13. Variable Interest Entities and Consolidated Investment Vehicles

As further discussed in Notes 2 and 4, in accordance with financial accounting standards, Legg Mason consolidates certain sponsored investment vehicles, some of which are designated as CIVs. As of December 31, 2015, Legg Mason concluded it was the primary beneficiary of one sponsored investment fund VIE, which was consolidated (and designated a CIV) as of December 31, 2015, March 31, 2015, and December 31, 2014, despite significant third party investments in this product.

As of December 31, 2015, March 31, 2015, and December 31, 2014, Legg Mason also concluded it was the primary beneficiary of 14, 17, and 16, respectively, employee-owned funds it sponsors, which were consolidated and reported as CIVs.

Prior to March 31, 2015, Legg Mason also held a longer-term controlling financial interest in one sponsored investment fund VRE, which has third-party investors and was consolidated and included as a CIV prior to the three months ended March 31, 2015. Legg Mason redeemed a significant portion of its investment in this fund prior to March 31, 2015, and as a result no longer had a controlling financial interest in the fund; therefore, the fund was not consolidated, or included as a CIV as of or subsequent to March 31, 2015.

Prior to June 30, 2014, Legg Mason concluded it was the primary beneficiary of one of three CLOs in which it had a variable interest and the balances related to this CLO were consolidated and reported as a CIV in the Company's consolidated financial statements. During the three months ended June 30, 2014, this CLO substantially liquidated and therefore was not consolidated by Legg Mason as of, or subsequent to, June 30, 2014.

Legg Mason's investment in CIVs, as of December 31, 2015 and March 31, 2015, was $14,355 and $15,553, respectively, which represents its maximum risk of loss, excluding uncollected advisory fees. The assets of these CIVs are primarily comprised of investment securities. Investors and creditors of these CIVs have no recourse to the general credit or assets of Legg Mason beyond its investment in these funds.

The following tables reflect the impact of CIVs in the Consolidated Balance Sheets as of December 31, 2015 and March 31, 2015, respectively, and the Consolidated Statements of Income (Loss) for the three and nine months ended December 31, 2015 and 2014, respectively:

Consolidating Balance Sheets



	December 31, 2015									March 31, 2015
	Balance Before Consolidation of CIVs		CIVs		Eliminations			Consolidated Totals		Balance Before Consolidation of CIVs		CIVs		Eliminations			Consolidated Totals
Current Assets	$	1,715,627	$	59,578	$	(14,384	)	$	1,760,821	$	1,880,689	$	56,929	$	(15,583	)	$	1,922,035
Non-current assets	5,077,652		—		—			5,077,652		5,151,942		—		—			5,151,942
Total Assets	$	6,793,279	$	59,578	$	(14,384	)	$	6,838,473	$	7,032,631	$	56,929	$	(15,583	)	$	7,073,977
Current Liabilities	$	684,513	$	4,087	$	(29	)	$	688,571	$	808,640	$	6,436	$	(30	)	$	815,046
Non-current liabilities	1,706,114		—		—			1,706,114		1,728,510		—		—			1,728,510
Total Liabilities	2,390,627		4,087		(29		)	2,394,685		2,537,150		6,436		(30		)	2,543,556
Redeemable Non-controlling interests	117,601		37,568		3,362			158,531		10,787		27,581		7,152			45,520
Total Stockholders’ Equity	4,285,051		17,923		(17,717		)	4,285,257		4,484,694		22,912		(22,705		)	4,484,901
Total Liabilities and Equity	$	6,793,279	$	59,578	$	(14,384	)	$	6,838,473	$	7,032,631	$	56,929	$	(15,583	)	$	7,073,977

Consolidating Statements of Income (Loss)



