2019
Federated Hermes, Inc.
Annual Report
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Introducing Federated Hermes, Inc.
Federated Investors, Inc. has changed its name,
combining it with Hermes Investment Management
to create Federated Hermes, Inc.,
a $575.9 billion global investment manager
that offers world-class active investment management
and engagement services that target
fi nancial outperformance across a wide range of asset classes.
Federated Hermes is guided by our conviction that responsible
investing is the best way to create wealth over the long term.
$575B+
$877B+
1800+
Assets under management
(as of Dec. 31, 2019)
Assets under advice
(as of Dec. 31, 2019)
Employees
(as of Dec. 31, 2019)
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Financial Overview
(as of and for the years ended Dec. 31, )
Summary of Operations (in thousands)
Total revenue
Operating income
Net income
Per Share Data
Basic and diluted earnings per share
Cash dividends per share
Managed Assets (in millions)
Money market
Equity
Fixed-income
Alternative/private markets
Multi-asset
Total managed assets
$
$
$
$
$
$
2019
2018
1,326,894
347,927
272,339
2.69
1.08
$
$
$
$
$
1,135,677
330,280
220,297
2.18
1.06
395,539
$
301,794
89,011
69,023
18,102
4,199
72,497
63,158
18,318
4,093
$
575,874
$
459,860
Equity Assets
in billions
Fixed-Income Assets
in billions
Money Market Assets
in billions
Total Managed Assets
in billions
17
18
19
17
18
19
17
18
19
17
18
19
$62.8
$72.5
$89.0
$64.2
$63.2
$69.0
$265.2
$301.8
$395.5
$397.6
$459.9
$575.9
2019 Federated Hermes Annual Report
1
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Dear Fellow Shareholders:
In early 2020, Federated Investors, Inc. changed its name to Federated Hermes, Inc.
Federated Hermes combines under one brand two leading active management
fi rms—Federated Investors, Inc. and Hermes Investment Management—that
target fi nancial outperformance across a wide range of asset classes. The new
name and branding are tangible expressions of our company’s transformation,
backed by a conviction that responsible investing is the best way to create wealth
over the long term. Federated Hermes also changed its New York Stock Exchange
ticker symbol from FII to FHI, with common stock trading under the new symbol,
beginning on Feb. 3, 2020.
Federated Hermes believes that the inclusion of environmental, social and
governance (ESG) factors in its investment research process improves the
potential to create long-term value. We pursue sustainable growth by offering
fi nancial intermediaries and institutions strategies that include active equities,
fi xed income, liquidity, real estate, infrastructure, private equity and private
debt. Integral to the fi rm’s commitment to active ownership, Federated Hermes
provides stewardship services—engagement with equity and bond issuers,
proxy voting and policy advocacy—through EOS at Federated Hermes.
In 2019, the company delivered solid returns to shareholders and continued to
serve as a beacon for those seeking world-class active management investment
solutions and client service. Our earnings performance in a competitive
landscape highlights our ability to leverage strategic acquisitions combined with
our consistency in offering investment solutions for a variety of market conditions,
which for decades has been a distinguishing characteristic of the fi rm.
Earnings per diluted share were $2.69 on net income of $272.3 million.
Total assets under management reached a record $575.9 billion. Long-term
asset categories—comprising equity, fi xed-income, alternative/private markets
and multi-asset products—reached $180.3 billion and drove 59% of revenue.
In 2019, we continued to employ capital to benefi t shareholders. The company
repurchased 614,077 shares of class B common stock through year-end.
Through 2019, the company has paid quarterly dividends to our shareholders for
22 straight years, or 88 consecutive quarters. Dividends totaled $1.08 per share
in 2019. Since the company’s initial public offering in 1998, Federated Hermes’
use of cash has included $2.3 billion for dividends, $1.3 billion for share
repurchases and $1.1 billion for acquisitions.
Equity
$89.0 billion
■ Value and Income $34.7
■ International/Global $31.4
■ Growth $17.8
■ Blend $5.1
Fixed
Income
$69.0 billion
■ Multisector $40.2
■ High-Yield $12.4
■ Municipal $5.6
■ U.S. Corporate $5.1
■ U.S. Government $3.3
■ International/Global $1.6
■ Mortgage-Backed $0.8
2 Federated Hermes, Inc.
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2019 Highlights
Reached records across three managed asset classes—equity at $89.0 billion,
fi xed income at $69.0 billion and liquidity at $395.5 billion.
Completed the acquisition of $13.9 billion in assets from PNC Capital
Advisors LLC, including a fi ve-person, Cleveland-based international equity
team managing approximately $1.6 billion.
Grew liquidity assets by $93.7 billion, a 31% increase from 2018.
Launched four new mutual funds for U.S. investors modeled after strategies
originated by Hermes Investment Management, our London-based
international business.
Increased gross equity sales by 45%.
Created the Responsible Investing Offi ce at our Pittsburgh headquarters
to provide the infrastructure for integrating ESG factors into the investment
process across all asset classes and to guide sustainable initiatives within
the fi rm and the broader investment community.
Offering a competitive advantage
through EOS at Federated Hermes
A key differentiator for the company in 2019 was our stewardship services
provider, EOS. Launched by Hermes in 2004, it celebrated its 15th anniversary
last year and now represents $877 billion of assets under advice. EOS helps
institutional investors fulfi ll their fi duciary responsibilities, improve long-term
value creation as shareholders and collectively make an impact as active
owners of companies acting on behalf of their ultimate benefi ciaries. EOS is
a pioneer in effective corporate engagement, meeting with senior company
leadership to seek positive changes related to material ESG issues and
opportunities in the context of a company’s long-term business strategy.
Our engagement specialists bring extensive experience and expertise drawn
from multiple industries, professions and nationalities. This diverse experience
brings the skills and provides the credibility to maintain continuous dialogue
and engagement on outcomes across a full range of ESG issues at the most
senior levels of investee companies.
In 2019, EOS completed more than 1,000 company engagements in a single
year for the fi rst time, a clear signal of the importance being placed on
stewardship and engagement today. We are progressing on the expansion
of the EOS stewardship and engagement team in the U.S.
Money
Market
$395.5 billion
■ Government $257.3
■ Prime $126.8
■ Tax-Free $11.4
Alternative/
Private Markets
and Multi-Asset
$22.3 billion
■ Real Estate $8.1
■ Infrastructure $4.3
■ Multi-Asset $4.2
■ Private Equity $3.9
■ Other Alternative $1.8
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2019 Federated Hermes Annual Report
3
In Memoriam
Eugene F. Maloney
Federated Hermes was
deeply saddened by
the passing of Eugene F.
Maloney, executive vice
president, on July 19, 2019,
after 47 years with the
company. His keen intellect,
steadfast dedication to
Federated’s trust business
and wry sense of humor will
be sorely missed.
Gene was a graduate of the
College of the Holy Cross
and Fordham University
Law School. He also served
his country with distinction
for three years as an offi cer
in the U.S. Army.
Gene facilitated the legislative
and regulatory approvals that
allowed fi duciaries to use
mutual funds in place of direct
securities in managing client
accounts. Throughout his
distinguished career, Gene
remained at the forefront of
investment management
issues. An industry trailblazer,
he was considered one of
the foremost authorities on
fi duciary matters, providing
substantial input through
decades of letters, speeches
and testimony before client
industry groups and to the
U.S. Department of Labor,
the U.S. Securities and
Exchange Commission and
U.S. Congress.
He was a devoted husband,
father and grandfather. We
extend our deepest gratitude
for Gene’s many years of
dedicated service.
4 Federated Hermes, Inc.
Diversifying investment solutions
For nearly half a century, since we created one of the fi rst money market
mutual funds in the early 1970s, Federated Hermes has been dedicated to
supporting the essential role of liquidity products in capital markets. We have
developed a range of cash-management solutions to meet client needs,
focusing on products that offer diligent credit analysis, broad diversifi cation
and competitive yields. In 2019, as the Federal Reserve unwound a series of
interest rate hikes implemented the previous year, our money market strategies
continued to offer investors a signifi cant yield advantage compared to
average deposit rates and competitive returns compared to many longer-
duration securities. In this environment, we increased market share in 2019,
and money market assets ended the year at a record high of $395.5 billion.
On the equity side of our business, assets reached a record high of
$89.0 billion. Equity sales were led by Federated Kaufmann Small Cap Fund,
which pursues capital appreciation by investing primarily in stocks of small-cap
companies. The experienced Kaufmann growth team selects stocks through
an intensive, bottom-up process that includes frequent conversations with
key executives and employees, regular on-site visits, industry analysis and
thorough fundamental research.
Fixed-income assets also increased to a record high of $69.0 billion at
year-end, as net sales were led by high-yield funds and ultrashort products,
which offered more attractive yields than products investing in shorter-term
debt while at the same time providing lower interest-rate risk than portfolios
investing in longer-term debt securities.
In private markets, Federated Hermes is able to offer suitable investors a
broad range of private market investment solutions across a range of
alternative asset classes, including real estate, infrastructure, private equity
and private credit. Our private market investment processes embrace the
principles of responsible investing. Private market investment opportunities
can include the fi nancing of large-scale urban regeneration projects,
innovative technology companies that focus on demographic and societal
change, and global agricultural trade.
Expanding our products
In 2019, through new product launches and fund acquisitions, we created
an even stronger value proposition for our clients. We expanded the
availability of Hermes’ differentiated investment strategies to U.S. investors
with the launch of four new funds: the Federated Hermes Global Equity
Fund; the Federated Hermes Global Small Cap Fund; the Federated Hermes
International Equity Fund; and the Federated Hermes SDG Engagement
High Yield Credit Fund.
Additionally, in 2019, we acquired from PNC Capital Advisors LLC three
funds that complement our existing international equity products, including
the $1.6 billion International Equity Fund.
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Focusing on clients
A hallmark of Federated Hermes is a dedication to helping our clients grow their
business. The fi rm’s 227 regional consultants enhanced our reputation as a
trusted investment manager to more than 11,000 clients, including corporations,
government entities, insurance companies, foundations and endowments, banks
and broker/dealers.
In the U.S., our intermediary, retirement and institutional sales divisions each
grew gross mutual fund sales in long-term asset categories (equity, fi xed income,
alternatives and multi-asset). Federated Hermes also had strong growth in
equity and fi xed-income fund net sales. We continued to see an interest in our
separately managed account (SMA) business in 2019, as SMA assets grew
to $24.7 billion—ranking Federated Hermes as the 12th-largest SMA manager
worldwide1. Currently available in 18 equity, 11 fi xed income and one multi-asset
category, our SMA strategies provide our fi rm with a competitive advantage for
clients seeking diversifi ed solutions with a high level of customization.
Internationally, we integrated our Asia-Pacifi c sales teams, and we continue to
seek new options for growth in Europe, Latin America and the Asia-Pacifi c regions.
Delivering shareholder value
Sixty-fi ve years ago, our company was founded on the principle that doing
business the right way over time would build a durable franchise that could
weather a variety of market conditions while offering the opportunity for future
growth. Today, Federated Hermes’ more than 1,800 employees are an essential
part of fulfi lling that mission. We thank each employee, as our success is a
testament to their dedication and efforts.
We also offer our appreciation to you, our shareholders, for your continued
support of our efforts to innovate and deliver shareholder value. We believe that
the pieces are now in place to allow our unique combination of high-quality
responsible investment management, strong sales and outstanding client service
to provide robust growth now and well into the future.
J. Christopher Donahue
President, Chief Executive Offi cer and Chairman
Dividend History
per share
17
18
19
$1.00
$1.06
$1.08
Revenue by Source
$1.3 billion
■ Long-Term Assets 59%
■ Equity 40%
■ Fixed Income 14%
■ Alternative/Private Markets
and Multi-Asset 5%
■ Money Market 40%
■ Other 1%
1 Money Management Institute/Cerulli Associates, Q3 2019.
2019 Federated Hermes Annual Report
5
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Directors
Executives
J. Christopher Donahue
President, Chief Executive Offi cer and Chairman,
Federated Hermes, Inc.
J. Christopher Donahue
President, Chief Executive Offi cer and Chairman,
Federated Hermes, Inc.
Committee: Executive
Joseph C. Bartolacci
President and Chief Executive Offi cer,
Matthews International Corporation
Committees: Audit, Compensation, Compliance
Thomas R. Donahue
Vice President, Treasurer and Chief Financial Offi cer,
Federated Hermes, Inc.
President, FII Holdings, Inc.
Committee: Executive
John B. Fisher
Vice President, Federated Hermes, Inc.
President and Chief Executive Offi cer,
Federated Advisory Companies
Committee: Executive
Michael J. Farrell
President, Farrell & Co.
Committees: Audit, Compensation, Compliance
Marie Milie Jones
Founding Partner, JonesPassodelis, PLLC
Committees: Audit, Compensation, Compliance
Gordon J. Ceresino
Vice Chairman, Federated Hermes, Inc.
President, Federated International Management Limited
and Federated International Securities Corp.
Thomas R. Donahue
Vice President, Treasurer and Chief Financial Offi cer,
Federated Hermes, Inc.
President, FII Holdings, Inc.
John B. Fisher
Vice President, Federated Hermes, Inc.
President and Chief Executive Offi cer,
Federated Advisory Companies
Peter J. Germain
Executive Vice President, Chief Legal Offi cer,
General Counsel and Secretary, Federated Hermes, Inc.
Richard A. Novak
Vice President, Assistant Treasurer and
Principal Accounting Offi cer, Federated Hermes, Inc.
Saker A. Nusseibeh
Chief Executive Offi cer,
Hermes Fund Managers Limited
Paul A. Uhlman
Vice President, Federated Hermes, Inc.
President, Federated Securities Corp.
Stephen P. Van Meter
Vice President and Chief Compliance Offi cer,
Federated Hermes, Inc.
6 Federated Hermes, Inc.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
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 1-14818
FEDERATED HERMES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania
(State or other jurisdiction of incorporation or organization)
25-1111467
(I.R.S. Employer Identification No.)
1001 Liberty Avenue
Pittsburgh, Pennsylvania
(Address of principal executive offices)
15222-3779
(Zip Code)
412-288-1900
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Class B common stock, no par value
Trading Symbol(s) Name of each exchange on which registered
FHI
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
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
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and
"emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of the Class B Common Stock held by non-affiliates of the registrant as of June 30, 2019 was approximately $3.1
billion, based on the New York Stock Exchange closing price. For purposes of this calculation, the registrant has deemed all of its executive
officers and directors to be affiliates, but has made no determination as to whether any other persons are affiliates within the meaning of Rule
12b-2 under the Securities Exchange Act of 1934. The number of shares of Class A and Class B Common Stock outstanding on February 14,
2020, was 9,000 and 101,117,928, respectively.
Documents incorporated by reference:
Part III of this Form 10-K incorporates by reference certain information from the registrant's 2020 Information Statement.
Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
Part I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Part II
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
Part III
Item 10
Item 11
Item 12
Item 13
Item 14
Part IV
Item 15
Signatures
Exhibit Index
Page
4
20
33
33
33
33
33
35
36
50
52
88
88
88
89
89
89
89
89
90
96
97
2
FORWARD-LOOKING STATEMENTS
Certain statements in this report on Form 10-K constitute forward-looking statements, which involve known and unknown
risks, uncertainties, and other factors that may cause the actual results, levels of activity, performance or achievements of
Federated Hermes, Inc. and its consolidated subsidiaries, including Hermes Fund Managers Limited (Hermes) (collectively,
Federated), or industry results, to be materially different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. Forward-looking statements are typically identified by
words or phrases such as "trend," "potential," "opportunity," "believe," "expect," "anticipate," "current," "intention," "estimate,"
"position," "projection," "assume," "continue," "remain," "maintain," "sustain," "seek," "achieve," and similar expressions, or
future or conditional verbs such as "will," "would," "should," "could," "may" and similar expressions. Among other forward-
looking statements, such statements include certain statements relating to, or, as applicable, statements concerning
management's assessments, beliefs, expectations, assumptions, judgments, projections or estimates regarding: asset flows,
levels and mix; business mix; the level, timing, degree and impact of changes in interest rates, yields or asset levels or mix; fee
rates and sources and levels of revenues, expenses, gains, losses, income and earnings; the level and impact of reimbursements,
rebates or assumptions of fund-related expenses (Consideration Payable to Customers) and fee waivers (collectively, Fee
Waivers); when revenue is recognized; whether performance fees or carried interest will be earned; the components and level
of, and prospect for, distribution-related expenses; guarantee and indemnification obligations; the timing of, and direct or
contingent payment obligations and costs relating to acquisitions; payment obligations pursuant to employment or incentive
arrangements; business and market expansion opportunities, including, anticipated, or acceleration of, growth outside of the
United States (U.S.); interest and principal payments or expenses; taxes, tax rates, deferred tax assets and the impact of tax law
changes; borrowing, debt, future cash needs and principal uses of cash, cash flows and liquidity; the ability to raise additional
capital; type, classification and consolidation of investments; uses of treasury stock; Federated, product and market
performance and Federated's performance indicators; investor preferences; product and strategy demand, distribution,
development and restructuring initiatives and related planning and timing; the effect, and degree of impact, of changes in
customer relationships; legal proceedings; the pace, timing, impact, effects and other consequences of Brexit, as well as
potential, proposed and final laws, regulations and other rules, continuing regulatory oversight by U.S. and foreign regulators
and other authorities; dedication of resources; the adoption and impact of accounting policies, new accounting pronouncements
and accounting treatment determinations; compliance, and related legal, compliance and other professional services expenses;
interest rate, concentration, market, currency and other risks; auditor independence matters; and various other items set forth
under Item 1A - Risk Factors. Among other risks and uncertainties, market conditions may change significantly and impact
Federated's business and results, including by changing Federated's asset flows, levels, and mix, and business mix, which may
cause a decline in revenues and net income, result in impairments and increase the amount of Fee Waivers incurred by
Federated. The obligation to make purchase price payments in connection with acquisitions is subject to certain adjustments
and conditions, and the obligation to make contingent payments is based on net revenue levels and will be affected by the
achievement of such levels. The obligation to make additional payments pursuant to employment or incentive arrangements is
based on satisfaction of certain conditions set forth in those arrangements. Future cash needs, cash flows and uses of cash will
be impacted by a variety of factors, including the number and size of any acquisitions, Federated's success in developing,
structuring and distributing its products and strategies, potential changes in assets under management and/or changes in the
terms of distribution and shareholder services contracts with intermediaries who offer Federated's products to customers, and
potential increased legal, compliance and other professional services expenses stemming from additional or modified regulation
or the dedication of such resources to other initiatives. Federated's risks and uncertainties also include liquidity and credit risks
in Federated's money market funds and revenue risk, which will be affected by yield levels in money market fund products,
changes in fair values of assets under management, investor preferences and confidence, and the ability of Federated to collect
fees in connection with the management of such products. Many of these factors may be more likely to occur as a result of
continued scrutiny of the mutual fund industry by domestic or foreign regulators, and any disruption in global financial
markets. As a result, no assurance can be given as to future results, levels of activity, performance or achievements, and neither
Federated nor any other person assumes responsibility for the accuracy and completeness of such statements in the future. For
more information on these items and additional risks that may impact the forward-looking statements, see Item 1A - Risk
Factors.
