UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________
FORM 10-Q
____________________________________________________
(Mark One)
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
June 30, 2018
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
Commission File Number
001-14818
___________________________________________________
Federated Investors, Inc.
(Exact name of registrant as specified in its charter)
____________________________________________________
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Pennsylvania
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25-1111467
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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Federated Investors Tower
Pittsburgh, Pennsylvania
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15222-3779
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(Address of principal executive offices)
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(Zip Code)
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(Registrant's telephone number, including area code) 412-288-1900
___________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
x
No
o
.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§ 232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
x
No
o
.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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x
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Accelerated filer
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o
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Non-accelerated filer
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o
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Smaller reporting company
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o
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Emerging growth company
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o
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
o
No
x
.
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date: As of
July 20, 2018
, the Registrant had outstanding
9,000
shares of Class A Common Stock and
100,763,162
shares of Class B Common Stock.
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Item 1.
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Item 2.
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Item 3.
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Item 4.
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Item 1
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Item 1A.
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Item 2.
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Item 5.
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Other Information
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Item 6.
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Special Note Regarding Forward-Looking Information
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Certain statements in this report on Form 10-Q constitute forward-looking statements, which involve known and unknown risks, uncertainties, and other factors that may cause the actual results, levels of activity, performance or achievements of Federated Investors, Inc. and its consolidated subsidiaries (Federated), or industry results, to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements are typically identified by words or phrases such as "trend," "potential," "opportunity," "believe," "expect," "anticipate," "current," "intention," "estimate," "position," "projection," "assume," "continue," "remain," "maintain," "sustain," "seek," "achieve," and similar expressions, or future or conditional verbs such as "will," "would," "should," "could," "may" and similar expressions. Among other forward-looking statements, such statements include certain statements relating to: asset flows, levels and mix; business mix; sources and levels of revenues, expenses, gains, losses, income and earnings; when revenue is recognized; obligations to make payments relating to acquisitions and additional contingent or other payments pursuant to employment or incentive arrangements; business and market expansion opportunities; debt, future cash needs and cash flows; uses of treasury stock; legal proceedings; the components and level of, and prospect for, distribution-related expenses; classification and consolidation of investments; the ability to raise additional capital; management's assessments, beliefs, expectations, assumptions, projections or estimates, including regarding fee rates, the level and impact of reimbursements or assumptions of fund-related expenses (
Consideration Payable to Customers
) and fee waivers (collectively,
Fee Waivers
), the effect, and degree of impact, of changes in customer relationships, the level, timing, degree and impact of changes in interest rates, yields or asset levels or mix, the timing of acquisitions, legal proceedings, the timing, impact, effects and other consequences of continuing regulatory oversight, and potential, proposed and final laws, regulations and other rules and possible deregulation, by U.S. and foreign regulators and other authorities, borrowing, taxes and the impact of tax law changes, product and strategy demand, investor preferences, performance, product development and restructuring options and initiatives, including the plans for and timing of such options and initiatives, compliance, and related legal, compliance and other professional services expenses, interest payments or expenses, dedication of resources, accounting policies, indebtedness and certain investments, and liquidity; future principal uses of cash; performance indicators; the adoption and impact of accounting policies, new accounting pronouncements and accounting treatment determinations; auditor independence matters; interest rate, concentration, market and other risks; guarantee and indemnification obligations; and various items set forth under Item 1A - Risk Factors included in Federated's Annual Report on Form 10-K for the year ended
December 31, 2017
. Among other risks and uncertainties, market conditions may change significantly resulting in changes to Federated's asset flows, asset levels, asset mix and business mix, which may cause a decline in revenues and net income, result in impairments and increase the amount of Fee Waivers incurred by Federated. The obligation to make contingent payments is based on net revenue levels and will be affected by the achievement of such levels. The obligation to make purchase price payments in connection with acquisitions is subject to certain adjustments and conditions and the obligation to make additional payments pursuant to employment or incentive arrangements is based on satisfaction of certain conditions set forth in those arrangements. Future cash needs, cash flows and future uses of cash will be impacted by a variety of factors, including the number and size of any acquisitions, Federated's success in developing, structuring and distributing its products and strategies, potential changes in assets under management and/or changes in the terms of distribution and shareholder services contracts with intermediaries who offer Federated's products to customers, and potential increased legal, compliance and other professional services expenses stemming from additional or modified regulation or the dedication of such resources to other initiatives. Federated's risks and uncertainties also include liquidity and credit risks in Federated's money market funds and revenue risk, which will be affected by yield levels in money market fund products, changes in fair values of assets under management, investor preferences and confidence, and the ability of Federated to collect fees in connection with the management of such products. Many of these factors may be more likely to occur as a result of continued scrutiny of the mutual fund industry by domestic or foreign regulators, and any disruption in global financial markets. As a result, no assurance can be given as to future results, levels of activity, performance or achievements, and neither Federated nor any other person assumes responsibility for the accuracy and completeness of such statements in the future. For more information on these items and additional risks that may impact the forward-looking statements, see Item 1A - Risk Factors included in Federated's Annual Report on Form 10-K for the year ended
December 31, 2017
.
Part I. Financial Information
Item 1. Financial Statements
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Consolidated Balance Sheets
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(dollars in thousands)
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(unaudited)
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June 30,
2018
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December 31,
2017
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ASSETS
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Current Assets
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Cash and Cash Equivalents
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$
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375,172
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$
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316,264
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Investments—Consolidated Investment Companies
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33,603
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45,411
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Investments—Affiliates and Other
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8,786
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7,863
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Receivables, net of reserve of $11 and $60, respectively
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44,706
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53,482
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Prepaid Expenses
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19,906
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11,747
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Other Current Assets
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2,007
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2,507
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Total Current Assets
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484,180
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437,274
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Long-Term Assets
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Goodwill
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660,040
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660,040
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Renewable Investment Advisory Contracts
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73,878
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73,878
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Other Intangible Assets, net of accumulated amortization of $5,489 and $5,202, respectively
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2,711
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2,997
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Property and Equipment, net of accumulated depreciation of $75,803 and $70,561, respectively
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39,338
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37,670
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Other Long-Term Assets
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16,168
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19,551
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Total Long-Term Assets
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792,135
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794,136
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Total Assets
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$
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1,276,315
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$
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1,231,410
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LIABILITIES
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Current Liabilities
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Accounts Payable and Accrued Expenses
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$
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51,358
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$
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47,595
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Accrued Compensation and Benefits
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43,396
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74,572
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Other Current Liabilities
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40,306
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6,682
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Total Current Liabilities
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135,060
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128,849
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Long-Term Liabilities
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Long-Term Debt
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178,000
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170,000
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Long-Term Deferred Tax Liability, net
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122,806
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117,620
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Other Long-Term Liabilities
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20,340
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23,563
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Total Long-Term Liabilities
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321,146
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311,183
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Total Liabilities
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456,206
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440,032
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Commitments and Contingencies (Note (15))
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TEMPORARY EQUITY
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Redeemable Noncontrolling Interest in Subsidiaries
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20,984
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30,163
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PERMANENT EQUITY
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Federated Investors, Inc. Shareholders' Equity
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Common Stock:
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Class A, No Par Value, 20,000 Shares Authorized, 9,000 Shares Issued and Outstanding
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189
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189
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Class B, No Par Value, 900,000,000 Shares Authorized, 109,505,456 Shares Issued
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355,949
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343,189
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Retained Earnings
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732,753
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697,359
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Treasury Stock, at Cost, 8,742,294 and 8,405,003 Shares Class B Common Stock, respectively
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(288,277
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)
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(278,732
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Accumulated Other Comprehensive Loss, net of tax
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(1,489
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(790
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)
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Total Permanent Equity
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799,125
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761,215
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Total Liabilities, Temporary Equity and Permanent Equity
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$
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1,276,315
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$
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1,231,410
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(The accompanying notes are an integral part of these Consolidated Financial Statements.)
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Consolidated Statements of Income
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(dollars in thousands, except per share data)
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(unaudited)
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2018
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2017
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2018
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2017
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Revenue
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Investment Advisory Fees, net—Affiliates
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$
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130,531
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$
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145,205
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$
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265,762
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$
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293,124
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Investment Advisory Fees, net—Other
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37,596
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34,117
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76,631
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67,515
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Administrative Service Fees, net—Affiliates
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48,370
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45,601
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97,393
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92,302
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Other Service Fees, net—Affiliates
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39,496
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46,414
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80,059
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90,373
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Other Service Fees, net—Other
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0
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1,459
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0
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2,983
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Total Revenue
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255,993
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272,796
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519,845
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546,297
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Operating Expenses
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Compensation and Related
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74,147
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71,370
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152,521
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144,772
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Distribution
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69,446
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87,174
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141,945
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177,533
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Professional Service Fees
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9,278
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6,116
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18,908
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|
13,194
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Systems and Communications
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7,751
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8,041
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16,184
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16,266
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Office and Occupancy
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7,365
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7,161
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14,906
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14,513
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Travel and Related
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3,523
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2,958
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6,344
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|
5,893
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Advertising and Promotional
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3,237
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3,095
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6,465
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6,051
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Other
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489
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2,670
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2,144
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|
6,091
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Total Operating Expenses
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175,236
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188,585
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359,417
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384,313
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Operating Income
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80,757
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84,211
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160,428
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161,984
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Nonoperating (Expenses) Income
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Investment Income, net
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2,192
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|
1,703
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4,092
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3,355
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(Loss) Gain on Securities, net
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(815
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)
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2,234
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(1,997
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)
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4,796
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Debt Expense
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(1,431
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)
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(1,182
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)
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(2,761
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)
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(2,283
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)
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Other, net
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(28,974
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)
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(33
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)
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|
(29,117
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)
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(34
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)
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Total Nonoperating (Expenses) Income, net
|
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(29,028
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)
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|
2,722
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(29,783
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)
|
|
5,834
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Income Before Income Taxes
|
|
51,729
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|
|
86,933
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|
130,645
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|
167,818
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Income Tax Provision
|
|
13,062
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|
32,274
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|
|
31,972
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|
|
62,132
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Net Income Including the Noncontrolling Interests in Subsidiaries
|
|
38,667
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54,659
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|
98,673
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105,686
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Less: Net (Loss) Income Attributable to the Noncontrolling Interests in Subsidiaries
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(155
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)
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1,208
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(480
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)
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2,594
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Net Income
|
|
$
|
38,822
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|
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$
|
53,451
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$
|
99,153
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$
|
103,092
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Amounts Attributable to Federated Investors, Inc.
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Earnings Per Common Share—Basic and Diluted
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$
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0.38
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$
|
0.53
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$
|
0.98
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$
|
1.01
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Cash Dividends Per Share
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$
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0.27
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$
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0.25
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$
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0.52
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$
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0.50
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(The accompanying notes are an integral part of these Consolidated Financial Statements.)
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Consolidated Statements of Comprehensive Income
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(dollars in thousands)
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(unaudited)
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Three Months Ended
|
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Six Months Ended
|
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|
June 30,
|
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June 30,
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2018
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|
2017
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2018
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|
2017
|
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Net Income Including the Noncontrolling Interests in Subsidiaries
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$
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38,667
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$
|
54,659
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$
|
98,673
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|
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$
|
105,686
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Other Comprehensive (Loss) Income, net of tax
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Permanent Equity
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|
Foreign Currency Items
|
|
(722
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)
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|
223
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|
|
(479
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)
|
|
363
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|
Reclassification Adjustment Related to Foreign Currency Items
|
|
0
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|
|
0
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(191
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)
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|
0
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Unrealized Gain on Equity Securities
|
|
0
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|
276
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|
|
0
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|
1,393
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Reclassification Adjustment Related to Equity Securities
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|
0
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(510
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)
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(29
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)
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|
(1,157
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)
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Other Comprehensive (Loss) Income, net of tax
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|
(722
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)
|
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(11
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)
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(699
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)
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|
599
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|
Comprehensive Income Including the Noncontrolling Interests in Subsidiaries
|
|
37,945
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|
|
54,648
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|
|
97,974
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|
|
106,285
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Less: Comprehensive (Loss) Income Attributable to Redeemable Noncontrolling Interest in Subsidiaries
|
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(155
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)
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|
1,208
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|
|
(480
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)
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|
2,118
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|
Less: Comprehensive Income Attributable to Nonredeemable Noncontrolling Interest in Subsidiary
|
|
0
|
|
|
0
|
|
|
0
|
|
|
476
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|
Comprehensive Income Attributable to Federated Investors, Inc.
|
|
$
|
38,100
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|
|
$
|
53,440
|
|
|
$
|
98,454
|
|
|
$
|
103,691
|
|
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Consolidated Statements of Changes in Equity
|
(dollars in thousands)
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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Federated Investors, Inc. Shareholders' Equity
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
Retained
Earnings
|
|
Treasury
Stock
|
|
Accumulated
Other
Comprehensive
(Loss) Income, net of
tax
|
|
Total
Shareholders'
Equity
|
|
Nonredeemable
Noncontrolling
Interest in
Subsidiary
|
|
Total
Permanent
Equity
|
|
Redeemable
Noncontrolling
Interest in
Subsidiaries/
Temporary
Equity
|
Balance at December 31, 2016
|
|
$
|
320,982
|
|
|
$
|
529,749
|
|
|
$
|
(255,382
|
)
|
|
$
|
(523
|
)
|
|
$
|
594,826
|
|
|
$
|
958
|
|
|
$
|
595,784
|
|
|
$
|
31,362
|
|
Net Income
|
|
0
|
|
|
103,092
|
|
|
0
|
|
|
0
|
|
|
103,092
|
|
|
476
|
|
|
103,568
|
|
|
2,118
|
|
Other Comprehensive Income, net of tax
|
|
0
|
|
|
0
|
|
|
0
|
|
|
599
|
|
|
599
|
|
|
0
|
|
|
599
|
|
|
0
|
|
Subscriptions—Redeemable Noncontrolling Interest Holders
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
3,499
|
|
Deconsolidation
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(1,891
|
)
|
Stock Award Activity
|
|
12,204
|
|
|
(14,131
|
)
|
|
14,221
|
|
|
0
|
|
|
12,294
|
|
|
0
|
|
|
12,294
|
|
|
0
|
|
Dividends Declared
|
|
0
|
|
|
(50,930
|
)
|
|
0
|
|
|
0
|
|
|
(50,930
|
)
|
|
0
|
|
|
(50,930
|
)
|
|
0
|
|
Distributions to Noncontrolling Interest in Subsidiaries
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(1,434
|
)
|
|
(1,434
|
)
|
|
(4,426
|
)
|
Purchases of Treasury Stock
|
|
0
|
|
|
0
|
|
|
(28,252
|
)
|
|
0
|
|
|
(28,252
|
)
|
|
0
|
|
|
(28,252
|
)
|
|
0
|
|
Balance at June 30, 2017
|
|
$
|
333,186
|
|
|
$
|
567,780
|
|
|
$
|
(269,413
|
)
|
|
$
|
76
|
|
|
$
|
631,629
|
|
|
$
|
0
|
|
|
$
|
631,629
|
|
|
$
|
30,662
|
|
Balance at December 31, 2017
|
|
$
|
343,378
|
|
|
$
|
697,359
|
|
|
$
|
(278,732
|
)
|
|
$
|
(790
|
)
|
|
$
|
761,215
|
|
|
$
|
0
|
|
|
$
|
761,215
|
|
|
$
|
30,163
|
|
Adoption of New Accounting Pronouncements
|
|
0
|
|
|
125
|
|
|
0
|
|
|
(254
|
)
|
|
(129
|
)
|
|
0
|
|
|
(129
|
)
|
|
0
|
|
Net Income (Loss)
|
|
0
|
|
|
99,153
|
|
|
0
|
|
|
0
|
|
|
99,153
|
|
|
0
|
|
|
99,153
|
|
|
(480
|
)
|
Other Comprehensive Loss, net of tax
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(445
|
)
|
|
(445
|
)
|
|
0
|
|
|
(445
|
)
|
|
0
|
|
Subscriptions—Redeemable Noncontrolling Interest Holders
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
1,163
|
|
Deconsolidation
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(1,751
|
)
|
Stock Award Activity
|
|
12,760
|
|
|
(11,288
|
)
|
|
11,495
|
|
|
0
|
|
|
12,967
|
|
|
0
|
|
|
12,967
|
|
|
0
|
|
Dividends Declared
|
|
0
|
|
|
(52,596
|
)
|
|
0
|
|
|
0
|
|
|
(52,596
|
)
|
|
0
|
|
|
(52,596
|
)
|
|
0
|
|
Distributions to Noncontrolling Interest in Subsidiaries
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(8,111
|
)
|
Purchases of Treasury Stock
|
|
0
|
|
|
0
|
|
|
(21,040
|
)
|
|
0
|
|
|
(21,040
|
)
|
|
0
|
|
|
(21,040
|
)
|
|
0
|
|
Balance at June 30, 2018
|
|
$
|
356,138
|
|
|
$
|
732,753
|
|
|
$
|
(288,277
|
)
|
|
$
|
(1,489
|
)
|
|
$
|
799,125
|
|
|
$
|
0
|
|
|
$
|
799,125
|
|
|
$
|
20,984
|
|
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows
|
(dollars in thousands)
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
2018
|
|
|
2017
|
|
Operating Activities
|
|
|
|
|
Net Income Including the Noncontrolling Interests in Subsidiaries
|
|
$
|
98,673
|
|
|
$
|
105,686
|
|
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
|
|
|
|
|
Amortization of Deferred Sales Commissions
|
|
1,614
|
|
|
4,879
|
|
Depreciation and Other Amortization
|
|
5,343
|
|
|
5,179
|
|
Share-Based Compensation Expense
|
|
12,768
|
|
|
12,234
|
|
Gain on Disposal of Assets
|
|
(509
|
)
|
|
(3,350
|
)
|
Provision for Deferred Income Taxes
|
|
5,610
|
|
|
7,121
|
|
Loss on Derivative
|
|
28,978
|
|
|
0
|
|
Fair-Value Adjustments for Contingent Liabilities
|
|
124
|
|
|
0
|
|
Net Unrealized Loss (Gain) on Investments
|
|
2,549
|
|
|
(1,367
|
)
|
Net Sales of Investments—Consolidated Investment Companies
|
|
7,743
|
|
|
11,008
|
|
Deferred Sales Commissions Paid
|
|
(43
|
)
|
|
(2,846
|
)
|
Contingent Deferred Sales Charges Received
|
|
0
|
|
|
1,157
|
|
Other Changes in Assets and Liabilities:
|
|
|
|
|
Decrease in Receivables, net
|
|
8,771
|
|
|
2,129
|
|
Increase in Prepaid Expenses and Other Assets
|
|
(6,765
|
)
|
|
(3,589
|
)
|
Decrease in Accounts Payable and Accrued Expenses
|
|
(30,446
|
)
|
|
(43,260
|
)
|
Increase in Other Liabilities
|
|
1,976
|
|
|
1,390
|
|
Net Cash Provided by Operating Activities
|
|
136,386
|
|
|
96,371
|
|
Investing Activities
|
|
|
|
|
Purchases of Investments—Affiliates and Other
|
|
(2,515
|
)
|
|
(3,977
|
)
|
Cash Paid for Business Acquisitions
|
|
0
|
|
|
(4,352
|
)
|
Proceeds from Redemptions of Investments—Affiliates and Other
|
|
2,419
|
|
|
22,496
|
|
Cash Paid for Property and Equipment
|
|
(5,397
|
)
|
|
(3,461
|
)
|
Net Cash (Used) Provided by Investing Activities
|
|
(5,493
|
)
|
|
10,706
|
|
Financing Activities
|
|
|
|
|
Dividends Paid
|
|
(52,604
|
)
|
|
(50,937
|
)
|
Purchases of Treasury Stock
|
|
(20,374
|
)
|
|
(30,083
|
)
|
Distributions to Noncontrolling Interest in Subsidiaries
|
|
(8,111
|
)
|
|
(5,860
|
)
|
Contributions from Noncontrolling Interest in Subsidiaries
|
|
1,163
|
|
|
3,499
|
|
Cash Paid for Amended and Restated Credit Agreement
|
|
0
|
|
|
(483
|
)
|
Proceeds from Shareholders for Share-Based Compensation
|
|
207
|
|
|
90
|
|
Proceeds from New Borrowings
|
|
18,000
|
|
|
0
|
|
Payments on Contingent Consideration Liabilities
|
|
(228
|
)
|
|
(210
|
)
|
Payments on Debt
|
|
(10,000
|
)
|
|
(12,750
|
)
|
Net Cash Used by Financing Activities
|
|
(71,947
|
)
|
|
(96,734
|
)
|
Net Increase in Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents
|
|
58,946
|
|
|
10,343
|
|
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents, Beginning of Period
|
|
316,809
|
|
|
105,355
|
|
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents, End of Period
|
|
375,755
|
|
|
115,698
|
|
Less: Restricted Cash and Restricted Cash Equivalents Recorded in Other Long-Term Assets
|
|
583
|
|
|
530
|
|
Cash and Cash Equivalents
|
|
$
|
375,172
|
|
|
$
|
115,168
|
|
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
|
|
|
|
|
|
|
Notes to the Consolidated Financial Statements
|
(unaudited)
|
(1)
Basis of Presentation
Federated provides investment advisory, administrative, distribution and other services to various investment products, including sponsored investment companies and other funds (
Federated Funds
) and
Separate Accounts
(which include separately managed accounts, institutional accounts, sub-advised funds and other managed products) in both domestic and international markets. The interim Consolidated Financial Statements of Federated Investors, Inc. and its consolidated subsidiaries (collectively,
Federated
) included herein have been prepared in accordance with United States (
U.S.
) generally accepted accounting principles (
GAAP
). In the opinion of management, the financial statements reflect all adjustments that are of a normal recurring nature and necessary for a fair presentation of the results for the interim periods presented.
In preparing the financial statements, management is required to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Actual results may differ from those estimates, and such differences may be material to the Consolidated Financial Statements.
These financial statements should be read in conjunction with Federated's Annual Report on Form 10-K for the year ended
December 31, 2017
. Certain items previously reported have been reclassified to conform to the current period's presentation.
(2)
Recent Accounting Pronouncements
(a)
Recently Adopted Accounting Guidance
Revenue Recognition
On May 28, 2014, the Financial Accounting Standards Board (
FASB
) issued Accounting Standards Update (
ASU
) 2014-09, Revenue from Contracts with Customers (
Topic 606
), which supersedes virtually all existing revenue recognition guidance under GAAP. The update's core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. During 2016, the FASB issued ASU 2016-08, which clarified principal versus agent considerations, ASU 2016-10, which clarified identifying performance obligations and the licensing implementation guidance, ASU 2016-12, which addressed implementation issues and provided additional practical expedients and ASU 2016-20, which provided technical corrections to narrow aspects of the guidance (collectively, with ASU 2014-09, Topic 606).
Effective January 1, 2018, Federated adopted Topic 606 using the modified retrospective method, which did not require the restatement of prior years. In connection with the adoption of Topic 606, Federated has applied the guidance to all contracts that were not completed on the effective date of adoption.
Management reevaluated the capitalization and amortization policies of deferred sales commission assets, which resulted in a shorter amortization period. Upon adoption, Federated recorded a cumulative-effect adjustment of
$8.1 million
as a reduction to
Other Long-Term Assets
and
Retained Earnings
. Contingent deferred sales charges (
CDSC
s) received, which were previously recorded as a reduction of deferred sales commission assets, are now being recorded as revenue. Upon adoption, Federated recorded a cumulative-effect adjustment of
$8.0 million
as an increase to
Other Long-Term Assets
and
Retained Earnings
.
For the
three
and
six months ended
June 30, 2018
,
$0.5 million
and
$0.8 million
, respectively, of CDSCs received were recorded as revenue in
Other Service Fees, net—Affiliates
on the
Consolidated Statements of Income
.
Consideration Payable to Customers
(which includes reimbursements or assumptions of fund-related expenses) of
$8.2 million
and
$16.8 million
, respectively, for the
three
and
six months ended
June 30, 2018
, was recorded as a reduction of revenue in
Investment Advisory Fees, net—Affiliates
(
previously recorded primarily as Distribution expense
) on the
Consolidated Statements of Income
. Additionally, certain revenue is now being recorded as a single asset management fee, as it is part of a unitary fee arrangement with a single performance obligation. As such,
$1.6 million
and
$3.3 million
, respectively, for the
three
and
six months ended
June 30, 2018
was recorded in
Investment Advisory Fees, net—Other
(previously recorded in
Other Service Fees, net—Other
) on the
Consolidated Statements of Income
.
Financial Instruments
Effective January 1, 2018, Federated adopted
ASU 2016-01
, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU significantly revises an entity's accounting related to (1) the classification and measurement of investments in equity securities, including investments in mutual funds and (2) the presentation of certain fair value changes for financial liabilities. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. Management elected the modified retrospective transition method which
|
|
|
|
|
Notes to the Consolidated Financial Statements (continued)
|
(unaudited)
|
|
|
was applied by means of a cumulative-effect adjustment to the Consolidated Balance Sheets. While the modified retrospective transition method did not require the restatement of prior years, management elected to reclassify certain prior year presentations and disclosures, primarily the investment and fair value measurement footnotes and the Consolidated Statements of Cash Flows, to ensure comparability with current year investment classifications. The adoption did not have a material impact to Federated's Consolidated Financial Statements.
Statement of Cash Flows
On January 1, 2018, Federated adopted ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The standard addresses eight specific cash flow issues to reduce diversity in practice in how certain cash receipts and cash payments are presented on the Statement of Cash Flows. One relevant issue pertained to contingent consideration payments made after a business combination. However, Federated was already classifying these payments appropriately. While the ASU required the retrospective adoption approach, the adoption did not have an impact to Federated's Consolidated Financial Statements.
On January 1, 2018, Federated adopted ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, a consensus of the FASB Emerging Issues Task Force. Under this ASU, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows. The ASU required the retrospective adoption approach, which required the restatement of prior periods presented. The adoption did not have a material impact to Federated's Consolidated Financial Statements.
Clarifying the Definition of a Business
On January 1, 2018, Federated adopted ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this update require that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset (or a group of similar identifiable assets), the assets are not considered to be a business. To be considered a business, an acquisition or disposal must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. The amendments also narrow the definition of the term "outputs" to be consistent with Topic 606. The ASU was required to be applied prospectively. The adoption did not have a material impact to Federated's Consolidated Financial Statements.
Reporting on Comprehensive Income
Effective January 1, 2018, Federated adopted ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. Due to the revaluation of deferred taxes resulting from the Tax Cuts and Jobs Act of 2017 (
Tax Act
) being required to be included in income, regardless of the source of income or loss to which the deferred item related, the tax effects of items within
Accumulated Other Comprehensive Loss, net of tax
did not reflect the appropriate tax rate. The amendments in this update allow a reclassification from Accumulated other comprehensive loss, net of tax to Retained earnings for these stranded tax effects resulting from the
Tax Act
. Management elected to apply the guidance in the period of adoption, which did not require the restatement of prior years, and was applied by means of a cumulative-effect adjustment to the Consolidated Balance Sheets. The adoption did not have a material impact to Federated's Consolidated Financial Statements.
(b)
Recently Issued Accounting Guidance Not Yet Adopted
Leases
On February 25, 2016, the FASB issued ASU 2016-02, Leases (
Topic 842
). The core principle is that a lessee should recognize the assets and liabilities that arise from leases on the balance sheet, while retaining a distinction between finance and operating leases. The update is effective for Federated on January 1, 2019. While early adoption is permitted, Federated does not plan to early adopt. The update requires the modified retrospective adoption method. Management continues to identify the population of contracts for testing to determine if a lease exists, and is currently evaluating the potential impact of adoption to Federated's Consolidated Financial Statements.
