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EX-99.7 - FINANCIAL STATEMENTS OF LSV ASSET MANAGEMENT - SEI INVESTMENTS COseic-12311610kex997.htm
EX-32 - SECTION 906 CEO AND CFO CERTIFICATION - SEI INVESTMENTS COseic-12311610kex32.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - SEI INVESTMENTS COseic-12311610kex312.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - SEI INVESTMENTS COseic-12311610kex311.htm
EX-23.2 - CONSENT OF KPMG LLP RELATED TO LSV ASSET MANAGEMENT - SEI INVESTMENTS COseic-12311610kex232.htm
EX-23.1 - CONSENT OF KPMG LLP - SEI INVESTMENTS COseic-12311610kex231.htm
EX-21 - SUBSIDIARIES OF THE REGISTRANT - SEI INVESTMENTS COseic-12311610kex21.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from_________to ________

Commission File Number: 0-10200
SEI INVESTMENTS COMPANY
(Exact name of registrant as specified in its charter)
 
 
 
Pennsylvania
 
23-1707341
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
1 Freedom Valley Drive, Oaks, Pennsylvania
 
19456-1100
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code 610-676-1000
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $.01 per share
 
The NASDAQ Stock Market LLC
(The NASDAQ Global Select Market®)
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ý    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes  ¨    No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý




Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  ý
The aggregate market value of the voting common stock held by non-affiliates of the registrant was approximately $6.1 billion based on the closing price of $48.11 as reported by NASDAQ on June 30, 2016 (the last business day of the registrant’s most recently completed second fiscal quarter). For purposes of making this calculation only, the registrant has defined affiliates as including all executive officers, directors and beneficial owners of more than ten percent of the common stock of the registrant.
The number of shares outstanding of the registrant's common stock, as of the close of business on January 31, 2017:
 
 
 
Common Stock, $.01 par value
 
159,176,081

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference herein:

1.
The definitive proxy statement relating to the registrant’s 2017 Annual Meeting of Shareholders, to be filed within 120 days after the end of the fiscal year covered by this annual report, is incorporated by reference in Part III hereof.







SEI Investments Company
Fiscal Year Ended December 31, 2016
TABLE OF CONTENTS

 
 
Page
PART I
Item 1.
Business.
Item 1A.
Risk Factors.
Item 1B.
Unresolved Staff Comments.
Item 2.
Properties.
Item 3.
Legal Proceedings.
Item 4.
Mine Safety Disclosures.
 
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Item 6.
Selected Financial Data.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
Item 8.
Financial Statements and Supplementary Data.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Item 9A.
Controls and Procedures.
Item 9B.
Other Information.
 
PART III
Item 10.
Directors, Executive Officers and Corporate Governance.
Item 11.
Executive Compensation.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
Item 14.
Principal Accounting Fees and Services.
 
PART IV
Item 15.
Exhibits, Financial Statement Schedules.


Page 1 of 75



PART I
Forward Looking Statements
This Annual Report on Form 10-K contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve certain known and unknown risks, uncertainties and other factors, many of which are beyond our control, and are not limited to those discussed in Item 1A, “Risk Factors.” All statements that do not relate to historical or current facts are forward-looking statements. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, these include statements relating to present or anticipated products and markets, future revenues, capital expenditures, expansion plans, future financing and liquidity, personnel, and other statements regarding matters that are not historical facts or statements of current condition.
Any or all forward-looking statements contained within this Annual Report on Form 10-K may turn out to be wrong. They can be affected by inaccurate assumptions we might make, or by known or unknown risks and uncertainties. Many factors mentioned in the discussion below will be important in determining future results. Consequently, we cannot guarantee any forward-looking statements. Actual future results may vary materially.
We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. You are advised, however, to consult any further disclosures we make on related subjects in our filings with the U.S. Securities and Exchange Commission (SEC).
Item 1. Business.
Overview
SEI (NASDAQ: SEIC) is a leading global provider of investment processing, investment management and investment operations solutions. We help corporations, financial institutions, financial advisors, institutional investors and ultra-high-net-worth families create and manage wealth by providing comprehensive, innovative, investment and investment-business solutions. As of December 31, 2016, through its subsidiaries and partnerships in which the company has a significant interest, SEI manages or administers $751.1 billion in hedge, private equity, mutual fund and pooled or separately managed assets, including $283.1 billion in assets under management and $468.0 billion in client assets under administration. Our affiliate, LSV Asset Management (LSV), manages $87.2 billion of assets which are included as assets under management.
Our investment management business solutions include:
Investment processing outsourcing solutions for providers of institutional and private-client wealth management services, including banks, trust companies, independent wealth advisers and other financial services firms;
Investment management solutions for institutional investors, including retirement plan sponsors, not-for-profit organizations and affluent individual investors; and
Investment operations outsourcing solutions for investment management firms, banks and investment companies that sponsor and distribute mutual funds, hedge funds and alternative investments.
General Development of the Business
For over 45 years, SEI has been a leading provider of wealth management business solutions for the financial services industry.
We began doing business in 1968 by providing computer-based training simulations for bank loan officers. We developed an investment accounting system for bank trust departments in 1972 and became a leading provider of investment-processing outsourcing services to banks and trust institutions in the United States. Later, we broadened these outsourcing services and began offering bank clients a family of mutual funds, as well as investment-operations outsourcing services. We became a public company in 1981.
We began to adapt these solutions, and develop new investment management solutions for selected global markets in the 1990s, including: investment advisors, retirement plan sponsors and institutional investors, asset management distribution firms, investment managers and affluent individual investors. Today, we serve approximately 8,600 clients in the United States, Canada, the United Kingdom, continental Europe, South Africa and East Asia.
In each of these markets, we have combined our core competencies - investment processing, investment management and investment operations - to deliver broader and more strategic solutions for clients and markets. Today, we offer a global wealth platform and investment services for private banks and wealth services firms; a complete wealth platform for operating an investment advisory business; a comprehensive fiduciary management solution for retirement plan sponsors and institutional investors; a total operational outsourcing solution for investment managers and a complete life and wealth solution for ultra-high-net-worth families.

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Strategy
We seek to achieve growth in earnings and shareholder value by strengthening our position as a provider of global investment management solutions. To achieve this objective, we have implemented these strategies:
Create broader solutions for wealth service firms. Banks, investment managers and financial advisors seek to enter new markets, expand their service offerings, provide a differentiated experience to their clients, improve efficiencies, reduce risks and better manage their businesses. We offer business solutions integrating technology, operating processes and financial products designed to help these institutions better serve their clients and provide opportunities to improve their business success.
Help institutional investors manage retirement plans and operating capital. Retirement plan sponsors, not-for-profit organizations and other institutional investors strive to meet their fiduciary obligations and financial objectives while reducing business risk. We deliver customized investment management solutions, as part of a complete solution offering, that enable investors to make better decisions about their investments and to manage their assets more effectively.
Help affluent individual investors manage their life and wealth goals. These investors demand a holistic wealth management experience that focuses on their life goals and provides them with an integrated array of financial services that includes substantially more than traditional wealth management offerings. We help these investors identify their goals and offer comprehensive life and wealth advisory services including life planning, investments and other financial services.
Expand globally. Global markets are large and present significant opportunities for growth. We have evolved U.S. business models for the global wealth management marketplace, focusing on the needs of institutional investors, private banks, independent wealth advisers, investment managers, investment advisors and affluent individual investors.
Fundamental Principles
We are guided by these fundamental principles in managing the business and adopting these growth strategies:
Achieve growth in revenue and earnings. We seek to grow the business by providing additional services to clients, adding new clients, introducing new products and adapting products for new markets.
Forge long-term client relationships. We strive to achieve high levels of customer satisfaction and to forge close and long lasting client relationships. We believe these relationships enable us to market additional services and acquire knowledge and insights that fuel the product development process.
Invest in product development. We continually enhance products and services to keep pace with industry developments, regulatory requirements and the emerging needs of markets and clients. We believe ongoing investments in research and development give us a sustainable, competitive advantage in our markets.
Maintain financial strength. We adopt business models that generate recurring revenues and positive cash flows. Predictable cash flows serve as a source of funds for continuing operations, investments in new products, common stock repurchases and dividend payments.
Leverage investments across the business. We create scalable, enterprise-wide solutions designed to serve the needs of multiple markets, potentially offering operating efficiencies that can benefit corporate profitability.
Create value for shareholders. The objective of achieving long-term sustainable growth in revenues and earnings strongly influences the management of the business. This philosophy guides corporate management practices, strategic planning activities and employee compensation practices.
Business Solutions
Investment Processing
Investment processing solutions consist of application and business process outsourcing services, professional services and transaction-based services. We offer these services to providers of institutional and private-client wealth management services, including banks, trust companies, independent wealth advisers and other financial services firms. We also deliver these solutions, combined with our investment management programs, to investment advisors and other financial services firms that provide wealth management services to their advisory clients.
Application services are delivered through two proprietary software applications: TRUST 3000® and the SEI Wealth PlatformSM (the SEI Wealth Platform or the Platform). We own, maintain and operate these applications and associated information processing infrastructure and facilities, and are responsible for customer support. We design and develop enhancements to these proprietary applications. Through our wholly-owned subsidiaries, we also provide business-process

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outsourcing services including custodial and sub-custodial services, and back-office accounting services integrated with these software applications.
The TRUST 3000 product is a comprehensive trust and investment accounting system that provides securities processing and investment accounting for all types of domestic and global securities, and support for multiple account types, including personal trust, corporate trust, institutional trust and non-trust investment accounts.
The SEI Wealth Platform provides a global, unified and scalable platform for operating a wealth management business. This comprehensive solution includes investment processing and infrastructure services, and advanced capabilities to support wealth advisory, asset management, and wealth administration functions. The Platform provides global wealth management capabilities including a 24/7 operating model, global securities processing, and multi-currency accounting and reporting. Built around a client-centric relationship model, the Platform has an open architecture and supports workflow management and straight-through processing. We began delivering the SEI Wealth Platform to private banks and independent wealth advisers in the United Kingdom in 2007 and to banks in the United States in 2012. We have also implemented select groups of new and existing investment advisor clients in the United States.
Investment processing revenues are earned as monthly fees for contracted services including software licenses, information processing and business-process outsourcing. Revenues are primarily earned based upon the type and number of investor accounts serviced or as a percentage of the market value of the clients’ assets processed. These revenues are recognized in Information processing and software servicing fees on the accompanying Consolidated Statements of Operations.
Professional services revenues are earned from contracted, project-oriented services, including client implementations, and are recognized in Information processing and software servicing fees on the accompanying Consolidated Statements of Operations.
We also offer transaction execution services through our proprietary software applications. Fees are earned primarily from commissions earned on securities trades executed on behalf of clients. These revenues are recognized as Transaction-based and trade execution fees on the accompanying Consolidated Statements of Operations.
Investment Management Programs
Investment management programs consist of money market, fixed-income and equity mutual funds, collective investment products, alternative investment portfolios and separately managed accounts. Through our wholly owned subsidiaries, we serve as sponsor, administrator, transfer agent, investment advisor, distributor and shareholder servicer for many of these products. We distribute these programs through investment advisory firms, including investment advisors and banks, and directly to institutional and individual investors.
These investment products are used to formulate an investment strategy tailored to meet the needs of different investors, taking into consideration their objectives and risk tolerances. Our clients, or the investors served by our client intermediaries, are the investors in these products. Investors typically invest in a globally diversified portfolio that consists of multiple asset classes and investment styles.
We have expanded these investment management programs to include other consultative, operational and technology components, and have created comprehensive solutions tailored to the needs of a specific market. These components may include investment strategies, consulting services, administrative and processing services and technology tools.
As of December 31, 2016, SEI managed $195.9 billion in assets including: $148.2 billion invested in fixed-income and equity funds and separately managed account programs; $37.1 billion invested in collective trust fund programs and $10.6 billion invested in liquidity or money market funds. An additional $87.2 billion in assets is managed by our unconsolidated affiliate LSV, a registered investment advisor that specializes in a value equity management style for their clients.
Revenues from investment management programs are primarily earned as a percentage of net assets under management. These revenues are recognized in Asset management, administration and distribution fees on the accompanying Consolidated Statements of Operations. Our interest in the earnings of LSV is recognized in Equity in earnings of unconsolidated affiliates on the accompanying Consolidated Statements of Operations.
Investment Operations
Investment operations outsourcing solutions consist of accounting and administration services, and distribution support services. We deliver these solutions to investment management firms that offer traditional and alternative products. We support traditional managers who advise a variety of investment products including mutual funds, UCITS schemes, collective investment trusts (CITs), exchange-traded funds (ETFs), institutional accounts and separately managed accounts. We also provide comprehensive solutions to investment managers worldwide that sponsor and distribute alternative investment products

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such as hedge funds, funds of hedge funds, private equity funds and real estate funds, across both registered and partnership structures.
Accounting and administration services include account and fund administration, investment portfolio and fund accounting; cash administration and treasury services; trade capture, settlement and reconciliation; trustee and custodial services; legal, audit and tax support; and investor services. Distribution support services may include access to distribution platforms and market and industry analyses to identify specific product distribution opportunities. These solutions are delivered by utilizing a highly integrated, robust and scalable technology platform adapted to fit the specific business needs of our investment manager clients.
As of December 31, 2016, we administered $468.0 billion in client assets for traditional and alternative investment fund products, including mutual funds, hedge funds and private equity funds. Revenues from these products are primarily earned as a percentage of net assets under administration.
Revenues for the processing of institutional separate accounts and separately managed accounts are generally earned on the number of investor accounts serviced. Assets associated with this separate account processing are not included in reported assets under administration. Both revenue categories are recognized in Asset management, administration and distribution fees on the accompanying Consolidated Statements of Operations.
Business Segments
Business segments are generally organized around our target markets. Financial information about each business segment is contained in Note 13 to the Consolidated Financial Statements. Our business segments are:
Private Banks – provides investment processing and investment management programs to banks and trust institutions, independent wealth advisers and financial advisors worldwide;
Investment Advisors – provides investment management programs to affluent investors through a network of independent registered investment advisors, financial planners and other investment professionals in the United States;
Institutional Investors – provides investment management programs and administrative outsourcing solutions to retirement plan sponsors, hospitals and not-for-profit organizations worldwide;
Investment Managers – provides investment operations outsourcing solutions to fund companies, banking institutions and both traditional and non-traditional investment managers worldwide; and
Investments in New Businesses – focuses on providing investment management programs to ultra-high-net-worth families residing in the United States; developing internet-based investment services and advice solutions; entering new markets; and conducting other research and development activities.
The percentage of consolidated revenues generated by each business segment for the last three years was:
 