3
ITEM 1 – BUSINESS
General
Part I
Federated Hermes, Inc., a Pennsylvania corporation, together with its consolidated subsidiaries, including Hermes Fund
Managers Limited (Hermes) beginning July 1, 2018 (collectively, Federated), was formerly known as Federated Investors, Inc.
Effective January 31, 2020, Federated Investors, Inc.'s name was changed to Federated Hermes, Inc.
Federated is a leading provider of investment management products and related financial services. Federated has been in the
investment management business since 1955 and is one of the largest investment managers in the United States (U.S.) with
$575.9 billion in assets under management (AUM or managed assets) at December 31, 2019.
Federated operates in one operating segment, the investment management business. Federated sponsors, markets and provides
investment-related services to various investment products, including sponsored investment companies and other funds
(Federated Funds) and Separate Accounts (which include separately managed accounts (SMAs), institutional accounts, sub-
advised funds and other managed products) in both domestic and international markets, as well as provides stewardship
services to various companies. Federated's principal source of revenue is investment advisory fee income earned by various
domestic and/or foreign subsidiaries pursuant to investment advisory contracts and based primarily upon the AUM of the
investment products and strategies. Domestic advisory subsidiaries are registered as investment advisors under the Investment
Advisers Act of 1940 (Advisers Act), while foreign advisory subsidiaries are registered in the U.S. and/or with foreign
regulators.
Federated provides investment advisory services to 135 Federated Funds as of December 31, 2019. Federated markets these
funds to institutional customers and banks, broker/dealers and other financial intermediaries who use them to meet the needs of
customers and/or clients (collectively, customers), including retail investors, corporations and retirement plans. The Federated
Funds are domiciled in the U.S., as well as Ireland, the United Kingdom (UK), Luxembourg, the Cayman Islands and Canada.
Most of Federated's U.S.-domiciled funds are registered under the Investment Company Act of 1940 (1940 Act) and under other
applicable federal laws. Each U.S.-domiciled registered fund enters into an advisory agreement that is subject to annual
approval by the fund's board of directors or trustees, a majority of whom are not interested persons, as defined under the 1940
Act, of either the funds or Federated. In general, material amendments to such advisory agreements must be approved by the
funds' shareholders. These advisory agreements are generally terminable upon 60 days' notice to the investment advisor. See
Potential Adverse Effects of Termination or Failure to Renew Advisory Agreements in Item 1A - Risk Factors for additional
information on Federated's advisory agreements.
Of the 135 Federated Funds as of December 31, 2019, Federated's investment advisory subsidiaries managed 27 money market
funds totaling $286.6 billion in AUM, 49 fixed-income funds with $44.2 billion in AUM, 43 equity funds with $48.1 billion
in AUM, 11 alternative/private markets funds with $11.4 billion in AUM and five multi-asset funds with $4.0 billion in AUM.
As of December 31, 2019, Federated provided investment advisory services to $181.5 billion in Separate Account assets. These
Separate Accounts represent assets of government entities, high-net-worth individuals, pension and other employee benefit
plans, corporations, trusts, foundations, endowments, sub-advised funds and other accounts or products owned or sponsored by
third parties. Fees for Separate Accounts are typically based on AUM pursuant to investment advisory agreements that are
generally terminable upon notice to Federated (or, in certain cases, after a 30 day, 60 day or similar notice period).
Certain Federated Funds have adopted distribution plans that, subject to applicable law, provide for payment to Federated for
distribution services. These distribution plans are implemented through distribution agreements between Federated and the
Federated Funds. Although the specific terms of each such agreement vary, the basic terms of the agreements are similar.
Pursuant to these agreements, Federated acts as underwriter for the funds and distributes shares of the funds primarily through
unaffiliated dealers. Each distribution plan and agreement is initially approved by the directors or trustees of the respective fund
and is reviewed for approval by such directors or trustees annually as required under applicable law.
Federated also provides a broad range of services to support the operation and administration of the Federated Funds. These
services, for which Federated receives fees pursuant to agreements with the Federated Funds, include administrative services
and shareholder servicing.
On July 2, 2018, Federated completed, effective as of July 1, 2018, the acquisition of a controlling interest in Hermes (Hermes
Acquisition). As a result of the Hermes Acquisition, Federated provides stewardship services and environmental, social and
governance (ESG) integrated investment strategies. Through the stewardship services, Federated offers customers a range of
solutions for engagement, advocacy, active ownership and impact and delivers effective engagement with the companies in
which they invest. Federated integrates ESG factors into, or considers ESG factors in connection with, certain of its investment
strategies and processes to seek long-term performance for its customers and clients.
4
Assets Under Management
Total AUM are composed of Federated Funds and Separate Accounts and represent the balance of AUM at a point in time. Total
managed assets for the past two years were as follows:
dollars in millions
Equity
Fixed-Income
Alternative / Private Markets1
Multi-Asset
Total Long-Term Assets
Money Market
Total Managed Assets
As of December 31,
$
2019
89,011
69,023
18,102
4,199
180,335
395,539
$ 575,874
$
2018
72,497
63,158
18,318
4,093
158,066
301,794
$ 459,860
2019
vs. 2018
23%
9
(1)
3
14
31
25%
1 Alternative/Private Markets at December 31, 2019 and 2018 includes $8.2 billion and $8.3 billion, respectively, of fund assets managed
by a non-consolidated entity, Hermes GPE LLP, in which Hermes holds an equity method investment.
Average managed assets represent the average balance of AUM during a period of time. Because substantially all revenue and
certain components of distribution expense are generally calculated daily based on AUM, changes in average managed assets
are typically a key indicator of changes in revenue earned and asset-based expenses incurred during the same period. Average
managed assets for the past three years were as follows:
dollars in millions
Equity
Fixed-Income
Alternative / Private Markets1
Multi-Asset
Total Long-Term Assets
Money Market
Total Average Managed Assets
Year Ended December 31,
$
2019
81,212
65,375
17,896
4,192
168,675
340,505
$ 509,180
$
2018
70,680
63,454
9,397
4,764
148,295
267,093
$ 415,388
$
2017
60,255
55,204
441
5,062
120,962
245,459
$ 366,421
2019
vs. 2018
15%
3
90
(12)
14
27
23%
2018
vs. 2017
17%
15
NM
(6)
23
9
13%
1
Alternative/Private Markets for the year ended December 31, 2019 and 2018 includes $8.2 billion and $4.1 billion, respectively, of
average fund assets managed by a non-consolidated entity, Hermes GPE LLP, in which Hermes holds an equity method investment.
Changes in Federated's average asset mix year-over-year across both asset classes and product/strategy types have a direct
impact on Federated's operating income. Asset mix impacts Federated's total revenue due to the difference in the fee rates
earned on each asset class and product/strategy type per invested dollar. Generally, management-fee rates charged for advisory
services provided to equity and multi-asset products and strategies are higher than management-fee rates charged to fixed-
income and alternative/private markets products and strategies, which in turn are higher than management-fee rates charged to
money market products and strategies. Likewise, Federated Funds typically have a higher management-fee rate than Separate
Accounts. Additionally, certain components of distribution expense can vary depending upon the asset class, distribution
channel and/or the size or structure of the customer relationship. Federated generally pays out a larger portion of the revenue
earned from managed assets in money market and multi-asset funds than the revenue earned from managed assets in equity,
fixed-income and alternative/private markets funds.
Revenue
Federated's revenues from investment advisory, administrative and other service fees over the last three years were as follows:
dollars in thousands
Investment Advisory Fees, net
Administrative Service Fees, net
Other Service Fees, net
Total Revenue
Year Ended December 31,
2019
$ 907,605
245,887
173,402
$ 1,326,894
2018
$ 773,418
199,269
162,990
$ 1,135,677
2017
$ 731,670
188,814
182,440
$ 1,102,924
2019
vs. 2018
17%
23
6
17%
2018
vs. 2017
6%
6
(11)
3%
5
Investment Products and Strategies
Federated offers a wide range of products and strategies, including money market, equity, fixed-income, alternative/private
markets and multi-asset investments. Federated's offerings include products and strategies that Federated expects to be in
demand under a variety of economic and market conditions. Federated has structured its investment process to meet the
requirements of fiduciaries and others who use Federated's suitable products and strategies to meet the needs of their customers.
Fiduciaries typically have stringent demands regarding portfolio composition, risk and investment performance.
Federated, which began selling money market fund products to institutions in 1974, is one of the largest U.S. managers of
money market assets, with $395.5 billion in AUM at December 31, 2019. Federated has developed expertise in managing cash
for institutions, which typically have strict requirements for regulatory compliance, relative safety, liquidity and competitive
yields. Federated also manages retail money market products that are typically distributed through broker/dealers. At
December 31, 2019, Federated managed money market assets across a wide range of categories: government ($257.3 billion);
prime ($126.8 billion); and tax-free ($11.4 billion).
Federated's equity assets totaled $89.0 billion at December 31, 2019 and are managed across a wide range of categories
including: value and income ($34.7 billion); international/global ($31.4 billion); growth ($17.8 billion); and blend ($5.1
billion).
Federated's fixed-income assets totaled $69.0 billion at December 31, 2019 and are managed across a wide range of categories
including: multisector ($40.2 billion); high-yield ($12.4 billion); municipal ($5.6 billion); U.S. corporate ($5.1 billion); U.S.
government ($3.3 billion); international/global ($1.6 billion); and mortgage-backed ($0.8 billion).
Federated's alternative/private markets and multi-asset investments totaled $18.1 billion and $4.2 billion, respectively, at
December 31, 2019. Federated's alternative/private markets assets are managed across a wide range of categories including: real
estate ($8.1 billion); infrastructure ($4.3 billion); private equity ($3.9 billion); and other alternative ($1.8 billion).
Investment products are generally managed by a team of portfolio managers supported by fundamental and quantitative
research analysts. Federated's proprietary, independent investment research process is centered on the integration of several
disciplines including: fundamental research and credit analysis; ESG integrated investment strategies; quantitative research
models; style-consistent and disciplined portfolio construction and management; performance attribution; and trading.
See Note (5) to the Consolidated Financial Statements for information on revenue concentration risk.
Distribution Channels and Product Markets
Federated's distribution strategy is to provide investment management products and services to more than 11,000 institutions
and intermediaries, including banks, broker/dealers, registered investment advisors, government entities, corporations,
insurance companies, foundations and endowments. Federated uses its trained sales force of more than 225 representatives and
managers backed by an experienced support staff to offer its products and strategies, add new customer relationships and
strengthen and expand existing relationships.
Federated's investment products and strategies are distributed in three markets. These markets and the relative percentage of
managed assets at December 31, 2019 attributable to such markets are as follows: U.S. financial intermediary (65%);
U.S. institutional (23%); and international (12%).
U.S. Financial Intermediary. Federated distributes its products and strategies in this market through a large, diversified group of
over 7,700 national, regional and independent broker/dealers, banks and registered investment advisors. Financial
intermediaries use Federated's products to meet the needs of their customers, who are often retail investors. Federated offers a
full range of products to these customers, including mutual funds, Separate Accounts and private funds. As of December 31,
2019, managed assets in the U.S. financial intermediary market included $282.9 billion in money market assets, $55.1 billion in
equity assets, $35.5 billion in fixed-income assets, $3.2 billion in multi-asset and $0.1 billion in alternative/private markets
assets.
U.S. Institutional. Federated offers its products and strategies to a wide variety of domestic institutional customers including
government entities, not-for-profit entities, corporations, corporate and public pension funds, foundations, endowments and
non-Federated investment companies or other funds. As of December 31, 2019, managed assets in the U.S. institutional market
included $99.1 billion in money market assets, $27.7 billion in fixed-income assets, $3.7 billion in equity assets, $1.0 billion in
multi-asset and $0.2 billion in alternative/private markets assets.
International. Federated manages assets from institutional and financial intermediary customers outside the U.S. through
subsidiaries focused on gathering assets in Europe, the Middle East, Canada, Latin America and the Asia Pacific region. The
2018 Hermes Acquisition expanded the distribution footprint of Federated outside of the U.S. As of December 31, 2019,
6
managed assets in the international market included $30.2 billion in equity assets, $17.8 billion in alternative/private markets
assets, $13.6 billion in money market assets and $5.9 billion in fixed-income assets.
Competition
As of December 31, 2019, Federated had $394.3 billion of Federated Fund AUM and $181.5 billion of Separate Account AUM.
Of the Separate Account AUM, $24.7 billion related to SMAs.
The investment management business is highly competitive across all types of investment products and strategies, including
mutual funds, exchange traded funds (ETFs), SMAs, institutional accounts, sub-advised funds and other managed products and
strategies. Competition is particularly intense among mutual fund and ETF providers. According to the Investment Company
Institute, at the end of 2019, there were over 7,900 open-end mutual funds and nearly 2,100 ETFs of varying sizes and
investment objectives whose shares are currently being offered.
In addition to competition from other mutual fund managers, ETF providers and investment advisors, Federated competes with
investment alternatives offered by insurance companies, commercial banks, broker/dealers, deposit brokers, other financial
institutions and hedge funds.
Competition for sales of investment products and strategies is influenced by various factors, including investment performance,
attainment of stated objectives, yields and total returns, fees and expenses, advertising and sales promotional efforts, investor
confidence and preference, relationships with intermediaries and type and quality of services.
Regulatory Matters
Federated and its investment management business are subject to extensive regulation both in and outside the U.S. Federated
and its products, such as the Federated Funds, and strategies are subject to: federal securities laws, principally the Securities Act
of 1933 (1933 Act), the Securities Exchange Act of 1934 (1934 Act), the 1940 Act and the Advisers Act; state laws regarding
securities fraud and registration; regulations or other rules promulgated by various regulatory authorities, self-regulatory
organizations or exchanges; and foreign laws, regulations or other rules promulgated by foreign regulatory or other authorities.
See Item 1A - Risk Factors under the caption Potential Adverse Effects of Changes in Laws, Regulations and Other Rules on
Federated's Investment Management Business for additional information.
Current Regulatory Environment - Domestic
While the pace of new regulation is expected to continue to be moderate in 2020 compared to the post-financial crisis period,
the U.S. Securities and Exchange Commission (SEC) (among other regulatory authorities, self-regulatory organizations or
exchanges) continues to propose and finalize new rules and regulations. The rules and regulations that have or are expected to
become effective, and any new proposed rules and regulations, continue to impact the investment management industry
(collectively, both domestically and abroad, as applicable, Regulatory Developments).
While new regulations continue to be promulgated, efforts also continue to eliminate certain regulatory requirements. For
example, legislation has been introduced in both the Senate and the House of Representatives in 2019 in a continuing effort to
get revisions to money market fund reform passed and signed into law. The proposed law would permit the use of amortized
cost valuation by, and override the floating net asset value (NAV) and certain other requirements for, institutional and municipal
(or tax-exempt) money market funds. These requirements were imposed under the SEC's structural, operational and other
money market fund reforms adopted through amendments to Rule 2a-7, and certain other regulations, on July 23, 2014 (2014
Money Fund Rules) and related guidance (collectively, the 2014 Money Fund Rules and Guidance). Compliance with the 2014
Money Fund Rules and Guidance became effective on October 14, 2016. Federated continues to support efforts to permit the
use of amortized cost valuation by, and override the floating NAV and certain other requirements imposed under the 2014
Money Fund Rules and Guidance for, institutional and municipal (or tax-exempt) money market funds.