Goodwill Impairment
On January 26, 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. Under this ASU, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, the ASU retains the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The update is effective for Federated on January 1,
|
|
|
|
|
Notes to the Consolidated Financial Statements (continued)
|
(unaudited)
|
|
|
2020, with early adoption permitted, and requires the prospective adoption method. Management is currently evaluating the potential impact of adoption to Federated's Consolidated Financial Statements.
(3)
Significant Accounting Policies
As a result of the adoptions of
Topic 606
and
ASU 2016-01
, as well as current period derivative activity, the following accounting policies have been updated. For a complete listing of Federated's significant accounting policies, please refer to Federated's Annual Report on Form 10-K for the year ended
December 31, 2017
.
Deferred Sales Commissions
Federated pays upfront commissions to broker/dealers (
Deferred Sales Commissions
) to promote the sale of certain fund shares. For share classes that pay both a distribution fee and a CDSC, Federated generally capitalizes the Deferred Sales Commissions. The deferred sales commission asset (included in
Other Long-Term Assets
on the
Consolidated Balance Sheets
) is amortized over the estimated period of benefit of
six years
. Deferred sales commission amortization expense was
$1.6 million
and
$4.9 million
for the
six months ended
June 30, 2018
and
2017
, respectively, and was included in
Distribution
expense on the
Consolidated Statements of Income
.
Federated reviews the carrying value of deferred sales commission assets on a periodic basis to determine whether a significant long-term decline in the equity or bond markets or other events or circumstances indicate that an impairment in value may have occurred. Should there be an indication of an impairment in value, Federated compares the carrying value of the asset to the probability-weighted undiscounted future cash flows of the underlying asset to determine whether an impairment has occurred. If the carrying value of the asset exceeds the undiscounted future cash flows, the deferred sales commission asset is written down to its estimated fair value determined using discounted future cash flows. There were
no
impairments to the deferred sales commission asset during the
six months ended
June 30, 2018
and
2017
.
For share classes that do not pay both a distribution fee and CDSC, Federated may be entitled to receive an upfront commission, which is collected from subscribing shareholders and recognized as revenue in
Other Service Fees, net—Affiliates
on the
Consolidated Statements of Income
upon investor subscription. For Deferred Sales Commissions that are not capitalized, the Deferred Sales Commissions paid are expensed as incurred and totaled
$2.6 million
and
$0.8 million
as of
June 30, 2018
and
2017
, respectively, and were included in
Distribution
expense on the
Consolidated Statements of Income
.
Revenue Recognition
All of Federated's revenue is earned from contracts with customers, which are generally terminable upon no more than 60 days' notice. Revenue is measured in an amount that reflects the consideration to which Federated expects to be entitled in exchange for providing those services. This amount may be reduced by
Fee Waivers
. See
Note (7)
for information about current period
Fee Waivers
.
Revenue from providing investment advisory, administrative and the majority of other service fees is recognized when a performance obligation is satisfied, which occurs when control of the services is transferred to customers. For these revenue streams, control is transferred over time as the customer simultaneously consumes the benefit of the service as it is provided. Federated utilizes a time-based measure of progress for which each day is a distinct service period over the life of the contract. Investment advisory, administrative and the majority of other service fees are generally calculated as a percentage of average net assets of the
investment portfolios managed by Federated
. Based on the nature of the calculation, the revenue for these services is accounted for as variable consideration, and is subject to factors outside of Federated's control including investor activity and market volatility and is recognized as these uncertainties are resolved.
For the distribution performance obligation, control is transferred to the customer at a point in time upon investor subscription and/or redemption. Based on the nature of the calculation, the revenue for these services is accounted for as variable consideration, and is subject to factors outside of Federated's control including investor activity and market volatility and is recognized as these uncertainties are resolved. For certain revenue, primarily related to distribution fees, Federated may recognize revenue in the current period that pertains to performance obligations satisfied in prior periods, as it represents variable consideration and is recognized as uncertainties are resolved.
The fair value of these
investment portfolios managed by Federated
is primarily determined using quoted market prices, independent third-party pricing services and broker/dealer price quotes or the NAV Practical Expedient. In limited circumstances, a quotation or price evaluation is not readily available from a pricing source. In these cases, pricing is determined by management based on a prescribed valuation process that has been approved by the directors/trustees of the
|
|
|
|
|
Notes to the Consolidated Financial Statements (continued)
|
(unaudited)
|
|
|
Federated Funds
. For each period presented, a de minimis amount of assets under management (
AUM
) was priced in this manner by Federated management. For
Separate Accounts
that are not registered investment companies under the Investment Company Act of 1940 (
1940 Act
), the fair value of portfolio investments is primarily determined as specified in applicable customer agreements, including in agreements between the customer and the customer's third-party custodian. For
Separate Accounts
that are registered investment companies under the
1940 Act
(e.g., sub-advised mutual funds), the fair value of portfolio investments is determined based on a prescribed valuation process approved by the board of directors/trustees of the sub-advised fund.
Federated has contractual arrangements with third parties to provide certain fund-related services. Management considers whether Federated is acting as the principal service provider or as an agent to determine whether its revenue should be recorded based on the gross amount payable by the funds or net of payments to third-party service providers, respectively. Federated would be considered a principal service provider if it controls the service that is transferred to the customer. Alternatively, Federated would be considered an agent when it does not control the service, but rather arranges for the service to be provided by another party. Generally, the less the customer is directly involved with or participates in making decisions regarding the ultimate third-party service provider, the more supportive the facts are that Federated is acting as the principal in these transactions and should therefore report gross revenues. All of Federated's revenue is recorded gross of payments made to third parties.
Significant judgments are used when reviewing newly-created contracts and/or materially-modified contracts to determine whether: (1) Federated is the principal or agent; (2) a contract has multiple performance obligations when Federated is paid a single fee; and (3) two or more contracts should be combined. A change in the conclusion of whether Federated is the principal or agent would result in a change in the revenue being recorded gross or net of payments made to third parties. Different conclusions for the remaining two judgments may change the line items to which revenue is being recorded. There are no significant judgments that would impact the timing of revenue recognition.
Federated is not required to disclose estimates of revenue expected to be recorded in future periods as a result of applying the following exemptions: (1) contract terms are short-term in nature (i.e., expected duration of one year or less due to termination provisions) and (2) the expected variable consideration would be allocated entirely to future service periods.
Investments
Federated's investments are categorized as
Investments—Consolidated Investment Companies
or
Investments—Affiliates and Other
on the Consolidated Balance Sheets.
Investments—Consolidated Investment Companies
represent securities held by Federated as a result of consolidating certain
Federated Funds
.
Investments—Affiliates and Other
represent Federated's investments in fluctuating-value
Federated Funds
and investments held in Separate Accounts for which Federated owns the underlying debt and equity securities. All investments are carried at fair value with unrealized gains or losses on these securities recognized in
(Loss) Gain on Securities, net
on the Consolidated Statements of Income. Realized gains and losses on these securities are computed on a specific-identification basis and recognized in
(Loss) Gain on Securities, net
on the Consolidated Statements of Income.
The fair value of Federated's investments is generally based on quoted market prices in active markets for identical instruments. If quoted market prices are not available, fair value is generally based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, or model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. In the absence of observable market data inputs and/or value drivers, internally generated valuation techniques may be utilized in which one or more significant inputs or significant value drivers are unobservable in the market place. See
Note (9)
for additional information regarding the fair value of investments held as of
June 30, 2018
and
December 31, 2017
.
Derivatives and Hedging Instruments
From time to time, Federated may consolidate an investment product that holds freestanding derivative financial instruments for trading purposes. Federated reports such derivative instruments at fair value and records the changes in fair value in
(Loss) Gain on Securities, net
on the Consolidated Statements of Income.
From time to time, Federated may also enter into derivative financial instruments to hedge against the risk of movement in foreign exchange rates. Federated records all derivative financial instruments as either assets or liabilities on its Consolidated Balance Sheets and measures these instruments at fair value. Federated has not designated any derivative financial instrument as a hedging instrument for accounting purposes. The gain or loss on derivative instruments not designated for hedge
|
|
|
|
|
Notes to the Consolidated Financial Statements (continued)
|
(unaudited)
|
|
|
accounting is recognized in
Other, net
on the Consolidated Statements of Income. See
Note (10)
for additional information on current quarter derivative instruments.
(4)
Business Combinations
On
April 12, 2018
, Federated entered into an agreement to acquire a majority interest in Hermes Fund Managers Limited (
Hermes
) from BT Pension Scheme (
BTPS
). The addition of London-based Hermes, which has had multi-year significant asset growth, will further accelerate Federated's growth in markets outside of the U.S.
On July 2, 2018, Federated completed, effective as of
July 1, 2018
, the acquisition of a
60 percent
majority interest in Hermes (
Hermes Acquisition
). BTPS retained a
29.5 percent
interest in Hermes and contributed the remaining
10.5 percent
interest into an employee benefit trust for the benefit of certain members of Hermes' management and other key employees under a new long-term incentive plan. Federated paid a total of
£259.9 million
(
$343.3 million
) which included
£246 million
for the previously announced cost of the acquisition and an additional
£13.9 million
primarily for Federated's
60 percent
share of Hermes' estimated excess regulatory capital. Federated funded the transaction through a combination of cash and an
$18.0 million
drawdown from its existing revolving credit facility (see
Note (11)
for additional information).
Federated has incurred
$4.6 million
in transaction costs directly attributable to the
Hermes Acquisition
. Of this amount,
$2.8 million
has been expensed to date in
2018
, primarily recorded in
Professional Service Fees
on the
Consolidated Statements of Income
. The transaction costs exclude a derivative loss (see
Note (10)
for additional information) and a
$1.7 million
foreign exchange gain recognized in the second quarter of 2018 as a result of holding British pound sterling at quarter end. Federated anticipates future transaction costs of approximately
$16 million
, of which approximately
$11 million
may be recorded in the third quarter of 2018. Actual results may differ from these estimates, and such differences may be material to the Consolidated Financial Statements.
Due to the timing of the
Hermes Acquisition
, the information necessary to complete the preliminary purchase price allocation and pro forma financial results are not yet available. This information will be available in connection with third quarter 2018 reporting.
(5)
Revenue from Contracts with Customers
The following table presents Federated's revenue disaggregated by asset class:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(in thousands)
|
June 30, 2018
|
|
June 30, 2018
|
Equity
|
$
|
112,558
|
|
|
$
|
226,913
|
|
Money Market
|
98,923
|
|
|
203,406
|
|
Fixed-Income
|
44,512
|
|
|
89,526
|
|
Total Revenue
|
$
|
255,993
|
|
|
$
|
519,845
|
|
The following table presents Federated's revenue disaggregated by performance obligation:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(in thousands)
|
June 30, 2018
|
|
June 30, 2018
|
Asset Management
1
|
$
|
168,127
|
|
|
$
|
342,393
|
|
Administrative Services
|
48,370
|
|
|
97,393
|
|
Distribution
2
|
36,923
|
|
|
74,980
|
|
Other
3
|
2,573
|
|
|
5,079
|
|
Total Revenue
|
$
|
255,993
|
|
|
$
|
519,845
|
|
|
|
1
|
The performance obligation may include administrative, distribution and other services recorded as a single asset management fee under
Topic 606
, as it is part of a unitary fee arrangement with a single performance obligation.
|
|
|
2
|
The performance obligation is satisfied at a point in time and may include CDSC's and upfront commissions. A portion of this revenue relates to a performance obligation that has been satisfied in a prior period.
|
|
|
3
|
Includes shareholder service fees recorded in
Other Service Fees, net—Affiliates
on the Consolidated Statements of Income.
|
|
|
|
|
|
Notes to the Consolidated Financial Statements (continued)
|
(unaudited)
|
|
|
The following table presents Federated's revenue disaggregated by geographical market:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(in thousands)
|
June 30, 2018
|
|
June 30, 2018
|
Domestic
|
$
|
248,872
|
|
|
$
|
504,964
|
|
Foreign
1
|
7,121
|
|
|
14,881
|
|
Total Revenue
|
$
|
255,993
|
|
|
$
|
519,845
|
|
|
|
1
|
This represents revenue earned by non-U.S. domiciled subsidiaries.
|
The following table presents Federated's revenue disaggregated by product type:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(in thousands)
|
June 30, 2018
|
|
June 30, 2018
|
Federated Funds
|
$
|
218,396
|
|
|
$
|
443,213
|
|
Separate Accounts
|
37,597
|
|
|
76,632
|
|
Total Revenue
|
$
|
255,993
|
|
|
$
|
519,845
|
|
(6)
Concentration Risk
(a)
Revenue Concentration by Asset Class
The following table summarizes the percentage of total revenue earned from Federated's asset classes for the periods presented:
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
2018
|
|
|
2017
|
|
Equity Assets
|
|
44
|
%
|
|
42
|
%
|
Money Market Assets
|
|
39
|
%
|
|
41
|
%
|
Fixed-Income Assets
|
|
17
|
%
|
|
17
|
%
|
The change in the relative proportion of Federated's revenue attributable to equity assets for the first
six
months of
2018
as compared to the same period in
2017
was primarily the result of higher average equity assets.
The change in the relative proportion of Federated's revenue attributable to money market assets for the first
six
months of
2018
as compared to the same period in
2017
was primarily the result of a change in the mix of average money market assets and a decrease related to a January 2017 change in a customer relationship.
Current Regulatory Environment
Federated and its investment management business are subject to extensive regulation in the U.S. and abroad. Federated and its products, such as the
Federated Funds
, and strategies are subject to: federal securities laws, principally the Securities Act of 1933 (
1933 Act
), the Securities Exchange Act of 1934 (
1934 Act
), the
1940 Act
, the Investment Advisers Act of 1940; state laws regarding securities fraud and registration; regulations or other rules, promulgated by various regulatory authorities, self-regulatory organizations or exchanges; and foreign laws, regulations or other rules promulgated by foreign regulatory or other authorities.
See the
Business Developments
-
Current Regulatory Environment
section of Management's Discussion and Analysis for additional information about the current regulatory environment.
|
|
|
|
|
Notes to the Consolidated Financial Statements (continued)
|
(unaudited)
|
|
|
(b)
Revenue Concentration by Investment Strategy/Fund
The following table presents Federated's revenue concentration by investment strategy/fund:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Federated Strategic Value Dividend strategy
1
|
16
|
%
|
|
18
|
%
|
|
17
|
%
|
|
18
|
%
|
Federated Kaufmann Mid-Cap Growth strategy
2
|
11
|
%
|
|
9
|
%
|
|
11
|
%
|
|
8
|
%
|
Federated Government Obligations Fund
|
10
|
%
|
|
10
|
%
|
|
10
|
%
|
|
10
|
%
|
1
Strategy includes
Federated Funds
and
Separate Accounts
.
2 Strategy includes
Federated Funds
.
A significant and prolonged decline in the AUM in any of these strategies/funds could have a material adverse effect on Federated's future revenues and, to a lesser extent, net income, due to a related reduction in distribution expenses associated with the
Federated Funds
managed in accordance with these strategies/funds.
(c)
Revenue Concentration by Intermediary
Approximately
14%
of Federated's total revenue for both the
three
- and
six-month period
s ended
June 30, 2018
and
17%
and
16%
for the
three
- and
six-month period
s ended
June 30, 2017
, respectively, was derived from services provided to one intermediary, The Bank of New York Mellon Corporation, including its Pershing subsidiary. Significant negative changes in Federated's relationship with this intermediary could have a material adverse effect on Federated's future revenues and, to a lesser extent, net income due to a related reduction in distribution expenses associated with this intermediary.
(7)
Consolidation
The Consolidated Financial Statements include the accounts of Federated, which include
Federated Funds
and other entities in which Federated holds a controlling financial interest. Federated is involved with various entities in the normal course of business that may be deemed to be voting rights entities (
VRE
s) or variable interest entities (
VIE
s). From time to time, Federated invests in
Federated Funds
for general corporate investment purposes or, in the case of newly launched products, in order to provide investable cash to establish a performance history. Federated's investment in these
Federated Funds
represents its maximum exposure to loss. The assets of each consolidated
Federated Fund
are restricted for use by the respective
Federated Fund
. Generally, neither creditors of, nor equity investors in, the
Federated Funds
have any recourse to Federated's general credit. Given that the entities follow investment company accounting, which prescribes fair-value accounting, a deconsolidation generally does not result in gains or losses for Federated. Receivables from all
Federated Funds
for advisory and other services totaled
$23.0 million
and
$27.4 million
at
June 30, 2018
and
December 31, 2017
, respectively.
In the ordinary course of business, Federated may implement
Fee Waivers
for various
Federated Funds
for competitive, regulatory or contractual reasons. For the
three
and
six months ended
June 30, 2018
,
Fee Waivers
totaled
$88.1 million
and
$175.5 million
, respectively, of which
$59.6 million
and
$117.5 million
, respectively, related to money market funds which meet the scope exception of the consolidation guidance. For the
three
and
six months ended
June 30, 2017
,
Fee Waivers
totaled
$84.8 million
and
$175.3 million
, respectively, of which
$53.8 million
and
$113.6 million
, respectively, related to money market funds which meet the scope exception of the consolidation guidance.
Like other sponsors of investment companies, Federated in the ordinary course of business may make capital contributions to certain money market
Federated Funds
in connection with the reorganization of such funds into certain affiliated money market
Federated Funds
or in connection with the liquidation of a money market
Federated Fund
. In these instances, such capital contributions typically are intended to either offset realized losses or other permanent impairments to a fund's net asset value (
NAV
) or increase the market-based NAV per share of the fund's portfolio that is being reorganized to equal the market-based NAV per share of the acquiring fund or to bear a portion of expenses relating to a fund liquidation. Under current money fund regulations and Securities and Exchange Commission (
SEC
) guidance, Federated is required to report these types of capital contributions to the SEC as financial support to the investment company that is being reorganized or liquidated. There were
no
contributions for the
three
and
six months ended
June 30, 2018
or
June 30, 2017
.
|
|
|
|
|
Notes to the Consolidated Financial Statements (continued)
|
(unaudited)
|
|
|
In accordance with Federated's consolidation accounting policy, Federated first determines whether the entity being evaluated is a VRE or a VIE. Once this determination is made, Federated proceeds with its evaluation of whether to consolidate the entity. The disclosures below represent the results of such evaluations as of
June 30, 2018
and
December 31, 2017
.
(a)
Consolidated Voting Rights Entities
Most of the
Federated Funds
meet the definition of a VRE. Federated consolidates certain VREs when it is deemed to have control. As of
June 30, 2018
and
December 31, 2017
, consolidated VREs reported on Federated's Consolidated Balance Sheets included
$1.9 million
and
$5.7 million
, respectively, in
Investments—Consolidated Investment Companies
and
$0.7 million
and
$2.5 million
, respectively, in
Redeemable Noncontrolling Interest in Subsidiaries
. The decrease in these line items primarily relates to the deconsolidation of one
Federated Fund
VRE.
(b)
Consolidated Variable Interest Entities
As of
June 30, 2018
and
December 31, 2017
, Federated was deemed to be the primary beneficiary of, and therefore consolidated, certain
Federated Funds
as a result of its controlling financial interest. The following table presents the balances related to the consolidated
Federated Fund
VIEs that were included on the
Consolidated Balance Sheets
as well as Federated's net interest in the consolidated
Federated Fund
VIEs for each period presented:
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Cash and Cash Equivalents
|
|
$
|
0.0
|
|
|
$
|
0.1
|
|
Investments—Consolidated Investment Companies
|
|
31.7
|
|
|
39.7
|
|
Receivables
|
|
0.5
|
|
|
1.0
|
|
Less: Liabilities
|
|
0.6
|
|
|
0.4
|
|
Less: Redeemable Noncontrolling Interest in Subsidiaries
|
|
20.3
|
|
|
27.7
|
|
Federated's Net Interest in Federated Fund VIEs
|
|
$
|
11.3
|
|
|
$
|
12.7
|
|
Federated's net interest in the consolidated
Federated Fund
VIEs represents the value of Federated's economic ownership interest in these
Federated Funds
. The liabilities of the consolidated
Federated Fund
VIEs primarily represent operating liabilities of the entities.
Federated did not newly consolidate or deconsolidate any VIEs during the
six months ended
June 30, 2018
.
(c)
Non-Consolidated Variable Interest Entities
Federated's involvement with certain
Federated Funds
that are deemed to be VIEs includes serving as the investment manager, or at times, holding a minority interest or both. Federated's variable interest is not deemed to absorb losses or receive benefits that could potentially be significant to the VIE. Therefore, Federated is not the primary beneficiary of these VIEs and has not consolidated these entities.
At
June 30, 2018
and
December 31, 2017
, Federated's investment and maximum risk of loss related to non-consolidated VIEs was
$1.0 million
and
$0.9 million
, respectively, (recorded in
Investments—Affiliates and Other
on the
Consolidated Balance Sheets
) and was entirely related to one
Federated Fund
at the end of each period. AUM for these non-consolidated
Federated Funds
totaled
$66.5 million
and
$55.8 million
at
June 30, 2018
and
December 31, 2017
, respectively.
(8)
Investments
At
June 30, 2018
and
December 31, 2017
, Federated held investments in
Separate Accounts
of
$6.2 million
and
$6.3 million
, respectively, and investments in fluctuating-value
Federated Funds
of
$2.6 million
and
$1.6 million
, respectively, that were included in
Investments—Affiliates and Other
on the
Consolidated Balance Sheets
.
Federated's investments held in
Separate Accounts
as of
June 30, 2018
and
December 31, 2017
, were primarily composed of domestic debt securities (
$2.9 million
and
$3.0 million
, respectively) and stocks of large U.S. and international companies (
$2.5 million
and
$2.6 million
, respectively).
|
|
|
|
|
Notes to the Consolidated Financial Statements (continued)
|
(unaudited)
|
|
|
Federated consolidates certain
Federated Funds
into its Consolidated Financial Statements as a result of Federated's controlling financial interest in these
Federated Funds
(see
Note (7)
). All investments held by these
Federated Funds
were included in
Investments—Consolidated Investment Companies
on Federated's
Consolidated Balance Sheets
.
Federated's investments held by consolidated
Federated Funds
as of
June 30, 2018
and
December 31, 2017
, were primarily composed of domestic and foreign debt securities (
$31.3 million
and
$39.2 million
, respectively) and stocks of small and medium-sized companies (
$3.8 million
as of
December 31, 2017
).
The following table presents gains and losses recognized in
(Loss) Gain on Securities, net
on the
Consolidated Statements of Income
in connection with Federated's investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Investments—Consolidated Investment Companies
|
|
|
|
|
|
|
|
|
Unrealized (Losses) Gains
|
|
$
|
(653
|
)
|
|
$
|
389
|
|
|
$
|
(2,343
|
)
|
|
$
|
1,096
|
|
Realized Gains
1
|
|
501
|
|
|
1,075
|
|
|
1,325
|
|
|
2,074
|
|
Realized Losses
1
|
|
(723
|
)
|
|
(131
|
)
|
|
(898
|
)
|
|
(699
|
)
|
Net (Losses) Gains on Investments—Consolidated Investment Companies
|
|
(875
|
)
|
|
1,333
|
|
|
(1,916
|
)
|
|
2,471
|
|
Investments—Affiliates and Other
|
|
|
|
|
|
|
|
|
Unrealized Gains (Losses) Recognized on Securities Still Held
|
|
9
|
|
|
11
|
|
|
(206
|
)
|
|
271
|
|
Net Realized Gains Recognized on Securities Sold
1
|
|
51
|
|
|
890
|
|
|
125
|
|
|
2,054
|
|
Net Gains (Losses) on Investments—Affiliates and Other
|
|
60
|
|
|
901
|
|
|
(81
|
)
|
|
2,325
|
|
(Loss) Gain on Securities, net
|
|
$
|
(815
|
)
|
|
$
|
2,234
|
|
|
$
|
(1,997
|
)
|
|
$
|
4,796
|
|
|
|
1
|
Realized gains and losses are computed on a specific-identification basis.
|
(9)
Fair Value Measurements
Fair value is the price that would be received to sell an asset or the price that would be paid to transfer a liability as of the measurement date. A fair-value reporting hierarchy exists for disclosure of fair value measurements based on the observability of the inputs to the valuation of financial assets and liabilities. The levels are:
Level 1 – Quoted prices for identical instruments in active markets. Level 1 assets may include equity and debt securities that are traded in an active exchange market, including shares of mutual funds.
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 assets and liabilities may include debt and equity securities, purchased loans and over-the-counter derivative contracts whose fair value is determined using a pricing model without significant unobservable market data inputs.
Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable in active markets.
NAV Practical Expedient
– Investments that calculate NAV per share (or its equivalent) as a practical expedient. These investments have been excluded from the fair value hierarchy.
|
|
|
|
|
Notes to the Consolidated Financial Statements (continued)
|
(unaudited)
|
|
|
(a)
Fair Value Measurements on a Recurring Basis
The following table presents fair value measurements for classes of Federated's financial assets and liabilities measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
NAV Practical Expedient
|
|
Total
|
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
375,172
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
375,172
|
|
Investments—Consolidated Investment Companies
|
|
|
|
|
|
|
|
|
|
|
Equity Securities
|
|
1,586
|
|
|
751
|
|
|
0
|
|
|
0
|
|
|
2,337
|
|
Debt Securities
|
|
0
|
|
|
31,266
|
|
|
0
|
|
|
0
|
|
|
31,266
|
|
Investments—Affiliates and Other
|
|
|
|
|
|
|
|
|
|
|
Equity Securities
|
|
5,563
|
|
|
0
|
|
|
0
|
|
|
285
|
|
|
5,848
|
|
Debt Securities
|
|
0
|
|
|
2,938
|
|
|
0
|
|
|
0
|
|
|
2,938
|
|
Other
1
|
|
583
|
|
|
0
|
|
|
452
|
|
|
0
|
|
|
1,035
|
|
Total Financial Assets
|
|
$
|
382,904
|
|
|
$
|
34,955
|
|
|
$
|
452
|
|
|
$
|
285
|
|
|
$
|
418,596
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities
|
|
$
|
0
|
|
|
$
|
28,978
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
28,978
|
|
Other
2
|
|
12
|
|
|
273
|
|
|
928
|
|
|
0
|
|
|
1,213
|
|
Total Financial Liabilities
|
|
$
|
12
|
|
|
$
|
29,251
|
|
|
$
|
928
|
|
|
$
|
0
|
|
|
$
|
30,191
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
205,364
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
110,900
|
|
|
$
|
316,264
|
|
Investments—Consolidated Investment Companies
|
|
|
|
|
|
|
|
|
|
|
Equity Securities
|
|
5,424
|
|
|
746
|
|
|
0
|
|
|
0
|
|
|
6,170
|
|
Debt Securities
|
|
0
|
|
|
39,241
|
|
|
0
|
|
|
0
|
|
|
39,241
|
|
Investments—Affiliates and Other
|
|
|
|
|
|
|
|
|
|
|
Equity Securities
|
|
4,564
|
|
|
0
|
|
|
0
|
|
|
302
|
|
|
4,866
|
|
Debt Securities
|
|
0
|
|
|
2,997
|
|
|
0
|
|
|
0
|
|
|
2,997
|
|
Other
1
|
|
123
|
|
|
357
|
|
|
760
|
|
|
0
|
|
|
1,240
|
|
Total Financial Assets
|
|
$
|
215,475
|
|
|
$
|
43,341
|
|
|
$
|
760
|
|
|
$
|
111,202
|
|
|
$
|
370,778
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Financial Liabilities
2
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,203
|
|
|
$
|
0
|
|
|
$
|
1,203
|
|
|
|
1
|
Amounts include restricted cash, structured trade finance loans held by Federated as well as futures contracts and/or foreign currency forward contracts held within certain consolidated
Federated Funds
.
|
|
|
2
|
Amounts include acquisition-related future contingent consideration liabilities as well as certain liabilities attributable to structured trade finance loans held by Federated and may include foreign currency forward contracts and/or futures contracts held within certain consolidated
Federated Funds
.
|
The following is a description of the valuation methodologies used for financial assets and liabilities measured at fair value on a recurring basis. Federated did not hold any nonfinancial assets or liabilities measured at fair value on a recurring basis at
June 30, 2018
or
December 31, 2017
.