 
2016
 
2015
 
2014
Private Banks
 
33
%
 
34
%
 
35
%
Investment Advisors
 
23
%
 
23
%
 
22
%
Institutional Investors
 
22
%
 
22
%
 
22
%
Investment Managers
 
21
%
 
20
%
 
20
%
Investments in New Businesses
 
1
%
 
1
%
 
1
%
 
 
100
%
 
100
%
 
100
%
Private Banks    
The Private Banks segment delivers a comprehensive outsourcing solution integrating investment processing services, investment management and distribution programs, and business expertise to banks and trust institutions, independent wealth advisers and financial advisors worldwide.
We offer TRUST 3000 investment processing as an application solution (Software-as-a-Service, or SaaS) or as a business processing solution. Application solution clients outsource investment processing software services and information processing to SEI, but retain responsibility for back-office investment operations. Business processing solution clients also outsource investment operations, including custody and safekeeping of certain assets, income collection, securities settlement and other back-office accounting activities.
Contracts with TRUST 3000 clients have initial terms that are generally three to seven years in length. At December 31, 2016, we had significant relationships with 94 bank and trust institutions in the United States. Our principal competitors for this business are: Fidelity National Information Services, Inc. (FIS), Fi-Tek LLC, Innovest Portfolio Solutions, LLC, Charles

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Schwab & Co., Inc. and Fidelity Investments. Many large financial institutions develop, operate and maintain proprietary investment and trust accounting systems. We consider these “in-house” solutions to be a form of competition.
Marketing efforts in this segment are focused on the SEI Wealth Platform. The Platform offers advanced capabilities across the entire range of wealth management processes, including those of large global wealth managers. The Platform enables banks and investment service firms of all types to manage the growing complexity of their operations, replace legacy platforms, comply with complex regulations, and make more effective use of capital by outsourcing wealth management services.
We currently deliver the SEI Wealth Platform as a business processing solution. New Platform clients undergo a business transformation process that includes either a conversion of existing client assets, or a business transition process which funds new client assets onto the Platform as the client grows their business with a contractual minimum fee in place. We begin to earn processing revenues when the client commences operation on the Platform.
In 2015, we signed an existing TRUST 3000 client to be the first large national bank to implement the SEI Wealth Platform, and the first client to operate the Platform as an SaaS solution. This will be a multi-year conversion due to the client’s size, the development work involved to expand the Platform to be offered as a SaaS solution, and the scope of integration activities required. While executing this large-scale implementation, we will continue to install other signed clients. We will also continue to manage our current TRUST 3000 relationships toward eventual conversion to the Platform.
Contracts with SEI Wealth Platform clients have initial terms that are generally five to seven years in length. At December 31, 2016, we had significant relationships with 26 banks, independent wealth advisers and other wealth managers located in the United Kingdom and the United States. Our principal competitors for this business, in addition to those named above, are: Pershing LLC, FNZ UK Ltd., Temenos Group AG, Avaloq, SS&C Technologies, Fiserv, Inc. and smaller technology firms. We also consider “in-house” solutions to be a form of competition.
This segment also offers investment management and distribution programs for banks, wealth managers and other financial services intermediaries. These programs start with SEI’s standard investment solutions, strategies, funds and investment services. We also deliver customized solutions including asset management strategies, as well as investment manager and portfolio research services. Increasingly, asset management distributors with established platforms are seeking to grow their businesses by offering broader investment solutions while outsourcing non-client facing investment services activities. We believe we offer our distribution partners a cost-effective way to grow their businesses and offer their investors differentiated investment choices, such as SEI’s goal-based investing solution.
We have business relationships with approximately 320 banks, wealth managers and other financial services intermediaries at December 31, 2016. Our definition of an asset management distribution client for this segment includes financial intermediaries who have exceeded a minimal level of customer assets invested in our investment products. With the growth of our business, the minimal level of customer assets which defines a "business relationship" is adjusted from time to time. Our business is primarily based on 95 asset management distribution clients who, at December 31, 2016, had at least $5.0 million each in customer assets invested in our programs. We also had single-product relationships with 90 additional banks and trust institutions. The principal competitors for this business are: Russell Investment Group, Fidelity Investments, Franklin Templeton Investments, discretionary portfolio managers and various multi-manager investment programs offered by other firms. We also consider “in-house” proprietary asset management capabilities to be a form of long-term competition.
Investment Advisors
The Investment Advisors segment offers investment management solutions throughout the United States to registered investment advisors, financial planners and life insurance agents, many of whom are registered with independent broker-dealers. These solutions include our investment management programs and back-office investment processing outsourcing services and are usually offered on a bundled basis. We also help advisors manage and grow their businesses by giving them access to our marketing support programs and our practice management services which include, for example, workflow recommendations, succession planning advice, business assessment assistance and recommended management practices. We believe our solutions help investment advisors reduce risk, improve quality and gain operational efficiency which allows them to devote more of their resources to acquiring new clients and achieving better outcomes for their existing clients.
Advisors are responsible for the investor relationship which includes creating financial plans, implementing investment strategies and educating and servicing their customers. Advisors may customize portfolios to include separate account managers provided through our programs as well as SEI-sponsored mutual funds. Our wealth and investment programs are designed to be attractive to affluent or high-net-worth individual investors and small to medium-sized institutional retirement plans.

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We continually enhance our offering to meet the emerging needs of our advisors and their end clients. We anticipate the enhanced service offerings enabled through the SEI Wealth Platform will provide a more diverse range of back-office, front-office and client-facing investment processing outsourcing services and investment management solutions. We began to implement selected groups of advisor clients onto the Platform in 2015. In 2016, we began to conduct large-scale migrations of existing advisor relationships onto the Platform, including larger, more sophisticated advisors. We will continue to focus on recruiting new advisors, improving net cash flows into our investment management programs, and managing client relationships toward eventual migration onto the Platform.
We estimate we have business relationships with approximately 7,300 financial advisors at December 31, 2016. Our definition of a client for this segment includes financial advisors who have exceeded a minimal level of customer assets invested in our investment products. With the growth of our business, the minimal level of customer assets which defines a "business relationship" is adjusted from time to time. Our business is primarily based on approximately 1,900 investment advisors who, at December 31, 2016, had at least $5.0 million each in customer assets invested in our programs. Revenues are earned largely as a percentage of average assets under management.
The principal competition for our investment management products is from other active money managers, passive investment management sponsors, other turnkey asset management providers, mutual fund companies, custody service providers and the proprietary investment management programs of broker dealers. In the advisor distributor channel, the principal competitors include AssetMark Investment Services Inc., Brinker Capital, EnvestNet Asset Management, Inc., Fidelity Investments, TD Ameritrade, Charles Schwab & Co., Inc., and other broker-dealers. As we introduce the Platform, we expect to more directly compete with custody service providers.
Institutional Investors
The Institutional Investors segment offers Outsourced Chief Investment Officer (OCIO) solutions to retirement plan sponsors, healthcare systems, and not-for-profit organizations globally. We have a broadly experienced team with specific expertise in defined benefit plans, defined contribution plans, endowments, foundations and balance sheet assets.
Our clients benefit from solutions that combine the breadth of SEI’s investment management, advisory, and administration services. Depending on their needs, objectives, and risk tolerance, clients can elect to either retain control or outsource specific management functions. As a result, they can integrate SEI’s investment process, advisory services, and plan administration services into their existing best practices. This approach is designed to address the investor’s specific risk-return requirements, reduce business risk, provide ongoing due diligence, and increase operational efficiency.
SEI’s open architecture investment management approach provides access to manager research, manager selection and monitoring, portfolio construction and discretionary management. Advisory services include scenario modeling and customization of an asset allocation plan that is designed to meet long-term objectives. Plan administration services include trustee, custodial, and benefit payment services.
In 2017, we expect to continue to build a globally diversified institutional client base, provide our clients with value-added advice and discretionary services, and place increased emphasis on defined contribution and not-for-profit organizations fiduciary management sales opportunities.
Fees are primarily earned as a percentage of average assets under management calculated using the average of the four month ending balances preceding the billing date. At December 31, 2016, we had relationships with 479 institutional clients. The principal competitors for this segment are Mercer, Aon Hewitt, Willis Towers Watson, Russell Investments, Northern Trust Company and other OCIO/fiduciary management firms.
Investment Managers
The Investment Managers segment provides investment organizations of all types with the advanced operating infrastructure they need to be competitive while enabling them to navigate a host of business and regulatory challenges. Our comprehensive global operating platform provides asset managers with customized and integrated capabilities in the areas of data and information management, investment operations, risk management and compliance support, as well as fund administration, fund accounting and distribution support.
We work with a diverse and sophisticated group of alternative, traditional, and hybrid asset managers, including approximately one-third of the top 100 managers worldwide. Clients choose our full-service offering because of its flexibility, speed and ability to support their diverse business needs across multiple product types and structures, investment strategies and asset classes. Our investment manager clients offer a variety of packaging types, including hedge funds, private equity funds, mutual funds, separate accounts, ETFs, UCITS, unit trusts and closed-end funds. For clients focused on the U.S. retirement market

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who desire to manage assets within a collective investment trust, we offer trustee and investment management services in addition to the aforementioned administration services. Because our operational platform enables managers to view their business in such a comprehensive and integrated way, it gives them more insight and thus control over their business risks and results.
Over the past few years, investors have faced multiple market crises and rising volatility. Investment managers have responded with a range of innovative products designed to better manage volatility and downside risk, and many now offer alternatives to the pure long-only investing strategy historically used in traditional markets. This can be accomplished in a standalone private or public fund vehicle or using our series trust platform. Additionally, as competitiveness will increasingly be based on capabilities other than just investment expertise, we have offered managers solutions that help them gain scale and efficiency, run their businesses more intelligently, and be more responsive to investor and intermediary needs. We also continually enhance our solutions to anticipate and adapt to economic, regulatory and industry changes.
In 2017, we expect to continue our efforts to add new asset managers, grow our existing relationships, expand into new markets and further develop our solutions and global operations platform.
Contracts for fund administration outsourcing services generally have terms ranging from three to five years. Fees are primarily earned as a percentage of average assets under management and administration. A portion of the revenues for this segment is earned as account servicing fees. At December 31, 2016, we had relationships with 264 investment management companies and alternative investment managers. Our competitors vary according to the asset class or solution provided and include large global custodian banks such as State Street, BNY Mellon and Northern Trust as well as independently-owned firms such as SS&C Technologies and Citco.
Investments in New Businesses
The Investments in New Businesses segment represents other business ventures or research and development activities intended to expand our solutions to new or existing markets including ultra-high-net-worth families who reside in the United States. This segment also includes the costs associated with developing internet-based investment services and advice solutions. The family wealth management solution offers flexible family-office type services through a highly personalized solution while utilizing a goals-based investment process.
The principal competitors for the family wealth solution are diversified financial services providers focused on the ultra-high-net-worth market.
Research and Development
We are devoting significant resources to research and development, including expenditures for new technology platforms, enhancements to existing technology platforms and new investment products and services. Our research and development expenditures for the last three years were:
(all dollar amounts in thousands)
 
2016
 
2015
 
2014
Research and development expenditures
 
$
134,323

 
$
102,923

 
$
98,622

 
 
 
 
 
 
 
Capitalization of costs incurred in developing computer software
 
$
50,392

 
$
29,416

 
$
34,877

 
 
 
 
 
 
 
Research and development expenditures as a percentage of revenues
 
9.6
%
 
7.7
%
 
7.8
%
Our research and development expenditures are included in Compensation, benefits and other personnel and Consulting, outsourcing and professional fees on the accompanying Consolidated Statements of Operations.
The majority of our research and development spending is related to building the SEI Wealth Platform, which combines business service processing with asset management and distribution services. The Platform offers to our customers a client-centric, rather than an account-centric, process with model-based portfolio management services through a single platform. The Platform utilizes SEI’s proprietary applications with those built by third-party providers and integrates them into a single technology solution. This integration supports straight-through business processing and enables the transformation of our clients’ wealth services from operational investment processing services to client value-added services.
The Platform provides the technology infrastructure for the business solutions now being marketed and delivered to markets in the United States and the United Kingdom served by the Private Banks segment. The Platform also provides the technology infrastructure for the business solutions now being marketed and delivered to markets in the United States served by the

