ALLIANCEBERNSTEIN HOLDING L.P. - FORM 10-Q - EX-99.1 - EXHIBIT 99.1

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - ALLIANCEBERNSTEIN HOLDING L.P.	Financial_Report.xls
EX-32.2 - EXHIBIT 32.2 - ALLIANCEBERNSTEIN HOLDING L.P.	ex32_2.htm
EX-31.1 - EXHIBIT 31.1 - ALLIANCEBERNSTEIN HOLDING L.P.	ex31_1.htm
EX-31.2 - EXHIBIT 31.2 - ALLIANCEBERNSTEIN HOLDING L.P.	ex31_2.htm
EX-32.1 - EXHIBIT 32.1 - ALLIANCEBERNSTEIN HOLDING L.P.	ex32_1.htm
10-Q - ALLIANCEBERNSTEIN HOLDING L.P 10-Q 3-31-2014 - ALLIANCEBERNSTEIN HOLDING L.P.	form10q.htm

Exhibit 99.1

Part I

FINANCIAL INFORMATION

Item 1.

Financial Statements

ALLIANCEBERNSTEIN L.P.

AND SUBSIDIARIES

Condensed Consolidated Statements of Financial Condition

(in thousands, except unit amounts)

	March 31, 2014			December 31, 2013
	(unaudited)

ASSETS
Cash and cash equivalents	$	525,119		$	509,891
Cash and securities segregated, at fair value (cost: $899,814 and $980,458)		899,847			980,584
Receivables, net:
Brokers and dealers		392,982			323,446
Brokerage clients		1,044,138			938,148
Fees		268,994			289,039
Investments:
Long-term incentive compensation-related		97,301			117,579
Other		673,994			662,015
Furniture, equipment and leasehold improvements, net		168,722			174,518
Goodwill		2,986,539			2,986,539
Intangible assets, net		163,088			168,875
Deferred sales commissions, net		71,432			70,574
Other assets		198,884			164,643
Total assets	$	7,491,040		$	7,385,851

LIABILITIES AND CAPITAL
Liabilities:
Payables:
Brokers and dealers	$	291,706		$	291,023
Securities sold not yet purchased		130,261			71,983
Brokerage clients		1,714,322			1,698,469
AllianceBernstein mutual funds		113,456			133,005
Accounts payable and accrued expenses		490,057			529,004
Accrued compensation and benefits		353,841			324,243
Debt		373,144			268,398
Total liabilities		3,466,787			3,316,125

Commitments and contingencies (See Note 12)

Capital:
General Partner		39,796			40,382
Limited partners: 268,573,402 and 268,373,419 units issued and outstanding		4,020,045			4,078,676
Receivables from affiliates		(10,413	)		(16,542	)
Holding Units held for long-term incentive compensation plans		(35,452	)		(39,649	)
Accumulated other comprehensive loss		(33,817	)		(35,381	)
Partners’ capital attributable to AllianceBernstein Unitholders		3,980,159			4,027,486
Non-controlling interests in consolidated entities		44,094			42,240
Total capital		4,024,253			4,069,726
Total liabilities and capital	$	7,491,040		$	7,385,851

See Accompanying Notes to Condensed Consolidated Financial Statements.

ALLIANCEBERNSTEIN L.P.

AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(in thousands, except per unit amounts)

(unaudited)

	Three Months Ended March 31,
	2014		2013

Revenues:
Investment advisory and services fees	$	454,884	$	443,837
Bernstein research services		123,009		109,685
Distribution revenues		106,186		118,745
Dividend and interest income		4,101		4,446
Investment gains (losses)		559		6,951
Other revenues		26,680		26,300
Total revenues		715,419		709,964
Less: Interest expense		801		842
Net revenues		714,618		709,122

Expenses:
Employee compensation and benefits		307,033		301,235
Promotion and servicing:
Distribution-related payments		97,270		109,280
Amortization of deferred sales commissions		8,957		11,074
Other		55,017		50,992
General and administrative:
General and administrative		107,487		105,118
Real estate charges		1,942		638
Contingent payment arrangements		321		171
Interest on borrowings		781		983
Amortization of intangible assets		5,907		5,433
Total expenses		584,715		584,924

Operating income		129,903		124,198

Income taxes		11,365		11,167

Net income		118,538		113,031

Net income (loss) of consolidated entities attributable to non-controlling interests		1,813		(1,485	)

Net income attributable to AllianceBernstein Unitholders	$	116,725	$	114,516

Net income per AllianceBernstein Unit:
Basic	$	0.43	$	0.41
Diluted	$	0.43	$	0.41

See Accompanying Notes to Condensed Consolidated Financial Statements.

ALLIANCEBERNSTEIN L.P.

AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)

	Three Months Ended March 31,
	2014			2013

Net income	$	118,538		$	113,031
Other comprehensive income (loss):
Foreign currency translation adjustments		2,149			(10,320	)
Income tax expense		—			—
Foreign currency translation adjustments, net of tax		2,149			(10,320	)
Unrealized gains (losses) on investments:
Unrealized gains arising during period		428			742
Less: reclassification adjustment for (losses) included in net income		(4	)		—
Change in unrealized gains (losses) on investments		432			742
Income tax (expense)		(143	)		(383	)
Unrealized gains on investments, net of tax		289			359
Changes in employee benefit related items:
Amortization of transition asset		—			(36	)
Amortization of prior service cost		(1,299	)		27
Recognized actuarial gain (loss)		486			295
Changes in employee benefit related items		(813	)		286
Income tax (expense)		(20	)		(96	)
Employee benefit related items, net of tax		(833	)		190
Other comprehensive income (loss)		1,605			(9,771	)
Less: Comprehensive income (loss) in consolidated entities attributable to non-controlling interests		1,854			(1,475	)
Comprehensive income attributable to AllianceBernstein Unitholders	$	118,289		$	104,735

See Accompanying Notes to Condensed Consolidated Financial Statements.

ALLIANCEBERNSTEIN L.P. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Three Months Ended March 31,
	2014			2013

Cash flows from operating activities:
Net income	$	118,538		$	113,031
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred sales commissions		8,957			11,074
Non-cash long-term incentive compensation expense		6,101			7,093
Depreciation and other amortization		16,206			15,424
Unrealized losses (gains) on investments		(2,499	)		(8,482	)
Other, net		(171	)		(3,567	)
Changes in assets and liabilities:
Decrease in segregated cash and securities		80,737			479,728
(Increase) in receivables		(125,446	)		(141,651	)
Decrease (increase) in investments		11,473			(3,508	)
(Increase) decrease in deferred sales commissions		(9,815	)		4,455
(Increase) in other assets		(33,991	)		(17,857	)
Increase (decrease) in payables		24,294			(555,227	)
(Decrease) increase in accounts payable and accrued expenses		2,652			(10,067	)
Increase in accrued compensation and benefits		29,654			43,159
Net cash provided by (used in) operating activities		126,690			(66,395	)

Cash flows from investing activities:
Purchases of investments		(190	)		—
Proceeds from sales of investments		42			11
Purchases of furniture, equipment and leasehold improvements		(4,345	)		(3,379	)
Proceeds from sales of furniture, equipment and leasehold improvements		23			—
Net cash used in investing activities		(4,470	)		(3,368	)

Cash flows from financing activities:
Issuance of commercial paper, net		104,497			59,027
Increase (decrease) in overdrafts payable		(41,517	)		63,684
Distributions to General Partner and unitholders		(178,994	)		(106,182	)
Capital contributions from General Partner		437			750
Capital contributions from Holding		5,772			—
Payments of contingent payment arrangements		(517	)		—
Additional investments by Holding from distributions paid to AllianceBernstein consolidated rabbi trust		26			5,929
Additional investments by Holding with proceeds from exercise of compensatory options to buy Holding Units		4,656			6,642
Purchases of Holding Units to fund long-term incentive compensation plan awards, net		(3,385	)		(21,310	)
Purchases of AllianceBernstein Units		(229	)		(7	)
Other		(9	)		(6	)
Net cash (used in) provided by financing activities		(109,263	)		8,527

Effect of exchange rate changes on cash and cash equivalents		2,271			(6,476	)

Net (decrease) in cash and cash equivalents		15,228			(67,712	)
Cash and cash equivalents as of beginning of the period		509,891			627,182
Cash and cash equivalents as of end of the period	$	525,119		$	559,470

See Accompanying Notes to Condensed Consolidated Financial Statements.

ALLIANCEBERNSTEIN L.P.

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

March 31, 2014

(unaudited)

The words “we” and “our” refer collectively to AllianceBernstein L.P. and its subsidiaries (“AllianceBernstein”), or to their officers and employees. Similarly, the word “company” refers to AllianceBernstein. These statements should be read in conjunction with AllianceBernstein’s audited consolidated financial statements included in AllianceBernstein’s Form 10-K for the year ended December 31, 2013.

1.	Business Description, Organization and Basis of Presentation

Business Description

We provide research, diversified investment management and related services globally to a broad range of clients. Our principal services include:

•

Institutional Services – servicing our institutional clients, including private and public pension plans, foundations and endowments, insurance companies, central banks and governments worldwide, and affiliates such as AXA and its subsidiaries, by means of separately-managed accounts, sub-advisory relationships, structured products, collective investment trusts, mutual funds, hedge funds and other investment vehicles.

•

Retail Services – servicing our retail clients, primarily by means of retail mutual funds sponsored by AllianceBernstein or an affiliated company, sub-advisory relationships with mutual funds sponsored by third parties, separately-managed account programs sponsored by financial intermediaries worldwide and other investment vehicles.

•

Private Client Services – servicing our private clients, including high-net-worth individuals and families, trusts and estates, charitable foundations, partnerships, private and family corporations, and other entities (including most institutions for which we manage accounts with less than $25 million in assets), by means of separately-managed accounts, hedge funds, mutual funds and other investment vehicles.

•

Bernstein Research Services – servicing institutional investors, such as pension fund, hedge fund and mutual fund managers, seeking high-quality fundamental research, quantitative services and brokerage-related services in equities and listed options.

We also provide distribution, shareholder servicing, transfer agency services and administrative services to the mutual funds we sponsor.

Our high-quality, in-depth research is the foundation of our business. Our research disciplines include economic, fundamental equity, fixed income and quantitative research. In addition, we have experts focused on multi-asset strategies, wealth management and alternatives.

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

•

Actively-managed equity strategies, including style-pure (e.g., value and growth) and absolute return-focused strategies;

•

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

•

Passive management, including index and enhanced index strategies;

•

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

•

Multi-asset solutions and services, including dynamic asset allocation, customized target date funds, target risk funds and other strategies tailored to help clients meet their investment goals.

Our services employ various investment disciplines, including market capitalization (e.g., large-, mid- and small-cap equities), term (e.g., long-, intermediate- and short-duration debt securities), and geographic location (e.g., U.S., international, global, emerging markets, regional and local), in major markets around the world.

Organization

As of March 31, 2014, AXA, a société anonyme organized under the laws of France and the holding company for an international group of insurance and related financial services companies, through certain of its subsidiaries (“AXA and its subsidiaries”) owned approximately 1.5% of the issued and outstanding units representing assignments of beneficial ownership of limited partnership interests in AllianceBernstein Holding L.P. (“Holding Units”).

