Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - ALLIANCEBERNSTEIN L.P.a63016exhibit322.htm
EX-32.1 - EXHIBIT 32.1 - ALLIANCEBERNSTEIN L.P.a63016exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - ALLIANCEBERNSTEIN L.P.a63016exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - ALLIANCEBERNSTEIN L.P.a63016exhibit311.htm

 
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, 2016
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
x

 
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 o
 
Accelerated filer o
 
 
 
Non-accelerated filer x (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, 2016 was 268,777,653.




ALLIANCEBERNSTEIN L.P.
Index to Form 10-Q

 
 
Page
 
 
 
 
Part I
 
 
 
 
 
FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
Part II
 
 
 
 
 
OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 




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,
2016
 
December 31,
2015
 
(unaudited)
 
 
ASSETS
 
 
 
Cash and cash equivalents
$
690,563

 
$
541,483

Cash and securities segregated, at fair value (cost: $665,983 and $565,264)
666,169

 
565,274

Receivables, net:
 

 
 

Brokers and dealers
383,110

 
411,174

Brokerage clients
1,683,263

 
1,328,406

Fees
241,335

 
257,091

Investments:
 

 
 

Long-term incentive compensation-related
64,296

 
78,154

Other
451,886

 
591,646

Assets of consolidated variable interest entities:
 
 
 
   Cash and cash equivalents
35,076

 

   Investments
247,103

 

   Other assets
65,915

 

Furniture, equipment and leasehold improvements, net
160,140

 
160,360

Goodwill
3,044,807

 
3,044,807

Intangible assets, net
132,910

 
145,710

Deferred sales commissions, net
79,088

 
99,070

Other assets
272,896

 
210,546

Total assets
$
8,218,557

 
$
7,433,721

 
 
 
 
LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND CAPITAL
 

 
 

Liabilities:
 

 
 

Payables:
 

 
 

Brokers and dealers
$
341,949

 
$
191,990

Securities sold not yet purchased
13,716

 
16,097

Brokerage clients
1,778,162

 
1,715,096

AB mutual funds
205,123

 
137,886

Accounts payable and accrued expenses
583,808

 
469,753

Liabilities of consolidated variable interest entities
63,354

 

Accrued compensation and benefits
429,934

 
253,079

Debt
587,228

 
581,700

Total liabilities
4,003,274

 
3,365,601

 
 
 
 
Commitments and contingencies (See Note 12)


 


 
 
 
 
Redeemable non-controlling interest
224,566

 
13,203


1


 
 
 
 
Capital:
 

 
 

General Partner
40,281

 
40,875

Limited partners: 268,777,653 and 272,301,827 units issued and outstanding
4,070,184

 
4,128,752

Receivables from affiliates
(14,257
)
 
(14,498
)
AB Holding Units held for long-term incentive compensation plans
(27,712
)
 
(29,332
)
Accumulated other comprehensive loss
(95,294
)
 
(95,353
)
Partners’ capital attributable to AB Unitholders
3,973,202

 
4,030,444

Non-redeemable non-controlling interests in consolidated entities
17,515

 
24,473

Total capital
3,990,717

 
4,054,917

Total liabilities, redeemable non-controlling interest and capital
$
8,218,557

 
$
7,433,721

 
See Accompanying Notes to Condensed Consolidated Financial Statements.

2


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,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Investment advisory and services fees
$
477,050

 
$
515,924

 
$
928,463

 
$
1,009,912

Bernstein research services
115,053

 
121,910

 
241,518

 
247,956

Distribution revenues
97,321

 
111,850

 
190,013

 
221,034

Dividend and interest income
7,697

 
5,667

 
15,067

 
10,761

Investment gains (losses)
2,276

 
11,993

 
67,863

 
15,881

Other revenues
28,283

 
26,023

 
55,957

 
51,013

Total revenues
727,680

 
793,367

 
1,498,881

 
1,556,557

Less: Interest expense
1,874

 
630

 
3,949

 
1,249

Net revenues
725,806

 
792,737

 
1,494,932

 
1,555,308

 
 
 
 
 
 
 
 
Expenses:
 

 
 

 
 

 
 

Employee compensation and benefits
309,249

 
337,640

 
611,260

 
663,967

Promotion and servicing:
 

 
 

 
 

 
 

Distribution-related payments
93,217

 
102,578

 
180,344

 
202,964

Amortization of deferred sales commissions
10,577

 
12,713

 
21,819

 
25,112

Other
55,357

 
59,182

 
109,558

 
114,719

General and administrative:
 

 
 

 
 

 
 

General and administrative
109,757

 
108,092

 
215,680

 
215,425

Real estate (credits) charges
(2,801
)
 
(80
)
 
24,785

 
(463
)
Contingent payment arrangements
353

 
442

 
706

 
885

Interest on borrowings
1,052

 
736

 
2,284

 
1,590

Amortization of intangible assets
6,470

 
6,512

 
12,879

 
12,973

Total expenses
583,231

 
627,815

 
1,179,315

 
1,237,172

 
 
 
 
 
 
 
 
Operating income
142,575

 
164,922

 
315,617

 
318,136

 
 
 
 
 
 
 
 
Income taxes
10,588

 
9,153

 
20,452

 
19,623

 
 
 
 
 
 
 
 
Net income
131,987

 
155,769

 
295,165

 
298,513

 
 
 
 
 
 
 
 
Net income (loss) of consolidated entities attributable to non-controlling interests
4,843

 
6,675

 
(905
)
 
7,950

 
 
 
 
 
 
 
 
Net income attributable to AB Unitholders
$
127,144

 
$
149,094

 
$
296,070

 
$
290,563

 
 
 
 
 
 
 
 
Net income per AB Unit:
 

 
 

 
 

 
 

Basic
$
0.47

 
$
0.54

 
$
1.08

 
$
1.05

Diluted
$
0.47

 
$
0.54

 
$
1.08

 
$
1.05


See Accompanying Notes to Condensed Consolidated Financial Statements.

