INVESTMENTS AND FAIR VALUES OF ASSETS AND LIABILITIES

12 Months Ended

Mar. 31, 2011

INVESTMENTS AND FAIR VALUES OF ASSETS AND LIABILITIES

INVESTMENTS AND FAIR VALUES OF ASSETS AND LIABILITIES

3. INVESTMENTS AND FAIR VALUES OF ASSETS AND LIABILITIES

The disclosures below include details of Legg Mason's assets and liabilities that are measured at fair value, excluding the assets and liabilities of CIVs. See Note 18, Variable Interest Entities and Consolidation of Investment Vehicles, for information related to the assets and liabilities of CIVs that are measured at fair value.

Legg Mason has investments in debt and equity securities that are generally classified as available-for-sale and trading as described in Note 1. Investments as of March 31, 2011 and 2010, are as follows:

		2011		2010


Investment securities:
	Current investments⁽¹⁾	$	400,510	$	334,873
	Available-for-sale		11,300		6,957
	Other⁽²⁾		270		1,452

Total		$	412,080	$	343,282

(1): Includes trading investments of deferred compensation plans of $120,107 and $118,096, respectively, and equity method investments of deferred compensation plans of $48,528 and $49,031, respectively. The remainder represents seed investments in proprietary fund products.
(2): Includes investments in private equity securities that do not have readily determinable fair values.

The net unrealized and realized gain (loss) for investment securities classified as trading was $28,355, $125,395, and ($2,003,043) for fiscal 2011, 2010 and 2009, respectively. The realized and unrealized losses for fiscal 2009 primarily relate to losses on SIV-issued securities purchased from certain liquidity funds.

Legg Mason's available-for-sale investments consist of mortgage backed securities, U.S. government and agency securities and equity securities. Gross unrealized gains (losses) for investments classified as available-for-sale were $157 and ($186), respectively, as of March 31, 2011, and $172 and ($33), respectively, as of March 31, 2010.

Legg Mason uses the specific identification method to determine the cost of a security sold and the amount reclassified from accumulated other comprehensive income into earnings. The proceeds and gross realized gains and losses from sales and maturities of available for-sale investments are as follows:

		Years Ended March 31,

		2011			2010			2009

Available-for-sale:
	Proceeds	$	4,012		$	1,279		$	2,173
	Gross realized gains		7			1			5
	Gross realized losses		(19	)		(4	)		(84	)

Legg Mason had no investments classified as held-to-maturity as of March 31, 2011 and 2010.

The fair values of financial assets and (liabilities) of the Company were determined using the following categories of inputs at March 31, 2011 and 2010:

			Quoted prices in active markets (Level 1)			Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Value as of March 31, 2011


ASSETS:
	Cash equivalents⁽¹⁾
		Money market funds	$	912,951		$	—	$	—	$	912,951
		Time deposits		—			92,877		—		92,877

	Total cash equivalents			912,951			92,877		—		1,005,828
	Investment securities:
		Trading investments relating to long- term incentive compensation plans⁽²⁾		120,107			—		—		120,107
		Trading proprietary fund products and other investments⁽³⁾		90,123			102,562		11,378		204,063
		Equity method investments relating to long-term incentive compensation plans, proprietary fund products and other investments⁽⁴⁾		15,645			48,528		12,167		76,340

	Total current investments			225,875			151,090		23,545		400,510
	Available-for-sale investment securities			2,666			8,622		12		11,300
	Investments in partnerships, LLCs, and other			—			—		22,167		22,167
	Equity method investments in partnerships and LLCs			1,420			—		153,931		155,351
	Derivative assets:
		Currency and market hedge		1,169			—		—		1,169
	Other investments			—			—		270		270

			$	1,144,081		$	252,589	$	199,925	$	1,596,595

LIABILITIES:
	Derivative liabilities:
		Currency and market hedge	$	(3,120	)	$	—	$	—	$	(3,120	)

			Quoted prices in active markets (Level 1)			Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Value as of March 31, 2010


ASSETS:
	Cash equivalents⁽¹⁾
		Money market funds	$	930,015		$	—	$	—	$	930,015
		Time deposits		—			249,352		—		249,352

	Total cash equivalents			930,015			249,352		—		1,179,367
	Investment securities:
		Trading investments relating to long- term incentive compensation plans⁽²⁾		118,096			—		—		118,096
		Trading proprietary fund products and other investments⁽³⁾		52,375			67,663		22,459		142,497
		Equity method investments relating to long-term incentive compensation plans, proprietary fund products and other investments⁽⁴⁾		13,159			49,031		12,090		74,280

	Total current investments			183,630			116,694		34,549		334,873
	Available-for-sale investment securities			2,533			4,412		12		6,957
	Investments in partnerships, LLCs, and other			—			—		23,049		23,049
	Equity method investments in partnerships and LLCs			1,192			—		98,968		100,160
	Derivative assets:
		Currency and market hedge		697			—		—		697
	Other investments			—			—		1,452		1,452