As of March 31, 2014, the ownership structure of AllianceBernstein, expressed as a percentage of general and limited partnership interests, was as follows:

AXA and its subsidiaries	63.1	%
Holding	35.5
Unaffiliated holders	1.4
	100.0	%

AllianceBernstein Corporation (an indirect wholly-owned subsidiary of AXA, “General Partner”) is the general partner of both AllianceBernstein Holding L.P. (“Holding”) and AllianceBernstein. AllianceBernstein Corporation owns 100,000 general partnership units in Holding and a 1% general partnership interest in AllianceBernstein. Including both the general partnership and limited partnership interests in Holding and AllianceBernstein, AXA and its subsidiaries had an approximate 63.6% economic interest in AllianceBernstein as of March 31, 2014.

Basis of Presentation

The interim condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the interim results, have been made. The preparation of the condensed consolidated financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the interim reporting periods. Actual results could differ from those estimates. The December 31, 2013 condensed consolidated statement of financial condition was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.

The condensed consolidated financial statements include AllianceBernstein and its majority-owned and/or controlled subsidiaries. All significant inter-company transactions and balances among the consolidated entities have been eliminated.

Reclassification

Prior-period amounts in regard to accretion expense related to contingent payment arrangements previously presented as a component of general and administrative expense are now presented separately as contingent payment arrangements in the condensed consolidated statements of income to conform to the current year’s presentation.

2.	Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In March 2013, the Financial Accounting Standards Board (”FASB”) issued Accounting Standards Update (“ASU”) 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. We adopted this standard effective January 1, 2014 and there was no material impact on our financial condition or results of operations.

In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. We adopted this standard effective January 1, 2014 and there was no material impact on our financial condition or results of operations.

3.	Long-term Incentive Compensation Plans

We maintain several unfunded, non-qualified long-term incentive compensation plans, under which we grant annual awards to employees, generally in the fourth quarter.

Awards granted in December 2013 and 2012 allowed participants to allocate their awards between restricted Holding Units and deferred cash. Participants (except certain members of senior management) generally could allocate up to 50% of their awards to deferred cash, not to exceed a total of $250,000 per award. Each of our employees based outside of the United States (other than expatriates) who received a 2013 award of $100,000 or less could have allocated up to 100% of his or her award to deferred cash. For the 2013 awards, participants made their elections prior to the Compensation Committee meeting on December 12, 2013, the date on which the awards were granted and were valued using the closing price of a Holding Unit on that day. For the 2012 awards, participants had until mid-January 2013 to make their elections. The number of restricted Holding Units issued equaled the remaining dollar value of the award divided by the average of the closing prices of a Holding Unit for a five business day period in January 2013 commencing after participants made their elections. For the 2013 and 2012 awards:

•

We engaged in open-market purchases of Holding Units, or purchased newly-issued Holding Units from Holding, that were awarded to participants and held in a consolidated rabbi trust.

•

Quarterly distributions on vested and unvested Holding Units are paid currently to participants, regardless of whether or not a long-term deferral election has been made.

•

Interest on deferred cash is accrued monthly based on our monthly weighted average cost of funds.

We recognize compensation expense related to equity compensation grants in the financial statements using the fair value method. Fair value of restricted Holding Unit awards is the closing price of a Holding Unit on the grant date; fair value of options is determined using the Black-Scholes option valuation model. Under the fair value method, compensatory expense is measured at the grant date based on the estimated fair value of the award and is recognized over the required service period. For year-end long-term incentive compensation awards, employees who resign or are terminated without cause may retain their awards, subject to compliance with certain agreements and restrictive covenants set forth in the applicable award agreement, including restrictions on competition and employee and client solicitation, and a claw-back for failing to follow existing risk management policies. Most equity replacement, sign-on or similar deferred compensation awards included in separate employment agreements or arrangements include a required service period. Irrespective of whether or not the award agreement includes employee service requirements, Holding Units typically are distributed to employees ratably over four years, unless a long-term deferral election has been made.

Grants of restricted Holding Units and options to buy Holding Units typically are awarded to eligible members of the Board of Directors (“Eligible Directors”) of the General Partner during the second quarter. Restricted Holding Units are distributed on the third anniversary of the grant date and the options become exercisable ratably over three years. These restricted Holding Units and options are not forfeitable (except if the Eligible Director is terminated for “Cause”, as that term is defined in the applicable award agreement). Due to there being no service requirement, we fully expense these awards on each grant date.

We fund our restricted Holding Unit awards either by purchasing Holding Units on the open market or purchasing newly-issued Holding Units from Holding, all of which are then held in a consolidated rabbi trust until they are distributed to employees or retired. In accordance with the Amended and Restated Agreement of Limited Partnership of AllianceBernstein (“AllianceBernstein Partnership Agreement”), when AllianceBernstein purchases newly-issued Holding Units from Holding, Holding is required to use the proceeds it receives from AllianceBernstein to purchase the equivalent number of newly-issued AllianceBernstein Units, thus increasing its percentage ownership interest in AllianceBernstein. Holding Units held in the consolidated rabbi trust are corporate assets in the name of the trust and are available to the general creditors of AllianceBernstein.

During the first quarter of 2014, we purchased 0.2 million Holding Units (for $3.7 million, on a trade date basis) from employees to allow them to fulfill statutory tax withholding requirements at the time of distribution of long-term incentive compensation awards, offset by Holding Units purchased by employees as part of a distribution reinvestment election. During the first quarter of 2013, we purchased 1.0 million Holding Units (for $19.6 million, on a trade date basis). These amounts reflect open-market purchases of 0.8 million Holding Units for $16.0 million, with the remainder relating to purchases of Holding Units from employees to allow them to fulfill statutory tax withholding requirements at the time of distribution of long-term incentive compensation awards, offset by Holding Units purchased by employees as part of a distribution reinvestment election.

Each quarter, we have implemented plans to repurchase Holding Units pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (“Exchange Act”). A Rule 10b5-1 plan allows a company to repurchase its shares at times when it otherwise might be prevented from doing so because of self-imposed trading blackout periods or because it possesses material non-public information. Each broker we select has the authority under the terms and limitations specified in the plan to repurchase Holding Units on our behalf in accordance with the terms of the plan. Repurchases are subject to SEC regulations as well as certain price, market volume and timing constraints specified in the plan. The plan adopted during the first quarter of 2014 expired at the close of business on April 29, 2014. We did not buy any Holding Units pursuant to this plan during the first quarter of 2014. We may adopt additional Rule 10b5-1 plans in the future to engage in open-market purchases of Holding Units to help fund anticipated obligations under our incentive compensation award program and for other corporate purposes.

During the first quarter of 2014, we granted to employees and Eligible Directors 0.2 million restricted Holding Unit awards. During the first quarter of 2013, we granted to employees and Eligible Directors 6.6 million restricted Holding Unit awards (including 6.5 million granted in January 2013 for 2012 year-end awards). Prior to the third quarter of 2013 (and our decision described in the next paragraph to retire unallocated Holding Units in AllianceBernstein’s consolidated rabbi trust), we funded awards by allocating previously repurchased Holding Units that had been held in the rabbi trust. In the first quarter of 2014, we used Holding Units repurchased during the quarter and newly-issued Holding Units to fund the restricted Holding Unit awards granted in the first quarter of 2014.

Effective July 1, 2013, management retired all unallocated Holding Units in AllianceBernstein’s consolidated rabbi trust. To retire such units, AllianceBernstein delivered the unallocated Holding Units held in the rabbi trust to Holding in exchange for the same number of AllianceBernstein units. Each entity then retired its units. As a result, on July 1, 2013, each of AllianceBernstein’s and Holding’s units outstanding decreased by approximately 13.1 million units. AllianceBernstein and Holding intend (subject to compliance with applicable safe harbor rules to avoid AllianceBernstein being treated as a publicly-traded partnership) to retire additional units as AllianceBernstein purchases Holding Units on the open market or from employees to allow them to fulfill statutory tax withholding requirements at the time of distribution of long-term incentive compensation awards, if such units are not required to fund new employee awards in the near future. If a sufficient number of Holding Units is not available in the rabbi trust to fund new awards, Holding will newly issue Holding Units in exchange for newly-issued AllianceBernstein units.

During the first quarter of 2014, Holding issued 273,084 Holding Units upon exercise of options to buy Holding Units. Holding used the proceeds of $4.7 million received from employees as payment in cash for the exercise price to purchase the equivalent number of newly-issued AllianceBernstein Units.

4.	Cash Distributions

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

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

On April 30, 2014, the General Partner declared a distribution of $0.44 per AllianceBernstein Unit, representing a distribution of Available Cash Flow for the three months ended March 31, 2014. The General Partner, as a result of its 1% general partnership interest, is entitled to receive 1% of each distribution. The distribution is payable on May 22, 2014 to holders of record on May 12, 2014.

5.	Real Estate Charges

During 2010, we performed a comprehensive review of our real estate requirements in New York in connection with our workforce reductions commencing in 2008. As a result, during 2010 we decided to sub-lease over 380,000 square feet in New York (in excess of 90% of this space has been sublet) and largely consolidate our New York-based employees into two office locations from three. During the third quarter of 2012, in an effort to further reduce our global real estate footprint, we completed a comprehensive review of our worldwide office locations and began implementing a global space consolidation plan. As a result, our intention is to sub-lease approximately 510,000 square feet of office space (approximately 70% of this space has been sublet), more than 70% of which is New York office space (in addition to the 380,000 square foot space reduction in 2010), with the remainder consisting of office space in England, Australia and various U.S. locations.

During the first quarter of 2014, we recorded real estate charges of $1.9 million, comprising $1.9 million relating to the W.P. Stewart acquisition and $1.7 million of accelerated amortization of leasehold improvements (relating to the 2012 plan), offset by $1.7 million from a change in estimates relating to previously recorded real estate charges (primarily relating to the 2012 plan).

The activity in the liability account relating to our 2010 and 2012 office space consolidation initiatives for the following periods is as follows:

	Three Months Ended March 31, 2014			Twelve Months Ended December 31, 2013
	(in thousands)

Balance as of beginning of period	$	199,527		$	238,784
(Credit) expense incurred		(1,496	)		18,371
Deferred rent		—			326
Payments made		(12,208	)		(62,627	)
Interest accretion		1,252			4,673
Balance as of end of period	$	187,075		$	199,527

6.	Net Income per Unit

Basic net income per unit is derived by reducing net income for the 1% general partnership interest and dividing the remaining 99% by the basic weighted average number of units outstanding for each period. Diluted net income per unit is derived by reducing net income for the 1% general partnership interest and dividing the remaining 99% by the total of the diluted weighted average number of units outstanding for each period.

	Three Months Ended March 31,
	2014		2013
	(in thousands, except per unit amounts)

Net income attributable to AllianceBernstein Unitholders	$	116,725	$	114,516

Weighted average units outstanding – basic		268,459		277,786
Dilutive effect of compensatory options to buy Holding Units		1,077		937
Weighted average units outstanding – diluted		269,536		278,723
Basic net income per AllianceBernstein Unit	$	0.43	$	0.41
Diluted net income per AllianceBernstein Unit	$	0.43	$	0.41

As of March 31, 2014 and 2013, we excluded 2,828,033 and 3,161,304 options, respectively, from the diluted net income per unit computation due to their anti-dilutive effect.

As discussed in Note 3, on July 1, 2013, management retired all unallocated Holding Units in AllianceBernstein’s consolidated rabbi trust, and, since that time, has continued to retire units as we have purchased Holding Units on the open market or from employees to allow them to fulfill statutory tax withholding requirements at the time of distribution of long-term incentive compensation awards.

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

As of March 31, 2014 and December 31, 2013, $0.9 billion of United States Treasury Bills were segregated in a special reserve bank custody account for the exclusive benefit of brokerage customers of Sanford C. Bernstein & Co., LLC (one of our subsidiaries, “SCB LLC”) under Rule 15c3-3 of the Exchange Act.

