ALLIANCEBERNSTEIN L.P. - FORM 10-Q - April 27, 2017

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EX-32.2 - EXHIBIT 32.2 - ALLIANCEBERNSTEIN L.P.a33117exhibit322.htm
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EX-31.2 - EXHIBIT 31.2 - ALLIANCEBERNSTEIN L.P.a33117exhibit312.htm
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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 March 31, 2017
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, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth 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
 
 
 
 
 
Emerging growth company o
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 March 31, 2017 was 268,714,548.



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)
 
March 31,
2017
 
December 31,
2016
 
(unaudited)
 
 
ASSETS
 
 
 
Cash and cash equivalents
$
738,234

 
$
656,985

Cash and securities segregated, at fair value (cost: $1,255,801 and $946,093)
1,255,826

 
946,097

Receivables, net:
 

 
 

Brokers and dealers
546,783

 
335,686

Brokerage clients
1,510,417

 
1,513,656

Fees
264,371

 
270,373

Investments:
 

 
 

Long-term incentive compensation-related
61,570

 
67,761

Other
375,482

 
373,344

Assets of consolidated company-sponsored investment funds:
 
 
 
   Cash and cash equivalents
326,643

 
337,525

   Investments
754,422

 
574,076

   Other assets
13,836

 
44,570

Furniture, equipment and leasehold improvements, net
157,581

 
159,564

Goodwill
3,066,700

 
3,066,700

Intangible assets, net
127,491

 
134,606

Deferred sales commissions, net
53,990

 
63,890

Other assets
229,058

 
195,615

Total assets
$
9,482,404

 
$
8,740,448

 
 
 
 
LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND CAPITAL
 

 
 

Liabilities:
 

 
 

Payables:
 

 
 

Brokers and dealers
$
283,153

 
$
239,578

Securities sold not yet purchased
15,837

 
40,944

Brokerage clients
2,753,920

 
2,360,481

AB mutual funds
238,162

 
150,939

Accounts payable and accrued expenses
451,360

 
430,569

Liabilities of consolidated company-sponsored investment funds
398,137

 
292,800

Accrued compensation and benefits
331,420

 
251,019

Debt
607,941

 
512,970

Total liabilities
5,079,930

 
4,279,300

 
 
 
 
Commitments and contingencies (See Note 12)


 


 
 
 
 
Redeemable non-controlling interest
403,609

 
392,959


1

 
 
 
 
Capital:
 

 
 

General Partner
40,458

 
41,100

Limited partners: 268,714,548 and 268,893,534 units issued and outstanding
4,091,282

 
4,154,810

Receivables from affiliates
(12,623
)
 
(12,830
)
AB Holding Units held for long-term incentive compensation plans
(45,861
)
 
(32,967
)
Accumulated other comprehensive loss
(109,134
)
 
(118,096
)
Partners’ capital attributable to AB Unitholders
3,964,122

 
4,032,017

Non-redeemable non-controlling interests in consolidated entities
34,743

 
36,172

Total capital
3,998,865

 
4,068,189

Total liabilities, redeemable non-controlling interest and capital
$
9,482,404

 
$
8,740,448

 
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 March 31,
 
 
2017
 
2016
Revenues:
 
 
 
 
Investment advisory and services fees
 
$
498,290

 
$
451,413

Bernstein research services
 
112,741

 
126,465

Distribution revenues
 
96,554

 
92,692

Dividend and interest income
 
14,056

 
10,073

Investment gains (losses)
 
25,201

 
65,587

Other revenues
 
22,365

 
24,971

Total revenues
 
769,207

 
771,201

Less: Interest expense
 
4,290

 
2,075

Net revenues
 
764,917

 
769,126

 
 
 
 
 
Expenses:
 
 

 
 

Employee compensation and benefits
 
321,748

 
302,011

Promotion and servicing:
 
 

 
 

Distribution-related payments
 
96,367

 
87,127

Amortization of deferred sales commissions
 
9,079

 
11,242

Trade execution, marketing, T&E and other
 
48,214

 
54,201

General and administrative:
 
 

 
 

General and administrative
 
114,221

 
105,923

Real estate (credits) charges
 
(2
)
 
27,586

Contingent payment arrangements
 
177

 
353

Interest on borrowings
 
1,868

 
1,232

Amortization of intangible assets
 
6,933

 
6,409

Total expenses
 
598,605

 
596,084

 
 
 
 
 
Operating income
 
166,312

 
173,042

 
 
 
 
 
Income taxes
 
10,057

 
12,506

 
 
 
 
 
Net income
 
156,255

 
160,536

 
 
 
 
 
Net income (loss) of consolidated entities attributable to non-controlling interests
 
16,318

 
(5,748
)
 
 
 
 
 
Net income attributable to AB Unitholders
 
$
139,937

 
$
166,284

 
 
 
 
 
Net income per AB Unit:
 