			$	1,118,067		$	370,458	$	158,030	$	1,646,555

LIABILITIES:
	Derivative liabilities:
		Currency and market hedge	$	(485	)	$	—	$	—	$	(485	)

(1): Cash equivalents include highly liquid investments with original maturities of 90 days or less. Cash investments in actively traded money market funds are measured at NAV and are classified as Level 1. Cash investments in time deposits are measured at amortized cost, which approximates fair value because of the short time between the purchase of the instrument and its expected realization, and are classified as Level 2.
(2): Primarily mutual funds where there is minimal market risk to the Company as any change in value is offset by an adjustment to compensation expense and related liability.
(3): Total proprietary fund products and other investments represent primarily mutual funds that are invested approximately 60% and 40% in equity and debt securities as of March 31, 2011, respectively, and were invested approximately 63% and 37% in equity and debt securities as of March 31, 2010, respectively.
(4): Includes investments under the equity method (which approximates fair value) relating to long-term incentive compensation plans of $48,528 and $49,031 as of March 31, 2011 and 2010, respectively, and proprietary fund products and other investments of $27,812 and $25,249 as of March 31, 2011 and 2010, respectively, which are classified as Investment securities on the Consolidated Balance Sheets.

The table below presents a summary of changes in financial assets and (liabilities) measured at fair value using significant unobservable inputs (Level 3) for the periods from March 31, 2010 to March 31, 2011 and March 31, 2009 to March 31, 2010:

	Value as of March 31, 2010		Purchases, sales, issuance and settlements, net			Net transfer in (out) of Level 3		Realized and unrealized gains/(losses), net			Value as of March 31, 2011


ASSETS:
Proprietary fund products and other investments	$	22,459	$	(13,429	)	$	350	$	1,998		$	11,378
Equity method investments in proprietary fund products		12,090		—			—		77			12,167
Investments in partnerships, LLCs, and other		23,049		831			—		(1,713	)		22,167
Equity method investments in partnerships and LLCs		98,968		29,335			—		25,628			153,931
Other investments		1,464		(4,065	)		—		2,883			282

	$	158,030	$	12,672		$	350	$	28,873		$	199,925

	Value as of March 31, 2009			Purchases, sales, issuances and settlements, net			Net transfer in (out) of Level 3		Realized and unrealized gains/(losses), net			Value as of March 31, 2010


ASSETS:
Proprietary fund products and other investments	$	26,937		$	(11,013	)	$	—	$	6,535		$	22,459
Equity method investments in proprietary fund products		9,531			—			—		2,559			12,090
Investments in partnerships, LLCs, and other		20,630			2,745			—		(326	)		23,049
Equity method investments in partnerships and LLCs		33,584			61,042			—		4,342			98,968
Other investments		1,881			(779	)		—		362			1,464

	$	92,563		$	51,995		$	—	$	13,472		$	158,030

LIABILITIES:
Fund support	$	(20,631	)	$	—		$	—	$	20,631		$	—

Total realized and unrealized gains, net									$	34,103

Realized and unrealized gains and losses recorded for Level 3 investments are included in Fund support and Other income (expense) on the Consolidated Statements of Income. The change in unrealized gains (losses) relating to Level 3 assets and liabilities still held at the reporting date was $11,472 and $35,026 for the years ended March 31, 2011 and 2010, respectively.

There were no significant transfers between Levels 1 and 2 during the year ended March 31, 2011.

As a practical expedient, Legg Mason relies on the net asset value of certain investments as their fair value. The net asset values that have been provided by the investees have been derived from the fair values of the underlying investments as of the reporting date. The following table summarizes, as of March 31, 2011, the nature of these investments and any related liquidation restrictions or other factors which may impact the ultimate value realized.

Category of Investment	Investment Strategy	Fair Value Determined Using NAV			Unfunded Commitments		Remaining Term


Funds-of-hedge funds	Global, fixed income, macro, long/ short equity, natural resources, systematic, emerging market, European hedge	$	69,997	⁽¹⁾		n/a	n/a
Private funds	Long/short equity		22,372	⁽²⁾		7,882	6 to 9 years
Private fund	Fixed income, residential and commercial mortgage-backed securities		91,866	⁽²⁾		n/a	7 years, subject to two one-year extensions
Other	Various		13,652	⁽²⁾		n/a	Various⁽³⁾

Total		$	197,887		$	7,882

n/a — not applicable

(1): 73% monthly redemption; 27% quarterly redemption, 34% of which is subject to two-year lock-up.
(2): Liquidations are expected during the remaining term.
(3): 82% two-year remaining term; 18% 20-year remaining term.

There are no current plans to sell any of these investments.

- Definition

This item represents the complete disclosure regarding the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments, 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 Company 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 risk is 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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