Cash and Cash Equivalents
Cash and Cash Equivalents
include deposits with banks and investments in money market funds. Investments in money market
Federated Funds
totaled
$23.6 million
and
$309.1 million
at
June 30, 2018
and
December 31, 2017
, respectively. Cash investments in publicly available money market funds are valued under the market approach through the use of quoted market prices in an active market, which is the NAV of the funds, and are classified within Level 1 of the valuation hierarchy. For an
|
|
|
|
|
Notes to the Consolidated Financial Statements (continued)
|
(unaudited)
|
|
|
investment in a money market
Federated Fund
that is not publicly available but for which the NAV is calculated daily and for which there are no redemption restrictions, the security is valued using NAV as a practical expedient and is excluded from the fair value hierarchy. This investment is included in the
NAV Practical Expedient
column in the
December 31, 2017
table above.
Investments—Consolidated Investment Companies—Equity Securities
Investments—Consolidated Investment Companies—Equity Securities represent equity securities held by consolidated
Federated Funds
. For publicly traded equity securities available in an active market, the fair value of these securities is classified as Level 1 when the fair value is based on quoted market prices. The fair value of certain equity securities traded principally in foreign markets and held by consolidated
Federated Funds
are determined by a third-party pricing service (Level 2).
Investments—Consolidated Investment Companies—Debt Securities
Investments—Consolidated Investment Companies—Debt Securities primarily represent domestic and foreign bonds held by consolidated
Federated Funds
. The fair value of these securities may include observable market data such as valuations provided by independent pricing services after considering factors such as the yields or prices of investments of comparable quality, coupon, maturity, call rights and other potential prepayments, terms and type, reported transactions, indications as to values from dealers and general market conditions (Level 2).
Investments—Affiliates and Other—Equity Securities
Investments—Affiliates and Other—Equity Securities primarily represent equity investments held in
Separate Accounts
as well as investments in fluctuating-value
Federated Funds
. For publicly traded equity securities available in an active market, the fair value of these securities is classified as Level 1 when the fair value is based on quoted market prices. For investments in
Federated Funds
that are publicly available, the securities are valued under the market approach through the use of quoted market prices available in an active market, which is the NAV of the funds, and are classified within Level 1 of the valuation hierarchy. For certain investments in
Federated Funds
and/or
Separate Accounts
that are not publicly available but for which the NAV is calculated daily and for which there are no redemption restrictions, the securities are valued using NAV as a practical expedient and are excluded from the fair value hierarchy. These investments are included in the
NAV Practical Expedient
column in the table above.
Investments—Affiliates and Other—Debt Securities
Investments—Affiliates and Other—Debt Securities primarily represent domestic bonds held by
Separate Accounts
. The fair value of these securities may include observable market data such as valuations provided by independent pricing services after considering factors such as the yields or prices of investments of comparable quality, coupon, maturity, call rights and other potential prepayments, terms and type, reported transactions, indications as to values from dealers and general market conditions (Level 2).
Derivative Liabilities
During the second quarter of 2018, Federated entered into foreign currency forward derivative financial instrument transactions (see
Note (10)
for additional information). These derivatives are valued using contract terms and observable British Pound Sterling currency exchange rates in active markets (Level 2). The derivatives are short-term in nature.
(b)
Fair Value Measurements on a Nonrecurring Basis
Federated did not hold any assets or liabilities measured at fair value on a nonrecurring basis at
June 30, 2018
.
(c)
Fair Value Measurements of Other Financial Instruments
The fair value of Federated's debt is estimated by management using observable market data (Level 2). Based on this fair value
estimate, the carrying value of debt appearing on the
Consolidated Balance Sheets
approximates fair value.
(10)
Derivatives
On
April 13, 2018
, Federated entered into a foreign currency forward derivative financial instrument with Citi Bank, N.A. (
Citi
) under an existing International Swaps and Derivatives Association, Inc. Master Agreement dated June 9, 2010 (ISDA) in order to
hedge against foreign exchange rate fluctuations associated with the payment for the
Hermes Acquisition
. This forward was not designated as a hedging instrument for accounting purposes. Under this forward transaction, Federated committed to
|
|
|
|
|
Notes to the Consolidated Financial Statements (continued)
|
(unaudited)
|
|
|
purchase
£250 million
at an all-in forward rate of
1.43192
(which is comprised of a spot rate of
1.42522
plus forward points of
0.00670
) for settlement on
August 1, 2018
.
On
June 27, 2018
, Federated entered into a second foreign currency forward transaction with
Citi
in which Federated committed to sell
£250 million
at an all-in forward rate of
1.31601
(which is comprised of a spot rate of
1.31400
plus forward points of
0.00201
) for settlement on
August 1, 2018
. This second forward allowed Federated to effectively close the initial forward to lock in the foreign exchange rate and amount due on August 1, 2018. The change in the spot rate and a reduction in the forward points will result in a payment of
$29.0 million
to
Citi
on August 1, 2018 when both derivatives are settled.
While these derivatives are subject to an enforceable master netting arrangement as allowed by the ISDA, both are currently in a liability position and are recorded gross and at fair value in
Other Current Liabilities
as of
June 30, 2018
on the Consolidated Balance Sheets, totaling
$29.0 million
. The
$29.0 million
change in fair value of these derivatives was recorded as a nonoperating expense in
Other, net
on the
Consolidated Statements of Income
during the three-month period ended
June 30, 2018
.
(11)
Debt
On
June 5, 2017
, Federated entered into an unsecured Third Amended and Restated Credit Agreement by and among Federated, certain of its subsidiaries as guarantors party thereto, a syndicate of ten banks as Lenders party thereto, PNC Bank, National Association as administrative agent, PNC Capital Markets LLC, as sole bookrunner and joint lead arranger, Citigroup Global Markets, Inc., as joint lead arranger, Citibank, N.A. as syndication agent, and TD Bank, N.A. as documentation agent (
Credit Agreement
). The
Credit Agreement
amended and restated Federated's prior unsecured Second Amended and Restated Credit Agreement, which was dated June 24, 2014 and scheduled to mature on June 24, 2019 (
Prior Credit Agreement
). The
Credit Agreement
refinanced
$200 million
available on the revolving credit facility and
$178.5 million
outstanding on the term loan facility under the
Prior Credit Agreement
, replacing both with a
$375 million
revolving credit facility which has an additional
$200 million
available via an optional increase (or accordion) feature. The interest on the revolving credit facility is calculated at the monthly London Interbank Offering Rate (
LIBOR
) plus a spread. The borrowings under the revolving credit facility may include up to
$25 million
for which interest is calculated at the daily
LIBOR
plus a spread (
Swing Line
). Federated had
no
borrowings under the previous revolving credit facility. The
Credit Agreement
does not include a term loan facility. On July 1, 2018, Federated entered into an amendment to the
Credit Agreement
to add certain definitions and to amend certain negative covenants relating to indebtedness, guaranties, and restrictions on dividends, related to the
Hermes Acquisition
. This amendment contains other customary conditions, representations, warranties and covenants.
The
Credit Agreement
, which expires on June 5, 2022, has no principal payment schedule, but instead requires that any outstanding principal be repaid by the expiration date. Federated, however, may elect to make discretionary principal payments prior to the expiration date. During the quarter ended
June 30, 2018
, and in conjunction with the
Hermes Acquisition
, Federated borrowed
$18.0 million
on the
Swing Line
which was fully repaid by July 16, 2018.
Debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rates
|
|
|
|
|
(dollars in thousands)
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Revolving Credit Facility
|
|
3.107
|
%
|
|
2.486
|
%
|
|
$
|
160,000
|
|
|
$
|
170,000
|
|
Swing Line
1
|
|
3.216
|
%
|
|
N/A
|
|
|
18,000
|
|
|
0
|
|
Long-Term Debt
|
|
|
|
|
|
$
|
178,000
|
|
|
$
|
170,000
|
|
|
|
1
|
Represents the weighted-average interest rate for the period in which a balance is outstanding.
|
The commitment fee under the
Credit Agreement
currently is
0.125%
per annum on the daily unused portion of each Lender's commitment. As of
June 30, 2018
, Federated has
$197 million
available for borrowings.
The
Credit Agreement
, similar to the
Prior Credit Agreement
, includes representations and warranties, affirmative and negative financial covenants, including an interest coverage ratio covenant and a leverage ratio covenant, reporting requirements and other non-financial covenants. Federated was in compliance with all covenants at and during the
six
months ended
June 30, 2018
(see the
Liquidity and Capital Resources
section of Management's Discussion and Analysis for additional information).
The Credit Agreement also has certain stated events of default and cross default provisions which would permit the lenders/
|
|
|
|
|
Notes to the Consolidated Financial Statements (continued)
|
(unaudited)
|
|
|
counterparties to accelerate the repayment of debt outstanding if not cured within the applicable grace periods. The events of default generally include breaches of contract, failure to make required loan payments, insolvency, cessation of business, notice of lien or assessment, and other proceedings, whether voluntary or involuntary, that would require the repayment of amounts borrowed.
The
Credit Agreement
also requires certain subsidiaries to enter into a Second Amended and Restated Continuing Agreement of Guaranty and Suretyship to guarantee payment of all obligations incurred through the
Credit Agreement
.
(12)
Share-Based Compensation Plans
During the first
six
months of
2018
, Federated awarded
486,769
shares of restricted Federated Class B common stock, nearly all of which was granted in connection with a bonus program in which certain key employees received a portion of their bonus in the form of restricted stock under Federated's Stock Incentive Plan. This restricted stock, which was granted on the bonus payment date and issued out of treasury, will generally vest over a
three
-year period. The remaining shares were awarded to certain key employees and generally vest over a
ten
-year period.
During
2017
, Federated awarded
946,570
shares of restricted Federated Class B common stock under its Stock Incentive Plan. Of this amount,
513,570
shares were awarded in connection with the aforementioned bonus program in
2017
. The remaining shares were awarded to certain key employees and generally vest over a
ten
-year period.
(13)
Equity
In October 2016
,
the board of directors authorized a share repurchase program with no stated expiration date that allows Federated to buy back up to
4 million
shares of Federated Class B common stock. No other programs existed as of June 30, 2018.
The program authorizes executive management to determine the timing and the amount of shares for each purchase.
The repurchased stock is to be held in treasury for employee share-based compensation plans, potential acquisitions and other corporate activities, unless Federated's board of directors subsequently determines to retire the repurchased stock and restore the shares to authorized but unissued status (rather than holding the shares in treasury).
During the first
six
months of
2018
, Federated repurchased
0.8 million
shares of its Class B common stock for
$21.0 million
, nearly all of which were repurchased in the open market. At
June 30, 2018
,
1.4 million
shares remain available to be purchased under Federated's buyback program.
(14)
Earnings Per Share Attributable to Federated Investors, Inc. Shareholders
The following table sets forth the computation of basic and diluted earnings per share using the two-class method for amounts attributable to Federated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
(in thousands, except per share data)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Numerator – Basic and Diluted
|
|
|
|
|
|
|
|
|
Net Income Attributable to Federated Investors, Inc.
|
|
$
|
38,822
|
|
|
$
|
53,451
|
|
|
$
|
99,153
|
|
|
$
|
103,092
|
|
Less: Total Income Available to Participating Unvested Restricted Shareholders
1
|
|
(1,529
|
)
|
|
(2,159
|
)
|
|
(3,907
|
)
|
|
(4,122
|
)
|
Total Net Income Attributable to Federated Common Stock
2
|
|
$
|
37,293
|
|
|
$
|
51,292
|
|
|
$
|
95,246
|
|
|
$
|
98,970
|
|
Denominator
|
|
|
|
|
|
|
|
|
Basic Weighted-Average Federated Common Stock
2
|
|
97,193
|
|
|
97,581
|
|
|
97,191
|
|
|
97,722
|
|
Dilutive Potential Shares from Stock Options
|
|
1
|
|
|
1
|
|
|
1
|
|
|
1
|
|
Diluted Weighted-Average Federated Common Stock
2
|
|
97,194
|
|
|
97,582
|
|
|
97,192
|
|
|
97,723
|
|
Earnings Per Share
|
|
|
|
|
|
|
|
|
Net Income Attributable to Federated Common Stock – Basic and Diluted
2
|
|
$
|
0.38
|
|
|
$
|
0.53
|
|
|
$
|
0.98
|
|
|
$
|
1.01
|
|
|
|
1
|
Income available to participating unvested restricted shareholders includes dividends paid on unvested restricted shares and their proportionate share of undistributed earnings.
|
|
|
2
|
Federated Common Stock excludes unvested restricted shares which are deemed participating securities in accordance with the two-class method of computing earnings per share.
|
|
|
|
|
|
Notes to the Consolidated Financial Statements (continued)
|
(unaudited)
|
|
|
(15)
Commitments and Contingencies
(a)
Contractual
Federated may be required to make certain compensation-related payments through
2023
in connection with various significant employment and incentive arrangements. Federated is obligated to make future minimum compensation payments of approximately
$9 million
. Based on asset levels as of
June 30, 2018
and performance goals, incentive payments could total up to an additional
$31 million
over the remaining terms of these arrangements.
(b)
Guarantees and Indemnifications
On an intercompany basis, various wholly owned subsidiaries of Federated guarantee certain financial obligations of Federated Investors, Inc., and Federated Investors, Inc. guarantees certain financial and performance-related obligations of various wholly owned subsidiaries. In addition, in the normal course of business, Federated has entered into contracts that provide a variety of indemnifications. Typically, obligations to indemnify third parties arise in the context of contracts entered into by Federated, under which Federated agrees to hold the other party harmless against losses arising out of the contract, provided the other party's actions are not deemed to have breached an agreed-upon standard of care. In each of these circumstances, payment by Federated is contingent on the other party making a claim for indemnity, subject to Federated's right to challenge the other party's claim. Further, Federated's obligations under these agreements may be limited in terms of time and/or amount. It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of Federated's obligations and the unique facts and circumstances involved in each particular agreement. As of
June 30, 2018
, management does not believe that a material loss related to any of these matters is reasonably possible.
(c)
Legal Proceedings
Like other companies, Federated has claims asserted and threatened against it in the ordinary course of business. As of
June 30, 2018
, Federated does not believe that a material loss related to these claims is reasonably possible.
See Item 1A - Risk Factors included in Federated's Annual Report on Form 10-K for the year ended
December 31, 2017
for additional information regarding risks related to claims asserted or threatened against Federated.
(16)
Income Taxes
On December 22, 2017, the
Tax Act
was signed into law. The
Tax Act
significantly modified the federal tax code and, among other changes, reduced the federal corporate income tax rate from a maximum of
35%
to a flat
21%
. In addition, as a result of this rate change, Federated's 2017 results included a
$70.4 million
reduction to the income tax provision resulting from the revaluation of its net deferred tax liability. This represents a provisional estimate based on management's initial analysis and interpretation of the legislation. Given the complexity of the legislation, anticipated guidance from the U.S. Department of Treasury (
Treasury Department
) and the potential for additional guidance from the SEC and/or the FASB, this estimate may be adjusted during 2018. As of
June 30, 2018
, management does not anticipate a material change to the estimate.
The Tax Act's international provisions regarding Global Intangible Low-Taxed Income (
GILTI
) and the Base Erosion Anti-Avoidance Tax (
BEAT
) are not expected to have a material impact on Federated's financial statements. However, this assessment is based on preliminary review and analysis of these provisions and may change as Federated continues its evaluation of these highly complex rules, for which interpretive guidance is needed and expected. In addition, the
Hermes Acquisition
increases the potential impact of these U.S. international tax provisions.
In January 2018, the
FASB
released guidance on the accounting for the
GILTI
provisions, indicating that a company can elect an accounting policy either to account for the
GILTI
tax as an expense in the period incurred or to factor the
GILTI
tax into the measurement of deferred taxes. As Federated requires additional time to evaluate the
GILTI
provisions and their accounting implications, it has not yet elected its accounting policy with regard to this item.
(17)
Subsequent Events
On
July 2, 2018
, Federated completed the
Hermes Acquisition
. See
Note (4)
for additional information.
On
July 26, 2018
,
the board of directors declared a
$0.27
per share dividend to shareholders of record as of
August 8, 2018
to be paid on
August 15, 2018
.
|
|
|
Part I, Item 2. Management's Discussion and Analysis
|
|
of Financial Condition and Results of Operations (unaudited)
|
|
The discussion and analysis below should be read in conjunction with the consolidated financial statements appearing elsewhere in this report. Management has presumed that the readers of this interim financial information have read or have access to Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in Federated's Annual Report on Form 10-K for the year ended
December 31, 2017
.
General
Federated is one of the largest investment managers in the U.S. with
$379.7 billion
in managed assets as of
June 30, 2018
. The majority of Federated's revenue is derived from advising
Federated Funds
and
Separate Accounts
in both domestic and international markets. Federated also derives revenue from providing administrative and other fund-related services, including distribution and shareholder servicing.
Investment advisory fees, administrative service fees and certain fees for other services, such as distribution and shareholder service fees, are contract-based fees that are generally calculated as a percentage of the average net assets of managed investment portfolios. Federated's revenue is primarily dependent upon factors that affect the value of managed assets including market conditions and the ability to attract and retain assets. Nearly all managed assets in Federated's investment products and strategies can be redeemed or withdrawn at any time with no advance notice requirement. Fee rates for Federated's services generally vary by asset and service type and may vary based on changes in asset levels. Generally, management-fee rates charged for advisory services provided to equity products and strategies are higher than management-fee rates charged to fixed-income products and strategies, which are higher than management-fee rates charged to money market products and strategies. Likewise,
Federated Funds
typically have a higher management-fee rate than Separate Accounts. Similarly, revenue is also dependent upon the relative composition of average AUM across both asset and product types. Federated may implement
Fee Waivers
for competitive reasons such as to maintain certain fund expense ratios, to maintain positive or zero net yields on certain money market funds, to meet regulatory requirements or to meet contractual requirements. Since Federated's products are largely distributed and serviced through financial intermediaries, Federated pays a portion of fees earned from sponsored products to the financial intermediaries that sell these products and strategies. These payments are generally calculated as a percentage of net assets attributable to the applicable financial intermediary and represent the vast majority of
Distribution
expense on the Consolidated Statements of Income. Certain components of
Distribution
expense can vary depending upon the asset type, distribution channel and/or the size of the customer relationship. Federated generally pays out a larger portion of revenue earned from managed assets in money market funds than revenue earned from managed assets in equity or fixed-income funds.
Federated's most significant operating expenses are
Compensation and Related
expense and
Distribution
expense, as described above.
Compensation and Related
expense includes base salary and wages, incentive compensation and other employee expenses including payroll taxes and benefits. Incentive compensation, which includes stock-based compensation, can vary depending on various factors including, but not limited to, the overall results of operations of Federated, investment management performance and sales performance.
The discussion and analysis of Federated's financial condition and results of operations are based on Federated's Consolidated Financial Statements. Management evaluates Federated's performance at the consolidated level. Therefore, Federated operates in a single operating segment, the investment management business. Management analyzes all expected revenue and expenses and considers market demands in determining an overall fee structure for services provided and in evaluating the addition of new business. Federated's growth and profitability are dependent upon its ability to attract and retain AUM and upon the profitability of those assets, which is impacted, in part, by
Fee Waivers
(including management's decisions regarding
Voluntary Yield-related Fee Waivers
). Fees for mutual fund-related services are ultimately subject to the approval of the independent directors or trustees of the mutual funds. Management believes that meaningful indicators of Federated's financial performance include AUM, gross and net product sales, total revenue and net income, both in total and per diluted share.
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Management's Discussion and Analysis (continued)
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of Financial Condition and Results of Operations (unaudited)
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Business Developments
Business Combination
On
July 2, 2018
, Federated completed the
Hermes Acquisition
. See
Note (4)
to the Consolidated Financial Statements
for additional information.
Current Regulatory Environment
Domestic
Certain rules and regulations adopted by the
SEC
, among other regulatory authorities, self-regulatory organizations or exchanges, have continued to become or are expected to become effective in 2018 or 2019. While increased regulation continues in 2018, the pace of new regulation slowed in late 2017 and 2018, with the possibility for deregulation continuing to exist. The rules and regulations that have or are expected to become effective continue, and any new proposed rules and regulations will continue, to impact the investment management industry (collectively, both domestically and abroad, as applicable, Regulatory Developments).
Through a series of Executive Orders and Presidential Memoranda issued in the first quarter of 2017, U.S. regulators were instructed to take steps to reduce regulation and control regulatory costs. As a result, the possibility continues for repeal or modification of certain aspects of the Dodd-Frank Wall Street Reform and Consumer Protection Act (
Dodd-Frank Act
) or the modification, or delay in the final implementation, of other laws, rules or regulations, as well as other deregulation. For example, the SEC reduced its regulatory agenda, published in late-July 2017, by about one-half and further streamlined its regulatory agenda in 2018.
The
Treasury Department
issued a report in October 2017 on asset management and insurance (
Treasury Asset Management Report
). In that report, the Treasury Department made various recommendations for deregulation of the asset management industry. Among other recommendations, the Treasury Department recommended amending rules to avoid dual SEC and Commodity Futures Trading Commission registration requirements for investment companies and to eliminate Dodd-Frank Act imposed stress testing requirements for investment advisors and investment companies in favor of stress testing requirements under Rule 2a-7 under the
1940 Act
(
Rule 2a-7
).
Deregulation also is a focus of certain legislative efforts. The House Financial Services Committee advanced a bill seeking to reverse certain aspects of money market fund reform and a hearing on that bill was held in the Senate in June 2018. For example, the proposed law would permit the use of amortized cost valuation by, and override the floating NAV and certain other requirements for, institutional and municipal (or tax-exempt) money market funds, which requirements were imposed under the SEC's structural, operational and other money market fund reforms adopted through amendments to Rule 2a-7, and certain other regulations, on July 23, 2014 (
2014 Money Fund Rules
) and related guidance (collectively, the
2014 Money Fund Rules and Guidance
).
The current regulatory environment has affected, and is expected to continue to affect, to varying degrees, Federated's business, results of operations, financial condition and/or cash flows. Increased regulation and Regulatory Developments have required, and are expected to continue to require, additional internal and external resources to be devoted to technology, legal, compliance, operations and other efforts to address regulatory-related matters, and have caused, and may continue to cause, product structure, pricing, offering and development effort adjustments, as well as changes in asset flows and mix, customer relationships, revenues and operating income. Given the possibility for deregulation that exists in the current regulatory environment in the U.S., the degree of impact of Regulatory Developments can vary and is uncertain.
On December 11, 2015, the SEC proposed a rule that, if adopted as proposed, would increase the regulation of the use of derivatives by investment companies by imposing, among others, requirements to comply with portfolio leverage limitations, to segregate certain assets, and to establish a formalized derivatives risk management program. It is unclear if or when the derivatives rule will be finalized. While the proposed derivatives rule remains on the SEC's most recent Spring 2018 regulatory agenda, which was published on May 9, 2018, management does not expect this rule to be finalized until the fourth quarter of 2018 at the earliest, with an extended compliance period. Among other recommendations on derivatives regulation, the Treasury Asset Management Report recommended that the SEC consider a derivatives rule that would include a derivatives risk management program and an asset segregation requirement, but reconsider what, if any, portfolio limits should be part of the rule. Government regulatory policies, and the possibility for deregulation in the U.S., could further delay or result in modifications to this rule or result in this rule not being adopted.
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Management's Discussion and Analysis (continued)
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of Financial Condition and Results of Operations (unaudited)
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On April 6, 2016, the Department of Labor (
DOL
) released its final rule imposing a modified fiduciary standard for retirement plan advisors (
Final Fiduciary Rule
). The Final Fiduciary Rule, together with related guidance, modified the definition of "fiduciary" under the Employee Retirement Income Security Act of 1974 and addressed conflicts of interest raised by the receipt of compensation (such as Rule 12b-1 fees) by retirement plan advisors by requiring such advisors to (among other requirements) put their clients' interests before their own profits, acknowledge their fiduciary status, level certain fees, enter into customer contracts addressing standards of impartial conduct (subject to certain exceptions), provide disclosure regarding investment fees and costs, adopt certain policies and procedures to address conflicts of interest and retain certain records. In March 2018, the U.S. Court of Appeals for the Fifth Circuit vacated the Final Fiduciary Rule in its entirety. On June 21, 2018, the U.S. Court of Appeals for the Fifth Circuit issued its mandate confirming its decision to vacate the Final Fiduciary Rule. The DOL did not appeal the decision and it is now final.
On April 18, 2018, the SEC issued three new proposals, including a proposed Regulation Best Interest, which would require broker/dealers to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer, and makes it clear that a broker/dealer may not put its financial interests ahead of the interests of a retail customer in making recommendations. Under Regulation Best Interest as proposed, a broker/dealer would discharge its duty to act in the best interests of a retail customer by complying with each of three specific obligations: (1) Disclosure to the retail customer of the key facts about its relationship with the customer, including material conflicts of interest; (2) Exercising reasonable diligence, care, skill, and prudence, to (a) understand the product; (b) have a reasonable basis to believe that the product is in the retail customer's best interest; and (c) have a reasonable basis to believe that a series of transactions is in the retail customer's best interest; and (3) Establishing, maintaining and enforcing policies and procedures reasonably designed to identify and then, at a minimum, to disclose and mitigate, or eliminate, material conflicts of interest arising from financial incentives, with other material conflicts of interest at least being disclosed. In a companion release, the SEC proposed interpretations designed to reaffirm, and, in certain cases, clarify, the SEC's views on the fiduciary duty investment advisors owe to their clients under the Advisers Act. In another companion release, the SEC proposed Form CRS, which would be a short client or customer relationship summary disclosure intended to help address retail investor confusion about the nature of their relationships with investment professionals, and would supplement other more detailed disclosures required to be provided by advisors in Form ADV, Part 2A, and by brokers under Regulation Best Interest. The SEC also proposed to restrict certain broker/dealers and their financial professionals from using the terms "adviser" or "advisor" as part of their name or title with retail investors. Investment advisors and broker/dealers would also need to disclose their registration status with the SEC in certain retail investor communications. The public comment period on each proposing release ends on August 7, 2018.
Although the Final Fiduciary Rule has been vacated in its entirety, both the SEC and the investment management industry had already taken action or begun to make changes in light of the Final Fiduciary Rule before it was vacated. For example, in response to the level fee and certain other requirements under the Final Fiduciary Rule and the questions they raised regarding the sale and distribution of mutual fund shares under the
1940 Act
, the SEC issued guidance in late 2016 and early 2017 addressing mutual fund fee structures in light of the Final Fiduciary Rule. That guidance permits sales load variation disclosure for multiple intermediaries and permits, subject to certain conditions being satisfied, broker/dealers, when acting as brokers, to charge a commission outside of the mutual fund for sales or distribution services on sales of mutual fund shares that do not have any front-end or contingent deferred sales loads or other asset-based sales charges (so called "clean shares"). Certain broker-dealers have eliminated commission-based compensation arrangements and made other conflict of interest and policy changes. Certain intermediaries also reduced the number of mutual funds offered on their platforms. It is uncertain whether, and to what degree, broker-dealers and other intermediaries will roll-back or continue the changes that were already implemented, or in the process of being implemented, to comply with the Final Fiduciary Rule, particularly given that the SEC's Regulation Best Interest, as proposed, appears to allow for more flexibility than the Final Fiduciary Rule.