3


ALLIANCEBERNSTEIN L.P.
AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Net income
$
131,987

 
$
155,769

 
$
295,165

 
$
298,513

Other comprehensive income (loss):
 

 
 

 
 
 
 
 Foreign currency translation adjustment, before reclassification and tax:
(5,123
)
 
7,598

 
102

 
(4,677
)
Less: reclassification adjustment for gains included in net income upon liquidation

 
1,542

 

 
1,542

Foreign currency translation adjustments, before tax
(5,123
)
 
6,056

 
102

 
(6,219
)
Income tax expense

 

 

 

Foreign currency translation adjustments, net of tax
(5,123
)
 
6,056

 
102

 
(6,219
)
Unrealized (losses) on investments:
 

 
 

 
 
 
 
Unrealized (losses) arising during period
(11
)
 
(530
)
 
(19
)
 
(341
)
Less: reclassification adjustment for losses included in net income

 

 
(3
)
 

Change in unrealized (losses) on investments
(11
)
 
(530
)
 
(16
)
 
(341
)
Income tax benefit
4

 
161

 
3

 
280

Unrealized (losses) on investments, net of tax
(7
)
 
(369
)
 
(13
)
 
(61
)
Changes in employee benefit related items:
 

 
 

 
 
 
 
Amortization of prior service cost
10

 

 
81

 

Recognized actuarial gain (loss)
391

 
238

 
(42
)
 
475

Changes in employee benefit related items
401

 
238

 
39

 
475

Income tax expense
(4
)
 
(3
)
 
(75
)
 
(65
)
Employee benefit related items, net of tax
397

 
235

 
(36
)
 
410

Other comprehensive (loss) income
(4,733
)
 
5,922

 
53

 
(5,870
)
Less: Comprehensive income (loss) in consolidated entities attributable to non-controlling interests
4,787

 
6,683

 
(910
)
 
7,891

Comprehensive income attributable to AB Unitholders
$
122,467

 
$
155,008

 
$
296,128

 
$
284,752

 
See Accompanying Notes to Condensed Consolidated Financial Statements.


4


ALLIANCEBERNSTEIN L.P. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Six Months Ended June 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
295,165

 
$
298,513

 
 
 
 
Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Amortization of deferred sales commissions
21,819

 
25,112

Non-cash long-term incentive compensation expense
4,383

 
9,682

Depreciation and other amortization
29,548

 
28,391

Unrealized gains on investments
(17,517
)
 
(4,826
)
Unrealized losses on investments of consolidated variable interest entities
2,599

 

Other, net
9,091

 
(8,486
)
Changes in assets and liabilities:
 

 
 

(Increase) decrease in segregated cash and securities
(100,895
)
 
8,821

(Increase) in receivables
(382,084
)
 
(87,105
)
Decrease in investments
147,317

 
56,117

(Increase) in investments of consolidated variable interest entities
(10,630
)
 

(Increase) in deferred sales commissions
(1,837
)
 
(26,475
)
(Increase) in other assets
(62,693
)
 
(60,687
)
(Increase) in other assets and liabilities of consolidated variable interest entities
(943
)
 

Increase (decrease) in payables
336,812

 
(18,922
)
Increase (decrease) in accounts payable and accrued expenses
67,807

 
(14,931
)
Increase in accrued compensation and benefits
176,636

 
230,865

Net cash provided by operating activities
514,578

 
436,069

 
 
 
 
Cash flows from investing activities:
 

 
 

Purchases of investments

 
(88
)
Proceeds from sales of investments
92

 

Purchases of furniture, equipment and leasehold improvements
(20,304
)
 
(11,730
)
Proceeds from sales of furniture, equipment and leasehold improvements

 
33

Net cash used in investing activities
(20,212
)
 
(11,785
)
 
 
 
 
Cash flows from financing activities:
 

 
 

(Repayment) of commercial paper, net
(46,144
)
 
(84,907
)
Proceeds from bank loans
50,000

 
50,000

Increase in overdrafts payable
47,630

 
28,901

Distributions to General Partner and Unitholders
(275,930
)
 
(313,597
)
Capital contributions from non-controlling interests in consolidated entities

 
430

Redemptions of non-controlling interests of consolidated VIEs, net
(45,534
)
 

Capital contributions (to) from affiliates
(120
)
 
793

Payments of contingent payment arrangements
(538
)
 
(404
)
Additional investments by AB Holding with proceeds from exercise of compensatory options to buy AB Holding Units
2,377

 
8,979

Purchases of AB Holding Units to fund long-term incentive compensation plan awards, net
(83,744
)
 
(19,709
)
Purchases of AB Units
(337
)
 
(726
)
Other
(11
)
 
(14
)
Net cash used in financing activities
(352,351
)
 
(330,254
)
 
 
 
 
 
 
 
 

5


Effect of exchange rate changes on cash and cash equivalents
6,324

 
(4,176
)
 
 
 
 
Net increase in cash and cash equivalents
148,339

 
89,854

Cash and cash equivalents as of beginning of the period
577,300

 
555,503

Cash and cash equivalents as of end of the period
$
725,639

 
$
645,357

 
 
 
 
Supplemental information - consolidation of variable interest entities:
 
 
 
Consolidation of cash and cash equivalents of consolidated variable interest entities
$
35,817

 
$

Consolidation of investments of consolidated variable interest entities
215,175

 

Consolidation of other assets of consolidated variable interest entities
13,871

 

Consolidation of other liabilities of consolidated variable interest entities
14,012

 

Consolidation of redeemable non-controlling interest of consolidated variable interest entities
250,851

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

6


ALLIANCEBERNSTEIN L.P.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2016
(unaudited)

The words “we” and “our” refer collectively to AllianceBernstein L.P. and its subsidiaries (“AB”), or to their officers and employees. Similarly, the word “company” refers to AB. These statements should be read in conjunction with AB’s audited consolidated financial statements included in AB’s Form 10-K for the year ended December 31, 2015.

1. Business Description Organization and Basis of Presentation

Business Description

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 private and public pension plans, foundations and endowments, insurance companies, central banks and governments worldwide, and affiliates such as AXA and its 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 AB 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 Wealth Management Services – servicing our private clients, including high-net-worth individuals and families, 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, such as pension fund, hedge fund and mutual fund managers, seeking high-quality fundamental research, quantitative services and brokerage-related services in equities and listed options.

We also provide distribution, shareholder servicing, transfer agency services and administrative services to the mutual funds we sponsor.
 
Our high-quality, in-depth research is the foundation of our business.  Our research disciplines include economic, fundamental equity, fixed income and quantitative research.  In addition, we have experts focused on multi-asset strategies, wealth management and alternative investments.

We provide a broad range of investment services with expertise in:

Actively-managed equity strategies, with global and regional portfolios across capitalization ranges and investment strategies, including value, growth and core equities;

Actively-managed traditional and unconstrained fixed income strategies, including taxable and tax-exempt strategies;

Passive management, including index and enhanced index strategies;

Alternative investments, including hedge funds, fund of funds and private equity (e.g., direct real estate investing); and

Multi-asset solutions and services, including dynamic asset allocation, customized target-date funds and target-risk funds.

Our services span 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, emerging markets, regional and local), in major markets around the world.

7



Organization

As of June 30, 2016, AXA, a société anonyme organized under the laws of France and the holding company for the AXA Group, a worldwide leader in financial protection, through certain of its subsidiaries (“AXA and its subsidiaries”), owns approximately 1.5% of the issued and outstanding units representing assignments of beneficial ownership of limited partnership interests in AllianceBernstein Holding L.P. (“AB Holding Units”).