AllianceBernstein Investments, Inc. (one of our subsidiaries, “AllianceBernstein Investments”), the distributor of company-sponsored U.S. mutual funds, maintains several special bank accounts for the exclusive benefit of customers. As of March 31, 2014 and December 31, 2013, $45.4 million and $56.0 million, respectively, of cash were segregated in these bank accounts.

8.	Investments

Investments consist of:
	March 31, 2014		December 31, 2013
	(in thousands)

Available-for-sale (primarily seed capital)	$	5,541	$	4,858
Trading:
Long-term incentive compensation-related		72,386		88,385
United States Treasury Bills		28,994		38,986
Seed capital		403,812		316,681
Equities and exchange-traded options		71,889		130,059
Investments in limited partnership hedge funds:
Long-term incentive compensation-related		24,915		29,194
Seed capital		80,259		75,354
Consolidated private equity fund (10% seed capital)		35,022		45,741
Private equity (seed capital)		42,907		45,360
Other		5,570		4,976
Total investments	$	771,295	$	779,594

Total investments related to long-term incentive compensation obligations of $97.3 million and $117.6 million as of March 31, 2014 and December 31, 2013, respectively, consist of company-sponsored mutual funds and hedge funds. For long-term incentive compensation awards granted before 2009, we typically made investments in our services that were notionally elected by plan participants and maintained them (and continue to maintain them) in a consolidated rabbi trust or separate custodial account. The rabbi trust and custodial account enable us to hold such investments separate from our other assets for the purpose of settling our obligations to participants. The investments held in the rabbi trust and custodial account remain available to the general creditors of AllianceBernstein.

The underlying investments of the hedge funds in which we invest include long and short positions in equity securities, fixed income securities (including various agency and non-agency asset-based securities), currencies, commodities and derivatives (including various swaps and forward contracts). These investments are valued at quoted market prices or, where quoted market prices are not available, are fair valued based on the pricing policies and procedures of the underlying funds.

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

We provide seed capital to our investment teams to develop new products and services for our clients.

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

9.	Derivative Instruments

We enter into various futures, forwards and swaps to economically hedge certain seed money investments. In addition, we have currency forwards that economically hedge certain cash accounts. We do not hold any derivatives designated in a formal hedge relationship under Accounting Standards Codification (“ASC”) 815-10, Derivatives and Hedging.

The notional value and fair value as of March 31, 2014 and December 31, 2013 for derivative instruments not designated as hedging instruments were as follows:

			Fair Value
	Notional Value		Asset Derivatives		Liability Derivatives
	(in thousands)
March 31, 2014:
Exchange-traded futures	$	70,587	$	144	$	2,348
Currency forwards		192,570		566		1,678
Interest rate swaps		72,452		1,021		951
Credit default swaps		52,065		810		363
Option swaps		232		188		101
Total return swaps		81,742		923		1,573
Total derivatives	$	469,648	$	3,652	$	7,014

December 31, 2013:
Exchange-traded futures	$	63,107	$	289	$	2,542
Currency forwards		111,774		576		927
Interest rate swaps		81,253		1,149		573
Credit default swaps		42,270		696		126
Option swaps		144		87		86
Total return swaps		85,107		488		2,057
Total derivatives	$	383,655	$	3,285	$	6,311

As of March 31, 2014 and December 31, 2013, the derivative assets and liabilities are included in both receivables and payables to brokers and dealers on our condensed consolidated statements of financial condition.

The gains and losses for the three months ended March 31, 2014 and 2013 recognized in investment gains (losses) in the condensed consolidated statements of income were as follows:

	Three Months Ended March 31,
	2014			2013
	(in thousands)

Exchange-traded futures	$	(498	)	$	(3,931	)
Currency forwards		(1,666	)		176
Interest rate swaps		(793	)		283
Credit default swaps		(5	)		(112	)
Options swaps		(35	)		(124	)
Total return swaps		(2,524	)		(3,375	)
Net (losses) on derivative instruments	$	(5,521	)	$	(7,083	)

We may be exposed to credit-related losses in the event of nonperformance by counterparties to derivative financial instruments. We take steps to minimize our counterparty exposure through a credit review and approval process. In addition, we executed various collateral arrangements with counterparties to the over-the-counter derivative transactions that require both pledging and accepting collateral in the form of cash. As of March 31, 2014 and December 31, 2013, we held $2.7 million and $1.4 million, respectively, of cash collateral payable to trade counterparties. This obligation to return cash is reported in payables to brokers and dealers in our condensed consolidated statements of financial condition.

Although notional amount is the most commonly used measure of volume in the derivative market, it is not used as a measure of credit risk. Generally, the current credit exposure of our derivative contracts is limited to the net positive estimated fair value of derivative contracts at the reporting date after taking into consideration the existence of netting agreements and any collateral received. A derivative with positive value (a derivative asset) indicates existence of credit risk because the counterparty would owe us if the contract were closed. Alternatively, a derivative contract with negative value (a derivative liability) indicates we would owe money to the counterparty if the contract were closed. Generally, if there is more than one derivative transaction with a single counterparty, a master netting arrangement exists with respect to derivative transactions with that counterparty to provide for aggregate net settlement.

Certain of our standardized contracts for over-the-counter derivative transactions (“ISDA Master Agreements”) contain credit risk related contingent provisions related to each counterparty’s credit rating. In some ISDA Master Agreements, if the counterparty’s credit rating (or in some agreements, our AUM) falls below a specified threshold, either a default or a termination event permitting the counterparty to terminate the ISDA Master Agreement would be triggered. In all agreements that provide for collateralization, various levels of collateralization of net liability positions are applicable, depending on the credit rating of the counterparty. As of March 31, 2014 and December 31, 2013, we delivered $9.1 million and $8.9 million, respectively, of cash collateral into brokerage accounts, which is reported in cash and cash equivalents in our condensed consolidated statements of financial condition.

10.	Offsetting Assets and Liabilities

Offsetting of securities borrowed as of March 31, 2014 and December 31, 2013 was as follows:

	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Assets Presented in the Statement of Financial Position		Financial Instruments		Cash Collateral Pledged		Net Amount
	(in thousands)

March 31, 2014	$	140,860	$	—	$	140,860	$	—	$	140,860	$	—
December 31, 2013	$	83,619	$	—	$	83,619	$	—	$	83,619	$	—

Offsetting of securities loaned as of March 31, 2014 and December 31, 2013 was as follows:

		Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Liabilities Presented in the Statement of Financial Position		Financial Instruments		Cash Collateral Received		Net Amount
	(in thousands)

March 31, 2014		$	36,894	$	—	$	36,894	$	—	$	36,894	$	—
December 31, 2013		$	65,101	$	—	$	65,101	$	—	$	65,101	$	—

11.	Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. The three broad levels of fair value hierarchy are as follows:

•

Level 1 – Quoted prices in active markets are available for identical assets or liabilities as of the reported date.

•

Level 2 – Quoted prices in markets that are not active or other pricing inputs that are either directly or indirectly observable as of the reported date.

•

Level 3 – Prices or valuation techniques that are both significant to the fair value measurement and unobservable as of the reported date. These financial instruments do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Valuation of our financial instruments by pricing observability levels as of March 31, 2014 and December 31, 2013 was as follows (in thousands):

	Level 1		Level 2		Level 3		Total

March 31, 2014:
Money markets	$	124,619	$	—	$	—	$	124,619
U.S. Treasury Bills		—		884,756		—		884,756
Available-for-sale
Equity securities		5,279		—		—		5,279
Fixed income securities		262		—		—		262
Trading
Equity securities		329,799		1,411		—		331,210
Fixed income securities		195,304		2,747		—		198,051
Long-exchange traded options		18,826		—		—		18,826
Derivatives		144		3,508		—		3,652
Private equity		11,264		5,670		50,744		67,678
Total assets measured at fair value	$	685,497	$	898,092	$	50,744	$	1,634,333

Securities sold not yet purchased
Short equities – corporate	$	119,359	$	—	$	—	$	119,359
Short exchange-traded options		10,902		—		—		10,902
Derivatives		2,348		4,666		—		7,014
Total liabilities measured at fair value	$	132,609	$	4,666	$	—	$	137,275

December 31, 2013:
Money markets	$	153,630	$	—	$	—	$	153,630
U.S. Treasury Bills		—		964,953		—		964,953
Available-for-sale
Equity securities		4,794		—		—		4,794
Fixed income securities		64		—		—		64
Trading
Equity securities		312,931		1,235		—		314,166
Fixed income securities		194,085		4,253		—		198,338
Long exchange-traded options		22,621		—		—		22,621
Derivatives		290		2,995		—		3,285
Private equity		19,836		8,934		52,081		80,851
Total assets measured at fair value	$	708,251	$	982,370	$	52,081	$	1,742,702

Securities sold not yet purchased
Short equities – corporate	$	46,978	$	—	$	—	$	46,978
Short exchange-traded options		25,005		—		—		25,005
Derivatives		2,542		3,769		—		6,311
Total liabilities measured at fair value	$	74,525	$	3,769	$	—	$	78,294

Following is a description of the fair value methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:

•

Money markets: We invest excess cash in various money market funds that are valued based on quoted prices in active markets; these are included in Level 1 of the valuation hierarchy.

•

Treasury Bills: We hold United States Treasury Bills, which are primarily segregated in a special reserve bank custody account as required by Rule 15c3-3 of the Exchange Act. These securities are valued based on quoted yields in secondary markets and are included in Level 2 of the valuation hierarchy.

•

Equity and fixed income securities: Our equity and fixed income securities consist principally of company-sponsored mutual funds with net asset values and various separately-managed portfolios consisting primarily of equity and fixed income securities with quoted prices in active markets, which are included in Level 1 of the valuation hierarchy. In addition, some securities are valued based on observable inputs from recognized pricing vendors, which are included in Level 2 of the valuation hierarchy.

•

Derivatives: We hold exchange-traded futures with counterparties that are included in Level 1 of the valuation hierarchy. In addition, we also hold currency forward contracts, interest rate swaps, credit default swaps, option swaps and total return swaps with counterparties that are included in Level 2 of the valuation hierarchy.

•

Options: We hold long exchange-traded options that are included in Level 1 of the valuation hierarchy.

•

Private equity: Generally, the valuation of private equity investments owned by our consolidated venture capital fund requires significant management judgment due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of such investments. Private equity investments are valued initially at cost. The carrying values of private equity investments are adjusted either up or down from cost to reflect expected exit values as evidenced by financing and sale transactions with third parties, or when determination of a valuation adjustment is confirmed through ongoing review in accordance with our valuation policies and procedures. A variety of factors are reviewed and monitored to assess positive and negative changes in valuation, including current operating performance and future expectations of investee companies, industry valuations of comparable public companies, changes in market outlooks, and the third party financing environment over time. In determining valuation adjustments resulting from the investment review process, particular emphasis is placed on current company performance and market conditions. For these reasons, which make the fair value of private equity investments unobservable, equity investments are included in Level 3 of the valuation hierarchy. However, if private equity investments owned by our consolidated venture capital fund become publicly-traded, they are included in Level 1 of the valuation hierarchy. Also, if these investments contain trading restrictions, publicly-traded equity investments are included in Level 2 of the valuation hierarchy. During the first quarter of 2014, the trading restriction period for one of our public securities lapsed and, as a result, $3.0 million was transferred from a Level 2 classification to a Level 1 classification.

•

Securities sold not yet purchased: Securities sold not yet purchased, primarily reflecting short positions in equities and exchange-traded options, are included in Level 1 of the valuation hierarchy.