On October 13, 2016, the SEC adopted rules relating to the modernization of investment company reporting and disclosure, the enhancement of liquidity risk management by open-end investment companies and the permitted use of "swing pricing" by open-end investment companies. The SEC later issued Investment Company Reporting Modernization Frequently Asked Questions, which were last updated on April 27, 2018. Among other requirements and changes, the reporting modernization rules require registered investment companies to make certain disclosures regarding securities lending activities and, using a standardized data format, require registered investment companies (other than money market funds) to report portfolio-wide and position-level holding data monthly on Form N-PORT, and registered investment companies (other than face-amount certificate companies) to report certain census-type information annually on Form N-CEN. The rules also require standardized and enhanced disclosure regarding derivatives in fund financial statements. The Federated Funds that are registered under the
1940 Act
are required to report on Form N-PORT and Form N-CEN. In December 2017, in light of a cyber incident disclosed by the SEC in September 2017 and requests from industry participants, the SEC postponed the compliance date for filing Form
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Management's Discussion and Analysis (continued)
|
of Financial Condition and Results of Operations (unaudited)
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N-PORT from June 1, 2018 to April 30, 2019. For larger fund complexes, such as Federated's, required information has to be compiled, maintained and made available to the SEC from and after June 1, 2018. The compliance date for Form N-CEN was June 1, 2018.
The liquidity risk management rules require open-end investment companies (other than money market funds and certain exchange traded funds (
ETF
s)) to establish liquidity risk management programs that contain certain required elements, including (among others): (1) classification of the liquidity of fund portfolio investments into four "buckets" (i.e., highly liquid, moderately liquid, less liquid and illiquid); (2) assessment, management and periodic review of a fund's liquidity risk; (3) establishment of a highly liquid investment minimum (i.e., a minimum percentage of cash and investments that can be liquidated in three business days without significantly changing the market value of the investment); (4) limitation on illiquid investments (i.e., 15% of net assets) with board reporting of exceptions; and (5) fund board review and approval of the liquidity management program and the designation of a fund advisor or officer to administer the program. In addition to certain other policy and procedure, disclosure and recordkeeping requirements, the rules require confidential reporting on Form N-LIQUID when a fund's level of illiquid assets exceeds 15% of its net assets or when the fund's highly liquid investments fall below its highly liquid investment minimum for more than a brief period of time. Larger fund complexes, such as Federated's, are required to establish their liquidity risk management programs by December 1, 2018. Compliance with disclosure and certain other requirements was required by June 1, 2017. In July 2017, the Investment Company Institute requested the SEC to adjust the compliance schedule for the liquidity risk management rule's asset classification and related requirements to allow the SEC to adopt amendments permitting each fund to formulate its own policies and procedures to determine how to classify the liquidity of its investments and, in any event, to postpone the December 1, 2018 compliance date for at least one year. The Treasury Asset Management Report, while supporting robust liquidity risk management programs, endorsed the current 15% limitation on illiquid assets applicable to investment companies and rejected any highly prescriptive regulatory approach to liquidity risk management, such as the bucketing requirement. In addition, it recommended that the SEC adopt a principles-based approach to liquidity risk management rules, and any associated bucketing requirements, and postpone the currently scheduled December 2018 implementation of the bucketing requirement. In December 2017, the SEC postponed the requirement to report on Form N-LIQUID until April 1, 2019, in light of the cyber incident disclosed by the SEC in September 2017. On January 10, 2018, the SEC issued Investment Company Liquidity Risk Management Programs Frequently Asked Questions, which clarified certain of the rules' requirements for sub-advised funds and ETFs. Given the possibility for deregulation in the U.S., it is uncertain whether the current compliance dates will be delayed or whether aspects of the liquidity risk management rules will be modified or eliminated prior to the final required compliance date. In February 2018, the SEC postponed the implementation of the bucketing requirement until June 1, 2019, and, based on comments from certain SEC Commissioners, industry participants, including Federated, are requesting the SEC to consider eliminating the bucketing requirements because, among other reasons, they are highly burdensome, defective and costly, and will not provide the SEC or fund managers with meaningful insights into fund liquidity during times of market stress or other intended benefits. Other provisions of the liquidity risk management rules, including the requirement to establish risk management programs and the limitation of illiquid investments to 15% of net assets, are still scheduled to take effect on December 1, 2018.
On June 28, 2018, the SEC issued adopted amendments to the public liquidity-related disclosure requirements for open-end mutual funds to assist in providing investors with accessible and useful information about the liquidity risk management practices of the funds they hold. Under the amendments, funds will be required to discuss in their annual or semi-annual shareholder reports the operation and effectiveness of their liquidity risk management program, replacing a pending requirement that funds publicly provide the aggregate liquidity classification profile of their portfolios on Form N-PORT. The amendments to Form N-PORT will provide funds the flexibility to split their portfolio holdings into more than one classification category in three specified circumstances when split reporting equally or more accurately reflects the liquidity of the investment or eases cost burdens. Under the amendments, Form N-PORT also will require that funds disclose their holdings of cash and cash equivalents not reported elsewhere on the Form. This rule becomes effective on September 10, 2018, with a compliance date for the Form N-PORT amendments being June 1, 2019, and a compliance date for the shareholder report disclosure requirements of December 1, 2019, for large fund complexes.
The swing pricing rule, which becomes effective on November 19, 2018, permits open-end investment companies (other than money market funds and ETFs) to use swing pricing to effectively pass on the costs resulting from shareholder purchase and redemption transactions to the transacting shareholders. The Treasury Asset Management Report encouraged further analysis of whether, and to what extent, swing pricing will be implemented by funds and recommended that particular focus should be placed on investor protection and whether funds are appropriately setting the amount of the swing factor as justified by relevant trading costs. Given government regulatory policies, and the possibility for deregulation in the U.S., it is uncertain whether aspects of the swing pricing rule will be delayed or modified prior to the effective date. As of June 30, 2018, management does not believe there is interest in the U.S. fund industry generally to adopt swing pricing.
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Management's Discussion and Analysis (continued)
|
of Financial Condition and Results of Operations (unaudited)
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At the time the SEC finalized the rules relating to the modernization of investment company reporting and disclosure, the SEC did not adopt a proposed rule that would have permitted delivery of fund shareholder reports through website posting in lieu of mailing. The Treasury Asset Management Report recommended that the SEC finalize its proposed rule to modernize its shareholder report disclosure requirements and permit the use of implied consent for electronic disclosures, while retaining a shareholder's choice to continue receiving paper disclosures. On June 6, 2018, the SEC adopted rule 30e-3 under the 1940 Act (Rule 30e-3). While Rule 30e-3 becomes effective January 1, 2019, the rule has an extended transition period under which funds may replace delivery of paper shareholder reports with electronic reports beginning January 1, 2021. If funds elect to rely on Rule 30e-3 beginning January 1, 2021 and before January 1, 2022, funds would be required to provide two years of notice to shareholders before relying on the rule. The rule creates an optional "notice and access" method for delivering shareholder reports. Subject to certain accessibility, quarterly holdings availability, formatting, notice, print upon request, and paper copy election conditions in the rule, the rule will allow funds to deliver their shareholder reports by making them publicly accessible on a website, free of charge, and sending investors a paper notice of each report's availability by mail.
On May 23, 2018, the SEC issued proposed rules under the Securities Act of 1933 and 1940 Act that, if adopted, would establish, subject to certain conditions, a safe harbor for unaffiliated brokers or dealers participating in a securities offering of a covered investment fund to publish or distribute a covered investment fund research report. The proposed rule is intended to reduce obstacles to providing research on investment funds by harmonizing the treatment of such research with research on other public entities. The SEC proposed this rule in furtherance of the Fair Access to Investment Research Act of 2017. The public comment period for the proposed rule ended on July 9, 2018.
On June 5, 2018, the SEC issued a request for comment seeking public input on enhancing mutual fund, ETF and other investment fund disclosures to improve the investor experience and help investors to make informed investment decisions. Among other matters, this request for comment also solicits feedback on investor preferences for means of delivery and how to make better use of 21st century technology, including how to make disclosures more interactive and personalized. The public comment period ends on October 31, 2018.
On June 5, 2018, in light of the adoption of Rule 30e-3, the SEC also issued a request for comment on processing fees intermediaries charge for forwarding fund materials, such as shareholder reports and prospectuses, to beneficial shareholders under current rules of the New York Stock Exchange and other self-regulatory organizations. The request for comment seeks public comment and additional data on the current processing fee framework for fees charged by intermediaries for the distribution of disclosure materials other than proxy materials to fund investors to better understand the potential effects on funds and their investors. The public comment period ends on October 31, 2018.
On June 28, 2018, the SEC issued a proposed rule 6c-11 under the 1940 Act (Rule 6c-11) that would permit ETFs that satisfy certain conditions to operate without the expense and delay of obtaining an exemptive order. In that proposed rule, among other proposals, the SEC also proposed enhanced disclosure requirements to provide investors who purchase and sell ETF shares on the secondary market with additional information regarding ETF trading costs and amendments to Form N-CEN to require ETFs to report whether they rely on Rule 6c-11 and to report additional information to allow the SEC to confirm compliance with Rule 6c-11. The public comment period on the proposed rule ends 60 days after the proposed rule is published in the Federal Register.
On June 28, 2018, the SEC issued a final rule that requires the use of the Inline eXtensible Business Reporting Language (XBRL) format for the submission of operating company financial statement information and fund risk/return summary information and eliminates the 15 business day XBRL filing period for fund risk/return summaries and the requirement for operating companies and funds to post "Interactive Data Files" on their websites. The new rule will be effective 30 days after publication of the rule in the Federal Register.
The SEC staff has been engaging in a series of investigations, enforcement actions and/or examinations involving investment management industry participants, including investment management companies and investment advisors. The SEC examinations have included certain sweep examinations of investment management companies and investment advisors involving various topics, including, but not limited to, compliance with the 2014 Money Fund Rules and Guidance, "distribution in guise," marketing support payments, intermediary and other payments and related disclosures, allocation of initial public offerings, allocation of portfolio security litigation proceeds, manager of managers arrangements, monitoring of use of social networks, target date funds, the impact of the United Kingdom's (UK) vote to exit the European Union (EU) (known as "Brexit"), valuation practices, share class selection, fixed-income and high yield liquidity, liquidity controls, liquid alternatives, cybersecurity, side-by-side management of private funds, private placements, mutual fund waivers, direct and indirect custody of client assets by investment advisors, separately managed or wrap-fee accounts, performance reporting and excessive trading. The SEC staff also has announced that, among other areas of focus, cybersecurity, anti-money laundering,
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Management's Discussion and Analysis (continued)
|
of Financial Condition and Results of Operations (unaudited)
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wrap fee programs, mutual funds and ETFs, disclosure of costs of investing and retirement products will be examination priorities in 2018. These investigations, actions and examinations have led, and may lead, to further regulation and scrutiny of the investment management industry. Over the past three years, the SEC staff also issued various guidance statements on cyber-security, investment company business continuity, mutual fund distribution, revising fund disclosure in light of changing market conditions, inadvertent custody, and sales load variation disclosure, among other topics. On October 26, 2017, Steven Peikin, co-director of the SEC's enforcement division, indicated that the SEC, while continuing to pursue tough enforcement in cases involving intentional wrongdoing that results in losses to investors, would drop the "broken windows" strategy of pursuing many enforcement actions over smaller enforcement issues, and may also pull back from trying to make some companies admit to wrongdoing as a condition of settling with the SEC in certain cases. Given government regulatory policies, the changes in SEC management, and the possibility for deregulation in the U.S., the degree to which regulatory investigations, actions and examinations will continue, as well as their frequency and scope, can vary and is uncertain.
Regulation or potential regulation by other regulators, in addition to the SEC, also continued, and may continue, to affect investment management industry participants, including Federated. For example, the Financial Industry Regulatory Authority (
FINRA
) has undertaken a cybersecurity sweep examination and various state legislatures or regulators have adopted or are beginning to adopt state-specific cybersecurity and/or privacy requirements that may apply to varying degrees in addition to federal regulation.
The Financial Stability Oversight Council (
FSOC
) indicated in 2014 that it intended to monitor the effectiveness of the 2014 Money Fund Rules. This prompted concerns that the FSOC may recommend new or heightened regulation for "non-bank financial companies" under Section 120 of the Dodd-Frank Act, which the Board of Governors of the Federal Reserve System have indicated can include open-end investment companies, such as money market funds and other mutual funds. The FSOC has since moved away from potential systemically important financial institution designations of asset managers or investment products, in favor of studying and evaluating the financial stability implications of the asset management sector. The FSOC has focused on potential risks arising from liquidity/redemptions and leverage, as well as securities lending, operational risks of service provider concentrations and resolvability and transition planning. The FSOC also continues to review and monitor SEC efforts on reporting modernization, liquidity management and derivatives. While the FSOC's focus appears to have shifted, it retains its authority to designate non-bank financial companies as systemically important financial institutions.
Efforts also continue to improve the transparency, and to seek to curtail certain authority, of the FSOC. For example, on February 28, 2017, the Republican Staff of the Committee on Financial Services, U.S. House of Representatives, issued a report entitled "The Arbitrary and Inconsistent FSOC Nonbank Designation Process." The report criticized the FSOC for not following its own rules and guidance relating to designations on systemically important non-bank financial institutions and for inconsistent and arbitrary analysis of companies. On March 28, 2017, ten U.S. Senators sent a letter to the Secretary of the Treasury criticizing the FSOC's process for designating non-bank systemically important financial institutions as lacking transparency and accountability, insufficiently tracking data, and not having a consistent methodology for determinations. In the letter, the 10 Senators expressed their support for ending the FSOC's "too big to fail" policy. On April 21, 2017, President Trump issued a Presidential Memorandum for the Secretary of the Treasury that, among other matters, directed him to consider whether the FSOC's processes for making determinations and designations are sufficiently transparent, provide adequate due process, adequately consider the costs of any determination or designation on the regulated entity, and are consistent with President Trump's Executive Order on core principles for regulating the U.S. financial system. On June 12, 2017, the Treasury Department issued a report in which it recommended, among other proposals, that Congress expand FSOC's authority to play a larger role in the coordination and direction of regulatory and supervisory policies, including by giving FSOC the authority to appoint a lead regulator on any issue on which multiple agencies may have conflicting and overlapping regulatory jurisdiction. On October 6, 2017, the Treasury Department issued a second report addressing banks and credit unions. In that report, it indicated that it would issue a separate report on its review of the process by which the FSOC determines that a non-bank financial company could pose a threat to the financial stability of the United States, subjecting such an entity to supervision by the Federal Reserve and enhanced prudential standards. The Treasury Asset Management Report, noting that entity-based systemic risk evaluations of asset managers or their funds are generally not the best approach for mitigating risk, recommended that, while the FSOC should maintain a risk identification and evaluation function, the FSOC should look to the SEC to address systemic risks through regulation within and across the asset management industry in the U.S. On November 17, 2017, the Treasury issued a third report in which it made the following recommendations, among others, to enhance the analytical process, engagement, and transparency of FSOC's non-bank financial company designation process: (1) FSOC should revise its guidance to provide that it will assess the likelihood of a firm's material financial distress as part of its analysis; (2) FSOC should revise its guidance to provide that it will conduct a cost-benefit analysis as part of its process, and should only designate a company if the expected benefits to financial stability outweigh the costs of designation; (3) FSOC should enhance its communication with non-bank financial companies under review and their primary financial regulators; and (4) FSOC should
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Management's Discussion and Analysis (continued)
|
of Financial Condition and Results of Operations (unaudited)
|
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provide a clear "off-ramp" to designated non-bank financial companies and adopt a more robust and transparent process for its annual reevaluations. At its April 12, 2018 meeting, the FSOC discussed efforts underway to develop potential amendments to the FSOC's interpretative guidance on nonbank financial company designations in light of the November 17, 2017 Treasury report. On April 12, 2018, the Financial Stability Oversight Council Improvement Act, which was originally introduced in the U.S. House of Representatives on October 12, 2017 and subsequently passed the House, was referred to the Senate Committee on Banking, Housing, and Urban Affairs. The bill, if passed and signed into law, would amend the Financial Stability Act of 2010 to require the FSOC, in determining whether a nonbank financial company should be designated as systemically important and consequently supervised by the Federal Reserve Board and subject to prudential standards, to consider the appropriateness of imposing such standards as opposed to other forms of regulation to mitigate identified risks to U.S. financial stability. Specifically, in amending the procedural requirements applicable to the FSOC, the bill would require the FSOC to: (1) undertake certain procedures for initial evaluations; (2) provide an opportunity, during an annual reevaluation of such a determination by FSOC for a nonbank financial company, for the company to submit written materials to, and meet with, the FSOC in order to contest FSOC's determination; and (3) every five years, upon request by a nonbank financial company, reevaluate such a determination by FSOC and hold a vote on whether to rescind FSOC's determination. Given the possibility of deregulation in the U.S., coupled with the efforts underway to improve the transparency and to seek to curtail certain authority of the FSOC, the degree to which actions by the FSOC can impact the investment management industry, including Federated, is uncertain.
The current regulatory environment has impacted, and will continue to impact, Federated's business, results of operations, financial condition and/or cash flows. For example, changes required under the 2014 Money Fund Rules and Guidance resulted in a shift in asset mix from institutional prime and municipal (or tax-exempt) money market funds to stable NAV government money market funds across the investment management industry and at Federated, which impacted its AUM, revenues and operating income. While management believes that, as interest rates rise, money market funds will benefit generally from increased yields, particularly as compared to deposit account alternatives, and that, as spreads widen, investors who exited prime money market funds will likely continue to reconsider their investment options over time, including Federated's prime private money market fund and prime collective fund, the degree of improvement to Federated's prime money market business can vary and is uncertain. While the Fifth Circuit Court of Appeals' recent decision vacates the Final Fiduciary Rule, the Final Fiduciary Rule impacted, and may likely continue to impact, Federated's AUM, revenues and operating income. For example, while the extent to which broker-dealers and other intermediaries will roll-back actions taken to comply or to prepare to comply with the Final Fiduciary Rule, if intermediaries continue to reduce the number of Federated Funds offered on their platforms, mutual fund-related sales and distribution fees earned by Federated may decrease. In that case, similar to other investment management industry participants, Federated could experience a further shift in asset mix and AUM, and a further impact on revenues and operating income. On the other hand, management believes that Federated's business may be positively affected because separately managed account/wrap-fee strategies work well in level wrap fee account structures and can provide transparency and potential tax advantages to clients, and Federated's experience with bank trust departments and fiduciary experience and resources presents an opportunity to add value for clients.
Federated has dedicated, and continues to dedicate, significant internal and external resources to analyze and address Regulatory Developments, and their effect on Federated's business, results of operations, financial condition and/or cash flows. This effort includes considering and/or effecting legislative, regulatory, product structure and development, information system development, reporting capability, business and other options that have been or may be available in an effort to minimize the potential impact of any adverse consequences. Federated's efforts include having conversations with intermediary customers regarding Regulatory Developments, and analyzing product offering and structure adjustments, regulatory alternatives and other means to comply, and to assist its customers to comply, with new fiduciary rules, the
1940 Act
and other applicable laws and regulations. Among other actions, Federated developed an educational website to assist clients with compliance with the Final Fiduciary Rule (now vacated), increased the number of Federated Funds that offer clean shares, including R6 shares, and added T Shares, which currently are not being offered, to 33 Federated Funds. As appropriate, Federated participated, and will continue to participate, either individually or with industry groups, in the comment process for proposed regulations. Federated also continues to expend legal and compliance resources to examine corporate governance and public company disclosure proposals issued by the SEC and to adopt, revise and/or implement policies and procedures and to respond to examinations, inquiries and other matters involving its regulators, including the SEC, customers or other third parties. Federated continues to devote resources to technology and system investment, cybersecurity and information governance, and the development of other investment management and compliance tools, to enable Federated to, among other things, be in a better position to address new or modified regulatory requirements. The Regulatory Developments discussed above, and related regulatory oversight, also impacted, and/or may impact, Federated's customers and vendors, their preferences and their businesses, which has caused, and/or may cause, certain product line-up, structure, pricing and product development changes, money market, equity, fixed income or balanced fund products to be less attractive to institutional and other investors, reductions in the number
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Management's Discussion and Analysis (continued)
|
of Financial Condition and Results of Operations (unaudited)
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of Federated Funds offered by intermediaries, changes in the fees Federated, retirement plan advisors and intermediaries will be able to earn on investment products and services sold to retirement plan clients, and reductions in AUM, revenues and operating profits, as well as changes in asset flows, levels and mix and customer relationships.
Federated will continue to monitor Regulatory Developments as necessary, and may implement additional changes to its business and practices as Federated deems necessary or appropriate. Further analysis and planning, or additional refinements to Federated's product line and business practices, may be required in response to market, customer or regulatory changes and developments, such as further money market fund regulation or potential deregulation, new fiduciary rules and other Regulatory Developments, or any additional regulation or guidance issued by the SEC or other regulatory authorities.
Management believes that the floating NAV, and fees and gates, required by the 2014 Money Fund Rules, as well as other Regulatory Developments, has been and will continue to be detrimental to Federated's fund business. In addition to the impact on Federated's AUM, revenues, operating income and other aspects of Federated's business described above, on a cumulative basis, Federated's regulatory, product development and restructuring, and other efforts in response to the Regulatory Developments discussed above, including the internal and external resources dedicated to such efforts, have had, and may continue to have, a material impact on Federated's expenses and, in turn, financial performance. As of June 30, 2018, given the current regulatory environment, the possibility of future additional or modified regulation or oversight, and the potential for deregulation in the U.S., Federated is unable to fully assess the impact of adopted or proposed regulations, and other Regulatory Developments, and Federated's efforts related thereto, on its business, results of operations, financial condition and/or cash flows. The regulatory changes and developments in the current regulatory environment, and Federated's efforts in responding to them, could have a material and adverse effect on Federated's business, results of operations, financial condition and/or cash flows. As of June 30, 2018, given the potential for deregulation in the U.S. and the efforts underway to improve the transparency of, and to seek to curtail certain authority of, the FSOC, Federated also is unable to assess whether, or the degree to which, any of the Federated Funds, including money market funds, or any of its other products, could ultimately be designated a systemically important non-bank financial company by the FSOC. While the FSOC's authority is subject to scrutiny amidst the political uncertainty and regulatory environment in the U.S., in management's view, the issuance of final regulations pertaining to systemically important non-bank financial companies is, and any reforms ultimately put into effect would be, detrimental to Federated's money market fund business and could materially and adversely affect Federated's business, results of operations, financial condition and/or cash flows. Federated also is unable to assess at this time whether, or the degree to which, any deregulation efforts or potential options being evaluated in connection with regulatory changes and developments ultimately may be successful.
International
On March 13, 2017, the UK Parliament passed the European Union (Notification of Withdrawal) Bill, which received Royal Assent from Her Majesty the Queen and became an Act of Parliament on March 16, 2017. On March 29, 2017, UK Prime Minister Theresa May delivered a letter to European Council President Donald Tusk formally notifying the European Council, in accordance with Article 50(2) of the Treaty on European Union, of the UK's intention to withdraw from the EU.
The UK voted to approve Brexit and exit the EU on June 23, 2016. Since that time, the Bank of England announced an extension of its quantitative easing program and the UK's credit rating was downgraded and concerns persist regarding the UK's credit given the uncertainty over the outcome of Brexit negotiations. In September 2017, the UK's credit rating was downgraded a second time based on the UK government's fiscal consolidation plans being increasingly in question and the UK's debt burden being expected to continue to rise, and its ratings outlook was changed to stable from negative. While UK financial markets have rebounded, with the formal Article 50(2) notice having been delivered, debate continues regarding the exit process, with Brexit negotiations between the UK and the EU continuing. On December 8, 2017, the EU and UK came to agreement in principal on the following separation issues, with the understanding that nothing will be final until all issues are agreed upon: (1) the health, welfare and other rights that EU citizens will have in the UK and such rights that UK citizens will have in the EU; (2) the amount of money the UK will be required to pay the EU for initiatives approved prior to the Brexit vote on June 23, 2016; and (3) issues relating to the border between Northern Ireland, when it is outside the EU, and the Republic of Ireland, which will be part of the EU. Additional issues include, among others, whether work and travel permit restrictions will be imposed and the ultimate impact Brexit will have on the UK economy and the EU. On March 23, 2018, EU leaders announced they have approved guidelines for negotiations on future relations with the UK. Specifically, EU leaders endorsed a transition period between March 2019 (when the UK is expected to exit EU) and the end of 2020. During the transition, the UK will be able to negotiate, sign and ratify its own trade deals. Additionally, EU citizens arriving in the UK will enjoy the same rights and guarantees of those who arrive prior to Brexit. On July 9, 2018, UK Prime Minister Theresa May in a speech to Parliament set forth the UK's most recent proposals relating to Brexit. The proposals contain the following components: (A) maintenance of a common rule book for industrial goods and agricultural products, other than common agricultural and fishery policies, but not services; (B) ensuring a fair trading environment through reciprocal commitments relating to state aid
|
|
|
|
Management's Discussion and Analysis (continued)
|
of Financial Condition and Results of Operations (unaudited)
|
|
and cooperative arrangements between regulators on competition and maintaining high regulatory standards for the environment, climate change, social issues, employment, and consumer protection; (C) establishment of a joint institutional framework to provide for the consistent interpretation and application of UK-EU agreements in the UK and EU courts and appropriate resolution of disputes, including through the establishment of a joint committee of representatives from the UK and EU; and (D) developing a new business-friendly customs model and facilitated customs arrangement that operates as a combined customs territory and removes the need for customs checks and controls between the UK and EU; under this arrangement, the UK would apply UK tariffs and trade policy for goods intended for the UK and the EU's tariffs and trade policy for goods intended for the EU. It is uncertain at this time whether the EU Parliament will accept all or portions of the UK's latest proposal. The resignations of the UK's Brexit Secretary, David Davis, and the UK's Foreign Secretary, Boris Johnson, after Prime Minister May set forth the UK's most recent proposals also may raise questions regarding whether the proposals will continue to garner support in the UK.
While UK and EU leaders are striving to reach agreement by October 2018, the process for agreeing and implementing the UK's withdrawal from the EU may take up to two years or more from March 29, 2017 and result in significant political and economic uncertainty, while the UK government and the European Commission negotiate the withdrawal agreement covering the terms of the UK's exit and its future relationship with the EU. See Item 1A - Risk Factors included in Federated's Annual Report on Form 10-K for the year ended
December 31, 2017
for further discussion of the risks of political instability, currency abandonment and other market disruptions on Federated and its business. The UK's exit from the EU also will likely affect the requirements and/or timing of implementation of legislation and regulation applicable to doing business in the UK, including the laws and regulations applicable to Federated, as well as to the sponsoring, management, operation and distribution of Federated's products and services, both in and outside the UK. For example, while EU Directives have been approved by the UK Parliament, EU regulations generally are effective in the EU without local parliament action and will need to be approved by the UK Parliament to remain in effect post-Brexit. If the UK does not remain part of the single European market (referred to as either a "Hard or Clean Brexit"), the ability to passport fund distribution and management services could be eliminated between the UK and EU, increasing regulatory burdens and compliance and other costs for UK funds being distributed in the EU and EU funds (such as Irish-domiciled funds) being distributed in the UK. The ability to engage investment managers for EU funds and UK funds also could be impacted, resulting in structural and other changes for UK- and EU-domiciled funds. It also remains unclear whether Brexit may impact various initiatives underway in the EU, such as money market fund reform and the implementation of a financial transactions tax (FTT). Federated is monitoring the impact of Brexit, and, while Brexit has not had a significant impact on Federated's business as of June 30, 2018, Federated remains unable to assess the degree of any potential impact Brexit, and resulting changes, may have on Federated's business, results of operations, financial condition and/or cash flows. The
Hermes Acquisition
increases the potential impact Brexit, and resulting changes, may have on Federated's business, results of operations, financial condition and/or cash flows.
