Windy City Investments, Inc.

 

 

 

TABLE OF CONTENTS

 

 

 

Overview

 

Founded in 1898, our company is a leading provider of investment management services to high-net-worth and institutional investors and the financial consultants and advisors who serve them. We derive substantially all of our revenues from providing investment advisory services and distributing our managed account products, closed-end exchange-traded funds (“closed-end funds”) and open-end mutual funds (“open-end funds” or “mutual funds”). We have a history of innovation in investment products, conservatism in investment approach and attentive client service. We have developed a distinctive, multi-boutique business model that features seven independently branded investment managers, each of which has its own investment strategies and dedicated investment, research and trading personnel. Our investment teams are supported by our scaled distribution, service and operations platform. In addition, our company possesses a well-balanced mix of managed account products, closed-end funds, and open-end funds across equity and fixed income strategies.

 

Our seven independently branded investment managers are: Nuveen Asset Management (“NAM”), focusing on fixed-income investments; Nuveen HydePark Group, LLC (“HydePark”), focusing on enhanced equity investment management; NWQ Investment Management Company, LLC (“NWQ”), specializing in value-style equities ; Santa Barbara Asset Management, LLC (“Santa Barbara”), dedicated to growth equities; Symphony Asset Management LLC (“Symphony”), with expertise in alternative investments as well as equity and credit strategies; Tradewinds Global Investors, LLC (“Tradewinds”), specializing in global equities; and Winslow Capital Management, Inc. (“Winslow Capital”), specializing in large-cap growth equities.

 

Our Business Strategies

 

Our overall objective is to provide high quality investment services and expand our product offerings to allow us to successfully serve our clients, grow our business and deliver strong financial results. We are focused on delivering growth in assets under management and generating high free cash flow, while continuing to prudently invest in new opportunities and innovative strategies. We continue to pursue the following strategies to achieve this objective:

 

Grow core closed-end fund and retail managed account businesses.  We are working to grow our leadership position in closed-end funds by developing new and differentiated offerings focusing on municipal, other income-oriented and equity products, with particular emphasis on products that seek to deliver steady cash flow and participation in potential equity market appreciation and offer investors protection from rising interest rates, inflation and commodity costs. In addition, we continue to attempt to differentiate our closed-end funds by providing a high level of secondary market support. We sponsor 123 closed-end funds of which 68 were leveraged through the issuance of auction rate preferred stock (“ARPS”), as of February 28, 2010. As a result of the general failure of auctions for ARPS beginning in February 2008, we have been working proactively to refinance the outstanding ARPS of the Nuveen sponsored funds. As of February 28, 2010, outstanding ARPS of our funds had been reduced from $15.4 billion to $8.0 billion. See “Risk Factors – Risks Related to Our Business.” We are have been successful in moderating outflows in our retail managed account business by launching new and existing products from our investment teams onto the managed account platforms of the major wirehouses and regional broker dealers and by selectively re-opening access to products at NWQ and Tradewinds which we previously closed in this channel due to rapid growth. We leverage our sales and service infrastructure and distribution partner relationships in distributing retail managed accounts.

 

Expand our open-end mutual fund business.  We have enjoyed strong success in building out our open-end mutual fund businesses and have grown our mutual fund assets under management by 11.0% annually since December 31, 2004. We plan to continue to expand and broaden our open-end mutual fund offerings by providing the initial capital, development and sales support for new products with a focus on equity and taxable fixed income offerings. We also plan to leverage our established distribution relationships by cross-

selling fund products to financial advisors who currently sell our other products. In addition, we now offer share classes for distribution to 401(k) and other defined contribution plans.

 

Further develop our institutional business.  We have heightened our emphasis on the institutional business over the last five years and, as a result, since December 31, 2004 we have grown our institutional assets under management by 20.1% on an average annual basis. We intend to continue to develop new institutional product strategies and structures, such as concentrated portfolios, long-short strategies, commingled trust vehicles and other privately offered funds.

 

Develop new areas of high quality investment specialization and enhance current platforms.  We believe we have a proven track record of identifying and growing high quality investment teams by leveraging the combination of the managers’ strong investment capabilities with our distribution, service and operations platform. For example, following our acquisition of NWQ in 2002, we combined NWQ’s strong investment capabilities with our distribution, service and operations platform and NWQ’s assets under management grew from approximately $7.0 billion when we acquired it to $45.0 billion (which includes Tradewinds, which was spun out of NWQ in 2006) as of December 31, 2009. We are working with our investment teams to encourage the development of new investment strategies from within their current capabilities. In December 2008, we expanded our investment capabilities by acquiring Winslow Capital, which specializes in large-cap growth equities.

 

Maintain and grow distribution and client relationships, including international expansion.  We plan to continue to focus on providing high quality service and support to the financial advisors at our distribution partners with our sales and service force of 122 professionals in order to strengthen our existing relationships. We plan to continue employing a consultative-based approach in serving our clients’ needs. We also will continue to serve the financial advisors and institutional consultants who recommend our products by providing them with wealth management education, practice management training and client relationship management technology. In addition, we intend to use our established relationships with our clients, particularly retail high-net-worth advisors, to cross-sell products from our different investment teams. Finally we are looking to expand internationally, offering our core products to foreign investors primarily through our established distribution partners.

 

Investment Products and Services

 

We provide investment management services and offer a broad array of investment products through our seven independent, separately branded investment managers, each with distinct investment processes and strategies and dedicated investment and research teams. Each investment strategy can be offered in multiple product structures in order to provide customized investment solutions, including separately managed retail and institutional accounts, closed-end funds and mutual funds. These investment products are designed primarily for high-net-worth and institutional investors, and are distributed through intermediary firms including broker-dealers, commercial banks, affiliates of insurance providers, financial planners, accountants, consultants and investment advisors or are provided directly to institutional investors.

 

Investment Managers

 

We provide asset management services through the following seven separately branded investment managers:

 

Nuveen Asset Management focuses on municipal and taxable fixed income investments, and had $77.3 billion in assets under management as of December 31, 2009, representing 53% of our assets under management. Using a value oriented approach, NAM evaluates securities and sectors and selects what it views as attractive bond structures and credit exposures while positioning the portfolio within appropriate maturity and duration ranges. For Nuveen’s open-end and closed-end funds, NAM provides investment advisory services primarily with respect to municipal bond and taxable fixed income securities, and enters into sub-advisory agreements with affiliated or unaffiliated sub-advisors to provide discretionary management for certain asset classes, which include growth and value equities, foreign securities, preferred securities, convertible securities, real estate investments, senior loans and other asset classes.

Nuveen HydePark focuses on enhanced equity investment management, and had $1.5 billion in assets under management as of December 31, 2009, representing 1% of our assets under management. Nuveen HydePark uses proprietary quantitative techniques to create value added portfolios designed to closely track client-selected benchmarks. Nuveen HydePark currently provides investment management services to institutional accounts and asset allocation services to open-end funds.

 

NWQ Investment Management focuses on value equities, and had $19.6 billion in assets under management as of December 31, 2009, representing 14% of our assets under management. NWQ’s investment approach concentrates on identifying undervalued companies that our investment professionals believe possess catalysts to improve profitability and/or unlock value. NWQ’s analysts conduct bottoms-up research to capitalize on opportunities that may be created by investor over-reaction, misperception and short-term focus. NWQ emphasizes analysis of the risk/reward of each investment within a diversified portfolio in order to provide downside protection. NWQ strives to enhance these capabilities by maintaining an entrepreneurial research environment.

 

Santa Barbara Asset Management focuses on “blue chip” large through small cap companies that exhibit stable and consistent earnings growth, and had $3.8 billion in assets under management as of December 31, 2009, representing 3% of our assets under management. Santa Barbara’s investment philosophy is to invest in companies that it believes are well managed, have demonstrated an ability to grow revenue and earnings in a stable and consistent fashion, consistently generate healthy returns on capital and maintain a conservative capital structure. Investment emphasis for equities is on stable growth companies based on factors such as profitability, rate of growth, stability and growth, trend, and current earnings momentum.

 

Symphony Asset Management focuses primarily on equity and fixed income strategies in alternative investments, structured products and long-only portfolios, and had $8.5 billion in assets under management as of December 31, 2009, representing 5% of our assets under management. The investment team at Symphony uses quantitative models to simplify its investment process, followed by developing more qualitative insights into investment opportunities to drive ultimate investment decisions. Symphony currently manages fixed income and equity portfolios designed to reduce market-related risk through market-neutral and other strategies.

 

Tradewinds Global Investors focuses on global equities, and had $25.4 billion in assets under management as of December 31, 2009, representing 18% of our assets under management. Tradewinds’ investment process concentrates on examining equity securities of companies ranging from large to small cap in developed and emerging markets to identify and invest in undervalued, mispriced and underfollowed securities of companies with strong or improving business fundamentals.

 

Winslow Capital Management focuses on large-cap growth equities, and had $8.7 billion in assets under management as of December 31, 2009, representing 6% of our assets under management. Winslow Capital concentrates its investing in companies with above-average earnings growth potential.

 

We also offer investment products in a variety of taxable income styles including preferred securities, convertible securities, real estate investment trusts (“REITs”) and emerging market debt. Some of these styles are accessed through sub-advisory relationships with other specialized, third-party investment managers. As of December 31, 2009, approximately $6.4 billion in assets representing 4% of our assets under management were managed through external sub-advisory relationships.

 

We have traditionally had a very low employment turnover rate among our portfolio managers. The majority of our portfolio managers, as well as those employed by sub-advisors, have devoted most of their professional careers to the analysis, selection and surveillance of the types of securities held in the funds or accounts they manage.

 

Investment Products

 

Institutional and Retail Managed Accounts.  We provide tailored investment management services to institutions and individuals through traditional managed accounts. Managed accounts are individual

portfolios comprised primarily of stocks and bonds that offer investors the opportunity for a greater degree of customization than packaged products. Our managed account offerings include large-cap growth and value accounts, small-cap and mid-cap growth and value accounts, small-cap core accounts, international equity accounts, blends of stocks and bonds, and market-neutral as well as tax-free and taxable-income accounts. Symphony offers single- and multi-strategy hedged portfolios across different asset classes and capitalization ranges including U.S. equities, convertible, high-yield and investment-grade debt, and senior loans. Symphony also manages structured-finance products such as CLOs (collateralized loan obligations). NAM, NWQ, Symphony, Tradewinds and Winslow Capital also offer certain of their investment capabilities to institutional clients through privately offered funds.

 

Closed-End Funds.  As of December 31, 2009, we sponsored 123 actively managed closed-end funds that feature a range of equity, balanced and fixed-income investment strategies. Of these funds, 101 invest exclusively in municipal securities. The remaining 22 funds invest in a variety of debt and/or equity securities, including preferred securities, senior loans, REITS, as well as common shares of both U.S. and non-U.S. companies. Unlike open-end funds, closed-end funds do not continually offer to sell and redeem their shares. Rather, closed-end funds list their common shares on a national exchange (e.g., the New York Stock Exchange or NYSE Amex, formerly the American Stock Exchange) and common shareholders seeking liquidity may trade their shares daily on the exchange through a financial adviser or otherwise. The prices at which common shares are traded may be above or below the shares’ net asset value. The funds’ Board of Trustees at least annually will consider action that might be taken to reduce or eliminate discounts for funds whose common shares are persistently trading at a significant discount to their net asset value. Such actions may include, but are not limited to, repurchasing shares or the conversion of a fund from a closed-end to an open-end investment company, which may negatively impact the company’s total assets under management. As of February 28, 2010, 68 out of the 123 closed-end funds we sponsor seek to enhance common share distributions and total returns on average over time through the use of leverage. These funds may leverage their capital structures in a variety of ways, including through issuance of preferred equity securities, incurring short-term borrowings as well as by investing in securities such as tender option bonds. As discussed above, we have been proactively working to refinance the outstanding ARPS of our funds since the auctions for ARPS began to fail generally in February 2008. A fund’s cost of leverage is typically based on short-term interest rates, while the proceeds from the incurrence of leverage are invested by the funds in additional portfolio investments. If a fund’s cost of leverage were to exceed the net rate of return earned by the fund’s investment portfolio for an extended period, the fund’s Board of Trustees may consider selling portfolio securities in order to reduce the outstanding level of leverage. This may negatively affect the company’s total assets under management.

 

Open-End Mutual Funds.  As of December 31, 2009, we offered 66 open-end mutual funds. These funds are actively managed and continuously offer to sell their shares at prices based on the daily net asset values of their portfolios. All 66 funds offer daily redemption at net asset value. Of the 66 mutual funds, we offer 32 national and state-specific municipal funds that invest substantially all of their assets in diversified portfolios of limited-term, intermediate-term or long-term municipal bonds. We offer other mutual funds that invest in U.S. equities, international equities, portfolios combining equity with taxable fixed-income or municipal securities and in taxable fixed-income securities.

The following table shows, by investment product, net assets managed by the Company at December 31 for each of the past three years ended December 31, 2009, 2008 and 2007:

 

Net Assets Under Management

 

 

The following table summarizes gross sales for our investment products for the past three years ended December 31, 2009, 2008 and 2007:

 

Gross Sales of Investment Products

 

The following table summarizes net flows (equal to the sum of sales, reinvestments and exchanges, less redemptions) for our investment products for the past three years ended December 31, 2009, 2008 and 2007:

 

Net Flows

 

 

The relative attractiveness of our managed accounts, mutual funds, closed-end funds and privately offered funds to investors depends upon many factors, including current and expected market conditions, the performance histories of the funds, their current yields, the availability of viable alternatives and the level of continued participation by unaffiliated, third party firms that distribute our products to their customers.

 

The assets under management of managed accounts, mutual funds, closed-end funds and privately offered funds are affected by changes in the market values of the underlying securities. Changing market conditions may cause positive or negative shifts in valuation and, subsequently, in the advisory fees earned from these assets.

 

Investment Management Services

 

We provide investment management services to funds, accounts and portfolios pursuant to investment management agreements. With respect to separately managed accounts, our investment managers generally receive fees, on a quarterly basis, based on the value of the assets managed on a particular date, such as the first or last calendar day of a quarter, or on the average asset value for the period. Certain of our investment managers may earn performance fees on certain institutional accounts and funds based on the performance of the accounts. With respect to mutual funds and closed-end funds, we receive fees based either on each fund’s average daily net assets or on a combination of the average daily net assets and gross interest income.

