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Fair Value

9 Months Ended

Sep. 30, 2020

See Note 14, 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.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Valuation of our financial instruments by pricing observability levels as of September 30, 2020 and December 31, 2019 was as follows (in thousands):


	Level 1		Level 2		Level 3		NAV Expedient⁽¹⁾		Other		Total
September 30, 2020:
Money markets	$	131,614	$	—	$	—	$	—	$	—	$	131,614
Securities segregated (U.S. Treasury Bills)	—		1,868,891		—		—		—		1,868,891
Derivatives	317		26,353		—		—		—		26,670
Investments:

Equity securities	143,749		22,096		121		171		—		166,137
Long exchange-traded options	12,153		—		—		—		—		12,153
Limited partnership hedge funds⁽²⁾	—		—		—		—		41,459		41,459

Time deposits⁽³⁾	—		—		—		—		19,900		19,900
Other investments	6,257		—		—		—		7,786		14,043
Total investments	162,159		22,096		121		171		69,145		253,692
Total assets measured at fair value	$	294,090	$	1,917,340	$	121	$	171	$	69,145	$	2,280,867

Securities sold not yet purchased:
Short equities – corporate	$	2,892	$	—	$	—	$	—	$	—	$	2,892
Short exchange-traded options	11,091		—		—		—		—		11,091
Derivatives	223		28,007		—		—		—		28,230
Contingent payment arrangements	—		—		29,723		—		—		29,723
Total liabilities measured at fair value	$	14,206	$	28,007	$	29,723	$	—	$	—	$	71,936


	Level 1		Level 2		Level 3		NAV Expedient⁽¹⁾		Other		Total
December 31, 2019:
Money markets	$	126,401	$	—	$	—	$	—	$	—	$	126,401
Securities segregated (U.S. Treasury Bills)	—		1,094,866		—		—		—		1,094,866
Derivatives	939		12,552		—		—		—		13,491
Investments:
Equity securities	170,946		8,952		119		314		—		180,331
Long exchange-traded options	6,931		—		—		—		—		6,931
Limited partnership hedge funds⁽²⁾	—		—		—		—		47,361		47,361

Time deposits⁽³⁾	—		—		—		—		18,281		18,281
Other investments	5,883		—		—		—		8,007		13,890
Total investments	183,760		8,952		119		314		73,649		266,794
Total assets measured at fair value	$	311,100	$	1,116,370	$	119	$	314	$	73,649	$	1,501,552

Securities sold not yet purchased:
Short equities – corporate	$	17,809	$	—	$	—	$	—	$	—	$	17,809
Short exchange-traded options	12,348		—		—		—		—		12,348
Derivatives	871		18,388		—		—		—		19,259
Contingent payment arrangements	—		—		22,911		—		—		22,911
Total liabilities measured at fair value	$	31,028	$	18,388	$	22,911	$	—	$	—	$	72,327

⁽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.

Other investments include (i) an investment in a software publishing company that does not have a readily available fair value ($2.0 million as of September 30, 2020 and $1.0 million as of December 31, 2019), (ii) an investment in a start-up company that does not have a readily available fair value (this investment was zero as of September 30, 2020 and was $0.9 million as of December 31, 2019), (iii) an investment in an equity method investee that is not measured at fair value in accordance with GAAP ($2.5 million as of September 30, 2020 and $2.9 million as of December 31, 2019), and (iv) broker dealer exchange memberships that are not measured at fair value in accordance with GAAP ($3.3 million as of September 30, 2020 and $3.2 million as of December 31, 2019).

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 securities: Our equity securities consist principally of company-sponsored mutual funds with NAVs and various separately-managed portfolios consisting primarily of equity and fixed income mutual funds 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.

• 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 nine months ended September 30, 2020 there were no transfers between Level 2 and Level 3 securities.

The change in carrying value associated with Level 3 financial instruments carried at fair value, classified as private equity and equity securities, is as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2020		2019		2020		2019
	(in thousands)
Balance as of beginning of period	$	114	$	117	$	119	$	142
Purchases	—		—		—		—
Sales	—		—		—		—
Realized gains (losses), net	—		—		—		—
Unrealized gains (losses), net	7		1		2		(24)
Balance as of end of period	$	121	$	118	$	121	$	118

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 part of acquisitions made by the Company, we may enter into contingent consideration arrangements as part of the purchase price. 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 September 30,						Nine Months Ended September 30,
	2020		2019		2020		2019
	(in thousands)
Balance as of beginning of period	$	28,910	$	25,603	$	22,911	$	7,336
Addition	—		—		4,400		17,384
Accretion	813		829		2,412		1,712

Payments	—		—		—		—
Balance as of end of period	$	29,723	$	26,432	$	29,723	$	26,432

As of September 30, 2020 and December 31, 2019, we have acquisition-related contingent liabilities remaining with a fair value of $29.7 million and $22.9 million, respectively.

The liabilities were valued using expected revenue growth rates and discount rates. The expected revenue growth rates range from 0.7% to 50.0%, with a weighted average of 4.9%, calculated using cumulative revenues and range of revenue growth rates (excluding revenue growth from additional AUM contributed from existing clients). The discount rates ranged from 1.9% to 10.4%, with a weighted average of 8.0%, calculated using total contingent liabilities and range of discount rates.

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 nine months ended September 30, 2020 or during the year ended December 31, 2019.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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