ALLIANCEBERNSTEIN L.P. - FORM 10-Q - August 2, 2010

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549

FORM 10-Q
 
 
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
 
 
  
 
For the quarterly period ended June 30, 2010
  
 
 
  
 
OR
  
 
 
  
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
 
For the transition period from                         to

Commission File No.  000-29961

ALLIANCEBERNSTEIN L.P.
(Exact name of registrant as specified in its charter)

Delaware
 
13-4064930
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

1345 Avenue of the Americas, New York, NY  10105
(Address of principal executive offices)
(Zip Code)

(212) 969-1000
(Registrant’s telephone number, including area code)

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 x
 
No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer x
  
Accelerated filer o
     
Non-accelerated filer o (Do not check if a smaller reporting company)
  
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o
 
No x

The number of units of limited partnership interest outstanding as of June 30, 2010 was 275,609,529.
 
 
 
 

ALLIANCEBERNSTEIN L.P.

Index to Form 10-Q

 
  
 
  
Page
 
  
 
  
 
Part I
 
  
 
  
 
 
  
FINANCIAL INFORMATION
  
 
 
  
 
  
 
Item 1.
  
Financial Statements
  
 
 
      
 
 
    
1
 
      
 
 
    
2
 
      
 
 
    
3
 
      
 
 
    
4-20
 
      
 
 
    
21
 
      
 
Item 2.
    
22-40
 
      
 
Item 3.
    
40
 
      
 
Item 4.
    
40
 
  
 
  
 
Part II
 
  
 
  
 
OTHER INFORMATION
 
  
 
  
 
Item 1.
    
41
 
      
 
Item 1A.
    
41
       
 
Item 2.
    
41
 
      
 
Item 3.
    
41
 
      
 
Item 4.
    
41
 
      
 
Item 5.
    
41
 
      
 
Item 6.
    
42
 
  
 
  
 
 
43

 
 
 
Part I

FINANCIAL INFORMATION
Item 1. Financial Statements

ALLIANCEBERNSTEIN L.P.
AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition
(in thousands, except unit amounts)

 
 
June 30,
2010
 
 
December 31,
2009
 
 
 
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
Cash and cash equivalents
 
$
670,096
    
$
614,216
  
Cash and securities segregated, at fair value (cost: $945,237 and $985,213)
 
 
945,344
      
985,331
  
Receivables, net:
 
 
        
 
  
Brokers and dealers
 
 
172,848
      
170,148
  
Brokerage clients
 
 
691,703
      
582,248
  
Fees, net
 
 
306,792
      
346,482
  
Investments:
 
 
            
Deferred compensation-related
    
331,071
      
400,959
  
Other
    
411,542
      
373,870
  
Furniture, equipment and leasehold improvements, net
 
 
326,190
      
359,674
  
Goodwill
 
 
2,893,029
      
2,893,029
  
Intangible assets, net
 
 
213,287
      
223,992
  
Deferred sales commissions, net
 
 
83,045
      
90,187
  
Other assets
 
 
167,766
      
174,804
  
Total assets
 
$
7,212,713
    
$
7,214,940
  
 
 
 
            
LIABILITIES AND CAPITAL
 
 
            
Liabilities:
 
 
            
Payables:
 
 
            
Brokers and dealers
 
$
118,184
    
$
120,574
  
Securities sold not yet purchased
    
22,181
      
31,806
  
Brokerage clients
 
 
1,643,944
      
1,430,835
  
AllianceBernstein mutual funds
 
 
67,333
      
86,054
  
Accounts payable and accrued expenses
 
 
309,875
      
278,398
  
Accrued compensation and benefits
 
 
438,454
      
316,331
  
Debt
 
 
78,996
      
248,987
  
Total liabilities
 
 
2,678,967
      
2,512,985
  
Commitments and contingencies (See Note 8)
 
 
            
 
 
 
            
Capital:
 
 
            
General Partner
 
 
48,047
      
48,671
  
Limited partners: 275,609,529 and 274,745,592 units issued and outstanding
 
 
4,806,180
      
4,862,158
  
Capital contributions receivable from General Partner
 
 
(18,404
)
    
(19,664
)
Holding Units held for deferred compensation plans
 
 
(393,877
)
    
(338,941
)
Accumulated other comprehensive income (loss)
 
 
(51,758
)
    
(21,862
)
Partners’ capital attributable to AllianceBernstein Unitholders
 
 
4,390,188
      
4,530,362
  
Non-controlling interests in consolidated entities
 
 
143,558
      
171,593
  
Total capital
 
 
4,533,746
      
4,701,955
  
Total liabilities and capital
 
$
7,212,713
    
$
7,214,940
  
 
 
See Accompanying Notes to Condensed Consolidated Financial Statements

 
1

ALLIANCEBERNSTEIN L.P.
AND SUBSIDIARIES
Condensed Consolidated Statements of Income
 (in thousands, except per unit amounts)
(unaudited)

   
Three Months Ended June 30,
    
Six Months Ended June 30,
  
   
2010
    
2009
    
2010
    
2009
  
                         
Revenues:
                        
Investment advisory and services fees
   $ 512,788     $ 448,110     $ 1,025,040     $ 893,072  
Bernstein research services
     117,158       110,867       227,910       216,509  
Distribution revenues
     83,477       64,582       163,826       122,658  
Dividend and interest income
     4,911       6,577       8,822       14,378  
Investment gains (losses)
     (56,532 )     65,284       (64,552 )     24,047  
Other revenues
     27,735       27,400       54,297       51,472  
Total revenues
     689,537       722,820       1,415,343       1,322,136  
Less: Interest expense
     1,194       1,380       1,914       3,132  
Net revenues
     688,343       721,440       1,413,429       1,319,004  
                                 
Expenses:
                                
Employee compensation and benefits
     313,113       324,961       632,538       638,764  
Promotion and servicing:
                                
Distribution-related payments
     71,015       55,149       137,764       102,960  
Amortization of deferred sales commissions
     12,147       13,844       24,268       28,741  
Other
     49,816       46,329       92,645       88,251  
General and administrative
     128,795       141,616       266,843       280,814  
Interest on borrowings
     430       675       985       1,639  
Amortization of intangible assets
     5,378       5,554       10,755       10,733  
Total expenses
     580,694       588,128       1,165,798       1,151,902  
                                 
Operating income
     107,649       133,312       247,631       167,102  
                                 
Non-operating income
     2,258       5,951       6,773       12,236  
                                 
Income before income taxes
     109,907       139,263       254,404       179,338  
                                 
Income taxes
     13,127       9,668       26,131       18,232  
                                 
Net income
     96,780       129,595       228,273       161,106  
                                 
Net loss (income) of consolidated entities attributable to non-controlling interests
     9,339       (1,300 )     26,112       4,040  
                                 
Net income attributable to AllianceBernstein Unitholders
   $ 106,119     $ 128,295     $ 254,385     $ 165,146  
                                 
Net income per AllianceBernstein Unit:
                                
Basic
   $ 0.38     $ 0.48     $ 0.92     $ 0.62  
Diluted
   $ 0.38     $ 0.48     $ 0.91     $ 0.62  
 
 
See Accompanying Notes to Condensed Consolidated Financial Statements

 
2

ALLIANCEBERNSTEIN L.P.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

 
 
Six Months Ended June 30,
 
 
 
2010
 
 
2009
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
 
Net income
 
$
228,273
  
 
$
161,106
  
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
    
 
 
    
Amortization of deferred sales commissions
 
 
24,268
  
 
 
28,741
  
Amortization of non-cash deferred compensation
 
 
53,225
  
 
 
36,123
  
Depreciation and other amortization
 
 
41,373
  
 
 
42,285
  
Unrealized losses (gains) on deferred compensation-related investments
    
12,980
      
(82,445
)
Unrealized loss on consolidated venture capital fund
    
28,454
      
8,323
  
Other
 
 
12,752
      
(2,789
)
Changes in assets and liabilities:
 
 
    
 
 
