EX-99.1 6 exhibit991q318.htm EXHIBIT 99.1 Exhibit

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)
(unaudited)
 
September 30,
2018
 
December 31,
2017
 
 
 
 
ASSETS
 
 
 
Cash and cash equivalents
$
607,109

 
$
671,930

Cash and securities segregated, at fair value (cost: $1,262,899 and $816,350)
1,262,906

 
816,350

Receivables, net:
 

 
 

Brokers and dealers
303,542

 
199,690

Brokerage clients
1,627,419

 
1,647,059

AB funds fees
209,677

 
212,115

Other fees
111,231

 
124,164

Investments:
 

 
 

Long-term incentive compensation-related
58,414

 
66,034

Other
420,133

 
377,555

Assets of consolidated company-sponsored investment funds:
 
 
 
   Cash and cash equivalents
10,438

 
326,518

   Investments
303,301

 
1,246,283

   Other assets
9,095

 
35,397

Furniture, equipment and leasehold improvements, net
158,475

 
157,569

Goodwill
3,066,700

 
3,066,700

Intangible assets, net
85,463

 
105,784

Deferred sales commissions, net
16,738

 
30,126

Other assets
297,995

 
211,893

Total assets
$
8,548,636

 
$
9,295,167

 
 
 
 
LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND CAPITAL
 

 
 

Liabilities:
 

 
 

Payables:
 

 
 

Brokers and dealers
$
204,986

 
$
237,861

Securities sold not yet purchased
20,961

 
29,961

Brokerage clients
2,781,140

 
2,229,371

AB mutual funds
50,436

 
82,967

Accounts payable and accrued expenses
373,596

 
515,660

Liabilities of consolidated company-sponsored investment funds
8,579

 
698,101

Accrued compensation and benefits
664,947

 
270,610

Debt
398,242

 
565,745

Total liabilities
4,502,887

 
4,630,276

 
 
 
 

1


 
September 30,
2018
 
December 31,
2017
Commitments and contingencies (See Note 13)
 
 
 
 
 
 
 
Redeemable non-controlling interest
103,997

 
601,587

 
 
 
 
Capital:
 

 
 

General Partner
40,553

 
41,221

Limited partners: 268,565,762 and 268,659,333 units issued and outstanding
4,105,882

 
4,168,841

Receivables from affiliates
(11,630
)
 
(11,494
)
AB Holding Units held for long-term incentive compensation plans
(86,961
)
 
(42,688
)
Accumulated other comprehensive loss
(107,777
)
 
(94,140
)
Partners’ capital attributable to AB Unitholders
3,940,067

 
4,061,740

Non-redeemable non-controlling interests in consolidated entities
1,685

 
1,564

Total capital
3,941,752

 
4,063,304

Total liabilities, redeemable non-controlling interest and capital
$
8,548,636

 
$
9,295,167

 
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 September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
 
Investment advisory and services fees
 
$
610,063

 
$
543,107

 
$
1,782,287

 
$
1,572,560

Bernstein research services
 
103,581

 
108,385

 
324,192

 
330,596

Distribution revenues
 
104,488

 
106,042

 
317,610

 
302,745

Dividend and interest income
 
21,942

 
17,619

 
71,351

 
51,023

Investment gains (losses)
 
565

 
18,808

 
26,860

 
68,122

Other revenues
 
24,012

 
24,902

 
76,548

 
71,532

Total revenues
 
864,651

 
818,863

 
2,598,848

 
2,396,578

Less: Interest expense
 
14,475

 
6,713

 
36,147

 
17,198

Net revenues
 
850,176

 
812,150

 
2,562,701

 
2,379,380

 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

Employee compensation and benefits
 
357,442

 
329,777

 
1,059,515

 
979,387

Promotion and servicing:
 
 
 
 
 
 

 
 

Distribution-related payments
 
106,372

 
106,106

 
322,827

 
300,951

Amortization of deferred sales commissions
 
4,651

 
7,629

 
17,362

 
25,015

Trade execution, marketing, T&E and other
 
50,793

 
50,266

 
164,095

 
155,993

General and administrative:
 
 
 
 
 
 

 
 

General and administrative
 
107,526

 
128,712

 
337,596

 
360,395

Real estate (credit) charges
 
(155
)
 
18,655

 
6,490

 
39,400

Contingent payment arrangements
 
52

 
(140
)
 
157

 
215

Interest on borrowings
 
2,711

 
2,105

 
7,952

 
6,227

Amortization of intangible assets
 
6,965

 
7,013

 
20,753

 
20,921

Total expenses
 
636,357

 
650,123

 
1,936,747

 
1,888,504

 
 
 
 
 
 
 
 
 
Operating income
 
213,819

 
162,027

 
625,954

 
490,876

 
 
 
 
 
 
 
 
 
Income taxes
 
9,419

 
4,547

 
32,782

 
24,869

 
 
 
 
 
 
 
 
 
Net income
 
204,400

 
157,480

 
593,172

 
466,007

 
 
 
 
 
 
 
 
 
Net income of consolidated entities attributable to non-controlling interests
 
726

 
16,526

 
23,637

 
50,013

 
 
 
 
 
 
 
 
 
Net income attributable to AB Unitholders
 
$
203,674

 
$
140,954

 
$
569,535

 
$
415,994

 
 
 
 
 
 
 
 
 
Net income per AB Unit:
 
 

 
 

 
 

 
 

Basic
 
$
0.75

 
$
0.53

 
$
2.09

 
$
1.54

Diluted
 
$
0.75

 
$
0.52

 
$
2.09

 
$
1.54


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 September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Net income
 
$
204,400

 
$
157,480

 
$
593,172

 
$
466,007

Other comprehensive income (loss):
 
 

 
 

