Attached files
file | filename |
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EX-32.2 - EXHIBIT 32.2 - ALLIANCEBERNSTEIN L.P. | a93017exhibit322.htm |
EX-32.1 - EXHIBIT 32.1 - ALLIANCEBERNSTEIN L.P. | a93017exhibit321.htm |
EX-31.2 - EXHIBIT 31.2 - ALLIANCEBERNSTEIN L.P. | a93017exhibit312.htm |
EX-31.1 - EXHIBIT 31.1 - ALLIANCEBERNSTEIN L.P. | a93017exhibit311.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 September 30, 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 September 30, 2017 was 265,824,057.
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)
(unaudited)
September 30, 2017 | December 31, 2016 | ||||||
ASSETS | |||||||
Cash and cash equivalents | $ | 802,209 | $ | 656,985 | |||
Cash and securities segregated, at fair value (cost: $784,535 and $946,093) | 784,566 | 946,097 | |||||
Receivables, net: | |||||||
Brokers and dealers | 299,641 | 335,686 | |||||
Brokerage clients | 1,651,524 | 1,513,656 | |||||
AB funds fees | 171,165 | 165,997 | |||||
Other fees | 104,196 | 104,376 | |||||
Investments: | |||||||
Long-term incentive compensation-related | 64,716 | 67,761 | |||||
Other | 455,037 | 373,344 | |||||
Assets of consolidated company-sponsored investment funds: | |||||||
Cash and cash equivalents | 445,250 | 337,525 | |||||
Investments | 799,935 | 574,076 | |||||
Other assets | 6,455 | 44,570 | |||||
Furniture, equipment and leasehold improvements, net | 152,448 | 159,564 | |||||
Goodwill | 3,066,700 | 3,066,700 | |||||
Intangible assets, net | 112,556 | 134,606 | |||||
Deferred sales commissions, net | 37,004 | 63,890 | |||||
Other assets | 231,249 | 195,615 | |||||
Total assets | $ | 9,184,651 | $ | 8,740,448 | |||
LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND CAPITAL | |||||||
Liabilities: | |||||||
Payables: | |||||||
Brokers and dealers | $ | 299,382 | $ | 239,578 | |||
Securities sold not yet purchased | 33,811 | 40,944 | |||||
Brokerage clients | 2,386,422 | 2,360,481 | |||||
AB mutual funds | 123,678 | 150,939 | |||||
Accounts payable and accrued expenses | 519,886 | 430,569 | |||||
Liabilities of consolidated company-sponsored investment funds | 593,800 | 292,800 | |||||
Accrued compensation and benefits | 612,230 | 251,019 | |||||
Debt | 297,436 | 512,970 | |||||
Total liabilities | 4,866,645 | 4,279,300 | |||||
Commitments and contingencies (See Note 12) |
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Redeemable non-controlling interest | 421,618 | 392,959 | |||||
Capital: | |||||||
General Partner | 39,620 | 41,100 | |||||
Limited partners: 265,824,057 and 268,893,534 units issued and outstanding | 4,010,144 | 4,154,810 | |||||
Receivables from affiliates | (11,978 | ) | (12,830 | ) | |||
AB Holding Units held for long-term incentive compensation plans | (48,786 | ) | (32,967 | ) | |||
Accumulated other comprehensive loss | (94,219 | ) | (118,096 | ) | |||
Partners’ capital attributable to AB Unitholders | 3,894,781 | 4,032,017 | |||||
Non-redeemable non-controlling interests in consolidated entities | 1,607 | 36,172 | |||||
Total capital | 3,896,388 | 4,068,189 | |||||
Total liabilities, redeemable non-controlling interest and capital | $ | 9,184,651 | $ | 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 September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenues: | ||||||||||||||||
Investment advisory and services fees | $ | 543,107 | $ | 489,393 | $ | 1,572,560 | $ | 1,417,856 | ||||||||
Bernstein research services | 108,385 | 110,885 | 330,596 | 352,403 | ||||||||||||
Distribution revenues | 106,042 | 97,625 | 302,745 | 287,638 | ||||||||||||
Dividend and interest income | 17,619 | 9,908 | 51,023 | 30,128 | ||||||||||||
Investment gains (losses) | 18,808 | 17,606 | 68,122 | 85,469 | ||||||||||||
Other revenues | 24,902 | 24,240 | 71,532 | 75,044 | ||||||||||||