The change in carrying value associated with Level 3 financial instruments carried at fair value is as follows:

	Three Months Ended March 31,
	2014			2013
	(in thousands)

Balance as of beginning of period	$	52,081		$	76,953
Transfer out		—			—
Purchases		501			10
Sales		(1,121	)		—
Realized gains (losses), net		1,121			—
Unrealized gains (losses), net		(1,838	)		(2,110	)
Balance as of end of period	$	50,744		$	74,853

Transfers into and out of all levels of the fair value hierarchy are reflected at end-of-period fair values. Realized and unrealized gains and losses on Level 3 financial instruments are recorded in investment gains and losses in the condensed consolidated statements of income. Approximately one-third of the Level 3 investments are private equity investments owned by our consolidated venture capital fund, of which we own 10% and non-controlling interests own 90%.

Quantitative information about Level 3 fair value measurements as of March 31, 2014 and December 31, 2013 is as follows:

	Fair Value as of March 31, 2014			Valuation Technique	Unobservable Input	Range
	(in thousands)
Private Equity:

Technology, Media and Telecommunications		$	15,457	Market comparable companies	Revenue multiple	2.0 – 2.5
					Discount rate	18	%
					Discount years	1.75

Healthcare and Cleantech		$	2,539	Market comparable companies	Revenue multiple⁽¹⁾	0.9 – 16.8
					R&D multiple⁽¹⁾	0.3 – 10.0
					Discount for lack of marketability and risk factors	50	%

⁽¹⁾

The median for the Healthcare and Cleantech revenue multiple is 7.2; the median R&D multiple is 5.3.

	Fair Value as of December 31, 2013		Valuation Technique	Unobservable Input	Range
	(in thousands)
Private Equity:

Technology, Media and Telecommunications	$	13,956	Market comparable companies	Revenue multiple		2.5 – 3.5
				Discount rate		18	%
				Discount years		1.0

Healthcare and Cleantech	$	2,892	Market comparable companies	Revenue multiple⁽²⁾		1.2 – 49.0
				R&D multiple⁽²⁾		1.1 – 17.1
				Discount for lack of marketability and risk factors		50-60	%

⁽²⁾

The median for the Healthcare and Cleantech revenue multiple is 12.5; the median R&D multiple is 11.0.

The significant unobservable inputs used in the fair value measurement of the reporting entities’ venture capital securities in the technology, media and telecommunications areas are enterprise value to revenue multiples and a discount rate to account for the time until the securities are likely monetized and various risk factors. Significant increases (decreases) in the enterprise value to revenue multiple inputs in isolation would result in a significantly higher (lower) fair value measurement. Significant increases (decreases) in the discount rate would result in a significantly lower (higher) fair value measurement.

The significant unobservable inputs used in the fair value measurement of the reporting entities’ venture capital securities in the healthcare and cleantech areas are enterprise value to revenue multiples, enterprise value to R&D investment multiples, and a discount for lack of marketability and various risk factors. Significant increases (decreases) in the enterprise value to revenue multiple and enterprise value to R&D investment multiple inputs in isolation would result in a significantly higher (lower) fair value measurement. Significant increases (decreases) in the discount for lack of marketability and various risk factors in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the level of enterprise value to revenue multiple is accompanied by a directionally similar change in the assumption used for the enterprise value to R&D multiple. In addition, a change in the assumption used for the discount for lack of marketability and various risk factors is not correlated to changes in the assumptions used for the enterprise value to revenue multiple or the enterprise value to R&D investment multiple.

One of our private equity investments is a venture capital fund (fair value of $27.2 million and unfunded commitment of $10.1 million as of March 31, 2014) that invests in communications, consumer, digital media, healthcare and information technology markets. Also, we have an investment in a private equity fund focused exclusively on the energy sector (fair value of $5.4 million and unfunded commitment of $2.2 million as of March 31, 2014). In addition, one of the investments included in our consolidated private equity fund (fair value of $0.1 million and unfunded commitment of $0.2 million as of March 31, 2014) is a venture capital fund investing in clean energy, resource and energy efficiency and other sustainable industries. The fair value of each of these investments has been estimated using the capital account balances provided by the partnerships. The interests in these partnerships cannot be redeemed.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

We did not have any material assets or liabilities that were measured at fair value for impairment on a nonrecurring basis during the three months ended March 31, 2014 or during the year ended December 31, 2013.

12.	Commitments and Contingencies

Legal Proceedings

With respect to all significant litigation matters, we consider the likelihood of a negative outcome. If we determine the likelihood of a negative outcome is probable, and the amount of the loss can be reasonably estimated, we record an estimated loss for the expected outcome of the litigation. If the likelihood of a negative outcome is reasonably possible and we are able to determine an estimate of the possible loss or range of loss in excess of amounts already accrued, if any, we disclose that fact together with the estimate of the possible loss or range of loss. However, it is often difficult to predict the outcome or estimate a possible loss or range of loss because litigation is subject to inherent uncertainties, particularly when plaintiffs allege substantial or indeterminate damages, the litigation is in its early stages, or when the litigation is highly complex or broad in scope. In such cases, we disclose that we are unable to predict the outcome or estimate a possible loss or range of loss.

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

We believe that any losses to Philips resulted from adverse developments in the U.S. housing and mortgage market that precipitated the financial crisis in 2008 and not from any negligence or failure on our part. We believe that we have strong defenses to these claims, which are set forth in our October 12, 2012 response to the Letter of Claim, and will defend this matter vigorously. Currently, we are unable to estimate a reasonably possible range of loss because the matter remains in its early stages.

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

In management’s opinion, an adequate accrual has been made as of March 31, 2014 to provide for any probable losses regarding any litigation matters for which we can reasonably estimate an amount of loss. It is reasonably possible that we could incur additional losses pertaining to these matters, but currently we cannot estimate any such additional losses.

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

13.	Units Outstanding

Changes in limited partnership units outstanding during the three-month period ended March 31, 2014 were as follows:

Outstanding as of December 31, 2013	268,373,419
Options exercised	273,084
Units issued	8,337
Units retired	(81,438	)
Outstanding as of March 31, 2014	268,573,402

During the first quarter of 2014, we purchased 9,505 AllianceBernstein Units in private transactions and retired them.

14.

Debt

As of March 31, 2014 and December 31, 2013, AllianceBernstein had $373.1 million and $268.4 million, respectively, in commercial paper outstanding with weighted average interest rates of approximately 0.2% and 0.3%, respectively. The commercial paper is short term in nature, and as such, recorded value is estimated to approximate fair value (and considered a Level 2 security in the fair value hierarchy). Average daily borrowings of commercial paper during the first three months of 2014 and the full year 2013 were $436.7 million and $282.0 million, respectively, with weighted average interest rates of approximately 0.2% and 0.3%, respectively.

15.	Changes in Capital

Changes in capital during the three-month period ended March 31, 2014 are as follows:

	Partners’ Capital Attributable to AllianceBernstein Unitholders			Non- Controlling Interests In Consolidated Entities		Total Capital
	(in thousands)

Balance as of December 31, 2013	$	4,027,486		$	42,240	$	4,069,726
Comprehensive income:
Net income		116,725			1,813		118,538
Other comprehensive income, net of tax:
Unrealized gains on investments		289			—		289
Foreign currency translation adjustments		2,108			41		2,149
Changes in employee benefit related items		(833	)		—		(833	)
Comprehensive income		118,289			1,854		120,143

Distributions to General Partner and unitholders		(178,994	)		—		(178,994	)
Capital contributions from affiliates		6,209			—		6,209
Purchases of AllianceBernstein Units		(229	)		—		(229	)
Compensation-related transactions		7,398			—		7,398
Balance as of March 31, 2014	$	3,980,159		$	44,094	$	4,024,253

Changes in capital during the three-month period ended March 31, 2013 are as follows:

	Partners’ Capital Attributable to AllianceBernstein Unitholders			Non-Controlling Interests In Consolidated Entities			Total Capital
	(in thousands)

Balance as of December 31, 2012	$	3,759,766		$	43,502		$	3,803,268
Comprehensive income:
Net income (loss)		114,516			(1,485	)		113,031
Other comprehensive income, net of tax:
Unrealized gains on investments		359			—			359
Foreign currency translation adjustments		(10,330	)		10			(10,320	)
Changes in employee benefit related items		190			—			190
Comprehensive income		104,735			(1,475	)		103,260

Distributions to General Partner and unitholders		(106,182	)		—			(106,182	)
Capital contributions from affiliates		750			—			750
Purchases of AllianceBernstein Units		(7	)		—			(7	)
Compensation-related transactions		127,562			—			127,562
Balance as of March 31, 2013	$	3,886,624		$	42,027		$	3,928,651

Deferred taxes are not recognized on foreign currency translation adjustments for foreign subsidiaries whose earnings are considered permanently invested outside the United States.

16.	Acquisitions

On January 20, 2014, we signed a share purchase agreement with Formuepleje A/S, Fondsmaeglerselskab and certain individual shareholders to acquire CPH Capital Fondsmaeglerselskab A/S, a Danish asset management firm that currently manages approximately $3 billion in global core equity assets for institutional investors. This acquisition requires approval from the Danish Financial Services Authority and we anticipate closing this acquisition during the second quarter of 2014. The acquisition is not expected to have a significant impact on 2014 revenues and earnings.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Overview

Our total assets under management (“AUM”) as of March 31, 2014 were $454.1 billion, up $3.7 billion, or 0.8%, compared to December 31, 2013, and up $10.9 billion, or 2.4%, compared to March 31, 2013. During the first quarter of 2014, AUM increased as a result of market appreciation of $8.1 billion, offset by $4.4 billion of net outflows (primarily in Institutions and Retail, offset by inflows in Private Client). During the twelve months ended March 31, 2014, AUM increased as a result of market appreciation of $28.1 billion and AUM acquired in an acquisition of $2.1 billion, offset by net outflows of $19.3 billion (primarily in Institutions and Retail).

Institutional AUM increased $0.4 billion, or 0.1%, to $226.4 billion during the first quarter of 2014, primarily due to market appreciation of $4.3 billion, partially offset by net outflows of $3.8 billion (as compared to net outflows of $5.6 billion during the fourth quarter of 2013). Gross sales decreased 49.4% sequentially from $5.5 billion during the fourth quarter of 2013 to $2.8 billion during the first quarter of 2014. However, redemptions and terminations decreased 64.4% sequentially from $9.2 billion to $3.3 billion. Also, the pipeline of awarded but unfunded Institutional mandates increased from $5.6 billion at December 31, 2013 to $7.6 billion at March 31, 2014.

Retail AUM increased $2.0 billion, or 1.3%, to $155.0 billion during the first quarter of 2014, primarily due to market appreciation of $3.1 billion, offset by net outflows of $1.1 billion (as compared to net outflows of $3.9 billion during the fourth quarter of 2013). Gross sales increased 28.0% sequentially from $7.8 billion during the fourth quarter of 2013 to $9.9 billion during the first quarter of 2014, resulting from higher sales in Asia, the U.S. and Latin America, and in every asset class. Additionally, redemptions and terminations decreased 6.2% sequentially from $10.5 billion to $9.8 billion.

Private Client AUM increased $1.3 billion, or 1.8%, to $72.7 billion during the first quarter of 2014, primarily due to market appreciation of $0.7 billion and net inflows of $0.5 billion (as compared to net outflows of $0.8 billion during the fourth quarter of 2013). Gross sales increased 45.0% sequentially from $1.5 billion during the fourth quarter of 2013 to $2.2 billion during the first quarter of 2014. Additionally, redemptions and terminations decreased 10.6% sequentially from $1.8 billion to $1.6 billion.