As of June 30, 2016, the ownership structure of AB, expressed as a percentage of general and limited partnership interests, is as follows:

AXA and its subsidiaries
63.2
%
AB Holding
35.6

Unaffiliated holders
1.2

 
100.0
%

AllianceBernstein Corporation (an indirect wholly-owned subsidiary of AXA, “General Partner”) is the general partner of both AllianceBernstein Holding L.P. (“AB Holding”) and AB. AllianceBernstein Corporation owns 100,000 general partnership units in AB Holding and a 1% general partnership interest in AB. Including both the general partnership and limited partnership interests in AB Holding and AB, AXA and its subsidiaries had an approximate 63.8% economic interest in AB as of June 30, 2016.

Basis of Presentation

The interim condensed consolidated financial statements 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 condensed consolidated statement of financial condition as of December 31, 2015 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”).

The condensed consolidated financial statements include AB and its majority-owned and/or controlled subsidiaries, and the consolidated entities that are considered to be variable interest entities ("VIEs") and for which AB is considered the primary beneficiary. Non-controlling interests on the condensed consolidated statements of financial condition includes the portion of consolidated company-sponsored investment funds in which we do not have direct equity ownership. All significant inter-company transactions and balances among the consolidated entities have been eliminated.


2.
Significant Accounting Policies

Recently Adopted Accounting Pronouncements

In February 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-02, Consolidation – Amendments to the Consolidation Analysis ("ASU 2015-02"), which provides a new consolidation standard for evaluating: (i) limited partnerships and similar entities for consolidation, (ii) how decision maker or service provider fees affect the consolidation analysis, (iii) how interest held by related parties affect the consolidation analysis and (iv) the consolidation analysis required for certain investment funds. We adopted ASU 2015-02 using the modified retrospective method with an effective adoption date of January 1, 2016, which did not require the restatement of prior-year periods. The adoption of ASU 2015-02 resulted in the consolidation of certain investment funds that were not previously consolidated. These funds became consolidated VIEs as we are considered the party with both (i) the power to direct the activities of the VIE that most significantly impact its economic performance and (ii) 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. See Consolidation of VIEs below.


8


In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. This standard requires debt issuance costs be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. We adopted this standard on January 1, 2016 on a retrospective basis, which required the restatement of prior periods. The adoption of this standard did not have a material impact on our financial condition or results of operations.

In May 2015, the FASB issued ASU 2015-07, Fair Value Measurement : Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). This standard removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value ("NAV") per share practical expedient. We adopted this standard on January 1, 2016 on a retrospective basis, which required the restatement of prior-period disclosures. The adoption of this standard did not have a material impact on our financial condition or results of operations.

Accounting Pronouncements Not Yet Adopted

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The amendment is effective retrospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2017. Management currently is evaluating the impact that the adoption of this standard will have on our consolidated financial statements. We expect to have this evaluation completed in the fourth quarter of 2016.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The amendment addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments and is effective for fiscal years (and interim periods within those years) beginning after December 15, 2017. The amendment will result in a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, except for one provision relating to equity securities without readily determinable fair values, which provision will be applied prospectively. The amendment is not expected to have a material impact on our financial condition or results of operations.

In February 2016, the FASB issued ASU 2016-02, Leases. The amendment requires recognition of lease assets and lease liabilities on the statement of financial condition and disclosure of key information about leasing arrangements. Specifically, this guidance requires an operating lease lessee to recognize on the statement of financial condition a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. However, for leases with a term of twelve months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. The amendment is effective for fiscal years (and interim periods within those years) beginning after December 15, 2018 and requires lessees to recognize and measure leases at the beginning of the earliest period presented in the financial statements using a modified retrospective approach. Management currently is evaluating the impact that the adoption of this standard will have on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-07, Investments - Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting. The amendment eliminates the current requirement for a retroactive adjustment and instead requires that the investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Additionally, the amendment requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendment is effective for fiscal years (and interim periods within those years) beginning after December 15, 2016 and should be applied prospectively as of the effective date of increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. The amendment is not expected to have a material impact on our financial condition or results of operations.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. The amendment includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements, including income tax effects of share-based payments, minimum statutory tax withholding requirements and forfeitures. The amendment is effective for fiscal years (and interim periods within those years) beginning after December 15, 2016 and may be applied using various transition approaches (prospective, retrospective and modified retrospective). The amendment is not expected to have a material impact on our financial condition or results of operations.

Consolidation of VIEs
As discussed above, we adopted ASU 2015-02 effective January 1, 2016.

9


For legal entities evaluated for consolidation, we first determined whether the fees we receive and the interests we hold qualify as a variable interest in the entity. This included an evaluation of fees paid to us as a decision maker or service provider to the entity being evaluated. Fees received by us are not variable interests if (i) the fees are compensation for services provided and are commensurate with the level of effort required to provide those services, (ii) the service arrangement includes only terms, conditions or amounts that are customarily present in arrangements for similar services negotiated at arm’s length, and (iii) our other economic interests in the entity held directly and indirectly through our related parties, as well as economic interests held by related parties under common control, would not absorb more than an insignificant amount of the entity’s losses or receive more than an insignificant amount of the entity’s benefits.
For those entities in which we have a variable interest, we performed an analysis to determine whether the entity is a VIE by considering whether the entity’s equity investment at risk is insufficient, whether the investors lack decision making rights proportional to their ownership percentage of the entity, and whether the investors lack the obligation to absorb an entity’s expected losses or the right to receive an entity’s expected income.
A VIE must be consolidated by its primary beneficiary, which generally is defined as the party that has a controlling financial interest in the VIE. We are deemed to have a controlling financial interest in a VIE if we have (i) the power to direct the activities of the VIE that most significantly affect the VIE's economic performance, and (ii) the obligation to absorb losses of the VIE or the right to receive income from the VIE that could potentially be significant to the VIE. For purposes of evaluating (ii) above, fees paid to us as a decision maker or service provider are excluded if the fees are compensation for services provided commensurate with the level of effort required to be performed and the arrangement includes only customary terms, conditions or amounts present in arrangements for similar services negotiated at arm’s length. The primary beneficiary evaluation generally is performed qualitatively based on all facts and circumstances, as well as quantitatively, as appropriate.
If we have a variable interest in an entity that is determined not to be a VIE, the entity is then evaluated for consolidation under the voting interest entity (“VOE”) model. For limited partnerships and similar entities, we are deemed to have a controlling financial interest in a VOE, and would be required to consolidate the entity, if we own a majority of the entity’s kick-out rights through voting limited partnership interests and limited partners do not hold substantive participating rights (or other rights that would indicate that we do not control the entity). For entities other than limited partnerships, we are deemed to have a controlling financial interest in a VOE if we own a majority voting interest in the entity.
The analysis performed regarding the determination of variable interests held, whether entities are VIEs or VOEs, and whether we have a controlling financial interest in such entities requires the exercise of judgment. The analysis is updated continuously as circumstances change or new entities are formed.
As a result of the adoption of ASU 2015-02, effective January 1, 2016, we have consolidated three investment funds that are classified as VIEs in which we have a controlling financial interest. Ownership interests not held by us relating to these consolidated VIEs are included in redeemable non-controlling interest on the condensed consolidated statement of financial condition. In addition, effective January 1, 2016, we reclassified our consolidated private equity fund as a consolidated VIE (which was consolidated as of December 31, 2015 under previous accounting guidance due to our controlling financial interest of a VOE). Ownership interests not held by us relating to this consolidated VIE, which is a closed-end fund, are included in non-controlling interest on the condensed consolidated statement of financial condition. The supplemental information included on the condensed consolidated statement of cash flows relates to balance sheet amounts of the three investment funds consolidated as of January 1, 2016.
As of June 30, 2016, the net assets of company-sponsored investment products that are non-consolidated VIEs are approximately $39.2 billion, and our maximum risk of loss is our investment of $6.1 million in these VIEs and advisory fee receivables from these VIEs, which are not material.
3.
Long-term Incentive Compensation Plans

We maintain an unfunded, non-qualified long-term incentive compensation plan, under which we grant annual awards to employees, generally in the fourth quarter, and to members of the Board of Directors, who are not employed by us or any of our affiliates ("Eligible Directors").

