Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 
 
 
 
 
FORM 10-Q
 
 
 
 
 

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-10994
 
 
 
 
 
 
virtuslogo2016.jpg
VIRTUS INVESTMENT PARTNERS, INC.
(Exact name of registrant as specified in its charter)
 
 
 
 
 

 
 
 
Delaware
 
95-4191764
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
100 Pearl St., Hartford, CT 06103
(Address of principal executive offices) (Zip Code)
(800) 248-7971
(Registrant’s telephone number, including area code)

 
 
 
 
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
x
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
 ¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x
The number of shares outstanding of the registrant’s common stock was 5,888,533 as of October 31, 2016.
 
 
 
 
 

Table of Contents

VIRTUS INVESTMENT PARTNERS, INC.
INDEX
 
 
 
Page
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 1A.
Item 2.
Item 6.
 
“We,” “us,” “our,” the “Company” and “Virtus” as used in this Quarterly Report on Form 10-Q, refer to Virtus Investment Partners, Inc., a Delaware corporation, and its subsidiaries.


Table of Contents

PART I – FINANCIAL INFORMATION
 
Item 1.    Financial Statements


1
Table of Contents

Virtus Investment Partners, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
 
September 30,
2016
 
December 31,
2015
($ in thousands, except share data)
 
 
 
Assets:
 
 
 
Cash and cash equivalents
$
165,421

 
$
87,574

Investments
95,174

 
56,738

Accounts receivable, net
36,867

 
38,757

Assets of consolidated sponsored investment products
 
 
 
Cash of consolidated sponsored investment products
1,149

 
1,513

Cash pledged or on deposit of consolidated sponsored investment products
944

 
10,353

Investments of consolidated sponsored investment products
137,140

 
323,335

Other assets of consolidated sponsored investment products
2,560

 
8,549

Assets of consolidated investment product
 
 
 
Cash equivalents of consolidated investment product
12,703

 
8,297

Investments of consolidated investment product
360,210

 
199,485

Other assets of consolidated investment product
4,628

 
1,467

Furniture, equipment and leasehold improvements, net
7,864

 
9,116

Intangible assets, net
39,030

 
40,887

Goodwill
6,788

 
6,701

Deferred taxes, net
44,623

 
54,143

Other assets
14,463

 
12,814

Total assets
$
929,564

 
$
859,729

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Accrued compensation and benefits
$
37,813

 
$
49,617

Accounts payable and accrued liabilities
21,429

 
23,036

Dividends payable
4,117

 
4,233

Other liabilities
13,619

 
13,051

Liabilities of consolidated sponsored investment products
2,930

 
15,387

Liabilities of consolidated investment product
 
 
 
Debt of consolidated investment product
—

 
152,597

Notes payable of consolidated investment product
323,852

 
—

Securities purchased payable and other liabilities of consolidated investment product
25,704

 
18,487

Total liabilities
429,464

 
276,408

Commitments and Contingencies (Note 13)

 

Redeemable noncontrolling interests
30,301

 
73,864

Equity:
 
 
 
Equity attributable to stockholders:
 
 
 
Common stock, $0.01 par value, 1,000,000,000 shares authorized; 9,112,052 shares issued and 7,609,753 shares outstanding at September 30, 2016 and 9,613,088 shares issued and 8,398,944 shares outstanding at December 31, 2015
91

 
96

Additional paid-in capital
1,089,350

 
1,140,875

Accumulated deficit
(436,705
)
 
(472,614
)
Accumulated other comprehensive loss
(235
)
 
(1,034
)
Treasury stock, at cost, 1,502,299 and 1,214,144 shares at September 30, 2016 and December 31, 2015, respectively
(182,702
)
 
(157,699
)
Total equity attributable to stockholders
469,799

 
509,624

Noncontrolling interests
—

 
(167
)
Total equity
469,799

 
509,457

Total liabilities and equity
$
929,564

 
$
859,729

The accompanying notes are an integral part of these condensed consolidated financial statements.

2
Table of Contents

Virtus Investment Partners, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
($ in thousands, except per share data)
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
Investment management fees
$
60,398

 
$
64,891

 
$
176,234

 
$
204,254

Distribution and service fees
12,116

 
15,587

 
36,761

 
52,820

Administration and transfer agent fees
9,588

 
11,614

 
29,085

 
37,233

Other income and fees
222

 
283

 
624

 
1,555

Total revenues
82,324

 
92,375

 
242,704

 
295,862

Operating Expenses
 
 
 
 
 
 
 
Employment expenses
33,142

 
33,504

 
102,184

 
102,719

Distribution and other asset-based expenses
17,380

 
21,717

 
52,913

 
69,900

Other operating expenses
11,392

 
11,165

 
34,614

 
51,403

Other operating expenses of consolidated sponsored investment products
611

 
1,120

 
2,521

 
2,895

Other operating expenses of consolidated investment product
24

 
—

 
3,921

 
—

Restructuring and severance
1,879

 
—

 
4,270

 
—

Depreciation and other amortization
754

 
910

 
2,392

 
2,562

Amortization expense
604

 
837

 
1,858

 
2,511

Total operating expenses
65,786

 
69,253

 
204,673

 
231,990

Operating Income
16,538

 
23,122

 
38,031

 
63,872

Other Income (Expense)
 
 
 
 
 
 
 
Realized and unrealized gain (loss) on investments, net
961

 
(2,082
)
 
3,584

 
(1,194
)
Realized and unrealized gain (loss) on investments of consolidated sponsored investment products, net
3,536

 
(17,619
)
 
6,928

 
(18,271
)
Realized and unrealized gain (loss) of consolidated investment product, net
144

 
(721
)
 
2,960

 
(721
)
Other income, net
250

 
141

 
463

 
823

Total other income (expense), net
4,891

 
(20,281
)
 
13,935

 
(19,363
)
Interest Income (Expense)
 
 
 
 
 
 
 
Interest expense
(128
)
 
(138
)
 
(389
)
 
(382
)
Interest and dividend income
221

 
324

 
1,113

 
906

Interest and dividend income of investments of consolidated sponsored investment products
1,364

 
2,898

 
6,021

 
8,320

Interest expense of consolidated investment product
(3,788
)
 
(1
)
 
(10,188
)
 
(1
)
Interest income of consolidated investment product
4,047

 
42

 
8,835

 
42

Total interest income, net
1,716

 
3,125

 
5,392

 
8,885

Income Before Income Taxes
23,145

 
5,966

 
57,358

 
53,394

Income tax expense
6,869

 
9,669

 
20,512

 
28,360

Net Income (Loss)
16,276

 
(3,703
)
 
36,846

 
25,034

Noncontrolling interests
(651
)
 
3,054

 
(770
)
 
3,436

Net Income (Loss) Attributable to Common Stockholders
$
15,625

 
$
(649
)
 
$
36,076

 
$
28,470

Earnings (Loss) per Share—Basic
$
2.04

 
$
(0.07
)
 
$
4.47

 
$
3.21

Earnings (Loss) per Share—Diluted
$
1.99

 
$
(0.07
)
 
$
4.39

 
$
3.15

Cash Dividends Declared per Share
$
0.45

 
$
0.45

 
$
1.35

 
$
1.35

Weighted Average Shares Outstanding—Basic (in thousands)
7,676

 
8,775

 
8,062

 
8,876

Weighted Average Shares Outstanding—Diluted (in thousands)
7,854

 
8,775

 
8,223

 
9,039

The accompanying notes are an integral part of these condensed consolidated financial statements.