Bernstein Research Services revenue for the first quarter of 2014 was $123.0 million, up $13.3 million, or 12.1%, compared to the first quarter of 2013, as a result of strong growth across all geographies, particularly in Europe.

Net revenues for the first quarter increased $5.5 million, or 0.8%, to $714.6 million from $709.1 million in the first quarter of 2013. The most significant drivers of the increase were higher Bernstein Research Services revenues of $13.3 million and higher base advisory fees of $11.7 million, partially offset by lower distribution revenues of $12.5 million and lower investment gains of $6.5 million. Operating expenses for the first quarter of 2014 decreased $0.2 million, or 0.1%, to $584.7 million from $584.9 million in the first quarter of 2013, primarily due to lower promotion and servicing expenses of $10.1 million, partially offset by higher employee compensation and benefits expenses of $5.8 million, higher general and administrative expenses of $2.4 million and higher real estate charges of $1.3 million.

Operating income for the first quarter of 2014 increased $5.7 million, or 4.6%, to $129.9 million, from the first quarter of 2013, and our operating margin increased from 17.7% (21.9% on an adjusted basis) in the first quarter of 2013 to 17.9% (21.9% on an adjusted basis) in the first quarter of 2014.

Assets Under Management

Assets under management by distribution channel were as follows:

		As of March 31,
		2014		2013			$ Change			% Change
	(in billions)

Institutions		$	226.4		$	225.1		$	1.3		0.6	%
Retail			155.0			150.4			4.6		3.1
Private Client			72.7			67.7			5.0		7.3
Total		$	454.1		$	443.2		$	10.9		2.4

Assets under management by investment service were as follows:

	As of March 31,
	2014		2013		$ Change			% Change
	(in billions)
Equity
Actively Managed	$	108.6	$	98.8	$	9.8			10.0	%
Passively Managed⁽¹⁾		48.2		43.8		4.4			9.9
Total Equity		156.8		142.6		14.2			9.9

Fixed Income
Actively Managed
Taxable		213.4		226.0		(12.6	)		(5.6	)
Tax–exempt		30.0		30.9		(0.9	)		(3.1	)
		243.4		256.9		(13.5	)		(5.3	)

Passively Managed⁽¹⁾		9.1		8.3		0.8			9.5
Total Fixed Income		252.5		265.2		(12.7	)		(4.8	)

Other⁽²⁾		44.8		35.4		9.4			26.5
Total	$	454.1	$	443.2	$	10.9			2.4

⁽¹⁾	Includes index and enhanced index services.

⁽²⁾	Includes multi-asset solutions and services, and certain alternative investments.

Changes in assets under management for the three-month and twelve-month periods ended March 31, 2014 were as follows:

	Distribution Channel
	Institutions			Retail			Private Client			Total
	(in billions)

Balance as of December 31, 2013	$	226.0		$	153.0		$	71.4		$	450.4
Long-term flows:
Sales/new accounts		2.8			9.9			2.2			14.9
Redemptions/terminations		(3.3	)		(9.8	)		(1.6	)		(14.7	)
Cash flow/unreinvested dividends		(3.3	)		(1.2	)		(0.1	)		(4.6	)
Net long-term inflows (outflows)		(3.8	)		(1.1	)		0.5			(4.4	)
Transfers in/(out)		(0.1	)		-			0.1			-
Market appreciation		4.3			3.1			0.7			8.1
Net change		0.4			2.0			1.3			3.7
Balance as of March 31, 2014	$	226.4		$	155.0		$	72.7		$	454.1

Balance as of March 31, 2013	$	225.1		$	150.4		$	67.7		$	443.2
Long-term flows:
Sales/new accounts		20.5			44.5			6.7			71.7
Redemptions/terminations		(18.2	)		(47.5	)		(7.5	)		(73.2	)
Cash flow/unreinvested dividends		(10.5	)		(5.8	)		(1.5	)		(17.8	)
Net long-term inflows (outflows)		(8.2	)		(8.8	)		(2.3	)		(19.3	)
Acquisition		0.3			0.7			1.1			2.1
Transfers in/(out)		(0.1	)		-			0.1			-
Market appreciation		9.3			12.7			6.1			28.1
Net change		1.3			4.6			5.0			10.9
Balance as of March 31, 2014	$	226.4		$	155.0		$	72.7		$	454.1

	Investment Service
	Equity Actively Managed			Equity Passively Managed⁽¹⁾			Fixed Income Actively Managed - Taxable			Fixed Income Actively Managed -Tax -Exempt			Fixed Income Passively Managed⁽¹⁾			Other⁽²⁾			Total
	(in billions)

Balance as of December 31, 2013	$	107.8		$	49.3		$	211.0		$	28.7		$	9.3		$	44.3		$	450.4
Long-term flows:
Sales/new accounts		4.2			0.1			7.3			1.4			0.2			1.7			14.9
Redemptions/terminations		(3.6	)		(0.2	)		(7.5	)		(0.8	)		(0.2	)		(2.4	)		(14.7	)
Cash flow/unreinvested dividends		(0.7	)		(1.7	)		(2.3	)		0.1			(0.5	)		0.5			(4.6	)
Net long-term (outflows) inflows		(0.1	)		(1.8	)		(2.5	)		0.7			(0.5	)		(0.2	)		(4.4	)
Market appreciation (depreciation)		0.9			0.7			4.9			0.6			0.3			0.7			8.1
Net change		0.8			(1.1	)		2.4			1.3			(0.2	)		0.5			3.7
Balance as of March 31, 2014	$	108.6		$	48.2		$	213.4		$	30.0		$	9.1		$	44.8		$	454.1

Balance as of March 31, 2013	$	98.8		$	43.8		$	226.0		$	30.9		$	8.3		$	35.4		$	443.2
Long-term flows:
Sales/new accounts		15.8			2.7			42.7			4.7			1.4			4.4			71.7
Redemptions/terminations		(18.9	)		(0.7	)		(45.2	)		(4.5	)		(0.8	)		(3.1	)		(73.2	)
Cash flow/unreinvested dividends		(6.1	)		(6.0	)		(8.6	)		(1.0	)		0.2			3.7			(17.8	)
Net long-term (outflows) inflows		(9.2	)		(4.0	)		(11.1	)		(0.8	)		0.8			5.0			(19.3	)
Acquisition		2.1			-			-			-			-			-			2.1
Market appreciation (depreciation)		16.9			8.4			(1.5	)		(0.1	)		-			4.4			28.1
Net change		9.8			4.4			(12.6	)		(0.9	)		0.8			9.4			10.9
Balance as of March 31, 2014	$	108.6		$	48.2		$	213.4		$	30.0		$	9.1		$	44.8		$	454.1

⁽¹⁾	Includes index and enhanced index services.

⁽²⁾	Includes multi-asset solutions and services, and certain alternative investments.

Average assets under management by distribution channel and investment service were as follows:

	Three Months Ended
	3/31/14		3/31/13		$ Change			% Change
	(in billions)
Distribution Channel:
Institutions	$	227.1	$	222.6	$	4.5			2.1	%
Retail		153.2		147.2		6.0			4.0
Private Client		71.7		66.9		4.8			7.1
Total	$	452.0	$	436.7	$	15.3			3.5

Investment Service:
Equity Actively Managed	$	107.4	$	97.3	$	10.1			10.4	%
Equity Passively Managed⁽¹⁾		48.2		42.2		6.0			14.3
Fixed Income Actively Managed – Taxable		212.8		224.4		(11.6	)		(5.2	)
Fixed Income Actively Managed – Tax-exempt		29.5		30.9		(1.4	)		(4.6	)
Fixed Income Passively Managed⁽¹⁾		9.4		8.1		1.3			16.5
Other ⁽²⁾		44.7		33.8		10.9			32.2
Total	$	452.0	$	436.7	$	15.3			3.5

⁽¹⁾	Includes index and enhanced index services.

⁽²⁾	Includes multi-asset solutions and services, and certain alternative investments.

Our Institutional channel first quarter average AUM of $227.1 billion increased by $4.5 billion, or 2.1%, compared to the first quarter of 2013, primarily due to our Institutional channel AUM increasing $1.3 billion, or 0.6%, over the last twelve months to $226.4 billion at March 31, 2014. The relatively smaller increase in AUM of $1.3 billion during the last twelve months as compared to the increase of $4.5 billion in year-to-year average AUM is due to higher net outflows occurring in March 2014. The $1.3 billion increase in AUM over the past twelve months was primarily due to $9.3 billion of market appreciation, offset by net outflows of $8.2 billion (consisting of outflows of $9.5 billion in equity services and $0.3 billion in fixed income services, offset by inflows of $1.6 billion in other services).

Our Retail channel first quarter average AUM of $153.2 billion increased by $6.0 billion, or 4.0%, compared to the first quarter of 2013, primarily due to our Retail channel AUM increasing $4.6 billion, or 3.1%, over the last twelve months to $155.0 billion at March 31, 2014. The $4.6 billion increase in AUM over the past twelve months was primarily due to market appreciation of $12.7 billion, offset by net outflows of $8.8 billion (consisting of outflows of $9.2 billion in fixed income services and $1.8 billion in equity services, offset by inflows of $2.2 billion in other services).

Our Private Client channel first quarter average AUM of $71.7 billion increased by $4.8 billion, or 7.1%, compared to the first quarter of 2013, primarily due to our Private Client channel AUM increasing $5.0 billion, or 7.3%, over the last twelve months to $72.7 billion at March 31, 2014. The $5.0 billion increase in AUM over the past twelve months was primarily due to market appreciation of $6.1 billion, offset by net outflows of $2.3 billion (consisting of outflows of $1.9 billion in equity services and $1.7 billion in fixed income services, offset by inflows of $1.3 billion in other services).

Absolute investment composite returns, net of fees, and relative performance compared to benchmarks for certain representative Institutional (except as otherwise indicated) equity and fixed income services were as follows for the three months ended March 31:

	2014			2013

Global High Income (fixed income)
Absolute return		3.3	%		2.9	%
Relative return (vs. 33% Barclays High Yield, 33% JPM EMBI Global and 33% JPM GBI-EM)		0.5			2.6
Global Fixed Income (fixed income)
Absolute return		2.5			(2.7	)
Relative return (vs. CITI WLD GV BD-USD/JPM GLBL BD)		(0.1	)		0.1
Intermediate Municipal Bonds (fixed income) (Private Client composite)
Absolute return		1.5			0.3
Relative return (vs. Lipper Short/Int. Blended Muni Fund Avg)		0.0			(0.1	)
U.S. Strategic Core Plus (fixed income)
Absolute return		2.4			0.1
Relative return (vs. Barclays U.S. Aggregate)		0.5			0.2
Emerging Market Debt (fixed income)
Absolute return		3.9			(2.0	)
Relative return (vs. JPM EMBI Global/JPM EMBI)		0.4			0.3
Global Plus (fixed income)
Absolute return		2.6			(1.9	)
Relative return (vs. Barclays Global Aggregate)		0.2			0.2
Emerging Markets Value
Absolute return		(0.4	)		(4.1	)
Relative return (vs. MSCI EM Index)		0.0			(2.5	)
Global Value
Absolute return		2.2			8.4
Relative return (vs. MSCI World Index)		0.9			0.7
Global Strategic Value
Absolute return		3.0			8.8
Relative return (vs. MSCI ACWI Index)		1.9			2.3
U.S. Small & Mid Cap Value
Absolute return		2.7			14.3
Relative return (vs. Russell 2500 Value Index)		(0.8	)		0.9
U.S. Strategic Value
Absolute return		2.9			13.3
Relative return (vs. Russell 1000 Value Index)		(0.1	)		1.0
U.S. Small Cap Growth
Absolute return		1.3			10.9
Relative return (vs. Russell 2000 Growth Index)		0.8			(2.3	)
U.S. Large Cap Growth
Absolute return		(0.9	)		9.2
Relative return (vs. Russell 1000 Growth Index)		(2.0	)		(0.3	)
U.S. Small & Mid Cap Growth
Absolute return		0.8			11.4
Relative return (vs. Russell 2500 Growth Index)		(0.3	)		(0.8	)
Select U.S. Equity
Absolute return		0.7			10.8
Relative return (vs. S&P 500 Index)		(1.1	)		0.2
International Style Blend – Developed
Absolute return		0.9			4.7
Relative return (vs. MSCI EAFE Index)		0.2			(0.4	)

The markets had a somewhat volatile start to the year as the U.S. Federal Reserve began to pull back its bond purchases. However, with cuts to asset purchases already priced into the markets, the impact on bond returns was not significant. As central banks worldwide adjust monetary stances and rate policies—now in divergent directions—continued moderate volatility remains likely.