We fund our restricted AB Holding Unit awards either by purchasing AB Holding Units on the open market or purchasing newly-issued AB Holding Units from AB Holding, and then keeping all of these AB Holding Units in a consolidated rabbi trust until delivering them or retiring them. In accordance with the Amended and Restated Agreement of Limited Partnership of AB (“AB Partnership Agreement”), when AB purchases newly-issued AB Holding Units from AB Holding, AB Holding is required to use the proceeds it receives from AB to purchase the equivalent number of newly-issued AB Units, thus increasing

10


its percentage ownership interest in AB. AB Holding Units held in the consolidated rabbi trust are corporate assets in the name of the trust and are available to the general creditors of AB.

During the three and six months ended June 30, 2016, we purchased 1.9 million and 3.8 million AB Holding Units for $44.3 million and $84.0 million, respectively (on a trade date basis). These amounts reflect open-market purchases of 1.9 million and 3.7 million AB Holding Units for $43.9 million and $82.0 million, respectively, with the remainder relating to purchases of AB Holding Units from employees to allow them to fulfill statutory tax withholding requirements at the time of delivery of long-term incentive compensation awards. During the three and six months ended June 30, 2015, we purchased 0.1 million and 0.8 million AB Holding Units for $4.3 million and $21.3 million, respectively (on a trade date basis). These amounts reflected open-market purchases of 0.1 million and 0.7 million AB Holding Units for $4.0 million and $19.0 million, respectively, with the remainder relating to purchases of AB Holding Units from employees to allow them to fulfill statutory tax withholding requirements at the time of delivery of long-term incentive compensation awards. Purchases of AB Holding Units reflected on the consolidated statements of cash flows are net of AB Holding Unit purchases by employees as part of a distribution reinvestment election.

Each quarter, we implement plans to repurchase AB Holding Units pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (“Exchange Act”). A Rule 10b5-1 plan allows a company to repurchase its shares at times when it otherwise might be prevented from doing so because of self-imposed trading blackout periods or because it possesses material non-public information. Each broker we select has the authority under the terms and limitations specified in the plan to repurchase AB Holding Units on our behalf in accordance with the terms of the plan. Repurchases are subject to regulations promulgated by the SEC as well as certain price, market volume and timing constraints specified in the plan. The plan adopted during the second quarter of 2016 expired at the close of business on July 27, 2016. We may adopt additional Rule 10b5-1 plans in the future to engage in open-market purchases of AB Holding Units to help fund anticipated obligations under our incentive compensation award program and for other corporate purposes.

During the first six months of both 2016 and 2015, we granted to employees and Eligible Directors 0.3 million restricted AB Holding Unit awards. We used AB Holding Units repurchased during the period and newly-issued AB Holding Units to fund these awards.

During the first six months of 2016 and 2015, AB Holding issued 0.1 million and 0.5 million AB Holding Units, respectively, upon exercise of options to buy AB Holding Units. AB Holding used the proceeds of $2.4 million and $9.0 million, respectively, received from employees as payment in cash for the exercise price to purchase the equivalent number of newly-issued AB Units.

4.
Cash Distributions

AB is required to distribute all of its Available Cash Flow, as defined in the AB Partnership Agreement, to its Unitholders and to the General Partner. Available Cash Flow can be summarized as the cash flow received by AB from operations minus such amounts as the General Partner determines, in its sole discretion, should be retained by AB for use in its business, or plus such amounts as the General Partner determines, in its sole discretion, should be released from previously retained cash flow.

Typically, Available Cash Flow has been the adjusted diluted net income per unit for the quarter multiplied by the number of general and limited partnership interests at the end of the quarter. In future periods, management anticipates that Available Cash Flow will be based on adjusted diluted net income per unit, unless management determines that one or more non-GAAP adjustments that are made for adjusted net income should not be made with respect to the Available Cash Flow calculation.

On July 28, 2016, the General Partner declared a distribution of $0.46 per AB Unit, representing a distribution of Available Cash Flow for the three months ended June 30, 2016. 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 25, 2016 to holders of record on August 8, 2016.


11



5.
Real Estate Charges

During 2010, we performed a comprehensive review of our real estate requirements in New York in connection with our workforce reductions, which commenced in 2008. As a result, during 2010 we decided to sub-lease over 380,000 square feet in New York (all of this space has been sublet) and consolidate our New York-based employees into two office locations from three. During the third quarter of 2012, in an effort to further reduce our global real estate footprint, we completed a comprehensive review of our worldwide office locations and began implementing a global space consolidation plan. As a result, we decided to sub-lease approximately 510,000 square feet of office space (all of this space has been sublet), more than 70% of which is New York office space (in addition to the 380,000 square foot space reduction in 2010), with the remainder consisting of office space in England, Australia and various U.S. locations.

During the first six months of 2016, we recorded pre-tax real estate charges of $24.8 million, resulting from new charges of $26.7 million relating to the further consolidation of office space at our New York offices, offset by changes in estimates related to previously recorded real estate charges of $1.9 million.

The activity in the liability account relating to our 2010 and 2012 office space consolidation initiatives for the following periods is as follows:
 
 
Six Months Ended
June 30, 2016
 
Twelve Months Ended
December 31, 2015
 
(in thousands)
 
 
 
 
Balance as of beginning of period
$
116,064

 
$
148,429

Expense (credit) incurred
(836
)
 
2,258

Payments made
(13,464
)
 
(38,920
)
Interest accretion
2,142

 
4,297

Balance as of end of period
$
103,906

 
$
116,064


6.
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 diluted weighted average number of units outstanding for each period.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands, except per unit amounts)
 
 
 
 
 
 
 
 
Net income attributable to AB Unitholders
$
127,144

 
$
149,094

 
$
296,070

 
$
290,563

 
 
 
 
 
 
 
 
Weighted average units outstanding – basic
269,720

 
272,858

 
270,787

 
272,844

Dilutive effect of compensatory options to buy AB Holding Units
650

 
1,253

 
534

 
1,184

Weighted average units outstanding – diluted
270,370

 
274,111

 
271,321

 
274,028

Basic net income per AB Unit
$
0.47

 
$
0.54

 
$
1.08

 
$
1.05

Diluted net income per AB Unit
$
0.47

 
$
0.54

 
$
1.08

 
$
1.05



12


For the three and six months ended June 30, 2016, we excluded 2,793,454 and 2,873,106 options, respectively, from the diluted net income per unit computation due to their anti-dilutive effect. For the three and six months ended June 30, 2015, we excluded 2,383,589 options from the diluted net income per unit computation due to their anti-dilutive effect.
 