On April 5, 2017, European Parliament passed EU money market fund reforms (Money Market Fund Regulation or
MMFR
), which went into force on July 21, 2017. The MMFR provides for the following types of money market funds in the EU: (1) Government constant NAV (
CNAV
) funds; (2) Low volatility NAV (
LVNAV
) funds; (3) Short-term variable NAV (
VNAV
) funds; and (4) standard VNAV funds. The reforms became effective (i.e., must be complied with) in regards to new funds on July 21, 2018 and will be effective in regards to existing funds on January 21, 2019. Federated continues product-type analysis (e.g., whether certain CNAV funds should convert to LVNAV funds), compliance and other efforts utilizing both internal and external resources to prepare for MMFR. Federated also continues to engage with trade associations and appropriate regulators in connection with the MMFR as the European Securities Market Authority and the European Commission begin work on the next stage of implementing the MMFR.
While the MMFR will need to be complied with in 2018 or early 2019, government CNAV and LVNAV fund reforms will be subject to a future review by the European Commission in 2022. This review will consider the adequacy of the reforms from a prudential and economic perspective, taking into account, among other factors, the impact of the reforms on investors, money market funds, money fund managers and short-term financing markets, the role that money market funds play in purchasing debt issued or guaranteed by EU Member States, and international regulatory developments. As noted above, it is uncertain whether Brexit could delay implementation of the EU money market fund reforms. For Federated money market fund products subject to the MMFR, Federated has begun to take steps to structure such products consistent with the MMFR.
A European FTT also continues to be discussed without the FTT being adopted. Notwithstanding challenges to its legality, these discussions involve, among other topics, the scope, application and allocation of the FTT, although any agreement on the FTT may be delayed until the Brexit negotiations are completed. Proponents of the FTT have sought the widest possible application of the FTT with low tax rates. On October 10, 2016, the finance ministers of the 10 participating Member States agreed on another proposal for an FTT. Under this proposal, the FTT would be applied on Group of Ten (
G10
) shares (i.e., shares issued by issuers located in the G10 countries). In this case, the G10 countries include Austria, Belgium, France, Germany, Greece,
|
|
|
|
Management's Discussion and Analysis (continued)
|
of Financial Condition and Results of Operations (unaudited)
|
|
Italy, Portugal, Slovakia, Slovenia and Spain. After a transition period, the FTT would be extended to all shares unless participating Member States decide otherwise. Under the proposal, a reduced minimum rate (80% of the normal tax rate) could be applied for market makers bound by a contract with a specific trading venue to carry out market making activities with regard to specific shares, irrespective of whether it is proprietary trading or market making. As proposed, when applicable to securities transactions, the FTT would be applied on the gross transaction amount. The FTT also would apply to all transactions involved in a transaction chain, except with respect to transactions by agents or clearing members when the agents and clearing members act as facilitators. If even two Member States decide not to participate, the FTT proposal cannot be finalized. On September 26, 2017, French President Emmanuel Macron recommended re-launching the FTT negotiations, proposing that all 28 Member States adopt a form of FTT. EU Finance Ministers also have launched a review of how the Brexit negotiations would affect the implementation of an FTT. It was reported that a March 4, 2018 agreement between Angela Merkel's Christian Democratic Union and grand coalition partners, the Social Democratic Party, in Germany included a statement that the parties want to "conclude the introduction of a substantial financial transaction tax" in the EU. Discussions with respect to an EU FTT that would impose a 0.1% tax on equity and bond trades and a 0.01% tax on derivative transactions resumed at a meeting between the 10 Member States that was held in May 2018, although no formal action was taken as of June 30, 2018. The exact time needed to reach resolution, implement any agreement and enact legislation is not known at this time. As noted above, Brexit could delay agreement on, and implementation of, the FTT in Europe. The Labour Party in the UK has also separately proposed a UK FTT.
The Financial Stability Board (
FSB
) and International Organization of Securities Commissions (
IOSCO
) published for comment on March 6, 2015 a second consultative document on "Assessment Methodologies for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions" (
Second Consultation
). In the Second Consultation, the FSB and IOSCO took a more inclusive approach setting forth revised methodologies for assessing the systemic risk of investment funds with an increased focus on leverage, and a new methodology for asset managers that focuses on activities that are conducted by a particular asset manager and may have the potential to generate systemic risk and warrant consideration. On June 17, 2015, IOSCO announced that its risk analysis will initially focus on industry activities and managers in the broader global financial context in identifying potential systemic risks, rather than on the size of asset managers, but that after that review is complete, work on methodologies for the identification of individual entities should be reassessed. On July 30, 2015, the FSB announced that it has decided to wait to finalize the assessment methodologies for non-bank non-insurance company global systemically important financial institutions until after its current work on financial stability risks stemming from asset management activities is completed. The FSB indicated that, after discussing its initial findings in September 2015, it will develop activities-based policy recommendations.
Regarding the FSB's work on financial stability risks stemming from asset management activities, on January 12, 2017, following up on a 2016 proposal, the FSB published its final "Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities" (
Final FSB Recommendations
), which set forth 14 final policy recommendations intended to address four identified structural vulnerabilities from asset management activities that the FSB believes could potentially present financial stability risks. The four identified structural vulnerabilities identified by the FSB include: (1) a perceived liquidity mismatch between fund investments and redemption terms and conditions for open-end fund shares; (2) leverage within investment funds; (3) operational risk and challenges at asset managers in stressed conditions; and (4) securities lending activities of asset managers and funds. Regarding the perceived liquidity mismatch, the Final FSB Recommendations seek to increase information and transparency, strengthen liquidity risk management, and encourage the use of system-wide stress testing by regulatory authorities, through, among other efforts, developing consistent disclosure and reporting requirements, distinguishing between information useful to investors and regulatory authorities, making more liquidity risk management tools (e.g., swing pricing, redemption fees, other anti-dilution methods) available to open-end funds, and requiring and providing guidance on stress testing to support liquidity risk management. Regarding leverage, the Final FSB Recommendations focus on measuring and monitoring leverage within funds, including through, among other efforts, developing consistent measures of leverage, identifying or developing more risk-based measures to monitor leverage risk and collecting fund-level and aggregate data on leverage and its use in funds. Regarding operational risk, the Final FSB Recommendations aim to improve risk management frameworks and practices taking into account the level of risk an asset manager's activities pose to the financial system, including through, among other efforts, imposing requirements or providing guidance on business continuity and transition planning. Regarding securities lending, the Final FSB Recommendations focus on monitoring for situations where indemnifications provided by asset managers to their clients in relation to securities lending activities indicate the development of material risks or regulatory arbitrage that may adversely affect financial stability and recommend that regulatory authorities verify and confirm asset managers adequately cover potential credit losses. It had been reported that IOSCO intended to implement the recommendations relating to leverage by the end of 2018. On July 7, 2017, IOSCO published a "Consultation on CIS Liquidity Risk Management Recommendations," which sets forth IOSCO's framework for liquidity risk management for collective investment schemes. In doing so, IOSCO's consultation document addresses certain of the structural vulnerabilities
|
|
|
|
Management's Discussion and Analysis (continued)
|
of Financial Condition and Results of Operations (unaudited)
|
|
identified by the FSB in the Final FSB Recommendations regarding liquidity risk management in the asset management industry, and makes recommendations regarding disclosure of liquidity risk management programs to investors, monitoring and assessment of liquidity risk, availability and effectiveness of liquidity risk management tools, fund level stress testing and contingency planning, among other matters. On July 7, 2017, IOSCO also published a consultation report, "Open-ended Fund Liquidity and Risk Management - Good Practices and Issues for Consideration," which is intended to assist regulators, asset managers and investors in understanding liquidity risks and addressing liquidity risk management. Management, while generally supporting many of the recommendations in the Final FSB Recommendations and IOSCO consultation document that can be viewed as guidance on liquidity, leverage and other related risks, continues to respectfully disagree with the premise that the regulated fund industry, particularly in the U.S., creates financial stability risk and believes that additional burdensome regulation is not warranted. On February 1, 2018,
IOSCO
issued its final report on "Recommendation For Liquidity Risk Management For Collective Investment Schemes," which sets forth IOSCO's recommendations to those entities responsible for managing the liquidity of collective investment schemes in an effort to improve liquidity risk management practices. IOSCO also released its final report on "Open-ended Fund Liquidity and Risk Management - Good Practices and Issues For Consideration," which is intended to assist regulators, the industry and investors in managing liquidity and related risks. Among other guidance and recommendations, the IOSCO final report recommends that, when looking at the management of liquidity within a fund, a holistic approach needs to be considered, conditioned on the overall consistency of the fund's redemption terms with its investment strategy, and the fund's potential or existing investor base.
Management believes that a UK FTT or EU FTT, particularly if enacted with broad application, would be detrimental to Federated's business and could adversely affect, potentially in a material way, Federated's business, results of operations, financial condition and/or cash flows (including Federated's non-U.S. operations). Management continues to monitor and evaluate the potential impact of European money market reforms on Federated's business, results of operations, financial condition and/or cash flows (including Federated's non-U.S. operations). Regulatory reforms stemming from Brexit, as well as the potential political and economic uncertainty surrounding Brexit, the Final FSB Recommendations, the IOSCO consultation document or other initiatives also may adversely affect, potentially in a material way, Federated's business, results of operations, financial condition and/or cash flows (including Federated's non-U.S. operations). Similar to Federated's efforts in the U.S., Federated has dedicated, and continues to dedicate, significant internal and external resources to analyze and address European reforms that impact Federated's fund business. European regulatory developments, and Federated's efforts relating thereto, have had, and may continue to have, an impact on Federated's expenses and, in turn, financial performance. As of June 30, 2018, Federated is unable to assess the potential impact that EU money market reforms, an FTT or other regulatory reforms or initiatives may have on its business, results of operations, financial condition and/or cash flows until such regulatory developments become effective and are required to be complied with or an FTT is enacted. Federated also is unable to assess at this time whether, or the degree to which Federated, any of its investment management subsidiaries or any of the Federated Funds, including money market funds, or any of its other products, could ultimately be determined to be a non-bank, non-insurance company global systemically important financial institution. The
Hermes Acquisition
increases the potential impact that the above matters may have on Federated's business, results of operations, financial condition and/or cash flows.
|
|
|
|
Management's Discussion and Analysis (continued)
|
of Financial Condition and Results of Operations (unaudited)
|
|
Asset Highlights
Managed Assets at Period End
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
Percent
Change
|
(in millions)
|
|
2018
|
|
|
2017
|
|
|
By Asset Class
|
|
|
|
|
|
|
Money Market
|
|
$
|
255,247
|
|
|
$
|
242,096
|
|
|
5
|
%
|
Equity
|
|
62,945
|
|
|
65,787
|
|
|
(4
|
)
|
Fixed-Income
|
|
61,485
|
|
|
52,507
|
|
|
17
|
|
Total Managed Assets
|
|
$
|
379,677
|
|
|
$
|
360,390
|
|
|
5
|
%
|
By Product Type
|
|
|
|
|
|
|
Funds:
|
|
|
|
|
|
|
Money Market
|
|
$
|
172,671
|
|
|
$
|
173,338
|
|
|
0
|
%
|
Equity
|
|
36,462
|
|
|
37,225
|
|
|
(2
|
)
|
Fixed-Income
|
|
39,927
|
|
|
40,880
|
|
|
(2
|
)
|
Total Fund Assets
|
|
249,060
|
|
|
251,443
|
|
|
(1
|
)
|
Separate Accounts:
|
|
|
|
|
|
|
Money Market
|
|
82,576
|
|
|
68,758
|
|
|
20
|
|
Equity
|
|
26,483
|
|
|
28,562
|
|
|
(7
|
)
|
Fixed-Income
|
|
21,558
|
|
|
11,627
|
|
|
85
|
|
Total Separate Account Assets
|
|
130,617
|
|
|
108,947
|
|
|
20
|
|
Total Managed Assets
|
|
$
|
379,677
|
|
|
$
|
360,390
|
|
|
5
|
%
|
Average Managed Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30,
|
|
Percent Change
|
|
June 30,
|
|
Percent Change
|
(in millions)
|
|
2018
|
|
|
2017
|
|
|
|
2018
|
|
|
2017
|
|
|
By Asset Class
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market
|
|
$
|
260,371
|
|
|
$
|
242,298
|
|
|
7
|
%
|
|
$
|
263,958
|
|
|
$
|
244,944
|
|
|
8
|
%
|
Equity
|
|
63,911
|
|
|
65,399
|
|
|
(2
|
)
|
|
65,372
|
|
|
64,590
|
|
|
1
|
|
Fixed-Income
|
|
61,698
|
|
|
52,291
|
|
|
18
|
|
|
62,646
|
|
|
52,047
|
|
|
20
|
|
Total Average Managed Assets
|
|
$
|
385,980
|
|
|
$
|
359,988
|
|
|
7
|
%
|
|
$
|
391,976
|
|
|
$
|
361,581
|
|
|
8
|
%
|
By Product Type
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market
|
|
$
|
175,885
|
|
|
$
|
172,626
|
|
|
2
|
%
|
|
$
|
178,870
|
|
|
$
|
177,522
|
|
|
1
|
%
|
Equity
|
|
36,784
|
|
|
37,325
|
|
|
(1
|
)
|
|
37,256
|
|
|
37,141
|
|
|
0
|
|
Fixed-Income
|
|
40,249
|
|
|
40,670
|
|
|
(1
|
)
|
|
40,664
|
|
|
40,378
|
|
|
1
|
|
Total Average Fund Assets
|
|
252,918
|
|
|
250,621
|
|
|
1
|
|
|
256,790
|
|
|
255,041
|
|
|
1
|
|
Separate Accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market
|
|
84,486
|
|
|
69,672
|
|
|
21
|
|
|
85,088
|
|
|
67,422
|
|
|
26
|
|
Equity
|
|
27,127
|
|
|
28,074
|
|
|
(3
|
)
|
|
28,116
|
|
|
27,449
|
|
|
2
|
|
Fixed-Income
|
|
21,449
|
|
|
11,621
|
|
|
85
|
|
|
21,982
|
|
|
11,669
|
|
|
88
|
|
Total Average Separate Account Assets
|
|
133,062
|
|
|
109,367
|
|
|
22
|
|
|
135,186
|
|
|
106,540
|
|
|
27
|
|
Total Average Managed Assets
|
|
$
|
385,980
|
|
|
$
|
359,988
|
|
|
7
|
%
|
|
$
|
391,976
|
|
|
$
|
361,581
|
|
|
8
|
%
|
|
|
|
|
Management's Discussion and Analysis (continued)
|
of Financial Condition and Results of Operations (unaudited)
|
|
Changes in Equity Fund and Separate Account Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
(in millions)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Equity Funds
|
|
|
|
|
|
|
|
|
Beginning Assets
|
|
$
|
36,421
|
|
|
$
|
37,159
|
|
|
$
|
38,101
|
|
|
$
|
36,231
|
|
Sales
|
|
1,778
|
|
|
1,411
|
|
|
3,627
|
|
|
3,114
|
|
Redemptions
|
|
(2,729
|
)
|
|
(2,394
|
)
|
|
(5,788
|
)
|
|
(5,441
|
)
|
Net Redemptions
|
|
(951
|
)
|
|
(983
|
)
|
|
(2,161
|
)
|
|
(2,327
|
)
|
Net Exchanges
|
|
200
|
|
|
(74
|
)
|
|
72
|
|
|
(14
|
)
|
Acquisition-Related
|
|
0
|
|
|
0
|
|
|
0
|
|
|
287
|
|
Market Gains and Losses
1
|
|
792
|
|
|
1,123
|
|
|
450
|
|
|
3,048
|
|
Ending Assets
|
|
$
|
36,462
|
|
|
$
|
37,225
|
|
|
$
|
36,462
|
|
|
$
|
37,225
|
|
|
|
|
|
|
|
|
|
|
Equity Separate Accounts
|
|
|
|
|
|
|
|
|
Beginning Assets
|
|
$
|
27,546
|
|
|
$
|
27,611
|
|
|
$
|
30,038
|
|
|
$
|
26,150
|
|
Sales
2
|
|
1,095
|
|
|
1,852
|
|
|
2,609
|
|
|
3,764
|
|
Redemptions
2
|
|
(2,622
|
)
|
|
(1,835
|
)
|
|
(5,115
|
)
|
|
(3,829
|
)
|
Net (Redemptions) Sales
2
|
|
(1,527
|
)
|
|
17
|
|
|
(2,506
|
)
|
|
(65
|
)
|
Net Exchanges
|
|
(2
|
)
|
|
0
|
|
|
1
|
|
|
0
|
|
Market Gains and Losses
1
|
|
466
|
|
|
934
|
|
|
(1,050
|
)
|
|
2,477
|
|
Ending Assets
|
|
$
|
26,483
|
|
|
$
|
28,562
|
|
|
$
|
26,483
|
|
|
$
|
28,562
|
|
|
|
|
|
|
|
|
|
|
Total Equity Assets
|
|
|
|
|
|
|
|
|
Beginning Assets
|
|
$
|
63,967
|
|
|
$
|
64,770
|
|
|
$
|
68,139
|
|
|
$
|
62,381
|
|
Sales
2
|
|
2,873
|
|
|
3,263
|
|
|
6,236
|
|
|
6,878
|
|
Redemptions
2
|
|
(5,351
|
)
|
|
(4,229
|
)
|
|
(10,903
|
)
|
|
(9,270
|
)
|
Net Redemptions
2
|
|
(2,478
|
)
|
|
(966
|
)
|
|
(4,667
|
)
|
|
(2,392
|
)
|
Net Exchanges
|
|
198
|
|
|
(74
|
)
|
|
73
|
|
|
(14
|
)
|
Acquisition-Related
|
|
0
|
|
|
0
|
|
|
0
|
|
|
287
|
|
Market Gains and Losses
1
|
|
1,258
|
|
|
2,057
|
|
|
(600
|
)
|
|
5,525
|
|
Ending Assets
|
|
$
|
62,945
|
|
|
$
|
65,787
|
|
|
$
|
62,945
|
|
|
$
|
65,787
|
|
|
|
1
|
Reflects the approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends, distributions, net investment income and the impact of changes in foreign exchange rates.
|
|
|
2
|
For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of total investment return.
|
|
|
|
|
Management's Discussion and Analysis (continued)
|
of Financial Condition and Results of Operations (unaudited)
|
|
Changes in Fixed-Income Fund and Separate Account Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
(in millions)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Fixed-Income Funds
|
|
|
|
|
|
|
|
|
Beginning Assets
|
|
$
|
40,578
|
|
|
$
|
40,239
|
|
|
$
|
41,200
|
|
|
$
|
39,434
|
|
Sales
|
|
3,832
|
|
|
3,729
|
|
|
7,939
|
|
|
7,715
|
|
Redemptions
|
|
(4,218
|
)
|
|
(3,591
|
)
|
|
(8,793
|
)
|
|
(7,422
|
)
|
Net (Redemptions) Sales
|
|
(386
|
)
|
|
138
|
|
|
(854
|
)
|
|
293
|
|
Net Exchanges
|
|
(207
|
)
|
|
10
|
|
|
(80
|
)
|
|
(14
|
)
|
Acquisition-Related
|
|
0
|
|
|
0
|
|
|
0
|
|
|
148
|
|
Market Gains and Losses
1
|
|
(58
|
)
|
|
493
|
|
|
(339
|
)
|
|
1,019
|
|
Ending Assets
|
|
$
|
39,927
|
|
|
$
|
40,880
|
|
|
$
|
39,927
|
|
|
$
|
40,880
|
|
|
|
|
|
|
|
|
|
|
Fixed-Income Separate Accounts
|
|
|
|
|
|
|
|
|
Beginning Assets
|
|
$
|
21,676
|
|
|
$
|
11,541
|
|
|
$
|
23,017
|
|
|
$
|
11,880
|
|
Sales
2
|
|
923
|
|
|
277
|
|
|
1,723
|
|
|
491
|
|
Redemptions
2
|
|
(716
|
)
|
|
(401
|
)
|
|
(2,743
|
)
|
|
(1,096
|
)
|
Net Sales (Redemptions)
2
|
|
207
|
|
|
(124
|
)
|
|
(1,020
|
)
|
|
(605
|
)
|
Net Exchanges
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(56
|
)
|
Market Gains and Losses
1
|
|
(325
|
)
|
|
210
|
|
|
(439
|
)
|
|
408
|
|
Ending Assets
|
|
$
|
21,558
|
|
|
$
|
11,627
|
|
|
$
|
21,558
|
|
|
$
|
11,627
|
|
|
|
|
|
|
|
|
|
|
Total Fixed-Income Assets
|
|
|
|
|
|
|
|
|
Beginning Assets
|
|
$
|
62,254
|
|
|
$
|
51,780
|
|
|
$
|
64,217
|
|
|
$
|
51,314
|
|
Sales
2
|
|
4,755
|
|
|
4,006
|
|
|
9,662
|
|
|
8,206
|
|
Redemptions
2
|
|
(4,934
|
)
|
|
(3,992
|
)
|
|
(11,536
|
)
|
|
(8,518
|
)
|
Net (Redemptions) Sales
2
|
|
(179
|
)
|
|
14
|
|
|
(1,874
|
)
|
|
(312
|
)
|
Net Exchanges
|
|
(207
|
)
|
|
10
|
|
|
(80
|
)
|
|
(70
|
)
|
Acquisition-Related
|
|
0
|
|
|
0
|
|
|
0
|
|
|
148
|
|
Market Gains and Losses
1
|
|
(383
|
)
|
|
703
|
|
|
(778
|
)
|
|
1,427
|
|
Ending Assets
|
|
$
|
61,485
|
|
|
$
|
52,507
|
|
|
$
|
61,485
|
|
|
$
|
52,507
|
|
|
|
1
|
Reflects the approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends, distributions, net investment income and the impact of changes in foreign exchange rates.
|
|
|
2
|
For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of total investment return.
|
|
|
|
|
Management's Discussion and Analysis (continued)
|
of Financial Condition and Results of Operations (unaudited)
|
|
Total Changes in Equity and Fixed-Income Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
(in millions)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Funds
|
|
|
|
|
|
|
|
|
Beginning Assets
|
|
$
|
76,999
|
|
|
$
|
77,398
|
|
|
$
|
79,301
|
|
|
$
|
75,665
|
|
Sales
|
|
5,610
|
|
|
5,140
|
|
|
11,566
|
|
|
10,829
|
|
Redemptions
|
|
(6,947
|
)
|
|
(5,985
|
)
|
|
(14,581
|
)
|
|
(12,863
|
)
|
Net Redemptions
|
|
(1,337
|
)
|
|
(845
|
)
|
|
(3,015
|
)
|
|
(2,034
|
)
|
Net Exchanges
|
|
(7
|
)
|
|
(64
|
)
|
|
(8
|
)
|
|
(28
|
)
|
Acquisition-Related
|
|
0
|
|
|
0
|
|
|
0
|
|
|
435
|
|
Market Gains and Losses
1
|
|
734
|
|
|
1,616
|
|
|
111
|
|
|
4,067
|
|
Ending Assets
|
|
$
|
76,389
|
|
|
$
|
78,105
|
|
|
$
|
76,389
|
|
|
$
|
78,105
|
|
|
|
|
|
|
|
|
|
|
Separate Accounts
|
|
|
|
|
|
|
|
|
Beginning Assets
|
|
$
|
49,222
|
|
|
$
|
39,152
|
|
|
$
|
53,055
|
|
|
$
|
38,030
|
|
Sales
2
|
|
2,018
|
|
|
2,129
|
|
|
4,332
|
|
|
4,255
|
|
Redemptions
2
|
|
(3,338
|
)
|
|
(2,236
|
)
|
|
(7,858
|
)
|
|
(4,925
|
)
|
Net Redemptions
2
|
|
(1,320
|
)
|
|
(107
|
)
|
|
(3,526
|
)
|
|
(670
|
)
|
Net Exchanges
|
|
(2
|
)
|
|
0
|
|
|
1
|
|
|
(56
|
)
|
Market Gains and Losses
1
|
|
141
|
|
|
1,144
|
|
|
(1,489
|
)
|
|
2,885
|
|
Ending Assets
|
|
$
|
48,041
|
|
|
$
|
40,189
|
|
|
$
|
48,041
|
|
|
$
|
40,189
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
|
|
|
|
Beginning Assets
|
|
$
|
126,221
|
|
|
$
|
116,550
|
|
|
$
|
132,356
|
|
|
$
|
113,695
|
|
Sales
2
|
|
7,628
|
|
|
7,269
|
|
|
15,898
|
|
|
15,084
|
|
Redemptions
2
|
|
(10,285
|
)
|
|
(8,221
|
)
|
|
(22,439
|
)
|
|
(17,788
|
)
|
Net Redemptions
2
|
|
(2,657
|
)
|
|
(952
|
)
|
|
(6,541
|
)
|
|
(2,704
|
)
|
Net Exchanges
|
|
(9
|
)
|
|
(64
|
)
|
|
(7
|
)
|
|
(84
|
)
|
Acquisition-Related
|
|
0
|
|
|
0
|
|
|
0
|
|
|
435
|
|
Market Gains and Losses
1
|
|
875
|
|
|
2,760
|
|
|
(1,378
|
)
|
|
6,952
|
|
Ending Assets
|
|
$
|
124,430
|
|
|
$
|
118,294
|
|
|
$
|
124,430
|
|
|
$
|
118,294
|
|
|
|
1
|
Reflects the approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends, distributions, net investment income and the impact of changes in foreign exchange rates.
|
|
|
2
|
For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the calculation of total investment return.
|
|
|
|
|
Management's Discussion and Analysis (continued)
|
of Financial Condition and Results of Operations (unaudited)
|
|
Changes in Federated's average asset mix period-over-period across both asset classes and product types have a direct impact on Federated's operating income. Asset mix impacts Federated's total revenue due to the difference in the fee rates earned on each asset class and product type per invested dollar and certain components of distribution expense can vary depending upon the asset class, distribution channel and/or the size of the customer relationship. The following table presents the relative composition of average managed assets and the percent of total revenue derived from each asset class and product type for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Total Average Managed Assets
|
|
Percent of Total Revenue
|
|
|
Six Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
By Asset Class
|
|
|
|
|
|
|
|
|
Money Market Assets
|
|
67
|
%
|
|
68
|
%
|
|
39
|
%
|
|
41
|
%
|
Equity Assets
|
|
17
|
%
|
|
18
|
%
|
|
44
|
%
|
|
42
|
%
|
Fixed-Income Assets
|
|
16
|
%
|
|
14
|
%
|
|
17
|
%
|
|
17
|
%
|
By Product Type
|
|
|
|
|
|
|
|
|
Funds:
|
|
|
|
|
|
|
|
|
Money Market Assets
|
|
45
|
%
|
|
49
|
%
|
|
36
|
%
|
|
39
|
%
|
Equity Assets
|
|
10
|
%
|
|
10
|
%
|
|
35
|
%
|
|
34
|
%
|
Fixed-Income Assets
|
|
10
|
%
|
|
11
|
%
|
|
14
|
%
|
|
15
|
%
|
Separate Accounts:
|
|
|
|
|
|
|
|
|
Money Market Assets
|
|
22
|
%
|
|
19
|
%
|
|
3
|
%
|
|
2
|
%
|
Equity Assets
|
|
7
|
%
|
|
8
|
%
|
|
9
|
%
|
|
8
|
%
|
Fixed-Income Assets
|
|
6
|
%
|
|
3
|
%
|
|
3
|
%
|
|
2
|
%
|
Total managed assets represent the balance of AUM at a point in time. By contrast, total average managed assets represent the average balance of AUM during a period of time. Because substantially all revenue and certain components of distribution expense are generally calculated daily based on AUM, changes in average managed assets are typically a key indicator of changes in revenue earned and asset-based expenses incurred during the same period.