Advisory fees, net of sub-advisory fees and expense reimbursements, earned on managed assets for each of the past three years are shown in the following table:

 

Net Investment Advisory Fees

 

 

Our advisory fee schedules currently provide for maximum annual fees ranging from 0.40% to 0.75% in the case of the municipal and taxable fixed income mutual funds, and 0.35% to 1.25% in the case of the equity mutual funds. Maximum fees in the case of the closed-end funds currently range from 0.35% to 1.15% of total net assets, except with respect to five select portfolios. The investment management agreements for these select portfolios provide for annual advisory fees ranging from 0.25% to 0.30%. Additionally, for 57 funds offered since 1999, the investment management agreement specifies that, for at least the first five years, we will waive a portion of management fees or reimburse other expenses. The investment management agreement provides for waived management fees or reimbursements of other expenses ranging from 0.05% to 0.45% for the first five years. In each case, the management fee schedules provide for reductions in the fee rate at increased asset levels.

 

In August 2004, we implemented a complex-wide fund pricing structure for all of our managed funds. The complex-wide pricing structure separates traditional portfolio management fees into two components – a fund specific component and an aggregate complex-wide component. The aggregate complex-wide component introduces breakpoints related to the entire complex of managed funds, rather than utilizing breakpoints only within individual funds. Above these breakpoints, fee rates are reduced on incremental assets. In 2007, we modified the complex-wide fee schedule to provide additional breakpoints above complex-wide fund assets of $80 billion.

 

For separately managed accounts, fees are negotiated and are based primarily on asset size, portfolio complexity and individual needs. These fees can range up to 1.50% of net asset value annually, with the majority of the assets falling between 0.22% and 0.80%.

 

We may earn performance fees for performance above specifically defined benchmarks for various of our investment strategies. Performance fees earned by privately offered hedge funds or performance-based separate accounts, are generally measured annually and are recognized only at the performance measurement dates contained in an individual account management agreement. As of December 31, 2009, the underlying measurement dates for the majority of our performance-based arrangements fall in the second half of the calendar year. This percentage may change in the future due to changes in assets under management and/or anniversary date contract changes.

 

Each of our open-end and closed-end funds has entered into an investment management agreement with NAM. Although the specific terms of each agreement vary, the basic terms are similar. Pursuant to the agreements, NAM provides overall management services to each of the funds, subject to the supervision of each fund’s Board of Directors and in accordance with each fund’s investment objectives and policies. The investment management

agreements must be approved annually by the directors of the respective funds, including a majority of the directors who are not “interested persons” of NAM, as defined in the Investment Company Act. Amendments to such agreements typically must be approved by fund shareholders. Each agreement may be terminated without penalty by either party upon 60 days’ written notice, and terminates automatically upon its assignment (as defined in the Investment Company Act). Such an “assignment” would take place in the event of a change in control of NAM. Under the Investment Company Act, a change in control of NAM would be deemed to occur in the event of certain changes in the ownership of our voting stock. The termination of all or a portion of the investment management agreements, for any reason, could have a material adverse effect on our business and results of operations.

 

Each fund bears all expenses associated with its operations, including the costs associated with the issuance and redemption of securities, where applicable. The funds do not bear compensation expenses of directors or officers of the fund who are employed by Nuveen. Some of our investment management agreements provide that, to the extent certain enumerated expenses exceed a specified percentage of a fund’s or a portfolio’s average net assets for a given year, NAM will absorb such excess through a reduction in the management fee and, if necessary, pay such expenses so that the year-to-date net expense will not exceed the specified percentage. In addition, we may voluntarily waive all or a portion of our advisory fees from a fund, and/or reimburse expenses, for competitive reasons. Reimbursed expenses for mutual funds, including voluntary waivers, totaled $5.6 million during 2009 and $3.2 million during 2008. We expect to continue voluntary waivers at our discretion. The amount of such waivers may be more or less than historical amounts.

 

Pursuant to sub-advisory agreements with NAM, Institutional Capital Corporation (“ICAP”) performs portfolio management services for a sleeve of the Nuveen Multi-Manager Large-Cap Value Fund; Security Capital Research & Management Incorporated (“SC”) performs portfolio management services for our REIT closed-end fund and a diversified dividend and income closed-end fund; Wellington Management Company, LLP (“WM”) performs portfolio management services in emerging markets for a diversified dividend and income closed-end fund and two mortgage opportunity term closed-end funds; Spectrum Asset Management, Inc. (“SM”) performs portfolio management services for three preferred securities closed-end funds, two multi-strategy income and growth closed-end funds and a tax-advantaged floating rate closed-end fund; Enhanced Investment Technologies LLC (“INTECH”) performs portfolio management services for a core equity-based closed-end fund; and Gateway Advisors (“GA”) performs portfolio management services for four equity premium closed-end funds. We had a 23% non-voting minority equity ownership interest in ICAP that was sold in 2006; we have no equity ownership interest in ICAP, SC, WM, SM, INTECH or GA.

 

We pay ICAP, SC, WM, SM, INTECH and GA a portfolio advisory fee for sub-advisory services. The sub-advisory fees are based on the percentage of the aggregate amount of average daily net assets in the funds or to the portion thereof they sub-advise. The fee schedules provide for rate declines as asset levels increase. Pursuant to sub-advisory agreements, through our advisory subsidiaries, we perform portfolio management services on behalf of three equity-based closed-end funds and a fixed-income based closed-end fund. The closed-end fund sub-advisory agreements are with a subsidiary of Merrill Lynch. We earn sub-advisory fees based on the assets in the funds we sub-advise.

 

Services provided by our investment managers to managed accounts are also governed by management contracts, which are customized to suit a particular account. A majority of these contracts and certain assets under management of NAM, NWQ, Santa Barbara, Symphony, Tradewinds and Winslow Capital involve investment management services provided to clients who are participants in “wrap-fee” programs sponsored by unaffiliated investment advisors or broker-dealers. Such agreements, and the other investment agreements to which our investment managers are parties, generally provide that they can be terminated without penalty upon written notice by either party within any specified period. Under the provisions of the Investment Advisers Act, such investment management agreements may not be assigned to another manager without the client’s consent. The term “assignment” is broadly defined under this Act to include any direct or indirect transfer of the contract or of a controlling block of the advisor’s stock by a security holder.

Investment Product and Service Distribution

 

We distribute our investment products and services, including separately managed accounts, closed-end funds and mutual funds, through registered representatives associated with unaffiliated national and regional broker-dealers, commercial banks, private banks, broker-dealer affiliates of insurance agencies and independent insurance dealers, financial planners, accountants, and tax consultants (“retail distribution firms”) and through unaffiliated consultants serving institutional markets. We also provide investment products and services directly to institutional investors. Our distribution strategy is to maximize the accessibility and distribution potential of its investment products by maintaining strong relationships with a broad array of registered representatives and independent advisors and consultants. We have well-established relationships with registered representatives in retail distribution firms throughout the country. These registered representatives participate to varying degrees in our marketing programs, depending upon any one or more of the following factors: their interest in distributing investment products provided by us; their perceptions of the relative attractiveness of our managed funds and accounts; the profiles of their customers and their clients’ needs; and the conditions prevalent in financial markets.

 

Registered representatives may reduce or eliminate their involvement in marketing our products at any time, or may elect to emphasize the investment products of competing sponsors, or the proprietary products of their own firms. Registered representatives may receive compensation incentives to sell their firm’s investment products or may choose to recommend to their customers investment products sponsored by firms other than by us. This decision may be based on such considerations as investment performance, types and amount of distribution compensation, sales assistance and administrative service payments, and the levels and quality of customer service. In addition, a registered representative’s ability to distribute our mutual funds is subject to the continuation of a selling agreement between the firm with which the representative is affiliated and us. A selling agreement does not obligate the retail distribution firm to sell any specific amount of products and typically can be terminated by either party upon 60 days’ notice. During 2009, there were no distribution relationships at any one firm that represented 10% of consolidated operating revenue for 2009.

 

We employ external and internal sales and service professionals who work closely with intermediary distribution partner firms and consultants to offer products and services for high-net-worth investors and institutional investors. These professionals regularly meet with independent advisors and consultants, who distribute our products, to help them develop investment portfolio and risk-management strategies designed around the core elements of a diversified portfolio. We also employ several professionals who provide education and training to the same independent advisors and consultants. These professionals offer expertise and guidance on a number of topics including wealth management strategies, practice management development, asset allocation and portfolio construction.

 

As part of our asset management business, we earn revenue upon the distribution of our mutual funds and upon the public offering of new closed-end exchange-traded funds. We do not earn distribution revenue upon the establishment of managed accounts.

 

Common shares of closed-end funds are initially sold to the public in offerings that are underwritten by a syndication group, including the Company, through our Nuveen Investments, LLC, broker-dealer. Underwriting fees earned are dependent upon our level of participation in a syndicate or selling group for a new closed-end fund. During the year ended December 31, 2008, there were no new closed-end funds offered by the Company. During the year ended December 31, 2009, there were seven new closed-end funds offered by the Company.

 

All of our mutual funds have adopted a Flexible Sales Charge Program that provides investors with alternative ways of purchasing fund shares based upon their individual needs and preferences.

 

Class A shares may be purchased at a price equal to the fund’s net asset value plus an up-front sales charge ranging from 2.5% of the public offering price for limited-term municipal funds to 5.75% for equity funds. At the maximum sales charge level, approximately 90% to 95% of the sales charge is typically reallowed as a concession to the retail distribution firms. Additionally, purchases of Class A shares that equal or exceed $1 million may be made without an up-front sales charge, but are subject to a Contingent Deferred Sales Charge (“CDSC”) ranging from 0.50% to 1% for shares redeemed within 12 months. In order to compensate retail distribution firms for

Class A share sales that are $1 million or greater, we advance a sales commission ranging from 0.25% to 1.25% at the time of sale. Class A shares are also subject to an annual SEC Rule 12b-1 service fee of between 0.20% and 0.25% of assets, which is used to compensate securities dealers for providing continuing financial advice and other services to investors.

 

Class B shares are not available for new accounts or for additional investment into existing accounts. However, certain of our mutual funds will issue Class B shares upon the exchange of Class B shares from another fund or for purposes of dividend reinvestment. Eligible investors may purchase Class B shares at the offering price, which is the net asset value per share without any up-front sales charge. Class B shares are subject to an annual SEC Rule 12b-1 distribution fee of 0.75% of assets to compensate us for costs incurred in connection with the sale of such shares, an annual SEC Rule 12b-1 service fee of between 0.20% and 0.25% of assets to compensate securities dealers for providing continuing financial advice and other services to investors, and a CDSC which declines from 5% to 1% for shares redeemed within a period of 5 or 6 years. Class B shares convert to Class A shares after they are held for eight years.

 

Class C shares may be purchased at a price equal to the fund’s net asset value without any up-front sales charge. However, these shares are subject to an annual SEC Rule 12b-1 distribution fee of 0.35% to 0.75% of assets to compensate securities dealers over time for the sale of fund shares, an annual SEC Rule 12b-1 service fee of between 0.20% and 0.25% of assets to compensate securities dealers for providing continuing financial advice and other services to investors, and a 1% CDSC for shares redeemed within 12 months of purchase. In addition, we advance a 1% sales commission to retail distribution firms at the time of sale and, in return, receive the first year’s SEC Rule 12b-1 distribution fee and SEC Rule 12b-1 service fee.

 

Class R3 shares may be purchased from certain of our mutual funds at a price equal to the fund’s net asset value without any up-front sales charge. However, these shares are subject to an annual SEC Rule 12b-1 distribution and service fee designed to compensate securities dealers for the sale of fund shares or for providing continuing financial advice or other services to investors. Class R3 shares are only available for purchase by certain retirement plans that have an agreement with us to utilize these shares in certain investment products or programs.

 

Class I shares, formerly named Class R shares, may be purchased at a price equal to the fund’s net asset value without any up-front sales charge, on-going fees or CDSCs. These shares are available primarily to clients of fee-based advisors, wrap programs and investors purchasing $1 million or more of fund shares.

 

Company History and Acquisitions

 

Our company, headquartered in Chicago, is the successor to a business formed in 1898 by Mr. John Nuveen that served as an underwriter and trader of municipal bonds. We introduced our first municipal bond mutual fund in 1976, and our first municipal bond closed-end fund in 1987. We began providing individual managed account services to investors in early 1995, and since 1997 we have offered an increasingly wide range of equity-based managed accounts and funds to our target markets.

 

We incorporated in the State of Delaware on March 23, 1992, as a wholly owned subsidiary of The St. Paul Companies, Inc., now The Travelers Companies, Inc. (“TRV”). John Nuveen & Co. Incorporated, the predecessor of our Company (now named Nuveen Investments, LLC), had been a wholly owned subsidiary of TRV since 1974. During 1992, TRV sold a portion of its ownership interest in our company through a public offering.

 

On August 31, 1997, we completed the acquisition of all of the outstanding stock of Rittenhouse Financial Services, Inc., which specialized in managing individual equity and balanced portfolios primarily for high-net-worth individuals served by financial advisors. Rittenhouse provided us with a high quality, scalable distribution and service platform focused on the growing retail managed account market.

 

On September 17, 1999, we completed the sale of our investment banking business to US Bancorp Piper Jaffray. In conjunction with the sale, we ceased underwriting and distributing municipal bonds and serving as remarketing agent for variable rate bonds.

On July 16, 2001, we completed the acquisition of Symphony Asset Management, LLC, an institutional investment manager based in San Francisco. As a result of the acquisition, our product offerings expanded to include alternative investments designed to reduce risk through market-neutral and other strategies in several equity and fixed income asset classes. Symphony also manages several long-only portfolios for us.

 

On August 1, 2002, we completed the acquisition of NWQ Investment Management, an asset management firm that specializes in value-oriented equity investments. NWQ has significant relationships among institutions and financial advisors serving high-net-worth investors.

 

On April 7, 2005, TRV sold approximately 40 million shares of our common stock in a secondary underwritten public offering. Upon the closing of the secondary offering, we were no longer a majority-owned subsidiary of TRV, and as of the end of September 2005, all of TRV’s remaining ownership interest in Nuveen had been sold.

 

On October 3, 2005, we completed the acquisition of Santa Barbara Asset Management. Santa Barbara specializes in mid- to large-cap and small- to mid-cap growth equities, primarily serving institutions and high-net-worth investors.

 

In the first quarter of 2006, a separate investment management platform was established, dedicated to international and global investing. This unit, named Tradewinds Global Investors, LLC, is one of the distinct, independent and separately branded investment managers within Nuveen Investments. The Tradewinds investment team previously managed international and global value portfolios as part of NWQ.

 

On April 30, 2007, we acquired HydePark Investment Strategies, which specializes in enhanced equity strategies.