 
 
 
 
Foreign currency translation adjustment, before reclassification and tax
 
(4,154
)
 
7,735

 
(14,889
)
 
24,091

Less: reclassification adjustment for losses included in net income upon liquidation
 

 

 
(100
)
 

Foreign currency translation adjustments, before tax
 
(4,154
)
 
7,735

 
(14,789
)
 
24,091

Income tax benefit
 

 

 

 

Foreign currency translation adjustments, net of tax
 
(4,154
)
 
7,735

 
(14,789
)
 
24,091

Unrealized gains on investments:
 
 

 
 

 
 
 
 
Unrealized (losses) gains arising during period
 

 
(4
)
 

 
6

Less: reclassification adjustment for gains included in net income
 

 

 

 

Change in unrealized (losses) gains on investments
 

 
(4
)
 

 
6

Income tax benefit
 

 
5

 

 
3

Unrealized gains on investments, net of tax
 

 
1

 

 
9

Changes in employee benefit related items:
 
 

 
 

 
 
 
 
Amortization of prior service cost
 
6

 
6

 
17

 
18

Recognized actuarial gain
 
285

 
295

 
853

 
818

Changes in employee benefit related items
 
291

 
301

 
870

 
836

Income tax expense
 
(5
)
 
(2
)
 
(121
)
 
(81
)
Employee benefit related items, net of tax
 
286

 
299

 
749

 
755

  Other
 

 

 
374

 

Other comprehensive (loss) income
 
(3,868
)
 
8,035

 
(13,666
)
 
24,855

Less: Comprehensive income in consolidated entities attributable to non-controlling interests
 
721

 
16,554

 
23,608

 
50,990

Comprehensive income attributable to AB Unitholders
 
$
199,811

 
$
148,961

 
$
555,898

 
$
439,872

 
See Accompanying Notes to Condensed Consolidated Financial Statements.


4



ALLIANCEBERNSTEIN L.P. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Nine Months Ended September 30,
 
2018
 
2017
 
 
 
 
Cash flows from operating activities:
 
 
 
Net income
$
593,172

 
$
466,007

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

 
 

Amortization of deferred sales commissions
17,362

 
25,015

Non-cash long-term incentive compensation expense
13,051

 
26,947

Depreciation and other amortization
52,599

 
49,995

Unrealized (gains) losses on investments
(5,226
)
 
3,323

Unrealized gains on investments of consolidated company-sponsored investment funds
(23,755
)
 
(33,062
)
Other, net
585

 
10,195

Changes in assets and liabilities:
 

 
 

(Increase) decrease in segregated cash and securities
(446,556
)
 
161,531

(Increase) decrease in receivables
(179,020
)
 
8,079

Increase in investments
(30,130
)
 
(76,780
)
Decrease (increase) in investments of consolidated company-sponsored investment funds
966,737

 
(180,966
)
(Increase) decrease in deferred sales commissions
(3,974
)
 
1,871

Increase in other assets
(134,259
)
 
(33,003
)
(Decrease) increase in other assets and liabilities of consolidated company-sponsored investment funds, net
(663,220
)
 
327,284

Increase (decrease) in payables
584,282

 
(58,126
)
(Decrease) increase in accounts payable and accrued expenses
(22,908
)
 
23,982

Increase in accrued compensation and benefits
395,643

 
358,586

Net cash provided by operating activities
1,114,383

 
1,080,878

 
 
 
 
Cash flows from investing activities:
 

 
 

Purchases of investments

 
(11
)
Proceeds from sales of investments

 
10

Purchases of furniture, equipment and leasehold improvements
(26,993
)
 
(24,952
)
Proceeds from sales of furniture, equipment and leasehold improvements

 
39

Net cash used in investing activities
(26,993
)
 
(24,914
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Repayment of commercial paper, net
(97,303
)
 
(220,363
)
(Repayment) proceeds of bank loans
(75,000
)
 

(Decrease) increase in overdrafts payable
(39,025
)
 
66,134

Distributions to General Partner and Unitholders
(652,991
)
 
(489,049
)
Redemptions of investments in consolidated company-sponsored investment funds, net
(518,601
)
 
(8,373
)
Capital contributions to non-controlling interests in consolidated entities

 
(43,217
)
Purchase of non-controlling interest

 
(1,833
)
Capital contributions (to) from affiliates
(1,344
)
 
79

Payments of contingent payment arrangements
(1,146
)
 
(6,344
)
Additional investments by AB Holding with proceeds from exercise of compensatory options to buy AB Holding Units
10,802

 
17,672

Purchases of AB Holding Units to fund long-term incentive compensation plan awards, net
(82,710
)
 
(134,186
)
Purchases of AB Units
(129
)
 
(993
)

5


Debt issuance costs
(1,705
)
 

Net cash used in financing activities
(1,459,152
)
 
(820,473
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(9,139
)
 
17,458

 
 
 
 
 
 
 
 
Net (decrease) increase in cash and cash equivalents
(380,901
)
 
252,949

Cash and cash equivalents as of beginning of the period
998,448

 
994,510

Cash and cash equivalents as of end of the period
$
617,547

 
$
1,247,459

 
 
 
 
See Accompanying Notes to Condensed Consolidated Financial Statements.

6


ALLIANCEBERNSTEIN L.P.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 2018
(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, 2017.

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"), AXA Equitable Holdings, Inc. ("EQH") and their respective 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, concentration 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

During the second quarter of 2018, AXA Equitable Holdings, Inc. ("EQH"), the holding company for a diversified financial services organization, conducted an initial public offering; AXA, a French holding company for AXA Group, a worldwide leader in life, property and casualty and health insurance and asset management owns approximately 72% of the outstanding common stock of EQH as of September 30, 2018. AXA has announced its intention to sell its entire interest in EQH over time, subject to market conditions and other factors. AXA is under no obligation to do so and retains the sole discretion to determine the timing of any future sales of shares of EQH common stock.