3
Table of Contents

Virtus Investment Partners, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
($ in thousands)
 
 
 
 
 
 
 
Net Income (Loss)
$
16,276

 
$
(3,703
)
 
$
36,846

 
$
25,034

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of tax of ($28) for the three months ended September 30, 2015 and ($348) and $167 for the nine months ended September 30, 2016 and 2015, respectively
—

 
49

 
569

 
(271
)
Unrealized (loss) gain on available-for-sale securities, net of tax of $31 and $35 for the three months ended September 30, 2016 and 2015, respectively and ($140) and $26 for the nine months ended September 30, 2016 and 2015 respectively
(50
)
 
(290
)
 
230

 
(389
)
Other comprehensive (loss) income
(50
)
 
(241
)
 
799

 
(660
)
Comprehensive income (loss)
16,226

 
(3,944
)
 
37,645

 
24,374

Comprehensive (income) loss attributable to noncontrolling interests
(651
)
 
3,054

 
(770
)
 
3,436

Comprehensive Income (Loss) Attributable to Common Stockholders
$
15,575

 
$
(890
)
 
$
36,875

 
$
27,810

The accompanying notes are an integral part of these condensed consolidated financial statements.

4
Table of Contents



Virtus Investment Partners, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended
September 30,
 
2016
 
2015
($ in thousands)
 
 
 
Cash Flows from Operating Activities:
 
 
 
Net income
$
36,846

 
$
25,034

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation expense, intangible asset and other amortization
4,430

 
5,241

Stock-based compensation
9,064

 
9,166

Excess tax benefits from stock-based compensation
(192
)
 
(1,515
)
Amortization of discount on notes payable of consolidated investment product
3,719

 
—

Amortization of deferred commissions
1,900

 
6,903

Payments of deferred commissions
(1,405
)
 
(2,585
)
Equity in earnings of equity method investments
(444
)
 
(804
)
Realized gain on sale of equity method investment
(2,883
)
 
—

Realized and unrealized (gains) losses on trading securities, net
(700
)
 
1,490

Realized and unrealized (gains) losses on investments of consolidated sponsored investment products, net
(7,815
)
 
21,611

Realized and unrealized (gains) losses of consolidated investment product, net
(2,289
)
 
721

Sales of trading securities, net
10,811

 
9,945

Sales (purchases) of investments by consolidated sponsored investment products, net
97,569

 
(96,222
)
(Purchases) sales of securities sold short by consolidated sponsored investment products, net
(4,648
)
 
3,534

Purchases of investments by consolidated investment product, net
(154,139
)
 
(29,085
)
Deferred taxes, net
9,032

 
655

Changes in operating assets and liabilities:
 
 
 
Cash pledged or on deposit of consolidated sponsored investment products
9,644

 
(6,912
)
Accounts receivable, net and other assets
(297
)
 
4,101

Other assets of consolidated sponsored investment products
(478
)
 
(1,649
)
Other assets of consolidated investment product
(415
)
 
43

Accrued compensation and benefits, accounts payable, accrued liabilities and other liabilities
(12,893
)
 
(8,102
)
Liabilities of consolidated sponsored investment products
426

 
1,499

Liabilities of consolidated investment product, net
4,027

 
(20
)
Net cash used in operating activities
(1,130
)
 
(56,951
)
Cash Flows from Investing Activities:
 
 
 
Capital expenditures
(1,461
)
 
(3,723
)
Proceeds from sale of equity method investment
8,621

 
—

Change in cash and cash equivalents of consolidated sponsored investment products due to deconsolidation
103

 
—

Equity method investment contributions
(2,471
)
 
(1,617
)
Cash acquired in business combination
—

 
89

Purchases of available-for-sale securities
(183
)
 
(168
)
Net cash provided by (used in) investing activities
4,609

 
(5,419
)
Cash Flows from Financing Activities:
 
 
 
Borrowings of proceeds from short sales by consolidated sponsored investment products
—

 
831

Payments on borrowings by consolidated sponsored investment products
(3,557
)
 
(164
)
Repayment of debt of consolidated investment product
(152,597
)
 
—

Borrowings of debt of consolidated investment product
—

 
9,140

Proceeds from issuance of notes payable by consolidated investment product
316,280

 
—

Dividends paid
(11,119
)
 
(12,146
)
Repurchases of common shares
(72,216
)
 
(45,000
)
Proceeds from exercise of stock options
428

 
70

Taxes paid related to net share settlement of restricted stock units
(1,518
)
 
(5,080
)
Excess tax benefits from stock-based compensation
192

 
1,515

Payment of deferred financing costs
(1,442
)
 
—

Contributions of noncontrolling interests, net
3,959

 
38,747

Net cash provided by (used in) financing activities
78,410

 
(12,087
)
Net increase (decrease) in cash and cash equivalents
81,889

 
(74,457
)
Cash and cash equivalents, beginning of period
97,384

 
203,304

Cash and Cash Equivalents, End of Period
$
179,273

 
$
128,847

Non-Cash Investing Activities:
 
 
 
Change in accrual for capital expenditures
$
140

 
$
(313
)
Investment in acquired business
—

 
4,800

Non-Cash Financing Activities:
 
 
 
Decrease to noncontrolling interest due to deconsolidation of consolidated sponsored investment products
$
(48,292
)
 
$
(8,640
)
Dividends payable
$
3,424

 
$
4,258

The accompanying notes are an integral part of these condensed consolidated financial statements.

5
Table of Contents

Virtus Investment Partners, Inc.
Condensed Consolidated Statements of Changes in Equity
(Unaudited)
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury Stock
 
Total
Attributed To
Stockholders
 
Non-
controlling
Interests
 
Total
Equity
 
Redeemable
Non-
controlling
Interests
($ in thousands except per share data)
Shares
 
Par Value
 
Shares
 
Amount
 
Balances at December 31, 2014
8,975,833

 
$
96

 
$
1,148,908

 
$
(507,521
)
 
$
(242
)
 
575,441

 
$
(77,699
)
 
$
563,542

 
$
(190
)
 
$
563,352

 
$
23,071

Net income (loss)
—

 
—

 
—

 
28,470

 
—

 
—

 
—

 
28,470

 
(106
)
 
28,364

 
(3,330
)
Net unrealized loss on securities available-for-sale
—

 
—

 
—

 
—

 
(389
)
 
—

 
—

 
(389
)
 
—

 
(389
)
 
—

Foreign currency translation adjustments
—

 
—

 
—

 
—

 
(271
)
 
—

 
—

 
(271
)
 
—

 
(271
)
 
—

Activity of noncontrolling interests, net
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
30,154

Cash dividends declared ($1.35 per common share)
—

 
—

 
(12,136
)
 
—

 
—

 
—

 
—

 
(12,136
)
 
 
 
(12,136
)
 
—

Repurchases of common shares
(368,468
)
 
—

 
—

 
—

 
—

 
368,468

 
(45,000
)
 
(45,000
)
 
—

 
(45,000
)
 
—

Issuance of common shares related to employee stock transactions
60,301

 
—

 
796

 
—

 
—

 
—

 
—

 
796

 
—

 
796

 
—

Taxes paid on stock-based compensation
—

 
—

 
(5,080
)
 
—

 
—

 
—

 
—

 
(5,080
)
 
—

 
(5,080
)
 
—

Stock-based compensation
—

 
—

 
8,656

 
—

 
—

 
—

 
—

 
8,656

 
—

 
8,656

 
—

Excess tax benefits from stock-based compensation
—

 
—

 
1,038

 
—

 
—

 
—

 
—

 
1,038

 
—

 
1,038

 
—

Balances at September 30, 2015
8,667,666

 
$
96

 
$
1,142,182

 
$
(479,051
)
 
$
(902
)
 
943,909

 
$
(122,699
)
 
$
539,626

 
$
(296
)
 
$
539,330

 
$
49,895

Balances at December 31, 2015
8,398,944

 
$
96

 
$
1,140,875

 
$
(472,614
)
 
$
(1,034
)
 
1,214,144

 
$
(157,699
)
 
$
509,624

 
$
(167
)
 
$
509,457

 
$
73,864

Net income
—

 
—

 
—

 
36,076

 
—

 
—

 
—

 
36,076

 
—

 
36,076

 
770

Net unrealized gain on securities available-for-sale
—

 
—

 
—

 
—

 
230

 
—

 
—

 
230

 
—

 
230

 
—

Foreign currency translation adjustments
—

 
—

 
—

 
—

 
569

 
—

 
—

 
569

 
—

 
569

 
—

Activity of noncontrolling interests, net
—

 
—

 
—

 
(167
)
 