 

 
 

Basic
 
$
0.52

 
$
0.61

Diluted
 
$
0.51

 
$
0.60


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 March 31,
 
 
2017
 
2016
 
 
 
 
 
Net income
 
$
156,255

 
$
160,536

Other comprehensive income (loss):
 
 
 
 
Foreign currency translation adjustments, before tax
 
9,001

 
5,225

Income tax expense
 
(134
)
 
—

Foreign currency translation adjustments, net of tax
 
8,867

 
5,225

Unrealized gains (losses) on investments:
 
 
 
 
Unrealized (losses) arising during period
 
(16
)
 
(8
)
Less: reclassification adjustment for (losses) included in net income
 
—

 
(3
)
Change in unrealized gains (losses) on investments
 
(16
)
 
(5
)
Income tax expense
 
(2
)
 
(1
)
Unrealized (losses) on investments, net of tax
 
(18
)
 
(6
)
Changes in employee benefit related items:
 
 
 
 
Amortization of prior service cost
 
6

 
71

Recognized actuarial loss (gain)
 
259

 
(433
)
Changes in employee benefit related items
 
265

 
(362
)
Income tax expense
 
(76
)
 
(71
)
Employee benefit related items, net of tax
 
189

 
(433
)
Other comprehensive income
 
9,038

 
4,786

Less: Comprehensive income (loss) in consolidated entities attributable to non-controlling interests
 
16,394

 
(5,697
)
Comprehensive income attributable to AB Unitholders
 
$
148,899

 
$
171,019

 
See Accompanying Notes to Condensed Consolidated Financial Statements.


4


ALLIANCEBERNSTEIN L.P. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Three Months Ended March 31,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
156,255

 
$
160,536

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

 
 

Amortization of deferred sales commissions
9,079

 
11,242

Non-cash long-term incentive compensation expense
7,693

 
739

Depreciation and other amortization
16,282

 
14,784

Unrealized (gains) on investments
(16,397
)
 
(10,587
)
Unrealized (gains) losses on investments of consolidated company-sponsored investment funds
(26,834
)
 
8,032

Other, net
3,528

 
11,936

Changes in assets and liabilities:
 

 
 

(Increase) in segregated cash and securities
(309,729
)
 
(158,502
)
(Increase) decrease in receivables
(206,909
)
 
117,443

Decrease in investments
20,497

 
127,820

(Increase) in investments of consolidated company-sponsored investment funds
(153,512
)
 
(12,208
)
Decrease in deferred sales commissions
821

 
2,007

(Increase) in other assets
(32,109
)
 
(1,402
)
Decrease in other assets and liabilities of consolidated company-sponsored investment funds
136,071

 
1,735

Increase in payables
502,976

 
277,154

(Decrease) increase in accounts payable and accrued expenses
(30,810
)
 
65,447

Increase in accrued compensation and benefits
80,054

 
59,741

Net cash provided by operating activities
156,956

 
675,917

 
 
 
 
Cash flows from investing activities:
 

 
 

Proceeds from sales of investments
—

 
91

Purchases of furniture, equipment and leasehold improvements
(6,525
)
 
(11,241
)
Net cash used in investing activities
(6,525
)
 
(11,150
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Issuance (repayment) of commercial paper, net
93,581

 
(96,989
)
Increase (decrease) in overdrafts payable
50,377

 
(91,313
)
Distributions to General Partner and Unitholders
(198,040
)
 
(153,433
)
Capital contributions (to) non-controlling interests in consolidated entities
(3,137
)
 
—

Redemptions of non-controlling interests of consolidated company-sponsored investment funds, net
(4,036
)
 
(47,508
)
Capital contributions (to) from affiliates
(81
)
 
6,348

Payments of contingent payment arrangements
(412
)
 
(280
)
Additional investments by AB Holding with proceeds from exercise of compensatory options to buy AB Holding Units
4,468

 
1,457

Purchases of AB Holding Units to fund long-term incentive compensation plan awards, net
(30,833
)
 
(39,550
)
Other
—

 
(6
)
Net cash used in financing activities
(88,113
)
 
(421,274
)
 
 
 
 
 
 
 
 

5

Effect of exchange rate changes on cash and cash equivalents
8,049

 
8,440

 
 
 
 
Net increase in cash and cash equivalents
70,367

 
251,933

Cash and cash equivalents as of beginning of the period
994,510

 
577,300

Cash and cash equivalents as of end of the period
$
1,064,877

 
$
829,233

 
 
 
 
See Accompanying Notes to Condensed Consolidated Financial Statements.

6

ALLIANCEBERNSTEIN L.P.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2017
(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, 2016.

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 S.A. ("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 direct lending); 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 March 31, 2017, 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 March 31, 2017, 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
35.5

Unaffiliated holders
1.3

 
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 March 31, 2017.

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, 2016 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”).