The current regulatory environment has affected, and is expected to continue to affect, to varying degrees, Federated's business,
results of operations, financial condition and/or cash flows. Increased regulation and Regulatory Developments have required,
and are expected to continue to require, additional internal and external resources to be devoted to technology, legal,
compliance, operations and other efforts to address regulatory-related matters, and have caused, and may continue to cause,
product structure, pricing, offering and development effort adjustments, as well as changes in asset flows and mix, customer
relationships, revenues and operating income. The degree of impact of Regulatory Developments can vary and is uncertain.
In the fourth quarter of 2019, the SEC proposed or adopted new rules that impact U.S. investment management industry
participants, including Federated. For example:
• On December 30, 2019, the SEC proposed amendments to Rule 2-01 of Regulation S-X seeking to codify certain staff
consultations and modernize certain aspects of its auditor independence framework. The amendments would limit the
7
scope of potential independence-impairing relationships that arise among funds in a mutual fund complex, shorten the
look-back period for domestic first time filers in assessing compliance with the independence requirements, expand the
number of de minimis consumer loans to the categorical exclusions from independence-impairing lending relationships,
further develop the concept of beneficial ownership, and introduce a transition framework to address inadvertent
independence violations that only arise as a result of merger and acquisition transactions. Prior amendments to the auditor
independence rules, which became effective on October 3, 2019, focused the analysis on beneficial ownership rather than
on both record and beneficial ownership; replaced the ten percent bright-line shareholder ownership test with a significant
influence test; added a known through reasonable inquiry standard with respect to identifying beneficial owners of the
audit client's equity securities; and excluded from the definition of audit client, for a fund under audit, any other funds that
otherwise would be considered affiliates of the audit client under the rules for certain lending relationships. The public
comment period on the proposed amendments ends on March 16, 2020. Federated is assessing the most recent amendments
to determine the extent to which they mitigate risk that Federated's or the Federated Funds' auditors will inadvertently
implicate the auditor independence rules.
On December 23, 2019, the SEC's newly adopted rule 6c-11 under the 1940 Act (Rule 6c-11) became effective, providing
certain exemptions from the 1940 Act and specifically (1) permit ETFs that satisfy certain conditions to operate without the
expense and delay of obtaining an exemptive order; (2) impose certain enhanced disclosure requirements regarding ETF
trading costs; and (3) amend Form N-1A to provide more useful, ETF-specific information to investors who purchase ETF
shares on an exchange (and amend Form N-8B-2 to provide the same information to investors in ETFs organized as Unit
Investment Trusts). The Form amendments will have a transition period of one year following the effective date.
Additionally, the SEC rescinded exemptive relief previously granted to ETFs as the ETFs will now be able to operate under
Rule 6c-11.
• On November 25, 2019, the SEC re-proposed Rule 18f-4 under the 1940 Act (the "Derivatives Rule"), which regulates the
use of derivatives by mutual funds, closed end funds, ETFs, and other investment companies. Among other requirements,
the Derivatives Rule imposes a requirement for funds to adopt and implement a derivatives risk management program that
meets certain criteria (including stress testing and back-testing) with board oversight and reporting by a dedicated
administrator appointed by the board. The re-proposed Derivatives Rule also caps a fund's leverage at 150% based upon
the value-at-risk (VaR) relative to a designated reference index. The VaR approach generally provides more flexibility and
is an indication of a fund's risk attributable to using derivatives. There is an exception for funds that use derivatives only
for limited purposes, such as if the fund's derivatives exposure is limited to 10% of fund net assets, or if the fund uses
derivatives only for currency hedging purposes. The SEC has also proposed amendments to investment company reporting
requirements to enhance the SEC's ability to oversee funds' use of, and compliance with, the Derivatives Rule, and for the
SEC and the public to have greater insight into the impact that funds' use of derivatives would have on their portfolios.
Finally, the SEC proposed to rescind its 1979 general statement of policy (Release 10666), which sets forth the parameters
for funds to use derivatives in compliance with Section 18 of the 1940 Act. The public comment period on the proposed
Derivatives Rule ends on March 24, 2020. Federated is assessing the potential impact of the Derivatives Rule, but does not
expect the Derivatives Rule to have a significant impact on its business, results of operations, financial condition and/or
cash flows or the Federated Funds.
• On November 5, 2019, the SEC proposed two amendments to its rules governing proxy solicitations. In addition to
addressing changes to the procedure for submitting shareholder proposals, the proposed amendments largely seek to codify
prior SEC guidance released on August 21, 2019 in several important respects. The amendments would codify the SEC's
interpretation that proxy voting advice generally constitutes a solicitation within the meaning of the 1934 Act. The
amendments would condition the availability of certain exemptions from the existing proxy information and filing
requirements of the federal proxy rules used by proxy voting advice businesses on certain additional disclosure
requirements, such as disclosing conflicts of interest. The amendments also would amend the proxy rules to clarify when
the failure to disclose certain information in proxy voting advice may be considered misleading within the meaning of the
rule, depending upon the particular facts and circumstances at issue. The public comment period on the proposed
amendments ended on February 3, 2020. Federated is assessing the potential impact of the amendments on its business
(including its Equity Ownership Services business), results of operations, financial condition and/or cash flows.
• On November 4, 2019, the SEC proposed amendments to its investment adviser advertising and cash solicitation rules. In
general the proposed amendments attempt to update and modernize the existing regulations. The amendments to the
advertising rule introduce a new principles-based prohibition on certain advertising practices, and more tailored
requirements for the presentation of performance results based on an advertisement's intended audience and permit the use
of testimonials, endorsements, and third-party ratings. The amendments also would require that most advertisements be
reviewed and approved internally by designated employees prior to use. The amendments to the cash solicitation rule
8
broaden its application considerably, including expanding its application to arrangements that involve compensation other
than cash compensation. The public comment period on the proposed amendments ended on February 10, 2020. Federated
is assessing the potential impact of the amendments on its business, results of operations, financial condition and/or cash
flows.
• On October 18, 2019 the SEC proposed amendments to Rule 0-5 under the 1940 Act to expedite the review process for
exemptive relief applications that are "substantially identical" to recent precedent. While the relief provided by the
amendments would be narrow, the amendments have the potential to streamline an important regulatory process often
utilized when bringing new products to market. The SEC has indicated that firms may not "mix and match relief" from
prior orders, and warned that "small changes to the terms and conditions of an application, compared to a precedent
application, may either raise a novel issue, or require a significant amount of time for the Staff to consider whether it raises
such an issue." The proposed amendments also establish an internal timeframe for review of applications outside of the
proposed expedited procedure. The public comment period on the proposed amendments ended on November 29, 2019.
Federated believes these amendments will benefit the investment management industry.
Investment management industry participants, such as Federated, also continued, and will continue, to monitor, plan for and
implement certain changes in response to new proposed or adopted rules, such as the following (which Federated previously
described in greater detail in its prior public filings):
• On June 5, 2019, the SEC adopted a package of new rules (i.e. Regulation Best Interest) and amendments and
interpretations intended to enhance the quality of retail investors' relationships with broker-dealers and investment advisers
and to enhance investor protections while preserving retail investor access and choice in (1) the type of professional with
whom they work; (2) the services they receive; and (3) how they pay for these services. The new rules are intended to
enhance the standard of conduct that broker-dealers owe to their customers and align the standard of conduct with retail
customers' reasonable expectations. The rules will also provide additional transparency and clarity for retail investors
through enhanced disclosures on Form CRS designed to help them understand who they are dealing with, and why that
matters. The interpretations reaffirm, and in some cases clarify, the standard of conduct that investment advisers owe to
their clients and clarify the scope of the services a broker-dealer can provide consistent with the statutory definition of
investment adviser. With the adoption of this package, regardless of whether a retail investor chooses a broker-dealer or an
investment adviser (or both), the retail investor will be entitled to a recommendation (from a broker-dealer) or advice (from
an investment adviser) that is in the best interest of the retail investor and that does not place the interests of the firm or the
financial professional ahead of the interests of the retail investor. Regulation Best Interest and Form CRS became effective
on September 10, 2019. Compliance with Regulation Best Interest and Form CRS reporting is required by June 30, 2020.
The interpretation of an investment adviser's fiduciary duty became effective on July 12, 2019. On October 18, 2019, the
SEC's Division of Investment Management issued Frequently Asked Questions which provide further guidance to
investment advisers on disclosure requirements related to: (i) conflicts of interest regarding compensation that the adviser
received in connection with recommended investments; (ii) investment adviser conflicts related to mutual fund share class
recommendations; (iii) investment advisers' receipt of revenue sharing payments; and (iv) material amendments to Form
ADV. The Department of Labor (DOL) is also considering regulatory options in light of its modified fiduciary standard for
retirement plan advisors, promulgated in 2016 (DOL Fiduciary Rule), being vacated in its entirety in mid-2018, and is
expected to issue a new fiduciary rule in the first quarter of 2020. In response to the DOL Fiduciary Rule, broker-dealer
and other intermediaries implemented, or began implementing, changes to their business practices, including eliminating
commission-based compensation arrangements, reducing the number of mutual funds offered on their platforms or
requiring "clean shares" or other product fee structure changes based on SEC guidance. It remains uncertain whether, and
to what degree, broker-dealers or other intermediaries will roll-back, modify or continue changes made prior to the DOL
Fiduciary Rule being vacated, or make new or additional changes in light of Regulation Best Interest, Form CRS, the SEC
fiduciary duty interpretations, or any new fiduciary rule proposed by the DOL. Federated continues to analyze the potential
impact of these Regulatory Developments on Federated's business, results of operations, financial condition and/or cash
flows.
• The SEC proposed rules and amendments on March 20, 2019, to permit registered closed-end funds and business
development companies to use the registration, offering and communications reforms the SEC had previously adopted for
operating companies under the 1933 Act and to further harmonize the disclosure and regulatory framework for these funds
with that of operating companies. The proposed rules and amendments implement provisions of the Economic Growth,
Regulatory Relief, and Consumer Protection Act (the "CEF Act") and Small Business Credit Availability Act (the "BDC
Act"), and would generally provide eligible closed-end funds and business development companies with flexibility to
follow more lenient securities offering rules currently available to traditional public operating companies. The proposed
rules and amendments may benefit certain types of business development companies or closed-end funds, such as
9
exchange listed closed-end funds, but would impose additional regulatory requirements on other types of funds, such as
continuously offered closed-end funds (including interval and tender offer closed-end funds). Federated offers exchange
listed and continuously offered closed-end funds. The public comment period on the proposed rules and amendments ended
on June 9, 2019.
• The SEC proposed rule 12d1-4 and amendments under the 1940 Act on December 19, 2018, which are designed to
streamline and enhance the regulatory framework for funds that invest in other funds (or "fund of funds" arrangements). At
the same time, the SEC rescinded rule 12d1-2 under the 1940 Act and most related exemptive orders granted by the SEC to
provide relief from Sections 12(d)(1)(A), (B), (C) and (G) of the 1940 Act. The proposed rule would, under certain
specified conditions, permit a fund to acquire shares of another fund in excess of the limits of section 12(d)(1) of the 1940
Act without obtaining an exemptive order from the SEC. Specifically, proposed rule 12d1-4 would: (1) prohibit an
acquiring fund, except one that is part of the same group of investment companies as the acquired fund or one that has a
sub-advisor that acts as advisor to the acquired fund, from controlling an acquired fund and requires an applicable
acquiring fund that holds more than 3% of an acquired fund's outstanding voting securities to vote those securities in a
prescribed manner in order to minimize influence over the acquired fund; (2) prohibit an acquiring fund that acquires more
than 3% of an acquired fund's outstanding voting securities from redeeming more than 3% of the acquired fund's total
outstanding securities in any 30-day period; (3) impose conditions designed to prevent duplicative and excessive fees in
fund of funds arrangements by requiring an evaluation of aggregate fees associated with the investment in the acquired
fund and the complexity of the fund of funds arrangement; and (4) prohibit funds from creating three-tier fund of fund
structures, except in certain limited circumstances. Rule 12d1-2, which is proposed to be rescinded, currently permits funds
that primarily invest in funds within the same group of investment companies to invest in unaffiliated funds and certain
non-fund assets. The SEC also proposed related amendments to rule 12d1-1 under the 1940 Act and Form N-CEN. The
proposed amendments to rule 12d1-1 would allow funds that primarily invest in funds within the same group of investment
companies to continue to invest in unaffiliated money market funds. Finally, the amendments to Form N-CEN would
require funds to report whether they relied on rule 12d1-4 or the statutory exception in Section 12(d)(1)(G) of the 1940 Act
during the applicable reporting period. The public comment period on the proposed rule ended on May 2, 2019. Federated
continues to analyze the potential impact that the rule, if adopted as proposed, would have on Federated's fund of fund
arrangements and relevant products and, as of December 31, 2019, given the uncertainty surrounding the scope and certain
requirements of the proposed rule once finalized, Federated is unable to conclusively determine the impact on its business,
results of operations, financial condition and/or cash flows.
In addition to the above Regulatory Developments, the SEC staff has been engaging in a series of investigations, enforcement
actions and/or examinations involving investment management industry participants, including investment advisors and
investment management companies such as Federated's investment management subsidiaries and the Federated Funds. The
SEC examinations have included certain sweep examinations of investment management companies and investment advisors
involving various topics, including, but not limited to, representations regarding use of ESG factors, cyber-security, certain
technology systems, index construction and maintenance, disclosure of risks of investing in smaller or thinly traded ETFs,
funds with "aberrational" performance, compliance with the 2014 Money Fund Rules and Guidance, "distribution in guise," the
impact of the UK's vote to exit the European Union (EU) (known as "Brexit"), share class selection, fixed-income and high
yield liquidity, liquidity controls and liquid alternatives. In 2019 alone, the SEC staff conducted approximately 2,180
examinations of registered investment advisers, over 350 examinations of broker-dealers, over 150 examinations of registered
investment companies, 110 examinations of national security exchanges, and over 90 examinations of municipal advisers and
transfer agents. For 2020, the SEC has announced that it will focus on mutual funds and ETFs, the activities of their registered
investment advisors, and oversight practices of their boards of directors, and more generally on matters important to retail
investors (including retirement investors), information security, digital assets, electronic investment advice, anti-money
laundering, and compliance in registrants responsible for critical market infrastructure, among other matters, as examination
priorities. Over the past three years, the SEC staff also issued various guidance statements and risk alerts on compliance issues
related to the cash solicitation rule, risk-based examination initiatives for registered investment companies, observations from
investment adviser examinations relating to electronic messaging, transfer agent safeguarding of funds and securities,
investment adviser principal and agency cross trading compliance issues, compliance issues related to Regulation S-P privacy
notices and safeguard policies, safeguarding customer records and information in network storage, cyber-security, investment
company business continuity, mutual fund distribution, revising fund disclosures in light of changing market conditions
(including London Inter-Bank Offered Rate (LIBOR) cessation), inadvertent custody, and sales load variation disclosure,
among other topics. These investigations, examinations and actions have led, and may lead, to further regulation, guidance
statements and scrutiny of the investment management industry. Given government regulatory policies, and the possibility of a
continuing slower pace for new regulation in the U.S., the degree to which regulatory investigations, actions and examinations
will continue, as well as their frequency and scope, can vary and is uncertain.
10
Regulation or potential regulation by regulators other than the SEC also continued, and may continue, to affect investment
management industry participants, including Federated. For example, the Financial Industry Regulatory Authority (FINRA)
also has undertaken examinations, including, for example, a cyber-security sweep examination, and various state legislatures or
regulators have adopted or are beginning to adopt state-specific cyber-security and/or privacy requirements that may apply, to
varying degrees, in addition to federal regulation.
The activities of the Financial Stability Oversight Council (FSOC) also continue to be monitored by the investment
management industry, including Federated. Since the FSOC indicated in 2014 that it intended to monitor the effectiveness of
the 2014 Money Fund Rules, concerns persisted that the FSOC may recommend new or heightened regulation for "non-bank
financial companies," which the Board of Governors of the Federal Reserve System (Governors) have indicated can include
open-end investment companies, such as money market funds and other mutual funds. In its past Annual Reports, the FSOC
recommended that the SEC monitor the implementation of these rules and evaluate the extent to which they address potential
risks in the asset management industry. In its 2019 Annual Report published on December 4, 2019, the FSOC turned its focus to
other types of cash management vehicles that continue to use amortized cost or have a stable NAV, and that may be sponsored
or advised by registered investment advisers, but are nevertheless not subject to SEC oversight. These include entities such as
local government investment pools and private liquidity funds. Noting that such entities are not subject to the 2014 Money
Fund Rules, the FSOC recommended that financial regulators monitor developments concerning such short-term cash
management vehicles for any financial stability risk implications. The FSOC also identified liquidity and redemption risks, as
well as the use of leverage, as an area of focus for investment funds and recommended that the SEC monitor the
implementation and evaluate the effectiveness of rules intended to reduce such risks (e.g. the 2016 Liquidity Rule, and the re-
proposed Derivatives Rule).