—

 
—

 
—

 
(167
)
 
167

 
—

 
(44,333
)
Cash dividends declared ($1.35 per common share)
—

 
—

 
(11,003
)
 
—

 
—

 
—

 
—

 
(11,003
)
 
—

 
(11,003
)
 
—

Repurchases of common shares
(844,671
)
 
(6
)
 
(47,207
)
 
—

 
—

 
288,155

 
(25,003
)
 
(72,216
)
 
—

 
(72,216
)
 
—

Issuance of common shares related to employee stock transactions
55,480

 
1

 
991

 
—

 
—

 
—

 
—

 
992

 
—

 
992

 
—

Taxes paid on stock-based compensation
—

 
—

 
(1,518
)
 
—

 
—

 
—

 
—

 
(1,518
)
 
 
 
(1,518
)
 
—

Stock-based compensation
—

 
—

 
8,815

 
—

 
—

 
—

 
—

 
8,815

 
—

 
8,815

 
—

Tax deficiencies from stock-based compensation
—

 
—

 
(1,603
)
 
—

 
—

 
—

 
—

 
(1,603
)
 
—

 
(1,603
)
 
—

Balances at September 30, 2016
7,609,753

 
$
91

 
$
1,089,350

 
$
(436,705
)
 
$
(235
)
 
1,502,299

 
$
(182,702
)
 
$
469,799

 
$
—

 
$
469,799

 
$
30,301

The accompanying notes are an integral part of these condensed consolidated financial statements.

6
Table of Contents

Virtus Investment Partners, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization and Business
Virtus Investment Partners, Inc. (the “Company,” “we,” “us,” “our” or “Virtus”), a Delaware corporation, operates in the investment management industry through its subsidiaries.
The Company provides investment management and related services to individuals and institutions throughout the United States of America. The Company’s retail investment management services are provided to individuals through products consisting of open-end mutual funds, closed-end funds, exchange traded funds (“ETFs”), variable insurance funds, Undertaking for Collective Investment in Transferable Securities (“UCITS”) and separately managed accounts. Institutional investment management services are provided to corporations, multiemployer retirement funds, employee retirement systems, foundations, endowments, structured products and as a subadviser to unaffiliated mutual funds.

2. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, these financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Company’s financial condition and results of operations. Operating results for the nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

The condensed consolidated financial statements include the accounts of the Company, its subsidiaries and investment products that are consolidated. Voting interest entities ("VOEs") are consolidated when the Company is considered to have a controlling financial interest which is typically present when the Company owns a majority of the voting interest in an entity or otherwise has the power to govern the financial and operating policies of the entity.

The Company evaluates any variable interest entities ("VIEs") in which the Company has a variable interest for consolidation. A VIE is an entity in which either (a) the equity investment at risk is not sufficient to permit the entity to finance its own activities without additional financial support or (b) where as a group, the holders of the equity investment at risk do not possess: (i) the power through voting or similar rights to direct the activities that most significantly impact the entity’s economic performance; (ii) the obligation to absorb expected losses or the right to receive expected residual returns of the entity; or (iii) proportionate voting and economic interests and where substantially all of the entity’s activities either involve or are conducted on behalf of an investor with disproportionately fewer voting rights. If an entity has any of these characteristics, it is considered a VIE and is required to be consolidated by its primary beneficiary. The primary beneficiary is the entity that has both the power to direct the activities that most significantly impact the VIE’s economic performance and has the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE.

The Company has two types of investment products that are consolidated: consolidated sponsored investment products and the consolidated investment product. Consolidated sponsored investment products are investment products in which the Company generally holds a majority of the beneficial interests. The consolidated investment product is a collateralized loan obligation ("CLO") in which the Company has less than the majority of the beneficial interests. The secured notes of the CLO have contractual recourse only to the related assets of the CLO and are classified as financial liabilities. The consolidation and deconsolidation of these investment products have no impact on net income attributable to stockholders. The Company’s risk with respect to these investments is limited to its beneficial interests in these products. The Company has no right to the benefits from, and does not bear the risks associated with, these investment products beyond the Company’s investments in, and fees generated from, these products. The Company does not consider cash and investments held by the investment products it consolidates to be assets of the Company other than its direct investment in these products. See Note 14 for additional information related to the consolidation of sponsored investment products and the investment product. Intercompany accounts and transactions have been eliminated as a result of consolidation.
These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended

7
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December 31, 2015 filed with the Securities and Exchange Commission. The Company’s significant accounting policies, which have been consistently applied, are summarized in its 2015 Annual Report on Form 10-K.

New Accounting Standards Implemented
The Company adopted Accounting Standards Update ("ASU") No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis ("ASU 2015-02") on January 1, 2016. This standard modifies existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain entities. Certain unconsolidated entities that had been classified as VOEs under previous consolidation guidance are now classified as VIEs under ASU 2015-02. As such, disclosure for VIEs is included in Note 14 to the condensed consolidated financial statements. Adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.
The Company adopted ASU No. 2014-13, Measuring the Financial Assets and Financial Liabilities of a Consolidated Collateralized Financing Entity (“CFE”) ("ASU 2014-13") on January 1, 2016. This new standard requires reporting entities to use the more observable of the fair value of the financial assets or the financial liabilities to measure the financial assets and the financial liabilities of a CFE when a CFE is initially consolidated. It permits entities to make an accounting policy election to apply this same measurement approach after initial consolidation or to apply other GAAP to account for the consolidated CFE’s financial assets and financial liabilities. It also prohibits all entities from electing to use the fair value option in ASC 825, Financial Instruments, to measure either the financial assets or financial liabilities of a consolidated CFE that is within the scope of this issue. The Company has elected the measurement alternative for its consolidated investment product. The Company's subsequent earnings from the consolidated investment product will reflect changes in value of the Company's own economic interest in the consolidated investment product. Disclosures for the Company's CFE are included in Note 14 to the condensed consolidated financial statements. Adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements.
The Company adopted ASU No. 2015-16 “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” ("ASU 2015-16") on January 1, 2016. ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 requires that the acquirer record, in the financial statements of the period in which adjustments to provisional amounts are determined, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. Adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements.
The Company adopted ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-3") on January 1, 2016, which changes the presentation of debt issuance costs in the balance sheet. This new standard requires that debt issuance costs be presented as a deduction from the carrying amount of the related debt rather than being presented as an asset. Amortization of debt issuance costs will continue to be reported as interest expense. In August 2015, the FASB issued ASU 2015-15 to amend ASU 2015-03 to address line-of-credit agreements. ASU 2015-15 allows entities to present debt issuance costs related to line-of-credit agreements as an asset and amortize deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings. Adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements.

New Accounting Standards Not Yet Implemented

In August 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments which clarifies the treatment of several cash flow categories. In addition, ASU 2016-15 clarifies that when cash receipts and cash payments have aspects of more than one class of cash flows and cannot be separated, classification will depend on the predominant source or use. This update is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.    

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting (ASU 2016-09"). This standard makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholdings on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. The standard is effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.


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In March 2016, the FASB issued ASU 2016-08, Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net), which amends the principal-versus-agent implementation guidance in ASU 2014-09 Revenue from Contracts with Customers; as further discussed below. The new guidance will impact whether an entity reports revenue on a gross or net basis. The Company is currently evaluating the impact of adopting ASU 2016-08, which is effective for the Company in conjunction with the adoption of ASU 2014-09.