Total revenues | 818,863 | 749,657 | 2,396,578 | 2,248,538 | ||||||||||||
Less: Interest expense | 6,713 | 2,066 | 17,198 | 6,015 | ||||||||||||
Net revenues | 812,150 | 747,591 | 2,379,380 | 2,242,523 | ||||||||||||
Expenses: | ||||||||||||||||
Employee compensation and benefits | 329,777 | 316,737 | 979,387 | 927,997 | ||||||||||||
Promotion and servicing: | ||||||||||||||||
Distribution-related payments | 108,284 | 95,844 | 307,407 | 276,188 | ||||||||||||
Amortization of deferred sales commissions | 7,629 | 9,787 | 25,015 | 31,606 | ||||||||||||
Trade execution, marketing, T&E and other | 48,088 | 47,205 | 149,537 | 156,763 | ||||||||||||
General and administrative: | ||||||||||||||||
General and administrative | 128,712 | 106,504 | 360,395 | 322,184 | ||||||||||||
Real estate charges (credits) | 18,655 | (140 | ) | 39,400 | 24,645 | |||||||||||
Contingent payment arrangements | (140 | ) | (21,129 | ) | 215 | (20,423 | ) | |||||||||
Interest on borrowings | 2,105 | 1,009 | 6,227 | 3,293 | ||||||||||||
Amortization of intangible assets | 7,013 | 6,465 | 20,921 | 19,344 | ||||||||||||
Total expenses | 650,123 | 562,282 | 1,888,504 | 1,741,597 | ||||||||||||
Operating income | 162,027 | 185,309 | 490,876 | 500,926 | ||||||||||||
Income taxes | 4,547 | 11,578 | 24,869 | 37,315 | ||||||||||||
Net income | 157,480 | 173,731 | 466,007 | 463,611 | ||||||||||||
Net income of consolidated entities attributable to non-controlling interests | 16,526 | 15,696 | 50,013 | 14,791 | ||||||||||||
Net income attributable to AB Unitholders | $ | 140,954 | $ | 158,035 | $ | 415,994 | $ | 448,820 | ||||||||
Net income per AB Unit: | ||||||||||||||||
Basic | $ | 0.53 | $ | 0.58 | $ | 1.54 | $ | 1.65 | ||||||||
Diluted | $ | 0.52 | $ | 0.58 | $ | 1.54 | $ | 1.64 |
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 September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net income | $ | 157,480 | $ | 173,731 | $ | 466,007 | $ | 463,611 | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Foreign currency translation adjustment, before reclassification and tax | 7,735 | 437 | 24,091 | 539 | ||||||||||||
Less: reclassification adjustment for (losses) included in net income upon liquidation | — | (6 | ) | — | (6 | ) | ||||||||||
Foreign currency translation adjustments, before tax | 7,735 | 443 | 24,091 | 545 | ||||||||||||
Income tax benefit | — | — | — | — | ||||||||||||
Foreign currency translation adjustments, net of tax | 7,735 | 443 | 24,091 | 545 | ||||||||||||
Unrealized (losses) gains on investments: | ||||||||||||||||
Unrealized (losses) gains arising during period | (4 | ) | 12 | 6 | (7 | ) | ||||||||||
Less: reclassification adjustment for (losses) included in net income | — | (7 | ) | — | (10 | ) | ||||||||||
Change in unrealized (losses) gains on investments | (4 | ) | 19 | 6 | 3 | |||||||||||
Income tax benefit (expense) | 5 | (8 | ) | 3 | (5 | ) | ||||||||||
Unrealized gains (losses) on investments, net of tax | 1 | 11 | 9 | (2 | ) | |||||||||||
Changes in employee benefit related items: | ||||||||||||||||
Amortization of prior service cost | 6 | 6 | 18 | 87 | ||||||||||||
Recognized actuarial loss | 295 | 244 | 818 | 202 | ||||||||||||
Changes in employee benefit related items | 301 | 250 | 836 | 289 | ||||||||||||
Income tax (expense) benefit | (2 | ) | 24 | (81 | ) | (51 | ) | |||||||||
Employee benefit related items, net of tax | 299 | 274 | 755 | 238 | ||||||||||||
Other comprehensive income | 8,035 | 728 | 24,855 | 781 | ||||||||||||
Less: Comprehensive income in consolidated entities attributable to non-controlling interests | 16,554 | 15,725 | 50,990 | 14,815 | ||||||||||||
Comprehensive income attributable to AB Unitholders | $ | 148,961 | $ | 158,734 | $ | 439,872 | $ | 449,577 |
See Accompanying Notes to Condensed Consolidated Financial Statements.