    
Decrease in segregated cash and securities
 
 
39,987
  
 
 
1,326,483
  
(Increase) decrease in receivables
 
 
(221,589
)
 
 
173,528
  
(Increase) in investments
 
 
(20,676
)
 
 
(50,882
)
(Increase) in deferred sales commissions
 
 
(17,126
)
 
 
(16,934
)
Decrease (increase) in other assets
 
 
4,114
  
 
 
(35,978
)
Increase (decrease) in payables
 
 
326,914
  
 
 
(1,291,150
)
Increase (decrease) in accounts payable and accrued expenses
 
 
34,993
  
 
 
(17,039
)
Increase in accrued compensation and benefits
 
 
122,853
  
 
 
91,099
  
Net cash provided by operating activities
 
 
670,795
  
 
 
370,471
  
 
 
 
    
 
 
    
Cash flows from investing activities:
 
 
    
 
 
    
Purchases of investments
 
 
(73
)
 
 
(10,429
)
Proceeds from sales of investments
 
 
194
  
 
 
2,852
  
Additions to furniture, equipment and leasehold improvements, net
 
 
(3,685
)
 
 
(36,098
)
Net cash used in investing activities
 
 
(3,564
)
 
 
(43,675
)
 
 
 
    
 
 
    
Cash flows from financing activities:
 
 
      
 
    
(Repayment) of commercial paper, net
 
 
(170,155
)
 
 
(120,113
)
Proceeds from bank loans, net
    
—
      
22,000
  
(Decrease) in overdrafts payable
    
(55
)
    
(27,318
)
Distributions to General Partner and unitholders
 
 
(341,862
)
 
 
(136,678
)
(Distributions to) contributions from non-controlling interests in consolidated entities
    
(992
)
    
1,266
  
Capital contributions from General Partner
 
 
1,854
  
 
 
1,854
  
Additional investment by Holding with proceeds from exercise of compensatory options to buy Holding Units
 
 
8,101
  
 
 
—
  
Purchases of Holding Units to fund deferred compensation plan awards, net
 
 
(85,982
)
 
 
(654
)
Other
    
(25
)
    
157
  
Net cash used in financing activities
 
 
(589,116
)
 
 
(259,486
)
 
 
 
    
 
 
    
Effect of exchange rate changes on cash and cash equivalents
 
 
(22,235
)
 
 
36,387
  
 
 
 
    
 
 
    
Net increase in cash and cash equivalents
 
 
55,880
  
 
 
103,697
  
Cash and cash equivalents as of beginning of the period
 
 
614,216
  
 
 
552,577
  
Cash and cash equivalents as of end of the period
 
$
670,096
  
 
$
656,274
  
 
 
See Accompanying Notes to Condensed Consolidated Financial Statements

 
3

ALLIANCEBERNSTEIN L.P.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2010
(unaudited)

The words “we” and “our” refer collectively to AllianceBernstein Holding L.P. (“Holding”) and AllianceBernstein L.P. and its subsidiaries (“AllianceBernstein”), or to their officers and employees. Similarly, the word “company” refers to both Holding and AllianceBernstein. Where the context requires distinguishing between Holding and AllianceBernstein, we identify which of them is being discussed. Cross-references are in italics.

These statements should be read in conjunction with AllianceBernstein’s audited consolidated financial statements included in AllianceBernstein’s Form 10-K for the year ended December 31, 2009.

1.
Business Description and Organization

We provide research, diversified investment management and related services globally to a broad range of clients. Our principal services include:
 
 
•
Institutional Services – servicing our institutional clients, including unaffiliated corporate and public employee pension funds, endowment funds, domestic and foreign institutions and governments, and affiliates such as AXA and certain of its insurance company subsidiaries, by means of separately-managed accounts, sub-advisory relationships, structured products, collective investment trusts, mutual funds, hedge funds and other investment vehicles.

 
•
Retail Services – servicing our retail clients, primarily by means of retail mutual funds sponsored by AllianceBernstein or an affiliated company, sub-advisory relationships with mutual funds sponsored by third parties, separately-managed account programs sponsored by financial intermediaries worldwide and other investment vehicles.

 
•
Private Client Services – servicing our private clients, including high-net-worth individuals, trusts and estates, charitable foundations, partnerships, private and family corporations, and other entities, by means of separately-managed accounts, hedge funds, mutual funds and other investment vehicles.

 
•
Bernstein Research Services – servicing institutional investors seeking research, portfolio strategy and brokerage-related services, and issuers of publicly-traded securities seeking equity capital markets services.
 
We also provide distribution, shareholder servicing and administrative services to the mutual funds we sponsor.

We provide a broad range of investment services with expertise in:
 
 
•
Value equities, generally targeting stocks that are out of favor and considered undervalued;

 
•
Growth equities, generally targeting stocks with under-appreciated growth potential;

 
•
Fixed income securities, including taxable and tax-exempt securities;

 
•
Blend strategies, combining style-pure investment components with systematic rebalancing;

 
•
Passive management, including index and enhanced index strategies;

 
•
Alternative investments, such as hedge funds, currency management strategies, venture capital and, beginning in 2010, direct real estate investing; and

 
•
Asset allocation services, by which we offer blend strategies specifically-tailored for our clients (e.g., customized target-date fund retirement services for defined contribution plan sponsors).

We manage these services using various investment disciplines, including market capitalization (e.g., large-, mid- and small-cap equities), term (e.g., long-, intermediate- and short-duration debt securities), and geographic location (e.g., U.S., international, global and emerging markets), as well as local and regional disciplines in major markets around the world.

During 2009, we were selected by the U.S. Treasury Department as one of only three firms to manage its portfolio of assets issued by banks and other institutions taking part in the Capital Purchase Program of the Troubled Assets Relief Program. In addition, we were selected by the U.S. Treasury Department as one of nine pre-qualified fund managers under the Public-Private Investment Program and, during the fourth quarter of 2009, we were one of five firms that closed an initial Public-Private Investment Fund (“PPIF”) of at least $500 million. In April 2010, we closed our PPIF with over $1.1 billion raised.

 
4

Our research is the foundation of our business.  Our research disciplines include fundamental research, quantitative research, economic research and currency forecasting.  In addition, we have created several specialized research units, including one that examines global strategic changes that can affect multiple industries and geographies, and another dedicated to identifying potentially successful innovation by early-stage companies.

As of June 30, 2010, AXA, a société anonyme organized under the laws of France and the holding company for an international group of insurance and related financial services companies, through certain of its subsidiaries (“AXA and its subsidiaries”) owned approximately 1.4% of the issued and outstanding units representing assignments of beneficial ownership of limited partnership interests in Holding (“Holding Units”).

As of June 30, 2010, the ownership structure of AllianceBernstein, expressed as a percentage of general and limited partnership interests, was as follows:

AXA and its subsidiaries
 
 
61.4
%
Holding
 
 
36.7
 
Unaffiliated holders
 
 
1.9
 
 
 
 
100.0
%

AllianceBernstein Corporation (an indirect wholly-owned subsidiary of AXA, “General Partner”) is the general partner of both Holding and AllianceBernstein. AllianceBernstein Corporation owns 100,000 general partnership units in Holding and a 1% general partnership interest in AllianceBernstein. Including both the general partnership and limited partnership interests in Holding and AllianceBernstein, AXA and its subsidiaries had an approximate 62.5% economic interest in AllianceBernstein as of June 30, 2010.

2.
Summary of Significant Accounting Policies

Basis of Presentation

The interim condensed consolidated financial statements of AllianceBernstein included herein have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the interim results, have been made. The preparation of the condensed consolidated financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the interim reporting periods. Actual results could differ from those estimates. The December 31, 2009 condensed consolidated statement of financial condition was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.