Principles of Consolidation

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 voting interest entities ("VOEs") and for which AB has a controlling financial interest. 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.

Reclassifications

During 2017, prior period amounts for our VOEs investments previously presented as other investments are now presented as investments of consolidated company-sponsored investment funds in the condensed consolidated statements of financial condition to conform to the current period's presentation. Additionally, prior period amounts for dividend and interest related to our consolidated company-sponsored investment funds previously presented as other revenues are now presented as dividend and interest income in the condensed consolidated statements of income to conform to the current period's presentation.

Lastly, all disclosures relating to the investments, derivatives and fair value of consolidated company-sponsored investment funds previously presented in Notes 8, 9, 10 and 11 are now separately disclosed in Note 13, Consolidated Company-Sponsored Investment Funds.





8

Revision

During the third quarter of 2016, management determined that the frequency with which we settle our U.S. inter-company payable balances with foreign subsidiaries over the past several years created deemed dividends under Section 956 of the U.S. Internal Revenue Code of 1986, as amended ("Section 956"). In the past, we funded our foreign subsidiaries as they required cash for their operations rather than pre-fund them each quarter, thereby reducing the inter-company balance to zero on a quarterly basis, as required by Section 956. As a result, we had been understating our income tax provision and income tax liability since 2010. We evaluated the aggregate effects of this error in our income tax provision and income tax liability to our previously issued financial statements in accordance with SEC Staff Accounting Bulletins No. 99 and No. 108 and, based upon quantitative and qualitative factors, have determined that the error was not material to our previously issued financial statements. However, the cumulative effect of this error would have been material to our third quarter 2016 financial results if recorded as an out-of-period adjustment in the third quarter of 2016. Accordingly, we revised our previously issued financial statements from 2012 through the second quarter of 2016. We revised our income tax provision, net income attributable to AB Unitholders, and basic and diluted net income per AB Unit reported in prior periods in the statements of income. The table below reflects the revisions to these line items for the three months ended March 31, 2016 that are included in this Form 10-Q:

 
 
Three Months Ended March 31, 2016
 
 
As Reported
 
Adjustment
 
As Revised
 
 
(in thousands, except per unit amounts)
 
 
 
 
 
 
 
Income taxes
 
$
9,864

 
$
2,642

 
$
12,506

Net income attributable to AB Unitholders
 
168,926

 
(2,642
)
 
166,284

Basic net income per AB Unit
 
0.62

 
(0.01
)
 
0.61

Diluted net income per AB Unit
 
0.61

 
(0.01
)
 
0.60


2.
Significant Accounting Policies

Recently Adopted Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. We adopted this standard on January 1, 2017. The adoption of this standard did not 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. We adopted this standard on January 1, 2017 on a prospective basis. 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 have not yet completed this analysis, but based on the analysis completed to date management does not expect the standard to have a material impact on our financial condition or results of operations.

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

9

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 August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). The amendment is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The amendment is effective for fiscal years (and interim periods within those years) beginning after December 15, 2017 and should be applied using a retrospective transition method. The amendment is not expected to have a material impact on our financial condition or results of operations.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The revised guidance will be applied prospectively, and is effective in 2020. The revised guidance is not expected to have a material impact on our financial condition or results of operations.

In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The amendment requires that an employer disaggregate the service cost component from the other components of net benefit costs on the income statement. The amendment is effective for fiscal years (and interim periods within those years) beginning after December 15, 2017 and should be applied retrospectively. The amendment is not expected to have a material impact on our results of operations.

Consolidation of company-sponsored investment funds
We adopted ASU 2015-02, Consolidation - Amendments to the Consolidation Analysis ("ASU 2015-02") effective January 1, 2016.
For legal entities (company-sponsored investment funds) evaluated for consolidation, we first determine whether the fees we receive and the interests we hold qualify as a variable interest in the entity, including 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 perform 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.

10

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 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.
3.
Long-term Incentive Compensation Plans

We maintain several unfunded, non-qualified long-term incentive compensation plans, under which we grant annual awards to employees, generally in the fourth quarter, and to members of the Board of Directors of the General Partner, who are not employed by our company or by 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 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 months ended March 31, 2017 and 2016, we purchased 1.3 million and 1.9 million AB Holding Units for $31.0 million and $39.7 million, respectively (on a trade date basis). These amounts reflect open-market purchases of 1.2 million and 1.8 million AB Holding Units for $27.8 million and $38.1 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 condensed consolidated statements of cash flows are net of AB Holding Unit purchases by employees as part of a distribution reinvestment election.

Each quarter, we consider whether to implement a plan 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 fourth quarter of 2016 expired at the close of business on February 10, 2017; we did not adopt a plan during the first quarter of 2017. 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 three months of 2017 and 2016, we granted to employees and Eligible Directors 1.1 million and 0.3 million restricted AB Holding Unit awards, respectively. We used AB Holding Units repurchased during the period and newly-issued AB Holding Units to fund these awards.