4
ALLIANCEBERNSTEIN L.P. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine Months Ended September 30, | |||||||
2017 | 2016 | ||||||
Cash flows from operating activities: | |||||||
Net income | $ | 466,007 | $ | 463,611 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Amortization of deferred sales commissions | 25,015 | 31,606 | |||||
Non-cash long-term incentive compensation expense | 26,947 | 6,530 | |||||
Depreciation and other amortization | 49,995 | 44,010 | |||||
Unrealized losses (gains) on investments | 3,323 | (27,659 | ) | ||||
Unrealized (gains) on investments of consolidated company-sponsored investment funds | (33,062 | ) | (16,675 | ) | |||
Other, net | 10,195 | 8,099 | |||||
Changes in assets and liabilities: | |||||||
Consolidation of cash and cash equivalents of consolidated company-sponsored investment funds | — | 8,512 | |||||
Decrease in segregated cash and securities | 161,531 | 73,252 | |||||
Decrease (increase) in receivables | 8,079 | (206,052 | ) | ||||
(Increase) decrease in investments | (76,780 | ) | 184,655 | ||||
(Increase) in investments of consolidated company-sponsored investment funds | (192,797 | ) | (34,576 | ) | |||
Decrease (increase) in deferred sales commissions | 1,871 | (2,171 | ) | ||||
(Increase) in other assets | (33,003 | ) | (40,933 | ) | |||
Decrease (increase) in other assets and liabilities of consolidated company-sponsored investment funds | 339,115 | (1,791 | ) | ||||
(Decrease) increase in payables | (58,126 | ) | 268,937 | ||||
Increase in accounts payable and accrued expenses | 23,982 | 59,950 | |||||
Increase in accrued compensation and benefits | 358,586 | 322,600 | |||||
Net cash provided by operating activities | 1,080,878 | 1,141,905 | |||||
Cash flows from investing activities: | |||||||
Purchases of investments | (11 | ) | — | ||||
Proceeds from sales of investments | 10 | 191 | |||||
Purchases of furniture, equipment and leasehold improvements | (24,952 | ) | (28,318 | ) | |||
Proceeds from sales of furniture, equipment and leasehold improvements | 39 | 14 | |||||
Purchase of business, net of cash acquired | — | (20,541 | ) | ||||
Net cash used in investing activities | (24,914 | ) | (48,654 | ) | |||
Cash flows from financing activities: | |||||||
(Repayment) of commercial paper, net | (220,363 | ) | (197,064 | ) | |||
Increase (decrease) in overdrafts payable | 66,134 | (74,837 | ) | ||||
Distributions to General Partner and Unitholders | (489,049 | ) | (400,441 | ) | |||
Redemptions of non-controlling interests of consolidated company-sponsored investment funds, net | (8,373 | ) | (36,226 | ) | |||
Capital contributions (to) from non-controlling interests in consolidated entities | (43,217 | ) | 364 | ||||
Purchase of non-controlling interest | (1,833 | ) | — | ||||
Capital contributions from affiliates | 79 | 439 | |||||
Payments of contingent payment arrangements/purchases of shares | (6,344 | ) | (4,994 | ) | |||
Additional investments by AB Holding with proceeds from exercise of compensatory options to buy AB Holding Units | 17,672 | 2,371 |
5
Purchases of AB Holding Units to fund long-term incentive compensation plan awards, net | (134,186 | ) | (128,778 | ) | |||
Purchases of AB Units | (993 | ) | (359 | ) | |||
Other | — | (19 | ) | ||||
Net cash used in financing activities | (820,473 | ) | (839,544 | ) | |||
Effect of exchange rate changes on cash and cash equivalents | 17,458 | 7,155 | |||||
Net increase in cash and cash equivalents | 252,949 | 260,862 | |||||
Cash and cash equivalents as of beginning of the period | 994,510 | 577,300 | |||||
Cash and cash equivalents as of end of the period | $ | 1,247,459 | $ | 838,162 | |||
See Accompanying Notes to Condensed Consolidated Financial Statements.
6
ALLIANCEBERNSTEIN L.P.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 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, concentration 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 September 30, 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 2.7% of the issued and outstanding units representing assignments of beneficial ownership of limited partnership interests in AllianceBernstein Holding L.P. (“AB Holding Units”). 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.
As of September 30, 2017, the ownership structure of AB, including limited partnership units outstanding as well as the general partner's 1% interest, is as follows:
