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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
 (MARK ONE)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2014
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 number: 001-09318
FRANKLIN RESOURCES, INC.
(Exact name of registrant as specified in its charter)  
Delaware
 
13-2670991
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
One Franklin Parkway, San Mateo, California
 
94403
(Address of principal executive offices)
 
(Zip Code)
Registrant s telephone number, including area code: (650) 312-2000
Securities registered pursuant to Section 12(b) of the Act:  
Title of each class  
 
Name of each exchange on which registered  
Common Stock, par value $.10 per share
 
New York Stock Exchange
S ecurities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
x   YES     o   NO
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
o   YES    x   NO
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.    
x   YES     o   NO
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
x   YES     o   NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x   
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer     x
Accelerated filer      o
Non-accelerated filer      o (Do not check if a smaller reporting company)
Smaller reporting company    o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     o   YES    x   NO
The aggregate market value of the voting common equity (“common stock”) held by non-affiliates of the registrant, as of March 31, 2014 (the last business day of registrant’s second quarter of fiscal year 2014 ), was $21.6 billion based upon the last sale price reported for such date on the New York Stock Exchange.
Number of shares of the registrant’s common stock outstanding at October 31, 2014 : 622,371,509 .
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the registrant’s definitive proxy statement for its annual meeting of stockholders, to be filed with the Securities and Exchange Commission within 120 days after September 30, 2014 , are incorporated by reference into Part III of this report.



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INDEX TO ANNUAL REPORT ON FORM 10-K
FORM 10-K
ITEM
 
PAGE
NUMBER
 
 
 
ITEM 1.
3

 
 
3

 
 
4

 
 
5

 
 
14

 
 
14

 
 
20

 
 
20

 
 
21

 
 
21

 
ITEM 1A.
21

 
ITEM 1B.
29

 
ITEM 2.
29

 
ITEM 3.
30

 
ITEM 4.
30

 
 
Executive Officers  of the Registrant
30

 
 

 
ITEM 5.
32

 
ITEM 6.
33

 
ITEM 7.
34

 
ITEM 7A.
60

 
ITEM 8.
62

 
ITEM 9.
106

 
ITEM 9A.
106

 
ITEM 9B.
106

 
 
 
ITEM 10.
106

 
ITEM 11.
107

 
ITEM 12.
107

 
ITEM 13.
107

 
ITEM 14.
107

 
 

 
ITEM 15.
108

 
110

 




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PART I
Forward-looking Statements . In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements that involve a number of known and unknown risks, uncertainties and other important factors, including the risks and other factors discussed in Item 1A (“Risk Factors”), that could cause actual results and outcomes to differ materially from any future results or outcomes expressed or implied by such forward-looking statements. When used in this report, words or phrases generally written in the future tense and/or preceded by words such as “will,” “may,” “could,” “expect,” “believe,” “anticipate,” “intend,” “plan,” “seek,” “estimate,” or other similar words are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Moreover, statements in Risk Factors, “Management s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report that speculate about future events are forward-looking statements.
While forward-looking statements are our best prediction at the time that they are made, you should not rely on them. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. We caution you against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. If a circumstance occurs after the date of this Annual Report on Form 10-K that causes any of our forward-looking statements to be inaccurate, whether as a result of new information, future developments or otherwise, we do not have an obligation, and we undertake no obligation, to announce publicly the change to our expectations, or to make any revision to our forward-looking statements, unless required by law.
Item 1.      Business.
Overview
Franklin Resources, Inc. (“Franklin”) is a holding company that, together with its various subsidiaries (collectively, the “Company”), operates as Franklin Templeton Investments ® . We are a global investment management organization committed to the aim of delivering strong investment performance for our clients by drawing on the experience and perspective gained throughout over 65 years in the investment management business. We believe in the value of active investment management, and plan to continue to build on our strengths while pursuing new growth opportunities. The common stock of Franklin is traded on the New York Stock Exchange (the “NYSE”) under the ticker symbol “BEN,” and is included in the Standard & Poor s 500 Index.
We offer investment services under our Franklin ® , Templeton ® , Mutual Series ® , Bissett ® , Fiduciary Trust™, Darby ® , Balanced Equity Management ® and K2 ® brand names. When used in this report, unless the context otherwise makes clear, our “funds” means the mutual funds offered under our brand names. In this report, words such as “we,” “us,” “our” and similar terms refer to the Company.
We provide investment management and related services to investors in jurisdictions worldwide through products that include U.S.- and non-U.S.-registered open-end and closed-end funds (“U.S. Funds” and “Non-U.S. Funds”), unregistered funds, and institutional, high net-worth and separately-managed accounts (collectively, our “sponsored investment products” or “SIPs”). As of September 30, 2014 , we had $898.0 billion in assets under management (“AUM”). In addition to investment management, our services include fund administration, sales, distribution, marketing, shareholder servicing, trustee, custody and other fiduciary services. We offer a broad range of SIPs under equity, hybrid, fixed-income and cash management funds and accounts, including alternative investment products, that meet a variety of specific investment needs of individual and institutional investors. We also provide sub-advisory services to certain investment products sponsored by other companies which may be sold to the public under the brand names of those other companies or on a co-branded basis.
The investment funds that we manage have various investment objectives designed to meet the needs and goals of different investors. Most of the investment funds we manage are registered open-end mutual funds that continuously offer their shares to investors. We also offer closed-end funds that issue a set number of shares to investors in a public offering and the shares are then traded on a public stock exchange. Since the funds themselves do not have direct employees, to support their operations, the funds contract with separate entities, including our subsidiaries, to provide the investment management and related services they require. An investment advisory entity manages a fund s portfolio



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of securities in accordance with the fund s stated objectives. Investors may purchase shares of an open-end fund through a broker/dealer, financial adviser, bank or other similar financial intermediary that may provide investment advice to the investor, while investors may purchase shares of a closed-end fund on the stock exchange where the fund is traded. Financial intermediaries may earn fees and commissions and receive other compensation with respect to the fund shares sold to investors.
The business and regulatory environments in which we operate globally remain complex, uncertain and subject to change. We are subject to various laws, rules and regulations globally that impose restrictions, limitations and registration, reporting and disclosure requirements on our business and add complexity to our global compliance operations. In September 2014, Franklin deregistered as a bank holding company with the Board of Governors of the Federal Reserve System (“Federal Reserve”) after limiting the operations of Fiduciary Trust Company International (“Fiduciary Trust”) and Franklin Templeton Bank & Trust, F.S.B. (“FTB&T”) to trust and fiduciary activities. Fiduciary Trust is now a New York state-chartered limited purpose trust company and FTB&T is a federal savings association.
We continue to focus on the long-term investment performance of our SIPs and on providing high quality customer service to our clients. The success of these and other strategies may be affected by the Risk Factors discussed below in Item 1A of Part I of this Annual Report, and other factors as discussed in this section.
Company History and Acquisitions
The Company and its predecessors have been engaged in the investment management and related services business since 1947. Franklin was incorporated in Delaware in November 1969 and originated our mutual fund business with the Franklin family of funds. The Franklin Funds are known for U.S. taxable and tax-free fixed-income funds, hybrid funds, and growth- and value-oriented equity funds. We have expanded our business, in part, by acquiring companies engaged in the investment management and/or related services business.
In October 1992, we acquired substantially all of the assets and liabilities of the investment management and related services business of Templeton, Galbraith & Hansberger Ltd. This acquisition added the Templeton family of funds to our organization. The Templeton funds are known for their global investment strategies and value style of investing.
In November 1996, we acquired certain assets and liabilities of Heine Securities Corporation, including Mutual Series Fund Inc., which now operates under the name Franklin Mutual Series. Franklin Mutual Series provides investment management services to various accounts and investment companies and is known for its value-oriented equity funds.
In July 2000, we expanded our business in Korea when we purchased all of the remaining outstanding shares of a Korean investment management company, Ssangyong Templeton Investment Trust Management Co., Ltd., in which we previously held a partial interest, making us one of the largest independent foreign money managers in Korea. The company has been renamed Franklin Templeton Investment Trust Management Co., Ltd.
In October 2000, we acquired all of the outstanding shares of Bissett & Associates Investment Management Ltd., which now operates under the name Franklin Bissett Investment Management as part of our Canadian subsidiary, Franklin Templeton Investments Corp. With this acquisition, we added Bissett’s family of Canadian taxable fixed-income and growth-oriented equity mutual funds to our Canadian-based funds.
In April 2001, we acquired all of the outstanding shares of Fiduciary Trust. Fiduciary Trust provides investment management and related services to high net-worth individuals and families and institutional clients and is insured by the Federal Deposit Insurance Corporation (“FDIC”). In July 2014, the New York State Department of Financial Services (“NYDFS”) approved the amendment of Fiduciary Trust’s organization certificate to provide that Fiduciary Trust may exercise only fiduciary powers.
In July 2002, our subsidiary Franklin Templeton Asset Management (India) Private Limited (“FTAMIPL”), in which we held a majority interest, acquired all of the outstanding shares of Pioneer ITI AMC Limited. In April 2007, we completed the purchase of the remaining 25% interest in each of FTAMIPL and Franklin Templeton Trustee Services Private Limited, each located in India.



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In October 2003, we expanded our private equity investment management services in emerging markets when we acquired all of the remaining outstanding shares of Darby Overseas Investments, Ltd. and all of the remaining outstanding limited partnership interests of Darby Overseas Partners, L.P. (collectively, “Darby”), in which we previously held a partial interest. Darby, based in Washington, D.C., sponsors and manages funds for institutional investors and high net-worth individuals that invest primarily in emerging markets through private equity and mezzanine finance transactions, including regional and specialized sector funds.
In July 2006, we completed the purchase of all of the remaining interests in a Brazilian investment management company, Bradesco Templeton Asset Management Ltda., in which we previously held a partial interest. The company has been renamed Franklin Templeton Investimentos (Brasil) Ltda.
In January 2011, we acquired all of the outstanding shares of a specialty U.K. equity manager, Rensburg Fund Management Limited (“Rensburg”). Rensburg has been renamed Franklin Templeton Fund Management Limited.
In July 2011, we acquired all of the outstanding shares of a specialty Australian equity manager, Balanced Equity Management Pty. Limited.
In November 2012, we acquired approximately 69% of the equity of K2 Advisors Holdings LLC (“K2”), a fund of hedge funds solutions provider. We also agreed to acquire K2’s remaining equity interests over a multi-year period beginning in 2017.
Investment Management and Related Services
We derive our revenues and net income from providing investment management and related services to our SIPs and the sub-advised products that we service. Our investment management fees, which represent the majority of our revenues, depend to a large extent on the level and mix of our AUM and the types of services provided. Sales and distribution fees, also a significant source of our revenues, consist of sales charges and commissions derived from sales and distribution of our SIPs.
Our business is conducted through our subsidiaries, including those registered with the U.S. Securities and Exchange Commission (the “SEC”) as investment advisers under the Investment Advisers Act of 1940 (the “Advisers Act”), subsidiaries registered as investment adviser equivalents in jurisdictions including Australia, Brazil, Canada, Hong Kong, India, Japan, Korea, Malaysia, Mexico, Singapore, The Bahamas, the United Arab Emirates, the U.K. and certain other subsidiaries.
AUM by Investment Objective
Our fees for providing investment management services are generally based on a percentage of the market value of AUM in the accounts that we advise, the investment objectives of the accounts and the types of services that we provide for the accounts. As of September 30, 2014 , AUM by investment objective on a worldwide basis was as follows:
Investment Objective
 
Value in Billions
 
Percentage of Total AUM
Equity
 
 
 
 
Growth potential, income potential, value or various combinations thereof
 
$
371.0

 
41
%
Hybrid
 
 
 
 
Asset allocation, balanced, flexible, alternative and income-mixed funds
 
159.0

 
18
%
Fixed-Income
 
 
 
 
Both long-term and short-term
 
361.0

 
40
%
Cash Management
 
 
 
 
Short-term liquid assets
 
7.0

 
1
%
Total
 
$
898.0

 
100
%
Broadly speaking, the change in the net assets of our SIPs depends primarily upon two factors: (1) the increase or decrease in the market value of the securities held in the portfolio of investments; and (2) the level of sales (inflows)



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as compared to the level of redemptions (outflows). We are subject to the risk of asset volatility resulting from changes in the global capital markets. In addition, changing market conditions may cause a shift in our asset mix, potentially resulting in an increase or decrease in our revenues and income depending upon the nature of our AUM and the level of management fees we earn based on our AUM. Despite the risk of volatility, we believe that we have a competitive advantage as a result of the greater diversity of our SIPs available to our clients.
Summary of Services
1.    Investment Management Services
We provide our investment management services pursuant to agreements in effect with each of our SIPs and the products for which we provide sub-advisory services. Our investment management services include services to managed accounts for which we have full investment discretion, and to advisory accounts for which we have no investment discretion. Advisory accounts for which we have no investment discretion may or may not include the authority to trade for the account. Our services include fundamental investment research and valuation analyses, including original economic, political, industry and company research, and analyses of suppliers, customers and competitors. Our company research utilizes such sources as company public records and other publicly available information, management interviews, company prepared information, and company visits and inspections. Research services provided by brokerage firms are also used to support our findings. Our management fee on an account varies with the types of services that we provide for the account, among other things.
Our subsidiaries that provide discretionary investment management services for our SIPs and sub-advised products either perform or obtain investment research and determine which securities the SIPs or sub-advised products will purchase, hold or sell under the supervision and oversight of the funds’ boards of directors or trustees, as applicable. In addition, these subsidiaries may take all appropriate steps to implement such decisions, including arranging for the selection of brokers and dealers and the execution and settlement of trades in accordance with applicable criteria set forth in the management agreements for the SIPs, internal policies, and applicable law and practice. Our subsidiaries that provide non-discretionary investment management services perform investment research for our clients and make recommendations as to which securities the clients purchase, hold or sell, and may or may not perform trading activities for the products.
Through our subsidiaries, we compensate the personnel who serve as officers of our funds, in addition to the personnel necessary to conduct such funds’ day-to-day business operations. The funds themselves do not have direct employees. Our subsidiaries either provide or arrange for the provision of: office space, telephone, office equipment and supplies; trading desk facilities; authorization of expenditures and approval of bills for payment; preparation of registration statements, proxy statements and annual and semi-annual reports to fund shareholders, notices of dividends, capital gains distributions and tax credits, and other regulatory reports; the daily pricing of fund investment portfolios, including collecting quotations from pricing services; accounting services, including preparing and supervising publication of daily net asset value quotations, periodic earnings reports and other financial data; services to ensure compliance with securities regulations, including recordkeeping requirements; preparation and filing of tax reports; the maintenance of accounting systems and controls; and other administrative services. The funds generally pay their own expenses, such as external legal, custody and independent audit fees, regulatory registration fees, and other related expenses. The funds also share in board and shareholder meeting and reporting costs.
Most of our investment management agreements between our subsidiaries and our U.S. Funds must be renewed each year (after an initial two-year term), and must be specifically approved at least annually by a vote of each fund’s board of directors or trustees as a whole and separately by the directors/trustees that are not interested persons of such fund under the Investment Company Act of 1940 (the “Investment Company Act”), or by a vote of the holders of a majority of such fund’s outstanding voting securities. Our U.S. agreements automatically terminate in the event of their “assignment,” as defined in the Investment Company Act. In addition, either party may terminate such an agreement without penalty after prior written notice. If agreements representing a significant portion of our AUM were terminated, it would have a material adverse impact on us.
Under the majority of our investment management agreements globally, the funds pay us a monthly fee in arrears based upon the fund’s average daily net assets. Annual fee rates under our various agreements are often reduced as net assets exceed various threshold levels. Annual rates also vary by investment objective and type of services provided.



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Our agreements generally permit us to provide services to more than one fund and to other clients so long as our ability to render services to each of the funds is not impaired, and so long as purchases and sales of portfolio securities for various advised funds are made on an equitable basis.
We use a “master/feeder” fund of funds structure in certain situations. This structure allows an investment adviser to manage a single portfolio of securities at the “master fund” level and have multiple “feeder funds” that invest substantially all of their respective assets into the master fund. Individual and institutional shareholders invest in the “feeder funds,” which can offer a variety of service and distribution options. A management fee may be charged either at the master fund level or the feeder fund level depending on the specific requirements of the fund, although funds also involving performance fees or carried interest will typically charge these together with management fees at the master fund level. Administrative, shareholder servicing and custodian fees are often waived at the feeder fund level and only charged at the master fund level, although the feeder funds will indirectly bear their pro-rata share of the expenses of the master fund as an investor in the master fund. Fees and expenses specific to a feeder fund may be charged at the level of that feeder fund.
For our U.S. Funds, our management personnel and the fund directors or trustees regularly review the investment management fee structures for the funds in light of fund performance, the level and range of services provided, industry conditions and other relevant factors. Our Non-U.S. Funds, unregistered funds, institutional, high net-worth and separately-managed accounts, and the products for which we provide sub-advisory services are subject to various termination rights and review and renewal provisions. Investment management fees are generally waived or voluntarily reduced when a new fund or account is established and then increased to contractual levels within an established timeline or as net asset values reach certain levels.
2.    Institutional Investment Management
We provide a broad array of investment management services to institutional clients, focusing on foundations, endowment funds and government and corporate defined contribution and pension plans. Our subsidiaries offer a wide range of both U.S. and international equity, fixed-income and alternative strategies through a variety of investment vehicles, including separate accounts, open-end and closed-end funds and unregistered funds. In the U.S., we generally operate our institutional business under the trade name “Franklin Templeton Institutional.”
Through various subsidiaries, including our subsidiary Franklin Templeton Institutional, LLC, we distribute and market globally our different capabilities under our brand names. We primarily attract new institutional business through our relationships with pension, defined contribution and management consultants, direct sales efforts and additional mandates from our existing client relationships, as well as from our responses to requests for proposals.
Through various subsidiaries, we also market and distribute our SIPs to separately-managed accounts. Our subsidiaries Franklin Templeton Financial Services Corp. and Templeton/Franklin Investment Services, Inc. also serve as direct marketing broker/dealers for institutional investors for certain of our institutional mutual and private funds.
3.    Alternative Investment Products Management
Through various subsidiaries, we offer and support investment products as alternatives to our traditional equity and fixed-income products and related management services for our clients. Our alternative investment products include, among other capabilities, private equity, hedge funds, real estate and commodities. Examples of some of these offerings follow.
K2, a hedge fund product solutions provider, offers and supports alternative investments and multi-asset solutions platforms for institutional and other qualified investors. K2 provides risk management, manager selection and asset allocation capabilities in various global jurisdictions. Products offered include discretionary and non-discretionary custom-tailored investment programs, commingled funds of hedge funds, and hedge fund investment advisory services.
Darby is primarily engaged in sponsoring and managing funds that invest in private equity and mezzanine finance transactions in emerging markets in Asia, Latin America and Central/Eastern Europe. Darby offers these investment funds through private placements to institutional and high net-worth individual investors.



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Templeton Asset Management Ltd., an investment adviser, sponsors and manages a limited number of investment funds that also invest primarily in emerging markets in Asia, Latin America and Central/Eastern Europe.
Franklin Templeton Institutional, LLC, an investment adviser, manages investment partnerships that invest in funds with exposure to global real estate opportunities.
Franklin Advisers, Inc., an investment adviser, manages various privately offered funds with strategies that include the use of fixed-income and other financial instruments as well as derivatives across the global interest rate, currency and credit markets.
Franklin Alternative Strategies Advisers, LLC, an investment adviser, manages a privately offered fund that uses a systematic investment strategy to tactically adjust exposure to equity, fixed-income, currency and other asset classes.
4.    High Net-Worth Investment Management
Through our subsidiary Fiduciary Trust (including its trust company and investment adviser subsidiaries), we provide investment management and related services to, among others, high net-worth individuals and families, foundations and institutional clients. Similarly, through our Canadian high net-worth business unit, Fiduciary Trust Company of Canada (“FTCC”), we provide services and offer SIPs to high net-worth individuals and families and institutional clients.
Fiduciary Trust offers investment management and advisory services across different investment styles and asset classes. The majority of Fiduciary Trust’s client assets are actively managed by individual portfolio managers, while a significant number of clients also seek multi-manager, multi-asset class solutions. Fiduciary Trust also provides estate and tax planning to individuals and families.
5.    Sales, Distribution and Marketing
A significant portion of our revenues are generated from providing sales and distribution services. Our registered open-end mutual funds and certain other products generally pay us distribution fees in return for sales, distribution and marketing efforts on their behalf. Fund shares are sold primarily through a large network of independent financial intermediaries, including broker/dealers, financial advisers, banks and other third parties. We pay substantially all of our sales and distribution fees to the financial intermediaries who sell our SIPs to the public on our behalf.
Our subsidiary Franklin/Templeton Distributors, Inc. (“FTDI”) acts as the principal underwriter and distributor of shares of most of our open-end U.S. Funds. Certain of our non-U.S. subsidiaries provide sales, distribution and marketing services to our Non-U.S. Funds distributed outside the U.S. Some of our Non-U.S. Funds, particularly the Luxembourg-domiciled Franklin Templeton Investment Funds Société d’Investissement à Capital Variable (“SICAV”), are distributed globally on a cross-border basis, while others are distributed exclusively in local markets. We earn sales and distribution fees primarily by distributing our funds pursuant to distribution agreements between FTDI or our non-U.S. subsidiaries and the funds. Under each distribution agreement, we offer and sell the fund’s shares on a continuous basis and pay certain costs associated with selling, distributing and marketing the fund’s shares, including the costs of developing and producing sales literature, shareholder reports and prospectuses.
Our U.S. retirement business is conducted through divisions of FTDI that work closely with sponsors, consultants, record keepers and financial advisers of defined contribution plans, including 401(k) plans, variable annuity products and individual retirement accounts (“IRAs”). We offer our capabilities to the U.S. retirement industry through a number of investment options, including sub-advised portfolios, funds, education savings plans and variable insurance funds.
Most of our retail funds are distributed with a multi-class share structure. We adopted this share structure to provide investors with more sales charge alternatives for their investments. Class A shares are sold with a front-end sales charge to investors, except for when certain investment criteria are met. Class B shares, which are available in some of our Non-U.S. Funds, have no front-end sales charges, but instead have a declining schedule of sales charges (called contingent deferred sales charges) if the investor redeems within four years from the date of purchase. Class C shares also have no front-end sales charges, although our distribution subsidiaries pay an up-front commission to financial intermediaries on these sales. Class C shares have a contingent deferred sales charge for redemptions within



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12 months from the date of purchase. Although Class C shares are generally more costly to us in the year of sale, they allow us to be more competitive by providing a fixed percentage annual charge option. Class R and Class R6 shares, available in the U.S. as retirement share classes, also have no front-end sales charges. Class R shares are available to certain retirement, college savings and health savings plan accounts, and Class R6 shares are available to employer sponsored retirement plans where plan level or omnibus accounts are held on the books of our transfer agent.
In the U.S., we also offer Advisor Class shares in many of our Franklin and Templeton funds, and we offer Class Z shares in the Franklin Mutual Series funds, both of which have no sales charges. Advisor and Class Z shares are offered to certain qualified financial intermediaries, institutions and high net-worth clients (both affiliated and unaffiliated) who have assets held in accounts managed by a subsidiary of Franklin and are also available to our full-time employees and current and former officers, trustees and directors. In the U.S., we also offer money market funds to investors without a sales charge. Under the terms and conditions described in the prospectuses or the statements of additional information for some funds, certain investors can purchase shares at net asset value or at reduced sales charges. Outside the U.S., we offer share classes similar to the Advisor Class shares to certain types of investors, although depending upon the fund and the country in which the fund is domiciled, the equivalent share class may be offered on a more restrictive or less restrictive basis than the similar U.S. Advisor Class shares.
Our insurance product funds sold in the U.S. offer a multi-class share structure, and are offered at net asset value without a sales charge directly to insurance company separate accounts, certain qualified plans and other mutual funds (funds of funds).
Outside the U.S., we offer additional types of share classes and unit series in response to local demand based on the needs of investors in particular markets, subject to applicable regulations which may change over time. In the majority of cases, investors in any class of shares may exchange their shares for a like class of shares in another one of our funds, subject to certain fees that may apply. Our Non-U.S. Funds have sales charges and fee structures that vary by region.
The distribution agreements with our open-end U.S. Funds generally provide for FTDI to pay commission expenses for sales of our fund shares to qualifying broker/dealers and other independent financial intermediaries. These financial intermediaries receive various sales commissions and other fees from FTDI for services in matching investors with funds whose investment objectives match such investors’ goals and risk profiles. Such intermediaries may also receive fees for their assistance in explaining the operations of the funds and in servicing and maintaining investors’ accounts, and for reporting and various other distribution services. We are heavily dependent upon these third-party distribution and sales channels and business relationships. FTDI may also make payments to certain broker/dealers who provide marketing support services, as described further below. There is increasing competition for access to these channels, which has caused our distribution costs to rise and could cause further increases in the future as competition continues and service expectations increase. As of September 30, 2014 , approximately 1,400 local, regional and national banks, securities firms and financial adviser firms offered shares of our open-end U.S. Funds for sale to the U.S. investing public, and approximately 3,400 banks, securities firms and financial adviser firms offered shares of our cross-border Non-U.S. Funds for sale outside of the U.S.
Most of our open-end U.S. Funds, with the exception of certain money market funds, have adopted distribution plans under Rule 12b-1 (the “Rule 12b-1 Plans”) promulgated under the Investment Company Act (“Rule 12b-1”). Under the Rule 12b-1 Plans, the funds pay FTDI for marketing, marketing support, advertising, printing and sales promotion services relating to the distribution of their shares, subject to the Rule 12b-1 Plans’ limitations based on average daily net AUM. In 2010, the SEC proposed changes to Rule 12b-1 which, if adopted, could limit our ability to recover expenses relating to the distribution of our funds.
The Rule 12b-1 Plans are established for one year terms and must be approved annually by each fund’s board of directors or trustees and by a majority of its directors or trustees who are not interested persons of the fund under the Investment Company Act (the “disinterested fund directors/trustees”). All of these Rule 12b-1 Plans are subject to termination at any time by a majority vote of the disinterested fund directors/trustees or by the particular fund shareholders. Fees from the Rule 12b-1 Plans that FTDI receives as revenues are paid primarily to third-party broker/dealers who sell our funds to the public on our behalf. Similar arrangements exist with the distribution of our Non-U.S.



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Funds where, generally, our subsidiary that distributes the funds receives maintenance fees from the funds and pays commissions and certain other fees to banks and other intermediaries.
FTDI and/or its affiliates may make the following additional payments to broker/dealers that sell shares of our funds:
Marketing support payments. FTDI may make payments to certain broker/dealers who are holders or dealers of record for accounts in one or more of our open-end U.S. Funds. A broker/dealer’s marketing support services may include business planning assistance, advertising, educating broker/dealer personnel about the funds and shareholder financial planning needs, placement on the broker/dealer’s list of offered funds, and access to sales meetings, sales representatives and management representatives of the broker/dealer. FTDI compensates broker/dealers differently depending upon, among other factors, sales and asset levels, and the level and/or type of marketing and educational activities provided by the broker/dealer. Such compensation may include financial assistance to broker/dealers that enable FTDI to participate in and/or present at conferences or seminars, sales or training programs for invited registered representatives and other employees, client and investor events and other broker/dealer-sponsored events. These payments may vary depending upon the nature of the event. FTDI periodically reviews its marketing support arrangements to determine whether to continue such payments. The statement of additional information for each retail U.S. Fund, provided to investors in such funds upon request, provides a list of broker/dealers that receive such marketing support payments and the maximum payments received. FTDI may also make marketing support payments to financial intermediaries that serve as plan service providers to certain employer sponsored retirement plans in connection with activities intended to assist in the sale of our open-end U.S. Funds to such plans. Certain of our non-U.S. subsidiaries may also make marketing support or similar payments to intermediaries located outside the U.S. with respect to investments in Non-U.S. Funds.
Transaction support and other payments. FTDI may pay ticket charges per purchase or exchange order placed by a broker/dealer or one-time payments for ancillary services, such as setting up funds on a broker/dealer’s fund trading system. From time to time, FTDI, at its expense, may make additional payments to broker/dealers that sell or arrange for the sale of shares of our U.S. Funds. FTDI routinely sponsors due diligence meetings for registered representatives during which they receive updates on various funds and are afforded the opportunity to speak with portfolio managers. Invitation to these meetings is not conditioned on selling a specific number of shares. Those who have shown an interest in our funds, however, are more likely to be considered. To the extent permitted by their firm’s policies and procedures, registered representatives’ expenses in attending these meetings may be covered by FTDI. Similar payments may be made by our non-U.S. subsidiaries that distribute our Non-U.S. Funds to third party distributors of such funds.
Other compensation may be offered to the extent not prohibited by federal or state laws or any self-regulatory agency, such as the Financial Industry Regulatory Authority (“FINRA”). FTDI makes payments for events it deems appropriate, subject to FTDI’s guidelines and applicable law.
6.    Shareholder Servicing
We receive shareholder servicing fees as compensation for providing transfer agency services, which include providing customer statements, transaction processing, customer service and tax reporting. Our subsidiary Franklin Templeton Investor Services, LLC (“FTIS”) serves as shareholder servicing and dividend-paying agent for our open-end U.S. Funds. FTIS is registered with the SEC as a transfer agent under the U.S. Securities Exchange Act of 1934(the “Exchange Act”). FTIS is compensated pursuant to transfer agency service agreements with the funds. These fees are generally fixed annual charges per shareholder account that vary with the particular type of fund and the services being rendered. FTIS also is reimbursed for out-of-pocket expenses. Other non-U.S. subsidiaries provide similar services to our Non-U.S. Funds, and may be compensated based on a combination of similar per account fees and fees based on the level of AUM in the accounts that we serve.
FTIS may also pay servicing fees to third-party intermediaries primarily to help offset costs associated with client account maintenance support, statement preparation and transaction processing. Such third parties: (i) maintain omnibus accounts with the fund in the institution’s name on behalf of numerous beneficial owners of fund shares; or (ii) provide support for fund shareholder accounts by sharing account data with FTIS through the Depository Trust & Clearing Corporation systems. The funds reimburse FTIS for these third party payments.



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7.    Trust and Custody
Through various trust company subsidiaries, including Fiduciary Trust, we offer trust, custody and related services, including administration, performance measurement, estate planning and tax planning. We provide planned giving administration and related custody services for non-profit organizations, including pooled income funds, charitable remainder trusts, charitable lead trusts and gift annuities, for which we may or may not act as trustee. Our subsidiary FTB&T is regulated by the Office of the Comptroller of the Currency (“OCC”) as a federal savings association that is limited to trust and fiduciary activities. FTB&T serves primarily as custodian of IRAs and business retirement plans invested solely in Franklin Templeton funds.
Summary of SIPs
1.    Investment Objectives Overview
Our SIPs are offered globally to retail, institutional, high net-worth and separate account clients, which include individual investors, qualified groups, trustees, tax-deferred (such as IRAs in the U.S. and retirement saving plans, or RSPs, in Canada) or money purchase plans, employee benefit and profit sharing plans, trust companies, bank trust departments and institutional investors. Our SIPs include portfolios managed for some of the world’s largest corporations, endowments, charitable foundations and pension funds, as well as wealthy individuals and other institutions. We use various investment techniques to focus on specific client objectives for these specialized portfolios.
The SIPs that we offer accommodate a variety of investment goals, spanning the spectrum of our clients’ risk tolerance - from capital appreciation (with our more growth-oriented products) to capital preservation (with our fixed-income offerings). In seeking to achieve such objectives, each portfolio emphasizes different strategies and invests in different types of instruments.
Our equity investment products include some that are considered value-oriented, others that are considered growth-oriented, and some that use a combination of growth and value characteristics, generally identified as blend or core products. Value investing focuses on identifying companies that our research analysts and portfolio managers believe are undervalued based on a number of different factors, usually put in the context of historical ratios such as price-to-earnings or price-to-book value; however, we also consider the future earnings potential of each individual company on a multi-year basis. Growth investing focuses on identifying companies that our research analysts and portfolio managers believe have sustainable growth characteristics, meeting our criteria for sustainable growth potential, quality and valuation. In this effort, the key variables we examine include: market opportunity (overall size and growth); competitive positioning of the company; assessment of management (strength, breadth, depth, and integrity) and execution of plans; and the general financial strength and profitability of the enterprise, to determine whether the growth and quality aspects are properly reflected in the current share price. Paramount to all of our different equity products is the incorporation of independent, fundamental research through our own collaborative in-house group of investment professionals. Our approach across the variety of equity products we manage emphasizes bottom-up stock selection within a disciplined portfolio construction process, and is complemented by our ongoing assessment of risk at both the security and portfolio levels.
Portfolios seeking income generally focus on one or more of the following securities: taxable and tax-exempt money market instruments; tax-exempt municipal bonds; global fixed-income securities; and fixed-income debt securities of corporations, of the U.S. government and its sponsored agencies and instrumentalities, such as the Government National Mortgage Association, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, or of the various states in the U.S. Others focus on investments in particular countries and regions.



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2.    Types of SIPs
As of September 30, 2014 , our total AUM was $898.0 billion and the types of SIPs we offered were as follows:
U.S. Funds - Our U.S. Funds (including open-end and closed-end funds and our insurance products trust) accounted for $491.4 billion of AUM as of September 30, 2014 . Our five largest U.S. Funds and their AUM were FCF - Franklin Income Fund ($94.3 billion), TIT - Templeton Global Bond Fund ($72.6 billion), FMSF - Franklin Mutual Global Discovery Fund ($25.5 billion), Templeton Growth Fund Inc. ($17.3 billion) and FMSF - Franklin Mutual Shares Fund ($16.4 billion). These five funds represented, in the aggregate, 25% of total AUM.
Cross-Border Funds - Our cross-border products, which are comprised of a variety of investment funds principally domiciled in Luxembourg and registered for sale to non-U.S. investors in 39 countries, accounted for $167.7 billion of AUM as of September 30, 2014 . Our three largest cross-border funds and their AUM were FTIF - Templeton Global Bond Fund ($38.5 billion), FTIF - Templeton Global Total Return Fund ($34.7 billion) and FTIF - Templeton Asian Growth Fund ($13.2 billion). These three funds represented, in the aggregate, 10% of total AUM.
Local/Regional Funds - In addition to our cross-border products, in some countries we offer products for the particular local market. These local/regional funds accounted for $47.5 billion of AUM as of September 30, 2014 .
Other Managed Accounts, Alternative Investment Products and Trusts - On a company-wide basis, our managed accounts, alternative investment products and trusts accounted for $191.4 billion of AUM as of September 30, 2014 , of which $10.1 billion included K2 investment products and funds, and $7.4 billion included Darby products and real estate, emerging markets and certain global fixed-income investment funds.



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3.    AUM by Investment Objective and Types of SIPs
The following table shows our AUM by investment objective and types of SIPs as of September 30, 2014 :
(in billions)

INVESTMENT OBJECTIVE
 
INVESTMENT DESCRIPTION
 
U.S.
Funds
 
Cross-Border
Funds
 
Local/Regional
Funds
 
Other Managed Accounts,
Alternative Investment
Products and Trusts
 
Total
Equity
 
 
 
 
 
 
 
 
 
 
 
 
Asia-Pacific
 
Invests primarily in equity securities of companies located in the Asia-Pacific region
 
$
1.1

 
$
18.3

 
$
4.0

 
$
24.0

 
$
47.4

Canada
 
Invests primarily in equity securities of companies located in Canada
 

 

 
5.3

 
8.9

 
14.2

Europe, the Middle East and Africa
 
Invests primarily in equity securities of companies located in Europe, the Middle East and Africa
 
2.9

 
9.1

 
6.7

 
0.3

 
19.0

U.S.
 
Invests primarily in equity securities of companies located in the U.S.
 
89.8

 
9.9

 
2.0

 
7.8

 
109.5

Emerging Markets
 
Invests primarily in equity securities of companies located in developing regions of the world
 
5.9

 
6.2

 
3.9

 
7.3

 
23.3

Global/International
 
Invests primarily in equity securities of companies doing business either worldwide or only outside of the U.S.
 
76.1

 
16.2

 
5.8

 
59.5

 
157.6

Total Equity
 
 
 
175.8

 
59.7

 
27.7

 
107.8

 
371.0

Hybrid
 
 
 
 
 
 
 
 
 
 
 
 
Asia-Pacific
 
Invests primarily in equity and fixed-income securities of companies located in the Asia-Pacific region
 

 

 
0.5

 
5.5

 
6.0

Canada
 
Invests primarily in equity and fixed-income securities of companies located in Canada
 

 

 
1.8

 
1.3

 
3.1

Europe, the Middle East and Africa
 
Invests primarily in equity and fixed-income securities of companies located in Europe, the Middle East and Africa
 

 
2.0

 

 
0.4

 
2.4

U.S.
 
Invests primarily in equity and fixed-income securities of companies located in the U.S.
 
109.5

 
4.3

 

 
25.6

 
139.4

Global/International
 
Invests primarily in equity and fixed-income securities of companies doing business either worldwide or only outside of the U.S.
 
3.5

 
3.5

 
0.5

 
0.6

 
8.1

Total Hybrid
 
 
 
113.0

 
9.8

 
2.8

 
33.4

 
159.0




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(in billions)

INVESTMENT OBJECTIVE
 
INVESTMENT DESCRIPTION
 
U.S.
Funds
 
Cross-Border
Funds
 
Local/Regional
Funds
 
Other Managed Accounts,
Alternative Investment
Products and Trusts
 
Total
Fixed-Income
 
 
 
 
 
 
 
 
 
 
 
 
Asia-Pacific
 
Invests primarily in debt securities offered by companies and governments located in the Asia-Pacific region
 
$

 
$
2.1

 
$
5.4

 
$
1.5

 
$
9.0

Canada
 
Invests primarily in debt securities of companies and governments located in Canada
 

 

 
3.2

 
0.5

 
3.7

Europe, the Middle East and Africa
 
Invests primarily in debt securities of companies and governments located in Europe, the Middle East and Africa
 

 
2.2

 

 
4.3

 
6.5

U.S. Tax-Free
 
Invests primarily in municipal bond issuers located in the U.S.
 
68.0

 

 

 
4.1

 
72.1

U.S. Taxable
 
Invests primarily in taxable debt securities of companies and governments located in the U.S.
 
40.9

 
10.7

 
3.1

 
9.1

 
63.8

Emerging Markets
 
Invests primarily in taxable debt securities of companies and governments located in developing countries worldwide
 
1.4

 
8.2

 

 
9.1

 
18.7

Global/International
 
Invests primarily in debt securities of companies and governments doing business either worldwide or only outside of the U.S.
 
87.2

 
74.4

 
4.0

 
21.6

 
187.2

Total Fixed- Income
 
 
 
197.5

 
97.6

 
15.7

 
50.2

 
361.0

Cash Management
Invests primarily in money market instruments and short-term securities
 
5.1

 
0.6

 
1.3

 

 
7.0

Total
 
 
 
$
491.4

 
$
167.7

 
$
47.5

 
$
191.4

 
$
898.0

Financial Information About Segment and Geographic Areas
Certain financial information about the Company s business segment and geographic areas is contained in Note 17 – Segment and Geographic Information in the notes to consolidated financial statements in Item 8 of Part II of this Form 10-K, which is incorporated herein by reference.
Regulatory Considerations
Virtually all aspects of our business are subject to various federal, state, and international regulation and supervision that continue to change and evolve over time. Consequently, there is uncertainty associated with the regulatory environments in which we operate.
U.S. Regulation
We are subject to U.S. federal securities laws, state laws regarding securities fraud, other federal and state laws and rules and regulations of certain regulatory and self-regulatory organizations, including those rules and regulations promulgated by, among others, the SEC and the NYSE. Certain of our subsidiaries are also subject to the rules and regulations promulgated by the SEC, FINRA, the Commodity Futures Trading Commission (“CFTC”) and the National Futures Association. Because of our non-U.S. operations and/or trading in our SIPs that take place outside the U.S., we are also subject to regulation by non-U.S. regulators and U.S. regulators such as the Department of Justice and the SEC with respect to the Foreign Corrupt Practices Act of 1977. We are also subject to the laws and regulations of states and other jurisdictions regarding the reporting and escheatment of unclaimed or abandoned property.



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We are subject to various securities, corporate governance and disclosure rules adopted by the SEC, and federal securities laws and state securities and corporate laws, including those affecting corporate governance and disclosure, such as the U.S Securities Act of 1933, the Exchange Act, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), and the USA Patriot Act of 2001. As a NYSE-listed company, we are also subject to the rules of the NYSE, including its listing and corporate governance standards.
Certain of our subsidiaries are registered with the SEC under the Advisers Act and many of our funds are registered with the SEC under the Investment Company Act, both of which impose numerous obligations, as well as detailed operational requirements, on our subsidiaries that are investment advisers to registered investment companies. The Advisers Act imposes numerous obligations on our registered investment adviser subsidiaries, including record keeping, operating and marketing requirements, disclosure obligations and prohibitions on fraudulent activities. The Investment Company Act imposes similar obligations on the registered investment companies advised by our subsidiaries. The SEC is authorized to institute proceedings and impose sanctions for violations of the Advisers Act and the Investment Company Act, ranging from fines and censure to termination of an investment adviser’s registration.
Our subsidiaries must also comply with numerous complex and changing U.S. and/or non-U.S. rules and regulations, some of which may conflict, as well as complex tax regimes. Further, as we continue to expand our operations, sometimes rapidly, into additional non-U.S. jurisdictions, the rules and regulations of those non-U.S. jurisdictions become applicable, sometimes with short compliance deadlines, and add further regulatory complexity to our ongoing global compliance operations.
FINRA Conduct Rules limit the amount of aggregate sales charges that may be paid in connection with the purchase and holding of investment company shares sold through broker/dealers. The effect of the rule is to limit the amount of fees that could be paid pursuant to a fund’s Rule 12b-1 Plan to FTDI, our principal sales and distribution subsidiary in the U.S., which earns distribution fees on the distribution of fund shares in the U.S. In 2010, the SEC proposed changes to Rule 12b-1 which, if adopted, could limit our ability to recover expenses relating to the distribution of our funds.
The Dodd-Frank Act authorized the establishment of the Financial Stability Oversight Council (“FSOC”), the mandate of which is to identify and respond to threats to U.S. financial stability. The FSOC may designate non-bank financial companies as systemically important financial institutions (“SIFIs”), which are subject to supervision and regulation by the Federal Reserve. The FSOC, as well as other global regulators, are considering what threats to global financial stability, if any, arise from asset management companies and/or the funds that they manage, and whether such threats can be mitigated by treating such entities as SIFIs and subjecting them to additional regulation. To the extent that we or our funds are designated as a SIFI, such regulation, which could include requirements related to risk-based capital, leverage, liquidity, credit exposure, stress testing, resolution plans, early remediation, and certain risk management requirements, could impact our business.
The Dodd-Frank Act, as well as other legislative and regulatory changes, impose other restrictions and limitations on us, resulting in increased scrutiny and oversight of our financial services and products. We continue to analyze the impact of the Dodd-Frank Act as implementing rules are adopted and become effective. Under the Dodd-Frank Act, which imposes a number of new regulations governing derivative transactions, certain categories of swaps are currently required, and further categories of swaps are likely to be required, to be submitted for clearing by a regulated clearing organization and reported on a swap execution facility, and the posting of collateral will be required for uncleared swaps. These and other requirements are likely to impact how we manage our investment strategies because of, among other things, an increase in the costs and expenses of utilizing swaps and other derivatives. In addition to the rulemaking mandated by the Dodd-Frank Act, rules adopted by the CFTC in 2012 removed or limited previously available exemptions and exclusions from registration and regulation as a commodity pool operator and commodity trading advisor on which we had relied, resulting in the imposition of either additional registration, disclosure, reporting and recordkeeping requirements or more stringent requirements to comply with the remaining exemptions or exclusions for operators of certain of our registered mutual funds and other pooled vehicles that use or trade in futures, swaps and other derivatives considered commodity interests and subject to regulation by the CFTC. Also, the SEC has developed proposals for stricter regulation of money market funds that could significantly change the structure and operations of those funds. We expect that such regulatory requirements and developments will cause us to incur additional administrative and compliance costs.



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Our subsidiaries Fiduciary Trust and FTB&T have limited their operations to trust and fiduciary activities permissible for trust companies that qualify for an exemption from the definition of “bank” under the Bank Holding Company Act of 1956, and Franklin has therefore deregistered as a bank holding company with the Federal Reserve. The operations and activities of Fiduciary Trust and its subsidiaries remain subject to extensive regulation, supervision and examination by the FDIC and the NYDFS. Fiduciary Trust’s trust company subsidiaries are also subject to oversight by the regulators of the states in which each is chartered. FTB&T is subject to regulation, supervision and examination by the FDIC and the OCC. The laws and regulations of those regulators generally impose restrictions and requirements with which we must comply concerning capital adequacy, anti-money laundering, management practices, liquidity, branching, earnings, dividends, investments and the provision of services. Franklin is subject to supervision by the OCC as to whether it serves as a source of strength to FTB&T.
In addition, certain federal and state anti-takeover laws generally provide that no person may acquire control of Franklin, and gain indirect control of either Fiduciary Trust or FTB&T, without prior regulatory approval.  For example, beneficial ownership of 10% or more of the voting securities of Franklin would be presumed to constitute “control” under the federal Change in Bank Control Act of 1978.  Such federal and state laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of Franklin, including through transactions that some shareholders might consider desirable.
The federal banking agencies (including the FDIC and the OCC) apply risk-based and leverage capital rules to evaluate the capital adequacy of insured depository institutions, which may include trust companies and savings associations. The FDIC’s capital adequacy rules applicable to Fiduciary Trust and the OCC’s capital adequacy rules applicable to FTB&T are substantially similar. Those agencies’ existing capital rules require Fiduciary Trust and FTB&T to meet specific capital adequacy requirements that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.
In July 2013, the federal banking agencies adopted new capital rules to implement the Basel Committee s capital framework, known as “Basel III”, in the U.S. When fully effective, Basel III will impose a number of other changes to existing capital rules, including replacing the risk-weightings under the existing general risk-based capital rules with new risk-weightings (referred to in the new capital rules as the “standardized approach”). The new capital rules will become effective on January 1, 2015 (subject to certain phase-in periods through January 1, 2019). We believe that Fiduciary Trust’s and FTB&T’s capital ratios calculated in accordance with the new capital rules on a fully phased-in basis will substantially exceed the minimum required ratios.
Fiduciary Trust and FTB&T are each subject to restrictions under federal law that limit transactions between these subsidiaries and Franklin and/or its other subsidiaries, including investments or asset purchases. These and various other transactions, including any payment of money to Franklin and its other subsidiaries, must be on terms and conditions that are, or in good faith would be, offered to companies that are not affiliated with these entities.
The federal banking agencies and the NYDFS have broad enforcement powers, including the power to terminate deposit insurance, impose substantial fines and other civil and criminal penalties and appoint a conservator or receiver. Failure to comply with applicable laws, regulations and supervisory agreements could subject Franklin and our trust company subsidiaries, as well as officers, directors and other “institution-affiliated parties” of these organizations to administrative sanctions and potentially substantial civil money penalties. In addition, under Section 616 of the Dodd-Frank Act, the appropriate federal banking agency for either Fiduciary Trust or FTB&T can require Franklin to act as a “source of financial strength” for its insured depository institution subsidiaries, as applicable.
Non-U.S. Regulation
Our operations outside the U.S. are subject to the laws and regulations of various non-U.S. jurisdictions and non-U.S. regulatory agencies and bodies. As we continue to expand our international presence, a number of our subsidiaries and international operations have become subject to regulatory systems, in various jurisdictions, comparable to those covering our operations in the U.S. Regulators in these non-U.S. jurisdictions may have broad authority with respect to the regulation of financial services including, among other things, the authority to grant or cancel required licenses or registrations. In addition, these regulators may subject certain of our subsidiaries to net capital and other financial or operational requirements.