As of September 30, 2018, EQH owns approximately 3.9% 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 EQH, “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 September 30, 2018, the ownership structure of AB, including limited partnership units outstanding as well as the general partner's 1% interest, is as follows:

EQH and its subsidiaries
63.7
%
AB Holding
35.5

Unaffiliated holders
0.8

 
100.0
%

Including both the general partnership and limited partnership interests in AB Holding and AB, EQH and its subsidiaries had an approximate 65.1% economic interest in AB as of September 30, 2018.

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, 2017 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”) in which AB has a controlling financial interest. Non-controlling interests on the condensed consolidated statements of financial condition include 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.

Reclassification

During 2018, prior period amounts for payments to financial intermediaries for administrative services, sub-accounting services and maintenance of books and records for certain funds previously presented as distribution-related payments are now presented as trade execution, marketing, T&E and other expenses in the condensed consolidated statements of income to conform to the current period's presentation.


8


2.
Significant Accounting Policies

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, which outlines a single comprehensive revenue recognition model for all contracts with customers and supersedes most of the existing revenue recognition requirements. We adopted this new standard on January 1, 2018 on a modified retrospective basis for contracts that were not completed as of the date of adoption.

The new standard did not change the timing of revenue recognition for our base fees, distribution revenues, shareholder servicing fees and broker-dealer revenues. However, performance-based fees, which, prior to the adoption of ASC 606, were recognized at the end of the applicable measurement period when no risk of reversal remained, and carried-interest distributions received (considered performance-based fees), recorded as deferred revenues until no risk of reversal remained, may in certain instances be recognized earlier under the new standard, if it is probable that significant reversal of performance-based fees recognized will not occur.

On January 1, 2018, we recorded a cumulative effect adjustment, net of tax, of a $35.0 million increase to partners’ capital in the condensed consolidated statement of financial condition. This amount represents carried interest distributions of $77.9 million previously received, net of revenue sharing payments to investment team members of $42.7 million, with respect to which it is probable that significant reversal will not occur.

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. We adopted this standard on January 1, 2018. The adoption of this standard did not have a material impact on our financial condition or results of operations.

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. We adopted this standard on January 1, 2018. The adoption of this standard did not have a material impact on our financial condition or results of operations.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The new standard requires that the statement of cash flows explains the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Companies are also required to reconcile such total amounts in the balance sheet and disclose the nature of the restrictions. We adopted this standard on January 1, 2018. The adoption of this standard did not 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. We adopted this standard on January 1, 2018. The adoption of this standard did not have a material impact on our financial condition or 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. We adopted this standard on January 1, 2018. 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 February 2016, the FASB issued ASU 2016-02, Leases. This pronouncement, along with subsequent ASUs issued to clarify certain provisions of ASU 2016-02, requires lessees to record most leases on their balance sheet while also disclosing key information about those lease arrangements. The classification criteria to distinguish between finance and operating leases are generally consistent with the classification criteria to distinguish between capital and operating leases under existing lease accounting guidance. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018. We plan to adopt the new standard for our fiscal year beginning January 1, 2019, using the simplified transition method.
As of January 1, 2019, we expect to record an increase in assets ranging between $400 million to $450 million and an increase in liabilities ranging between $550 million to $600 million, respectively, on our statement of financial condition as a result

9


of recognizing right-of-use assets and lease liabilities for our real estate leases. The right-of-use assets recognized as of January 1, 2019 are substantially net of deferred rent and liabilities associated with previously recognized impairments as of December 31, 2018. These estimated ranges are based on our anticipated real estate lease portfolio as of January 1, 2019, and it does not include the potential impacts of re-measurement due to changes in our assessment of the lease term subsequent to our adoption of the standard. In addition, we are evaluating the impact of recording right-of-use assets and lease liabilities for non-real estate leases on our statement of financial condition. The adoption of this standard will not have a material impact on our results of operations.
In June 2016, the FASB issued ASU 2016-03, Financial Instruments - Credit Losses (Topic 326). This new guidance relates to the accounting for credit losses on financial instruments. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The new guidance is effective for financial statements issued for fiscal years ending after December 15, 2019, with early adoption permitted. Management currently is evaluating the impact that adoption of this standard will have on our consolidated financial statements.
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. As a result of the revised guidance, a goodwill impairment will 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 February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits a company to reclassify the disproportionate income tax effects of the 2017 Tax Cuts and Job Act ("2017 Tax Act") on items within Accumulated Other Comprehensive Income ("AOCI") to retained earnings. The FASB refers to these amounts as "stranded tax effects." The ASU also requires certain new disclosures, some of which are applicable for all companies. The guidance is effective for all companies for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Companies may adopt the new guidance using one of two transition methods: (1) retrospective to each period (or periods) in which the income tax effect of the 2017 Tax Act related to items remaining in AOCI are recognized, or (2) at the beginning of the period of adoption. The adoption of this standard is not expected to have a material impact on our financial condition or results of operations.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The amendment modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The revised guidance is effective for all companies for fiscal years beginning after December 15, 2019, and interim periods within those years. Companies are permitted to early adopt any eliminated or modified disclosure requirements and delay adoption of the additional disclosure requirements until their effective date. The removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted on a prospective basis. The revised guidance is not expected to have a material impact on our financial condition or results of operations.

In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Topic 715-20). The amendment modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The revised guidance is effective for financial statements issued for fiscal years ending after December 15, 2020, with early adoption permitted. The revised guidance is not expected to have a material impact on our financial condition or results of operations.