As of
June 30, 2018
, total managed assets
increased
5%
from
June 30, 2017
primarily as a result of an increase in money market assets and fixed-income assets. Total average money market assets
increased
7%
and
8%
for the
three and six
months ended
June 30, 2018
, respectively, as compared to the same periods in
2017
. Period-end money market assets
increased
5%
at
June 30, 2018
as compared to
June 30, 2017
. The Federal Open Market Committee of the Federal Reserve Board (
FOMC
) raised the target funds rate in June 2018, its second increase of the year, and signaled two additional increases are likely in 2018. Average equity assets
decreased
2%
and
increased
1%
for the
three and six
months ended
June 30, 2018
, respectively, as compared to the same periods in
2017
. Period-end equity assets
decreased
4%
at
June 30, 2018
as compared to
June 30, 2017
primarily due to net redemptions, partially offset by market appreciation. Average fixed-income assets
increased
18%
and
20%
for the
three and six
months ended
June 30, 2018
, respectively, as compared to the same periods in
2017
. Period-end fixed-income assets
increased
17%
at
June 30, 2018
as compared to
June 30, 2017
, primarily as a result of net sales. During the second quarter of 2018, the tug-of-war between robust economic fundamentals and worries over mounting trade tensions caused equity markets to vacillate, with larger-capitalization stocks as represented by the Dow Jones Industrial Average eking out a slight gain for the three months ended
June 30, 2018
while more domestic-oriented, smaller stocks as represented by the Russell 2000 Index rose more than 7% for the period. Driven by the Federal Reserve's actions and stronger economic data, the bond market saw Treasury yields trend slightly higher over the same three-month period, particularly on the shorter end. Moves on the longer end were restrained primarily by a risk-off trade arising from the aforementioned trade concerns.
|
|
|
|
Management's Discussion and Analysis (continued)
|
of Financial Condition and Results of Operations (unaudited)
|
|
Results of Operations
Revenue.
Revenue
decreased
$16.8 million
for the
three
-month period ended
June 30, 2018
as compared to the same period in
2017
primarily due to (1) a decrease of
$8.2 million
due to
Consideration Payable to Customers
now being recorded as a reduction of revenue
effective January 1, 2018 as a result of the adoption of
Topic 606
(under legacy guidance this amount would have been recorded as Distribution expense (
$6.1 million
) and Other expense (
$2.1 million
), (2) an increase in voluntary waivers for certain money market funds for competitive reasons ($5.0 million) and (3) a decrease of $3.3 million due to a change in the mix of average money market assets.
Revenue
decreased
$26.5 million
for the
six
-month period ended
June 30, 2018
as compared to the same period in
2017
primarily due to (1) a decrease of
$16.8 million
due to
Consideration Payable to Customers
now being recorded as a reduction of revenue
as a result of the adoption of
Topic 606
(under legacy guidance this amount would have been recorded as Distribution expense (
$12.8 million
) and Other expense (
$4.0 million
), (2) a decrease of $8.1 million due to a change in the mix of average money market assets and (3) a net decrease of $6.8 million due to a January 2017 change in a customer relationship. These decreases in revenue were partially offset by an increase of $4.3 million due to higher average equity assets.
See
Note (2)
to the Consolidated Financial Statements for additional information on the adoption of
Topic 606
.
For the six-month period ended
June 30, 2018
and
2017
, Federated's ratio of revenue to average managed assets was 0.27% and 0.30%, respectively. The decrease in the rate was primarily related to a change in the mix of average money market assets (including the customer relationship change) and the reduction in revenue as a result of the adoption of
Topic 606
.
Operating Expenses.
Total Operating Expenses
for the
three
-month period ended
June 30, 2018
decreased
$13.3 million
as compared to the same period in
2017
.
Distribution
expense
decreased
$17.7 million
primarily due to a decrease of $9.0 million related to the mix of average money market fund assets and a decrease of
$7.4 million
as a result of the adoption of
Topic 606
which requires
Consideration Payable to Customers
to be recorded as a reduction of revenue.
Total Operating Expenses
for the
six
-month period ended
June 30, 2018
decreased
$24.9 million
as compared to the same period in
2017
.
Distribution
expense
decreased
$35.6 million
primarily due to (1) a decrease of $17.7 million related to the mix of average money market fund assets, (2) a decrease of
$15.1 million
as a result of the adoption of
Topic 606
as noted above and (3) a decrease of $5.3 million due to a January 2017 change in a customer relationship. This decrease was partially offset by (1) an increase in
Compensation and Related
expense of
$7.7 million
primarily due to an increase in incentive compensation driven mainly by sales performance and (2) an increase in
Professional Service Fees
expense of
$5.7 million
primarily related to an increase in costs of $2.7 million associated with the
Hermes Acquisition
.
See
Note (2)
to the Consolidated Financial Statements for additional information on the adoption of
Topic 606
.
Nonoperating (Expenses) Income.
Nonoperating (Expenses) Income, net
decreased
$31.8 million
for the
three
-month period ended
June 30, 2018
as compared to the same period in
2017
. The decrease is primarily due to a
$29.0 million
loss, recorded in
Other, net
in the second quarter of 2018, related to two derivative financial instruments associated with the
Hermes Acquisition
(see
Note (10)
to the Consolidated Financial Statements for additional information).
Nonoperating (Expenses) Income, net
decreased
$35.6 million
for the
six
-month period ended
June 30, 2018
as compared to the same period in
2017
. The decrease is primarily due to the aforementioned
$29.0 million
loss recorded in the second quarter of 2018 related to two derivative financial instruments. In addition,
(Loss) Gain on Securities, net
decreased $6.8 million due to (1) a $4.4 million decrease in
Investments—Consolidated Investment Companies
primarily due to a decrease in the market value of investments held by consolidated investment companies and (2) a $2.4 million decrease in
Investments—Affiliates and Other
primarily due to fewer gains realized from the redemption of investments in the first half of 2018 as compared to the same period in 2017.
Income Taxes.
The income tax provision was
$13.1 million
and
$32.0 million
for the
three
- and
six
-month periods ended
June 30, 2018
, respectively, as compared to
$32.3 million
and
$62.1 million
for the same periods in
2017
. The effective tax rate was
25.3%
and
24.5%
for the
three
- and
six
-month periods ended
June 30, 2018
, respectively, as compared to
37.1%
and
37.0%
for the same periods in
2017
. The decreases in the income tax provision and the effective tax rate were primarily due to the enactment of the
Tax Act
.
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Management's Discussion and Analysis (continued)
|
of Financial Condition and Results of Operations (unaudited)
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Net Income Attributable to Federated Investors, Inc.
Net income
decreased
$14.6 million
for the
three
-month period ended
June 30, 2018
as compared to the same period in
2017
, primarily as a result of the changes in revenues, expenses, nonoperating (expenses) income and income taxes noted above. Diluted earnings per share for the
three
-month period ended
June 30, 2018
decreased
$0.15
as compared to the same period of
2017
primarily due to
decreased
net income.
Net income
decreased
$3.9 million
for the
six
-month period ended
June 30, 2018
as compared to the same period in
2017
, primarily as a result of the changes in revenues, expenses, nonoperating (expenses) income and income taxes noted above. Diluted earnings per share for the
six
-month period ended
June 30, 2018
decreased
0.03
as compared to the same period in
2017
primarily due to
decreased
net income.
Liquidity and Capital Resources
Liquid Assets.
At
June 30, 2018
, liquid assets, net of noncontrolling interests, consisting of cash and cash equivalents, investments and receivables, totaled
$440.6 million
as compared to
$392.6 million
at
December 31, 2017
. The change in liquid assets is discussed below.
At
June 30, 2018
, Federated's liquid assets included investments in certain Federated-sponsored money market and fluctuating-value funds that may have direct and/or indirect exposures to international sovereign debt and currency risks. Federated continues to actively monitor its money market, fixed-income and equity portfolios to manage sovereign debt and currency risks with respect to certain European countries (such as the UK in light of Brexit), China and surrounding countries, and countries subject to economic sanctions. Federated's experienced portfolio managers and analysts work to evaluate credit risk through quantitative and fundamental analysis. Further, regarding international exposure, certain money market funds (approximately
$24 million
), that meet the requirements of Rule 2a-7 or operate in accordance with requirements similar to those in Rule 2a-7, include holdings with indirect short-term exposures invested primarily in high-quality international bank names that are subject to Federated's credit analysis process. In addition, at
June 30, 2018
, Federated held approximately
£262 million
(approximately
$346 million
), of which
£259.9 million
was paid on July 2, 2018 for the
Hermes Acquisition
(see
Note (4)
to the Consolidated Financial Statements for additional information).
Cash Provided by Operating Activities
.
Net cash
provided
by operating activities totaled
$136.4 million
for the
six
months ended
June 30, 2018
as compared to
$96.4 million
for the same period in
2017
. The
increase
of
$40.0 million
was primarily due to
a decrease in cash paid related to the
$35.6 million
decrease
in distribution-related expenses previously discussed and a decrease of $22.2 million in cash paid for taxes primarily due to the change in the tax rate related to the
Tax Act
. These items were partially offset by a decrease in cash received related to the
$26.5 million
decrease
in revenue previously discussed
.
Cash Used by Investing Activities
.
During the
six
-month period ended
June 30, 2018
, net cash
used
by investing activities was
$5.5 million
which primarily represented cash paid for property and equipment (including technology).
Cash Used by Financing Activities
.
During the
six
-month period ended
June 30, 2018
, net cash
used
by financing activities was
$71.9 million
. During the first
six
months of
2018
, Federated paid (1)
$52.6 million
or
$0.52
per share in dividends to holders of its common shares, (2)
$20.4 million
to repurchase shares of Class B common stock primarily in connection with its stock repurchase program (see
Note (13)
to the Consolidated Financial Statements for additional information) and (3)
$10.0 million
in connection with its debt obligations (see
Note (11)
to the Consolidated Financial Statements for additional information). These payments were offset by
$18.0 million
borrowed from Federated's revolving credit facility used to partially fund the
Hermes Acquisition
(see
Note (4)
and
Note (11)
to the Consolidated Financial Statements for additional information).
Borrowings.
In 2017, Federated entered into its
Credit Agreement
that refinanced
$200 million
available on the revolving credit facility and
$178.5 million
outstanding on the term loan facility under the
Prior Credit Agreement
, replacing both with a
$375 million
revolving credit facility, which has an additional
$200 million
available via an optional increase (or accordion) feature. The original proceeds were used for general corporate purposes including cash payments related to acquisitions, dividends, investments and share repurchases. During the second quarter of 2018, Federated borrowed
$18.0 million
to fund a portion of the
Hermes Acquisition
. During the
six
-month periods ended
June 30, 2018
and
2017
, Federated made debt payments of
$10.0 million
and
$12.8 million
, respectively. As of
June 30, 2018
, Federated has
$197 million
available to borrow under the
Credit Agreement
. See
Note (11)
to the Consolidated Financial Statements for additional information.
The Credit Agreement includes an interest coverage ratio covenant (consolidated earnings before interest, taxes, depreciation and amortization (
EBITDA
) to consolidated interest expense) and a leverage ratio covenant (consolidated debt to consolidated
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Management's Discussion and Analysis (continued)
|
of Financial Condition and Results of Operations (unaudited)
|
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EBITDA
) as well as other customary terms and conditions. Federated was in compliance with all of its covenants, including its interest coverage and leverage ratios at and during the
six
months ended
June 30, 2018
. An interest coverage ratio of at least 4 to 1 is required and, as of
June 30, 2018
, the interest coverage ratio was 77 to 1. A leverage ratio of no more than 3 to 1 is required and, as of
June 30, 2018
, the leverage ratio was 0.5 to 1.
The Credit Agreement also has certain stated events of default and cross default provisions which would permit the lenders/counterparties to accelerate the repayment of debt outstanding if not cured within the applicable grace periods. The events of default generally include breaches of contract, failure to make required loan payments, insolvency, cessation of business, notice of lien or assessment, and other proceedings, whether voluntary or involuntary, that would require the repayment of amounts borrowed.
Future Cash Needs.
Management expects that principal uses of cash will include funding business acquisitions (including the
Hermes Acquisition
) and global expansion, funding distribution expenditures, paying incentive and base compensation, paying shareholder dividends, repaying debt obligations, paying taxes, repurchasing company stock, developing and seeding new products and strategies, modifying existing products, strategies and relationships, and funding property and equipment (including technology). Any number of factors may cause Federated's future cash needs to increase. As a result of the highly regulated nature of the investment management business, management anticipates that aggregate expenditures for compliance and investment management personnel, compliance systems and technology and related professional and consulting fees may continue to increase.
On
July 26, 2018
,
the board of directors declared a
$0.27
per share dividend to shareholders of record as of
August 8, 2018
to be paid on
August 15, 2018
.
After evaluating Federated's existing liquid assets, expected continuing cash flow from operations, its borrowing capacity under the
Credit Agreement
and its ability to obtain additional financing arrangements and issue debt or stock, management believes it will have sufficient liquidity to meet its present and reasonably foreseeable cash needs.
Financial Position
The following discussion summarizes significant changes on the
Consolidated Balance Sheets
that are not discussed elsewhere in Management's Discussion and Analysis of Financial Condition and Results of Operations as well as the status of Federated's goodwill as of
June 30, 2018
.
For balances at
June 30, 2018
as compared to
December 31, 2017
,
Investments—Consolidated Investment Companies
decreased
$11.8 million
and
Redeemable Noncontrolling Interest in Subsidiaries
decreased
$9.2 million
due primarily to redemptions by third-party investors in one consolidated
Federated Fund
VIE.
Accrued Compensation and Benefits
at
June 30, 2018
decreased
$31.2 million
from
December 31, 2017
primarily due to the
2017
accrued annual incentive compensation being paid in the first quarter of
2018
($62.5 million), partially offset by certain
2018
incentive compensation accruals recorded at
June 30, 2018
($36.4 million).
Other Current Liabilities
at
June 30, 2018
increased
$33.6 million
from
December 31, 2017
primarily due to the
$29.0 million
accrual related to the foreign currency forward derivative financial instruments at
June 30, 2018
which will be paid in the third quarter of
2018
. See
Note (10)
for additional information.
There were no indicators of goodwill impairment as of
June 30, 2018
.
Contractual Obligations and Contingent Liabilities
Contractual.
Pursuant to various employment and incentive arrangements, Federated may be required to make certain compensation-related payments. See
Note (15)
to the Consolidated Financial Statements for additional information.
Legal Proceedings.
Federated has claims asserted against it from time to time. See
Note (15)
to the Consolidated Financial Statements for additional information.
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Management's Discussion and Analysis (continued)
|
of Financial Condition and Results of Operations (unaudited)
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Recent Accounting Pronouncements
For a list of new accounting standards applicable to Federated, see
Note (2)
to the Consolidated Financial Statements.
Critical Accounting Policies
Federated's Consolidated Financial Statements have been prepared in accordance with GAAP. In preparing the financial statements, management is required to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Management continually evaluates the accounting policies and estimates it uses to prepare the Consolidated Financial Statements. In general, management's estimates are based on historical experience, information from third-party professionals and various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results may differ from those estimates made by management and those differences may be material.
Of the significant accounting policies described in Federated's Annual Report on Form 10-K for the year ended
December 31, 2017
, management believes that its policy regarding accounting for intangible assets involves a higher degree of judgment and complexity. See Federated's Annual Report on Form 10-K for the year ended
December 31, 2017
, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations under the section Critical Accounting Policies for a complete discussion of this policy.
Part I, Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of
June 30, 2018
there were no material changes to Federated's exposures to market risk that would require an update to the disclosures provided in Federated's Annual Report on Form 10-K for the year ended
December 31, 2017
.
Part I, Item 4. Controls and Procedures
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(a)
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Federated carried out an evaluation, under the supervision and with the participation of management, including Federated's President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of Federated's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of
June 30, 2018
. Based upon that evaluation, the President and Chief Executive Officer and the Chief Financial Officer concluded that Federated's disclosure controls and procedures were effective at
June 30, 2018
.
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(b)
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There has been no change in Federated's internal control over financial reporting that occurred during the quarter ended
June 30, 2018
that has materially affected, or is reasonably likely to materially affect, Federated's internal control over financial reporting.
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Part II, Item 1. Legal Proceedings
Information regarding this Item is contained in
Note (15)
to the Consolidated Financial Statements.
Part II, Item 1A. Risk Factors
Federated's management and Audit Committee continue to believe that Federated's registered public accounting firm, Ernst & Young LLP (EY), has the ability to exercise objective and impartial judgment on all issues encompassed within EY's audit and review services. As previously disclosed under "Risks Related to Auditor Independence" in Item 1A of Federated's most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (
2017 Annual Report
), public companies, such as Federated, utilize the audit services of an independent registered public accounting firm (Accounting Firm) such as EY to audit or review their financial statements included in certain public filings, such as their Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q. The Accounting Firm is required to make a determination that such firm satisfies certain independence requirements under the federal securities laws. Like other public companies, there is a risk that activities or relationships of the Accounting Firm engaged by Federated, or such firm's partners or employees, can prevent a determination from being made that such firm satisfies such independence requirements with respect to Federated, which could render such firm ineligible to serve as Federated's Accounting Firm. For example, Rule 2-01(c)(1)(i)(A) of Regulation S-X (Investment Rule) issued by the SEC prohibits the Accounting Firm, or covered person professionals and their immediate family members, from having certain direct investments in the audit client and affiliated entities. EY informed Federated on July 18, 2018 that a pension trust of a non-US affiliated entity of EY had previously made and maintains an investment in a fund (Hermes Fund) managed by Hermes Alternative Investment Management Limited (HAIML), which is a wholly owned subsidiary of Hermes Fund Managers Limited (
Hermes
). The pension trust's investment in the Hermes Fund implicates the Investment Rule because an indirect wholly owned subsidiary of Federated Investors acquired a 60% majority interest in
Hermes
on July 2, 2018, effective July 1, 2018 (Hermes Acquisition). The pension trust first invested in the Hermes Fund in 2007, well prior to the Hermes Acquisition. The pension trust's investment represents less than 3.3% of the Hermes Fund's assets as of July 18, 2018. EY subsequently informed Federated that the pension trust has submitted an irrevocable redemption notice to redeem its investment in the Hermes Fund. Pursuant to the redemption terms of the Hermes Fund, the pension trust's redemption cannot be effected until December 26, 2018 at the earliest. The redemption notice cannot be revoked by the pension trust. The redemption notice can only be revoked by HAIML, as the advisor for Hermes Fund, if, and to the extent, the pension trust successfully sells its interest in the Hermes Fund in a secondary market transaction. EY also informed Federated that the pension trust simultaneously submitted a request to HAIML to conduct a secondary market auction for the pension trust's interest in the Hermes Fund. If this secondary market auction is successful, or if the pension trust is successful in pursuing a direct secondary market sale to a single buyer, such a secondary market transaction would allow all or part of its interest in the Hermes Fund to be sold, and its investment to be eliminated or reduced, as soon as August 2018. In addition, the only voting rights shareholders of the Hermes Fund have under the Hermes Fund's governing documents relate to key appointments, including the election of the non-executive members of the Hermes Fund's committee, the appointment of the Hermes Fund's trustee and the adoption of the Hermes Fund's financial statements. The next meeting of the Hermes Fund at which shareholders can vote on the election of members of the Hermes Fund's committee is not until June 2019, and the size of the pension fund's investment in the Hermes Fund would not allow it to unilaterally elect a committee member or the trustee. EY does not audit the Hermes Fund and the
Hermes Fund's assets and operations are not consolidated in Federated financial statements that are subject to audit by EY. Finally, no member of EY's audit team that provides audit services to Federated is a beneficiary of the pension trust. Management has reviewed this matter with Federated's Audit Committee, and, based on that review, as well as a letter from EY to Federated dated July 26, 2018, in which EY indicated that it had determined that this matter does not impair EY's ability to exercise objective and impartial judgment in performing audit or review services for Federated and their belief that a reasonable investor with knowledge of all relevant facts and circumstances would conclude that EY has been and is capable of exercising objective and impartial judgment in all issues encompassed within EY's audit and review services, Federated's management and the Audit Committee have made a determination that such matters would not impair EY's objectivity, impartiality or judgment in performing audit or review services for Federated. Please see "Risks Related to Auditor Independence" in Item 1A of Federated's
2017 Annual Report
for additional disclosure regarding the potential consequences of non-compliance with the independence requirements under the federal securities laws, which could include a material adverse effect on Federated's business, results of operations, financial condition and/or cash flows.
There are no material changes to the other risk factors included in
Federated's
2017 Annual Report
.
Part II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) The following table summarizes stock repurchases under Federated's share repurchase program during the
second
quarter of
2018
.
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Total Number
of Shares
Purchased
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Average
Price Paid
per Share
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Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
1
|
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Maximum Number of Shares that
May Yet Be Purchased Under the
Plans or Programs
1
|
April
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50,000
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$
|
26.94
|
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50,000
|
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2,006,147
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May
2
|
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307,767
|
|
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24.45
|
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300,000
|
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1,706,147
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June
2
|
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357,098
|
|
|
23.23
|
|
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349,248
|
|
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1,356,899
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Total
|
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714,865
|
|
|
$
|
24.01
|
|
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699,248
|
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1,356,899
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1
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In October 2016
,
the board of directors authorized a share repurchase program with no stated expiration date that allows Federated to buy back up to
4.0 million
shares of Federated Class B common stock. No other programs existed as of June 30, 2018.
See
Note (13)
to the Consolidated Financial Statements for additional information on this program.
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2
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In May and June of
2018
, 7,767 and 7,850 shares, respectively, of restricted stock with a weighted-average price of $2.78 and $1.18 per share, respectively, were repurchased as employees forfeited restricted stock.
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Part II, Item 5. Other Information
AMENDMENT TO BYLAWS
On
July 26, 2018
, the board of directors approved an amendment to Federated's bylaws. The amendment, effective immediately, provides indemnification to a director or officer of Federated who is required to provide personally identifiable information (PII) to regulators or counterparties with whom Federated, or a subsidiary, sponsored fund or managed account, does business because of a legal requirement or procedural requirement of such regulator or counterparty, and the security of such PII is compromised and used to the detriment of such director or officer.
Part II, Item 6. Exhibits
The following exhibits required to be filed or furnished by Item 601 of Regulation S-K are filed or furnished herewith and incorporated by reference herein:
Exhibit 3.1
– Restated Bylaws of Federated Investors, Inc.
Exhibit 31.1
– Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
Exhibit 31.2
– Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
Exhibit 32
– Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
The following XBRL documents are filed herewith:
Exhibit 101.INS – XBRL Instance Document
Exhibit 101.SCH – XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL – XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF – XBRL Taxonomy Extension Definition Linkbase Document
Exhibit 101.LAB – XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE – XBRL Taxonomy Extension Presentation Linkbase Document
SIGNATURES
Pursuant to the requirements 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.
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Federated Investors, Inc.
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(Registrant)
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Date
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July 27, 2018
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By:
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/s/ J. Christopher Donahue
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J. Christopher Donahue
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President and Chief Executive Officer
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Date
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July 27, 2018
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By:
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/s/ Thomas R. Donahue
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Thomas R. Donahue
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Chief Financial Officer
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FEDERATED INVESTORS, INC.
RESTATED BYLAWS
RESTATED BYLAWS
OF FEDERATED INVESTORS, INC.