 

On November 13, 2007, a group of private equity investors led by Madison Dearborn Partners acquired all of the outstanding shares of the Company for approximately $5.8 billion in cash.

 

At the end of 2008, we combined Rittenhouse Financial Services with Santa Barbara Asset Management. The large cap “blue chip” growth equity strategy of Rittenhouse is now offered through Santa Barbara which also specialized in growth equities as described above.

 

On December 26, 2008, we acquired Winslow Capital Management, Inc., which specializes in large-cap growth equities.

 

Competition

 

The investment management industry is relatively mature and saturated with competitors that provide products and services similar to ours. Furthermore, the marketplace for investment products is rapidly changing; investors are becoming more sophisticated; the demand for and access to investment advice and information are becoming more widespread; and more investors are demanding investment vehicles that are customized to their personal situations. Competition in the investment management industry continues to increase as a result of greater regulatory flexibility afforded to banks and other financial institutions to sponsor and distribute mutual funds. The registered representatives that distribute our investment products also distribute numerous competing products, often including products sponsored by the retail distribution firms where they are employed. There are relatively few barriers to entry for new investment management firms. Our managed account business is also subject to substantial competition from other investment management firms seeking to be approved as managers in the various “wrap-fee” programs. The markets for mutual funds are highly competitive, with many participating sponsors. The sponsor firms have a limited number of approved managers at the highest and most attractive levels of their programs and based upon the information available, we believe that we held significantly less than a 5% share of the market with respect to net sales of mutual funds in each of the last three years. We closely monitor the investment performance of such firms on an on-going basis as they evaluate which firms are eligible for continued participation in these programs. We are also subject to competition in obtaining the commitment of underwriters to underwrite our closed-end fund offerings. To the extent the increased competition for underwriting and distribution causes higher distribution costs, our net revenue and earnings will be reduced.

We encounter significant competition in all areas of our business. We compete with other investment managers, mutual fund advisors, brokerage and investment banking firms, insurance companies, hedge funds, banks and other financial institutions, many of which are larger, have proprietary access to distribution, have a broader range of product choices and investment capabilities, and have greater capital resources. Our ability to successfully compete in this market is based on the following factors: our ability to achieve consistently strong investment performance; to maintain and build upon our distribution relationships and continue to build new ones; to develop appropriately priced investment products well suited for our distribution channels and attractive to underlying clients and investors; to offer multiple investment choices; to provide effective shareowner servicing; to retain and strengthen the confidence of our clients; to attract and retain talented portfolio management and sales personnel; and to develop and leverage our brand in existing and new distribution channels. Additionally, our ability to successfully compete with other investment management companies is highly dependent on our reputation and our relationship with clients.

 

Regulatory

 

Each of our investment advisor subsidiaries (and each of the previously identified unaffiliated sub-advisors to certain of our funds) is registered with the SEC under the Investment Advisers Act. Each closed-end fund and open-end fund is registered with the SEC under the Investment Company Act. Each national open-end fund is qualified for sale (or not required to be so qualified) in all states in the United States and the District of Columbia. Each single-state open-end fund is qualified for sale (or not required to be so qualified) in the state for which it is named and other designated states. Virtually all aspects of our investment management business, including the business of the sub-advisors, are subject to various federal and state laws and regulations. These laws and regulations are primarily intended to benefit the investment product holder and generally grant supervisory agencies and bodies broad administrative powers, including the power to limit or restrict us (and any sub-advisor) from carrying on its investment management business in the event that we fail to comply with such laws and regulations. In such an event, the possible sanctions, which may be imposed, include the suspension of individual employees, limitations on our engaging in the investment management business for specified periods of time, the revocation of the advisors’ registrations as investment advisors or other censures and fines.

 

Under the Investment Company Act, if one of our investment advisor subsidiaries, our broker dealer subsidiary Nuveen Investments, LLC or any of their respective affiliates were either convicted of a felony or misdemeanor involving the purchase or sale of securities or were permanently or temporarily enjoined by a court from acting in a variety of capacities relating to the securities business, the entity subject to such sanction and its affiliates would become ineligible to act as an investment advisor or underwriter unless the SEC granted an exemption from such ineligibility. Such an exemption would have to be applied for and it would be wholly within the discretion of the SEC to grant or deny any such application subject to any conditions the SEC deemed appropriate in the public interest.

 

Our officers, directors, and employees may, from time to time, own securities that are also held by one or more of our funds. Our internal policies with respect to individual investments require prior clearance of all transactions in securities of our company and other restrictions are imposed with respect to transactions in our closed-end fund securities. All of our employees are considered access persons and as such are subject to additional restrictions with respect to the pre-clearance of the purchase or sale of securities over which they have investment discretion. We also require employees to report transactions in certain securities and restrict certain transactions so as to seek to avoid the possibility of improper use of information relating to the management of client accounts.

 

Our subsidiary, Nuveen Investments, LLC, is registered as a broker-dealer under the Exchange Act and is subject to regulation by the SEC, FINRA and other federal and state agencies and self-regulatory organizations. Nuveen Investments, LLC is subject to the SEC’s Uniform Net Capital Rule, designed to enforce minimum standards regarding the general financial condition and liquidity of a broker-dealer. Under certain circumstances, this rule may limit our ability to make withdrawals of capital and receive dividends from Nuveen Investments, LLC. The regulatory net capital of Nuveen Investments, LLC has consistently exceeded such minimum net capital requirements. At December 31, 2009, Nuveen Investments, LLC had aggregate net capital, as defined, of approximately $24.6 million, which exceeded the regulatory minimum by approximately $22.6 million. The securities industry is one of the most highly regulated in the United States, and failure to comply with related laws

and regulations can result in the revocation of broker-dealer licenses, the imposition of censures or fines and the suspension or expulsion of a firm and/or its employees from the securities business.

 

Litigation and Regulatory Proceedings

 

Regulatory authorities, including FINRA and the SEC, examine our registered broker-dealer and investment advisor subsidiaries, or the registered investment companies managed by our affiliates, from time to time in the regular course of their businesses. In addition, from time to time we or one or more of our registered subsidiaries receives information requests from a regulatory authority as part of an industry-wide “sweep” examination of particular topics or industry practices. There is an ongoing FINRA Enforcement Inquiry into our broker-dealer’s marketing and distribution of ARPS. In January 2010, FINRA’s staff notified our broker-dealer that the staff had made a preliminary determination to recommend that a disciplinary action be brought against the broker-dealer. The potential charges recommended by the staff of FINRA in such action would allege that certain ARPS marketing materials provided by our broker-dealer were false and misleading from 2006 to 2008 and would also allege failure by our broker-dealer relating to its supervisory system with respect to the marketing of ARPS during that period. The staff of FINRA provided us with an opportunity to make a written submission to FINRA to aid its consideration of whether to revise and/or go forward with the staff’s preliminary determination to recommend disciplinary action. We submitted a response to the potential allegations and asserted defenses in February 2010. We are continuing to discuss these matters with the staff of FINRA. Certain states have also requested information about our marketing materials for ARPS. We believe that such marketing materials were accurate and not misleading when provided to broker dealers for their use.

 

Each national open-end Nuveen fund is qualified for sale (or not required to be so qualified) in all states in the United States and the District of Columbia. Each single-state open-end Nuveen fund is qualified for sale (or not required to be so qualified) in the state for which it is named and other designated states.

 

Advertising and Promotion

 

We provide individual registered representatives with daily prices, weekly, monthly and quarterly sales bulletins, monthly product, statistical and performance updates, product education programs, product training seminars, and promotional programs coordinated with our advertising campaigns. In addition, we regularly coordinate our marketing and promotional efforts with individual registered representatives, as described in “Investment Product and Service Distribution.” We also augment our marketing efforts through magazine, newspaper and other forms of advertising, targeted direct mail and telemarketing sales programs, web-based marketing and sponsorship of certain sports and civic activities.

 

Employees

 

At December 31, 2009, we had 902 full-time employees. Employees are compensated with a combination of salary, cash bonus and fringe benefits. In addition, we have sought to retain our key and senior employees through competitive incentive arrangements, which include equity-based opportunities. We consider our relations with our employees to be good.

 

Risks Related to Our Business

 

Significant and sustained declines in securities markets, such as the declines occurring beginning in 2008 into early 2009, have and may continue to adversely affect our assets under management and financial results. Poor investment performance may also adversely affect our assets under management and our future offerings.

 

A large portion of our revenues is derived from investment advisory contracts with clients. Under these contracts, the investment advisory fees we receive are typically based on the market value of assets under management. Significant and sustained declines in securities markets and/or the value of the securities managed may reduce our assets under management and sales of our products, and, as a result, adversely affect our revenues and financial results. Beginning in 2008, accelerating in the fourth quarter of 2008, and continuing into 2009, securities markets were characterized by substantially increased volatility and experienced significant overall declines. Primarily as a result of market depreciation, our assets under management decreased from $164.3 billion at December 31, 2007 to $115.3 billion at March 31, 2009.

 

In addition, our investment performance is one of the primary factors associated with the success of our business. Poor investment performance by our managers for a sustained period could adversely affect our level of assets under management and associated revenues. Moreover, some of our investment advisory contracts provide for performance fees based on investment performance. Sustained periods of poor investment performance and increased redemptions by existing clients may reduce or eliminate performance fees that we are able to earn under our investment advisory contracts and diminish our ability to sell our other investment management products and attract new investors.

 

Our assets under management and investment products are impacted by many factors beyond our control, including the following:

 

General fluctuations in equity markets and dealings in equity markets.  As of December 31, 2009, approximately 44% of our assets under management were equity assets. As noted above, recently there have been substantial fluctuations in price levels in securities markets, including equity markets. These fluctuations can occur on a daily basis and over longer periods as a result of a variety of factors, including national and international economic and political events, broad trends in business and finance, and interest rate movements. Reduced equity market prices generally may result in lower levels of assets under management and the loss of, or reduction in, incentive and performance fees, each of which will result in reduced revenues. Periods of reduced market prices may adversely affect our profitability if we do not reduce our fixed costs.

 

Changes in interest rates and defaults.  As of December 31, 2009, approximately 56% of our assets under management were fixed income securities. During 2008, particularly in the fourth quarter of 2008, there were several disruptions in the credit markets and periods of illiquidity. This resulted in a decline in the value of the fixed income securities that we manage reducing our assets under management. Although fixed income securities markets stabilized in 2009, these conditions could recur. Increases in interest rates from their present levels may also adversely affect the values of fixed income securities. Further, the value of the assets may decline as a result of an issuer’s actual or perceived creditworthiness or an issuer’s ability to meet its obligations. In addition, increases in interest rates may have a magnified adverse effect on our leveraged closed-end funds. Moreover, fluctuations in interest rates may have a significant impact on securities markets, which may adversely affect our overall assets under management.

 

Redemptions and other withdrawals.  Investors (in response to adverse market conditions, inconsistent investment performance, changing credit qualities of assets or financial guarantees thereof, the pursuit of other investment opportunities or otherwise) may reduce their investments in our specific investment products or in the market segments in which our investment products are concentrated.

Political and general economic risks.  The investment products managed by us may invest significant funds in international markets that are subject to risk of loss from political or diplomatic developments, government policies, civil unrest, currency fluctuations and changes in legislation related to foreign ownership. International markets, particularly emerging markets, are often smaller, may not have the liquidity of established markets, may lack established regulations and may experience significantly more volatility than established markets.

 

Reduction in attractive investments.  Fluctuations in securities markets may adversely affect the ability of our managers to find appropriate investments. If any of our investment managers is not able to find sufficient appropriate investments for new client assets in a timely manner, the investment manager’s investment performance could be adversely affected.

 

The failure of the auctions for Auction Rate Preferred Stock that began in February 2008 could have an adverse effect on our business.

 

We sponsor 123 closed-end funds of which 101 were leveraged through the issuance of an auction-rate preferred stock (“ARPS”). Our leveraged closed-end funds had $15.4 billion of ARPS outstanding as of December 31, 2007. This leverage seeks to enhance income for common shareholders of the fund in accordance with the funds’ investment objectives and policies. Beginning on February 12, 2008, the $342 billion auction-rate securities market, including approximately $65 billion of ARPS issued by closed-end funds, began to experience widespread auction failures. Since February 14, 2008, virtually all auctions for ARPS issued by closed-end funds, and all ARPS of our funds, have failed. As a result of the auction failures, investors in ARPS of our funds have been unable to sell their ARPS in these auctions. Although our funds have refinanced $7.3 billion of their outstanding ARPS as of February 28, 2010, $8.0 billion remained outstanding as of such date. All $8.0 billion of these ARPS were issued by our municipal funds and pay tax-exempt dividends which limits the refinancing options available for these ARPS. Although we continue to make progress refinancing ARPS, our inability to arrange for the refinancing of the remaining outstanding ARPS of our funds could damage our relationships with the third party distributors through which we distribute the closed-end funds we sponsor and other investment products. It could also damage our reputation in the marketplace making it more difficult for us to distribute new closed-end funds and other investment products sponsored by us which could result in an adverse affect on our business. As discussed above in Item 1. “Business – Litigation and Regulatory Proceedings,” the staff of the Financial Industry Regulatory Authority (“FINRA”) has notified our broker dealer subsidiary, Nuveen Investments, LLC, that it has made a preliminary determination to recommend that a disciplinary action be brought against the broker dealer in connection with FINRA’s inquiry into the marketing and distribution of our funds’ ARPS. This FINRA Enforcement Inquiry or action by other regulatory authorities could result in fines or other action which could adversely affect us.

 

We face substantial competition in the investment management business.

 

The asset management industry in which we are engaged is extremely competitive, and we face substantial competition in all aspects of our business. We compete with numerous international and domestic asset management firms and broker-dealers, mutual fund companies, hedge funds, commercial banks, insurance companies and other investment companies and financial institutions. Many of these organizations offer products and services that are similar to, or compete with, those offered by us, and some have substantially more personnel and greater financial resources and/or assets under management than we do. Some of our competitors have proprietary products and distribution channels that may make it more difficult for us to compete with them.

 

A sizable number of new asset management firms and mutual funds have been established in the last ten years, increasing our competition. In addition, the asset management industry has experienced consolidation as numerous asset management firms have either been acquired by other financial services firms or have ceased operations. In many cases, this has resulted in firms having greater financial resources than us. In addition, a number of heavily capitalized companies, including commercial banks and foreign entities, have made investments in and acquired asset management firms. Access to brokerage firms’ retail distribution systems, “wrap fee” retail managed account programs, and mutual fund and other distribution channels has also

become increasingly competitive. Despite the recent problems of certain of these competitors, all of these factors could make it more difficult for us to compete and no assurance can be given that we will be successful in competing and growing or maintaining our assets under management and business. If clients and potential clients decide to use the services of competitors, it could reduce our revenues and growth rate, and if our revenues decrease without a commensurate reduction in our expenses, our net income will be reduced.