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Investment Advisors segment. We believe the advanced capabilities of the Platform will enable us to significantly extend and enhance the services we offer to clients and expand SEI’s addressable markets.
The Investment Managers segment is enhancing its business solutions to provide services to other areas of the investment firm. The new application initially being developed exclusively for this segment includes components that will aggregate, transact and process data to provide integration and aggregation capabilities, data management services, and risk and compliance reporting.
Marketing and Sales
Our business solutions are directly marketed to potential clients in our target markets. At January 31, 2017, we employed 103 sales representatives who operate from offices located throughout the United States, Canada, the United Kingdom, continental Europe, South Africa, Asia and other locations.
Customers
In 2016, no single customer accounted for more than ten percent of revenues in any business segment.
Personnel
At January 31, 2017, we had 3,186 full-time and 57 part-time employees. Employee unions do not represent any of our employees. Management considers employee relations to be generally good.
Regulatory Considerations
Our principal, regulated wholly-owned subsidiaries are SEI Investments Distribution Co., or SIDCO, SEI Investments Management Corporation, or SIMC, SEI Private Trust Company, or SPTC, SEI Trust Company, or STC, and SEI Investments (Europe) Limited, or SIEL. SIDCO is a broker-dealer registered with the SEC under the Securities Exchange Act of 1934 and is a member of the Financial Industry Regulatory Authority, Inc. (FINRA). SIMC is an investment advisor registered with the SEC under the Investment Advisers Act of 1940 and with the Commodity Futures Trading Commission (CFTC) under the Commodity Exchange Act. SPTC is a limited purpose federal thrift chartered and regulated by the Office of the Comptroller of the Currency. STC is a Pennsylvania trust company, regulated by the Pennsylvania Department of Banking and Securities. SIEL is an investment manager and financial institution subject to regulation by the Financial Conduct Authority of the United Kingdom. In addition, various SEI subsidiaries are subject to the jurisdiction of regulatory authorities in Canada, the Republic of Ireland and other foreign countries. The Company has a minority ownership interest of approximately 38.9 percent in LSV, which is also an investment advisor registered with the SEC.
The Company, its regulated subsidiaries, their regulated services and solutions and their customers are all subject to extensive legislation, regulation and supervision that recently has been subject to, and continues to experience, significant change and increased regulatory activity. These changes and regulatory activities could have a material adverse effect on us and our clients.
The various governmental agencies and self-regulatory authorities that regulate or supervise the Company and its subsidiaries have broad administrative powers. In the event of a failure to comply with laws, regulations and requirements of these agencies and authorities, the possible sanctions that may be imposed include the suspension of individual employees, limitations on our ability to engage in business for specified periods of time, the revocation of applicable registration as a broker-dealer, investment advisor or other regulated entity, and, as the case may be, censures and fines. Additionally, certain securities and banking laws applicable to us and our subsidiaries provide for certain private rights of action that could give rise to civil litigation. Any litigation could have significant financial and non-financial consequences including monetary judgments and the requirement to take action or limit activities that could ultimately affect our business.
Governmental scrutiny from regulators, legislative bodies and law enforcement agencies with respect to matters relating to our regulated subsidiaries and their activities, services and solutions, our business practices, our past actions and other matters has increased dramatically in the past several years. Responding to these examinations, investigations, actions and lawsuits, regardless of the ultimate outcome of the proceeding, is time consuming and expensive and can divert the time and effort of our senior management from our business. Penalties and fines sought by regulatory authorities have increased substantially over the last several years, and certain regulators have been more likely in recent years to commence enforcement actions or to advance or support legislation targeted at the financial services industry. We continue to be subject to inquiries from examinations and investigations by supervisory and enforcement divisions of regulatory authorities and expect this to continue in the future. We believe this is also the case with many of our regulated clients. Governmental scrutiny and legal and enforcement proceedings can also have a negative impact on our reputation, our relationship with clients and prospective clients, and on the morale and performance of our employees, which could adversely affect our businesses and results of operations.

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We are subject to the USA PATRIOT Act of 2001, which contains anti-money laundering and financial transparency laws and requires implementation of regulations applicable to financial services companies, including standards for verifying client identification and monitoring client transactions and detecting and reporting suspicious activities. Anti-money laundering laws outside the United States contain similar requirements. We offer investment and banking solutions that also are subject to regulation by the federal and state securities and banking authorities, as well as foreign regulatory authorities, where applicable. Existing or future regulations that affect these solutions could lead to a reduction in sales of these solutions or require modifications of these solutions.
Compliance with existing and future regulations and responding to and complying with recent increased regulatory activity affecting broker-dealers, investment advisors, investment companies, financial institutions and their service providers could have a significant impact on us. We periodically undergo regulatory examinations and respond to regulatory inquiries and document requests. In addition, recent legislative activity in the United States (including the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and attendant rule making activities) and in other jurisdictions (including the European Union and the United Kingdom) have made and continue to make extensive changes to the laws regulating financial services firms. As a result of these examinations, inquiries and requests, as a result of increased civil litigation activity, and as a result of these new laws and regulations, we engage legal counsel, review our compliance procedures, solution and service offerings, and business operations, and make changes as we deem necessary. These additional activities and required changes may result in increased expense or may reduce revenues.
Our bank clients are subject to supervision by federal and state banking authorities concerning the manner in which such clients purchase and receive our products and services. Our plan sponsor clients and our subsidiaries providing services to those clients are subject to supervision by the Department of Labor and compliance with employee benefit regulations. Investment advisor and broker-dealer clients are regulated by the SEC, state securities authorities, or FINRA. Existing or future regulations applicable to our clients may affect our clients’ purchase of our products and services.
In addition, see the discussion of governmental regulations in Item 1A “Risk Factors” for a description of the risks that proposed regulatory changes may present for our business.
Available Information
We maintain a website at www.seic.com and make available free of charge through the Investors section of this website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. We include our website in this Annual Report on Form 10-K only as an inactive textual reference and do not intend it to be an active link to our website. The material on our website is not part of this Annual Report on Form 10-K.
Item 1A. Risk Factors.
We believe that the risks and uncertainties described below are those that impose the greatest threat to the sustainability of our business. However, there are other risks and uncertainties that exist that may be unknown to us or, in the present opinion of our management, do not currently pose a material risk of harm to us. The risk and uncertainties facing our business, including those described below, could materially adversely affect our business, results of operations, financial condition and liquidity.
Our revenues and earnings are affected by changes in capital markets. A majority of our revenues are earned based on the value of assets invested in investment products that we manage or administer. Significant fluctuations in securities prices may materially affect the value of these assets and may also influence an investor’s decision to invest in and maintain an investment in a mutual fund or other investment product. As a result, our revenues and earnings derived from assets under management and administration could be adversely affected.
We are exposed to product development risk. We continually strive to increase revenues and meet our customers' needs by introducing new products and services. As a result, we are subject to product development risk, which may result in loss if we are unable to develop and deliver products to our target markets that address our clients' needs and that are developed on a timely basis and reflect an attractive value proposition. The majority of our product development risk pertains to the SEI Wealth Platform, which provides a global, unified and scalable platform for operating a wealth management business. It is designed to improve client experience capabilities and strengthen operating efficiencies by providing straight through business processing solutions and transform the front, middle and back office operations that exist today. New product development is primarily for the purpose of enhancing our competitive position in the industry. In the event that we fail to develop products or services at an acceptable cost or on a timely basis or if we fail to deliver products and services which are of sound, economic value to our clients and our target markets, or an inability to support the product in a cost-effective and compliant manner, we may recognize significant financial losses.

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In 2015, we signed an existing client to be the first large national bank to implement the SEI Wealth Platform, and the first client to operate the Platform as an SaaS solution. This will be a multi-year conversion due to the client’s size, the development work involved to expand the Platform to be offered as a SaaS solution, and the scope of integration activities required. The failure to develop and implement the contractually-agreed upon services on a timely basis for this client may result in significant financial losses and may negatively impact our ability to generate future growth in revenues derived from the SEI Wealth Platform.
We are dependent upon third-party service providers in our operations. We utilize numerous third-party service providers located in the United States, Canada, the United Kingdom and other offshore locations in our operations, in the development of new products, and in the maintenance of our proprietary systems. A failure by a third-party service provider could expose us to an inability to provide contractual services to our clients in a timely basis. Additionally, if a third-party service provider is unable to provide these services, we may incur significant costs to either internalize some of these services or find a suitable alternative.
We serve as the investment advisor for many of the products offered through our investment management programs and utilize the services of investment sub-advisers to manage the majority of these assets. A failure in the performance of our due diligence processes and controls related to the supervision and oversight of these firms in detecting and addressing conflicts of interest, fraudulent activity, noncompliance with relevant securities and other laws could cause us to suffer financial loss, regulatory sanctions or damage to our reputation.
We are exposed to data and cyber security risks. A failure to safeguard the integrity and confidentiality of client data and our proprietary data from the infiltration by an unauthorized user may lead to modifications or theft of critical and sensitive data pertaining to us or our clients. We have established a strategy designed to protect against threats and vulnerabilities containing preventive and detective controls including, but not limited to, firewalls, intrusion detection systems, computer forensics, vulnerability scanning, server hardening, penetration testing, anti-virus software, data leak prevention, encryption and centralized event correlation monitoring. Despite our efforts to ensure the integrity of our proprietary systems and information, it is possible that we may not be able to anticipate or to implement effective preventive measures against all cyber threats, especially because the methods used change frequently or are not recognized until launched. Additionally, security breaches or disruptions of our proprietary systems, or those of our service providers, could impact our ability to provide services to our clients, which could expose us to liability for damages which may not be covered by insurance, result in the loss of customer business, damage our reputation, subject us to regulatory scrutiny or expose us to civil litigation. In addition, the failure to upgrade or maintain our computer systems, software and networks, as necessary, could also make us susceptible to breaches and unauthorized access and misuse. Data security breaches may also result from non-technical means, for example, employee misconduct or human error. We may be required to expend significant additional resources to modify, investigate or remediate vulnerabilities or other exposures arising from data and cyber security risks. Furthermore, even if not directed at us specifically, attacks on other financial institutions could disrupt the overall functioning of the financial system. As a result of the importance of communications and information systems to our business, we could also be adversely affected if attacks affecting our third party service providers impair our ability to process transactions and communicate with clients and counterparties.
We are exposed to operational risks. Operational risk generally refers to the risk of loss resulting from our operations, including, but not limited to, improper or unauthorized execution and processing of transactions, deficiencies in our operating systems, inefficiencies in our operational business units, business disruptions and inadequacies or breaches in our internal control processes. We operate different businesses in diverse markets and are reliant on the ability of our employees and systems to process large volumes of transactions often within short time frames. In the event of a breakdown or improper operation of systems, human error or improper action by employees, we could suffer significant financial loss, regulatory sanctions or damage to our reputation. In order to mitigate and control operational risk, we continue to enhance policies and procedures that are designed to identify and manage operational risk.
We are exposed to systems and technology risks. Through our proprietary systems, we maintain and process data for our clients that is critical to their business operations. An unanticipated interruption of service may have significant ramifications, such as lost data, damaged software codes, or inaccurate processing of transactions. As a result, the costs necessary to rectify these problems may be substantial. Our continued success also depends in part on our ability to protect our proprietary technology and solutions and to defend against infringement claims of others. We primarily rely upon trade secret law, software security measures, copyrights and confidentiality restrictions in contracts with employees, vendors and customers. Our industry is characterized by the existence of a large number of trade secrets, copyrights and the rapid issuance of patents, as well as frequent litigation based on allegations of infringement or other violations of intellectual property rights of others. A successful assertion by others of infringement claims or a failure to maintain the confidentiality and exclusivity of our intellectual property may have a material adverse effect on our business and financial results.


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Pricing pressure from increased competition and poor investment performance may affect our revenues and earnings.
The investment management industry is highly competitive and has relatively low barriers to entry. In recent years, the Company has experienced, and continues to experience, pricing pressures from the introduction of new, lower-priced investment products and services as well as from competitor firms offering automated portfolio management and other services based on technological innovations. These new investment products and technological innovations available to both institutional and retail investors have led to a general trend towards lower fees in some segments of the investment management industry. We believe price competition and pricing pressures in these and other areas will continue as institutional investors continue to reduce the amounts they are willing to pay and financial services firms seek to obtain market share by reducing fees or margins.

Our investment management solutions include investment management programs and back-office investment processing outsourcing services and are generally offered on a bundled basis. The breadth of our business solutions allows us to compete on a number of factors including: the performance of our investment products; the level of fees charged; the quality of our investment processing services; our reputation and position in the industry; and our ability to address the complex and changing needs of our clients. Increased competition on the basis of any of these factors could have an adverse impact on our competitive position resulting in a decrease in our revenues and earnings.
Our ability to maintain our existing clients and attract new clients may be negatively affected if the performance of our mutual funds and other investment products, relative to market conditions and other comparable competitive investment products, is lower. Investors may decide to place their investable funds elsewhere which would reduce the amount of assets we manage resulting in a decrease in our revenues and earnings.
Our earnings and cashflows are affected by the performance of LSV. We maintain a minority ownership interest in LSV which is a significant contributor to our earnings. We also receive partnership distribution payments from LSV on a quarterly basis which contribute to our operating cashflows. LSV is a registered investment advisor that provides investment advisory services to institutions, including pension plans and investment companies. LSV is a value-oriented, contrarian money manager offering a deep-value investment alternative utilizing a proprietary equity investment model to identify securities generally considered to be out of favor by the market. Volatility in the capital markets or poor investment performance on the part of LSV, on a relative basis or an absolute basis, could result in a significant reduction in their assets under management and revenues and a reduction in performance fees. Consequently, LSV's contribution to our earnings through our minority ownership as well as to our operating cashflows through LSV's partnership distribution payments could be adversely affected.
In addition, we provided an unsecured guaranty for $45.0 million of the obligations of LSV Employee Group III in connection with their purchase of a partnership interest in LSV, of which $5.7 million remains outstanding at December 31, 2016. The ability of LSV Employee Group III to successfully repay their loan obligation subject to our guaranty is dependent upon the level of quarterly partnership distribution payments from LSV. In the event that LSV Employee Group III does not receive sufficient partnership distribution payments from LSV or is otherwise unable to meet all of their financial obligations regarding the loan, the lenders have the right to seek payment from us for the outstanding obligations. The repayment of such obligations related to our guaranty agreement may negatively affect our operating results, liquidity and financial condition.
We are dependent on third party pricing services for the valuation of securities invested in our investment products. The majority of the securities held by our investment products are valued using quoted prices from active markets gathered by external third party pricing services. Securities for which market prices are not readily available are valued in accordance with procedures applicable to that investment product. These procedures may utilize unobservable inputs that are not gathered from any active markets and involve considerable judgment. If these valuations prove to be inaccurate, our revenues and earnings from assets under management could be adversely affected.
Our Company and our clients are subject to extensive governmental regulation. Our various business activities are conducted through entities which may be registered with or regulated by the SEC and CFTC as an investment advisor, a broker-dealer, a transfer agent, or an investment company, and with federal or state banking authorities as a trust company. Our broker-dealer is also a member of the Financial Industry Regulatory Authority and is subject to its rules and oversight. In addition, some of our foreign subsidiaries are registered with, and subject to the oversight of, regulatory authorities primarily in the United Kingdom, the Republic of Ireland and Canada. Many of our clients are subject to substantial regulation by federal and state banking, securities or insurance authorities or the Department of Labor. Compliance with existing and future regulations, responding to and complying with recent regulatory activity affecting broker-dealers, investment advisors, investment companies and their service providers and financial institutions, and examination or other supervisory activities of our regulators or of the regulators of our clients, could have a significant impact on our operations or business or our ability to provide certain products or services.