Revenue Recognition

Investment advisory and services fees
AB provides asset management services by managing customer assets and seeking to deliver investment returns to investors. Each investment management contract between AB and a customer creates a distinct, separately identifiable performance obligation for each day the customer’s assets are managed as the customer can benefit from each day of service. In accordance with ASC 606, a series of distinct goods and services that are substantially the same and have the same pattern of transfer to the customer are treated as a single performance obligation. Accordingly, we have determined that our investment and advisory services are performed over time and entitle us to variable consideration earned based upon the value of the investors’ assets under management (“AUM”).


10


We calculate AUM using established market-based valuation methods and fair valuation (non-observable market) methods. Market-based valuation methods include: last sale/settle prices from an exchange for actively-traded listed equities, options and futures; evaluated bid prices from recognized pricing vendors for fixed income, asset-backed or mortgage-backed issues; mid prices from recognized pricing vendors and brokers for credit default swaps; and quoted bids or spreads from pricing vendors and brokers for other derivative products. Fair valuation methods include: discounted cash flow models, evaluation of assets versus liabilities or any other methodology that is validated and approved by our Valuation Committee (see paragraph immediately below for additional information about our Valuation Committee). Fair valuation methods are used only where AUM cannot be valued using market-based valuation methods, such as in the case of private equity or illiquid securities.

The Valuation Committee, which consists of senior officers and employees, is responsible for overseeing the pricing and valuation of all investments held in client and AB portfolios. The Valuation Committee has adopted a Statement of Pricing Policies describing principles and policies that apply to pricing and valuing investments held in these portfolios. We also have a Pricing Group, which reports to the Valuation Committee and is responsible for overseeing the pricing process for all investments.

We record as revenue investment advisory and services base fees, which we generally calculate as a percentage of AUM. At month-end, all the components of the transaction price (i.e., the base fee calculation) are no longer variable and the value of the consideration is determined. These fees are not subject to claw back and there is minimal probability that a significant reversal of the revenue recorded will occur. 

The transaction price for the asset management performance obligation for certain investment advisory contracts, including those associated with hedge funds or other alternative investments, provide for a performance-based fee (including carried interest), in addition to a base advisory fee, which is calculated as either a percentage of absolute investment results or a percentage of investment results in excess of a stated benchmark over a specified period of time. The performance-based fees are forms of variable consideration and are therefore excluded from the transaction price until it becomes probable that there will not be significant reversal of the cumulative revenue recognized. At each reporting date, we evaluate the constraining factors, discussed below, surrounding the variable consideration to determine the extent to which, if any, revenues associated with the performance-based fee can be recognized.

Constraining factors impacting the amount of variable consideration included in the transaction price include: the contractual claw-back provisions to which the variable consideration is subject, the length of time to which the uncertainty of the consideration is subject, the number and range of possible consideration amounts, the probability of significant fluctuations in the fund’s market value, the level at which the fund’s value exceeds the contractual threshold required to earn such a fee, and the materiality of the amount being evaluated.

Prior to the adoption of ASC 606 on January 1, 2018, we recognized performance-based fees at the end of the applicable measurement period when no risk of reversal remained, and carried-interest distributions received as deferred revenues until no risk of reversal remained.

Bernstein Research Services
Bernstein Research Services revenue consists principally of commissions received for trade execution services and providing equity research services to institutional clients. Brokerage commissions for trade execution services and related expenses are recorded on a trade-date basis when the performance obligations are satisfied. Generally, the transaction price is agreed upon at the point of each trade and based upon the number of shares traded or the value of the consideration traded. Research revenues are recognized when the transaction price is quantified, collectability is assured and significant reversal of such revenue is not probable.

Distribution Revenues
Two of our subsidiaries act as distributors and/or placement agents of company-sponsored mutual funds and receive distribution services fees from certain of those funds as partial reimbursement of the distribution expenses they incur. Depending upon the contractual arrangements with the customer and the specific product sold, the variable consideration can be determined in different ways, as discussed below, as we satisfy the performance obligation.

Most open-end U.S. funds have adopted a plan under Rule 12b-1 of the Investment Company Act that allows the fund to pay, out of assets of the fund, distribution and service fees for the distribution and sale of its shares (“Rule 12b-1 Fees”). The open-end U.S. funds have such agreements with us, and we have selling and distribution agreements pursuant to which we pay sales commissions to the financial intermediaries that distribute our open-end U.S. funds. These agreements are terminable by either party upon notice (generally 30 days) and do not obligate the financial intermediary to sell any specific amount of fund shares.

11



We record 12b-1 fees monthly based upon a percentage of the net asset value (“NAV”) of the funds. At month-end, the variable consideration of the transaction price is no longer constrained as the NAV can be calculated and the value of consideration is determined. These services are separate and distinct from other asset management services as the customer can benefit from these services independently of other services. We accrue the corresponding 12b-1 fees paid to sub-distributors monthly as the expenses are incurred. We are acting in a principal capacity in these transactions; as such, these revenues and expenses are recorded on a gross basis.

We offer back-end load shares in limited instances and charge the investor a contingent deferred sales charge (“CDSC”) if the investment is redeemed within a certain period. The variable consideration for these contracts is contingent upon the timing of the redemption by the investor and the value of the sale proceeds. Due to these constraining factors, we exclude the CDSC fee from the transaction price until the investor redeems the investment. Upon redemption, the cash consideration received for these contractual arrangements are recorded as reductions of unamortized deferred sales commissions.

Our Luxembourg subsidiary, the management company for most of our non-U.S. funds, earns a management fee which is accrued daily and paid monthly, at an annual rate, based on the average daily net assets of the fund. With respect to certain share classes, the management fee may also contain a component that is paid to distributors and other financial intermediaries and service providers to cover shareholder servicing and other administrative expenses (also referred to as an All-in-Fee). As we have concluded that asset management is distinct from distribution, we allocate a portion of the investment and advisory fee to distribution revenues for the servicing component based on standalone selling prices.