During the first three months of 2017 and 2016, AB Holding issued 0.3 million and 0.1 million AB Holding Units, respectively, upon exercise of options to buy AB Holding Units. AB Holding used the proceeds of $4.5 million and $1.5 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.


11

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, with the concurrence of the Board of Directors, that one or more adjustments that are made for adjusted net income should not be made with respect to the Available Cash Flow calculation.

On April 27, 2017, the General Partner declared a distribution of $0.52 per AB Unit, representing a distribution of Available Cash Flow for the three months ended March 31, 2017. 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 May 18, 2017 to holders of record on May 8, 2017.


5.
Real Estate Charges

Since 2010, in connection with our workforce reductions and in an effort to reduce our global real estate footprint, we have implemented a global office space consolidation. As a result, we have sub-leased over one million square feet of office space. The activity in the liability account relating to our global space consolidation initiatives for the following periods is as follows:
 
Three Months Ended
March 31, 2017
 
Twelve Months Ended
December 31, 2016
 
(in thousands)
 
 
 
 
Balance as of beginning of period
$
112,932

 
$
123,912

Expense (credit) incurred
(2
)
 
12,248

Deferred rent
—

 
4,930

Payments made
(7,318
)
 
(32,988
)
Interest accretion
1,045

 
4,830

Balance as of end of period
$
106,657

 
$
112,932


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 March 31,
 
 
2017
 
2016
 
(in thousands, except per unit amounts)
 
 
 
 
 
Net income attributable to AB Unitholders
 
$
139,937

 
$
166,284

 
 
 
 
 
Weighted average units outstanding – basic
 
268,479

 
271,853

Dilutive effect of compensatory options to buy AB Holding Units
 
534

 
400

Weighted average units outstanding – diluted
 
269,013

 
272,253

Basic net income per AB Unit
 
$
0.52

 
$
0.61

Diluted net income per AB Unit
 
$
0.51

 
$
0.60


For the three months ended March 31, 2017 and 2016, we excluded 2,437,307 and 2,888,476 options, respectively, from the diluted net income computation due to their anti-dilutive effect.

 

12

7.
Cash and Securities Segregated Under Federal Regulations and Other Requirements

As of March 31, 2017 and December 31, 2016, $1.2 billion and $0.9 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 March 31, 2017 and December 31, 2016, $73.0 million and $52.9 million, respectively, of cash was segregated in these bank accounts.


8.
Investments

Investments consist of:
 
 
 
 
March 31,
2017
 
December 31,
2016
 
(in thousands)
Trading:
 

 
 

Long-term incentive compensation-related
$
46,511

 
$
50,935

U.S. Treasury Bills
23,974

 
28,937

Seed capital
194,670

 
188,053

Equities
5,246

 
6,602

Exchange-traded options
1,558

 
3,106

Investments in limited partnership hedge funds:
 

 
 

Long-term incentive compensation-related
15,059

 
16,826

Seed capital
27,719

 
23,704

Private equity
44,405

 
45,278

Time deposits
70,466

 
70,097

Other
7,444

 
7,567

Total investments
$
437,052

 
$
441,105


Total investments related to long-term incentive compensation obligations of $61.6 million and $67.8 million as of March 31, 2017 and December 31, 2016, 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, 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 a third-party venture capital fund that invests in communications, consumer, digital media, healthcare and information technology markets. In regard to our seed capital investments, the amounts above reflect those funds in which we are not the primary beneficiary of a VIE or hold a controlling financial interest in a VOE. See Note 13, Consolidated Company-Sponsored Investment Funds, for the seed capital investments that are consolidated entities. As of March 31, 2017 and December 31, 2016, our seed capital investments were $533.5 million

13

and $500.0 million, respectively. Seed capital investments in unconsolidated company-sponsored investment funds are valued using published net asset values or non-published net asset values if they are not listed on an active exchange but have net asset values that are comparable to funds with published net asset values and have no redemption restrictions.

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

The portion of trading gains (losses) for the three months ended March 31, 2017 and 2016 related to trading securities held as of March 31, 2017 and 2016 were as follows:

 
 
Three Months Ended March 31,
 
 
2017
 
2016
 
(in thousands)
 
 
 
 
 
Net gains recognized during the period
 
$
13,760

 
$
1,232

Less: net gains (losses) recognized during the period on trading securities sold during the period
 
923

 
(10,361
)
Unrealized gains recognized during the period on trading securities held
 
$
12,837

 
$
11,593


9.
Derivative Instruments

See Note 13, Consolidated Company-Sponsored Investment Funds, for disclosure of derivative instruments held by our consolidated company-sponsored investment funds.