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The Financial Conduct Authority (the “FCA”) and the Prudential Regulation Authorities (the “PRA”) currently regulate certain of our subsidiaries in the U.K. Authorization by the FCA and the PRA is required to conduct any financial services related business in the U.K. pursuant to the Financial Services and Markets Act 2000. The FCA’s and PRA s rules under that act govern a firm’s capital resources requirements, senior management arrangements, conduct of business, interaction with clients, and systems and controls. Breaches of these rules could result in a wide range of disciplinary actions against our U.K.-regulated subsidiaries.
In addition to the above, our U.K.-regulated subsidiaries and certain other European subsidiaries and branches, must comply with the pan-European regime established by the European Union’s (“EU”) Markets in Financial Instruments Directive (“MiFID”), which became effective in November 2007 and regulates the provision of investment services and conduct of investment activities throughout the European Economic Area. MiFID sets out detailed requirements governing the organization and conduct of business of investment firms and regulated markets. It also includes pre- and post-trade transparency requirements for equity markets and extensive transaction reporting requirements. The U.K. has adopted the MiFID rules into national legislation via the FCA rules, as have those other EU member states in which we have a presence.
A review of MiFID by the European Commission has led to the creation of a replacement directive and a new draft regulation (together “MiFID II”) which will become effective on January 3, 2017 and which extends the scope of the original MiFID in response to issues raised by the financial crisis. While the Level 1 text was published in the Official Journal on June 12, 2014, many of the provisions will be implemented by means of technical standards, to be drafted by the European Securities and Markets Authority (“ESMA”) and approved by the European Commission. ESMA published their initial Consultation Paper and Discussion Paper on May 22, 2014. There will be several rounds of consultations and we expect ESMA to provide its final technical standards and Level 2 text to the European Commission by July 2015. Changes will be made to pre- and post-trade reporting obligations and there will be an expansion of the types of instruments subject to these requirements, such as bonds, structured products and derivatives. A new concept of trading venue has been created and algorithmic trading will be subject to specific regulations. There will also be changes to conduct of business requirements, including selling practices, intermediary inducements and client categorization, as well as the provision of investment advice and management within the EU by non-EU advisers, including ours. Powers will also be given to EU national regulators to ban certain products and services and to the European Securities and Markets Authority to temporarily restrict certain financial activities within the EU.
One of the most significant developments in MiFID II is the ban on commission payments to independent advisers and discretionary managers, which will result in a major change in the commercial relationships between fund providers and distributors. Similar changes were seen in the U.K. following the Retail Distribution Review (“RDR”), though how non-independent advisers might also be affected depends on the final Level 2 text, which is under consultation. The final interpretation of the inducements rules could also result in major changes to how fund managers pay for investment research, if ESMA draft guidance is followed. This could result in a reduction in the range and quality of available research, increased costs for fund managers, and a need for revised commercial terms with both brokers and clients to reflect these changes.
In addition, the FCA moved forward with the second phase of RDR by banning payments from product providers to platforms for new business from April 6, 2014. In response, we launched further new share classes for our funds offered in the U.K., and we amended affected platform agreements. The Netherlands implemented a similar regime to the RDR rules with effect from January 1, 2014.
During 2014, additional rules implementing obligations under the European Market Infrastructure Regulation were implemented, imposing requirements relating to transaction reporting in relation to exchange-traded and OTC derivatives transactions. Further provisions requiring central clearing of OTC derivatives, margin requirements for uncleared OTC derivatives and, importantly, rules on equivalence with other derivatives reporting and clearing regimes are expected at the end of 2014 or early 2015. Given the international scale of our trading activity, the various regulatory regimes to which we are subject could result in duplication of administration and increased transaction costs.
The EU’s Alternative Investment Fund Managers Directive (“AIFMD”) came into effect on July 22, 2014 and most EU member states have implemented its provisions on a national level. AIFMD regulates managers of, and service providers to, investment funds (“AIFs”) that are domiciled and offered in the EU and that are not authorized as retail



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funds under the Undertakings for Collective Investment in Transferable Securities Directive (“UCITS”). The AIFMD also regulates the marketing within the EU of all AIFs, including those domiciled outside the EU. In general, AIFMD has a staged implementation up to 2018. Compliance with the AIFMD’s requirements may restrict AIF marketing and will impose additional compliance obligations in the form of remuneration policies, capital requirements, reporting requirements, leverage oversight, valuation, stakes in EU companies, the domicile, duties and liability of custodians and liquidity management.
The European Commission has also published proposals to update the Market Abuse Directive with a regulation on insider dealing and market manipulation and with an accompanying directive on criminal sanctions, all designed to further harmonize interpretations of the market abuse offenses and the resulting sanctions.
The most recent iteration of the Undertakings for Collective Investment in Transferable Securities Directive (“UCITS V”) became effective on September 17, 2014, though Member States have until March 18, 2016 to introduce the necessary rules and regulations into their national laws. The main objectives of UCITS V are to expand the responsibilities and potential liabilities of depositaries, to regulate remuneration policies, and to harmonize the sanctions available to regulatory authorities.
Proposals on packaged retail investment and insurance products (“PRIIPs”) are to be implemented through the strengthening of MiFID standards for non-insurance PRIIPs, revisions to the Insurance Mediation Directive’s selling standard for all insurance-based PRIIPs and new investor disclosure requirements for all PRIIPs through the PRIIPs Key Information Document (“KID”) regulation, which was approved by the European Parliament in April 2014. It requires manufacturers of these products to draw up a KID which can be no longer than three pages in length and must be written in simple language. The regulation allows UCITS providers, who are already required to produce the UCITS Key Investor Information Document, a transitional period of five years from enactment during which they will be exempt from its terms.
In addition, the European Commission s proposal for a financial transaction tax (“FTT”) in the EU, which would, if approved by all EU member states, apply to all financial transactions where at least one party is established in an EU member state and either that party or another party to the transaction is a financial institution was a controversial topic for all the EU member states to agree upon and after discussions failed to establish unanimous support. Subsequently the European commission has put forward a revised proposal to implement the tax in the 11 EU member states which wished to participate. While the specific terms of the revised FTT proposal remain subject to negotiation, any tax on securities transactions could likely have a negative impact on the liquidity of the derivatives and securities markets in Europe and could adversely impact our European clients’ assets and our non-European clients to the extent that they are or want to be invested in European assets.
In Canada, our subsidiaries are subject to provincial and territorial laws and are registered with and regulated by provincial and territorial securities regulatory authorities. The mandate of Canadian securities regulatory authorities is generally to protect investors and to foster fair and efficient capital markets. Securities regulatory authorities impose certain requirements on registrants, including a standard of conduct, capital and insurance, record keeping, regulatory financial reporting, conflict of interest management, compliance systems and security holder reporting. Failure to comply with applicable securities laws, regulations and rules could result in, among other things, reprimands, suspension of or restrictions on an individual s or firm s registration, prohibitions from becoming or acting as a registrant, administrative penalties or disgorgement. In addition, as a federally licensed trust company, FTCC is subject to regulation and supervision by the Office of the Superintendent of Financial Institutions Canada and another subsidiary, FTC Investor Services Inc., is a member of and regulated by the Mutual Fund Dealers Association of Canada. These regulatory bodies have similar requirements to those of the securities regulatory authorities with a view to ensuring the capital adequacy and sound business practices of the subsidiaries and the appropriate treatment of their clients.
In March 2013, the Canadian Securities Administrators, the umbrella organization of provincial and territorial securities regulatory authorities, released final amendments to its rules regarding registrant obligations that require additional disclosure by registrants to their clients, including enhanced disclosure at account opening of all operating charges and fees a client may be required to pay, pre-trade disclosure of any charges a client may be required to pay, enhanced reporting on client statements that includes charges paid by the client and all compensation received by registrants in respect of a client s account and new reporting regarding the performance of investments held in the



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account. These new rules, which are being phased in over a three year period, require us to make changes to our systems to comply with these new disclosure and reporting standards.
In Singapore, our subsidiaries are subject to, among others, the Securities and Futures Act (“SFA”), the Financial Advisers Act (“FAA”) and the subsidiary legislation promulgated pursuant to these Acts, which are administered by the Monetary Authority of Singapore (“MAS”). Our asset management subsidiary and its employees conducting regulated activities specified in the SFA and/or the FAA are required to be licensed with the MAS. Failure to comply with applicable laws, regulations, codes, directives, notices and guidelines issued by the MAS may result in penalties including fines, censures and the suspension or revocation of licenses granted by the MAS.
In Australia, our subsidiaries are subject to various Australian federal and state laws and are regulated by the Australian Securities and Investments Commission (“ASIC”). ASIC regulates companies, financial markets and financial services in Australia. ASIC imposes certain conditions on licensed financial services organizations that apply to our subsidiaries, including requirements relating to capital resources, operational capability and controls. Failure to comply with applicable law, regulations or conditions could result in various sanctions being imposed including cancellation, suspension or variation of the licenses held by our Australian subsidiaries.
In Hong Kong, our subsidiary is subject to the Securities and Futures Ordinance (the “SFO”) and its subsidiary legislation, which governs the securities and futures markets and regulates, among others, offers of investments to the public and provides for the licensing of dealing in securities and asset management activities and intermediaries. This legislation is administered by the Securities and Futures Commission (the “SFC”). The SFC is also empowered under the SFO to establish standards for compliance as well as codes and guidelines. Our subsidiary and its employees conducting any of the regulated activities specified in the SFO are required to be licensed with the SFC, and are subject to the rules, codes and guidelines issued by the SFC from time to time. Failure to comply with the applicable laws, regulations, codes and guidelines could result in various sanctions being imposed, including fines, reprimands and the suspension or revocation of the licenses granted by the SFC.
In India, our subsidiaries are primarily subject to relevant regulations promulgated by the Securities and Exchange Board of India (“SEBI”). The Reserve Bank of India (“RBI”), the Ministry of Corporate Affairs (“MCA”) and the Foreign Investment Promotion Board (“FIPB”) are the other major regulatory authorities that are capable of issuing directions of a binding nature to our subsidiaries. A failure to comply with the applicable laws, regulations, codes, notices, directives, guidelines, orders, circulars and schemes issued by SEBI, RBI, MCA or FIPB may result in penalties including fines, censures and/or suspension or revocation of licenses, approvals or registration status.
In Japan, our subsidiary is subject to the Financial Instruments and Exchange Act (the “FIEL”) and the Act on Investment Trusts and Investment Corporations. These laws are administered and enforced by the Japanese Financial Services Agency (the “JFSA”), which establishes standards for compliance, including capital adequacy and financial soundness requirements, customer protection requirements and conduct of business rules. The JFSA is empowered to conduct administrative proceedings that can result in censure, fine, the issuance of cease and desist orders or the suspension or revocation of registrations and licenses granted under the FIEL.
There are similar legal and regulatory arrangements in effect in many other non-U.S. jurisdictions where our subsidiaries, branches and representative offices, as well as certain joint ventures or companies in which we own minority stakes, are authorized to conduct business. We are also subject to regulation and supervision by, among others, the Securities Commission of The Bahamas; the Comissão de Valores Mobiliários in Brazil; the Cayman Islands Monetary Authority; the China Securities Regulatory Commission in the People’s Republic of China; the Autorité des Marchés Financiers in France; the Federal Financial Supervisory Authority in Germany; the Central Bank of Ireland; the Commissione Nazionale per le Società e la Borsa in Italy; the Financial Services Commission and the Financial Supervisory Service in Korea; the Commission de Surveillance du Secteur Financier in Luxembourg; the Securities Commission in Malaysia; the Comision Nacional Bancaria y de Valores in Mexico; the Autoriteit Financiële Markten in the Netherlands; the Polish Securities and Exchange Commission; the Romanian Financial Services Authority; the Comisión Nacional del Mercado de Valores in Spain; the Finansinspektionen in Sweden; the Swiss Federal Banking Commission; the Financial Supervisory Commission in the Republic of China; the Dubai Financial Services Authority in the United Arab Emirates; and the State Securities Commission of Vietnam.



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Competition
The financial services industry is a highly competitive global industry. According to data sourced from the Investment Company Institute as of June 30, 2014, there were approximately 7,800 registered open-end mutual funds whose shares were offered to the public in the U.S. and approximately 70,200 registered open-end mutual funds whose shares were offered to the public outside the U.S., in each case excluding exchange-traded funds.
We face strong competition from numerous investment management companies, securities brokerage and investment banking firms, insurance companies, banks and other financial institutions, which offer a wide range of financial and investment management services to the same institutional accounts, separate accounts, retail investors and high net-worth clients that we are seeking to attract. Competition is based on various factors, including, among others, business reputation, investment performance, product mix and offerings, service quality and innovation, distribution relationships, and fees charged.
Due to our international presence and varied product mix, it is difficult to assess our market position relative to other investment managers on a worldwide basis, but we believe that we are one of the more widely diversified asset managers based in the U.S. We believe that our equity and fixed-income asset mix coupled with our global presence will serve our competitive needs well over the long term. We continue to focus on the long-term performance of our investment products, service to clients and extensive marketing activities through our strong broker/dealer and other financial institution distribution network as well as with high net-worth and institutional clients. We believe that performance, diversity of products and customer service, along with fees and costs, are the primary drivers of competition in the financial services industry.
The periodic establishment of new investment management firms and investment products increases the competition that we face. Many of our competitors have long-standing and established relationships with broker/dealers, investment advisers and their clients. Others have focused on, offer and market specific product lines, which provide strong competition to certain of our asset classes. In addition, consolidation in the financial services industry has created stronger competitors, some with greater financial resources and broader distribution channels than our own.
We rely largely on third-party broker/dealers and other similar independent financial intermediaries to distribute and sell our fund shares. We have pursued and continue to pursue sales relationships with all types of financial intermediaries to broaden our distribution network. We have experienced increased costs related to maintaining our distribution channels and we anticipate that this trend will continue. A failure to maintain strong business relationships with the major intermediaries who currently distribute our products may also impair our distribution and sales operations. Additionally, competing broker/dealers whom we rely upon to distribute and sell our mutual funds may also sell their own proprietary funds and investment products, which could further limit the distribution of our investment products. Any inability to access and successfully sell our products to clients through third-party distribution channels could have a negative effect on our level of AUM, related revenues and overall business and financial condition.
We maintain a technology platform to compete with the rapidly developing and evolving marketplace. However, technology is subject to rapid change and we cannot guarantee that our competitors may not implement more advanced platforms for their products, which could affect our business.
We believe that we are well positioned to deal with changes in marketing trends as a result of our already extensive advertising activities and broad based marketplace recognition. In conjunction with our subsidiaries, we conduct advertising and promotional campaigns through various media sources to promote brand recognition, and advertise in major financial publications, as well as on television and the Internet, to promote brand name recognition and to assist our distribution network. Such activities include purchasing network and cable programming, sponsorship of sporting events, newspaper and magazine advertising, online and paid search advertising and social media marketing.
Intellectual Property
We have used, registered, and/or applied to register certain trademarks, service marks and trade names to distinguish our sponsored investment products and services from those of our competitors in the U.S. and in other countries and jurisdictions, including, but not limited to, Franklin ® , Templeton ® , Mutual Series ® , Bissett ® , Fiduciary Trust™, Darby ® , Balanced Equity Management ® and K2 ® . Our trademarks, service marks and trade names are important to us and, accordingly, we enforce our trademark, service mark and trade name rights. The Franklin Templeton



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Investments ® brand has been, and continues to be, extremely well received both in our industry and with our clients, reflecting the fact that our brand, like our business, is based in part on trust and confidence. If our brand is harmed, our future business prospects may be adversely affected.
Employees
As of September 30, 2014 , we employed approximately 9,300 employees and operated offices in 35 countries. We consider our relations with our employees to be satisfactory.
Available Information
Franklin files reports with the SEC, including current and periodic reports, proxy statements and other information filed with or furnished to the SEC from time to time. The public may read and copy any of these filings at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers, including Franklin, that file electronically with the SEC, at www.sec.gov. Additional information about the Company’s filings can also be obtained at our website at www.franklinresources.com under “Investor Relations.” We make available free of charge on our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
Corporate Governance Guidelines. The Company has adopted Corporate Governance Guidelines. The Corporate Governance Guidelines are posted on the Company’s website under “Corporate Governance” and are available in print to any stockholder who requests a copy.
Committee Charters. The Company’s Board of Directors has an Audit Committee, Compensation Committee and Corporate Governance Committee. The Board of Directors has adopted written charters for each such committee, which are posted on the Company’s website under “Corporate Governance” and are available in print to any stockholder who requests a copy.
Item 1A.
Risk Factors.
Volatility and disruption of the capital and credit markets, and adverse changes in the global economy, may significantly affect our results of operations and may put pressure on our financial results. The capital and credit markets continue to experience volatility and disruption worldwide. Declines in global financial market conditions have in the past resulted in significant decreases in our assets under management (“AUM”), revenues and income, and future declines may negatively impact our financial results. Such declines have had and may in the future have an adverse impact on our results of operations. We may need to modify our business, strategies or operations and we may be subject to additional constraints or costs in order to compete in a changing global economy and business environment.
The amount and mix of our AUM are subject to significant fluctuations . Fluctuations in the amount and mix of our AUM may be attributable in part to market conditions outside of our control that have had, and in the future could have, a negative impact on our revenues and income. We derive our operating revenues and net income from providing investment management and related services. The level of our revenues depends largely on the level and mix of AUM. Our investment management fee revenues are primarily based on a percentage of the value of AUM and vary with the nature of the account or product managed. Any decrease in the value or amount of our AUM because of market volatility or other factors, such as a decline in the price of stocks, in particular market segments or in the securities market generally, negatively impacts our revenues and income. We are subject to significant risk of asset volatility from changes in the global financial, equity and debt markets. Individual financial, equity and debt markets may be adversely affected by economic, political, financial or other instabilities that are particular to the country or region in which a market is located, including without limitation local acts of terrorism, economic crises, political protests, insurrection or other business, social or political crises. Global economic conditions, exacerbated by war, terrorism, natural disasters or financial crises, changes in the equity or debt marketplaces, unanticipated changes in currency exchange rates, interest rates, inflation rates, the yield curve, defaults by derivative counterparties, bond default risks, the sovereign debt crisis



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in Europe, the crisis in Ukraine and any related sanctions, and other factors that are difficult to predict affect the mix, market values and levels of our AUM. The funds we manage may be subject to an unanticipated large number of redemptions as a result of such events, causing the funds to sell securities they hold, possibly at a loss, or draw on any available lines of credit to obtain cash to settle these redemptions, or settle in-kind with securities held in the applicable fund. We may, at our discretion, provide financial support to a fund to enable it to maintain sufficient liquidity in such event. Changes in investor preferences regarding our more popular investment products also could cause sizable redemptions and lower the value of our AUM, which would result in lower revenue and operating results. Moreover, changing market conditions may cause a shift in our asset mix between international and U.S. assets, potentially resulting in a decline in our revenues and income depending upon the nature of our AUM and the level of management fees we earn based on our AUM. We generally derive higher investment management and distribution fees from our international products than from our U.S. products, and higher sales fees from our U.S. products than from our international products. Additionally, changing market conditions may cause a shift in our asset mix towards fixed-income products and a related decline in our revenues and income, as we generally derive higher fee revenues and income from equity products than from fixed-income products we manage. Further, increases in interest rates, in particular if rapid, as well as any uncertainty in the future direction of interest rates, may have a negative impact on our fixed-income products. Although the shorter duration of the bond investments in many of these products may help mitigate the interest rate risk, rising interest rates or interest rate uncertainty typically decrease the total return on many bond investments due to lower market valuations of existing bonds. Any decrease in the level of our AUM resulting from market declines, interest rate volatility or uncertainty, increased redemptions or other factors could negatively impact our revenues and income.
We are subject to extensive, complex, overlapping and frequently changing rules, regulations and legal interpretations. There is uncertainty associated with the regulatory environment in which we operate. Our business is subject to extensive and complex, overlapping and/or conflicting, and frequently changing rules, regulations, policies and legal interpretations in the countries in which we operate, including those with respect to securities and other financial instruments, advisory, accounting, tax, compensation, ethics, data protection, privacy and escheatment laws and regulations.
We are subject to U.S. federal securities laws, state laws regarding securities fraud, other federal and state laws and rules and regulations of certain regulatory and self-regulatory organizations, including those rules and regulations promulgated by, among others, the U.S. Securities and Exchange Commission (“SEC”) and the New York Stock Exchange. Certain of our subsidiaries are also subject to the rules and regulations promulgated by the SEC, the Financial Industry Regulatory Authority, the Commodity Futures Trading Commission (“CFTC”) and the National Futures Association. Because of our non-U.S. operations and/or trading in our sponsored investment products (“SIPs”) that take place outside the U.S., we are also subject to regulation by non-U.S. regulators and U.S. regulators such as the Department of Justice and the SEC with respect to the Foreign Corrupt Practices Act of 1977. We are also subject to the laws and regulations of states and other jurisdictions regarding the reporting and escheatment of unclaimed or abandoned property. Certain of our subsidiaries are registered with the SEC under the Investment Advisers Act of 1940 and many of our funds are registered with the SEC under the Investment Company Act of 1940 (the “Investment Company Act”), both of which impose numerous obligations, as well as detailed operational requirements, on our subsidiaries that are investment advisers to registered investment companies. Our subsidiaries must also comply with numerous complex and changing U.S. and/or non-U.S. rules and regulations, some of which may conflict, as well as complex tax regimes. Further, as we continue to expand our operations, sometimes rapidly, into additional non-U.S. jurisdictions, the rules and regulations of those non-U.S. jurisdictions become applicable, sometimes with short compliance deadlines, and add further regulatory complexity to our ongoing global compliance operations.
Financial reporting requirements, and the processes, controls and procedures that have been put in place to address them, are often comprehensive and complex. We may be adversely affected as a result of new or revised legislation or regulations or by changes in the interpretation of existing laws and regulations. While management has focused attention and resources on our compliance policies, procedures and practices, non-compliance with applicable laws, rules, regulations, conflicts of interest requirements or fiduciary principles, or our inability to keep up with, or adapt to, an ever changing, complex regulatory environment, could result in civil liability, criminal liability and/or sanctions against us, including fines and censures, injunctive relief, suspension or expulsion from a particular jurisdiction or market or the revocation of licenses or charters, any of which could adversely affect our reputation, prospects, revenues and income.



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The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) authorized the establishment of the Financial Stability Oversight Council (“FSOC”), the mandate of which is to identify and respond to threats to U.S. financial stability. The FSOC may designate non-bank financial companies as systemically important financial institutions (“SIFIs”), which are subject to supervision and regulation by the Board of Governors of the Federal Reserve System. The FSOC, as well as other global regulators, are considering what threats to global financial stability, if any, arise from asset management companies and/or the funds that they manage, and whether such threats can be mitigated by treating such entities as SIFIs and subjecting them to additional regulation. To the extent that we or our funds are designated as a SIFI, such regulation, which could include requirements related to risk-based capital, leverage, liquidity, credit exposure, stress testing, resolution plans, early remediation, and certain risk management requirements, could impact our business. The Dodd-Frank Act, as well as other legislative and regulatory changes, impose other restrictions and limitations on us, resulting in increased scrutiny and oversight of our financial services and products. We continue to analyze the impact of the Dodd-Frank Act as implementing rules are adopted and become effective. Under the Dodd-Frank Act, which imposes a number of new regulations governing derivative transactions, certain categories of swaps are currently required, and further categories of swaps are likely to be required, to be submitted for clearing by a regulated clearing organization and reported on a swap execution facility, and the posting of collateral will be required for uncleared swaps. These and other requirements are likely to impact how we manage our investment strategies because of, among other things, an increase in the costs and expenses of utilizing swaps and other derivatives. In addition to the rulemaking mandated by the Dodd-Frank Act, rules adopted by the CFTC in 2012 removed or limited previously available exemptions and exclusions from registration and regulation as a commodity pool operator and commodity trading advisor on which we had relied, resulting in the imposition of either additional registration, disclosure, reporting and recordkeeping requirements or more stringent requirements to comply with the remaining exemptions or exclusions for operators of certain of our registered mutual funds and other pooled vehicles that use or trade in futures, swaps and other derivatives considered commodity interests and subject to regulation by the CFTC. Also, the SEC has developed proposals for stricter regulation of money market funds that could significantly change the structure and operations of those funds. We expect that such regulatory requirements and developments will cause us to incur additional administrative and compliance costs.
Our subsidiaries Fiduciary Trust Company International (“Fiduciary Trust”) and Franklin Templeton Bank & Trust, F.S.B. (“FTB&T”) have limited their operations to trust and fiduciary activities permissible for trust companies that qualify for an exemption from the definition of “bank” under the Bank Holding Company Act of 1956. Fiduciary Trust and FTB&T are subject to regulation, supervision and examination by their respective regulators, which include the Federal Deposit Insurance Corporation (the “FDIC”) and the New York State Department of Financial Services for Fiduciary Trust, and the FDIC and the Office of the Comptroller of the Currency for FTB&T.
In addition, certain federal and state anti-takeover laws generally provide that no person may acquire control of Franklin, and gain indirect control of either Fiduciary Trust or FTB&T, without prior regulatory approval.  For example, beneficial ownership of 10% or more of the voting securities of Franklin would be presumed to constitute “control” under the federal Change in Bank Control Act of 1978.  Such federal and state laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of Franklin, including through transactions that some shareholders might consider desirable.
The laws and regulations applicable to our business generally involve restrictions and requirements in connection with a variety of technical, specialized, and expanding matters and concerns. For example, compliance with the Bank Secrecy Act, anti-money laundering and Know-Your-Customer requirements, and economic and trade sanctions, both domestically and internationally, has taken on heightened importance as a result of efforts to, among other things, limit terrorism and actions that undermine the stability, sovereignty and territorial integrity of countries. At the same time, there has been increased regulation with respect to the protection of customer privacy and the need to secure sensitive customer information. As we continue to address these requirements or focus on meeting new or expanded ones, we may expend a substantial amount of time and resources. Any inability to meet these requirements, within the required timeframes, may subject us to sanctions or other restrictions by governments and/or regulators that could adversely impact our broader business objectives.
U.S. regulatory and legislative actions and reforms have made the regulatory environment in which we operate more costly and future actions and reforms could adversely impact our financial condition and results of operations. The federal securities laws have been augmented substantially and made significantly more complex by, among other



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measures, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Act and the USA Patriot Act of 2001. Moreover, the adoption of new laws or regulations and changes in the interpretation or enforcement of existing laws or regulations have directly affected, and may continue to affect, our business. With new laws and changes in interpretation of existing requirements, the associated time we must dedicate to, and related costs we must incur in, meeting the regulatory complexities of our business have increased. In particular, certain provisions of the Dodd-Frank Act still require the adoption of implementing rules. We may be required to invest significant additional management time and resources to address the new regulations being adopted pursuant to the Dodd-Frank Act. In addition, the SEC has proposed changes to Rule 12b-1 promulgated under the Investment Company Act which, if adopted, could limit our ability to recover expenses relating to the distribution of our funds. Outlays associated with meeting regulatory complexities have also increased as we expand our business into new jurisdictions. Compliance activities to meet these and other new legal requirements have required us to expend additional time and resources, and, consequently, we are incurring increased costs of doing business, which potentially negatively impacts our profitability and future financial results. Moreover, any potential accounting or reporting error, whether financial or otherwise, if material, could damage our reputation, adversely affect our ability to conduct business, and decrease revenues and income. Finally, any regulatory and legislative actions and reforms affecting the mutual fund industry, including compliance initiatives, may negatively impact revenues by increasing our costs of accessing or operating in the financial markets or by making certain investment offerings less favorable to our clients.

Failure to comply with the laws, rules or regulations in any of the non-U.S. jurisdictions in which we operate could result in substantial harm to our reputation and results of operations. As with all investment management companies, our activities are highly regulated in almost all countries in which we conduct business. The regulatory environments of the non-U.S. jurisdictions where we conduct our business or where the funds and products we manage are organized or sold are complex, uncertain and subject to change. Local regulatory environments may vary widely and place additional demands on our sales, investment, legal and compliance personnel. Failure to comply with the applicable laws, rules, regulations, codes, directives, notices or guidelines in any of our non-U.S. jurisdictions could result in a wide range of penalties and disciplinary actions, including fines, censures and the suspension or expulsion from a particular jurisdiction or market or the revocation of licenses, any of which could adversely affect our reputation and operations. In recent years, the non-U.S. regulatory environments in which we operate have seen significant increased and evolving regulation, which has imposed and may continue to impose additional compliance and operational costs on us in the applicable jurisdictions. Regulators in non-U.S. jurisdictions could also change their policies or laws in a manner that might restrict or otherwise impede our ability to offer our investment products and services in their respective markets, or we may be unable to keep up with, or adapt to, the ever changing, complex regulatory requirements in such jurisdictions or markets, which could further negatively impact our business.
Changes in tax laws or exposure to additional income tax liabilities could have a material impact on our financial condition, results of operations and liquidity. We are subject to income taxes as well as non-income based taxes, in both the U.S. and various non-U.S. jurisdictions and are subject to ongoing tax audits in the U.S. and various non-U.S. jurisdictions. Tax authorities may disagree with certain positions we have taken and assess additional taxes. We regularly assess the likely outcomes of these audits in order to determine the appropriateness of our tax provision. However, there can be no assurance that we will accurately predict the outcomes of these audits, and the actual outcomes of these audits could have a material impact on our net income or financial condition. Changes in tax laws or tax rulings could materially impact our effective tax rate. For example, proposals for fundamental U.S. corporate tax reform, if enacted, could change the amount of taxes we are required to pay and have a significant impact on our future results of operations, profitability and financial condition.
Any significant limitation, failure or security breach of our information and cyber security infrastructure, software applications, technology or other systems that are critical to our operations could harm our operations and reputation. We are highly dependent upon the use of various proprietary and third-party information and security technology, software applications and other technology systems to operate our business. We are also dependent on the effectiveness of our information and cyber security infrastructure, policies, procedures and capabilities to protect our computer and telecommunications systems and the data that reside on or are transmitted through them. We use our technology to, among other things, support our operations, obtain securities pricing information, process client transactions, and provide reports and other customer services to the clients of the funds we manage. Any inaccuracies, delays, systems failures or security breaches in these and other processes could subject us to client dissatisfaction and losses. Although



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we take protective measures, including measures to effectively secure information through system security technology, our technology systems may still be vulnerable to unauthorized access, computer viruses or other events that have a security impact, such as an external hacker attack by one or more cyber criminals (including phishing attacks attempting to get clients to provide confidential information) or an authorized employee or vendor inadvertently causing us to release confidential information, which could materially harm our operations and reputation. Breach of our technology systems could result in the unauthorized disclosure or modification of sensitive or confidential information; loss of valuable information; breach of client contracts; liability for stolen assets, information or identity; remediation costs to repair damage caused by the breach; additional security costs to mitigate against future incidents; regulatory actions, and litigation costs resulting from the incident. Moreover, loss or unauthorized disclosure of confidential customer identification information could harm our reputation and subject us to liability under laws that protect confidential personal data, resulting in increased costs or a decline in our revenues or common stock price.
Further, although we take precautions to password protect and encrypt our laptops and sensitive information on our other mobile electronic devices, if such devices are stolen, misplaced or left unattended, they may become vulnerable to hacking or other unauthorized use, creating a possible security risk and resulting in potentially costly actions by us. Most of the software applications that we use in our business are licensed from, and supported, upgraded and maintained by, third-party vendors. A suspension or termination of certain of these licenses or the related support, upgrades and maintenance could cause temporary system delays or interruption. In addition, our failure to properly manage and operate our data centers could have an adverse impact on our business. Although we have in place certain disaster recovery plans, we may experience system delays and interruptions as a result of natural disasters, power failures, acts of war, and third-party failures. Technology is subject to rapid change and we cannot guarantee that our competitors may not implement more advanced technology platforms for their products, which could affect our business. Potential system failures or breaches, or advancements in technology, and the cost necessary to address them, could result in material financial loss or costs, regulatory actions, breach of client contracts, reputational harm or legal claims and liability, which in turn could negatively impact our revenues and income.
Our business operations are complex and a failure to properly perform operational tasks or the misrepresentation of our products and services, or the termination of investment management agreements representing a significant portion of our AUM, could have an adverse effect on our revenues and income. Through our subsidiaries, we provide investment management and related services to our SIPs. In addition to investment management, our services include fund administration, sales, distribution, marketing, shareholder servicing, trustee, custody and other fiduciary services. In order to be competitive and comply with our agreements, we must properly perform our fund and portfolio administration and related responsibilities, including portfolio recordkeeping and accounting, security pricing, corporate actions, investment restrictions compliance, daily net asset value computations, account reconciliations, and required distributions to fund shareholders. In addition, the intentional or unintentional misrepresentation of our products and services in advertising materials, public relations information, social media or other external communications could adversely affect our reputation and business prospects. Our investment management fees, which represent the majority of our revenues, are dependent on fees earned under investment management agreements that we have with the SIPs we advise. Our revenues could be adversely affected if such agreements representing a significant portion of our AUM are terminated or significantly altered. Further, certain of our subsidiaries may act as general partner for various investment partnerships, which may subject them to liability for the partnerships liabilities. If we fail to properly perform and monitor our operations, our business could suffer and our revenues and income could be adversely affected.
We face risks, and corresponding potential costs and expenses, associated with conducting operations and growing our business in numerous countries. We sell investment funds and offer investment management and related services in many different regulatory jurisdictions around the world, and intend to continue to expand our operations internationally. As we do so, we will continue to face challenges to the adequacy of our resources, procedures and controls to consistently and effectively operate our business. In order to remain competitive, we must be proactive and prepared to implement necessary resources when growth opportunities present themselves, whether as a result of a business acquisition or rapidly increasing business activities in particular markets or regions. Local regulatory environments may vary widely, as may the adequacy and sophistication of each. Similarly, local distributors, and their policies and practices as well as financial viability, may also vary widely, or be inconsistent or less developed or mature than other distributors. Notwithstanding potential long-term cost savings by increasing certain operations, such as transfer agent and other back-office operations, in countries or regions of the world with lower operating costs, growth of our international operations may involve near-term increases in expenses as well as additional capital costs, such as



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information systems and technology costs and costs related to compliance with particular regulatory or other local requirements or needs. Local requirements or needs may also place additional demands on sales and compliance personnel and resources, such as meeting local language requirements, while also integrating personnel into an organization with a single operating language. Finding, hiring and retaining additional, well-qualified personnel and crafting and adopting policies, procedures and controls to address local or regional requirements remain a challenge as we expand our operations internationally. Moreover, regulators in non-U.S. jurisdictions could also change their policies or laws in a manner that might restrict or otherwise impede our ability to distribute or register investment products in their respective markets. Any of these local requirements, activities, or needs could increase the costs and expenses we incur in a specific jurisdiction without any corresponding increase in revenues and income from operating in the jurisdiction. Recently, certain laws and regulations outside the U.S. have included extraterritorial application. This may lead to duplicative or conflicting legal or regulatory burdens and additional costs and risks. In addition, from time to time we enter into international joint ventures or take minority stakes in companies in which we may not have control. These investments may involve risks, including the risk that the controlling stakeholder or joint venture partner may have business interests, strategies or goals that are inconsistent with ours, and the risk that business decisions or other actions or omissions of the controlling stakeholder, joint venture partner or the entity itself may result in liability for us or harm to our reputation or adversely affect the value of our investment in the entity.
We depend on key personnel and our financial performance could be negatively affected by the loss of their services. The success of our business will continue to depend upon our key personnel, including our portfolio and fund managers, investment analysts, investment advisers, sales and management personnel and other professionals as well as our executive officers and business unit heads. Competition for qualified, motivated, and highly skilled executives, professionals and other key personnel in the investment management industry remains significant. Our success depends to a substantial degree upon our ability to find, attract, retain, and motivate qualified individuals, including through competitive compensation packages, and upon the continued contributions of these people. Laws and regulations, including those contained in or relating to the Capital Requirements Directive of the European Union (“EU”), those recently adopted under the EU s Alternative Investment Fund Manager Directive, those required to be adopted under the Dodd-Frank Act and certain provisions of the EU s new Undertakings for Collective Investment in Transferable Securities V Directive and Markets in Financial Instruments Directive II, could impose restrictions on compensation paid by financial institutions, which could restrict our ability to compete effectively for qualified professionals. As our business grows, we are likely to need to increase correspondingly the overall number of individuals that we employ. Moreover, in order to retain certain key personnel, we may be required to increase compensation to such individuals, resulting in additional expense without a corresponding increase in potential revenues. We cannot assure you that we will be successful in finding, attracting and retaining qualified individuals, and the departure of key investment personnel, in particular, if not replaced, could cause us to lose clients, which could have a material adverse effect on our financial condition, results of operations and business prospects.
Strong competition from numerous and sometimes larger companies with competing offerings and products could limit or reduce sales of our products, potentially resulting in a decline in our market share, revenues and income. We compete with numerous investment management companies, securities brokerage and investment banking firms, insurance companies, banks and other financial institutions. Our investment products also compete with products offered by these competitors as well as real estate investment trusts, hedge funds and others. The periodic establishment of new investment management companies and other competitors increases the competition that we face. At the same time, consolidation in the financial services industry has created stronger competitors with greater financial resources and broader distribution channels than our own. Competition is based on various factors, including, among others, business reputation, investment performance, product mix and offerings, service quality and innovation, distribution relationships, and fees charged. For example, to the extent that there is a trend among existing or potential clients in favor of low-fee passive products such as index and certain exchange-traded funds, it may favor our competitors who provide those products over active managers like us. Additionally, competing securities broker/dealers whom we rely upon to distribute and sell our mutual funds may also sell their own proprietary funds and investment products, which could limit the distribution of our investment products. To the extent that existing or potential clients, including securities broker/dealers, decide to invest in or distribute the products of our competitors, the sales of our products as well as our market share, revenues and income could decline. Our ability to attract and retain AUM is also dependent on the relative investment performance of our funds and other managed investment portfolios, offering a mix of SIPs that meets investor demand and our ability to maintain our investment management fees and pricing structure at competitive levels.



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Changes in the third-party distribution and sales channels on which we depend could reduce our income and hinder our growth. We derive nearly all of our fund sales through third-party broker/dealers, banks, investment advisers and other financial intermediaries. Increasing competition for these distribution channels and regulatory initiatives have caused our distribution costs to rise and could cause further increases in the future or could otherwise negatively impact the distribution of our products. Pursuant to the Dodd-Frank Act, the SEC may establish different standards for broker/dealers in their interaction with retail customers, which could have an impact on sales and/or distribution costs. Higher distribution costs lower our income; consolidations in the broker/dealer industry could also adversely impact our income. Moreover, if several of the major financial advisers who distribute our products were to cease operations or limit or otherwise end the distribution of our products, it could have a significant adverse impact on our income. In addition, the U.K., the Netherlands and recently the EU in its Markets in Financial Instruments Directive II have adopted regimes which ban, or may limit, the payment of commissions to intermediaries in relation to certain sales to retail customers and similar regimes are under consideration in several other markets. Depending on their exact terms, such regimes may result in existing flows of business moving to less profitable channels or even to competitors providing substitutable products outside the regime. There is no assurance we will continue to have access to the third-party broker/dealers, banks, investment advisers and other financial intermediaries that currently distribute our products, or continue to have the opportunity to offer all or some of our existing products through them. A failure to maintain strong business relationships with such distributors may also impair our distribution and sales operations. Because we use broker/dealers, banks, investment advisers and other financial intermediaries to sell our products, we do not control the ultimate investment recommendations given to clients. Any inability to access and successfully sell our products to clients through third-party distribution channels could have a negative effect on our level of AUM, income and overall business and financial condition.
Our increasing focus on international markets as a source of investments and sales of investment products subjects us to increased exchange rate and other risks in connection with our revenues and income generated overseas. While we maintain a significant portion of our operations in the U.S., we also provide services and earn revenues in The Bahamas, Asia-Pacific, Europe, Canada, Latin America, the Middle East and Africa. As a result, we are subject to foreign exchange risk through our non-U.S. operations. Fluctuations in the exchange rates to the U.S. dollar may affect our financial results from one period to the next. While we have taken steps to reduce our exposure to foreign exchange risk, for example, by denominating a significant amount of our transactions in U.S. dollars, the situation may change in the future as our business continues to grow outside the U.S. Appreciation of the U.S. dollar could moderate revenues from managing investment products internationally or could affect relative investment performance of certain funds invested in non-U.S. securities. In addition, we have risk associated with the foreign exchange revaluation of U.S. dollar balances held by certain non-U.S. subsidiaries for which the local currency is the functional currency. Separately, management fees that we earn tend to be higher in connection with international AUM than with U.S. AUM. Consequently, a downturn in international markets could have a significant effect on our revenues and income. Moreover, as our business continues to grow in non-U.S. markets, any ongoing and future business, economic, social or political unrest affecting these markets, in addition to any direct consequences such unrest may have on our personnel and facilities located in the affected area, may also have a more lasting impact on the long-term investment climate in these and other areas and, as a result, our AUM and the corresponding revenues and income that we generate from them may be negatively affected.
Harm to our reputation or poor investment performance of our products could reduce the level of our AUM or affect our sales, potentially negatively impacting our revenues and income. Our reputation is critical to the success of our business. We believe that our brand names have been, and continue to be, well received both in our industry and with our clients, reflecting the fact that our brands, like our business, are based in part on trust and confidence. If our reputation is harmed, existing clients may reduce amounts held in, or withdraw entirely from, funds that we advise or funds may terminate their management agreements with us, which could reduce the amount of AUM and cause us to suffer a corresponding loss in our revenues and income. Our investment performance, along with achieving and maintaining superior distribution and client services, is also critical to the success of our business. Strong investment performance often stimulates sales of our investment products. Poor investment performance as compared to third-party benchmarks or competitive products could lead to a decrease in sales of investment products we manage and stimulate redemptions from existing products, generally lowering the overall level of AUM and reducing the management fees we earn. We cannot assure you that past or present investment performance in the investment products we manage will be indicative of future performance. Any poor investment performance may negatively impact our



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revenues and income. Reputational harm or poor investment performance may cause us to lose current clients and we may be unable to continue to attract new clients or develop new business. If we fail to address, or appear to fail to address, successfully and promptly the underlying causes of any reputational harm or poor investment performance, we may be unsuccessful in repairing any existing harm to our reputation or performance and our future business prospects would likely be affected.
Our future results are dependent upon maintaining an appropriate level of expenses, which is subject to fluctuation. The level of our expenses is subject to fluctuation and may increase for the following or other reasons: changes in the level and scope of our operating expenses in response to market conditions; variations in the level of total compensation expense due to, among other things, bonuses, changes in our employee count and mix, and competitive factors; changes in expenses and capital costs, including costs incurred to maintain and enhance our administrative and operating services infrastructure or to cover uninsured losses, and an increase in insurance expenses including through the assumption of higher deductibles and/or co-insurance liability.
Our ability to successfully manage and grow our business can be impeded by systems and other technological limitations. Our continued success in effectively managing and growing our business depends on our ability to integrate the varied accounting, financial, information, and operational systems on a global basis. Moreover, adapting or developing our existing technology systems to meet our internal needs, as well as client needs, industry demands and new regulatory requirements, is also critical for our business. The constant introduction of new technologies presents new challenges to us. We have an ongoing need to continually upgrade and improve our various technology systems, including our data processing, financial, accounting, shareholder servicing and trading systems. Further, we also must be proactive and prepared to implement technology systems when growth opportunities present themselves, whether as a result of a business acquisition or rapidly increasing business activities in particular markets or regions. These needs could present operational issues or require, from time to time, significant capital spending. It also may require us to reevaluate the current value and/or expected useful lives of our technology systems, which could negatively impact our results of operations.
Our inability to successfully recover should we experience a disaster or other business continuity problem could cause material financial loss, loss of human capital, regulatory actions, reputational harm, or legal liability. Should we experience a local or regional disaster or other business continuity problem, such as an earthquake, tsunami, terrorist attack, pandemic or other natural or man-made disaster, our continued success will depend, in part, on the safety and availability of our personnel, our office facilities, and the proper functioning of our computer, telecommunication and other systems and operations. While our operational size, the diversity of locations from which we operate, and our redundant back-up systems provide us with a strong advantage should we experience a local or regional disaster or other business continuity event, we could still experience near-term operational challenges, in particular depending upon how a local or regional event may affect our human capital across our operations or with regard to particular aspects of our operations, such as key executive officers or personnel in our technology group. Moreover, as we grow our operations in new geographic regions, the potential for particular types of natural or man-made disasters, political, economic or infrastructure instabilities, or other country- or region-specific business continuity risks increases. Past disaster recovery efforts have demonstrated that even seemingly localized events may require broader disaster recovery efforts throughout our operations and, consequently, we regularly assess and take steps to improve upon our existing business continuity plans and key management succession. However, a disaster on a significant scale or affecting certain of our key operating areas within or across regions, or our inability to successfully recover should we experience a disaster or other business continuity problem, could materially interrupt our business operations and cause material financial loss, loss of human capital, regulatory actions, reputational harm, or legal liability.
Certain of the portfolios we manage, including our emerging market portfolios, are vulnerable to significant market-specific political, economic or other risks, any of which may negatively impact our revenues and income. Our emerging market portfolios and revenues derived from managing these portfolios are subject to significant risks of loss from political, economic, and diplomatic developments, currency fluctuations, social instability, changes in governmental policies, expropriation, nationalization, asset confiscation and changes in legislation related to non-U.S. ownership. International trading markets, particularly in some emerging market countries, are often smaller, less liquid, less regulated and significantly more volatile than those in the U.S.



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Regulatory and governmental examinations and/or investigations, litigation and the legal risks associated with our business, could adversely impact our AUM, increase costs and negatively impact our profitability and/or our future financial results. From time to time we may receive requests for documents or other information from governmental authorities or regulatory bodies or we may become the subject of governmental or regulatory investigations and/or examinations, or governmental or regulatory investigations and/or examinations that have been inactive could become active. In addition, we may be named in litigation. We may be obligated, and under our certificate of incorporation, by-laws and standard form of director indemnification agreement we are obligated under certain conditions, or we may choose, to indemnify directors, officers or employees against liabilities and expenses they may incur in connection with such matters to the extent permitted under applicable law. Even if claims made against us are without merit, litigation typically is an expensive process. Risks associated with legal liability often are difficult to assess or quantify and their existence and magnitude can remain unknown for significant periods of time. Eventual exposures from and expenses incurred relating to any litigation, investigations, examinations and settlements could adversely impact our AUM, increase costs and negatively impact our profitability and/or our financial results. Judgments, findings or allegations of wrongdoing by regulatory or governmental authorities or in litigation against us or settlements with respect thereto could affect our reputation, increase our costs of doing business and/or negatively impact our revenues, any of which could have a material negative impact on our financial results.
Our ability to meet cash needs depends upon certain factors, including the market value of our assets, operating cash flows and our perceived creditworthiness. Our ability to meet anticipated cash needs depends upon factors such as the market value of our assets, our operating cash flows and our creditworthiness as perceived by lenders. If we are unable to obtain funds and financing, we may be forced to incur unanticipated costs or revise our business plans. Further, our access to the capital markets depends significantly on our credit ratings. A reduction in our long- or short-term credit ratings could increase our borrowing costs and limit our access to the capital markets. Volatility in the global financing markets may also impact our ability to access the capital markets should we seek to do so, and have an adverse effect on investors willingness to purchase our securities, interest rates, credit spreads and the valuation levels of equity markets. If we are unable to obtain funds and financing, or access the capital markets in a timely manner, we may be forced to incur unanticipated costs or revise our business plans, and our business could be adversely impacted.
We are dependent on the earnings of our subsidiaries. Substantially all of our operations are conducted through our subsidiaries. As a result, our cash flow and our ability to fund operations are dependent upon the earnings of our subsidiaries and the distribution of earnings, loans or other payments by our subsidiaries. Our subsidiaries are separate and distinct legal entities and have no obligation to provide us with funds for our payment obligations, whether by dividends, distributions, loans or other payments. Any payments to us by our subsidiaries could be subject to statutory or contractual restrictions and are contingent upon our subsidiaries earnings and business considerations. Certain of our subsidiaries are subject to regulatory restrictions which may limit their ability to transfer funds to their parent companies and/or our ability to repatriate funds to the U.S. Our financial condition could be adversely affected if certain of our subsidiaries are unable to distribute funds to us.
Item  1B.
Unresolved Staff Comments.
None.
Item 2.
Properties.
We conduct our worldwide operations using a combination of leased and owned facilities. While we believe we have sufficient facilities to conduct our business at present, we will continue to lease, acquire and dispose of facilities throughout the world as necessary.
 
We lease space in various states in the U.S., including California, Connecticut, Delaware, Florida, Massachusetts, New Jersey, New York, Utah and Washington, D.C., and in various non-U.S. locations, including Australia, Austria, Belgium, Brazil, Canada, China (including Hong Kong), Colombia, France, Germany, Hungary, India, Isle of Man, Italy, Japan, Korea, Luxembourg, Malaysia, Mexico, the Netherlands, Poland, Romania, Russia, Singapore, Slovakia, South Africa, Spain, Sweden, Switzerland, Thailand, Turkey, United Arab Emirates, the U.K. (including England and Scotland) and Vietnam. As of September 30, 2014 , we leased and occupied approximately 1,131,000 square feet of



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space. We have also leased and subsequently subleased to third parties approximately 62,000 square feet of excess leased space.
In addition, we own four buildings in San Mateo, California; five buildings in Rancho Cordova, California; two buildings in Stockton, California; five buildings in St. Petersburg, Florida; one building in Ft. Lauderdale, Florida; three buildings in Hyderabad, India; and two buildings in Nassau, The Bahamas, as well as space in office buildings in Argentina, India and Singapore. The buildings we own consist of approximately 2,112,000 square feet of space. We have leased to third parties approximately 288,000 square feet of excess owned space.
Item  3.
Legal Proceedings.
The information set forth in response to this Item 3 of Regulation S-K under “Legal Proceedings” is incorporated by reference from the “Legal Proceedings” section in Note 14 – Commitments and Contingencies in the notes to consolidated financial statements in Item 8 of Part II of this Form 10-K, which is incorporated herein by reference.
Item  4.
Mine Safety Disclosures.
Not applicable.
Executive Officers of the Registrant
Pursuant to General Instruction G(3) to Form 10-K, the following description of our executive officers is included as an unnumbered item in Part I of this report in lieu of being included in our definitive proxy statement for our annual meeting of stockholders. Set forth below are the name, age, present title, and certain other information for each of our executive officers as of November 12, 2014 . Each executive officer is appointed by Franklin’s Board of Directors and holds his/her office until the earlier of his/her death, resignation, retirement, disqualification or removal.
Vijay C. Advani
Age 53
Executive Vice President - Global Advisory Services of Franklin since March 2011; formerly, Executive Vice President-Global Distribution of Franklin from June 2008 to March 2011, and Executive Vice President–Global Advisor Services of Franklin from December 2005 to June 2008; officer and/or director of certain subsidiaries of Franklin.
Gregory E. Johnson
Age 53
Chairman of the Board of Franklin since June 2013, Chief Executive Officer of Franklin since January 2004 and President of Franklin since December 1999; officer and/or director of certain subsidiaries of Franklin; director or trustee of 44 registered investment companies managed or advised by subsidiaries of Franklin.
Jennifer M. Johnson
Age 50
Executive Vice President and Chief Operating Officer of Franklin since March 2010; formerly, Executive Vice President–Operations and Technology of Franklin from December 2005 to March 2010, and Senior Vice President and Chief Information Officer of Franklin from May 2003 to December 2005; officer and/or director of certain subsidiaries of Franklin.
Rupert H. Johnson, Jr.
Age 74
Vice Chairman of Franklin since December 1999 and director of Franklin since 1969; officer and/or director of certain subsidiaries of Franklin; director or trustee of 41 registered investment companies managed or advised by subsidiaries of Franklin.