TABLE OF CONTENTS
ARTICLE I
………………………………………………………………………………….. 1
Section 1.01. Registered Office
………………………………………………………… 1
Section 1.02. Other Offices
…………………………………………………………….. 1
Section 1.03. Fiscal Year
………………………………………………………………. 1
ARTICLE II
…………………………………………………………………………………. 1
Section 2.01. Manner of Giving Notice
………………………………………………… 1
(a) General Rule……………………………………………………………………… 1
(b) Adjourned Shareholder Meetings………………………………………………… 2
Section 2.02. Notice of Meetings of Board of Directors
……………………………….. 2
Section 2.03. Notice of Meetings of Shareholders
………………………………………. 2
(a) General Rule………………………………………………………………………. 2
(b) Contents…………………………………………………………………………… 2
(c) Notice of Action by Shareholders on By-laws……………………………………. 2
Section 2.04. Waiver of Notice
………………………………………………………….. 2
(a) Written Waiver……………………………………………………………………. 2
(b) Waiver by Attendance…………………………………………………………….. 3
Section 2.05. Modification of Proposal Contained in Notice
……………………………. 3
Section 2.06. Exception to Requirement of Notice
……………………………………... 3
(a) General Rule………………………………………………………………………. 3
(b) Shareholders Without Forwarding Addresses…………………………………….. 3
Section 2.07. Use of Conference Telephone and Similar Equipment
…………………… 3
ARTICLE III
…………………………………………………………………………………. 4
Section 3.01. Place of Meeting
………………………………………………………….. 4
Section 3.02. Annual Meeting
…………………………………………………………… 4
Section 3.03. Special Meetings
………………………………………………………… 4
(a) Call of Special Meetings………………………………………………………… 4
(b) Fixing of Time for Meeting……………………………………………………… 4
Section 3.04. Quorum and Adjournment
………………………………………………. 4
(a) General Rule……………………………………………………………………… 4
(b) Withdrawal of a Quorum………………………………………………………… 5
(c) Adjournment for Lack of Quorum……………………………………………….. 5
(d) Adjournments Generally…………………………………………………………. 5
(e) Electing Directors at Adjourned Meeting………………………………………… 5
(f) Other Action in Absence of Quorum……………………………………………… 5
Section 3.05. Action by Shareholders
…………………………………………………… 5
Section 3.06. Organization of Meetings
………………………………………………… 5
Section 3.07. Voting Rights of Shareholders
…………………………………………… 6
Section 3.08. Voting and Other Action by Proxy
………………………………………. 6
(a) General Rule……………………………………………………………………… 6
(b) Minimum Requirements…………………………………………………………. 6
(c) Revocation……………………………………………………………………….. 6
(d) Expenses…………………………………………………………………………. 7
Section 3.09. Voting by Fiduciaries and Pledgees
……………………………………… 7
Section 3.10. Voting by Joint Holders of Shares
……………………………………….. 7
(a) General Rule……………………………………………………………………… 7
(b) Exception…………………………………………………………………………. 7
Section 3.11. Voting by Corporations and Other Business Organizations
……………… 7
(a) Voting by Corporate Shareholders………………………………………………… 7
(b) Controlled Shares………………………………………………………………….. 8
Section 3.12. Determination of Shareholders of Record
……………………………….. 8
(a) Fixing Record Date……………………………………………………………….. 8
(b) Determination When a Record Date is Not Fixed………………………………… 8
Section 3.13. Voting Lists
………………………………………………………………. 9
(a) General Rule……………………………………………………………………… 9
(b) Effect of List……………………………………………………………………… 9
Section 3.14. Judges of Election
………………………………………………………… 9
(a) Appointment………………………………………………………………………. 9
(b) Vacancies…………………………………………………………………………. 9
(c) Duties…………………………………………………………………………….. 9
(d) Report…………………………………………………………………………….. 9
Section 3.15. Consent of Shareholders in Lieu of Meeting
…………………………….. 10
(a) Unanimous Written Consent……………………………………………………… 10
(b) Partial Written Consent…………………………………………………………… 10
Section 3.16. Minors as Security Holders
……………………………………………… 10
ARTICLE IV
………………………………………………………………………………… 10
Section 4.01. Powers: Personal Liability
………………………………………………. 10
(a) General Rule……………………………………………………………………… 10
(b) Personal Liability of Directors……………………………………………………. 10
(c) Notation of Dissent……………………………………………………………….. 11
Section 4.02. Qualifications and Selection of Directors
……………………………….. 11
(a) Qualifications…………………………………………………………………….. 11
(b) Nomination of Directors…………………………………………………………. 11
(c) Election of Directors……………………………………………………………… 12
(d) Cumulative Voting……………………………………………………………….. 12
Section 4.03. Number and Term of Office
……………………………………………… 12
(a) Number…………………………………………………………………………… 12
(b) Term of Office……………………………………………………………………. 12
(c) Resignation……………………………………………………………………….. 12
Section 4.04. Vacancies
………………………………………………………………… 12
(a) General Rule……………………………………………………………………… 12
(b) Action by Resigned Directors……………………………………………………. 12
Section 4.05. Removal of Directors
……………………………………………………. 13
(a) Removal by the Shareholders…………………………………………………….. 13
(b) Removal by the Board……………………………………………………………. 13
Section 4.06. Place of Meetings
…………………………………………………………13
Section 4.07. Organization of Meetings
……………………………………………….. 13
Section 4.08. Regular Meetings
………………………………………………………… 13
Section 4.09. Special Meetings
…………………………………………………………. 13
Section 4.10. Quorum of and Action by Directors
…………………………………….. 13
(a) General Rule……………………………………………………………………… 13
(b) Action by Written Consent………………………………………………………. 14
Section 4.11. Executive and Other Committees
……………………………………….. 14
(a) Establishment and Powers……………………………………………………….. 14
(b) Alternate Committee Members………………………………………………….. 14
(c) Term…………………………………………………………………………….... 14
(d) Committee Procedures…………………………………………………………… 14
Section 4.12. Compensation
……………………………………………………………. 14
ARTICLE V
………………………………………………………………………………… 15
Section 5.01. Officers Generally
……………………………………………………….. 15
(a) Number…………………………………………………………………………… 15
(b) Resignations………………………………………………………………………. 15
(c) Bonding…………………………………………………………………………… 15
Section 5.02. Election and Term of Office
……………………………………………… 15
Section 5.03. Subordinate Officers, Committees and Agents
…………………………… 15
Section 5.04. Removal of Officers and Agents
…………………………………………. 15
Section 5.05. Vacancies
……………………………………………………………....... 16
Section 5.06. Authority
………………………………………………………………… 16
Section 5.07. The Chairman of the Board
……………………………………………… 16
Section 5.08. The Vice Chairman
……………………………………………………… 16
Section 5.09. The President
……………………………………………………………. 16
Section 5.10. The Vice Presidents
…………………………………………………….. 16
Section 5.11. The Secretary
…………………………………………………………… 16
Section 5.12. The Treasurer
…………………………………………………………… 17
Section 5.13. Salaries
………………………………………………………………….. 17
ARTICLE VI
………………………………………………………………………………… 17
Section 6.01. Share Certificates
………………………………………………………… 17
Section 6.02. Issuance
………………………………………………………………….. 17
Section 6.03. Transfer
………………………………………………………………….. 18
Section 6.04. Record Holder of Shares
………………………………………………… 18
Section 6.05. Lost, Destroyed or Mutilated Certificates
………………………………. 18
Section 6.06. Restriction on Transfer of Shares
……………………………………….. 18
(a) Initial Underwritten Registration………………………………………………… 18
(b) Waiver by board of Directors……………………………………………………. 18
(c) Certificate Legend………………………………………………………………… 18
(d) Status of Bylaws………………………………………………………………….. 19
ARTICLE VII
……………………………………………………………………………….. 19
Section 7.01. Scope of Indemnification
……………………………………………….. 19
(a) General Rule……………………………………………………………………… 19
(b) Partial Payment…………………………………………………………………… 20
(c) Presumption………………………………………………………………………. 20
(d) Definitions……………………………………………………………………….. 20
Section 7.02. Proceedings Initiated by Indemnified Representatives
…………………. 20
Section 7.03. Advancing Expenses
……………………………………………………. 21
Section 7.04. Securing of Indemnification Obligations
……………………………….. 21
Section 7.05. Payment of Indemnification
…………………………………………….. 21
Section 7.06. Arbitration
………………………………………………………………. 21
(a) General Rule……………………………………………………………………… 21
(b) Burden of Proof………………………………………………………………….. 22
(c) Expenses…………………………………………………………………………. 22
(d) Effect…………………………………………………………………………….. 22
Section 7.07. Contribution
……………………………………………………………. 22
Section 7.08. Mandatory Indemnification of Indemnified Representatives
………….. 22
Section 7.09. Contract Rights: Amendment or Repeal
………………………………. 22
Section 7.10. Scope of Article
………………………………………………………… 22
Section 7.11. Reliance on Provisions
…………………………………………………. 23
Section 7.12. Interpretation
…………………………………………………………… 23
ARTICLE VIII
……………………………………………………………………………… 23
Section 8.01. Corporate Seal
………………………………………………………….. 23
Section 8.02. Checks
………………………………………………………………….. 23
Section 8.03. Contracts
………………………………………………………………… 23
(a) General Rule……………………………………………………………………… 23
(b) Statutory Form of Execution of Instruments…………………………………….. 23
Section 8.04. Interested Directors or Officers: Quorum
………………………………. 23
(a) General Rule……………………………………………………………………… 23
(b) Quorum…………………………………………………………………………… 24
Section 8.05. Deposits
…………………………………………………………………... 24
Section 8.06. Corporate Records
……………………………………………………….. 24
(a) Required Records…………………………………………………………………. 24
(b) Right of Inspection……………………………………………………………….. 24
Section 8.07. Financial Reports
………………………………………………………… 25
Section 8.08. Amendment of Bylaws
………………………………………………….. 25
RESTATED BYLAWS
OF
FEDERATED INVESTORS, INC.
ARTICLE I
Offices and Fiscal Year
Section 1.01. Registered Office.
The registered office of the Corporation in the Commonwealth of Pennsylvania shall be at Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, Pennsylvania 15222-3779 in the County of Allegheny, until otherwise established by an amendment of the articles of the Corporation or by the board of directors and a record of the change is filed with the Pennsylvania Department of State in the manner provided by law.
Section 1.02. Other Offices.
The Corporation may also have offices at such other places within or without the Commonwealth of Pennsylvania as the board of directors may from time to time appoint or the business of the Corporation may require.
Section 1.03. Fiscal Year.
The fiscal year of the Corporation shall end on the last day of December in each year.
ARTICLE II
Section 2.01. Manner of Giving Notice.
(a)
General Rule. Whenever written notice is required to be given to
any person under the provisions of the Business Corporation Law of 1988 or by the articles of the Corporation or these bylaws, it may be given to the person either personally or by sending a copy thereof by first class or express mail, postage prepaid, or by telegram (with messenger service specified), telex or TWX (with answer back received) or courier service, charges prepaid, or by facsimile transmission, to the address (or to the telex, TWX or facsimile number) of the person appearing on the books of the Corporation or, in the case of directors, supplied by the director to the Corporation for the purpose of notice. If the notice is sent by mail, telegraph or courier service, it shall be deemed to have been given to the person entitled thereto when deposited in the United States mail or with a telegraph office or courier service for delivery to that person or, in the case of telex or TWX, when dispatched or, in the case of facsimile transmission, when received. A notice of meeting shall specify the place, day and hour of the meeting and any other information required by any other provision of the Business Corporation Law of 1988, the articles of the Corporation, or these bylaws.
(b)
Adjourned Shareholder Meetings. When a meeting of shareholders is adjourned, it shall not be necessary to give any notice of the adjourned meeting or of the business to be transacted at an adjourned meeting, other than by announcement at the meeting at which the adjournment is taken, unless the board of directors fixes a new record date for the adjourned meeting or the Business Corporation Law of 1988 requires notice of the business to be transacted and that notice has not previously been given.
Section 2.02. Notice of Meetings of Board of Directors.
Notice of a regular meeting of the board of directors need not be given. Notice of every special meeting of the board of directors shall be given to each director by telephone or in writing at least 72 hours (in the case of notice by telephone, telex, TWX or facsimile transmission, telegraph, courier service or express mail) or five days (in the case of notice by first class mail) before the time at which the meeting is to be held. Every such notice shall state the time and place of the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board need be specified in the notice of the meeting.
Section 2.03. Notice of Meetings of Shareholders.
(a)
General Rule. Written notice of every meeting of the shareholders shall be given by, or at the direction of, the secretary to each shareholder of record entitled to vote at the meeting at least:
(1)
ten days prior to the day named for a meeting called to consider a fundamental change under 15Pa.C.S. Chapter 19; or
(2)
five days prior to the day named for the meeting in any other case.
If the secretary neglects or refuses to give notice of a meeting, the person or persons calling the meeting may do so.
(b)
Contents. In the case of a special meeting of shareholders, the notice shall specify the general nature of the business to be transacted.
(c)
Notice of Action by Shareholders on By-laws. 1n the case of a meeting of shareholders that has as one of its purposes, action on the bylaws, written notice shall be given to
each shareholder entitled to vote at the meeting that the purpose, or one of the purposes, of the meeting is to consider the adoption, amendment or repeal of the bylaws. There shall be included in, or enclosed with, the notice a copy of the proposed amendment or a summary of the changes to be effected thereby.
Section 2.04. Waiver of Notice.
(a)
Written Waiver. Whenever any written notice is required to be given under the provisions of the Business Corporation Law of 1988, the articles of the Corporation or these bylaws, a waiver thereof in writing, signed by the person or persons entitled to the notice, whether before or after the time stated therein, shall be deemed equ1valent to the giving of the notice. Neither the business to be transacted at, nor the purpose of, a meeting need be specified in the waiver of notice of the meeting.
(b)
Waiver by Attendance. Attendance of a person at any meeting shall constitute a waiver of notice of the meeting except where a person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting was not lawfully called or convened.
Section 2.05. Modification of Proposal Contained in Notice.
Whenever the language of a proposed resolution is included in a written notice of a meeting required to be given under the provisions of the Business Corporation Law of 1988 or the articles of the Corporation or these bylaws, the meeting considering the resolution may without further notice adopt it with such clarifying or other amendments as do not enlarge its original purpose.
Section 2.06. Exception to Requirement of Notice.
(a)
General Rule. Whenever any notice or communication is required to be given to any person under the provisions of the Business Corporation Law of 1988 or by the articles of the Corporation or these bylaws or by the terms of any agreement or other instrument or as a condition precedent to taking any corporate action and communication with that person is then unlawful, the giving of the notice or communication to that person shall not be required.
(b)
Shareholders Without Forwarding Addresses. Notice or other communications shall not be sent to any shareholder with whom the Corporation has been unable to communicate for more than 24 consecutive months because communications to the shareholder are returned unclaimed or the shareholder has otherwise failed to provide the Corporation with a current address. Whenever the shareholder provides the Corporation with a current address, the Corporation shall commence sending notices and other communications to the shareholder in the same manner as to other shareholders.
Section 2.07. Use of Conference Telephone and Similar Equipment.
One or more persons may participate in a meeting of the board of directors or the shareholders of the Corporation by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in a meeting pursuant to this section shall constitute presence in person at the meeting.
ARTICLE III
Shareholders
Section 3.01. Place of Meeting.
All meetings of the shareholders of the Corporation shall be held at the registered office of the Corporation unless another place is designated by the board of directors in the notice of a meeting.
Section 3.02. Annual Meeting.
The board of directors may fix the date and time of the annual meeting of the shareholders; but, if no such date and time is fixed by the board, the meeting for any calendar year shall be held on the first Tuesday in May in such year, if not a legal holiday under the laws of the Commonwealth of Pennsylvania, and, if a legal holiday, then on the next succeeding business day, not a Saturday, at ten o'clock a.m., local time. At the meeting the shareholders then entitled to vote shall elect directors and shall transact such other business as may properly be brought before the meeting. If the annual meeting shall not have been called and held within six months after the designated time, any shareholder then entitled to vote may call the meeting at any time thereafter.
Section 3.03. Special Meetings.
(a)
Call of Special Meetings. Special meetings of the shareholders may be called at any time (1) by the board of directors or (2) unless otherwise provided in the articles of the Corporation, by shareholders entitled to cast at least 20% of the votes that all shareholders are entitled to cast at the particular meeting.
(b)
Fixing of Time for Meeting. At any time, upon written request of any person who has duly called a special meeting, it shall be the duty of the secretary to fix the time of meeting which shall be held not more than 60 days after the receipt of the request. If the secretary neglects or refuses to fix the time of the meeting, the person or persons calling the meeting may do so.
Section 3.04. Quorum and Adjournment.
(a)
General Rule. A meeting of shareholders of the Corporation duly called shall not be organized for the transaction of business unless a quorum is present. The presence of shareholders entitled to cast at least a majority of votes that all shareholders are entitled to cast on a particular matter to be acted upon at the meeting shall constitute a quorum for the purposes of consideration and action on the matter. Shares of the Corporation owned, directly or indirectly, by it and controlled,
directly or indirectly, by the board of directors of the Corporation, as such, shall not be counted in determining the total number of outstanding shares for quorum purposes at any given time.
(b)
Withdrawal of a Quorum. The shareholders present at a duly organized meeting can continue to do business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum.
(c)
Adjournment for Lack of Quorum. If a meeting cannot be organized because a quorum has not attended, those present may, except as provided in the Business Corporation Law of 1988, adjourn the meeting to such time and place as they may determine.
(d)
Adjournments Generally. Any meeting at which directors are to be elected shall be adjourned only from day to day, or for such longer periods not exceeding 15 days each as the shareholders present and entitled to vote shall direct, until the directors have been elected. Any other regular or special meeting may be adjourned for such period as the shareholders present and entitled to vote shall direct.
(e)
Electing Directors at Adjourned Meeting. Those shareholders entitled to vote who attend a meeting called for the election of directors that has been previously adjourned for lack of a quorum, although less than a quorum as fixed in this section, shall nevertheless constitute a quorum for the purpose of electing directors.
(f)
Other Action in Absence of Quorum. Those shareholders entitled to vote who attend a meeting of shareholders that has been previously adjourned for one or more periods aggregating at least 15 days because of an absence of a quorum, although less than a quorum as fixed in this section, shall nevertheless constitute a quorum for the purpose of acting upon any matter set forth in the notice of the meeting if the notice states that those shareholders who attend the adjourned meeting shall nevertheless constitute a quorum for the purpose of acting upon the matter.
Section 3.05. Action by Shareholders.
Except as otherwise provided in the Business Corporation Law of 1988 or the articles of the Corporation or these bylaws, whenever any corporate action is to be taken by vote of the shareholders of the corporation, it shall be authorized upon receiving the affirmative vote of a majority of the votes cast by all shareholders entitled to vote thereon and, if any shareholders are entitled to
vote thereon as a class, upon receiving the affirmative vote of a majority of the votes cast by the shareholders entitled to vote as a class.
Section 3.06. Organization of Meetings.
At every meeting of the shareholders, the chairman of the board, if there be one, or, in the case of a vacancy in the office or absence of the chairman of the board, one of the following officers present in the order stated: the president, the vice presidents in their order of rank and seniority, or a person chosen by majority vote of the shareholders present and entitled to vote, shall act as chairman of the meeting. The secretary or, in the absence of the
secretary, an assistant secretary, or, in the absence of the secretary and assistant secretaries, a person appointed by the chairman of the meeting, shall act as secretary.
Section 3.07. Voting Rights of Shareholders.
Unless otherwise provided in the articles of the Corporation, every shareholder of the Corporation shall be entitled to one vote for every share standing in the name of the shareholder on the books of the Corporation.
Section 3.08. Voting and Other Action by Proxy.
(a)
General Rule.
(1)
Every shareholder entitled to vote at a meeting of shareholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person to act for the shareholder by proxy.
(2)
The presence of, or vote or other action at a meeting of shareholders, or the expression of consent or dissent to corporate action in writing, by a proxy of a shareholder, shall constitute the presence of, or vote or action by, or written consent or dissent of the shareholder.
(3)
Where two or more proxies of a shareholder entitled to vote are present, the Corporation shall, unless otherwise expressly provided in the proxy, accept as the vote of all shares represented thereby the vote cast by a majority of them and, if a majority of the proxies cannot agree whether the shares represented shall be voted or upon the manner of voting the shares, the voting of the shares shall be divided equally among those persons.
(b)
Minimum Requirements. Every proxy shall be executed in writing by the shareholder or by the duly authorized attorney-in-fact of the shareholder and filed with the secretary of the Corporation. A telegram, telex, cablegram, datagram or similar transmission from a shareholder or attorney-in-fact, or a photographic, facsimile or similar reproduction of a writing executed by a shareholder or attorney-in-fact:
(1)
may be treated as properly executed for purposes of this subsection; and
(2)
shall be so treated if it sets forth a confidential and unique identification number or other mark furnished by the corporation to the shareholder for the purposes of a particular meeting or transaction.
(c)
Revocation. A proxy, unless coupled with an interest, shall be revocable at will, notwithstanding any other agreement or any provision in the proxy to the contrary, but the revocation of a proxy shall not be effective until written notice thereof has been given to the secretary of the Corporation. An unrevoked proxy shall not be valid after three years from the date of its execution unless a longer time is expressly provided therein. A proxy shall not be revoked by the death or
incapacity of the maker unless, before the vote is counted or the authority is exercised, written notice of the death or incapacity is given to the secretary of the corporation.
(d)
Expenses. Unless otherwise restricted in the articles of the Corporation, the Corporation shall pay the reasonable expenses of solicitation of votes, proxies or consent of shareholders entitled to vote by or on behalf of the board of directors or its nominees for election to the board, including solicitation by professional proxy solicitors and otherwise.
Section 3.09. Voting by Fiduciaries and Pledgees.
Shares of the Corporation standing in the name of a trustee or other fiduciary and shares held by an assignee for the benefit of creditors or by a receiver may be voted by the trustee, fiduciary, assignee or receiver. A shareholder whose shares are pledged shall be entitled to vote the shares until the shares have been transferred into the name of the pledgee, or a nominee of the pledgee, but nothing in this section shall affect the validity of a proxy given to a pledgee or nominee.
Section 3.10. Voting by Joint Holders of Shares.
(a)
General Rule. Where shares of the Corporation are held jointly or as tenants in common by two or more persons, as fiduciaries or otherwise:
(1)
if only one or more of such persons is present in person or by proxy, all of the shares standing in the names of such persons shall be deemed to be represented for the purpose of determining a quorum and the Corporation shall accept as the vote of all the shares the vote cast by a joint owner or a majority of them; and
(2)
if the persons are equally divided upon whether the shares held by them shall be voted or upon the manner of voting the shares, the voting of the shares shall be divided equally among the persons without prejudice to the rights of the joint owners or the beneficial owners thereof among themselves.
(b)
Exception. If there has been filed with the secretary of the corporation a copy, certified by an attorney at law to be correct, of the relevant portions of the agreement under which the shares are held or the instrument by which the trust or estate was created or the order of court appointing them or of an order of court directing the voting of the shares, the persons specified as having such voting power in the document latest in date of operative effect so filed, and only those persons, shall be entitled to vote the shares but only in accordance therewith.
Section 3.11. Voting by Corporations and Other Business Organizations.
(a)
Voting by Corporate Shareholders. Any corporation or other business organization that is a shareholder of this corporation may vote by any of its officers or agents, or by proxy appointed by any officer or agent, unless some other person, (i) in the case of such corporation, by resolution of the board of directors or a provision of its articles or bylaws, or (ii) in the case of such
business organization, by resolution of its governing body or a provision of its charter or bylaws or their equivalent, a copy of which resolution or provision certified to be correct by one of its officers, has been filed with the secretary of this Corporation, is appointed its general or special proxy in which case that person shall be entitled to vote the shares.
(b)
Controlled Shares. Shares of this Corporation owned, directly or indirectly, by it and controlled, directly or indirectly, by the board of directors of this Corporation, as such, shall not be voted at any meeting and shall not be counted in determining the total number of outstanding shares for voting purposes at any given time.
Section 3.12. Determination of Shareholders of Record.
(a)
Fixing Record Date. The board of directors may fix a time prior to the date of any meeting of shareholders as a record date for the determination of the shareholders entitled to notice of, or to vote at, the meeting, which time, except in the case of an adjourned meeting, shall not be more than 60 days prior to the date of the meeting of shareholders. Only shareholders of record on the date fixed shall be so entitled notwithstanding any transfer of shares on the books of the Corporation after any record date fixed as provided in this subsection. The board of directors may similarly fix a record date for the determination of shareholders of record for any other purpose. When a determination of shareholders of record has been made as provided in this section for purposes of a meeting, the determination shall apply to any adjournment thereof unless the board fixes a new record date for the adjourned meeting.
(b)
Determination When a Record Date is Not Fixed. If a record date is not fixed:
(1)
The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day immediately preceding the day on which the meeting is held.
(2)
The record date for determining shareholders entitled to:
(i)
express consent or dissent to corporate action in writing without a meeting, when prior action by the board of directors is not necessary;
(ii)
call a special meeting of the shareholders; or
(iii)
propose an amendment of the articles of the Corporation,
shall be the close of business on the day on which the first written consent or dissent, request for a special meeting or petition proposing an amendment of the articles is filed with the secretary of the Corporation.
(3)
The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto.
Section 3.13. Voting Lists.
(a)
General Rule. The officer or agent having charge of the transfer books for shares of the Corporation shall make a complete list of the shareholders entitled to vote at any meeting of shareholders, arranged in alphabetical order, with the address of and the number of shares held by each. The list shall be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting for the purposes thereof.
(b)
Effect of List. Failure to comply with the requirements of this section shall not affect the validity of any action taken at a meeting prior to a demand at the meeting by any shareholder entitled to vote thereat to examine the list. The original share register or transfer book, or a duplicate thereof kept in the Commonwealth of Pennsylvania, shall be prima facie evidence as to who are the shareholders entitled to examine the list or share register or transfer book or to vote at any meeting of shareholders.
Section 3.14. Judges of Election.
(a)
Appointment. In advance of any meeting of shareholders of the Corporation, the board of directors may appoint judges of election, who need not be shareholders, to act at the meeting or any adjournment thereof. If judges of election are not so appointed, the presiding officer of the meeting may, and on the request of any shareholder entitled to vote shall, appoint judges of election at the meeting. The number of judges shall be one or three. A person who is a candidate for office to be filled at the meeting shall not act as a judge.
(b)
Vacancies. In case any person appointed as a judge fails to appear or fails or refuses to act, the vacancy may be filled by appointment made by the board of directors in advance of the convening of the meeting or at the meeting by the presiding officer thereof.
(c)
Duties. The judges of election shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum., the authenticity, validity and effect of proxies, receive votes or ballots, hear and determine all challenges and questions in any way arising in connection with the right to vote, count and tabulate all votes, determine the result and do such acts as may be proper to conduct the election or vote with fairness to all shareholders. The judges of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical. If there are three judges of election, the decision, act or certificate of a majority shall be effective in all respects as the decision, act or certificate of all.
(d)
Report. On request of the presiding officer of the meeting, or of any shareholder, the judges of election shall make a report in writing of any challenge or question or matter determined by them, and execute a certificate of any fact found by them. Any report or certificate made by them shall be prima facie evidence of the facts stated therein.
Section 3.15. Consent of Shareholders in Lieu of Meeting.
(a)
Unanimous Written Consent. Any action required or permitted to be taken at a meeting of the shareholders or of a class of shareholders may be taken without a meeting if, prior or subsequent to the action, a consent or consents thereto by all of the shareholders who would be entitled to vote at a meeting for such purpose shall be filed with the secretary of the Corporation.
(b)
Partial Written Consent. Any action required or permitted to be taken at a meeting of the shareholders or of a class of shareholders may be taken without a meeting upon the written consent of shareholders who would have been entitled to cast the minimum number of votes that would be necessary to authorize the action at a meeting at which all shareholders entitled to vote thereon were present and voting. The consents shall be filed with the secretary of the Corporation. The action shall not become effective until after at least ten days' written notice of the action has been given to each shareholder entitled to vote thereon who has not consented thereto.
Section 3.16. Minors as Security Holders.
The Corporation may treat a minor who holds shares or obligations of the Corporation as having capacity to receive and to empower others to receive dividends, interest, principal and other payments or distributions, to vote or express consent or dissent and to make elections and exercise rights relating to such shares or obligations unless, in the case of payments or distributions on shares, the corporate officer responsible for maintaining the list of shareholders or the transfer agent of the Corporation or, in the case of payments or distributions on obligations, the treasurer or paying officer or agent has received written notice that the holder is a minor.
ARTICLE IV
Board of Directors
Section 4.01. Powers: Personal Liability.
(a)
General Rule. Unless otherwise provided by statute, all powers vested by law in the Corporation shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed under the direction of, the board of directors.
(b)
Personal Liability of Directors.
(1)
A director shall not be personally liable, as such, for monetary damages for any action taken unless:
(i)
the director has breached or failed to perform the duties of his or her office under 15 Pa.CS. Such. 17B; and
(ii)
the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness.
(2)
Paragraph (1) shall not apply to:
(i)
the responsibility or liability of a director pursuant to any criminal statute, or
(ii)
the liability of a director for the payment of taxes pursuant to Federal, State or local law.
Any repeal, amendment or modification of the bylaw set forth in this Section 4.01(b) shall not adversely affect any right or protection existing at the time of such repeal, amendment or modification to which a director or former director may be entitled hereunder. The rights conferred by this bylaw shall continue as to any person who has ceased to be a director of the Corporation and shall inure to the benefit of the heirs, executors and administrators of such person.
(c) Notation of Dissent. A director who is present at a meeting of the board of directors, or of a committee of the board, at which action on any corporate matter is taken on which the director is generally competent to act, shall be presumed to have assented to the action taken unless his or her dissent is entered in the minutes of the meeting or unless the director files a written dissent to the action with the secretary of the meeting before the adjournment thereof or transmits the dissent in writing to the secretary of the Corporation immediately after the adjournment of the meeting. The right to dissent shall not apply to a director who voted in favor of the action. Nothing in this section shall bar a director from asserting that minutes of the meeting incorrectly omitted his or her dissent if, promptly upon receipt of a copy of such minutes, the director notifies the secretary, in writing, of the asserted omission or inaccuracy.
Section 4.02. Qualifications and Selection of Directors.
(a)
Qualifications. Each director of the Corporation shall be a natural person of full age who need not be a resident of Pennsylvania or a shareholder of the Corporation.
(b)
Nomination of Directors. Nominations for the election of directors by the shareholders entitled to vote therefor may be made by the board of directors or by any shareholder entitled to vote for the election thereof; provided, however, that in the case of any nomination by
such shareholder, advance written notice of such nomination shall be received by the secretary of the Corporation by certified mail no later than (i) 90 days prior to the anniversary of the previous year’s annual meeting of shareholders, or (ii) with respect to an election of directors to be held at a special meeting of shareholders or at an annual meeting, the tenth day following the date on which notice of such meeting is first given to the shareholder. Each such notice of such nomination shall set forth (i) the name, age, business address and, if known, residence address of each nominee proposed in such notice, (ii) the principal occupation of employment of each such nominee, and (iii) the number and class of shares of stock of the Corporation which are beneficially owned by each such nominee. In addition, the shareholder making such nomination shall promptly provide any other information reasonably requested by the secretary of the Corporation.
(c)
Election of Directors. Except as otherwise provided in these bylaws, directors of the Corporation shall be elected by the shareholders entitled to vote. In elections for directors, voting need not be by ballot unless required by vote of the shareholders before the voting for election of directors begins. The candidates receiving the highest number of votes from each class or group of classes, if any, entitled to elect directors separately up to the number of directors to be elected by the class or group of classes shall be elected. If at any meeting of shareholders, directors of more than one class are to be elected, each class of directors shall be elected in a separate election.