7.
Cash and Securities Segregated Under Federal Regulations and Other Requirements

As of June 30, 2016 and December 31, 2015, $0.6 billion and $0.5 billion, respectively, of U.S. Treasury Bills were segregated in a special reserve bank custody account for the exclusive benefit of our brokerage customers under Rule 15c3-3 of the Exchange Act.

One of our subsidiaries, which serves as the distributor of our U.S. mutual funds, maintains several special bank accounts for the exclusive benefit of customers. As of June 30, 2016 and December 31, 2015, $61.6 million and $55.4 million, respectively, of cash was segregated in these bank accounts.

8.
Investments

Investments consist of:
 
 
 
 
June 30,
2016
 
December 31,
2015
 
(in thousands)
 
 
 
 
Available-for-sale
$
305

 
$
364

Trading:
 

 
 

Long-term incentive compensation-related
47,681

 
59,150

U.S. Treasury Bills
29,899

 
24,942

Seed capital
271,787

 
406,322

Equities
67,610

 
43,584

Exchange-traded options
8,045

 
5,910

Investments in limited partnership hedge funds:
 

 
 

Long-term incentive compensation-related
16,615

 
19,004

Seed capital
20,565

 
20,082

Consolidated private equity fund

 
23,897

Private equity
35,999

 
48,761

Investments held by consolidated VIEs
247,103

 

Other
17,676

 
17,784

Total investments
$
763,285

 
$
669,800


Total investments related to long-term incentive compensation obligations of $64.3 million and $78.2 million as of June 30, 2016 and December 31, 2015, respectively, consist of company-sponsored mutual funds and hedge funds. For long-term incentive compensation awards granted before 2009, we typically made investments in our services that were notionally elected by plan participants and maintained them (and continue to 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 AB.

The underlying investments of the 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.

U.S. Treasury Bills, the majority of which are pledged as collateral with clearing organizations, are held in our investment account. These clearing organizations have the ability by contract or custom to sell or re-pledge this collateral.

We allocate seed capital to our investment teams to help develop new products and services for our clients. The seed capital trading investments are equity and fixed income products, primarily in the form of separately-managed account portfolios,

13


U.S. mutual funds, Luxembourg funds, Japanese investment trust management funds or Delaware business trusts. We also may allocate seed capital to investments in private equity funds, such as our consolidated venture capital fund, which holds technology, media, telecommunications, healthcare and clean-tech investments, and a third-party venture capital fund that invests in communications, consumer, digital media, healthcare and information technology markets. As of June 30, 2016 and December 31, 2015, our seed capital investments were $385.2 million and $478.0 million, respectively.

Our consolidated venture capital fund, previously consolidated under the voting interest entity model, is considered a consolidated VIE effective January 1, 2016 upon the adoption of ASU 2015-02.

Trading securities also include long positions in corporate equities, an exchange-traded fund and long exchange-traded options traded through our options desk.

The portion of trading gains (losses) for the three and six months ended June 30, 2016 and 2015 related to trading securities held as of June 30, 2016 and 2015 were as follows:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
 
 
 
 
 
 
 
 
Net gains (losses) recognized during the period
$
7,394

 
$
(1,432
)
 
$
8,626

 
$
5,352

Less: net (losses) gains recognized during the period on trading securities sold during the period
(2,335
)
 
506

 
(12,696
)
 
6,553

Unrealized gains (losses) recognized during the period on trading securities held
$
9,729

 
$
(1,938
)
 
$
21,322

 
$
(1,201
)

9.
Derivative Instruments

We enter into various futures, forwards, options and swaps to economically hedge certain seed capital investments.  Also, we have currency forwards that economically hedge certain balance sheet exposures. In addition, our options desk trades long and short exchange-traded equity options. We do not hold any derivatives designated in a formal hedge relationship under Accounting Standards Codification (“ASC”) 815-10, Derivatives and Hedging.

The notional value and fair value as of June 30, 2016 and December 31, 2015 for derivative instruments (excluding our options desk trading activities discussed below) not designated as hedging instruments were as follows:


14


 
 
 
Fair Value
 
Notional Value
 
Asset Derivatives
 
Liability Derivatives
 
(in thousands)
June 30, 2016:
 
 
 
 
 
Exchange-traded futures
$
82,680

 
$
827

 
$
1,750

Currency forwards
184,612

 
3,848

 
4,607

Interest rate swaps
36,548

 
565

 
1,780

Credit default swaps
20,636

 
1,153

 
385

Option swaps
157

 
191

 
34

Total return swaps
61,415

 
423

 
992

Total derivatives
$
386,048

 
$
7,007

 
$
9,548

 
 
 
 
 
 
December 31, 2015:
 
 
 
 
 
Exchange-traded futures
$
160,755

 
$
1,539

 
$
2,651

Currency forwards
262,873

 
4,604

 
4,077

Interest rate swaps
65,484

 
2,945

 
3,745

Credit default swaps
29,421

 
2,089

 
774

Option swaps
24

 
9

 
2

Total return swaps
146,001

 
1,402

 
972

Total derivatives
$
664,558

 
$
12,588

 
$
12,221


As of June 30, 2016 and December 31, 2015, the derivative assets and liabilities are included in both receivables and payables to brokers and dealers on our condensed consolidated statements of financial condition.

The gains and losses for derivative instruments (excluding our options desk trading activities) for the three and six months ended June 30, 2016 and 2015 recognized in investment gains (losses) in the condensed consolidated statements of income were as follows:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
 
 
 
 
 
 
 
 
Exchange-traded futures
$
(913
)
 
$
1,428

 
$
2,433

 
$
(3,559
)
Currency forwards
(685
)
 
(1,294
)
 
(1,820
)
 
2,158

Interest rate swaps
(559
)
 
415

 
(1,931
)
 
(330
)
Credit default swaps
(198
)
 
(158
)
 
(606
)
 
(215
)
Options swaps
39

 
(4
)
 
87

 
(21
)
Total return swaps
(2,736
)
 
2,086

 
(6,772
)
 
(1,615
)
Net (losses) gains on derivative instruments
$
(5,052
)
 
$
2,473

 
$
(8,609
)
 
$
(3,582
)

We may be exposed to credit-related losses in the event of nonperformance by counterparties to derivative financial instruments. We minimize our counterparty exposure through a credit review and approval process. In addition, we executed various collateral arrangements with counterparties to the over-the-counter derivative transactions that require both pledging and accepting collateral in the form of cash. As of June 30, 2016 and December 31, 2015, we held $0.8 million and $1.5 million, respectively, of cash collateral payable to trade counterparties. This obligation to return cash is reported in payables to brokers and dealers in our condensed consolidated statements of financial condition.