In March 2016, the FASB issued ASU No. 2016-07, "Investments—Equity Method and Joint Ventures (Topic 232): Simplifying the Transition to the Equity Method of Accounting." This standard eliminates the requirement that when an existing cost method investment qualifies for use of the equity method, an investor must restate its historical financial statements, as if the equity method had been used during all previous periods. Under the new guidance, at the point an investment qualifies for the equity method, any unrealized gain or loss in accumulated other comprehensive income/(loss) will be recognized through earnings. The standard is effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). The standard replaces current codification Topic 840 with updated guidance on accounting for leases and requires a lessee to recognize assets and liabilities arising from an operating lease on the balance sheet, whereas previous GAAP rules did not require lease assets and liabilities to be recognized for most leases. Furthermore, companies are permitted to make an accounting policy election to not recognize lease assets and liabilities for leases with a term of 12 months or less. For both finance leases and operating leases, the lease liability should be initially measured at the present value of the lease payments. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee will not significantly change under this new guidance. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods therein. Early adoption is permitted. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-1"), which requires all equity investments (other than those accounted for under the equity method) to be measured at fair value with changes in the fair value recognized through net income. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017 and interim periods therein. Early adoption is not permitted. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 was originally effective for fiscal years and interim periods within those years beginning after December 15, 2016. In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-09 by one year for periods beginning after December 15, 2017. Early adoption is permitted as of the original effective date and requires either a retrospective or a modified retrospective approach to adoption. As deferred, ASU 2014-09 is effective for the first interim period within annual reporting periods beginning after December 15, 2017 with early adoption permitted. The Company is currently evaluating the potential impact of this standard on its consolidated financial statements.


3. Intangible Assets, Net

Intangible assets, net are summarized as follows:
 
 
September 30, 2016
 
December 31, 2015
($ in thousands)
 
 
 
Definite-lived intangible assets:
 
 
 
Investment contracts
$
158,747

 
$
158,747

Accumulated amortization
(154,533
)
 
(152,676
)
Definite-lived intangible assets, net
4,214

 
6,071

Indefinite-lived intangible assets
34,816

 
34,816

Total intangible assets, net
$
39,030

 
$
40,887



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Activity in intangible assets, net is as follows:
 
 
Nine Months Ended September 30,
 
2016
 
2015
($ in thousands)
 
 
 
Intangible assets, net
 
 
 
Balance, beginning of period
$
40,887

 
$
41,783

Additions
—

 
2,400

Amortization
(1,857
)
 
(2,511
)
Balance, end of period
$
39,030

 
$
41,672

4. Investments
Investments consist primarily of investments in the Company's sponsored mutual funds. The Company’s investments, excluding the investments of consolidated sponsored investment products and the investments of the consolidated investment product, which are separately discussed in Note 14, at September 30, 2016 and December 31, 2015 were as follows:
 
September 30, 2016
 
December 31, 2015
($ in thousands)
 
 
 
Marketable securities
$
81,486

 
$
41,496

Equity method investments
7,101

 
9,007

Nonqualified retirement plan assets
5,662

 
5,310

Other investments
925

 
925

Total investments
$
95,174

 
$
56,738

Marketable Securities
The Company’s marketable securities consist of both trading and available-for-sale securities. The composition of the Company’s marketable securities is summarized as follows:
September 30, 2016
 
 
Cost
 
Unrealized
Loss
 
Unrealized
Gain
 
Fair
Value
($ in thousands)
 
 
 
 
 
 
 
Trading:
 
 
 
 
 
 
 
Sponsored funds
$
68,284

 
$
(2,819
)
 
$
1,404

 
$
66,869

Equity securities
10,591

 
—

 
476

 
11,067

Available-for-sale:
 
 
 
 
 
 
 
Sponsored closed-end funds
3,538

 
(215
)
 
227

 
3,550

Total marketable securities
$
82,413

 
$
(3,034
)
 
$
2,107

 
$
81,486


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December 31, 2015
 
 
Cost
 
Unrealized
Loss
 
Unrealized
Gain
 
Fair
Value
($ in thousands)
 
 
 
 
 
 
 
Trading:
 
 
 
 
 
 
 
Sponsored funds
$
31,167

 
$
(2,134
)
 
$
298

 
$
29,331

Equity securities
9,434

 
(386
)
 
120

 
9,168

Available-for-sale:
 
 
 
 
 
 
 
Sponsored closed-end funds
3,355

 
(365
)
 
7

 
2,997

Total marketable securities
$
43,956

 
$
(2,885
)
 
$
425

 
$
41,496


For the three months ended September 30, 2016, the Company recognized a net realized gain of $0.1 million on trading securities and for the nine months ended September 30, 2016, the Company recognized a net realized loss of $0.3 million on trading securities. For the three and nine months ended September 30, 2015, the Company recognized net realized losses of $0.5 million and $0.4 million, respectively, on trading securities.
5. Fair Value Measurements
The Company’s assets and liabilities measured at fair value on a recurring basis, excluding the assets and liabilities of consolidated sponsored investment products and the consolidated investment product, which are separately discussed in Note 14, as of September 30, 2016 and December 31, 2015 by fair value hierarchy level were as follows:
September 30, 2016
 
 
Level 1
 
Level 2
 
Level 3
 
Total
($ in thousands)
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash equivalents
$
138,303

 
$
—

 
$
—

 
$
138,303

Marketable securities trading:
 
 
 
 
 
 
 
Sponsored funds
66,869

 
—

 
—

 
66,869

Equity securities
11,067

 
—

 
—

 
11,067

Marketable securities available-for-sale:
 
 
 
 
 
 
 
Sponsored closed-end funds
3,550

 
—

 
—

 
3,550

Other investments:
 
 
 
 
 
 
 
Nonqualified retirement plan assets
5,662

 
—

 
—

 
5,662

Total assets measured at fair value
$
225,451

 
$
—

 
$
—

 
$
225,451



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December 31, 2015
 
 
Level 1
 
Level 2
 
Level 3
 
Total
($ in thousands)
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash equivalents
$
54,772

 
$
—

 
$
—

 
$
54,772

Marketable securities trading:
 
 
 
 
 
 
 
Sponsored funds
29,331

 
—

 
—

 
29,331

Equity securities
9,168

 
—

 
—

 
9,168

Marketable securities available-for-sale:
 
 
 
 
 
 
 
Sponsored closed-end funds
2,997

 
—

 
—

 
2,997

Other investments
 
 
 
 
 
 
 
Nonqualified retirement plan assets
5,310

 
—

 
—

 
5,310

Total assets measured at fair value
$
101,578

 
$
—

 
$
—

 
$
101,578

The following is a discussion of the valuation methodologies used for the Company’s assets measured at fair value:
Cash equivalents represent investments in money market funds. Cash investments in actively traded money market funds are valued using published net asset values and are classified as Level 1.
Sponsored funds represent investments in open-end mutual funds, variable insurance funds and closed-end funds for which the Company acts as the investment manager. The fair value of open-end mutual funds and variable insurance funds is determined based on their published net asset values and are categorized as Level 1. The fair value of closed-end funds is determined based on the official closing price on the exchange on which they are traded and are categorized as Level 1.
Equity securities include securities traded on active markets and are valued at the official closing price (typically last sale or bid) on the exchange on which the securities are primarily traded and are categorized as Level 1.
Nonqualified retirement plan assets represent mutual funds within a nonqualified retirement plan whose fair value is determined based on their published net asset value and are categorized as Level 1.
Cash, accounts receivable, accounts payable and accrued liabilities equal or approximate fair value based on the short-term nature of these instruments.
Transfers into and out of levels are reflected when (1) significant inputs used for the fair value measurement, including market inputs or performance attributes, become observable or unobservable, (2) when the Company determines it has the ability, or no longer has the ability, to redeem, in the near term, certain investments that the Company values using a net asset value, or (3) if the book value no longer represents fair value. There were no transfers between levels during the three and nine months ended September 30, 2016 and 2015.
6. Equity Transactions

During the nine months ended September 30, 2016 and 2015, the Company repurchased 844,671 and 368,468 common shares, respectively, at a weighted average price of $83.94 and $122.09 per share, respectively, for a total cost, including fees and expenses, of approximately $72.2 million and $45.0 million, respectively. The 844,671 shares repurchased during the nine months ended September 30, 2016 included 556,516 shares repurchased pursuant to a tender offer that was completed in the second quarter of 2016. Shares repurchased under the tender offer were at a price of $82.50 per share for an aggregate cost of $47.2 million, or $84.81 per share including fees and expenses and were retired by the Company.