On December 4, 2019, the FSOC voted unanimously to adopt amendments to its interpretive guidance regarding the
designation of non-bank financial companies as systemically important financial institutions. The adopted amendments are
substantially similar to those that were proposed on March 6, 2019. Under the amended guidance, the FSOC changes its
designation approach from an entity-based approach to an activities-based approach under which an individual firm would only
be so designated if it determined that efforts to address the financial stability risks of that firm's activities by its primary federal
and state regulators have been insufficient. Under the amended guidance, among other things, the FSOC is required first to
focus on regulating activities that pose systemic risk, through actions by primary regulators. This differs from the FSOC's
historical focus on designating individual firms as systemically important. Under the proposed guidance, the FSOC also would
make its designation process more efficient by reducing it from three stages to two, and make the designation process more
transparent by inviting participation and engagement by firms under consideration for designation. The FSOC also would be
required to conduct a cost benefit analysis (to the U.S. financial system, the U.S. economy, and the nonbank financial company)
prior to making a designation, which must include an analysis of the likelihood of the potential systemic impact actually
occurring, and to assess the likelihood of a non-bank financial company's material financial distress by considering "not only
the impact of an identified risk, but also the likelihood that the risk will be realized."
Certain Democratic candidates for the 2020 Presidential election have expressed support for a financial transactions tax (FTT)
that would impose a 0.1% or 0.2% tax on securities transactions. On March 5, 2019, legislation was introduced in both the
House of Representatives and Senate that, if passed and signed into law, would impose a 0.1% tax on stock, bond and derivative
transactions. The tax would apply to sales made in the U.S. or by U.S. persons, and initial securities issuances and short-term
debt would be exempt. A later proposal would tax stock trades at 0.5%, bond trades at 0.1%, and derivatives transactions at
0.005% coupled with an income tax credit for individuals with income of less than $50,000 ($75,000 for married couples),
which is intended to offset the average burden of the tax for such individuals. Management does not believe this legislation will
be enacted under President Trump's administration.
The current regulatory environment has impacted, and will continue to impact, Federated's business, results of operations,
financial condition and/or cash flows. For example, regulatory changes, such as the 2014 Money Fund Rules and Guidance, can
result in shifts in asset mixes and flows. These shifts impact Federated's AUM, revenues and operating income. Management
continues to believe that, as and to the extent interest rates remain at higher levels and do not return to near zero, money market
funds will benefit generally from increased yields, particularly as compared to deposit account alternatives, and that assets will
continue to flow back into money market funds. While 2018 and 2019 did see a shift in asset mix back toward institutional
prime and municipal (tax-exempt) money market funds, there is no guarantee such shift will continue and return the asset mix
between institutional prime, municipal (or tax-exempt) and government money market funds to pre-October 2016 levels;
therefore, the degree of improvement to Federated's prime money market business can vary and is uncertain.
The changes made in response to the DOL Fiduciary Rule impacted, and any modifications or additional changes that may be
made in response to Regulation Best Interest, Form CRS, the SEC fiduciary duty interpretations, or any new fiduciary rule
proposed by the DOL likely may impact, Federated's AUM, revenues and operating income. For example, while it remains
11
uncertain whether, and to what degree, broker-dealers or other intermediaries will roll-back, modify or continue changes made
prior to the DOL Fiduciary Rule being vacated, or to make new or additional changes in light of Regulation Best Interest, Form
CRS, the SEC fiduciary duty interpretations, or any new fiduciary rule proposed by the DOL, if intermediaries continue to
reduce the number of Federated Funds offered on their platforms, mutual fund-related sales and distribution fees earned by
Federated may decrease. In that case, similar to other investment management industry participants, Federated could experience
a further shift in asset mix and AUM, and a further impact on revenues and operating income. On the other hand, management
continues to believe that Federated's business may be positively affected because separately managed account/wrap-fee
strategies work well in level wrap fee account structures and can provide transparency and potential tax advantages to clients,
while Federated's experience with bank trust departments and fiduciary experience and resources presents an opportunity to add
value for clients.
Federated has dedicated, and continues to dedicate, significant internal and external resources to analyze and address
Regulatory Developments, and their effect on Federated's business, results of operations, financial condition and/or cash flows.
This effort includes considering and/or affecting legislative, regulatory, product structure and development, information system
development, reporting capability, business and other options that have been or may be available in an effort to minimize the
potential impact of any adverse consequences. Federated's efforts include having conversations with intermediary customers
regarding Regulatory Developments, and analyzing product offering and structure adjustments, regulatory alternatives and
other means to comply, and to assist its customers to comply, with new fiduciary rules or interpretations, the 1940 Act and other
applicable laws and regulations. As appropriate, Federated also participated, and will continue to participate, either individually
or with industry groups, in the comment process for proposed regulations. Federated continues to expend legal and compliance
resources to examine corporate governance and public company disclosure proposals and final rules issued by the SEC, to
adopt, revise and/or implement policies and procedures, and to respond to examinations, inquiries and other matters involving
its regulators, including the SEC, customers or other third parties. Federated continues to devote resources to technology and
system investment, cybersecurity and information governance, and the development of other investment management and
compliance tools, to enable Federated to, among other benefits, be in a better position to address new or modified regulatory
requirements. The Regulatory Developments discussed above, and related regulatory oversight, also impacted, and/or may
impact, Federated's customers and vendors, their preferences and their businesses. For example, these developments have
caused, and/or may cause, certain product line-up, structure, pricing and product development changes, as well as money
market, equity, fixed-income, alternative/private markets or multi-asset fund products to be less attractive to institutional and
other investors, reductions in the number of Federated Funds offered by intermediaries, changes in the fees Federated,
retirement plan advisors and intermediaries will be able to earn on investment products and services sold to retirement plan
clients, and reductions in AUM, revenues and operating profits. In addition, these developments have caused, and/or may cause,
changes in asset flows, levels and mix, as well as customer relationships.
Federated will continue to monitor Regulatory Developments as necessary, and may implement additional changes to its
business and practices as it deems necessary or appropriate. Further analysis and planning, or additional refinements to
Federated's product line and business practices, may be required in response to market, customer or regulatory changes and
developments, such as new conflict of interest or fiduciary rules and other Regulatory Developments, or any additional
regulation or guidance issued by the SEC or other regulatory authorities.
In addition to the impact on Federated's AUM, revenues, operating income and other aspects of Federated's business described
above, on a cumulative basis, Federated's regulatory, product development and restructuring, and other efforts in response to the
Regulatory Developments discussed above, including the internal and external resources dedicated to such efforts, have had,
and may continue to have, a material impact on Federated's expenses and, in turn, financial performance. As of December 31,
2019, given the current regulatory environment, and the possibility of future additional or modified regulation or oversight,
Federated is unable to fully assess the impact of adopted or proposed regulations, and other Regulatory Developments, and
Federated's efforts related thereto, on its business, results of operations, financial condition and/or cash flows. The regulatory
changes and developments in the current regulatory environment, and Federated's efforts in responding to them, could have a
material and adverse effect on Federated's business, results of operations, financial condition and/or cash flows. As of
December 31, 2019, while the FSOC's change in focus and continuing transparency efforts have reduced the possibility of any
Federated products being designated a systemically important non-bank financial company, in management's view any such
designation and any reforms ultimately put into effect would be detrimental to Federated's money market fund business and
could materially and adversely affect Federated's business, results of operations, financial condition and/or cash flows.
Federated also is unable to assess at this time whether, or the degree to which, any continuing deregulation efforts or potential
options being evaluated in connection with regulatory changes and developments ultimately may be successful.
12
International
With the passing of the European Union (Withdrawal Agreement) Bill 2020 (Withdrawal Agreement Bill) by the UK Parliament
approving Prime Minister Boris Johnson's Brexit agreement, and the Queen's royal assent, the UK exited the European Union
on January 31, 2020. The Withdrawal Agreement Bill implements the withdrawal agreement reached between the UK and the
other 27 EU member states and sets out the arrangements for the UK's withdrawal from the EU. It provides for a transition
period through the end of 2020 for the UK to leave the EU, and this transition period cannot be extended with EU law
continuing to be upheld in the UK during the transition period. The Withdrawal Agreement Bill establishes customs checks on
goods being moved between the UK and Northern Ireland in order to avoid a hard border. Taxes will only have to be paid on
goods being moved from the UK to Northern Ireland if those products are considered at risk of then being transported into the
Republic of Ireland, with the ability to obtain a refund if the goods are not actually transported to the Republic of Ireland.
Northern Ireland continues to follow EU regulations relating to labeling and manufacturing goods. UK nationals are able to live
and work in EU countries, and EU nationals are able to live and work in the UK, during the transition period and UK citizens in
the EU, and EU citizens in the UK, retain their residency and social security rights. An independent monitoring authority will
be established to monitor the rights of EU citizens that remain in the UK after Brexit. The Withdrawal Agreement Bill also
establishes a timeline for the UK to repay approximately £33 billion in financial obligations to the EU. The UK and EU will
utilize the transition period to negotiate a Free Trade Agreement in 2020.
Until a Free Trade Agreement is reached and the transition period ends, significant political, economic, legal and regulatory
uncertainty continues to exist regarding the impact of Brexit. See Item 1A - Risk Factors for further discussion of the risks of
political instability, currency abandonment and other market disruptions on Federated and its business. The UK's exit from the
EU also will likely affect the requirements and/or timing of implementation of legislation and regulation applicable to doing
business in the UK, including the laws and regulations applicable to Federated, as well as to the sponsoring, management,
operation and distribution of Federated's products and services, both in and outside the UK. Uncertainty exists regarding the
ability to passport fund distribution and management services between the UK and EU, increasing regulatory burdens and
compliance and other costs for UK funds being distributed in the EU and EU funds (such as Irish-domiciled funds) being
distributed in the UK. The ability to engage investment managers for EU funds and UK funds also could be impacted, resulting
in structural and other changes for UK- and EU-domiciled funds. The UK Financial Conduct Authority (FCA) has implemented
a temporary permissions regime that allows EEA-domiciled investment funds that market in the UK under a passport to
continue temporarily marketing in the UK, and allows EEA-based firms currently passporting into the UK to continue new and
existing regulated business within the scope of their current permissions in the UK for up to three years, while they seek full
FCA authorization. EU governments, such as, among others, France, the Netherlands, Italy and Germany also have adopted
similar temporary permission regimes or other laws to permit UK products to be sold, and EU-UK financial transactions to
continue, for a period of time in their countries in the event of a hard Brexit. UK and EU industry groups have been asking
regulators to adopt an EU-wide temporary permissions regime to avoid having to comply with requirements imposed by each
EU country. It also remains unclear whether Brexit may impact various initiatives underway in the EU, such as the
implementation of an FTT.
Federated is monitoring the impact of Brexit, and, while Brexit has not had a significant impact on Federated's business as of
December 31, 2019, Federated remains unable to assess the degree of any potential impact Brexit, and resulting changes, may
have on Federated's business, results of operations, financial condition and/or cash flows. Federated continues to expend
internal and external resources on contingency planning for Brexit. For example, Hermes organized a subsidiary based in
Dublin, Ireland, and established offices in Germany and Denmark, as part of Brexit contingency planning for its business. The
Hermes Acquisition increased the potential impact Brexit, and resulting changes, may have on Federated's business, results of
operations, financial condition and/or cash flows.
The European Commission has issued four legislative proposals relating to its Action Plan on Sustainable Finance. The
legislation addresses, among other things, the establishment of a framework to facilitate sustainable investment, including a
unified EU classification system setting harmonized criteria to determine whether an economic activity is environmentally
sustainable, disclosures relating to sustainable investments and sustainability risks, amendments to the Benchmark Regulation
to create a new category of benchmarks comprising low-carbon and positive carbon impact benchmarks, and amendments to
the Markets in Financial Instruments Directive (MiFID II) to provide consistency and clarity for institutional investors
integrating ESG factors into their investment decision-making process. Pursuant to the Action Plan on Sustainable Finance, in
August 2019 the European Commission commissioned studies on sustainability ratios and research, with the objectives of
designing a coherent legal and economic classification of sustainability-related products and services and exploring the
integration of ESG risks into the EU banking prudential framework and into banks' business strategies and investment policies.
On November 8, 2019, the Council of the EU adopted the Low Carbon Benchmark Regulation (LCBR), which requires new
categories of financial benchmarks, one being an EU climate transition benchmark and one being a "Paris-aligned" benchmark
13
that brings investment portfolios in line with the Paris Agreement (a 2016 agreement within the United Nations Framework
Convention on Climate Change dealing with greenhouse-gas-emissions mitigation, adaptation, and finance). The providers of
these benchmarks will have to disclose whether or not, and to what extent, the benchmarks ensure a degree of overall alignment
with the target of reducing carbon emissions or the attainment of the objectives of the Paris Agreement is ensured. The LCBR
also requires all benchmark providers to disclose whether their benchmarks pursue ESG objectives and whether the provider
offers such ESG-focused benchmarks.
On November 8, 2019, the Council of the EU also adopted the Disclosure Regulation, which is aimed at raising market
awareness of sustainability and eliminating "greenwashing" or the provision of unsubstantiated or misleading claims regarding
the sustainability characteristics and benefits of an investment product. The Disclosure Regulation also aims to harmonize
disclosures by providing a uniform format for disclosures. Firms are required to disclose procedures that integrate ESG risks
into their investment and advisory processes, the extent to which those risks may impact the profitability of investments, and
information on how environmentally friendly strategies are implemented. The Disclosure Regulation covers investment funds,
investment advice, private and occupational pensions, insurance-based investment products and insurance advice.
On November 27, 2019, the European Parliament passed the Sustainability-Related Disclosures Regulation (SRDR), which
requires certain website, prospectus and annual report disclosures and implements a product classification system. Under the
SRDR, a firm will be required to (1) disclose on its website(s) information about the integration of sustainability risks into the
firm's decision-making processes and investment advice, (2) disclose on its website(s) adverse sustainability impacts arising
from the firm's investment decisions, (3) include pre-contractual disclosures on the integration of sustainability risks into
investment decisions and the likely impacts of sustainability on investment returns, and (4) disclose on its website(s)
information explaining how remuneration policies are consistent with the integration of sustainability risks. The SRDR also
defines "Dark Green Products" as products having an objective of "sustainable investment" and "Light Green Products" as
products that promote environmental or social characteristics. The SRDR became effective on December 29, 2019, with
compliance for a majority of its provisions being required from and after March 10, 2021.
On December 18, 2019, the European Parliament and Council of the EU agreed upon the Taxonomy Regulation, which is aimed
at establishing a framework to facilitate sustainable investment. The EU and Member States will be required to apply the
taxonomy when adopting measures (e.g., labels or standards) setting requirements regarding financial products or corporate
bonds presented as "environmentally sustainable". The Taxonomy Regulation applies to financial market participants (e.g.,
institutional investors and asset managers) who offer financial products. Among other requirements, it requires disclosures for
all financial products (with an opt-out with a disclaimer for non-green products) regarding how and to what extent the
investments that underlie the financial products support economic activities that meet the criteria of the taxonomy (including
details on the respective proportions of enabling and transition activities). Climate change mitigation and adaptation criteria are
to be adopted by the end of 2020 with application by the end of 2021. Other environmental objectives (e.g. water and marine
resources, circular economy, biodiversity) are to be adopted by the end of 2021 with application by the end of 2022. Member
States, the EU, and covered market participants will have to start complying with the Taxonomy Regulation requirements
beginning December 31, 2021.
Federated continues to assess the potential impact that Sustainable Finance proposals may have on its non-U.S. business, results
of operations, financial condition and/or cash flows.
On October 12, 2019, the European Securities and Markets Authority (ESMA) published the final report on the draft regulatory
technical standards (RTS) under Article 25 of the regulation on European long-term investment funds (ELTIF). The new
regulatory framework includes revised cost disclosure requirements applicable to packaged retail investment and insurance-
based products (PRIIPs). In March 2019, ESMA released a consultation paper on the draft RTS, mainly because of differences
between cost disclosure requirements in the PRIIPs and under the UCITS Directive. In the final report, ESMA indicated that it
would postpone the finalization of the draft RTS until the new PRIIPs delegated acts have been published, and that upon
finalization of the review of the PRIIPs Delegated Regulation 2017/653, it will assess the most appropriate way to finalize the
draft ELTIF RTS and may carry out another round of consultations.
On September 30, 2019, the FCA's new requirement took effect requiring UK managers to undertake an annual assessment of
whether funds under their advisement provide value. Various factors are to be considered, including the fees the fund charges,
performance, whether economies of scale are being obtained and passed on to investors, the quality of service provided to
investors, etc. Managers must make a public statement of the outcome of the value assessment. Similarly, the Central Bank of
Ireland (CBI) has also imposed a value assessment requirement for Irish UCITs funds.
The Fifth Anti-Money Laundering Regulations were implemented in the UK on January 10, 2020. A key extension of the
regulations is to the letting sector of the real estate industry. The regulations will require additional due diligence to be
14
undertaken on tenants going forward. There are also new additional high-risk factors to consider when assessing the need for
enhanced due diligence. Firms must understand the ownership and control structure of their corporate customers, and record
any difficulties encountered in identifying beneficial ownership. Furthermore, there is a new requirement for firms to report to
the UK Companies House discrepancies between the information the firm holds on its customers compared with the
information held in the Companies House Register.