AXA and its subsidiaries | 64.0 | % |
AB Holding | 34.9 | |
Unaffiliated holders | 1.1 | |
100.0 | % |
Including both the general partnership and limited partnership interests in AB Holding and AB, AXA and its subsidiaries had an approximate 64.9% economic interest in AB as of September 30, 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 include 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 consolidated 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
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, which revises revenue recognition criteria for revenue arising from contracts with customers, requires certain costs to obtain and fulfill contracts with customers to be capitalized if they meet certain criteria, and expands disclosure requirements. We will adopt this new accounting standard on January 1, 2018 on a modified retrospective basis, recognizing the cumulative effect of initial adoption in Partners’ Capital. We are continuing to monitor the interpretations of this new accounting guidance by relevant industry groups. Based on our analysis performed to-date, we do not expect any changes in the timing of revenue recognition for our base management fees, distribution revenues, shareholder servicing revenues and broker-dealer revenues. However, performance-based management fees, which are currently recognized at the end of the applicable measurement periods when no risk of reversal remains, may in certain instances be recognized prior to the measurement date under the new standard when it is probable that significant reversal of performance-based fees recognized will not occur. This amendment is not expected to have a material impact on our financial condition or results of operations. Our financial statements will include additional disclosures as required by ASU 2014-09.
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 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 the retrospective transition method. The amendment is not expected to have a material impact on our financial condition or results of operations.
9
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. As a result of the revised guidance, a goodwill impairment will 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.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation, Scope of Modification Accounting. The amendment provides clarity and reduces both diversity in practice and cost and complexity when applying the guidance in Topic 718, Compensation - Stock Compensation, to a change to the terms or conditions of a share-based payment award. This amendment is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 and will be applied prospectively to an award modified on or after the adoption date. This 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 amount of fees is 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 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.
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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 and nine months ended September 30, 2017, we purchased 0.3 million and 5.9 million AB Holding Units for $6.9 million and $134.6 million, respectively (on a trade date basis). These amounts reflect open-market purchases of 0.3 million and 5.2 million AB Holding Units for $6.8 million and $117.1 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. During the three and nine months ended September 30, 2016, we purchased 2.0 million and 5.8 million AB Holding Units for $45.2 million and $129.2 million, respectively (on a trade date basis). These amounts reflect open-market purchases of 2.0 million and 5.7 million AB Holding Units for $45.1 million and $127.1 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 second quarter of 2017 expired at the close of business on July 26, 2017. We did not adopt a plan during the third 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 nine months of 2017 and 2016, we granted to employees and Eligible Directors 2.2 million and 0.7 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 nine months of 2017 and 2016, AB Holding issued 1.0 million and 0.1 million AB Holding Units, respectively, upon exercise of options to buy AB Holding Units. AB Holding used the proceeds of $17.7 million and $2.4 million, respectively, received 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, 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.
