Fair Value

9 Months Ended

Sep. 30, 2012

Fair Value [Abstract]

Fair Value

8.    Fair Value

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

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

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

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables summarize the valuation of our financial instruments by pricing observability levels as of September 30, 2012 and December 31, 2011:

	September 30, 2012
	Level 1		Level 2		Level 3		Total
	(in thousands)
Money markets	$	311,174	$	—	$	—	$	311,174
U.S. Treasury bills		—		942,338		—		942,338
U.K. Treasury bills		—		124		—		124
Equity securities
Growth		114,538		—		—		114,538
Value		42,672		91		—		42,763
Blend		65,238		—		—		65,238
Other(1)		23,765		11		—		23,776
Fixed Income securities
Taxable(2)		177,744		519		—		178,263
Tax-exempt(3)		5,602		783		—		6,385
Derivatives		2,097		3,349		—		5,446
Long exchange-traded options		9,508		—		—		9,508
Private equity		10,699		—		61,662		72,361
Total assets measured at fair value	$	763,037	$	947,215	$	61,662	$	1,771,914
Securities sold not yet purchased
Short equities – corporate	$	18,830	$	—	$	—	$	18,830
Short exchange-traded options		4,860		—		—		4,860
Other		1,681		—		—		1,681
Derivatives		32		6,659		—		6,691
Total liabilities measured at fair value	$	25,403	$	6,659	$	—	$	32,062

	December 31, 2011
	Level 1		Level 2		Level 3		Total
	(in thousands)
Money markets	$	340,548	$	—	$	—	$	340,548
U.S. Treasury bills		—		1,277,944		—		1,277,944
U.K. Treasury bills		—		119		—		119
Equity securities
Growth		107,802		189		—		107,991
Value		60,096		9		—		60,105
Blend		118,208		—		—		118,208
Other(1)		45,583		—		—		45,583
Fixed Income securities
Taxable(2)		110,062		14,488		—		124,550
Tax-exempt(3)		15,366		743		—		16,109
Other		17		—		—		17
Derivatives		127		3,494		—		3,621
Long exchange-traded options		14,322		—		—		14,322
Private equity		11,592		—		64,466		76,058
Total assets measured at fair value	$	823,723	$	1,296,986	$	64,466	$	2,185,175
Securities sold not yet purchased
Short equities – corporate	$	34,469	$	—	$	—	$	34,469
Short exchange-traded options		3,567		—		—		3,567
Other		1,271		—		—		1,271
Derivatives		2,054		5,205		—		7,259
Total liabilities measured at fair value	$	41,361	$	5,205	$	—	$	46,566

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(1) Primarily long positions in corporate equities traded through our options desk.

(2) Primarily corporate and government securities.

(3) Primarily municipal bonds.

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

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

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

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

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

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

• Private equity: The valuation of non-public private equity investments owned by our consolidated venture capital fund requires significant management judgment due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of such investments. Private equity investments are valued initially at cost. The carrying values of private equity investments are adjusted either up or down from cost to reflect expected exit values as evidenced by financing and sale transactions with third parties, or when determination of a valuation adjustment is confirmed through ongoing review in accordance with our valuation policies and procedures. A variety of factors are reviewed and monitored to assess positive and negative changes in valuation including, but not limited to, current operating performance and future expectations of investee companies, industry valuations of comparable public companies, changes in market outlooks and the third party financing environment over time. In determining valuation adjustments resulting from the investment review process, particular emphasis is placed on current company performance and market conditions. Non-public equity investments are included in Level 3 of the valuation hierarchy because they trade infrequently and, therefore, their fair value is unobservable. Publicly-traded equity investments owned by our consolidated venture capital fund are included in Level 1 of the valuation hierarchy. If they contain trading restrictions, publicly-traded equity investments are included in Level 2 of the valuation hierarchy. One of our private securities went public in the first quarter of 2011 and, due to a trading restriction period, $3.6 million was transferred from a Level 3 classification to a Level 2 classification. During the second quarter of 2011, the trading restriction period for one of our public securities lapsed and, as a result, $20.6 million was transferred from a Level 2 classification to a Level 1 classification. During the third quarter of 2011, the trading restriction period for one of our public securities lapsed and, as a result, $3.7 million was transferred from a Level 2 classification to a Level 1 classification. During the first quarter of 2012, one of our private securities went public and, due to a trading restriction period, $13.5 million was transferred from a Level 3 classification to a Level 2 classification. During the third quarter of 2012, the trading restriction period for one of our public securities lapsed and, as a result, $6.0 million was transferred from a Level 2 classification to a Level 1 classification.

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

The following table summarizes the change in carrying value associated with Level 3 financial instruments carried at fair value:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
	(in thousands)
Balance as of beginning of period	$	57,908		$	59,524		$	64,466		$	59,414
Transfer (out) in, net		—			—			(13,548	)		(3,588	)
Purchases		3,467			577			7,300			7,993
Sales		—			(1	)		(1,823	)		(214	)
Realized gains (losses), net		(8,379	)		(246	)		(7,524	)		(3,106	)
Unrealized gains (losses), net		8,666			(1,371	)		12,791			(2,016	)
Balance as of end of period	$	61,662		$	58,483		$	61,662		$	58,483

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

The following table provides quantitative information about Level 3 fair value measurements:

	Fair Value as of September 30, 2012		Valuation Technique	Unobservable Input	Range
	(in thousands)
Private Equity:
Technology, Media and Telecommunications	$	23,256	Market comparable companies	Revenue multiple		2.5 – 6
				Discount rate		18	%
				Discount years		1 – 2
Healthcare and Cleantech	$	14,871	Market comparable companies	Revenue multiple		0.7 – 45.9
				R&D multiple		1.3 – 37.4
				Discount for lack of marketability and risk factors		50-60	%

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

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

We have one private equity investment, which is a venture capital fund (fair value of $22.3 million and unfunded commitment of $16.8 million as of September 30, 2012) investing in communications, consumer, digital media, healthcare and information technology markets. In addition, one of the investments included in our consolidated private equity fund (fair value of $1.2 million and unfunded commitment of $0.2 million as of September 30, 2012) is a venture capital fund investing in clean energy, resource and energy efficiency and other sustainable industries. The fair value of each of these investments has been estimated using the capital account balances provided by the partnerships. The interests in these partnerships cannot be redeemed.

Assets Measured at Fair Value on a Nonrecurring Basis

There were no impairments recognized for goodwill, intangible assets or other long-lived assets as of September 30, 2012.