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Kenneth A. Lewis
Age 53
Executive Vice President of Franklin since October 2007 and Chief Financial Officer of Franklin since October 2006; formerly, Senior Vice President and Treasurer of Franklin from October 2006 to October 2007, Vice President–Enterprise Risk Management of Franklin from April 2006 to October 2006 and Vice President and Treasurer of Franklin from June 2002 to April 2006; officer and/or director of certain subsidiaries of Franklin; officer of various registered investment companies managed or advised by subsidiaries of Franklin.
John M. Lusk
Age 56
Executive Vice President - Investment Management of Franklin since March 2011; formerly, Executive Vice President–Portfolio Operations of Franklin from December 2005 to March 2011, and Vice President of Franklin from January 2004 to December 2005; officer and/or director of certain subsidiaries of Franklin.
Craig S. Tyle
Age 54
Executive Vice President and General Counsel of Franklin since August 2005; formerly, a partner at Shearman & Sterling LLP (a law firm) from March 2004 to July 2005 and General Counsel for the Investment Company Institute (a trade group for the U.S. fund industry) from September 1997 through March 2004; officer and/or director of certain subsidiaries of Franklin; officer of various registered investment companies managed or advised by subsidiaries of Franklin.
William Y. Yun
Age 55
Executive Vice President–Alternative Strategies of Franklin since June 2008; formerly, Executive Vice President– Institutional of Franklin from December 2005 to June 2008, and President of Fiduciary Trust, a subsidiary of Franklin acquired in April 2001, from 2000 to December 2005; officer and/or director of certain subsidiaries of Franklin; officer of registered investment company managed or advised by subsidiaries of Franklin.
Family Relationships
Gregory E. Johnson is the nephew of Rupert H. Johnson, Jr. and the brother of Charles E. Johnson (a director of Franklin) and Jennifer M. Johnson. Charles E. Johnson is the nephew of Rupert H. Johnson, Jr. and the brother of Gregory E. Johnson and Jennifer M. Johnson. Jennifer M. Johnson is the niece of Rupert H. Johnson, Jr. and the sister of Gregory E. Johnson and Charles E. Johnson.



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PART II
Item  5.
Market for Registrant s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is traded on the NYSE under the ticker symbol “BEN.” On September 30, 2014 , the closing price of our common stock on the NYSE was $54.61 per share. At October 31, 2014 , there were 3,885 stockholders of record of our common stock.
In July 2013, a three-for-one split of our common stock was distributed to common stockholders in the form of a stock dividend. Share and per share data for all prior periods presented have been adjusted retroactively to reflect the stock split.
The following table sets forth the high and low sales prices for our common stock on the NYSE for each full quarterly period of the two most recently completed fiscal years:
Quarter
 
2014 Fiscal Year
 
2013 Fiscal Year
 
High
 
Low
 
High
 
Low
October-December
 
$
57.85

 
$
49.49

 
$
44.64

 
$
41.34

January-March
 
$
58.87

 
$
49.92

 
$
50.35

 
$
42.67

April-June
 
$
58.42

 
$
51.00

 
$
56.54

 
$
44.22

July-September
 
$
58.28

 
$
52.65

 
$
54.36

 
$
45.06

We declared regular cash dividends of $0.48 per share ( $0.12 per share per quarter) in the fiscal year ended September 30, 2014 (“fiscal year 2014 ”). We declared regular cash dividends of $0.39 per share ( $0.097 per share in each of the first three quarters and $0.10 per share in the fourth quarter) and a special cash dividend of $1.00 per share in the fiscal year ended September 30, 2013 (“fiscal year 2013 ”). We currently expect to continue paying comparable regular cash dividends on a quarterly basis to holders of our common stock depending upon earnings and other relevant factors.
The equity compensation plan information called for by Item 201(d) of Regulation S-K is set forth in Item 12 of Part III of this Form 10-K under the heading “Equity Compensation Plan Information.”
The following table provides information with respect to the shares of our common stock that we repurchased during the three months ended September 30, 2014 .
Month
 
Total Number of
Shares Purchased
 
Average Price
Paid per Share
 
Total Number of Shares Purchased As Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 2014
 
360,000

 
$
55.93

 
360,000

 
32,621,896

August 2014
 
1,567,783

 
$
55.33

 
1,567,783

 
31,054,113

September 2014
 
1,281,000

 
$
55.34

 
1,281,000

 
29,773,113

Total
 
3,208,783

 
 
 
3,208,783

 
 

Under our stock repurchase program, we can repurchase shares of our common stock from time to time in the open market and in private transactions in accordance with applicable laws and regulations, including without limitation applicable federal securities laws. In order to pay taxes due in connection with the vesting of employee and executive officer stock and stock unit awards, we may repurchase shares under our program using a net stock issuance method. In December 2013, we announced that our Board of Directors authorized the repurchase of up to 30.0 million additional shares of our common stock under our stock repurchase program. At September 30, 2014 , 29.8 million  shares remained



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available for repurchase under the program, which is not subject to an expiration date. There were no unregistered sales of equity securities during fiscal years 2014 and 2013 .
Item 6.
Selected Financial Data.
FINANCIAL HIGHLIGHTS
as of and for the fiscal years ended September 30,  
 
2014
 
2013
 
2012
 
2011
 
2010
Summary of Operations (in millions)
 
 
 
 
 
 
 
 
 
 
Operating revenues
 
$
8,491.4

 
$
7,985.0

 
$
7,101.0

 
$
7,140.0

 
$
5,853.0

Operating income
 
3,221.2

 
2,921.3

 
2,515.2

 
2,659.8

 
1,958.7

Operating margin
 
37.9
%
 
36.6
%
 
35.4
%
 
37.3
%
 
33.5
%
Net income attributable to Franklin Resources, Inc.
 
2,384.3

 
2,150.2

 
1,931.4

 
1,923.6

 
1,445.7

Financial Data  (in millions)
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
16,357.1

 
$
15,390.3

 
$
14,751.5

 
$
13,775.8

 
$
10,708.1

Debt
 
1,198.2

 
1,197.7

 
1,566.1

 
998.2

 
979.9

Debt of consolidated sponsored investment products and variable interest entities
 
950.8

 
1,097.4

 
1,211.1

 
1,170.3

 

Franklin Resources, Inc. stockholders’ equity
 
11,584.1

 
10,073.1

 
9,201.3

 
8,524.7

 
7,727.0

Operating cash flows
 
2,138.0

 
2,035.7

 
1,066.2

 
1,621.8

 
1,651.0

Investing cash flows
 
390.6

 
232.9

 
873.4

 
435.9

 
(32.7
)
Financing cash flows
 
(1,195.3
)
 
(2,018.1
)
 
(1,084.9
)
 
(968.2
)
 
(594.9
)
Assets Under Management (in billions)
 
 
 
 
 
 
 
 
 
 
Ending
 
$
898.0

 
$
844.7

 
$
749.9

 
$
659.9

 
$
644.9

Average 1
 
887.9

 
808.2

 
705.7

 
694.4

 
571.1

Per Common Share 2
 
 
 
 
 
 
 
 
 
 
Earnings
 
 
 
 
 
 
 
 
 
 
Basic
 
$
3.79

 
$
3.37

 
$
2.99

 
$
2.89

 
$
2.12

Diluted
 
3.79

 
3.37

 
2.98

 
2.87

 
2.11

Cash dividends
 
0.48

 
1.39

 
1.03

 
0.33

 
1.29

Book value
 
18.60

 
15.97

 
14.45

 
13.05

 
11.50

Employee Headcount
 
9,266

 
9,002

 
8,558

 
8,453

 
7,927

__________________  
1  
Represents simple monthly average AUM.
2  
All per share amounts have been adjusted retroactively to reflect the three-for-one split of common stock described in Item 5 (“Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”).





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Item  7.
Management s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
The following discussion and analysis of the results of operations and financial condition of Franklin Resources, Inc. (“Franklin”) and its subsidiaries (collectively, the “Company”) should be read in conjunction with the “Forward-looking Statements” section set forth in Part I and the “Risk Factors” section set forth in Item 1A of Part I of this Annual Report on Form 10-K and in any more recent filings with the U.S. Securities and Exchange Commission (the “SEC”), each of which describe these risks, uncertainties and other important factors in more detail.
Overview
We are a global investment management organization and derive our operating revenues and net income from providing investment management and related services to investors in jurisdictions worldwide through products that include investment funds and institutional, high net-worth and separately-managed accounts (collectively, our “sponsored investment products” or “SIPs”). In addition to investment management, our services include fund administration, sales, distribution, marketing, shareholder servicing, trustee, custody and other fiduciary services. Our SIPs and investment management and related services are distributed or marketed to the public globally under seven distinct brand names: Franklin ® , Templeton ® , Mutual Series ® , Bissett ® , Fiduciary Trust , Darby ® , Balanced Equity Management ® and K2 ® . We offer a broad range of SIPs under equity, hybrid, fixed-income and cash management funds and accounts, including alternative investment products, that meet a wide variety of specific investment needs of individual and institutional investors. We also provide sub-advisory services to certain investment products sponsored by other companies which may be sold to the public under the brand names of those other companies or on a co-branded basis.
The level of our revenues depends largely on the level and relative mix of assets under management (“AUM”). As noted in the “Risk Factors” section set forth above in Item 1A of Part I of this Annual Report on Form 10-K, the amount and mix of our AUM are subject to significant fluctuations and can negatively impact our revenues and income. The level of our revenues also depends on mutual fund sales and the number of mutual fund shareholder accounts. The fees charged for our services are based on contracts with our SIPs or our clients. These arrangements could change in the future.
During the fiscal year ended September 30, 2014 (“fiscal year 2014 ”), the global equity financial markets provided strong returns, evidenced by increases of 20% in the S&P 500 Index and 13% in the MSCI World Index. The overall market performance benefited from an improved global outlook for much of the year, but was tempered by the crisis in Ukraine and economic slowdowns in China and Europe. Volatility increased during our fourth fiscal quarter, as global concerns more than offset the positive U.S. outlook, lowering the overall performance for the year. The prospect of interest rate increases also led to strengthening of the U.S. dollar during the fourth quarter. The global bond markets were uneven throughout the year as the Barclays Global Aggregate Index increased 1% . The overall market improvement benefited our AUM, fee revenues, operating income and net income, all of which increased from the prior fiscal year.
Our total AUM at September 30, 2014 was $898.0 billion , 6% higher than at September 30, 2013 , primarily driven by $69.2 billion of market appreciation, partially offset by a $6.8 billion decrease due to foreign exchange revaluation and $4.6 billion of net new outflows. The increase in simple monthly average AUM (“average AUM”) for fiscal year 2014 was higher, at 10% , as market depreciation in the fourth quarter led to a decrease in the amount of total AUM at year end.
The business and regulatory environments in which we operate globally remain complex, uncertain and subject to change. We are subject to various laws, rules and regulations globally that impose restrictions, limitations and registration, reporting and disclosure requirements on our business and add complexity to our global compliance operations. In September 2014, Franklin deregistered as a bank holding company with the Board of Governors of the Federal Reserve System.
Uncertainties regarding economic stabilization and improvement remain for the foreseeable future. As we continue to confront the challenges of the current economic and regulatory environments, we remain focused on the investment performance of our SIPs and on providing high quality customer service to our clients. While we are focused on expense



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management, we will also seek to attract, retain and develop employees and invest strategically in systems and technology that will provide a secure and stable environment. We will continue to seek to protect and further our brand recognition while developing and maintaining broker/dealer and client relationships. The success of these and other strategies may be influenced by the factors discussed in the “Risk Factors” section in Part I of this Annual Report.
RESULTS OF OPERATIONS
(in millions, except per share data)
 
 
 
 
 
 
 
2014
vs. 2013
 
2013
vs. 2012
for the fiscal years ended September 30,
 
2014
 
2013
 
2012
 
 
Operating revenues
 
$
8,491.4

 
$
7,985.0

 
$
7,101.0

 
6
%
 
12
%
Operating income
 
3,221.2

 
2,921.3

 
2,515.2

 
10
%
 
16
%
Net income attributable to Franklin Resources, Inc.
 
2,384.3

 
2,150.2

 
1,931.4

 
11
%
 
11
%
Diluted earnings per share
 
$
3.79

 
$
3.37

 
$
2.98

 
12
%
 
13
%
Operating margin 1
 
37.9
%
 
36.6
%
 
35.4
%
 
 
 
 
  ___________________  
1     Defined as operating income divided by total operating revenues.
Operating income increased in fiscal year 2014 primarily due to a 10% increase in investment management fees, which was driven by a 10% increase in average AUM, partially offset by a 4% increase in operating expenses. Net income attributable to Franklin Resources, Inc. increased $234.1 million primarily due to the increase in operating income.
Operating income increased in the fiscal year ended September 30, 2013 (“fiscal year 2013 ”) primarily due to a 14% increase in investment management fees, which was driven by a 15% increase in average AUM, partially offset by a lower effective management fee rate. Net income attributable to Franklin Resources, Inc. increased $218.8 million as the increase in operating income was partially offset by lower investment and other income.
In July 2013, a three-for-one split of the Company s common stock was distributed to common stockholders in the form of a stock dividend. Share and per share data for all prior periods presented have been adjusted retroactively to reflect the stock split.
Diluted earnings per share increased in fiscal years 2014 and 2013 consistent with the increases in net income and the impacts of 1% decreases in diluted average common shares outstanding primarily resulting from the repurchase of shares of our common stock.



35


ASSETS UNDER MANAGEMENT
AUM by investment objective was as follows:
(in billions)
 
 
 
 
 
 
 
2014
vs. 2013
 
2013
vs. 2012
as of September 30,
 
2014
 
2013
 
2012
 
 
Equity
 
 
 
 
 
 
 
 
 
 
Global/international
 
$
261.5

 
$
243.9

 
$
214.9

 
7
 %
 
13
 %
United States
 
109.5

 
97.2

 
82.2

 
13
 %
 
18
 %
Total equity
 
371.0

 
341.1

 
297.1

 
9
 %
 
15
 %
Hybrid
 
159.0

 
137.5

 
110.1

 
16
 %
 
25
 %
Fixed-Income
 
 
 
 
 
 
 
 
 
 
Tax-free
 
72.1

 
72.4

 
83.2

 
0
 %
 
(13
)%
Taxable
 
 
 
 
 
 
 
 
 
 
Global/international
 
225.1

 
228.8

 
196.4

 
(2
)%
 
16
 %
United States
 
63.8

 
58.3

 
56.7

 
9
 %
 
3
 %
Total fixed-income
 
361.0

 
359.5

 
336.3

 
0
 %
 
7
 %
Cash Management
 
7.0

 
6.6

 
6.4

 
6
 %
 
3
 %
Total
 
$
898.0

 
$
844.7

 
$
749.9

 
6
 %
 
13
 %
Average for the Year
 
$
887.9

 
$
808.2

 
$
705.7

 
10
 %
 
15
 %
AUM at September 30, 2014 increased 6% from September 30, 2013 , primarily due to $69.2 billion of market appreciation, as strong positive returns in global markets resulted in valuation increases in all long-term investment objectives, partially offset by a $6.8 billion decrease due to foreign exchange revaluation and $4.6 billion of net new outflows. Average AUM also benefited from market appreciation, increasing 10% during fiscal year 2014 .
AUM at September 30, 2013 increased 13% from September 30, 2012 , primarily due to $66.1 billion of market appreciation and $24.3 billion of net new flows. Strong positive returns in global markets resulted in valuation increases in all long-term investment objectives with the exception of tax-free fixed-income, which was negatively impacted by investor concerns regarding the economic outlook for certain municipalities. The net new flows were primarily driven by inflows in global/international fixed-income products. Average AUM benefited from the same factors, increasing 15% during fiscal year 2013 .
Average AUM is generally more indicative of trends in revenue for providing investment management and fund administration services than the year-over-year change in ending AUM.



36


Average AUM and the mix of average AUM by investment objective are shown below.
(in billions)
 
Average AUM
 
2014
vs. 2013
 
2013
vs. 2012
for the fiscal years ended September 30,
 
2014
 
2013
 
2012
 
 
Equity
 
 
 
 
 
 
 


 


Global/international
 
$
262.1

 
$
228.1

 
$
204.3

 
15
 %
 
12
 %
United States
 
107.6

 
87.8

 
78.7

 
23
 %
 
12
 %
Total equity
 
369.7

 
315.9

 
283.0

 
17
 %
 
12
 %
Hybrid
 
152.7

 
126.2

 
101.9

 
21
 %
 
24
 %
Fixed-Income
 
 
 
 
 
 
 
 
 
 
Tax-free
 
71.0

 
81.7

 
77.5

 
(13
)%
 
5
 %
Taxable
 
 
 
 
 
 
 


 


Global/international
 
227.7

 
220.5

 
185.4

 
3
 %
 
19
 %
United States
 
60.2

 
57.9

 
51.6

 
4
 %
 
12
 %
Total fixed-income
 
358.9

 
360.1

 
314.5

 
0
 %
 
14
 %
Cash Management
 
6.6

 
6.0

 
6.3

 
10
 %
 
(5
)%
Total
 
$
887.9

 
$
808.2

 
$
705.7

 
10
 %
 
15
 %
 
 
Mix of Average AUM
for the fiscal years ended September 30,
 
2014
 
2013
 
2012
Equity
 
 
 
 
 
 
Global/international
 
30
%
 
28
%
 
29
%
United States
 
12
%
 
11
%
 
11
%
Total equity
 
42
%
 
39
%
 
40
%
Hybrid
 
17
%
 
16
%
 
14
%
Fixed-Income
 
 
 
 
 
 
Tax-free
 
8
%
 
10
%
 
11
%
Taxable
 
 
 
 
 
 
Global/international
 
25
%
 
27
%
 
26
%
United States
 
7
%
 
7
%
 
8
%
Total fixed-income
 
40
%
 
44
%
 
45
%
Cash Management
 
1
%
 
1
%
 
1
%
Total
 
100
%
 
100
%
 
100
%



37


Components of the change in AUM were as follows:
(in billions)
 
 
 
 
 
 
 
2014
vs. 2013
 
2013
vs. 2012
for the fiscal years ended September 30,
 
2014
 
2013
 
2012
 
 
Beginning AUM
 
$
844.7

 
$
749.9

 
$
659.9

 
13
 %
 
14
 %
Long-term sales
 
192.6

 
215.6

 
170.8

 
(11
)%
 
26
 %
Long-term redemptions
 
(197.5
)
 
(190.0
)
 
(172.7
)
 
4
 %
 
10
 %
Net cash management
 
0.3

 
(1.3
)
 
(0.4
)
 
NM

 
225
 %
Net new flows
 
(4.6
)
 
24.3

 
(2.3
)
 
NM

 
NM

Reinvested distributions
 
21.6

 
21.3

 
18.4

 
1
 %
 
16
 %
Net flows
 
17.0

 
45.6

 
16.1

 
(63
)%
 
183
 %
Distributions
 
(26.1
)
 
(26.2
)
 
(22.5
)
 
0
 %
 
16
 %
Acquisitions
 

 
9.3

 

 
(100
)%
 
NM

Appreciation and other 1
 
62.4

 
66.1

 
96.4

 
(6
)%
 
(31
)%
Ending AUM
 
$
898.0

 
$
844.7

 
$
749.9

 
6
 %
 
13
 %
  __________________  
1  
Includes impact of foreign exchange revaluation.
Components of the change in AUM by investment objective were as follows:
(in billions)
 
Equity
 
 
 
Fixed-Income
 
 
 
 
for the fiscal year ended
September 30, 2014
 
Global/International
 
United States
 
Hybrid
 
Tax-Free
 
Taxable
Global/International
 
Taxable
United States
 
Cash
Management
 
Total
AUM at October 1, 2013
 
$
243.9

 
$
97.2

 
$
137.5

 
$
72.4

 
$
228.8

 
$
58.3

 
$
6.6

 
$
844.7

Long-term sales
 
51.5

 
24.3

 
31.5

 
8.2

 
60.8

 
16.3

 

 
192.6

Long-term redemptions
 
(54.1
)
 
(24.7
)
 
(23.4
)
 
(13.2
)
 
(66.7
)
 
(15.4
)
 

 
(197.5
)
Net exchanges
 
0.5

 
0.6

 
1.8

 
(1.0
)
 
(2.1
)
 

 
0.2

 

Net cash management
 

 

 

 

 

 

 
0.3

 
0.3

Net new flows
 
(2.1
)
 
0.2

 
9.9

 
(6.0
)
 
(8.0
)
 
0.9

 
0.5

 
(4.6
)
Reinvested distributions
 
3.9

 
3.5

 
5.3

 
2.4

 
4.9

 
1.6

 

 
21.6

Net flows
 
1.8

 
3.7

 
15.2

 
(3.6
)
 
(3.1
)
 
2.5

 
0.5

 
17.0

Distributions
 
(4.4
)
 
(3.7
)
 
(6.1
)
 
(2.9
)
 
(6.8
)
 
(2.2
)
 

 
(26.1
)
Appreciation (depreciation) and other 1
 
20.2

 
12.3

 
12.4

 
6.2

 
6.2

 
5.2

 
(0.1
)
 
62.4

AUM at September 30, 2014
 
$
261.5

 
$
109.5

 
$
159.0

 
$
72.1

 
$
225.1

 
$
63.8

 
$
7.0

 
$
898.0

__________________  
1  
Includes impact of foreign exchange revaluation.




38


(in billions)
 
Equity
 
 
 
Fixed-Income
 
 
 
 
for the fiscal year ended
September 30, 2013
 
Global/International
 
United States
 
Hybrid
 
Tax-Free
 
Taxable
Global/International
 
Taxable
United
States
 
Cash
Management
 
Total
AUM at October 1, 2012
 
$
214.9

 
$
82.2

 
$
110.1

 
$
83.2

 
$
196.4

 
$
56.7

 
$
6.4

 
$
749.9

Long-term sales
 
45.5

 
17.4

 
26.4

 
12.4

 
95.6

 
18.3

 

 
215.6

Long-term redemptions
 
(50.1
)
 
(21.0
)
 
(19.3
)
 
(16.7
)
 
(66.6
)
 
(16.3
)
 

 
(190.0
)
Net exchanges
 
(0.1
)
 
1.1

 
2.1

 
(2.8
)
 
(1.2
)
 
(0.6
)
 
1.5

 

Net cash management
 

 

 

 

 

 

 
(1.3
)
 
(1.3
)
Net new flows
 
(4.7
)
 
(2.5
)
 
9.2

 
(7.1
)
 
27.8

 
1.4

 
0.2

 
24.3

Reinvested distributions
 
3.4

 
2.0

 
5.1

 
2.4

 
6.7

 
1.7

 

 
21.3

Net flows
 
(1.3
)
 
(0.5
)
 
14.3

 
(4.7
)
 
34.5

 
3.1

 
0.2

 
45.6

Distributions
 
(3.5
)
 
(2.2
)
 
(6.0
)
 
(3.1
)
 
(9.0
)
 
(2.4
)
 

 
(26.2
)
Acquisitions
 

 

 
9.0

 

 
0.3

 

 

 
9.3

Appreciation (depreciation) and other 1
 
33.8

 
17.7

 
10.1

 
(3.0
)
 
6.6

 
0.9

 

 
66.1

AUM at September 30, 2013
 
$
243.9

 
$
97.2

 
$
137.5

 
$
72.4

 
$
228.8

 
$
58.3

 
$
6.6

 
$
844.7

  __________________  
1  
Includes impact of foreign exchange revaluation.

(in billions)
 
Equity
 
 
 
Fixed-Income
 
 
 
 
for the fiscal year ended
September 30, 2012
 
Global/International
 
United States
 
Hybrid
 
Tax-Free
 
Taxable
Global/International
 
Taxable
United States
 
Cash
Management
 
Total
AUM at October 1, 2011
 
$
185.8

 
$
68.4

 
$
101.3

 
$
72.0

 
$
178.8

 
$
46.9

 
$
6.7

 
$
659.9

Long-term sales
 
40.8

 
16.1

 
19.3

 
13.5

 
64.0

 
17.1

 

 
170.8

Long-term redemptions
 
(41.7
)
 
(18.7
)
 
(26.5
)
 
(8.9
)
 
(64.2
)
 
(12.7
)
 

 
(172.7
)
Net exchanges
 
(1.5
)
 
0.2

 
0.5

 
0.3

 
(0.9
)
 
1.4

 

 

Net cash management
 

 

 

 

 

 

 
(0.4
)
 
(0.4
)
Net new flows
 
(2.4
)
 
(2.4
)
 
(6.7
)
 
4.9

 
(1.1
)
 
5.8

 
(0.4
)
 
(2.3
)
Reinvested distributions
 
2.2

 
1.7

 
4.9

 
2.3

 
5.6

 
1.7

 

 
18.4

Net flows
 
(0.2
)
 
(0.7
)
 
(1.8
)
 
7.2

 
4.5

 
7.5

 
(0.4
)
 
16.1

Distributions
 
(2.4
)
 
(1.8
)
 
(5.7
)
 
(3.0
)
 
(7.5
)
 
(2.1
)
 

 
(22.5
)
Appreciation and other 1
 
31.7

 
16.3

 
16.3

 
7.0

 
20.6

 
4.4

 
0.1

 
96.4

AUM at September 30, 2012
 
$
214.9

 
$
82.2

 
$
110.1

 
$
83.2

 
$
196.4

 
$
56.7

 
$
6.4

 
$
749.9

  __________________  
1     Includes impact of foreign exchange revaluation.
AUM increased $53.3 billion or 6% during fiscal year 2014 , primarily due to $62.4 billion of market appreciation and other, which is net of a $6.8 billion decrease due to the impact of foreign exchange revaluation, partially offset by $4.6 billion of net new outflows. The market appreciation occurred in all long-term investment objectives, and reflected positive returns in global markets, as evidenced by increases in the MSCI World and S&P 500 indexes of 13% and 20% . The foreign exchange revaluation was primarily due to strengthening of the U.S. dollar against the Canadian dollar, Euro and Australian dollar. Long-term sales decreased 11% to $192.6 billion from the prior year primarily due to lower sales of global/international fixed-income products, partially offset by higher sales of equity products. Long-term redemptions increased 4% to $197.5 billion primarily due to higher redemptions in equity and hybrid products, partially offset by lower redemptions in tax-free fixed-income products.
AUM increased $94.8 billion or 13% during fiscal year 2013 , primarily driven by $66.1 billion of market appreciation and other and $24.3 billion of net new flows. The market appreciation primarily resulted from equity and



39


hybrid products, consistent with increases in the MSCI World and S&P 500 indexes of 21% and 19% . Long-term sales increased 26% to $215.6 billion from the prior year, primarily due to higher sales of global/international fixed-income and hybrid products. Long-term redemptions increased 10% to $190.0 billion due to higher redemptions in all investment objectives with the exception of hybrid, which had an $11.1 billion redemption from an institutional advisory account in the prior year.
Average AUM by sales region is shown below.
(in billions)
 
 
 
 
 
 
 
2014
vs. 2013
 
2013
vs. 2012
for the fiscal years ended September 30,
 
2014
 
2013
 
2012
 
 
United States
 
$
578.8

 
$
523.8

 
$
461.3

 
11
%
 
14
%
International
 
 
 
 
 
 
 
 
 
 
Europe, the Middle East and Africa
 
149.5

 
137.4

 
112.1

 
9
%
 
23
%
Asia-Pacific
 
91.6

 
83.5

 
74.3

 
10
%
 
12
%
Canada
 
39.0

 
35.2

 
32.1

 
11
%
 
10
%
Latin America 1
 
29.0

 
28.3

 
25.9

 
2
%
 
9
%
Total international
 
$
309.1

 
$
284.4

 
$
244.4

 
9
%
 
16
%
Total
 
$
887.9

 
$
808.2

 
$
705.7

 
10
%
 
15
%
  __________________  
1     Latin America sales region includes North America-based advisors serving non-resident clients.
The mix of average AUM in the United States sales region remained consistent at 65% for fiscal years 2014 , 2013 and 2012 .
Due to the global nature of our business operations, investment management and related services may be performed in locations unrelated to the sales region.
Investment Performance Overview
A key driver of our overall success is the long-term investment performance of our SIPs. A standard measure of the performance of these investment products is the percentage of AUM exceeding benchmarks and peer group medians. The investment performance of our taxable fixed-income products has been strong with AUM frequently outperforming the benchmarks and peer group medians for the one-, three-, five- and ten-year periods ended September 30, 2014 . Our global/international fixed-income funds generated notable results with at least 88% of AUM exceeding the benchmarks and at least 93% of AUM exceeding the peer group medians for all four periods presented, as did our hybrid products with at least 81% of AUM exceeding the benchmarks and at least 92% of AUM exceeding the peer group medians for all four periods. In addition, 100% of AUM in our tax-free fixed-income products exceeded the peer group median for the ten-year period. The performance of our global/international equity products has also been solid with at least 44% of AUM exceeding the benchmarks and peer group medians for the three-, five- and ten-year periods; however, the performance of our United States equity products has mostly lagged the benchmarks and peer group medians during the periods presented.



40


The performance of our products against benchmarks and peer group medians is presented in the table below.
 
 
Benchmark Comparison
 
Peer Group Comparison  1
 
 
% of AUM Exceeding Benchmark
 
% of AUM in Top Two Peer Group Quartiles
as of September 30, 2014
 
1-Year
 
3-Year
 
5-Year
 
10-Year
 
1-Year
 
3-Year
 
5-Year
 
10-Year
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Global/international
 
29
%
 
60
%
 
46
%
 
59
%
 
42
%
 
60
%
 
44
%
 
65
%
United States
 
7
%
 
8
%
 
12
%
 
46
%
 
31
%
 
25
%
 
65
%
 
48
%
Total equity
 
22
%
 
43
%
 
34
%
 
55
%
 
39
%
 
48
%
 
51
%
 
59
%
Hybrid
 
81
%
 
83
%
 
82
%
 
85
%
 
92
%
 
95
%
 
96
%
 
98
%
Fixed-Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tax-free
 
76
%
 
60
%
 
54
%
 
51
%
 
69
%
 
44
%
 
68
%
 
100
%
Taxable
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Global/international
 
89
%
 
89
%
 
88
%
 
94
%
 
93
%
 
98
%
 
98
%
 
99
%
United States
 
71
%
 
78
%
 
60
%
 
56
%
 
45
%
 
65
%
 
60
%
 
60
%
Total fixed-income
 
83
%
 
81
%
 
76
%
 
77
%
 
80
%
 
80
%
 
85
%
 
92
%
_________________  
1  
The peer group rankings are sourced from Lipper, a Thomson Reuters Company, Morningstar or eVestment in each fund’s market and were based on an absolute ranking of returns. © 2014 Morningstar, Inc. All rights reserved. The information herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.
AUM measured in the benchmark and peer group rankings represents 90% and 85% of our total AUM as of September 30, 2014 . The benchmark comparisons are based on each fund s return as compared to a market index that has been selected to be generally consistent with the investment objectives of the fund.
For products with multiple share classes, rankings for the primary share class are applied to the entire product. Private equity funds, certain privately-offered emerging market and real estate funds, cash management funds and funds acquired in fiscal year 2013 are not included. Certain other funds and products were also excluded because of limited benchmark or peer group data. Had this data been available, the results may have been different. These results assume the reinvestment of dividends, are based on data available as of October 16, 2014 and are subject to revision. While we remain focused on achieving strong long-term performance, our future benchmark and peer group rankings may vary from our past performance.
OPERATING REVENUES
The table below presents the percentage change in each operating revenue category.
(in millions)
 
 
 
 
 
 
 
2014
vs. 2013
 
2013
vs. 2012
for the fiscal years ended September 30,
 
2014
 
2013
 
2012
 
 
Investment management fees
 
$
5,565.7

 
$
5,071.4

 
$
4,458.7

 
10
 %
 
14
%
Sales and distribution fees
 
2,546.4

 
2,516.0

 
2,259.3

 
1
 %
 
11
%
Shareholder servicing fees
 
281.1

 
303.7

 
302.5

 
(7
)%
 
0
%
Other, net
 
98.2

 
93.9

 
80.5

 
5
 %
 
17
%
Total Operating Revenues
 
$
8,491.4

 
$
7,985.0

 
$
7,101.0

 
6
 %
 
12
%



41


Investment Management Fees
Investment management fees are generally calculated under contractual arrangements with our SIPs and the products for which we provide sub-advisory services as a percentage of the market value of AUM. Annual rates vary by investment objective and type of services provided. Rates for products sold outside of the U.S. are generally higher than for U.S. products because they are structured to compensate for certain distribution costs.
Investment management fees increased $494.3 million and $612.7 million in fiscal years 2014 and 2013 , primarily due to 10% and 15% increases in average AUM. Average AUM increased in both years in all sales regions and across all long-term investment objectives with the exception of tax-free fixed-income in fiscal year 2014.
Our effective investment management fee rate (investment management fees divided by average AUM) was 62.7 basis points for fiscal years 2014 and 2013 , and 63.2 basis points for fiscal year 2012 . The rate for fiscal year 2014 remained unchanged as the impacts of higher performance fees, a slightly higher weighting of higher fee products in the U.S. equity objective and a change in the pricing structure in Canada were offset by the impacts of slightly higher weightings of AUM in U.S. products and in lower fee products in the global/international equity and fixed-income objectives. The pricing structure change in Canada resulted in the bundling of investment management and servicing fees effective January 1, 2014. The rate decrease in fiscal year 2013 primarily resulted from fee rebates, which were included in distribution expense in the prior year.
Performance-based investment management fees were $50.9 million , $20.1 million and $13.6 million for fiscal years 2014 , 2013 and 2012 , with the increases primarily related to fund of hedge funds products.
U.S. industry asset-weighted average management fee rates were as follows 1 :
(in basis points)
 
Industry Average
for the fiscal years ended September 30,
 
2014
 
2013
 
2012
Equity
 
 
 
 
 
 
Global/international
 
58
 
60
 
61
United States
 
41
 
44
 
45
Hybrid
 
53
 
39
 
39
Fixed-Income
 
 
 
 
 
 
Tax-free
 
35
 
36
 
37
Taxable
 
 
 
 
 
 
Global/international
 
55
 
57
 
58
United States
 
37
 
38
 
37
Cash Management
 
11
 
13
 
13
 ________________
1  
U.S. industry asset-weighted average management fee rates were calculated using information available from Lipper, a Thomson Reuters Company, as of September 30, 2014 , 2013 and 2012 and include all U.S.-registered open-end funds that reported expense data to Lipper as of the funds’ most recent annual report date, and for which expenses were equal to or greater than zero. As defined by Lipper, management fees include fees from providing advisory and fund administration services. The averages combine retail and institutional funds data and include all share classes and distribution channels, without exception. Variable annuity and fund-of-funds products are not included. The increase in average rates in the hybrid objective reflects the addition of alternative products to this category.
Our actual effective investment management fee rates are generally higher than the U.S. industry average rates as we actively manage our products and have a higher level of international AUM, both of which generate higher fees. Changes to our effective investment management fee rates in the U.S. have not varied significantly from changes in industry rates, however the changes in our rates during fiscal year 2014 were less than the changes in the industry rates.
Our product offerings and global operations are diverse. As such, the impact of future changes in the market value of AUM on investment management fees will be affected by the relative mix of investment objective, geographic region, distribution channel and investment vehicle of the assets.



42


Sales and Distribution Fees
We earn fees from the sale of certain classes of SIPs on which investors pay a commission at the time of purchase (“commissionable sales”). Sales commissions are reduced or eliminated on some share classes and for some sale transactions depending upon the amount invested and the type of investor. Therefore, sales fees will change with the overall level of gross sales, the size of individual transactions, and the relative mix of sales between different share classes and types of investors.
Globally, our mutual funds and certain other products generally pay us distribution fees in return for sales, marketing and distribution efforts on their behalf. Specifically, the majority of U.S.-registered mutual funds, with the exception of certain of our money market mutual funds, have adopted distribution plans under Rule 12b-1 (the “Rule 12b-1 Plans”) promulgated under the Investment Company Act of 1940. The Rule 12b-1 Plans permit the mutual funds to pay us for marketing, marketing support, advertising, printing and sales promotion services relating to the distribution of their shares, subject to the Rule 12b-1 Plans’ limitations on amounts based on average daily net AUM. Similar arrangements exist for the distribution of our non-U.S. funds.
We pay substantially all of our sales and distribution fees to the financial advisers and other intermediaries who sell our SIPs to the public on our behalf. See the description of sales, distribution and marketing expenses below.
Sales and distribution fees by revenue driver are presented below.
(in millions)
 
 
 
 
 
 
 
2014
vs. 2013
 
2013
vs. 2012
for the fiscal years ended September 30,
 
2014
 
2013
 
2012
 
 
Asset-based fees
 
$
1,823.3

 
$
1,693.1

 
$
1,522.8

 
8
 %
 
11
%
Sales-based fees
 
711.7

 
810.6

 
725.7

 
(12
)%
 
12
%
Contingent sales charges
 
11.4

 
12.3

 
10.8

 
(7
)%
 
14
%
Sales and Distribution Fees
 
$
2,546.4

 
$
2,516.0

 
$
2,259.3

 
1
 %
 
11
%
Asset-based distribution fees increased $130.2 million in fiscal year 2014 primarily due to a 6% increase in the related average AUM and a higher mix of equity and hybrid AUM. Equity and hybrid products typically generate higher distribution fees than fixed-income products. Asset-based distribution fees increased $170.3 million in fiscal year 2013 primarily due to a 12% increase in the related average AUM.
Sales-based fees decreased $98.9 million in fiscal year 2014 primarily due to a 10% decrease in total commissionable sales, as well as a lower mix of U.S. product commissionable sales. Sales-based fees increased $84.9 million in fiscal year 2013 primarily due to an 18% increase in total commissionable sales, partially offset by a lower mix of U.S. product sales. U.S. products typically generate higher sales fees than non-U.S. products. Commissionable sales represented 12% of total sales for fiscal years 2014 and 2013 , and 13% for fiscal year 2012 .
Contingent sales charges are earned from investor redemptions within a contracted period of time. These charges are levied only on certain shares sold without a front-end sales charge, and vary with the mix of redemptions of these shares.
Shareholder Servicing Fees
We receive shareholder servicing fees as compensation for providing transfer agency services, which include providing customer statements, transaction processing, customer service and tax reporting. These fees are generally fixed charges per shareholder account that vary with the particular type of fund and the service being rendered. In some instances, we charge SIPs these fees based on the level of AUM. In the U.S., transfer agency service agreements provide that accounts closed in a calendar year generally remain billable at a reduced rate through the second quarter of the following calendar year. In Canada, such agreements that were in place through December 31, 2013 provided that accounts closed in the calendar year remain billable for four months after the end of the calendar year. Accordingly, the level of fees varies with the change in open accounts and the level of closed accounts that remain billable. Approximately 1.2 million accounts closed in the U.S. during calendar years 2013 and 2012 . A change to the pricing



43


structure in Canada effective January 1, 2014 resulted in the bundling of investment management and servicing fees, therefore shareholder servicing fees are no longer charged to SIPs in Canada.
Other services include tax planning and preparation for individual and trust clients, for which fees are primarily account based, and trustee services, for which fees are based on the level of AUM.
Shareholder servicing fees decreased $22.6 million in fiscal year 2014 , primarily due to the change in fee structure in Canada. The Canada decrease of $33.0 million was partially offset by a $4.7 million increase from SIPs in the U.S. primarily due to a 6% increase in active accounts, and increases of $3.2 million in trustee services fees and $1.9 million from SIPs in Europe, both primarily due to higher levels of related AUM.
Shareholder servicing fees increased $1.2 million in fiscal year 2013 primarily due to a $5.5 million increase in fees from a 7% increase in active accounts in the U.S., a $4.4 million increase in fees in Europe primarily due to higher levels of AUM and a $1.3 million increase in other services fees, substantially offset by a $7.6 million decrease in fees from closed accounts in the U.S. that remained billable at a reduced rate and a $2.4 million decrease in fees from a 6% decrease in billable shareholder accounts in Canada.
Other, Net
Other, net revenue increased $4.3 million and $13.4 million in fiscal years 2014 and 2013 , primarily due to $6.6 million and $17.1 million increases in interest and dividend income from consolidated SIPs, partially offset by $3.9 million decreases in banking-related net revenues in both years as we wound down and terminated our banking business. The increase in fiscal year 2014 also includes $0.8 million from higher custody fees. During fiscal year 2014 we ceased accepting deposits and originating loans, and deregistered as a bank holding company.
OPERATING EXPENSES
The table below presents the percentage change in each operating expense category.
(in millions)
 
2014
 
2013
 
2012
 
2014
vs. 2013
 
2013
vs. 2012
for the fiscal years ended September 30,
 
 
 
 
 
Sales, distribution and marketing
 
$
3,088.2

 
$
3,042.1

 
$
2,739.7

 
2
%
 
11
%
Compensation and benefits
 
1,467.9

 
1,384.5

 
1,255.5

 
6
%
 
10
%
Information systems and technology
 
216.3

 
191.1

 
182.9

 
13
%
 
4
%
Occupancy
 
137.7

 
134.2

 
129.9

 
3
%
 
3
%
General, administrative and other
 
360.1

 
311.8

 
277.8

 
15
%
 
12
%
Total Operating Expenses
 
$
5,270.2

 
$
5,063.7

 
$
4,585.8

 
4
%
 
10
%
Sales, Distribution and Marketing
Sales, distribution and marketing expenses primarily consist of payments to financial advisers, broker/dealers and other third parties for providing services to investors in our SIPs, including marketing support services. Sales expenses are determined as percentages of sales and are incurred from the same commissionable sales transactions that generate sales fee revenues. Distribution expenses are determined as percentages of AUM and are incurred from assets that generate either distribution fees or higher levels of investment management fees. Marketing support expenses are based on AUM, sales or a combination thereof. Also included is the amortization of deferred sales commissions related to up-front commissions on shares sold without a front-end sales charge to investors. The deferred sales commissions are amortized over the periods in which commissions are generally recovered from related revenues.



44


Sales, distribution and marketing expenses by cost driver are presented below.
(in millions)
 
2014
 
2013
 
2012
 
2014
vs. 2013
 
2013
vs. 2012
for the fiscal years ended September 30,
 
 
 
 
 
Asset-based expenses
 
$
2,307.2

 
$
2,148.9

 
$
1,946.9

 
7
 %
 
10
%
Sales-based expenses
 
653.2

 
755.2

 
662.9

 
(14
)%
 
14
%
Amortization of deferred sales commissions
 
127.8

 
138.0

 
129.9

 
(7
)%
 
6
%
Sales, Distribution and Marketing
 
$
3,088.2

 
$
3,042.1

 
$
2,739.7

 
2
 %
 
11
%
Asset-based expenses increased $158.3 million in fiscal year 2014 primarily due to distribution expense increases of $98.7 million related to U.S. products and $49.6 million related to non-U.S. products. The distribution expense increases primarily resulted from higher related average AUM of 7% in the U.S and 3% internationally, and a higher mix of equity and hybrid products globally, which have higher expense rates than fixed-income products.
Asset-based expenses increased $202.0 million in fiscal year 2013 primarily due to distribution expense increases of $102.3 million related to non-U.S. products and $90.8 million related to U.S. products. The distribution expense increases primarily resulted from higher related average AUM of 15% internationally and 9% in the U.S. The non-U.S. product expense increase was partially offset by a $47.4 million decrease related to fee rebates. The U.S. product expenses were also impacted by a slightly higher mix of Class C assets, which have higher expense rates than other U.S. product classes.
Distribution expenses, which are typically higher for non-U.S. products, are generally not directly correlated with distribution fee revenues due to international fee structures which provide for recovery of certain distribution costs through investment management fees.
Sales-based expenses decreased $102.0 million in fiscal year 2014 primarily due to a 10% decrease in total commissionable sales, as well as a lower mix of U.S. product commissionable sales. Sales-based expenses increased $92.3 million in fiscal year 2013 primarily due to an 18% increase in total commissionable sales, partially offset by a lower mix of U.S. product sales. U.S. products typically generate higher sales commissions than non-U.S. products.
Amortization of deferred sales commissions decreased $10.2 million in fiscal year 2014 primarily due to lower sales of U.S. Class C shares, which are sold without a front-end sales charge to investors. Amortization of deferred sales commissions increased $8.1 million in fiscal year 2013 primarily due to higher sales of U.S. Class C shares.
Compensation and Benefits
Compensation and benefit expenses increased $83.4 million in fiscal year 2014 due to increases in salaries, wages and benefits, and variable compensation. Salaries, wages and benefits increased $49.9 million primarily due to higher staffing levels and annual merit salary adjustments that were effective December 1, 2013. Variable compensation increased $33.5 million primarily due to higher bonus expense based on our performance.
Compensation and benefit expenses increased $129.0 million in fiscal year 2013 due to increases in variable compensation and salaries, wages and benefits. Variable compensation increased $71.2 million primarily due to higher bonus expense based on our performance. Salaries, wages and benefits increased $57.8 million primarily due to higher staffing levels and annual merit salary adjustments that were effective December 1, 2012, partially offset by a $6.8 million decrease in severance benefits related to employee terminations.
Variable compensation as a percentage of compensation and benefits was 39% for fiscal years 2014 and 2013 , and 38% for fiscal year 2012 . At September 30, 2014 , our global workforce had increased to approximately 9,300 employees from approximately 9,000 employees at September 30, 2013 .
We continue to place a high emphasis on our pay for performance philosophy. As such, any changes in the underlying performance of our SIPs or changes in the composition of our incentive compensation offerings could have an impact on compensation and benefit expenses going forward. However, in order to attract and retain talented individuals, our level of compensation and benefit expenses may increase more quickly or decrease more slowly than our revenue.



45


Information Systems and Technology
Information systems and technology expenses increased $25.2 million and $8.2 million in fiscal years 2014 and 2013 primarily due to higher investments in strategic technology projects for operational purposes and higher external data service costs.
Details of capitalized information systems and technology costs are shown below.
(in millions)
 
 
 
 
 
 
for the fiscal years ended September 30,
 
2014
 
2013
 
2012
Net carrying value at beginning of year
 
$
93.5

 
$
90.3

 
$
67.9

Additions, net of disposals
 
37.4

 
43.2

 
54.9

Amortization
 
(45.4
)
 
(40.0
)
 
(32.5
)
Net Carrying Value at End of Year
 
$
85.5

 
$
93.5

 
$
90.3

Occupancy
We conduct our worldwide operations using a combination of leased and owned facilities. Occupancy expenses include rent and other facilities-related costs including depreciation and utilities.
Occupancy expenses increased $3.5 million and $4.3 million in fiscal years 2014 and 2013 primarily due to increases in rent expense and building maintenance costs. Higher property taxes also contributed to the increase in fiscal year 2014 .
General, Administrative and Other
General, administrative and other operating expenses primarily consist of fund-related service fees payable to external parties, corporate travel and entertainment, advertising and promotion costs, professional fees, and other miscellaneous expenses. Effective January 1, 2014, we assumed responsibility for certain operating expenses of our Canadian funds in exchange for an AUM-based administration fee.
General, administrative and other operating expenses increased $48.3 million in fiscal year 2014 primarily due to Canadian fund expenses, higher levels of third-party servicing and professional fees, and consulting fees related to private equity performance fees. The increase due to Canadian fund expenses was $17.4 million. Third-party servicing fees increased $15.7 million primarily due to a pricing structure change and higher subadvisory expenses. Professional fees increased $8.4 million due to various corporate activities including the winding down of our private banking business. We incurred $7.6 million of consulting fees related to private equity performance fees in fiscal year 2014.
General, administrative and other operating expenses increased $34.0 million in fiscal year 2013 primarily due to the acquisition of K2 Advisors Holdings, LLC (“K2”) and higher levels of general business activity. The K2 acquisition resulted in a $9.5 million increase in amortization of intangible assets and a $7.7 million increase in the related contingent consideration liability. Higher business activity levels resulted in increases of $5.1 million in corporate travel expenses, $4.5 million in advertising and promotion expenses and $3.4 million in professional fees.
We are committed to investing in advertising and promotion in response to changing business conditions, and to advance our products where we see continued or potential new growth opportunities. As a result of potential changes in our strategic marketing campaigns, the level of advertising and promotion expenditures may increase more rapidly, or decrease more slowly, than our revenues.



46


OTHER INCOME (EXPENSES)
Other income (expenses) were as follows:
(in millions)
 
 
 
 
 
 
for the fiscal years ended September 30,
 
2014
 
2013
 
2012
Investment and other income, net
 
$
235.8

 
$
152.2

 
$
199.7

Interest expense
 
(47.4
)
 
(46.9
)
 
(36.7
)
Other Income, Net
 
$
188.4

 
$
105.3

 
$
163.0

Investment and other income, net consists primarily of income (losses) from equity method investees; realized gains (losses) on sale of available-for-sale investment securities; gains (losses) on investments of consolidated SIPs, trading investment securities, and assets and liabilities of consolidated variable interest entities (“VIEs”); foreign currency exchange gains (losses) and dividend and interest income.
Other income, net increased $83.1 million in fiscal year 2014 primarily due to $32.1 million of foreign currency exchange net gains as the U.S. dollar strengthened against the Euro as compared to $30.9 million of net losses in the prior year, and $7.1 million of net gains from changes in the fair value of the assets and liabilities of consolidated collateralized loan obligations (“CLOs”) as compared to $16.0 million of net losses in the prior year.
Other income, net decreased $57.7 million in fiscal year 2013 primarily due to market volatility that resulted in net losses and lower net gains on certain investments, foreign currency exchange losses, lower dividend income, and higher interest expense, partially offset by net gains from securities held by consolidated SIPs and higher realized gains on available-for-sale investment securities. Changes in the fair value of the assets and liabilities of consolidated CLOs resulted in $16.0 million of net losses as compared to $25.6 million of net gains in the prior year, and lower market valuations resulted in a $26.0 million decrease in net gains on trading investment securities. Additionally, the U.S. dollar weakened against the Euro, resulting in foreign currency exchange net losses of $30.9 million as compared to $7.1 million of net gains in the prior year. Dividend income decreased $11.7 million primarily due to a higher mix of investments in short duration fixed-income SIPs with lower yields. Interest expense increased $10.2 million primarily due to debt issued in September 2012 and costs related to early redemption of previously issued debt. These changes were partially offset by $42.4 million of net gains from securities held by consolidated SIPs as compared to $15.9 million of net losses in the prior year, and a $9.9 million increase in realized gains on available-for-sale investment securities.
Significant portions of the net gains (losses) of consolidated CLOs and SIPs are offset in noncontrolling interests in our consolidated statements of income.
Our investments in SIPs include initial cash investments made in the course of launching mutual fund and other investment product offerings, as well as investments for other business reasons. The market conditions that impact our AUM similarly affect the investment income earned or losses incurred on our SIPs investments.