Principles of Consolidation

The condensed consolidated financial statements include AllianceBernstein and its majority-owned and/or controlled subsidiaries. All significant inter-company transactions and balances among the consolidated entities have been eliminated.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current year’s presentation.  These include: (i) securities sold not yet purchased, previously included in payable to brokers and dealers in the condensed consolidated statements of financial condition, is currently shown separately, (ii) Holding Units owned by AllianceBernstein not yet awarded under deferred compensation plans, previously included in limited partners’ capital in the condensed consolidated statement of financial position, have been reclassified to Holding Units held for deferred compensation plans, (iii) Bernstein Research Services transaction costs, previously included in general and administrative expense in the condensed consolidated statements of income, have been reclassified to other promotion and servicing expenses, (iv) certain distribution services expenses, previously included in other promotion and servicing expenses in the condensed consolidated statements of income, have been reclassified to distribution-related payments, and (v) unrealized loss on consolidated venture capital fund, previously included in other adjustments to reconcile net income to net cash provided by operating activities in the condensed consolidated statement of cash flows, is currently shown separately.

 
5

Cash Distributions

AllianceBernstein is required to distribute all of its Available Cash Flow, as defined in the Amended and Restated Agreement of Limited Partnership of AllianceBernstein (“AllianceBernstein Partnership Agreement”), to its unitholders and to the General Partner. Available Cash Flow can be summarized as the cash flow received by AllianceBernstein from operations minus such amounts as the General Partner determines, in its sole discretion, should be retained by AllianceBernstein for use in its business.
 
The General Partner computes cash flow received from operations by determining the sum of:

 
•
net cash provided by operating activities of AllianceBernstein,

 
•
proceeds from borrowings and from sales or other dispositions of assets in the ordinary course of business, and

 
•
income from investments in marketable securities, liquid investments and other financial instruments that are acquired for investment purposes and that have a value that may be readily established,

and then subtracting from this amount the sum of:

 
•
payments in respect of the principal of borrowings, and

 
•
amounts expended for the purchase of assets in the ordinary course of business.

On August 2, 2010, the General Partner declared a distribution of $105.8 million, or $0.38 per AllianceBernstein Unit, representing a distribution of Available Cash Flow for the three months ended June 30, 2010. The General Partner, as a result of its 1% general partnership interest, is entitled to receive 1% of each distribution. The distribution is payable on August 19, 2010 to holders of record on August 12, 2010.

Fees Receivable, Net

Fees receivable are shown net of allowances. An allowance for doubtful accounts related to investment advisory and services fees is determined through an analysis of the aging of receivables, assessments of collectibility based on historical trends and other qualitative and quantitative factors, including the following: our relationship with the client, the financial health (or ability to pay) of the client, current economic conditions and whether the account is closed or active.

Investments

Investments include United States Treasury Bills, unconsolidated mutual funds and limited partnership hedge funds we sponsor and manage, various separately-managed portfolios comprised of equity and fixed income securities, exchanged-traded options and investments owned by a consolidated venture capital fund in which we own a controlling interest as the general partner and in which we hold a 10% limited partnership interest.

Investments in United States Treasury Bills, mutual funds, and equity and fixed income securities are classified as either trading or available-for-sale securities. Trading investments are stated at fair value with unrealized gains and losses reported in net income. Available-for-sale investments are stated at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive income in partners’ capital. Realized gains and losses on the sale of investments are included in income in the current period. Average cost is used to determine the realized gain or loss on investments sold.

We use the equity method of accounting for investments in limited partnership hedge funds. The equity in earnings of our limited partnership hedge fund investments is included in investment gains and losses on the condensed consolidated statements of income.

The investments owned by our consolidated venture capital fund are generally illiquid and are initially valued at cost. These investments are adjusted to fair value to reflect the occurrence of “significant developments” (i.e., capital transactions or business, economic or market events). Adjustments to fair value are included in investment gains and losses on the condensed consolidated statements of income. There is one private equity investment which represents an approximate 11% ownership in a company that we own directly, outside of our consolidated venture capital fund.  This investment is accounted for using the cost method.

See Note 7 for a description of how we measure the fair value of our investments.

 
6

Goodwill

In 2000, AllianceBernstein acquired the business and assets of SCB Inc., an investment research and management company formerly known as Sanford C. Bernstein Inc. (“Bernstein”), and assumed the liabilities of Bernstein (“Bernstein Transaction”). The purchase price consisted of a cash payment of approximately $1.5 billion and 40.8 million newly-issued AllianceBernstein Units. The Bernstein Transaction was accounted for under the purchase method and the cost of the acquisition was allocated on the basis of the estimated fair value of the assets acquired and the liabilities assumed. The excess of the purchase price over the fair value of identifiable assets acquired, net of liabilities assumed, resulted in the recognition of goodwill of approximately $3.0 billion.

We test our goodwill annually, as of September 30, for impairment. The carrying value of goodwill is also reviewed if facts and circumstances, such as significant declines in assets under management, revenues, earnings or the Holding Unit price, occur, suggesting possible impairment. As of September 30, 2009, the impairment test indicated that goodwill was not impaired.

To the extent that securities valuations are depressed for prolonged periods of time, our assets under management, revenues, profitability and unit price may be adversely affected.  As a result, subsequent impairment tests may be based upon different assumptions and future cash flow projections, which may result in an impairment of this asset. Any impairment could reduce materially the recorded amount of goodwill with a corresponding charge to our earnings.

Intangible Assets, Net

Intangible assets consist primarily of costs assigned to acquired investment management contracts of SCB Inc. based on their estimated fair value at the time of acquisition, less accumulated amortization. Intangible assets are recognized at fair value and are amortized on a straight-line basis over their estimated useful life of approximately 20 years. The gross carrying amount and accumulated amortization of intangible assets subject to amortization totaled $416.0 million and $202.7 million, respectively, as of June 30, 2010 and $415.9 million and $191.9 million, respectively, as of December 31, 2009. Amortization expense was $5.4 million and $5.6 million for the three months ended June 30, 2010 and 2009, respectively, and $10.8 million and $10.7 million for the six months ended June 30, 2010 and 2009, respectively. Estimated annual amortization expense for each of the next five years is approximately $22 million.

We periodically review intangible assets for impairment as events or changes in circumstances indicate that the carrying value may not be recoverable. If the carrying value exceeds fair value, additional impairment tests are performed to measure the amount of the impairment loss, if any.

Deferred Sales Commissions, Net

We pay commissions to financial intermediaries in connection with the sale of shares of open-end company-sponsored mutual funds sold without a front-end sales charge (“back-end load shares”). These commissions are capitalized as deferred sales commissions and amortized over periods not exceeding five and one-half years for U.S. fund shares and four years for non-U.S. fund shares, the periods of time during which deferred sales commissions are generally recovered. We recover these commissions from distribution services fees received from those funds and from contingent deferred sales commissions (“CDSC”) received from shareholders of those funds upon the redemption of their shares. CDSC cash recoveries are recorded as reductions of unamortized deferred sales commissions when received. Effective January 31, 2009, back-end load shares are no longer offered to new investors by our U.S. mutual funds.

We periodically review the deferred sales commission asset for impairment as events or changes in circumstances indicate that the carrying value may not be recoverable. If the carrying value exceeds fair value, additional impairment tests are performed to measure the amount of the impairment loss, if any.

Loss Contingencies

With respect to all significant litigation matters, we consider the likelihood of a negative outcome.  If we determine the likelihood of a negative outcome is probable, and the amount of the loss can be reasonably estimated, we record an estimated loss for the expected outcome of the litigation. If the likelihood of a negative outcome is reasonably possible and we are able to determine an estimate of the possible loss or range of loss, we disclose that fact together with the estimate of the possible loss or range of loss. However, it is difficult to predict the outcome or estimate a possible loss or range of loss because litigation is subject to inherent uncertainties, particularly when plaintiffs allege substantial or indeterminate damages, or when the litigation is highly complex or broad in scope. In such cases, we disclose that we are unable to predict the outcome or estimate a possible loss or range of loss.