 

In addition, in part as a result of the substantial competition in the asset management industry, there has been a trend toward lower fees in some segments of the asset management business. In order for us to maintain our fee structure in a competitive environment, we must be able to provide clients with investment returns and service that will encourage them to be willing to pay such fees. There can be no assurance that we will be able to maintain our current fee structure or provide our clients with attractive investment returns, or that we will be able to develop new products that are desirable to the market or our registered representatives. Fee reductions on existing or future business could have an adverse impact on our revenue and profitability.

 

Our business relies on third-party distributors who may choose not to sell or recommend our products or increase the costs of distribution.

 

Our ability to distribute our products is highly dependent on access to the client base of financial advisors that also offer competing investment products. Registered representatives who recommend our products may reduce or eliminate their involvement in marketing our products at any time, or may elect to emphasize the investment products of competing sponsors, or the proprietary products of their own firms. In addition, registered representatives may receive compensation incentives to sell their firm’s investment products or may choose to recommend to their customers investment products sponsored by firms other than us. Further, expenses associated with maintaining access to third-party distribution programs may increase in the future as a result of efforts by distribution firms to defray a portion of their costs of internal customer account related services in connection with their customers’ investments in our products. Finally, a registered representative’s ability to distribute our mutual funds is subject to the continuation of a selling agreement between the firm with which the representative is affiliated and us. We cannot be sure that we will continue to gain access to these financial advisors. The inability to have this access could have a material adverse effect on our business.

 

In addition, certain financial institutions through which we distribute our products have experienced difficulties resulting from the economic downturn beginning in 2008. Some of these distributors have been acquired and others have obtained funding from the United States government. The resulting disruptions within these third party distributors could adversely impact our business.

 

The firms through which we distribute closed-end funds charge structuring fees in connection with bringing closed-end funds to market. These fees have significantly increased our costs for new closed-end funds, thereby reducing our margins on these products.

 

If our asset mix changes, our revenues and operating margins could be reduced.

 

Our assets under management can generate different revenues per dollar of assets under management based on factors such as the type of asset managed by us (equity assets generally produce greater revenues than fixed income assets), the type of client (institutional clients generally pay higher fees than other clients), the type of asset management product or service provided and the fee schedule of the asset manager providing the service. A shift in the mix of our assets under management from higher revenue-generating assets to lower revenue-generating assets may result in a decrease in our revenues even if our aggregate level of assets under management remains unchanged or increases.

 

Our business is dependent upon our retaining our key personnel, the loss of whom would harm our ability to operate efficiently.

 

Our executive officers, investment professionals and senior relationship personnel are important to the success of our business. The market for qualified personnel to fill these roles is extremely competitive. We anticipate that

we will need to recruit and retain qualified investment and other professionals. However, we may not be successful in our efforts to recruit and retain the required personnel. Due to the competitive market for these professionals and the success of some of our personnel, our costs associated with providing compensation incentives necessary to attract and retain key personnel are significant and will likely increase over time. We anticipate needing to offer additional incentive programs to retain our key personnel. Moreover, since certain of our key personnel contribute significantly to our revenues and net income, the loss of even a small number of key personnel could have a disproportionate impact on our business. From time to time we may work with key employees to revise equity-based incentives and other employment-related terms to reflect current circumstances. In addition, since the investment track record of many of our products and services may be attributed to a small number of employees, the departure of one or more of these employees could cause the business to lose client accounts or managed assets, which could have a material adverse effect on our results of operations and financial condition.

 

Our business is subject to extensive regulation, and compliance failures and changes in laws and regulations could adversely affect us.

 

Our business is also subject to extensive regulation, including by the SEC and FINRA. Our failure to comply with applicable laws, regulations or rules of self-regulatory organizations could cause regulatory authorities to institute proceedings against us or our subsidiaries and could result in the imposition of sanctions ranging from censure and fines to termination of an investment advisor or broker-dealer’s registration and otherwise prohibiting an investment advisor from acting as an investment advisor. Changes in laws, regulations, rules of self-regulatory organizations or in governmental policies, and unforeseen developments in litigation targeting the securities industry generally or us, could have a material adverse effect on us. The impact of future accounting pronouncements could also have a material adverse effect upon us.

 

In addition, changes in regulations or industry-wide or specifically targeted regulatory or court decisions may require us to reduce our fee levels, or restructure the fees we charge. For example, distribution fees paid to mutual fund distributors in accordance with SEC Rule 12b-1 are a significant element of revenues for a number of the mutual funds that we manage. There have been suggestions from regulatory agencies and other industry participants that Rule 12b-1 distribution fees in the mutual fund industry should be reconsidered and, potentially, reduced or eliminated. Any industry-wide reduction or restructuring of Rule 12b-1 distribution fees could have an adverse effect on our revenues and net income.

 

Our investment advisor subsidiaries are registered with the SEC as investment advisors under the Investment Advisers Act of 1940, as amended (the “Investment Advisers Act”). The Investment Advisers Act imposes numerous obligations on registered investment advisors, including fiduciary, recordkeeping, operational and disclosure obligations. In light of recent allegations of fraud against certain other investment advisors, we anticipate substantially increased regulation of investment advisors.

 

Each of our closed-end funds and open-end funds is registered with the SEC under the Investment Company Act of 1940, as amended (the “Investment Company Act”), and the shares of each closed-end fund and open-end fund are registered with the SEC under the Securities Act. Each national open-end fund is qualified for sale (or not required to be so qualified) in all states in the United States and the District of Columbia. Each single-state open-end fund is qualified for sale (or not required to be so qualified) in the state for which it is named and other designated states.

 

Our subsidiary, Nuveen Investments, LLC, is registered as a broker-dealer under the Exchange Act and is subject to regulation by the SEC, FINRA and federal and state agencies. Our broker-dealer subsidiary is subject to the SEC’s net capital rules and certain state securities laws designed to enforce minimum standards regarding the general financial condition and liquidity of a broker-dealer. Under certain circumstances, these rules would limit our ability to make withdrawals of capital and receive dividends from our broker-dealer subsidiary. The securities industry is one of the most highly regulated in the United States, and failure to comply with the related laws and regulations can result in revocation of broker-dealer licenses, the imposition of censures or fines and the suspension or expulsion from the securities business of a firm, its officers or employees.

Our investment management subsidiaries are subject to the Employee Retirement Income Security Act of 1974 (“ERISA”) and to regulations promulgated thereunder, insofar as they act as a “fiduciary” under ERISA with respect to benefit plan clients. ERISA and applicable provisions of the Internal Revenue Code impose duties on persons who are fiduciaries under ERISA, prohibit specified transactions involving ERISA plan clients and provide monetary penalties for violations of these prohibitions. The failure of any of our subsidiaries to comply with these requirements could result in significant penalties that could reduce our net income.

 

Changes in the status of tax deferred retirement plan investments and tax-free municipal bonds, the capital gains and corporate dividend tax rates, and other individual and corporate tax rates and regulations could affect investor behavior and cause investors to view certain investment offerings less favorably, thereby decreasing our assets under management.

 

Our business involves risk of being engaged in litigation that could increase our expenses and reduce our net income.

 

There has been an increased incidence of litigation and regulatory investigations in the asset management industry in recent years, including customer claims as well as class action suits seeking substantial damages. In addition, we, along with other industry participants, are subject to risks related to litigation, settlements and regulatory investigations arising from market events such as the ARPS auction failures described above. We could become involved in such litigation or the subject of such a regulatory investigation, such as the FINRA ARPS enforcement inquiry described above, which could adversely affect us.

 

Our revenues will decrease if our investment advisory contracts are terminated.

 

A substantial portion of our revenues are derived from investment advisory agreements. Our investment advisory agreements with registered fund clients must be approved annually by the trustees of the respective funds, including a majority of the trustees who are not “interested persons” of our relevant advisory subsidiary or the fund, as defined in the Investment Company Act. Amendments to these agreements typically must be approved by the funds’ boards of trustees and, if material, by its shareholders. Each agreement may be terminated without penalty by either party upon 60 days’ written notice. Our investment advisory agreements with advisory clients, other than registered fund clients, also generally provide that they can be terminated without penalty upon 60 days’ written notice.

 

Any adverse public disclosure, our failure to follow client guidelines or any other matters could harm our reputation and have an adverse effect on us.

 

Maintaining the trust and confidence of clients and other market participants, and the resulting good reputation, is important to our business. Our reputation is vulnerable to many threats that can be difficult or impossible to control, and difficult and costly to remediate. Regulatory inquiries, employee misconduct and rumors, among other things, can substantially damage our reputation, even if they are baseless or satisfactorily addressed. Any damage to our reputation could impede our ability to attract and retain clients and key personnel, and lead to a reduction in the amount of our assets under management, any of which could have a material adverse effect on our revenues and net income.

 

When clients retain us to manage assets or provide products or services on their behalf, they specify guidelines or contractual requirements that we are required to observe in the provision of our services. In addition, we are required to abide by certain conflict of interest policies and regulations. A failure to comply with these guidelines, contractual requirements, policies and regulations could result in damage to our reputation or to the client seeking to recover losses from us, reducing assets under management, or terminating its contract with us, any of which could have an adverse impact on our business.

We may continue to acquire other companies, and the expected benefits of such acquisitions may not materialize.

 

The acquisition of complementary businesses has been and may continue to be an active part of our overall business strategy. There can be no assurance that we will find suitable candidates for strategic transactions at acceptable prices, have sufficient capital resources to accomplish our strategy, or be successful in entering into agreements for desired transactions. Acquisitions also pose the risk that any business we acquire may lose customers or employees or could underperform relative to expectations. We could also experience financial or other setbacks if transactions encounter unanticipated problems, including problems related to execution or integration. Finally, services, key personnel or businesses of acquired companies may not be effectively integrated into our business or be successful.

 

We may explore strategic transactions such as a potential merger or a sale of some or all of our assets. We may not be able to complete any such strategic transactions or the expected benefits of such strategic transactions may not materialize, which may prevent us from implementing strategies to grow our business.

 

We may explore potential strategic transactions such as a merger or a sale of some or all of our assets. We cannot provide assurances that we will be able to complete such a transaction on terms acceptable to us, or at all. Successful completion of any strategic transaction we identify depends on a number of factors that are not entirely within our control, including our ability to negotiate acceptable terms, conclude satisfactory agreements and obtain all necessary regulatory approvals and investment advisory agreement consents. In addition, we may need to finance any strategic transaction that we identify, and may not be able to obtain the necessary financing on satisfactory terms and within the timeframe that would permit a transaction to proceed. We could experience adverse accounting and financial consequences, such as the need to make large provisions against the acquired assets or to write down the acquired assets. We might also experience a dilutive effect on our earnings. In addition, depending on how any such transaction is structured, there may be an adverse impact on our capital structure. We may incur significant costs arising from our efforts to engage in strategic transactions, and such costs may exceed the returns that we realize from a given transaction. Moreover, these expenditures may not result in the successful completion of a transaction.

 

Our business is subject to numerous operational risks, any of which could disrupt our ability to function effectively.

 

We must be able to consistently and reliably obtain securities pricing information, process client and investor transactions and provide reports and other customer service to our clients and investors. Any failure to keep current and accurate books and records can render us liable to disciplinary action by governmental and self-regulatory authorities, as well as to claims by our clients. If any of our financial, portfolio accounting or other data processing systems do not operate properly or are disabled or if there are other shortcomings or failures in our internal processes, people or systems, we could suffer an impairment to our liquidity, a financial loss, a disruption of our businesses, liability to clients, regulatory problems or damage to our reputation. These systems may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control, including a disruption of electrical or communications services or our inability to occupy one or more of our buildings. In addition, our operations are dependent upon information from, and communications with, third parties, and operational problems at third parties may adversely affect our ability to carry on our business.

 

Our operations rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, our computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code, and other events that have a security impact. If one or more of such events occur, it potentially could jeopardize our or our clients’ or counterparties’ confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our, our clients’, our counterparties’ or third parties’ operations. We may be required to spend significant additional resources to modify our protective measures

or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against fully or not fully covered through any insurance that we maintain.

 

A disaster or a disruption in the infrastructure that supports our asset managers, or an event disrupting the ability of our employees to perform their job functions, including terrorist attacks or a disruption involving electrical communications, transportation or other services used by us or third parties with whom we conduct business, directly affecting any of our operations could have a material adverse impact on our ability to continue to operate our business without interruption. Although we have disaster recovery programs in place, there can be no assurance that these will be sufficient to mitigate the harm that may result from such a disaster or disruption. In addition, insurance and other safeguards might only partially reimburse us for our losses.

 

We are highly leveraged and our substantial indebtedness could adversely affect our financial condition.

 

We are highly leveraged and have a substantial amount of indebtedness, which requires significant interest and principal payments. As of December 31, 2009, we had approximately $4.1 billion in aggregate principal amount of indebtedness, which included borrowings of the full $250 million available under the revolving credit facility that is part of our senior secured credit facilities.

 

Our and our subsidiaries’ substantial amount of indebtedness could have important consequences in operating our business, including:

 

 

Our debt agreements contain restrictions that could limit our flexibility in operating our business.

 

The operating and financial covenants and restrictions in our senior secured credit facilities and the documentation governing our other debt may adversely affect our ability to finance our future operations or capital needs or engage in other business activities that may be in our interest. The agreements governing our indebtedness restrict, subject to certain exceptions, our and our subsidiaries’ ability to, among other things:

 

 

 

Our and our subsidiaries’ ability to comply with these covenants and restrictions may be affected by events beyond our control. If we fail to make any required payment under our senior secured credit facilities or to comply with any of the financial and operating covenants in our senior secured credit facilities, we will be in default. In the event of any default under our senior secured credit facilities, the applicable lenders could elect to terminate borrowing commitments and declare all borrowings outstanding, together with accrued and unpaid interest and other fees, to be due and payable, to require us to apply all available cash to repay these borrowings or to prevent us from making or permitting subsidiaries to make distributions or dividends, the proceeds of which are used by us to make other debt service payments. If any of our creditors accelerate the maturity of their indebtedness, we may not have sufficient assets to satisfy our obligations under our senior credit facilities or our other indebtedness.

 

Our ability to generate the significant amount of cash needed to service our debt and financial obligations depends on many factors beyond our control, including current economic conditions and conditions in the securities markets.