Investment management industry participants, including Federated, continued, and will continue, to monitor, plan for and
implement certain changes in response to new proposed or adopted rules, such as the following (which Federated previously
described in greater detail in its prior public filings):
• On October 6, 2019, the FCA rules on improving shareholder engagement in connection with the Shareholder Rights
Directive II became effective. The FCA previously issued a Policy Statement, final rules and a consultation paper on the
Shareholder Rights Directive II on May 31, 2019. The final rules and guidance apply to regulated life insurers, asset
managers and companies with shares admitted to trading on a regulated market. The Policy Statement confirmed that firms,
such as asset managers, had to implement an engagement policy, and make certain disclosures regarding their engagement
policy and investment strategies (or explain why they have not done so), by June 10, 2019. The engagement policy is
required to cover how firms integrate shareholder engagement in their investment strategies, how they monitor investee
companies on strategy, financial and non-financial performance, capital structure and social impact, environmental impact
and corporate governance, how they conduct dialogue and exercise voting, cooperate with other shareholders,
communicate with other stakeholders and manage conflicts of interest. In addition to engagement policy implementation,
the detailed rules require firms to send details of portfolio composition, turnover and turnover costs to certain clients. Firms
that are required to make annual disclosures must do so for the first full period after the rules come into effect. For
Federated's non-U.S. operations (excluding Hermes) Federated elected to disclose support for the Shareholder Rights
Directive II but not adopt a new set of engagement policies. Hermes also supports the Shareholder Rights Directive II and
previously published its engagement policies.
• On September 20, 2019, the FCA issued a policy statement on illiquid assets and open-end funds, which sets forth new
rules and guidance applicable to non-UCITS retail schemes (NURS), but not other types of funds (including UCITS).
Under the policy statement, NURS holding property and other immovables will be required to suspend dealing when there
is material uncertainty about valuation of at least 20% of a fund's property. Authorized fund managers will be allowed to
continue to deal where they agree with the NURS' depositary that doing so is in the best interests of investors. Fund
managers investing mainly in illiquid assets will also be required to produce contingency plans for dealing with liquidity
risks. A fund will also be required to include additional disclosure in its prospectus describing the fund's liquidity risk
management strategies, including the tools that will be used and the possible impact on investors. A standard risk warning
also will be required in financial promotions to retail investors. Compliance with the policy statement is required by
September 30, 2020.
• On September 2, 2019, ESMA published guidelines on liquidity stress testing in UCITS funds and alternative investment
funds (AIFs), with the objectives of increasing the standardization, consistency and frequency of liquidity stress testing
currently being undertaken and promoting the convergent supervision of liquidity stress testing by each National
Competent Authority (NCA). The guidelines recommend that, when designing liquidity stress testing models, fund
managers should determine the risk factors that may impact a fund's liquidity, the types of scenarios to utilize and their
severity, the indicators to be monitored based on the liquidity stress testing results, the manner in which liquidity stress
testing results will be reported to management, and how the results will be utilized. The guidelines further recommend that
fund managers should have a strong understanding of the liquidity risks arising from a fund's assets and liabilities and a
fund's overall liquidity profile to enable the fund manager to implement appropriate liquidity stress testing for the fund.
The guidelines apply beginning on September 30, 2020. The ESMA guidelines followed an August 7, 2019 letter from the
CBI in which it reminded the investment industry that responsibility for liquidity risk management, which includes
compliance with all legal and regulatory obligations in respect of liquidity of each fund under management, rests with the
boards of fund companies, individual directors and relevant designated persons. In September 2019, the FCA also informed
asset managers that it wants all open-end funds to adhere to new liquidity rules as soon as possible. With the increased
focus on liquidity, Federated has begun enhancing its formal liquidity procedures for its investment products.
• On July 19, 2019, ESMA published a Final Report on Guidelines on stress test scenarios under the EU Money Market Fund
Regulation (MMF Regulation) and a Final Report on reporting to competent authorities under Article 37 of the MMF
Regulation, which are aimed at ensuring a coherent application of the MMF Regulation. As required by Article 28 of the
MMF Regulation, the Guidelines on stress testing establish common reference parameters of the stress test scenarios
money market funds or managers of money market funds should include in their stress testing scenarios. As required by
Article 37 of the MMF Regulation, the Guidelines on reporting provide guidance on how to fill in the reporting template on
15
money market funds that their managers will transmit to competent authorities as of the first quarter of 2020. Federated
continues to analyze the new Guidelines and the requirements for compliance.
• A European FTT also continues to be discussed although it remains unclear when an agreement will be reached regarding
its adoption. Since the European Commission first proposed a European FTT in 2011, proponents of the FTT have sought
the widest possible application of the FTT with low tax rates. In December 2019, Germany proposed a draft directive that
would impose a 0.2% tax on purchases of shares of large companies worth more than €1 billion, which would cover over
500 companies. Initial public offerings (IPOs) would be excluded, and each Member State would be free to tax equity
funds and similar products for private pensions. Under the German proposal, the five countries with the highest incomes
would share a small part of their revenues with the other countries, so that each participating country would receive at least
€20 million of FTT revenue. No formal action was taken as of December 31, 2019. The weakening economy in Europe
may increase this risk. The exact time needed to reach a final agreement on a FTT, implement any agreement and enact
legislation is not known at this time. Brexit also could delay agreement on, and implementation of, the FTT in the EU or
UK. The Labour Party in the UK has also separately proposed a UK FTT, but with the uncertainty surrounding the impact
of Brexit, it is unclear whether a UK FTT will be advanced in 2020.
• The FCA has issued its final guidance on extending the Senior Managers and Certification Regime (SMCR) to insurers and
all other firms offering financial services in the UK, intended to increase accountability for senior personnel and key staff.
The FCA designates certain "senior management functions" and "certification functions." Under the SMCR, personnel
conducting senior management functions (called Senior Managers) will need to be approved by the FCA and, those
approved will be listed in a Financial Services Register. Personnel that do not perform senior management functions but
whose role could cause significant harm to customers or the firm are considered to perform certification functions (called
Certification Staff). As such, firms are required to certify that such personnel are fit and proper to perform their roles. Both
Senior Managers and Certification Staff were required to be identified and trained by December 9, 2019. Firms will have
an additional twelve months to complete the certification process for Certification Staff. All staff (other than ancillary staff)
will be subject to certain conduct rules set forth by the FCA.
The activities of the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO)
also continue to be monitored by the investment management industry, including Federated. Building on consultations and
other reports published from 2015 through 2019 regarding methodologies for identifying non-bank non-insurer global
systemically important financial institutions, recommendations to address structural vulnerabilities from asset management
activities, and liquidity risk management, the FSB and IOSCO continued, and will continue, to assess, recommend and
implement regulatory reforms affecting money market funds, liquidity risk management, derivatives, leverage, and other
aspects of the investment management industry. For example, in its Annual Report on the Implementation and Effects of the
G20 Financial Regulatory Reforms published on October 16, 2019, the FSB indicates that, to strengthen the monitoring of non-
bank financial institutions, the FSB is assessing data availability and making improvements to its annual monitoring exercise
and will launch a thematic peer review in 2020 to assess progress in implementing its policy framework. Among other
recommendations, the report specifically recommends that financial stability authorities should continue to contribute to the
FSB's monitoring of emerging risks and stand ready to act if such risks materialize. In its December 13, 2019 report on
"Recommendations for a Framework Assessing Leverage in Investment Funds", IOSCO unveiled a two-step framework
designed to facilitate monitoring of leverage in investment funds that could potentially pose risks to financial stability. The
framework is aimed at achieving a meaningful and consistent assessment of leverage-related risks of a fund or group of funds.
The recommendations also aim to achieve a balance between precise leverage measures and simple, robust metrics that
regulators can apply consistently to the wide range of funds offered in different jurisdictions. For Step 1, IOSCO recommends
that regulators use Gross Notional Exposure (GNE) or adjusted GNE as baseline analytical tools. For Step 2, IOSCO
recommends that each regulator determine its approach to define appropriate risk-based measures for analyzing funds identified
under Step 1 that may potentially pose significant leverage-related risks to the financial system.
Global securities regulators are urging the adoption of new risk free reference rates as alternatives to LIBOR. Separate working
groups have been formed in the UK, the U.S., the EU, Japan and Switzerland to recommend an alternative to LIBOR for their
respective markets. The FCA and the Bank of England (BoE) Prudential Regulation Authority continue efforts started in
September 2018 regarding the transition from LIBOR to the Sterling Overnight Index Average (SONIA) by the end of 2021.
The BoE continues to encourage firms to consider their actions and preparations in managing the transition from LIBOR to
alternative interest rate benchmarks, and to seek assurances that firms' senior managers and boards understand the risks
associated with this transition. In early June 2019, representatives of the BoE and FCA told banks that it is "last orders" for
LIBOR and that banks must stop adding to their post-2021 LIBOR exposures. On January 16, 2020, the BoE, FCA and the
Working Group on Sterling Risk-Free Reference Rates (RFRWG) published a series of documents outlining priorities and
milestones for 2020 with respect to the LIBOR transition. The priorities include (1) ceasing issuance of cash products linked to
16
sterling LIBOR by the end of the third quarter of 2020, (2) throughout 2020, taking steps that demonstrate that compounded
SONIA is easily accessible and usable, (3) taking steps to enable a further shift of volumes from LIBOR to SONIA in derivative
markets, (4) establishing a framework for the transition of legacy LIBOR products, in order to significantly reduce the stock of
LIBOR referencing contracts by the first quarter of 2021; and (5) considering how best to address issues such as "tough legacy"
contracts. Regulators in the U.S. and other countries are also working on the transition from LIBOR. For example, the SEC and
other regulators in the U.S. are undertaking efforts to identify risks and prepare for the transition from LIBOR to the Secured
Overnight Financing Rate (SOFR) by the end of 2021. The SOFR was selected as the preferred LIBOR replacement in the U.S.
by the Alternative Reference Rates Committee at the Federal Reserve Bank of New York. In early June 2019, a representative
of the Federal Reserve Bank of New York urged the finance industry to ramp up preparations for the end of LIBOR and take the
warnings seriously. On July 12, 2019, the SEC issued a "Staff Statement on LIBOR Transition" in which the SEC staff
indicated that the expected discontinuation of LIBOR could have a significant impact on the financial markets and may present
a material risk for certain market participants, including public companies, investment advisers, investment companies and
broker dealers. The SEC staff further noted that the risks associated with the discontinuation and transition will be exacerbated
if the work necessary to effect an orderly transition to an alternative reference rate is not completed in a timely manner, and
reported that the staff is actively monitoring the extent to which market participants are identifying and addressing these risks.
IOSCO previously published on July 31, 2019 a statement endorsing risk free reference rates as a robust alternative to LIBOR
that can be used in the majority of products, and urged transitioning to risk free reference rates "now." On December 18, 2019,
the FSB published its "Annual Progress Report on Implementation of Recommendations to Reform Major Interest Rate
Benchmarks" in which the FSB emphasized that the continued reliance of global financial markets on LIBOR poses risks to
financial stability. In the report, the FSB calls for significant and sustained efforts by regulators and by financial and non-
financial firms across many jurisdictions to transition away from LIBOR by the end of 2021. The phase-out of LIBOR may
cause the renegotiation or re-pricing of certain credit facilities, derivatives or other financial transactions to which investment
management industry participants, including Federated and its products, customers or service providers, are parties, alter the
accounting treatment of certain instruments or transactions, or have other unintended consequences, which, among other
effects, could require additional internal and external resources, and may increase operating expenses. Federated continues to
assess the impact that the transition from LIBOR will have on Federated and Federated's products and strategies, customers and
service providers.
Management believes that a UK FTT or EU FTT, particularly if enacted with broad application, would be detrimental to
Federated's business and could adversely affect, potentially in a material way, Federated's business, results of operations,
financial condition and/or cash flows. Management continues to monitor and evaluate the impact of regulatory reforms on
Federated's business, results of operations, financial condition and/or cash flows. Regulatory reforms stemming from Brexit or
FCA, FSB, IOSCO or other initiatives or Regulatory Developments, as well as the potential political and economic uncertainty
surrounding Brexit, also may adversely affect, potentially in a material way, Federated's business, results of operations,
financial condition and/or cash flows. Similar to its efforts in the U.S., Federated has dedicated, and continues to dedicate,
significant internal and external resources to analyze and address European reforms that impact Federated's investment
management and stewardship business.
European Regulatory Developments, and Federated's efforts relating thereto, have had, and may continue to have, an impact on
Federated's expenses and, in turn, financial performance. As of December 31, 2019, Federated is unable to conclusively assess
the potential impact that a FTT or other regulatory reforms or initiatives may have on its business, results of operations,
financial condition and/or cash flows. Federated also is unable to conclusively assess at this time whether, or the degree to
which, Federated, any of its investment management subsidiaries or any of the Federated Funds, including money market funds,
or any of its other products, could ultimately be determined to be a non-bank, non-insurance company global systemically
important financial institution. The Hermes Acquisition increased the potential impact that the above matters may have on
Federated's business, results of operations, financial condition and/or cash flows.
Employees
At December 31, 2019, Federated employed 1,826 persons.
17
Information about our Executive Officers
The following section sets forth certain information regarding the executive officers of Federated as of February 21, 2020:
Name
J. Christopher Donahue President, Chief Executive Officer, Chairman and Director of Federated Hermes, Inc.
Position
Age
70
Gordon J. Ceresino
Vice Chairman of Federated Hermes, Inc. and President of Federated International
Management Limited and Federated International Securities Corp.
Thomas R. Donahue
Vice President, Treasurer, Chief Financial Officer and Director of Federated Hermes, Inc.
and President of FII Holdings, Inc.
John B. Fisher
Peter J. Germain
Vice President and Director of Federated Hermes, Inc. and President and Chief Executive
Officer of Federated Advisory Companies*
Executive Vice President, Chief Legal Officer, General Counsel and Secretary of Federated
Hermes, Inc.
Richard A. Novak
Vice President, Assistant Treasurer and Principal Accounting Officer of Federated Hermes,
Inc.
Saker A. Nusseibeh
Chief Executive Officer, Hermes Fund Managers Limited
Paul A. Uhlman
Vice President of Federated Hermes, Inc. and President of Federated Securities Corp.
Stephen P. Van Meter
Vice President and Chief Compliance Officer of Federated Hermes, Inc.
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63
60
56
58
53
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*
Federated Advisory Companies include the following: Federated Advisory Services Company, Federated Equity
Management Company of Pennsylvania, Federated Global Investment Management Corp., Federated Investment
Counseling, Federated Investment Management Company and Federated MDTA LLC, each wholly owned by
Federated.
Mr. J. Christopher Donahue has served as director, President and Chief Executive Officer of Federated since 1998 and was
elected as Chairman effective April 2016. He also serves as a director, trustee or officer of various Federated subsidiaries. He is
President of 29 investment companies managed by subsidiaries of Federated. He is also director or trustee of 32 investment
companies managed by subsidiaries of Federated. Mr. Donahue is the brother of Thomas R. Donahue who serves as Vice
President, Treasurer, Chief Financial Officer and director of Federated.
Mr. Gordon J. Ceresino has served as Vice Chairman of Federated since 2007. He is President of Federated International
Management Limited and Federated International Securities Corp. and Vice Chairman of Federated MDTA LLC, each of which
are wholly owned subsidiaries of Federated. He serves as a director of Hermes Fund Managers Limited. Mr. Ceresino also
serves as a director, trustee or President or Chief Executive Officer of certain other wholly owned subsidiaries of Federated
involved in Federated's non-U.S. operations.
Mr. Thomas R. Donahue has served as Vice President, Treasurer and Chief Financial Officer of Federated since 1998. He
previously served as a member of the Board from May 1998 to April 2004 and was re-elected to the Board in April 2016. He
also serves as an Assistant Secretary of Federated and he is President of FII Holdings, Inc., a wholly owned subsidiary of
Federated. He serves as a director of Hermes Fund Managers Limited. He also serves as a director, trustee or officer of various
other Federated subsidiaries. He is also a director or trustee of six investment companies managed by subsidiaries of Federated.
Mr. Donahue is the brother of J. Christopher Donahue who serves as President, Chief Executive Officer, Chairman and director
of Federated.
Mr. John B. Fisher has served as Vice President of Federated since 1998. He previously served as a member of the Board from
May 1998 to April 2004 and was re-elected to the Board in April 2016. He has also been President and Chief Executive Officer
of Federated Advisory Companies since 2006 and serves as a board member for each of these subsidiaries that are wholly
owned by Federated. He serves as a director of Hermes Fund Managers Limited. He also serves as a director, trustee or officer
of certain other Federated subsidiaries. He is President of three investment companies managed by subsidiaries of Federated.
He is also director or trustee of 26 investment companies managed by subsidiaries of Federated. Prior to 2006, Mr. Fisher
served as President of the Institutional Sales Division of Federated Securities Corp., a wholly owned subsidiary of Federated.
Mr. Peter J. Germain has served as Executive Vice President, Chief Legal Officer and Secretary of Federated since October
2017, and as General Counsel and Vice President of Federated since January 2005. In his capacity as Chief Legal Officer, he
oversees the delivery of legal, compliance, internal audit and risk management services to Federated and its affiliates. He also
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serves as a director, trustee or officer of various Federated subsidiaries. Mr. Germain also serves as Chief Legal Officer,
Executive Vice President and Secretary of 32 investment companies managed by subsidiaries of Federated.