Although notional amount is the most commonly used measure of volume in the derivative market, it is not used as a measure of credit risk. Generally, the current credit exposure of our derivative contracts is limited to the net positive estimated fair value of derivative contracts at the reporting date after taking into consideration the existence of netting agreements and any collateral received. A derivative with positive value (a derivative asset) indicates existence of credit risk because the

15


counterparty would owe us if the contract were closed. Alternatively, a derivative contract with negative value (a derivative liability) indicates we would owe money to the counterparty if the contract were closed. Generally, if there is more than one derivative transaction with a single counterparty, a master netting arrangement exists with respect to derivative transactions with that counterparty to provide for aggregate net settlement.

Certain of our standardized contracts for over-the-counter derivative transactions (“ISDA Master Agreements”) contain credit risk related contingent provisions pertaining to each counterparty’s credit rating. In some ISDA Master Agreements, if the counterparty’s credit rating, or in some agreements, our assets under management (“AUM”), falls below a specified threshold, either a default or a termination event permitting the counterparty to terminate the ISDA Master Agreement would be triggered. In all agreements that provide for collateralization, various levels of collateralization of net liability positions are applicable, depending on the credit rating of the counterparty. As of June 30, 2016 and December 31, 2015, we delivered $5.9 million and $12.8 million, respectively, of cash collateral into brokerage accounts. We report this cash collateral in cash and cash equivalents in our condensed consolidated statements of financial condition.

As of June 30, 2016 and December 31, 2015, we held $8.0 million and $5.9 million, respectively, of long exchange-traded equity options, which are classified as trading investments and included in other investments on our condensed consolidated statements of financial condition. In addition, as of both June 30, 2016 and December 31, 2015, we held $0.8 million of short exchange-traded equity options, which are included in securities sold not yet purchased on our condensed consolidated statements of financial condition. Our options desk provides our clients with equity derivative strategies and execution for exchange-traded options on single stocks, exchange-traded funds and indices. While predominately agency-based, the options desk may commit capital to facilitate a client’s transaction. Our options desk hedges the risks associated with this activity by taking offsetting positions in equities. For the three and six months ended June 30, 2016, we recognized $8.1 million and $16.7 million, respectively, of losses on equity options activity. For the three and six months ended June 30, 2015, we recognized $7.6 million and $40.4 million, respectively, of losses on equity options activity. These losses are recognized in investment gains (losses) in the condensed consolidated statements of income.

As of June 30, 2016, our consolidated VIEs held $1.5 million (net) of futures, forwards and swaps within their portfolios. For the three and six months ended June 30, 2016, we recognized $0.3 million of losses and $2.7 million of gains, respectively, on these derivative positions. These gains are recognized in investment gains (losses) in the condensed consolidated statements of income. As of June 30, 2016, the consolidated VIEs held $0.4 million of cash collateral payable to trade counterparties. This obligation to return cash is reported in the liabilities of consolidated VIEs in our condensed consolidated statements of financial condition. As of June 30, 2016, the consolidated VIEs delivered $9.5 million of cash collateral into brokerage accounts. The consolidated VIEs report this cash collateral in the consolidated VIEs cash and cash equivalents in our condensed consolidated statements of financial condition.

16




10.
Offsetting Assets and Liabilities

Offsetting of assets as of June 30, 2016 and December 31, 2015 was as follows:
 
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amounts of Assets Presented in the Statement of Financial Position
 
Financial
Instruments
 
Cash
Collateral
Received
 
Net
Amount
 
(in thousands)
June 30, 2016:
 
 
 
 
 
 
 
 
 
 
 
Securities borrowed
$
33,967

 
$

 
$
33,967

 
$

 
$
(33,967
)
 
$

Derivatives
$
7,007

 
$

 
$
7,007

 
$

 
$
(810
)
 
$
6,197

Derivatives held by consolidated VIEs
$
58,999

 
$

 
$
58,999

 
$

 
$
(422
)
 
$
58,577

Long exchange-traded options
$
8,045

 
$

 
$
8,045

 
$

 
$

 
$
8,045

December 31, 2015:
 

 
 

 
 

 
 

 
 

 
 

Securities borrowed
$
75,274

 
$

 
$
75,274

 
$

 
$
(75,274
)
 
$

Derivatives
$
12,588

 
$

 
$
12,588

 
$

 
$
(1,518
)
 
$
11,070

Long exchange-traded options
$
5,910

 
$

 
$
5,910

 
$

 
$

 
$
5,910


Offsetting of liabilities as of June 30, 2016 and December 31, 2015 was as follows:
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amounts of Liabilities Presented in the Statement of Financial Position
 
Financial
Instruments
 
Cash
Collateral
Pledged
 
Net Amount
 
(in thousands)
June 30, 2016:
 
 
 
 
 
 
 
 
 
 
 
Securities loaned
$
13,200

 
$

 
$
13,200

 
$

 
$
(13,200
)
 
$

Derivatives
$
9,548

 
$

 
$
9,548

 
$

 
$
(5,905
)
 
$
3,643

Derivatives held by consolidated VIEs
$
57,467

 
$

 
$
57,467

 
$

 
$
(9,493
)
 
$
47,974

Short exchange-traded options
$
772

 
$

 
$
772

 
$

 
$

 
$
772

December 31, 2015:
 

 
 

 
 

 
 

 
 

 
 

Securities loaned
$
9,518

 
$

 
$
9,518

 
$

 
$
(9,518
)
 
$

Derivatives
$
12,221

 
$

 
$
12,221

 
$

 
$
(12,221
)
 
$

Short exchange-traded options
$
843

 
$

 
$
843

 
$

 
$

 
$
843


Cash collateral, whether pledged or received on derivative instruments, is not considered material and, accordingly, is not disclosed by counterparty.