47


The consolidated cash, cash equivalents and investments portfolio by investment objective at September 30, 2014 was as follows:
(in millions)
 
Total Portfolio
 
Percent of Total Portfolio
 
Trading Securities Included in Portfolio
 
Percent of Total Trading Securities
 
Assets of Consolidated SIPs and VIEs Included in Total Portfolio
 
Percent of Total
Cash and Cash Equivalents
 
$
7,596.0

 
62
%
 
$

 
0
%
 
$
119.2

 
5
%
Investment Securities
 
 
 
 
 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
Global/international
 
535.5

 
4
%
 

 
0
%
 
481.4

 
21
%
United States
 
9.9

 
0
%
 

 
0
%
 

 
0
%
Total equity
 
545.4

 
4
%
 

 
0
%
 
481.4

 
21
%
Hybrid
 
409.1

 
3
%
 
0.5

 
0
%
 
209.9

 
9
%
Fixed-Income
 
 
 
 
 
 
 
 
 
 
 
 
Tax-free
 
11.4

 
0
%
 

 
0
%
 

 
0
%
Taxable
 
 
 
 
 
 
 
 
 
 
 
 
Global/international
 
992.6

 
8
%
 
82.2

 
6
%
 
653.2

 
29
%
United States
 
2,035.2

 
17
%
 
1,194.8

 
94
%
 
817.6

 
36
%
Total fixed-income
 
3,039.2

 
25
%
 
1,277.0

 
100
%
 
1,470.8

 
65
%
Total Investment Securities
 
3,993.7

 
32
%
 
1,277.5

 
100
%
 
2,162.1

 
95
%
Other Investments
 
684.5

 
6
%
 

 
0
%
 

 
0
%
Total Cash and Cash Equivalents and Investments
 
$
12,274.2

 
100
%
 
$
1,277.5

 
100
%
 
$
2,281.3

 
100
%
 
Investments of consolidated SIPs and VIEs are generally assigned a classification in the table above based on the investment objective of the consolidated entity holding the securities. Other investments include $521.4 million of investments in equity method investees that hold securities that are subject to market valuation risks and primarily have a global/international equity investment objective.  
TAXES ON INCOME
As a multi-national corporation, we provide many of our services from locations outside the U.S. Some of these jurisdictions have lower tax rates than the U.S. The mix of pre-tax income subject to these lower rates, when aggregated with income originating in the U.S., produces a lower overall effective income tax rate than existing U.S. federal and state income tax rates.
Our effective income tax rate for fiscal year 2014 was 29.3% as compared to 28.3% in fiscal year 2013 and 28.5% in fiscal year 2012 . The rate increase in fiscal year 2014 was primarily due to higher earnings in higher tax jurisdictions, partially offset by higher net income attributable to noncontrolling interests. The decrease in fiscal year 2013 was primarily due to net income attributable to noncontrolling interests as compared to net losses in the prior year, partially offset by the impact of changes in state tax legislation in the prior year.
In certain countries our income is subject to reduced tax rates due to tax rulings. One of these rulings expired on September 30, 2014 and was replaced with a new ruling at a higher tax rate on October 1, 2014. The higher tax rate is expected to result in an increase to future years income tax expense, with an estimated increase of approximately $25 million in fiscal year 2015. However, it is reasonably possible that the increase in fiscal year 2015 may be offset by the recognition of tax benefits as a result of the expiration of statutes of limitations in various U.S. and non-U.S. tax jurisdictions.



48


The effective income tax rate for future reporting periods will continue to reflect the relative contributions of non-U.S. earnings that are subject to reduced tax rates and that are not currently included in U.S. taxable income. Changes in tax rates in these jurisdictions may affect our effective income tax rate and net income.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows were as follows:
(in millions)
 
 
 
 
 
 
for the fiscal years ended September 30,
 
2014
 
2013
 
2012
Cash Flow Data
 
 
 
 
 
 
Operating cash flows
 
$
2,138.0

 
$
2,035.7

 
$
1,066.2

Investing cash flows
 
390.6

 
232.9

 
873.4

Financing cash flows
 
(1,195.3
)
 
(2,018.1
)
 
(1,084.9
)
Net cash provided by operating activities increased in fiscal year 2014 primarily due to higher net income, a higher increase in other liabilities primarily resulting from the consolidation impact of short positions of consolidated SIPs, and a lower increase in receivables, prepaid expenses and other. These increases were partially offset by a net increase in trading securities of consolidated SIPs, a lower increase in commissions payable, and a lower increase in income taxes payable. Net cash provided by investing activities increased mainly due to lower purchases, net of liquidations, of investments by consolidated VIEs. Net cash used in financing activities decreased primarily due to lower dividends paid on common stock, payments on debt in the prior year, and higher subscriptions in consolidated SIPs by noncontrolling interests, partially offset by a decrease in deposits and higher repurchases of common stock.
Net cash provided by operating activities increased in fiscal year 2013 primarily due to a lower net increase in trading securities, higher net income and an increase in income taxes payable as compared to a decrease in the prior year. Net cash provided by investing activities decreased mainly due to lower liquidations of investments, cash recognized due to consolidation of a VIE in the prior year, and lower proceeds from the sale of loans. Net cash used in financing activities increased primarily due to payments on debt as compared to proceeds from issuance of debt in the prior year and higher dividends paid on common stock, partially offset by lower repurchases of common stock.
The assets and liabilities of our consolidated VIEs and consolidated SIPs attributable to third-party investors do not impact our liquidity and capital resources. We have no right to these consolidated entities assets, other than our direct equity investment in them, and/or investment management fees earned from them. The debt holders of these consolidated entities have no recourse to our assets beyond the level of our direct investment, therefore we bear no other risks associated with the entities liabilities. Accordingly, the assets and liabilities of our consolidated VIEs and consolidated SIPs, other than our direct investments in them, are excluded from the amounts and discussion below.



49


Our liquid assets and debt consisted of the following:
(in millions)
 
 
 
 
 
 
as of September 30,
 
2014
 
2013
 
2012
Assets
 
 
 
 
 
 
Cash and cash equivalents
 
$
7,476.8

 
$
6,186.0

 
$
5,784.3

Receivables
 
910.8

 
982.1

 
823.8

Investments
 
2,239.2

 
2,280.8

 
2,266.7

Total Liquid Assets
 
$
10,626.8

 
$
9,448.9

 
$
8,874.8

Liabilities
 
 
 
 
 
 
Debt
 
 
 
 
 
 
Federal Home Loan Bank advances
 
$

 
$

 
$
69.0

Senior notes
 
1,198.2

 
1,197.7

 
1,497.1

Total Debt
 
$
1,198.2

 
$
1,197.7

 
$
1,566.1

Liquidity
Liquid assets consist of cash and cash equivalents, receivables and certain investments. Cash and cash equivalents primarily consist of cash on hand, deposits with financial institutions, money market funds, securities of U.S. government-sponsored enterprises and the U.S. Treasury, and time deposits. Liquid investments consist of trading and available-for-sale securities, investments in equity method investees consisting of mutual fund SIPs, direct investments in redeemable consolidated SIPs, and time deposits with maturities greater than three months.
Cash and cash equivalents at September 30, 2014 increased primarily due to net cash provided by operating and investing activities, partially offset by net cash used in financing activities. The percentages of cash and cash equivalents held by our U.S. and non-U.S. operations were 36% and 64% at September 30, 2014 , and 37% and 63% at September 30, 2013 .  
We utilize a significant portion of our liquid assets to satisfy operational and regulatory requirements and fund capital contributions relating to our SIPs. Certain of our subsidiaries are required by our internal policy or regulation to maintain minimum levels of capital which are partially maintained by retaining cash and cash equivalents. As a result, such subsidiaries may be restricted in their ability to transfer cash to their parent companies. Also, as a multi-national corporation, we operate in various locations outside of the U.S. Certain of our non-U.S. subsidiaries are subject to regulatory or contractual repatriation restrictions or requirements. Such restrictions and requirements limit our ability to transfer cash between various international jurisdictions, including repatriation to the U.S. Should we require more capital in the U.S. than is generated domestically, we could elect to reduce the level of discretionary activities, such as share repurchases, or we could elect to repatriate future earnings from non-U.S. jurisdictions or raise capital through debt or equity issuance. Certain of these alternatives could result in higher effective tax rates, increased interest expense or other dilution to our earnings. At September 30, 2014 , our U.S. and non-U.S. subsidiaries held $1,716.8 million and $2,047.7 million of liquid assets to satisfy operational and regulatory requirements and fund capital contributions to our SIPs, as compared to $1,864.7 million and $2,178.7 million held at September 30, 2013 . Included in these amounts were U.S. and non-U.S. liquid assets that were restricted from transfer to Franklin and other subsidiaries of $86.8 million and $354.5 million at September 30, 2014 and $551.0 million and $334.6 million at September 30, 2013 .
Capital Resources
We believe that we can meet our present and reasonably foreseeable operating cash needs and future commitments through existing liquid assets, continuing cash flows from operations, the ability to issue debt or equity securities and borrowing capacity under our uncommitted private placement program.
In prior fiscal years, we issued senior unsecured and unsubordinated notes for general corporate purposes, to redeem outstanding notes and to finance an acquisition. At September 30, 2014 , $1,198.2 million of the notes were outstanding with an aggregate face value of $1,200.0 million . The notes consist of $250.0 million issued at a fixed



50


interest rate of 3.125%  per annum which mature in 2015 , $300.0 million issued at a fixed interest rate of 1.375% per annum which mature in 2017 , $350.0 million issued at a fixed interest rate of 4.625% per annum which mature in 2020 and $300.0 million issued at a fixed interest rate of 2.800%  per annum which mature in 2022 .
Interest on the notes is payable semi-annually. The notes contain an optional redemption feature that allows us to redeem each series of notes prior to maturity in whole or in part at any time, at a make-whole redemption price. The indentures governing the notes contain limitations on our ability and the ability of our subsidiaries to pledge voting stock or profit participating equity interests in our subsidiaries to secure other debt without similarly securing the notes equally and ratably. The indentures also include requirements that must be met if we consolidate or merge with, or sell all of our assets to, another entity. As of September 30, 2014 , we were in compliance with the covenants of the notes.
At September 30, 2014 , we had $500.0 million of short-term commercial paper available for issuance under an uncommitted private placement program which has been inactive since April 2012 . In July 2014 , we closed our account at the Federal Reserve Bank of New York resulting in the termination of our bank lines of credit under the Federal Reserve System and our ability to borrow through the secured Federal Reserve Bank short-term discount window. These closures are a result of the termination of our banking activities, and are not expected to have a material impact on our future liquidity.
Our ability to access the capital markets in a timely manner depends on a number of factors, including our credit rating, the condition of the global economy, investors’ willingness to purchase our securities, interest rates, credit spreads and the valuation levels of equity markets. If we are unable to access capital markets in a timely manner, our business could be adversely impacted.
Uses of Capital
We expect that our main uses of cash will be to invest in and grow our business, acquire shares of our common stock, invest in our SIPs, fund property and equipment purchases, pay operating expenses of the business, enhance technology infrastructure and business processes, pay stockholder dividends and repay and service debt.
We declare and pay dividends on a quarterly basis. We declared regular cash dividends of $0.48 per share ( $0.12 per share for each quarter) in fiscal year 2014 , and regular cash dividends of $0.39 per share ( $0.097 per share for each of the first three quarters and $0.10 per share for the fourth quarter) and a special cash dividend of $1.00 per share in fiscal year 2013 . We currently expect to continue paying comparable regular cash dividends on a quarterly basis to holders of our common stock depending upon earnings and other relevant factors.
We maintain a stock repurchase program to manage our equity capital with the objective of maximizing shareholder value. Our stock repurchase program is effected through regular open-market purchases and private transactions in accordance with applicable laws and regulations. During fiscal years 2014 and 2013 , we repurchased 11.5 million and 10.5 million shares of our common stock at a cost of $622.2 million and $491.0 million . In December 2013, our Board of Directors authorized the repurchase of up to 30.0 million additional shares of our common stock under the stock repurchase program. At September 30, 2014 , 29.8 million shares remained available for repurchase under the program, which is not subject to an expiration date.
During fiscal year 2014 , we redeemed $3.2 million , net of investments, from our SIPs. During fiscal year 2013 , we invested $17.8 million , net of redemptions, in our SIPs.
In November 2012, we acquired an ownership interest of approximately 69% of K2. The purchase consideration included a $182.9 million cash investment in K2, which was primarily used to retire $176.5 million of debt immediately following the acquisition.
The funds that we manage have their own resources available for purposes of providing liquidity to meet shareholder redemptions, including securities that can be sold or provided to investors as in-kind redemptions, and lines of credit. While we have no contractual obligation to do so, we may voluntarily elect to provide the funds with direct or indirect financial support based on our business objectives.



51


CONTRACTUAL OBLIGATIONS, COMMITMENTS AND CONTINGENT LIABILITIES
The following table summarizes our contractual obligations, commitments and contingent liabilities.
(in millions)
 
Payments Due by Period
as of September 30, 2014
 
Total
 
Less than
1 Year
 
1-3 Years
 
3-5 Years
 
More than 5 Years
Debt
 
 
 
 
 
 
 
 
 
 
Principal
 
$
1,198.2

 
$
250.0

 
$
299.0

 
$

 
$
649.2

Interest
 
184.5

 
36.5

 
57.4

 
49.2

 
41.4

Operating leases
 
187.4

 
47.2

 
62.5

 
35.6

 
42.1

Purchase obligations 1
 
133.4

 
81.2

 
41.9

 
6.5

 
3.8

Total Contractual Obligations
 
1,703.5

 
414.9

 
460.8

 
91.3

 
736.5

Committed capital contributions 2
 
35.7

 
35.7

 

 

 

Contingent consideration liabilities 3
 
148.9

 
8.6

 
48.5

 
91.8

 

Total Contractual Obligations, Commitments and Contingent Liabilities
 
$
1,888.1

 
$
459.2

 
$
509.3

 
$
183.1

 
$
736.5

  __________________  
1
Purchase obligations include contractual amounts that will be due to purchase goods and services to be used in our operations and may be canceled at earlier times than those indicated under certain conditions that may include termination fees.
2  
Committed capital contributions relate to discretionary commitments to invest in SIPs and other investment products. Generally, the timing of the funding of these commitments is unknown as they are callable on demand at any time prior to the expiration of the commitment periods.
3  
Contingent consideration liabilities primarily relate to the Company’s commitment to acquire the remaining interests in K2.
The debt holders of consolidated VIEs and consolidated SIPs have no recourse to our assets beyond the level of our direct investments, therefore we bear no risks associated with these entities liabilities and have not included them in the table above. See Note 12 – Variable Interest Entities and Consolidated Sponsored Investment Products, in the notes to consolidated financial statements in Item 8 of Part II of this Form 10-K.
At September 30, 2014 , our consolidated balance sheet includes liabilities for unrecognized tax benefits of $118.2 million and related accrued interest of $18.0 million (see Note 13 – Taxes on Income in the notes to consolidated financial statements in Item 8 of Part II of this Form 10-K). The amounts of unrecognized tax benefits and related interest that are expected to be paid in the next twelve months are insignificant. However, because of the high degree of uncertainty regarding the timing of future cash outflows of liabilities for unrecognized tax benefits, a reasonable estimate of the period of cash payments beyond the next twelve months from the balance sheet date of September 30, 2014 cannot be made. Consequently, unrecognized tax benefits have not been included in the table above.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. These estimates, judgments and assumptions are affected by our application of accounting policies. Actual results may differ from those estimates under different assumptions. Described below are the accounting policies that we believe are most critical to understanding our results of operations and financial position. For additional information about our accounting policies, see Note 1 - Significant Accounting Policies in the notes to consolidated financial statements in Item 8 of Part II of this Form 10-K.
Consolidation
We consolidate our subsidiaries and SIPs in which we have a controlling financial interest. We have a controlling financial interest when we own a majority of the voting interest in an entity or are the primary beneficiary of a VIE. We also consolidate non-VIE limited partnerships and similar structures that we control.



52


A VIE is an entity in which the equity investment holders have not contributed sufficient capital to finance its activities or the equity investment holders do not have defined rights and obligations normally associated with an equity investment. The assessment of whether an entity is a VIE or voting interest entity (“VOE”) involves judgment and analysis on a structure by structure basis. When performing the assessment we consider factors such as the entity s legal organization and capital structure, the rights of the equity investment holders and our contractual involvement with and ownership interest in the entity. Our VIEs are all investment entities and our variable interests consist of our equity ownership in and/or investment management fees earned from these entities.
A limited partnership or similar structure entity for which we are the general partner or managing member, our aggregate investment is not substantive and the limited partners or other investors do not have the substantive ability to remove us as the general partner or managing member or otherwise participate in the decision making of the entity is a VIE. Otherwise the entity is a VOE and we are presumed to control the entity unless the limited partners or other investors have the substantive ability to remove us as the general partner or managing member or otherwise participate in the decision-making of the entity.
We use two models for determining whether we are the primary beneficiary of VIEs. For all VIEs with the exception of CLOs, we are the primary beneficiary if we have the majority of the risks or rewards of ownership, which we determine using expected cash flows scenarios. For CLOs, we are the primary beneficiary if we have the power to direct the activities that most significantly impact the VIE s economic performance and the obligation to absorb losses of or right to receive benefits from the VIE that could potentially be significant to the VIE.
Under both models, the key estimates and assumptions used in the analyses include the amount of AUM, investment management fee rates, the life of the investment product, prepayment rates, and the discount rate. These estimates and assumptions are subject to variability. For example, AUM is impacted by market volatility and the level of sales, redemptions, contributions, withdrawals and dividend reinvestments of mutual fund shares that occur daily. In addition, third-party purchases and redemptions, which are outside of our control, can impact our evaluation. Collateralized assets of CLOs are impacted by market volatility and prepayment rates. There is judgment involved in assessing whether we have the power to direct the activities that most significantly impact VIEs economic performance and the obligation to absorb losses of or right to receive benefits from VIEs that could potentially be significant to the VIEs. As of September 30, 2014 , we were the primary beneficiary of three CLOs and two other SIP VIEs.



53


Fair Value Measurements
We use a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based on whether the inputs to those valuation techniques are observable or unobservable. The three levels of fair value hierarchy are set forth below. Our assessment of the hierarchy level of the assets or liabilities measured at fair value is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Transfers between levels are recognized at the end of each quarter.
    
Level 1
Unadjusted quoted prices in active markets for identical assets or liabilities.
 
 
Level 2
Observable inputs other than Level 1 quoted prices, such as non-binding quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable or corroborated by observable market data. Level 2 quoted prices are generally obtained from two independent third-party brokers or dealers, including prices derived from model-based valuation techniques for which the significant assumptions are observable in the market or corroborated by observable market data. Quoted prices are validated through price variance analysis, subsequent sales testing, stale price review, price comparison across pricing vendors and due diligence reviews of third-party vendors.
 
 
Level 3
Unobservable inputs that are supported by little or no market activity. These inputs require significant management judgment and reflect our estimation of assumptions that market participants would use in pricing the asset or liability.
The fair values for Level 3 assets and liabilities are determined using various methodologies in accordance with our global valuation and pricing policy which defines valuation and pricing conventions for each security type. When available, we measure fair value based on the reported net asset value (“NAV”) of underlying investments or independent third-party broker or dealer price quotes. These inputs are evaluated for reasonableness through various procedures which include due diligence reviews of the third parties, price comparisons across pricing vendors, stale price reviews and subsequent sales testing. If these inputs are not available, we primarily employ a market-based method, using purchase multiples observed for comparable third-party transactions, valuations of comparable entities, projected operating results of the investee entity or subsequent financing transactions entered into by the investee entity. If the inputs for a market-based method are not available, we utilize an income-based method, which considers the net present value of anticipated future cash flows of the investment. A discount may be applied due to the nature or duration of any restrictions on the disposition of the investment. We review and approve the market-based and income-based methods on a periodic basis for changes that would impact the unobservable inputs incorporated into the valuation process. The fair value measurements from these methods are further validated through price variance analysis, subsequent sales testing and market comparable sales.
We record a substantial amount of our investments at fair value or amounts that approximate fair value on a recurring basis. Fair values are estimated for disclosure purposes for financial instruments that are not measured at fair value.
As of September 30, 2014 , Level 3 assets represented 20% of total assets measured at fair value, substantially all of which related to investments of consolidated SIPs in equity and debt securities of entities and funds that are not traded in active markets. Level 3 liabilities, comprised of contingent consideration liabilities and debt of consolidated VIEs, represented 15% of total liabilities measured at fair value at September 30, 2014 . There were insignificant transfers into and out of Level 3 during fiscal year 2014 .
Following are descriptions of the significant assets and liabilities measured at fair value, including the fair value methodologies used and hierarchy levels.
Investment Securities, Trading consist primarily of non-consolidated SIPs and to a lesser extent, debt securities. The fair value of the SIPs is determined based on their published NAV and they are classified as Level 1. The fair value of the debt securities is primarily determined using independent third-party broker or dealer price quotes, and they are classified Level 2.



54


Investment Securities, Available-for-Sale consist primarily of non-consolidated SIPs, securities of U.S. states and political subdivisions, securities of the U.S. Treasury and federal agencies, corporate debt securities, mortgage-backed securities, and other equity securities. The fair value of the SIPs is determined based on their published NAV and they are classified as Level 1. The fair value of the debt securities is primarily determined using independent third-party broker or dealer price quotes and they are classified as Level 2. The fair value of other equity securities, which consist primarily of non-sponsored investment products, is determined based on their published NAV, and they are classified as Level 1.
Investment securities, available-for-sale are evaluated for other-than-temporary impairment on a quarterly basis when the cost of an investment exceeds its fair value. We consider many factors, including the severity and duration of the decline in fair value below cost, our intent and ability to hold the security for a period of time sufficient for an anticipated recovery in fair value, and the financial condition and specific events related to the issuer.
Investments of Consolidated SIPs consist of trading securities and other investments that are not generally traded in active markets. The fair value of the trading securities is determined using quoted market prices, or independent third-party broker or dealer price quotes if quoted market prices are not available. These securities are classified as Level 1 or Level 2. The quoted market prices may be adjusted if events occur, such as significant price changes in U.S.-traded market proxies after the close of corresponding foreign markets, trade halts or suspensions, or unscheduled market closures. The market proxies consist of correlated country-specific exchange-traded securities such as futures, American Depositary Receipts indices or exchange-traded funds. The price adjustments are primarily determined based on third-party factors derived from model-based valuation techniques for which the significant assumptions are observable in the market.
The investments that are not generally traded in active markets consist of debt and equity securities of entities in emerging markets and fund products. The fair values of the debt and equity securities are determined using significant unobservable inputs in either a market-based or income-based approach and they are classified as Level 3. The fair value of the fund products is determined using NAV as a practical expedient. These investments are classified as Level 2 if they are redeemable without restriction on at least a quarterly basis, or Level 3 if they have a redemption frequency greater than quarterly, are subject to redemption restrictions, or are nonredeemable.
Investments and Debt of Consolidated VIEs consist of corporate debt securities held by and debt issued by CLOs.  We elected the fair value option for all assets and liabilities of our consolidated CLOs. The fair values of the corporate debt securities and debt are obtained from independent third-party broker or dealer price quotes and are classified as Level 2, except for debt that is classified as Level 3 because the price quotes are derived from significant unobservable inputs.
Goodwill and Other Intangible Assets
Goodwill represents the excess cost of a business acquisition over the fair value of the net assets acquired. Other intangible assets consist primarily of mutual fund management contracts and customer base assets resulting from business acquisitions. We amortize these intangible assets over their estimated useful lives, which range from six to 15 years, using the straight-line method, unless the asset is determined to have an indefinite useful life. Indefinite-lived intangible assets primarily represent contracts to manage mutual fund assets for which there is no foreseeable limit on the contract period.
We make significant estimates and assumptions when valuing goodwill and other intangible assets in connection with the initial purchase price allocation of an acquired entity, as well as when evaluating impairment of goodwill and other intangible assets on an ongoing basis.
Goodwill and indefinite-lived intangible assets are tested for impairment annually and when an event occurs or circumstances change that more likely than not reduce the fair value of the related reporting unit or indefinite-lived intangible asset below its carrying value. We have one reporting unit, investment management and related services, consistent with our single operating segment, to which all goodwill has been assigned.  
We may first assess goodwill and indefinite-lived intangible assets for qualitative factors to determine whether it is necessary to perform a quantitative impairment test. The qualitative analysis considers entity-specific and



55


macroeconomic factors and their potential impact on the key assumptions used in the determination of the fair value of the reporting unit or indefinite-lived intangible asset. A quantitative impairment test is performed if the results of the qualitative assessment indicate that it is more likely than not that the fair value of the related reporting unit is less than its carrying value or an indefinite-lived intangible asset is impaired, or if a qualitative assessment is not performed.
The quantitative goodwill impairment test involves a two-step process. The first step compares the fair value of the reporting unit to its carrying value. If the carrying value is less than the fair value, no impairment exists and the second step is not performed. If the carrying value is higher than the fair value, there is an indication that impairment may exist and the second step is performed to compute the amount of the impairment. In the second step, impairment is computed by comparing the implied fair value of reporting unit goodwill with the carrying value of the goodwill.
The quantitative indefinite-lived intangible assets impairment test compares the fair value of the asset to its carrying value. If the carrying value is higher than the fair value, impairment is recognized in the amount of the difference in values.
In estimating the fair value of the reporting unit and indefinite-lived intangible assets, we use valuation techniques based on an income approach under which future cash flows are discounted. Our future cash flow estimates include assumptions about revenue and AUM growth rates, the pre-tax profit margin, the average effective fee rate, the effective tax rate, and the discount rate, which is based on our weighted average cost of capital. The most relevant of these assumptions to the determination of estimated fair value are the AUM growth rate and the discount rate.
We performed our annual impairment tests for goodwill and indefinite-lived intangible assets as of August 1, 2014 . We elected to perform a qualitative assessment of the valuation of goodwill and 86% of our indefinite-lived intangible assets and concluded it is more likely than not that the fair values of our reporting unit and the specific intangible assets exceed their carrying values. We performed a quantitative test for the remaining indefinite-lived intangible assets and did not recognize any impairment because our estimates of the fair values of the assets exceeded their carrying values. The fair values for the remaining indefinite-lived intangible assets exceeded their carrying values by more than 100%.
We subsequently monitor the market conditions and their potential impact on the assumptions used in the annual calculations of fair value to determine whether circumstances have changed that would more likely than not reduce the fair value of our reporting unit below its carrying value, or indicate that our indefinite-lived intangible assets might be impaired. We consider, among other things, changes in our AUM and weighted-average cost of capital by assessing whether these changes would impact the reasonableness of the assumptions used in our impairment tests as of August 1, 2014 . We also monitor fluctuations of our common stock per share price to evaluate our market capitalization relative to the reporting unit as a whole. Subsequent to August 1, 2014 , there were no impairments to goodwill or indefinite-lived intangible assets as we determined no events occurred or circumstances changed that would indicate that these assets might be impaired.
We test definite-lived intangible assets for impairment quarterly. Impairment is indicated when the carrying value of the asset is not recoverable and exceeds its fair value. In evaluating the recoverability of definite-lived intangible assets, we estimate the undiscounted future cash flows to be derived from these assets. Our future undiscounted cash flow projections include assumptions about revenue and AUM growth rates, effective fee rates, investor redemptions, the pre-tax profit margin, and expected useful lives. The most relevant of these assumptions to determine future cash flows is the change in the amount of AUM. The assumptions used in our impairment tests are developed taking into consideration the ongoing market conditions. If the carrying value of an asset is not recoverable through the related undiscounted cash flows, the impairment loss is measured based on the amount by which the carrying value of the asset exceeds its fair value. The fair value of the asset is determined by discounted cash flows or other methods as appropriate for the asset type.
As of September 30, 2014 , the undiscounted future cash flow projections for 56% of our definite-lived intangible assets exceeded their carrying values by at least 70%. We estimated the future undiscounted cash flows for these assets using AUM growth rates ranging from (5)% to 6% . The assumptions used in the impairment tests for definite-lived intangible assets were developed taking into consideration current market conditions. As of September 30, 2014 , a decline in these assets related AUM of 42% could cause us to evaluate whether their fair value is below the carrying



56


value. The undiscounted future cash flow projections for substantially all of the remaining assets exceeded their carrying values by at least 15%. There was no impairment of definite-lived intangible assets during fiscal year 2014 .
Revenues
Investment management, distribution and shareholder servicing fees are recognized as earned over the period in which services are rendered, except for performance-based investment management fees, which are recognized when earned. Sales commissions related to the sale of shares of SIPs are recognized on trade date. Investment management fees, other than performance-based fees, and distribution fees are determined based on a percentage of AUM, primarily on a monthly basis using average daily AUM. Performance-based investment management fees are based on performance targets established in the related investment management contracts. Shareholder servicing fees are generally calculated based on the number and type of accounts serviced.
AUM is generally based on the fair value of the underlying securities held by SIPs and is calculated using fair value methods derived primarily from unadjusted quoted market prices, unadjusted independent third-party broker or dealer price quotes in active markets, or market prices or price quotes adjusted for observable price movements after the close of the primary market. The fair values of the underlying securities for which market prices are not readily available are internally valued using various methodologies which incorporate unobservable inputs as appropriate for each security type.
Pricing of the securities held by SIPs is governed by our global valuation and pricing policy, which defines valuation and pricing conventions for each security type, including practices for responding to unexpected or unusual market events. As of September 30, 2014 , our total AUM by fair value hierarchy level was 52% Level 1, 47% Level 2 and 1% Level 3.
As substantially all of our AUM is valued based on observable market prices or inputs, market risk is the most significant risk underlying the valuation of our AUM. While recent economic conditions have resulted in ongoing market price volatility, the fair value of substantially all of the securities held by SIPs continues to be derived from observable market inputs.
Income Taxes
Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and the reported amounts in the consolidated financial statements using the statutory tax rates in effect for the year when the reported amount of the asset or liability is expected to be recovered or settled, respectively. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying values of deferred tax assets to the amount that is more likely than not to be realized. For each tax position taken or expected to be taken in a tax return, we determine whether it is more likely than not that the position will be sustained upon examination based on the technical merits of the position, including resolution of any related appeals or litigation. A tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to recognize. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. We recognize the accrual of interest on uncertain tax positions in interest expense and penalties in other operating expenses.
As a multinational corporation, we operate in various locations outside the U.S. and generate earnings from our non-U.S. subsidiaries. We indefinitely reinvest the undistributed earnings of our non-U.S. subsidiaries, except for income previously taxed in the U.S., subject to regulatory or legal repatriation restrictions or requirements, and the excess net earnings reduced by cash needs for operational and regulatory capital requirements, capital management plans and capital expenditure plans of our Canadian and U.K. subsidiaries. As a result, we have not recognized a provision for U.S. income taxes and a deferred income tax liability on $7.3 billion of cumulative undistributed non-U.S. earnings that are indefinitely reinvested at September 30, 2014 . Changes to our policy of reinvestment or repatriation of non-U.S. earnings may have a significant effect on our financial condition and results of operations.



57


Loss Contingencies
We are involved in various lawsuits and claims encountered in the normal course of business. When such a matter arises and periodically thereafter, we consult with our legal counsel and evaluate the merits of the claims based on the facts available at that time. In management’s opinion, an adequate accrual has been made as of September 30, 2014 to provide for probable losses that may arise from these matters for which we could reasonably estimate an amount. See also Note 14 – Commitments and Contingencies in the notes to consolidated financial statements in Item 8 of Part II of this Form 10-K.
NEW ACCOUNTING GUIDANCE
See Note 2 – New Accounting Guidance in the notes to consolidated financial statements in Item 8 of Part II of this Form 10-K.



58


Selected Quarterly Financial Data (Unaudited)
(in millions, except per share data)
 
 
 
 
 
 
 
 
Quarter ended
 
December 31
 
March 31
 
June 30
 
September 30
Fiscal year 2014
 
 
 
 
 
 
 
 
Operating revenues
 
$
2,109.5

 
$
2,095.9

 
$
2,130.5

 
$
2,155.5

Operating income
 
813.1

 
786.0

 
786.8

 
835.3

Net income attributable to Franklin Resources, Inc.
 
603.8

 
561.0

 
578.9

 
640.6

Earnings per share
 
 
 
 
 
 
 
 
Basic
 
$
0.96

 
$
0.89

 
$
0.92

 
$
1.03

Diluted
 
0.96

 
0.89

 
0.92

 
1.02

Dividends per share
 
$
0.12

 
$
0.12

 
$
0.12

 
$
0.12

Common stock price per share
 
 
 
 
 
 
 
 
High
 
$
57.85

 
$
58.87

 
$
58.42

 
$
58.28

Low
 
49.49

 
49.92

 
51.00

 
52.65

AUM (in billions)
 
 
 
 
 
 
 
 
Ending
 
$
879.1

 
$
886.9

 
$
920.5

 
$
898.0

Average
 
865.9

 
876.4

 
902.8

 
912.1

 
 
 
 
 
 
 
 
 
Fiscal year 2013
 
 
 
 
 
 
 
 
Operating revenues
 
$
1,901.8

 
$
2,013.6

 
$
2,084.8

 
$
1,984.8

Operating income
 
685.1

 
729.4

 
771.7

 
735.1

Net income attributable to Franklin Resources, Inc.
 
516.1

 
572.8

 
552.3

 
509.0

Earnings per share
 
 
 
 
 
 
 
 
Basic
 
$
0.81

 
$
0.90

 
$
0.87

 
$
0.80

Diluted
 
0.81

 
0.90

 
0.86

 
0.80

Dividends per share
 
$
1.097

1  
$
0.097

 
$
0.097

 
$
0.100

Common stock price per share
 
 

 
 

 
 

 
 

High
 
$
44.64

 
$
50.35

 
$
56.54

 
$
54.36

Low
 
41.34

 
42.67

 
44.22

 
45.06

AUM   (in billions)
 
 
 
 
 
 
 
 
Ending
 
$
781.8

 
$
823.7

 
$
815.0

 
$
844.7

Average
 
763.6

 
807.3

 
833.2

 
827.8

  __________
1  
Includes a special cash dividend of $1.00 per share.
Risk Factors
For a description of certain risk factors and other important factors that may affect us, our subsidiaries and our business, please see the description of the risk factors set forth under Item 1A of Part I of this Form 10-K, which is incorporated herein by reference.



59


Item  7A.
Quantitative and Qualitative Disclosures About Market Risk.
In the normal course of business, our financial position is subject to market risk, including, but not limited to, potential loss due to changes in the value of financial instruments including those resulting from adverse changes in interest rates, foreign currency exchange rates and market valuation. Financial instruments include, but are not limited to, investment securities and debt obligations. Management is responsible for managing market risk. Our Enterprise Risk Management Committee is responsible for providing a framework to assist management to identify, assess and manage market and other risks.
Our market risk from assets and liabilities of consolidated VIEs and consolidated SIPs is limited to that of our direct investments in, and/or investment management fees earned from, these entities. Accordingly, the assets and liabilities of our consolidated VIEs and consolidated SIPs are excluded from the discussion below.
AUM Market Price Risk
We are exposed to market risk through our investment management and distribution fees, which are generally calculated as a percentage of the market value of AUM. Changes in equity market prices, interest rates, credit spreads, foreign exchange rates, or a combination of these factors could cause the value of AUM to decline, which would result in lower investment management and distribution fees. Our exposure to these risks is minimized as we sponsor a broad range of investment products in various global jurisdictions, which serves to mitigate the impact of changes in any particular market(s) or region(s).
Assuming the respective effective fee rates remain unchanged, a proportional 10% change in the value of our average AUM would result in corresponding 10% changes in our investment management fees and asset-based distribution fee revenues and expenses, excluding performance-based investment management fees. Such a change for the fiscal year ended September 30, 2014 would have resulted in an annualized increase or decrease in pre-tax earnings of $503.1 million .
Interest Rate Risk
We are exposed to changes in interest rates primarily through our investments in SIPs that invest in debt securities, which were $1,538.5 million at September 30, 2014 . Our exposure to interest rate risks from investments in SIPs is minimized by the low average duration exposure mandate of a substantial majority of the SIPs. The investment mandates of the remaining SIPs consist of a broad range of products in various global jurisdictions, mitigating the impact of changes in any particular market(s) or region(s). We had no exposure to changes in interest rates from debt obligations at September 30, 2014 as all of our outstanding debt was issued at fixed rates.
As of September 30, 2014 , we have considered the potential impact of a 100 basis point movement in market interest rates on our portfolio of SIPs that invest in debt securities. Based on our analysis, we do not expect that such a change would have a material impact on our operating revenues or results of operations in the next twelve months.
Foreign Currency Exchange Risk
We are subject to foreign currency exchange risk through our international operations. While the majority of our revenues are earned in the U.S., we also provide services and earn revenues in The Bahamas, Asia-Pacific, Europe, Canada, Latin America, the Middle East and Africa. Our exposure to foreign currency exchange risk is minimized in relation to our results of operations since a significant portion of these revenues is denominated in U.S. dollars. This situation may change in the future as our business continues to grow outside the U.S. and expenses incurred denominated in foreign currencies increase.
The exposure to foreign currency exchange risk in our consolidated balance sheet mostly relates to cash and cash equivalents and investments that are denominated in foreign currencies, primarily in Euro, Indian Rupee, Pound Sterling and Canadian dollar. These assets accounted for 8% of the total cash and cash equivalents and investments at September 30, 2014 . Changes in the values of these assets resulting from changes in U.S. dollar exchange rates are recorded in accumulated other comprehensive income (loss), except for cash and cash equivalents held by subsidiaries for which the U.S. dollar is the functional currency, for which the changes are recorded in earnings. We also have exposure to foreign exchange revaluation of cash and cash equivalents and investments that are denominated in U.S.



60

Table of Contents

dollars and held by non-U.S. subsidiaries for which their local currency is the functional currency. These assets accounted for 7% of the total cash and cash equivalents and investments at September 30, 2014 . Changes in the values of these assets resulting from changes in U.S. dollar exchange rates are recorded in earnings.
A 10% weakening of the U.S. dollar against the various foreign currencies to which we had exposure as described above would result in corresponding 10% increases in the U.S. dollar values of the foreign currency assets and 10% decreases in the foreign currency values of the U.S. dollar assets. Such a weakening as of September 30, 2014 would result in a $78.1 million increase in accumulated other comprehensive income (loss) and a $62.2 million decrease in pre-tax earnings. We generally do not use derivative financial instruments to manage foreign currency exchange risk exposure. As a result, both positive and negative currency fluctuations against the U.S. dollar may affect our results of operations and accumulated other comprehensive income.
Market Valuation Risk
We are exposed to market valuation risks related to securities we hold that are carried at fair value. To mitigate the risks we maintain a diversified investment portfolio and, from time to time, we may enter into derivative agreements.
The following is a summary of the effect of a 10% increase or decrease in the carrying values of our financial instruments subject to market valuation risks at September 30, 2014 . If such a 10% increase or decrease in carrying values were to occur, the changes from trading investment securities and direct investments in consolidated VIEs and consolidated SIPs would result in a $172.4 million increase or decrease in our pre-tax earnings. The changes from available-for-sale investment securities would not result in a change to other-than-temporary impairment charges that would be material to our pre-tax earnings.
(in millions)
 
Carrying Value
 
Carrying
Value
Assuming a
10% Increase
 
Carrying
Value
Assuming a
10% Decrease
Investment securities, trading
 
$
1,277.5

 
$
1,405.3

 
$
1,149.8

Investment securities, available-for-sale
 
554.1

 
609.5

 
498.7

Direct investments in consolidated VIEs and consolidated SIPs
 
446.1

 
490.7

 
401.5

Total
 
$
2,277.7

 
$
2,505.5

 
$
2,050.0





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Table of Contents


Item 8.
Financial Statements and Supplementary Data.
Index of Consolidated Financial Statements for the fiscal years ended September 30, 2014 , 2013 and 2012 .
 
CONTENTS
 
Page
 
63

 
64

Consolidated Financial Statements of Franklin Resources, Inc. and its consolidated subsidiaries:
 
 

 
65

 
66

 
67

 
69

 
71

 
73

All schedules have been omitted as the information is provided in the financial statements or in related notes thereto or is not required to be filed, as the information is not applicable.
Certain required quarterly information is included in Item 7 of Part II of this Form 10-K report under the heading "Selected Quarterly Financial Data (Unaudited)" and incorporated herein by reference.



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Table of Contents

MANAGEMENT S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Franklin Resources, Inc. and its consolidated subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2014 , based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control Integrated Framework (2013). Based on that assessment, management concluded that, as of September 30, 2014 , the Company’s internal control over financial reporting was effective.
The effectiveness of the Company’s internal control over financial reporting as of September 30, 2014 has been audited by PricewaterhouseCoopers LLP, the independent registered public accounting firm that audits the Company’s consolidated financial statements, as stated in their report immediately following this report, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of September 30, 2014 .



63

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
and Stockholders of Franklin Resources, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of comprehensive income, of stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of Franklin Resources, Inc. and its subsidiaries (the “Company”) at September 30, 2014 and 2013 , and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2014 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2014 , based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
November 12, 2014
 




64


FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share data)
 
 
 
 
 
 
for the fiscal years ended September 30,
 
2014
 
2013
 
2012
Operating Revenues
 
 
 
 
 
 
Investment management fees
 
$
5,565.7

 
$
5,071.4

 
$
4,458.7

Sales and distribution fees
 
2,546.4

 
2,516.0

 
2,259.3

Shareholder servicing fees
 
281.1

 
303.7

 
302.5

Other, net
 
98.2

 
93.9

 
80.5

Total operating revenues
 
8,491.4

 
7,985.0

 
7,101.0

Operating Expenses
 
 
 
 
 
 
Sales, distribution and marketing
 
3,088.2

 
3,042.1

 
2,739.7

Compensation and benefits
 
1,467.9

 
1,384.5

 
1,255.5

Information systems and technology
 
216.3

 
191.1

 
182.9

Occupancy
 
137.7

 
134.2

 
129.9

General, administrative and other
 
360.1

 
311.8

 
277.8

Total operating expenses
 
5,270.2

 
5,063.7

 
4,585.8

Operating Income
 
3,221.2

 
2,921.3

 
2,515.2

Other Income (Expenses)
 
 
 
 
 
 
Investment and other income, net
 
235.8

 
152.2

 
199.7

Interest expense
 
(47.4
)
 
(46.9
)
 
(36.7
)
Other income, net
 
188.4

 
105.3

 
163.0

Income before taxes
 
3,409.6

 
3,026.6

 
2,678.2

Taxes on income
 
997.9

 
855.9

 
762.7

Net income
 
2,411.7

 
2,170.7

 
1,915.5

Less: Net income (loss) attributable to
 
 
 
 
 
 
Nonredeemable noncontrolling interests
 
6.8

 
16.9

 
(20.9
)
Redeemable noncontrolling interests
 
20.6

 
3.6

 
5.0

Net Income Attributable to Franklin Resources, Inc.
 
$
2,384.3

 
$
2,150.2

 
$
1,931.4

 
 
 
 
 
 
 
Earnings per Share
 
 
 
 
 
 
Basic
 
$
3.79

 
$
3.37

 
$
2.99

Diluted
 
3.79

 
3.37

 
2.98

Dividends per Share
 
$
0.48

 
$
1.39

 
$
1.03










See Notes to Consolidated Financial Statements.



65

Table of Contents

FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
 
 
 
 
 
 
for the fiscal years ended September 30,
 
2014
 
2013
 
2012
Net Income
 
$
2,411.7

 
$
2,170.7

 
$
1,915.5

Other Comprehensive Income (Loss)
 
 
 
 
 
 
Net unrealized gains (losses) on investments, net of tax
 
(40.9
)
 
(8.1
)
 
22.2

Currency translation adjustments, net of tax
 
(80.4
)
 
(49.5
)
 
0.3

Net unrealized gains (losses) on defined benefit plans, net of tax
 
(2.5
)
 
1.7

 
(0.9
)
Total other comprehensive income (loss)
 
(123.8
)
 
(55.9
)
 
21.6

Total comprehensive income
 
2,287.9

 
2,114.8

 
1,937.1

Less: Comprehensive income (loss) attributable to
 
 
 
 
 
 
Nonredeemable noncontrolling interests
 
6.8

 
16.9

 
(20.9
)
Redeemable noncontrolling interests
 
20.6

 
3.6

 
5.0

Comprehensive Income Attributable to Franklin Resources, Inc.
 
$
2,260.5

 
$
2,094.3

 
$
1,953.0



























See Notes to Consolidated Financial Statements.



66

Table of Contents

FRANKLIN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(in millions)
 
 
 
 
as of September 30,
 
2014
 
2013
Assets
 
 
 
 
Cash and cash equivalents
 
$
7,476.8

 
$
6,186.0

Receivables
 
950.0

 
1,038.9

Investments (including $1,845.6 and $1,892.7 at fair value at September 30, 2014 and 2013)
 
2,516.1

 
2,439.2

Loans receivable, net
 
2.5

 
229.7

Assets of consolidated sponsored investment products
 
 
 
 
Cash and cash equivalents
 
44.9

 
93.1

Investments, at fair value
 
1,373.7

 
1,203.2

Assets of consolidated variable interest entities
 
 
 
 
Cash and cash equivalents
 
74.3

 
44.0

Investments, at fair value
 
788.4

 
941.1

Deferred taxes, net
 
98.1

 
112.4

Property and equipment, net
 
530.7

 
564.1

Goodwill and other intangible assets, net
 
2,325.9

 
2,359.2

Other
 
175.7

 
179.4

Total Assets
 
$
16,357.1

 
$
15,390.3

Liabilities
 
 
 
 
Compensation and benefits
 
$
465.1

 
$
444.5

Accounts payable and accrued expenses
 
314.4

 
273.7

Commissions
 
440.3

 
437.7

Deposits
 
0.4

 
586.8

Debt
 
1,198.2

 
1,197.7

Debt of consolidated sponsored investment products
 
122.3

 
108.9

Debt of consolidated variable interest entities, at fair value
 
828.5

 
988.5

Deferred taxes
 
259.3

 
272.5

Other
 
281.4

 
272.7

Total liabilities
 
3,909.9

 
4,583.0

Commitments and Contingencies (Note 14)
 

 

Redeemable Noncontrolling Interests
 
234.8

 
121.8

[Table continued on next page]





See Notes to Consolidated Financial Statements.



67

Table of Contents

FRANKLIN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
[Table continued from previous page]
(in millions, except share and per share data)
 
 
 
 
as of September 30,
 
2014
 
2013
Stockholders’ Equity
 
 
 
 
Preferred stock, $1.00 par value, 1,000,000 shares authorized; none issued
 
$

 
$

Common stock, $0.10 par value, 1,000,000,000 shares authorized; 622,893,090 and 630,917,532 shares issued and outstanding at September 30, 2014 and 2013
 
62.3

 
63.1

Retained earnings
 
11,625.6

 
9,991.2

Appropriated retained earnings of consolidated variable interest entities
 
13.9

 
12.7

Accumulated other comprehensive income (loss)
 
(117.7
)
 
6.1

Total Franklin Resources, Inc. stockholders’ equity
 
11,584.1

 
10,073.1

Nonredeemable noncontrolling interests
 
628.3

 
612.4

Total stockholders’ equity
 
12,212.4

 
10,685.5

Total Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity
 
$
16,357.1

 
$
15,390.3



















See Notes to Consolidated Financial Statements.



68

Table of Contents

FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 
 
Franklin Resources, Inc.
 