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On October 25, 2017, the General Partner declared a distribution of $0.58 per AB Unit, representing a distribution of Available Cash Flow for the three months ended September 30, 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 November 16, 2017 to holders of record on November 6, 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:
Nine Months Ended September 30, 2017 | Twelve Months Ended December 31, 2016 | ||||||
(in thousands) | |||||||
Balance as of beginning of period | $ | 112,932 | $ | 123,912 | |||
Expense incurred | 32,036 | 12,248 | |||||
Deferred rent | 6,991 | 4,930 | |||||
Payments made | (28,011 | ) | (32,988 | ) | |||
Interest accretion | 3,160 | 4,830 | |||||
Balance as of end of period | $ | 127,108 | $ | 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 September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(in thousands, except per unit amounts) | ||||||||||||||||
Net income attributable to AB Unitholders | $ | 140,954 | $ | 158,035 | $ | 415,994 | $ | 448,820 | ||||||||
Weighted average units outstanding – basic | 265,585 | 268,133 | 267,448 | 269,896 | ||||||||||||
Dilutive effect of compensatory options to buy AB Holding Units | 400 | 590 | 455 | 554 | ||||||||||||
Weighted average units outstanding – diluted | 265,985 | 268,723 | 267,903 | 270,450 | ||||||||||||
Basic net income per AB Unit | $ | 0.53 | $ | 0.58 | $ | 1.54 | $ | 1.65 | ||||||||
Diluted net income per AB Unit | $ | 0.52 | $ | 0.58 | $ | 1.54 | $ | 1.64 |
For the three and nine months ended September 30, 2017, we excluded 2,427,527 options from the diluted net income computation due to their anti-dilutive effect. For the three and nine months ended September 30, 2016, we excluded 2,873,106 options from the diluted net income computation due to their anti-dilutive effect.
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7. | Cash and Securities Segregated Under Federal Regulations and Other Requirements |
As of September 30, 2017 and December 31, 2016, $0.7 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 September 30, 2017 and December 31, 2016, $61.5 million and $52.9 million, respectively, of cash was segregated in these bank accounts.
8. | Investments |
Investments consist of: | |||||||
September 30, 2017 | December 31, 2016 | ||||||
(in thousands) | |||||||
Trading: | |||||||
U.S. Treasury Bills | $ | 52,605 | $ | 28,937 | |||
Long-term incentive compensation-related | 50,966 | 50,935 | |||||
Seed capital | 158,754 | 188,053 | |||||
Equities | 105,826 | 6,602 | |||||
Exchange-traded options | 9,368 | 3,106 | |||||
Investments in limited partnership hedge funds: | |||||||
Long-term incentive compensation-related | 13,750 | 16,826 | |||||
Seed capital | 25,740 | 23,704 | |||||
Private equity (seed capital) | 38,553 | 45,278 | |||||
Time deposits | 52,090 | 70,097 | |||||
Other | 12,101 | 7,567 | |||||
Total investments | $ | 519,753 | $ | 441,105 |
Total investments related to long-term incentive compensation obligations of $64.7 million and $67.8 million as of September 30, 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 company-sponsored mutual funds and hedge funds 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
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financial interest in a VOE. See Note 13, Consolidated Company-Sponsored Investment Funds, for the seed capital investments that are consolidated entities. As of September 30, 2017 and December 31, 2016, our total seed capital investments were $462.9 million 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 and nine months ended September 30, 2017 and 2016 related to trading securities held as of September 30, 2017 and 2016 were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(in thousands) | ||||||||||||||||
Net (losses) gains recognized during the period | $ | (1,829 | ) | $ | 9,052 | $ | 14,436 | $ | 17,678 | |||||||
Less: net gains (losses) recognized during the period on trading securities sold during the period | 311 | 1,411 | 12,850 | (11,285 | ) | |||||||||||
Unrealized (losses) gains recognized during the period on trading securities held | $ | (2,140 | ) | $ | 7,641 | $ | 1,586 | $ | 28,963 |