Other Revenues
Revenues from contracts with customers include a portion of other revenues, which consists primarily of shareholder servicing fees, as well as mutual fund reimbursements and other brokerage income.

We provide shareholder services, which include transfer agency, administrative and recordkeeping services provided to company-sponsored mutual funds. The consideration for these services is based on a percentage of the NAV of the fund or a fixed-fee based on the number of shareholder accounts being serviced. The revenues are recorded at month-end when the constraining factors involved with determining NAV or the number of shareholders’ accounts are resolved.

Non-Contractual Revenues
Dividend and interest income is accrued as earned. Investment gains and losses on the condensed consolidated statements of income include unrealized gains and losses of trading and private equity investments stated at fair value, equity in earnings of our limited partnership hedge fund investments, and realized gains and losses on investments sold.

Contract Assets and Liabilities

We use the practical expedient for contracts that have an original duration of one year or less. Accordingly, we do not consider the time value of money and, instead, accrue the incremental costs of obtaining the contract when incurred. As of September 30, 2018, the balances of contract assets and contract liabilities are not considered material and, accordingly, no further disclosures are necessary.

12


3. Revenue Recognition

See Note 2, Significant Accounting Policies, Revenue Recognition, for descriptions of revenues presented in the table below. The adoption of ASC 606 had no significant impact on revenue recognition during the first nine months of 2018, except for the recognition of $49.3 million of performance fees from two funds in liquidation that is not probable of significant reversal, that under the previous revenue accounting standard would not be recognized until final liquidation. Revenues for the three and nine months ended September 30, 2018 and 2017 consisted of the following:

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in thousands)
Subject to contracts with customers:
 
 
 
 
 
 
 
 
    Investment advisory and services fees
 
 
 
 
 
 
 
 
        Base fees
 
$
568,918

 
$
538,552

 
$
1,699,584

 
$
1,547,213

        Performance-based fees
 
41,145

 
4,555

 
82,703

 
25,347

    Bernstein research services
 
103,581

 
108,385

 
324,192

 
330,596

    Distribution revenues
 
 
 
 
 
 
 
 
        All-in-management fees
 
62,807

 
64,495

 
193,884

 
177,637

        12b-1 fees
 
22,136

 
23,199

 
66,746

 
71,677

        Other
 
19,545

 
18,348

 
56,980

 
53,431

    Other revenues
 
 
 
 
 
 
 
 
        Shareholder servicing fees
 
19,017

 
19,106

 
57,533

 
55,618

        Other
 
4,293

 
4,879

 
15,827

 
12,948

 
 
841,442

 
781,519

 
2,497,449

 
2,274,467

Not subject to contracts with customers:
 
 
 
 
 
 
 
 
    Dividend and interest income, net of interest
    expense
 
7,467

 
10,906

 
35,204

 
33,825

    Investment gains (losses)
 
565

 
18,808

 
26,860

 
68,122

    Other revenues
 
702

 
917

 
3,188

 
2,966

 
 
8,734

 
30,631

 
65,252

 
104,913

 
 
 
 
 
 
 
 
 
Total net revenues
 
$
850,176

 
$
812,150

 
$
2,562,701

 
$
2,379,380


4.
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 nine months ended September 30, 2018, we purchased 1.6 million and 2.9 million AB Holding Units for $48.0 million and $83.2 million, respectively (on a trade date basis). These amounts reflect open-market purchases of 1.6 million and 2.8 million AB Holding Units for $48.0 million and $80.9 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

13


delivery of long-term incentive compensation awards. During the three and nine months ended September 30, 2017, we purchased 0.3 million and 5.9 million AB Holding Units for $6.9 million and $134.6 million, respectively (on a trade date basis). These amounts reflect open-market purchases of 0.3 million and 5.2 million AB Holding Units for $6.8 million and $117.1 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.

Each quarter, we consider whether to implement a plan to repurchase AB Holding Units pursuant to Rules 10b5-1 and 10b-18 under the Exchange Act. A plan of this type 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 third quarter of 2018 expired at the close of business on October 22, 2018. We may adopt additional 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 nine months of 2018 and 2017, we granted to employees and Eligible Directors 2.5 million and 2.1 million restricted AB Holding Unit awards, respectively. We used AB Holding Units repurchased during the periods and newly-issued AB Holding Units to fund these awards.

During the first nine months of 2018 and 2017, AB Holding issued 0.6 million and 1.0 million AB Holding Units, respectively, upon exercise of options to buy AB Holding Units. AB Holding used the proceeds of $10.8 million and $17.7 million, respectively, received from employees as payment in cash for the exercise price to purchase the equivalent number of newly-issued AB Units.

5.
Real Estate Charges

Since 2010, 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:
 
Nine Months Ended
September 30, 2018
 
Twelve Months Ended
December 31, 2017
 
(in thousands)
Balance as of beginning of period
$
113,635

 
$
112,932

Expense incurred
6,490

 
28,507

Deferred rent

 
7,083

Payments made
(32,868
)
 
(39,122
)
Interest accretion
3,284

 
4,235

Balance as of end of period
$
90,541

 
$
113,635


14


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 limited partnership 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 limited partnership units outstanding for each period.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in thousands, except per unit amounts)
Net income attributable to AB Unitholders
 
$
203,674

 
$
140,954

 
$
569,535

 
$
415,994

 
 
 
 
 
 
 
 
 
Weighted average limited partnership units outstanding – basic
 
269,603

 
265,585

 
269,783

 
267,448

Dilutive effect of compensatory options to buy AB Holding Units
 
245

 
400

 
282

 
455

Weighted average limited partnership units outstanding – diluted
 
269,848

 
265,985

 
270,065

 
267,903

Basic net income per AB Unit
 
$
0.75

 
$
0.53

 
$
2.09

 
$
1.54

Diluted net income per AB Unit
 
$
0.75

 
$
0.52

 
$
2.09

 
$
1.54


For the three and nine months ended September 30, 2018, we excluded 824,245 options and 844,973 options, respectively, from the diluted net income computation due to their anti-dilutive effect. For both the three and nine months ended September 30, 2017, we excluded 2,427,527 options from the diluted net income computation due to their anti-dilutive effect.