	Three Months Ended
	December 31, 2015												December 31, 2014
	Balance Before Consolidation of CIVs			CIVs			Eliminations			Consolidated Totals			Balance Before Consolidation of CIVs			CIVs			Eliminations			Consolidated Totals
Total Operating Revenues	$	659,636		$	—		$	(79	)	$	659,557		$	719,166		$	—		$	(182	)	$	718,984
Total Operating Expenses	900,165			116			(79		)	900,202			599,574			224			(182		)	599,616
Operating Income (Loss)	(240,529		)	(116		)	—			(240,645		)	119,592			(224		)	—			119,368
Total Other Non-Operating Expense	(521		)	(1,509		)	414			(1,616		)	(4,387		)	1,758			1,326			(1,303		)
Income (Loss) Before Income Tax Provision	(241,050		)	(1,625		)	414			(242,261		)	115,205			1,534			1,326			118,065
Income tax provision (benefit)	(103,651		)	—			—			(103,651		)	38,017			—			—			38,017
Net Income (Loss)	(137,399		)	(1,625		)	414			(138,610		)	77,188			1,534			1,326			80,048
Less: Net income (loss) attributable to noncontrolling interests	1,227			—			(1,211		)	16			152			—			2,860			3,012
Net Income (Loss) Attributable to Legg Mason, Inc.	$	(138,626	)	$	(1,625	)	$	1,625		$	(138,626	)	$	77,036		$	1,534		$	(1,534	)	$	77,036



	Nine Months Ended December 31,
	December 31, 2015												December 31, 2014
	Balance Before Consolidation of CIVs			CIVs			Eliminations			Consolidated Totals			Balance Before Consolidation of CIVs			CIVs			Eliminations			Consolidated Totals
Total Operating Revenues	$	2,041,539		$	—		$	(246	)	$	2,041,293		$	2,117,309		$	—		$	(549	)	$	2,116,760
Total Operating Expenses	2,024,275			336			(246		)	2,024,365			1,747,375			665			(549		)	1,747,491
Operating Income (Loss)	17,264			(336		)	—			16,928			369,934			(665		)	—			369,269
Total Other Non-Operating Income (Expense)	(46,388		)	(3,406		)	1,200			(48,594		)	(132,917		)	4,683			123			(128,111		)
Income (Loss)Before Income Tax Provision (benefit)	(29,124		)	(3,742		)	1,200			(31,666		)	237,017			4,018			123			241,158
Income tax provision (benefit)	(50,914		)	—			—			(50,914		)	82,477			—			—			82,477
Net Income (Loss)	21,790			(3,742		)	1,200			19,248			154,540			4,018			123			158,681
Less: Net income (loss) attributable to noncontrolling interests	1,549			—			(2,542		)	(993		)	419			—			4,141			4,560
Net Income (Loss) Attributable to Legg Mason, Inc.	$	20,241		$	(3,742	)	$	3,742		$	20,241		$	154,121		$	4,018		$	(4,018	)	$	154,121

Other non-operating income (expense) includes interest income, interest expense, and net gains (losses) on investments.

The consolidation of CIVs has no impact on Net Income (Loss) Attributable to Legg Mason, Inc.

Legg Mason had no financial liabilities of CIVs carried at fair value as of December 31, 2015 or March 31, 2015. The fair value of the financial assets of CIVs were determined using the following categories of inputs as of December 31, 2015 and March 31, 2015:



	Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Value as of December 31, 2015
Assets:
Trading investments:
Hedge funds	$	1,006	$	7,131	$	10,778	$	18,915
Proprietary funds	33,759		—		—		33,759
Total trading investments	$	34,765	$	7,131	$	10,778	$	52,674



	Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Value as of March 31, 2015
Assets:
Trading investments:
Hedge funds	$	1,108	$	4,412	$	14,093	$	19,613
Proprietary funds	28,387		—		—		28,387
Total trading investments	$	29,495	$	4,412	$	14,093	$	48,000

Substantially all of the above financial instruments where valuation methods rely on other than observable market inputs as a significant input utilize the NAV practical expedient, such that measurement uncertainty has little relevance.

The changes in assets and (liabilities) of CIVs measured at fair value using significant unobservable inputs (Level 3) for the three and nine months ended December 31, 2015 and 2014, are presented in the tables below:



	Value as of September 30, 2015		Purchases		Sales			Settlements / Other		Transfers		Realized and unrealized gains/(losses), net			Value as of December 31, 2015
Assets:
Hedge funds	$	12,390	$	93	$	(654	)	$	—	$	—	$	(1,051	)	$	10,778



	Value as of September 30, 2014		Purchases		Sales			Settlements / Other		Transfers		Realized and unrealized gains/(losses), net			Value as of December 31, 2014
Assets:
Hedge funds	$	16,391	$	37	$	(894	)	$	—	$	—	$	(353	)	$	15,181
Private equity funds	32,229		5,920		(2,545		)	—		—		(2,076		)	33,528
	$	48,620	$	5,957	$	(3,439	)	$	—	$	—	$	(2,429	)	$	48,709