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 September 30, 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:
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Fair Value | |||||||||||
Notional Value | Asset Derivatives | Liability Derivatives | |||||||||
(in thousands) | |||||||||||
September 30, 2017: | |||||||||||
Exchange-traded futures | $ | 88,695 | $ | 1,111 | $ | 962 | |||||
Currency forwards | 139,983 | 3,077 | 3,119 | ||||||||
Interest rate swaps | 32,526 | 951 | 877 | ||||||||
Credit default swaps | 38,609 | 600 | 1,380 | ||||||||
Total return swaps | 63,657 | 107 | 262 | ||||||||
Total derivatives | $ | 363,470 | $ | 5,846 | $ | 6,600 | |||||
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 |
As of September 30, 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 and nine months ended September 30, 2017 and 2016 recognized in investment gains (losses) in the condensed consolidated statements of income were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(in thousands) | ||||||||||||||||
Exchange-traded futures | $ | (3,290 | ) | $ | (4,975 | ) | $ | (12,123 | ) | $ | (2,542 | ) | ||||
Currency forwards | (62 | ) | (641 | ) | (992 | ) | (2,461 | ) | ||||||||
Interest rate swaps | 151 | (251 | ) | (97 | ) | (2,182 | ) | |||||||||
Credit default swaps | (273 | ) | (352 | ) | (1,182 | ) | (958 | ) | ||||||||
Options swaps | — | (157 | ) | — | (70 | ) | ||||||||||
Total return swaps | (1,417 | ) | (1,666 | ) | (5,376 | ) | (8,438 | ) | ||||||||
Net (losses) on derivative instruments | $ | (4,891 | ) | $ | (8,042 | ) | $ | (19,770 | ) | $ | (16,651 | ) |
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 September 30, 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
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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 September 30, 2017 and December 31, 2016, we delivered $6.4 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 September 30, 2017 and December 31, 2016, we held $9.4 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 September 30, 2017 and December 31, 2016, we held $13.3 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 and nine months ended September 30, 2017, we recognized $12.7 million and $21.8 million, respectively, of losses on equity options activity. For the three and nine months ended September 30, 2016, we recognized $10.9 million and $27.6 million, respectively, of losses on equity options activity. These losses are recognized in investment gains (losses) in the condensed consolidated statements of income.
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 September 30, 2017 and December 31, 2016 was as follows:
Gross Amounts of Recognized Assets | Gross Amounts Offset in the Statement of Financial Condition | Net Amounts of Assets Presented in the Statement of Financial Condition | Financial Instruments | Cash Collateral Received | Net Amount | ||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
September 30, 2017: | |||||||||||||||||||||||
Securities borrowed | $ | 75,609 | $ | — | $ | 75,609 | $ | (73,600 | ) | $ | — | $ | 2,009 | ||||||||||
Derivatives | $ | 5,846 | $ | — | $ | 5,846 | $ | — | $ | — | $ | 5,846 | |||||||||||
Long exchange-traded options | $ | 9,368 | $ | — | $ | 9,368 | $ | — | $ | — | $ | 9,368 | |||||||||||
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 |
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Offsetting of liabilities as of September 30, 2017 and December 31, 2016 was as follows:
Gross Amounts of Recognized Liabilities | Gross Amounts Offset in the Statement of Financial Condition | Net Amounts of Liabilities Presented in the Statement of Financial Condition | Financial Instruments | Cash Collateral Pledged | Net Amount | ||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
September 30, 2017: | |||||||||||||||||||||||
Securities loaned | $ | 61,719 | $ | — | $ | 61,719 | $ | (61,719 | ) | $ | — | $ | — | ||||||||||
Derivatives | $ | 6,600 | $ | — | $ | 6,600 | $ | — | $ | (6,367 | ) | $ | 233 | ||||||||||
Short exchange-traded options | $ | 13,272 | $ | — | $ | 13,272 | $ | — | $ | — | $ | 13,272 | |||||||||||
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.