Excluding share repurchased under the tender offer described above, the Company has repurchased a total of 1,502,299 shares of common stock at a weighted average price of $121.58 per share plus transaction costs for a total cost of $182.7 million under its share repurchase program. At September 30, 2016, there were 1,197,701 shares of common stock available to repurchase under the Company’s current share repurchase program.


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On October 27, 2016, the Company entered into and completed a Stock Purchase Agreement with Bank of Montreal Holdings Inc. (“BMO”) to purchase 1,727,746 shares of the Company’s common stock at a price of $93.50 per share for a total purchase price of $161.5 million. To effect this transaction, the Company used $131.5 million of cash and cash equivalents and borrowed $30.0 million on its Credit Facility. The purchase represented all of the shares held by BMO and reflected approximately 22.7% of the Company’s outstanding common stock at September 30, 2016.
In connection with the purchase, the Board of Directors authorized an additional 730,045 shares to cover the incremental shares purchased beyond the remaining 1,197,701 shares available for repurchase under the Company's previously approved share repurchase program. After the completion of this transaction there were 200,000 shares remaining for future share repurchases.
The Board of Directors declared cash dividends of $0.45 per share in each of the first three quarters of 2016 and 2015. Total dividends declared were $11.0 million and $12.1 million for the nine months ended September 30, 2016 and 2015, respectively. Dividends declared in the third quarter of 2016 will be paid on November 11, 2016 to all shareholders of record on October 31, 2016.
7. Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) by component for the nine months ended September 30, 2016 and 2015 were as follows:
 
 
Unrealized 
Gains
and (Losses)
on Securities
Available-for-
Sale
 
Foreign 
Currency
Translation
Adjustments
($ in thousands)
 
 
 
Balance December 31, 2015
$
(465
)
 
$
(569
)
Unrealized net gains on securities available-for-sale, net of tax of ($140)
230

 
—

Foreign currency translation adjustments, net of tax of ($348)
—

 
569

Amounts reclassified from accumulated other comprehensive income
—

 
—

Net current-period other comprehensive income
230

 
569

Balance September 30, 2016
$
(235
)
 
$
—

 
 
 
 
 
Unrealized
Gains
and (Losses)
on Securities
Available-for-
Sale
 
Foreign 
Currency
Translation
Adjustments
($ in thousands)
 
 
 
Balance December 31, 2014
$
(107
)
 
$
(135
)
Unrealized net losses on securities available-for-sale, net of tax of $26
(389
)
 
—

Foreign currency translation adjustments, net of tax of $167
—

 
(271
)
Amounts reclassified from accumulated other comprehensive income
—

 
—

Net current-period other comprehensive loss
(389
)
 
(271
)
Balance September 30, 2015
$
(496
)
 
$
(406
)


8. Stock-based Compensation

The Company has an Amended and Restated Omnibus Incentive and Equity Plan (the “Plan”) under which officers, employees and directors may be granted equity-based awards, including restricted stock units (“RSUs”), stock options and unrestricted shares of common stock. On May 25, 2016, the shareholders of the Company approved an amendment to the Plan which increased the number of shares of common stock available under the Plan by 600,000, bringing the total number of

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authorized shares to 2,400,000. At September 30, 2016, 768,981 shares of common stock remained available for issuance of the 2,400,000 shares that were reserved for issuance under the Plan.

Each RSU entitles the holder to one share of common stock when the restriction expires. RSUs generally have a term of one to three years and may be time-vested or performance-contingent. The fair value of each RSU is estimated using the intrinsic value method, which is based on the fair market value price on the date of grant unless it contains a performance metric that is considered a market condition. RSUs that contain a market condition are valued using a simulation valuation model. Shares that are issued upon exercise of stock options and vesting of RSUs are newly issued shares from the Plan and are not issued from treasury stock. Stock options generally cliff vest after three years and have a contractual life of 10 years. Stock options are granted with an exercise price equal to the fair market value of the shares at the date of grant.

    
Restricted Stock Units

RSU activity for the nine months ended September 30, 2016 is summarized as follows:
 
 
Number
of Shares
 
Weighted
Average
Grant Date
Fair Value
Outstanding at December 31, 2015
191,617

 
$
156.66

Granted
155,361

 
$
75.72

Forfeited
(8,333
)
 
$
110.81

Settled
(55,233
)
 
$
167.34

Outstanding at September 30, 2016
283,412

 
$
111.56

For the nine months ended September 30, 2016 and 2015, a total of 19,457 and 37,488 RSUs, respectively, were withheld by the Company as a result of net share settlements to settle minimum employee tax withholding obligations. The Company paid $1.5 million and $5.1 million for the nine months ended September 30, 2016 and 2015, respectively, in minimum employee tax withholding obligations related to RSUs withheld. These net share settlements had the effect of share repurchases by the Company as they reduced the number of shares that would have been otherwise issued as a result of the vesting.
During the nine months ended September 30, 2016, the Company granted 33,244 RSUs which contain performance based metrics in addition to a service condition. The performance metrics are based on the Company’s growth in operating income, as adjusted, relative to peers, over a one-year period and total shareholder return (“TSR”) relative to peers over a three-year period. For the nine months ended September 30, 2016, total stock-based compensation expense included $0.2 million for these performance contingent RSUs.
The Company recognized total stock compensation expense of $2.4 million and $9.1 million, respectively, for the three and nine months ended September 30, 2016 and $2.7 million and $9.2 million, respectively, for the three and nine months ended September 30, 2015. As of September 30, 2016, unamortized stock-based compensation expense for unvested RSUs was $14.8 million, with a weighted-average remaining amortization period of 1.8 years.

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Stock Options
Stock option activity for the nine months ended September 30, 2016 is summarized as follows:
 
 
Number
of Shares
 
Weighted
Average
Exercise Price
Outstanding at December 31, 2015
156,636

 
$
18.78

Granted
—

 
$
—

Exercised
(12,729
)
 
$
33.56

Forfeited
—

 
$
—

Outstanding at September 30, 2016
143,907

 
$
17.47


9. Restructuring and Severance

During the three months ended September 30, 2016, the Company incurred severance costs of $1.9 million associated with select staff reductions. During the nine months ended September 30, 2016, the Company incurred $3.9 million in severance costs related to staff reductions, primarily in business support areas and $0.4 million in costs related to future lease obligations and leasehold improvement write-offs for vacated office space. Total unpaid severance and related charges as of September 30, 2016 was $3.6 million.

10. Earnings per Share
Basic earnings per share (“EPS”) excludes dilution for potential common stock issuances and is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the calculation of diluted EPS, the basic weighted-average number of shares is increased by the dilutive effect of RSUs and common stock options using the treasury stock method.
The computation of basic and diluted EPS is as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
($ in thousands, except per share amounts)
 
 
 
 
 
 
 
Net Income (Loss)
$
16,276

 
$
(3,703
)
 
$
36,846

 
$
25,034

Noncontrolling interests
(651
)
 
3,054

 
(770
)
 
3,436

Net Income (Loss) Attributable to Common Stockholders
$
15,625

 
$
(649
)
 
$
36,076

 
$
28,470

Shares (in thousands):

 

 
 
 
 
Basic: Weighted-average number of shares outstanding
7,676

 
8,775

 
8,062

 
8,876

Plus: Incremental shares from assumed conversion of dilutive instruments
178

 
—

 
161

 
163

Diluted: Weighted-average number of shares outstanding
7,854

 
8,775

 
8,223

 
9,039

Earnings (Loss) per Share—Basic
$
2.04

 
$
(0.07
)
 
$
4.47

 
$
3.21

Earnings (Loss) per Share—Diluted
$
1.99

 
$
(0.07
)
 
$
4.39

 
$
3.15

For the three and nine months ended September 30, 2016, there were 11,502 and 10,630 instruments, respectively, excluded from the above computations of weighted-average shares for diluted EPS, and for the three and nine months ended September 30, 2015, there were 323,570 and 2,028 instruments, respectively, excluded from the above computations of weighted-average shares for diluted EPS, because the effect would be anti-dilutive.

