Attached files

file filename
EX-99.1 - PRESS RELEASE - SEI INVESTMENTS COseic-earningsreleaseex991.htm
EX-32 - SECTION 906 CEO AND CFO CERTIFICATION - SEI INVESTMENTS COseic-3311710qex32.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - SEI INVESTMENTS COseic-3311710qex312.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - SEI INVESTMENTS COseic-3311710qex311.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ________________________________________
FORM 10-Q
________________________________________
 
(Mark One)*
ý
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended March 31, 2017
or
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from              to             
0-10200
(Commission File Number)
________________________________________ 
SEI INVESTMENTS COMPANY
(Exact name of registrant as specified in its charter)
________________________________________ 
Pennsylvania
 
23-1707341
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification Number)
1 Freedom Valley Drive, Oaks, Pennsylvania 19456-1100
(Address of principal executive offices)
(Zip Code)
(610) 676-1000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
 ________________________________________
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 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
 
ý
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
 
 
 
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  ¨    No  ý
The number of shares outstanding of the registrant’s common stock as of April 13, 2017 was 158,709,804.




SEI Investments Company

TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
PART I - FINANCIAL INFORMATION
 
 
 
 
 
 
Page
Item 1.
Financial Statements.
 
 
 
Consolidated Balance Sheets (Unaudited) -- March 31, 2017 and December 31, 2016
 
 
Consolidated Statements of Operations (Unaudited) -- For the Three Months Ended March 31, 2017 and 2016
 
 
Consolidated Statements of Comprehensive Income (Unaudited) -- For the Three Months Ended March 31, 2017 and 2016
 
 
Consolidated Statements of Cash Flows (Unaudited) -- For the Three Months Ended March 31, 2017 and 2016
 
 
Notes to Consolidated Financial Statements
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
 
Item 4.
Controls and Procedures.
 
 
 
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
 
 
 
Item 1.
Legal Proceedings.
 
Item 1A.
Risk Factors.
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
 
Item 6.
Exhibits.
 
 
Signatures
 



1 of 36



PART I.        FINANCIAL INFORMATION

Item 1.    Consolidated Financial Statements.

SEI Investments Company
Consolidated Balance Sheets
(unaudited)
(In thousands, except par value)

 
March 31, 2017
 
December 31, 2016
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
661,372

 
$
695,701

Restricted cash
3,500

 
3,500

Receivables from investment products
51,453

 
61,761

Receivables, net of allowance for doubtful accounts of $518 and $523
252,205

 
227,957

Securities owned
21,372

 
21,339

Other current assets
29,873

 
27,575

Total Current Assets
1,019,775

 
1,037,833

Property and Equipment, net of accumulated depreciation of $291,500 and $285,322
142,726

 
146,190

Capitalized Software, net of accumulated amortization of $315,512 and $303,540
300,756

 
295,867

Investments Available for Sale
89,262

 
84,033

Investments in Affiliated Funds, at fair value
5,156

 
4,858

Investment in Unconsolidated Affiliate
48,759

 
50,459

Deferred Income Taxes
1,878

 
2,127

Other Assets, net
16,240

 
15,456

Total Assets
$
1,624,552

 
$
1,636,823

Liabilities and Equity
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
7,372

 
$
5,966

Accrued liabilities
167,061

 
240,525

Deferred revenue
2,337

 
2,880

Total Current Liabilities
176,770

 
249,371

Deferred Income Taxes
69,379

 
69,693

Other Long-term Liabilities
15,610

 
14,645

Total Liabilities
261,759

 
333,709

Commitments and Contingencies

 

Shareholders' Equity:
 
 
 
Common stock, $.01 par value, 750,000 shares authorized; 158,687 and 159,031 shares issued and outstanding
1,587

 
1,590

Capital in excess of par value
976,007

 
955,461

Retained earnings
420,712

 
384,018

Accumulated other comprehensive loss, net
(35,513
)
 
(37,955
)
Total Shareholders' Equity
1,362,793

 
1,303,114

Total Liabilities and Shareholders' Equity
$
1,624,552

 
$
1,636,823

The accompanying notes are an integral part of these consolidated financial statements.

2 of 36



SEI Investments Company
Consolidated Statements of Operations
(unaudited)
(In thousands, except per share data)
 
 
Three Months Ended March 31,
 
2017
 
2016
Revenues:
 
 
 
Asset management, administration and distribution fees
$
278,565

 
$
251,437

Information processing and software servicing fees
74,763

 
73,399

Transaction-based and trade execution fees
6,656

 
9,427

Total revenues
359,984

 
334,263

Expenses:
 
 
 
Subadvisory, distribution and other asset management costs
42,502

 
39,195

Software royalties and other information processing costs
7,662

 
7,748

Brokerage commissions
4,959

 
7,108

Compensation, benefits and other personnel
108,943

 
101,931

Stock-based compensation
6,180

 
3,789

Consulting, outsourcing and professional fees
43,149

 
38,506

Data processing and computer related
16,772

 
15,718

Facilities, supplies and other costs
17,478

 
15,997

Amortization
12,022

 
11,012

Depreciation
6,800

 
6,447

Total expenses
266,467

 
247,451

Income from operations
93,517

 
86,812

Net gain (loss) from investments
347

 
(126
)
Interest and dividend income
1,343

 
1,083

Interest expense
(112
)
 
(114
)
Equity in earnings of unconsolidated affiliate
33,565

 
29,192

Gain on sale of subsidiary

 
2,791

Income before income taxes
128,660

 
119,638

Income taxes
39,923

 
42,141

Net income
88,737

 
77,497

Basic earnings per common share
$
0.56

 
$
0.48

Shares used to compute basic earnings per share
159,091

 
163,013

Diluted earnings per common share
$
0.55

 
$
0.47

Shares used to compute diluted earnings per share
162,742

 
166,145

The accompanying notes are an integral part of these consolidated financial statements.

3 of 36



SEI Investments Company
Consolidated Statements of Comprehensive Income
(unaudited)
(In thousands)
 
 
Three Months Ended March 31,
 
2017
 
2016
Net income
 
 
$
88,737

 
 
 
$
77,497

Other comprehensive gain, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
 
2,488

 
 
 
2,429

Unrealized (loss) gain on investments:
 
 
 
 
 
 
 
Unrealized (losses) gains during the period, net of income taxes of $19 and $(191)
(24
)
 
 
 
330

 
 
Less: reclassification adjustment for (gains) losses realized in net income, net of income taxes of $10 and $(103)
(22
)
 
(46
)
 
187

 
517

Total other comprehensive gain, net of tax
 
 
2,442

 
 
 
2,946

Comprehensive income
 
 
$
91,179

 
 
 
$
80,443

The accompanying notes are an integral part of these consolidated financial statements.

4 of 36



SEI Investments Company
Consolidated Condensed Statements of Cash Flows
(unaudited)
(In thousands)
 
 
Three Months Ended March 31,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
88,737

 
$
77,497

Adjustments to reconcile net income to net cash provided by operating activities (See Note 1)
(15,725
)
 
1,148

Net cash provided by operating activities
73,012

 
78,645

Cash flows from investing activities:
 
 
 
Additions to property and equipment
(3,205
)
 
(4,609
)
Additions to capitalized software
(16,861
)
 
(9,477
)
Purchases of marketable securities
(20,445
)
 
(8,652
)
Prepayments and maturities of marketable securities
15,166

 
12,090

Sales of marketable securities

 
185

Receipt of contingent payment from sale of SEI AK

 
2,791

Other investing activities

 
200

Net cash used in investing activities
(25,345
)
 
(7,472
)
Cash flows from financing activities:
 
 
 
Purchase and retirement of common stock
(56,553
)
 
(78,372
)
Proceeds from issuance of common stock
16,847

 
6,476

Payment of dividends
(44,597
)
 
(42,677
)
Net cash used in financing activities
(84,303
)
 
(114,573
)
Effect of exchange rate changes on cash and cash equivalents
2,307

 
1,992

Net decrease in cash and cash equivalents
(34,329
)
 
(41,408
)
Cash and cash equivalents, beginning of period
695,701

 
679,661

Cash and cash equivalents, end of period
$
661,372

 
$
638,253

The accompanying notes are an integral part of these consolidated financial statements.

5 of 36



Notes to Consolidated Financial Statements
(all figures are in thousands except share and per share data)
 
Note 1.    Summary of Significant Accounting Policies
Nature of Operations
SEI Investments Company (the Company), a Pennsylvania corporation, provides investment processing, investment management, and investment operations solutions to financial institutions, financial advisors, institutional investors, investment managers and ultra-high-net-worth families in the United States, Canada, the United Kingdom, continental Europe and various other locations throughout the world. Investment processing solutions consist of application and business process outsourcing services, professional services and transaction-based services. Revenues from investment processing solutions are recognized in Information processing and software servicing fees on the accompanying Consolidated Statements of Operations, except for fees earned associated with trade execution services which are recognized in Transaction-based and trade execution fees.
Investment management programs consist of mutual funds, alternative investments and separate accounts. These include a series of money market, equity, fixed-income and alternative investment portfolios, primarily in the form of registered investment companies. The Company serves as the administrator and investment advisor for many of these products. Revenues from investment management programs are recognized in Asset management, administration and distribution fees on the accompanying Consolidated Statements of Operations.
Investment operations solutions offer investment managers support for traditional investment products such as mutual funds, collective investment trusts, exchange-traded funds, and institutional and separate accounts, by providing outsourcing services including fund and investment accounting, administration, reconciliation, investor servicing and client reporting. These solutions also provide support to managers focused on alternative investments who manage hedge funds, funds of hedge funds, private equity funds and real estate funds, across registered, partnership and separate account structures domiciled in the United States and overseas. Revenues from investment operations solutions are recognized in Asset management, administration and distribution fees on the accompanying Consolidated Statements of Operations.
Basis of Presentation
The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Certain financial information and accompanying note disclosure normally included in the Company’s Annual Report on Form 10-K have been condensed or omitted. The interim financial information is unaudited but reflects all adjustments (consisting of only normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of financial position of the Company as of March 31, 2017, the results of operations for the three months ended March 31, 2017 and 2016, and cash flows for the three-month periods ended March 31, 2017 and 2016. These interim Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
There have been no significant changes in significant accounting policies during the three months ended March 31, 2017 as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 with the exception of the adoption of Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). As required by ASU 2016-09, excess tax benefits recognized on stock-based compensation expense are reflected in the accompanying Consolidated Statements of Operations as a component of the provision for income taxes on a prospective basis (See Note 11). Additionally, excess tax benefits or deficiencies recognized on stock-based compensation expense are classified as an operating activity in the accompanying Consolidated Statements of Cash Flows. The Company has applied this provision retrospectively for the periods prior to the date of adoption. As a result, for the three months ended March 31, 2016, net cash provided by operating activities increased by $624 with a corresponding offset to net cash used for financing activities.
ASU 2016-09 also allows for the option to account for forfeitures as they occur when determining the amount of compensation cost to be recognized, rather than estimating expected forfeitures over the course of a vesting period. The Company elected to account for forfeitures as they occur. In addition, ASU 2016-09 eliminates anticipated windfalls and shortfalls that were included in the calculation of assumed proceeds for computing the dilutive effect of share-based payment awards in the calculation of diluted earnings per share. No adjustments to the Company's prior period reported diluted earnings per share amounts were permitted by ASU 2016-09.
The net cumulative effect to the Company from the adoption of ASU 2016-09 was an increase to paid-in capital of $2,582, a reduction to retained earnings of $1,669 and an increase to deferred tax assets of $913 as of January 1, 2017.


6 of 36



Cash and Cash Equivalents
Cash and cash equivalents includes $313,762 and $374,760 at March 31, 2017 and December 31, 2016, respectively, primarily invested in SEI-sponsored open-ended money market mutual funds. The SEI-sponsored mutual funds are Level 1 assets.
Restricted Cash
Restricted cash includes $3,000 at March 31, 2017 and December 31, 2016 segregated for regulatory purposes related to trade-execution services conducted by SEI Investments (Europe) Limited. Restricted cash also includes $500 at March 31, 2017 and December 31, 2016, respectively, segregated in special reserve accounts for the benefit of customers of the Company’s broker-dealer subsidiary, SEI Investments Distribution Co. (SIDCO), in accordance with certain rules established by the Securities and Exchange Commission for broker-dealers.
Capitalized Software
The Company capitalized $16,861 and $9,477 of software development costs during the three months ended March 31, 2017 and 2016, respectively. The Company's software development costs primarily relate to the continued development of the SEI Wealth PlatformSM (the Platform). The Company capitalized $15,178 and $7,645 of software development costs for significant enhancements to the Platform during the three months ended March 31, 2017 and 2016, respectively. As of March 31, 2017, the net book value of the Platform was $283,565. The Platform has an estimated useful life of 15 years and a weighted average remaining life of 5.2 years. Amortization expense for the Platform was $11,972 and $10,955 during the three months ended March 31, 2017 and 2016, respectively.
The Company also capitalized $1,683 and $1,832 of software development costs during the three months ended March 31, 2017 and 2016, respectively, related to an application for the Investment Managers segment. Capitalized software development costs in-progress at March 31, 2017 associated with the application were $17,191. The application is not yet ready for use.
Earnings per Share
The calculations of basic and diluted earnings per share for the three months ended March 31, 2017 and 2016 are:
 
Three Months Ended March 31,
 
2017
 
2016
Net income
$
88,737

 
$
77,497

Shares used to compute basic earnings per common share
159,091,000

 
163,013,000

Dilutive effect of stock options
3,651,000

 
3,132,000

Shares used to compute diluted earnings per common share
162,742,000

 
166,145,000

Basic earnings per common share
$
0.56

 
$
0.48

Diluted earnings per common share
$
0.55

 
$
0.47

During the three months ended March 31, 2017 and 2016, employee stock options to purchase 11,279,000 and 10,506,000 shares of common stock with an average exercise price of $37.70 and $34.05, respectively, were outstanding but not included in the computation of diluted earnings per common share. These options for the three month periods were not included in the computation of diluted earnings per common share because either the performance conditions have not been satisfied or would have been satisfied if the reporting date was the end of the contingency period or the option’s exercise price was greater than the average market price of the Company’s common stock and the effect on diluted earnings per common share would have been anti-dilutive.
Reclassifications
Certain prior year amounts have been reclassified to conform to current year presentation.


7 of 36



Statements of Cash Flows
For purposes of the Consolidated Statements of Cash Flows, the Company considers investment instruments purchased with an original maturity of three months or less to be cash equivalents.
The following table provides the details of the adjustments to reconcile net income to net cash provided by operating activities for the three months ended March 31:
 
2017
 
2016
Net income
$
88,737

 
$
77,497

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
6,800

 
6,447

Amortization
12,022

 
11,012

Equity in earnings of unconsolidated affiliate
(33,565
)
 
(29,192
)
Distributions received from unconsolidated affiliate
35,265

 
34,525

Stock-based compensation
6,180

 
3,789

Provision for losses on receivables
(5
)
 
51

Deferred income tax expense
877

 
(1,029
)
Gain from sale of SEI AK

 
(2,791
)
Net (gain) loss from investments
(347
)
 
126

Tax benefit on stock options exercised (1)

 
624

Change in other long-term liabilities
965

 
279

Change in other assets
(849
)
 
1,099

Other
56

 
676

Change in current asset and liabilities
 
 
 
Decrease (increase) in
 
 
 
Receivables from investment products
10,308

 
(3,535
)
Receivables
(24,243
)
 
(6,585
)
Other current assets
(2,298
)
 
(2,622
)
Increase (decrease) in
 
 
 
Accounts payable
1,406

 
(157
)
Accrued liabilities
(27,754
)
 
(12,120
)
Deferred revenue
(543
)
 
551

Total adjustments
(15,725
)
 
1,148

Net cash provided by operating activities
$
73,012

 
$
78,645

(1) The tax benefit on stock options exercised for the three months ended March 31, 2016 was reclassified to operating activities from financing activities upon the adoption of ASU 2016-09.
New Accounting Pronouncements
On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The updated standard permits the use of either the retrospective or cumulative effect transition method. The FASB has recently issued several amendments to the standard, including principal versus agent guidance and identifying performance obligations. ASU 2014-09 currently becomes effective for the Company during the first quarter 2018.
The Company continues to assess the impact ASU 2014-09 will have on its revenue arrangements with completion, including selecting a transition method, expected by the third quarter of 2017. The majority of the Company’s services are bundled together and provided and completed for the client on a monthly basis. The Company expects revenue for these services to continue to be recognized monthly because of the continuous transfer of control to the client. Therefore, the adoption of this ASU is not expected to have a material impact on the recognition of revenue for the majority of the fees recognized for the services provided. However, the Company believes the adoption of the new standard may affect the timing

8 of 36



of the recognition of implementation fees recognized in Information processing and software servicing fees as well as fund conversion fees and other ancillary fees recognized in Asset management, administration and distribution fees. Transaction-based and trade execution fees are based on current period activity and is not expected to be affected by the adoption of ASU 2014-09. Due to the complexity of some of our agreements, the actual revenue recognition treatment required under the standard will be dependent on contract-specific terms, and certain aspects may vary in some instances from recognition ratably over the contract term.
The new standard also modified some of the principal and agent considerations which may result in changes to gross or net treatment of revenue and expenses but would not affect final net income. The Company is also evaluating its sales commission programs affected by the standard. Previously, sales commission costs were expensed at inception of a sales agreement but under the new standard will generally need to be capitalized and amortized over the period of contract performance.
The new standard provides companies with alternative methods of adoption and the Company is in the process of determining the method of adoption, which depends in part upon completion of the evaluation of the remaining revenue arrangements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (ASU 2016-02) requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases with the exception of short-term leases. For lessees, leases will continue to be classified as either operating or finance leases in the income statement. Lessor accounting is similar to the current model but updated to align with certain changes to the lessee model. Lessors will continue to classify leases as operating, direct financing or sales-type leases. The new standard must be adopted using a modified retrospective transition and requires application of the new guidance at the beginning of the earliest comparative period presented. The updated standard is effective for the Company beginning in the first quarter of 2019. Early adoption is permitted. The Company is currently evaluating the transition method that will be elected and the effect that the updated standard will have on its consolidated financial statements and related disclosures.

Note 2.
Investment in Unconsolidated Affiliate
LSV Asset Management
The Company has an investment in LSV Asset Management (LSV), a registered investment advisor that provides investment advisory services primarily to institutions, including pension plans and investment companies. LSV is currently an investment sub-advisor for a limited number of SEI-sponsored mutual funds. The Company accounts for its interest in LSV using the equity method because of its less than 50 percent ownership. The Company’s interest in the net assets of LSV is reflected in Investment in unconsolidated affiliate on the accompanying Consolidated Balance Sheets and its interest in the earnings of LSV is reflected in Equity in earnings of unconsolidated affiliate on the accompanying Consolidated Statements of Operations.
At March 31, 2017, the Company’s total investment in LSV was $48,759. The Company receives partnership distributions from LSV on a quarterly basis. The Company received partnership distributions from LSV of $35,265 and $34,525 in the three months ended March 31, 2017 and 2016, respectively.
The Company’s proportionate share in the earnings of LSV was $33,565 and $29,192 during the three months ended March 31, 2017 and 2016, respectively.
These tables contain condensed financial information of LSV: 
Condensed Statement of Operations
 
Three Months Ended March 31,
 
 
2017
 
2016
Revenues
 
$
109,953

 
$
92,653

Net income
 
86,215

 
74,457



9 of 36



Condensed Balance Sheets

 
March 31, 2017
 
December 31, 2016
Current assets
 
$
121,189

 
$
125,872

Non-current assets
 
1,782

 
1,927

Total assets
 
$
122,971

 
$
127,799

 
 
 
 
 
Current liabilities
 
$
40,506

 
$
39,303

Partners’ capital
 
82,465

 
88,496

Total liabilities and partners’ capital
 
$
122,971

 
$
127,799

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, the Company's total partnership interest in LSV was reduced from approximately 39.2 percent to approximately 38.9 percent.
Guaranty Agreement with LSV Employee Group III
In October 2012, LSV Employee Group III purchased a portion of the partnership interest of three existing LSV employees for $77,700, of which $69,930 was financed through two syndicated term loan facilities contained in a credit agreement with The PrivateBank and Trust Company. The Company provided an unsecured guaranty for $45,000 of the obligations of LSV Employee Group III to the lenders through a guaranty agreement. The lenders have the right to seek payment from the Company in the event of a default by LSV Employee Group III. LSV agreed to provide an unsecured guaranty for $24,930 of the obligations of LSV Employee Group III to the lenders through a separate guaranty agreement.
The Company’s direct interest in LSV was unchanged as a result of this transaction. The Company has determined that LSV Employee Group III is a variable interest entity (VIE); however, the Company is not considered the primary beneficiary because it does not have the power to direct the activities that most significantly impact the economic performance of LSV Employee Group III either directly or through any financial responsibility from the guaranty.
In September 2014, LSV Employee Group III made the final principal payment related to the term loan guaranteed by LSV. As of April 13, 2017, the remaining unpaid principal balance of the term loan guaranteed by the Company was $1,065. LSV Employee Group III has met all financial obligations to date regarding the scheduled repayment of the term loans since origination. The Company, in its capacity as guarantor, currently has no obligation of payment relating to the term loan of LSV Employee Group III and, furthermore, fully expects that LSV Employee Group III will meet all of their future obligations regarding the term loan.

Note 3.    Variable Interest Entities – Investment Products
The Company or its affiliates have created numerous investment products for its clients in various types of legal entity structures. The Company serves as the Manager, Administrator and Distributor for these investment products and may also serve as the Trustee for some of the investment products. The Company receives asset management, distribution, administration and custodial fees for these services. Clients are the equity investors and participate in proportion to their ownership percentage in the net income or loss and net capital gains or losses of the products, and, on liquidation, will participate in proportion to their ownership percentage in the remaining net assets of the products after satisfaction of outstanding liabilities.
The Company has concluded that it is not the primary beneficiary of the entities and; therefore, is not required to consolidate any of the pooled investment vehicles for which it receives asset management, distribution, administration and custodial fees under the VIE model. The entities either do not meet the definition of a VIE or the Company does not hold a variable interest in the entities. The entities either qualify for the money market scope exception, or are entities in which the Company’s asset management, distribution, administration and custodial fees are commensurate with the services provided and include fair terms and conditions, or are entities that are limited partnerships which have substantive kick-out rights. The Company acts as a fiduciary and does not hold any other interests other than insignificant seed money investments in the pooled investment vehicles. For this reason, the Company also concluded that it is not required to consolidate the pooled investment vehicles under the VOE model.
The Company is a party to expense limitation agreements with certain SEI-sponsored money market funds subject to Rule 2a-7 of the Investment Company Act of 1940 which establish a maximum level of ordinary operating expenses incurred by the fund in any fiscal year including, but not limited to, fees of the administrator or its affiliates. Under the terms of these agreements, the Company waived $7,072 and $12,477 in fees during the three months ended March 31, 2017 and 2016, respectively.


10 of 36



Note 4.
Composition of Certain Financial Statement Captions
Receivables
Receivables on the accompanying Consolidated Balance Sheets consist of: 
 
March 31, 2017
 
December 31, 2016
Trade receivables
$
54,973

 
$
48,683

Fees earned, not billed
186,894

 
168,971

Other receivables
10,856

 
10,826

 
252,723

 
228,480

Less: Allowance for doubtful accounts
(518
)
 
(523
)
 
$
252,205

 
$
227,957

Fees earned, not billed represents receivables earned but unbilled and results from timing differences between services provided and contractual billing schedules. These billing schedules generally provide for fees to be billed on a quarterly basis. In addition, certain fees earned from investment operations services are calculated based on assets under administration that have a prolonged valuation process which delays billings to clients.
Receivables from investment products on the accompanying Consolidated Balance Sheets primarily represent fees receivable for distribution, investment advisory, and administration services to various regulated investment companies and other investment products sponsored by SEI.
Property and Equipment
Property and Equipment on the accompanying Consolidated Balance Sheets consists of:
 
March 31, 2017
 
December 31, 2016
Buildings
$
152,171

 
$
152,171

Equipment
108,010

 
106,759

Land
10,030

 
10,030

Purchased software
128,377

 
128,008

Furniture and fixtures
17,407

 
17,292

Leasehold improvements
15,433

 
15,175

Construction in progress
2,798

 
2,077

 
434,226

 
431,512

Less: Accumulated depreciation
(291,500
)
 
(285,322
)
Property and Equipment, net
$
142,726

 
$
146,190

The Company recognized $6,800 and $6,447 in depreciation expense related to property and equipment for the three months ended March 31, 2017 and 2016, respectively.
Accrued Liabilities
Accrued liabilities on the accompanying Consolidated Balance Sheets consist of: 
 
March 31, 2017
 
December 31, 2016
Accrued employee compensation
$
25,949

 
$
79,735

Accrued consulting, outsourcing and professional fees
29,199

 
24,428

Accrued sub-advisory, distribution and other asset management fees
34,936

 
41,666

Accrued dividend payable

 
44,596

Accrued income taxes
36,524

 
3,721

Other accrued liabilities
40,453

 
46,379

Total accrued liabilities
$
167,061

 
$
240,525



11 of 36



Note 5.    Fair Value Measurements
The fair value of the Company’s financial assets and liabilities, except for the Company's investment funds sponsored by LSV, is determined in accordance with the fair value hierarchy. The fair value of the Company’s Level 1 financial assets consist mainly of investments in open-ended mutual funds that are quoted daily. Level 2 financial assets consist of Government National Mortgage Association (GNMA) mortgage-backed securities held by the Company's wholly-owned limited purpose federal thrift subsidiary, SEI Private Trust Company (SPTC), Federal Home Loan Bank (FHLB) and other U.S. government agency short-term notes held by SIDCO. The financial assets held by SIDCO were purchased as part of a cash management program requiring only short term, top-tier investment grade government and corporate securities. The financial assets held by SPTC are debt securities issued by GNMA and are backed by the full faith and credit of the U.S. government. These securities were purchased for the sole purpose of satisfying applicable regulatory requirements and have maturity dates which range from 2020 to 2041.
The fair value of the Company's investment funds sponsored by LSV is measured using the net asset value per share (NAV) as a practical expedient. The NAVs of the funds are calculated by the funds' independent custodian and are derived from the fair values of the underlying investments as of the reporting date. The funds allow for investor redemptions at the end of each calendar month. This investment has not been classified in the fair value hierarchy but is presented in the tables below to permit reconciliation to the amounts presented on the accompanying Consolidated Balance Sheets.
The valuation of the Company's Level 2 financial assets held by SIDCO and SPTC are based upon securities pricing policies and procedures utilized by third-party pricing vendors.
The pricing policies and procedures applied during the three months ended March 31, 2017 were consistent with those as described in our Annual Report on Form 10-K at December 31, 2016. The Company had no Level 3 financial assets or liabilities at March 31, 2017 or December 31, 2016. There were no transfers of financial assets between levels within the fair value hierarchy during the three months ended March 31, 2017.
The fair value of certain financial assets and liabilities of the Company was determined using the following inputs:
 
 
 
 
Fair Value Measurements at the End of the Reporting Period Using
Assets
 
March 31, 2017
 
Quoted Prices
in
Active  Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
Equity available-for-sale securities
 
$
9,900

 
$
9,900

 
$

Fixed-income available-for-sale securities
 
79,362

 

 
79,362

Fixed-income securities owned
 
21,372

 

 
21,372

Investment funds sponsored by LSV (1)
 
5,156

 
 
 
 
 
 
$
115,790

 
$
9,900

 
$
100,734


 
 
 
 
Fair Value Measurements at the End of the Reporting Period Using
Assets
 
December 31, 2016
 
Quoted Prices
in
Active  Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
Equity available-for-sale securities
 
$
9,581

 
$
9,581

 
$

Fixed-income available-for-sale securities
 
74,452

 

 
74,452

Fixed-income securities owned
 
21,339

 

 
21,339

Investment funds sponsored by LSV (1)
 
4,858

 
 
 
 
 
 
$
110,230

 
$
9,581

 
$
95,791

(1) The fair value amounts presented in the tables above are intended to permit reconciliation of the fair value hierarchy to the amounts presented on the accompanying Consolidated Balance Sheets (See Note 6).


12 of 36



Note 6.    Marketable Securities
Investments Available for Sale
Investments available for sale classified as non-current assets consist of: 
 
At March 31, 2017
 
Cost
Amount
 
Gross
Unrealized
Gains
 
Gross
Unrealized
(Losses)
 
Fair
Value
SEI-sponsored mutual funds
$
7,325

 
$
61

 
$
(817
)
 
$
6,569

Equities and other mutual funds
3,224

 
107

 

 
3,331

Debt securities
79,923

 

 
(561
)
 
79,362

 
$
90,472

 
$
168

 
$
(1,378
)
 
$
89,262

 
At December 31, 2016
 
Cost
Amount
 
Gross
Unrealized
Gains
 
Gross
Unrealized
(Losses)
 
Fair
Value
SEI-sponsored mutual funds
$
7,357

 
$
24

 
$
(996
)
 
$
6,385

Equities and other mutual funds
2,968

 
228

 

 
3,196

Debt securities
74,843

 

 
(391
)
 
74,452

 
$
85,168

 
$
252

 
$
(1,387
)
 
$
84,033

Net unrealized losses at March 31, 2017 and December 31, 2016 were $882 (net of income tax benefit of $328) and $836 (net of income tax benefit of $299), respectively. These net unrealized losses are reported as a separate component of Accumulated other comprehensive loss on the accompanying Consolidated Balance Sheets.
There were gross realized gains of $261 and gross realized losses of $229 from available-for-sale securities during the three months ended March 31, 2017. There were gross realized gains of $13 and gross realized losses of $303 from available-for-sale securities during the three months ended March 31, 2016. Gains and losses from available-for-sale securities, including amounts reclassified from accumulated comprehensive income, are reflected in Net gain (loss) from investments on the accompanying Consolidated Statements of Operations.
Investments in Affiliated Funds
The Company has an investment in funds sponsored by LSV. The Company records this investment on the accompanying Consolidated Balance Sheets at fair value. Unrealized gains and losses from the change in fair value of these funds are recognized in Net gain (loss) from investments on the accompanying Consolidated Statements of Operations.
The investment primarily consists of U.S. dollar denominated funds that invest primarily in securities of Canadian, Australian and Japanese companies as well as various other global securities. The underlying securities held by the funds are translated into U.S. dollars within the funds. The funds had a fair value of $5,156 and $4,858 at March 31, 2017 and December 31, 2016, respectively. The Company recognized gains of $298 and $144 during the three months ended March 31, 2017 and 2016, respectively, from the change in fair value of the funds.
Securities Owned
The Company’s broker-dealer subsidiary, SIDCO, has investments in U.S. government agency securities with maturity dates less than one year. These investments are reflected as Securities owned on the accompanying Consolidated Balance Sheets. Due to specialized accounting practices applicable to investments by broker-dealers, the securities are reported at fair value and changes in fair value are recorded in current period earnings. The securities had a fair value of $21,372 and $21,339 at March 31, 2017 and December 31, 2016, respectively. There were no material net gains or losses from the change in fair value of the securities during the three months ended March 31, 2017 and 2016.

Note 7.    Line of Credit
The Company has a five-year $300,000 Credit Agreement (the Credit Facility) with Wells Fargo Bank, National Association, and a syndicate of other lenders. The Credit Facility is scheduled to expire in June 2021, at which time any aggregate principal amount of loans outstanding becomes payable in full. Any borrowings made under the Credit Facility will accrue interest at rates that, at the Company's option, are based on a base rate (the Base Rate) plus a premium that can range from 0.25 percent to 1.00 percent or the London InterBank Offered Rate (LIBOR) plus a premium that can range from 1.25 percent to 2.00 percent depending on the Company’s Leverage Ratio (a ratio of consolidated indebtedness to consolidated

13 of 36



EBITDA for the four preceding fiscal quarters, all as defined in the related agreement). The Base Rate is defined as the highest of a) the Federal Funds Rate, as published by the Federal Reserve Bank of New York, plus 0.50 percent, b) the prime commercial lending rate of Wells Fargo, c) the applicable LIBOR plus 1.00 percent, or d) 0 percent. The Company also pays quarterly commitment fees based on the unused portion of the Credit Facility. The quarterly fees for the Credit Facility can range from 0.15 percent of the amount of the unused portion to 0.30 percent, depending on the Company’s Leverage Ratio. Certain wholly-owned subsidiaries of the Company have guaranteed the obligations of the Company under the agreement. The aggregate amount of the Credit Facility may be increased by an additional $100,000 under certain conditions set forth in the agreement.
The Credit Facility contains covenants that restrict the ability of the Company 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, the Company would also be restricted from paying dividends on, or repurchasing, its common stock without the approval of the lenders. None of the covenants of the Credit Facility negatively affect the Company’s liquidity or capital resources. Upon the occurrence of certain financial or economic events, significant corporate events, or certain other events of default constituting an event of default under the Credit Facility, all loans outstanding may be declared immediately due and payable and all commitments under the agreement may be terminated. The Company had no borrowings under the Credit Facility at March 31, 2017. The Company was in compliance with all covenants of the Credit Facility during the three months ended March 31, 2017.

Note 8.    Shareholders’ Equity
Stock-Based Compensation
The Company has only non-qualified stock options outstanding under its equity compensation plans. All outstanding stock options have performance-based vesting provisions specific to each option grant that tie the vesting of the applicable stock options to the Company’s financial performance. The Company’s stock options vest at a rate of 50 percent when a specified diluted earnings per share target is achieved, and the remaining 50 percent when a second, higher specified diluted earnings per share target is achieved. Options do not vest due to the passage of time but solely as a result of achievement of the financial vesting targets. The amount of stock-based compensation expense is based upon management’s estimate of when the earnings per share targets may be achieved.
The Company recognized stock-based compensation expense in its Consolidated Financial Statements in the three months ended March 31, 2017 and 2016, respectively, as follows: 
 
Three Months Ended March 31,
 
2017
 
2016
Stock-based compensation expense
$
6,180

 
$
3,789

Less: Deferred tax benefit
(2,153
)
 
(1,299
)
Stock-based compensation expense, net of tax
$
4,027

 
$
2,490

As of March 31, 2017, there was approximately $70,634 of unrecognized compensation cost remaining related to unvested employee stock options that management expects will vest and is being amortized.
The Company issues new common shares associated with the exercise of stock options. The total intrinsic value of options exercised during the three months ended March 31, 2017 was $21,407. The total options exercisable as of March 31, 2017 had an intrinsic value of $174,085. The total intrinsic value for options exercisable is calculated as the difference between the market value of the Company’s common stock as of March 31, 2017 and the weighted average exercise price of the shares. The market value of the Company’s common stock as of March 31, 2017 was $50.44 as reported by the Nasdaq Stock Market, LLC. The weighted average exercise price of the options exercisable as of March 31, 2017 was $21.22. Total options that were outstanding and exercisable as of March 31, 2017 were 17,237,000 and 5,958,000, respectively.
Common Stock Buyback
The Company’s Board of Directors, under multiple authorizations, has authorized the repurchase of the Company’s common stock on the open market or through private transactions. The Company purchased 1,099,000 shares at a total cost of $55,441 during the three months ended March 31, 2017, which reduced the total shares outstanding of common stock. The cost of stock purchases during the period includes the cost of certain transactions that settled in the following quarter. As of March 31, 2017, the Company had approximately $163,311 of authorization remaining for the purchase of common stock under the program.
The Company immediately retires its common stock when purchased. Upon retirement, the Company reduces Capital in excess of par value for the average capital per share outstanding and the remainder is charged against Retained earnings. If the

14 of 36



Company reduces its Retained earnings to zero, any subsequent purchases of common stock will be charged entirely to Capital in excess of par value.

Note 9.    Accumulated Other Comprehensive Loss
The components of Accumulated other comprehensive loss, net of tax, are as follows: 
 
Foreign
Currency
Translation
Adjustments
 
Unrealized
Gains (Losses)
on Investments
 
Accumulated Other Comprehensive Loss
Balance, January 1, 2017
$
(37,119
)
 
$
(836
)
 
$
(37,955
)
 
 
 
 
 
 
Other comprehensive gain before reclassifications
2,488

 
(24
)
 
2,464

Amounts reclassified from accumulated other comprehensive loss

 
(22
)
 
(22
)
Net current-period other comprehensive gain
2,488

 
(46
)
 
2,442

 
 
 
 
 
 
Balance, March 31, 2017
$
(34,631
)
 
$
(882
)
 
$
(35,513
)

Note 10.    Business Segment Information
The Company’s reportable 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 information in the following tables is derived from the Company’s internal financial reporting used for corporate management purposes. There are no inter-segment revenues for the three months ended March 31, 2017 and 2016. Management evaluates Company assets on a consolidated basis during interim periods. The accounting policies of the reportable business segments are the same as those described in Note 1 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
The following tables highlight certain financial information about each of the Company’s business segments for the three months ended March 31, 2017 and 2016.
 
Private
Banks
 
Investment
Advisors
 
Institutional
Investors
 
Investment
Managers
 
Investments
In New
Businesses
 
Total
 
For the Three Months Ended March 31, 2017
Revenues
$
112,634

 
$
88,238

 
$
77,004

 
$
80,487

 
$
1,621

 
$
359,984

Expenses
108,550

 
47,539

 
38,828

 
52,065

 
4,880

 
251,862

Operating profit (loss)
$
4,084

 
$
40,699

 
$
38,176

 
$
28,422

 
$
(3,259
)
 
$
108,122



15 of 36



 
Private
Banks
 
Investment
Advisors
 
Institutional
Investors
 
Investment
Managers
 
Investments
In New
Businesses
 
Total
 
For the Three Months Ended March 31, 2016
Revenues
$
113,361

 
$
76,679

 
$
72,897

 
$
69,918

 
$
1,408

 
$
334,263

Expenses
103,741

 
44,774

 
35,382

 
45,275

 
5,232

 
234,404

Operating profit (loss)
$
9,620

 
$
31,905

 
$
37,515

 
$
24,643

 
$
(3,824
)
 
$
99,859

Gain on sale of subsidiary
2,791

 

 

 

 

 
2,791

Segment profit (loss)
$
12,411

 
$
31,905

 
$
37,515

 
$
24,643

 
$
(3,824
)
 
$
102,650

A reconciliation of the total operating profit reported for the business segments to income from operations in the Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016 is as follows: 
 
2017
 
2016
Total operating profit from segments
$
108,122

 
$
99,859

Corporate overhead expenses
(14,605
)
 
(13,047
)
Income from operations
$
93,517

 
$
86,812


The following tables provide additional information for the three months ended March 31, 2017 and 2016 pertaining to our business segments: 
 
Capital Expenditures (1)
 
Depreciation
 
2017
 
2016
 
2017
 
2016
Private Banks
$
12,850

 
$
8,712

 
$
4,410

 
$
3,181

Investment Advisors
4,532

 
2,852

 
733

 
976

Institutional Investors
811

 
796

 
227

 
334

Investment Managers
1,615

 
1,322

 
916

 
1,190

Investments in New Businesses
106

 
94

 
368

 
548

Total from business segments
$
19,914

 
$
13,776

 
$
6,654

 
$
6,229

Corporate overhead
152

 
310

 
146

 
218

 
$
20,066

 
$
14,086

 
$
6,800

 
$
6,447

(1) Capital expenditures include additions to property and equipment and capitalized software.
 
Amortization
 
2017
 
2016
Private Banks
$
8,464

 
$
7,711

Investment Advisors
2,850

 
2,553

Institutional Investors
323

 
399

Investment Managers
216

 
266

Investments in New Businesses
119

 
26

Total from business segments
$
11,972

 
$
10,955

Corporate overhead
50

 
57

 
$
12,022

 
$
11,012

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


16 of 36



Note 11.    Income Taxes
The gross liability for unrecognized tax benefits at March 31, 2017 and December 31, 2016 was $18,077 and $17,287, respectively, exclusive of interest and penalties, of which $15,633 and $14,868 would affect the effective tax rate if the Company were to recognize the tax benefit.
The Company classifies interest and penalties on unrecognized tax benefits as income tax expense. As of March 31, 2017 and December 31, 2016, the combined amount of accrued interest and penalties related to tax positions taken on tax returns was $1,382 and $1,224, respectively.
 
March 31, 2017
 
December 31, 2016
Gross liability for unrecognized tax benefits, exclusive of interest and penalties
$
18,077

 
$
17,287

Interest and penalties on unrecognized benefits
1,382

 
1,224

Total gross uncertain tax positions
$
19,459

 
$
18,511

Amount included in Current liabilities
$
3,849

 
$
3,866

Amount included in Other long-term liabilities
15,610

 
14,645

 
$
19,459

 
$
18,511

The Company's effective income tax rate for the three months ended March 31, 2017 and 2016 differs from the federal income tax statutory rate due to the following:
 
2017
 
2016
Statutory rate
35.0
 %
 
35.0
 %
State taxes, net of federal tax benefit
1.5

 
1.4

Foreign tax expense and tax rate differential
(0.8
)
 
(0.7
)
Tax benefit from stock option exercises
(4.2
)
 

Other, net
(0.5
)
 
(0.5
)
 
31.0
 %
 
35.2
 %
The decrease in the tax rate for the three months ended March 31, 2017 was primarily due to the adoption of ASU 2016-09. Under this standard, the tax effects of stock option exercises are treated as discrete items in the reporting period in which they occur. Therefore, the tax effect of stock option exercises is not spread over the entire year through the use of the annual effective tax rate, but instead is recorded entirely in the period in which the tax deduction arose. Accordingly, the Company recorded the income tax benefit as a discrete item in income for the three months ended March 31, 2017. The Company's effective tax rate could fluctuate significantly on a quarterly basis due to the tax effects of stock-based compensation.
The Company files income tax returns in the United States on a consolidated basis and in many U.S. state and foreign jurisdictions. The Company is subject to examination of income tax returns by the Internal Revenue Service (IRS) and other domestic and foreign tax authorities. The Company is no longer subject to U.S. federal income tax examination for years before 2013 and is no longer subject to state, local or foreign income tax examinations by authorities for years before 2010.
The Company estimates it will recognize $3,849 of gross unrecognized tax benefits which is expected to be paid within one year due to the expiration of the statute of limitations and resolution of income tax audits and is netted against the current payable account. These unrecognized tax benefits are related to tax positions taken on certain federal, state, and foreign tax returns. However, the timing of the resolution of income tax examinations is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. While it is reasonably possible that some issues under examination could be resolved in the next twelve months, based upon the current facts and circumstances, the Company cannot reasonably estimate the timing of such resolution or the total range of potential changes as it relates to the current unrecognized tax benefits that are recorded as part of the Company’s financial statements.

Note 12.    Commitments and Contingencies
In the normal course of business, the Company is party to various claims and 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

17 of 36



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. During February 2017, SEI filed its response to the Complaint and in March 2017 the District Court for the Northern District of Texas approved the stipulated dismissal of all claims in this complaint predicated on Section 712(D) or Section 714(A) of the Louisiana Securities Law.
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.
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

18 of 36



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.

Note 13.    Sale of SEI Asset Korea
On July 31, 2012, the Company, MetLife International Holdings, Inc. (MetLife) and International Finance Corporation (IFC) entered into a definitive agreement with Baring Asset Management Limited (Barings) to sell all ownership interest in SEI Asset Korea (SEI AK). SEI AK was located in South Korea and provided domestic equity and fixed-income investment management services to financial institutions and pension funds.
On March 28, 2013, all conditions subject to closing the transaction were satisfied and all ownership interests in SEI AK were transferred to Barings. Under the terms of the agreement, a portion of the purchase price was paid upon closing with up to an additional $11,220 payable to the Company as a contingent purchase price with respect to three one-year periods ending on December 31, 2013, 2014, and 2015 depending upon whether SEI AK achieves specified revenue measures during such periods. The Company recognized a pre-tax gain of $2,791, or $0.01 diluted earnings per share, during the three months ended March 31, 2016 representing the final annual payment under the terms of the agreement. The Company's gain from the sale of SEI AK are included in Gain on sale of subsidiary on the accompanying Consolidated Statement of Operations.

19 of 36



Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(In thousands, except asset balances and per share data)
This discussion reviews and analyzes the consolidated financial condition, the consolidated results of operations and other key factors that may affect future performance. This discussion should be read in conjunction with the Consolidated Financial Statements, the Notes to the Consolidated Financial Statements and the Annual Report on Form 10-K for the year ended December 31, 2016.

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, administration or advised assets. As of March 31, 2017, through our subsidiaries and partnerships in which we have a significant interest, we manage, advise or administer $778.6 billion in hedge, private equity, mutual fund and pooled or separately managed assets, including $297.1 billion in assets under management and $478.1 billion in client assets under administration. Our affiliate, LSV Asset Management (LSV), manages $90.6 billion of assets which are included as assets under management.
Our Condensed Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016 were:
 
Three Months Ended March 31,
 
Percent Change*
 
2017
 
2016
 
Revenues
$
359,984

 
$
334,263

 
8
 %
Expenses
266,467

 
247,451

 
8
 %
Income from operations
93,517

 
86,812

 
8
 %
Net gain (loss) from investments
347

 
(126
)
 
NM

Interest income, net of interest expense
1,231

 
969

 
27
 %
Equity in earnings from unconsolidated affiliate
33,565

 
29,192

 
15
 %
Gain on sale of subsidiary

 
2,791

 
NM

Income before income taxes
128,660

 
119,638

 
8
 %
Income taxes
39,923

 
42,141

 
(5
)%
Net income
88,737

 
77,497

 
15
 %
Diluted earnings per common share
$
0.55

 
$
0.47

 
17
 %
* Variances noted "NM" indicate the percent change is not meaningful.
The following items had a significant impact on our financial results for the three months ended March 31, 2017 and 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 $20.7 billion, or 11 percent, to $201.4 billion in the first three months of 2017 as compared to $180.7 billion during the first three months of 2016. Our average assets under administration increased $69.3 billion, or 17 percent, to $474.0 billion in the first three months of 2017 as compared to $404.7 billion during the first three months of 2016.
Our proportionate share in the earnings of LSV increased to $33.6 million in the first three months of 2017 as compared to $29.2 million in the first three months of 2016 primarily due to increased assets under management from LSV's existing clients due to market appreciation; however, our earnings were negatively impacted by increased personnel expenses of LSV.
We capitalized $15.2 million in the first three months of 2017 for the SEI Wealth Platform as compared to $7.6 million in the first three months of 2016. Amortization expense related to the Platform increased to $12.0 million during the first three months of 2017 as compared to $11.0 million during the first three months of 2016 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 not eligible

20 of 36



for capitalization. These increased costs primarily impacted the Private Banks and Investment Advisors business segments.
We also capitalized $1.7 million in the first three months of 2017 as compared to $1.8 million in the first three months of 2016 for an application being developed for the Investment Managers segment. 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.
Stock-based compensation increased to $6.2 million in the first three months of 2017 as compared to $3.8 million in the first three months 2016. The increase was primarily due to stock option awards granted in late 2016.
Our effective tax rate was 31.0 percent during the first three months of 2017 as compared to 35.2 percent during the first three months of 2016. The decline in our effective tax rate was primarily due to the adoption of a new accounting standard which requires all excess tax benefits or deficiencies to be recorded as an income tax benefit or expense in the income statement. Our quarterly effective tax rate could fluctuate significantly due to the tax effects of stock-based compensation (See Note 11 to the Consolidated Financial Statements for more information).
We recorded our final pre-tax gain of $2.8 million, or $.01 diluted earnings per share, from the sale of SEI Asset Korea (SEI AK) in the first three months of 2016. The gain from the sale is included in Gain on sale of subsidiary on the accompanying Consolidated Statement of Operations (See Note 13 to the Consolidated Financial Statements for more information).
We continued our stock repurchase program during 2017 and purchased 1.1 million shares for $55.4 million in the three month period.


21 of 36



Ending Asset Balances
(In millions)
 
As of March 31,
 
Percent Change
 
2017
 
2016
 
Private Banks:
 
 
 
 
 
Equity and fixed-income programs
$
19,034

 
$
18,370

 
4
 %
Collective trust fund programs
5

 
4

 
25
 %
Liquidity funds
3,903

 
5,521

 
(29
)%
Total assets under management
$
22,942

 
$
23,895

 
(4
)%
Client assets under administration
20,760

 
18,324

 
13
 %
Total assets
$
43,702

 
$
42,219

 
4
 %
Investment Advisors:
 
 
 
 
 
Equity and fixed-income programs
55,311

 
47,357

 
17
 %
Collective trust fund programs
5

 
7

 
(29
)%
Liquidity funds
2,645

 
5,051

 
(48
)%
Total assets under management
$
57,961

 
$
52,415

 
11
 %
Institutional Investors:
 
 
 
 
 
Equity and fixed-income programs
80,136

 
73,468

 
9
 %
Collective trust fund programs
89

 
97

 
(8
)%
Liquidity funds
2,759

 
2,390

 
15
 %
Total assets under management
$
82,984

 
$
75,955

 
9
 %
Advised assets
3,228

 

 
NM
Total assets
86,212

 
75,955

 
14
 %
Investment Managers:
 
 
 
 
 
Equity and fixed-income programs
84

 
72

 
17
 %
Collective trust fund programs
40,646

 
32,385

 
26
 %
Liquidity funds
911

 
733

 
24
 %
Total assets under management
$
41,641

 
$
33,190

 
25
 %
Client assets under administration (A)
457,356

 
400,579

 
14
 %
Total assets
$
498,997

 
$
433,769

 
15
 %
Investments in New Businesses:
 
 
 
 
 
Equity and fixed-income programs
931

 
803

 
16
 %
Liquidity funds
79

 
41

 
93
 %
Total assets under management
$
1,010

 
$
844

 
20
 %
Advised assets
85

 

 
NM
Total assets
1,095

 
844

 
30
 %
LSV:
 
 
 
 
 
Equity and fixed-income programs
$
90,611

 
$
78,390

 
16
 %
Total:
 
 
 
 
 
Equity and fixed-income programs (B)
246,107

 
218,460

 
13
 %
Collective trust fund programs
40,745

 
32,493

 
25
 %
Liquidity funds
10,297

 
13,736

 
(25
)%
Total assets under management
$
297,149

 
$
264,689

 
12
 %
Advised assets (C)
3,313

 

 
NM
Client assets under administration (D)
478,116

 
418,903

 
14
 %
Total assets under management, advisement and administration
$
778,578

 
$
683,592

 
14
 %

22 of 36



(A)
Client assets under administration in the Investment Managers segment include $47.4 billion of assets that require limited services and therefore are at fee levels below our normal full service assets (as of March 31, 2017).
(B)
Equity and fixed-income programs include $5.0 billion of assets invested in asset allocation funds at March 31, 2017.
(C)
Assets for which SEI acts as an advisor to the accounts. These assets were excluded in previous periods. 
(D)
In addition to the numbers presented, SEI also administers an additional $10.1 billion in Funds of Funds assets (as of
March 31, 2017) on which SEI does not earn an administration fee.

23 of 36



Average Asset Balances
(In millions)
 
Three Months Ended March 31,
 
Percent Change
 
2017
 
2016
 
Private Banks:
 
 
 
 
 
Equity and fixed-income programs
$
18,498

 
$
17,644

 
5
 %
Collective trust fund programs
4

 
3

 
33
 %
Liquidity funds
4,051

 
5,661

 
(28
)%
Total assets under management
$
22,553

 
$
23,308

 
(3
)%
Client assets under administration
20,223

 
17,248

 
17
 %
Total assets
$
42,776

 
$
40,556

 
5
 %
Investment Advisors:
 
 
 
 
 
Equity and fixed-income programs
54,446

 
45,175

 
21
 %
Collective trust fund programs
5

 
7

 
(29
)%
Liquidity funds
2,559

 
5,009

 
(49
)%
Total assets under management
$
57,010

 
$
50,191

 
14
 %
Institutional Investors:
 
 
 
 
 
Equity and fixed-income programs
77,852

 
71,779

 
8
 %
Collective trust fund programs
90

 
98

 
(8
)%
Liquidity funds
2,891

 
2,834

 
2
 %
Total assets under management
$
80,833

 
$
74,711

 
8
 %
Advised assets
3,125

 

 
NM
Total assets
83,958

 
74,711

 
12
 %
Investment Managers:
 
 
 
 
 
Equity and fixed-income programs
75

 
66

 
NM
Collective trust fund programs
39,081

 
30,784

 
27
 %
Liquidity funds
860

 
832

 
3
 %
Total assets under management
$
40,016

 
$
31,682

 
26
 %
Client assets under administration
453,766

 
387,421

 
17
 %
Total assets
$
493,782

 
$
419,103

 
18
 %
Investments in New Businesses:
 
 
 
 
 
Equity and fixed-income programs
909

 
757

 
20
 %
Liquidity funds
63

 
48

 
31
 %
Total assets under management
$
972

 
$
805

 
21
 %
Advised assets
82

 

 
NM
Total assets
1,054

 
805

 
31
 %
LSV:
 
 
 
 
 
Equity and fixed-income programs
$
90,274

 
$
74,699

 
21
 %
Total:
 
 
 
 
 
Equity and fixed-income programs
242,054

 
210,120

 
15
 %
Collective trust fund programs
39,180

 
30,892

 
27
 %
Liquidity funds
10,424

 
14,384

 
(28
)%
Total assets under management
$
291,658

 
$
255,396

 
14
 %
Advised assets
3,207

 

 
NM
Client assets under administration
473,989

 
404,669

 
17
 %
Total assets under management, advisement and administration
$
768,854

 
$
660,065

 
16
 %

24 of 36



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 through our subsidiaries and partnerships in which we have a significant interest. Advised assets include assets for which we provide advisory services through a subsidiary to the accounts but do not manage the underlying assets. Assets under administration include total assets of our clients or their customers for which we provide administrative services, including client fund balances for which we provide administration and/or distribution services through our subsidiaries and partnerships in which we have a significant interest. 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 three months ended March 31, 2017 compared to the three months ended March 31, 2016 were as follows:
 
Three Months Ended March 31,
 
Percent
Change
 
2017
 
2016
 
Private Banks:
 
 
 
 
 
Revenues
$
112,634

 
$
113,361

 
(1
)%
Expenses
108,550

 
103,741

 
5
 %
Operating Profit
$
4,084

 
$
9,620

 
(58
)%
Gain on sale of subsidiary

 
2,791

 
NM
Segment Profit
$
4,084

 
$
12,411

 
(67
)%
Operating Margin (A)
4
%
 
8
%
 
 
Investment Advisors:
 
 
 
 
 
Revenues
$
88,238

 
$
76,679

 
15
 %
Expenses
47,539

 
44,774

 
6
 %
Operating Profit
$
40,699

 
$
31,905

 
28
 %
Operating Margin
46
%
 
42
%
 
 
Institutional Investors:
 
 
 
 
 
Revenues
$
77,004

 
$
72,897

 
6
 %
Expenses
38,828

 
35,382

 
10
 %
Operating Profit
$
38,176

 
$
37,515

 
2
 %
Operating Margin
50
%
 
51
%
 
 
Investment Managers:
 
 
 
 
 
Revenues
$
80,487

 
$
69,918

 
15
 %
Expenses
52,065

 
45,275

 
15
 %
Operating Profit
$
28,422

 
$
24,643

 
15
 %
Operating Margin
35
%
 
35
%
 
 
Investments in New Businesses:
 
 
 
 
 
Revenues
$
1,621

 
$
1,408

 
15
 %
Expenses
4,880

 
5,232

 
(7
)%
Operating Loss
$
(3,259
)
 
$
(3,824
)
 
NM
(A) Percentages determined exclusive of gain from sale of subsidiary.
For additional information pertaining to our business segments, see Note 10 to the Consolidated Financial Statements.

25 of 36



Private Banks
 
Three Months Ended March 31,
 
Percent
Change
 
2017
 
2016
 
Revenues:
 
 
 
 
 
Information processing and software servicing fees
$
74,272

 
$
72,923

 
2
 %
Asset management, administration & distribution fees
32,590

 
32,202

 
1
 %
Transaction-based and trade execution fees
5,772

 
8,236

 
(30
)%
Total revenues
$
112,634

 
$
113,361

 
(1
)%
Revenues decreased slightly in the three month period ended March 31, 2017 and were primarily affected by:
Decreased trade execution fees due to lower trading volumes; and
The negative impact from foreign currency exchange rate fluctuations between the U.S. dollar and the British pound; partially offset by
Increased recurring investment processing fees from the growth in new and existing client assets processed on the SEI Wealth Platform.
Operating margins decreased to four percent compared to eight percent in the three month periods. Operating income decreased by $5.5 million, or 58 percent, in the three month period and 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;
The net negative impact from foreign currency exchange rate fluctuations between the U.S. dollar and the British pound on our foreign operations; and
Increased incentive compensation and stock-based compensation costs; partially offset by
Decreased sales compensation expense; and
Decreased direct expenses associated with the decreased trade execution fees.

Investment Advisors
 
Three Months Ended March 31,
 
Percent
Change
 
2017
 
2016
 
Revenues:
 
 
 
 
 
Investment management fees-SEI fund programs
$
66,000

 
$
58,744

 
12
%
Separately managed account fees
18,258

 
14,446

 
26
%
Other fees
3,980

 
3,489

 
14
%
Total revenues (a)
$
88,238

 
$
76,679

 
15
%
(a) All amounts are reflected in Asset management, administration and distribution fees except for $164 and $354 in the three months ended March 31, 2017 and 2016, respectively, which are reflected in Transaction-based and trade execution fees.
Revenues increased $11.6 million, or 15 percent, in the three month period ended March 31, 2017 and 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; and
Changes in the product mix of our SEI fund and separately managed account programs.

26 of 36



Operating margin increased to 46 percent compared to 42 percent in the three month period. Operating income increased $8.8 million, or 28 percent, in the three month period and was primarily affected by:
An increase in revenues; 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;
Increased incentive compensation and stock-based compensation costs; and
Increased amortization expense related to the SEI Wealth Platform.

Institutional Investors
Revenues increased $4.1 million, or six percent, in the three month period ended March 31, 2017 and were primarily affected by:
Increased investment management fees from existing clients due to higher assets under management caused by market appreciation; and
Asset funding from new sales of our retirement and not-for-profit solutions; partially offset by
Client losses;
The negative impact from foreign currency exchange rate fluctuations between the U.S. dollar and the British pound; and
A decrease in the average basis points earned on client assets.
Operating margins decreased to 50 percent compared to 51 percent in the three month period. Operating income increased slightly in the three month period and was primarily affected by:
An increase in revenues; partially offset by
Increased direct expenses associated with investment management fees;
Increased incentive compensation and stock-based compensation costs; and
The net negative impact from foreign currency exchange rate fluctuations between the U.S. dollar and the British pound on our foreign operations.

Investment Managers
Revenues increased $10.6 million, or 15 percent, in the three month period ended March 31, 2017 and were primarily affected by:
Positive cash flows from new and existing clients as well as higher valuations from improved capital markets; partially offset by
Client losses and fund closures.
Operating margin remained at 35 percent in the three month period. Operating income increased $3.8 million, or 15 percent, in the three month period and 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;
Increased incentive compensation and stock-based compensation costs; and
Increased non-capitalized investment spending, mainly consulting costs.

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 $14.6 million and $13.0 million in the three months ended March 31, 2017 and 2016, respectively. The increase in corporate overhead expenses is primarily due to increased personnel compensation expense, mainly incentive compensation and stock-based compensation costs.

27 of 36



Other income and expense
Other income and expense items on the accompanying Consolidated Statements of Operations consists of: 
 
Three Months Ended March 31,
 
2017
 
2016
Net gain (loss) from investments
$
347

 
$
(126
)
Interest and dividend income
1,343

 
1,083

Interest expense
(112
)
 
(114
)
Equity in earnings of unconsolidated affiliate
33,565

 
29,192

Gain on sale of subsidiary

 
2,791

Total other income and expense items, net
$
35,143

 
$
32,826

Equity in earnings of unconsolidated affiliate
Equity in earnings of unconsolidated affiliate reflects our less than 50 percent ownership in LSV. Our proportionate share in the earnings of LSV was $33.6 million in first quarter 2017 as compared to $29.2 million in first quarter 2016, an increase of 15 percent. The increase in earnings was primarily due to increased assets under management from LSV's existing clients due to market appreciation; however, our earnings were negatively impacted by increased personnel expenses of LSV. LSV's average assets under management increased $15.6 billion to $90.3 billion during the three months ended March 31, 2017 as compared to $74.7 billion during the three months ended March 31, 2016, an increase of 21 percent.
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.
Gain on sale of subsidiary
We recorded a gain of $2.8 million during the three months ended March 31, 2016 from the sale of our ownership interests in SEI AK. This gain is included in Gain on sale of subsidiary on the accompanying Consolidated Statement of Operations (See Note 13 to the Consolidated Financial Statements for more information).
Income Taxes
Our effective income tax rate for the three months ended March 31, 2017 and 2016 differs from the federal income tax statutory rate due to the following:
 
2017
 
2016
Statutory rate
35.0
 %
 
35.0
 %
State taxes, net of federal tax benefit
1.5

 
1.4

Foreign tax expense and tax rate differential
(0.8
)
 
(0.7
)
Tax benefit from stock option exercises

(4.2
)
 

Other, net
(0.5
)
 
(0.5
)
 
31.0
 %
 
35.2
 %
The decrease in our tax rate for the three months ended March 31, 2017 was primarily due to the adoption of ASU 2016-09. Under this standard, we no longer record excess tax benefits from stock option exercises as an increase to additional paid in capital, but record such excess tax benefits as a reduction of income tax expense in the reporting period in which the exercises occur. At each interim reporting period, the cumulative stock option exercise activity is remeasured against year to date net income, resulting in an adjustment to the effect from excess tax benefits on our quarterly tax rate. Consequently, our effective tax rate could fluctuate significantly on a quarterly basis due to the tax effects of stock-based compensation.
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 March 31, 2017 or December 31, 2016 (See Note 5 to the Notes to Consolidated Financial Statements).

28 of 36



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 our Annual Report on Form 10-K, 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.
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 nine percent of our total consolidated revenues for the three months ended March 31, 2017. 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