Nonredeemable
Noncontrolling
Interests
 
Total
Stockholders’
Equity
(in millions)
Common Stock
 
Capital
in Excess
of Par
Value
 
Retained
Earnings
 
Appropriated
Retained
Earnings of
Consolidated
Variable
Interest Entities
 
Accumulated
Other
Compre-
hensive
Income (Loss)
 
Stockholders’
Equity
as of and for the fiscal years ended
September 30, 2014, 2013 and 2012
Shares
 
Amount
Balance at October 1, 2011
 
653.1

 
$
65.3

 
$

 
$
8,400.0

 
$
19.0

 
$
40.4

 
$
8,524.7

 
$
579.2

 
$
9,103.9

Net income (loss)
 
 

 
 

 
 

 
1,931.4

 
 
 
 

 
1,931.4

 
(20.9
)
 
1,910.5

Net income reclassified to appropriated retained earnings
 
 
 
 
 
 
 
 
 
20.0

 
 
 
20.0

 
(20.0
)
 
 
Other comprehensive income
 
 

 
 

 
 

 
 

 
 
 
21.6

 
21.6

 
 

 
21.6

Cash dividends on common stock
 
 
 
 
 
 
 
(666.7
)
 
 
 
 

 
(666.7
)
 
 

 
(666.7
)
Repurchase of common stock
 
(22.5
)
 
(2.2
)
 
(172.4
)
 
(622.8
)
 
 
 
 

 
(797.4
)
 
 

 
(797.4
)
Issuance of common stock
 
6.0

 
0.6

 
138.6

 
 

 
 
 
 

 
139.2

 
 

 
139.2

Excess tax benefit from stock-based compensation
 
 

 
 

 
22.0

 
 

 
 
 
 

 
22.0

 
 

 
22.0

Stock-based compensation
 
 

 
 

 
11.8

 
 

 
 
 
 

 
11.8

 
 

 
11.8

Nonredeemable noncontrolling interests
 
 

 
 

 
 

 
 

 
 
 
 

 
 

 
 

 
 

Net subscriptions
 
 

 
 

 
 

 
 

 
 
 
 

 
 

 
138.3

 
138.3

Net deconsolidation of sponsored investment products
 
 

 
 

 
 

 
 

 
 
 
 

 
 

 
(117.4
)
 
(117.4
)
Consolidation of variable interest entity
 
 

 
 

 
 

 
 
 
(5.3
)
 
 

 
(5.3
)
 


 
(5.3
)
Balance at September 30, 2012
 
636.6

 
$
63.7

 
$

 
$
9,041.9

 
$
33.7

 
$
62.0

 
$
9,201.3

 
$
559.2

 
$
9,760.5

Net income
 
 
 
 
 
 
 
2,150.2

 
 
 
 
 
2,150.2

 
16.9

 
2,167.1

Net loss reclassified to appropriated retained earnings
 
 
 
 
 
 
 
 
 
(20.1
)
 
 
 
(20.1
)
 
20.1

 
 
Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
(55.9
)
 
(55.9
)
 
 
 
(55.9
)
Cash dividends on common stock
 
 
 
 
 
 
 
(888.7
)
 
 
 
 
 
(888.7
)
 
 
 
(888.7
)
Repurchase of common stock
 
(10.5
)
 
(1.1
)
 
(177.7
)
 
(312.2
)
 
 
 
 
 
(491.0
)
 
 
 
(491.0
)
Issuance of common stock
 
4.8

 
0.5

 
147.0

 
 
 
 
 
 
 
147.5

 
 
 
147.5

Excess tax benefit from stock-based compensation
 
 

 
 
 
24.4

 
 

 
 
 
 

 
24.4

 
 

 
24.4

[Table continued on next page]

See Notes to Consolidated Financial Statements.



69

Table of Contents

FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
[Table continued from previous page]
 
 
Franklin Resources, Inc.
 
Nonredeemable
Noncontrolling
Interests
 
Total
Stockholders’
Equity
(in millions)
 
Common Stock
 
Capital
in Excess
of Par
Value
 
Retained
Earnings
 
Appropriated
Retained
Earnings of
Consolidated
Variable
Interest Entities
 
Accumulated
Other
Compre-
hensive
Income (Loss)
 
Stockholders’
Equity
as of and for the fiscal years ended
September 30, 2014, 2013 and 2012
 
Shares
 
Amount
Stock-based compensation
 
 
 
 
 
6.3

 
 

 
 
 
 

 
6.3

 
 

 
6.3

Nonredeemable noncontrolling interests
 
 

 
 

 
 

 
 

 
 
 
 

 
 

 
 

 
 

Net subscriptions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
63.7

 
63.7

Net consolidation of sponsored investment products
 
 

 
 

 
 

 
 

 
 
 
 

 
 

 
4.1

 
4.1

Acquisition
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5.4

 
5.4

Deconsolidation of variable interest entity
 
 

 
 

 
 

 
 
 
(0.9
)
 
 

 
(0.9
)
 
 
 
(0.9
)
Reclassification to redeemable noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(57.0
)
 
(57.0
)
Balance at September 30, 2013
 
630.9

 
$
63.1

 
$

 
$
9,991.2

 
$
12.7

 
$
6.1

 
$
10,073.1

 
$
612.4

 
$
10,685.5

Net income
 
 
 
 
 
 
 
2,384.3

 
 
 
 
 
2,384.3

 
6.8

 
2,391.1

Net income reclassified to appropriated retained earnings
 
 
 
 
 
 
 
 
 
1.2

 
 
 
1.2

 
(1.2
)
 
 
Other comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
(123.8
)
 
(123.8
)
 
 
 
(123.8
)
Cash dividends on common stock
 
 
 
 
 
 
 
(301.7
)
 
 
 
 
 
(301.7
)
 
 
 
(301.7
)
Repurchase of common stock
 
(11.5
)
 
(1.1
)
 
(172.9
)
 
(448.2
)
 
 
 
 
 
(622.2
)
 
 
 
(622.2
)
Issuance of common stock
 
3.5

 
0.3

 
148.9

 
 
 
 
 
 
 
149.2

 
 
 
149.2

Excess tax benefit from stock-based compensation
 
 
 
 
 
13.3

 
 
 
 
 
 
 
13.3

 
 
 
13.3

Stock-based compensation
 
 
 
 
 
10.7

 
 
 
 
 
 
 
10.7

 
 
 
10.7

Nonredeemable noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net subscriptions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.3

 
10.3

Balance at September 30, 2014
 
622.9

 
$
62.3

 
$

 
$
11,625.6

 
$
13.9

 
$
(117.7
)
 
$
11,584.1

 
$
628.3

 
$
12,212.4



See Notes to Consolidated Financial Statements.



70

Table of Contents

FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
 
 
 
 
 
 
for the fiscal years ended September 30,
 
2014
 
2013
 
2012
Net Income
 
$
2,411.7

 
$
2,170.7

 
$
1,915.5

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

 
 

Amortization of deferred sales commissions
 
127.8

 
138.0

 
129.9

Depreciation and other amortization
 
94.6

 
93.5

 
82.1

Stock-based compensation
 
127.7

 
113.4

 
101.3

Excess tax benefit from stock-based compensation
 
(12.2
)
 
(20.3
)
 
(19.7
)
Gains on sale of assets
 
(59.7
)
 
(51.2
)
 
(34.6
)
Income from investments in equity method investees
 
(68.1
)
 
(74.0
)
 
(68.6
)
Net (gains) losses on other investments of consolidated sponsored investment products
 
(16.9
)
 
(29.4
)
 
16.5

Net (gains) losses of consolidated variable interest entities
 
(6.1
)
 
17.1

 
(23.9
)
Other
 
6.1

 
4.1

 
31.9

Changes in operating assets and liabilities:
 
 
 
 
 
 
Increase in receivables, prepaid expenses and other
 
(113.7
)
 
(268.1
)
 
(222.8
)
Increase in trading securities, net
 
(80.2
)
 
(65.6
)
 
(577.8
)
Increase in trading securities of consolidated sponsored investment products, net
 
(482.9
)
 
(145.9
)
 
(203.0
)
Originations of loans held for sale
 
(38.3
)
 

 

Proceeds from sale of loans originated for resale
 
38.4

 

 

Increase (decrease) in accrued compensation and benefits
 
24.3

 
45.9

 
(2.6
)
Increase in commissions payable
 
2.6

 
53.8

 
14.4

Increase (decrease) in income taxes payable
 
15.8

 
50.1

 
(74.9
)
Increase in other liabilities
 
167.1

 
3.6

 
2.5

Net cash provided by operating activities
 
2,138.0

 
2,035.7

 
1,066.2

Purchase of investments
 
(303.2
)
 
(315.6
)
 
(247.2
)
Liquidation of investments
 
583.9

 
588.8

 
831.9

Purchase of investments by consolidated sponsored investment products
 
(324.2
)
 
(248.4
)
 
(188.5
)
Liquidation of investments by consolidated sponsored investment products
 
181.0

 
231.4

 
55.9

Purchase of investments by consolidated variable interest entities
 
(259.4
)
 
(685.9
)
 
(417.5
)
Liquidation of investments by consolidated variable interest entities
 
488.9

 
706.3

 
520.1

Decrease (increase) in loans receivable, net
 
38.0

 
(16.8
)
 
26.0

Decrease in loans transferred to held for sale
 
8.2

 

 

Proceeds from sale of loans transferred to held for sale
 
181.3

 
41.1

 
141.8

Decrease in loans receivable held by consolidated variable interest entities, net
 

 

 
59.7

Additions of property and equipment, net
 
(53.1
)
 
(62.2
)
 
(78.4
)
[Table continued on next page]
See Notes to Consolidated Financial Statements.



71

Table of Contents

FRANKLIN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Table continued from previous page]
(in millions)
 
 
 
 
 
 
for the fiscal years ended September 30,
 
2014
 
2013
 
2012
Acquisitions of subsidiaries, net of cash acquired
 
$

 
$
0.8

 
$

Cash and cash equivalents recognized due to consolidation of variable interest entity
 

 

 
169.6

Decrease in cash and cash equivalents due to net deconsolidation of sponsored investment products
 
(150.8
)
 
(6.6
)
 

Net cash provided by investing activities
 
390.6

 
232.9

 
873.4

Decrease in deposits
 
(587.5
)
 
(84.9
)
 
(218.5
)
Issuance of common stock
 
32.6

 
41.3

 
49.1

Dividends paid on common stock
 
(290.4
)
 
(882.7
)
 
(663.0
)
Repurchase of common stock
 
(622.2
)
 
(491.0
)
 
(797.4
)
Excess tax benefit from stock-based compensation
 
12.2

 
20.3

 
19.7

Decrease in commercial paper, net
 

 

 
(30.0
)
Proceeds from issuance of debt
 

 

 
592.3

Payments on debt
 

 
(545.4
)
 

Proceeds from issuance of debt by consolidated sponsored investment products
 
793.6

 
617.8

 
122.6

Payments on debt by consolidated sponsored investment products
 
(779.3
)
 
(620.6
)
 
(144.7
)
Payments on debt by consolidated variable interest entities
 
(194.3
)
 
(195.7
)
 
(227.1
)
Payments on contingent consideration liability
 
(6.3
)
 
(1.1
)
 

Noncontrolling interests
 
446.3

 
123.9

 
212.1

Net cash used in financing activities
 
(1,195.3
)
 
(2,018.1
)
 
(1,084.9
)
Effect of exchange rate changes on cash and cash equivalents
 
(60.4
)
 
21.2

 
(1.9
)
Increase in cash and cash equivalents
 
1,272.9

 
271.7

 
852.8

Cash and cash equivalents, beginning of year
 
6,323.1

 
6,051.4

 
5,198.6

Cash and Cash Equivalents, End of Year
 
$
7,596.0

 
$
6,323.1

 
$
6,051.4

 
 
 
 
 
 
 
Supplemental Disclosure of Non-Cash Activities
 
 
 
 
 
 
Increase in liabilities, net related to consolidation of variable interest entities
 
$

 
$

 
$
(174.9
)
Contingent consideration liabilities recognized due to acquisitions
 

 
93.6

 

Decrease in noncontrolling interests due to net deconsolidation of sponsored investment products
 

 
(11.0
)
 
(188.1
)
Increase in noncontrolling interests due to acquisition
 

 
38.2

 

 
 
 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
 
 
Cash paid for income taxes
 
$
979.3

 
$
825.9

 
$
819.8

Cash paid for interest
 
40.2

 
47.9

 
42.8

Cash paid for interest by consolidated variable interest entities and consolidated sponsored investment products
 
43.6

 
54.1

 
50.5

See Notes to Consolidated Financial Statements.



72

Table of Contents


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Significant Accounting Policies
Business. Franklin Resources, Inc. (“Franklin”) is a holding company that, together with its various subsidiaries (collectively, the “Company”) is referred to as Franklin Templeton Investments. The Company provides investment management and related services to investors globally through products that include investment funds and institutional, high net-worth and separately-managed accounts (collectively, the “sponsored investment products” or “SIPs”). In addition to investment management, the Company s services include fund administration, sales, distribution, marketing, shareholder servicing, trustee, custody, and other fiduciary services.
Basis of Presentation. The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Management believes that the accounting estimates are appropriate and the resulting balances are reasonable; however, due to the inherent uncertainties in making estimates, actual amounts may differ from these estimates. Certain comparative amounts for prior fiscal years have been reclassified to conform to the financial statement presentation as of and for the fiscal year ended September 30, 2014 (“fiscal year 2014 ”).
In July 2013 , a three-for-one split of the Company s common stock was distributed to common stockholders in the form of a stock dividend. The par value of the Company s common stock was maintained at $0.10 per share. The consolidated financial statements and notes thereto, including share and per share data, have been adjusted retroactively for all prior periods presented to reflect the stock split.
Consolidation. The consolidated financial statements include the accounts of Franklin and its subsidiaries and SIPs in which it has a controlling financial interest. The Company has a controlling financial interest when it owns a majority of the voting interest in an entity or when it is the primary beneficiary of a variable interest entity (“VIE”). The Company also consolidates non-VIE limited partnerships and similar structures that it controls. All material intercompany accounts and transactions have been eliminated.
A VIE is an entity in which the equity investment holders have not contributed sufficient capital to finance its activities or the equity investment holders do not have defined rights and obligations normally associated with an equity investment. The Company s VIEs are all investment entities, and its variable interests consist of its equity ownership interest in and/or investment management fees earned from these entities.
The Company uses two models for determining whether it is the primary beneficiary of VIEs. For all VIEs with the exception of collateralized loan obligations (“CLOs”), the Company is the primary beneficiary if it has the majority of the risks or rewards of ownership, which it determines using expected cash flow scenarios. For CLOs, the Company is the primary beneficiary if it has the power to direct the activities that most significantly impact the VIE s economic performance and the obligation to absorb losses of or right to receive benefits from the VIE that could potentially be significant to the VIE. Under both models, the key estimates and assumptions used in the analyses include the amount of assets under management (“AUM”), investment management fee rates, the life of the investment product, prepayment rates, and the discount rate.
The Company is presumed to control non-VIE limited partnerships and similar structures for which it is the general partner or managing member unless the limited partners or other investors have the substantive ability to remove the Company as general partner or managing member or otherwise participate in the decision-making of the entity. The Company s risk of loss in these entities is limited to its investments in the entities as the general partner and managing member entities are structured as limited liability companies.
Earnings per Share . Basic earnings per share is computed by dividing net income available to the Company s common shareholders, which exclude participating securities, by the weighted-average number of shares of common stock outstanding during the period. The Company s participating securities consist of its nonvested stock and stock unit awards that contain nonforfeitable rights to dividends or dividend equivalents. Diluted earnings per share is



73


computed on the basis of the weighted-average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the two-class method.
Fair Value Measurements. The Company uses a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based on whether the inputs to those valuation techniques are observable or unobservable. The three levels of fair value hierarchy are set forth below. The Company s assessment of the hierarchy level of the assets or liabilities measured at fair value is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Transfers between levels are recognized at the end of each quarter.
Level 1
Unadjusted quoted prices in active markets for identical assets or liabilities.
 
 
Level 2
Observable inputs other than Level 1 quoted prices, such as non-binding quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable or corroborated by observable market data. Level 2 quoted prices are generally obtained from two independent third-party brokers or dealers, including prices derived from model-based valuation techniques for which the significant assumptions are observable in the market or corroborated by observable market data. Quoted prices are validated through price variance analysis, subsequent sales testing, stale price review, price comparison across pricing vendors and due diligence reviews of third-party vendors.
 
 
Level 3
Unobservable inputs that are supported by little or no market activity. These inputs require significant management judgment and reflect the Company's estimation of assumptions that market participants would use in pricing the asset or liability.
The fair values for Level 3 assets and liabilities are determined using various methodologies in accordance with the Company s global valuation and pricing policy which defines valuation and pricing conventions for each security type. When available, fair value is measured based on the reported net asset value (“NAV”) of underlying investments or independent third-party broker or dealer price quotes. These inputs are evaluated for reasonableness through various procedures which include due diligence reviews of the third parties, price comparisons across pricing vendors, stale price reviews and subsequent sales testing. If these inputs are not available, the Company primarily employs a market-based method, using purchase multiples observed for comparable third-party transactions, valuations of comparable entities, projected operating results of the investee entity or subsequent financing transactions entered into by the investee entity. If the inputs for a market-based method are not available, the Company utilizes an income-based method, which considers the net present value of anticipated future cash flows of the investment. A discount may be applied due to the nature or duration of any restrictions on the disposition of the investment. The Company reviews and approves the market-based and income-based methods on a periodic basis for changes that would impact the unobservable inputs incorporated into the valuation process. The fair value measurements from these methods are further validated through price variance analysis, subsequent sales testing and market comparable sales.
The Company records a substantial amount of its investments at fair value or amounts that approximate fair value on a recurring basis. Fair values are estimated for disclosure purposes for financial instruments that are not measured at fair value.
Fair Value Option. The Company elected the fair value option for all assets and liabilities of its consolidated CLOs as this option better matches the changes in fair value of the assets and liabilities. The decision to elect the fair value option, which is irrevocable once elected, is determined on an instrument by instrument basis and applied to an entire instrument. The net gains or losses on the assets and liabilities of consolidated CLOs include interest income and expense and are recognized in investment and other income, net in the consolidated statements of income.
Cash and Cash Equivalents include cash on hand, deposits with financial institutions, time deposits, securities of U.S. government-sponsored enterprises and the U.S. Treasury, debt instruments with original maturities of three months or less at the purchase date, and other highly liquid investments, including money market funds, which are readily convertible into cash. The money market funds are non-consolidated SIPs. Cash and cash equivalents are carried at cost. Due to the short-term nature and liquidity of these financial instruments, the carrying values of these assets approximate fair value and, for disclosure purposes, they are classified as Level 1.



74


The Company maintains cash and cash equivalents with financial institutions in various countries, limits the amount of credit exposure with any given financial institution and conducts ongoing evaluations of the creditworthiness of the financial institutions with which it does business.
Receivables consist primarily of fees receivable from SIPs and are carried at invoiced amounts. Due to the short-term nature and liquidity of the receivables, the carrying values of these assets approximate fair value.
Investments consist of investment securities, trading and available-for-sale, investments in equity method investees and other investments.
Investment Securities, Trading consist primarily of non-consolidated SIPs and to a lesser extent, debt securities, and are carried at fair value. Changes in the fair value of trading securities are recognized as gains and losses in earnings. The fair value of the SIPs is determined based on their published NAV and they are classified as Level 1. The fair value of the debt securities is primarily determined using independent third-party broker or dealer price quotes, and they are classified as Level 2.
Investment Securities, Available-for-Sale consist primarily of non-consolidated SIPs, securities of U.S. states and political subdivisions, securities of the U.S. Treasury and federal agencies, corporate debt securities, mortgage-backed securities, and other equity securities. The securities are carried at fair value. Realized gains and losses are included in investment income using the average cost method. Unrealized gains and losses are recorded net of tax as part of accumulated other comprehensive income until realized. The fair value of the SIPs is determined based on their published NAV and they are classified as Level 1. The fair value of the debt securities is primarily determined using independent third-party broker or dealer price quotes and they are classified as Level 2.
The fair value of other equity securities is determined using either independent third-party broker or dealer price quotes, in which case they are classified as Level 2, or quoted market prices, in which case they are classified as Level 1.
Investments in Equity Method Investees consist of equity investments in entities, including SIPs, over which the Company is able to exercise significant influence, but not control. Significant influence is generally considered to exist when the Company s ownership interest in the voting stock of the investee is between 20% and 50%, although other factors, such as representation on the investee s board of directors and the impact of commercial arrangements, also are considered in determining whether the equity method of accounting is appropriate. Investments in limited partnerships and limited liability companies for which the Company is not deemed to have control are accounted for using the equity method when the Company s investment is more than minor or when the Company is the general partner. Under the equity method of accounting, the investments are initially carried at cost and subsequently adjusted by the Company s proportionate share of the entities net income, which is recognized in earnings.
Other Investments consist of equity investments in entities over which the Company is unable to exercise significant influence and are not marketable, time deposits and life settlement contracts. The equity investments are accounted for under the cost method. For disclosure purposes, the fair value of these investments is generally estimated based on their NAV and they are classified as Level 3. Time deposits that have maturities greater than three months but less than one year from the date of purchase are carried at cost. Due to the short-term nature and liquidity of these financial instruments, the carrying values of the time deposits approximate fair value, and they are classified as Level 2. Life settlement contracts are carried at fair value, which is determined based on discounted cash flows using significant unobservable inputs, and are classified as Level 3.
Impairment of Investments. Investments other than trading securities are evaluated for other-than-temporary impairment on a quarterly basis when the cost of an investment exceeds its fair value. For equity securities, the Company considers many factors, including the severity and duration of the decline in the fair value below cost, the Company s intent and ability to hold the security for a period of time sufficient for an anticipated recovery in fair value, and the financial condition and specific events related to the issuer. When an impairment of an equity security is determined to be other-than-temporary, the impairment is recognized in earnings. For debt securities, if the Company intends to sell or it is more likely than not that it will be required to sell a security before recovery of its amortized cost, the entire impairment is recognized in earnings. If the Company does not intend to sell or it is not more likely than not that it will be required to sell the security before anticipated recovery of its amortized cost, the impairment is separated into the



75


amount of the total impairment related to the credit loss and the amount of the total impairment related to all other factors. The credit loss component is the difference between the security ' s amortized cost and the present value of the expected cash flows, and is recognized in earnings. Losses related to all other factors are recognized in accumulated other comprehensive income.
Loans Receivable, net as of September 30, 2013 consisted primarily of private banking loans to investment management clients. Interest on the loans was accrued using the effective interest method. The majority of the loans carried variable interest rates, which were adjusted periodically. Loans receivable were carried at cost, net of an allowance for loan losses and were classified as Level 2 for disclosure purposes.
Cash and Cash Equivalents of Consolidated SIPs consist of deposits with financial institutions and are carried at cost. Due to the short-term nature and liquidity of these financial instruments, their carrying values approximate fair value and, for disclosure purposes, they are classified as Level 1.
Investments of Consolidated SIPs consist of trading securities and other investments that are not generally traded in active markets, and are carried at fair value. Changes in the fair value of the investments are recognized as gains and losses in earnings. The fair value of the trading securities is determined using quoted market prices, or independent third-party broker or dealer price quotes if quoted market prices are not available. These securities are classified as Level 1 or Level 2. The quoted market prices may be adjusted if events occur, such as significant price changes in U.S.-traded market proxies after the close of corresponding foreign markets, trade halts or suspensions, or unscheduled market closures. The market proxies consist of correlated country-specific exchange-traded securities, such as futures, American Depositary Receipts indices or exchange-traded funds. The price adjustments are primarily determined based on third-party factors derived from model-based valuation techniques for which the significant assumptions are observable in the market.
The investments that are not generally traded in active markets consist of debt and equity securities of entities in emerging markets and fund products. The fair values of the debt and equity securities are determined using significant unobservable inputs in either a market-based or income-based approach and they are classified as Level 3. The fair value of the fund products is determined using NAV as a practical expedient. These investments are classified as Level 2 if they are redeemable without restriction on at least a quarterly basis, or Level 3 if they have a redemption frequency greater than quarterly, are subject to redemption restrictions, or are nonredeemable.
Cash and Cash Equivalents of Consolidated VIEs consist of investments in a money market fund and are carried at fair value. The fair value of the fund is based on its published NAV and it is classified as Level 1.
Investments of Consolidated VIEs consist of corporate debt securities and are carried at fair value. The fair value is primarily obtained from independent third-party broker or dealer price quotes and they are classified as Level 2.
Property and Equipment, net are recorded at cost and are depreciated using the straight-line method over their estimated useful lives which range from three to 35 years. Expenditures for repairs and maintenance are charged to expense when incurred. Leasehold improvements are amortized using the straight-line method over their estimated useful lives or the lease term, whichever is shorter.
Internal and external costs incurred in connection with developing or obtaining software for internal use are capitalized and amortized over the estimated useful lives of the software, which range from three to five years, beginning when the software project is complete and the application is put into production.
Property and equipment is tested for impairment when there is an indication that the carrying amount of an asset may not be recoverable. Carrying values are not recoverable when the undiscounted cash flows estimated to be generated by the assets are less than their carrying value. When an asset is determined to not be recoverable, the impairment loss is measured based on the excess, if any, of the carrying value of the asset over its respective fair value. Fair value is determined by discounted future cash flows models, appraisals or other applicable methods.
Goodwill and Other Intangible Assets, net . Goodwill represents the excess cost of a business acquisition over the fair value of the net assets acquired. Other intangible assets consist primarily of mutual fund management contracts and customer base assets resulting from business acquisitions. These intangible assets are amortized over their estimated



76


useful lives, which range from six to 15 years, using the straight-line method, unless the asset is determined to have an indefinite useful life. Indefinite-lived intangible assets primarily represent contracts to manage mutual fund assets for which there is no foreseeable limit on the contract period.
Goodwill and indefinite-lived intangible assets are tested for impairment annually and when an event occurs or circumstances change that more likely than not reduce the fair value of the related reporting unit or indefinite-lived intangible asset below its carrying value. The Company has one reporting unit, investment management and related services, consistent with its single operating segment, to which all goodwill has been assigned.
Goodwill and indefinite-lived intangible assets may first be assessed for qualitative factors to determine whether it is necessary to perform a quantitative impairment test. The qualitative analysis considers entity-specific and macroeconomic factors and their potential impact on the key assumptions used in the determination of the fair value of the reporting unit or indefinite-lived intangible asset. A quantitative impairment test is performed if the results of the qualitative assessment indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying value or an indefinite-lived intangible asset is impaired, or if a qualitative assessment is not performed.
The quantitative goodwill impairment test involves a two-step process. The first step compares the fair value of the reporting unit to its carrying value. If the carrying value is less than the fair value, no impairment exists and the second step is not performed. If the carrying value is higher than the fair value, there is an indication that impairment may exist and the second step is performed to compute the amount of any impairment. In the second step, impairment is computed by comparing the implied fair value of the reporting unit goodwill with the carrying value of the goodwill.
The quantitative indefinite-lived intangible assets impairment test compares the fair value of the asset to its carrying value. If the carrying value is higher than the fair value, impairment is recognized in the amount of the difference in values.
In estimating the fair value of the reporting unit and indefinite-lived intangible assets, the Company uses valuation techniques based on an income approach under which future cash flows are discounted. The future cash flow estimates include assumptions about revenue and AUM growth rates, the pre-tax profit margin, the average effective fee rate, the effective tax rate, and the discount rate, which is based on the Company s weighted average cost of capital.
Definite-lived intangible assets are tested for impairment quarterly. Impairment is indicated when the carrying value of the asset is not recoverable and exceeds its fair value. In evaluating the recoverability of definite-lived intangible assets, the Company estimates the undiscounted future cash flows to be derived from these assets. The future undiscounted cash flow projections include assumptions about revenue and AUM growth rates, effective fee rates, investor redemptions, the pre-tax profit margin, and expected useful lives. If the carrying value of an asset is not recoverable through the related undiscounted cash flows, the impairment loss is measured based on the amount by which the carrying value of the asset exceeds its fair value. The fair value of the asset is determined by discounted cash flows or other methods as appropriate for the asset type.
Deferred Sales Commissions consist of up-front commissions paid to financial advisers and broker/dealers on shares sold without a front-end sales charge to investors, and are amortized over the periods in which they are generally recovered from related revenues, which range from one to seven years. Deferred sales commissions are included in other assets in the consolidated balance sheet.
Deposits are carried at the aggregate amount of deposits held. Deposits as of September 30, 2013 included interest-bearing and non-interest-bearing demand deposits, savings and time deposits. The fair value of deposits with no stated maturities was considered to approximate their carrying value because they were payable on demand. For disclosure purposes, the fair value of deposits with stated maturities was estimated based on discounted cash flow models using interest rates offered by comparable institutions on deposits with similar remaining maturities. All of the deposits were classified as Level 2.
Contingent Consideration Liabilities primarily consist of the expected future payments related to the Company’s commitment to acquire the remaining interests in K2 Advisors Holdings, LLC (“K2”) and are included in other liabilities on the consolidated balance sheet. The liabilities are carried at fair value, determined using an income-based method which considers the net present value of anticipated future cash flows, and are classified as Level 3.



77


Debt consists of senior notes, which are carried at amortized cost. For disclosure purposes, the fair value is estimated using quoted market prices, independent third-party broker or dealer price quotes, or prices of publicly traded debt with similar maturities, credit risk and interest rates. The notes are classified as Level 2.
Debt of Consolidated SIPs is carried at amortized cost. For disclosure purposes, the fair value is estimated using a discounted cash flow model that considers current interest rate levels, the quality of the underlying collateral and current economic conditions. The debt is classified as Level 3.
Debt of Consolidated VIEs consists of debt of CLOs, and is carried at fair value, which is obtained from independent third-party broker or dealer price quotes. The debt is classified as Level 2 unless the price quotes are derived from significant unobservable inputs, in which case it is classified as Level 3.
Noncontrolling Interests relate almost entirely to consolidated SIPs. Noncontrolling interests that are currently redeemable or convertible for cash or other assets at the option of the holder are classified as temporary equity. Nonredeemable noncontrolling interests are classified as a component of equity. Net income (loss) attributable to third-party investors is reflected as net income (loss) attributable to nonredeemable and redeemable noncontrolling interests in the consolidated statements of income. Sales and redemptions of shares of consolidated SIPs are a component of the change in noncontrolling interests included in financing activities in the consolidated statements of cash flows.
Appropriated Retained Earnings of Consolidated VIEs represents the difference between the fair values of consolidated CLOs assets and liabilities. These amounts are recognized as appropriated retained earnings as the CLO debt holders, not the Company, will ultimately receive the benefits or absorb the losses associated with the CLOs assets and liabilities. Net income (loss) attributable to third-party investors is reflected as net income (loss) attributable to nonredeemable noncontrolling interests in the consolidated statements of income.
Revenues . Fees from providing investment management and fund administration services (“investment management fees”), distribution fees and shareholder servicing fees are recognized as earned, over the period in which services are rendered, except for performance-based investment management fees, which are recognized when earned. Sales commissions related to the sale of shares of SIPs are recognized on trade date. Investment management fees, other than performance-based fees, and distribution fees are determined based on a percentage of AUM, primarily on a monthly basis using average daily AUM. Performance-based investment management fees are based on performance targets established in the related investment management contracts. Shareholder servicing fees are generally calculated based on the number and type of accounts serviced.
AUM is generally based on the fair value of the underlying securities held by SIPs and is calculated using fair value methods derived primarily from unadjusted quoted market prices, unadjusted independent third-party broker or dealer price quotes in active markets, or market prices or price quotes adjusted for observable price movements after the close of the primary market. The fair values of the underlying securities for which market prices are not readily available are internally valued using various methodologies which incorporate significant unobservable inputs as appropriate for each security type and represent an insignificant percentage of total AUM. Pricing of the securities held by SIPs is governed by the Company s global valuation and pricing policy, which defines valuation and pricing conventions for each security type, including practices for responding to unexpected or unusual market events.
Sales commissions and distribution fees are recorded gross of sales and distribution expenses paid to financial advisers and other intermediaries as the Company acts as the principal in its role as primary obligor to the sales and distribution agreements.
Advertising and Promotion costs are expensed as incurred.
Stock-Based Compensation. The fair value of share-based payment awards is estimated on the date of grant based on the market price of the underlying shares of the Company s common stock and is amortized to compensation expense on a straight-line basis over the related vesting period, which is generally three years. Expense relating to awards subject to performance conditions is recognized if it is probable that the performance goals will be achieved. The probability of achievement is assessed on a quarterly basis. The total number of awards expected to vest is adjusted for estimated forfeitures.



78


Postretirement Benefits . Defined contribution plan costs are expensed as incurred. Defined benefit plan costs are expensed as the benefits are earned.
Income Taxes. Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and the reported amounts in the consolidated financial statements using the statutory tax rates in effect for the year when the reported amount of the asset or liability is expected to be recovered or settled, respectively. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying values of deferred tax assets to the amount that is more likely than not to be realized. For each tax position taken or expected to be taken in a tax return, the Company determines whether it is more likely than not that the position will be sustained upon examination based on the technical merits of the position, including resolution of any related appeals or litigation. A tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to recognize. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. The Company recognizes the accrual of interest on uncertain tax positions in interest expense and penalties in other operating expenses.
As a multinational corporation, the Company operates in various locations outside the United States and generates earnings from its non-U.S. subsidiaries. The Company indefinitely reinvests the undistributed earnings of its non-U.S. subsidiaries, except for income previously taxed in the U.S., subject to regulatory or legal repatriation restrictions or requirements, and the excess net earnings reduced by cash needs for operational and regulatory capital requirements, capital management plans and capital expenditure plans of its Canadian and U.K. subsidiaries.
Foreign Currency Translation and Transactions. Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment, where that local currency is the functional currency, are translated at current exchange rates as of the end of the accounting period. The related revenues and expenses are translated at average exchange rates in effect during the period. Net exchange gains and losses resulting from translation are excluded from income and are recorded as part of accumulated other comprehensive income. Transactions denominated in a foreign currency are revalued at the current exchange rate at the transaction date and any related gains and losses are reflected in investment and other income, net in the consolidated statements of income.
Business Combinations are accounted for using the acquisition method of accounting. Application of this method requires identification of the acquirer, determination of the acquisition date and measurement of the purchase consideration at fair value. Any excess of the purchase consideration over the acquisition-date fair values of the net identifiable assets acquired and liabilities assumed is recognized as goodwill.
Note 2 – New Accounting Guidance
Accounting Guidance Adopted During Fiscal Year 2014
On October 1, 2013, the Company adopted new Financial Accounting Standards Board (“FASB”) guidance that requires an entity to report significant reclassifications out of accumulated other comprehensive income by component either on the face of the financial statements or in the notes. See Note 19 - Accumulated Other Comprehensive Income for the expanded disclosures.
New Accounting Guidance Not Yet Adopted
In August 2014, the FASB issued new guidance that provides an entity the election to measure the financial assets and financial liabilities of a consolidated collateralized financing entity using the more observable fair value of either the financial assets or financial liabilities. The Company will adopt the new guidance as of October 1, 2014 and elect this measurement alternative for its consolidated CLOs. The adoption will result in a $14.2 million increase in debt of consolidated VIEs, a $13.9 million reduction in appropriated retained earnings of consolidated VIEs and a $0.3 million reduction in retained earnings as of October 1, 2014. The Company’s subsequent earnings from the consolidated CLOs will reflect changes in fair value of its own economic interests in the CLOs, and will no longer include gains or losses on assets and liabilities of the CLOs, which were primarily attributable to noncontrolling interests.
In May 2014, the FASB issued new guidance that requires use of a single principles-based model for recognition of revenue from contracts with customers. The core principle of the model is that revenue is recognized upon the transfer



79


of promised goods or services to customers in an amount that reflects the expected consideration to be received for the goods or services. The guidance allows for either a full retrospective or modified approach at adoption, and is effective for the Company in the first quarter of the fiscal year ending September 30, 2018. The Company is currently evaluating the impact that the adoption of the guidance will have on its consolidated financial statements.
Note 3 Acquisition
On November 1, 2012, the Company acquired approximately 69% of the equity of K2, a fund of hedge funds solutions provider. The acquisition was transacted through a $182.9 million cash investment in K2. The Company also agreed to acquire K2’s remaining equity interests over a multi-year period beginning in fiscal year 2017, resulting in the conversion of this equity to a liability. The amount of the liability is contingent on K2’s future revenue and profits and had an estimated fair value of $90.6 million on November 1, 2012. As a result of the conversion, the Company owns 100% of K2’s outstanding equity for U.S. GAAP purposes.
The estimated fair values of the assets acquired and liabilities and noncontrolling interests assumed were as follows:
(in millions)
 
Estimated
Fair Value
As of November 1, 2012
 
Cash, including cash invested
 
$
191.6

Investments of consolidated sponsored investment products
 
31.1

Definite-lived intangible assets
 
85.0

Goodwill
 
174.1

Other assets
 
28.0

Debt
 
(176.5
)
Other liabilities
 
(21.6
)
Noncontrolling interests
 
(38.2
)
Total Identifiable Net Assets
 
$
273.5

The definite-lived intangible assets relate to management contracts that have estimated useful lives that range from six to 15 years. The debt was retired immediately following the acquisition. At acquisition date, K2 had $8.7 billion in AUM.
The Company has not presented pro forma combined results of operations for this acquisition because the results of operations as reported in the accompanying consolidated statements of income would not have been materially different.



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Note 4 Earnings per Share
The components of basic and diluted earnings per share were as follows:
(in millions, except per share data)
 
 
 
 
 
 
for the fiscal years ended September 30,
 
2014
 
2013
 
2012
Net Income Attributable to Franklin Resources, Inc.
 
$
2,384.3

 
$
2,150.2

 
$
1,931.4

Less: Allocation of earnings to participating nonvested stock and stock unit awards
 
14.3

 
13.9

 
11.7

Net Income Available to Common Stockholders
 
$
2,370.0

 
$
2,136.3

 
$
1,919.7

 
 
 
 
 
 
 
Weighted-average shares outstanding – basic
 
624.8

 
633.1

 
641.4

Effect of non-participating nonvested stock unit awards and dilutive common stock options
 
0.4

 
1.0

 
1.9

Weighted-Average Shares Outstanding – Diluted
 
625.2

 
634.1

 
643.3

 
 
 
 
 
 
 
Earnings per Share
 
 
 
 

 
 

Basic
 
$
3.79

 
$
3.37

 
$
2.99

Diluted
 
3.79

 
3.37

 
2.98

Non-participating nonvested stock unit awards excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive were 0.1 million for fiscal year 2014 , nil for the fiscal year ended September 30, 2013 (“fiscal year 2013 ”), and 0.4 million for the fiscal year ended September 30, 2012 (“fiscal year 2012 ”).
Note 5 – Investments
The disclosures below include details of the Company’s investments, excluding those of consolidated SIPs and consolidated VIEs. See Note 12 – Variable Interest Entities and Consolidated Sponsored Investment Products for information related to the investments held by these entities.
Investments consisted of the following:
(in millions)
 
 
 
 
as of September 30,
 
2014
 
2013
Investment securities, trading
 
$
1,277.5

 
$
1,196.7

Investment securities, available-for-sale
 
 
 
 
SIPs
 
517.6

 
534.6

Securities of U.S. states and political subdivisions
 
11.3

 
23.1

Securities of the U.S. Treasury and federal agencies
 
0.7

 
2.3

Mortgage-backed securities – agency residential 1
 
17.9

 
110.9

Other equity securities
 
6.6

 
11.3

Total investment securities, available-for-sale
 
554.1

 
682.2

Investments in equity method investees
 
594.9

 
485.4

Other investments
 
89.6

 
74.9

Total
 
$
2,516.1

 
$
2,439.2

________________
1  
Consist of U.S. government-sponsored enterprise obligations.
At September 30, 2014 and 2013 , investment securities with aggregate carrying amounts of $6.1 million and $7.1 million were pledged as collateral. Additionally, at September 30, 2013 , investment securities with aggregate



81


carrying amounts of $82.5 million were pledged as collateral for the ability to borrow from the Federal Reserve Bank and $28.4 million were pledged as collateral for amounts available in secured FHLB short-term borrowing capacity (see Note 11 Debt).
A summary of the gross unrealized gains and losses relating to investment securities, available-for-sale is as follows:
(in millions)
 
 
 
Gross Unrealized
 
 
as of September 30, 2014
Cost Basis
 
Gains
 
Losses
 
Fair Value
SIPs
 
$
477.0

 
$
43.5

 
$
(2.9
)
 
$
517.6

Securities of U.S. states and political subdivisions
 
11.0

 
0.3

 

 
11.3

Securities of the U.S. Treasury and federal agencies
 
0.7

 

 

 
0.7

Mortgage-backed securities – agency residential
 
18.0

 

 
(0.1
)
 
17.9

Other equity securities
 
6.3

 
0.3

 

 
6.6

Total
 
$
513.0

 
$
44.1

 
$
(3.0
)
 
$
554.1

(in millions)
 
 
 
Gross Unrealized
 
 
as of September 30, 2013
Cost Basis
 
Gains
 
Losses
 
Fair Value
SIPs
 
$
465.4

 
$
71.7

 
$
(2.5
)
 
$
534.6

Securities of U.S. states and political subdivisions
 
22.3

 
0.8

 

 
23.1

Securities of the U.S. Treasury and federal agencies
 
2.3

 

 

 
2.3

Mortgage-backed securities – agency residential
 
108.9

 
2.0

 

 
110.9

Other equity securities
 
10.9

 
0.4

 

 
11.3

Total
 
$
609.8

 
$
74.9

 
$
(2.5
)
 
$
682.2

 
The following tables show the gross unrealized losses and fair values of available-for-sale securities with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
(in millions)
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
as of September 30, 2014
 
 
 
 
 
SIPs
 
$
156.4

 
$
(2.7
)
 
$
1.5

 
$
(0.2
)
 
$
157.9

 
$
(2.9
)
Mortgage-backed securities – agency residential
 
4.0

 

 
11.6

 
(0.1
)
 
15.6

 
(0.1
)
Total
 
$
160.4

 
$
(2.7
)
 
$
13.1

 
$
(0.3
)
 
$
173.5

 
$
(3.0
)
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
(in millions)
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
as of September 30, 2013
 
 
 
 
 
SIPs
 
$
50.3

 
$
(2.4
)
 
$
1.4

 
$
(0.1
)
 
$
51.7

 
$
(2.5
)
 
The Company recognized other-than-temporary impairment of available-for-sale SIPs in the amounts of $0.4 million , $1.7 million and $10.1 million , and other-than-temporary impairment of other investments in the amounts of $0.2 million , $0.7 million and nil during fiscal years 2014 , 2013 and 2012 . The Company did not recognize any other-than-temporary impairment of available-for-sale debt securities during fiscal years 2014 , 2013 and 2012 .



82


At September 30, 2014 , contractual maturities of available-for-sale debt securities were as follows:
(in millions)
 
Cost Basis
 
Fair Value
Due in one year or less
 
$
4.5

 
$
4.5

Due after one year through five years
 
7.2

 
7.5

Total
 
$
11.7

 
$
12.0

Mortgage-backed securities are not included in the table above as their actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.
Note 6 – Fair Value Measurements
The disclosures below include details of the Company’s fair value measurements, excluding those of consolidated VIEs and consolidated SIPs. See Note 12 – Variable Interest Entities and Consolidated Sponsored Investment Products for information related to fair value measurements of the assets and liabilities of these entities.
Assets and liabilities measured at fair value on a recurring basis were as follows:  
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
as of September 30, 2014
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Investment securities, trading
 
$
1,196.1

 
$
81.4

 
$

 
$
1,277.5

Investment securities, available-for-sale
 
 
 
 
 
 
 
 
SIPs
 
517.6

 

 

 
517.6

Securities of U.S. states and political subdivisions
 

 
11.3

 

 
11.3

Securities of the U.S. Treasury and federal agencies
 

 
0.7

 

 
0.7

Mortgage-backed securities – agency residential
 

 
17.9

 

 
17.9

Other equity securities
 
1.7

 
4.9

 

 
6.6

Life settlement contracts
 

 

 
14.0

 
14.0

Total Assets Measured at Fair Value
 
$
1,715.4

 
$
116.2

 
$
14.0

 
$
1,845.6

Liabilities
 
 
 
 
 
 
 
 
Contingent consideration liabilities
 
$

 
$

 
$
98.5

 
$
98.5





83


(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
as of September 30, 2013
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Investment securities, trading
 
$
1,121.5

 
$
75.2

 
$

 
$
1,196.7

Investment securities, available-for-sale
 
 
 
 
 
 
 
 
SIPs
 
534.6

 

 

 
534.6

Securities of U.S. states and political subdivisions
 

 
23.1

 

 
23.1

Securities of the U.S. Treasury and federal agencies
 

 
2.3

 

 
2.3

Mortgage-backed securities – agency residential
 

 
110.9

 

 
110.9

Other equity securities
 
11.3

 

 

 
11.3

Life settlement contracts
 

 

 
13.8

 
13.8

Total Assets Measured at Fair Value
 
$
1,667.4

 
$
211.5

 
$
13.8

 
$
1,892.7

Liabilities
 
 
 
 
 
 
 
 
Contingent consideration liabilities
 
$

 
$

 
$
97.7

 
$
97.7

There were no transfers between Level 1 and Level 2, or transfers into Level 3, during fiscal years 2014 and 2013 .
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows:

 
2014
 
2013
(in millions)
 
Investments
 
Contingent Consideration Liabilities
 
Investments
 
Contingent Consideration Liabilities
for the fiscal years ended September 30,
 
 
 
Balance at beginning of year
 
$
13.8

 
$
(97.7
)
 
$
14.8

 
$

Acquisitions
 

 

 

 
(93.6
)
Total realized and unrealized gains (losses)
 
 
 
 
 
 
 
 
Included in investment and other income, net
 
2.9

 

 
2.0

 

Included in general, administrative and other expense
 

 
(6.7
)
 

 
(7.7
)
Other
 

 
(0.4
)
 

 
(0.5
)
Purchases
 
0.1

 

 
1.2

 

Sales
 
(0.7
)
 

 
(1.6
)
 

Settlements
 
(2.1
)
 
6.3

 
(2.4
)
 
4.1

Transfers out of Level 3
 

 

 
(0.2
)
 

Balance at End of Year
 
$
14.0

 
$
(98.5
)
 
$
13.8

 
$
(97.7
)
Change in unrealized gains (losses) included in net income relating to assets and liabilities held at end of year
 
$
1.2

 
$
(7.1
)
 
$
1.3

 
$
(8.2
)



84


The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements were as follows:
(in millions)
 
 
 
 
 
 
 
 
as of September 30, 2014
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Life settlement contracts
 
$
14.0

 
Discounted cash flow
 
Life expectancy
 
23–150 months (71)
Discount rate
 
3.3%–21.7% (11.7%)
 
 
 
 
 
 
 
 
 
Contingent consideration liabilities
 
98.5

 
Discounted cash flow
 
AUM growth rate
 
3.4%–20.2% (12.8%)
EBITDA margin
 
21.9% - 30.4% (28.2%)
Discount rate
 
14.0%
(in millions)
 
 
 
 
 
 
 
 
as of September 30, 2013
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Life settlement contracts
 
$
13.8

 
Discounted cash flow
 
Life expectancy
 
25–160 months (76)
Discount rate
 
3.3%–21.7% (11.7%)
 
 
 
 
 
 
 
 
 
Contingent consideration liabilities
 
97.7

 
Discounted cash flow
 
AUM growth rate
 
6.0%–25.0% (14.6%)
EBITDA margin
 
26.4% - 38.9% (34.4%)
Discount rate
 
14.0%
For life settlement contracts, a significant increase (decrease) in the life expectancy or the discount rate in isolation would result in a significantly lower (higher) fair value measurement.
For the contingent consideration liabilities, a significant increase (decrease) in the AUM growth rate or EBITDA margin, or decrease (increase) in the discount rate, in isolation would result in a significantly higher (lower) fair value measurement.
Financial instruments that were not measured at fair value were as follows:
(in millions)
 
 
 
2014
 
2013
as of September 30,
 
Fair Value Level
 
Carrying Value
 
Estimated Fair Value
 
Carrying Value
 
Estimated Fair Value
Financial Assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
1
 
$
7,476.8

 
$
7,476.8

 
$
6,186.0

 
$
6,186.0

Other investments 1
 
2 or 3
 
75.6

 
87.8

 
61.1

 
69.2

Loans receivable, net
 
2
 
2.5

 
2.7

 
229.7

 
230.1

Financial Liabilities
 
 
 
 
 
 
 
 

 
 

Deposits
 
2
 
$
0.4

 
$
0.4

 
$
586.8

 
$
587.2

Debt
 
2
 
1,198.2

 
1,235.8

 
1,197.7

 
1,221.5

_________________
1     Primarily consist of Level 3 assets.



85


Note 7 – Loans and Allowance for Loan Losses
Loans receivable by major category consisted of the following:
(in millions)
 
 
 
 
as of September 30,
 
2014
 
2013
Commercial loans
 
$

 
$
77.0

Real estate mortgage loans
 
2.4

 
2.6

Installment loans
 
0.3

 
143.3

Other
 

 
7.0

Total loans receivable
 
2.7

 
229.9

Less: allowance for loan losses
 
(0.2
)
 
(0.2
)
Loans Receivable, Net
 
$
2.5

 
$
229.7

Substantially all loans receivable were sold during fiscal year 2014 as the Company terminated its private banking business.
Interest income on loans receivable totaled $2.6 million , $7.1 million and $16.9 million , with average rates of 2.45% , 2.96% and 4.59% , for fiscal years 2014 , 2013 and 2012 .
Note 8 – Property and Equipment
Property and equipment consisted of the following:
(in millions)
 
 
 
 
 
Useful Lives
In Years
as of September 30,
 
2014
 
2013
 
Furniture, software and equipment
 
$
693.5

 
$
710.1

 
3 – 10
Premises and leasehold improvements
 
562.3

 
565.7

 
5 – 35
Land
 
74.3

 
74.4

 
N/A
Total cost
 
1,330.1

 
1,350.2

 
 
Less: accumulated depreciation and amortization
 
(799.4
)
 
(786.1
)
 
 
Property and Equipment, Net
 
$
530.7

 
$
564.1

 
 
Depreciation and amortization expense related to property and equipment was $82.6 million , $76.9 million and $67.9 million in fiscal years 2014 , 2013 and 2012 . No impairment loss in the value of property and equipment was recognized during these periods.
Note 9 – Goodwill and Other Intangible Assets
Goodwill and other intangible assets, net consisted of the following:
(in millions)
 
 
 
 
as of September 30,
 
2014
 
2013
Goodwill
 
$
1,691.0

 
$
1,701.5

Indefinite-lived intangible assets
 
547.4

 
548.6

Definite-lived intangible assets, net
 
87.5

 
109.1

Total
 
$
2,325.9

 
$
2,359.2




86


Changes in the carrying value of goodwill were as follows:
(in millions)
 
 
 
 
for the fiscal years ended September 30,
 
2014
 
2013
Balance at beginning of year
 
$
1,701.5

 
$
1,540.8

Acquisitions
 

 
181.6

Foreign exchange
 
(10.5
)
 
(20.9
)
Balance at End of Year
 
$
1,691.0

 
$
1,701.5

Definite-lived intangible assets were as follows:
 
 
2014
 
2013
(in millions)
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
as of September 30,
 
 
 
 
 
 
Customer base
 
$
165.6

 
$
(152.7
)
 
$
12.9

 
$
166.2

 
$
(144.5
)
 
$
21.7

Management contracts and other
 
133.2

 
(58.6
)
 
74.6

 
134.2

 
(46.8
)
 
87.4

Total
 
$
298.8

 
$
(211.3
)
 
$
87.5

 
$
300.4

 
$
(191.3
)
 
$
109.1

Indefinite-lived intangible assets consist of management contracts. Amortization expense related to definite-lived intangible assets was $20.8 million , $20.0 million and $10.6 million for fiscal years 2014 , 2013 and 2012 . No impairment loss in the value of goodwill and other intangible assets was recognized during these periods.
Definite-lived intangible assets had a weighted-average remaining useful life of 7.4 years at September 30, 2014 , with estimated remaining amortization expense as follows:
(in millions)
 
 
for the fiscal years ending September 30,
 
Amount
2015
 
$
20.5

2016
 
16.0

2017
 
11.8

2018
 
11.8

2019
 
4.6

Thereafter
 
22.8

Total
 
$
87.5

Note 10 – Deposits
Deposits, all of which are held in the Company’s U.S. offices, were as follows:
(in millions)
 
 
 
 
as of September 30,
 
2014
 
2013
Non-interest-bearing demand deposits
 
$
0.4

 
$
108.3

Interest-bearing deposits
 
 
 
 
Demand deposits
 

 
11.3

Savings deposits
 

 
447.6

Time deposits
 

 
19.6

Total interest-bearing deposits
 

 
478.5

Total
 
$
0.4

 
$
586.8




87


All outstanding client deposit accounts were closed during fiscal year 2014 as the Company terminated its private banking business.
Note 11 – Debt
The disclosures below include details of the Company’s debt, excluding that of consolidated VIEs and consolidated SIPs. See Note 12 – Variable Interest Entities and Consolidated Sponsored Investment Products for information related to the debt of these entities.
Debt consisted of the following:
(in millions)
 
2014
 
2013
 
Effective
Interest Rate
as of September 30,
 
 
 
$250 million 3.125% notes due May 2015
 
$
250.0

 
$
249.9

 
3.32
%
$300 million 1.375% notes due September 2017
 
299.0

 
298.7

 
1.66
%
$350 million 4.625% notes due May 2020
 
349.8

 
349.7

 
4.74
%
$300 million 2.800% notes due September 2022
 
299.4

 
299.4

 
2.93
%
Total
 
$
1,198.2

 
$
1,197.7

 
 
At September 30, 2014 , the Company’s outstanding senior unsecured and unsubordinated notes had an aggregate face value of $1.2 billion . The notes have fixed interest rates with interest payable semi-annually and contain an optional redemption feature that allows the Company to redeem each series of notes prior to maturity in whole or in part at any time, at a make-whole redemption price. The indentures governing the notes contain limitations on the Company’s ability and the ability of its subsidiaries to pledge voting stock or profit participating equity interests in its subsidiaries to secure other debt without similarly securing the notes equally and ratably. The indentures also include requirements that must be met if the Company consolidates or merges with, or sells all or substantially all of its assets to, another entity. At September 30, 2014 , the Company was in compliance with the covenants of the notes.
At September 30, 2014 , maturities for debt were as follows:  
(in millions)
 
Amount
for the fiscal years ending September 30,
2015
 
$
250.0

2016
 

2017
 
299.0

2018
 

2019
 

Thereafter
 
649.2

Total
 
$
1,198.2

At September 30, 2014 , the Company had $500.0 million of short-term commercial paper available for issuance under an uncommitted private placement program which has been inactive since April 2012 . In July 2014, the Company closed its account at the Federal Reserve Bank of New York resulting in the termination of its bank lines of credit under the Federal Reserve System and its ability to borrow through the secured Federal Reserve Bank short-term discount window.