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 March 31, 2017 and December 31, 2016 for derivative instruments (excluding derivative instruments relating to our options desk trading activities discussed below) not designated as hedging instruments were as follows:

 
 
 
Fair Value
 
Notional Value
 
Asset Derivatives
 
Liability Derivatives
 
(in thousands)
March 31, 2017:
 
 
 
 
 
Exchange-traded futures
$
93,712

 
$
536

 
$
1,909

Currency forwards
196,853

 
5,742

 
5,690

Interest rate swaps
54,105

 
635

 
708

Credit default swaps
39,988

 
687

 
1,157

Total return swaps
95,598

 
168

 
883

Total derivatives
$
480,256

 
$
7,768

 
$
10,347

 
 
 
 
 
 
December 31, 2016:
 
 
 
 
 
Exchange-traded futures
$
103,108

 
$
1,224

 
$
1,092

Currency forwards
180,820

 
4,541

 
4,711

Interest rate swaps
40,664

 
940

 
897

Credit default swaps
45,108

 
1,205

 
905

Total return swaps
90,043

 
503

 
1,044

Total derivatives
$
459,743

 
$
8,413

 
$
8,649



14

As of March 31, 2017 and December 31, 2016, 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 months ended March 31, 2017 and 2016 recognized in investment gains (losses) in the condensed consolidated statements of income were as follows:

 
 
Three Months Ended March 31,
 
 
2017
 
2016
 
(in thousands)
 
 
 
 
 
Exchange-traded futures
 
$
(5,532
)
 
$
3,346

Currency forwards
 
(1,062
)
 
(1,135
)
Interest rate swaps
 
(97
)
 
(1,372
)
Credit default swaps
 
(672
)
 
(408
)
Options swaps
 
—

 
48

Total return swaps
 
(2,129
)
 
(4,036
)
Net (losses) on derivative instruments
 
$
(9,492
)
 
$
(3,557
)

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 have 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 March 31, 2017, we had no cash collateral payable to trade counterparties. As of December 31, 2016, we held $0.8 million 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 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 March 31, 2017 and December 31, 2016, we delivered $8.1 million and $6.2 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 March 31, 2017 and December 31, 2016, we held $1.6 million and $3.1 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 March 31, 2017 and December 31, 2016, we held $0.9 million and $0.7 million, respectively, 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 months ended March 31, 2017 and 2016, we recognized $3.7 million and $8.6 million, respectively, of losses on equity options activity. These losses are recognized in investment gains (losses) in the condensed consolidated statements of income.

15


10.
Offsetting Assets and Liabilities

See Note 13, Consolidated Company-Sponsored Investment Funds, for disclosure of offsetting assets and liabilities of our consolidated company-sponsored investment funds.

Offsetting of assets as of March 31, 2017 and December 31, 2016 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)
March 31, 2017:
 
 
 
 
 
 
 
 
 
 
 
Securities borrowed
$
147,124

 
$
—

 
$
147,124

 
$
(142,789
)
 
$
—

 
$
4,335

Derivatives
$
7,768

 
$
—

 
$
7,768

 
$
—

 
$
—

 
$
7,768

Long exchange-traded options
$
1,558

 
$
—

 
$
1,558

 
$
—

 
$
—

 
$
1,558

December 31, 2016:
 

 
 

 
 

 
 

 
 

 
 

Securities borrowed
$
82,814

 
$
—

 
$
82,814

 
$
(80,277
)
 
$
—

 
$
2,537

Derivatives
$
8,413

 
$
—

 
$
8,413

 
$
—

 
$
(810
)
 
$
7,603

Long exchange-traded options
$
3,106

 
$
—

 
$
3,106

 
$
—

 
$
—

 
$
3,106


Offsetting of liabilities as of March 31, 2017 and December 31, 2016 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)
March 31, 2017:
 
 
 
 
 
 
 
 
 
 
 
Securities loaned
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Derivatives
$
10,347

 
$
—

 
$
10,347

 
$
—

 
$
(8,146
)
 
$
2,201

Short exchange-traded options
$
916

 
$
—

 
$
916

 
$
—

 
$
—

 
$
916

December 31, 2016:
 

 
 

 
 

 
 

 
 

 
 

Securities loaned
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Derivatives
$
8,649

 
$
—

 
$
8,649

 
$
—

 
$
(6,239
)
 
$
2,410

Short exchange-traded options
$
692

 
$
—

 
$
692

 
$
—

 
$
—

 
$
692


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

16



11.
Fair Value

See Note 13, Consolidated Company-Sponsored Investment Funds, for disclosure of fair value of our consolidated company-sponsored investment funds.