 
7

Revenue Recognition

Investment advisory and services fees, generally calculated as a percentage of assets under management (“AUM”), are recorded as revenue as the related services are performed. Certain investment advisory contracts, including those associated with hedge funds, provide for a performance-based fee, in addition to or in lieu of a base fee, which is calculated as either a percentage of absolute investment results or a percentage of investment results in excess of a stated benchmark over a specified period of time. Performance-based fees are recorded as a component of revenue at the end of each contract’s measurement period.

We calculate AUM using established fair valuation methodologies, including market-based valuation methods and fair valuation methods. Market-based valuation methods include:  last sale/settle prices from an exchange for actively-traded listed equities, options and futures; evaluated bid prices from recognized pricing vendors for fixed income, asset-backed or mortgage-backed issues; mid prices from recognized pricing vendors and brokers for credit default swaps; and quoted bids or spreads from pricing vendors and brokers for other derivative products.  Fair valuation methods include discounted cash flow models, evaluation of assets versus liabilities or any other methodology that is validated and approved by our Valuation Committee. Fair valuation methods are used only where AUM cannot be valued using market-based valuation methods, such as in the case of private equity or illiquid securities. Fair valued investments typically make up less than 1% of our total AUM.  Recent market volatility has not had a significant effect on our ability to acquire market data and, accordingly, our ability to use market-based valuation methods.

The Valuation Committee, which is composed of senior officers and employees, is responsible for overseeing the pricing and valuation of all investments held in client and AllianceBernstein portfolios.  The Valuation Committee has adopted a Statement of Pricing Policies describing principles and policies that apply to pricing and valuing investments held in client and AllianceBernstein portfolios.  We have also established a Pricing Group, which reports to the Valuation Committee.  The Valuation Committee has delegated to the Pricing Group responsibility for overseeing the pricing process for all investments.

Bernstein Research Services revenue consists primarily of brokerage transaction charges for research and brokerage-related services provided to institutional investors. Brokerage transaction charges earned and related expenses are recorded on a trade-date basis. Bernstein Research Services revenue also consists of underwriting fees, management fees and/or selling concessions from equity capital markets activities, which are recognized as the related services are performed.

Distribution revenues, shareholder servicing fees, and dividend and interest income are accrued as earned.

Deferred Compensation Plans

We maintain several unfunded, non-qualified deferred compensation plans under which annual awards to employees are generally made in the fourth quarter. For awards made before 2009, participants were permitted to allocate their awards: (i) among notional investments in Holding Units, certain of the investment services we provide to our clients, and a money market fund, (ii) restricted Holding Units or (iii) under certain circumstances, in options to buy Holding Units. Awards in 2009 consisted solely of restricted Holding Units. We typically made investments in our services that were notionally elected by the participants and maintain them in a consolidated rabbi trust or separate custodial account. Awards generally vest over four years but can vest more quickly upon grant depending on the terms of the individual award, the age of the participant, or the terms of an employment, separation or retirement agreement. Upon vesting, awards are distributed to participants unless they have made a voluntary long-term election to defer receipt. Quarterly cash distributions on unvested Holding Units or restricted Holding Units for which a long-term deferral election has not been made are paid currently to participants. For awards made prior to December 2009, quarterly cash distributions on notional investments in Holding Units and income credited on notional investments in our investment services or the money market fund for which a long-term deferral election has been made are reinvested and distributed as elected by participants. For awards made in December 2009, quarterly cash distributions on vested and unvested restricted Holding Units for which a long-term deferral election has been made are paid currently to participants.

Compensation expense for awards under the plans, including changes in participant account balances resulting from gains and losses on related investments (other than in Holding Units and options to buy Holding Units), is recognized on a straight-line basis over the applicable vesting periods. Mark-to-market gains or losses on investments made to fund deferred compensation obligations (other than in Holding Units and options to buy Holding Units) are recognized currently as investment gains (losses) in the condensed consolidated statements of income. In addition, our equity in the earnings of investments in limited partnership hedge funds made to fund deferred compensation obligations is recognized currently as investment gains (losses) in the condensed consolidated statements of income.

 
8

Compensatory Unit Awards and Option Plans

We recognize compensation expense related to grants of restricted Holding Units and options to buy Holding Units in the financial statements using the fair value method. Under the fair value method, compensatory expense is measured at the grant date based on the estimated fair value of the award and is recognized over the vesting period. Fair value of restricted Holding Unit awards is the closing price of a Holding Unit on the grant date; fair value of options is determined using the Black-Scholes option valuation model.

We fund our restricted Holding Unit awards to employees either by purchasing newly-issued Holding Units from Holding or purchasing Holding Units on the open market, all of which are held in a consolidated rabbi trust until they are distributed to employees upon vesting.  In accordance with the AllianceBernstein Partnership Agreement, when Holding issues Holding Units to AllianceBernstein, Holding is required to use the proceeds it receives from AllianceBernstein to purchase the equivalent number of newly-issued AllianceBernstein Units, thus increasing its percentage ownership interest in AllianceBernstein. Holding Units held in the consolidated rabbi trust are corporate assets in the name of the trust and available to the general creditors of AllianceBernstein.

In March 2010, we announced our intention to engage in open-market purchases of up to three million Holding Units, from time to time, to help fund anticipated obligations under our incentive compensation award program. As of June 30, 2010, we purchased three million Holding Units for $86.1 million. During the second half of 2010 and in future periods, we intend to engage in additional open market purchases of Holding Units, from time to time, to help fund anticipated obligations under our incentive compensation award program.

We granted 1.4 million restricted Holding Unit awards to employees during the first six months of 2010. To fund these awards, Holding issued 0.4 million Holding Units and we used 1.0 million Holding Units held in the consolidated rabbi trust. There were 2.5 million unallocated Holding Units remaining in the consolidated rabbi trust as of June 30, 2010.

New Holding Units are also issued by Holding upon exercise of options.  Proceeds received by Holding upon exercise of options are used to acquire newly-issued AllianceBernstein Units, increasing its percentage ownership interest in AllianceBernstein.

On July 26, 2010, the Amended and Restated 1997 Long Term Incentive Plan expired. Effective as of July 1, 2010, we established the 2010 Long Term Incentive Plan (“2010 Plan”), under which restricted Holding Units or phantom restricted Holding Units (a “phantom” award is a contractual right to receive Holding Units at a later date or upon a specified event); options to buy Holding Units; and other Holding Unit-based awards (including, without limitation, Holding Unit appreciation rights and performance awards) may be granted to employees and independent directors of the General Partner. The 2010 Plan will expire on June 30, 2020, and no awards under the 2010 Plan will be made after that date. Under the 2010 Plan, the number of newly-issued Holding Units with respect to which awards may be granted is 30 million. The 2010 Plan also permits us to award an additional 30 million Holding Units if we acquire the Holding Units on the open market or through private purchases.

Variable Interest Entities

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2009-17, Consolidations (Topic 810) – Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, effective January 1, 2010.  This standard changed how a company determines when an entity that is insufficiently capitalized or is not controlled through voting should be consolidated.  The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design, a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance, and whether a company is obligated to absorb losses or receive benefits that could potentially be significant to the entity.  The standard also requires ongoing assessments of whether a company is the primary beneficiary of a variable interest entity (“VIE”).  The provisions of this standard are effective January 1, 2010.  In January 2010, the FASB deferred portions of ASU 2009-17 that relate to asset managers. We determined that all entities for which we are a sponsor and/or investment manager, other than collateralized debt obligations and collateralized loan obligations (collectively “CDOs”), qualify for the scope deferral and will continue to be assessed for consolidation under prior accounting guidance for consolidation of variable interest entities.

As of June 30, 2010, we are the investment manager for ten CDOs that meet the definition of a VIE due primarily to the lack of unilateral decision-making authority of the equity holders.  The CDOs are alternative investment vehicles created for the sole purpose of issuing collateralized debt instruments that offer investors the opportunity for returns that vary with the risk level of their investment.  Our management fee structure for these CDOs will typically include a senior management fee, and may also include subordinated and incentive management fees.  We hold no equity interest in any of these CDOs.  For each of the CDOs, we evaluated the management fee structure, the current and expected economic performance of the entities and other provisions included in the governing documents of the CDOs that might restrict or guarantee an expected loss or residual return.  In accordance with ASC 810, we concluded that our investment management contract does not represent a variable interest in eight of the ten CDOs.  As such, we are not required to consolidate these entities.