Mr. Richard A. Novak has served as Vice President, Assistant Treasurer and Principal Accounting Officer of Federated since
2013. Prior to that time, he served as Fund Treasurer of Federated's domestic mutual funds beginning in 2006 and served as the
Controller of Federated from 1997 through 2005. He also serves as Senior Vice President, Treasurer, Assistant Treasurer,
Assistant Company Secretary, President or director for various other subsidiaries of Federated. Mr. Novak is a Certified Public
Accountant.
Mr. Saker A. Nusseibeh is Chief Executive Officer of Hermes, a majority-owned subsidiary of Federated beginning July 1,
2018. He joined Hermes in 2009 and was appointed Chief Executive Officer in May 2012, having served as acting Chief
Executive Officer since November 2011. He formerly served as Global Head of Equities at Fortis Investments USA, having
initially been appointed as Head of Global Equities in 2005. He also serves as a director of Hermes and as a director or officer
of certain subsidiaries of Hermes.
Mr. Paul A. Uhlman has served as Vice President of Federated, and President and a director of Federated Securities Corp., a
wholly owned subsidiary of Federated, since June 2016. He is also a director, trustee or officer of certain subsidiaries of
Federated. As President of Federated Securities Corp., he is responsible for the marketing and sales efforts of Federated. He had
previously served as a Vice President of Federated Securities Corp. since 1995, and most recently served as Executive Vice
President of Federated Securities Corp. since 2010. Mr. Uhlman also held the position of National Sales Director, Institutional
Sales, from 2007 through June 2016.
Mr. Stephen P. Van Meter has served as Vice President and Chief Compliance Officer of Federated since July 2015. Between
October 2011 and July 2015, he served as Compliance Operating Officer at Federated. Between October 2007 and October
2011, he served as Senior Counsel in the Division of Investment Management, Office of Chief Counsel, at the SEC. Between
September 2003 and October 2007, Mr. Van Meter served as Senior Counsel in the SEC's Division of Enforcement.
Available Information
Federated makes available, free of charge, on its website, www.FederatedHermes.com, its annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, annual information statements and amendments to those reports,
including those filed or furnished pursuant to Section 13(a) or 15(d) of the 1934 Act, as soon as reasonably practicable after
such information is electronically filed with or furnished to the SEC.
Other Information
All references to the Notes to the Consolidated Financial Statements in this Form 10-K refer to those in Item 8 - Financial
Statements and Supplementary Data (Consolidated Financial Statements). All other information required by this Item is
contained in Item 6 - Selected Financial Data and Note (5) to the Consolidated Financial Statements.
All cross-references between Items in this 10-K are considered to be incorporated into the Item containing the cross-reference.
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ITEM 1A – RISK FACTORS
As an investment manager, risk is an inherent part of Federated's business. U.S., UK and other global financial markets, by their
nature, are prone to uncertainty and subject participants to a variety of risks. If any of the following risks actually occur,
Federated's business, results of operations, financial condition and/or cash flows could be materially adversely affected. The
risks described below are not the only risks involved in Federated's business. Additional risks not presently known to Federated
or that Federated currently considers to be immaterial may also adversely affect its business, results of operations, financial
condition and/or cash flows.
Potential Adverse Effects of a Material Concentration in Revenue. At any point in time, a meaningful or significant portion
of Federated's total AUM or revenue may be attributable to one or more products or strategies, or asset classes, offered by
Federated, or one or more clients or customer intermediaries with whom Federated has a relationship. See Note (5) to the
Consolidated Financial Statements for information on material concentrations in Federated's revenue. A significant and
prolonged decline in the AUM of a strategy, asset class or fund with a material concentration could have a material adverse
effect on Federated's future revenues and, to a lesser extent, net income, due to a related reduction in distribution expenses
associated with these funds. Likewise, significant negative changes in Federated's relationship with a customer with a material
concentration could have a material adverse effect on Federated's future revenues and, to a lesser extent, net income due to a
related reduction in distribution expenses associated with this customer. A significant change in Federated's investment
management business or a significant reduction in AUM due to regulatory changes or developments, changes in the financial
markets, such as significant and rapid increases in interest rates over a short period of time causing certain investors to prefer
direct investments in interest-bearing securities, non-competitive performance, the availability, supply and/or market interest in
repurchase agreements and other investments, significant deterioration in investor confidence, a return to declining or
prolonged periods of low short-term interest rates or negative yields and resulting fee waivers, investor preferences for deposit
products or other Federal Deposit Insurance Corporation (FDIC)-insured products, or exchange-traded funds, index funds or
other passive investment products, changes in product fee structures, changes in relationships with financial intermediaries, or
other circumstances, could have a material adverse effect on Federated's business, results of operations, financial condition and/
or cash flows.
Potential Adverse Effects of Low Short-Term Interest Rates. After raising the federal funds target rate by 0.25% four times
during 2018 (the ninth such increase since December 2015), the Federal Open Market Committee of the Federal Reserve Board
(FOMC) decreased the federal funds target rate by 0.25% three times during 2019 to its current target of 1.50-1.75%. The
federal funds target rate, which drives short-term interest rates, had been close to zero for nearly seven years prior to the
December 2015 increase. The long-term low interest-rate environment resulted in the gross yield earned by certain money
market funds not being sufficient to cover all of the fund's operating expenses. As a result, beginning in the fourth quarter of
2008, Federated implemented voluntary waivers (either through fee waivers or reimbursements or assumptions of expenses) in
order for certain money market funds to maintain positive or zero net yields (Voluntary Yield-related Fee Waivers). These
waivers were partially offset by related reductions in distribution expense and net income attributable to noncontrolling
interests as a result of Federated's mutual understanding and agreement with third-party intermediaries to share the impact of
the Voluntary Yield-related Fee Waivers.
During periods of a low interest-rate environment, Voluntary Yield-related Fee Waivers are calculated as a percentage of AUM
in certain money market funds and thus can vary depending upon the asset levels and mix in such funds. While increases in
short-term interest rates generally have the effect of decreasing, and have decreased, these fee waivers for certain money market
funds, the corresponding increases in yields and the resulting decrease in fee waivers are neither certain nor directly
proportional. In addition, the level of waivers are dependent on several other factors including, but not limited to, yields on
instruments available for purchase by, and changes in expenses of, the money market funds. In any given period, a combination
of these factors impacts the amount of Voluntary Yield-related Fee Waivers. As an isolated variable, an increase in yields on
instruments held by the money market funds would cause the pre-tax impact of fee waivers to decrease. Conversely, as an
isolated variable, an increase in expenses of the money market funds would cause the pre-tax impact of fee waivers to increase.
With regard to asset mix, changes in the relative amount of money market fund assets in prime and government money market
funds (or between such funds and other money market funds or other products) as well as the mix among certain share classes
that vary in pricing structure can impact the level of fee waivers. Generally, prime money market funds will waive less than
government money market funds as a result of higher gross yields on the underlying investments. As such, as an isolated
variable, an increase in the relative proportion of average managed assets invested in prime money market funds as compared to
total average money market fund assets should typically result in lower Voluntary Yield-related Fee Waivers. The opposite
would also be true.
The FOMC increased the federal funds target rate range by 0.25% on nine occasions between December 2015 and December
2018. The interest rate increase in December 2017 eliminated the need to continue the Voluntary Yield-related Fee Waivers. The
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FOMC decreased the federal funds target rate range by 0.25% in August, September and October 2019. Despite the FOMC
reducing interest rates three times in 2019, there were no Voluntary Yield-related Fee Waivers in 2019. See Potential Adverse
Effects of Increased Competition in the Investment Management Business in this section for information on competitive
waivers currently being implemented by Federated, other than the Voluntary Yield-related Fee Waivers discussed above.
There is no guarantee that the FOMC will continue to maintain the federal funds rate at its current level. Federated is unable to
predict when, or to what extent, the FOMC will maintain or further decrease or increase their target for the federal funds rate.
Assuming asset levels and mix remain constant and based on recent market conditions, management estimates that Voluntary
Yield-related Fee Waivers will remain at or near zero.
The actual amount of future fee waivers, if any, the resulting negative impact of any waivers and Federated's ability to recover
the net pre-tax impact of such waivers (that is, the ability to capture the pre-tax impact going forward, not re-capture previously
waived amounts) could vary significantly from prior years as they are contingent on a number of variables including, but not
limited to, changes in asset levels and mix within the money market funds or among customer assets, yields on instruments
available for purchase by the money market funds, actions by the Governors, the FOMC, the Treasury Department, the SEC,
the DOL, the FSOC and other governmental entities, changes in fees and expenses of the money market funds, changes in
customer relationships, changes in money market product structures and offerings, demand for competing products, changes in
distribution models, changes in the distribution fee arrangements with third parties, Federated's willingness to continue the fee
waivers and changes in the extent to which the impact of the waivers is shared by any one or more third parties. The duration,
level and impact of a further decline in interest rates and/or future Voluntary Yield-related Fee Waivers, if any, as well as
Federated's ability to recover the net pre-tax impact of such waivers (that is, the ability to capture the pre-tax income going
forward, not re-capture previously waived amounts) could have a material adverse effect on Federated's business, results of
operations, financial condition and/or cash flows.
Potential Adverse Effects of Rising Interest Rates. Increases in interest rates could also have an adverse effect on Federated's
revenue from money market, fixed-income, alternative/private markets and other products and strategies. The value of equity
securities (such as dividend paying equity securities) also may rise and fall in response to changes in interest rates. In a rising
short-term interest rate environment, certain investors using money market products and strategies or other short-duration fixed-
income products and strategies for cash management purposes may shift these investments to direct investments in comparable
instruments in order to realize higher yields than those available in money market and other products or strategies holding
lower-yielding instruments. In addition, rising interest rates will tend to reduce the fair value of securities held in various
investment products and strategies. Rising interest rates also may impact demand for and cost to finance real estate and impact
the value of real estate or returns on real estate and other alternative products and strategies. Among other potential adverse
effects, rising interest rates may result in decreased liquidity and increased volatility in financial markets and could negatively
impact the performance of Federated's products and strategies and Federated's revenue. Management cannot estimate the impact
of rising interest rates (including, for example on Federated's revenue), but such impact could have a material adverse effect on
Federated's business, results of operations, financial condition and/or cash flows.
Potential Adverse Effects of a Decline or Disruption in the Economy or Financial Markets. Economic or financial market
(including securities, real estate, credit and other markets) downturns, disruptions or other conditions (domestic or
international) may cause volatility, illiquidity and other potential adverse effects in the financial markets and adversely affect,
potentially in a material way, the supply of investments, such as money market or municipal (tax-exempt) securities and the
profitability and performance of, demand for and investor confidence in Federated's investment products, strategies and
services. Such economic or financial market downturns, disruptions or other conditions may include, for example, disruptions
in the securities, real estate and credit markets, defaults or poor performance in certain sectors of the economy, unemployment,
excessive corporate debt levels, the commencement, continuation or ending of government policies and reforms (including
those of new administrations or otherwise), stimulus programs, and other market-related actions, quantitative easing or
tightening or other changes in monetary policy, central bank activism through continued ownership, exchange, cancellation or
issuance of debt or other means, increased regulation or a slower pace for new regulation or deregulation, increases or decreases
in interest rates, changes in oil prices or other changes in commodity markets or prices, changes in currency values, changes in
property values and financial costs, or exchange rates or currency abandonment, inflation or deflation, index changes, widening
bid/ask spreads, changes in the allocation of capital to market-making, restructuring of government-sponsored entities,
imposition of economic sanctions, trade friction or trade wars and increased trade tariffs, economic or political weakness,
geopolitical tensions or military escalation or other instability in certain countries or regions, technology-related or cyber-
attacks or incidents, terrorism, the prospects for or concerns about any of the foregoing factors or events, or other factors or
events that affect the financial markets. For example, regarding currency abandonment and political instability, there remains
uncertainty regarding the final arrangements that will apply to the UK's relationship with the EU and other countries post-
Brexit. This uncertainty may affect other countries in the EU and elsewhere. The UK's departure from the EU also may cause
volatility within the EU, triggering prolonged economic downturns in certain European countries or sparking additional
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Member States to depart, or contemplate departing, from the EU. In addition, Brexit creates the possibility of additional
economic stresses for the UK, including potential decreased trade, difficulty in, or increased expenses relating to, marketing and
selling UK funds and other financial products in the EU and EU funds and other financial products in the UK, capital outflows,
devaluation of the British pound sterling, wider corporate bond spreads due to uncertainty, worker dislocation or restrictions,
and declines in business and consumer spending as well as foreign direct investment. See Item 1- Business under the caption
Regulatory Matters for additional information on Brexit. Each of the above factors, among others, may cause or contribute to
economic or financial market downturns, disruptions or other conditions and their potentially adverse effects. In addition,
Federated's products and strategies may be adversely affected, potentially in a material way, by changes in U.S., UK, EU or
other markets, downgrades of U.S., UK or other countries' credit ratings, the U.S. debt ceiling or other developments in the
U.S., UK and other countries as well as by actual or potential deterioration in international sovereign, commodity or currency
market conditions.
At December 31, 2019, Federated's liquid assets of $359.1 million included investments in certain money market and
fluctuating-value Federated Funds that may have direct and/or indirect exposures to international sovereign debt and currency
risks. Federated and the money market and other fluctuating NAV funds managed or distributed by Federated also interact with
various other financial industry participants, such as counterparties, broker/dealers, banks, clearing organizations, other
investment products and customers, as a result of operations, trading, distribution and other relationships. As a result,
Federated's business (including, but not limited to, its reputation), results of operations, financial condition and/or cash flows
could be adversely affected by the creditworthiness or financial soundness of other financial industry participants, particularly
in times of economic or financial stress or disruption. There can be no assurance that potential losses that may be realized as a
result of these exposures will not have a material adverse effect on Federated's business (including, but not limited to, its
reputation), results of operations, financial condition and/or cash flows.
The ability of Federated to compete and sustain asset and revenue growth is dependent, in part, on the relative attractiveness of
the types of investment products and strategies Federated offers and its investment performance under prevailing market
conditions. Adverse market conditions or other events also could impact Federated's customers. In the event of extreme
circumstances, such as economic, political, or business crises, Federated's products and strategies may suffer significant net
redemptions in AUM causing severe liquidity issues in its short-term, fixed-income or certain other sponsored investment
products and strategies and declines in the value of and returns on AUM, all of which could cause material adverse effects on
Federated's business (including, but not limited to, its reputation), results of operations, financial condition and/or cash flows.
Custody, depository and portfolio accounting services for the Federated Funds generally are outsourced to third-party financial
institutions that are leading providers of such fund services. Accounting records for the Federated Funds are maintained by
these service providers (or vendors). These service providers, or other service providers of Federated and its products or
customers, could also be adversely affected by the adverse market conditions described above. It is not possible to predict the
extent to which the services or products Federated receives from such service providers would be interrupted or affected by
such situations. Accordingly, there can be no assurance that a potential service interruption or Federated's ability to find a
suitable replacement would not have a material adverse effect on Federated's business (including, but not limited to, its
reputation), results of operations, financial condition and/or cash flows.
Potential Adverse Effects of Changes in Laws, Regulations and Other Rules on Federated's Investment Management
Business. Federated and its investment management business are (and any new business line commenced or acquired by
Federated would be) subject to extensive regulation both in and outside the U.S. Federated and its products, such as the
Federated Funds, and strategies are subject to: federal securities laws, principally the 1933 Act, the 1934 Act, the 1940 Act and
the Advisers Act; state laws regarding securities fraud and registration; and regulations or other rules, promulgated by various
regulatory authorities, self-regulatory organizations or exchanges, both domestically and abroad, including, but not limited to,
the SEC, FINRA, FCA, CBI and New York Stock Exchange (NYSE). From time to time, the federal securities laws have been
or may be augmented or amended substantially. For example, among other measures, Federated and its products and strategies
have been impacted by the Dodd-Frank Act, the Sarbanes-Oxley Act of 2002, the Patriot Act of 2001 and the Gramm-Leach-
Bliley Act of 1999.
Federated and its domestic products (such as the Federated Funds) and strategies, and any non-U.S. products (such as non-U.S.
Federated Funds) and strategies to the extent offered in the U.S., continue to be primarily regulated by the SEC. Federated, and
certain Federated Funds, are also subject to regulation by the U.S. Commodity Futures Trading Commission (CFTC) and the
National Futures Association (NFA) due to their investment in futures, swaps or certain other commodity interests in more than
de minimis amounts. In addition, during the past several years, regulators, self-regulatory organizations or exchanges such as
the SEC, FINRA, CFTC, NFA, NYSE and state or local governments and regulators, have adopted, and may continue to adopt,
other regulations, rules and amendments that have increased Federated's operating expenses and affected the conduct of its
business, as well as Federated's AUM, revenues and operating income, and may continue to do so. Federated's business is
affected by laws, regulations, and regulatory authorities that impact the manner in which Federated's products are structured,
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distributed, provided or sold. Federated and its products and strategies also are affected by certain other laws and regulations
governing banks and other financial institutions or intermediaries. While the pace of regulation has slowed in 2018 and 2019,
the results of the 2020 presidential election may result in increased regulation, which could further increase the cost of
compliance for Federated.