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We offer investment and banking products that also are subject to regulation by the federal and state securities and banking authorities, as well as foreign regulatory authorities, where applicable. Existing or future regulations that affect these products could lead to a reduction in sales of these products or an increase in the cost of providing these products.
The fees and assessments imposed on our regulated subsidiaries by federal, state and foreign regulatory authorities could have a significant impact on us. In the current regulatory environment, the frequency and scope of regulatory reform may lead to an increase in fees and assessments resulting in increased expense, or an increase or change in regulatory requirements which could affect our operations and business.
We are subject to litigation and regulatory examinations and investigations. The financial services industry faces substantial regulatory risks and litigation. Like many firms operating within the financial services industry, we are experiencing a difficult regulatory environment across our markets. Our current scale and reach as a provider to the financial services industry; the increased regulatory oversight of the financial services industry generally; new laws and regulations affecting the financial services industry and ever-changing regulatory interpretations of existing laws and regulations, have made this an increasingly challenging and costly regulatory environment in which to operate. These examinations or investigations could result in the identification of matters that may require remediation activities or enforcement proceedings by the regulator. The direct and indirect costs of responding to these examinations, or of defending ourselves in any litigation could be significant. Additionally, actions brought against us may result in settlements, awards, injunctions, fines and penalties. The outcome of litigation or regulatory action is inherently difficult to predict and could have an adverse effect on our ability to offer some of our products and services.
Consolidation within our target markets may affect our business. Merger and acquisition activity between banks and other financial institutions could reduce the number of existing and prospective clients or reduce the amount of revenue we receive from retained clients. Consolidation activities may also cause larger institutions to internalize some or all of our services. These factors may negatively impact our ability to generate future growth in revenues and earnings.
The exit by the United Kingdom from the European Union could adversely affect our business. The results of the referendum held in the United Kingdom announced in June 2016 led to a determination that the United Kingdom should exit the European Union (EU). It is currently unclear how the United Kingdom's access to the EU Single Market, and the wider trading, legal and regulatory environment in which we, our clients and our counterparties operate, will be impacted and how this will affect our and their businesses and the global macroeconomic environment. The uncertainty surrounding the timing, terms and consequences of the United Kingdom's exit could adversely impact customer and investor confidence, result in additional market volatility and adversely affect our business.
We are dependent upon third party approvals. Many of the investment advisors through which we distribute our investment offerings are affiliated with independent broker-dealers or other networks, which have regulatory responsibility for the advisor’s practice. As part of the regulatory oversight, these broker-dealers or networks must approve the use of our investment products by affiliated advisors within their networks. Failure to receive such approval, or the withdrawal of such approval, could adversely affect the marketing of our investment products.
We are subject to financial and non-financial covenants which may restrict our ability to manage liquidity needs. Our $300.0 million five-year senior unsecured revolving credit facility (Credit Facility) contains financial and non-financial covenants. The non-financial covenants include restrictions on indebtedness, mergers and acquisitions, sale of assets and investments. In the event of default, we have restrictions on paying dividends and repurchasing our common stock. We have one financial covenant, the Leverage Ratio, which restricts the level of indebtedness we can incur to a maximum of 1.75 times earnings before interest, taxes, depreciation and amortization (EBITDA). We believe our primary risk is with the financial covenant if we were to incur significant unexpected losses that would impact the EBITDA calculation. This would increase the Leverage Ratio and restrict the amount we could borrow under the Credit Facility. A restriction on our ability to fully utilize our Credit Facility may negatively affect our operating results, liquidity and financial condition.
Changes in, or interpretation of, accounting principles could affect our revenues and earnings. We prepare our consolidated financial statements in accordance with generally accepted accounting principles. A change in these principles can have a significant effect on our reported results and may even retrospectively affect previously reported results (See Note 3 to the Consolidated Financial Statements for more information).
Changes in, or interpretations of, tax rules and regulations may adversely affect our effective tax rates. Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could be adversely affected by changes in tax laws or the interpretation of tax laws. We are subject to possible examinations of our income tax returns by the Internal Revenue Service and state and foreign tax authorities. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes; however, there can be no assurance that the final determination of any examination will not have an adverse effect on our operating results or financial position.

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Currency fluctuations could negatively affect our future revenues and earnings as our business grows globally. We operate and invest globally to expand our business into foreign markets. Our foreign subsidiaries use the local currency as the functional currency. As these businesses evolve, our exposure to changes in currency exchange rates may increase. Adverse movements in currency exchange rates may negatively affect our operating results, liquidity and financial condition.
Changes in interest rates may affect the value of our fixed-income investment securities. We own Government National Mortgage Association (GNMA) mortgage-backed securities for the sole purpose of satisfying applicable regulatory requirements imposed on our wholly-owned limited purpose federal thrift subsidiary, SPTC. The valuations of these securities are impacted by fluctuations in interest rates. Interest rates during the past several years have remained relatively low. The effect of a rising interest rate environment may negatively impact the value of these securities and thereby negatively affect our financial position and earnings.
We rely on our executive officers and senior management. Most of our executive officers and senior management personnel do not have employment agreements with us. The loss of these individuals may have a material adverse effect on our future operations.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our corporate headquarters is located in Oaks, Pennsylvania and consists of nine buildings situated on approximately 90 acres. We own and operate the land and buildings, which encompass approximately 524,000 square feet of office space and 34,000 square feet of data center space. We lease other offices which aggregate 156,000 square feet. We also own a 3,400 square foot condominium that is used for business purposes in New York, New York.
Item 3. Legal Proceedings.
SEI has been named in seven lawsuits filed in Louisiana courts; four of the cases also name SPTC as a defendant. The underlying allegations in all actions relate to the purported role of SPTC in providing back-office services to Stanford Trust Company. The complaints allege that SEI and SPTC participated in some manner in the sale of “certificates of deposit” issued by Stanford International Bank so as to be a “seller” of the certificates of deposit for purposes of primary liability under the Louisiana Securities Law or so as to be secondarily liable under that statute for sales of certificates of deposit made by Stanford Trust Company. Two of the actions also include claims for violations of the Louisiana Racketeering Act and possibly conspiracy, and a third also asserts claims of negligence, breach of contract, breach of fiduciary duty, violations of the uniform fiduciaries law, negligent misrepresentation, detrimental reliance, violations of the Louisiana Racketeering Act, and conspiracy.
The procedural status of the seven cases varies. The Lillie case, filed originally in the 19th Judicial District Court for the Parish of East Baton Rouge, was brought as a class action and is procedurally the most advanced of the cases. SEI and SPTC filed exceptions, which the Court granted in part, dismissing claims under the Louisiana Unfair Trade Practices Act and permitting the claims under the Louisiana Securities Law to go forward. On March 11, 2013, newly-added insurance carrier defendants removed the case to the United States District Court for the Middle District of Louisiana. On August 7, 2013, the Judicial Panel on Multidistrict Litigation transferred the matter to the Northern District of Texas where MDL 2099, In re: Stanford Entities Securities Litigation (“the Stanford MDL”), is pending. On September 22, 2015, the District Court on the motion of SEI and SPTC dismissed plaintiffs’ claims for primary liability under Section 714(A) of the Louisiana Securities Law, but declined to dismiss plaintiffs’ claims for secondary liability under Section 714(B) of the Louisiana Securities Law based on the allegations pled by plaintiffs. On November 4, 2015, the District Court granted SEI and SPTC's motion to dismiss plaintiffs' claims under Section 712(D) of the Louisiana Securities Law. Consequently, the only claims of plaintiffs still pending before the District Court in Lillie are plaintiffs' claims for secondary liability against SEI and SPTC under Section 714(B) of the Louisiana Securities Law. On May 2, 2016, the District Court certified the class as being "all persons for whom Stanford Trust Company purchased or renewed Stanford Investment Bank Limited certificates of deposit in Louisiana between January 1, 2007 and February 13, 2009". Notice of the pendency of the class action was mailed to potential class members on October 4, 2016.
On December 1, 2016, a group of plaintiffs who opted out of the Lillie class filed a complaint against SEI and SPTC in the United States District Court in the Middle District of Louisiana, alleging claims essentially the same as those in Lillie. In January 2017, the Judicial Panel on Multidistrict Litigation transferred the proceeding to the Northern District of Texas and the Stanford MDL. SEI’s response to the Complaint is expected to be filed during the first quarter of 2017.
Another one of the cases, filed in the 23rd Judicial District Court for the Parish of Ascension, also was removed to federal court and transferred by the Judicial Panel on Multidistrict Litigation to the Northern District of Texas and the Stanford MDL. The schedule for responding to that Complaint has not yet been established.

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The plaintiffs in two of the cases remaining in the Parish of East Baton Rouge have granted SEI and SPTC indefinite extensions to respond to the petitions.
In the two additional cases, filed in East Baton Rouge and brought by the same counsel who filed the Lillie action, virtually all of the litigation to date has involved motions practice and appellate litigation regarding the existence of federal subjection matter jurisdiction under the federal Securities Litigation Uniform Standards Act (SLUSA). After the matter was removed to the United States District Court for the Northern District of Texas, that court dismissed the action under SLUSA. The Court of Appeals for the Fifth Circuit reversed that order, and the Supreme Court of the United States affirmed the Court of Appeals judgment on February 26, 2014. The matter was remanded to state court and no material activity has taken place since that date.
While the outcome of this litigation remains uncertain, SEI and SPTC believe that they have valid defenses to plaintiffs' claims and intend to defend the lawsuits vigorously. Because of uncertainty in the make-up of the Lillie class, the specific theories of liability that may survive a motion for summary judgment or other dispositive motion, the relative lack of discovery regarding damages, causation, mitigation and other aspects that may ultimately bear upon loss, the Company is not reasonably able to provide an estimate of loss, if any, with respect to the foregoing lawsuits.
On November 26, 2014, a Writ of Summons was issued to two of our subsidiaries, SEI Investments - Global Fund Services Limited (GFSL) and SEI Investments - Depositary & Custodial Services (Ireland) Limited (D&C), to appear before the Court of First Instance Antwerp, Belgium. The plaintiffs in this case allege that through their initial investments in collective investment funds domiciled in Netherlands and subsequent transfer of claim rights to a Belgium domiciled partnership, they are beneficial owners of a portfolio of life settlement policies (the Portfolio) which lapsed due to a failure to make premium payments. The plaintiffs seek to recover jointly and severally from nine defendants including GFSL and D&C, damages of approximately $84 million. GFSL and D&C’s involvement in the litigation appears to arise out of their historical provision of administration and custody services, respectively, to the Strategic Life Settlement Fund PLC, who, together with its managers, appear to be the principal defendants in this claim. On December 4, 2015, the Belgium Court dismissed plaintiff's claims for a lack of jurisdiction. On December 22, 2015, the plaintiffs appealed the dismissal. The appeal is still pending.
While the outcome of this action is uncertain given its early phase and the lack of specific theories of liability asserted against GFSL and D&C, each of GFSL and D&C believe that they have valid defenses to plaintiffs’ claims and intend to defend the lawsuit vigorously, and GFSL and D&C are not reasonably able to provide an estimate of the ultimate loss, if any, with respect to this lawsuit.