 
9

For the two remaining CDOs, we concluded our collateral management agreement represented a variable interest primarily due to the level of subordinated fees.  We evaluated whether we possessed both of the following characteristics of a controlling financial interest: (1) the power to direct the activities of the VIE that most significantly impacts the entity’s economic performance, and (2) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. In both instances, we determined that we possessed the decision-making power noted in criteria (1) above.

In evaluating criteria (2) above, we considered all facts regarding the design, terms and characteristics of the CDOs and concluded that we do not meet the criteria.  Our conclusion was based on the following quantitative and qualitative factors: (a) we have no involvement with the CDOs beyond providing investment management services, (b) we hold no equity or debt interests in the CDOs, (c) we are not a transferor of any of the assets of the CDOs, (d) our expected aggregate fees in future periods are insignificant relative to the expected cash flows of the CDOs, (e) the variability of our expected fees in relation to the expected cash flows of the CDOs is insignificant, (f) our maximum exposure to loss for these CDOs is our investment management fee, which is based upon the fair value of the CDOs’ assets, (g) the CDOs have no recourse against us for any losses sustained in the CDO structure, (h) we have not provided, nor expect to provide, any financial or other support to the CDO, and (i) there are no liquidity arrangements, guarantees and/or other commitments by third parties that would impact our variable interest in the CDOs.  As such, we do not have a controlling financial interest in either of the two CDOs and we should not consolidate the CDOs into our consolidated financial statements.

The cash, collateral investments (at fair value) and notes payable (at amortized cost) as of June 30, 2010 of these two unconsolidated CDOs are $26.0 million, $352.6 million and $384.0 million, respectively.

For the entities that meet the scope deferral, management reviews its agreements quarterly and its investments in, and other financial arrangements with, certain entities that hold client AUM to determine the variable interest entities that the company is required to consolidate. These entities include certain mutual fund products, hedge funds, structured products, group trusts, collective investment trusts and limited partnerships. We earn investment management fees on client assets under management of these entities, but we derive no other benefit from these assets and cannot use them in our operations.

As of June 30, 2010, we have significant variable interests in certain hedge funds with approximately $20.8 million in AUM. However, these variable interest entities do not require consolidation because management has determined that we are not the primary beneficiary of the expected losses or expected residual returns of these entities. Our maximum exposure to loss in these entities is limited to our aggregate investments of $0.1 million.

  3.
Cash and Securities Segregated Under Federal Regulations and Other Requirements

As of June 30, 2010 and December 31, 2009, $0.9 billion and $0.9 billion, respectively, of United States Treasury Bills were segregated in a special reserve bank custody account for the exclusive benefit of brokerage customers of Sanford C. Bernstein & Co., LLC (“SCB LLC”), a wholly-owned subsidiary of AllianceBernstein, under Rule 15c3-3 of the Securities Exchange Act of 1934, as amended (“Exchange Act”).

AllianceBernstein Investments, Inc. (“AllianceBernstein Investments”), a wholly-owned subsidiary of AllianceBernstein and the distributor of company-sponsored mutual funds, maintains several special bank accounts for the exclusive benefit of customers.  As of June 30, 2010 and December 31, 2009, $22.6 million and $37.4 million, respectively, of cash were segregated in these bank accounts.

 
10

4.
Net Income Per Unit

Basic net income per unit is derived by reducing net income for the 1% general partnership interest and dividing the remaining 99% by the basic weighted average number of units outstanding for each period. Diluted net income per unit is derived by reducing net income for the 1% general partnership interest and dividing the remaining 99% by the total of the basic weighted average number of units outstanding and the dilutive unit equivalents resulting from outstanding compensatory options to buy Holding Units as follows:

   
Three Months Ended June 30,
    
Six Months Ended June 30,
  
   
2010
    
2009
    
2010
    
2009
  
   
(in thousands, except per unit amounts)
  
                         
Net income attributable to AllianceBernstein Unitholders
   $ 106,119     $ 128,295     $ 254,385     $ 165,146  
                                 
Weighted average units outstanding - basic
     275,498       265,625       275,204       265,280  
Dilutive effect of compensatory options to buy Holding Units
     2,026       1       1,933       —  
Weighted average units outstanding – diluted
     277,524       265,626       277,137       265,280  
                                 
Basic net income per AllianceBernstein Unit
   $ 0.38     $ 0.48     $ 0.92     $ 0.62  
Diluted net income per AllianceBernstein Unit
   $ 0.38     $ 0.48     $ 0.91     $ 0.62  

For the three months and six months ended June 30, 2010, we excluded 5,048,345 out-of-the-money options (i.e., options with an exercise price greater than the weighted average closing price of a unit for the relevant period), from the diluted net income per unit computation due to their anti-dilutive effect. For the three months and six months ended June 30, 2009, we excluded 6,206,572 and 6,237,692, respectively, out-of-the-money options from the diluted net income per unit computation due to their anti-dilutive effect.

5. 
Investments

Investments consist of:
        
 
 
June 30,
2010
 
 
December 31,
2009
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
Available-for-sale
 
$
17,414
    
 $
18,246
 
Trading:
 
              
Deferred compensation-related
    
277,098
      
326,364
  
United States Treasury Bills
 
  
40,989
      
28,000
  
Seed money
    
117,675
      
107,136
  
Other
 
  
54,707
      
23,082
  
Investments in limited partnership hedge funds:
 
              
Deferred compensation-related
 
  
53,973
      
74,595
  
Other
    
28,985
      
16,579
  
Consolidated private equity fund
    
128,195
      
162,747
  
Private equity
    
15,067
      
10,000
  
Other
 
  
8,510
      
8,080
  
Total investments
 
$
742,613
    
 $
774,829
 

Total investments related to deferred compensation obligations of $331.1 million and $401.0 million as of June 30, 2010 and December 31, 2009, respectively, consist of company-sponsored mutual funds and limited partnership hedge funds. We typically make investments in our services that are notionally elected by deferred compensation plan participants and maintain them in a consolidated rabbi trust or separate custodial account. The rabbi trust and custodial account enable us to hold such investments separate from our other assets for the purpose of settling our obligations to participants. The investments held in the rabbi trust and custodial account remain available to the general creditors of AllianceBernstein.

The underlying investments of the limited partnership hedge funds in which we invest include long and short positions in equity securities, fixed income securities (including various agency and non-agency asset-based securities), currencies, commodities and derivatives (including various swaps and forward contracts). These investments are valued at quoted market prices or, where quoted market prices are not available, are fair valued based on the pricing policies and procedures of the underlying funds.

 
11

United States Treasury Bills are held by SCB LLC in their investment account and are pledged as collateral with clearing organizations.

We provide seed money to our investment teams to develop new products and services for our clients.

6. 
Derivative Instruments

During the second quarter of 2010, we entered into various futures, forwards and swaps to economically hedge our seed money investments.  In addition, we have currency forwards that represent seed money that our investment teams are using to develop new products and services for our clients. We do not hold any derivatives designated in a formal hedge relationship under ASC 815-10, Derivatives and Hedging.

The following table presents the notional and fair value as of June 30, 2010 for derivative instruments not designated as hedging instruments:

   
Assets
    
Liabilities
  
   
Notional Value
    
Fair Value
    
Notional Value
    
Fair Value
  
   
(in thousands)
  
June 30, 2010:
                        
Exchange-traded futures
   $ 20,583     $ 751     $ —     $ —  
Currency forwards(1)
     —       —       30,598       1,099  
Interest rate swaps
     —       —       19,022       1,149  
Credit default swaps
     22,211       60       —       —  
Total return swaps
     30,928       1,795       —       —  
Total derivatives
   $ 73,722     $ 2,606     $ 49,620     $ 2,248  
 
 
(1)
Seed money used to develop new products and services.