Federated's and its products' operations outside of the U.S. are subject to foreign laws and regulation, which are promulgated or
amended from time to time, by foreign regulatory or other authorities, such as the FCA for London-based operations, the CBI
for Dublin-based operations, the German Federal Financial Supervisory Authority for Frankfurt-based operations, the Cayman
Island Monetary Authority for Cayman Island products, and the Ontario (and certain other provincial) Securities Commission
for Canadian products. For example, Federated's stewardship services may be impacted by proxy advisor regulations, including
the Proxy Advisors (Shareholders' Rights) Regulations 2019 passed by the UK Parliament. (See Item 1- Business under the
caption Regulatory Matters for additional information on laws and regulations applicable to Federated's business.) In addition
to existing and potential future regulation, a FTT, particularly if enacted with broad application in the UK or EU, or even the
U.S. (as proposed by certain Democratic candidates for the 2020 Presidential election), would be detrimental to Federated's
business. Regulatory reforms stemming from Brexit, as well as the potential political and economic uncertainty surrounding
Brexit or other initiatives also may increase volatility in the UK and EU and could be detrimental to Federated's business.
Additionally, Federated's acquisition of Hermes increases the potential impact that Brexit, and resulting changes, may have on
Federated's business, results of operations, financial condition and/or cash flows.
In addition, the Dodd-Frank Act provided for a systemic risk regulation regime under which it is possible that Federated, and/or
any one or more of its products (such as the Federated Funds), could be subject to designation as a systemically important
financial institution by the FSOC. Similarly, it is possible that the FSB could designate Federated, and/or one of its products
(such as the non-U.S. Federated Funds), as a non-bank, non-insurance company global systemically important financial
institution. Among other potential impacts, any such designation would result in Federated and/or its products being subject to
additional banking regulation and bank-oriented measures, including, for example, capital and liquidity requirements, leverage
limitations, enhanced public disclosures and risk management requirements, as well as oversight by the Governors or FSB, in
addition to being subject to primary regulation by securities regulators such as the SEC, FCA and CBI.
As Federated's business grows (whether organically or through acquisition or whether through new products, strategies or
services being offered or through growth of existing products, strategies and services, or otherwise), Federated's products,
strategies and operations need to comply with applicable laws, rules, regulations, interpretations and government policies,
which increases compliance risk and operating expenses, including the costs associated with compliance. Compliance risk and
operating expenses also can increase when Federated expands its use of ESG, sustainability, stewardship or other data inputs or
investment techniques in providing its investment products, strategies and services, enters new countries or markets, and/or
financial products and other investments, as well as when markets and technology increase in complexity.
Regulators, such as the SEC, FCA and CBI, also have undertaken or may undertake examination, investigations, and/or
enforcement actions involving investment management industry participants, such as Federated and its products. Federated
expends internal and external resources to respond to examinations and investigations, and defend enforcement actions, which
increases operating expenses, including professional fees and costs associated with compliance.
Management continues to monitor and evaluate the impact of the Regulatory Developments discussed above (and in Item 1-
Business under the caption Regulatory Matters) on Federated's business, results of operations, financial condition and/or cash
flows. These Regulatory Developments include, among others, stress testing requirements, fund of funds rules, Regulation Best
Interest, a new SEC derivatives rule, Brexit-related regulation, a potential FTT, new EU regulatory requirements, liquidity rules,
and EU money market fund regulation. Among other potential impacts, these Regulatory Developments have increased, and
may continue to increase, in addition to compliance risks and compliance costs, the costs associated with technology, legal,
operations and other efforts to address regulatory-related matters. These regulatory requirements and developments also have
caused, and may continue to cause, certain product line-up, structure, pricing and product development changes, changes in the
ability to utilize "soft dollars" to pay for certain research and brokerage services (rather than Federated paying for such services
directly), money market, equity, fixed-income, alternative/private markets and multi-asset products to be less attractive to
institutional and other investors, reductions in the number of Federated Funds offered by intermediaries, changes in the fees
Federated, retirement plan advisors and intermediaries will be able to earn on investment products and services sold to
retirement plan clients, and reductions in AUM, revenues and operating profits, as well as changes in asset flows, levels and
mix and customer relationships. As examples, it became necessary for Hermes to establish offices in Ireland, Germany and
Denmark, as Brexit may result in it becoming more difficult to passport products between the UK and EU Member States. In
addition, certain money market funds or other products or strategies may become less attractive to institutional or other
investors, which could result in changes in asset mix and reductions in AUM, revenues and operating income.
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On a cumulative basis, Federated's regulatory, product development and restructuring, and other efforts in response to the
Regulatory Developments discussed above, including the internal and external resources dedicated to such efforts, have had,
and may continue to have, a material impact on Federated's expenses and, in turn, financial performance. The floating NAV for
institutional and municipal (or tax-exempt) money market funds, and redemption fees and liquidity gates, required by the 2014
Money Fund Rules and Guidance, effective October 14, 2016, resulted in a shift in asset mix from institutional prime and
municipal (or tax-exempt) money market funds to stable NAV government money market funds across the investment
management industry and at Federated, which impacted its AUM, revenues and operating income. While 2018 and 2019 saw a
shift in asset mix back toward institutional prime and municipal (tax-exempt) money market funds, there is no guarantee such
shift will continue and return asset mix between institutional prime, municipal (or tax-exempt) and government money market
funds to pre-October 2016 levels. The regulatory changes and developments in the current regulatory environment, and
Federated's efforts in responding to them, could have a material and adverse effect on Federated's business, results of
operations, financial condition and/or cash flows. While the FSOC's change in focus and continuing transparency efforts have
reduced the possibility of any Federated products being designated a systemically important non-bank financial company,
management also believes that the designation of Federated and/or one or more products as a systemically important financial
institution or a non-bank, non-insurance company global systemically important financial institution by the FSB, and/or the
issuance of final regulations or reforms relating to such designations, would be detrimental to Federated's money market fund
business and could materially and adversely affect Federated's business, results of operations, financial condition and/or cash
flows. Given the current regulatory environment and the potential for a slower pace for new regulation or future additional or
modified regulation or guidance, Federated is unable to fully assess the degree of the impact of adopted or proposed regulations
and other Regulatory Developments, and Federated's efforts related thereto, on its business, results of operations, financial
condition and/or cash flows.
Changes in laws, regulations, rules, interpretations or governmental policies, domestically and abroad, also impact the financial
intermediaries, service providers (or vendors), customers and other third-parties with whom Federated, and its products (such as
the Federated Funds), conduct business. For example, the DOL is expected to issue a new fiduciary rule in early 2020.
Additionally, provisions of the Dodd-Frank Act or Regulation Best Interest, may affect intermediaries' sale or use of Federated's
products or strategies. Among other potential impacts, these changes are affecting, and may continue to affect, Federated's
arrangements with these intermediaries, and may continue to increase fee pressure, reduce the number of Federated products
and strategies offered by intermediaries, cause certain clients or intermediaries to favor passive products over actively managed
products, increase respective operating expenses and distribution costs, result in lower AUM, change asset flows, levels and
mix, and otherwise affect the conduct of Federated's or such intermediaries' respective businesses. This resulted, and will likely
continue to result, in Federated or one or more of these third parties seeking to restructure or alter their compensation or other
terms of the business arrangements between Federated or its products (including the Federated Funds) and one or more of these
third parties. The above factors could have a material adverse impact on Federated's business, results of operations, financial
condition and/or cash flows.
For a further discussion of U.S. and international Regulatory Developments that can impact Federated and its business,
products, strategies and services, see Item 1- Business under the caption Regulatory Matters.
Finally, Federated's business also has been, and will continue to be, impacted by the Tax Cuts and Jobs Act of 2017 (Tax Act),
signed into law on December 22, 2017. See Note (16) to the Consolidated Financial Statements for additional information. In
addition, various service industries, including, for example, mutual fund service providers, have been, and continue to be, the
subject of changes in tax policy that impact their state and local tax liability. Changes that have been adopted or proposed
include (1) an expansion of the nature of a service company's activities that subject it to tax in a jurisdiction, (2) a change in the
methodology by which multi-state companies apportion their income between jurisdictions, and (3) a requirement that affiliated
companies calculate their state tax as one combined entity. As adopted changes become effective and additional jurisdictions
enact similar changes, among other potential impacts, there could be a material adverse effect on Federated's tax liability and
effective tax rate and, as a result, net income. Various investment products also may be impacted by tax changes, which could
have an adverse effect on the products and Federated's business, results of operations, financial condition and/or cash flows.
Potential Adverse Effect of Providing Financial Support to Investment Products. Federated may, from time to time, elect
to provide financial support to its sponsored investment products (such as the Federated Funds). Providing such support utilizes
capital that would otherwise be available for other corporate purposes. Losses resulting from such support, or failure to have or
devote sufficient capital to support products, could have a material adverse effect on Federated's business (including, but not
limited to, its reputation), results of operations, financial condition and/or cash flows.
Risk of Federated's Money Market Products' Ability to Maintain a Stable Net Asset Value. Approximately 40% of
Federated's total revenue for 2019 was attributable to money market assets. An investment in money market funds is neither
insured nor guaranteed by the FDIC or any other government agency. Federated's retail and government/public debt money
market funds, as well as its private and collective money market funds, seek to maintain a stable or constant NAV. Federated
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also offers non-U.S. low volatility money market funds that seek to maintain a constant NAV, but will move to a four-digit NAV
if such fund's net asset value falls outside of a twenty basis point collar. Although stable or constant NAV money market funds
seek to maintain an NAV of $1.00 per share, it is possible for an investor to lose money by investing in these funds. Federated
also offers institutional prime or municipal (or tax-exempt) money market funds which transact at a fluctuating NAV that uses
four-decimal-place precision ($1.0000). Federated also offers a short-term variable NAV non-U.S. money market fund. It is
possible for an investor to lose money by investing in these funds. Federated devotes substantial resources, such as significant
credit analysis and attention to security valuation in connection with the management of its products and strategies. However,
the NAV of an institutional prime or municipal (or tax-exempt) money market fund, or variable NAV fund or, if the above
described conditions are met, a low-volatility NAV fund, can fluctuate, and there is no guarantee that a government/public debt
or retail (i.e. stable or constant NAV) money market fund, or a low-volatility money market fund, will be able to preserve a
stable or constant NAV in the future. Market conditions could lead to a limited supply of money market securities and severe
liquidity issues and/or declines in interest rates or additional prolonged periods of low yields in money market products or
strategies, and regulatory changes or developments could lead to shifts in asset levels and mix, which could impact money
market fund NAVs and performance. If the NAV of a Federated stable or constant NAV money market fund were to decline to
less than $1.00 per share, such Federated money market fund would likely experience significant redemptions, resulting in
reductions in AUM, loss of shareholder confidence and reputational harm, all of which could cause material adverse effects on
Federated's business, results of operations, financial condition and/or cash flows. It is also possible that, if the fluctuating NAV
of an institutional prime or municipal (or tax-exempt) money market fund, or variable NAV money market fund or low-
volatility money market fund consistently or significantly declines to less than $1.0000 per share, such Federated money market
fund could experience significant redemptions, resulting in reductions in AUM, loss of shareholder confidence and reputational
harm, all of which could cause material adverse effects on Federated's business, results of operations, financial condition and/or
cash flows.
No Assurance of Access to Sufficient Liquidity. From time to time, Federated's operations may require more cash than is
available from operations. In these circumstances, it may be necessary to borrow from lending facilities or to raise capital by
securing new debt or by selling shares of Federated equity or debt securities. Federated's ability to raise additional capital in the
future will be affected by several factors including, for example, Federated's creditworthiness and the market value of
Federated's common stock, as well as general market conditions. There can be no assurance that Federated will be able to
obtain these funds and financing on acceptable terms, if at all, and, if Federated cannot obtain such funds, it could have a
material adverse effect on Federated's business, results of operations, financial condition and/or cash flows. If a Federated Fund
requires liquidity to meet shareholder redemptions or for other reasons, there also can be no assurance that such Federated Fund
will be able to access any available line of credit, rely on inter-fund lending arrangements or access other sources of liquidity on
acceptable terms, if any at all, and, if such a Federated Fund cannot obtain sufficient liquidity, it could have a material adverse
effect on such Federated Fund, result in redemptions and a corresponding reduction in Federated's AUM and Federated's
revenue, and Federated may decide to provide credit support to such Federated Fund. These factors could have a material
adverse effect on Federated's business, results of operations, financial condition and/or cash flows.
Recruiting and Retaining Key Personnel. Federated's ability to attract or acquire, and motivate and retain, quality personnel
has contributed significantly to its growth and success and is important to attracting and retaining customers. The market for
qualified executives, portfolio managers, analysts, traders, sales representatives and other key personnel is extremely
competitive. There can be no assurance that Federated will be successful in its efforts to recruit or acquire, and motivate and
retain, the required personnel. In addition to competing opportunities, personnel elect to pursue other interests for business,
personal and other reasons or retire from time to time. Federated has encouraged the continued retention of its executives and
other key personnel through measures such as providing competitive compensation arrangements and, in certain cases,
employment agreements. The loss of any such personnel could have an adverse effect on Federated. In certain circumstances,
the departure of key employees could cause higher redemption rates for certain AUM or the loss of customer accounts or
relationships. Moreover, since certain of Federated's products and strategies, or customer relationships, contribute significantly
to its revenues and earnings, the loss of even a small number of key personnel associated with these products or strategies, or
customer relationships, could have a disproportionate adverse impact, potentially in a material way, on Federated's business,
results of operations, financial condition and/or cash flows.
Potential Adverse Effects of Increased Competition in the Investment Management Business. The investment management
business is highly competitive. Federated competes in the management and distribution of investment products and strategies
(such as mutual funds and Separate Accounts) and stewardship services with other fund management companies and investment
advisors, national and regional broker/dealers, commercial banks, insurance companies and other institutions. Many of these
competitors have substantially greater resources and brand recognition than Federated. Competition is based on various factors,
including, among others, business reputation, investment performance, quality of service, the strength and continuity of
management and selling relationships, distribution services offered, technological innovation (e.g., the use of financial
technology or artificial intelligence in providing investment advice), the type (e.g., passive versus actively managed, fund
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versus FDIC-insured deposits) and range of products and strategies offered and fees charged. As with any highly competitive
market, competitive pricing structures are important. If competitors charge lower fees for similar products or strategies,
Federated has reduced, or may decide to further reduce, the fees on its own products or strategies (either directly on a gross
basis or on a net basis through fee waivers) for competitive purposes in order to retain or attract customers. Increased
competition also may require changes in Federated's business model, products (e.g., launching ETFs) or strategies to respond to
competition from existing and new market innovations and competitors, which can increase expenses and creates the risk that
such changes will not be successful or Federated will not achieve its long-term strategic objectives. Such fee reductions,
changes in business models or strategies, or other effects of competition, could have a material adverse effect on Federated's
business, results of operations, financial condition and/or cash flows.
Many of Federated's products and strategies are designed for use by institutions such as banks, insurance companies and other
corporations. A large portion of Federated's managed assets, particularly money market, fixed-income and alternative/private
markets assets, are held by institutional investors. If or when the structure of institutional investment products, such as money
market funds, changes or becomes disfavored by institutions, whether due to regulatory or market changes, competing products
(such as insured deposit products or non-transparent actively managed ETFs) or otherwise, Federated may be unable to retain or
grow its share of this market and this could adversely affect Federated's future profitability and have a material adverse effect
on Federated's business, results of operations, financial condition and/or cash flows. Certain of Federated's products and
strategies also may be impact oriented and may not be suitable investments for certain fiduciary customers without obtaining
appropriate consent. This may limit Federated's ability to market or grow assets in such products and this could adversely affect
Federated's future profitability and affect, potentially in a material way, Federated's business, results of operations, financial
condition and/or cash flows.
A significant portion of Federated's revenue is derived from providing products (such as mutual funds) and strategies to the
U.S. Financial Intermediary market, comprising over 7,700 national, regional and independent broker/dealers, banks and
registered investment advisors. The future profitability of Federated will be adversely affected if it is unable to retain or grow
its share of this market, and could also be adversely affected by consolidations in the banking and securities industries, as well
as regulatory changes or developments impacting its customers.
Potential Adverse Effects of Changes in Federated's Distribution Channels. Federated acts as a wholesaler of investment
products and strategies to financial intermediaries, including, for example, banks, broker/dealers, registered investment advisors
and other financial planners. Federated also sells investment products and strategies, and stewardship services, directly to
corporations, institutions and other customers. There can be no assurance that any product diversification efforts (whether to
Federated's fund line-up or geographically), ESG positioning or investments in data and analytics to bolster Federated's
distribution efforts will be successful. There also can be no assurance that Federated will continue to have access to any
financial intermediary or financial intermediaries that currently distribute Federated products and strategies, that Federated's
relationship with any one or more financial intermediaries or other customers will continue over time or on existing economic
terms, or that Federated's sales or distribution efforts will achieve any particular level of success. The impact of Voluntary
Yield-related Fee Waivers, other waivers for competitive purposes, and related reductions in distribution expense can vary
depending upon, among other variables, changes in distribution models, changes in the distribution fee arrangements with one
or more financial intermediaries, changes in customer relationships and changes in the extent to which the impact of the
waivers is shared by one or more financial intermediaries. In addition, exclusive of the impacts of waivers and related
reductions in distribution expense, Federated has experienced increases in the cost of distribution as a percentage of total fund
revenue from 25% in 2018 to 26% in 2019. Federated expects such costs to continue to increase in total due to asset growth,
and per dollar of revenue earned due to the competitive pressures of the investment management business. Higher distribution
costs reduce Federated's operating and net income.