During the fourth quarter of 2016, the lawsuit entitled Steven Curd and Rebel Curd v. SEI Investments Management Corporation, referred to in Part II, Item 1 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, was terminated. During November 2016, plaintiffs Steven Curd and Rebel Curd, their counsel, and defendants SEI Investments Management Corporation and SEI Investments Global Funds Services reached a settlement agreement with respect to the proceeding, and on November 21, 2016, plaintiffs and defendants filed a motion with the District Court for the Eastern District of Pennsylvania stipulating to the dismissal with prejudice of all claims asserted in this action.
Executive Officers of the Registrant
Information about our executive officers is contained in Item 10 of this report and is incorporated by reference into this Part I.
Item 4. Mine Safety Disclosures.
None.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Price Range of Common Stock and Dividends:
Our common stock is traded on The Nasdaq Global Select Market® (NASDAQ) under the symbol “SEIC.” The following table shows the high and low sales prices for our common stock as reported by NASDAQ and the dividends declared on our common stock for the last two years. Our Board of Directors intends to declare future dividends on a semiannual basis.
2016
 
High
 
Low
 
Dividends
First Quarter
 
$
51.94

 
$
32.01

 
$

Second Quarter
 
51.75

 
42.04

 
0.26

Third Quarter
 
52.54

 
42.12

 

Fourth Quarter
 
50.60

 
43.54

 
0.28

2015
 
High
 
Low
 
Dividends
First Quarter
 
$
44.66

 
$
38.12

 
$

Second Quarter
 
50.75

 
43.26

 
0.24

Third Quarter
 
55.48

 
46.29

 

Fourth Quarter
 
55.10

 
47.31

 
0.26

According to the records of our transfer agent, there were 305 holders of record of our common stock on January 31, 2017. Because many of such shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
For information on our equity compensation plans, refer to Note 8 to the Consolidated Financial Statements and Item 12 of this Annual Report on Form 10-K.    
seic-123115_chartx34633a04.jpg
ASSUMES $100 INVESTED ON JANUARY 1, 2011 & DIVIDENDS REINVESTED
FISCAL YEAR ENDED DECEMBER 31,

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Issuer Purchases of Equity Securities:
Our Board of Directors has authorized the repurchase of up to $3.278 billion worth of our common stock, which includes an additional authorization of $200.0 million on December 13, 2016. Currently, there is no expiration date for our common stock repurchase program (See Note 8 to the Consolidated Financial Statements).
Information regarding the repurchase of common stock during the three months ended December 31, 2016 is:
Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Program
 
Approximate Dollar
Value of Shares that
May Yet Be
Purchased
Under the Program
October 1 – 31, 2016
 
214,000

 
$
44.69

 
214,000

 
$
76,011,000

November 1 – 30, 2016
 
468,000

 
46.33

 
468,000

 
54,330,000

December 1 – 31, 2016
 
725,000

 
49.07

 
725,000

 
218,752,000

Total
 
1,407,000

 
47.49

 
1,407,000

 
 
Item 6. Selected Financial Data.
(In thousands, except per-share data)
This table presents selected consolidated financial information for the five-year period ended December 31, 2016. This data should be read in conjunction with the financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Annual Report on Form 10-K.
Year Ended December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
Revenues
 
$
1,401,545

 
$
1,334,208

 
$
1,266,005

 
$
1,126,132

 
$
992,522

Total expenses
 
1,025,851

 
975,995

 
913,221

 
877,723

 
780,956

Income from operations
 
375,694

 
358,213

 
352,784

 
248,409

 
211,566

Other income (expense), net
 
132,791

 
142,267

 
136,878

 
186,989

 
117,930

Income before income taxes
 
508,485

 
500,480

 
489,662

 
435,398

 
329,496

Income taxes
 
174,668

 
168,825

 
170,949

 
146,924

 
121,462

Net income
 
333,817

 
331,655

 
318,713

 
288,474

 
208,034

Less: Net income attributable to the noncontrolling interest
 

 

 

 
(350
)
 
(1,186
)
Net income attributable to SEI Investments
 
333,817

 
331,655

 
318,713

 
288,124

 
206,848

Basic earnings per common share
 
$
2.07

 
$
2.00

 
$
1.89

 
$
1.68

 
$
1.19

Shares used to calculate basic earnings per common share
 
161,350

 
165,725

 
168,246

 
171,561

 
174,295

Diluted earnings per common share
 
$
2.03

 
$
1.96

 
$
1.85

 
$
1.64

 
$
1.18

Shares used to calculate diluted earnings per common share
 
164,431

 
169,598

 
172,565

 
175,718

 
175,872

Cash dividends declared per common share
 
$
0.54

 
$
0.50

 
$
0.46

 
$
0.42

 
$
0.63

Financial Position as of December 31,
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
695,701

 
$
679,661

 
$
667,446

 
$
578,273

 
$
452,247

Total assets
 
1,636,823

 
1,588,628

 
1,542,875

 
1,439,169

 
1,309,824

SEI Investments Shareholders’ equity
 
1,303,114

 
1,289,720

 
1,247,613

 
1,156,002

 
1,038,180



Page 17 of 75



Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(In thousands, except share and per-share data)
This discussion reviews and analyzes the consolidated financial condition at December 31, 2016 and 2015, the consolidated results of operations for the years ended December 31, 2016, 2015 and 2014, and other factors that may affect future financial performance. This discussion should be read in conjunction with the Selected Financial Data included in Item 6 of this Annual Report and the Consolidated Financial Statements and Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report.
Certain information contained in this discussion is or may be considered forward-looking. Forward-looking statements relate to future operations, strategies, financial results or other developments. Forward-looking statements are based upon estimates and assumptions that involve certain risks and uncertainties, many of which are beyond our control or are subject to change. Although we believe our assumptions are reasonable, they could be inaccurate. Our actual future revenues and income could differ materially from our expected results. We have no obligation to publicly update or revise any forward-looking statements.
Overview
Consolidated Summary
We are a leading global provider of investment processing, investment management and investment operations solutions. We help corporations, financial institutions, financial advisors and ultra-high-net-worth families create and manage wealth by providing comprehensive, innovative, investment and investment-business solutions. Investment processing fees are earned as monthly fees for contracted services, including computer processing services, software licenses and investment operations services, as well as transaction-based fees for providing securities valuation and trade-execution. Investment operations and investment management fees are earned as a percentage of average assets under management or administration. As of December 31, 2016, through our subsidiaries and partnerships in which we have a significant interest, we manage or administer $751.1 billion in hedge, private equity, mutual fund and pooled or separately managed assets, including $283.1 billion in assets under management and $468.0 billion in client assets under administration.
Our Condensed Consolidated Statements of Operations for the years ended 2016, 2015 and 2014 were:
Year Ended December 31,
 
2016
 
2015
 
Percent
Change*
 
2014
 
Percent
Change
Revenues
 
$
1,401,545

 
$
1,334,208

 
5
 %
 
$
1,266,005

 
5
 %
Expenses
 
1,025,851

 
975,995

 
5
 %
 
913,221

 
7
 %
Income from operations
 
375,694

 
358,213

 
5
 %
 
352,784

 
2
 %
Net gain (loss) from investments
 
112

 
(456
)
 
NM

 
614

 
NM

Interest income, net of interest expense
 
3,785

 
2,875

 
32
 %
 
2,896

 
(1
)%
Equity in earnings of unconsolidated affiliates
 
126,103

 
137,057

 
(8
)%
 
127,786

 
7
 %
Gain on sale of subsidiary
 
2,791

 
2,791

 
 %
 
5,582

 
NM

Income before income taxes
 
508,485

 
500,480

 
2
 %
 
489,662

 
2
 %
Income taxes
 
174,668

 
168,825

 
3
 %
 
170,949

 
(1
)%
Net income
 
333,817

 
331,655

 
1
 %
 
318,713

 
4
 %
Diluted earnings per common share
 
$
2.03

 
$
1.96

 
4
 %
 
$
1.85

 
6
 %
* Variances noted "NM" indicate the percent change is not meaningful.
Significant Items Impacting Our Financial Results in 2016
Revenues increased $67.3 million, or five percent, to $1.4 billion in 2016 compared to 2015. Net income increased $2.2 million, or one percent, to $333.8 million and diluted earnings per share increased to $2.03 per share in 2016 compared to $1.96 per share in 2015. We believe the following items were significant to our business results during 2016:
Revenue growth was primarily driven by higher Asset management, administration and distribution fees from improved cash flows from new and existing clients and market appreciation. Our average assets under management, excluding LSV, increased $13.4 billion, or eight percent, to $189.9 billion during 2016 as compared to $176.5 billion during 2015. Our average assets under administration increased $43.3 billion, or 11 percent, to $439.9 billion during 2016 as compared to $396.6 billion during 2015.
We recognized a $12.3 million performance fee and a corresponding $6.1 million sub-advisory expense associated with an SEI-sponsored investment product during the fourth quarter 2016. These items resulted in a positive net impact of approximately $0.03 diluted earnings per share and were reflected in the Institutional Investors segment. 

Page 18 of 75



Information processing and software servicing fees in our Private Banks segment increased $9.3 million in 2016 primarily due to increased assets from new and existing clients processed on the SEI Wealth Platform and increased non-recurring professional services fees.
Our proportionate share in the earnings of LSV was $126.1 million in 2016 as compared to $138.4 million in 2015, a decrease of nine percent. The decrease was primarily due to lower performance fees and increased personnel expenses of LSV.
The direct costs associated with our investment management programs increased in our Private Banks, Investment Advisors and Institutional Investors segments. These costs primarily relate to fees charged by investment advisory firms for day-to-day portfolio management of SEI-sponsored investment products and include the $6.1 million sub-advisory expense associated with performance fees mentioned previously. These costs are included in Sub-advisory, distribution and other asset management costs on the accompanying Consolidated Statements of Operations.
We capitalized $50.4 million and $29.4 million in software development costs in 2016 and 2015, respectively. Of these amounts, $39.8 million in 2016 and $24.5 million in 2015 directly relate to the SEI Wealth Platform. Amortization expense related to capitalized software was $45.0 million during 2016 as compared to $42.4 million during 2015 due to continued enhancements to the Platform.
As we continue the development of new elements of the Platform, our expenses related to maintenance, enhancements and support have increased. These costs are primarily recognized in personnel and consulting costs and are expensed as incurred. These increased costs primarily impacted the Private Banks and Investment Advisors business segments. We expect these costs to continue to increase into 2017.
We progressed in the development phase of a new application for the Investment Managers segment and capitalized $10.6 million in software development costs in 2016. This new offering includes components that leverage upon the current infrastructure and add significant enhancements designed to aggregate, transact and process data. The application has not yet been placed into service.
Our operating expenses, primarily personnel costs, in our Investment Advisors and Investment Managers segments increased. These expenses primarily consist of operational and marketing costs and are mainly related to servicing existing clients and acquiring new clients. These operating expenses are included in Compensation, benefits and other personnel costs on the accompanying Consolidated Statements of Operations.
The strengthening of the U.S. dollar against the British pound during 2016 negatively impacted our revenues and operating income of our Private Banks and Institutional Investors segments. A prolonged period of a strengthening U.S. dollar against the British pound could have a further negative impact to our revenues and operating profits of these segments.
We recorded our final pre-tax gain of $2.8 million, or $0.01 diluted earnings per share, in 2016 from the sale of SEI Asset Korea (SEI AK) which was completed during the first quarter 2013. This gain was the result of the third in a series of three annual payments related to the contingent purchase price we received from the sale. The gain from the sale is included in Gain on sale of subsidiary on the accompanying Consolidated Statement of Operations (See Note 15 to the Consolidated Financial Statements for more information).
Our effective tax rate was 34.3 percent in 2016 as compared to 33.7 percent in 2015. Our tax rate in 2015 benefited from a favorable settlement of a tax petition filed with the State of Pennsylvania (See the caption "Income Taxes" later in this discussion for more information).
We continued our stock repurchase program during 2016 and purchased approximately 6,600,000 shares at an average price of $44.60 per share for a total cost of $294.4 million.
Significant Items Impacting Our Financial Results in 2015
Revenues increased $68.2 million, or five percent, to $1.3 billion in 2015 compared to 2014. Net income increased $12.9 million, or four percent, to $331.7 million and diluted earnings per share increased to $1.96 per share in 2015 compared to $1.85 per share in 2014. We believe the following items were significant to our business results during 2015:
Revenue growth was primarily driven by higher Asset management, administration and distribution fees from improved cash flows from new and existing clients and the market appreciation of assets from the favorable market conditions which prevailed during the first six months of 2015. The market volatility occurring during the second half of 2015 negatively impacted our asset-based fee revenues and partially offset our revenue growth. Despite the volatility, our average assets under management, excluding LSV, increased $11.6 billion, or seven percent, to $176.5 billion during 2015 as compared to $164.9 billion during 2014. Our average assets under administration increased $42.3 billion, or 12 percent, to $396.6 billion during 2015 as compared to $354.3 billion during 2014.
Sales of new business in our Institutional Investors and Investment Managers business segments as well as positive cash receipts from new and existing advisor relationships in our Investment Advisors business segment contributed to the

Page 19 of 75



increase in our revenues and profits. Additionally, increased investment management fees from international clients in our Private Banks segment during the first six months of 2015 also contributed to our revenue growth.
Information processing and software servicing fees in our Private Banks segment increased $6.0 million in 2015 primarily due to the increase in assets from existing clients processed on the SEI Wealth Platform.
Our proportionate share in the earnings of LSV was $138.4 million in 2015 as compared to $140.2 million in 2014, a decrease of one percent. The decrease was primarily due to increased personnel expenses of LSV.
The direct costs associated with our investment management programs increased in our Private Banks, Investment Advisors and Institutional Investors segments. These costs primarily relate to fees charged by investment advisory firms for day-to-day portfolio management of SEI-sponsored investment products and are included in Sub-advisory, distribution and other asset management costs on the accompanying Consolidated Statements of Operations.
We wrote off approximately $6.0 million, or $0.02 diluted earnings per share, of previously capitalized software development costs and purchased software related to the SEI Wealth Platform during 2015. The expense associated with this write off impacted the Private Banks and Investment Advisors business segments and is included in Facilities, supplies and other costs on the accompanying Consolidated Statement of Operations (See Notes 1 and 4 to the Consolidated Financial Statements for more information).
We capitalized $24.5 million in 2015 for the SEI Wealth Platform as compared to $34.9 million in 2014. Our expenses related to maintenance and enhancements not eligible for capitalization have increased. A higher portion of these costs are recognized in personnel and consulting costs. These increased costs primarily impacted the Private Banks and Investment Advisors business segments.
Amortization expense related to capitalized software was $42.4 million during 2015 as compared to $38.4 million during 2014 due to continued enhancements to the Platform.
Our operating expenses related to personnel costs in our Investment Advisors and Investment Managers segments increased. These increased operational and sales costs are mainly related to servicing new and existing clients. Additionally, sales compensation expense in our Private Banks, Investment Advisors and Investment Managers segments increased due to new business activity. These increased operational costs are included in Compensation, benefits and other personnel costs on the accompanying Consolidated Statements of Operations.
We recorded a pre-tax gain of $2.8 million, or $0.01 diluted earnings per share, in 2015 from the sale of SEI AK. This gain was the result of the second in a series of three annual payments related to the contingent purchase price we received from the sale. The gain from the sale is included in Gain on sale of subsidiary on the accompanying Consolidated Statement of Operations (See Note 15 to the Consolidated Financial Statements for more information).
Our effective tax rate was 33.7 percent in 2015 as compared to 34.9 percent in 2014. The decrease in our tax rate was primarily due to a one-time reduction resulting from a favorable settlement of a tax petition filed with the State of Pennsylvania relating to the apportionment methodology of net income for prior years. (See the caption "Income Taxes" later in this discussion for more information).
We continued our stock repurchase program during 2015 and purchased approximately 5,951,000 shares at an average price of $48.66 per share for a total cost of $289.6 million.
Product Development - SEI Wealth Platform
Much of our product development efforts have been focused on building and delivering the SEI Wealth Platform which provides a global, unified and scalable platform for operating a wealth management business. The Platform combines internally built functionality with third-party applications and integrates them into a single solution with a common user experience. The goal is to provide straight-through business processing and transform the front, middle and back office operations that exist today. The capabilities of the Platform will expand the services we offer to large global financial institutions, investment advisors, and other similar institutions. In addition, the expanded capabilities of the Platform provide us the opportunity to enter into new markets.
We will continue to focus our development efforts on enhancing the functionality of the Platform and building the operational infrastructure for a wider deployment of the Platform under the business processing solution and SaaS delivery models to financial institutions and investment advisors in the United States. Future enhancements to the Platform may replace significant existing components or functionality. Once new enhancements are completed and ready to be placed into service, the components or functionality that are being replaced will be abandoned. If this occurs, the remaining net book value of the previously capitalized software development costs will be expensed over the remaining useful life of those components or written off.
An area of continued focus is improving the operational efficiency of the Platform in order to achieve scale more rapidly. Our operational costs consist mainly of third-party vendor costs and SEI personnel. We are investing in the operational and service infrastructure with the goal of achieving a sustainable operating model that minimizes costs as revenues increase. Additionally,