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 March 31, 2017 and December 31, 2016 was as follows (in thousands):

17

 
Level 1
 
Level 2
 
Level 3
 
Total
March 31, 2017:
 
 
 
 
 
 
 
Money markets
$
138,734

 
$
—

 
$
—

 
$
138,734

U.S. Treasury Bills
—

 
1,206,774

 
—

 
1,206,774

Trading
 

 
 

 
 

 
 

Equity securities
146,122

 
9,980

 
112

 
156,214

Fixed income securities
78,892

 
11,244

 
—

 
90,136

Long exchange-traded options
1,558

 
—

 
—

 
1,558

Derivatives
536

 
7,232

 
—

 
7,768

Private equity
—

 
—

 
4,914

 
4,914

Available-for-sale
64

 
—

 
—

 
64

Total assets measured at fair value
$
365,906

 
$
1,235,230

 
$
5,026

 
$
1,606,162

 
 
 
 
 
 
 
 
Securities sold not yet purchased
 

 
 

 
 

 
 

Short equities – corporate
$
14,921

 
$
—

 
$
—

 
$
14,921

Short exchange-traded options
916

 
—

 
—

 
916

Derivatives
1,909

 
8,438

 
—

 
10,347

Contingent payment arrangements
—

 
—

 
17,177

 
17,177

Total liabilities measured at fair value
$
17,746


$
8,438


$
17,177


$
43,361

 
 
 
 
 
 
 
 
December 31, 2016:
 
 
 
 
 
 
 
Money markets
$
107,250

 
$
—

 
$
—

 
$
107,250

U.S. Treasury Bills
—

 
922,126

 
—

 
922,126

Trading
 

 
 

 
 

 


Equity securities
148,128

 
5,724

 
110

 
153,962

Fixed income securities
80,473

 
11,107

 
—

 
91,580

Long exchange-traded options
3,106

 
—

 
—

 
3,106

Derivatives
1,224

 
7,189

 
—

 
8,413

Private equity
—

 
—

 
4,913

 
4,913

Available-for-sale
45

 
—

 
—

 
45

Total assets measured at fair value
$
340,226

 
$
946,146

 
$
5,023

 
$
1,291,395

 
 
 
 
 
 
 
 
Securities sold not yet purchased
 

 
 

 
 

 
 

Short equities – corporate
$
40,252

 
$
—

 
$
—

 
$
40,252

Short exchange-traded options
692

 
—

 
—

 
692

Derivatives
1,092

 
7,557

 
—

 
8,649

Contingent payment arrangements
—

 
—

 
17,589

 
17,589

Total liabilities measured at fair value
$
42,036


$
7,557


$
17,589


$
67,182


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;
•
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 ($39.5 million and $40.4 million as of March 31, 2017 and December 31, 2016, respectively) which is measured at fair value using net asset value ("NAV"), or its equivalent, as a practical expedient.


18

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: 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; provided, however, 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 various acquisitions. 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.

19



The change in carrying value associated with Level 3 financial instruments carried at fair value, classified as private equity and trading equity securities, is as follows:
 
 
Three Months Ended March 31,
 
 
2017
 
2016
 
(in thousands)
 
 
 
 
 
Balance as of beginning of period
 
$
5,023

 
$
16,148

Reclassification (see below)
 
—

 
(9,532
)
Purchases
 
—

 
—

Sales
 
—

 
—

Realized gains (losses), net
 
—

 
—

Unrealized gains (losses), net
 
3

 
(11
)
Balance as of end of period
 
$
5,026

 
$
6,605


Transfers into and out of all levels of the fair value hierarchy are reflected at end-of-period fair values. We reclassified the investments of our consolidated private equity fund from investments to investments of consolidated company-sponsored investment funds on our condensed consolidated statement of financial condition (see Note 13, Consolidated Company-Sponsored Investment Funds). 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.

As of March 31, 2017 and December 31, 2016, we have an investment in a private equity fund focused exclusively on the energy sector (fair value of $4.9 million for both periods) 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 March 31,
 
 
2017
 
2016
 
(in thousands)
 
 
 
 
 
Balance as of beginning of period
 
$
17,589

 
$
31,399

Accretion
 
178

 
353

Payments
 
(590
)
 
(633
)
Balance as of end of period
 
$
17,177

 
$
31,119


As of March 31, 2017 and December 31, 2016, the three acquisition-related contingent consideration liabilities recorded have a combined fair value of $17.2 million and $17.6 million, respectively, and are valued using a projected AUM weighted average growth rate of 18% for one acquisition, and revenue growth rates and discount rates ranging from 4% to 31% and 1.4% to 6.4%, respectively, for the three acquisitions.

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 three months ended March 31, 2017 or during the year ended December 31, 2016.

20



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.

AB may be involved in various matters, including regulatory inquiries, administrative proceedings and litigation, some of which may allege significant damages. It is reasonably possible that we could incur losses pertaining to these matters, but currently we cannot estimate any such 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. Consolidated Company-Sponsored Investment Funds

We regularly provide seed capital to new company-sponsored investment funds. As such, we may consolidate or de-consolidate a variety of company-sponsored investment funds each quarter. Due to the similarity of risks related to our involvement with each company-sponsored investment fund, disclosures required under the VIE model are aggregated, such as those disclosures regarding the carrying amount and classification of assets.
We are not required to provide financial support to company-sponsored investment funds and only the assets of such funds are available to settle its own liabilities. Our exposure to loss in regard to consolidated company-sponsored investment funds is limited to our investment in, and our management fee earned from, such funds. Equity and debt holders of such funds have no recourse to AB’s assets or to the general credit of AB.