 

We cannot assure you that our business will generate sufficient cash flow from operations to enable us to pay our indebtedness or to fund our other liquidity needs. Our inability to pay our debts would require us to pursue one or more alternative strategies, such as selling assets, refinancing or restructuring our indebtedness or selling equity capital. However, we cannot assure you that any alternative strategies will be feasible at the time or provide adequate funds to allow us to pay our debts as they come due and fund our other liquidity needs. Certain of our indebtedness restricts our ability to sell assets and use the proceeds from such sales. Additionally, we may not be able to refinance any of our indebtedness on commercially reasonable terms, or at all. If we cannot service our indebtedness, it could impede the implementation of our business strategy or prevent us from entering into transactions that would otherwise benefit our business.

 

Our ability to make scheduled payments or to refinance our obligations with respect to our debt, which has scheduled maturities beginning in November 2013, will depend on our financial and operating performance, which, in turn, is subject to prevailing economic, financial, competitive, legislative, legal and regulatory factors and to the following financial and business factors, some of which may be beyond our control:

 

 

 

None.

 

 

We are headquartered in Chicago, IL, and have other primary offices in Los Angeles, CA, San Francisco, CA, Santa Barbara, CA, Radnor, PA and Minneapolis, MN. We also have four small regional offices in other locations, primarily to support our sales representatives. We lease approximately 387,000 square feet of office space across the country. Management believes that our facilities are adequate to serve our currently anticipated business needs.

 

Intellectual Property

 

We have used, registered, and/or applied to register certain service marks to distinguish our investment products and services from our competitors in the U.S. and in foreign countries and jurisdictions. We enforce our service marks and other intellectual property rights in the U.S. and abroad.

 

 

From time to time, we are involved in legal matters relating to claims arising in the ordinary course of business such as disputes with employees or customers, and in regulatory inquiries that may involve the industry generally or be specific to us. There are currently no such matters or inquiries pending that we believe would have a material adverse effect on our business or financial condition. See also Item 1. “Business – Litigation and Regulatory Proceedings.”

 

 

 

There is no market for our equity securities, all of which are held by Windy City Investments, Inc. (“Parent”), which in turn is owned by Windy City Investments Holdings, L.L.C (“Holdings”). As of March 31, 2010, there were 276,383,059 Class A Units outstanding, 3,420,000 Class A-Prime Units outstanding, and 797,781 Class B Units outstanding. See Item 12. “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” Our senior secured credit facilities and our senior term notes restrict the making of dividends by the Company and our Parent. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

 

 

The Selected Financial Data table is set forth in Part II, Item 8 of this Annual Report on Form 10-K, following the footnotes to the financial statements.

 

Description of the Business

 

The principal businesses of Nuveen Investments are investment management and related research as well as the development, marketing and distribution of investment products and services for the high-net-worth and institutional market segments. We distribute our investment products and services, which include managed accounts, closed-end exchange-traded funds (“closed-end funds”), and open-end mutual funds (“open-end funds” or “mutual funds”) primarily to high-net-worth and institutional investors through intermediary firms, including broker-dealers, commercial banks, private banks, affiliates of insurance providers, financial planners, accountants, consultants and investment advisors.

 

We derive a substantial portion of our revenue from investment advisory fees, which are recognized as services are performed. These fees are directly related to the market value of the assets we manage. Advisory fee revenues generally will increase with a rise in the level of assets under management. Assets under management will rise through sales of our investment products or through increases in the value of portfolio investments. Assets under management may also increase as a result of reinvestment of distributions from funds and accounts. Fee income generally will decline when assets under management decline, as would occur when the values of fund portfolio investments decrease or when managed account withdrawals, mutual fund redemptions or closed-end fund deleveragings exceed gross sales and reinvestments.

 

In addition to investment advisory fees, we have two other main sources of operating revenue: performance fees and distribution and underwriting revenue. Performance fees are earned when investment performance on certain institutional accounts and private funds exceeds a contractual threshold. These fees are recognized only at the performance measurement date contained in the individual account management agreement. Distribution revenue is earned when certain funds are sold to the public through financial advisors. Generally, distribution revenue will rise and fall with the level of our sales of mutual fund products. Underwriting fees are earned on the initial public offerings of our closed-end funds. The level of underwriting fees earned in any given year will fluctuate depending on the number of new funds offered, the size of the funds offered and the extent to which we participate as a member of the syndicate group underwriting the fund. Also included in distribution and underwriting revenue is revenue relating to our MuniPreferred ^® and FundPreferred ^®. These are types of auction rate preferred stock (“ARPS”) issued by our closed-end funds, shares of which have historically been bought and sold through a secondary market auction process. A participation fee has been paid by the fund to the auction participants based on shares traded. Access to the auction must be made through a participating broker. We have offered non-participating brokers access to the auctions, for which we earned a portion of the participation fee. Beginning in mid-February 2008, the auctions for our ARPS, for the ARPS issued by other closed-end funds and for other auction rate securities began to fail on a widespread basis and have continued to fail. As we have described in several public announcements, we and the Nuveen closed-end funds have been working on various forms of debt and equity financing to redeem all of the approximately $15.4 billion of ARPS issued by our closed-end funds. As of February 28, 2010, the Nuveen funds have completed the redemption of approximately $7.3 billion of ARPS issued by them and we and the Nuveen funds continue to work on alternatives to address the remaining outstanding ARPS of these funds. However, turmoil in the credit markets beginning in September 2008 and continuing into 2009 severely hampered our efforts to redeem ARPS. If the Nuveen funds are unable to obtain debt or equity financing sufficient to redeem the remaining outstanding ARPS of the Nuveen funds, we do not expect this failure to have a direct adverse impact on the financial position, operating results or liquidity of Nuveen Investments since ARPS are obligations of the Nuveen funds and neither Nuveen Investments nor the Nuveen funds are contractually obligated to redeem, or provide liquidity to redeem, ARPS. However, Nuveen Investments and the Nuveen funds believe that it is in the best interests of the holders of ARPS and the common shareholders of the Nuveen funds to refinance the ARPS issued by the Nuveen funds as soon as practicable. The redemption of ARPS and certain related financings may result in lower advisory fees. We also expect distribution and underwriting revenue relating to ARPS to continue to decrease.

 

Sales of our products, and our profitability, are directly affected by many variables, including investor preferences for equity, fixed-income or other investments, the availability and attractiveness of competing products, market performance, continued access to distribution channels, changes in interest rates, inflation, and income tax rates and laws.

Acquisition of the Company

 

On June 19, 2007, Nuveen Investments, Inc. (the “Predecessor”) entered into an agreement (the “merger agreement”) under which a group of private equity investors led by Madison Dearborn Partners, LLC (“MDP”) agreed to acquire all of the outstanding shares of the Predecessor for $65.00 per share in cash. The Board of Directors and shareholders of the Predecessor approved the merger agreement. The transaction closed on November 13, 2007 (the “effective date”).

 

On the effective date, Windy City Investments Holdings, L.L.C. (“Holdings”) acquired all of the outstanding capital stock of the Predecessor for approximately $5.8 billion in cash. Holdings is owned by MDP, affiliates of BAML Capital Partners (formerly known as Merrill Lynch Global Private Equity) and certain other co-investors and certain of our employees, including senior management. Windy City Investments, Inc. (“Parent”) and Windy City Acquisition Corp. (the “Merger Sub”) are corporations formed by Holdings in connection with the acquisition and, concurrently with the closing of the acquisition on November 13, 2007, the Merger Sub merged with and into Nuveen Investments, which was the surviving corporation (the “Successor”) and assumed the obligations of the Merger Sub by operation of law. The merger agreement and the related financing transactions resulted in the following events which are collectively referred to as the “Transactions” or the “MDP Transactions”:

 

 

Immediately following the merger, Nuveen Investments became a wholly owned direct subsidiary of Parent and a wholly owned indirect subsidiary of Holdings.

 

The purchase price of the Company has been allocated to the assets and liabilities acquired based on their estimated fair market values at the date of acquisition as described in Note 3, “Purchase Accounting,” to our Annual Audited Financial Statements included in this Form 10-K.

 

Unless the context requires otherwise, “Nuveen Investments,” “we,” “us,” “our,” or the “Company” refers to the Successor and its subsidiaries, and for the periods prior to November 13, 2007, the Predecessor and its subsidiaries.

 

The consolidated statements of income, changes in shareholders’ equity and cash flows for the period from January 1, 2007 to November 13, 2007 represent operations of the Predecessor. The consolidated statements of income, changes in shareholders’ equity and cash flows for the period from November 14, 2007 to December 31, 2007, and the years ended December 31, 2008 and 2009 represent the operations of the Successor. The consolidated balance sheets as of December 31, 2009 and 2008 represent the financial condition of the Successor.

 

The acquisition of Nuveen Investments was accounted for as a business combination using the purchase method of accounting, whereby the purchase price (including liabilities assumed) was allocated to the assets acquired based on their estimated fair market values at the date of acquisition and the excess of the total purchase price over the fair value of the Company’s net assets was allocated to goodwill. The purchase price paid by Holdings to acquire the Company and related purchase accounting adjustments were “pushed down” and recorded on Nuveen Investments and its subsidiaries’ financial statements and resulted in a new basis of accounting for the “successor” period beginning on the day the acquisition was completed. As a result, the purchase price and related costs were allocated to the estimated fair values of the assets acquired and liabilities assumed at the time

of the acquisition based on management’s best estimates, which were based in part on the work of external valuation specialists engaged to perform valuations of certain of the tangible and intangible assets.

 

As a result of the consummation of the Transactions and the application of purchase accounting as of November 13, 2007, the consolidated financial statements for the period after November 13, 2007 are presented on a different basis than that for the periods before November 13, 2007, and therefore are not comparable to prior periods.

 

Summary of Operating Results

 

The table below reconciles the full year ended December 31, 2007 consolidated statement of operations with the discussion of the results of operations that follow:

 

Financial Results Summary

 

 

 

 

The table below presents the highlights of our operations for the years ended December 31, 2009, 2008 and 2007:

 

 

 

 

Results of Operations

 

The following tables and discussion and analysis contain important information that should be helpful in evaluating our results of operations and financial condition, and should be read in conjunction with our Annual Audited Financial Statements and related Notes included in this Form 10-K.

 

Gross sales of investment products (which include new managed accounts, deposits into existing managed accounts and the sale of mutual fund and closed-end fund shares) for the years ending December 31, 2009, 2008 and 2007 are shown in the table below:

 

 

Gross sales for 2009 of $27.1 billion were up $6.1 billion or 29% versus sales in the prior year driven by increases across all product lines. Closed-end fund sales increased $1.2 billion as the result of seven new initial public offerings in 2009. There were no new offerings in the prior year. Mutual fund sales increased $1.5 billion or 24% versus sales in the prior year. This increase was driven largely by a $0.6 billion or 14% increase in municipal mutual fund sales and a $0.7 billion or 54% increase in international value mutual fund sales. Retail managed account sales increased $1.3 billion or 17% for the year, driven by increases in municipal account sales, taxable fixed-income account sales, domestic equity account sales and the acquisition of Winslow Capital, which contributed $0.5 billion in sales for the year. Institutional managed account sales were up $2.1 billion, or 30% versus sales in the prior year, driven by the acquisition of Winslow Capital, which experienced a $3.2 billion increase for the year. Partially offsetting this increase were declines in domestic value equity account and alternative investment account sales.

 

Gross sales for 2008 of $21.0 billion were down 20% from the prior year. As a result of market conditions, there were no new closed-end fund offerings during the year. This compares unfavorably to the $1.7 billion raised in the prior year. Despite challenging market conditions, retail managed account sales declined only modestly as we selectively reopened our previously closed Tradewinds International Value product and NWQ Large-Cap Value

offerings. In addition, municipal retail managed account sales were strong, increasing 10% for the year. Institutional managed account sales declined $3.0 billion as investor caution due to market volatility dampened sales. Mutual fund sales were up 4% driven mainly by strong sales of our international value equity and municipal funds, partially offset by a decline in sales of our domestic value equity funds.

 

Net flows of investment products for the years ending December 31, 2009, 2008 and 2007 are shown below:

 

 

Overall, net flows for 2009 were $1.2 billion, an improvement of $11.5 billion from the prior year. The launch of the seven new closed-end funds discussed above resulted in closed-end fund net flows of $0.8 billion for the year, which is less than gross sales as a result of a reduction in leverage of certain funds. This compares favorably to the prior year when market depreciation caused several of the funds to reduce leverage in order to stay within internal operating leverage ratio bands. Mutual fund net inflows of $3.7 billion were up $3.3 billion for the year, driven by higher combined sales with a reduction in redemptions on municipal funds and domestic value funds. Retail managed accounts experienced net outflows of $2.3 billion, but improved significantly versus the prior year. This was driven by both an increase in municipal account sales and a reduction in redemptions on international value and domestic value accounts. Institutional managed accounts net outflows of $1.1 billion were down $1.7 billion from the prior year. This change was primarily driven by the loss of one large institutional account, which accounted for $2.2 billion in redemptions during the period. This loss was partially offset by net inflows in our Winslow Capital growth equity offerings.

 

In 2008, we experienced increased redemptions across all of our product lines as a broad range of markets delivered sharply negative returns for the year. The impact of these increased redemptions was most notable in our retail managed account products. Despite only a slight decline in sales year-over-year, retail managed account net outflows increased 56%. Closed-end funds experienced net outflows for the year as market depreciation caused several of the funds to reduce leverage in order to stay within internal operating leverage ratio bands. Net flows on institutional managed accounts declined $3.1 billion, $3.0 billion of which was caused by the previously discussed decline in sales. Mutual fund net flows were down $1.2 billion despite an increase in sales driven primarily by increased redemptions from our municipal and international value equity funds.

 

The following table summarizes net assets under management by product type:

 

 

At December 31, 2009, 47% of our assets were in municipal portfolios, 44% in equity portfolios and 9% in taxable fixed-income portfolios. At December 31, 2008, 48% of our assets were in municipal portfolios, 44% in equity portfolios and 8% in taxable fixed-income portfolios.

The components of the change in our assets under management were as follows:

 

 

Assets under management at December 31, 2009 were $144.8 billion, an increase of $25.6 billion or 21% versus assets under management at December 31, 2008. This increase was driven by $24.4 billion of market appreciation and $1.2 billion of net inflows. We experienced market appreciation across all product lines, with $14.6 billion of equity, $3.3 billion of taxable fixed-income and $6.5 billion of municipal market appreciation for the year. Net inflows during the year of $1.2 billion were driven by mutual funds and new closed-end fund offerings, partially offset by managed account net outflows.