Page 20 of 75



we have increased the resources devoted to enhancing the Platform's development, installation and service teams in order to prepare for the conversion of our first large U.S. national bank client to operate under the SaaS delivery model while simultaneously preparing for our largest client to operate under a fully integrated business processing outsourcing model. These resources will also be directed towards migrating existing bank clients from TRUST 3000 to the Platform. We started large-scale migrations of larger, more sophisticated advisors onto the Platform in 2016 and will implement all new advisors directly onto the Platform beginning in 2017. We believe continued investments in the SEI Wealth Platform and its infrastructure will enable a more aggressive timetable for the migration of these clients.
As we progress through the different stages of deployment of the Platform to a broader market, we expect to encounter numerous challenges; however, the Platform promises to provide a significant opportunity to expand our services into new markets that will increase revenues and profits in the long term. Until we attain a level of revenues that technological and operational scale can be achieved, we expect continued pressure on our operating margins in the Private Banks and Investment Advisors business segments from increased investment spending in 2017.
Sensitivity of our revenues and earnings to capital market fluctuations
The majority of our revenues are based on the value of assets invested in investment products that we manage or administer which are affected by changes in the capital markets. The prevailing capital market conditions during 2016 had a net positive impact on our asset-based fees thereby increasing our base revenues. Conversely, the declining capital markets during the second half of 2015 and early first quarter 2016 negatively impacted our asset-based fee revenues and partially offset our revenue growth. Any prolonged future downturns in general capital market conditions could have adverse effects on our revenues and earnings derived from assets under management and administration.


Page 21 of 75



Ending Asset Balances
This table presents ending asset balances of our clients, or of our clients’ customers, for which we provide management or administrative services through our subsidiaries and partnerships in which we have a significant interest.
Ending Asset Balances
 
 
(In millions)
 
As of December 31,
 
 
 
 
 
 
Percent Change
 
 
 
Percent Change
 
 
2016
 
2015
 
 
2014
 
Private Banks:
 
 
 
 
 
 
 
 
 
 
Equity and fixed-income programs
 
$
17,926

 
$
18,150

 
(1
)%
 
$
18,666

 
(3
)%
Collective trust fund programs
 
3

 
4

 
(25
)%
 
8

 
(50
)%
Liquidity funds
 
4,230

 
5,835

 
(28
)%
 
5,889

 
(1
)%
Total assets under management
 
$
22,159

 
$
23,989

 
(8
)%
 
$
24,563

 
(2
)%
Client proprietary assets under administration
 
19,255

 
17,532

 
10
 %
 
16,741

 
5
 %
Total assets
 
$
41,414

 
$
41,521

 
 %
 
$
41,304

 
1
 %
Investment Advisors:
 
 
 
 
 
 
 
 
 
 
Equity and fixed-income programs
 
$
52,847

 
$
46,123

 
15
 %
 
$
43,845

 
5
 %
Collective trust fund programs
 
5

 
7

 
(29
)%
 
9

 
(22
)%
Liquidity funds
 
2,741

 
4,924

 
(44
)%
 
3,173

 
55
 %
Total assets under management
 
$
55,593

 
$
51,054

 
9
 %
 
$
47,027

 
9
 %
Institutional Investors:
 
 
 
 
 
 
 
 
 
 
Equity and fixed-income programs
 
$
76,465

 
$
72,263

 
6
 %
 
$
72,828

 
(1
)%
Collective trust fund programs
 
93

 
96

 
(3
)%
 
95

 
1
 %
Liquidity funds
 
2,903

 
2,883

 
1
 %
 
2,929

 
(2
)%
Total assets under management
 
$
79,461

 
$
75,242

 
6
 %
 
$
75,852

 
(1
)%
Investment Managers:
 
 
 
 
 
 
 
 
 
 
Equity and fixed-income programs
 
$
81

 
$
66

 
23
 %
 
$
27

 
144
 %
Collective trust fund programs
 
36,991

 
32,117

 
15
 %
 
20,833

 
54
 %
Liquidity funds
 
667

 
832

 
(20
)%
 
946

 
(12
)%
Total assets under management
 
$
37,739

 
$
33,015

 
14
 %
 
$
21,806

 
51
 %
Client proprietary assets under administration
 
448,708

 
390,282

 
15
 %
 
355,890

 
10
 %
Total assets
 
$
486,447

 
$
423,297

 
15
 %
 
$
377,696

 
12
 %
Investments in New Businesses:
 
 
 
 
 
 
 
 
 
 
Equity and fixed-income programs
 
$
884

 
$
764

 
16
 %
 
$
736

 
4
 %
Liquidity funds
 
61

 
47

 
30
 %
 
98

 
(52
)%
Total assets under management
 
$
945

 
$
811

 
17
 %
 
$
834

 
(3
)%
LSV:
 
 
 
 
 
 
 
 
 
 
Equity and fixed-income programs
 
$
87,248

 
$
78,335

 
11
 %
 
$
82,665

 
(5
)%
Total:
 
 
 
 
 
 
 
 
 
 
Equity and fixed-income programs
 
$
235,451

 
$
215,701

 
9
 %
 
$
218,767

 
(1
)%
Collective trust fund programs
 
37,092

 
32,224

 
15
 %
 
20,945

 
54
 %
Liquidity funds
 
10,602

 
14,521

 
(27
)%
 
13,035

 
11
 %
Total assets under management
 
$
283,145

 
$
262,446

 
8
 %
 
$
252,747

 
4
 %
Client proprietary assets under administration
 
467,963

 
407,814

 
15
 %
 
372,631

 
9
 %
Total assets under management and administration
 
$
751,108

 
$
670,260

 
12
 %
 
$
625,378

 
7
 %



Page 22 of 75



Average Asset Balances
This table presents average asset balances of our clients, or of our clients’ customers, for which we provide management or administrative services through our subsidiaries and partnerships in which we have a significant interest.
Average Asset Balances
 
 
(In millions)
 
For the Year Ended December 31,
 
 
 
 
 
 
Percent Change
 
 
 
Percent Change
 
 
2016
 
2015
 
 
2014
 
Private Banks:
 
 
 
 
 
 
 
 
 
 
Equity and fixed-income programs
 
$
18,186

 
$
19,106

 
(5
)%
 
$
17,838

 
7
 %
Collective trust fund programs
 
3

 
7

 
(57
)%
 
12

 
(42
)%
Liquidity funds
 
4,799

 
5,491

 
(13
)%
 
5,547

 
(1
)%
Total assets under management
 
$
22,988

 
$
24,604

 
(7
)%
 
$
23,397

 
5
 %
Client proprietary assets under administration
 
18,433

 
17,652

 
4
 %
 
15,648

 
13
 %
Total assets
 
$
41,421

 
$
42,256

 
(2
)%
 
$
39,045

 
8
 %
Investment Advisors:
 
 
 
 
 
 
 
 
 
 
Equity and fixed-income programs
 
$
49,537

 
$
45,968

 
8
 %
 
$
41,346

 
11
 %
Collective trust fund programs
 
6

 
9

 
(33
)%
 
12

 
(25
)%
Liquidity funds
 
3,601

 
3,550

 
1
 %
 
2,840

 
25
 %
Total assets under management
 
$
53,144

 
$
49,527

 
7
 %
 
$
44,198

 
12
 %
Institutional Investors:
 
 
 
 
 
 
 
 
 
 
Equity and fixed-income programs
 
$
75,347

 
$
73,804

 
2
 %
 
$
70,796

 
4
 %
Collective trust fund programs
 
94

 
95

 
(1
)%
 
108

 
(12
)%
Liquidity funds
 
2,805

 
3,082

 
(9
)%
 
2,773

 
11
 %
Total assets under management
 
$
78,246

 
$
76,981

 
2
 %
 
$
73,677

 
4
 %
Investment Managers:
 
 
 
 
 
 
 
 
 
 
Equity and fixed-income programs
 
$
73

 
$
34

 
115
 %
 
$
66

 
(48
)%
Collective trust fund programs
 
33,808

 
23,476

 
44
 %
 
21,929

 
7
 %
Liquidity funds
 
805

 
1,004

 
(20
)%
 
857

 
17
 %
Total assets under management
 
$
34,686

 
$
24,514

 
41
 %
 
$
22,852

 
7
 %
Client proprietary assets under administration
 
421,446

 
378,970

 
11
 %
 
338,645

 
12
 %
Total assets
 
$
456,132

 
$
403,484

 
13
 %
 
$
361,497

 
12
 %
Investments in New Businesses:
 
 
 
 
 
 
 
 
 
 
Equity and fixed-income programs
 
$
816

 
$
776

 
5
 %
 
$
671

 
16
 %
Liquidity funds
 
48

 
68

 
(29
)%
 
81

 
(16
)%
Total assets under management
 
$
864

 
$
844

 
2
 %
 
$
752

 
12
 %
LSV:
 
 
 
 
 
 
 
 
 
 
Equity and fixed-income programs
 
$
80,620

 
$
82,785

 
(3
)%
 
$
80,440

 
3
 %
Total:
 
 
 
 
 
 
 
 
 
 
Equity and fixed-income programs
 
$
224,579

 
$
222,473

 
1
 %
 
$
211,157

 
5
 %
Collective trust fund programs
 
33,911

 
23,587

 
44
 %
 
22,061

 
7
 %
Liquidity funds
 
12,058

 
13,195

 
(9
)%
 
12,098

 
9
 %
Total assets under management
 
$
270,548

 
$
259,255

 
4
 %
 
$
245,316

 
6
 %
Client proprietary assets under administration
 
439,879

 
396,622

 
11
 %
 
354,293

 
12
 %
Total assets under management and administration
 
$
710,427

 
$
655,877

 
8
 %
 
$
599,609

 
9
 %



Page 23 of 75



In the preceding tables, assets under management are total assets of our clients or their customers invested in our equity and fixed-income investment programs, collective trust fund programs, and liquidity funds for which we provide asset management services. Assets under management and administration also include total assets of our clients or their customers for which we provide administrative services, including client proprietary fund balances for which we provide administration and/or distribution services. The assets presented in the preceding tables do not include assets processed on the SEI Wealth Platform and are not included in the accompanying Consolidated Balance Sheets because we do not own them.
Business Segments
Revenues, Expenses, and Operating profit (loss) for our business segments for the year ended 2016 compared to the year ended 2015, and for the year ended 2015 compared to the year ended 2014 are:
Year Ended December 31,
 
2016
 
2015
 
Percent
Change
 
2014
 
Percent
Change
Private Banks:
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
457,886

 
$
456,516

 
 %
 
$
441,467

 
3
 %
Expenses
 
421,188

 
410,975

 
2
 %
 
399,620

 
3
 %
Operating profit
 
$
36,698

 
$
45,541

 
(19
)%
 
$
41,847

 
9
 %
Gain on sale of subsidiary
 
2,791

 
2,791

 
 %
 
5,582

 
NM

Total profit
 
$
39,489

 
$
48,332

 
NM

 
$
47,429

 
NM

Operating margin (a)
 
8
%
 
10
%
 
 
 
9
%
 
 
Investment Advisors:
 
 
 
 
 
 
 
 
 
 
Revenues
 
330,677

 
306,620

 
8
 %
 
283,811

 
8
 %
Expenses
 
180,140

 
171,968

 
5
 %
 
146,500

 
17
 %
Operating profit
 
$
150,537

 
$
134,652

 
12
 %
 
$
137,311

 
(2
)%
Operating margin
 
46
%
 
44
%
 
 
 
48
%
 
 
Institutional Investors:
 
 
 
 
 
 
 
 
 
 
Revenues
 
312,584

 
297,568

 
5
 %
 
284,677

 
5
 %
Expenses
 
153,117

 
145,851

 
5
 %
 
140,659

 
4
 %
Operating profit
 
$
159,467

 
$
151,717

 
5
 %
 
$
144,018

 
5
 %
Operating margin
 
51
%
 
51
%
 
 
 
51
%
 
 
Investment Managers:
 
 
 
 
 
 
 
 
 
 
Revenues
 
294,390

 
267,963

 
10
 %
 
251,310

 
7
 %
Expenses
 
191,127

 
172,094

 
11
 %
 
159,176

 
8
 %
Operating profit
 
$
103,263

 
$
95,869

 
8
 %
 
$
92,134

 
4
 %
Operating margin
 
35
%
 
36
%
 
 
 
37
%
 
 
Investments in New Businesses:
 
 
 
 
 
 
 
 
 
 
Revenues
 
6,008

 
5,541

 
8
 %
 
4,740

 
17
 %
Expenses
 
20,962

 
20,656

 
1
 %
 
18,377

 
12
 %
Operating loss
 
$
(14,954
)
 
$
(15,115
)
 
NM

 
$
(13,637
)
 
NM

(a) Percentage determined exclusive of gain from sale of subsidiary (See Note 15 to the Consolidated Financial Statements).
For additional information pertaining to our business segments, see Note 13 to the Consolidated Financial Statements.