The following table presents the notional and fair value as of December 31, 2009 for derivative instruments not designated as hedging instruments:

   
Assets
    
Liabilities
  
   
Notional Value
    
Fair Value
    
Notional Value
    
Fair Value
  
   
(in thousands)
  
December 31, 2009:
                        
Exchange-traded futures
   $ 21,309     $ (15 )   $ —     $ —  
Currency forwards(1)
     31,926       612       —       —  
Interest rate swaps
     16,995       955       —       —  
Credit default swaps
     22,475       175       —       —  
Total derivatives
   $ 92,705     $ 1,727     $ —     $ —  
 
 
(1)
Seed money used to develop new products and services.

As of June 30, 2010, the asset derivatives are included in receivable from brokers and dealers and the liability derivatives are included in payables to brokers and dealers on our condensed consolidated statement of financial condition. As of December 31, 2009, the futures and forwards contracts were included in receivables from brokers and dealers and the credit default swaps were included in investments.

 
12

The following table presents gains and losses recognized in investment gains (losses) in the condensed consolidated statement of income:

   
Three Months Ended June 30,
    
Six Months Ended June 30,
  
   
2010
    
2009
    
2010
    
2009
  
   
(in thousands)
  
                         
Exchange-traded futures
   $ 1,120     $ 24     $ (180 )   $ 1,194  
Currency forwards
     (579 )     2       (850 )     9  
Interest rate swaps
     (2,028 )     —       (2,409 )     —  
Credit default swaps
     360       (106 )     202       (106 )
Total return swaps
     936       —       936       —  
Balance as of end of period
   $ (191 )   $ (80 )   $ (2,301 )   $ 1,097  

7. 
Fair Value
 
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. The three broad levels of fair value hierarchy are as follows:

 
• 
Level 1 – Quoted prices in active markets are available for identical assets or liabilities as of the reported date.

 
• 
Level 2 – Quoted prices in markets that are not active or other pricing inputs that are either directly or indirectly observable as of the reported date.

 
• 
Level 3 – Prices or valuation techniques that are both significant to the fair value measurement and unobservable as of the reported date. These financial instruments do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Effective January 1, 2010, we adopted ASU 2010-06, Improving Disclosures about Fair Value Measurements. This standard required additional disclosures about fair value measurements including transfers in and out of Levels 1 and 2 and a higher level of disaggregation for the different types of financial instruments.

 
13

The following table summarizes the valuation of our financial instruments by pricing observability levels as of June 30, 2010:

 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
 
   
(in thousands)
     
Money markets
  
$
220,328
 
 
$
—
 
 
$
—
    
$
220,328
  
U.S. Treasury bills
    
—
      
963,707
      
—
      
963,707
  
U.K. Treasury bills
    
—
      
180,029
      
—
      
180,029
  
Derivatives
    
751
      
1,855
      
—
      
2,606
  
Equity securities
                                
Growth
    
107,361
      
232
      
160
      
107,753
  
Value
    
74,942
      
—
      
—
      
74,942
  
Blend
    
102,558
      
—
      
—
      
102,558
  
Other(1)
    
45,421
      
—
      
—
      
45,421
  
Fixed Income securities
 
 
  
 
 
 
  
 
 
 
            
Taxable(2)
    
83,544
      
29,958
      
17
      
113,519
  
Tax-exempt(3)
    
9,930
      
751
      
—
      
10,681
  
Other
    
8
      
—
      
—
      
8
  
Long exchange-traded options
    
12,012
      
—
      
—
      
12,012
  
Private equity
 
 
25,587
 
 
 
3,706
 
 
 
102,544
      
131,837
  
Total assets measured at fair value
  
$
682,442
    
$
1,180,238
    
$
102,721
    
$
1,965,401
  
                                 
Securities sold not yet purchased
                                
Short equities – corporate
  
$
15,270
    
$
—
    
$
—
    
$
15,270
  
Short exchange-traded options
    
5,272
      
—
      
—
      
5,272
  
Other
    
1,639
      
—
      
—
      
1,639
  
Derivatives
    
—
      
2,248
      
—
      
2,248
  
Total liabilities measured at fair value
 
$
22,181
 
 
$
2,248
 
 
$
—
    
$
24,429
  
 
 
(1)
Primarily long positions in corporate equities traded through our options desk.
 
(2)
Primarily corporate and government securities.
 
(3)
Primarily municipal bonds.

The following table summarizes the valuation of our financial instruments by pricing observability levels as of December 31, 2009:

 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
 
   
(in thousands)
     
Money markets
  
$
178,875
 
 
$
—
 
 
$
—
    
$
178,875
  
U.S. Treasury bills
    
—
      
975,888
      
—
      
975,888
  
U.K. Treasury bills
    
—
      
177,772
      
—
      
177,772
  
Futures/currency forward contracts
    
(15
)
    
612
      
—
      
597
  
Equity securities
    
365,017
      
4,504
      
650
      
370,171
  
Fixed income securities
    
69,608
      
28,396
      
81
      
98,085
  
Long exchange-traded options
    
6,572
      
—
      
—
      
6,572
  
Private equity
 
 
2,913
 
 
 
62,006
 
 
 
97,828
      
162,747
  
Total assets measured at fair value
  
$
622,970
    
$
1,249,178
    
$
98,559
    
$
1,970,707
  
                                 
Securities sold not yet purchased
                                
Short equities – corporate
  
$
28,641
    
$
—
    
$
—
    
$
28,641
  
Short exchange-traded options
    
3,165
      
—
      
—
      
3,165
  
Total liabilities measured at fair value
 
$
31,806
 
 
$
—
 
 
$
—
    
$
31,806
  

 
14

Following is a description of the fair value methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:

 
•
Money markets: We invest excess cash in various money market funds that are valued based on quoted prices in active markets; these are included in Level 1 of the valuation hierarchy.

 
•
Treasury bills: We hold United States Treasury Bills, which are segregated in a special reserve bank custody account as required by Rule 15c3-3 of the Exchange Act. We also hold United Kingdom Treasury Bills. These securities are valued based on quoted yields in secondary markets and are included in Level 2 of the valuation hierarchy.

 
•
Derivatives: We hold exchange-traded futures with counterparties that are included in Level 1 of the valuation hierarchy. In addition, we also hold currency forward contracts, interest rate swaps, credit default swaps and total return swaps with counterparties that are included in Level 2 of the valuation hierarchy.

 
•
Equity and fixed income securities: Our equity and fixed income securities consist principally of company-sponsored mutual funds with exchange listed net asset values and various separately-managed portfolios consisting primarily of equity and fixed income securities with quoted prices in active markets, which are included in Level 1 of the valuation hierarchy. In addition, some fixed income securities are valued based on observable inputs from recognized pricing vendors, which are included in Level 2 of the valuation hierarchy.

 
• 
Options: We hold long exchange-traded options that are included in Level 1 of the valuation hierarchy.

 
•
Private equity: The valuation of non-public private equity investments owned by a consolidated venture capital fund requires significant management judgment due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of such investments. Private equity investments are valued initially at cost. The carrying values of private equity investments are adjusted either up or down from cost to reflect expected exit values as evidenced by financing and sale transactions with third parties, or when determination of a valuation adjustment is confirmed through ongoing review in accordance with our valuation policies and procedures. A variety of factors are reviewed and monitored to assess positive and negative changes in valuation including, but not limited to, current operating performance and future expectations of investee companies, industry valuations of comparable public companies, changes in market outlook and the third party financing environment over time. In determining valuation adjustments resulting from the investment review process, particular emphasis is placed on current company performance and market conditions. Non-public equity investments are included in Level 3 of the valuation hierarchy because they trade infrequently and, therefore, their fair value is unobservable. Publicly-traded equity investments are included in Level 1 of the valuation hierarchy. If they contain trading restrictions, publicly-traded equity investments are included in Level 2 of the valuation hierarchy. During the first quarter, the trading restriction period expired on one of our publicly-traded equity investments and the security was transferred from a Level 2 classification to a Level 1 classification as of June 30, 2010.