21


The balances of consolidated VIEs and VOEs included in our condensed consolidated statements of financial condition were as follows:
 
 
March 31, 2017
 
December 31, 2016
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
VIEs
 
VOEs
 
Total
 
VIEs
 
VOEs
 
Total
Cash and cash equivalents
 
326,324

 
319

 
326,643

 
337,525

 
—

 
337,525

Investments
 
730,533

 
23,889

 
754,422

 
550,850

 
23,226

 
574,076

Other assets
 
13,571

 
265

 
13,836

 
44,570

 
—

 
44,570

Total assets
 
$
1,070,428

 
$
24,473

 
$
1,094,901

 
$
932,945

 
$
23,226

 
$
956,171

 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
398,108

 
29

 
398,137

 
292,800

 
—

 
292,800

Redeemable non-controlling interest
 
394,937

 
7

 
394,944

 
384,294

 
—

 
384,294

Partners' capital attributable to AB Unitholders
 
244,413

 
24,437

 
268,850

 
221,229

 
23,226

 
244,455

Non-redeemable non-controlling interests in consolidated entities
 
32,970

 
—

 
32,970

 
34,622

 
—

 
34,622

Total liabilities, redeemable non-controlling interest and partners' capital
 
$
1,070,428

 
$
24,473

 
$
1,094,901

 
$
932,945

 
$
23,226

 
$
956,171

 
 
 
 
 
 
 
 
 
 
 
 
 

22

Fair Value
Cash and cash equivalents include cash on hand, demand deposits, overnight commercial paper and highly liquid investments with original maturities of three months or less. Due to the short-term nature of these instruments, the recorded value has been determined to approximate fair value.

Valuation of consolidated company-sponsored investment funds' financial instruments by pricing observability levels as of March 31, 2017 and December 31, 2016 was as follows (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
March 31, 2017:
 
 
 
 
 
 
 
  Investments - VIEs
$
494,620

 
$
225,560

 
$
10,273

 
$
730,453

  Investments - VOEs
11,357

 
11,719

 
—

 
23,076

  Derivatives - VIEs
39

 
4,319

 
—

 
4,358

  Derivatives - VOEs
$
—

 
$
13

 
$
—

 
$
13

Total assets measured at fair value
$
506,016

 
$
241,611

 
$
10,273

 
$
757,900

 
 
 
 
 
 
 
 
Short equities - VIEs
$
381,632

 
$
—

 
$
—

 
$
381,632

Derivatives - VIEs
20

 
4,848

 
—

 
4,868

  Derivatives - VOEs
$
—

 
$
—

 
$
—

 
$
—

Total liabilities measured at fair value
$
381,652

 
$
4,848

 
$
—

 
$
386,500

 
 
 
 
 
 
 
 
December 31, 2016:
 
 
 
 
 
 
 
  Investments - VIEs
$
341,830

 
$
203,197

 
$
5,741

 
$
550,768

  Investments - VOEs
10,188

 
12,061

 
—

 
22,249

  Derivatives - VIEs
58

 
1,739

 
—

 
1,797

Total assets measured at fair value
$
352,076

 
$
216,997

 
$
5,741

 
$
574,814

 
 
 
 
 
 
 
 
Short equities - VIEs
$
248,419

 
$
—

 
$
—

 
$
248,419

Derivatives - VIEs
48

 
2,033

 
—

 
2,081

Total liabilities measured at fair value
$
248,467

 
$
2,033

 
$
—

 
$
250,500


See Note 11 for 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.

The change in carrying value associated with Level 3 financial instruments carried at fair value within consolidated company-sponsored investment funds was as follows:

23

 
 
Three Months Ended March 31,
 
 
2017
 
2016
 
(in thousands)
 
 
 
 
 
Balance as of beginning of period
 
$
5,741

 
$
—

Impact of adoption of ASU 2015-02
 
—

 
14,740

Transfers in
 
749

 
—

Purchases
 
4,577

 
6

Sales
 
(1,073
)
 
(53
)
Realized (losses), net
 
(12
)
 
—

Unrealized gains, net
 
271

 
715

Accrued discounts
 
20

 
18

Balance as of end of period
 
$
10,273

 
$
15,426


The level 3 securities primarily consist of corporate bonds that are vendor priced with no ratings available, bank loans, non-agency collateralized mortgage obligations and asset-backed securities.

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.