Page 24 of 75



Private Banks
Year Ended December 31,
 
2016
 
2015
 
Percent
Change
 
2014
 
Percent
Change
Revenues:
 
 
 
 
 
 
 
 
 
 
Investment processing and software servicing fees
 
$
298,382

 
$
289,056

 
3
 %
 
$
283,021

 
2
%
Asset management, administration & distribution fees
 
133,740

 
138,606

 
(4
)%
 
132,427

 
5
%
Transaction-based and trade execution fees
 
25,764

 
28,854

 
(11
)%
 
26,019

 
11
%
Total revenues
 
$
457,886

 
$
456,516

 
 %
 
$
441,467

 
3
%
Revenues increased slightly in 2016 compared to the prior year. Revenues during 2016 were primarily affected by:
Increased recurring investment processing fees from the growth in new and existing client assets processed on the SEI Wealth Platform;
Increased non-recurring professional services fees from existing clients as well as clients scheduled for implementation on the SEI Wealth Platform; and
Non-recurring contract buyout fees of $1.6 million from an investment processing client; partially offset by
Decreased investment management fees from existing international clients due to negative cash flows associated with client losses and the deployment of a new product strategy for a global distribution client;
Lower recurring investment processing fees earned on our mutual fund trading solution due to price reductions; and
The negative impact from foreign currency exchange rate fluctuations between the U.S. dollar and the British pound.
Revenues increased $15.0 million, or 3 percent, in 2015 compared to the prior year. Revenues during 2015 were primarily affected by:
Increased recurring investment processing fees from the growth in existing client assets processed on the SEI Wealth Platform; and
Increased investment management fees from existing international clients due to increased net cash flows and higher average assets under management from favorable market conditions; partially offset by
Lower recurring investment processing fees earned on our mutual fund trading solution due to price reductions; and
The negative impact from foreign currency exchange rate fluctuations.
Operating margins were eight percent in 2016 and ten percent in 2015. Operating income decreased $8.8 million, or 19 percent, in 2016 compared to the prior year. Operating income in 2016 was primarily affected by:
Increased non-capitalized costs, mainly personnel and consulting costs, related to maintenance and enhancements to the SEI Wealth Platform;
Increased amortization expense related to the SEI Wealth Platform; and
The net negative impact from foreign currency exchange rate fluctuations between the U.S. dollar and the British pound on our foreign operations; partially offset by
The write-off of approximately $3.6 million of previously capitalized software development costs and purchased software related to the SEI Wealth Platform in the third quarter 2015; and
Decreased direct expenses associated with decreased investment management fees from existing international clients.
Operating margins were ten percent in 2015 and nine percent in 2014. Operating income increased $3.7 million, or nine percent, in 2015 compared to the prior year. Operating income in 2015 was primarily affected by:
An increase in revenues;
Decreased salary, incentive compensation and other personnel-related costs; and
Decreased expenses from foreign operations due to foreign currency exchange rate fluctuations; partially offset by
Increased direct expenses associated with increased investment management fees from existing international clients;
The write off of approximately $3.6 million of previously capitalized software development costs and purchased software related to the SEI Wealth Platform in the third quarter 2015;
Increased non-capitalized costs, mainly personnel costs, related to maintenance and enhancements to the SEI Wealth Platform;
Increased amortization expense related to the SEI Wealth Platform; and
Increased sales compensation expense due to new business activity.

Page 25 of 75




Investment Advisors
Year Ended December 31,
 
2016
 
2015
 
Percent
Change
 
2014
 
Percent
Change
Revenues:
 
 
 
 
 
 
 
 
 
 
Investment management fees-SEI fund programs
 
$
251,333

 
$
238,120

 
6
%
 
$
223,371

 
7
 %
Separately managed account fees
 
64,280

 
54,987

 
17
%
 
45,404

 
21
 %
Other fees
 
15,064

 
13,513

 
11
%
 
15,036

 
(10
)%
Total revenues (a)
 
$
330,677

 
$
306,620

 
8
%
 
$
283,811

 
8
 %
(a) All amounts are reflected in Asset management, administration and distribution fees except for $727, $742 and $2,406 in 2016, 2015 and 2014, respectively, which are reflected in Transaction-based and trade execution fees.
Revenues increased $24.1 million, or eight percent, in 2016 and increased $22.8 million, or eight percent, in 2015 compared to 2014. Revenues during 2016 and 2015 were primarily affected by:
Increased investment management fees and separately managed account program fees due to higher assets under management caused by market appreciation and an increase in net cash flows from new and existing advisors; partially offset by
A decrease in average basis points earned on assets in 2015 due to client-directed shifts into lower fee investment products.
Operating margins were 46 percent in 2016 and 44 percent in 2015. Operating income increased $15.9 million, or 12 percent, in 2016 compared to the prior year. Operating income in 2016 was primarily affected by:
An increase in revenues;
The write-off of approximately $2.4 million of previously capitalized software development costs related to the SEI Wealth Platform in the third quarter 2015; and
Decreased sales compensation expense; partially offset by
Increased direct expenses associated with increased assets in our investment management programs;
Increased personnel costs for marketing to and servicing new advisors;
Increased non-capitalized costs, mainly personnel and consulting costs, related to maintenance, enhancements and client migrations to the SEI Wealth Platform; and
Increased amortization expense related to the SEI Wealth Platform.
Operating margins were 44 percent in 2015 and 48 percent in 2014. Operating income decreased $2.7 million, or two percent, in 2015 compared to the prior year. Operating income in 2015 was primarily affected by:
Increased direct expenses associated with the increased assets in our investment management programs;
Increased personnel costs, mainly salary, related to acquiring and servicing new advisors as well as increased sales compensation expense due to new business activity;
The write off of approximately $2.4 million of previously capitalized software development costs related to the SEI Wealth Platform in the third quarter 2015;
Increased non-capitalized costs, mainly personnel costs, related to maintenance and enhancements to the SEI Wealth Platform; and
Increased amortization expense related to the SEI Wealth Platform; partially offset by
An increase in revenues.
Institutional Investors
Revenues increased $15.0 million, or five percent, in 2016 and increased $12.9 million, or five percent, in 2015 compared to 2014. Revenues during 2016 and 2015 were primarily affected by:
Increased investment management fees from existing clients due to higher assets under management caused by market appreciation;
Performance fees of $12.3 million earned during the fourth quarter 2016 from an SEI-sponsored investment product; and
Asset funding from new sales of our retirement and not-for-profit solutions; partially offset by
Client losses and the negative impact from foreign currency exchange rate fluctuations between the U.S. dollar and the British pound.

Page 26 of 75



Operating margins were 51 percent in 2016 and 2015. Operating income increased $7.8 million, or five percent, in 2016 compared to the prior year. Operating income during 2016 was primarily affected by:
An increase in revenues; and
Decreased personnel costs, mainly sales compensation expenses; partially offset by
Sub-advisory expense of $6.1 million related to the previously mentioned performance fees;
Increased direct expenses associated with investment management fees; and
The net negative impact from foreign currency exchange rate fluctuations between the U.S. dollar and the British pound on our foreign operations.
Operating margins were 51 percent in 2015 and 2014. Operating income increased $7.7 million, or five percent, in 2015 compared to the prior year. Operating income during 2015 was primarily affected by:
An increase in revenues; and
Decreased stock-based compensation costs of $3.9 million; partially offset by
Increased direct expenses associated with higher investment management fees; and
Increased personnel costs, mainly salary and incentive-based compensation expenses.
Investment Managers
Revenues increased $26.4 million, or ten percent, in 2016 and increased $16.7 million, or seven percent, in 2015 compared to 2014. Revenues during 2016 and 2015 were primarily affected by:
Positive cash flows from new and existing clients; partially offset by
Client losses and fund closures.
Operating margins were 35 percent in 2016 and 36 percent in 2015. Operating income increased $7.4 million, or eight percent, in 2016 compared to the prior year. Operating income during 2016 was primarily affected by:
An increase in revenues; partially offset by
Increased personnel expenses, technology and other operational costs to service new and existing clients; and
Increased non-capitalized investment spending, mainly consulting costs.
Operating margins were 36 percent in 2015 and 37 percent in 2014. Operating income increased $3.7 million, or four percent, in 2015 compared to the prior year. Operating income during 2015 was primarily affected by:
An increase in revenues; and
Decreased stock-based compensation costs of $4.5 million; partially offset by
Increased personnel expenses, technology and other operational costs to service new and existing clients.
Other
Corporate overhead expenses
Corporate overhead expenses primarily consist of general and administrative expenses and other costs not directly attributable to a reportable business segment. Corporate overhead expenses were $59.3 million, $54.5 million and $48.9 million in 2016, 2015 and 2014, respectively. The increase in corporate overhead expenses in 2016 was primarily due to higher salary and other personnel-related costs and expenses associated with ongoing litigation and regulatory activity. The increase in corporate overhead expenses in 2015 was primarily due to higher salary and other personnel-related costs as well as costs incurred for the relocation of our London operations.
Other income and expense items
Other income and expense items on the accompanying Consolidated Statements of Operations consist of:
Year Ended December 31,
 
2016
 
2015
 
2014
Net gain (loss) from investments
 
$
112

 
$
(456
)
 
$
614

Interest and dividend income
 
4,316

 
3,358

 
3,354

Interest expense
 
(531
)
 
(483
)
 
(458
)
Equity in earnings of unconsolidated affiliates
 
126,103

 
137,057

 
127,786

Gain on sale of subsidiary
 
2,791

 
2,791

 
5,582

Total other income and expense items, net
 
$
132,791

 
$
142,267

 
$
136,878


Page 27 of 75



Equity in earnings of unconsolidated affiliates
Equity in earnings of unconsolidated affiliates includes our ownership in LSV. Our proportionate share in the earnings of LSV declined to $126.1 million in 2016 as compared to $138.4 million in 2015. The decrease in our earnings was primarily due to a reduction in performance fees and increased personnel expenses of LSV. LSV’s average assets under management decreased $2.2 billion to $80.6 billion during 2016 as compared to $82.8 billion during 2015, a decrease of three percent. In 2015, our proportionate share in the earnings of LSV declined slightly to $138.4 million from $140.2 million in 2014. The decrease in 2015 was primarily due to increased personnel expenses of LSV.
In April 2016, LSV provided an interest in the partnership to select key employees which reduced the ownership percentage of each existing partner on a pro-rata basis. As a result, our total partnership interest in LSV was reduced from approximately 39.2 percent to approximately 38.9 percent.
Equity in earnings of unconsolidated affiliates in 2015 and 2014 also included our proportionate share in the losses of Gao Fu, a wealth services firm based in China. In December 2014, we wrote down our investment in Gao Fu to its net realizable value based on our ownership percentage of the remaining net assets of the firm and recognized an impairment charge of $11.3 million during the fourth quarter 2014. This charge is reflected in Equity in earnings of unconsolidated affiliates on the accompanying Consolidated Statements of Operations. We wrote off our remaining investment in Gao Fu during 2015.
Gain on sale of subsidiary
On July 31, 2012, we entered into an agreement to sell all of our ownership interest in SEI AK and completed the sale on March 28, 2013. We recorded gains from the sale of $2.8 million during 2016 and 2015 and $5.6 million during 2014. The gain recorded in 2016 was the result of the final in a series of three annual payments related to the contingent purchase price we received from the sale. These gains are included in Gain on sale of subsidiary on the accompanying Consolidated Statement of Operations (See Note 15 to the Consolidated Financial Statements for more information).
Income Taxes
Our effective tax rate was 34.3 percent in 2016, 33.7 percent in 2015, and 34.9 percent in 2014. Our effective tax rate is affected by recurring items, such as tax rates in various states and foreign jurisdictions and the relative amount of income we earned in those jurisdictions. These amounts have been fairly consistent in prior years. In 2014, there was an increase in the taxable income earned in certain foreign jurisdictions which was taxed at a lower rate or was offset by the foreign tax credit.
Our effective tax rate is also affected by discrete items that may occur in any given year, but are not consistent from year to year. Below are the most significant recurring and discrete items (See Note 12 to the Consolidated Financial Statements for more information):
2016
An increase in our effective rate due to lower foreign income in jurisdictions with lower effective tax rates or offset by a foreign tax credit; and
A one time reduction in 2015 in our effective rate due to a favorable settlement of a tax petition with the Pennsylvania Department of Revenue regarding prior year apportionment methodology; partially offset by
A reduction in our effective rate from a higher research and development tax credit due to an increase in eligible spending.
2015
A one time reduction in our effective rate due to a favorable settlement of a tax petition with the Pennsylvania Department of Revenue regarding prior year apportionment methodology; and
A reduction in our effective rate due to more foreign income in jurisdictions with lower effective tax rates or offset by a foreign tax credit.
2014
A reduction in our effective rate due to more foreign income in jurisdictions with lower effective tax rates or offset by a foreign tax credit;
A reduction in our state effective rate as a result of Pennsylvania Tax Law changes that became effective January 1, 2014; and
A reduction in our effective rate due to the reinstatement of the Research and Development Tax Credit. The tax credit was retroactively extended for 2014 through the Tax Increase Prevention Law, signed into law on December 19, 2014.
Stock-Based Compensation
During 2016, 2015 and 2014, we recognized approximately $16.0 million, $17.3 million and $13.5 million, respectively, in stock-based compensation expense. All of our stock options have performance-based vesting provisions that tie vesting of the options to our financial performance and do not contain any time-based vesting provisions. The amount of stock-based