(d)
Cumulative Voting. The shareholders of the Corporation shall not have the right to cumulate their votes for election of directors of the Corporation.
Section 4.03. Number and Term of Office.
(a)
Number. The board of directors shall consist of such number of directors, not less than five nor more than fifteen, as may be determined from time to time by resolution of the board of directors.
(b)
Term of Office. Each director shall hold office until the expiration of the term of one year for which he or she was selected and until a successor has been selected and qualified or until his or her earlier death, resignation or removal. A decrease in the number of directors shall not have the effect of shortening the term of any incumbent director.
(c)
Resignation. Any director may resign at any time upon written notice to the Corporation. The resignation shall be effective upon receipt thereof by the Corporation or at such subsequent time as shall be specified in the notice of resignation.
Section 4.04. Vacancies.
(a)
General Rule. Unless otherwise provided in the articles of incorporation, vacancies in the board of directors, including vacancies resulting from an increase in the number of directors, may be filled by a majority vote of the remaining members of the board though less than a quorum, or by a sole remaining director, and each person so selected shall be a director to serve for the
balance of the unexpired term, and until a successor has been selected and qualified or until his or her earlier death, resignation or removal.
(b)
Action by Resigned Directors. Unless otherwise provided in the articles of incorporation, when one or more directors resign from the board effective at a future date, the directors then in office, including those who have so resigned, shall have power by the applicable vote to fill the vacancies, the vote thereon to take effect when the resignations become effective.
Section 4.05. Removal of Directors.
(a)
Removal by the Shareholders. The entire board of directors, or any class of the board, or any individual director may be removed from office without assigning any cause by the vote of shareholders, or of the holders of a class or series of shares, entitled to
elect directors, or the class of directors. In case the board or a class of the board or any one or more directors are so removed, new directors may be elected at the same meeting.
(b)
Removal by the Board. The board of directors may declare vacant the office of a director who has been judicially declared of unsound mind or who has been convicted of an offense punishable by imprisonment for a term of more than one year or if, within 50 days after notice of his or her selection, the director does not accept the office either in writing or by attending a meeting of the board of directors.
Section 4.06. Place of Meetings.
Meetings of the board of directors may be held at such place within or without the Commonwealth of Pennsylvania as the board of directors may from time to time appoint or as may be designated in the notice of the meeting.
Section 4.07. Organization of Meetings.
At every meeting of the board of directors, the chairman of the board, if there be one, or, in the case of a vacancy in the office or absence of the chairman of the board, one of the following officers present in the order stated: the president, the vice presidents in
their order of rank and seniority, or a person chosen by majority vote of the directors present, shall act as chairman of the meeting. The secretary or, in the absence of the secretary, an assistant secretary, or, in the absence of the secretary and assistant secretaries, a person appointed by the chairman of the meeting, shall act as secretary.
Section 4.08. Regular Meetings.
Regular meetings of the board of directors shall be held at such time and place as shall be designated from time to time by resolution of the board of directors.
Section 4.09. Special Meetings.
Special meetings of the board of directors shall be held whenever called by the chairman or by two or more of the directors.
Section 4.10. Quorum of and Action by Directors.
(a)
General Rule. A majority of the directors in office of the Corporation shall be necessary to constitute a quorum for the transaction of business, and the acts of a majority of the directors present and voting at a meeting at which a quorum is present shall be the acts of the board of directors.
(b)
Action by Written Consent. Any action required or permitted to be taken at a meeting of the directors may be taken without a meeting if, prior or subsequent to the action, a consent or consents thereto by all of the directors in office is filed with the secretary of the Corporation.
Section 4.11. Executive and Other Committees.
(a)
Establishment and Powers. The board of directors may, by resolution adopted by a majority of the directors in office, establish one or more committees to consist of one or more directors of the Corporation. Any committee, to the extent provided in the resolution of the board of directors, shall have and may exercise all of the powers and authority of the board of directors except that a committee shall not have any power or authority as to the following:
(1)
The submission to shareholders of any action requiring approval of shareholders under the Business Corporation Law of 1988.
(2)
The creation or filling of vacancies in the board of directors.
(3)
The adoption, amendment or repeal of these bylaws.
(4)
The amendment or repeal of any resolution of the board that by its terms is amendable or repealable only by the board of directors.
(5)
Action on matters committed by a resolution of the board of directors to another committee of the board.
(b)
Alternate Committee Members. The board of directors may designate one or more directors as alternate members of any committee who may replace any absent or disqualified member at any meeting of the committee or for the purposes of any written action by the committee. In the absence or disqualification of a member and alternate member or members of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not constituting a quorum, may unanimously appoint another director to act at the meeting in the place of the absent or disqualified member.
(c)
Term. Each committee of the board of directors shall serve at the pleasure of the board.
(d)
Committee Procedures. The term "board of directors" or "board," when used in any provision of these bylaws relating to the organization or procedures of or the manner of taking action by the board of directors, shall be construed to include and refer to any executive or other committee of the board.
Section 4.12. Compensation.
The board of directors shall have the authority to fix the compensation of directors for their services as directors and a director may be a salaried officer of the corporation.
ARTICLE V
Officers
Section 5.01. Officers Generally.
(a)
Number. Qualifications and Designation. The officers of the Corporation shall be a chairman of the board of directors, a vice chairman, a president, a secretary, a treasurer, and such other officers as may be elected in accordance with the provisions of Section 5.03. Except for the chairman of the board who shall be a member of the board of directors, officers may but need not be directors or shareholders of the Corporation. The chairman, vice chairman, president and secretary shall be natural persons of full age. The treasurer may be a corporation, but if a natural person shall be of full age. Any number of offices may be held by the same person.
(b)
Resignations. Any officer may resign at any time upon written notice to the Corporation. The resignation shall be effective upon receipt thereof by the Corporation or at such subsequent time as may be specified in the notice of resignation.
(c)
Bonding. The Corporation may secure the fidelity of any or all of its officers by bond or otherwise.
Section 5.02. Election and Term of Office.
The officers of the Corporation, except those elected by delegated authority pursuant to Section 5.03, shall be elected annually by the board of directors, and each such officer shall hold office for a term of one year and until a successor has been selected and qualified or until his or her earlier death, resignation or removal.
Section 5.03. Subordinate Officers, Committees and Agents
. The board of directors may from time to time elect such other officers and appoint such committees, employees or other agents as the business of the corporation may require, including one or more vice presidents, one or more assistant secretaries, and one or more assistant treasurers, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine. The board of directors may delegate to any officer or committee the power to elect subordinate officers and to retain or appoint employees or other agents, or committees thereof and to prescribe the authority and duties of such subordinate officers, committees, employees or other agents.
Section 5.04. Removal of Officers and Agents.
Any officer or agent of the Corporation may be removed by the board of directors with or without cause. The removal shall be without prejudice
to the contract rights, if any, of any person so removed. Election or appointment of an officer or agent shall not of itself create contract rights.
Section 5.05. Vacancies.
A vacancy in any office because of death, resignation, removal, disqualification or any other cause, shall be filled by the board of directors or by the officer or committee to which the power to fill such office has been delegated pursuant to Section 5.03, as the case may be, and if the office is one for which these bylaws prescribe a term, shall be filled for the unexpired portion of the term.
Section 5.06. Authority.
All officers of the Corporation, as between themselves and the Corporation, shall have such authority and perform such duties in the management of the Corporation as may be provided by or pursuant to resolutions or orders of the board of directors or, in the absence of controlling provisions in the resolutions or orders of the board of directors, as may be determined by or pursuant to these bylaws.
Section 5.07. The Chairman of the Board.
The chairman of the board, or, in the absence of the chairman, the president, shall preside at all meetings of the shareholders and of the board of directors.
Section 5.08. The Vice Chairman.
The vice chairman shall perform such duties as may from time to time be assigned to him by the board of directors, the chairman of the board or the president.
Section 5.09. The President.
The president shall be the chief executive officer of the Corporation and shall have general supervision over the business and operations of the Corporation, subject, however, to the control of the board of directors. The president shall sign, execute and acknowledge, in the name of the corporation, deeds, mortgages, bonds, contracts or other instruments authorized by the board of directors, except in cases where the signing and execution thereof shall be expressly delegated by the board of directors, or by these bylaws, to some other officer or agent of the Corporation; and, in general, shall perform all duties incident to the office of president.
Section 5.10. The Vice Presidents.
The vice presidents shall perform the duties of the president in the absence of the president and such other duties as may from time to time be assigned to them by the board of directors or the president.
Section 5.11. The Secretary.
The secretary or an assistant secretary shall attend all meetings of the shareholders and of the board of directors and shall record all the votes of the shareholders and of the directors and the minutes of the meetings of the shareholders and of the board of directors and of committees of the board in a book or books to be kept for that purpose; shall see that notices are given and records and reports properly kept and filed by the Corporation as required by law; shall be the custodian of the seal of the Corporation and see that it is affixed to documents executed on behalf of the Corporation under its seal; and, in general, shall perform all duties incident to the
office of the secretary, and such other duties as may from time to time be assigned by the board of directors or the president.
Section 5.12. The Treasurer.
The treasurer or an assistant treasurer shall have or provide for the custody of the funds or other property of the Corporation; shall collect and receive or provide for the collection and receipt of moneys earned by or in any manner due to or received by the Corporation; shall deposit all funds in his or her custody as treasurer in such banks or other places of deposit as the board of directors may from time to time designate; shall, whenever so required by the board of directors, render an account showing all transactions as treasurer and the financial condition of the corporation; and, in general, shall discharge such other duties as may from time to time be assigned by the board of directors or the president.
Section 5.13. Salaries.
The salaries of the officers elected by the board of directors shall be fixed from time to time by the board of directors or by such officer as may be designated by resolution of the board. The salaries or other compensation of any other officers, employees and other agents shall be fixed from time to time by the officer or committee to which the power to elect such officers or to retain or appoint such employees or other agents has been delegated pursuant to Section 5.03. No officer shall be prevented from receiving such salary or other compensation by reason of the fact that the officer is also a director of the Corporation.
ARTICLE VI
Share Certificates. Transfer, Etc.
Section 6.01. Share Certificates.
Certificates for shares of the Corporation shall be in such form as approved by the board of directors, and shall state that the Corporation is incorporated under the laws of the Commonwealth of Pennsylvania, the name of the person to whom issued, and the number and class of shares and the designation of the series (if any) that the certificate represents. The share register or transfer books and blank share certificates shall be kept by the secretary or by any transfer agent or registrar designated by the board of directors for that purpose.
Section 6.02. Issuance.
The share certificates of the Corporation shall be numbered and registered in the share register or transfer books of the Corporation as they are issued. They shall be signed by the president or a vice president and by the secretary or an assistant secretary or the treasurer or an assistant treasurer; but where a certificate is signed by a transfer agent or a registrar, the signature of any corporate officer upon the certificate may be a facsimile, engraved or printed. In case any officer who has signed, or whose facsimile signature has been placed upon, any share certificate shall have ceased to be such officer because of death, resignation or otherwise, before the certificate is issued, it may be issued with the same effect as if the officer had not ceased to be
such at the date of its issue. The provisions of this Section 6.02 shall be subject to any inconsistent or contrary agreement at the time between the Corporation and any transfer agent or registrar.
Section 6.03. Transfer.
Transfers of shares shall be made on the share register or transfer books of the Corporation upon surrender of the certificate therefor, endorsed by the person named in the certificate or by an attorney lawfully constituted in writing. No transfer shall be made inconsistent with the provisions of the Uniform Commercial Code, 13 Pa.CS. Div. 8, or other provisions of law.
Section 6.04. Record Holder of Shares.
The Corporation shall be entitled to treat the person in whose name any share or shares of the Corporation stand on the books of the Corporation as the absolute owner thereof, and shall not be bound to recognize any equitable or other claim to, or interest in, such share or shares on the part of any other person.
Section 6.05. Lost, Destroyed or Mutilated Certificates.
The holder of any shares of the Corporation shall immediately notify the Corporation of any loss, destruction or mutilation of the certificate therefor, and the board of directors may, in its discretion, cause a new certificate or certificates to be issued to the holder, in case of mutilation of the certificate, upon the surrender of the mutilated certificate or, in case of loss or destruction of the certificate, upon satisfactory proof of the loss or destruction and, if the board of directors shall so determine, the deposit of a bond in such form and in such sum, and with such surety or sureties, as the board may direct.
Section 6.06. Restriction on Transfer of Shares.
(a)
Initial Underwritten Registration. In the event that the Corporation at any time prepares and files a registration statement registering shares of capital stock of the Corporation to be sold to, or otherwise distributed by, underwriters under the Securities Act of 1933, as the initial public offering by the Corporation of such shares, a shareholder shall not sell, transfer or otherwise dispose of the shares of capital stock of the Corporation held, directly or indirectly, prior to such initial public offering, in any public sale or distribution, including a sale pursuant to
Rule 144 (or any successor provision) under the Securities Act of 1933, during the period of seven days prior to, and 180 days after, the day when the registration statement has become effective, except as part of the sale to, or distribution by, the underwriters.
(b)
Waiver by Board of Directors. Notwithstanding anything contained in these bylaws to the contrary, the Board of Directors of the Corporation may waive any restrictions set forth in this Section 6.06 as it applies to any shareholder or shareholders at any time or from time to
time.
(c)
Certificate Legend. All certificates for shares of the Corporation shall have the following legend printed or stamped thereon:
"The shares represented by this certificate may not be sold, assigned, transferred, pledged or otherwise disposed of, except in accordance with the terms and conditions of the bylaws of the corporation."
(d)
Status of Bylaws. Notwithstanding any other provision of these bylaws or of the Business Corporation Law of 1988, the bylaw in this Section 6.06 shall constitute a contract among the shareholders of the Corporation, and shall not be amended without their unanimous consent.
ARTICLE VII
Indemnification of Directors, Officers and Other Authorized Representatives
Section 7.01. Scope of Indemnification
.
(a)
General Rule. The Corporation shall indemnify an indemnified representative against (i) any liability incurred in connection with any proceeding in which the indemnified representative may be involved as a party or otherwise by reason of the fact that such person is or was serving in an indemnified capacity, including, without limitation, liabilities resulting from any actual or alleged breach or neglect of duty, error, misstatement or misleading statement, negligence, gross negligence or act giving rise to strict or products liability, and (ii) any liability, including, without limitation, the cost of credit monitoring, incurred by the indemnified representative as a result of the indemnified representative, while acting in an indemnified capacity, having provided personally identifiable information, including, without limitation, birthdates, social security numbers, driver’s license numbers or passport numbers, to a regulator or counterparty by or with whom the Corporation, or a subsidiary, sponsored fund or managed account, is regulated or engages in business to satisfy a legal or procedural requirement of such regulator or counterparty, including, without limitation, know-your-customer or anti-money laundering requirements, if the security of such personally identifiable information is compromised and used to the detriment of the indemnified representative, except, in cases (i) or (ii):
(1)
where the indemnification is expressly prohibited by applicable law;
(2)
where the conduct of the indemnified representative has been finally determined pursuant to Section 7.06 or otherwise:
(i)
to constitute willful misconduct or recklessness within the meaning of 15 Pa.C.S. § 1746(b) or any superseding provision of law sufficient in the circumstances to bar indemnification against liabilities arising from the conduct; or
(ii)
to be based upon or attributable to
the receipt by the indemnified representative from the Corporation of a personal benefit to which the indemnified representative is not legally entitled; or
(3)
to the extent the indemnification has been finally determined in a final adjudication pursuant to Section 7.06 to be otherwise unlawful.
(b)
Partial Payment. If an indemnified representative is entitled to indemnification in respect of a portion, but not all, of any liabilities to which such person may be subject, the Corporation shall indemnify the indemnified representative to the maximum extent for such portion of the liabilities.
(c)
Presumption. The termination of a proceeding by judgment, order, settlement or conviction or upon a plea of nolo contendere or its equivalent shall not of itself create a presumption that the indemnified representative is not entitled to indemnification.
(d)
Definitions. For the purposes of this Article VII:
(1)
"indemnified capacity" means any and all past, present and future service by an indemnified representative in one or more capacities as a director, officer, employee or agent of the Corporation, or, at the request of the Corporation, as a director, officer, employee, agent, fiduciary or trustee of another corporation, limited liability company, partnership, joint venture, trust, employee benefit plan or other entity or enterprise;
(2)
"indemnified representative" means any and all directors and officers of the Corporation and any other person designated as an indemnified representative by the board of directors of the Corporation (which may, but need not, include any person serving at the request of the corporation, as a director, officer, employee, agent, fiduciary or trustee of another corporation, limited liability company, partnership, joint venture, trust, employee benefit plan or other entity of enterprise);
(3)
"liability" means any damage, judgment, amount paid in settlement, fine, penalty, punitive damages, excise tax assessed with respect to an employee benefit plan, or cost or expense, of any nature (including, without limitation, attorneys' fees and disbursements); and
(4)
"proceeding" means any threatened, pending or completed action, suit, appeal or other proceeding of any nature, whether civil criminal, administrative or investigative, whether formal or informal, and whether brought by or in the right of the corporation, a class of its security holders or otherwise.
Section 7.02. Proceedings Initiated by Indemnified Representatives.
Notwithstanding any other provision of this Article VII, the Corporation shall not indemnify under this Article an indemnified representative for any liability incurred in a proceeding initiated (which shall not be
deemed to include counterclaims or affirmative defenses) or participated in as an intervenor or amicus curiae by the person seeking indemnification unless the initiation of or participation in the proceedings is authorized, either before or after its commencement, by the affirmative vote of a majority of the directors in office. This section shall not apply to reimbursement of expenses incurred in successfully prosecuting or defending an arbitration under Section 7.06 or otherwise successfully prosecuting or defending the rights of an indemnified representative granted by or pursuant to
this Article.
Section 7.03. Advancing Expenses.
The Corporation shall pay the expenses (including attorneys' fees and disbursements) incurred in good faith by an indemnified representative in advance of the final disposition of a proceeding described in Section 7.01 or the initiation of or participation in a proceeding which is authorized pursuant to Section 7.02 upon receipt of an undertaking by or on behalf of the indemnified representative to repay the amount if it is ultimately determined pursuant to Section 7.06 that such person is not entitled to be indemnified by the Corporation pursuant to this Article. The financial ability of an indemnified representative to repay an advance shall not be a prerequisite to the making of the advance.
Section 7.04. Securing of Indemnification Obligations.
To further effect, satisfy or secure the indemnification obligations provided herein or otherwise, the Corporation may maintain insurance, obtain a letter of credit, act as selfinsurer, create a reserve, trust, escrow, cash collateral or other fund or account, enter into indemnification agreements, pledge or grant a security interest in any assets or properties of the Corporation, or use any other mechanism or arrangement whatsoever in such amounts, at such costs, and upon such other terms and conditions as the board of directors shall deem appropriate. Absent fraud, the determination of the board of directors with respect to such amounts, costs, terms and conditions shall be conclusive against all security holders, officers and directors and shall not be subject to voidability.
Section 7.05. Payment of Indemnification
. An indemnified representative shall be entitled to indemnification within 30 days after a written request for indemnification has been delivered to the secretary of the Corporation.
Section 7.06. Arbitration.
(a)
General Rule. Any dispute related to the right to indemnification, contribution or advancement of expenses as provided under this Article, except with respect to indemnification for liabilities arising under the Securities Act of 1933 that the Corporation has undertaken to submit to a court for adjudication, shall be decided only by arbitration in the metropolitan area in which the principal executive offices of the Corporation are located at the time, in accordance with the commercial arbitration rules then in effect of the American Arbitration Association, or any successor to the functions thereof, before a panel of three arbitrators, one of whom shall be selected by the Corporation, the second of whom shall be selected by the indemnified representative and third of whom shall be selected by the other two arbitrators. In the absence of the American Arbitration Association or such successor, or if for any reason arbitration under the arbitration rules of the
American Arbitration Association or such successor cannot be initiated, or if one of the parties fails or refuses to select an arbitrator or if the arbitrators selected by the corporation and the indemnified representative cannot agree on the selection of the third arbitrator within 30 days after such time as the Corporation and the indemnified representative have each been notified of the selection of the other's arbitrator, the necessary arbitrator or arbitrators shall be selected by the presiding judge of the court of general jurisdiction in such metropolitan area.
(b)
Burden of Proof. The party or parties challenging the right of an indemnified representative to the benefits of this Article VII shall have the burden of proof.
(c)
Expenses. The Corporation shall reimburse an indemnified representative for the expenses (including attorneys' fees and disbursements) incurred in successfully prosecuting or defending such arbitration.
(d)
Effect. Any award entered by the arbitrators shall be final, binding and nonappealable and judgment may be entered thereon by any party in accordance with applicable law in any court of competent jurisdiction, except that the Corporation shall be entitled to interpose as a defense in any such judicial enforcement proceeding any prior final judicial determination adverse to the indemnified representative under Section 7.01(a)(2) in a proceeding not directly involving indemnification under this Article VII. This arbitration provision shall be specifically enforceable.
Section 7.07. Contribution.
If the indemnification provided for in this Article VII or otherwise is unavailable for any reason in respect of any liability or portion thereof, the Corporation shall contribute to the liabilities to which the indemnified representative may be subject in such proportion as is appropriate to effect the intent of this Article or otherwise.
Section 7.08. Mandatory Indemnification of Indemnified Representatives.
To the extent that a representative of the Corporation has been successful on the merits or otherwise in defense of any action or proceeding referred to in 15 Pa.CS. §§ 1741 or 1742 or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees and disbursements) actually and reasonably incurred by such person in connection therewith.
Section 7.09. Contract Rights: Amendment or Repeal.
All rights under this Article VII shall be deemed a contract between the Corporation and the indemnified representative pursuant to which the Corporation and each indemnified representative intend to be legally bound. Any repeal, amendment or modification hereof shall be prospective only and shall not affect any rights or obligations then existing.
Section 7.10. Scope of Article.
The rights granted by this Article VII shall not be deemed exclusive of any other rights to which those seeking indemnification, contribution or advancement of expenses may be entitled under any statute, agreement, vote of shareholders or disinterested directors or otherwise both as to action in an indemnified capacity and as to action in any other
capacity. The indemnification, contribution and advancement of expenses provided by, or granted pursuant to, this Article shall continue as to a person who has ceased to be an indemnified representative in respect of matters arising prior to such time, and shall inure to the benefit of the heirs and personal representatives of such a person.
Section 7.11. Reliance on Provisions.
Each person who shall act as an indemnified representative of the Corporation shall be deemed to be doing so in reliance upon the rights provided by this Article VII.
Section 7.12. Interpretation
. The provisions of this Article VII are intended to constitute bylaws authorized by 15 Pa.C.S. § 1746.
ARTICLE VIII
Miscellaneous
Section 8.01. Corporate Seal.
The Corporation shall have a corporate seal in the form of a circle containing the name of the Corporation, the year of incorporation and such other details as may be approved by the board of directors.
Section 8.02. Checks.
All checks, notes, bills of exchange or other orders in writing shall be signed by such person or persons as the board of directors or any person authorized by resolution of the board of directors may from time to time designate.
Section 8.03. Contracts.
(a)
General Rule. Except as otherwise provided in the Business Corporation Law of 1988 in the case of transactions that require action by the shareholders, the board of directors may authorize any officer or agent to enter into any contract or to execute or deliver any instrument on behalf of the corporation, and such authority may be general or confined to specific instances.
(b)
Statutory Form of Execution of Instruments. Any note, mortgage, evidence of indebtedness, contract or other document, or any assignment or endorsement thereof, executed or entered into between the corporation and any other person, when signed by one or more officers or agents having actual or apparent authority to sign it, or by the president or vice president and secretary or assistant secretary or treasurer or assistant treasurer of the Corporation, shall be held to have been properly executed for and in behalf of the Corporation, without prejudice to the rights of the Corporation against any person who shall have executed the instrument in excess of his or her actual authority.
Section 8.04. Interested Directors or Officers: Quorum.
(a)
General Rule. A contract or transaction between the corporation and one or more of its directors or officers or between the Corporation and another corporation, limited liability company, partnership, joint venture, trust or other enterprise in which one or more of its directors or officers are directors or officers or have a financial or other interest, shall not be void or voidable solely for that reason, or solely because the director or officer is present at or participates in the meeting of the board of directors that authorizes the contract or transaction, or solely because his, her or their votes are counted for that purpose, if:
(1)
the material facts as to the relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors and the board authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors even though the disinterested directors are less than a quorum;
(2)
the material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon and the contract or transaction is specifically approved in good faith by vote of those shareholders; or
(3)
the contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified by the board of directors or the shareholders.
(b)
Quorum. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board that authorizes a contract or transaction specified in subsection (a).
Section 8.05. Deposits.
All funds of the Corporation shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositaries as the board of directors may approve or designate, and all such funds shall be withdrawn only upon checks signed by such one or more officers or employees as the board of directors shall from time to time determine.
Section 8.06. Corporate Records.
(a)
Required Records. The Corporation shall keep complete and accurate books and records of account, minutes of the proceedings of the incorporators, shareholders and directors and a share register giving the names and addresses of all shareholders and the number and class of shares held by each. The share register shall be kept at either the registered office of the Corporation in the Commonwealth of Pennsylvania or at its principal place of business wherever situated or at the office of its registrar or transfer agent. Any books, minutes or other records may be in written form or any other form capable of being converted into written form within a reasonable time.
(b)
Right of Inspection. Every shareholder shall, upon written verified demand stating the purpose thereof, have a right to examine, in person or by agent or attorney, during the usual hours for business for any proper purpose, the share register, books and records of account, and records of the proceedings of the incorporators, shareholders and directors and to
make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to the interest of the person as a shareholder. In every instance where an attorney or other agent is the person who seeks the right of inspection, the demand shall be accompanied by a verified power of attorney or other writing that authorizes the attorney or other agent to so act on behalf of the shareholder. The demand shall be directed to the corporation at its registered office in the Commonwealth of Pennsylvania or at its principal place of business wherever situated.
Section 8.07. Financial Reports.
Unless otherwise agreed between the Corporation and a shareholder, the Corporation shall furnish to its shareholders annual financial statements, including at least a balance sheet as of the end of each fiscal year and a statement of income and expenses for the fiscal year. The financial statement shall be prepared on the basis of generally accepted accounting principles, if the Corporation prepares financial statements for the fiscal year on that basis for any purpose, and may be consolidated statements of the Corporation and one or more of its subsidiaries. The financial statements shall be mailed by the Corporation to each of its shareholders entitled thereto within 120 days after the close of each fiscal year and, after the mailing and upon written request, shall be mailed by the Corporation to any shareholder or beneficial owner entitled thereto to whom a copy of the most recent annual financial statements has not previously been mailed. Statements that are audited or reviewed by a public accountant shall be accompanied by the report of the accountant; in other cases, each copy shall be accompanied by a statement of the person in charge of the financial records of the corporation:
(1)
Stating his or her reasonable belief as to
whether or not the financial statements were prepared in accordance with generally accepted accounting principles and, if not, describing the basis of presentation.
(2)
Describing any material respects in which the financial statements were not prepared on a basis consistent with those prepared for the previous year.
This Section 8.07 shall not apply to the Corporation if it shall be required by the Securities Exchange Act of 1934 or any other law to file financial statements at least once a year in a public office.
Section 8.08. Amendment of Bylaws.
These bylaws may be amended or repealed, or new bylaws may be adopted, either (i) subject to the provisions of the articles of the Corporation, by vote of the shareholders entitled to vote at any duly organized annual or special meeting of shareholders, or (ii) with respect to those matters that are not by statute committed expressly to the shareholders, and regardless of whether the shareholders have previously adopted or approved the bylaw being amended or repealed, by vote of a majority of the board of directors of the Corporation in office at any regular or special meeting of directors. Any change in these bylaws shall take effect when adopted unless otherwise provided in the resolution effecting the change.