11. Income Taxes

In calculating the provision for income taxes, the Company uses an estimate of the annual effective tax rate based upon the facts and circumstances at each interim period. On a quarterly basis, the estimated annual effective tax rate is adjusted,

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as appropriate, based upon changes in facts and circumstances, if any, as compared to those forecasted at the beginning of the fiscal year and each interim period thereafter.

The provision for income taxes reflected U.S. federal, state and local taxes at an estimated effective tax rate of 35.8% and 53.1% for the nine months ended September 30, 2016 and 2015, respectively. The decrease in the estimated effective tax rate was primarily due to changes in the valuation allowances related to market adjustments on the Company’s marketable securities.

12. Credit Facility

On September 30, 2016, the Company entered into a new senior unsecured revolving credit facility (“Credit Facility”) replacing the previous senior secured revolving credit facility. The Credit Facility has a five-year term and provides borrowing capacity of up to $150.0 million, with an increase provision conditioned on approval by the lending group, to a borrowing capacity of $200.0 million. In addition, the Credit Facility has a $7.5 million sub-limit for the issuance of standby letters of credit. At September 30, 2016 and December 31, 2015, no amounts were outstanding under the Credit Facility. As of September 30, 2016, the Company had the capacity to draw on the full amount of the Credit Facility. Amounts outstanding under the Credit Facility bear interest at an annual rate equal to, at the Company’s option, either LIBOR for interest periods of one, two, three or six months or an alternate base rate (as defined in the Credit Facility agreement), plus, in each case, an applicable margin, that ranges from 0.75% to 2.25%. Under the terms of the Credit Facility, the Company is also required to pay certain fees, including an annual commitment fee that ranges from 0.30% to 0.45% on undrawn amounts and a letter of credit participation fee at an annual rate equal to the applicable margin as well as any applicable fronting fees, each of which is payable quarterly in arrears.

The credit agreement governing the Credit Facility contains customary restrictive covenants on the Company and its subsidiaries. Restrictive covenants in the credit agreement include, but are not limited to: prohibitions on creating, incurring or assuming any liens; entering into merger arrangements; selling, leasing, transferring or otherwise disposing of assets; making a material change in the nature of the business; entering into transactions with affiliates; and incurring indebtedness through the subsidiaries. Many of these restrictions are subject to certain minimum thresholds and exceptions. Financial covenants under the credit agreement include: (i) the quarterly maintenance of a leverage ratio (total debt to adjusted EBITDA), as defined in the credit agreement, of not greater than 3.00:1.00, and (ii) a minimum interest coverage ratio (EBITDA to interest expense) for the four consecutive fiscal quarters ended before the date of determination) of not less than 4.00:1.00.

The credit agreement governing the Credit Facility also contains customary provisions regarding events of default which could result in an acceleration or increase in amounts due, including (subject to certain materiality thresholds and grace periods) payment default, failure to comply with covenants, material inaccuracy of a representation or warranty, bankruptcy or insolvency proceedings, change of control, certain judgments, ERISA matters, cross-default to other debt agreements, governmental action prohibiting or restricting the company or its subsidiaries in a manner that has a material adverse effect and failure of certain guaranty obligations. The lenders (and their respective affiliates) may have provided, and may in the future provide, investment banking, cash management, underwriting, lending, commercial banking, leasing, foreign exchange, trust or other advisory services to the company and its subsidiaries and affiliates. These parties may have received, and may in the future receive, customary compensation for these services.


13. Commitments and Contingencies
Legal Matters

The Company is regularly involved in litigation and arbitration as well as examinations, inquiries and investigations by various regulatory bodies, including the Securities and Exchange Commission ("SEC"), involving its compliance with, among other things, securities laws, client investment guidelines, laws governing the activities of broker-dealers and other laws and regulations affecting its products and other activities. Legal and regulatory matters of this nature involve or may involve but are not limited to the Company’s activities as an employer, issuer of securities, investor, investment adviser, broker-dealer or taxpayer. In addition, in the normal course of business, the Company discusses matters with its regulators raised during regulatory examinations or is otherwise subject to their inquiry. These matters could result in censures, fines, penalties or other sanctions.

The Company accrues for a liability when it is both probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In addition, in the event the Company determines that a loss is not

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probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosures related to such matter as appropriate and in compliance with ASC 450, Loss Contingencies. The disclosures, accruals or estimates, if any, resulting from the foregoing analysis are reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. Based on information currently available, available insurance coverage and established reserves, the Company believes that the outcomes of its legal and regulatory proceedings are not likely, either individually or in the aggregate, to have a material adverse effect on the Company’s results of operations, cash flows or its consolidated financial condition. However, in the event of unexpected subsequent developments and given the inherent unpredictability of these legal and regulatory matters, the Company can provide no assurance that its assessment of any claim, dispute, regulatory examination or investigation or other legal matter will reflect the ultimate outcome and an adverse outcome in certain matters could, from time to time, have a material adverse effect on the Company’s results of operations or cash flows in particular quarterly or annual periods.

In re Virtus Investment Partners, Inc. Securities Litigation; formerly Tom Cummins v. Virtus Investment Partners Inc. et al

On February 20, 2015, a putative class action complaint alleging violations of certain provisions of the federal securities laws was filed by an individual shareholder against the Company and certain of the Company’s current officers (the “defendants”) in the United States District Court for the Southern District of New York (the "Court"). On April 21, 2015, three plaintiffs, including the original plaintiff, filed motions to be appointed lead plaintiff and, on June 9, 2015, the Court appointed Arkansas Teachers Retirement System lead plaintiff. On August 21, 2015, plaintiff filed a Consolidated Class Action Complaint (the “Consolidated Complaint”) amending the originally filed complaint, which was purportedly filed on behalf of all purchasers of the Company’s common stock between January 25, 2013 and May 11, 2015 (the “Class Period”). The Consolidated Complaint alleges that, during the Class Period, the defendants disseminated materially false and misleading statements and concealed material adverse facts relating to certain funds formerly subadvised by F-Squared Investments Inc. ("F-Squared"). The Consolidated Complaint alleges claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 10b-5. The plaintiff seeks to recover unspecified damages. A motion to dismiss the Consolidated Complaint was filed on behalf of the Company and the other defendants on October 21, 2015. On July 1, 2016, the Court entered an opinion and order granting in part, and denying in part, the motion to dismiss, narrowing Plaintiff's claims under Sections 10(b) and 20(a) of the Exchange Act and dismissing one of the defendants from the suit. The remaining defendants' Answer to the Consolidated Complaint was filed on August 5, 2016. The Company believes that the suit is without merit and intends to defend it vigorously. The Company believes that there is not a material loss that is probable and reasonably estimable related to this claim.