	Value as of March 31, 2015		Purchases		Sales			Settlements / Other		Transfers			Realized and unrealized gains/(losses), net			Value as of December 31, 2015
Assets:
Hedge funds	$	14,093	$	248	$	(1,062	)	$	—	$	(526	)	$	(1,975	)	$	10,778



	Value as of March 31, 2014			Purchases		Sales			Settlements / Other		Transfers		Realized and unrealized gains/(losses), net			Value as of December 31, 2014
Assets:
Hedge funds	$	17,888		$	489	$	(3,077	)	$	—	$	—	$	(119	)	$	15,181
Private equity funds	31,810			6,933		(4,942		)	—		—		(273		)	33,528
	$	49,698		$	7,422	$	(8,019	)	$	—	$	—	$	(392	)	$	48,709
Liabilities:
CLO debt	$	(79,179	)	$	—	$	—		$	79,179	$	—	$	—		$	—
Total realized and unrealized gains, net													$	(392	)

Realized and unrealized gains and losses recorded for Level 3 assets and liabilities of CIVs are included in Other non-operating income (expense) of CIVs in the Consolidated Statements of Income (Loss). The change in unrealized losses for Level 3 investments and liabilities of CIVs relating only to those assets and liabilities still held at the reporting date were $1,027 and $2,012 for the three months ended December 31, 2015 and 2014, respectively, and were $2,029 and $682 for the nine months ended December 31, 2015 and 2014, respectively.

There were no transfers between Level 1 and Level 2 during either of the three and nine months ended December 31, 2015 and 2014.

The NAVs used as a practical expedient by CIVs have been provided by the investees and have been derived from the fair values of the underlying investments as of the respective reporting dates. The following table summarizes, as of December 31, 2015 and March 31, 2015, the nature of these investments and any related liquidation restrictions or other factors, which may impact the ultimate value realized:

Fair Value Determined

Using NAV

As of December 31, 2015

Category of Investment

Investment Strategy

December 31, 2015

March 31, 2015

Unfunded Commitments

Remaining Term

Hedge funds

Global macro, fixed income, long/short equity, systematic, emerging market, U.S. and European hedge

18,915

⁽¹⁾

19,613

n/a

n/a – not applicable


(1)	Redemption restrictions: 5% daily redemption; 10% monthly redemption; 5% quarterly redemption; and 80% are subject to three to five year lock-up or side pocket provisions.

As of December 31, 2015 and March 31, 2015, for VIEs in which Legg Mason holds a variable interest or is the sponsor and holds a variable interest, but for which it was not the primary beneficiary, Legg Mason's carrying value and maximum risk of loss were as follows:



	As of December 31, 2015				As of March 31, 2015
	Equity Interests on the Consolidated Balance Sheet ⁽¹⁾		Maximum Risk of Loss ⁽²⁾		Equity Interests on the Consolidated Balance Sheet ⁽¹⁾		Maximum Risk of Loss ⁽²⁾
CLOs	$	—	$	299	$	—	$	1,146
Real Estate Investment Trust	10,387		15,626		13,026		18,096
Other sponsored investment funds	24,210		31,062		21,983		34,463
Total	$	34,597	$	46,987	$	35,009	$	53,705


(1)	Includes $34,597 and $27,463 related to investments in proprietary funds products as of December 31, 2015 and March 31, 2015, respectively.


(2)	Includes equity investments the Company has made or is required to make and any earned but uncollected management fees.

The Company's total AUM of unconsolidated VIEs was $18,056,130 and $19,527,670 as of December 31, 2015 and March 31, 2015, respectively.

The assets of these VIEs are primarily comprised of cash and cash equivalents, investment securities, and CLO loans, and the liabilities are primarily comprised of CLO debt and various expense accruals. These VIEs are not consolidated because either (1) Legg Mason does not have the power to direct significant economic activities of the entity and rights/obligations associated with benefits/losses that could be significant to the entity, or (2) Legg Mason does not absorb a majority of each VIE's expected losses or does not receive a majority of each VIE's expected residual gains.