7. 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 October 24, 2018, the General Partner declared a distribution of $0.76 per AB Unit, representing a distribution of Available Cash Flow for the three months ended September 30, 2018. 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 November 15, 2018 to holders of record on November 5, 2018.

8.
Cash and Securities Segregated Under Federal Regulations and Other Requirements

As of September 30, 2018 and December 31, 2017, $1.3 billion and $0.8 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.

15



9.
Investments

Investments consist of:
 
 
 
 
September 30,
2018
 
December 31,
2017
 
(in thousands)
U.S. Treasury Bills
$
22,774

 
$
52,609

Equity securities:
 
 
 
    Long-term incentive compensation-related
43,647

 
51,758

    Seed capital
118,158

 
160,672

    Other
120,705

 
81,154

Exchange-traded options
1,100

 
4,981

Investments in limited partnership hedge funds:
 

 
 

Long-term incentive compensation-related
14,767

 
14,276

Seed capital
101,732

 
22,923

Private equity (seed capital)
36,450

 
38,186

Time deposits
8,835

 
5,138

Other
10,379

 
11,892

Total investments
$
478,547

 
$
443,589


Total investments related to long-term incentive compensation obligations of $58.4 million and $66.0 million as of September 30, 2018 and December 31, 2017, respectively, consist of company-sponsored mutual funds and hedge funds. For long-term incentive compensation awards granted before 2009, we typically made investments in company-sponsored mutual funds and hedge funds 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. A portion of our seed capital 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. During 2018, our seed capital in limited partnership hedge funds increased $78.8 million primarily due to the deconsolidation of a fund in which we have a seed investment of $79.0 million due to no longer having a controlling financial interest. See Note 14, Consolidated Company-Sponsored Investment Funds, for a description of the seed capital investments that we consolidate. As of September 30, 2018 and December 31, 2017, our total seed capital investments were $468.3 million and $523.2 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.

In addition, we also have long positions in corporate equities and long exchange-traded options traded through our options desk.


16


The portion of unrealized gains (losses) for the three and nine months ended September 30, 2018 and 2017 related to equity securities held as of September 30, 2018 and 2017 were as follows:

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in thousands)
Net gains (losses) recognized during the period
 
$
3,429

 
$
(1,869
)
 
$
(177
)
 
$
15,721

Less: net gains recognized during the period on equity securities sold during the period
 
1,156

 
366

 
2,820

 
14,067

Unrealized gains (losses) recognized during the period on equity securities held
 
$
2,273

 
$
(2,235
)
 
$
(2,997
)
 
$
1,654


10.
Derivative Instruments

See Note 14, 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 help us to 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 September 30, 2018 and December 31, 2017 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)
September 30, 2018:
 
 
 
 
 
Exchange-traded futures
$
143,281

 
$
915

 
$
965

Currency forwards
88,091

 
7,888

 
7,622

Interest rate swaps
87,222

 
1,251

 
1,044

Credit default swaps
87,679

 
1,264

 
3,031

Total return swaps
120,455

 
79

 
1,275

Total derivatives
$
526,728

 
$
11,397

 
$
13,937

 
 
 
 
 
 
December 31, 2017:
 
 
 
 
 
Exchange-traded futures
$
163,458

 
$
948

 
$
2,540

Currency forwards
126,503

 
8,306

 
8,058

Interest rate swaps
43,309

 
951

 
870

Credit default swaps
74,600

 
1,247

 
2,465

Total return swaps
68,106

 
167

 
390

Total derivatives
$
475,976

 
$
11,619

 
$
14,323


As of September 30, 2018 and December 31, 2017, the derivative assets and liabilities are included in both receivables and payables to brokers and dealers on our condensed consolidated statements of financial condition.


17


The gains and losses for derivative instruments (excluding our options desk trading activities discussed below) for the three and nine months ended September 30, 2018 and 2017 recognized in investment gains (losses) in the condensed consolidated statements of income were as follows:

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in thousands)
Exchange-traded futures
 
$
157

 
$
(3,290
)
 
$
1,699

 
$
(12,123
)
Currency forwards
 
673

 
(62
)
 
947

 
(992
)
Interest rate swaps
 
157

 
151

 
424

 
(97
)
Credit default swaps
 
(1,117
)
 
(273
)
 
(1,212
)
 
(1,182
)
Total return swaps
 
(5,625
)
 
(1,417
)
 
(5,665
)
 
(5,376
)
Net (losses) gains on derivative instruments
 
$
(5,755
)
 
$
(4,891
)
 
$
(3,807
)
 
$
(19,770
)

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 both September 30, 2018 and December 31, 2017, we held $0.5 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 September 30, 2018 and December 31, 2017, we delivered $5.3 million and $8.8 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 September 30, 2018 and December 31, 2017, we held $1.1 million and $5.0 million, respectively, of long exchange-traded equity options, which are included in other investments on our condensed consolidated statements of financial condition. In addition, as of September 30, 2018 and December 31, 2017, we held $10.8 million and $13.6 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 nine months ended September 30, 2018, we recognized a $5.7 million gain and a $3.2 million loss, respectively, on equity options activity. For the three and nine months ended September 30, 2017, we recognized $12.7 million and $21.8 million, respectively, of losses on equity options activity. These losses are recognized in investment gains (losses) in the condensed consolidated statements of income.