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. |
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Assets and Liabilities Measured at Fair Value on a Recurring Basis
Valuation of our financial instruments by pricing observability levels as of September 30, 2017 and December 31, 2016 was as follows (in thousands):
Level 1 | Level 2 | Level 3 | NAV Expedient(1) | Other | Total | ||||||||||||||||||
September 30, 2017: | |||||||||||||||||||||||
Money markets | $ | 152,893 | $ | — | $ | — | $ | — | $ | — | $ | 152,893 | |||||||||||
Securities segregated (U.S. Treasury Bills) | — | 723,029 | — | — | — | 723,029 | |||||||||||||||||
Derivatives | 1,111 | 4,735 | — | — | — | 5,846 | |||||||||||||||||
Investments | |||||||||||||||||||||||
Trading | |||||||||||||||||||||||
U.S. Treasury Bills | — | 52,605 | — | — | — | 52,605 | |||||||||||||||||
Equity securities | 231,897 | 4,108 | 116 | 98 | — | 236,219 | |||||||||||||||||
Fixed income securities | 68,328 | 10,986 | — | 13 | — | 79,327 | |||||||||||||||||
Long exchange-traded options | 9,368 | — | — | — | — | 9,368 | |||||||||||||||||
Limited partnership hedge funds(2) | — | — | — | — | 39,490 | 39,490 | |||||||||||||||||
Private equity | — | — | 954 | 37,599 | — | 38,553 | |||||||||||||||||
Time deposits(3) | — | — | — | — | 52,090 | 52,090 | |||||||||||||||||
Other | |||||||||||||||||||||||
Available-for-sale | 98 | — | — | — | — | 98 | |||||||||||||||||
Other investments(2)(4) | — | — | — | — | 12,003 | 12,003 | |||||||||||||||||
Total investments | 309,691 | 67,699 | 1,070 | 37,710 | 103,583 | 519,753 | |||||||||||||||||
Total assets measured at fair value | $ | 463,695 | $ | 795,463 | $ | 1,070 | $ | 37,710 | $ | 103,583 | $ | 1,401,521 | |||||||||||
Securities sold not yet purchased | |||||||||||||||||||||||
Short equities – corporate | $ | 20,539 | $ | — | $ | — | $ | — | $ | — | $ | 20,539 | |||||||||||
Short exchange-traded options | 13,272 | — | — | — | — | 13,272 | |||||||||||||||||
Derivatives | 962 | 5,638 | — | — | — | 6,600 | |||||||||||||||||
Contingent payment arrangements | — | — | 12,103 | — | — | 12,103 | |||||||||||||||||
Total liabilities measured at fair value | $ | 34,773 | $ | 5,638 | $ | 12,103 | $ | — | $ | — | $ | 52,514 | |||||||||||
December 31, 2016: | |||||||||||||||||||||||
Money markets | $ | 107,250 | $ | — | $ | — | $ | — | $ | — | $ | 107,250 | |||||||||||
Securities segregated (U.S. Treasury Bills) | — | 893,189 | — | — | — | 893,189 | |||||||||||||||||
Derivatives | 1,224 | 7,189 | — | — | — | 8,413 | |||||||||||||||||
Investments | |||||||||||||||||||||||
Trading | |||||||||||||||||||||||
U.S. Treasury Bills | — | 28,937 | — | — | — | 28,937 | |||||||||||||||||
Equity securities | 148,128 | 5,724 | 110 | 36 | — | 153,998 | |||||||||||||||||
Fixed income securities | 80,473 | 11,107 | — | 12 | — | 91,592 | |||||||||||||||||
Long exchange-traded options | 3,106 | — | — | — | — | 3,106 | |||||||||||||||||
Limited partnership hedge funds(2) | — | — | — | — | 40,530 | 40,530 | |||||||||||||||||
Private equity | — | — | 4,913 | 40,365 | — | 45,278 | |||||||||||||||||
Time deposits(3) | — | — | — | — | 70,097 | 70,097 |
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Other | |||||||||||||||||||||||
Available-for-sale | 45 | — | — | — | — | 45 | |||||||||||||||||
Other investments(2)(4) | — | — | — | — | 7,522 | 7,522 | |||||||||||||||||
Total investments | 231,752 | 45,768 | 5,023 | 40,413 | 118,149 | 441,105 | |||||||||||||||||