Mark Youngers v. Virtus Investment Partners, Inc. et al

On May 8, 2015, a putative class action complaint alleging violations of certain provisions of the federal securities laws was filed in the United States District Court for the Central District of California (the "District Court") by an individual who alleges he is a former shareholder of one of the Virtus mutual funds formerly subadvised by F-Squared and formerly known as the AlphaSector Funds. The complaint alleges claims against the Company, certain of the Company’s officers and affiliates, and certain other parties (the “defendants”). The complaint was purportedly filed on behalf of purchasers of the AlphaSector Funds between May 8, 2010 and December 22, 2014, inclusive (the “Class Period”). The complaint alleges that, during the Class Period, the defendants disseminated materially false and misleading statements and concealed or omitted material facts necessary to make the statements made not misleading. On June 7, 2015, a group of three individuals, including the original plaintiff, filed a motion to be appointed lead plaintiff and on July 27, 2015, the District Court appointed movants as lead plaintiff. On October 1, 2015, the plaintiffs filed a First Amended Class Action Complaint which, among other things, added a derivative claim for breach of fiduciary duty on behalf of Virtus Opportunities Trust. On October 19, 2015, the District Court entered an order transferring the action to the Southern District of New York (the "Court"). On January 4, 2016, the Plaintiffs filed a Second Amended Complaint. A motion to dismiss was filed on behalf of the Company and affiliated defendants on February 1, 2016. On July 1, 2016, the Court entered an opinion and order granting in part, and denying in part, the motion to dismiss. The Court dismissed four causes of action entirely and a fifth cause of action with respect to a portion of the Class Period. The Court also dismissed all claims against ten defendants named in the Complaint. The Court held that the Plaintiffs may pursue certain securities claims under Sections 10(b) and 20(a) of the Exchange Act and Section 12 of the Securities Act of 1933. The Answer to the Second Amended Complaint was filed on August 5, 2016. A Stipulation of Voluntary Dismissal of the claim under Section 12 of the Securities Act was filed on September 15, 2016. The defendants filed a motion to certify an interlocutory appeal of the July 1, 2016 order to the Court of Appeals for the Second Circuit on August 26, 2016. Oral argument on the motion was held on October 7, 2016. The Company believes that the suit has no basis in law or fact and intends to defend it vigorously. The Company believes that there is not a material loss that is probable and reasonably estimable related to this claim.

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14. Consolidation
Consolidated Sponsored Investment Products

As of September 30, 2016 and December 31, 2015, the Company consolidated 18 and 12 sponsored investment products, respectively. During the nine months ended September 30, 2016, the Company consolidated 11 additional sponsored investment products and deconsolidated five sponsored investment products in which it no longer held a majority voting interest.

Consolidated sponsored investment products that are voting interest entities ("VOEs") are funds in which the Company has a controlling financial interest. Consolidated sponsored investment products are typically consolidated when the Company makes an initial investment in a newly launched fund as the Company typically owns a majority of the voting interest and are deconsolidated when the Company redeems its investment or its voting interests decrease to a minority percentage.
The Company has one consolidated sponsored investment product that is a global fund that is considered a variable interest entity ("VIE") for which the Company is the primary beneficiary. The Company determined that it is the primary beneficiary of the VIE as the Company has the power to direct the activities that most significantly impact the economic performance of the entity and has the obligation to absorb losses, or the rights to receive benefits from, the VIE that could potentially be significant to the VIE. As of September 30, 2016, the Company consolidated one sponsored investment product that was a VIE.
The following table presents the balances of the consolidated sponsored investment products that, after intercompany eliminations, were reflected in the Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015:
 
As of
 
September 30, 2016
 
December 31, 2015
 
VOEs
 
VIE
 
VOEs
 
VIE
($ in thousands)
 
 
 
 
 
 
 
Total cash and cash equivalents
$
1,961

 
$
132

 
$
11,408

 
$
458

Total investments
95,452

 
41,688

 
291,247

 
32,088

All other assets
1,943

 
617

 
8,281

 
268

Total liabilities
(2,538
)
 
(392
)
 
(14,948
)
 
(439
)
Redeemable noncontrolling interests
(8,816
)
 
(21,485
)
 
(61,236
)
 
(12,628
)
The Company’s net interests in consolidated sponsored investment products
$
88,002

 
$
20,560

 
$
234,752

 
$
19,747


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Fair Value Measurements

The assets and liabilities of the consolidated sponsored investment products measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015 by fair value hierarchy level were as follows:

As of September 30, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
($ in thousands)
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Debt securities
$
—

 
$
98,727

 
$
146

 
$
98,873

Equity securities
33,524

 
4,743

 
—

 
38,267

Derivatives
—

 
6

 
—

 
6

Total Assets Measured at Fair Value
$
33,524

 
$
103,476

 
$
146

 
$
137,146

Liabilities
 
 
 
 
 
 
 
Derivatives
$
—

 
$
188

 
$
—

 
$
188

Short sales
522

 
—

 
—

 
522

Total Liabilities Measured at Fair Value
$
522

 
$
188

 
$
—

 
$
710

As of December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
($ in thousands)
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Debt securities
$
—

 
$
151,156

 
$
1,397

 
$
152,553

Equity securities
162,986

 
7,796

 
—

 
170,782

Derivatives
33

 
738

 
—

 
771

Total Assets Measured at Fair Value
$
163,019

 
$
159,690

 
$
1,397

 
$
324,106

Liabilities
 
 
 
 
 
 
 
Derivatives
$
128

 
$
844

 
$
—

 
$
972

Short sales
5,334

 
75

 
—

 
5,409

Total Liabilities Measured at Fair Value
$
5,462

 
$
919

 
$
—

 
$
6,381


The following is a discussion of the valuation methodologies used for the assets and liabilities of the Company’s consolidated sponsored investment products measured at fair value.
Investments of consolidated sponsored investment products represent the underlying debt, equity and other securities held in sponsored products which are consolidated by the Company. Equity securities are valued at the official closing price on the exchange on which the securities are traded and are categorized within Level 1. Level 2 investments include most debt securities, which are valued based on quotations received from independent pricing services or from dealers who make markets in such securities and certain equity securities, including non-US securities, for which closing prices are not readily available or are deemed to not reflect readily available market prices and are valued using an independent pricing service. Pricing services do not provide pricing for all securities, and therefore indicative bids from dealers are utilized, which are based on pricing models used by market makers in the security and are also included within Level 2. Level 3 investments include debt securities that are not widely traded, are illiquid or are priced by dealers based on pricing models used by market makers in the security.

For the nine months ended September 30, 2016 and 2015, securities held by consolidated sponsored investment products with an end of period value of $0.3 million and $8.9 million, respectively, were transferred from Level 2 to Level 1 because certain non-U.S. securities quoted market prices were no longer adjusted based on third-party factors derived from model-based valuation techniques for which the significant assumptions were observable in the market. For the nine months ended September 30, 2016 and 2015, securities held by consolidated sponsored investment products with an end of period value of 0.5 million and $0.3 million, respectively, were transferred from Level 1 to Level 2 because certain non-U.S.

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securities quoted market prices were adjusted based on third-party factors derived from model-based valuation techniques for which the significant assumptions were observable in the market.

The following table is a reconciliation of assets of consolidated sponsored investment products for Level 3 investments for which significant unobservable inputs were used to determine fair value.

 
Nine Months Ended September 30,
 ($ in thousands)
2016
 
2015
Level 3 Debt securities (a)
 
 
 
Balance at beginning of period
$
1,397

 
$
1,065

Realized losses, net
(356
)
 
—

Purchases
163

 
135

Paydowns
(5
)
 
(14
)
Sales
(1,461
)
 
(13
)
Transferred to Level 2
—

 
(126
)
Transfers from Level 2
58

 
—

Change in unrealized gain, net
350

 
(121
)
Balance at end of period
$
146

 
$
926


(a)
None of the securities reflected in the table were internally fair valued at September 30, 2016 or September 30, 2015. The investments that are categorized as Level 3 were valued utilizing third party pricing information without adjustment. Such valuations are based on unobservable inputs.

Derivatives

The Company has certain consolidated sponsored investment products which include derivative instruments as part of their investment strategies. These derivatives may include futures contracts, options contracts and forward contracts. Derivative instruments in an asset position are classified as other assets of consolidated sponsored investment products in the Condensed Consolidated Balance Sheets. Derivative instruments in a liability position are classified as liabilities of consolidated sponsored investment products within the Condensed Consolidated Balance Sheets. The change in fair value of such derivatives is recorded in realized and unrealized gain (loss) on investments of consolidated sponsored investment products, net, in the Condensed Consolidated Statements of Operations. In connection with entering into these derivative contracts, these funds may be required to pledge to the broker an amount of cash equal to the “initial margin” requirements that varies based on the type of derivative. The cash pledged or on deposit is recorded in the Condensed Consolidated Balance Sheets of the Company as cash pledged or on deposit of consolidated sponsored investment products. The fair value of such derivatives at September 30, 2016 and 2015 was immaterial.