Derivative Instruments
As of March 31, 2017 and December 31, 2016, the VIEs held $20.4 million and $2.9 million (net), respectively, of futures, forwards and swaps within their portfolios (including $20.9 million and $3.2 million, respectively, of derivatives included in their investments balance on the condensed consolidated statements of financial condition. For the three months ended March 31, 2017 and 2016, we recognized $7.2 million and $3.0 million, respectively, of gains on these derivative positions. These gains are recognized in investment gains (losses) in the condensed consolidated statements of income. As of March 31, 2017 and December 31, 2016, the VIEs held $0.7 million and $0.5 million, respectively, of cash collateral payable to trade counterparties. This obligation to return cash is reported in the liabilities of consolidated company-sponsored investment funds in our condensed consolidated statements of financial condition. As of March 31, 2017 and December 31, 2016, the VIEs delivered $5.6 million and $3.3 million, respectively, of cash collateral into brokerage accounts. The VIEs report this cash collateral in the consolidated company-sponsored investment funds cash and cash equivalents in our condensed consolidated statements of financial condition.
As of March 31, 2017, the VOEs held $43,105 (net) of futures, forwards and swaps within their portfolios. For the three months ended March 31, 2017, we recognized $0.4 million of losses on these derivative positions. These gains are recognized in investments gains (losses) in the condensed consolidated statements of income. As of March 31, 2017, the VOEs had no cash collateral payable to trade counterparties. As of March 31, 2017, the VOEs delivered $0.3 million of cash collateral into brokerage accounts. The VOEs report this cash collateral in the consolidated company-sponsored investment funds cash and cash equivalents in our condensed consolidated statements of financial condition.

24


Offsetting Assets and Liabilities
Offsetting of derivative assets of consolidated company-sponsored investment funds as of March 31, 2017 and December 31, 2016 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
 
Collateral
Received
 
Net
Amount
 
(in thousands)
March 31, 2017:
 
 
 
 
 
 
 
 
 
 
 
Derivatives - VIEs
$
25,255

 
$
—

 
$
25,255

 
$
—

 
$
(652
)
 
$
24,603

Derivatives - VOEs
$
43

 
$
—

 
$
43

 
$
—

 
$
—

 
$
43

December 31, 2016:
 

 
 

 
 
 
 

 
 

 
 

Derivatives - VIEs
$
4,997

 
$
—

 
$
4,997

 
$
—

 
$
(461
)
 
$
4,536


Offsetting of derivative liabilities of consolidated company-sponsored investment funds as of March 31, 2017 and December 31, 2016 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
 
Collateral
Pledged
 
Net Amount
 
(in thousands)
March 31, 2017:
 
 
 
 
 
 
 
 
 
 
 
Derivatives - VIEs
$
4,868

 
$
—

 
$
4,868

 
$
—

 
$
(4,868
)
 
$
—

Derivatives - VOEs
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

December 31, 2016:
 

 
 

 
 
 
 

 
 

 
 

Derivatives - VIEs
$
2,081

 
$
—

 
$
2,081

 
$
—

 
$
(2,081
)
 
$
—


Cash collateral, whether pledged or received on derivative instruments, is not considered material and, accordingly, is not disclosed by counterparty.
Non-Consolidated VIEs
As of March 31, 2017, the net assets of company-sponsored investment products that are non-consolidated VIEs are approximately $49.3 billion, and our maximum risk of loss is our investment of $23.6 million in these VIEs and advisory fee receivables from these VIEs, which are not material.

25


14.
Units Outstanding

Changes in AB Units outstanding during the three-month period ended March 31, 2017 were as follows:
 
 
 
Outstanding as of December 31, 2016
268,893,534

Options exercised
262,819

Units issued
907,449

Units retired
(1,349,254
)
Balance as of March 31, 2017
268,714,548


15.
Debt

As of March 31, 2017 and December 31, 2016, AB had $607.9 million and $513.0 million, respectively, in commercial paper outstanding with weighted average interest rates of approximately 1.1% and 0.9%, 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 three months of 2017 and the full year 2016 were $532.2 million and $422.9 million, respectively, with weighted average interest rates of approximately 0.9% and 0.6%, respectively.
16.
Changes in Capital

Changes in capital during the three-month period ended March 31, 2017 were as follows: 

 
Partners’ Capital Attributable to AB Unitholders
 
Non-Controlling Interests In Consolidated Entities
 
Total Capital
 
(in thousands)
 
 
 
 
 
 
Balance as of December 31, 2016
$
4,032,017

 
$
36,172

 
$
4,068,189

Comprehensive income:
 

 
 

 
 

Net income
139,937

 
1,632

 
141,569

Other comprehensive income, net of tax:
 

 
 

 
 

Unrealized (losses) on investments
(18
)
 
—

 
(18
)
Foreign currency translation adjustments
8,791

 
76

 
8,867

Changes in employee benefit related items
189

 
—

 
189

Comprehensive income
148,899

 
1,708

 
150,607