17



11.
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

Valuation of our financial instruments by pricing observability levels as of June 30, 2016 and December 31, 2015 was as follows (in thousands):

18


 
Level 1
 
Level 2
 
Level 3
 
Total
June 30, 2016:
 
 
 
 
 
 
 
Money markets
$
115,570

 
$

 
$

 
$
115,570

U.S. Treasury Bills

 
634,440

 

 
634,440

Available-for-sale
 

 
 

 
 

 


Equity securities
203

 

 

 
203

Fixed income securities
102

 

 

 
102

Trading
 

 
 

 
 

 


Equity securities
255,744

 
817

 
107

 
256,668

Fixed income securities
129,676

 
689

 

 
130,365

Long exchange-traded options
8,045

 

 

 
8,045

Derivatives
827

 
6,180

 

 
7,007

Private equity

 

 
4,831

 
4,831

Consolidated VIEs
 
 
 
 
 
 
 
  Investments
100,619

 
134,689

 
11,713

 
247,021

  Derivatives
485

 
56,842

 

 
57,327

Total assets measured at fair value
$
611,271


$
833,657


$
16,651


$
1,461,579

 
 
 
 
 
 
 
 
Securities sold not yet purchased
 

 
 

 
 

 
 

Short equities – corporate
$
12,944

 
$

 
$

 
$
12,944

Short exchange-traded options
772

 

 

 
772

Derivatives
1,750

 
7,798

 

 
9,548

Consolidated VIEs - derivatives
442

 
57,025

 

 
57,467

Contingent payment arrangements

 

 
30,861

 
30,861

Total liabilities measured at fair value
$
15,908


$
64,823


$
30,861


$
111,592

 
 
 
 
 
 
 
 
December 31, 2015:
 
 
 
 
 
 
 
Money markets
$
116,445

 
$

 
$

 
$
116,445

U.S. Treasury Bills

 
485,121

 

 
485,121

Available-for-sale
 

 
 

 
 

 


Equity securities
181

 

 

 
181

Fixed income securities
183

 

 

 
183

Trading
 

 
 

 
 

 


Equity securities
304,083

 
22,039

 
113

 
326,235

Fixed income securities
180,194

 
2,582

 

 
182,776

Long exchange-traded options
5,910

 

 

 
5,910

Derivatives
1,539

 
11,049

 

 
12,588

Private equity
14,305

 

 
16,035

 
30,340

Total assets measured at fair value
$
622,840


$
520,791


$
16,148


$
1,159,779

 
 
 
 
 
 
 
 
Securities sold not yet purchased
 

 
 

 
 

 
 

Short equities – corporate
$
15,254

 
$

 
$

 
$
15,254

Short exchange-traded options
843

 

 

 
843

Derivatives
2,651

 
9,570

 

 
12,221

Contingent payment arrangements

 

 
31,399

 
31,399

Total liabilities measured at fair value
$
18,748


$
9,570


$
31,399


$
59,717



19


Included in Note 8, Investments, but excluded in the above fair value table, are the following investments:
•    Limited partnership hedge funds, which are recorded using the equity method of accounting;
One private equity investment ($10.2 million as of December 31, 2015; sold in the first quarter of 2016), which is recorded using the cost method of accounting;
Other investments, which primarily include miscellaneous investments recorded using the cost or equity method of accounting and long-term deposits; and
One private equity investment ($31.2 million and $32.0 million as of June 30, 2016 and December 31, 2015, respectively) which is measured at fair value using NAV (or its equivalent) as a practical expedient.

We provide below 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 U.S. Treasury Bills, which are primarily segregated in a special reserve bank custody account as required by Rule 15c3-3 of the Exchange Act. These securities are valued based on quoted yields in secondary markets and 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 NAVs 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 securities are valued based on observable inputs from recognized pricing vendors, which 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, option swaps and total return swaps with counterparties that 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: As of December 31, 2015, private equity investments include the investments of our consolidated venture capital fund and our investment in a private equity energy fund. As of June 30, 2016, the consolidated venture capital fund is classified as a consolidated VIE (see Note 2) and is discussed separately below; our investment in a private equity energy fund remains. Generally, the valuation of private equity investments 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 current operating performance and future expectations of investee companies, industry valuations of comparable public companies, changes in market outlooks, 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. For these reasons, which make the fair value of private equity investments unobservable, equity investments are included in Level 3 of the valuation hierarchy. If private equity investments become publicly traded, they are included in Level 1 of the valuation hierarchy. Also, if they contain trading restrictions, publicly-traded equity investments are included in Level 2 of the valuation hierarchy until the trading restrictions expire.

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.

Contingent payment arrangements: Contingent payment arrangements relate to contingent payment liabilities associated with acquisitions in 2010, 2013 and 2014. At each reporting date, we estimate the fair values of the contingent consideration expected to be paid based upon probability-weighted AUM and revenue projections, using unobservable market data inputs, which are included in Level 3 of the valuation hierarchy.

20


Consolidated VIEs: Three of our consolidated VIEs are open-end Luxembourg funds investing in (i) high yield debt issued by U.S. corporations and related derivatives, (ii) fixed income securities issued by Asia-Pacific issuers and related derivatives, and (iii) equity securities, including common and preferred stocks, convertible securities, depositary receipts and securities of real estate investment trusts. In addition, our venture capital fund, which is classified as a consolidated VIE effective January 1, 2016, holds both private equity investments as well as private equity investments that became publicly-traded. The investments and derivatives held by the consolidated VIEs are included in Levels 1, 2 and 3 of the valuation hierarchy.
 
The change in carrying value associated with Level 3 financial instruments carried at fair value, classified as private equity investments, trading equity securities and investments held by our consolidated VIEs, is as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
 
 
 
 
 
 
 
 
Balance as of beginning of period
$
22,028

 
$
27,739

 
$
16,148

 
$
27,813

Transfer out

 

 

 
(26
)
Activity related to consolidate VIEs
(3,712
)
 

 
2,179

 

Purchases

 
76

 

 
198

Sales

 
(14,178
)
 

 
(14,178
)
Realized gains (losses), net

 
7,177

 

 
1,983

Unrealized (losses) gains, net
(1,665
)
 
(675
)
 
(1,676
)
 
4,349

Balance as of end of period
$
16,651

 
$
20,139

 
$
16,651

 
$
20,139


Transfers into and out of all levels of the fair value hierarchy are reflected at end-of-period fair values. 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.
Also, as of June 30, 2016, our three consolidated VIEs that are open-end Luxembourg funds hold $2.4 million of investments that are classified as Level 3. They primarily consist of corporate bonds that are vendor priced with no ratings available, bank loans, non-agency collateralized mortgage obligations and asset-backed securities. The remainder of the activity related to consolidated VIEs pertains to our consolidated venture capital fund.
Quantitative information about private equity Level 3 fair value measurements as of June 30, 2016 and December 31, 2015 is as follows:
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range
 
(in thousands)
Private Equity as of June 30, 2016 (included in consolidated VIEs' investments):
 
 
 
 
 
 
 
Technology, Media and Telecommunications
$
9,346

 
Market comparable transactions
 
Revenue multiple
 
1.7 - 2.9

 
 

 
 
 
Marketability discount
 
15 - 30%

 
 
 
 
 
 
 
 
Private Equity as of December 31, 2015:
 
 
 
 
 
 
 
Technology, Media and Telecommunications
$
9,527

 
Market comparable transactions
 
Revenue multiple
 
2.5 - 4.8

 
 
 
 