88


Note 12 Variable Interest Entities and Consolidated Sponsored Investment Products
The Company sponsors and manages various types of investment products, which consist of both VIEs and non-VIEs. The Company consolidates the VIE products for which it is the primary beneficiary and the non-VIE products which it controls. The Company has no right to the consolidated products’ assets, other than its direct equity investment in them, and/or investment management fees earned from them. The debt holders of these consolidated entities have no recourse to the Company’s assets beyond the level of its direct investment, therefore the Company bears no other risks associated with the entities’ liabilities.
The balances of consolidated SIPs and consolidated VIEs included in the Company’s consolidated balance sheets were as follows:
 
 
2014
 
2013
(in millions)
 
Consolidated
 
 
 
Consolidated
 
 
as of September 30,
 
SIPs
 
VIEs
 
Total
 
SIPs
 
VIEs
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
44.9

 
$
74.3

 
$
119.2

 
$
93.1

 
$
44.0

 
$
137.1

Receivables
 
16.2

 
23.0

 
39.2

 
19.1

 
37.7

 
56.8

Investments, at fair value
 
1,373.7

 
788.4

 
2,162.1

 
1,203.2

 
941.1

 
2,144.3

Other assets
 
0.7

 

 
0.7

 
0.7

 

 
0.7

Total Assets
 
$
1,435.5

 
$
885.7

 
$
2,321.2

 
$
1,316.1

 
$
1,022.8

 
$
2,338.9

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses
 
$
18.5

 
$
35.3

 
$
53.8

 
$
25.2

 
$
10.9

 
$
36.1

Debt, at fair value
 

 
828.5

 
828.5

 

 
988.5

 
988.5

Debt
 
122.3

 

 
122.3

 
108.9

 

 
108.9

Other liabilities
 
12.4

 

 
12.4

 
8.5

 

 
8.5

Total liabilities
 
153.2

 
863.8

 
1,017.0

 
142.6

 
999.4

 
1,142.0

Redeemable Noncontrolling Interests
 
234.8

 

 
234.8

 
121.8

 

 
121.8

Stockholders  Equity
 
 
 
 
 
 
 
 
 
 
 
 
Franklin Resources Inc.’s interests
 
436.5

 
21.9

 
458.4

 
454.8

 
23.4

 
478.2

Nonredeemable noncontrolling interests
 
611.0

 

 
611.0

 
596.9

 

 
596.9

Total stockholders’ equity
 
1,047.5

 
21.9

 
1,069.4

 
1,051.7

 
23.4

 
1,075.1

Total Liabilities, Redeemable Noncontrolling Interests and Stockholders  Equity
 
$
1,435.5

 
$
885.7

 
$
2,321.2

 
$
1,316.1

 
$
1,022.8

 
$
2,338.9

The consolidated SIPs and consolidated VIEs did not have a significant impact on net income attributable to the Company in fiscal years 2014 , 2013 and 2012 .
Consolidated VIEs
Consolidated VIEs consist of sponsored CLOs, which are asset-backed financing entities collateralized by a pool of corporate debt securities. The Company generally earns senior and subordinated management fees from the CLOs based on the par value of outstanding investments and, in certain instances, may also receive performance-based fees. In addition, the Company holds a residual interest in one of these entities. The debt holders of the CLOs have recourse only to the corresponding collateralized assets, which cannot be used by the Company for any other purpose. Scheduled debt payments are based on the performance of the CLOs collateral pool and may be prepaid prior to the contractual



89


maturity dates. The Company is the primary beneficiary of the CLOs as it has the power to direct the activities that most significantly impact the CLOs’ economic performance in its role as collateral manager and has the right to receive benefits that could potentially be significant to the CLOs.
The assets and liabilities of the CLOs are carried at fair value. Changes in the fair values were as follows:
(in millions)
 
2014
 
2013
for the fiscal years ended September 30,
 
 
Net gains from changes in fair value of assets
 
$
39.5

 
$
64.8

Net losses from changes in fair value of liabilities
 
(32.4
)
 
(80.8
)
Total Net Gains (Losses)
 
$
7.1

 
$
(16.0
)
The following tables present information on the investments and debt of the CLOs:
(in millions)
 
Total 
Investments
 
Debt
as of September 30, 2014
 
 
Unpaid principal balance
 
$
787.1

 
$
861.9

Difference between unpaid principal balance and fair value
 
1.3

 
(33.4
)
Fair Value
 
$
788.4

 
$
828.5

There were no investments 90 days or more past due at September 30, 2014 .
(in millions)
 
Total 
Investments
 
Investments
90 Days or More
Past Due
 
Debt
as of September 30, 2013
 
 
 
Unpaid principal balance
 
$
943.6

 
$
7.9

 
$
1,017.8

Difference between unpaid principal balance and fair value
 
(2.5
)
 
(7.7
)
 
(29.3
)
Fair Value
 
$
941.1

 
$
0.2

 
$
988.5

Consolidated SIPs
Consolidated SIPs consist of limited partnerships and similar structures that the Company controls and other fund products in which the Company has a controlling financial interest. The Company consolidated 30 SIPs as of September 30, 2014 , and 36 SIPs as of September 30, 2013 . SIPs are typically consolidated when the Company makes an initial investment in a newly launched fund or limited partnership entity. They are deconsolidated when the Company redeems its investment in the SIP or its voting interests decrease to a minority percentage. The Company’s investments in SIPs subsequent to deconsolidation are accounted for as trading or available-for-sale investment securities, or equity method or cost method investments depending on the nature of the SIP and the Company’s level of ownership.
Investments
Investments of consolidated SIPs and consolidated VIEs consisted of the following:
 
 
2014
 
2013
(in millions)
 
Consolidated
 
 
 
Consolidated
 
 
as of September 30,
 
SIPs
 
VIEs
 
Total
 
SIPs
 
VIEs
 
Total
Investment securities, trading
 
$
249.6

 
$

 
$
249.6

 
$
244.1

 
$

 
$
244.1

Other debt securities
 
205.6

 
788.4

 
994.0

 
272.3

 
941.1

 
1,213.4

Other equity securities
 
918.5

 

 
918.5

 
686.8

 

 
686.8

Total Investments
 
$
1,373.7

 
$
788.4

 
$
2,162.1

 
$
1,203.2

 
$
941.1

 
$
2,144.3




90


Investment securities, trading held by consolidated SIPs consist of debt and equity securities that are traded in active markets. Other debt and equity securities held by consolidated SIPs primarily consist of direct investments in secured and unsecured debt securities and equity securities of entities in emerging markets, which are generally not traded in active markets. Other equity securities also include investments in funds that are not traded in active markets. Investments of consolidated VIEs consist of corporate debt securities.
Debt
Debt of consolidated SIPs and consolidated VIEs consisted of the following:
 
 
2014
 
2013
(in millions)
 
 
 
Effective Interest Rate
 
 
 
Effective Interest Rate
as of September 30,
 
Amount
 
 
Amount
 
Debt of consolidated VIEs, at fair value, due fiscal years 2018-2024
 
$
828.5

 
1.43
%
 
$
988.5

 
1.32
%
Debt of consolidated SIPs due fiscal years 2015-2019
 
122.3

 
3.87
%
 
108.9

 
4.08
%
Total Debt
 
$
950.8

 
 
 
$
1,097.4

 
 
The debt of consolidated VIEs had floating interest rates ranging from 0.46% to 9.73% at September 30, 2014 , and from 0.50% to 9.77% at September 30, 2013 .
The debt of consolidated SIPs had both fixed and floating interest rates ranging from 2.19% to 5.89% at September 30, 2014 , and from 2.45% to 5.83% at September 30, 2013 . The repayment of amounts outstanding under the debt agreements is secured by the assets of the consolidated SIPs or a pledge of the right to call capital.
At September 30, 2014 , contractual maturities for debt of consolidated SIPs and consolidated VIEs were as follows:  
(in millions)
 
Amount
for the fiscal years ending September 30,
2015
 
$
50.0

2016
 

2017
 
28.4

2018
 
253.9

2019
 
329.2

Thereafter
 
289.3

Total
 
$
950.8




91


Fair Value Measurements
The tables below present the balances of assets and liabilities of consolidated SIPs and consolidated VIEs measured at fair value on a recurring basis. 
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
as of September 30, 2014
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents of consolidated VIEs
 
$
74.3

 
$

 
$

 
$
74.3

Receivables of consolidated VIEs
 

 
23.0

 

 
23.0

Investments of consolidated VIEs
 

 
787.9

 
0.5

 
788.4

Investments of consolidated SIPs
 
 
 
 
 
 
 
 
Equity securities
 
149.9

 
304.0

 
614.3

 
1,068.2

Debt securities
 
2.4

 
96.8

 
206.3

 
305.5

Total Assets Measured at Fair Value
 
$
226.6

 
$
1,211.7

 
$
821.1

 
$
2,259.4

Liabilities
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses of consolidated VIEs
 
$

 
$
35.3

 
$

 
$
35.3

Debt of consolidated VIEs
 

 
781.3

 
47.2

 
828.5

Other liabilities of consolidated SIPs
 
4.0

 
0.6

 

 
4.6

Total Liabilities Measured at Fair Value
 
$
4.0

 
$
817.2

 
$
47.2

 
$
868.4

(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
as of September 30, 2013
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Cash and cash equivalents of consolidated VIEs
 
$
44.0

 
$

 
$

 
$
44.0

Receivables of consolidated VIEs
 

 
37.7

 

 
37.7

Investments of consolidated VIEs
 

 
940.6

 
0.5

 
941.1

Investments of consolidated SIPs
 
 
 
 
 
 
 
 
Equity securities
 
158.1

 
213.6

 
470.9

 
842.6

Debt securities
 
4.5

 
83.8

 
272.3

 
360.6

Total Assets Measured at Fair Value
 
$
206.6

 
$
1,275.7

 
$
743.7

 
$
2,226.0

Liabilities
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses of consolidated VIEs
 
$

 
$
10.9

 
$

 
$
10.9

Debt of consolidated VIEs
 

 
928.8

 
59.7

 
988.5

Total Liabilities Measured at Fair Value
 
$

 
$
939.7

 
$
59.7

 
$
999.4

Receivables and accounts payable and accrued expenses of consolidated VIEs consist primarily of investment trades pending settlement. The fair values of these assets and liabilities are obtained from independent third-party broker or dealer quotes.
Other liabilities of consolidated SIPs consist of short positions in debt and equity securities. The fair value of the liabilities is determined based on the fair value of the underlying securities using quoted market prices, or independent third-party broker or dealer price quotes if quoted market prices securities are not available.



92


The investments in fund products for which fair value was estimated using NAV as a practical expedient consisted of the following:
(in millions)
 
 
 
Fair Value Level
 
 
 
 
as of September 30,
 
Redemption Frequency
 
 
2014
 
2013
Global fixed-income fund
 
Monthly
 
2
 
$
275.1

 
$
191.8

Hedge funds
 
Monthly or quarterly
 
2
 
27.2

 
6.6

Real estate and private equity funds
 
Nonredeemable
 
3
 
392.3

 
242.1

Hedge funds
 
Annually or triennially
 
3
 
1.2

 
1.5

Total
 
 
 
 
 
$
695.8

 
$
442.0

The investments in real estate and private equity funds are expected to be returned through distributions as a result of liquidations of the funds’ underlying assets over a weighted-average period of 3.9 years and 4.7 years at September 30, 2014 and 2013 . The consolidated SIPs’ unfunded commitments to these funds totaled $139.2 million and $135.5 million at September 30, 2014 and 2013 , of which the Company was contractually obligated to fund $3.1 million and $2.8 million based on its ownership percentage in the SIPs.
Transfers into Level 2 from Level 1 were $0.1 million and $47.4 million , and transfers into Level 1 from Level 2 were $0.2 million and $53.9 million during fiscal years 2014 and 2013 . The transfers into Level 2 from Level 1 during fiscal year 2013 included $47.0 million of securities for which the quoted market prices were adjusted as of December 31, 2012 due to significant price changes in U.S.-traded market proxies resulting from the resolution of U.S. fiscal cliff negotiations. The impacted securities trade in 16 different countries in Europe, Asia and Latin America. The adjustments were made after the close of the foreign markets and were based on third-party factors derived from model-based valuation techniques for which the significant assumptions were observable in the market. All transfers into Level 1 from Level 2 were securities that were valued using unadjusted quoted market prices.
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows:  
(in millions)
 
Investments of
Consolidated SIPs
 
Investments of Consolidated VIEs
 
Total
Level 3 Assets
 
Debt of
Consolidated VIEs
for the fiscal year ended September 30, 2014
 
Equity
 
Debt
 
 
 
Balance at October 1, 2013
 
$
470.9

 
$
272.3

  
$
0.5

 
$
743.7

 
$
(59.7
)
Realized and unrealized gains (losses) included in investment and other income, net
 
44.5

 
(35.7
)
  

 
8.8

 
12.5

Purchases
 
195.0

 
60.0

  

 
255.0

 

Sales
 
(91.6
)
 
(84.8
)
 

 
(176.4
)
 

Transfers into Level 3
 

 
0.6

 

 
0.6

 

Transfers out of Level 3
 
(1.3
)
 

 

 
(1.3
)
 

Effect of exchange rate changes
 
(3.2
)
 
(6.1
)
  

 
(9.3
)
 

Balance at September 30, 2014
 
$
614.3

 
$
206.3

  
$
0.5

 
$
821.1

 
$
(47.2
)
Change in unrealized gains (losses) included in net income relating to assets and liabilities held at September 30, 2014
 
$
(24.9
)
 
$
(36.8
)
 
$

 
$
(61.7
)
 
$
12.5




93


(in millions)
 
Investments of
Consolidated SIPs
 
Investments of Consolidated VIEs
 
Total
Level 3 Assets
 
Debt of
Consolidated VIEs
for the fiscal year ended September 30, 2013
 
Equity
 
Debt
 
 
 
Balance at October 1, 2012
 
$
527.0

 
$
317.5

  
$

 
$
844.5

 
$
(67.9
)
Realized and unrealized gains included in investment and other income, net
 
43.2

 
4.5

  

 
47.7

 
5.5

Purchases
 
156.2

 
73.3

  

 
229.5

 

Sales
 
(53.4
)
 
(130.9
)
 

 
(184.3
)
 

Settlements
 

 

 

 

 
2.7

Acquisition
 
0.8

 

 

 
0.8

 

Reclassification to Level 2
 
(205.4
)
 

 

 
(205.4
)
 

Transfers into Level 3
 

 

  
0.5

 
0.5

 

Effect of exchange rate changes
 
2.5

 
7.9

  

 
10.4

 

Balance at September 30, 2013
 
$
470.9

 
$
272.3

  
$
0.5

 
$
743.7

 
$
(59.7
)
Change in unrealized gains included in net income relating to assets and liabilities held at September 30, 2013
 
$
4.7

 
$
0.1

 
$

 
$
4.8

 
$
7.3

There were no transfers out of Level 3 during fiscal year 2013 . The reclassification out of Level 3 to Level 2 during fiscal year 2013 relates to an investment in a global fixed-income fund which is redeemable on a monthly basis without restriction and was originally misclassified as Level 3.
The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements were as follows:
(in millions)
 
 
 
 
 
 
 
 
as of September 30, 2014
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Debt securities
 
$
206.3

 
Discounted cash flow
 
Discount rate
 
3.6%–18.0% (11.9%)
Risk premium
 
0.0%–8.0% (1.9%)
 
 
 
 
 
 
 
 
 
Equity securities
 
152.9

 
Market comparable companies

 
EBITDA multiple
 
3.1–11.0 (8.0)
Discount for lack of marketability
 
25.0%–50.0% (33.2%)
38.1

 
Discounted cash flow
 
Discount rate
 
6.0%–20.0% (16.9%)
 
29.8

 
Market pricing
 
Price to book value ratio
 
1.8–2.8 (2.1)
(in millions)
 
 
 
 
 
 
 
 
as of September 30, 2013
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range (Weighted Average)
Debt securities
 
$
272.3

 
Discounted cash flow
 
Discount rate
 
5.7%–25.6% (8.3%)
Risk premium
 
0.0%–19.3% (2.2%)
 
 
 
 
 
 
 
 
 
Equity securities
 
137.4

 
Market comparable companies

 
EBITDA multiple
 
5.0–10.2 (8.0)
Discount for lack of marketability
 
20.0%–30.0% (23.7%)
70.8

 
Discounted cash flow
 
Discount rate
 
12.0%–18.0% (16.2%)
 
Discount for lack of marketability
 
0.0%–50.0% (20.6%)
 
19.1

 
Market pricing
 
Price to book value ratio
 
1.7



94


Level 3 debt securities held by consolidated SIPs consisted of corporate loans and notes, mezzanine loans and convertible debentures, and equity securities consisted primarily of common and preferred shares at September 30, 2014 and 2013 .
The fair values of Level 3 assets and liabilities that were determined based on third-party pricing information or NAV are excluded from the above two tables. At September 30, 2014 and 2013 , the exclusions consisted of $47.2 million and $59.7 million of debt of consolidated VIEs that was valued using third-party broker or dealer price quotes and $393.5 million and $243.6 million of investments in various funds held by consolidated SIPs for which fair value was estimated using NAV as a practical expedient.
Following are descriptions of the sensitivity of the Level 3 recurring fair value measurements to changes in the significant unobservable inputs presented in the above tables.
For securities utilizing the discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, risk premium or discount for lack of marketability in isolation would result in a significantly lower (higher) fair value measurement. The discount for lack of marketability used to determine fair value may include other factors such as liquidity or credit risk. Generally, a change in the discount rate is accompanied by a directionally similar change in the risk premium and discount for lack of marketability.
For securities utilizing the market comparable companies valuation technique, a significant increase (decrease) in the EBITDA multiple in isolation would result in a significantly higher (lower) fair value measurement. A significant increase (decrease) in the discount for lack of marketability in isolation would result in a significantly lower (higher) fair value measurement. The discount for lack of marketability used to determine fair value may include other factors such as liquidity or credit risk.
For securities utilizing a market pricing valuation technique, a significant increase (decrease) in the price to book value ratio would result in a significantly higher (lower) fair value measurement.
Financial instruments of consolidated SIPs that were not measured at fair value were as follows:
(in millions)
 
 
 
September 30, 2014
 
September 30, 2013
 
Fair Value Level
 
Carrying Value
 
Estimated Fair Value
 
Carrying Value
 
Estimated Fair Value
Financial Assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents of consolidated SIPs
 
1
 
$
44.9

 
$
44.9

 
$
93.1

 
$
93.1

Financial Liabilities
 
 
 
 
 
 
 
 
 
 
Debt of consolidated SIPs
 
3
 
122.3

 
122.0

 
108.9

 
110.4

Redeemable Noncontrolling Interests
Changes in redeemable noncontrolling interests of consolidated SIPs were as follows:
(in millions)
 
 
 
 
 
 
for the fiscal years ended September 30,
 
2014
 
2013
 
2012
Balance at beginning of year
 
$
121.8

 
$
26.7

 
$
18.6

Net income
 
20.6

 
3.6

 
5.0

Net subscriptions
 
436.0

 
60.2

 
73.8

Net deconsolidations
 
(343.6
)
 
(58.5
)
 
(70.7
)
Acquisition
 

 
32.8

 

Reclassification from nonredeemable noncontrolling interests
 

 
57.0

 

Balance at End of Year
 
$
234.8

 
$
121.8

 
$
26.7

The reclassification from nonredeemable noncontrolling interests during fiscal year 2013 relates to an investment in a global fixed-income fund which is redeemable on a monthly basis without restriction.



95


Non-consolidated VIEs
VIEs for which the Company is not the primary beneficiary consist of sponsored and other investment products from which the Company earns investment management fees and/or in which it has an equity ownership interest.
The carrying values of the investment management fees receivable from and the equity ownership interests in these VIEs included in the Company’s consolidated balance sheets are set forth below. These amounts represent the Company’s maximum exposure to loss from these investment products.  
(in millions)
 
 
 
 
as of September 30,
 
2014
 
2013
Receivables
 
$
49.8

 
$
46.3

Investments
 
202.0

 
198.5

Total
 
$
251.8

 
$
244.8

The Company’s total AUM of non-consolidated VIEs was $42.4 billion at September 30, 2014 and $37.3 billion at September 30, 2013 .
While the Company has no contractual obligation to do so, it routinely makes cash investments in the course of launching SIPs. The Company also may voluntarily elect to provide its SIPs with additional direct or indirect financial support based on its business objectives. The Company did not provide financial or other support to its SIPs during fiscal years 2014 and 2013 .
Note 13 – Taxes on Income
Taxes on income were as follows:
(in millions)
 
 
 
 
 
 
for the fiscal years ended September 30,
 
2014
 
2013
 
2012
Current expense
 
 
 
 
 
 
Federal
 
$
803.6

 
$
699.6

 
$
602.9

State
 
82.4

 
76.8

 
56.1

Non-U.S.
 
114.1

 
85.7

 
83.2

Deferred (benefit) expense
 
(2.2
)
 
(6.2
)
 
20.5

Total
 
$
997.9

 
$
855.9

 
$
762.7

The provision for U.S. income taxes in fiscal years 2014 , 2013 and 2012 included benefits of $1.0 million , $1.4 million and $0.5 million related to the utilization of net operating loss carry-forwards. In fiscal years 2014 , 2013 and 2012 , the Company’s income taxes payable for federal, state and non-U.S. purposes have been reduced by tax benefits of $13.3 million , $24.4 million and $22.0 million associated with its stock-based compensation plans. The benefits were recorded as increases in capital in excess of par value.
Income before taxes consisted of the following:
(in millions)
 
 
 
 
 
 
for the fiscal years ended September 30,
 
2014
 
2013
 
2012
U.S.
 
$
2,160.8

 
$
1,904.1

 
$
1,711.9

Non-U.S.
 
1,248.8

 
1,122.5

 
966.3

Total
 
$
3,409.6

 
$
3,026.6

 
$
2,678.2

The Company’s income in certain countries is subject to reduced tax rates due to tax rulings. The impact of the reduced rates on income tax expense was $100.6 million or $0.16 per diluted share for fiscal year 2014 , $80.1 million



96


or $0.12 per diluted share for fiscal year 2013 , and $80.0 million or $0.12 per diluted share for fiscal year 2012 . One of the rulings expired on September 30, 2014 and was replaced by a new ruling at a higher tax rate on October 1, 2014 that expires in fiscal year 2019. The other tax rulings will expire in fiscal years 2019 and 2022 .
The significant components of deferred tax assets and deferred tax liabilities were as follows:
(in millions)
 
 
 
 
as of September 30,
 
2014
 
2013
Deferred Tax Assets
 
 
 
 
Deferred compensation and employee benefits
 
$
65.5

 
$
73.9

Stock-based compensation
 
35.9

 
32.0

Net operating loss carry-forwards
 
34.0

 
32.0

Tax benefit for uncertain tax positions
 
32.5

 
31.5

Other
 
12.6

 
15.2

Total deferred tax assets
 
180.5

 
184.6

Valuation allowance for net operating loss carry-forwards
 
(26.3
)
 
(18.7
)
Deferred tax assets, net of valuation allowance
 
154.2

 
165.9

Deferred Tax Liabilities
 
 
 
 
Goodwill and other purchased intangibles
 
231.4

 
229.8

Deferred commissions
 
28.1

 
28.0

Depreciation on fixed assets
 
18.2

 
24.0

Unrealized gains on investments
 
17.9

 
25.2

Other
 
19.8

 
19.0

Total deferred tax liabilities
 
315.4

 
326.0

Net Deferred Tax Liability
 
$
161.2

 
$
160.1

Deferred income tax assets and liabilities that relate to the same tax jurisdiction are recorded net on the consolidated balance sheets. The components of the net deferred tax liability were classified in the consolidated balance sheets as follows:
(in millions)
 
 
 
 
as of September 30,
 
2014
 
2013
Deferred tax assets, net
 
$
98.1

 
$
112.4

Deferred tax liabilities
 
259.3

 
272.5

Net Deferred Tax Liability
 
$
161.2

 
$
160.1

 
At September 30, 2014 , there were $120.5 million of non-U.S. net operating loss carry-forwards, $71.7 million of which expire between 2015 and 2024 with the remaining carry-forwards having an indefinite life. In addition, there were $135.8 million in state net operating loss carry-forwards that expire between 2020 and 2034 . A partial valuation allowance has been provided to offset the related deferred tax assets due to the uncertainty of realizing the benefit of the net operating loss carry-forwards. The valuation allowance increased $7.6 million in fiscal year 2014 and $1.3 million in the prior year.
The Company has made no provision for U.S. income taxes on $7.3 billion of cumulative undistributed non-U.S. earnings that are indefinitely reinvested at September 30, 2014 . Determination of the potential amount of unrecognized deferred U.S. income tax liability related to such reinvested non-U.S. earnings is not practicable because of the numerous assumptions associated with this hypothetical calculation. However, foreign tax credits would be available to reduce some portion of this amount. Changes to the Company’s policy of reinvestment or repatriation of non-U.S. earnings may have a significant effect on its financial condition and results of operations.



97


The following reconciles the amount of tax expense at the federal statutory rate and taxes on income as reflected in the consolidated statements of income:
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
for the fiscal years ended September 30,
 
2014
 
2013
 
2012
Federal taxes at statutory rate
 
$
1,193.4

 
35.0
 %
 
$
1,059.3

 
35.0
 %
 
$
937.4

 
35.0
 %
State taxes, net of federal tax effect
 
52.4

 
1.5
 %
 
47.3

 
1.6
 %
 
34.4

 
1.3
 %
Effect of non-U.S. operations
 
(246.3
)
 
(7.2
)%
 
(248.0
)
 
(8.2
)%
 
(218.8
)
 
(8.2
)%
Effect of net loss (income) attributable to noncontrolling interests
 
(9.6
)
 
(0.3
)%
 
(7.1
)
 
(0.2
)%
 
4.7

 
0.2
 %
Other
 
8.0

 
0.3
 %
 
4.4

 
0.1
 %
 
5.0

 
0.2
 %
Tax Provision
 
$
997.9

 
29.3
 %
 
$
855.9

 
28.3
 %
 
$
762.7

 
28.5
 %
A reconciliation of the beginning and ending balances of gross unrecognized tax benefits is as follows:
(in millions)
 
 
 
 
 
 
for the fiscal years ended September 30,
 
2014
 
2013
 
2012
Balance at beginning of year
 
$
109.5

 
$
101.3

 
$
99.7

Additions for tax positions of prior years
 
3.0

 
16.5

 
16.4

Reductions for tax positions of prior years
 
(2.4
)
 
(17.1
)
 
(6.3
)
Additions for tax positions related to the current year
 
14.1

 
13.4

 
10.0

Settlements with taxing authorities
 
(0.3
)
 

 
(13.7
)
Expirations of statute of limitations
 
(5.7
)
 
(4.6
)
 
(4.8
)
Balance at End of Year
 
$
118.2

 
$
109.5

 
$
101.3

If recognized, substantially all of this amount, net of any deferred tax benefits, would favorably affect the Company’s effective income tax rate in future periods.
Accrued interest on uncertain tax positions at September 30, 2014 and 2013 was $18.0 million and $15.6 million , and is not presented in the unrecognized tax benefits table above. Interest expense (benefit) of $2.4 million , $1.0 million and $(0.3) million was recognized in the consolidated statements of income during fiscal years 2014 , 2013 and 2012 . Accrued penalties at September 30, 2014 and 2013 were insignificant.
The Company files a consolidated U.S. federal income tax return, multiple U.S. state and local income tax returns, and income tax returns in multiple non-U.S. jurisdictions. The Company is subject to examination by the taxing authorities in these jurisdictions. The Company’s major tax jurisdictions and the tax years for which the statutes of limitations have not expired are as follows: India 1998 to 2014; Canada 2007 to 2014; Singapore 2009 to 2014; Hong Kong 2008 to 2014; Luxembourg 2012 to 2014; the U.K. 2012 to 2014; U.S. federal 2006 to 2008 and 2011 to 2014; the State of California 2007 to 2014; New York City 2010 to 2014; Minnesota 2009 to 2014; the States of Florida, New York and Massachusetts 2011 to 2014.
The Company has on-going examinations in various stages of completion in New York City, the States of California, Minnesota and New York, Canada, Hong Kong and India. Examination outcomes and the timing of settlements are subject to significant uncertainty. Such settlements may involve some or all of the following: the payment of additional taxes, the adjustment of deferred taxes and/or the recognition of unrecognized tax benefits. The Company has recognized a tax benefit only for those positions that meet the more-likely-than-not recognition threshold. It is reasonably possible that the total unrecognized tax benefit as of September 30, 2014 could decrease by an estimated $39.5 million within the next twelve months as a result of the expiration of statutes of limitations in the U.S. federal and certain U.S. state and local and non-U.S. tax jurisdictions, and potential settlements with U.S. states and non-U.S. taxing authorities. The unrecognized tax benefits described above are contractual obligations; however, at this time, the Company cannot make a reliable estimate as to the timing of cash settlements beyond the next twelve months. The



98


amounts of unrecognized tax benefits and related interest that are expected to be paid in the next twelve months are insignificant.
Note 14 – Commitments and Contingencies
Legal Proceedings
The Company is from time to time involved in litigation relating to claims arising in the normal course of business. Management is of the opinion that the ultimate resolution of such claims will not materially affect the Company s business, financial position, results of operations or liquidity. In management s opinion, an adequate accrual has been made as of September 30, 2014 to provide for any probable losses that may arise from such matters for which the Company could reasonably estimate an amount.
Other Commitments and Contingencies
The Company leases office space and equipment under operating leases expiring at various dates through fiscal year 2029 . Lease expense was $58.2 million , $57.4 million and $58.7 million in fiscal years 2014 , 2013 and 2012 . Sublease income totaled $1.7 million for fiscal year 2014 and $2.0 million for fiscal years 2013 and 2012 .
Future minimum lease payments under long-term non-cancelable operating leases were as follows as of September 30, 2014 :
(in millions)
 
 
for the fiscal years ending September 30,
 
Amount
2015
 
$
47.2

2016
 
39.8

2017
 
22.7

2018
 
20.3

2019
 
15.3

Thereafter
 
42.1

Total Minimum Lease Payments
 
$
187.4

Future minimum rentals to be received under non-cancelable subleases totaled $5.0 million at September 30, 2014 .
While the Company has no contractual obligation to do so, it routinely makes cash investments in the course of launching SIPs. At September 30, 2014 , the Company had $35.7 million of committed capital contributions which relate to discretionary commitments to invest in SIPs and other investment products. These unfunded commitments are not recorded in the Company s consolidated balance sheet.
In conjunction with an insurance recovery for prior years losses, the Company agreed to indemnify its insurance provider and hold it harmless against future payments that it may be required to make to any insured who does not release his, her or its rights under the relevant policy or relating to claims under that policy up to available policy limits. The Company also agreed to indemnify those insured funds that agreed to release any rights under the relevant policy or relating to claims under that policy, to the same extent of the released rights. While management believes that the chance of the Company having to make any payments as a result of these indemnities is remote, policy limits for certain insureds could be up to $88.0 million in the aggregate.
Note 15 – Stock-Based Compensation
The Company’s stock-based compensation plans include the Amended and Restated Annual Incentive Compensation Plan (the “AIP”) and the 2002 Universal Stock Incentive Plan, as amended and restated (the “USIP”). Under the terms of the AIP, eligible employees may receive cash, equity awards and/or mutual fund unit awards generally based on the performance of the Company, its funds and the individual employee. The USIP provides for the issuance



99


of the Company’s common stock for various stock-related awards to officers, directors and employees. There are 120.0 million shares authorized under the USIP, of which 29.6 million shares were available for grant at September 30, 2014 . The Compensation Committee of the Board of Directors determines the terms and conditions of awards under the AIP and USIP.
Total stock-based compensation costs of $127.7 million , $113.4 million and $101.3 million were recognized in the consolidated statements of income during fiscal years 2014 , 2013 and 2012 .
Stock and Stock Unit Awards
Stock awards generally entitle holders to the right to sell the underlying shares of the Company’s common stock once the awards vest. Stock unit awards generally entitle holders to receive the underlying shares of common stock once the awards vest. Certain performance-based long-term stock and stock unit awards have been granted that generally vest based on the achievement of predetermined Company financial performance goals. In the event a performance measure is not achieved at or above a specified threshold level, the portion of the award tied to such performance measure is forfeited.
Stock and stock unit award activity was as follows:
(shares in thousands)
 
Shares
 
Weighted-Average
Grant-Date Fair Value
for the fiscal year ended September 30, 2014
 
 
Nonvested balance at September 30, 2013
 
3,732

 
$
40.61

Granted
 
2,650

 
53.89

Vested
 
(2,715
)
 
43.00

Forfeited/canceled
 
(194
)
 
46.40

Nonvested Balance at September 30, 2014
 
3,473

 
$
48.55

Total unrecognized compensation cost related to nonvested stock and stock unit awards, net of estimated forfeitures, was $129.3 million at September 30, 2014 . This cost is expected to be recognized over a remaining weighted-average vesting period of 1.6 years . The weighted-average grant-date fair values of stock awards and stock unit awards granted during fiscal years 2014 , 2013 and 2012 were $53.89 , $44.01 and $35.59 per share. The total fair value of stock and stock unit awards vested during the same periods was $153.0 million , $126.3 million and $91.7 million .
The Company generally does not repurchase shares upon vesting of stock and stock unit awards. However, in order to pay taxes due in connection with the vesting of employee and executive officer stock and stock unit awards, shares are repurchased using a net stock issuance method.
Stock Options
Stock option activity was as follows:  
(shares in thousands)
 
Shares
 
Weighted-Average Exercise Price
for the fiscal year ended September 30, 2014
 
 
Outstanding at September 30, 2013
 
463

 
$
15.16

Exercised
 
(463
)
 
15.16

Outstanding at September 30, 2014
 

 
$

The total intrinsic values of stock options exercised during fiscal years 2014 , 2013 and 2012 were $17.9 million , $43.3 million and $61.2 million . Cash received from stock option exercises during the same periods was $7.2 million , $18.1 million and $27.7 million , and income tax benefits from the exercises were $5.9 million , $19.3 million and $16.7 million .



100


Employee Stock Investment Plan
The amended and restated Franklin Resources, Inc. 1998 Employee Stock Investment Plan (the “ESIP”) allows eligible participants to buy shares of the Company’s common stock at a discount of its market value on defined dates. The Compensation Committee of the Board of Directors determines the terms and conditions of awards under the ESIP. A total of 0.6 million shares were issued under the ESIP during fiscal year 2014 , and 5.8 million shares were reserved for future issuance at September 30, 2014 .
Note 16 – Employee Benefit Plans
Defined Benefit Plans
Franklin Templeton Global Investors Limited, a subsidiary of Franklin located in the U.K., sponsors a defined benefit pension plan (the “Pension Plan”). In addition, Fiduciary Trust Company International, a subsidiary of Franklin located in the U.S., sponsors a defined benefit healthcare plan (the “Healthcare Plan”) that provides post-retirement medical benefits to full-time employees who have worked ten years and attained age 55 while in the service of Fiduciary Trust, or have met alternate eligibility criteria. Both plans are closed to new participants, and the Pension Plan was closed to new contributions in May 2012.



101


Financial information for the plans was as follows:
(in millions)
 
Pension Plan
 
Healthcare Plan
as of and for the fiscal years ended September 30,
 
2014
 
2013
 
2014
 
2013
Change in Benefit Obligation
 
 
 
 
 
 
 
 
Benefit obligation at beginning of year
 
$
41.4

 
$
52.7

 
$
5.5

 
$
6.8

Interest cost
 
1.9

 
2.3

 
0.2

 
0.2

Plan settlements
 

 
(18.4
)
 

 

Benefits paid
 
(5.3
)
 
(2.4
)
 
(0.8
)
 
(0.6
)
Actuarial (gains) losses
 
1.8

 
7.6

 
0.5

 
(0.9
)
Foreign currency movements
 
0.1

 
(0.4
)
 

 

Benefit Obligation at End of Year
 
$
39.9

 
$
41.4

 
$
5.4

 
$
5.5

Change in Fair Value of Plan Assets
 
 
 
 

 
 
 
 

Fair value of plan assets at beginning of year
 
$
41.1

 
$
52.8

 
$

 
$

Actual return on assets
 
3.8

 
9.4

 

 

Employer contributions
 
1.1

 

 
0.8

 
0.6

Plan settlements
 

 
(18.4
)
 

 

Benefits paid
 
(5.3
)
 
(2.4
)
 
(0.8
)
 
(0.6
)
Foreign currency movements
 
0.1

 
(0.3
)
 

 

Fair Value of Plan Assets at End of Year
 
$
40.8

 
$
41.1

 
$

 
$

Funded Status
 
$
0.9

 
$
(0.3
)
 
$
(5.4
)
 
$
(5.5
)
(in millions)
 
Pension Plan
 
Healthcare Plan
as of and for the fiscal years ended September 30,
 
2014
 
2013
 
2014
 
2013
Amounts Recognized in the Consolidated Balance Sheets
 
 
 
 
 
 
 
 
Other assets
 
$
0.9

 
$

 
$

 
$

Compensation and benefits
 

 

 
(0.4
)
 
(0.4
)
Other liabilities
 

 
(0.3
)
 
(5.0
)
 
(5.1
)
Net Asset (Liability)
 
$
0.9

 
$
(0.3
)
 
$
(5.4
)
 
$
(5.5
)
Weighted-Average Assumptions
 
 
 
 

 
 
 
 

Discount rate
 
4.10
%
 
4.50
%
 
4.05
%
 
4.55
%
Expected long-term rate of return on plan assets 1
 
6.41
%
 
6.41
%
 
N/A

 
N/A

Rate of compensation increase
 
N/A

 
N/A

 
2.50
%
 
2.50
%
________________
1  
The expected long-term rate of return on plan assets is based on the weighted-average historic performance of each asset class and current market conditions.




102


The components of net periodic benefit cost (gain) for the plans were as follows:
(in millions)
 
Pension Plan
 
Healthcare Plan
for the fiscal years ended September 30,
 
2014
 
2013
 
2012
 
2014
 
2013
 
2012
Service cost
 
$

 
$

 
$
3.6

 
$

 
$

 
$

Interest cost
 
1.9

 
2.3

 
2.2

 
0.2

 
0.2

 
0.3

Plan curtailments
 

 

 
0.5

 

 

 

Plan settlements
 

 
1.6

 

 

 

 

Expected return on plan assets
 
(2.6
)
 
(3.2
)
 
(3.1
)
 

 

 

Amortization of net actuarial losses
 

 

 

 

 
0.3

 

Net Periodic Benefit Cost (Gain)
 
$
(0.7
)
 
$
0.7

 
$
3.2

 
$
0.2

 
$
0.5

 
$
0.3

As of September 30, 2014 and 2013 , the Pension Plan assets were invested in investment funds with holdings of $34.6 million and $35.8 million in equity securities, $3.3 million and $3.2 million in debt securities, and $2.9 million and $2.1 million in cash and cash equivalents. The fair value of the investment funds, which are classified as Level 1, is determined based on the published NAV of the funds. There were no Pension Plan assets classified as Level 2 or 3 during fiscal years 2014 or 2013 .
The Company has no target allocation set for the Pension Plan as the plan members control all investment decisions. The Healthcare Plan is an unfunded benefit plan. The Company expects to contribute $1.1 million to the Pension Plan and $0.4 million to the Healthcare Plan in fiscal year 2015.
The plan benefits expected to be paid over the next ten years were as follows:  
(in millions)
 
Pension Plan
 
Healthcare Plan
for the fiscal years ending September 30,
2015
 
$
1.4

 
$
0.5

2016
 
0.1

 
0.5

2017
 
0.4

 
0.5

2018
 
0.3

 
0.4

2019
 
0.4

 
0.4

Thereafter in the succeeding five years
 
13.0

 
2.1

Defined Contribution Plans
The Company sponsors a 401(k) plan that covers substantially all U.S. employees who meet certain employment requirements. Participants may contribute up to 50% of pretax annual compensation and up to 100% of the cash portion of the participant s year-end bonus, as defined by the plan and subject to Internal Revenue Code limitations, each year to the plan. In addition, certain of the Company s non-U.S. subsidiaries sponsor defined contribution plans primarily for the purpose of providing deferred compensation incentives for its employees and to comply with local regulatory requirements. The total expenses recognized for defined contribution plans in the consolidated statements of income were $47.0 million , $44.0 million and $36.8 million for fiscal years 2014 , 2013 and 2012 .



103


Note 17 – Segment and Geographic Information
The Company has one operating segment, investment management and related services.
Geographic information was as follows:
(in millions)
 
 
 
 
 
 
for the fiscal years ended September 30,
 
2014
 
2013
 
2012
Operating Revenues
 
 
 
 
 
 
United States
 
$
5,014.4

 
$
5,389.5

 
$
4,791.9

Luxembourg
 
2,034.0

 
363.4

 
311.8

The Bahamas
 
492.7

 
1,049.7

 
904.2

Asia-Pacific
 
420.2

 
661.0

 
627.7

Canada
 
357.6

 
323.3

 
309.0

Europe, the Middle East and Africa, excluding Luxembourg
 
159.8

 
184.4

 
146.8

Latin America
 
12.7

 
13.7

 
9.6

Total
 
$
8,491.4

 
$
7,985.0

 
$
7,101.0

(in millions)
 
 
 
 
 
 
as of September 30,
 
2014
 
2013
 
2012
Property and Equipment, Net
 
 
 
 
 
 
United States
 
$
417.0

 
$
443.4

 
$
447.9

Asia-Pacific
 
78.0

 
81.0

 
94.3

The Bahamas
 
15.1

 
15.7

 
16.5

Europe, the Middle East and Africa
 
13.8

 
15.3

 
13.0

Canada
 
5.9

 
8.1

 
10.4

Latin America
 
0.9

 
0.6

 
0.6

Total
 
$
530.7

 
$
564.1

 
$
582.7

Operating revenues are generally allocated to geographic areas based on the location of the office providing services. During fiscal year 2014, one of the Company s Luxembourg subsidiaries became the management company responsible for providing investment management, distribution and shareholder servicing services to the Company’s cross-border SIPs. These services were previously the responsibility of subsidiaries in the Bahamas, Asia-Pacific and the United States.



104


Note 18 – Other Income (Expenses)
Other income (expenses) consisted of the following:  
(in millions)
 
 
 
 
 
 
for the fiscal years ended September 30,
 
2014
 
2013
 
2012
Investment and Other Income, Net
 
 
 
 
 
 
Dividend income
 
$
10.1

 
$
10.8

 
$
22.5

Interest income
 
9.1

 
7.5

 
12.5

Gains on trading investment securities, net
 
10.4

 
8.7

 
34.7

Realized gains on sale of investment securities, available-for-sale
 
57.8

 
50.9

 
41.0

Realized losses on sale of investment securities, available-for-sale
 
(1.0
)
 
(0.9
)
 
(2.2
)
Income from investments in equity method investees
 
68.1

 
74.0

 
68.6

Other-than-temporary impairment of investments
 
(0.6
)
 
(2.4
)
 
(10.1
)
Gains (losses) on investments of consolidated SIPs, net
 
33.9

 
42.4

 
(15.9
)
Gains (losses) on assets and liabilities of consolidated VIEs, net
 
7.1

 
(16.0
)
 
25.6

Foreign currency exchange gains (losses), net
 
32.1

 
(30.9
)
 
7.1

Other, net
 
8.8

 
8.1

 
15.9

Total
 
235.8

 
152.2

 
199.7

Interest Expense
 
(47.4
)
 
(46.9
)
 
(36.7
)
Other Income (Expenses), Net
 
$
188.4

 
$
105.3

 
$
163.0

Substantially all of the Company’s dividend income and realized gains and losses on sale of available-for-sale securities were generated by investments in its non-consolidated SIPs. Interest income was primarily generated by cash equivalents and investments in trading securities and debt securities of U.S. states and political subdivisions. Proceeds from the sale of available-for-sale securities were $380.4 million , $367.1 million and $578.1 million for fiscal years 2014 , 2013 and 2012 . The realized gains and losses on sale of available-for-sale securities and the amounts of other-than-temporary impairment of investments related to available-for-sale securities were reclassified into investment and other income, net from accumulated other comprehensive income.
Net gains recognized on the Company s trading investment securities that were held at September 30, 2014 , 2013 and 2012 were $5.2 million , $0.6 million and $24.0 million . Net gains recognized on trading investment securities of consolidated SIPs that were held at September 30, 2014 , 2013 and 2012 were $3.7 million , $12.2 million and $22.9 million .
Note 19 – Accumulated Other Comprehensive Income
Changes in accumulated other comprehensive income by component were as follows:  
(in millions)
 
Unrealized Gains (Losses) on Investments
 
Currency Translation Adjustments
 
Unrealized Losses on Defined Benefit Plans
 
Total
for the fiscal year ended September 30, 2014
 
 
 
 
Balance at October 1, 2013
 
$
71.9

 
$
(63.2
)
 
$
(2.6
)
 
$
6.1

Other comprehensive income (loss) before reclassifications, net of tax
 
5.9

 
(80.4
)
 
(2.5
)
 
(77.0
)
Reclassifications to net investment and other income, net of tax
 
(46.8
)
 

 

 
(46.8
)
Total other comprehensive loss
 
(40.9
)
 
(80.4
)
 
(2.5
)
 
(123.8
)
Balance at September 30, 2014
 
$
31.0

 
$
(143.6
)
 
$
(5.1
)
 
$
(117.7
)



105


Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item  9A.
Controls and Procedures.
The Company’s management evaluated, with the participation of the Company’s principal executive and principal financial officers, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”)) as of September 30, 2014 . Based on their evaluation, the Company’s principal executive and principal financial officers concluded that the Company s disclosure controls and procedures as of September 30, 2014 were designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC s rules and forms, and (ii) accumulated and communicated to management, including the principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.
There has been no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the Company’s fiscal quarter ended September 30, 2014 , that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting and the Report of Independent Registered Public Accounting Firm set forth in Item 8 of Part II of this Form 10-K are incorporated herein by reference.
Item 9B.
Other Information.
None.