18


11.
Offsetting Assets and Liabilities

See Note 14, Consolidated Company-Sponsored Investment Funds, for disclosure of offsetting assets and liabilities of our consolidated company-sponsored investment funds.

Offsetting of assets as of September 30, 2018 and December 31, 2017 was as follows:
 
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Statement of Financial Condition
 
Net Amounts of Assets Presented in the Statement of Financial Condition
 
Financial
Instruments
 
Cash Collateral
Received
 
Net
Amount
 
(in thousands)
September 30, 2018:
 
 
 
 
 
 
 
 
 
 
 
Securities borrowed
$
46,175

 
$

 
$
46,175

 
$
(42,514
)
 
$

 
$
3,661

Derivatives
$
11,397

 
$

 
$
11,397

 
$

 
$
(530
)
 
$
10,867

Long exchange-traded options
$
1,100

 
$

 
$
1,100

 
$

 
$

 
$
1,100

December 31, 2017:
 

 
 

 
 

 
 

 
 

 
 

Securities borrowed
$
85,371

 
$

 
$
85,371

 
$
(82,353
)
 
$

 
$
3,018

Derivatives
$
11,619

 
$

 
$
11,619

 
$

 
$
(519
)
 
$
11,100

Long exchange-traded options
$
4,981

 
$

 
$
4,981

 
$

 
$

 
$
4,981

       
Offsetting of liabilities as of September 30, 2018 and December 31, 2017 was as follows:
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Statement of Financial Condition
 
Net Amounts of Liabilities Presented in the Statement of Financial Condition
 
Financial
Instruments
 
Cash Collateral
Pledged
 
Net Amount
 
(in thousands)
September 30, 2018:
 
 
 
 
 
 
 
 
 
 
 
Securities loaned
$

 
$

 
$

 
$

 
$

 
$

Derivatives
$
13,937

 
$

 
$
13,937

 
$

 
$
(5,279
)
 
$
8,658

Short exchange-traded options
$
10,799

 
$

 
$
10,799

 
$

 
$

 
$
10,799

December 31, 2017:
 

 
 

 
 

 
 

 
 

 
 

Securities loaned
$
37,960

 
$

 
$
37,960

 
$
(37,922
)
 
$

 
$
38

Derivatives
$
14,323

 
$

 
$
14,323

 
$

 
$
(8,794
)
 
$
5,529

Short exchange-traded options
$
13,585

 
$

 
$
13,585

 
$

 
$

 
$
13,585


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

19


12.
Fair Value

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.
       

20


Assets and Liabilities Measured at Fair Value on a Recurring Basis

Valuation of our financial instruments by pricing observability levels as of September 30, 2018 and December 31, 2017 was as follows (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
NAV Expedient(1)
 
Other
 
Total
September 30, 2018:
 
 
 
 
 
 
 
 
 
 
 
Money markets
$
110,654

 
$

 
$

 
$

 
$

 
$
110,654

Securities segregated (U.S. Treasury Bills)

 
1,262,906

 

 

 

 
1,262,906

Derivatives
915

 
10,482

 

 

 

 
11,397

Investments
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury Bills

 
22,774

 

 

 

 
22,774

Equity securities
272,053

 
10,028

 
117

 
312

 

 
282,510

Long exchange-traded options
1,100

 

 

 

 

 
1,100

   Limited partnership hedge funds(2)

 

 

 

 
116,499

 
116,499

   Private equity

 

 

 
36,450

 

 
36,450

   Time deposits(3)

 

 

 

 
8,835

 
8,835

   Other investments

 

 

 

 
10,379

 
10,379

Total investments
273,153

 
32,802

 
117

 
36,762

 
135,713

 
478,547

Total assets measured at fair value
$
384,722

 
$
1,306,190

 
$
117

 
$
36,762

 
$
135,713

 
$
1,863,504

 
 
 
 
 
 
 
 
 
 
 
 
Securities sold not yet purchased
 

 
 

 
 

 
 
 
 
 
 

Short equities – corporate
$
10,162

 
$

 
$

 
$

 
$

 
$
10,162

Short exchange-traded options
10,799

 

 

 

 

 
10,799

Derivatives
965

 
12,972

 

 

 

 
13,937

Contingent payment arrangements

 

 
11,013

 

 

 
11,013

Total liabilities measured at fair value
$
21,926

 
$
12,972

 
$
11,013

 
$

 
$

 
$
45,911

 
 
 
 
 
 
 
 
 
 
 
 

21


 
Level 1
 
Level 2
 
Level 3
 
NAV Expedient(1)
 
Other
 
Total
December 31, 2017:
 
 
 
 
 
 
 
 
 
 
 
Money markets
$
62,071

 
$

 
$

 
$

 
$

 
$
62,071

Securities segregated (U.S. Treasury Bills)

 
816,350

 

 

 

 
816,350

Derivatives
948

 
10,671

 

 

 

 
11,619

Investments
 
 
 
 
 
 
 
 
 
 
 
  U.S. Treasury Bills

 
52,609

 

 

 

 
52,609

  Equity securities
276,755

 
16,618

 
117

 
94

 

 
293,584

  Long exchange-traded options
4,981

 

 

 

 

 
4,981

    Limited partnership hedge funds(2)

 

 

 

 
37,199

 
37,199

    Private equity

 

 
954

 
37,232

 

 
38,186

    Time deposits(3)

 

 

 

 
5,138

 
5,138

    Other investments

 

 

 

 
11,892

 
11,892

Total investments
281,736

 
69,227

 
1,071

 
37,326

 
54,229

 
443,589

Total assets measured at fair value
$
344,755

 
$
896,248

 
$
1,071

 
$
37,326

 
$
54,229

 
$
1,333,629

 
 
 
 
 
 
 
 
 
 
 
 
Securities sold not yet purchased
 

 
 

 
 

 
 
 
 
 
 

Short equities – corporate
$
16,376

 
$

 
$

 
$

 
$

 
$
16,376

Short exchange-traded options
13,585

 

 

 

 

 
13,585

Derivatives
2,540

 
11,783

 

 

 

 
14,323

Contingent payment arrangements

 

 
10,855

 

 

 
10,855

Total liabilities measured at fair value
$
32,501

 
$
11,783

 
$
10,855

 
$

 
$

 
$
55,139


(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.