 
Marketability discount
 
30
%

21


The significant unobservable inputs used in the fair value measurement of the reporting entities’ venture capital securities in the Technology, Media and Telecommunications areas are enterprise value to revenue multiples and a discount to account for liquidity and various risk factors. Significant increases (decreases) in the enterprise value to revenue multiple inputs in isolation would result in a significantly higher (lower) fair value measurement. Significant increases (decreases) in the discount would result in a significantly lower (higher) fair value measurement.
In addition, as of June 30, 2016 and December 31, 2015, we have an investment in a private equity fund focused exclusively on the energy sector (fair value of $4.8 million and $6.5 million) that is classified as Level 3. This investment’s valuation is based on a market approach, considering recent transactions in the fund and the industry.
The change in carrying value associated with Level 3 financial instruments carried at fair value, classified as contingent payment arrangements, is as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
 
 
 
 
 
 
 
 
Balance as of beginning of period
$
31,119

 
$
42,223

 
$
31,399

 
$
42,436

Accretion
353

 
442

 
706

 
885

Payments
(611
)
 
(633
)
 
(1,244
)
 
(1,289
)
Balance as of end of period
$
30,861

 
$
42,032

 
$
30,861

 
$
42,032


Our three acquisition-related contingent consideration liabilities (with a combined fair value of $30.9 million as of June 30, 2016 and $31.4 million as of December 31, 2015) currently are valued using a projected AUM weighted average growth rate of 46%, a revenue growth rate of 43%, and a discount rate of 3% (using a cost of debt assumption).

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

We did not have any material assets or liabilities that were measured at fair value for impairment on a nonrecurring basis during the six months ended June 30, 2016 or during the year ended December 31, 2015.

12.
Commitments and Contingencies

Legal Proceedings

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 in excess of amounts already accrued, if any, we disclose that fact together with the estimate of the possible loss or range of loss. However, it is often 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. Such is also the case when the litigation is in its early stages or when the litigation is highly complex or broad in scope. In these cases, we disclose that we are unable to predict the outcome or estimate a possible loss or range of loss.

During the first quarter of 2012, we received a legal letter of claim (“Letter of Claim”) sent on behalf of Philips Pension Trustees Limited and Philips Electronics U.K. Limited (“Philips”), a former pension fund client, alleging that AllianceBernstein Limited (one of our subsidiaries organized in the U.K.) was negligent and failed to meet certain applicable standards of care with respect to the initial investment in, and management of, a £500 million portfolio of U.S. mortgage-backed securities. Philips has alleged damages ranging between $177 million and $234 million, plus compound interest on an alleged $125 million of realized losses in the portfolio. On January 2, 2014, Philips filed a claim form (“Claim”) in the High Court of Justice in London, England, which formally commenced litigation with respect to the allegations in the Letter of Claim.

We believe that any losses to Philips resulted from adverse developments in the U.S. housing and mortgage market that precipitated the financial crisis in 2008 and not from any negligence or other failure or malfeasance on our part. We believe
that we have strong defenses to these claims, which are set forth in our October 12, 2012 response to the Letter of Claim and our June 27, 2014 Statement of Defence in response to the Claim, and intend to defend this matter vigorously.

In addition to the Claim discussed immediately above, we are involved in various other matters, including regulatory inquiries, administrative proceedings and litigation, some of which allege significant damages.

In management’s opinion, an adequate accrual has been made as of June 30, 2016 to provide for any probable losses regarding any litigation matters for which we can reasonably estimate an amount of loss. It is reasonably possible that we could incur additional losses pertaining to these matters, but currently we cannot estimate any such additional losses.

Management, after consultation with legal counsel, currently believes that the outcome of any individual matter that is pending or threatened, or all of them combined, will not have a material adverse effect on our results of operations, financial condition or liquidity. However, any inquiry, proceeding or litigation has an element of uncertainty; management cannot determine whether further developments relating to any individual matter that is pending or threatened, or all of them combined, will have a material adverse effect on our results of operation, financial condition or liquidity in any future reporting period.

13.
Units Outstanding

Changes in AB Units outstanding during the six-month period ended June 30, 2016 were as follows:
 
 
 
Outstanding as of December 31, 2015
272,301,827

Options exercised
139,093

Units issued
323,094

Units retired
(3,986,361
)
Balance as of June 30, 2016
268,777,653


During the first six months of 2016, we purchased 14,338 AB Units in private transactions and retired them.

14.
Debt

As of June 30, 2016 and December 31, 2015, AB had $537.2 million and $581.7 million, respectively, in commercial paper outstanding with weighted average interest rates of approximately 0.6% and 0.5%, respectively. The commercial paper is short term in nature, and as such, recorded value is estimated to approximate fair value (and considered a Level 2 security in the fair value hierarchy). Average daily borrowings of commercial paper during the first six months of 2016 and the full year 2015 were $475.8 million and $387.9 million, respectively, with weighted average interest rates of approximately 0.6% and 0.3%, respectively.

In addition, SCB LLC has three uncommitted lines of credit with four financial institutions. Two of these lines of credit permit us to borrow up to an aggregate of approximately $200.0 million, with AB named as an additional borrower, while one line has no stated limit. As of June 30, 2016, SCB LLC had $50.0 million in bank loans outstanding at a weighted average interest rate of 1.0%. As of December 31, 2015, SCB LLC had no bank loans outstanding. Average daily borrowings of bank loans during the first six months of 2016 and full year 2015 were $6.3 million and $3.9 million, respectively, with weighted average interest rates of approximately 0.8% and 1.2%, respectively.


22




15.
Changes in Capital

Changes in capital during the six-month period ended June 30, 2016 were as follows: 

 
Partners’ Capital Attributable to AB Unitholders
 
Non-Controlling Interests In Consolidated Entities
 
Total Capital
 
(in thousands)
 
 
 
 
 
 
Balance as of December 31, 2015
$
4,030,444

 
$
24,473

 
$
4,054,917

Comprehensive income:
 

 
 

 
 

Net income
296,070

 
(6,953
)
 
289,117

Other comprehensive income, net of tax:
 

 
 

 
 

Unrealized (losses) on investments
(13
)
 

 
(13
)
Foreign currency translation adjustments
107

 
(5
)
 
102

Changes in employee benefit related items
(36
)
 

 
(36
)
Comprehensive income
296,128

 
(6,958
)
 
289,170

 
 
 
 
 
 
Distributions to General Partner and unitholders
(275,930
)
 

 
(275,930
)
Compensation-related transactions
(76,983
)
 

 
(76,983
)
Capital contributions to affiliates
(120
)
 

 
(120
)
Other
(337
)
 

 
(337
)
Balance as of June 30, 2016
$
3,973,202

 
$
17,515

 
$
3,990,717


Changes in capital during the six-month period ended June 30, 2015 were as follows:

 
Partners’ Capital Attributable to AB Unitholders
 
Non-Controlling Interests In Consolidated Entities
 
Total Capital
 
(in thousands)
 
 
 
 
 
 
Balance as of December 31, 2014
$
4,085,465

 
$
30,396

 
$
4,115,861

Comprehensive income:
 

 
 

 
 

Net income
290,563

 
7,950

 
298,513

Other comprehensive income, net of tax: