ALLIANCEBERNSTEIN HOLDING L.P. - FORM 10-Q - EX-99.1 - EXHIBIT 99.1 - July 27, 2017

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EX-31.2 - EXHIBIT 31.2 - ALLIANCEBERNSTEIN HOLDING L.P.ab-20170630xex312.htm
EX-31.1 - EXHIBIT 31.1 - ALLIANCEBERNSTEIN HOLDING L.P.ab-20170630xex311.htm
10-Q - 10-Q - ALLIANCEBERNSTEIN HOLDING L.P.ab-20170630x10q.htm

Part I
FINANCIAL INFORMATION
Item 1. Financial Statements
Exhibit 99.1
ALLIANCEBERNSTEIN L.P.
AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition
(in thousands, except unit amounts)
 
June 30,
2017
 
December 31,
2016
 
(unaudited)
 
 
ASSETS
 
 
 
Cash and cash equivalents
$
598,391

 
$
656,985

Cash and securities segregated, at fair value (cost: $1,077,646 and $946,093)
1,077,649

 
946,097

Receivables, net:
 

 
 

Brokers and dealers
368,527

 
335,686

Brokerage clients
1,589,856

 
1,513,656

AB mutual funds fees
172,891

 
165,997

Other fees
99,233

 
104,376

Investments:
 

 
 

Long-term incentive compensation-related
62,585

 
67,761

Other
417,396

 
373,344

Assets of consolidated company-sponsored investment funds:
 
 
 
   Cash and cash equivalents
364,777

 
337,525

   Investments
659,336

 
574,076

   Other assets
6,957

 
44,570

Furniture, equipment and leasehold improvements, net
152,158

 
159,564

Goodwill
3,066,700

 
3,066,700

Intangible assets, net
120,589

 
134,606

Deferred sales commissions, net
44,581

 
63,890

Other assets
266,286

 
195,615

Total assets
$
9,067,912

 
$
8,740,448

 
 
 
 
LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND CAPITAL
 

 
 

Liabilities:
 

 
 

Payables:
 

 
 

Brokers and dealers
$
257,676

 
$
239,578

Securities sold not yet purchased
22,552

 
40,944

Brokerage clients
2,444,583

 
2,360,481

AB mutual funds
193,520

 
150,939

Accounts payable and accrued expenses
490,478

 
430,569

Liabilities of consolidated company-sponsored investment funds
426,047

 
292,800

Accrued compensation and benefits
453,544

 
251,019

Debt
512,437

 
512,970

Total liabilities
4,800,837

 
4,279,300

 
 
 
 
Commitments and contingencies (See Note 12)
 
 
 

1

 
 
 
 
Redeemable non-controlling interest
344,104

 
392,959

 
 
 
 
Capital:
 

 
 

General Partner
39,683

 
41,100

Limited partners: 265,714,086 and 268,893,534 units issued and outstanding
4,014,259

 
4,154,810

Receivables from affiliates
(12,604
)
 
(12,830
)
AB Holding Units held for long-term incentive compensation plans
(52,999
)
 
(32,967
)
Accumulated other comprehensive loss
(102,225
)
 
(118,096
)
Partners’ capital attributable to AB Unitholders
3,886,114

 
4,032,017

Non-redeemable non-controlling interests in consolidated entities
36,857

 
36,172

Total capital
3,922,971

 
4,068,189

Total liabilities, redeemable non-controlling interest and capital
$
9,067,912

 
$
8,740,448

 
See Accompanying Notes to Condensed Consolidated Financial Statements.

2

ALLIANCEBERNSTEIN L.P.
AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(in thousands, except per unit amounts)
(unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
 
Investment advisory and services fees
 
$
531,163

 
$
477,050

 
$
1,029,453

 
$
928,463

Bernstein research services
 
109,470

 
115,053

 
222,211

 
241,518

Distribution revenues
 
100,149

 
97,321

 
196,703

 
190,013

Dividend and interest income
 
19,348

 
10,147

 
33,404

 
20,220

Investment gains (losses)
 
24,113

 
2,276

 
49,314

 
67,863

Other revenues
 
24,265

 
25,833

 
46,630

 
50,804

Total revenues
 
808,508

 
727,680

 
1,577,715

 
1,498,881

Less: Interest expense
 
6,195

 
1,874

 
10,485

 
3,949

Net revenues
 
802,313

 
725,806

 
1,567,230

 
1,494,932

 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

Employee compensation and benefits
 
327,862

 
309,249

 
649,610

 
611,260

Promotion and servicing:
 
 

 
 

 
 

 
 

Distribution-related payments
 
102,756

 
93,217

 
199,123

 
180,344

Amortization of deferred sales commissions
 
8,307

 
10,577

 
17,386

 
21,819

Trade execution, marketing, T&E and other
 
53,235

 
55,357

 
101,449

 
109,558

General and administrative:
 
 

 
 
 
 

 
 

General and administrative
 
117,462

 
109,757

 
231,683

 
215,680

Real estate charges (credits)
 
20,747

 
(2,801
)
 
20,745

 
24,785

Contingent payment arrangements
 
178

 
353

 
355

 
706

Interest on borrowings
 
2,254

 
1,052

 
4,122

 
2,284

Amortization of intangible assets
 
6,975

 
6,470

 
13,908

 
12,879

Total expenses
 
639,776

 
583,231

 
1,238,381

 
1,179,315

 
 
 
 
 
 
 
 
 
Operating income
 
162,537

 
142,575

 
328,849

 
315,617

 
 
 
 
 
 
 
 
 
Income taxes
 
10,265

 
13,231

 
20,322

 
25,737

 
 
 
 
 
 
 
 
 
Net income
 
152,272

 
129,344

 
308,527

 
289,880

 
 
 
 
 
 
 
 
 
Net income (loss) of consolidated entities attributable to non-controlling interests
 
17,169

 
4,843

 
33,487

 
(905
)
 
 
 
 
 
 
 
 
 
Net income attributable to AB Unitholders
 
$
135,103

 
$
124,501

 
$
275,040

 
$
290,785

 
 
 
 
 
 
 
 
 
Net income per AB Unit:
 
 

 
 

 
 

 
 

Basic
 
$
0.50

 
$
0.46

 
$
1.01

 
$
1.06

Diluted
 
$
0.50

 
$
0.46

 
$
1.01

 
$
1.06


See Accompanying Notes to Condensed Consolidated Financial Statements.

3

ALLIANCEBERNSTEIN L.P.
AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Net income
 
$
152,272

 
$
129,344

 
$
308,527

 
$
289,880

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Foreign currency translation adjustments, before tax
 
7,355

 
(5,123
)
 
16,356

 
102

Income tax benefit
 
134

 
—

 
—

 
—

Foreign currency translation adjustments, net of tax
 
7,489

 
(5,123
)
 
16,356

 
102

Unrealized gains (losses) on investments:
 
 

 
 

 
 
 
 
Unrealized gains (losses) arising during period
 
26

 
(11
)
 
10

 
(19
)
Less: reclassification adjustment for (losses) included in net income
 
—

 
—

 
—

 
(3
)
Change in unrealized gains (losses) on investments
 
26

 
(11
)
 
10

 
(16
)
Income tax benefit (expense)
 
—

 
4

 
(2
)
 
3

Unrealized gains (losses) on investments, net of tax
 
26

 
(7
)
 
8

 
(13
)
Changes in employee benefit related items:
 
 

 
 

 
 
 
 
Amortization of prior service cost
 
6

 
10

 
12

 
81

Recognized actuarial loss (gain)
 
264

 
391

 
523

 
(42
)
Changes in employee benefit related items
 
270

 
401

 
535

 
39

Income tax expense
 
(3
)
 
(4
)
 
(79
)
 
(75
)
Employee benefit related items, net of tax
 
267

 
397

 
456

 
(36
)
Other comprehensive income (loss)
 
7,782

 
(4,733
)
 
16,820

 
53

Less: Comprehensive income (loss) in consolidated entities attributable to non-controlling interests
 
18,042

 
4,787

 
34,436

 
(910
)
Comprehensive income attributable to AB Unitholders
 
$
142,012

 
$
119,824

 
$
290,911

 
$
290,843

 
See Accompanying Notes to Condensed Consolidated Financial Statements.


4


ALLIANCEBERNSTEIN L.P. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Six Months Ended June 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
308,527

 
$
289,880

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

 
 

Amortization of deferred sales commissions
17,386

 
21,819

Non-cash long-term incentive compensation expense
21,337

 
4,383

Depreciation and other amortization
33,313

 
29,548

Unrealized losses (gains) on investments
2,636

 
(17,517
)
Unrealized (gains) losses on investments of consolidated company-sponsored investment funds
(18,550
)
 
2,599

Other, net
5,712

 
9,091

Changes in assets and liabilities:
 

 
 

(Increase) in segregated cash and securities
(131,552
)
 
(100,895
)
(Increase) in receivables
(50,545
)
 
(382,084
)
(Increase) decrease in investments
(37,978
)
 
147,317

(Increase) in investments of consolidated company-sponsored investment funds
(66,710
)
 
(10,630
)
Decrease (increase) in deferred sales commissions
1,923

 
(1,837
)
(Increase) in other assets
(68,430
)
 
(62,693
)
Decrease (increase) in other assets and liabilities of consolidated company-sponsored investment funds
170,860

 
(943
)
Increase in payables
70,082

 
336,812

(Decrease) increase in accounts payable and accrued expenses
(11,189
)
 
73,092

Increase in accrued compensation and benefits
201,417

 
176,636

Net cash provided by operating activities
448,239

 
514,578

 
 
 
 
Cash flows from investing activities:
 

 
 

Purchases of investments
(11
)
 
—

Proceeds from sales of investments
10

 
92

Purchases of furniture, equipment and leasehold improvements
(14,023
)
 
(20,304
)
Proceeds from sales of furniture, equipment and leasehold improvements
39

 
—

Net cash used in investing activities
(13,985
)
 
(20,212
)
 
 
 
 
Cash flows from financing activities:
 

 
 

(Repayment) of commercial paper, net
(33,709
)
 
(46,144
)
Proceeds from bank loans
30,000

 
50,000

Increase in overdrafts payable
68,504

 
47,630

Distributions to General Partner and Unitholders
(339,139
)
 
(275,930
)
Redemptions of non-controlling interests of consolidated company-sponsored investment funds, net
(72,732
)
 
(45,534
)
Capital contributions to non-controlling interests in consolidated entities
(7,869
)
 
—

Purchase of non-controlling interest
(1,833
)
 
—

Capital contributions to affiliates
(280
)
 
(120
)
Payments of contingent payment arrangements
(812
)
 
(538
)
Additional investments by AB Holding with proceeds from exercise of compensatory options to buy AB Holding Units
9,246

 
2,377

Purchases of AB Holding Units to fund long-term incentive compensation plan awards, net
(127,472
)
 
(83,744
)

5

Purchases of AB Units
(684
)
 
(337
)
Other
5

 
(11
)
Net cash used in financing activities
(476,775
)
 
(352,351
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
11,179

 
6,324

 
 
 
 
Net (decrease) increase in cash and cash equivalents
(31,342
)
 
148,339

Cash and cash equivalents as of beginning of the period
994,510

 
577,300

Cash and cash equivalents as of end of the period
$
963,168

 
$
725,639

 
 
 
 
See Accompanying Notes to Condensed Consolidated Financial Statements.

6

ALLIANCEBERNSTEIN L.P.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2017
(unaudited)

The words “we” and “our” refer collectively to AllianceBernstein L.P. and its subsidiaries (“AB”), or to their officers and employees. Similarly, the word “company” refers to AB. These statements should be read in conjunction with AB’s audited consolidated financial statements included in AB’s Form 10-K for the year ended December 31, 2016.

1. Business Description Organization and Basis of Presentation

Business Description

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

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

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

•
Private Wealth Management Services – servicing our private clients, including high-net-worth individuals and families, trusts and estates, charitable foundations, partnerships, private and family corporations, and other entities, by means of separately-managed accounts, hedge funds, mutual funds and other investment vehicles.

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

We also provide distribution, shareholder servicing, transfer agency services and administrative services to the mutual funds we sponsor.
 
Our high-quality, in-depth research is the foundation of our business.  Our research disciplines include economic, fundamental equity, fixed income and quantitative research.  In addition, we have experts focused on multi-asset strategies, wealth management and alternative investments.

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

•
Actively-managed equity strategies, with global and regional portfolios across capitalization ranges and investment strategies, including value, growth and core equities;

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

•Passive management, including index and enhanced index strategies;

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

•Multi-asset solutions and services, including dynamic asset allocation, customized target-date funds and target-risk funds.

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

7


Organization

As of June 30, 2017, AXA, a société anonyme organized under the laws of France and the holding company for the AXA Group, a worldwide leader in financial protection, through certain of its subsidiaries (“AXA and its subsidiaries”), owns approximately 1.5% of the issued and outstanding units representing assignments of beneficial ownership of limited partnership interests in AllianceBernstein Holding L.P. (“AB Holding Units”). AllianceBernstein Corporation (an indirect wholly-owned subsidiary of AXA, “General Partner”) is the general partner of both AllianceBernstein Holding L.P. (“AB Holding”) and AB. AllianceBernstein Corporation owns 100,000 general partnership units in AB Holding and a 1% general partnership interest in AB.

As of June 30, 2017, the ownership structure of AB, including limited partnership units outstanding as well as the general partner's 1% interest, is as follows:

AXA and its subsidiaries
64.0
%
AB Holding
34.8

Unaffiliated holders
1.2

 
100.0
%

Including both the general partnership and limited partnership interests in AB Holding and AB, AXA and its subsidiaries had an approximate 64.6% economic interest in AB as of June 30, 2017.

Basis of Presentation

The interim condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the interim results, have been made. The preparation of the condensed consolidated financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the interim reporting periods. Actual results could differ from those estimates. The condensed consolidated statement of financial condition as of December 31, 2016 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”).

Principles of Consolidation

The condensed consolidated financial statements include AB and its majority-owned and/or controlled subsidiaries, and the consolidated entities that are considered to be variable interest entities (“VIEs”) and voting interest entities (“VOEs”) and for which AB has a controlling financial interest. Non-controlling interests on the condensed consolidated statements of financial condition includes the portion of consolidated company-sponsored investment funds in which we do not have direct equity ownership. All significant inter-company transactions and balances among the consolidated entities have been eliminated.

Reclassifications

During 2017, prior period amounts for our VOEs' investments previously presented as other investments are now presented as investments of consolidated company-sponsored investment funds in the condensed consolidated statements of financial condition to conform to the current period's presentation. Additionally, prior period amounts for dividend and interest related to our consolidated company-sponsored investment funds previously presented as other revenues are now presented as dividend and interest income in the condensed consolidated statements of income to conform to the current period's presentation.

Lastly, all disclosures relating to the investments, derivatives and fair value of consolidated company-sponsored investment funds previously presented in Notes 8, 9, 10 and 11 are now separately disclosed in Note 13, Consolidated Company-Sponsored Investment Funds.





8

Revision

During the third quarter of 2016, management determined that the frequency with which we had settled our U.S. inter-company payable balances with foreign subsidiaries over the past several years created deemed dividends under Section 956 of the U.S. Internal Revenue Code of 1986, as amended (“Section 956”). In the past, we funded our foreign subsidiaries as they required cash for their operations rather than pre-fund them each quarter, thereby reducing the inter-company balance to zero on a quarterly basis, as required by Section 956. As a result, we had been understating our income tax provision and income tax liability since 2010. We evaluated the aggregate effects of this error in our income tax provision and income tax liability to our previously issued financial statements in accordance with SEC Staff Accounting Bulletins No. 99 and No. 108 and, based upon quantitative and qualitative factors, have determined that the error was not material to our previously issued financial statements. However, the cumulative effect of this error would have been material to our third quarter 2016 financial results if recorded as an out-of-period adjustment in the third quarter of 2016. Accordingly, we revised our previously issued financial statements from 2012 through the second quarter of 2016. We revised our income tax provision, net income attributable to AB Unitholders, and basic and diluted net income per AB Unit reported in prior periods in the statements of income. The table below reflects the revisions to these line items for the three and six months ended June 30, 2016 that are included in this Form 10-Q:

 
 
Three Months Ended June 30, 2016
 
 
As Reported
 
Adjustment
 
As Revised
 
 
(in thousands, except per unit amounts)
 
 
 
 
 
 
 
Income taxes
 
$
10,588

 
$
2,643

 
$
13,231

Net income attributable to AB Unitholders
 
127,144

 
(2,643
)
 
124,501

Basic net income per AB Unit
 
0.47

 
(0.01
)
 
0.46

Diluted net income per AB Unit
 
0.47

 
(0.01
)
 
0.46

 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2016
 
 
As Reported
 
Adjustment
 
As Revised
 
 
(in thousands, except per unit amounts)
 
 
 
 
 
 
 
Income taxes
 
$
20,452

 
$
5,285

 
$
25,737

Net income attributable to AB Unitholders
 
296,070

 
(5,285
)
 
290,785

Basic net income per AB Unit
 
1.08

 
(0.02
)
 
1.06

Diluted net income per AB Unit
 
1.08

 
(0.02
)
 
1.06

 
 
 
 
 
 
 

2.
Significant Accounting Policies

Recently Adopted Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-07, Investments - Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting. The amendment eliminates the current requirement for a retroactive adjustment and instead requires that the investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Additionally, the amendment requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. We adopted this standard on January 1, 2017. The adoption of this standard did not have a material impact on our financial condition or results of operations.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. The amendment includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements, including income tax effects of share-based payments, minimum statutory tax withholding

9

requirements and forfeitures. We adopted this standard on January 1, 2017 on a prospective basis. The adoption of this standard did not have a material impact on our financial condition or results of operations.

Accounting Pronouncements Not Yet Adopted

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The amendment is effective retrospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2017. Management currently is evaluating the impact that the adoption of this standard will have on our consolidated financial statements. We have not yet completed this analysis, but based on the analysis completed to date management does not expect the standard to have a material impact on our financial condition or results of operations.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The amendment addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments and is effective for fiscal years (and interim periods within those years) beginning after December 15, 2017. The amendment will result in a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, except for one provision relating to equity securities without readily determinable fair values, which provision will be applied prospectively. The amendment is not expected to have a material impact on our financial condition or results of operations.

In February 2016, the FASB issued ASU 2016-02, Leases. The amendment requires recognition of lease assets and lease liabilities on the statement of financial condition and disclosure of key information about leasing arrangements. Specifically, this guidance requires an operating lease lessee to recognize on the statement of financial condition a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. However, for leases with a term of twelve months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. The amendment is effective for fiscal years (and interim periods within those years) beginning after December 15, 2018 and requires lessees to recognize and measure leases at the beginning of the earliest period presented in the financial statements using a modified retrospective approach. Management currently is evaluating the impact that the adoption of this standard will have on our consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). The amendment is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The amendment is effective for fiscal years (and interim periods within those years) beginning after December 15, 2017 and should be applied using a retrospective transition method. The amendment is not expected to have a material impact on our financial condition or results of operations.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The revised guidance will be applied prospectively, and is effective in 2020. The revised guidance is not expected to have a material impact on our financial condition or results of operations.

In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The amendment requires that an employer disaggregate the service cost component from the other components of net benefit costs on the income statement. The amendment is effective for fiscal years (and interim periods within those years) beginning after December 15, 2017 and should be applied retrospectively. The amendment is not expected to have a material impact on our results of operations.

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation, Scope of Modification Accounting. The amendment provides clarity and reduces both diversity in practice and cost and complexity when applying the guidance in Topic 718, Compensation - Stock Compensation, to a change to the terms or conditions of a share-based payment award. This amendment is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 and will be applied prospectively to an award modified on or after the adoption date. This amendment is not expected to have a material impact on our results of operations.

Consolidation of company-sponsored investment funds
We adopted ASU 2015-02, Consolidation - Amendments to the Consolidation Analysis (“ASU 2015-02”) effective January 1, 2016.

10

For legal entities (company-sponsored investment funds) evaluated for consolidation, we first determine whether the fees we receive and the interests we hold qualify as a variable interest in the entity, including an evaluation of fees paid to us as a decision maker or service provider to the entity being evaluated. Fees received by us are not variable interests if (i) the fees are compensation for services provided and are commensurate with the level of effort required to provide those services, (ii) the service arrangement includes only terms, conditions or amounts that are customarily present in arrangements for similar services negotiated at arm’s length, and (iii) our other economic interests in the entity held directly and indirectly through our related parties, as well as economic interests held by related parties under common control, would not absorb more than an insignificant amount of the entity’s losses or receive more than an insignificant amount of the entity’s benefits.
For those entities in which we have a variable interest, we perform an analysis to determine whether the entity is a VIE by considering whether the entity’s equity investment at risk is insufficient, whether the investors lack decision making rights proportional to their ownership percentage of the entity, and whether the investors lack the obligation to absorb an entity’s expected losses or the right to receive an entity’s expected income.
A VIE must be consolidated by its primary beneficiary, which generally is defined as the party that has a controlling financial interest in the VIE. We are deemed to have a controlling financial interest in a VIE if we have (i) the power to direct the activities of the VIE that most significantly affect the VIE's economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive income from the VIE that could potentially be significant to the VIE. For purposes of evaluating (ii) above, fees paid to us as a decision maker or service provider are excluded if the fees are compensation for services provided commensurate with the level of effort required to be performed and the arrangement includes only customary terms, conditions or amounts present in arrangements for similar services negotiated at arm’s length. The primary beneficiary evaluation generally is performed qualitatively based on all facts and circumstances, as well as quantitatively, as appropriate.
If we have a variable interest in an entity that is determined not to be a VIE, the entity is then evaluated for consolidation under the VOE model. For limited partnerships and similar entities, we are deemed to have a controlling financial interest in a VOE, and would be required to consolidate the entity, if we own a majority of the entity’s kick-out rights through voting limited partnership interests and limited partners do not hold substantive participating rights (or other rights that would indicate that we do not control the entity). For entities other than limited partnerships, we are deemed to have a controlling financial interest in a VOE if we own a majority voting interest in the entity.
The analysis performed regarding the determination of variable interests held, whether entities are VIEs or VOEs, and whether we have a controlling financial interest in such entities requires the exercise of judgment. The analysis is updated continuously as circumstances change or new entities are formed.
3.
Long-term Incentive Compensation Plans

We maintain several unfunded, non-qualified long-term incentive compensation plans, under which we grant annual awards to employees, generally in the fourth quarter, and to members of the Board of Directors of the General Partner, who are not employed by our company or by any of our affiliates (“Eligible Directors”).

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

During the three and six months ended June 30, 2017, we purchased 4.3 million and 5.7 million AB Holding Units for $96.7 million and $127.8 million, respectively (on a trade date basis). These amounts reflect open-market purchases of 3.7 million and 4.9 million AB Holding Units for $82.4 million and $110.3 million, respectively, with the remainder relating to purchases of AB Holding Units from employees to allow them to fulfill statutory tax withholding requirements at the time of delivery of long-term incentive compensation awards. During the three and six months ended June 30, 2016, we purchased 1.9 million and 3.8 million AB Holding units for $44.3 million and $84.0 million, respectively (on a trade date basis). These amounts reflect open-market purchases of 1.9 million and 3.7 million AB Holding Units for $43.9 million and $82.0 million, respectively, with the remainder relating to purchases of AB Holding Units from employees to allow them to fulfill statutory tax withholding requirements at the time of delivery of long-term incentive compensation awards. Purchases of AB Holding Units reflected on the condensed consolidated statements of cash flows are net of AB Holding Unit purchases by employees as part of a distribution reinvestment election.


11

Each quarter, we consider whether to implement a plan to repurchase AB Holding Units pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (“Exchange Act”). A Rule 10b5-1 plan allows a company to repurchase its shares at times when it otherwise might be prevented from doing so because of self-imposed trading blackout periods or because it possesses material non-public information. Each broker we select has the authority under the terms and limitations specified in the plan to repurchase AB Holding Units on our behalf in accordance with the terms of the plan. Repurchases are subject to regulations promulgated by the SEC as well as certain price, market volume and timing constraints specified in the plan. The plan adopted during the second quarter of 2017 expired at the close of business on July 26, 2017. We may adopt additional Rule 10b5-1 plans in the future to engage in open-market purchases of AB Holding Units to help fund anticipated obligations under our incentive compensation award program and for other corporate purposes.

During the first six months of 2017 and 2016, we granted to employees and Eligible Directors 2.0 million and 0.3 million restricted AB Holding Unit awards, respectively. We used AB Holding Units repurchased during the period and newly-issued AB Holding Units to fund these awards.

During the first six months of 2017 and 2016, AB Holding issued 0.5 million and 0.1 million AB Holding Units, respectively, upon exercise of options to buy AB Holding Units. AB Holding used the proceeds of $9.2 million and $2.4 million, respectively, received as payment in cash for the exercise price to purchase the equivalent number of newly-issued AB Units.

4.
Cash Distributions

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

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

On July 27, 2017, the General Partner declared a distribution of $0.56 per AB Unit, representing a distribution of Available Cash Flow for the three months ended June 30, 2017. The General Partner, as a result of its 1% general partnership interest, is entitled to receive 1% of each distribution. The distribution is payable on August 24, 2017 to holders of record on August 7, 2017.


5.
Real Estate Charges

Since 2010, in connection with our workforce reductions and in an effort to reduce our global real estate footprint, we have implemented a global office space consolidation. As a result, we have sub-leased over one million square feet of office space. The activity in the liability account relating to our global space consolidation initiatives for the following periods is:
 
Six Months Ended
June 30, 2017
 
Twelve Months Ended
December 31, 2016
 
(in thousands)
 
 
 
 
Balance as of beginning of period
$
112,932

 
$
123,912

Expense (credit) incurred
15,940

 
12,248

Deferred rent
3,601

 
4,930

Payments made
(20,861
)
 
(32,988
)
Interest accretion
2,074

 
4,830

Balance as of end of period
$
113,686

 
$
112,932


12



6.
Net Income per Unit

Basic net income per unit is derived by reducing net income for the 1% general partnership interest and dividing the remaining 99% by the basic weighted average number of units outstanding for each period. Diluted net income per unit is derived by reducing net income for the 1% general partnership interest and dividing the remaining 99% by the total of the diluted weighted average number of units outstanding for each period.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands, except per unit amounts)
 
 
 
 
 
 
 
 
 
Net income attributable to AB Unitholders
 
$
135,103

 
$
124,501

 
$
275,040

 
$
290,785

 
 
 
 
 
 
 
 
 
Weighted average units outstanding – basic
 
268,302

 
269,720

 
268,391

 
270,787

Dilutive effect of compensatory options to buy AB Holding Units
 
430

 
650

 
482

 
534

Weighted average units outstanding – diluted
 
268,732

 
270,370

 
268,873

 
271,321

Basic net income per AB Unit
 
$
0.50

 
$
0.46

 
$
1.01

 
$
1.06

Diluted net income per AB Unit
 
$
0.50

 
$
0.46

 
$
1.01

 
$
1.06


For the three and six months ended June 30, 2017, we excluded 2,507,179 and 2,452,633 options, respectively, from the diluted net income computation due to their anti-dilutive effect. For the three and six months ended June 30, 2016, we excluded 2,793,454 and 2,873,106 options, respectively, from the diluted net income computation due to their anti-dilutive effect.
 
7.
Cash and Securities Segregated Under Federal Regulations and Other Requirements

As of June 30, 2017 and December 31, 2016, $1.0 billion and $0.9 billion, respectively, of U.S. Treasury Bills were segregated in a special reserve bank custody account for the exclusive benefit of our brokerage customers under Rule 15c3-3 of the Exchange Act.

One of our subsidiaries, which serves as the distributor of our U.S. mutual funds, maintains several special bank accounts for the exclusive benefit of customers. As of June 30, 2017 and December 31, 2016, $70.6 million and $52.9 million, respectively, of cash was segregated in these bank accounts.

13




8.
Investments

Investments consist of:
 
 
 
 
June 30,
2017
 
December 31,
2016
 
(in thousands)
Trading:
 

 
 

 U.S. Treasury Bills
$
27,764

 
$
28,937

Long-term incentive compensation-related
49,189

 
50,935

Seed capital
166,739

 
188,053

Equities
82,381

 
6,602

Exchange-traded options
8,348

 
3,106

Investments in limited partnership hedge funds:
 

 
 

Long-term incentive compensation-related
13,396

 
16,826

Seed capital
25,283

 
23,704

Private equity (seed capital)
44,852

 
45,278

Time deposits
50,429

 
70,097

Other
11,600

 
7,567

Total investments
$
479,981

 
$
441,105


Total investments related to long-term incentive compensation obligations of $62.6 million and $67.8 million as of June 30, 2017 and December 31, 2016, respectively, consist of company-sponsored mutual funds and hedge funds. For long-term incentive compensation awards granted before 2009, we typically made investments in our services that were notionally elected by plan participants and maintained them (and continue to maintain them) in a consolidated rabbi trust or separate custodial account. The rabbi trust and custodial account enable us to hold such investments separate from our other assets for the purpose of settling our obligations to participants. The investments held in the rabbi trust and custodial account remain available to the general creditors of AB.

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

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

We allocate seed capital to our investment teams to help develop new products and services for our clients. The seed capital trading investments are equity and fixed income products, primarily in the form of separately-managed account portfolios, U.S. mutual funds, Luxembourg funds, Japanese investment trust management funds or Delaware business trusts. We also may allocate seed capital to investments in private equity funds, such as a third-party venture capital fund that invests in communications, consumer, digital media, healthcare and information technology markets. In regard to our seed capital investments, the amounts above reflect those funds in which we are not the primary beneficiary of a VIE or hold a controlling financial interest in a VOE. See Note 13, Consolidated Company-Sponsored Investment Funds, for the seed capital investments that are consolidated entities. As of June 30, 2017 and December 31, 2016, our total seed capital investments were $465.9 million and $500.0 million, respectively. Seed capital investments in unconsolidated company-sponsored investment funds are valued using published net asset values or non-published net asset values if they are not listed on an active exchange but have net asset values that are comparable to funds with published net asset values and have no redemption restrictions.

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


14

The portion of trading gains (losses) for the three and six months ended June 30, 2017 and 2016 related to trading securities held as of June 30, 2017 and 2016 were as follows:

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
Net gains recognized during the period
 
$
2,505

 
$
7,394

 
$
16,265

 
$
8,626

Less: net gains (losses) recognized during the period on trading securities sold during the period
 
11,616

 
(2,335
)
 
12,539

 
(12,696
)
Unrealized (losses) gains recognized during the period on trading securities held
 
$
(9,111
)
 
$
9,729

 
$
3,726

 
$
21,322


9.
Derivative Instruments

See Note 13, Consolidated Company-Sponsored Investment Funds, for disclosure of derivative instruments held by our consolidated company-sponsored investment funds.

We enter into various futures, forwards, options and swaps to economically hedge certain seed capital investments.  Also, we have currency forwards that economically hedge certain balance sheet exposures. In addition, our options desk trades long and short exchange-traded equity options. We do not hold any derivatives designated in a formal hedge relationship under Accounting Standards Codification (“ASC”) 815-10, Derivatives and Hedging.

The notional value and fair value as of June 30, 2017 and December 31, 2016 for derivative instruments (excluding derivative instruments relating to our options desk trading activities discussed below) not designated as hedging instruments were as follows:

 
 
 
Fair Value
 
Notional Value
 
Asset Derivatives
 
Liability Derivatives
 
(in thousands)
June 30, 2017:
 
 
 
 
 
Exchange-traded futures
$
98,938

 
$
813

 
$
916

Currency forwards
190,292

 
5,666

 
5,156

Interest rate swaps
34,038

 
898

 
970

Credit default swaps
32,399

 
423

 
1,015

Total return swaps
63,770

 
76

 
119

Total derivatives
$
419,437

 
$
7,876

 
$
8,176

 
 
 
 
 
 
December 31, 2016:
 
 
 
 
 
Exchange-traded futures
$
103,108

 
$
1,224

 
$
1,092

Currency forwards
180,820

 
4,541

 
4,711

Interest rate swaps
40,664

 
940

 
897

Credit default swaps
45,108

 
1,205

 
905

Total return swaps
90,043

 
503

 
1,044

Total derivatives
$
459,743

 
$
8,413

 
$
8,649


As of June 30, 2017 and December 31, 2016, the derivative assets and liabilities are included in both receivables and payables to brokers and dealers on our condensed consolidated statements of financial condition.

The gains and losses for derivative instruments (excluding our options desk trading activities) for the three and six months ended June 30, 2017 and 2016 recognized in investment gains (losses) in the condensed consolidated statements of income were as follows:

15


 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
Exchange-traded futures
 
$
(3,301
)
 
$
(913
)
 
$
(8,833
)
 
$
2,433

Currency forwards
 
132

 
(685
)
 
(930
)
 
(1,820
)
Interest rate swaps
 
(151
)
 
(559
)
 
(248
)
 
(1,931
)
Credit default swaps
 
(237
)
 
(198
)
 
(909
)
 
(606
)
Options swaps
 
—

 
39

 
—

 
87

Total return swaps
 
(1,830
)
 
(2,736
)
 
(3,959
)
 
(6,772
)
Net (losses) on derivative instruments
 
$
(5,387
)
 
$
(5,052
)
 
$
(14,879
)
 
$
(8,609
)

We may be exposed to credit-related losses in the event of nonperformance by counterparties to derivative financial instruments. We minimize our counterparty exposure through a credit review and approval process. In addition, we have executed various collateral arrangements with counterparties to the over-the-counter derivative transactions that require both pledging and accepting collateral in the form of cash. As of June 30, 2017, we had no cash collateral payable to trade counterparties. As of December 31, 2016, we held $0.8 million of cash collateral payable to trade counterparties. This obligation to return cash is reported in payables to brokers and dealers in our condensed consolidated statements of financial condition.

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

Certain of our standardized contracts for over-the-counter derivative transactions (“ISDA Master Agreements”) contain credit risk related contingent provisions pertaining to each counterparty’s credit rating. In some ISDA Master Agreements, if the counterparty’s credit rating, or in some agreements, our assets under management (“AUM”), falls below a specified threshold, either a default or a termination event permitting the counterparty to terminate the ISDA Master Agreement would be triggered. In all agreements that provide for collateralization, various levels of collateralization of net liability positions are applicable, depending on the credit rating of the counterparty. As of June 30, 2017 and December 31, 2016, we delivered $5.6 million and $6.2 million, respectively, of cash collateral into brokerage accounts. We report this cash collateral in cash and cash equivalents in our condensed consolidated statements of financial condition.

As of June 30, 2017 and December 31, 2016, we held $8.3 million and $3.1 million, respectively, of long exchange-traded equity options, which are classified as trading investments and included in other investments on our condensed consolidated statements of financial condition. In addition, as of June 30, 2017 and December 31, 2016, we held $7.5 million and $0.7 million, respectively, of short exchange-traded equity options, which are included in securities sold not yet purchased on our condensed consolidated statements of financial condition. Our options desk provides our clients with equity derivative strategies and execution for exchange-traded options on single stocks, exchange-traded funds and indices. While predominately agency-based, the options desk may commit capital to facilitate a client’s transaction. Our options desk hedges the risks associated with this activity by taking offsetting positions in equities. For the three and six months ended June 30, 2017, we recognized $5.4 million and $9.2 million, respectively, of losses on equity options activity. For the three and six months ended June 30, 2016, we recognized $8.1 million and $16.7 million, respectively, of losses on equity options activity. These losses are recognized in investment gains (losses) in the condensed consolidated statements of income.

16


10.
Offsetting Assets and Liabilities

See Note 13, Consolidated Company-Sponsored Investment Funds, for disclosure of offsetting assets and liabilities of our consolidated company-sponsored investment funds.

Offsetting of assets as of June 30, 2017 and December 31, 2016 was as follows:
 
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amounts of Assets Presented in the Statement of Financial Position
 
Financial
Instruments
 
Cash Collateral
Received
 
Net
Amount
 
(in thousands)
June 30, 2017:
 
 
 
 
 
 
 
 
 
 
 
Securities borrowed
$
55,323

 
$
—

 
$
55,323

 
$
(52,150
)
 
$
—

 
$
3,173

Derivatives
$
7,876

 
$
—

 
$
7,876

 
$
—

 
$
—

 
$
7,876

Long exchange-traded options
$
8,348

 
$
—

 
$
8,348

 
$
—

 
$
—

 
$
8,348

December 31, 2016:
 

 
 

 
 

 
 

 
 

 
 

Securities borrowed
$
82,814

 
$
—

 
$
82,814

 
$
(80,277
)
 
$
—

 
$
2,537

Derivatives
$
8,413

 
$
—

 
$
8,413

 
$
—

 
$
(810
)
 
$
7,603

Long exchange-traded options
$
3,106

 
$
—

 
$
3,106

 
$
—

 
$
—

 
$
3,106


       

17

Offsetting of liabilities as of June 30, 2017 and December 31, 2016 was as follows:
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amounts of Liabilities Presented in the Statement of Financial Position
 
Financial
Instruments
 
Cash Collateral
Pledged
 
Net Amount
 
(in thousands)
June 30, 2017:
 
 
 
 
 
 
 
 
 
 
 
Securities loaned
$
28,750

 
$
—

 
$
28,750

 
$
(28,616
)
 
$
—

 
$
134

Derivatives
$
8,176

 
$
—

 
$
8,176

 
$
—

 
$
(5,564
)
 
$
2,612

Short exchange-traded options
$
7,510

 
$
—

 
$
7,510

 
$
—

 
$
—

 
$
7,510

December 31, 2016:
 

 
 

 
 

 
 

 
 

 
 

Securities loaned
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Derivatives
$
8,649

 
$
—

 
$
8,649

 
$
—

 
$
(6,239
)
 
$
2,410

Short exchange-traded options
$
692

 
$
—

 
$
692

 
$
—

 
$
—

 
$
692


Cash collateral, whether pledged or received on derivative instruments, is not considered material and, accordingly, is not disclosed by counterparty.
11.
Fair Value

See Note 13, Consolidated Company-Sponsored Investment Funds, for disclosure of fair value of our consolidated company-sponsored investment funds.

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

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

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

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

18

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Valuation of our financial instruments by pricing observability levels as of June 30, 2017 and December 31, 2016 was as follows (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
NAV Expedient(1)
 
Other
 
Total
June 30, 2017:
 
 
 
 
 
 
 
 
 
 
 
Money markets
$
173,176

 
$
—

 
$
—

 
$
—

 
$
—

 
$
173,176

Securities segregated (U.S. Treasury Bills)
—

 
1,007,079

 
—

 
—

 
—

 
1,007,079

Derivatives
813

 
7,063

 
—

 
—

 
—

 
7,876

Investments
 
 
 
 
 
 
 
 
 
 
 
    Trading
 

 
 

 
 

 
 
 
 
 
 

      U.S. Treasury Bills
—

 
27,764

 
—

 
—

 
—

 
27,764

      Equity securities
204,418

 
4,006

 
114

 
65

 
—

 
208,603

      Fixed income securities
78,328

 
11,365

 
—

 
13

 
—

 
89,706

      Long exchange-traded options
8,348

 
—

 
—

 
—

 
—

 
8,348

    Limited partnership hedge funds(2)
—

 
—

 
—

 
—

 
38,679

 
38,679

    Private equity
—

 
—

 
4,914

 
39,938

 
—

 
44,852

    Time deposits(3)
—

 
—

 
—

 
—

 
50,429

 
50,429

    Other
 
 
 
 
 
 
 
 
 
 
 
        Available-for-sale
102

 
—

 
—

 
—

 
—

 
102

        Other investments(2)(4)
—

 
—

 
—

 
—

 
11,498

 
11,498

Total investments
291,196

 
43,135

 
5,028

 
40,016

 
100,606

 
479,981

Total assets measured at fair value
$
465,185

 
$
1,057,277

 
$
5,028

 
$
40,016

 
$
100,606

 
$
1,668,112

 
 
 
 
 
 
 
 
 
 
 
 
Securities sold not yet purchased
 

 
 

 
 

 
 
 
 
 
 

Short equities – corporate
$
15,042

 
$
—

 
$
—

 
$
—

 
$
—

 
$
15,042

Short exchange-traded options
7,510

 
—

 
—

 
—

 
—

 
7,510

Derivatives
916

 
7,260

 
—

 
—

 
—

 
8,176

Contingent payment arrangements
—

 
—

 
16,777

 
—

 
—

 
16,777

Total liabilities measured at fair value
$
23,468

 
$
7,260

 
$
16,777

 
$
—

 
$
—

 
$
47,505

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016:
 
 
 
 
 
 
 
 
 
 
 
Money markets
$
107,250

 
$
—

 
$
—

 
$
—

 
$
—

 
$
107,250

Securities segregated (U.S. Treasury Bills)
—

 
893,189

 
—

 
—

 
—

 
893,189

Derivatives
1,224

 
7,189

 
—

 
—

 
—

 
8,413

Investments
 
 
 
 
 
 
 
 
 
 
 
    Trading
 

 
 

 
 

 
 
 
 
 
 
      U.S. Treasury Bills
—

 
28,937

 
—

 
—

 
—

 
28,937

      Equity securities
148,128

 
5,724

 
110

 
36

 
—

 
153,998

      Fixed income securities
80,473

 
11,107

 
—

 
12

 
—

 
91,592

      Long exchange-traded options
3,106

 
—

 
—

 
—

 
—

 
3,106

    Limited partnership hedge funds(2)
—

 
—

 
—

 
—

 
40,530

 
40,530

    Private equity
—

 
—

 
4,913

 
40,365

 
—

 
45,278

    Time deposits(3)
—

 
—

 
—

 
—

 
70,097

 
70,097


19

    Other
 
 
 
 
 
 
 
 
 
 
 
        Available-for-sale
45

 
—

 
—

 
—

 
—

 
45

        Other investments(2)(4)
—

 
—

 
—

 
—

 
7,522

 
7,522

Total investments
231,752

 
45,768

 
5,023

 
40,413

 
118,149

 
441,105

Total assets measured at fair value
$
340,226

 
$
946,146

 
$
5,023

 
$
40,413

 
$
118,149

 
$
1,449,957

 
 
 
 
 
 
 
 
 
 
 
 
Securities sold not yet purchased
 

 
 

 
 

 
 
 
 
 
 

Short equities – corporate
$
40,252

 
$
—

 
$
—

 
$
—

 
$
—

 
$
40,252

Short exchange-traded options
692

 
—

 
—

 
—

 
—

 
692

Derivatives
1,092

 
7,557

 
—

 
—

 
—

 
8,649

Contingent payment arrangements
—

 
—

 
17,589

 
—

 
—

 
17,589

Total liabilities measured at fair value
$
42,036

 
$
7,557

 
$
17,589

 
$
—

 
$
—

 
$
67,182


(1) Investments measured at fair value using NAV (or its equivalent) as a practical expedient.
(2) Investments in equity method investees that are not measured at fair value in accordance with GAAP.
(3) Investments carried at amortized cost that are not measured at fair value in accordance with GAAP.
(4) Investments carried at cost that are not measured at fair value in accordance with GAAP.

One of our private equity investments (measured at fair value using NAV as a practical expedient) is a venture capital fund with a fair value of $39.9 million and unfunded commitment of $0.8 million as of June 30, 2017, invests in communications, consumer, digital media, healthcare and information technology markets. The fair value of this investment has been estimated using the capital account balances provided by the partnership. The interest in this partnership cannot be redeemed.

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

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

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

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

•
Derivatives: We hold exchange-traded futures with counterparties that are included in Level 1 of the valuation hierarchy. In addition, we also hold currency forward contracts, interest rate swaps, credit default swaps, option swaps and total return swaps with counterparties that are valued based on observable inputs from recognized pricing vendors, which are included in Level 2 of the valuation hierarchy.

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

•
Private equity: Generally, the valuation of private equity investments requires significant management judgment due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of such investments. Private equity investments are valued initially at cost. The carrying values of private equity investments are adjusted either up or down from cost to reflect expected exit values as evidenced by financing and sale transactions with third parties, or when determination of a valuation adjustment is confirmed through ongoing review in accordance with our valuation policies and procedures. A variety of factors are reviewed and monitored to assess positive and negative changes in valuation, including current operating performance and future expectations of investee companies, industry valuations of comparable public companies, changes in market outlooks, and the third party financing environment over time. In determining valuation adjustments resulting from the investment review process, particular emphasis is placed on current

20

company performance and market conditions. For these reasons, which make the fair value of private equity investments unobservable, equity investments are included in Level 3 of the valuation hierarchy. If private equity investments become publicly traded, they are included in Level 1 of the valuation hierarchy; provided, however, if they contain trading restrictions, publicly-traded equity investments are included in Level 2 of the valuation hierarchy until the trading restrictions expire.

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

•
Contingent payment arrangements: Contingent payment arrangements relate to contingent payment liabilities associated with various acquisitions. At each reporting date, we estimate the fair values of the contingent consideration expected to be paid based upon probability-weighted AUM and revenue projections, using unobservable market data inputs, which are included in Level 3 of the valuation hierarchy.
During the six months ended June 30, 2017, there were no transfers between Level 1 and Level 2 securities.
The change in carrying value associated with Level 3 financial instruments carried at fair value, classified as private equity and trading equity securities, is as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
Balance as of beginning of period
 
$
5,026

 
$
6,605

 
$
5,023

 
$
16,148

Reclassification (see below)
 
—

 
—

 
—

 
(9,532
)
Purchases
 
—

 
—

 
—

 
—

Sales
 
—

 
—

 
—

 
—

Realized gains (losses), net
 
—

 
—

 
—

 
—

Unrealized gains (losses), net
 
2

 
(1,667
)
 
5

 
(1,678
)
Balance as of end of period
 
$
5,028

 
$
4,938

 
$
5,028

 
$
4,938


Transfers into and out of all levels of the fair value hierarchy are reflected at end-of-period fair values. We reclassified the investments of our consolidated private equity fund from investments to investments of consolidated company-sponsored investment funds on our condensed consolidated statement of financial condition (see Note 13, Consolidated Company-Sponsored Investment Funds). Realized and unrealized gains and losses on Level 3 financial instruments are recorded in investment gains and losses in the condensed consolidated statements of income.

As of June 30, 2017 and December 31, 2016, we have an investment in a private equity fund focused exclusively on the energy sector (fair value of $4.9 million for both periods) that is classified as Level 3.This investment's valuation is based on a market approach, considering recent transactions in the fund and the industry.
The change in carrying value associated with Level 3 financial instruments carried at fair value, classified as contingent payment arrangements, is as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
Balance as of beginning of period
 
$
17,177

 
$
31,119

 
$
17,589

 
$
31,399

Accretion
 
177

 
353

 
355

 
706

Payments
 
(577
)
 
(611
)
 
(1,167
)
 
(1,244
)
Balance as of end of period
 
$
16,777

 
$
30,861

 
$
16,777

 
$
30,861



21

As of June 30, 2017 and December 31, 2016, the three acquisition-related contingent consideration liabilities recorded have a combined fair value of $16.8 million and $17.6 million, respectively, and are valued using a projected AUM weighted average growth rate of 18% for one acquisition, and revenue growth rates and discount rates ranging from 4% to 31% and 1.4% to 6.4%, respectively, for the three acquisitions.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

We did not have any material assets or liabilities that were measured at fair value for impairment on a nonrecurring basis during the six months ended June 30, 2017 or during the year ended December 31, 2016.

12.
Commitments and Contingencies

Legal Proceedings

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

AB may be involved in various matters, including regulatory inquiries, administrative proceedings and litigation, some of which may allege significant damages. It is reasonably possible that we could incur losses pertaining to these matters, but currently we cannot estimate any such losses.

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

We regularly provide seed capital to new company-sponsored investment funds. As such, we may consolidate or de-consolidate a variety of company-sponsored investment funds each quarter. Due to the similarity of risks related to our involvement with each company-sponsored investment fund, disclosures required under the VIE model are aggregated, such as disclosures regarding the carrying amount and classification of assets.
We are not required to provide financial support to company-sponsored investment funds and only the assets of such funds are available to settle each fund's own liabilities. Our exposure to loss in regard to consolidated company-sponsored investment funds is limited to our investment in, and our management fee earned from, such funds. Equity and debt holders of such funds have no recourse to AB’s assets or to the general credit of AB.


22


The balances of consolidated VIEs and VOEs included in our condensed consolidated statements of financial condition were as follows:
 
 
June 30, 2017
 
December 31, 2016
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
VIEs
 
VOEs
 
Total
 
VIEs
 
VOEs
 
Total
Cash and cash equivalents
 
$
364,738

 
$
39

 
$
364,777

 
$
337,525

 
$
—

 
$
337,525

Investments
 
629,680

 
29,656

 
659,336

 
550,850

 
23,226

 
574,076

Other assets
 
6,044

 
913

 
6,957

 
44,570

 
—

 
44,570

Total assets
 
$
1,000,462

 
$
30,608

 
$
1,031,070

 
$
932,945

 
$
23,226

 
$
956,171

 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
$
416,194

 
$
9,853

 
$
426,047

 
$
292,800

 
$
—

 
$
292,800

Redeemable non-controlling interest
 
335,440

 
—

 
335,440

 
384,294

 
—

 
384,294

Partners' capital attributable to AB Unitholders
 
212,660

 
20,755

 
233,415