Total assets measured at fair value | $ | 340,226 | $ | 946,146 | $ | 5,023 | $ | 40,413 | $ | 118,149 | $ | 1,449,957 | |||||||||||
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 |
(1) Investments measured at fair value using NAV (or its equivalent) as a practical expedient.
(2) Investments in equity method investees that are not measured at fair value in accordance with GAAP.
(3) Investments carried at amortized cost that are not measured at fair value in accordance with GAAP.
(4) Investments carried at cost that are not measured at fair value in accordance with GAAP.
One of our private equity investments (measured at fair value using NAV as a practical expedient) is a venture capital fund with a fair value of $37.6 million and an unfunded commitment of $0.8 million as of September 30, 2017. This partnership invests in communications, consumer, digital media, healthcare and information technology markets. The fair value of this investment has been estimated using the capital account balances provided by the partnership. The interest in this partnership cannot be redeemed.
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 |
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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. |
During the nine months ended September 30, 2017, there were no transfers between Level 1 and Level 2 securities.
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 September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(in thousands) | ||||||||||||||||
Balance as of beginning of period | $ | 5,028 | $ | 4,938 | $ | 5,023 | $ | 16,148 | ||||||||
Reclassification (see below) | — | — | — | (9,532 | ) | |||||||||||
Purchases | — | — | — | — | ||||||||||||
Sales | — | — | — | — | ||||||||||||
Realized gains (losses), net | — | — | — | — | ||||||||||||
Unrealized gains (losses), net | (3,958 | ) | 2 | (3,953 | ) | (1,676 | ) | |||||||||
Balance as of end of period | $ | 1,070 | $ | 4,940 | $ | 1,070 | $ | 4,940 |
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 September 30, 2017 and December 31, 2016, we have an investment in a private equity fund focused exclusively on the energy sector (fair value of $1.0 million and $4.9 million, respectively) 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.
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We acquired Ramius Alternative Solutions LLC in 2016, CPH Capital Fondsmaeglerselskab A/S in 2014 and SunAmerica's alternative investment group in 2010, all of which included contingent consideration arrangements as part of the purchase price. 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 September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(in thousands) | ||||||||||||||||
Balance as of beginning of period | $ | 16,777 | $ | 30,861 | $ | 17,589 | $ | 31,399 | ||||||||
Additions | — | 11,893 | — | 11,893 | ||||||||||||
Accretion | 53 | 354 | 408 | 1,060 | ||||||||||||
Changes in estimates | (193 | ) | (21,483 | ) | (193 | ) | (21,483 | ) | ||||||||
Payments | (4,534 | ) | (3,608 | ) | (5,701 | ) | (4,852 | ) | ||||||||
Balance as of end of period | $ | 12,103 | $ | 18,017 | $ | 12,103 | $ | 18,017 |
During the third quarter of 2017, we made the final contingent consideration payment relating to our 2014 acquisition and recorded a change in estimate and wrote off the remaining contingent consideration payable relating to our 2010 acquisition. As of September 30, 2017