 

Net outflows in 2008 of $10.3 billion coupled with $39.3 billion of market depreciation were partially offset by $4.5 billion of assets acquired in our acquisition of Winslow Capital, resulting in a 27% decline in assets under management at December 31, 2008 compared to December 31, 2007. Closed-end fund assets decreased $12.5 billion, as a result of $10.1 billion in market depreciation and $2.4 billion in net outflows. The net outflows were the result of several funds reducing leverage in order to stay within internal operating leverage ratio bands. Mutual fund assets declined $4.5 billion, driven by $4.9 billion in market depreciation, partially offset by $0.4 billion in net flows. Managed account assets declined $28.1 billion, driven by $24.3 billion in market depreciation and $8.3 billion in net outflows, partially offset by the addition of $4.5 billion of assets as a result of the Winslow Capital acquisition.

 

Investment advisory fee income, net of sub-advisory fees and expense reimbursements, for the years ended December 31, 2009, 2008 and 2007 is shown in the following table:

 

 

Advisory fees of $620.1 million for the year ended December 31, 2009 were down $87.3 million, or 12%, from the prior year. Advisory fees were down across all product categories driven by lower asset levels, mainly as the result of significant market depreciation in the second half of 2008. Closed-end fund advisory fees were down $15.3 million, or 6% from the prior year. Advisory fees on mutual funds were down $2.7 million, or 3%, while managed account advisory fees were down $69.3 million, or 20%, for the period.

 

Advisory fees of $707.4 million for 2008 were down $84.8 million, or 11%, from 2007. Advisory fees were down across all categories driven by lower asset levels, mainly as the result of significant market depreciation. Closed-end fund advisory fees were down $10.0 million, or 4%, from 2007. Advisory fees on mutual funds were down $10.3 million, or 9%, from 2007 while managed account advisory fees were down $64.6 million, or 16%.

Product distribution revenue for the years ended December 31, 2009, 2008 and 2007 is shown in the following table:

 

 

Product distribution revenue in 2009 was $0.8 million, a decrease of $8.7 million or 92% from the prior year. This decrease was due largely to one-time placement fee revenue of $5.0 million earned in 2008 for acting as the placement agent on the offering of the Variable Rate Demand Preferred Shares (“VRDP”). In addition, MuniPreferred^® and FundPreferred^® fees decreased by $2.5 million as a result of an overall decline in ARPS outstanding due to the redemption of these shares. Mutual fund distribution revenue declined $2.2 million driven mainly by an increase in commissions paid to third party distribution firms on large dollar value sales. Partially offsetting these declines was a $1.0 million increase in underwriting revenue as a result of the seven new closed-end fund offerings during 2009.

 

Product distribution revenue in 2008 was $9.4 million, an increase of $2.6 million, or 39%, from 2007. Underwriting revenue on closed-end funds increased $2.6 million. Although there were no new closed-end fund offerings in 2008, we received $5.0 million in placement fee revenue (offset by $7.5 million in placement fee expense included in “Other Operating Expenses”) for Variable Rate Demand Preferred shares issued in 2008. MuniPreferred^® and FundPreferred^® fees declined as a result of an overall decline in ARPS outstanding as a result of the redemption of these shares. Mutual fund distribution revenue increased $0.5 million driven mainly by an increase in mutual fund sales as well as a reduction in commissions paid to third party distribution firms on large dollar value sales.

 

Performance Fees/Other Revenue

 

Performance fees/other revenue consist of performance fees earned on institutional assets managed, consulting revenue and various fees earned in connection with services provided on behalf of our defined portfolio assets under surveillance in our unit investment trusts. We discontinued offering unit investment trust products in 2002.

 

Performance fees/other revenue for 2009 were $41.9 million, an increase of $18.0 million, or 75%, from 2008. This increase was driven by higher performance fee revenue of $19.4 million, partially offset by lower HydePark consulting revenue.

 

Performance fees/other revenue for 2008 were $23.9 million, a decrease of $2.1 million, or 8%, from 2007. Performance fee revenue declined from $23.2 million in 2007 to $19.6 million in 2008 due to a decline in performance fees on alternative investment products. Partially offsetting this decline was an increase in consulting revenue as a result of a full year of Nuveen HydePark revenues in 2008.

Operating Expenses

 

Operating expenses for the years ended December 31, 2009, 2008 and 2007 are shown in the following table:

 

 

Compensation and Benefits

 

Compensation and related benefits decreased $8.8 million during 2009 primarily due to a reduction in incentive compensation as a result of the overall decline in earnings and a reduction in staffing levels.

 

Compensation and related benefits expense declined $85.4 million in 2008 when compared with 2007. Base compensation and benefits increased $12.2 million driven mainly by the carryover impact of headcount increases made in 2007. Headcount for the Company as of the end of the year was down versus end of year 2007; however, the reduction in headcount was made late in the year and therefore did not have a significant impact on base compensation for 2008. Non-cash compensation declined significantly in 2008 as the result of additional expense of $43.5 million recorded in 2007 related to the accelerated vesting of all outstanding stock options and restricted stock as a result of the MDP Transactions. Incentive compensation declined $55.0 million as a result of the overall decline in earnings.

 

Amortization of Intangible Assets

 

Amortization of intangible assets increased $5.4 million during 2009 as a result of the acquisition of Winslow at the end of 2008.

 

Amortization of intangible assets increased $49.7 million during 2008 as a direct result of the increase in amortizable intangible assets as a result of the MDP Transactions.

 

Occupancy and Equipment Costs

 

Occupancy and equipment costs increased $5.2 million during 2009 primarily as a result of an increase in depreciation expense related to the amortization of leasehold improvements, computer software and computer equipment. The acquisition of Winslow Capital at the end of 2008 also contributed to the higher occupancy and equipment expenses.

 

Occupancy and equipment costs increased $2.1 million during 2008. This increase reflects higher rent, driven by an increase in leased office space and higher depreciation expense.

Outside and Professional Services

 

Outside and professional services expense decreased $2.0 million during 2009 due to a decline in consulting fees, partially offset by an increase in higher electronic data and research costs for our investment teams.

 

Outside and professional services expense increased $7.6 million during 2008 primarily due to increases in electronic information and information technology expenses as a result of investments in upgrading our operational platform and as we continue to provide our investment and research teams with more tools to better manage their portfolios.

 

Goodwill and Intangible Asset Impairment

 

As a result of the steep global economic decline in 2008, we identified approximately $1.1 billion of non-cash goodwill impairment and $0.9 billion of non-cash intangible asset impairment as of December 31, 2008. The amount of the impairment was determined by us following our annual impairment test in accordance with Codification (see “Recent Updates to Authoritative Accounting Literature,” below), and included the assistance of certain valuation work performed by a nationally recognized independent consulting firm. For further information, see Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” to our Annual Financial Statements.

 

All Other Operating Expenses

 

All other operating expenses, including advertising and promotional costs, travel and entertainment, structuring fees, severance, recruiting, fund organization costs, trade errors and other expenses, decreased $37.4 million during 2009. Severance expense was lower by $37.4 million as a result of the organization restructuring largely completed in 2008. In addition, $7.5 million of placement fee expense was incurred as a one-time expense in 2008 related to the offering of the Variable Rate Demand Preferred shares. Partially offsetting these decreases are $12.9 million of higher structuring fees and fund organization costs related to the new closed-end fund offerings completed in 2009 and $4.4 million in higher miscellaneous one-time expenses. The remaining decreases in spending are driven by reductions in discretionary spending including lower advertising and promotional costs, travel and entertainment and recruiting expenses.

 

All other operating expenses, including advertising and promotion, occupancy and equipment, travel and entertainment, structuring fees, severance, fund organization costs and other expenses increased $42.5 million during 2008. The main driver of the increase was an increase in severance of $49.5 million due to organizational restructuring (for additional information see Note 4, “Restructuring Charges,” to our Annual Audited Financial Statements included in this Form 10-K). Partially offsetting this increase was a decline in structuring/placement fees on closed-end funds of $5.3 million.

 

Other Income/(Expense)

 

Other income/(expense) includes realized gains and losses on investments and miscellaneous income/(expense), including gain or loss on the disposal of property.

The following is a summary of other income/(expense) for the years ended December 31, 2009, 2008 and 2007:

 

 

Included in gains/(losses) on investments in 2009 is $111.1 million in gains on Symphony CLO V, a collateralized loan obligation managed by Symphony in which MDP is the primary beneficiary, but the Company has no equity. As a result of the MDP interest in Symphony CLO V, we are required to consolidate Symphony CLO V in our financial statements (see also “Net Income/Loss Due to Non-Controlling Interest,” below). Also included in gains/(losses) on investments is $15.6 million of unrealized mark-to-market gains on derivative transactions entered into as a result of the Transactions. Included in $6.2 million of losses on fixed assets and leases is a $2.3 million loss on the disposal of fixed assets, and a $3.9 million loss related to the write-off of a portion of the Radnor, PA lease. Miscellaneous expense of $1.3 million is comprised of $1.9 million of miscellaneous expense resulting from the consolidation of Symphony CLO V, offset by $0.6 million of net gain related to the early retirement of debt. The $0.6 million net gain related to the early retirement of debt is comprised of a $4.4 million gain relating to the difference between the repurchase amount and par (including accrued interest) offset by a $3.8 million loss due to the acceleration of the amortization of deferred items related to the repurchased debt. For additional information, please refer to “Capital Resources, Liquidity and Financial Condition – Equity” below.

 

Included in gains/(losses) on investments in 2008 is a $46.8 million non-cash unrealized mark-to-market loss on derivative transactions entered into as a result of the Transactions. Also included in gains/(losses) on investments is $148.8 million in non-cash losses on Symphony CLO V (see also “Net (Income)/Loss Due to Non-controlling interest” below). In addition to the investment losses reported on Symphony CLO V, we recorded approximately $2.2 million in miscellaneous expense also as a result of the consolidation of Symphony CLO V. During 2008, we recorded an additional $2.3 million of expense as a result of the Transactions and $2.0 million in expense on the settlement of litigation. Partially offsetting these expenses was a non-cash gain on the early retirement of debt. For further information, see Note 7, “Debt,” to our Annual Audited Financial Statements included in this Form 10-K. Additionally, a loss of $38.3 million was recorded in 2008 for other-than-temporary impairment on available for sale securities that are not expected to recover in the near term.

 

Net Income/Loss Due to Non-Controlling Interest

 

Symphony CLO V is a non-controlling interest. See Note 12, “Consolidated Funds – Symphony CLO V,” to our Annual Audited Financial Statements included in this Form 10-K. We have no equity interest in this CLO investment vehicle and all gains and losses recorded in our financial statements are attributable to other investors. For the years ended December 31, 2009, 2008 and 2007, we recorded $135.3 million net income, a $141.5 million net loss and a $7.4 million net loss, respectively, on Symphony CLO V. The entire amount of the income or loss is offset in net income/loss attributable to non-controlling interests.

 

Key employees at NWQ, Tradewinds, Symphony, and Santa Barbara have been granted non-controlling equity-based profits interests in their respective businesses. For additional information on these non-controlling interests, please refer to “Capital Resources, Liquidity and Financial Condition – Equity” below.

Net Interest Expense

 

The following is a summary of net interest expense for the years ended December 31, 2009, 2008 and 2007:

 

 

In 2009, net interest expense increased $15.1 million versus 2008. The main driver of this increase was $27.3 million in interest expense related to our second lien debt incurred in July and August 2009. This increase was partially offset by a reduction of $13.1 million in interest expense recorded as a result of the consolidation of Symphony CLO V described above. Included in dividend and interest revenue for 2009 is $34.2 million of dividend and interest revenue from the consolidation of Symphony CLO V, compared to $30.8 million of dividend and interest revenue from the consolidation of Symphony CLO V in 2008.

 

Net interest expense in 2008 increased $209.5 million versus 2007 due to the existence for the full year of outstanding debt incurred in connection with the MDP Transactions. Included in net interest expense for the year is $9.5 million of net interest revenue related to Symphony CLO V described above. Net interest revenue of Symphony CLO V is comprised of $30.8 million in dividend and interest revenue, offset by $21.3 million of interest expense.

 

Recent Updates to Authoritative Accounting Literature

 

Codification of Accounting Standards

 

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 168, “The FASB Accounting Standards Codification^tm and the Hierarchy of Generally Accepted Accounting Principles – a Replacement of FASB Statement No. 162” (“SFAS No. 168”). SFAS No. 168 states that the FASB Accounting Standards Codification^tm (the “Codification” or “ASC”) will become the source of authoritative U.S. generally accepted accounting principles (“U.S. GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. On the effective date of SFAS No. 168, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other grandfathered non-SEC accounting literature not included in the Codification became nonauthoritative. SFAS No. 168 was effective for financial statements issued for interim and annual periods ending after September 15, 2009.

 

The Codification does not change U.S. GAAP. The Codification only changes the way that U.S. GAAP is referenced. The Codification reorganizes the various U.S. GAAP pronouncements into approximately 90 accounting topics and displays them in a consistent structure for ease of research and cross-reference. All existing accounting pronouncements used to create the Codification became superseded.

 

In this Form 10-K, the Company has made reference to U.S. GAAP issued by FASB as either “FASB ASC” or “Topic” before the new Codification topic reference number.

 

As a result of the Codification, the FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASU”). The FASB will not consider ASUs as authoritative in their own right. ASUs will serve to only update the Codification, provide background information about the Codification’s guidance, and provide the bases for conclusions on change(s) in the Codification.

Accounting for Variable Interest Entities

 

ASU 2009-17, “Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (Statement 167),” amends the guidance on variable interest entities (“VIEs”) in ASC Topic 810 (FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities”) related to the consolidation of variable interest entities. It requires reporting entities to evaluate former qualified special purpose entities (“QSPEs”) for consolidation, changes the approach to determining a VIE’s primary beneficiary from a quantitative assessment to a qualitative assessment designed to identify a controlling financial interest, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a VIE. It also clarifies, but does not significantly change, the characteristics that identify a VIE. This ASU is effective as of the beginning of a company’s first fiscal year that begins after November 15, 2009 (January 1, 2010 for calendar year-end companies), and for subsequent interim and annual reporting periods. Early adoption is prohibited.

 

At its January 27, 2010 meeting, the FASB agreed to issue an ASU to finalize its proposal to indefinitely defer SFAS No. 167’s consolidation requirements for reporting enterprises’ interests in entities that either have all of the characteristics of investment companies or for which it is industry practice to apply measurement principles for financial reporting purposes consistent with those that apply to investment companies, if other conditions are met. The impact of this indefinite deferral to Nuveen Investments is that, for as long as the FASB’s indefinite deferral of this aspect of SFAS No. 167 remains, Nuveen Investments will not be required to evaluate numerous funds that it sponsors (which are legally organized as registered investment companies) for purposes of whether or not these funds need to be consolidated into Nuveen Investments’ consolidated financial results.