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 $36.4 million and no unfunded commitment as of September 30, 2018. This partnership 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 without specific approval by the general partner.

Other investments include (i) an investment in a start-up company that does not have a readily available fair value ($3.6 million and $4.6 million as of September 30, 2018 and December 31, 2017, respectively), (ii) an investment in an equity method investee that is not measured at fair value in accordance with GAAP ($3.6 million as of September 30, 2018 and $4.1 million as of December 31, 2017), and (iii) broker dealer exchange memberships ($3.1 million as of September 30, 2018 and $3.2 million as of December 31, 2017).
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.


22


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.

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 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 nine months ended September 30, 2018, 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 equity securities, is as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in thousands)
Balance as of beginning of period
 
$
117

 
$
5,028

 
$
1,071

 
$
5,023

Purchases
 

 

 

 

Sales
 

 

 

 

Realized gains (losses), net
 

 

 

 

Unrealized gains (losses), net
 

 
(3,958
)
 
(954
)
 
(3,953
)
Balance as of end of period
 
$
117

 
$
1,070

 
$
117

 
$
1,070


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.


23


As of December 31, 2017, we had an investment in a private equity fund focused exclusively on the energy sector (fair value of $1.0 million) that was classified as Level 3 and written off during the second quarter of 2018.This investment's valuation was based on a market approach, considering recent transactions in the fund and the industry.
We acquired Ramius Alternative Solutions LLC in 2016, CPH Capital Fondsmaeglerselskab A/S in 2014 and SunAmerica's alternative investment group in 2010, all of which included 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,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in thousands)
Balance as of beginning of period
 
$
10,960

 
$
16,777

 
$
10,855

 
$
17,589

Accretion
 
53

 
53

 
158

 
408

Change in estimates
 

 
(193
)
 

 
(193
)
Payments
 

 
(4,534
)
 

 
(5,701
)
Balance as of end of period
 
$
11,013

 
$
12,103

 
$
11,013

 
$
12,103


During the third quarter of 2017, we made the final contingent consideration payment relating to our 2014 acquisition and recorded a change in estimate and wrote off the remaining contingent consideration payable relating to our 2010 acquisition. As of September 30, 2018 and December 31, 2017, one acquisition-related contingent liability with a fair value of $11.0 million and $10.9 million, respectively, remains relating to our 2016 acquisition, which was valued using a revenue growth rate of 31% and a discount rate ranging from 1.4% to 2.3%.

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, 2018 or during the year ended December 31, 2017.

13.
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 we cannot currently 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.

24


14. 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.
The balances of consolidated VIEs and VOEs included in our condensed consolidated statements of financial condition were as follows:
 
 
September 30, 2018
 
December 31, 2017
 
 
(in thousands)
 
 
VIEs
 
VOEs
 
Total
 
VIEs
 
VOEs
 
Total
Cash and cash equivalents
 
$
9,736

 
$
702

 
$
10,438

 
$
326,158

 
$
360

 
$
326,518

Investments
 
186,386

 
116,915

 
303,301

 
1,189,835

 
56,448

 
1,246,283

Other assets
 
5,544

 
3,551

 
9,095

 
33,931

 
1,466

 
35,397

Total assets
 
$
201,666

 
$
121,168

 
$
322,834

 
$
1,549,924

 
$
58,274

 
$
1,608,198

 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
$
6,077

 
$
2,502

 
$
8,579

 
$
695,997

 
$
2,104

 
$
698,101

Redeemable non-controlling interest
 
80,436

 
20,673

 
101,109

 
596,241

 
(18
)
 
596,223

Partners' capital attributable to AB Unitholders
 
114,495

 
97,993

 
212,488

 
256,929

 
56,188

 
313,117

Non-redeemable non-controlling interests in consolidated entities
 
658

 

 
658

 
757

 

 
757

Total liabilities, redeemable non-controlling interest and partners' capital
 
$
201,666

 
$
121,168

 
$
322,834

 
$
1,549,924

 
$
58,274

 
$
1,608,198

 
 
 
 
 
 
 
 
 
 
 
 
 
During 2018, we deconsolidated a fund in which we have a seed investment of $79.0 million due to no longer having a controlling financial interest. This VIE had significant consolidated assets and liabilities as of December 31, 2017.

25


Fair Value
Cash and cash equivalents include cash on hand, demand deposits, overnight commercial paper and highly liquid investments with original maturities of three months or less. Due to the short-term nature of these instruments, the recorded value has been determined to approximate fair value.

Valuation of consolidated company-sponsored investment funds' financial instruments by pricing observability levels as of September 30, 2018 and December 31, 2017 was as follows (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
NAV Expedient
 
Total
September 30, 2018:
 
 
 
 
 
 
 
 
 
  Investments - VIEs
$
19,818

 
$
160,266

 
$
6,302

 
$

 
$
186,386

  Investments - VOEs
66,384

 
50,339

 
192