During the quarter our global plus and U.S. multi-sector portfolios outperformed their benchmarks due to an overweight in non-government sectors and security selection in corporate bonds. Performance of our global fixed income portfolios was similar to benchmarks; country/yield curve decisions detracted, offset somewhat by sector and currency decisions. Performance of our emerging market debt portfolios exceeded benchmarks, driven by country decisions and security selection. Performance in our high income portfolios was ahead of benchmarks due to an underweight in emerging market debt in favor of developed market credit sectors such as high yield and non-agency mortgages, with investment-grade corporate exposures also helping.

Municipals outperformed comparable taxable bonds after underperforming in 2013 as mutual fund outflows abated and supply remained light. In fact, municipal new issue supply was 26% less in the first quarter than a year ago. Our portfolios performed in-line with their peers; the biggest contributor to performance was our overweight to credit while an underweight in callable bonds detracted from performance.

Performance of our equity services compared to benchmarks was mixed in the first quarter of 2014. Our value services typically did well, as investors continued their return to under-valued stocks with strong or recovering fundamentals. Our growth portfolios mostly lagged, as investors realized profits on quality growth stocks that did well in 2013. Finally, the Select U.S. portfolio under-performed as consumer discretionary stocks were under pressure, and large cap technology and energy stocks outperformed, groups which are underweight in the portfolio relative to the benchmark.

Consolidated Results of Operations

	Three Months Ended
	3/31/14			3/31/13			$ Change			% Change
	(in millions, except per unit amounts)

Net revenues	$	714.6		$	709.1		$	5.5			0.8	%
Expenses		584.7			584.9			(0.2	)		(0.1	)
Operating income		129.9			124.2			5.7			4.6
Income taxes		11.4			11.2			0.2			1.8
Net income		118.5			113.0			5.5			4.9
Net income (loss) of consolidated entities attributable to non-controlling interests		1.8			(1.5	)		3.3			n/m
Net income attributable to AllianceBernstein Unitholders	$	116.7		$	114.5		$	2.2			1.9

Diluted net income per AllianceBernstein Unit	$	0.43		$	0.41		$	0.02			4.9

Distributions per AllianceBernstein Unit	$	0.44		$	0.41		$	0.03			7.3

Operating margin ⁽¹⁾		17.9	%		17.7	%

⁽¹⁾

Operating income excluding net income (loss) attributable to non-controlling interests as a percentage of net revenues.

Net income attributable to AllianceBernstein Unitholders for the three months ended March 31, 2014 increased $2.2 million, or 1.9%, from the three months ended March 31, 2013. The increase was due to (in millions):

Higher Bernstein Research Services revenues	$	13.3
Higher base advisory fees		11.7
Lower investment gains (relating to seed capital and deferred compensation investments)		(10.0	)
Higher employee compensation and benefits expenses		(5.8	)
Higher other promotion and servicing expenses		(4.0	)
Higher general and administrative expenses (excluding real estate charges)		(2.4	)
Other		(0.6	)
	$	2.2

Real Estate Charges

Units Outstanding

Cash Distributions

AllianceBernstein is required to distribute all of its Available Cash Flow, as defined in the AllianceBernstein Partnership Agreement, to its unitholders and to the General Partner. Since the third quarter of 2012, Available Cash Flow has been the adjusted diluted net income per unit for the quarter multiplied by the number of general and limited partnership interests at the end of the quarter. In future periods, management anticipates that Available Cash Flow will be based on adjusted diluted net income per unit, unless management determines that one or more non-GAAP adjustments that are made for adjusted net income should not be made with respect to the Available Cash Flow calculation. See Note 4 to the condensed consolidated financial statements contained in Item 1 for a description of Available Cash Flow.

Management Operating Metrics

We are providing the non-GAAP measures “adjusted net revenues”, “adjusted operating income” and “adjusted operating margin” because they are the principal operating metrics management uses in evaluating and comparing period-to-period operating performance and we believe they are useful to investors. Management principally uses these metrics in evaluating performance because they present a clearer picture of our operating performance, and allow management to see long-term trends without the distortion primarily caused by long-term incentive compensation-related mark-to-market adjustments, real estate consolidation charges and other adjustment items. Similarly, these management operating metrics help investors better understand the underlying trends in our results and, accordingly, we believe they provide a valuable perspective for investors.

These non-GAAP measures are provided in addition to, and not as substitutes for, net revenues, operating income and operating margin, and they may not be comparable to non-GAAP measures presented by other companies. Management uses both the accounting principles generally accepted in the United States of America (“US GAAP”) and non-GAAP measures in evaluating our financial performance. The non-GAAP measures alone may pose limitations because they do not include all of our revenues and expenses.

	Three Months Ended March 31,
	2014			2013
	(in thousands)

Net revenues, US GAAP basis	$	714,618		$	709,122
Exclude:
Long-term incentive compensation-related investment (gains)		(1,297	)		(6,029	)
Long-term incentive compensation-related dividends and interest		(179	)		(269	)
90% of consolidated venture capital fund investment losses (gains)		(2,006	)		1,220
Distribution-related payments		(97,270	)		(109,280	)
Amortization of deferred sales commissions		(8,957	)		(11,074	)
Pass-through fees and expenses		(7,331	)		(6,868	)
Adjusted net revenues	$	597,578		$	576,822

Operating income, US GAAP basis	$	129,903		$	124,198
Exclude:
Long-term incentive compensation-related items		89			29
Real estate charges		1,942			638
Acquisition-related expenses		859			—
Sub-total of non-GAAP adjustments		2,890			667
Less: Net income (loss) of consolidated entities attributable to non-controlling interests		1,813			(1,485	)
Adjusted operating income	$	130,980		$	126,350

Adjusted operating margin		21.9	%		21.9	%

Adjusted operating income for the three months ended March 31, 2014 increased $4.6 million, or 3.7%, from the three months ended March 31, 2013, primarily as a result of higher Bernstein Research Services revenues of $13.3 million and higher investment advisory base fees of $11.7 million, offset by higher employee compensation expense (excluding the impact of long-term incentive compensation-related items) of $9.9 million, higher other promotion and servicing expenses of $3.6 million, higher general and administrative expenses of $2.3 million, and $2.8 million of investment losses in the current quarter as compared to $2.2 million of investment gains in the prior-year quarter.

Adjusted Net Revenues

Adjusted net revenues exclude investment gains and losses and dividends and interest on long-term incentive compensation-related investments, and 90% of the investment gains and losses of our consolidated venture capital fund attributable to non-controlling interests. In addition, adjusted net revenues offset distribution-related payments to third parties as well as amortization of deferred sales commissions against distribution revenues. We believe offsetting net revenues by distribution-related payments is useful for our investors and other users of our financial statements because such presentation appropriately reflects the nature of these costs as pass-through payments to third parties who perform functions on behalf of our sponsored mutual funds and/or shareholders of these funds. We offset amortization of deferred sales commissions against net revenues because such costs, over time, essentially offset our distribution revenues. We also exclude additional pass-through expenses we incur (primarily through our transfer agency) that are reimbursed and recorded as fees in revenues. These fees have no impact on operating income, but they do have an impact on our operating margin. As such, we exclude these fees from adjusted net revenues.

Adjusted Operating Income

Adjusted operating income represents operating income on a US GAAP basis excluding (1) the impact on net revenues and compensation expense of the mark-to-market gains and losses (as well as the dividends and interest) associated with employee long-term incentive compensation-related investments, (2) real estate charges, (3) acquisition-related expenses and (4) the net income or loss of consolidated entities attributable to non-controlling interests.

Prior to 2009, a large proportion of employee compensation was in the form of long-term incentive compensation awards that were notionally invested in AllianceBernstein investment services and generally vested over a period of four years. AllianceBernstein economically hedged the exposure to market movements by purchasing and holding these investments on its balance sheet. All such investments had vested by year-end 2012 and the investments have been distributed to the participants, except for those investments with respect to which the participant elected a long-term deferral. The investments’ appreciation or depreciation is recorded within investment gains and losses on the income statement, as well as increasing or decreasing compensation expense. Because this plan is economically hedged, management believes it is useful to reflect the offset achieved from hedging the investments’ market exposure in the calculation of adjusted operating income and adjusted operating margin. The non-GAAP measures exclude gains and losses and dividends and interest on long-term incentive compensation-related investments included in revenues and compensation expense.

Real estate charges have been excluded because they are not considered part of our core operating results when comparing financial results from period to period and to industry peers.

Acquisition-related expenses, primarily severance and professional fees incurred as a result of a fourth quarter 2013 acquisition and professional fees incurred as a result of a pending acquisition, have been excluded because they are not considered part of our core operating results when comparing results from period to period and to industry peers.

Most of the net income or loss of consolidated entities attributable to non-controlling interests relates to the 90% limited partner interests held by third parties in our consolidated venture capital fund. We own a 10% limited partner interest in the fund. Because we are the general partner of the venture capital fund and are deemed to have a controlling interest, US GAAP requires us to consolidate the financial results of the fund. However, recognizing 100% of the gains or losses in operating income while only retaining 10% is not reflective of our underlying financial results at the operating income level. As a result, we are excluding the 90% limited partner interests we do not own from our adjusted operating income. Similarly, net income of joint ventures attributable to non-controlling interests, although not significant, is excluded because it does not reflect the economic interest attributable to AllianceBernstein.

Adjusted Operating Margin

Adjusted operating margin allows us to monitor our financial performance and efficiency from period to period without the volatility noted above in our discussion of adjusted operating income and to compare our performance to industry peers on a basis that better reflects our performance in our core business. Adjusted operating margin is derived by dividing adjusted operating income by adjusted net revenues.