 

The Company has commenced the review of all CLOs and CDOs sponsored by the Company or its subsidiaries to determine which are VIEs and will need to be consolidated. As of the date of the filing of this Form 10-K, management has not yet completed this analysis.

 

The Company does not have any QSPEs.

 

Under ASU 2009-17, the FASB has stated that it expects more VIEs to be consolidated. Previous accounting rules for VIEs focused primarily on the party exposed to a majority of risks and rewards of the VIE. The new accounting rules requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest(s) give it a controlling financial interest in a VIE. This analysis identifies the primary beneficiary of a VIE as the enterprise that has both of the following characteristics:

 

 

Additionally, companies will be required to assess whether they have an implicit financial responsibility to ensure that a VIE operates as designed when determining whether they have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance.

 

ASU 2009-17 will also require ongoing reassessments of whether an enterprise is the primary beneficiary of a VIE. Previous accounting rules for VIEs required reconsideration of whether an enterprise is the primary beneficiary of a VIE only when specific events occurred.

 

ASU 2009-17 will also eliminate the quantitative approach previously required for determining the primary beneficiary of a VIE, which was based on determining which enterprise absorbs the majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both.

 

ASU 2009-17 also amends certain guidance for determining whether an entity is a VIE. It is possible that application of this revised guidance will change a company’s assessment of which entities with which it is involved are VIEs.

ASU 2009-17 also includes an additional reconsideration event for determining whether an entity is a VIE when any changes in facts and circumstances occur such that the holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance.

 

Finally, ASU 2009-17 requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a VIE.

 

ASU on Fair Value Measurements and Disclosures

 

ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements,” amends certain disclosure requirements of Subtopic 820-10. This ASU provides additional disclosures for transfers in and out of Levels 1 and 2 and for activity in Level 3. This ASU also clarifies certain other existing disclosure requirements, including level of desegregation and disclosures around inputs and valuation techniques. The final amendments to the Codification will be effective for annual and interim reporting periods beginning after December 15, 2009, except for the requirement to provide the Level 3 activity for purchases, sales, issuances and settlements on a gross basis. That requirement will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early adoption is not permitted. The amendments in the ASU do not require disclosures for earlier periods presented for comparative purposes at initial adoption.

 

Capital Resources, Liquidity and Financial Condition

 

Our primary liquidity needs are to fund capital expenditures, service indebtedness and support working capital requirements. Our principal sources of liquidity are cash flows from operating activities and borrowings under our senior secured credit facilities and long-term notes.

 

In connection with the MDP Transactions, we significantly increased our level of debt. As of December 31, 2009, we had outstanding approximately $4.1 billion in aggregate principal amount of indebtedness and had limited additional borrowing capacity.

 

During July 2009, we obtained a new $450 million six-year, second-lien term loan facility with a fixed interest rate of 12.5%. A fee of 10% of the principal amount of the new term loans was paid ratably to the new lenders. The new term loans were made under our amended senior secured credit facility described below. We have escrowed proceeds from our new term loans to retire our 5% senior unsecured notes due 2010 (discussed below) at maturity. The remaining net proceeds from the new term loans were used to pay down a portion of our existing $2.3 billion first-lien term loans. During August 2009, we elected to borrow an additional $50 million under this second-lien term loan facility. A fee of 7% of the principal amount of these new term loans was paid ratably to the new lenders. The net proceeds from these new term loans were used to pay down a portion of our existing $2.3 billion first-lien term loans.

 

Also in July 2009, we funded $52 million into a recently created, secular trust as part of a newly established multi-year Mutual Fund Incentive Program for certain of our employees. The trust acquired shares of Nuveen mutual funds supporting the awards of these mutual fund shares under this new incentive program. Awards under this new incentive program are subject to vesting.

 

Senior Secured Credit Facilities

 

In connection with the MDP Transactions, we entered into senior secured credit facilities, consisting of a $2.3 billion term loan facility and a $250 million revolving credit facility. At the time of the Transactions, we borrowed the full $2.3 billion term loan facility. The amounts borrowed under the term loan facility were used as part of the financing that was used to consummate the Transactions. During November 2008, we drew down the full $250 million revolving credit facility due to concerns over counterparty risk as a result of the severely deteriorating global credit market conditions. The $250 million in proceeds from the revolving credit facility are

included in the $310 million of “Cash and cash equivalents” on our December 31, 2009 consolidated balance sheet, included in this Annual Report on Form 10-K.

 

All borrowings under our senior secured credit facilities, other than the new term loans made in July and August 2009 described above (the “Additional Term Loans”), bear interest at a rate per annum equal to LIBOR plus 3.0%. In addition to paying interest on outstanding principal under our senior secured credit facilities, we are required to pay a commitment fee to the lenders in respect of any unutilized loan commitments at a rate of 0.3750% per annum. The Additional Term Loans bear interest at a rate per annum of 12.50%.

 

All obligations under our senior secured credit facilities are guaranteed by Parent and each of our present and future, direct and indirect, material domestic subsidiaries (excluding subsidiaries that are broker-dealers). The obligations under our senior secured credit facilities and these guarantees are secured, subject to permitted liens and other specified exceptions, (1) on a first-lien basis, by all the capital stock of Nuveen Investments and certain of its subsidiaries (excluding significant subsidiaries and limited, in the case of foreign subsidiaries, to 100% of the non-voting capital stock and 65% of the voting capital stock of the first tier foreign subsidiaries) directly held by Nuveen Investments or any guarantor and (2) on a first-lien basis by substantially all present and future assets of Nuveen Investments and each guarantor, except that the Additional Term Loans are secured by the same capital stock and assets on a second-lien basis.

 

The first-lien term loan facility matures on November 13, 2014 and the revolving credit facility matures on November 13, 2013. The Additional Term Loans mature July 31, 2015.

 

We were required to make quarterly payments under the term loan facility in the amount of approximately $5.8 million. We used a portion of the Additional Term Loans to prepay these quarterly payments. Our senior secured credit facilities permit all or any portion of the loans outstanding thereunder to be prepaid at par, except that the Additional Term Loans may only be voluntarily prepaid with specified premiums prior to July 31, 2014.

 

Our senior secured credit facilities contain a number of covenants that, among other things, limit or restrict the ability of the borrower and the guarantors to dispose of assets, incur additional indebtedness, incur guarantee obligations, prepay other indebtedness, make dividends and other restricted payments, create liens, make equity or debt investments, make acquisitions, engage in mergers or consolidations, change the line of business, change the fiscal year, or engage in certain transactions with affiliates. The senior secured credit facilities contain a financial maintenance covenant that will prohibit the borrower from exceeding a specified ratio of (1) funded senior secured indebtedness less unrestricted cash and cash equivalents to (2) consolidated adjusted EBITDA, as defined under our senior secured credit facilities. The senior secured credit facilities also contain customary events of default, limitations on our incurrence of additional debt, and other limitations.

 

Notes

 

Also in connection with the Transactions, we issued $785 million of 10.5% senior notes. The 10.5% senior notes mature on November 15, 2015 and pay a coupon of 10.5% based on par value, payable semi-annually on May 15 and November 15 of each year, commencing on May 15, 2008. We received approximately $758.9 million in net proceeds from the issuance of the 10.5% senior notes after underwriting commissions and structuring fees. The net proceeds were used as part of the financing that was used to consummate the Transactions. From time to time, we may, in compliance with the covenants under our senior secured credit facilities and the indenture for the 10.5% senior notes, redeem, repurchase or otherwise acquire for value the 10.5% senior notes.

 

Obligations under the 10.5% senior notes are guaranteed by Parent and each of our existing and subsequently acquired or organized direct or indirect domestic subsidiaries (excluding subsidiaries that are broker-dealers) that guarantee the debt under our senior secured credit facilities. These subsidiary guarantees are subordinated in right of payment to the guarantees of our senior secured credit facilities.

Senior Term Notes

 

On September 12, 2005, we issued $550 million of senior unsecured notes, consisting of $250 million of 5-year notes and $300 million of 10-year notes of which the majority remain outstanding. We received approximately $544.4 million in net proceeds after discounts. The 5-year senior term notes bear interest at an annual fixed rate of 5.0%, payable semi-annually on March 15 and September 15 of each year. The 10-year senior term notes bear interest at an annual fixed rate of 5.5%, payable semi-annually also beginning March 15, 2006. The net proceeds from the notes were used to finance outstanding debt. The costs related to the issuance of the senior unsecured notes were capitalized and are being amortized to expense over their respective terms. From time to time the Company may, in compliance with the covenants under our senior secured credit facilities and the indentures for the 10.5% senior notes and these notes, redeem, repurchase or otherwise acquire for value these notes.

 

During 2008, we repurchased an aggregate $17.8 million (par value) of our $250 million 5-year notes. Of the $8.4 million paid in total, approximately $0.2 million was for accrued interest, with the remaining amount for principal. As a result, we recorded a $9.5 million gain on early extinguishment of debt during the fourth quarter of 2008. This gain is reflected in “Other Income/(Expense)” on our consolidated statement of income for the year ended December 31, 2008.

 

During 2009, the Company retired additional amounts of the 5% senior term notes due September 15, 2010. As of December 31, 2009, $26.4 million was paid in cash and $3.0 million was accrued to be paid on January 4, 2010 for a repurchase transaction with a December 29, 2009 trade date and a January 4, 2010 settlement date. Of the total $29.4 million in total cash paid/to be paid by January 4, 2010, approximately $0.3 million was for accrued interest, with the remaining $29.1 million for principal representing $33.5 million in par. The Company recorded a $4.4 million gain on early extinguishment of debt in connection with these repurchase transactions. This gain is reflected in “Other Income/(Expense)” on the Company’s consolidated statement of income for the year ended December 31, 2009.

 

Adequacy of Liquidity

 

We believe that funds generated from operations and existing cash reserves will be adequate to fund debt service requirements, capital expenditures and working capital requirements for the foreseeable future. Our ability to continue to fund these items, to service debt and to maintain compliance with covenants in our debt agreements may be affected by general economic, financial, competitive, legislative, legal and regulatory factors and by our ability to refinance or repay outstanding indebtedness with scheduled maturities beginning in November 2013. On April 1, 2009, Moody’s Investors Service lowered our corporate family rating to Caa1, the rating for our senior secured credit facilities to B3, and the rating for our senior unsecured notes to Caa3. In addition, on April 1, 2009, Standard and Poor’s Ratings Services lowered our local currency long-term counterparty credit rating to B-. While these ratings downgrades have not affected our financial condition, results of operations or liquidity, they could make it more difficult for us to obtain financing in the future. In the event that we are unable to repay any of our outstanding indebtedness as it becomes due, we might need to explore alternative strategies for funding, such as selling assets, refinancing or restructuring our indebtedness or selling equity capital. However, securing alternative sources of funding might not be feasible which could result in further adverse effects on our financial condition.

 

Our senior secured credit facilities include a financial maintenance covenant requiring us to maintain a maximum ratio of net senior secured indebtedness to adjusted EBITDA (as defined in the credit agreement). As of December 31, 2009, this maximum ratio was 6.00:1.00. As of December 31, 2009, we were in compliance with this covenant, as our actual ratio of senior secured indebtedness to adjusted EBITDA (as defined in the credit agreement) was 4.76:1.00 based on $1,809 million of senior secured indebtedness and adjusted EBITDA (as defined in the credit agreement) of $379.7 million. In addition, as of December 31, 2009, we were in compliance with all other covenants and other restrictions under our debt agreements.

Aggregate Contractual Obligations

 

We have contractual obligations to make future payments under short-term and long-term debt, as well as long-term non-cancelable lease agreements. The following table summarizes these contractual obligations at December 31, 2009 (excludes Symphony CLO V debt):

 

 

 

 

We have no significant capital lease obligations.

 

Equity

 

As part of the NWQ acquisition, key individuals of NWQ purchased a non-controlling, member interest in NWQ Investment Management Company, LLC. The non-controlling interest of $0.1 million as of December 31, 2007 is reflected on our consolidated balance sheet. This purchase allowed management to participate in profits of NWQ above specified levels beginning January 1, 2003. During 2007, we recorded approximately $1.9 million of income attributable to these non-controlling interests. We did not record any income attributable to these non-controlling interests on this program for 2008. Beginning in 2004 and continuing through 2008, we had the right to purchase the non-controlling members’ respective interests in NWQ at fair value. During the first quarter of 2008, we exercised our right to call all of the remaining Class 4 non-controlling members’ interests. As of March 31, 2008, we had repurchased all member interests outstanding under this program.

As part of the Santa Barbara acquisition, an equity opportunity was put in place to allow key individuals to participate in Santa Barbara’s earnings growth over the subsequent five years (Class 2 Units, Class 5A Units, Class 5B Units, and Class 6 Units, collectively referred to as “Units”). The Class 2 Units were fully vested upon issuance. One third of the Class 5A Units vested on June 30, 2007, one third vested on June 30, 2008, and one third vested on June 30, 2009. One third of the Class 5B Units vested upon issuance, one third on June 30, 2007, and one third vested on June 30, 2009. The Class 6 Units vested on June 30, 2009. The Units entitle the holders to receive a distribution of the cash flow from Santa Barbara’s business to the extent such cash flow exceeds certain thresholds. The distribution thresholds vary from year to year, reflecting Santa Barbara achieving certain profit levels and the distributions of profits interests are also subject to a cap in each year. During 2009, 2008 and 2007, we recorded approximately $38 thousand, $0.2 million and $2.9 million, respectively, attributable to these non-controlling interests. Beginning in 2008 and continuing through 2012, we have the right to acquire the Units of the non-controlling members. During the first quarter of 2008, we exercised our right to call 100% of the Class 2 Units. During the first quarter of 2010, we exercised our right to call 100% of the Class 5 Units.

 

During 2006, new equity opportunities were put in place covering NWQ, Tradewinds and Symphony. These programs allow key individuals of these businesses to participate in the growth of their respective businesses over the subsequent six years. Classes of interests were established at each subsidiary (collectively referred to as “Interests”). Certain of these Interests vested or vest on June 30, 2007, 2008, 2009, 2010 and 2011. The Interests entitle the holders to receive a distribution of the cash flow from their business to the extent such cash flow exceeds certain thresholds. The distribution thresholds increase from year to year and the distributions of the profits interests are also subject to a cap in each year. During 2009, 2008 and 2007, we recorded approximately $1.6 million, $1.9 million and $2.8 million, respectively, of income attributable to these non-controlling interests. Beginning in 2008 and continuing through 2012, we have the right to acquire the Interests of the non-controlling members. During the first quarter of 2008, we exercised our right to call all of the Class 7 Interests. During the first quarter of 2009, we exercised our right to call all the Class 8 Interests. During the first quarter of 2010, we exercised our right to call all of the Class 9 Interests.