 
•
Securities sold not yet purchased: Securities sold not yet purchased, primarily reflecting short positions in equities and exchange-traded options, are included in Level 1 of the valuation hierarchy.

The following table summarizes the change in carrying value associated with Level 3 financial instruments carried at fair value:

   
Three Months Ended June 30,
    
Six Months Ended June 30,
  
   
2010
    
2009
    
2010
    
2009
  
   
(in thousands)
  
                         
Balance as of beginning of period
   $ 102,256     $ 157,855     $ 98,559     $ 162,552  
                                 
Transfer (out) in, net
     (82 )     (30,360 )     (163 )     (30,380 )
Purchases (sales), net
     (1,408 )     5,800       939       6,404  
Realized gains (losses), net
     (2,481 )     813       (2,429 )     791  
Unrealized gains (losses), net
     4,436       (1,978 )     5,815       (7,237 )
Balance as of end of period
   $ 102,721     $ 132,130     $ 102,721     $ 132,130  

Realized and unrealized gains and losses on Level 3 financial instruments are recorded in investment gains and losses in the condensed consolidated statements of income. Substantially all of the Level 3 investments are private equity investments owned by our consolidated venture capital fund, of which we own 10% and non-controlling interests own 90%.

 
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Assets Measured at Fair Value on a Nonrecurring Basis

There were no impairments recognized for goodwill, intangible assets or other long-lived assets as of June 30, 2010.

8.
Commitments and Contingencies

Legal Proceedings

On October 2, 2003, a purported class action complaint entitled Hindo, et al. v. AllianceBernstein Growth & Income Fund, et al. (“Hindo Complaint”) was filed against, among others, AllianceBernstein, Holding and the General Partner. The Hindo Complaint alleges that certain defendants failed to disclose that they improperly allowed certain hedge funds and other unidentified parties to engage in “late trading” and “market timing” of certain of our U.S. mutual fund securities, violating various securities laws.

Following October 2, 2003, additional lawsuits making factual allegations generally similar to those in the Hindo Complaint were filed in various federal and state courts against AllianceBernstein and certain other defendants. On September 29, 2004, plaintiffs filed consolidated amended complaints with respect to four claim types: mutual fund shareholder claims; mutual fund derivative claims; derivative claims brought on behalf of Holding; and claims brought under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) by participants in the Profit Sharing Plan for Employees of AllianceBernstein.

On April 21, 2006, AllianceBernstein and attorneys for the plaintiffs in the mutual fund shareholder claims, mutual fund derivative claims, and ERISA claims entered into a confidential memorandum of understanding containing their agreement to settle these claims. The agreement has been documented by a stipulation of settlement, which has been approved by the court. The settlement amount ($30 million), which we previously expensed and disclosed, has been disbursed. The derivative claims brought on behalf of Holding, in which plaintiffs seek an unspecified amount of damages, remain pending.

We intend to vigorously defend against the lawsuit involving derivative claims brought on behalf of Holding. At the present time, we are unable to predict the outcome or estimate a possible loss or range of loss in respect of this matter because of the inherent uncertainty regarding the outcome of complex litigation, and the fact that the plaintiffs did not specify an amount of damages sought in their complaint.

We are involved in various other matters, including regulatory inquiries, administrative proceedings and litigation, some of which allege significant damages. While any inquiry, proceeding or litigation has the element of uncertainty, management believes that the outcome of any one of the other regulatory inquiries, administrative proceedings, lawsuits or claims that is pending or threatened, or all of them combined, will not have a material adverse effect on our results of operations or financial condition.

Other

During July 2009, we entered into a subscription agreement under which we committed to invest up to $40 million in a venture capital fund over a six-year period. As of June 30, 2010, we had funded $3.8 million of this commitment.

Also during July 2009, we were selected by the U.S. Treasury Department as one of nine pre-qualified investment managers under the Public-Private Investment Program. As part of the program, each investment manager is required to invest a minimum of $20 million in the Public-Private Investment Fund they manage. As of June 30, 2010, we had funded $17.0 million of this commitment.

9.
Qualified Employee Benefit Plans

We maintain a qualified profit sharing plan covering U.S. employees and certain foreign employees. Employer contributions are discretionary and generally limited to the maximum amount deductible for federal income tax purposes.

We maintain several defined contribution plans for foreign employees in the United Kingdom, Australia, Japan and other foreign entities. Employer contributions are generally consistent with regulatory requirements and tax limits. Defined contribution expense for foreign entities was $1.8 million and $1.7 million during the three months ended June 30, 2010 and 2009, respectively, and $3.6 million and $3.7 million during the six months ended June 30, 2010 and 2009, respectively.

We maintain a qualified, noncontributory, defined benefit retirement plan (“Retirement Plan”) covering current and former employees who were employed by AllianceBernstein in the United States prior to October 2, 2000. Benefits are based on years of credited service, average final base salary (as defined in the Retirement Plan), and primary Social Security benefits. Service and compensation after December 31, 2008 are not taken into account in determining participants’ retirement benefits.

 
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Our policy is to satisfy our funding obligation for each year in an amount not less than the minimum required by ERISA and not greater than the maximum amount we can deduct for federal income tax purposes. Through July 2010, we have made no contributions to the Retirement Plan and currently intend to contribute $6.0 million to the Retirement Plan later this year. Contribution estimates, which are subject to change, are based on regulatory requirements, future market conditions and assumptions used for actuarial computations of the Retirement Plan’s obligations and assets. Management, at the present time, is unable to determine the amount, if any, of additional future contributions that may be required.

        Net expense under the Retirement Plan consisted of:

   
Three Months Ended June 30,
    
Six Months Ended June 30,
  
   
2010
    
2009
    
2010
    
2009
  
   
(in thousands)
  
                         
Interest cost on projected benefit obligations
   $ 1,139     $ 1,098     $ 2,278     $ 2,196  
Expected return on plan assets
     (1,129 )     (769 )     (2,258 )     (1,538 )
Recognized actuarial loss
     56       109       112       218  
Amortization of transition asset
     (36 )     (36 )     (72 )     (72 )
Net pension charge
   $ 30     $ 402     $ 60     $ 804  

10.
Units Outstanding

The following table summarizes the activity in units:
 
Outstanding as of December 31, 2009
    
274,745,592
  
Options exercised
    
475,159
  
Units issued
    
389,606
  
Units forfeited
    
(828
)
Outstanding as of June 30, 2010
    
275,609,529
  

In accordance with the Holding Partnership Agreement, when Holding issues Holding Units to AllianceBernstein, Holding is required to use the proceeds it receives from AllianceBernstein to purchase the equivalent number of newly-issued AllianceBernstein Units. Holding Units issued pertain to Holding Units newly issued under our Amended and Restated 1997 Long Term Incentive Plan and could include: (i) restricted Holding Unit awards to independent members of the Board of Directors of the General Partner, (ii) restricted Holding Unit awards to eligible employees, (iii) restricted Holding Unit awards for recruitment, and (iv) restricted Holding Unit issuances in connection with certain employee separation agreements.

11.
Income Taxes

AllianceBernstein is a private partnership for federal income tax purposes and, accordingly, is not subject to federal or state corporate income taxes. However, AllianceBernstein is subject to the 4.0% New York City unincorporated business tax (“UBT”). Domestic corporate subsidiaries of AllianceBernstein, which are subject to federal, state and local income taxes, are generally included in the filing of a consolidated federal income tax return with separate state and local income tax returns being filed. Foreign corporate subsidiaries are generally subject to taxes in the foreign jurisdictions where they are located.