Net Revenues

The components of net revenues were as follows:

	Three Months Ended
	3/31/14		3/31/13		$ Change			% Change
	(in millions)
Investment advisory and services fees:
Institutions:
Base fees	$	99.4	$	101.5	$	(2.1	)		(2.0	)%
Performance-based fees		1.9		2.6		(0.7	)		(28.3	)
		101.3		104.1		(2.8	)		(2.7	)
Retail:
Base fees		196.8		200.2		(3.4	)		(1.7	)
Performance-based fees		0.7		0.8		(0.1	)		(12.1	)
		197.5		201.0		(3.5	)		(1.7	)
Private Client:
Base fees		155.8		138.6		17.2			12.4
Performance-based fees		0.3		0.1		0.2			167.8
		156.1		138.7		17.4			12.5
Total:
Base fees		452.0		440.3		11.7			2.7
Performance-based fees		2.9		3.5		(0.6	)		(18.3	)
		454.9		443.8		11.1			2.5

Bernstein research services		123.0		109.7		13.3			12.1
Distribution revenues		106.2		118.7		(12.5	)		(10.6	)
Dividend and interest income		4.1		4.4		(0.3	)		(7.8	)
Investment gains (losses)		0.5		7.0		(6.5	)		(92.0	)
Other revenues		26.7		26.3		0.4			1.4
Total revenues		715.4		709.9		5.5			0.8
Less: interest expense		0.8		0.8		-
Net revenues	$	714.6	$	709.1	$	5.5			0.8

Investment Advisory and Services Fees

Investment advisory and services fees are the largest component of our revenues. These fees generally are calculated as a percentage of the value of AUM as of a specified date, or as a percentage of the value of average AUM for the applicable billing period, and vary with the type of investment service, the size of account and the total amount of assets we manage for a particular client. Accordingly, fee income generally increases or decreases as AUM increase or decrease and is therefore affected by market appreciation or depreciation, the addition of new client accounts or client contributions of additional assets to existing accounts, withdrawals of assets from and termination of client accounts, purchases and redemptions of mutual fund shares, shifts of assets between accounts or products with different fee structures, and acquisitions. Our average basis points realized (investment advisory fees divided by average AUM) generally approximate 50 to 70 basis points for actively managed equity services, 15 to 50 basis points for actively managed fixed income services and 5 to 20 basis points for passively managed services. As such, a shift of client assets from active equity services toward fixed income services and/or other services results in a decline in revenues just as a shift of assets toward active equity services would increase revenues.

We calculate AUM using established market-based valuation methods and fair valuation (non-observable market) methods. Market-based valuation methods include: last sale/settle prices from an exchange for actively-traded listed equities, options and futures; evaluated bid prices from recognized pricing vendors for fixed income, asset-backed or mortgage-backed issues; mid prices from recognized pricing vendors and brokers for credit default swaps; and quoted bids or spreads from pricing vendors and brokers for other derivative products. Fair valuation methods include: discounted cash flow models, evaluation of assets versus liabilities or any other methodology that is validated and approved by our Valuation Committee (see paragraph immediately below for more information regarding our Valuation Committee). Fair valuation methods are used only where AUM cannot be valued using market-based valuation methods, such as in the case of private equity or illiquid securities. Investments utilizing fair valuation methods typically make up an insignificant amount of our total AUM. Market volatility has not had a significant effect on our ability to acquire market data and, accordingly, our ability to use market-based valuation methods.

The Valuation Committee, which is composed of senior officers and employees, is responsible for overseeing the pricing and valuation of all investments held in client and AllianceBernstein portfolios. The Valuation Committee has adopted a Statement of Pricing Policies describing principles and policies that apply to pricing and valuing investments held in these portfolios. We also have a Pricing Group, which reports to the Valuation Committee, and is responsible for overseeing the pricing process for all investments.

We sometimes charge our clients performance-based fees. In these situations, we charge a base advisory fee and are eligible to earn an additional performance-based fee or incentive allocation that is calculated as either a percentage of absolute investment results or a percentage of investment results in excess of a stated benchmark over a specified period of time. Some performance-based fees include a high-watermark provision, which generally provides that if a client account underperforms relative to its performance target (whether absolute or relative to a specified benchmark), it must gain back such underperformance before we can collect future performance-based fees. Therefore, if we fail to achieve our performance target for a particular period, we will not earn a performance-based fee for that period and, for accounts with a high-watermark provision, our ability to earn future performance-based fees will be impaired. We are eligible to earn performance-based fees on approximately 11% of the assets we manage for institutional clients and approximately 3% of the assets we manage for private clients (in total, approximately 6% of our company-wide AUM).

For the three months ended March 31, 2014, our investment advisory and services fees increased by $11.1 million, or 2.5%, from the first quarter of 2013, primarily due to a $11.7 million, or 2.7%, increase in base fees, which primarily resulted from a 3.5% increase in average AUM.

Institutional investment advisory and services fees for the three months ended March 31, 2014 decreased by $2.8 million, or 2.7%, from the three months ended March 31, 2013, primarily due to a continued significant shift in product mix away from actively managed equity services. Average AUM for actively managed equity services decreased 7.9% while average AUM for other services increased 27.1%.

Retail investment advisory and services fees for the three months ended March 31, 2014 decreased by $3.5 million, or 1.7%, from the three months ended March 31, 2013, while average AUM increased 4.0%. The decrease in fees as compared to an increase in average AUM is primarily due to a shift in product mix from long-term non-U.S. global fixed income mutual funds toward long-term U.S. mutual funds and other Retail products and services, which generally have lower fees as compared to long-term non-U.S. global fixed income mutual funds.

Private client investment advisory and services fees for the three months ended March 31, 2014 increased by $17.4 million, or 12.5%, from the three months ended March 31, 2013, primarily as a result of an increase in average billable AUM of 8.0%.

Bernstein Research Services

Bernstein Research Services revenue consists principally of equity commissions received for providing equity research and brokerage-related services to institutional investors.

Revenues from Bernstein Research Services for the three months ended March 31, 2014 increased $13.3 million, or 12.1%, from the three months ended March 31, 2013. The increase was the result of strong growth across all geographies, particularly in Europe.

Distribution Revenues

AllianceBernstein Investments and AllianceBernstein (Luxembourg) S.A. (one of our subsidiaries) act as distributors and/or placing agents of company-sponsored mutual funds and receive distribution services fees from certain of those funds as partial reimbursement of the distribution expenses they incur. Period-over-period fluctuations of distribution revenues are typically in line with fluctuations of the corresponding average AUM of these mutual funds.

Distribution revenues for the three months ended March 31, 2014 decreased $12.5 million, or 10.6%, compared to the three months ended March 31, 2013, while the corresponding average AUM of these mutual funds decreased 7.3%. Average AUM of non B-shares and non C-shares mutual funds (which have lower distribution fee rates than B-share and C-share mutual funds) decreased 6.4%, while average AUM of B-share and C-share mutual funds decreased by 11.9%.

Dividend and Interest Income and Interest Expense

Dividend and interest income consists primarily of investment income and interest earned on customer margin balances and U.S. Treasury Bills. Interest expense principally reflects interest accrued on cash balances in customers’ brokerage accounts. Dividend and interest income, net of interest expense, for the three months ended March 31, 2014 was essentially flat compared to the three months ended March 31, 2013.

Investment Gains (Losses)

Investment gains (losses) consist primarily of realized and unrealized investment gains or losses on: (i) employee long-term incentive compensation-related investments, (ii) investments owned by our consolidated venture capital fund, (iii) U.S. Treasury Bills, (iv) market-making in cash equities and exchange-traded options and equities, (v) seed capital investments and (vi) derivatives. Investments gains (losses) also include realized gains or losses on the sale of seed capital investments classified as available-for-sale securities and equity in earnings of proprietary investments in limited partnership hedge funds that we sponsor and manage.

Investment gains (losses) are as follows:

	Three Months Ended March 31,
	2014			2013
	(in millions)
Long-term incentive compensation-related investments
Realized gains (losses)	$	2.8		$	0.5
Unrealized gains (losses)		(1.5	)		5.5

Consolidated private equity fund investments
Realized gains (losses)
Non-public investments		—			—
Public investments		6.3			(1.4	)
Unrealized gains (losses)
Non-public investments		1.1			(0.9	)
Public investments		(5.2	)		1.0

Seed capital investments
Realized gains (losses)
Seed capital		5.4			1.9
Derivatives		(4.8	)		(10.9	)
Unrealized gains (losses)
Seed capital		(1.2	)		9.2
Derivatives		(0.7	)		3.8

Brokerage-related investments
Realized gains (losses)		(9.8	)		(3.3	)
Unrealized gains (losses)		8.1			1.6
	$	0.5		$	7.0

Other Revenues

Other revenues consist of fees earned for transfer agency services provided to company-sponsored mutual funds, fees earned for administration and recordkeeping services provided to company-sponsored mutual funds and the general accounts of AXA and its subsidiaries, and other miscellaneous revenues. Other revenues for the three months ended March 31, 2014 increased $0.4 million, or 1.4%, from the three months ended March 31, 2013, primarily due to higher shareholder servicing fees.

Expenses

The components of expenses were as follows:

	Three Months Ended
	3/31/14		3/31/13		$ Change			% Change
	(in millions)

Employee compensation and benefits	$	307.0	$	301.2	$	5.8			1.9	%
Promotion and servicing:
Distribution-related payments		97.3		109.3		(12.0	)		(11.0	)
Amortization of deferred sales commissions		9.0		11.1		(2.1	)		(19.1	)
Other		55.0		51.0		4.0			7.9
		161.3		171.4		(10.1	)		(5.9	)
General and administrative:
General and administrative		107.5		105.1		2.4			2.3
Real estate charges		1.9		0.6		1.3			204.4
		109.4		105.7		3.7			3.5
Contingent payment arrangements		0.3		0.2		0.1			87.7
Interest		0.8		1.0		(0.2	)		(20.5	)
Amortization of intangible assets		5.9		5.4		0.5			8.7
Total	$	584.7	$	584.9	$	(0.2	)		(0.1	)

Employee Compensation and Benefits

Employee compensation and benefits consist of base compensation (including salaries and severance), annual short-term incentive compensation awards (cash bonuses), annual long-term incentive compensation awards, commissions, fringe benefits and other employment costs (including recruitment, training, temporary help and meals).

Compensation expense as a percentage of net revenues was 43.0% and 42.5% for the three months ended March 31, 2014 and 2013, respectively. Compensation expense generally is determined on a discretionary basis and is primarily a function of our firm’s financial performance. Amounts are awarded to help us achieve our key compensation goals of attracting, motivating and retaining top talent, by providing awards for the past year’s performance and providing incentives for future performance, while also helping ensure that our firm’s unitholders receive an appropriate return on their investment. Senior management, with the approval of the Compensation Committee of the Board of Directors of AllianceBernstein Corporation (“Compensation Committee”), confirmed that the appropriate metric to consider in determining the amount of incentive compensation is the ratio of adjusted employee compensation and benefits expense to adjusted net revenues. Adjusted net revenues used in the adjusted compensation ratio are the same as the adjusted net revenues presented as a non-GAAP measure (discussed earlier in this MD&A). Adjusted employee compensation and benefits expense is total employee compensation and benefits expense minus other employment costs such as recruitment, training, temporary help and meals (which costs were 1.1% of adjusted net revenues for the three months ended March 31, 2014 and 2013), and excludes the impact of mark-to-market vesting expense, as well as dividends and interest expense, associated with employee long-term incentive compensation-related investments. Senior management, with the approval of the Compensation Committee, also established as an objective that adjusted employee compensation and benefits expense generally should not exceed 50% of our adjusted net revenues except in unexpected or unusual circumstances. Our ratios of adjusted compensation expense as a percentage of adjusted revenues were 50.0% for the three months ended March 31, 2014 and 2013.

For the three months ended March 31, 2014, employee compensation and benefits expense increased $5.8 million, or 1.9%, primarily due to higher base compensation of $5.4 million and higher incentive compensation of $2.8 million, partially offset by lower commissions of $2.7 million.

Promotion and Servicing

Promotion and servicing expenses include distribution-related payments to financial intermediaries for distribution of AllianceBernstein mutual funds and amortization of deferred sales commissions paid to financial intermediaries for the sale of back-end load shares of AllianceBernstein mutual funds. Also included in this expense category are costs related to travel and entertainment, advertising and promotional materials.