PART III
Item  10.
Directors, Executive Officers and Corporate Governance.
The information required by this Item 10 with respect to executive officers of the Company is contained at the end of Part I of this Form 10-K under the heading “Executive Officers of the Registrant.”
Code of Ethics. The Company has adopted a Code of Ethics and Business Conduct (the “Code of Ethics”) that applies to the Company s principal executive officer, principal financial officer, principal accounting officer, controller, and any persons performing similar functions, as well as all directors, officers and employees of the Company and its subsidiaries and affiliates. The Code of Ethics is posted on the Company’s website at www.franklinresources.com under “Corporate Governance.” A copy of the Code of Ethics is available in print free of charge to any stockholder who requests a copy. Interested parties may address a written request for a printed copy of the Code of Ethics to: Secretary, Franklin Resources, Inc., One Franklin Parkway, San Mateo, California 94403-1906. The Company intends to satisfy the disclosure requirement regarding any amendment to, or a waiver from, a provision of the Code of Ethics for the Company’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, by posting such information on its website.
The other information required by this Item 10 is incorporated by reference from the information provided under the sections entitled “Proposal No.1 Election of Directors–Nominees,” “Information about the Board and its Committees–The Audit Committee” and “Section 16(a) Beneficial Ownership Reporting Compliance” from the Company’s definitive proxy statement for its annual meeting of stockholders (“2015 Proxy Statement”) to be filed with the SEC within 120 days after September 30, 2014 .



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Table of Contents

Item  11.
Executive Compensation.
The information required by this Item 11 is incorporated by reference from the information provided under the sections entitled “Director Fees” and “Executive Compensation” of the Company’s 2015 Proxy Statement.
Item  12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item 12 with respect to security ownership of certain beneficial owners and management is incorporated by reference from the information provided under the sections entitled “Stock Ownership and Stock-Based Holdings of Directors and Executive Officers” and “Stock Ownership of Certain Beneficial Owners” of the Company’s 2015 Proxy Statement.
  Equity Compensation Plan Information.
The following table sets forth certain information as of September 30, 2014 with respect to the shares of the Company’s common stock that may be issued under the Company’s existing compensation plans that have been approved by stockholders and plans that have not been approved by stockholders.
Plan Category
 
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
 
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
 
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c)
 
Equity compensation plans approved by stockholders 1
 
1,686,617

2  
N/A

3  
35,378,800

4  
Equity compensation plans not approved by stockholders
 

 

 

 
Total
 
1,686,617

 
N/A

 
35,378,800

 
________________
1  
Consists of the 2002 Universal Stock Incentive Plan, as amended and restated (the “USIP”) and the amended and restated Franklin Resources, Inc. 1998 Employee Stock Investment Plan (the “ESIP”). Equity securities granted under the USIP may include awards in connection with the Amended and Restated Annual Incentive Compensation Plan and the 2014 Key Executive Incentive Compensation Plan.
2  
Represents restricted stock unit awards under the USIP that may be settled in shares of the Company’s common stock. Excludes options to purchase shares of the Company’s common stock accruing under the Company’s ESIP. Under the ESIP, each eligible employee is granted a separate option to purchase up to 6,000 shares of common stock each semi-annual accrual period on January 31 and July 31 at a purchase price per share equal to 85% of the fair market value of the common stock on the enrollment date or the exercise date, whichever is lower.
3  
Does not take into account restricted stock unit awards under the USIP.
4  
As of September 30, 2014 , 5.8 million shares of common stock were available for future issuance under the ESIP and 29.6 million shares of common stock were available for future issuance under the USIP.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item 13 is incorporated by reference from the information provided under the sections entitled “Proposal No. 1 Election of Directors-General,” “Corporate Governance–Director Independence Standards” and “Certain Relationships and Related Transactions” of the Company’s 2015 Proxy Statement.
Item  14.
Principal Accountant Fees and Services.
The information required by this Item 14 is incorporated by reference from the information provided under the section entitled “Fees Paid to Independent Registered Public Accounting Firm” of the Company’s 2015 Proxy Statement.



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Table of Contents


PART IV
Item  15.
Exhibits and Financial Statement Schedules.
 
(a)(1)
The financial statements filed as part of this report are listed in Item 8 of this Form 10-K.
(a)(2)
No financial statement schedules are required to be filed as part of this report because all such schedules have been omitted. Such omission has been made on the basis that information is provided in the financial statements, or in the related notes thereto, in Item 8 of this Form 10-K or is not required to be filed as the information is not applicable.
(a)(3)
Exhibits.
 
Exhibit No.
 
Description
3(i)(a)

 
Registrant’s Certificate of Incorporation, as filed November 28, 1969, incorporated by reference to Exhibit (3)(i) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 1994 (File No. 001-09318) (the “1994 Annual Report”)
3(i)(b)

 
Registrant’s Certificate of Amendment of Certificate of Incorporation, as filed March 1, 1985, incorporated by reference to Exhibit 3(ii) to the 1994 Annual Report
3(i)(c)

 
Registrant’s Certificate of Amendment of Certificate of Incorporation, as filed April 1, 1987, incorporated by reference to Exhibit 3(iii) to the 1994 Annual Report
3(i)(d)

 
Registrant’s Certificate of Amendment of Certificate of Incorporation, as filed February 2, 1994, incorporated by reference to Exhibit 3(iv) to the 1994 Annual Report
3(i)(e)

 
Registrant’s Certificate of Amendment of Certificate of Incorporation, as filed on February 4, 2005, incorporated by reference to Exhibit (3)(i)(e) to the Registrant’s Quarterly Report on Form 10-Q for the period ended December 31, 2004 (File No. 001-09318)
3(ii)

 
Registrant’s Amended and Restated Bylaws (as adopted and effective December 10, 2013), incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed with the SEC on December 11, 2013 (File No. 001-09318)
4.1

 
Indenture between the Registrant and The Bank of New York Mellon Trust Company, N.A. (as successor to Chemical Bank), as trustee, dated as of May 19, 1994, incorporated by reference to Exhibit 4 to the Registrant’s Registration Statement on Form S-3 filed with the SEC on April 14, 1994 (File No. 033-53147)
4.2

 
First Supplemental Indenture, dated October 9, 1996, between the Registrant and The Bank of New York Mellon Trust Company, N.A. (as successor to The Chase Manhattan Bank), as trustee, incorporated by reference to Exhibit 4.2 to the Registrant’s Registration Statement on Form S-3 filed with the SEC on October 4, 1996 (File No. 333-12101)
4.3

 
Second Supplemental Indenture, dated May 20, 2010, between the Registrant and The Bank of New York Mellon Trust Company, N.A., as trustee, incorporated by reference to Exhibit 4.1 to the Registrant’s Form 8-K filed with the SEC on May 20, 2010 (File No. 001-09318)
4.4

 
Third Supplemental Indenture, dated September 24, 2012, between the Registrant and The Bank of New York Mellon Trust Company, N.A., as trustee, incorporated by reference to Exhibit 4.1 to the Registrant’s Form 8-K filed with the SEC on September 24, 2012 (File No. 001-09318)
10.1

 
Representative Form of Amended and Restated Indemnification Agreement with directors of the Registrant, incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2006 (File No. 001-09318)*
10.2

 
Representative Form of Notice of Restricted Stock Award and Restricted Stock Award Agreement (RSA) under the Registrant’s 2002 Universal Stock Incentive Plan for certain executive officers of the Registrant (filed herewith)*
10.3

 
Representative Form of Notice of Restricted Stock Unit Award and Restricted Stock Unit Award Agreement (RSU) under the Registrant’s 2002 Universal Stock Incentive Plan for long-term performance awards for certain executive officers of the Registrant (filed herewith)*
10.4

 
2006 Directors Deferred Compensation Plan, as amended and restated effective March 13, 2013, incorporated by reference to Exhibit 10.1 to the Registrant s Quarterly Report on Form 10-Q for the period ended March 31, 2013 (File No. 001-09318)*



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Table of Contents

Exhibit No.
 
Description
10.5

 
1998 Employee Stock Investment Plan (as amended and restated February 1, 2012), incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended December 31, 2011 (File No. 001-09318)*
10.6

 
2002 Universal Stock Incentive Plan (as amended and restated effective October 22, 2012), incorporated by reference to Exhibit 10.25 to the Registrant s Annual Report on Form 10-K for the fiscal year ended September 30, 2012 (File No. 001-09318)*
10.7

 
Amended and Restated Annual Incentive Compensation Plan (as amended and restated effective October 20, 2014) (filed herewith)*
10.8

 
2014 Key Executive Incentive Compensation Plan (as adopted and effective December 10, 2013), incorporated by reference to Exhibit 10.1 to the Registrant s Current Report on Form 8-K filed with the SEC on March 13, 2014 (File No. 001-09318)*
10.9

 
Non-Employee Director Compensation as of March 31, 2014, incorporated by reference to Exhibit 10.3 to the Registrant s Quarterly Report on Form 10-Q for the period ended March 31, 2014 (File No. 001-09318)*
10.10

 
Named Executive Officer Compensation as of March 31, 2014, incorporated by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 2014 (File No. 001-09318)*
12

 
Computation of Ratios of Earnings to Fixed Charges (filed herewith)
21

 
List of Subsidiaries (filed herewith)
23

 
Consent of Independent Registered Public Accounting Firm (filed herewith)
31.1

 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2

 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.1

 
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
32.2

 
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
101

 
The following materials from the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2014, formatted in Extensible Business Reporting Language (XBRL), include: (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) related notes (filed herewith)
___________
*         Management Contract or Compensatory Plan or Arrangement



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Table of Contents

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
FRANKLIN RESOURCES, INC.
 
 
 
 
Date:
November 12, 2014
By:
/s/ Kenneth A. Lewis        
 
 
 
Kenneth A. Lewis, Chief Financial Officer and Executive Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
 
Date:
 
By:
 
 
 
 
Samuel H. Armacost, Director
 
 
 
 
Date:
November 12, 2014
By:
/s/ Peter K. Barker       
 
 
 
Peter K. Barker, Director
 
 
 
 
Date:
November 12, 2014
By:
/s/ Charles E. Johnson        
 
 
 
Charles E. Johnson, Director
 
 
 
 
Date:
November 12, 2014
By:
/s/ Gregory E. Johnson        
 
 
 
Gregory E. Johnson, Chairman, Director, President and Chief Executive Officer (Principal Executive Officer)
 
 
 
 
Date:
November 12, 2014
By:
/s/ Rupert H. Johnson, Jr.        
 
 
 
Rupert H. Johnson, Jr., Vice Chairman and Director
 
 
 
 
Date:
November 12, 2014
By:
/s/ Kenneth A. Lewis        
 
 
 
Kenneth A. Lewis, Chief Financial Officer and Executive Vice President
(Principal Financial and Accounting Officer)
 
 
 
 
Date:
November 12, 2014
By:
/s/ Mark C. Pigott
 
 
 
Mark C. Pigott, Director
 
 
 
 
Date:
November 12, 2014
By:
/s/ Chutta Ratnathicam        
 
 
 
Chutta Ratnathicam, Director
 
 
 
 
Date:
November 12, 2014
By:
/s/ Laura Stein        
 
 
 
Laura Stein, Director
 
 
 
 
Date:
November 12, 2014
By:
/s/ Anne M. Tatlock        
 
 
 
Anne M. Tatlock, Director
 
 
 
 
Date:
November 12, 2014
By:
/s/ Geoffrey Y. Yang        
 
 
 
Geoffrey Y. Yang, Director
 



110

Table of Contents

EXHIBIT INDEX
Exhibit No.
 
Description
3(i)(a)

 
Registrant’s Certificate of Incorporation, as filed November 28, 1969, incorporated by reference to Exhibit (3)(i) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 1994 (File No. 001-09318) (the “1994 Annual Report”)
3(i)(b)

 
Registrant’s Certificate of Amendment of Certificate of Incorporation, as filed March 1, 1985, incorporated by reference to Exhibit 3(ii) to the 1994 Annual Report
3(i)(c)

 
Registrant’s Certificate of Amendment of Certificate of Incorporation, as filed April 1, 1987, incorporated by reference to Exhibit 3(iii) to the 1994 Annual Report
3(i)(d)

 
Registrant’s Certificate of Amendment of Certificate of Incorporation, as filed February 2, 1994, incorporated by reference to Exhibit 3(iv) to the 1994 Annual Report
3(i)(e)

 
Registrant’s Certificate of Amendment of Certificate of Incorporation, as filed on February 4, 2005, incorporated by reference to Exhibit (3)(i)(e) to the Registrant’s Quarterly Report on Form 10-Q for the period ended December 31, 2004 (File No. 001-09318)
3(ii)

 
Registrant’s Amended and Restated Bylaws (as adopted and effective December 10, 2013), incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed with the SEC on December 11, 2013 (File No. 001-09318)
4.1

 
Indenture between the Registrant and The Bank of New York Mellon Trust Company, N.A. (as successor to Chemical Bank), as trustee, dated as of May 19, 1994, incorporated by reference to Exhibit 4 to the Registrant’s Registration Statement on Form S-3 filed with the SEC on April 14, 1994 (File No. 033-53147)
4.2

 
First Supplemental Indenture, dated October 9, 1996, between the Registrant and The Bank of New York Mellon Trust Company, N.A. (as successor to The Chase Manhattan Bank), as trustee, incorporated by reference to Exhibit 4.2 to the Registrant’s Registration Statement on Form S-3 filed with the SEC on October 4, 1996 (File No. 333-12101)
4.3

 
Second Supplemental Indenture, dated May 20, 2010, between the Registrant and The Bank of New York Mellon Trust Company, N.A., as trustee, incorporated by reference to Exhibit 4.1 to the Registrant’s Form 8-K filed with the SEC on May 20, 2010 (File No. 001-09318)
4.4

 
Third Supplemental Indenture, dated September 24, 2012, between the Registrant and The Bank of New York Mellon Trust Company, N.A., as trustee, incorporated by reference to Exhibit 4.1 to the Registrant’s Form 8-K filed with the SEC on September 24, 2012 (File No. 001-09318)
10.1

 
Representative Form of Amended and Restated Indemnification Agreement with directors of the Registrant, incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2006 (File No. 001-09318)*
10.2

 
Representative Form of Notice of Restricted Stock Award and Restricted Stock Award Agreement (RSA) under the Registrant’s 2002 Universal Stock Incentive Plan for certain executive officers of the Registrant (filed herewith)*
10.3

 
Representative Form of Notice of Restricted Stock Unit Award and Restricted Stock Unit Award Agreement (RSU) under the Registrant’s 2002 Universal Stock Incentive Plan for long-term performance awards for certain executive officers of the Registrant (filed herewith)*
10.4

 
2006 Directors Deferred Compensation Plan, as amended and restated effective March 13, 2013, incorporated by reference to Exhibit 10.1 to the Registrant s Quarterly Report on Form 10-Q for the period ended March 31, 2013 (File No. 001-09318)*
10.5

 
1998 Employee Stock Investment Plan (as amended and restated February 1, 2012), incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended December 31, 2011 (File No. 001-09318)*
10.6

 
2002 Universal Stock Incentive Plan (as amended and restated effective October 22, 2012), incorporated by reference to Exhibit 10.25 to the Registrant s Annual Report on Form 10-K for the fiscal year ended September 30, 2012 (File No. 001-09318)*
10.7

 
Amended and Restated Annual Incentive Compensation Plan (as amended and restated effective October 20, 2014) (filed herewith)*
10.8

 
2014 Key Executive Incentive Compensation Plan (as adopted and effective December 10, 2013), incorporated by reference to Exhibit 10.1 to the Registrant s Current Report on Form 8-K filed with the SEC on March 13, 2014 (File No. 001-09318)*



111

Table of Contents

Exhibit No.
 
Description
10.9

 
Non-Employee Director Compensation as of March 31, 2014, incorporated by reference to Exhibit 10.3 to the Registrant s Quarterly Report on Form 10-Q for the period ended March 31, 2014 (File No. 001-09318)*
10.10

 
Named Executive Officer Compensation as of March 31, 2014, incorporated by reference to Exhibit 10.4 to the Registrant s Quarterly Report on Form 10-Q for the period ended March 31, 2014 (File No. 001-09318)*
12

 
Computation of Ratios of Earnings to Fixed Charges (filed herewith)
21

 
List of Subsidiaries (filed herewith)
23

 
Consent of Independent Registered Public Accounting Firm (filed herewith)
31.1

 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2

 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.1

 
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
32.2

 
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
101

 
The following materials from the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2014, formatted in Extensible Business Reporting Language (XBRL), include: (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) related notes (filed herewith)
__________
*        Management Contract or Compensatory Plan or Arrangement




112


Exhibit 10.2

FRANKLIN RESOURCES, INC.
2002 UNIVERSAL STOCK INCENTIVE PLAN
NOTICE OF RESTRICTED STOCK AWARD

    
Name:
 
Address:
 


In accordance with the Franklin Resources, Inc. 2002 Universal Stock Incentive Plan (the “2002 Plan”), as an incentive for increased efforts and successful achievements, Franklin Resources, Inc. (the “Company”), has awarded Participant shares of common stock of the Company subject to the terms and conditions of the accompanying Restricted Stock Award Agreement (the “Award Agreement”), this Notice of Restricted Stock Award (the “Notice of Award” and together with the Award Agreement, the “Award”) and the 2002 Plan, as follows:

Award Number
 
Award Date
 
Total Number of Shares (the “Shares” ) Awarded
 

Subject to Participant’s Continuous Status as an Employee (as defined in the 2002 Plan) of the Company or any of its Subsidiaries (as defined in the 2002 Plan) and other limitations set forth in the Award and the 2002 Plan, the Shares shall vest in accordance with the following schedule:
Vesting Schedule                  Number of Shares

[Vesting schedule terms subject to approval of the Compensation Committee of the Board of Directors of the Company.]

Participant acknowledges and agrees that the Shares subject to this Award shall vest only by Participant’s Continuous Status as an Employee and that such status is at the will of the Company or the applicable Subsidiary (not through the act of being hired, being granted this Award or acquiring Shares hereunder). Participant further acknowledges and agrees that nothing in this Award nor in the 2002 Plan, which is incorporated herein by this reference, affects the Company’s, or a Subsidiary’s, right to terminate, or to change the terms of, Participant’s employment at any time, with or without cause.
Participant acknowledges that, from time to time, the Company may be in a “Blackout Period” and/or subject to applicable securities laws that could subject Participant to liability for engaging in any transaction involving the sale of the Company’s shares. Participant further acknowledges and agrees that, prior to the sale of any Shares acquired under this Award, it is Participant’s responsibility to determine whether or not such sale of Shares will subject Participant to liability under insider trading rules or other applicable securities laws.
Participant hereby: (i) consents to access the 2002 Plan prospectus in connection with the Form S-8 registration statement for the 2002 Plan, any updates thereto, the 2002 Plan, the Award Agreement and this Notice of Award (collectively, the “2002 Plan Documents”) in electronic form either through Connected on the Company’s Intranet or another form of electronic communication (e.g. e-mail); (ii) represents that Participant has access to the Company’s Intranet and the Internet; (iii) acknowledges receipt of electronic copies, or that Participant is already in possession of paper copies, of the 2002 Plan Documents and the Company’s most recent annual report to stockholders; and (iv) acknowledges that Participant is familiar with and has accepted the Award subject to the terms and provisions of the 2002 Plan Documents.

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Participant may receive, without charge, upon written or oral request, paper copies of any or all of the 2002 Plan Documents, documents incorporated by reference in the Form S-8 registration statement for the 2002 Plan, and the Company’s most recent annual report to stockholders by requesting them from Stock Administration at the Company, One Franklin Parkway, San Mateo, CA 94403-1906. Telephone (650) 312-2000. Participant may also withdraw Participant’s consent to receive any or all documents electronically by notifying Stock Administration at the above address in writing.
By accepting the Award, whether in electronic form or otherwise, Participant agrees that the Award is granted under and governed by the terms and conditions of the 2002 Plan, this Notice of Award and the Award Agreement.



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FRANKLIN RESOURCES, INC.
2002 UNIVERSAL STOCK INCENTIVE PLAN
RESTRICTED STOCK AWARD AGREEMENT


This Restricted Stock Award Agreement, together with any Appendix(es) attached hereto (hereinafter, collectively, the “Agreement”), is made as of the Award Date set forth in the Notice of Restricted Stock Award (the “Notice of Award”) between Franklin Resources, Inc. (the “Company”) and the Participant named therein (“Participant”).

WITNESSETH:

WHEREAS, the Board of Directors and stockholders of the Company have adopted the Franklin Resources, Inc. 2002 Universal Stock Incentive Plan (the “2002 Plan”), authorizing the grant of common stock of the Company (“Stock”) to eligible individuals as an incentive in connection with the performance of services for the Company and its Subsidiaries, as defined in the 2002 Plan, which is incorporated herein by this reference (capitalized terms used but not defined in this Agreement have the same meaning as set forth in the 2002 Plan or the Notice of Award, as applicable); and

WHEREAS, the Company recognizes the efforts of Participant on behalf of the Company and its Subsidiaries and desires to motivate Participant in Participant’s work and provide an inducement to remain in the service of the Company and its Subsidiaries; and

WHEREAS, the Company has determined that it would be to the advantage and in the interest of the Company and its stockholders to award the Stock provided for in this Agreement and the Notice of Award to Participant, subject to certain restrictions, as an incentive for increased efforts and successful achievements;
    
NOW, THEREFORE, in consideration of the foregoing premises and of the mutual covenants herein contained, the parties hereto hereby agree as follows:

1.     Restricted Stock Award . The Company is issuing to Participant shares of Stock as set forth in the Notice of Award, subject to the rights of and limitations on Participant as owner thereof as set forth in this Agreement. Such shares are being issued in book entry form and maintained on the books of Computershare, the Company’s transfer agent, or any successor thereto. All shares of Stock issued hereunder shall be deemed issued to Participant as fully paid and non-assessable shares, and, subject to the restrictions set forth in the 2002 Plan and this Agreement, Participant shall have all rights of a stockholder with respect thereto, including the right to vote, to receive dividends (including stock dividends), to participate in stock splits or other recapitalizations, and to exchange such shares in a tender offer, merger, consolidation or other reorganization. The Company shall pay any applicable stock transfer taxes. Participant hereby acknowledges that Participant is acquiring the Stock issued hereunder for investment and not with a view to the distribution thereof, and that Participant does not intend to subdivide Participant’s interest in the Stock with any other person.

2. Transfer Restriction .

(a)    No Stock issued to Participant hereunder shall be sold, transferred by gift, pledged, hypothecated, or otherwise transferred or disposed of by Participant prior to the date on which it becomes vested under paragraph 3, except by will or the laws of descent and distribution. This paragraph shall not preclude Participant from exchanging the Stock awarded hereunder pursuant to a cash or stock tender offer, merger, reorganization or consolidation. Notwithstanding the foregoing, any securities (including stock dividends and stock splits) received with respect to shares of Stock which are not yet vested under paragraph 3 shall be subject to the provisions of this Agreement in the same manner and shall become fully vested at the same time as the Stock with respect to which such additional securities were issued.


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(b)    Participant acknowledges that, from time to time, the Company may be in a “Blackout Period” and/or subject to applicable securities laws that could subject Participant to liability for engaging in any transaction involving the sale of Stock. Participant further acknowledges and agrees that, prior to the sale of any Stock acquired under this Award, it is Participant’s responsibility to determine whether or not such sale of Stock will subject Participant to liability under insider trading rules or other applicable securities laws.

3.     Vesting .

(a)    Participant’s interest in the Stock awarded under paragraph 1 shall become vested and nonforfeitable in accordance with the Vesting Schedule in the Notice of Award so long as Participant maintains a Continuous Status as an Employee. Upon vesting, the Company shall, within thirty (30) days of such vesting, deliver to Participant the certificates evidencing the nonforfeitable shares (free of restrictive legends on such stock certificates), provided the withholding requirements of paragraph 4 have been satisfied. Alternatively, provided the withholding requirements of paragraph 4 have been satisfied, the Committee may permit or require that such nonforfeitable shares of Stock (free of the restrictive notations on shares of Stock issued in book-entry form) be deposited directly with a brokerage firm or transfer agent determined acceptable to the Company for such purpose or to a designated agent of the Company, and the Committee may utilize electronic or automated methods of share transfer.

(b)    If Participant ceases to maintain a Continuous Status as an Employee for any reason other than death or disability (as described in subparagraph (c)), all shares of Stock to the extent not yet vested under subparagraph (a) on the date Participant ceases to maintain a Continuous Status as an Employee shall be forfeited by Participant without payment of any consideration to Participant therefor. Any shares of Stock so forfeited shall be canceled and returned to the status of authorized but unissued shares, to be held for future distributions under the Company’s 2002 Plan.

(c)    If Participant dies or in the event of termination of Participant’s Continuous Status as an Employee as a result of disability (as determined by an executive officer of the Company in accordance with the policies of the Company) while an employee of the Company or any of its Subsidiaries, Participant’s interest in all shares of Stock awarded hereunder shall become fully vested and nonforfeitable as of the date of death or termination of employment on account of such disability.  Unless changed by the Board, “disability” means that Participant ceases to be an employee on account of disability as a result of which Participant is determined to be disabled by the determining authority under the long-term or total permanent disability policy, or government social security or other similar benefit program, of the country or location in which Participant is employed and in the absence of such determining authority, as determined by the Board in accordance with the policies of the Company.

4.     Withholding of Taxes .

(a) General . Participant is ultimately liable and responsible for all taxes owed by Participant in connection with the Stock awarded, regardless of any action the Company or any of its Subsidiaries takes with respect to any tax withholding obligations that arise in connection with the Stock awarded. Neither the Company nor any of its Subsidiaries makes any representation or undertaking regarding the treatment of any tax withholding in connection with the grant or vesting of the Stock awarded or the subsequent sale of any of the Stock. The Company and its Subsidiaries do not commit and are under no obligation to structure the Award to reduce or eliminate Participant’s tax liability.

(b) Payment of Withholding Taxes . Prior to any event in connection with the Stock awarded ( e.g. , vesting) that the Company determines may result in any tax withholding obligation, whether United States federal, state or local taxes or any applicable foreign taxes and including any employment tax obligation (the “Tax Withholding Obligation”), Participant must agree to the satisfaction of such Tax Withholding Obligation in a manner acceptable to the Company, including by means of one of the following methods:

(i) By Share Withholding. Unless the Company permits Participant to satisfy the Tax Withholding Obligation by some other means in accordance with clause (iii) below, Participant authorizes the Company (in the exercise of its sole discretion) to withhold from those unrestricted shares of Stock to be delivered to Participant upon

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vesting under paragraph 3 above the whole number of shares sufficient to satisfy the Tax Withholding Obligation, provided that the Company shall withhold only the amount of shares necessary to satisfy the minimum applicable Tax Withholding Obligation. Share withholding will result in the delivery of a lower number of unrestricted shares of Stock to Participant. Share withholding will generally be used to satisfy the tax liability of individuals subject to the short-swing profit restrictions of Section 16(b) of the Securities Exchange Act of 1934, as amended.

(ii) By Sale of Shares . Unless the Company permits Participant to satisfy the Tax Withholding Obligation by some other means in accordance with clause (iii) below, and provided that the terms of this clause (ii) do not violate Section 13(k) of the Securities Exchange Act of 1934, as amended, Participant’s acceptance of the Stock awarded constitutes Participant’s instruction and authorization to the Company and any brokerage firm determined acceptable to the Company for such purpose to sell on Participant’s behalf a whole number of shares from those unrestricted shares of Stock to be delivered to Participant upon vesting under paragraph 3 above as the Company determines to be appropriate to generate cash proceeds sufficient to satisfy the applicable Tax Withholding Obligation. Such shares will be sold on the day such Tax Withholding Obligation arises ( e.g. , a vesting date) or as soon thereafter as practicable. Participant will be responsible for all brokers’ fees and other costs of sale, and Participant agrees to indemnify and hold the Company harmless from any losses, costs, damages, or expenses relating to any such sale. To the extent the proceeds of such sale exceed the Tax Withholding Obligation, the Company agrees to pay such excess in cash to Participant. Participant acknowledges that the Company or its designee is under no obligation to arrange for such sale at any particular price, and that the proceeds of any such sale may not be sufficient to satisfy the Tax Withholding Obligation. Accordingly, Participant agrees to pay to the Company or any of its Subsidiaries as soon as practicable, including through additional payroll withholding, any amount of the Tax Withholding Obligation that is not satisfied by the sale of shares described above.

(iii) By Check, Wire Transfer or Other Means . At any time not less than five (5) business days (or such fewer number of days as determined by the Committee or its designee) before any Tax Withholding Obligation arises ( e.g. , a vesting date), Participant may request permission to satisfy the Tax Withholding Obligation by check, wire transfer or other means, by submitting such request, in writing, to the Company. Alternatively, the Company may require that Participant satisfy any Tax Withholding Obligation in any such manner. If the Company approves Participant’s request, or so requires, within five (5) business days of the vesting date (or such fewer number of days as determined by the Committee or its designee) Participant must deliver to the Company the amount that the Company determines is sufficient to satisfy the Tax Withholding Obligation by (x) wire transfer to such account as the Company may direct, (y) delivery of a certified check payable to the Company, or (z) such other means as specified from time to time by the Committee or its designee.

5.     Successors . This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and assigns. Nothing contained in the 2002 Plan, the Notice of Award or this Agreement shall be interpreted as imposing any liability on the Company or the Committee in favor of Participant or any purchaser or other transferee of Stock with respect to any loss, cost or expense which such Participant, purchaser or other transferee may incur in connection with, or arising out of any transaction involving, any Stock subject to the 2002 Plan, the Notice of Award or this Agreement.

6.     Integration . The terms of the 2002 Plan, the Notice of Award and this Agreement are intended by the Company and Participant to be the final expression of their agreement with respect to the shares of Stock and may not be contradicted by evidence of any prior or contemporaneous agreement. The Company and Participant further intend that the 2002 Plan, the Notice of Award and this Agreement shall constitute the complete and exclusive statement of their terms and that no extrinsic evidence whatsoever may be introduced in any arbitration, judicial, administrative or other legal proceeding involving the 2002 Plan, the Notice of Award or this Agreement. Accordingly, the 2002 Plan, the Notice of Award and this Agreement contain the entire understanding between the parties and supersede all prior oral, written and implied agreements, understandings, commitments and practices among the parties.

7.     Waivers . Any failure to enforce any terms or conditions of the 2002 Plan, the Notice of Award or this Agreement by the Company or by Participant shall not be deemed a waiver of that term or condition, nor shall any waiver or relinquishment of any right or power for all or any other times.

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8.     Severability of Provisions . If any provision of the 2002 Plan, the Notice of Award or this Agreement shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision thereof; and the 2002 Plan, the Notice of Award and this Agreement shall be construed and enforced as if none of them included such provision.

9.     Committee Decisions Conclusive . All decisions of the Committee arising under the 2002 Plan, the Notice of Award or this Agreement shall be conclusive.

10.     Mandatory Direct Discussion, Mediation, and Arbitration . To the extent permitted by law, any claim, disagreement, or dispute arising out of or relating to the 2002 Plan, the Notice of Award, and/or this Agreement, including the meaning or interpretation thereof (a “Dispute”), shall be resolved solely and exclusively by direct discussion and mandatory mediation followed, if necessary, by final and binding arbitration in accordance with the terms and procedures specified in this Section 10. These terms and procedures apply solely to the resolution of a Dispute as defined in this Agreement. Any other claim, issue, or complaint raised by an employee who is subject to the Franklin Templeton Investments’ Alternative Dispute Resolution Policy and Agreement (the “ADR Agreement”), which claims, issues or complaints are not covered by this Agreement will be resolved according to the terms and procedures of the ADR Agreement. With regard to any Dispute as defined in this Agreement, if there is a difference between the terms or procedures defined in the ADR Agreement, and the terms and procedures defined in this Agreement, this Agreement’s terms and procedures shall control. The Participant and the Company specifically agree to waive the right to pursue any Dispute before a court or jury.
(a)     Direct Discussion . Upon written notice of any Dispute, the Participant and the Company (each referred to as a “party” and together as the “parties”) shall first attempt to resolve the Dispute by direct discussion.

(b)     Mediation . If a Dispute is not resolved by direct discussion then either party may request mediation of the Dispute by sending a written notice requesting mediation to the other party. The parties will mutually agree to the selection of a mediator, whose compensation will be borne by the Company.

(c) Arbitration . If a Dispute is not resolved by direct discussion and mandatory mediation, then either party may request final and binding arbitration of the Dispute by sending a written notice requesting arbitration to the other party. The claim or dispute will be heard by a single arbitrator unless, within 45 days of receiving the initial written demand for arbitration, either the Participant or the Company elects by written notice to the other party for the arbitration to be heard by a panel of three arbitrators. If a single arbitrator is used, the parties will mutually agree to the selection of the arbitrator. If either the Participant or the Company elects for the arbitration to be heard by a panel of three arbitrators, the Participant and the Company will each select one arbitrator, and the arbitrators selected by the Participant and the Company will, within a reasonable period of time, then appoint a third arbitrator to serve as chair of the panel.

The arbitration will be conducted in accordance with the Employment Arbitration Rules and Mediation Procedures of the AAA as amended and effective November 1, 2009 (the “AAA Rules”) but without necessarily retaining AAA or any other third party to administer the arbitration. The parties will determine whether a third party administration service is necessary and, if necessary, agree to a mutually acceptable arbitration administration service, whether AAA or otherwise, within 45 days of receipt of the initial written demand for arbitration. The location for the arbitration shall be in the county or comparable jurisdiction of Participant’s employment. Judgment on the award rendered may be entered in any court having jurisdiction.

The Company will pay all of the costs of arbitration that are attributable to the employer pursuant to the AAA Rules, unless applicable law requires the Company to pay a greater share or all of the costs. In addition, if a single arbitrator is used, or if the Company elects for the arbitration to be heard by a panel of three arbitrators, the compensation and expenses of the arbitrator(s) will be paid by the Company. If Participant elects for the arbitration to be heard by a panel of three arbitrators, Participant will be responsible for paying one-half of the arbitrators’ compensation and expenses.

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All statutes of limitation that would otherwise be applicable shall apply to any arbitration proceeding under this paragraph. Neither Participant nor the Company will have the right to participate in a class, representative or collective action, as a class representative, class member or an opt-in party or join or consolidate claims with claims of any other person or entity, with respect to any Dispute. Nothing in this Agreement, however, is intended or understood to limit, contradict, or preclude the rights reserved by law for Participant to initiate any administrative claim, or to excuse Participant from bringing an administrative claim before any agency in order to fulfill Participant’s obligation to exhaust administrative remedies. The provisions of this paragraph are intended by Participant and the Company to be exclusive for all purposes and applicable to any and all Disputes.

Except as otherwise provided in this Agreement, or as otherwise mutually agreed by the parties, the arbitrator(s) will conduct the arbitration pursuant to the AAA Rules, the U.S. Federal Arbitration Act, 9 U.S.C. section 1, et seq., and the U.S. Federal Rules of Evidence. The arbitrator(s) shall have jurisdiction and authority only to award the Participant an amount equal to or less than the amount of the Award challenged in the Dispute, subject to the same terms and conditions as the Notice of Award in Dispute, and shall not have jurisdiction or authority to make any other award of any type, including, without limitation, punitive damages, unforeseeable economic damages, damages for pain, suffering or emotional distress, or any other kind or form of damages. The arbitrator(s) shall not have jurisdiction or authority to grant preliminary or final injunctive relief or specific performance. The remedy, if any, awarded by the arbitrator(s) shall be the sole and exclusive remedy for any Dispute that is subject to arbitration under this paragraph.

11.     Delaware Law . The 2002 Plan, the Notice of Award and this Agreement are governed by, and all Disputes arising under or in connection with the 2002 Plan, the Notice of Award and this Agreement shall be resolved in accordance with, the laws of the State of Delaware, without regard to its conflict of laws rules, to the extent not preempted by the federal laws of the United States of America.

12. Country Appendices . If Participant relocates to a country outside the United States: (i) any special terms and conditions that may apply to Restricted Stock Awards granted to Participants in such country under Appendices to this Agreement will apply to Participant; or (ii) if Restricted Stock Awards have not been granted to Employees in such country under this Agreement, any other special terms and conditions will apply to Participant, in each case to the extent the Company determines that the application of such terms and conditions is necessary or advisable to comply with local law or facilitate the administration of the 2002 Plan, and provided the imposition of the term or condition will not result in any adverse accounting expense with respect to the Restricted Stock Award (unless the Company specifically determines to incur such expense).

13. Forfeiture .

(a)    Forfeiture Pursuant to Restatement of Financial Results. Notwithstanding anything in the Award to the contrary, in the event that (i) the Company issues a restatement of financial results to correct a material error; (ii) the Committee determines, in good faith, that fraud or willful misconduct by the Participant was a significant contributing factor to the need to issue such restatement; and (iii) some or all of the shares of Stock that were granted and/or other property earned prior to such restatement by the Participant would not have been granted and/or earned, as applicable, based upon the restated financial results, the Participant shall immediately return to the Company those shares of Stock, property received with respect to those shares of Stock, including any cash dividends paid with respect to those shares of Stock, any pre-tax income derived from ownership and any gross proceeds from disposition of such Stock and property, that would not have been granted and/or earned based upon the restated financial results (the “Repayment Obligation”), and all such shares of Stock (whether or not vested) shall immediately be forfeited. The Company shall be able to enforce the Repayment Obligation by all legal means available, including, without limitation, by withholding such amount from other sums and property owed by the Company to the Participant.

(b)    Forfeiture Pursuant to Fraud or Breach of Securities Law. Notwithstanding anything in the Award to the contrary, in the event that the Participant:

(i)    is convicted by any court for fraud;

5




(ii)    is finally adjudicated by any court or is otherwise finally determined by a Regulatory Agency to be in violation of any Securities Law where the violation related to a period of time during which the Participant was an Employee; or

(iii)    enters into a settlement agreement with a Regulatory Agency, with or without admission of any liability, in relation to or in connection with an allegation concerning a violation of any Securities Law by the Participant where the violation or alleged violation related to a period of time during which the Participant was an Employee, and the terms of the settlement agreement result in (x) the Participant making, or being required to make, payment of any penalty or a payment in lieu of any penalty or redress in respect of such violation, or alleged violation; (y) the publication of any statement of reprimand or censure; or (z) the Participant suffering any other penalty including (without limitation) suspension or termination of his status for the purposes of any Securities Law,

all of the Participant’s shares of Stock granted pursuant to this Agreement that have not vested shall immediately be forfeited without any payment to the Participant therefor and the Participant will immediately cease to have any further rights over or interest in such shares of Stock.

Notwithstanding the foregoing, the Committee may determine, in its sole discretion, that only a portion of the Participant’s shares of Stock specified by the Committee (or no such shares of Stock) shall be forfeited.

For the purposes of this sub-paragraph (b), the following words shall have the following meanings:

“Regulatory Agency” shall mean in any jurisdiction any department of government, independent agency, authority appointed by statute or by government in connection with the supervision and or enforcement of any Securities Law including, but not limited to, the U.S. Securities and Exchange Commission;

“Securities Law” shall mean any enactment, law, statute, rule, requirement or regulation in any jurisdiction relating to Securities that is or was applicable to the Company or that is or was applicable to the Participant;
 
“Securities” shall mean any shares, bonds, derivatives or other financial instruments or financial assets or any interest therein.

(c)    Other Repayment/Forfeiture. Any benefits Participant may receive hereunder shall be subject to repayment or forfeiture as may be required to comply with (i) any applicable listing standards of a national securities exchange adopted in accordance with Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (regarding recovery of erroneously awarded compensation) and any implementing rules and regulations of the U.S. Securities and Exchange Commission adopted thereunder, (ii) similar laws, and implementing rules and regulations, of the European Union (as implemented by its member states and by the European Securities and Markets Authority) and of any other jurisdiction and (iii) any policies adopted by the Company to implement such requirements, all to the extent determined by the Company in its discretion to be applicable to Participant.


END OF AGREEMENT


6


Exhibit 10.3
FRANKLIN RESOURCES, INC.
2002 UNIVERSAL STOCK INCENTIVE PLAN
NOTICE OF RESTRICTED STOCK UNIT AWARD


Name:
 
Address:
 


In accordance with the Franklin Resources, Inc. 2002 Universal Stock Incentive Plan (the “2002 Plan”), as an incentive for increased efforts and successful achievements, Franklin Resources, Inc. (the “Company”) has awarded Participant Restricted Stock Units (“Units”) (as defined in the 2002 Plan) over common stock of the Company subject to the terms and conditions of the accompanying Restricted Stock Unit Award Agreement (the “Award Agreement”), this Notice of Restricted Stock Unit Award (the “Notice of Award” and together with the Award Agreement, the “Award”) and the 2002 Plan, as follows:


Award Number
 
Award Date
 
Total Number of Units Awarded
 


Vesting Schedule

[Vesting schedule performance terms subject to approval of the Compensation Committee of the Board of Directors of the Company.]

For purposes of this Notice of Award and the Award Agreement, the term “vest” shall mean, with respect to any Units, that such Units are no longer subject to forfeiture to the Company (other than pursuant to Section 16 of the Award Agreement).
Participant acknowledges and agrees that nothing in this Award nor in the 2002 Plan, which is incorporated herein by this reference, affects the Company’s, or a Subsidiary’s, right to terminate, or to change the terms of, Participant’s employment at any time, with or without cause.
Participant acknowledges that, from time to time, the Company may be in a “Blackout Period” and/or subject to applicable securities laws that could subject Participant to liability for engaging in any transaction involving the sale of the Company’s shares. Participant further acknowledges and agrees that, prior to the sale of any shares acquired under this Award, it is Participant’s responsibility to determine whether or not such sale of shares will subject Participant to liability under insider trading rules or other applicable securities laws.
Participant hereby: (i) consents to access the 2002 Plan prospectus in connection with the Form S-8 registration statement for the 2002 Plan, any updates thereto, the 2002 Plan, the Award Agreement and this Notice of Award (collectively, the “2002 Plan Documents”) in electronic form either through Connected on the Company’s Intranet or another form of electronic communication (e.g. e-mail); (ii) represents that Participant has access to the Company’s Intranet and the Internet; (iii) acknowledges receipt of electronic copies, or that Participant is already in possession of paper copies, of the 2002 Plan Documents and the Company’s most recent annual report to stockholders; and (iv) acknowledges that Participant is familiar with and has accepted the Award subject to the terms and provisions of the 2002 Plan Documents.

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Participant may receive, without charge, upon written or oral request, paper copies of any or all of the 2002 Plan Documents, documents incorporated by reference in the Form S-8 registration statement for the 2002 Plan, and the Company’s most recent annual report to stockholders by requesting them from Stock Administration at the Company, One Franklin Parkway, San Mateo, CA 94403-1906. Telephone (650) 312-2000. Participant may also withdraw Participant’s consent to receive any or all documents electronically by notifying Stock Administration at the above address in writing.
By accepting the Award, whether in electronic form or otherwise, Participant agrees that the Award is granted under and governed by the terms and conditions of the 2002 Plan, this Notice of Award and the Award Agreement.


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FRANKLIN RESOURCES, INC.
2002 UNIVERSAL STOCK INCENTIVE PLAN
RESTRICTED STOCK UNIT AWARD AGREEMENT

This Restricted Stock Unit Award Agreement, together with any Appendix(es) attached hereto (hereinafter, collectively, the “Agreement”), is made as of the Award Date set forth in the Notice of Restricted Stock Unit Award (the “Notice of Award”) between Franklin Resources, Inc. (the “Company”) and the Participant named therein (“Participant”).

WITNESSETH:

WHEREAS, the Board of Directors and stockholders of the Company have adopted the Franklin Resources, Inc. 2002 Universal Stock Incentive Plan (the “2002 Plan”), authorizing the grant of Restricted Stock Units (as defined in the 2002 Plan) (“Units”) to eligible individuals as an incentive in connection with the performance of services for the Company and its Subsidiaries, as defined in the 2002 Plan, which is incorporated herein by this reference (capitalized terms used but not defined in this Agreement have the same meaning as set forth in the 2002 Plan or the Notice of Award, as applicable); and

WHEREAS, the Company recognizes the efforts of Participant on behalf of the Company and its Subsidiaries and desires to motivate Participant in Participant’s work and provide an inducement to remain in the service of the Company and its Subsidiaries; and

WHEREAS, the Company has determined that it would be to the advantage and in the interest of the Company and its stockholders to award Units provided for in this Agreement and the Notice of Award to Participant, subject to certain restrictions, as an incentive for increased efforts and successful achievements;

NOW, THEREFORE, in consideration of the foregoing premises and of the mutual covenants herein contained, the parties hereto hereby agree as follows:

1.     Restricted Stock Unit Award . The Company is awarding to Participant Units as set forth in the Notice of Award, subject to the rights of and limitations on Participant as owner thereof as set forth in this Agreement.

2.
Transfer Restriction .

(a)    Units may not be transferred by Participant in any manner other than by will or by the laws of descent and distribution. Notwithstanding the foregoing, Participant may designate a beneficiary of Units in the event of Participant’s death on the beneficiary designation form provided by the Company. Pursuant to paragraph 7 of this Agreement, the terms of this Agreement shall be binding upon the executors, administrators, heirs, successors and transferees of Participant.

(b)    Participant acknowledges that, from time to time, the Company may be in a “Blackout Period” and/or subject to applicable securities laws that could subject Participant to liability for engaging in any transaction involving the sale of the Company’s shares. Participant further acknowledges and agrees that, prior to the sale of any shares acquired under this Award, it is Participant’s responsibility to determine whether or not such sale of shares will subject Participant to liability under insider trading rules or other applicable securities laws.

3.     Vesting .

(a)    Units shall become vested in accordance with the Vesting Schedule in the Notice of Award so long as Participant maintains a Continuous Status as an Employee.

(b)    If Participant ceases to maintain a Continuous Status as an Employee for any reason, all Units to the extent not yet vested under subparagraph (a) on the date Participant ceases to maintain a Continuous Status as an

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Employee shall be forfeited by Participant without payment of any consideration to Participant therefor. Any Units so forfeited shall be canceled and any shares considered issuable pursuant to such Units, if applicable, shall be returned to the status of authorized but unissued shares, to be held for future distributions under the Company’s 2002 Plan. Notwithstanding the above, an executive officer of the Company, in his or her sole discretion, may determine whether a portion or all of the unvested Units awarded hereunder become vested as of the date of death or termination of employment on account of disability (as determined by an executive officer of the Company in accordance with the policies of the Company). Unless changed by the Board of Directors of the Company, “disability” means that Participant ceases to be an employee on account of disability as a result of which Participant is determined to be disabled by the determining authority under the long-term or total permanent disability policy, or government social security or other similar benefit program, of the country or location in which Participant is employed and in the absence of such determining authority by the Board in accordance with the policies of the Company.

4.     Vesting of Units and Issuance of Shares . Upon each vesting date, (i) one share of common stock of the Company (“Stock”) and (ii) an amount in cash equal to the cash dividends, if any, paid with respect to such share between the Award Date and the vesting date shall be issuable for each Unit that vests on such date, subject to the terms and provisions of the 2002 Plan, the Notice of Award and this Agreement. Upon satisfaction of any required tax or other withholding obligations as set forth in paragraph 6 of this Agreement, the shares of Stock and cash amount (if any) will be issued to Participant (as evidenced by the appropriate entry in the books of the Company or a duly authorized transfer agent of the Company) as soon as practicable after the vesting date, but in any event, within the period ending on the later to occur of the date that is two and a half (2½) months from the end of (i) Participant’s tax year that includes the applicable vesting date, or (ii) the Company’s tax year that includes the applicable vesting date. Any fractional Unit remaining after all Units under this Award are fully vested shall be discarded and neither a fractional share of Stock nor any dividends issued with respect to such fractional share shall be issued at vesting of the fractional Unit. Notwithstanding the above, the Company may, in its discretion, pay to Participant all or a portion of any vested Units in cash in an amount equal to the Fair Market Value of the relevant number of shares of Stock on the applicable vesting date, or on such other date or dates which the Company may at its absolute discretion prescribe, less any tax or other withholding obligations set forth in paragraph 6 of this Agreement.

5.     Right to Shares . Except as otherwise determined by the Committee, in its discretion, and as provided in Section 4, Participant shall not have any right in, to or with respect to any of the shares of Stock (including any voting rights or rights with respect to dividends paid on the shares of Stock, including rights to dividend equivalent payments) issuable for a Unit under the Award until the Award is settled by the issuance of such shares of Stock to Participant.

6.     Withholding of Taxes .

(a) General . Participant is ultimately liable and responsible for all taxes owed by Participant in connection with the 2002 Plan including, without limitation, the award of Units, vesting of units, issue and sale of shares regardless of any action the Company or any of its Subsidiaries takes with respect to any tax withholding obligations that arise in connection with the 2002 Plan. Neither the Company nor any of its Subsidiaries makes any representation or undertaking regarding the treatment of any tax withholding in connection with the grant or vesting of Units awarded or the subsequent sale of any of the shares of Stock. The Company and its Subsidiaries do not commit and are under no obligation to structure the Award to reduce or eliminate Participant’s tax liability.

(b) Payment of Withholding Taxes . Prior to any event in connection with Units awarded ( e.g. , vesting) that the Company determines may result in any tax withholding obligation, whether United States federal, state or local taxes or applicable foreign taxes and including any employment tax obligation (the “Tax Withholding Obligation”), Participant must agree to the satisfaction of such Tax Withholding Obligation in a manner acceptable to the Company, including by means of one of the following methods:

(i) By Share Withholding. Unless the Company permits Participant to satisfy the Tax Withholding Obligation by some other means in accordance with clause (iii) below, Participant authorizes the Company (in the exercise of its sole discretion) to withhold from those shares of Stock issuable to Participant the whole number of

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shares sufficient to satisfy the Tax Withholding Obligation, provided that the Company shall withhold only the amount of shares necessary to satisfy the minimum applicable Tax Withholding Obligation. Share withholding will generally be used to satisfy the tax liability of individuals subject to the short-swing profit restrictions of Section 16(b) of the Securities Exchange Act of 1934, as amended.