 

Broker-Dealer

 

Our broker-dealer subsidiary is subject to requirements of the SEC relating to liquidity and capital standards (See Note 19, “Net Capital Requirement,” in the Company’s consolidated financial statements).

 

Off-Balance Sheet Arrangements

 

We do not invest in any off-balance sheet vehicles that provide financing, liquidity, market or credit risk support or engage in any leasing activities that expose us to any liabilities that are not reflected in our Annual Financial Statements and Quarterly Financial Statements.

 

Critical Accounting Policies

 

Our financial statements and accompanying notes are prepared in accordance with U.S. generally accepted accounting principles. Preparing financial statements requires management to make estimates and assumptions that impact our financial position and results of operations. These estimates and assumptions are affected by our application of accounting policies. Below we describe certain critical accounting policies that we believe are important to the understanding of our results of operations and financial position. In addition, please refer to Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” to our Annual Financial Statements for further discussion of our accounting policies.

Goodwill and Intangible Assets

 

Goodwill

 

Under Codification, goodwill is not amortized but is tested at least annually for impairment by comparing the fair value of the reporting unit to its carrying value amount, including goodwill.

 

Prior to the MDP Transaction that closed on November 13, 2007, “Predecessor” Nuveen performed the annual goodwill impairment test as of May 31. “Successor” Nuveen selected a new annual goodwill impairment test date: December 31. Due to the proximity of the date on which the MDP Transaction closed (November 13, 2007) and the new goodwill annual impairment test date (December 31, 2007), there were no indications of impaired value at December 31, 2007. Between then and December 31, 2008, global economic conditions deteriorated to such an extent that we had to adjust our underlying assumptions to take into account the impact the global economic downturn had to prospects for future growth. We believe that such changes in assumptions are not unique to our business; we believe such changes in assumptions to be widespread and applicable to all companies.

 

We identified approximately $1.1 billion of goodwill impairment as of December 31, 2008. The recognition of the impairment resulted in a non-cash charge to income for the year ended December 31, 2008. The amount of the impairment was determined by us following our annual impairment test in accordance with Codification, and included the assistance of certain valuation work performed by a nationally recognized independent consulting firm.

 

The results of our annual goodwill impairment test as of December 31, 2009 did not indicate any further potential impairment of goodwill.

 

For purposes of the annual goodwill impairment test, we have defined four reporting units:

 

(1) corporate;

 

(2) managed accounts;

 

(3) mutual funds; and

 

(4) closed-end exchange-traded funds.

 

The reporting units are one level below our operating segment and were determined based on how we manage the business, including our internal reporting structure, management accountability and resource prioritization process.

 

We determined implied fair values for each of the reporting units listed above. In making a determination of implied fair values, the following valuation methodologies were considered: the Income Approach; the Market Approach; and the Cost Approach. Each of the approaches were considered for appropriateness to our business. We believe that, for companies providing a product or service, the Income Approach and Market Approach would generally provide the most reliable indications of value, because the value of such firms is more dependent on their ability to generate earnings than on the value of the assets used in the production process. Therefore, for purposes of analyzing the implied fair values of our reporting units, the Income Approach and Market Approach were applied.

Specifically, the Income Approach incorporated the use of the Discounted Cash Flow Method and the Market Approach incorporated the use of the Guideline Company Method. The fair values were determined as follows:

 

 

Significant forecast assumptions used in the Income Approach include: revenue growth rate; gross profit; operating expenses as a percent of revenue; earnings before interest, taxes, depreciation and amortization (“EBITDA”); capital expenditures; and debt-free net working capital. Significant assumptions used in the Market Approach include a control premium and multiples of indicated value to EBITDA. Assumptions inherent in EBITDA estimates include assumptions about: operational risk, growth expectations, and profitability.

 

Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units and determining the fair value of each reporting unit. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate market multiples and other assumptions. Changes in these estimates could materially affect our impairment conclusions.

 

Goodwill of a reporting unit shall be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Examples of such events or circumstances include:

 

a) a significant adverse change in legal factors or in the business climate;

 

b) an adverse action or assessment by a regulator;

 

c) unanticipated competition;

 

d) a loss of key personnel;

 

e) a more-likely-than-not expectation that a reporting unit or significant portion of a reporting unit will be sold or otherwise disposed of; and

 

f) the testing for recoverability under Codification of a significant asset group within a reporting unit.

 

Indefinite-Lived Intangible Assets

 

Identifiable intangible assets generally represent the cost of client relationships and management contracts. We are required to periodically review identifiable intangible assets for impairment as events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the carrying amounts of the assets exceed their respective fair values, additional impairment tests are performed to measure the amount of the impairment loss, if any.

 

As a result of the recent steep global economic decline that first began at the end of 2007, we identified approximately $0.9 billion of intangible asset impairment as of December 31, 2008. The recognition of the impairment resulted in a non-cash charge to income for the year ended December 31, 2008. The amount of the impairment was determined by us following our annual impairment test in accordance with Codification, and included the assistance of certain valuation work performed by a nationally recognized independent consulting firm.

The results of our annual impairment test as of December 31, 2009 did not indicate any further potential impairment of intangible assets with indefinite useful lives.

 

In making a determination of the implied fair value for our indefinite-lived intangible assets, the following valuation methodologies were considered: the Income Approach; the Multi-Period Excess Earnings Method; the Relief from Royalty Method; and the Cost Approach. We and our outside valuation consultants believe that Trade Names are most appropriately valued utilizing the Income Approach. As a result, we decided to use the Relief from Royalty Method, a form of the Income Approach. The Relief from Royalty Method capitalizes the cost savings associated with owning, rather than licensing, Trade Names. Significant assumptions utilized in valuing our indefinite-lived intangible assets with the Relief from Royalty Method include: revenue; royalty rate; useful life; income tax expense; discount rate; and the tax benefit of amortization expense.

 

Impairment of Investment Securities

 

Codification provides guidance on determining when an investment is other-than-temporarily impaired. We periodically evaluate our investments for other-than-temporary declines in value. To determine if an other-than-temporary decline exists, we evaluate, among other factors, general market conditions, the duration and extent to which the fair value is less than cost, as well as our intent and ability to hold the investment. Additionally, we consider the financial health of and near-term business outlook for a counterparty, including factors such as industry performance and operational cash flow. If an other-than-temporary decline in value is determined to exist, the unrealized investment loss net of tax, in accumulated other comprehensive income, is realized as a charge to net income in that period. See Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” to our Annual Financial Statements.

 

We also have an investment in two collateralized debt obligation entities for which one of our subsidiaries acts as a collateral manager – Symphony CLO I, Ltd. (“CLO”) and the Symphony Credit Opportunities Fund Ltd. (“CDO”). We account for our investments in the CLO and CDO under EITF 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets.” The excess of future cash flows over the initial investment at the date of purchase is recognized as interest income over the life of the investment using the effective yield method. We review cash flow estimates throughout the life of the CLO and CDO investment pool to determine whether an impairment should be recognized. Cash flow estimates are based on the underlying pool of collateral securities, which are primarily corporate syndicated loans, and take into account the overall credit quality of the issuers in the collateral securities, the forecasted default rate of the collateral securities and our past experience in managing similar securities. If an updated estimate of future cash flows (taking into account both timing and amounts) is less than the revised estimate, an impairment loss is recognized based on the excess of the carrying amount of the investment over its fair value. There is a certain amount of judgment involved in the assumptions used in our cash flow estimating process. Changes in these assumptions could affect our impairment conclusions.

 

In response to the steep global economic decline, we recognized an impairment charge on our investments of approximately $38.3 million as of December 31, 2008. This impairment charge is reflected as an expense on our consolidated statement of income for the year ended December 31, 2008. Of the $38.3 million impairment, $8.8 million related to our investment in the CDO, and is due to underlying credit losses of the CDO. The remaining $29.5 million of impairment relates to various other investments, mainly mutual funds and equity securities, whose market value was below cost for a considerable period of time with no clear indication at December 31, 2008 of any future reversals. The market values for these investments were based on unadjusted quoted market prices.

 

Accounting for Income Taxes

 

Codification establishes financial accounting and reporting standards for the effect of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax

consequences of events that have been recognized in our financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could impact our financial position or our results of operations.

 

We have significant net deferred tax liabilities recorded on our financial statements, which are attributable to the effect of purchase accounting adjustments recorded as a result of the MDP Transactions. At December 31, 2009, the Company had federal tax loss carryforward benefits of approximately $41.1 million that will expire between 2028 and 2029. At December 31, 2009, the Company also had state tax loss carryforward benefits of approximately $32.8 million that will expire between 2013 and 2029. For financial reporting purposes, a valuation allowance of approximately $17.2 million has been established due to the uncertainty that the assets will be realized. The Company believes that the remaining state tax loss carryforwards of approximately $15.6 million will be utilized prior to expiration.

 

Forward-Looking Information and Risks

 

From time to time, information we provide or information included in our filings with the SEC may contain statements that are not historical facts, but are “forward-looking statements.” These statements relate to future events or future financial performance and reflect management’s expectations and opinions. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” or comparable terminology. These statements are only predictions, and our actual future results may differ significantly from those anticipated in any forward-looking statements due to numerous known and unknown risks, uncertainties and other factors. All of the forward-looking statements are qualified in their entirety by reference to the factors described in “Risk Factors,” “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” and elsewhere in this Form 10-K. These factors may not be exhaustive, and we cannot predict the extent to which any factor, or combination of factors, may cause actual results to differ materially from those predicted in any forward-looking statements. We undertake no responsibility to update publicly or revise any forward-looking statements, whether as a result of new information, future events or any other reason.

 

Risks, uncertainties and other factors that pertain to our business and the effects of which may cause our assets under management, earnings, revenues and/or profit margins to decline include:

 

 

 

 

Market Risk

 

The following information, and information included elsewhere in this report, describes the key aspects of certain financial instruments that have market risk.

 

Interest Rate Sensitivity

 

Although we have sought to mitigate our interest rate risk as discussed hereafter, our obligations under our senior secured credit facilities will expose our earnings to changes in short-term interest rates since the interest rate on this debt is variable. At December 31, 2009, the aggregate principal amount of our indebtedness (excluding the debt of Symphony CLO V) was approximately $4.1 billion, of which approximately $2.3 billion is variable rate debt and approximately $1.8 billion is fixed rate debt. For our variable rate debt, we estimate that a 100 basis point increase (one percentage point) in variable interest rates would have resulted in a $23.4 million increase in annual interest expense; however, it would not be expected to have a substantial impact on the fair value of the debt at December 31, 2009. A change in interest rates would have had no impact on interest incurred on our fixed rate debt or cash flow, but would have had an impact on the fair value of the debt. We estimate that a 100 basis point increase in interest rates from the levels at December 31, 2009 would result in a net decrease in the fair value of our fixed debt of approximately $60.3 million.

 

The variable nature of our obligations under our senior secured credit facilities creates interest rate risk. In order to mitigate this risk, the Company entered into certain derivative transactions that effectively converted the Company’s variable rate debt arising from the MDP Transactions into fixed-rate borrowings (collectively, the “New Debt Derivatives”). As some of these derivative transactions matured, the Company has occasionally entered into new, similar transactions in order to continue to mitigate interest rate exposure on the variable rate debt. At December 31, 2009, these derivative transactions were comprised of eight interest rate swaps with a notional value totaling $1.2 billion. These derivatives were not accounted for as hedges for accounting purposes. For additional information, see Note 9, “Derivative Financial Instruments” of the accompanying consolidated financial statements. At December 31, 2009, the fair value of the New Debt Derivatives was a net liability of $62.9 million, of which $19.9 million is reflected in “Short-Term Obligations” and $43.0 million is reflected in “Long-Term Obligations.” We estimate that a 100 basis point change in interest rates would have a $19.9 million impact on the fair value of the New Debt Derivatives.

Our investments consist primarily of company sponsored managed investment funds that invest in a variety of asset classes. Additionally, we periodically invest in new advisory accounts to establish a performance history prior to a potential product launch. Company sponsored funds and accounts are carried on our consolidated financial statements at fair market value and are subject to the investment performance of the underlying securities in the sponsored fund or account. Any unrealized gain or loss is recognized upon the sale of the investment. The carrying value of our investments in fixed income funds or accounts, which expose us to interest rate risk, was approximately $50.0 million (which excludes Symphony CLO V) at December 31, 2009. We estimate that a 100 basis point increase in interest rates from the levels at December 31, 2009 would result in a net decrease of approximately $6.0 million in the fair value of the fixed income investments at December 31, 2009. A 100 basis point increase in interest rates is a hypothetical scenario used to demonstrate potential risk and does not represent management’s view of future market changes.

 

Equity Market Sensitivity

 

As discussed above in the “Interest Rate Sensitivity” section, we invest in certain company sponsored managed investment funds and accounts that invest in a variety of asset classes. The carrying value of our investments in funds and accounts subject to equity price risk is approximately $116.6 million at December 31, 2009. We estimate that a 10% adverse change in equity prices would result in an $11.7 million decrease in the fair value of our equity securities. The model to determine sensitivity assumes a corresponding shift in all equity prices.

 

We do not enter into foreign currency transactions for speculative purposes and currently have no material investments that would expose us to foreign currency exchange risk.

 

In evaluating market risk, it is also important to note that most of our revenue is based on the market value of assets under management. Declines of financial market values will negatively impact our revenue and net income.

 

Inflation

 

Our assets are, to a large extent, liquid in nature and therefore not significantly affected by inflation. However, inflation may result in increases in our expenses, such as employee compensation, advertising and promotional costs, and office occupancy costs. To the extent inflation, or the expectation thereof, results in rising interest rates or has other adverse effects upon the securities markets and on the value of financial instruments, it may adversely affect our financial condition and results of operations. A substantial decline in the value of fixed-income or equity investments could adversely affect the net asset value of funds and accounts we manage, which in turn would result in a decline in investment advisory and performance fee revenue.

Nuveen Investments, Inc. & Subsidiaries

Consolidated Balance Sheets

(in thousands)

 

 

See accompanying notes to consolidated financial statements.

Nuveen Investments, Inc. & Subsidiaries (and Predecessor)

Consolidated Statements of Income

(in thousands)