Promotion and servicing expenses decreased $10.1 million, or 5.9%, during the three months ended March 31, 2014 compared to the three months ended March 31, 2013. The decrease reflects lower distribution-related payments of $12.0 million and lower amortization of deferred sales commissions of $2.1 million, partially offset by higher marketing of $1.9 million, higher transfer fees of $1.0 million and higher travel and entertainment of $0.9 million.

General and Administrative

General and administrative expenses include technology, professional fees, occupancy, communications and similar expenses. General and administrative expenses as a percentage of net revenues were 15.3% (15.0% excluding real estate charges) and 14.9% (14.8% excluding real estate charges) for the three months ended March 31, 2014 and 2013, respectively. General and administrative expenses increased $3.7 million, or 3.5%, during the first quarter of 2014 compared to the same period in 2013, primarily due to higher portfolio services expenses of $1.5 million and higher real estate charges of $1.3 million.

Contingent Payment Arrangements

Contingent payment arrangements reflect changes in estimates of contingent payment liabilities established in connection with acquisitions in previous periods, as well as accretion expense of these liabilities. There were no changes in estimates during the first quarters of 2014 and 2013.

Income Taxes

AllianceBernstein, a private limited partnership, is not subject to federal or state corporate income taxes, but is subject to a 4.0% New York City unincorporated business tax (“UBT”). Our domestic corporate subsidiaries are subject to federal, state and local income taxes, and are generally included in the filing of a consolidated federal income tax return. Separate state and local income tax returns are also filed. Foreign corporate subsidiaries are generally subject to taxes in the jurisdictions where they are located.

Income tax expense for the three months ended March 31, 2014 was essentially flat as compared to the three months ended March 31, 2013.

Net Income (Loss) of Consolidated Entities Attributable to Non-Controlling Interests

Net income (loss) of consolidated entities attributable to non-controlling interests consists of limited partner interests owned by other investors representing 90% of the total limited partner interests in our consolidated venture capital fund. During the first quarter of 2014, we had a $1.8 million net gain of consolidated entities attributable to non-controlling interests, due primarily to a $2.2 million net investment gain attributable to our consolidated venture capital fund (of which 90% belongs to non-controlling interests) and management fees of $0.2 million.

CAPITAL RESOURCES AND LIQUIDITY

During the first three months of 2014, net cash provided by operating activities was $126.7 million, compared to net cash used in operating activities of $66.4 million during the corresponding 2013 period. The change is primarily due to an increase in broker-dealer related payables (net of receivables and segregated U.S. Treasury Bills activity) of $165.6 million and a decrease in fees receivable of $31.2 million.

During the first three months of 2014, net cash used in investing activities was $4.5 million, compared to $3.4 million during the corresponding 2013 period. The increase is primarily due to higher purchases of furniture, equipment and leasehold improvements of $1.0 million.

During the first three months of 2014, net cash used in financing activities was $109.3 million, compared to net cash provided by financing activities of $8.5 million during the corresponding 2013 period. The change reflects a decrease in overdrafts payable of $105.2 million and higher distributions to the General Partner and unitholders of $72.8 million as a result of higher earnings (distributions on earnings are paid one quarter in arrears), partially offset by higher net issuances of commercial paper of $45.5 million and lower repurchases of Holding Units of $17.9 million.

As of March 31, 2014, AllianceBernstein had $525.1 million of cash and cash equivalents, all of which is available for liquidity, but consists primarily of cash on deposit for our broker-dealers to comply with various customer clearing activities and cash held by foreign entities for which a permanent investment election for U.S. tax purposes is taken. If the cash held at our foreign subsidiaries of $324.4 million, which includes cash on deposit for our foreign broker dealers, was to be repatriated to the U.S., we would be required to accrue and pay U.S. income taxes on these funds, based on the unremitted amount. Our current intent is to permanently reinvest these earnings outside the U.S.

Debt and Credit Facilities

AllianceBernstein has a $1.0 billion committed, unsecured senior revolving credit facility (the “Credit Facility”) with a group of commercial banks and other lenders, which matures on January 17, 2017. The Credit Facility provides for possible increases in the principal amount by up to an aggregate incremental amount of $250 million, any such increase being subject to the consent of the affected lenders. The Credit Facility is available for AllianceBernstein’s and SCB LLC’s business purposes, including the support of AllianceBernstein’s $1.0 billion commercial paper program. Both AllianceBernstein and SCB LLC can draw directly under the Credit Facility and management may draw on the Credit Facility from time to time. AllianceBernstein has agreed to guarantee the obligations of SCB LLC under the Credit Facility.

The Credit Facility contains affirmative, negative and financial covenants, which are customary for facilities of this type, including, among other things, restrictions on dispositions of assets, restrictions on liens, a minimum interest coverage ratio and a maximum leverage ratio. As of March 31, 2014, we were in compliance with these covenants. The Credit Facility also includes customary events of default (with customary grace periods, as applicable), including provisions under which, upon the occurrence of an event of default, all outstanding loans may be accelerated and/or lender’s commitments may be terminated. Also, under such provisions, upon the occurrence of certain insolvency- or bankruptcy-related events of default, all amounts payable under the Credit Facility would automatically become immediately due and payable, and the lender’s commitments would automatically terminate.

Amounts under the Credit Facility may be borrowed, repaid and re-borrowed by us from time to time until the maturity of the facility. Voluntary prepayments and commitment reductions requested by us are permitted at any time without fee (other than customary breakage costs relating to the prepayment of any drawn loans) upon proper notice and subject to a minimum dollar requirement. Borrowings under the Credit Facility bear interest at a rate per annum, which will be, at our option, a rate equal to an applicable margin, which is subject to adjustment based on the credit ratings of AllianceBernstein, plus one of the following indexes: London Interbank Offered Rate; a floating base rate; or the Federal Funds rate.

As of March 31, 2014 and December 31, 2013, we had no amounts outstanding under the Credit Facility. During the first three months of 2014 and the full year 2013, we did not draw upon the Credit Facility.

In addition, SCB LLC has five uncommitted lines of credit with four financial institutions. Two of these lines of credit permit us to borrow up to an aggregate of approximately $200.0 million, with AllianceBernstein named as an additional borrower, while three lines have no stated limit. As of March 31, 2014 and December 31, 2013, SCB LLC had no bank loans outstanding. Average daily borrowings of bank loans during the first three months of 2014 and full year 2013 were $8.5 million and $6.2 million, respectively, with weighted average interest rates of approximately 1.1% and 1.0%, respectively.

Our financial condition and access to public and private debt markets should provide adequate liquidity for our general business needs. Management believes that cash flow from operations and the issuance of debt and AllianceBernstein Units or Holding Units will provide us with the resources necessary to meet our financial obligations. See “Cautions Regarding Forward-Looking Statements”.

COMMITMENTS AND CONTINGENCIES

AllianceBernstein’s capital commitments, which consist primarily of operating leases for office space, are generally funded from future operating cash flows.

During 2009, we entered into a subscription agreement under which we committed to invest up to $35 million, as amended in 2011, in a venture capital fund over a six-year period. As of March 31, 2014, we had funded $24.9 million of this commitment.

During 2010, as general partner of AllianceBernstein U.S. Real Estate L.P. (the “Real Estate Fund”), we committed to invest $25 million in the Real Estate Fund. As of March 31, 2014, we had funded $12.4 million of this commitment.

During 2012, we entered into an investment agreement under which we committed to invest up to $8 million in an oil and gas fund over a three-year period. As of March 31, 2014, we had funded $5.8 million of this commitment, which reflects a recall of previously returned capital in the amount of $2.6 million.

See Note 12 for discussion of contingencies.

CRITICAL ACCOUNTING ESTIMATES

The preparation of the condensed consolidated financial statements and notes to condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.

There have been no updates to our critical accounting estimates from those disclosed in Management’s Discussion and Analysis of Financial Condition in our Form 10-K for the fiscal year ended December 31, 2013.

ACCOUNTING PRONOUNCEMENTS

See Note 2 to AllianceBernstein’s condensed consolidated financial statements contained in Item 1.

CAUTIONS REGARDING FORWARD-LOOKING STATEMENTS

Certain statements provided by management in this report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. The most significant of these factors include, but are not limited to, the following: the performance of financial markets, the investment performance of sponsored investment products and separately-managed accounts, general economic conditions, industry trends, future acquisitions, competitive conditions and government regulations, including changes in tax regulations and rates and the manner in which the earnings of publicly-traded partnerships are taxed. We caution readers to carefully consider such factors. Further, such forward-looking statements speak only as of the date on which such statements are made; we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. For further information regarding these forward-looking statements and the factors that could cause actual results to differ, see “Risk Factors” in Part I, Item 1A of our Form 10-K for the year ended December 31, 2013 and Part II, Item 1A in this Form 10-Q. Any or all of the forward-looking statements that we make in the Form 10-K, this Form 10-Q, other documents we file with or furnish to the SEC, and any other public statements we issue, may turn out to be wrong. It is important to remember that other factors besides those listed in “Risk Factors” and those listed below also could affect adversely our revenues, financial condition, results of operations and business prospects.

The forward-looking statements referred to in the preceding paragraph, most of which directly affect AllianceBernstein but also affect Holding because Holding’s principal source of income and cash flow is attributable to its investment in AllianceBernstein, include statements regarding:

•

Our belief that the cash flow Holding realizes from its investment in AllianceBernstein will provide Holding with the resources necessary to meet its financial obligations: Holding’s cash flow is dependent on the quarterly cash distributions it receives from AllianceBernstein. Accordingly, Holding’s ability to meet its financial obligations is dependent on AllianceBernstein’s cash flow from its operations, which is subject to the performance of the capital markets and other factors beyond our control.

•

Our financial condition and ability to access the public and private capital markets providing adequate liquidity for our general business needs: Our financial condition is dependent on our cash flow from operations, which is subject to the performance of the capital markets, our ability to maintain and grow client assets under management and other factors beyond our control. Our ability to access the public and private capital markets on reasonable terms may be limited by adverse market conditions, our firm’s long-term credit ratings, our profitability and changes in government regulations, including tax rates and interest rates.

•

The outcome of litigation: Litigation is inherently unpredictable, and excessive damage awards do occur. Though we have stated that we do not expect certain pending legal proceedings to have a material adverse effect on our results of operations, financial condition or liquidity, any settlement or judgment with respect to pending or future legal proceeding could be significant, and could have such an effect.

•

The possibility that we will engage in open market purchases of Holding Units to help fund anticipated obligations under our incentive compensation award program: The number of Holding Units we may decide to buy in future periods, if any, to help fund incentive compensation awards is dependent upon various factors, some of which are beyond our control, including the fluctuation in the price of a Holding Unit (NYSE: AB) and the availability of cash to make these purchases.

•

Our determination that adjusted employee compensation expense should not exceed 50% of our adjusted net revenues: Aggregate employee compensation reflects employee performance and competitive compensation levels. Fluctuations in our revenues and/or changes in competitive compensation levels could result in adjusted employee compensation expense being higher than 50% of our adjusted net revenues.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to AllianceBernstein’s market risk for the quarter ended March 31, 2014.

Item 4.

Controls and Procedures

Disclosure Controls and Procedures

AllianceBernstein maintains a system of disclosure controls and procedures that is designed to ensure that information required to be disclosed in our reports under the Exchange Act is (i) recorded, processed, summarized and reported in a timely manner, and (ii) accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to permit timely decisions regarding our disclosure.

As of the end of the period covered by this report, management carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting occurred during the first quarter of 2014 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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