Page 28 of 75



compensation expense recognized is based upon an estimate of when the earnings per share targets may be achieved. If our estimate proves to be inaccurate, the amount of stock-based compensation expense could be accelerated, spread out over a longer period, or reversed. This may cause volatility in the recognition of stock-based compensation expense and materially affect our earnings.
Effective January 1, 2017, we adopted the provisions of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). The primary impact of adoption will be the recognition of all excess tax benefits or deficiencies in our provision for income taxes in the income statement rather than an adjustment to paid-in capital. The determination of all tax effects on our income tax expense is dependent on current period stock option activity as well as our stock price, previously recognized expense for share-based payment awards, current tax laws, etc. This could cause our income tax expense to differ significantly from period to period.
In addition, we expect the dilutive effect from our stock options outstanding in 2017 will increase as a result of the adoption of ASU 2016-09. We elected to account for forfeitures as they occur when determining the amount of compensation cost to be recognized as well as retroactively reflecting all tax effects from stock option exercises as an operating activity for the periods prior to the date of adoption. The amendments to the accounting for income taxes and the change in the policy for accounting for forfeitures will require an adjustment to retained earnings as of January 1, 2017, where the cumulative effect of these changes are required to be recorded.
There was approximately $77.0 million of unrecognized compensation cost related to unvested employee stock options at December 31, 2016 and we expect to recognize approximately $25.0 million in stock-based compensation costs in 2017. These amounts do not reflect any estimate of forfeitures or cancellations in future periods. Actual forfeitures and cancellations occurring in a future period will reduce our stock-based compensation expense.
Fair Value Measurements
The fair value of our financial assets and liabilities, except for the investment funds sponsored by LSV, is determined in accordance with the fair value hierarchy. The fair value of the investment funds sponsored by LSV is measured using the net asset value per share (NAV) as a practical expedient. The fair value of all other financial assets are determined using Level 1 or Level 2 inputs and consist mainly of investments in equity or fixed-income mutual funds that are quoted daily and Government National Mortgage Association (GNMA) and other U.S. government agency securities that are single issuer pools that are valued based on current market data of similar assets. We did not have any financial liabilities at December 31, 2016 or 2015 (See Note 5 to the Consolidated Financial Statements for more information).
Regulatory Matters
Like many firms operating within the financial services industry, we are experiencing a difficult regulatory environment across our markets. Our current scale and reach as a provider to the financial services industry, the introduction and implementation of new solutions for our financial services industry clients, the increased regulatory oversight of the financial services industry generally, new laws and regulations affecting the financial services industry and ever-changing regulatory interpretations of existing laws and regulations, and a greater propensity of regulators to pursue enforcement actions and other sanctions against regulated entities, have made this an increasingly challenging and costly regulatory environment in which to operate.
SEI and some of our regulated subsidiaries have undergone or been scheduled to undergo a range of periodic or thematic reviews, examinations or investigations by numerous regulatory authorities around the world, including the Office of the Comptroller of the Currency, the Securities and Exchange Commission, the Financial Industry Regulatory Authority, the Financial Conduct Authority of the United Kingdom (FCA), the Central Bank of Ireland and others. These regulatory activities typically result in the identification of matters or practices to be addressed by us or our subsidiaries and, in certain circumstances, the regulatory authorities require remediation activities or pursue enforcement proceedings against us or our subsidiaries. As described under the caption “Regulatory Considerations” in Item 1 of this report, the range of possible sanctions that are available to regulatory authorities include limitations on our ability to engage in business for specified periods of time, the revocation of registration, censures and fines. The direct and indirect costs of responding to these regulatory activities and of complying with new or modified regulations, as well as the potential financial costs and potential reputational impact against us of any enforcement proceedings that might result, is uncertain but could have a material adverse impact on our operating results or financial position.

Page 29 of 75



Foreign Currency Exchange Rates
We transact business in the local currencies of various foreign countries, principally the United Kingdom, Canada and Ireland. The total of all of our foreign operations in these countries accounted for approximately 12 percent of our total consolidated revenues during 2016. Also, most of our foreign operations match local currency revenues with local currency costs. We translate sales and other results denominated in foreign currency into U.S. dollars for our consolidated financial statements. During periods of a strengthening dollar, our reported international sales and earnings could be reduced because foreign currencies may translate into fewer U.S. dollars. A fluctuation of currency exchange rates may expose us to gains and losses on non-U.S. currency transactions and a potential devaluation of the local currencies relative to the U.S. dollar which may impair our revenue growth and operating profits and also prolong sales cycles with potential customers. We currently do not engage in any foreign currency hedging strategies. The percentages of our total consolidated revenues and expenses during 2016 transacted in British pound, Canadian dollar and Euro currencies were as follows:
 
2016
British pound
 
Total revenues
6%
Total expenses
6%
 
 
Canadian dollar
 
Total revenues
5%
Total expenses
5%
 
 
Euro
 
Total revenues
1%
Total expenses
2%
United Kingdom European Union Membership Referendum
The results of the United Kingdom’s referendum regarding their membership in the European Union (EU) (referred to as Brexit) announced in late June 2016 caused significant volatility in global stock markets and currency exchange rates that resulted in the strengthening of the U.S. dollar against foreign currencies in which we conduct business. Our foreign subsidiary located in the United Kingdom, SEI Investments (Europe) Limited (SIEL), accounted for approximately six percent of our total consolidated revenues during 2016. The majority of our operations in the United Kingdom match local currency revenues with local currency costs.
Liquidity and Capital Resources
Year Ended December 31,
 
2016
 
2015
 
2014
Net cash provided by operating activities
 
$
425,236

 
$
391,460

 
$
374,803

Net cash used in investing activities
 
(79,585
)
 
(78,015
)
 
(53,385
)
Net cash used in financing activities
 
(319,688
)
 
(289,805
)
 
(224,750
)
Effect of exchange rate changes on cash and cash equivalents
 
(9,923
)
 
(11,425
)
 
(7,495
)
Net increase in cash and cash equivalents
 
16,040

 
12,215

 
89,173

Cash and cash equivalents, beginning of year
 
679,661

 
667,446

 
578,273

Cash and cash equivalents, end of year
 
$
695,701

 
$
679,661

 
$
667,446

Cash requirements and liquidity needs are primarily funded through our cash flow from operations and our capacity for additional borrowing. At December 31, 2016, our unused sources of liquidity consisted of cash and cash equivalents and the full amount available under our credit facility.
In June 2016, we replaced our credit facility with a new five-year credit facility agreement which provides for borrowings of up to $300 million (See Note 7 to the Consolidated Financial Statements). The new credit facility is a senior unsecured revolving line of credit with Wells Fargo Bank, National Association, and a syndicate of other lenders and is scheduled to expire in June 2021. The availability of the credit facility is subject to compliance with certain covenants set forth in the agreement. The credit facility contains covenants which restrict our ability to engage in mergers, consolidations, asset sales, investments, transactions with affiliates, or to incur liens, as defined in the agreement. In the event of a default under the credit facility, we would also be

Page 30 of 75



restricted from paying dividends on, or repurchasing our common stock. Currently, our ability to borrow from the credit facility is not limited by any covenant of the agreement. We currently have no borrowings under our credit facility.
The majority of our excess cash reserves are primarily placed in accounts located in the United States that invest in SEI-sponsored money market mutual funds denominated in the U.S. dollar. We also utilize demand deposit accounts or money market accounts at several well-established financial institutions located in the United States. Accounts used to manage these excess cash reserves do not impose any restrictions or limitations that would prevent us from being able to access such cash amounts immediately. As of January 31, 2017, the amount of cash and cash equivalents considered free and immediately accessible for other general corporate purposes was $220.6 million.
Our cash and cash equivalents include accounts managed by our subsidiaries that are used in their operations or to cover specific business and regulatory requirements. The availability of this cash for other purposes beyond the operations of these subsidiaries may be limited. Also, some of our foreign subsidiaries may have excess cash reserves which are considered to be undistributed earnings and indefinitely reinvested. Upon distribution of these earnings, in the form of dividends or otherwise, we would be immediately subject to both U.S. and foreign withholding taxes which would reduce the amount we would ultimately realize. In addition to the foreign withholding taxes, the negative impact resulting from unfavorable exchange rate fluctuations on the cash balances held by our foreign subsidiaries would also reduce the amount realized. We do not include accounts of our foreign subsidiaries in our calculation of free and immediately accessible cash for other general corporate purposes.
Cash flows from operations increased $33.8 million in 2016 compared to 2015 primarily from the net change in our working capital accounts, mainly receivables. The increase was partially offset by lower distributions payments received from our unconsolidated affiliate, LSV. Cash flows from operations increased $16.7 million in 2015 compared to 2014 primarily from the increase in our net income, an increase in the distribution payments received from LSV and non-cash items such as the increase in depreciation, amortization and stock-based compensation expense. The increase was partially offset by the larger negative impact from the net change in our working capital accounts in 2015 as compared to 2014.
Net cash used in investing activities includes:
Purchases, sales and maturities of marketable securities. Our purchases, sales and maturities of marketable securities during 2016, 2015 and 2014 were as follows:
 
 
2016
 
2015
 
2014
Purchases
 
$
(73,193
)
 
$
(52,538
)
 
$
(56,754
)
Sales and maturities
 
69,293

 
46,312

 
63,434

Net investing activities from marketable securities
 
$
(3,900
)
 
$
(6,226
)
 
$
6,680

Marketable securities purchased generally consisted of investments in short-term U.S. government agency and commercial paper securities through SIDCO's cash management program, additional GNMA securities to satisfy applicable regulatory requirements of SPTC and investments for the start-up of new investment products. Proceeds received from sales and maturities primarily included maturities of short-term securities owned by SIDCO and sales and principal prepayments related to the GNMA securities owned by SPTC.
The capitalization of costs incurred in developing computer software. We capitalized $50.4 million, $29.4 million and $34.9 million of software development costs in 2016, 2015 and 2014, respectively. Amounts capitalized primarily include costs for significant enhancements and upgrades for the expanded functionality of the SEI Wealth Platform. Our capitalized software amounts also include $10.6 million and $4.9 million in 2016 and 2015, respectively, for a new application for the Investment Managers segment.
Capital expenditures. Our capital expenditures in 2016, 2015 and 2014 primarily include purchased software and equipment for our data center operations. Our expenditures in 2016 also include software and equipment for a new U.S. disaster recovery site. Our expenditures in 2015 include $13.8 million to relocate our London operations to a new facility. Our expenditures in 2014 include $8.4 million related to the construction of an additional building at our corporate headquarters.
Receipt of contingent payment from sale of SEI AK. The sale of SEI AK was completed during the first quarter of 2013. We received cash of $2.8 million during 2016 and 2015 and $5.6 million during 2014 resulting from annual payments related to the contingent purchase price from the sale. The cash received in 2016 was the final payment in the series of annual payments. Additional information pertaining to the sale is presented in Note 15 to the Consolidated Financial Statements.

Page 31 of 75



Net cash used in financing activities includes:
The repurchase of our common stock. Our Board of Directors has authorized the repurchase of our common stock through multiple authorizations. Currently, there is no expiration date for our common stock repurchase program. The following table lists information regarding repurchases of our common stock during 2016, 2015 and 2014:
Year
 
Total Number of
Shares  Repurchased
 
Average Price
Paid per Share
 
Total Cost
2016
 
6,600,000

 
$
44.60

 
$
294,374

2015
 
5,951,000

 
48.66

 
289,587

2014
 
7,888,000

 
35.29

 
278,357

Proceeds from the issuance of our common stock. We received $48.3 million, $65.5 million and $104.9 million in proceeds from the issuance of our common stock during 2016, 2015 and 2014, respectively. The proceeds we receive from the issuance of our common stock is directly attributable to the levels of stock option exercise activity.
Dividend payments. Our cash dividends paid during 2016, 2015 and 2014 were as follows:
Year
 
Cash Dividends Paid
 
Cash Dividends
Paid per Share
2016
 
$
84,686

 
$
0.52

2015
 
80,030

 
0.48

2014
 
74,294

 
0.44

Our Board of Directors declared a semi-annual cash dividend of $0.28 per share on December 13, 2016. The dividend was paid on January 6, 2017 for a total of $44.6 million.
We believe our operating cash flow, available borrowing capacity, and existing cash and cash equivalents should provide adequate funds for ongoing operations; continued investment in new products and equipment; our common stock repurchase program and future dividend payments.
Significant Arrangement
On October 1, 2012, we provided an unsecured guaranty of the obligations of LSV Employee Group III to The PrivateBank and Trust Company and certain other lenders. We entered into this agreement in order to facilitate the acquisition of certain partnership interests of LSV by LSV Employee Group III. Additional information pertaining to the agreement is presented in Note 2 to the Consolidated Financial Statements.
Contractual Obligations and Contingent Obligations
As of December 31, 2016, the Company is obligated to make payments in connection with its lines of credit, operating leases, maintenance contracts and other commitments in the amounts listed below. The Company has no unrecorded obligations other than the items noted in the following table:
 
 
Total
 
2017
 
2018