In order to preserve AllianceBernstein’s status as a private partnership for federal income tax purposes, AllianceBernstein Units must not be considered publicly traded. The AllianceBernstein Partnership Agreement provides that all transfers of AllianceBernstein Units must be approved by AXA Equitable and the General Partner; AXA Equitable and the General Partner approve only those transfers permitted pursuant to one or more of the safe harbors contained in relevant treasury regulations. If such units were considered readily tradable, AllianceBernstein’s net income would be subject to federal and state corporate income tax. Furthermore, should AllianceBernstein enter into a substantial new line of business, Holding, by virtue of its ownership of AllianceBernstein, would lose its status as a “grandfathered” publicly-traded partnership and would become subject to corporate income tax, which would reduce materially Holding’s net income and its quarterly distributions to Holding Unitholders.

Our income tax provision for the first quarter of 2009 includes a $3.4 million entry relating to an under-accrual of foreign taxes in the fourth quarter of 2008. This adjusting entry was not material to the income tax provision or income tax liability in our condensed consolidated financial statements or to the results of operations and financial condition in any prior reporting period.

 
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12.
Debt

Total credit available, debt outstanding and weighted average interest rates were as follows:

 
June 30, 2010
  
December 31, 2009
  
   
Credit
Available
    
Debt
Outstanding
    
Interest
Rate
    
Credit
Available
    
Debt
Outstanding
    
Interest
Rate
  
 
(in millions)
  
     
Revolving credit facility
   $ 921.0     $ —       — %   $ 751.0     $ —       — %
Commercial paper (1)
     79.0       79.0       0.3       249.0       249.0       0.2  
Total revolving credit facility - AllianceBernstein
     1,000.0       79.0       0.3       1,000.0       249.0       0.2  
Revolving credit facility –SCB LLC
     950.0       —       —       950.0       —       —  
Total
   $ 1,950.0     $ 79.0       0.3     $ 1,950.0     $ 249.0       0.2  
 
(1) Commercial paper is short-term in nature and, as such, recorded value is estimated to approximate fair value.

AllianceBernstein has a $1.0 billion five-year revolving credit facility with a group of commercial banks and other lenders which expires in February 2011. The revolving credit facility is intended to provide back-up liquidity for our $1.0 billion commercial paper program, although we borrow directly under the facility from time to time. Amounts borrowed under the commercial paper program reduce amounts available for direct borrowing under the revolving credit facility on a dollar-for-dollar basis. Our interest rate, at our option, is a floating rate generally based upon a defined prime rate, a rate related to the London Interbank Offered Rate (“LIBOR”) or the Federal Funds rate. The revolving credit facility contains covenants which, among other things, require us to meet certain financial ratios. We are in compliance with these covenants.

SCB LLC has a $950 million three-year revolving credit facility with a group of commercial banks to fund its activities resulting from engaging in certain securities trading (including derivatives) and custody activities on behalf of private clients and participating in equity capital offerings on behalf of issuers of publicly-traded securities. The facility expires in January 2011. Under the revolving credit facility, the interest rate, at the option of SCB LLC, is a floating rate generally based upon a defined prime rate, a rate related to LIBOR or the Federal Funds rate. This revolving credit facility contains covenants which, among other things, require AllianceBernstein, as guarantor, to meet the same financial ratios contained in its $1.0 billion revolving credit facility. We are in compliance with these covenants.

AllianceBernstein and AXA executed guarantees in regard to the $950 million SCB LLC facility. In the event SCB LLC is unable to meet its obligations, AllianceBernstein or AXA will pay the obligations when due or on demand. AllianceBernstein will reimburse AXA to the extent AXA must pay on its guarantee. This agreement is continuous and remains in effect until the later of payment in full of any such obligation under the credit facility has been made or the maturity date.

SCB LLC has several separate uncommitted credit facilities with various banks.  SCB LLC also has two uncommitted lines of credit with a commercial bank, one for $75 million secured by pledges of U.S. Treasury Bills and a second for $50 million secured by pledges of equity securities.

On July 23, 2010, a subsidiary of AllianceBernstein arranged for a non-recourse credit line from AXA Equitable Life Insurance Company (“AXA Equitable”) in an amount equal to $100 million. The credit line, which matures on October 15, 2010 or any later date agreed to by AXA Equitable, will be used to purchase real estate investments with the expectation that they will be transferred to a real estate opportunity fund being established by AllianceBernstein.

 
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13.
Comprehensive Income

Comprehensive income consisted of:

   
Three Months Ended June 30,
    
Six Months Ended June 30,
  
   
2010
    
2009
    
2010
    
2009
  
   
(in thousands)
  
                         
Net income
   $ 96,780     $ 129,595     $ 228,273     $ 161,106  
Other comprehensive income (loss), net of tax:
                                
Unrealized gains (losses) on investments
     (1,260 )     1,019       (902 )     1,401  
Foreign currency translation adjustment
     (11,749 )     53,669       (29,965 )     48,394  
Changes in retirement plan related items
     20       73       40       146  
Comprehensive income
     83,791       184,356       197,446       211,047  
Comprehensive (income) loss in consolidated entities attributable to non-controlling interests
     10,897       (3,622 )     27,043       1,826  
Comprehensive income attributable to AllianceBernstein Unitholders
   $ 94,688     $ 180,734     $ 224,489     $ 212,873  

14. 
Changes in Capital

Changes in capital for the six months ended June 30, 2010 consisted of:

   
Partners’ Capital Attributable to AllianceBernstein Unitholders
    
Non-Controlling Interests In Consolidated Entities
  
Total Capital
  
   
(in thousands)
  
                         
Balance as of  December 31, 2009
 
$
4,530,362
  
 
$
171,593
 
 
$
4,701,955
  
Comprehensive income (loss):
                      
 
Net income (loss)
 
 
254,385
  
 
 
(26,112
)
 
 
228,273
  
Other comprehensive income (loss), net of tax:
                        
Unrealized gains (losses) on investments
    
(1,137
)
    
235
      
(902
 )
Foreign currency translation adjustments
    
(28,799
)
    
(1,166
)
    
(29,965
 )
Changes in retirement plan related items
    
40
      
—
      
40
  
Comprehensive income (loss)
    
224,489
      
(27,043
)
    
197,446
  
                         
Cash distributions to General Partner and unitholders
    
(341,862
)
    
—
      
(341,862
 )
Capital contributions (distributions)
    
1,854
      
(992
)
    
862
  
Compensation-related transactions
    
(24,655
)
    
—
      
(24,655
 )
Balance as of June 30, 2010
 
$
4,390,188
  
 
$
143,558
  
 
$
4,533,746
  

 
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Changes in capital for the six months ended June 30, 2009 consisted of:
 
   
Partners’ Capital Attributable to AllianceBernstein Unitholders
    
Non-Controlling Interests In Consolidated Entities
  
Total Capital
  
   
(in thousands)
  
                         
Balance as of  December 31, 2008
 
$
4,317,659
  
 
$
169,167
 
 
$
4,486,826
  
Comprehensive income (loss):
                      
 
Net income (loss)
 
 
165,146
  
 
 
(4,040
)
 
 
161,106
  
Other comprehensive income (loss), net of tax:
                        
Unrealized gains (losses) on investments
    
1,403
      
(2
)
    
1,401
  
Foreign currency translation adjustments
    
46,178
      
2,216
      
48,394
  
Changes in retirement plan related items
    
146
      
—
      
146
  
Comprehensive income (loss)
    
212,873
      
(1,826
)
    
211,047
  
                         
Cash distributions to General Partner and unitholders
    
(136,678
)
    
—
      
(136,678
 )
Capital contributions
    
1,854
      
1,266
      
3,120
  
Compensation-related transactions
    
35,467
      
—
      
35,467
  
Balance as of June 30, 2009
 
$
4,431,175
  
 
$
168,607
  
 
$
4,599,782
  

15.
Accounting Pronouncements

In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements. This standard has two parts, the first of which we adopted on January 1, 2010. The first part required additional disclosures about fair value measurements including transfers in and out of Levels 1 and 2 and a higher level of disaggregation for the different types of financial instruments. The second portion of the standard requires a reconciliation of Level 3 fair value measurements, with information about purchases, sales, issuances and settlements presented separately. The second portion of the standard is effective for fiscal years ending after December 15, 2010 and is not expected to have a material impact on our consolidated financial statements.

 
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