Short Sales

Some of the Company’s consolidated sponsored investment products may engage in short sales, which are transactions in which a security is sold which is not owned or is owned but there is no intention to deliver, in anticipation that the price of the security will decline. Short sales are recorded in the Condensed Consolidated Balance Sheets within other liabilities of consolidated sponsored investment products.

Consolidated Investment Product

Overview

The Company's consolidated investment product is a collateralized loan obligation ("CLO") in which the Company has a beneficial interest. The term CLO generally refers to a special purpose vehicle that owns a portfolio of investments and issues various tranches of debt and subordinated note securities to finance the purchase of those investments. The investment activities of a CLO are governed by investment guidelines, generally contained within a CLO’s “indenture” and other governing documents which limit, among other things, the CLO’s exposure to any single industry or obligor and provide that

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the CLO’s assets satisfy certain ratings requirements. Most CLOs have a defined investment period during which they are allowed to make investments and reinvest capital as it becomes available. The CLOs are considered variable interest entities (VIE). The assets of each of the CLOs, including cash and cash equivalents, are held solely as collateral to satisfy the obligations of the CLOs. The Company does not own and has no right to the benefits from, nor does it bear the risks associated with, the assets held by the CLOs, beyond its direct investments in, and investment advisory fees generated from, the CLOs. If the Company were to liquidate, the assets of the CLOs would not be available to its general creditors, and as a result, the Company does not consider these assets available for the benefit of its investors. Additionally, the investors in the CLOs have no recourse to the Company’s general assets for the debt issued by the CLOs. Therefore, this debt is not the Company’s obligation. The Company consolidates entities when it is determined to be the primary beneficiary under current VIE accounting guidance.

On June 9, 2016, the Company issued a CLO with a par value of $356.3 million consisting of six classes of senior secured floating rate notes payable with a par value of $320.0 million and subordinated notes with a par value of $36.3 million. Upon the launch of the CLO, the warehouse debt of $152.6 million was repaid and the Company redeemed its preference shares while simultaneously making a $36.3 million investment in the CLO's subordinated notes.

The CLO is a VIE and the Company consolidates the CLO's assets and liabilities as a consolidated investment product within its financial statements as it is the primary beneficiary of the VIE. The Company has determined that it is the primary beneficiary of the VIE as it has the power to direct the activities that most significantly impact the economic performance of the entity and has the obligation to absorb losses, or the rights to receive benefits from, the VIE that could potentially be significant to the VIE.

As discussed in Note 2, the Company adopted ASU 2014-13 effective January 1, 2016. This guidance requires reporting entities to use the more observable of the fair value of the financial assets or the financial liabilities to measure the financial assets and the financial liabilities of a CFE when a CFE is initially consolidated. The Company has elected the measurement alternative for its consolidated investment product and has determined that the fair value of the financial assets of the CFE is more observable than the fair value of the financial liabilities of the CFE. The Company's earnings from the consolidated investment product will reflect changes in value of the Company's beneficial interest in the consolidated investment product. The fair value of the Company’s beneficial interest, which is eliminated in consolidation, is determined primarily based on an income approach. The income approach is driven by current information such as market yields and projected cash flows expected to be received from the portfolio of collateral assets based on forecasted default and recovery rates that a market participant would use in determining the current fair value of the interest. The Company utilizes unadjusted third party pricing information in determining the fair value of its beneficial interest.

The following table presents the balances of the consolidated investment product that, after intercompany eliminations, were reflected in the Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015:
 
As of
 
September 30, 2016
 
December 31, 2015
($ in thousands)
 
 
 
Total cash equivalents
$
12,703

 
$
8,297

Total investments
360,210

 
199,485

Other assets
4,628

 
1,467

Debt
—

 
(152,597
)
Notes payable
(323,852
)
 
—

Securities purchased payable and other liabilities
(25,704
)
 
(18,487
)
The Company’s net interests in the consolidated investment product
$
27,985

 
$
38,165


Total Investments of Consolidated Investment Product

Total investments represent bank loan investments of $360.2 million at September 30, 2016, which comprise the majority of the CLO portfolio asset collateral, are senior secured corporate loans from a variety of industries. Bank loan investments mature at various dates between 2017 and 2024, pay interest at LIBOR plus a spread of up to 7.5% and typically range in S&P credit rating categories from BBB- to CCC-. At September 30, 2016, the fair value of the senior bank loans exceeded the unpaid principal balance by approximately $0.1 million. No collateral assets were in default as of September 30, 2016.

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Notes Payable of Consolidated Investment Product

The CLO has note obligations that bear interest at variable rates based on LIBOR plus a pre-defined spread ranging from 1.0% to 8.75%. The principal amounts outstanding of the note obligations issued by the CLO mature in April 2028. The CLO may elect to reinvest any prepayments received on bank loan investments prior to April 2020. Any subsequent prepayments received must be used to pay down the note obligations.

The Company’s beneficial interests and maximum exposure to loss related to the consolidated investment product is limited to (i) ownership in the subordinated notes and related participations in management fees of the CLOs and (ii) accrued management fees. The secured notes of the CLO have contractual recourse only to the related assets of the CLO and are classified as financial liabilities. Although these beneficial interests are eliminated upon consolidation, the application of the measurement alternative, as adopted on January 1, 2016, prescribed by ASU 2014-13, results in the net amount of the consolidated investment product shown above to be equivalent to the beneficial interests retained by the Company at September 30, 2016 as shown in the table below:

 
As of
Beneficial Interests
September 30, 2016
($ in thousands)
 
Subordinated notes
$
27,443

Accrued investment management fees
542

  Total Beneficial Interests
$
27,985


The following table represents revenue and expenses of the consolidated investment product included in the Company’s Consolidated Statements of Operations for the periods indicated:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
($ in thousands)
2016
 
2016
Income:
 
 
 
Realized and unrealized gain, net
$
144

 
$
2,960

Interest Income
4,047

 
8,835

  Total Revenue
$
4,191

 
$
11,795

 
 
 
 
Expenses:
 
 
 
Other operating expenses
24

 
3,921

Interest expense
3,788

 
10,188

  Total Expense
$
3,812

 
$
14,109

 
 
 
 
Net Income (loss) attributable to consolidated investment product
$
379

 
$
(2,314
)


As summarized in the table below, the application of the measurement alternative as prescribed by ASU 2014-13 results in the consolidated net income summarized above to be equivalent to the Company’s own economic interests in the consolidated investment product which are eliminated upon consolidation:


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Economic Interests
Three Months Ended September 30,
 
Nine Months Ended September 30,
($ in thousands)
2016
 
2016
Distributions received and unrealized losses on the subordinated notes held by the Company
$
(58
)
 
$
(2,857
)
Investment management fees
437
 
543
  Total Economic Interests
$
379

 
$
(2,314
)

Fair Value Measurements of Consolidated Investment Product

The assets and liabilities of the consolidated investment product measured at fair value on a recurring basis by fair value hierarchy level were as follows:

As of September 30, 2016:
 
Level 1
 
Level 2
 
Level 3
 
Total
($ in thousands)
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash equivalents
$
12,703

 
$
—

 
$
—

 
$
12,703

Bank loans
—

 
360,210

 
—

 
360,210

Total Assets Measured at Fair Value
$
12,703

 
$
360,210

 
$
—

 
$
372,913

Liabilities
 
 
 
 
 
 
 
Notes payable
$
—

 
$
323,852

 
$
—

 
$
323,852

Total Liabilities Measured at Fair Value
$
—

 
$
323,852

 
$
—

 
$
323,852

As of December 31, 2015:
 
Level 1
 
Level 2
 
Level 3
 
Total
($ in thousands)
 
 
 
 
 
 
 
Assets
 
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