(ii) By Sale of Shares . Unless the Company permits Participant to satisfy the Tax Withholding Obligation by some other means in accordance with clause (iii) below, and provided that the terms of this clause (ii) do not violate Section 13(k) of the Securities Exchange Act of 1934, as amended, Participant’s acceptance of the Award constitutes Participant’s instruction and authorization to the Company and any brokerage firm determined acceptable to the Company for such purpose to sell on Participant’s behalf a whole number of shares from those shares of Stock issuable to Participant as the Company determines to be appropriate to generate cash proceeds sufficient to satisfy the applicable Tax Withholding Obligation. Such shares will be sold on the day such Tax Withholding Obligation arises ( e.g. , a vesting date) or as soon thereafter as practicable. Participant will be responsible for all brokers’ fees and other costs of sale, and Participant agrees to indemnify and hold the Company harmless from any losses, costs, damages, or expenses relating to any such sale. To the extent the proceeds of such sale exceed the Tax Withholding Obligation the Company agrees to pay such excess in cash to Participant. Participant acknowledges that the Company or its designee is under no obligation to arrange for such sale at any particular price, and that the proceeds of any such sale may not be sufficient to satisfy the Tax Withholding Obligation. Accordingly, Participant agrees to pay to the Company or any of its Subsidiaries as soon as practicable, including through additional payroll withholding, any amount of the Tax Withholding Obligation that is not satisfied by the sale of shares of Stock described above.

(iii) By Check, Wire Transfer or Other Means . At any time not less than five (5) business days (or such fewer number of days as determined by the Committee or its designee) before any Tax Withholding Obligation arises ( e.g. , a vesting date), Participant may request permission to satisfy the Tax Withholding Obligation by check, wire transfer or other means, by submitting such request, in writing, to the Company. Alternatively, the Company may require that Participant satisfy any Tax Withholding Obligation in any such manner. If the Company approves Participant’s request, or so requires, within five (5) business days of the vesting date (or such fewer number of days as determined by the Committee or its designee) Participant must deliver to the Company the amount that the Company determines is sufficient to satisfy the Tax Withholding Obligation by (x) wire transfer to such account as the Company may direct, (y) delivery of a certified check payable to the Company, or (z) such other means as specified from time to time by the Committee or its designee.
 
7.     Successors . This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and assigns. Nothing contained in the 2002 Plan, the Notice of Award or this Agreement shall be interpreted as imposing any liability on the Company or the Committee in favor of Participant or any purchaser or other transferee of Units or shares of Stock with respect to any loss, cost or expense which such Participant, purchaser or other transferee may incur in connection with, or arising out of any transaction involving, any Units or shares of Stock subject to the 2002 Plan, the Notice of Award or this Agreement.

8.     No Compensation Deferrals . None of the 2002 Plan, the Notice of Award and this Agreement are intended to provide for an elective deferral of compensation that would be subject to Section 409A (“Section 409A”) of the United States Internal Revenue Code of 1986, as amended. The Company reserves the right, to the extent the Company deems necessary or advisable in its sole discretion, to unilaterally amend or modify the 2002 Plan, the Notice of Award and/or this Agreement to ensure that no awards (including, without limitation, the Units) become subject to the requirements of Section 409A, provided, however, that the Company makes no representation that the Units are not subject to Section 409A nor makes any undertaking to preclude Section 409A from applying to the Units.

9.     Integration . The terms of the 2002 Plan, the Notice of Award and this Agreement are intended by the Company and Participant to be the final expression of their agreement with respect to Units and may not be contradicted by evidence of any prior or contemporaneous agreement. The Company and Participant further intend that the 2002 Plan, the Notice of Award and this Agreement shall constitute the complete and exclusive statement of their terms and that no extrinsic evidence whatsoever may be introduced in any arbitration, judicial, administrative or other legal proceeding involving the 2002 Plan, the Notice of Award or this Agreement. Accordingly, the 2002 Plan, the Notice

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of Award and this Agreement contain the entire understanding between the parties and supersede all prior oral, written and implied agreements, understandings, commitments and practices among the parties.

10.     Waivers . Any failure to enforce any terms or conditions of the 2002 Plan, the Notice of Award or this Agreement by the Company or by Participant shall not be deemed a waiver of that term or condition, nor shall any waiver or relinquishment of any right or power for all or any other times.

11.     Severability of Provisions . If any provision of the 2002 Plan, the Notice of Award or this Agreement shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision thereof; and the 2002 Plan, the Notice of Award and this Agreement shall be construed and enforced as if none of them included such provision.

12.     Committee Decisions Conclusive . All decisions of the Committee arising under the 2002 Plan, the Notice of Award or this Agreement shall be conclusive.

13.     Mandatory Direct Discussion, Mediation, and Arbitration . To the extent permitted by law, any claim, disagreement, or dispute arising out of or relating to the 2002 Plan, the Notice of Award, and/or this Agreement, including the meaning or interpretation thereof (a “Dispute”), shall be resolved solely and exclusively by direct discussion and mandatory mediation followed, if necessary, by final and binding arbitration in accordance with the terms and procedures specified in this Section 13. These terms and procedures apply solely to the resolution of a Dispute as defined in this Agreement. Any other claim, issue, or complaint raised by an employee who is subject to the Franklin Templeton Investments’ Alternative Dispute Resolution Policy and Agreement (the “ADR Agreement”), which claims, issues or complaints are not covered by this Agreement will be resolved according to the terms and procedures of the ADR Agreement. With regard to any Dispute as defined in this Agreement, if there is a difference between the terms or procedures defined in the ADR Agreement, and the terms and procedures defined in this Agreement, this Agreement’s terms and procedures shall control. The Participant and the Company specifically agree to waive the right to pursue any Dispute before a court or jury.
(a)     Direct Discussion . Upon written notice of any Dispute, the Participant and the Company (each referred to as a “party” and together as the “parties”) shall first attempt to resolve the Dispute by direct discussion.

(b) Mediation . If a Dispute is not resolved by direct discussion then either party may request mediation of the Dispute by sending a written notice requesting mediation to the other party. The parties will mutually agree to the selection of a mediator, whose compensation will be borne by the Company.

(c) Arbitration . If a Dispute is not resolved by direct discussion and mandatory mediation, then either party may request final and binding arbitration of the Dispute by sending a written notice requesting arbitration to the other party. The claim or dispute will be heard by a single arbitrator unless, within 45 days of receiving the initial written demand for arbitration, either the Participant or the Company elects by written notice to the other party for the arbitration to be heard by a panel of three arbitrators. If a single arbitrator is used, the parties will mutually agree to the selection of the arbitrator. If either the Participant or the Company elects for the arbitration to be heard by a panel of three arbitrators, the Participant and the Company will each select one arbitrator, and the arbitrators selected by the Participant and the Company will, within a reasonable period of time, then appoint a third arbitrator to serve as chair of the panel.

The arbitration will be conducted in accordance with the Employment Arbitration Rules and Mediation Procedures of the AAA as amended and effective November 1, 2009 (the “AAA Rules”) but without necessarily retaining AAA or any other third party to administer the arbitration. The parties will determine whether a third party administration service is necessary and, if necessary, agree to a mutually acceptable arbitration administration service, whether AAA or otherwise, within 45 days of receipt of the initial written demand for arbitration. The location for the arbitration shall be in the county or comparable jurisdiction of Participant’s employment. Judgment on the award rendered may be entered in any court having jurisdiction.


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The Company will pay all of the costs of arbitration that are attributable to the employer pursuant to the AAA Rules, unless applicable law requires the Company to pay a greater share or all of the costs. In addition, if a single arbitrator is used, or if the Company elects for the arbitration to be heard by a panel of three arbitrators, the compensation and expenses of the arbitrator(s) will be paid by the Company. If Participant elects for the arbitration to be heard by a panel of three arbitrators, Participant will be responsible for paying one-half of the arbitrators’ compensation and expenses.

All statutes of limitation that would otherwise be applicable shall apply to any arbitration proceeding under this paragraph. Neither Participant nor the Company will have the right to participate in a class, representative or collective action, as a class representative, class member or an opt-in party or join or consolidate claims with claims of any other person or entity, with respect to any Dispute. Nothing in this Agreement, however, is intended or understood to limit, contradict, or preclude the rights reserved by law for Participant to initiate any administrative claim, or to excuse Participant from bringing an administrative claim before any agency in order to fulfill Participant’s obligation to exhaust administrative remedies. The provisions of this paragraph are intended by Participant and the Company to be exclusive for all purposes and applicable to any and all Disputes.

Except as otherwise provided in this Agreement, or as otherwise mutually agreed by the parties, the arbitrator(s) will conduct the arbitration pursuant to the AAA Rules, the U.S. Federal Arbitration Act, 9 U.S.C. section 1, et seq., and the U.S. Federal Rules of Evidence. The arbitrator(s) shall have jurisdiction and authority only to award the Participant an amount equal to or less than the amount of the Award challenged in the Dispute, subject to the same terms and conditions as the Notice of Award in Dispute, and shall not have jurisdiction or authority to make any other award of any type, including, without limitation, punitive damages, unforeseeable economic damages, damages for pain, suffering or emotional distress, or any other kind or form of damages. The arbitrator(s) shall not have jurisdiction or authority to grant preliminary or final injunctive relief or specific performance. The remedy, if any, awarded by the arbitrator(s) shall be the sole and exclusive remedy for any Dispute that is subject to arbitration under this paragraph.

14.     Delaware Law . The 2002 Plan, the Notice of Award and this Agreement are governed by, and all Disputes arising under or in connection with the 2002 Plan, the Notice of Award and this Agreement shall be resolved in accordance with, the laws of the State of Delaware, without regard to its conflict of laws rules, to the extent not preempted by the federal laws of the United States of America.

15.     Country Appendices . If Participant relocates to a country outside the United States: (i) any special terms and conditions that may apply to Units granted to Participants in such country under Appendices to this Agreement will apply to Participant; or (ii) if Units have not been granted to Employees in such country under this Agreement, any other special terms and conditions, will apply to Participant, in each case to the extent the Company determines that the application of such terms and conditions is necessary or advisable to comply with local law or facilitate the administration of the 2002 Plan, and provided the imposition of the term or condition will not result in any adverse accounting expense with respect to the Units (unless the Company specifically determines to incur such expense).

16.
Forfeiture .

(a)    Forfeiture Pursuant to Restatement of Financial Results. Notwithstanding anything in the Award to the contrary, in the event that (i) the Company issues a restatement of financial results to correct a material error; (ii) the Committee determines, in good faith, that fraud or willful misconduct by the Participant was a significant contributing factor to the need to issue such restatement; and (iii) some or all of the Units that were granted and/or shares of Stock and/or other property earned prior to such restatement by the Participant would not have been granted and/or earned, as applicable, based upon the restated financial results, the Participant shall immediately return to the Company all shares of Stock and other property received with respect to those Units, including any cash dividends paid with respect to the Units or such shares of Stock, any pre-tax income derived from ownership and any gross proceeds from disposition of such Stock and property, that would not have been granted and/or earned based upon the restated financial results (the “Repayment Obligation”), and all such Units (whether or not vested) shall immediately be forfeited. The Company shall be able to enforce the Repayment Obligation by all legal means available, including, without limitation, by withholding such amount from other sums and property owed by the Company to the Participant.

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(b)    Forfeiture Pursuant to Fraud or Breach of Securities Law. Notwithstanding anything in the Award to the contrary, in the event that the Participant:

(i)    is convicted by any court for fraud;

(ii)    is finally adjudicated by any court or is otherwise finally determined by a Regulatory Agency to be in violation of any Securities Law where the violation related to a period of time during which the Participant was an Employee; or

(iii)    enters into a settlement agreement with a Regulatory Agency, with or without admission of any liability, in relation to or in connection with an allegation concerning a violation of any Securities Law by the Participant where the violation or alleged violation related to a period of time during which the Participant was an Employee, and the terms of the settlement agreement result in (x) the Participant making, or being required to make, payment of any penalty or a payment in lieu of any penalty or redress in respect of such violation, or alleged violation; (y) the publication of any statement of reprimand or censure; or (z) the Participant suffering any other penalty including (without limitation) suspension or termination of his status for the purposes of any Securities Law,

all of the Participant’s Units that have not vested shall immediately be forfeited without any payment to the Participant therefor. Any Units so forfeited shall be cancelled.

Notwithstanding the foregoing, the Committee may determine, in its sole discretion, that only a portion of the Participant’s Units specified by the Committee (or no Units) shall be forfeited.

For the purposes of this sub-paragraph (b), the following words shall have the following meanings:

“Regulatory Agency” shall mean in any jurisdiction any department of government, independent agency, authority appointed by statute or by government in connection with the supervision and or enforcement of any Securities Law including, but not limited to, the U.S. Securities and Exchange Commission;

“Securities Law” shall mean any enactment, law, statute, rule, requirement or regulation in any jurisdiction relating to Securities that is or was applicable to the Company or that is or was applicable to the Participant;
 
“Securities” shall mean any shares, bonds, derivatives or other financial instruments or financial assets or any interest therein.

(c)    Other Repayment/Forfeiture. Any benefits Participant may receive hereunder shall be subject to repayment or forfeiture as may be required to comply with (i) any applicable listing standards of a national securities exchange adopted in accordance with Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (regarding recovery of erroneously awarded compensation) and any implementing rules and regulations of the U.S. Securities and Exchange Commission adopted thereunder, (ii) similar laws, and implementing rules and regulations, of the European Union (as implemented by its member states and by the European Securities and Markets Authority) and of any other jurisdiction and (iii) any policies adopted by the Company to implement such requirements, all to the extent determined by the Company in its discretion to be applicable to Participant.

END OF AGREEMENT


6


Exhibit 10.7

FRANKLIN RESOURCES, INC.
AMENDED AND RESTATED ANNUAL INCENTIVE COMPENSATION PLAN
(amended and restated October 20, 2014)
(amended and restated October 22, 2012)
(amended and restated March 16, 2010)
(amended and restated December 13, 2006)
(amended and restated December 16, 2005)
(amended and restated September 22, 2005)
(amended and restated December 16, 2004)
(amended and restated December 11, 2003)

I.
PURPOSE

Franklin Resources, Inc. has established this Amended and Restated Annual Incentive Compensation Plan to reward employees for contributions to the Company (as hereinafter defined) by providing them an opportunity to share in the organization’s annual performance results. Through these incentives, the Company intends to attract, retain, and motivate eligible employees to achieve the highest levels of performance results in the financial services business.
II.
DEFINITIONS

When used in this plan document, the following words and phrases shall have the following meanings:
2.1 “Award Pool” means the total dollars available for funding Incentive Awards under the Plan for an applicable Plan Year.

2.2 “Bonus Opportunity” means a potential bonus target for a Participant.

2.3 “Committee” means the Compensation Committee of the Board of Directors of Franklin Resources, Inc., and/or another committee of the Board of Directors to the extent of such other committee’s authority granted by the Board.

2.4 “Company” means Franklin Resources, Inc., a Delaware corporation, and its direct and indirect subsidiaries.

2.5 “Compensation Committee” means the Compensation Committee of the Franklin Resources, Inc. Board of Directors.

2.6 “Equity Award” means a grant of Stock, Options, SARs, Stock Unit Awards, Restricted Stock Awards or Restricted Stock Unit Awards under the 2002 Universal Stock Incentive Plan or successor equity compensation plan, or Mutual Fund Unit Awards.

2.7 “Incentive Award” means the actual current value of an award to a Participant, regardless of the form of the award, determined by a Committee or Management during or following the end of the Plan Year, as applicable.

2.8 “Management” means the executive officers of the Company.

2.9 “Mutual Fund Unit Award” means the grant of a right to receive shares in mutual funds sponsored by the Company upon the vesting of the units in recognition of and as a reward for the past efforts and contributions of the Participant on behalf of the Company, with such right to receive shares in such mutual funds subject to a risk

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of forfeiture or other restrictions that will lapse based on the completion of service or achievement of performance objectives by the Participant, as determined by a Committee.

2.10 “Option” means the grant of a right to purchase Stock at a specified exercise price in recognition of and as a reward for the past efforts and contributions of the Participant on behalf of the Company, with the right to purchase such shares of Stock subject to the completion of service or achievement of performance objectives by the Participant, as determined by a Committee.

2.11 “Participant” means all employees who have been determined by a Committee or Management to be Participants pursuant to Section 3.1.

2.12 “Plan” means the Amended and Restated Annual Incentive Compensation Plan as set forth in this document, as amended from time to time.

2.13 “Pre-Bonus Operating Income” (hereafter “PBOI”) means the net operating income of the Company, exclusive of passive income and calculated before non-operating interest, taxes, extraordinary items, and certain special items (such as special compensation payouts on account of a merger) and before the accrual of Incentive Awards under the Plan and awards under the Company’s 2004 Key Executive Incentive Compensation Plan or any successor plan.

2.14 “Plan Year” means the 12-month period beginning on the first day of each fiscal year of the Company.

2.15 “Restricted Stock Award” means the grant of shares of Stock in recognition of and as a reward for the past efforts and contributions of the Participant on behalf of the Company, with such shares of Stock subject to a risk of forfeiture or other restrictions that will lapse based on the completion of service or achievement of performance objectives by the Participant, as determined by a Committee.

2.16 “Restricted Stock Unit Award” means the grant of a right to receive Stock upon the vesting of the units in recognition of and as a reward for the past efforts and contributions of the Participant on behalf of the Company, with such right to receive Stock subject to a risk of forfeiture or other restrictions that will lapse based on the completion of service or achievement of performance objectives by the Participant, as determined by a Committee.

2.17 “SAR” means the grant of a right to receive, in cash or Stock (as determined by a Committee), value equal to (or otherwise based on) the excess of (a) the fair market value of a specified number of shares of Stock at the time of exercise over (b) a specified exercise price, in recognition of and as a reward for the past efforts and contributions of the Participant on behalf of the Company, with the right to receive such value in cash or Stock subject to the completion of service or achievement of performance objectives by the Participant, as determined by a Committee.

2.18 “Stock” means Franklin Resources, Inc. common stock reserved for issuance under the Franklin Resources, Inc. 2002 Universal Stock Incentive Plan or successor equity compensation plan.

2.19 “Stock Unit Award” means the grant of a right to receive Stock in the future.

III.
PARTICIPATION

3.1 All individuals who are employees at the beginning of the Plan Year, except employees who participate in commission-based incentive plans or other incentive arrangements determined by a Committee or Management, are eligible to be designated by a Committee or Management as Participants during that Plan Year. Employees hired during a Plan Year may be added to the Plan as Participants in the discretion of a Committee or Management.

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3.2 A Participant’s Incentive Award will be based upon an evaluation of a Participant’s overall performance, including the successful accomplishment of annual goals and objectives, as well as other performance factors.

IV.
AWARD POOL FUNDING AND INDIVIDUAL AWARDS

4.1 For each Plan Year, the Compensation Committee shall determine the amount to be allocated to the Award Pool, not to exceed Twenty Percent (20%) of PBOI.

4.2 A Committee or Management may generally determine the amount of Bonus Opportunities under the Plan. The Committee or Management may advise Participants of particular Bonus Opportunities or ranges of Bonus Opportunities at any time during the Plan Year.

4.3 The actual amounts allocated to the Award Pool may be determined and/or revised by the Compensation Committee at any time during or after the end of each Plan Year, based upon actual or projected Company performance and PBOI.

4.4 Actual Incentive Awards may be determined during or following the end of each Plan Year. The amount of any Incentive Awards determined and paid prior to the end of a Plan Year shall be credited against the Award Pool for such Plan Year so that the net amount remaining in the Award Pool is available for Incentive Awards determined and paid after the end of such Plan Year. Actual Incentive Awards may vary from the Bonus Opportunities depending on the PBOI allocated or projected to be allocated to the Award Pool and a Participant’s individual performance.

4.5 To promote the highest levels of individual performance, there is no minimum or maximum which applies to individual Incentive Awards of any Participant. Amounts not allocated as Incentive Awards do not carry over to the next Plan Year, and may be used for distribution as incentive compensation to employees who are not Participants in the Plan.

4.6 Notwithstanding a Participant’s individual performance and anything to the contrary in this Plan, Management or a Committee may decrease (even to zero) or increase the Incentive Award payable to a Participant; provided however, that only a Committee may increase or decrease an Incentive Award payable to a member of Management.

V.
PAYMENT OF ANNUAL AWARDS

5.1 Incentive Awards may, in a Committee’s discretion, be paid in the following time and manner:

(a) Incentive Awards may be paid in cash or in a combination of cash and Equity Awards subject to restrictions and vesting, if any, determined by a Committee to be appropriate. Incentive Awards paid in Equity Awards granted under the 2002 Universal Stock Incentive Plan or successor equity compensation plan shall also be subject to the limit on the maximum number of shares that may be issued under such plan and any additional limitations on the maximum number of shares that may be awarded to any individual in any fiscal or calendar year under such plan.

(b) Any Equity Awards granted as part of an Incentive Award shall be governed by the terms of the applicable award agreement evidencing such Equity Award grant and, in the case of Equity Awards other than Mutual Fund Units, the 2002 Universal Stock Incentive Plan or any successor plan, and shall not be governed by or subject to the terms of this Plan.


3



(c) The cash portion of an Incentive Award shall be paid at such time and in such manner as a Committee determines. Participants shall be notified in writing as to the date and time of payment of any deferred portion of the Incentive Award.

(d) Equity Awards awarded as part of an Incentive Award shall be distributed at such time during or after the end of the Plan Year as determined by a Committee. Notwithstanding anything in the Plan to the contrary, Equity Awards and any modifications thereto shall be made by a Committee, and, if applicable, in accordance with the 2002 Universal Stock Incentive Plan or successor equity compensation plan.

(e) Notwithstanding the foregoing, the payment of any Incentive Awards determined by the Company to provide for a “deferral of compensation” (within the meaning of Section 1.409A-1(b) of the Treasury regulations under the Internal Revenue Code of 1986, as amended (the “Code”), and any successor thereto) shall be completed no later than two and one-half (2½) months following the end of the calendar year in which such Incentive Awards are earned.

5.2 Application of Code Section 409A.

Notwithstanding any other provision of this Plan to the contrary, the Company, in its sole discretion and without Participant consent, may amend or modify the Plan in any manner to provide for the application and effects of Section 409A of the Code (relating to deferred compensation arrangements) and any related regulatory or administrative guidance issued by the Internal Revenue Service, or any successors thereto. The Company shall have the authority to delay the payment of any benefits described under the Plan to the extent it deems necessary or appropriate to comply with Section 409A(a)(2)(B)(i) of the Code (relating to payments made to certain “key employees” of certain publicly-traded companies) and in such event, any such payments to which a Participant would otherwise be entitled during the six (6) month period immediately following his or her separation from service will be paid on the first business day following the expiration of such six (6) month period.
VI.
PAYMENT IN EVENT OF DEATH, DISABILITY, LEAVE OF ABSENCE OR RETIREMENT

6.1 Death of Participant.

A Participant who dies is entitled to a pro-rated Incentive Award based on performance up to the last day worked. Payment shall be made in cash in a single payment during or as soon as practical following the end of the Plan Year in which death occurred. If the Participant dies following the end of a Plan Year but before an Incentive Award for that year has been paid, the Participant’s full Incentive Award shall be paid in cash in a single payment when it would otherwise have been paid. Payment of Incentive Awards on account of death shall be paid to the person designated by the Participant as beneficiary under this Plan. If there is no such designation or the designated beneficiary fails to survive the Participant, payment shall be made to the Participant’s spouse or if there is none, the Participant’s estate. Notwithstanding the foregoing provisions of this Section 6.1 with respect to the payment of Incentive Awards, a Participant’s full Incentive Award, a portion of his full Incentive Award, or no portion thereof may be payable to the persons specified above. Such determination shall be made by Management or by a Committee.
6.2 Disability.

A Participant who ceases to be an employee on account of disability, as a result of which the Participant shall be eligible for payments under Company long-term disability insurance policies, shall be entitled to receive a pro-rated Incentive Award based on performance up to the last day worked. Payment shall be made in cash in a single installment during or as soon as practical following the end of the Plan Year in which employment terminated. If the Participant ceases to be an employee on account of disability following the end of a Plan Year but before an Incentive Award for that Plan Year has been paid, the Participant’s full Incentive Award shall be paid in cash in a single payment when it would otherwise have been paid. Notwithstanding the foregoing provisions of this

4



Section 6.2 with respect to the payment of Incentive Awards, a Participant may receive his full Incentive Award, a portion of his full Incentive Award, or no portion thereof. Such determination shall be made by Management or by a Committee.
6.3 Leave of Absence.

A Participant on leave of absence for any portion of the Plan Year may receive his full Incentive Award, a portion of his full Incentive Award, or no portion thereof. Such determination shall be made by Management or by a Committee.
6.4    Retirement.
A Participant who retires during the Plan Year is eligible to receive a pro-rated Incentive Award based on performance to the date of retirement in cash in a single payment during or as soon as practical following the end of the fiscal year in which the Participant retires. A Participant has “retired” for purposes of this Plan if he terminates employment with the Company after reaching age 55 with at least 10 years of service to the Company, including service to any entity that is acquired by the Company, provided that the Company may modify this provision as necessary to comply with applicable requirements or practices of relevant non-U.S. jurisdictions. Notwithstanding the foregoing provisions of this Section 6.4 with respect to the payment of Incentive Awards, a Participant may receive his full Incentive Award, a portion of his full Incentive Award, or no portion thereof. Such determination shall be made by Management or by a Committee.
VII.
PAYMENT IN EVENT OF TERMINATION OF EMPLOYMENT

7.1 Involuntary Termination of Employment.

(a) If a Participant’s employment is terminated by the Company as a result of the Company’s dissatisfaction with the job related activities of the Participant or conviction of the Participant of a felony, the Participant shall forfeit any rights to any unpaid Incentive Awards under the Plan. Notwithstanding the foregoing, a Committee, in its sole discretion, may (x) pay the Participant a pro-rated Incentive Award based upon performance during the Plan Year to the date of termination or (y) pay the Participant’s full Incentive Award (or any greater amount).

(b) If a Participant’s employment is terminated for reasons other than those described in Sections 6 and 7.1(a) above, Management or a Committee shall have discretion to pay any or no portion of the Participant’s Incentive Award (or any greater amount) following such termination.

7.2 Voluntary Termination of Employment.

If a Participant voluntarily resigns from employment at the Company prior to the payment of an Incentive Award with respect to a Plan Year, no Incentive Award with respect to such Plan Year will be paid. The Participant shall forfeit the right to any Incentive Awards for such Plan Year and any subsequent Plan Year. Notwithstanding the foregoing, a Committee may (a) pay the Participant a pro-rated Incentive Award based upon performance during the Plan Year to the date of termination or (b) pay the Participant’s full Incentive Award (or any greater amount).
VIII.
AMENDMENT OR TERMINATION

8.1 Amendment.

The Compensation Committee reserves the right, in its sole discretion to amend this Plan at any time in whole or in part; provided, however, that no amendment shall result in the forfeiture or cancellation of any Participant’s Incentive Award(s) earned as of the end of the fiscal year immediately preceding the date the Compensation Committee adopts the amendment, unless otherwise agreed to by the affected Participant(s).

5




8.2 Termination.

The Compensation Committee may terminate the Plan at any time. Termination shall not result in the forfeiture or cancellation of any Participant’s Incentive Award(s) which have been determined but not yet paid, unless otherwise agreed to by the affected Participant(s).
IX.
ADMINISTRATION

9.1 Administration of the Plan.

This Plan has been adopted by the stockholders of Franklin Resources, Inc. and shall be administered by the Compensation Committee.
(a) The Compensation Committee shall meet at such times and places and upon such notice as the chairperson determines in consultation with the other Compensation Committee members. A majority of the Compensation Committee shall constitute a quorum. Any acts by the Compensation Committee may be taken at any meeting at which a quorum is present and shall be by majority vote of those members entitled to vote. Additionally, any acts reduced to writing or approved in writing by all the members of the Compensation Committee shall be valid acts of the Compensation Committee.

(b) The Compensation Committee shall have the sole authority, in its absolute discretion, to adopt, amend, and rescind such policies and procedures as, in its opinion, may be advisable in the administration of the Plan, to construe and interpret the Plan, the policies and procedures, and any instruments evidencing Incentive Awards and to make all other determinations deemed necessary or advisable for the administration of the Plan. All decisions, determinations, and interpretations of the Compensation Committee shall be binding on all Participants.

(c) The Plan is intended to meet the requirements of the rules promulgated by the Securities and Exchange Commission under Section 16(b) of the Securities Exchange Act of 1934, as amended, and shall be administered and construed accordingly.

9.2 Non-alienation of Benefits.

No benefit under this Plan may be sold, assigned, transferred, conveyed, hypothecated, encumbered, anticipated, or otherwise disposed of, and any attempt to do so shall be void. No such benefit shall, prior to receipt thereof by a Participant, be in any manner subject to the debts, contracts, liabilities, engagements, or torts of such Participant.
9.3 No Limitation of Rights.

Nothing in this Plan shall be construed to limit in any way the Company’s general personnel policies and procedures particularly with respect to the right of the Company to terminate a Participant’s employment at any time for any reason whatsoever with or without cause; nor shall it be evidence of any agreement or understanding, express or implied, that the Company (a) will employ a Participant in any particular position, (b) will ensure participation in any incentive programs, or (c) will grant any awards for such programs.
9.4 Applicable Law.

The provisions of the Plan shall be governed by and construed in accordance with the laws of the State of Delaware, with the exception of Delaware’s conflict of laws provisions.

6



9.5 Mandatory Arbitration.

The Participant and the Company agree to submit all disputes arising under the Plan or the participation by Participant in the Plan exclusively to final and binding arbitration in accordance with the Company’s dispute resolution policies with respect to employment arrangements and compensation plans as in effect from time to time.
X.
FORFEITURE OF INCENTIVE AWARDS

10.1 Forfeiture Pursuant to Restatement of Financial Results

(a) Notwithstanding any other provision of this Plan to the contrary, in the event that (i) the Company issues a restatement of financial results to correct a material error; (ii) the Compensation Committee determines, in good faith, that a Participant’s fraud or willful misconduct was a significant contributing factor to the need to issue such restatement; and (iii) some or all of an award granted to that Participant prior to such restatement (the “Relevant Award”) and/or shares of Stock or mutual fund shares that were granted and/or other property earned by the Participant prior to such restatement (the “Relevant Property”) would not have been granted and/or earned, as applicable, based upon the restated financial results, the Participant shall immediately return to the Company the Relevant Award and the Relevant Property, including any property received with respect to that Relevant Award or Relevant Property, including any pre-tax income derived from any disposition of it, and shares of Stock, mutual fund shares or other property previously received in settlement of a Relevant Award that would not have been granted and/or earned based upon the restated financial results (the “Repayment Obligation”), and any and all such Relevant Award or Relevant Property (whether or not vested) shall immediately be forfeited. The Company shall be able to enforce the Repayment Obligation by all legal means available, including, without limitation, by withholding such amount from other sums owed by the Company to the Participant.

10.2 Forfeiture Pursuant to Fraud or Breach of Securities Law.

(a) Notwithstanding any other provision of this Plan to the contrary, in the event that the Participant:

(i) is convicted by any court for fraud;

(ii) is finally adjudicated by any court or is otherwise finally determined by a Regulatory Agency to be in violation of any Securities Law where the violation related to a period of time during which the Participant was an employee; or

(iii) enters into a settlement agreement with a Regulatory Agency, with or without admission of any liability, in relation to or in connection with an allegation concerning a violation of any Securities Law by the Participant where the violation or alleged violation related to a period of time during which the Participant was an employee, and the terms of the settlement agreement result in (x) the Participant making, or being required to make, payment of any penalty or a payment in lieu of any penalty or redress in respect of such violation, or alleged violation; (y) the publication of any statement of reprimand or censure; or (z) the Participant suffering any other penalty including (without limitation) suspension or termination of his status for the purposes of any Securities Law, each of the Participant’s awards under the Plan if and to the extent that it has not vested shall immediately be forfeited without any payment to the Participant therefor and the Participant will immediately cease to have any further rights over or interest in such award. Notwithstanding the foregoing, the Compensation Committee may determine, in its sole discretion, that only a portion of the Participant’s award specified by the Compensation Committee (or no such portion of the award) shall be forfeited.


7



For the purposes of Section 10.2, the following words shall have the following meanings:
“Regulatory Agency” shall mean in any jurisdiction any department of government, independent agency, authority appointed by statute or by government in connection with the supervision and or enforcement of any Securities Law including, but not limited to, the U.S. Securities and Exchange Commission;
“Securities Law” shall mean any enactment, law, statute, rule, requirement or regulation in any jurisdiction relating to Securities that is or was applicable to the Company or that is or was applicable to the Participant;
“Securities” shall mean any shares, bonds, derivatives or other financial instruments or financial assets or any interest therein.
10.3 Other Repayment/Forfeiture.    

Any benefits Participants may receive hereunder shall be subject to repayment or forfeiture as may be required to comply with (i) any applicable listing standards of a national securities exchange adopted in accordance with Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (regarding recovery of erroneously awarded compensation) and any implementing rules and regulations of the U.S. Securities and Exchange Commission adopted thereunder, (ii) similar laws, and implementing rules and regulations, of the European Union (as implemented by its member states and by the European Securities and Markets Authority) and of any other jurisdiction and (iii) any policies adopted by the Company to implement such requirements, all to the extent determined by the Company in its discretion to be applicable to Participant.

* * *
This Plan was originally approved by the stockholders of Franklin Resources, Inc. on January 19, 1994. The stockholders of Franklin Resources, Inc. approved an amendment of the Plan on January 24, 1995. The Board of Directors of Franklin Resources, Inc. approved an amendment and restatement of the Plan on December 11, 2003 to (a) provide that up to 20% of PTOI may be allocated to the Award Pool by the Compensation Committee and (b) give broad discretion to the Compensation Committee in determining the amount of Incentive Awards payable to Participants in the Plan, which amendment and restatement was approved by the stockholders of Franklin Resources, Inc. on January 29, 2004. The Board of Directors of Franklin Resources, Inc. approved an amendment and restatement of the Plan on December 16, 2004 to provide that Incentive Awards may be paid in Options, SARs, Stock Unit Awards and Restricted Stock Unit Awards, which amendment and restatement was not subject to the approval of the stockholders of Franklin Resources, Inc. The Board of Directors of Franklin Resources, Inc. approved an amendment and restatement of the Plan on September 22, 2005 principally to (a) provide that the allocation of actual amounts to the Award Pool, Associates’ Pool(s) and/or Principals’ Pool(s) for a Plan Year and the determination and payment of actual Incentive Awards for a Plan Year may be made in advance of the completion of such Plan Year and (b) make various conforming and other technical changes to the Plan, which amendment and restatement was not subject to the approval of the stockholders of Franklin Resources, Inc. The Board of Directors of Franklin Resources, Inc. approved an amendment and restatement of the Plan on December 16, 2005 principally to change the governing law of the Plan to Delaware, which amendment and restatement was not subject to the approval of the stockholders of Franklin Resources, Inc. The Board of Directors of Franklin Resources, Inc. approved an amendment and restatement of the Plan on December 13, 2006 principally to make clarifying and technical changes to the Plan, which amendment and restatement was not subject to the approval of the stockholders of Franklin Resources, Inc. The Board of Directors of Franklin Resources, Inc. approved an amendment and restatement of the Plan on March 16, 2010 principally to (a) make clarifying and technical changes to the Plan, including to extend certain administrative authority to appropriate officers and members of management personnel in addition to the Compensation Committee, as well as (b) include a clawback provision providing for the forfeiture of Incentive Awards by a Participant in the context of certain material financial restatements resulting from such Participant’s misconduct, which amendment and restatement was not subject to the approval of the stockholders of Franklin Resources, Inc. The Board of Directors of Franklin

8



Resources, Inc. approved an amendment and restatement of the Plan on October 22, 2012 to permit additional committees established by the Board to act under the Plan to the extent of the authority granted to any such committee, which amendment and restatement was not subject to the approval of the stockholders of Franklin Resources, Inc. The Board of Directors of Franklin Resources, Inc. approved an amendment and restatement of the Plan on October 20, 2014 to amend the clawback provision to also provide for the forfeiture of Incentive Awards by a Participant in the case of certain circumstances involving fraud or breach of securities laws by the Participant, any applicable listing standards of a national securities exchange adopted in accordance with Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act and, similar laws, and implementing rules and regulations, of the European Union (as implemented by its member states and by the European Securities and Markets Authority) and of any other jurisdiction, which amendment and restatement was not subject to the approval of the stockholders of Franklin Resources, Inc.
FRANKLIN RESOURCES, INC.


9


EXHIBIT 12
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(in millions)
 
2014
 
2013
 
2012
 
2011
 
2010
for the fiscal years ended September 30,
 
 
 
 
 
Income before taxes excluding equity in income of investees, noncontrolling interests of consolidated subsidiaries and capitalized interest
 
$
3,341.5

 
$
2,952.6

 
$
2,609.6

 
$
2,625.3

 
$
2,050.2

Additions:
 
 
 
 

 
 

 
 

 
 

Dividends received from equity method investees
 
13.3

 
18.8

 
7.9

 
20.0

 
18.1

Interest on uncertain tax positions included in income before taxes
 
2.4

 
1.0

 
(0.3
)
 
3.2

 
5.1

Fixed charges
 
 
 
 

 
 

 
 

 
 

Interest expense - excluding interest on deposits
 
47.4

 
48.9

 
45.4

 
53.7

 
18.4

Interest expense - deposits
 
0.2

 
1.2

 
2.9

 
4.1

 
4.7

Interest on uncertain tax positions not related to third party
 
(2.4
)
 
(1.0
)
 
0.3

 
(3.2
)
 
(5.1
)
Interest factor on rent 1
 
19.4

 
19.1

 
19.5

 
20.7

 
22.2

Total fixed charges
 
64.6

 
68.2

 
68.1

 
75.3

 
40.2

Adjusted earnings
 
$
3,421.8

 
$
3,040.6

 
$
2,685.3

 
$
2,723.8

 
$
2,113.6

Ratio of adjusted earnings to fixed charges including interest on deposits
 
53.0

 
44.6

 
39.4

 
36.2

 
52.6

Ratio of adjusted earnings to fixed charges excluding interest on deposits
 
53.1

 
45.4

 
41.1

 
38.2

 
59.4

________________
1         Interest factor on rent represents one-third of rental expense (the approximate portion of rental expense representing interest).





EXHIBIT 21
FRANKLIN RESOURCES, INC.
LIST OF SUBSIDIARIES
(as of September 30, 2014)
Name
 
State or Nation of
Incorporation or Organization
Balanced Equity Management Pty. Limited
 
Australia
C&EE General Partner Ltd.
 
Delaware
Darby Administração de Investimentos Ltda.
 
Brazil
Darby Asia Founder Partner, L.P.
 
Cayman Islands
Darby Asia Investors (HK), Ltd.
 
Hong Kong
Darby Asia Investors (India) Private Limited
 
India
Darby Asia Investors, Ltd.
 
British Virgin Islands
Darby Asia Mezzanine Fund II Management Co., Ltd.
 
Cayman Islands
Darby Asia Opportunities Fund III GP, L.P.
 
Cayman Islands
Darby Asia Opportunities Fund III Management Co., Ltd.
 
Cayman Islands
Darby Brazil Mezzanine Management, LLC
 
Delaware
Darby CEE Founder Partner II, LLC
 
Delaware
Darby Colpatria Capital SAS
 
Colombia
Darby Converging Europe Founder Partner, L.P.
 
Delaware
Darby Converging Europe Fund III Management
 
Luxembourg
Darby Emerging Markets Investments, Ltd.
 
Delaware
Darby Europe Mezzanine Management
 
Cayman Islands
Darby Holdings, Inc.
 
Delaware
Darby Latin American Investors, Ltd.
 
Cayman Islands
Darby Latin American Mezzanine Investments
 
Cayman Islands
Darby Latin American Mezzanine Management II, LLC
 
Delaware
Darby Mexico Private Equity, S.A.P.I. de C.V.
 
Mexico
Darby Overseas Investments, Ltd.
 
Delaware
Darby Overseas Partners, L.P.
 
Delaware
Darby - Hana Infrastructure Fund Management Co., Ltd.
 
Korea
Darby-Probanco Investors, LLC
 
Delaware
DCEF Founder Partner III, L.P.
 
United Kingdom
DK Consulting Ltd.
 
Korea
DLAMF II Special Company, LLC
 
Delaware
Fiduciary International Holding, Inc.
 
New York
Fiduciary International Ireland Limited
 
Ireland
Fiduciary International, Inc.
 
New York
Fiduciary Investment Corporation
 
New York
Fiduciary Investment Management International, Inc.
 
Delaware
Fiduciary Trust (International) Sàrl
 
Switzerland
Fiduciary Trust Company International
 
New York
Fiduciary Trust Company of Canada
 
Canada





Name
 
State or Nation of
Incorporation or Organization
Fiduciary Trust International Limited
 
United Kingdom
Fiduciary Trust International of California
 
California
Fiduciary Trust International of Delaware
 
Delaware
Fiduciary Trust International of the South
 
Florida
Franklin Advisers, Inc.
 
California
Franklin Advisers GP, LLC
 
Delaware
Franklin Advisory Services, LLC
 
Delaware
Franklin Alternative Strategies Advisers, LLC
 
Delaware
Franklin Alternative Strategies Advisers GP, LLC
 
Delaware
Franklin Capital Corporation
 
Utah
Franklin Investment Advisory Services, LLC
 
Delaware
Franklin Mutual Advisers, LLC
 
Delaware
Franklin Templeton Asia Holdings Private Limited
 
Singapore
Franklin Templeton Asset Management (India) Private Limited
 
India
Franklin Templeton Asset Management (Malaysia) Sdn. Bhd.
 
Malaysia
Franklin Templeton Asset Management Mexico, S.A. de C.V., Sociedad Operadora de Sociedades de Inversion
 
Mexico
Franklin Templeton Austria GmbH
 
Austria
Franklin Templeton Bank & Trust, F.S.B.
 
United States
Franklin Templeton Capital Holdings Private Limited
 
Singapore
Franklin Templeton Companies, LLC
 
Delaware
Franklin Templeton Financial Services Corp.
 
New York
Franklin Templeton France S.A.
 
France
Franklin Templeton Fund Management Limited
 
United Kingdom
Franklin Templeton Global Investors Limited
 
United Kingdom
Franklin Templeton GSC Asset Management Sdn. Bhd.
 
Malaysia
Franklin Templeton Holding Limited
 
Mauritius
Franklin Templeton Institutional, LLC
 
Delaware
Franklin Templeton Institutional GP, LLC
 
Delaware
Franklin Templeton International Services (India) Private Limited
 
India
Franklin Templeton International Services S. à r.l.
 
Luxembourg
Franklin Templeton Investímentos (Brasil) Ltda.
 
Brazil
Franklin Templeton Investment Management GmbH
 
Germany
Franklin Templeton Investment Management Limited
 
United Kingdom
Franklin Templeton Investment Services GmbH
 
Germany
Franklin Templeton Investment Services Mexico S. de R.L.
 
Mexico
Franklin Templeton Investment Trust Management Co., Ltd.
 
Korea
Franklin Templeton Investments (Asia) Limited
 
Hong Kong
Franklin Templeton Investments Australia Limited
 
Australia
Franklin Templeton Investments Corp.
 
Canada
Franklin Templeton Investments Japan Limited
 
Japan





Name
 
State or Nation of
Incorporation or Organization
Franklin Templeton Investments (ME) Limited
 
Dubai, U.A.E.
Franklin Templeton Investments Poland sp. z o.o.
 
Poland
Franklin Templeton Investments South Africa (Pty) Ltd
 
South Africa
Franklin Templeton Investor Services, LLC
 
Delaware
Franklin Templeton Italia SIM S.p.A.
 
Italy
Franklin Templeton Luxembourg Holding S.A.
 
Luxembourg
Franklin Templeton Magyarorszag Kft.
 
Hungary
Franklin Templeton Management Luxembourg S.A.
 
Luxembourg
Franklin Templeton Portfolio Advisors, Inc.
 
California
Franklin Templeton Real Estate Advisors GP, LLC
 
Delaware
Franklin Templeton Real Estate Advisors II GP, LLC
 
Delaware
Franklin Templeton Real Estate Group Carry, L.P.
 
Delaware
Franklin Templeton Services Limited
 
Ireland
Franklin Templeton Services, LLC
 
Delaware
Franklin Templeton Services (India) Private Limited
 
India
Franklin Templeton Servicios de Asesoria Mexico, S. de R.L. de C.V.
 
Mexico
Franklin Templeton Slovakia, s.r.o.
 
Slovakia
Franklin Templeton Strategic Investments Ltd.
 
Cayman Islands
Franklin Templeton Switzerland Ltd.
 
Switzerland
Franklin Templeton Trustee Services Private Limited
 
India
Franklin Templeton Uruguay S.A.
 
Uruguay
Franklin/Templeton Distributors, Inc.
 
New York
Franklin/Templeton Travel, Inc.
 
California
F S Capital Group
 
California
F S Properties, Inc.
 
California
FT Opportunistic Distressed Fund Ltd.
 
Cayman Islands
FTC Investor Services Inc.
 
Canada
FTCI (Cayman) Ltd.
 
Cayman Islands
ITI Capital Markets Limited
 
India
K2 Advisors Holdings, LLC
 
Delaware
K2 Advisors Hong Kong Limited
 
Hong Kong
K2 Advisors Japan Ltd.
 
Japan
K2 Advisors L.L.C.
 
Delaware
K2 Advisors Limited
 
United Kingdom
K2/D&S Management Co., L.L.C.
 
Delaware
K2/Highland Management Co., L.L.C.
 
Delaware
LSIMC, LLC
 
Delaware
Riva Financial Systems Limited
 
United Kingdom
Templeton Asset Management (Labuan) Limited
 
Malaysia
Templeton Asset Management Limited Mexico, S. de R.L. de C.V.
 
Mexico
Templeton Asset Management Ltd.
 
Singapore





Name
 
State or Nation of
Incorporation or Organization
Templeton Asset Management (Poland) TFI S.A.
 
Poland
Templeton China Research Limited
 
Hong Kong
Templeton do Brasil Ltda.
 
Brazil
Templeton Franklin Global Distributors, Ltd.
 
Bermuda
Templeton Global Advisors Limited
 
The Bahamas
Templeton Global Holdings Ltd.
 
The Bahamas
Templeton International, Inc.
 
Delaware
Templeton Investment Counsel, LLC
 
Delaware
Templeton Restructured Investments, L.L.C.
 
Delaware
Templeton Restructured Investments III, Ltd.
 
Cayman Islands
Templeton Restructured Investments IV, Ltd.
 
Cayman Islands
Templeton Worldwide, Inc.
 
Delaware
Templeton/Franklin Investment Services, Inc.
 
Delaware
TSEMF III (Jersey) Limited
 
Jersey (Channel Islands)
TSEMF IV (Jersey) Limited
 
Jersey (Channel Islands)
________________
*
All subsidiaries currently do business principally under their respective corporate names except as follows:
some of our subsidiaries may use the names Franklin Templeton Investments, Franklin Templeton International and Templeton Worldwide;
our Darby subsidiaries may use the name Darby Private Equity;
Fiduciary Trust Company of Canada may use the names Fiduciary Trust Canada and Franklin Templeton Solutions in various Canadian jurisdictions;
Franklin Alternative Strategies Advisers, LLC may use the name Pelagos Capital Management;
Franklin Templeton Investments Corp. may use the names Franklin Bissett Investment Management, Franklin Templeton Investments and Franklin Templeton Institutional in various Canadian jurisdictions;
Franklin Templeton Portfolio Advisors, Inc. may use the names Franklin Portfolio Advisors and Templeton Portfolio Advisors; and
K2 Advisors L.L.C. may use the name K2 Advisors.




EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-183969) and on Form S-8 (Nos. 333-173905, 333-143402, 333-128691, 333-103869, 333-100801, 333-89517, 333-83377, 333-70035, 333-57682 and 333-48171) of Franklin Resources, Inc. of our report dated November 12, 2014 relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
November 12, 2014





EXHIBIT 31.1
CERTIFICATION
I, Gregory E. Johnson, certify that:
1.
I have reviewed this annual report on Form 10-K of Franklin Resources, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date:
November 12, 2014
 
/s/    G REGORY  E. J OHNSON 
 
 
 
Gregory E. Johnson
Chairman of the Board, Chief Executive Officer and President
 





EXHIBIT 31.2
CERTIFICATION
I, Kenneth A. Lewis, certify that:
1.
I have reviewed this annual report on Form 10-K of Franklin Resources, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date:
November 12, 2014
 
/s/    K ENNETH A . L EWIS
 
 
 
Kenneth A. Lewis
Chief Financial Officer and Executive Vice President
 




EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002 (FURNISHED HEREWITH)
I, Gregory E. Johnson, Chairman of the Board, Chief Executive Officer and President of Franklin Resources, Inc. (the “Company”), certify, as of the date hereof and solely for purposes of and pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1.
The Annual Report on Form 10-K of the Company for the fiscal year ended September 30, 2014 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.
This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.
 
Dated:
November 12, 2014
 
/s/    G REGORY  E. J OHNSON 
 
 
 
Gregory E. Johnson
Chairman of the Board, Chief Executive Officer and President
 





EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002 (FURNISHED HEREWITH)
I, Kenneth A. Lewis, Chief Financial Officer and Executive Vice President of Franklin Resources, Inc. (the “Company”), certify, as of the date hereof and solely for purposes of and pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1.
The Annual Report on Form 10-K of the Company for the fiscal year ended September 30, 2014 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.
This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.
 
Dated:
November 12, 2014
 
/s/    K ENNETH A . L EWIS
 
 
 
Kenneth A. Lewis
Chief Financial Officer and Executive Vice President