Potential Adverse Effects of Declines in the Amount of or Changes in the Mix of Assets under Management. A significant
portion of Federated's revenue is derived from investment advisory fees, which are typically based on the value of managed
assets and vary with the type of asset being managed, with higher fees generally earned on equity and multi-asset products and
strategies than on fixed-income, alternative/private markets and money market products and strategies. Federated also may earn
performance fees or carried interest on certain products and types of assets. Mutual fund and other fund products generally have
a higher management-fee rate than Separate Accounts. Additionally, certain components of distribution expense can vary
depending upon the asset class, distribution channel and/or the size or structure of the customer relationship. Consequently,
significant fluctuations in the value of securities held by, or the level of redemptions from, the products (such as the Federated
Funds) or strategies advised by Federated, and overall asset mix among products and strategies, may materially affect the
amount of managed assets and thus Federated's revenue, profitability and growth. Similarly, changes in Federated's average
asset mix across both asset and product or strategy types have a direct impact on Federated's revenue and profitability.
Federated generally pays out a larger portion of the revenue earned from managed assets in money market and multi-asset funds
than the revenue earned from managed assets in equity, fixed-income and alternative/private markets funds. A significant
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portion of Federated's managed assets is in investment products or strategies that permit investors to redeem or withdraw their
investment at any time. Capacity constraints, where the size of AUM in a particular product, strategy or asset class make it
more difficult to trade efficiently in the market, can result in certain products, strategies, or asset classes being closed to new
investment, which may result in redemptions or a reallocation of assets to other products, strategies or asset classes.
Additionally, changing market conditions may cause a shift in Federated's asset mix towards money market and fixed-income
products or strategies, and regulatory changes or developments may cause a shift between money fund products or from money
market funds to other products. Each of the above factors may cause a decline in or otherwise affect, potentially in a material
way, Federated's business, results of operations, financial condition and/or cash flows.
Potential Adverse Effects of Poor Investment Performance. Success in the investment management business is largely
dependent on investment performance relative to market conditions and the performance of competing products and strategies.
Good performance generally assists retention and growth of managed assets, resulting in additional revenues. Good
performance can also result in performance fees or carried interest being earned on certain products. Conversely, poor
performance, or the failure to meet product or strategy investment objectives and policies, tends to result in decreased sales and
increased redemptions, and failure to earn performance fees, carried interest and/or other fees. A product or strategy being, or
becoming, an unsuitable product or strategy for a customer, whether due to changes in customer investment objectives or
otherwise, also tends to result in decreased sales and increased redemptions, and failure to earn performance fees, carried
interest and/or other fees. For certain products or strategies, failure to integrate and apply acceptable environmental, societal, or
governance standards, sustainability or responsible investment may be considered, or result in, poor performance, and result in
decreased sales and increased redemptions, and failure to earn performance fees, carried interest and/or other fees. The failure
to earn performance fees, carried interest and/or other fees results in a corresponding decrease in revenues and non-operating
income to Federated. Poor performance could, therefore, have a material adverse effect on Federated's business (including, but
not limited to, business prospects), results of operations, financial condition and/or cash flows. Market conditions, such as
volatility, illiquidity and rising interest rates, among other conditions, can adversely affect the performance of certain
quantitative or other investment strategies or certain products, asset classes or sectors. The effects of poor performance on
Federated could be magnified where assets or customers are concentrated in certain strategies, products, asset classes or sectors.
Changes in foreign currency exchange rates and poor performance of investments made by Federated, or derivatives (including,
for example, hedges or forward contracts) or other financial transactions entered into by Federated, can result in investment or
capital losses and also can materially adversely affect Federated's business, results of operations, financial condition and/or cash
flows.
Operational Risks. Federated's products, business and operations are supported internally and through management of
relationships, including, for example, outsourcing relationships with various third party service providers (or vendors), both
domestically and internationally. In turn, service providers' operations rely on additional relationships with other third parties.
Operational risks include, but are not limited to, improper, inefficient, or unauthorized execution, processing, pricing and/or
monitoring of transactions, inadequate, inefficient, inflexible, deficient or non-scalable technology, operating systems or other
infrastructure, poor performance by internal resources or third party service providers, failure to appropriately supervise internal
resources or third party service providers, business disruptions, inadequacies or breaches in Federated's, its products' or a
service provider's internal control processes, unauthorized disclosure or manipulation of, or access to, confidential, proprietary
or non-public personal information and noncompliance with regulatory requirements, investment mandates and related
investment parameters, or customer-imposed restrictions. As Federated's and its relevant service providers' businesses expand
and require additional scalability, operational risk increases. There is a risk that changes in operational systems and business
processes are not completed correctly, in a controlled manner, in a timely manner or in a manner that achieves intended results.
Management relies on its employees, systems and business continuity plans, and those of relevant service providers, to comply
with established procedures, controls, regulatory requirements, investment parameters or customer-imposed restrictions.
Breakdown or improper use of systems, human error or improper action by employees or service providers, or noncompliance
with regulations or other rules, investment parameters or customer-imposed restrictions, could cause material adverse effects on
Federated's business (including, but not limited to, its reputation), results of operations, financial condition and/or cash flows.
No Assurance of Successful Acquisitions. Federated's business strategy contemplates seeking acquisition candidates,
including acquisitions of other investment management companies and investment assets, both domestically and internationally.
There can be no assurance that Federated will find suitable acquisition candidates at acceptable prices and with an aligned
business culture and vision, have sufficient capital resources to realize its acquisition strategy, be successful in entering into
definitive agreements for or consummating desired acquisitions, or successfully collaborating with acquired companies or
integrating acquired companies or assets into Federated, or its products or strategies. There also can be no assurance that any
such acquisitions, if consummated, will not increase organizational stress to unacceptable levels or cause process failures, or
that any such acquisition, if consummated, will increase value or otherwise prove to be advantageous to Federated. On the other
hand, successful collaboration with acquired companies or integration of acquired companies or assets may increase the value
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of such acquired companies or assets and result in increased contingent deferred payments or other payment obligations for
Federated, which can affect Federated's business, results of operations, financial condition and/or cash flows.
Impairment Risk. At December 31, 2019, Federated had intangible assets including goodwill totaling $1.2 billion on its
Consolidated Balance Sheets, the vast majority of which represents assets capitalized in connection with Federated's
acquisitions and business combinations. Federated may not realize the value of these assets. Management performs an annual
review of the carrying values of goodwill and indefinite-lived intangible assets and periodic reviews of the carrying values of
all other assets to determine whether events and circumstances indicate that an impairment in value may have occurred. A
variety of factors could cause the carrying value of an asset to become impaired. Should a review indicate impairment, a write-
down of the carrying value of the asset would occur, resulting in a noncash charge which would adversely affect Federated's
financial position and results of operations for the period.
Systems, Technology and Cybersecurity Risks. Federated utilizes software and related technologies throughout its business
(both domestically and internationally) including, for example, both proprietary systems and those provided by outside service
providers (or vendors). Service providers to, and customers of, Federated and its products, and third parties on which such
service providers and customers rely, also utilize software and related technologies in their businesses. Federated continues to
increase its investment in systems and technology, including externally hosted systems and technology, for investment
management and trading operations, information and data management, disaster recovery, compliance and other areas of its
business, and is exploring innovative technological solutions and products involving artificial intelligence and financial
technology. Unanticipated issues could occur with any software, system or other technology and it is not possible to predict
with certainty all of the adverse effects that could result from a failure of Federated or a third party to address technology or
computer system problems. Along with cyber incidents described more fully below, data or model imprecision, software or
other technology malfunctions, human error, programming inaccuracies and similar or other circumstances or events may
impair the performance of systems and technology. Accordingly, there can be no assurance that potential system interruptions,
other technology-related issues or the cost necessary to rectify the problems would not have a material adverse effect on
Federated's business (including, but not limited to, its reputation and business prospects), results of operations, financial
condition and/or cash flows.
In addition, like other companies in the investment management industry and elsewhere, Federated's business relies on the
security and reliability of information and communications technology, systems and networks. Federated uses digital
technology, including, for example, networked systems, email and the Internet, to conduct business operations and engage
clients, customers, employees, products, accounts, shareholders and relevant service providers, among others. The use of the
Internet and other electronic media, computers and technology exposes Federated, its business, its products and strategies and
services, customers, and relevant service providers, and their respective operations, to potential risks from frequent
cybersecurity attacks, events or incidents (cyber incidents). For example, Federated and relevant service providers collect,
maintain and transmit confidential, proprietary and non-public personal customer and employee information (such as in
connection with online account access and performing investment, reconciliation, transfer agent, custodian and other
recordkeeping and related functions) that can be targeted by cyber incidents. Federated, as well as its products and certain
service providers, also generate, compile and process information for purposes of preparing and making filings or reports to
governmental agencies, and a cyber incident that impacts that information, or the generation and filing processes, may prevent
required regulatory filings and reports from being made. Cyber incidents involving Federated or its products or service
providers, regulators or exchanges to which confidential, personally identifiable or other information is reported or filed also
may result in unauthorized disclosure or compromise of, or access to, such information.
Cyber incidents can result from intentional (or deliberate) attacks or unintentional events by insiders or third parties, including
cybercriminals, competitors, nation-states and "hacktivists," among others. Cyber incidents may include, for example, phishing,
use of stolen access credentials, unauthorized access to systems, networks or devices (for example, through hacking activity),
structured query language attacks, infection from or spread of malware, ransomware, computer viruses or other malicious
software code, corruption of data, and attacks (including, but not limited to, denial-of-service attacks on websites) which shut
down, disable, slow, impair or otherwise disrupt operations, business processes, technology, connectivity or website or internet
access, functionality or performance. In addition to intentional cyber incidents, unintentional cyber incidents can occur (for
example, the inadvertent release of confidential or non-public personal information).
Like other companies, Federated has experienced, and will continue to experience, cyber incidents on a daily basis. As of
December 31, 2019, cyber incidents have not had a material adverse effect on Federated's business, results of operations,
financial condition and/or cash flows. Cyber incidents can affect, potentially in a material way, Federated's relationships with its
customers, employees, products, accounts, shareholders and relevant service providers. A cyber incident may cause Federated,
its business, products or services, employees, customers, or relevant service providers, to lose proprietary, sensitive,
confidential or non-public business, customer, employee or personal information, or intellectual property, suffer data corruption
or business interruption, lose operational capacity (for example, the loss of the ability to process transactions, calculate NAVs,
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or allow the transaction of business, or other disruptions to operations), and/or fail to comply with applicable privacy and other
laws. Among other potentially harmful effects, cyber incidents also may result in theft, unauthorized monitoring and failures in
the physical infrastructure or operating systems. Any cyber incident could cause lost revenues, the occurrence of other financial
losses, diminished future cash flows, significant increases in compliance or other costs or expenses (such as costs associated
with compliance with cybersecurity laws and regulations and with protection, detection, remediation and corrective measures),
exposure to increased litigation and legal risks (such as regulatory actions and penalties, and breach of contract or other
litigation-related fees and expenses), reputational damage, damage to competitiveness, stock price and shareholder value, and
other negative or adverse impacts. Cyber incidents affecting issuers in which Federated's or its customers' assets are invested
also could cause such investments to lose value. Any of these cyber incidents may become incrementally worse if they were to
remain undetected for an extended period of time. The operating systems of Federated, its products, its customers and relevant
service providers are dependent on the effectiveness of information security policies and procedures which seek to ensure that
such systems are protected from cyber incidents. Federated has established a committee to oversee Federated's information
security and data governance efforts, and updates on cyber incidents and risks are reviewed with relevant committees, as well as
Federated's Board of Directors (or a committee thereof), on a periodic (generally quarterly) basis (and more frequently when
circumstances warrant) as part of risk management oversight responsibilities. Federated has, and believes its products and its
service providers have, established risk management systems that are reasonably designed to seek to reduce the risks associated
with cyber incidents. Federated employs various measures aimed at mitigating cyber risk, including, among others, use of
firewalls, system segmentation, system monitoring, virus scanning, periodic penetration testing, employee phishing training and
an employee cybersecurity awareness campaign. Among other vendor management efforts, Federated also conducts due
diligence on key service providers (or vendors) relating to cybersecurity. However, there is no guarantee that such efforts will
be successful, either entirely or partially, as there are limits on Federated's ability to prevent, detect or mitigate cyber incidents.
Among other reasons, the cybersecurity landscape is constantly evolving, the nature of malicious cyber incidents is becoming
increasingly sophisticated and Federated, and its relevant affiliates and products, cannot control the systems and cybersecurity
systems and practices of issuers, relevant service providers or other third parties. Federated's risk from cyber incidents also can
increase as a result of expansion into new markets, domestic or international acquisitions, new technology, or previously
unexploited vulnerabilities in software or related patches becoming activated (or "weaponized") by hackers. While Federated
has obtained cyber-insurance, there is no guarantee that a particular incident would be covered by such insurance. In certain
circumstances, insurance coverage may not be available or deductible amounts may not be exceeded, and Federated or the
Federated Funds may have to bear the costs related to claims or any losses or other liabilities resulting from a cyber incident.
While Federated cannot predict the financial or reputational impact to its business resulting from any cyber incident, depending
upon the nature, magnitude and severity of a cyber incident, the occurrence of a cyber incident, or a similar situation or
incident, could have a material adverse effect on Federated's business (including, but not limited to, its reputation), results of
operations, financial condition and/or cash flows. The internal and external resources and efforts necessary to implement system
and technology upgrades, data governance and cybersecurity policies, procedures and measures, including, for example,
technology, systems, skilled personnel and service providers (or vendors), as well as vendor management, have, and will
continue to, increase Federated's operating expenses, and can adversely affect, potentially in a material way, Federated's
business, results of operations, financial condition and/or cash flows.
Potential Adverse Effects of Reputational Harm. Any material losses in customer (including shareholder) confidence in
Federated, its products or strategies or in the mutual fund industry as a result of actual or potential regulatory proceedings or
litigation, economic or financial market downturns or disruptions, material errors in public news reports, allegations of trade
name, trade mark or other intellectual property infringement or misappropriation, allegations of breaches of fiduciary duty,
misconduct or unprofessional, unethical or illegal behavior, abuse of authority, a cyber incident, rumors on the Internet or other
matters could increase redemptions from and/or reduce sales of Federated's products (such as the Federated Funds) and
strategies and other investment management products and services and/or negatively impact Federated's brand, culture, trusted
status, reputation and/or stock price. If such losses were to occur, it could have a material adverse effect on Federated's business
(including, but not limited to, business prospects), results of operations, financial condition and/or cash flows. There also is no
guarantee that Federated's rebranding efforts will be successful. With increased focus from shareholders on sustainability,
environmental, social, and governance matters by shareholders, any perceived deficiency in Federated's policies and practices
on these matters may impact Federated's brand, reputation or stock price, as well as investor preference for Federated's
securities, products, strategies and services, and, accordingly, adversely affect, potentially in a material way, Federated's stock
price and business (including, but not limited to, business prospects), results of operations, financial condition and/or cash
flows.
Potential Adverse Effects of Termination or Failure to Renew Advisory Agreements. A substantial majority of Federated's
revenues are derived from investment advisory agreements with Federated Funds (and to a lesser extent, sub-advised mutual
funds) registered under the 1940 Act that, as required by law, are terminable upon 60 days' notice. In addition, each such
investment advisory agreement must be approved and renewed annually by each mutual fund's board of directors or trustees,
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including independent members of the board, or its shareholders, as required by law. Failure to renew, changes resulting in
lower fees under, or termination of, certain or a significant number of, these agreements could have a material adverse impact
on Federated's business, results of operations, financial condition and/or cash flows. As required by the 1940 Act, each
investment advisory agreement with a mutual fund automatically terminates upon its assignment, although new investment
advisory agreements may be approved by the mutual fund's directors or trustees and shareholders. A sale or other transfer of a
sufficient number of shares of Federated's voting securities to transfer control of Federated could be deemed an assignment in
certain circumstances. An assignment, actual or constructive, will trigger these termination provisions and may adversely affect
Federated's ability to realize the value of these agreements. Federated's investment advisory agreements for Separate Accounts
that are not investment companies subject to the 1940 Act are generally terminable upon notice to Federated (or, in certain
cases, after a 30 day, 60 day or similar notice period). As required by the Advisers Act, investment advisory agreements for
Separate Accounts that are not investment companies subject to the 1940 Act also provide that consent is required from
Federated's customers before the agreements may be assigned and an assignment, actual or constructive, also will trigger these
consent requirements and may adversely affect Federated's ability to realize the value of these agreements. Regarding the
investment advisory agreements with non-U.S. registered Federated Funds, shareholder notice or consent can be required if,
after an investment advisory agreement is entered into, there are changes to fees, and such investment advisory agreements are
generally terminable for any reason, without cause, after a 30-day to 90-day notice period. Customer consent to amend
investment advisory agreements for non-U.S. Separate Accounts can be required for amendments to such agreements, and such
agreements also are generally terminable for any reason, without cause, after a 30-day to 90-day notice period.
Under the terms of a 2005 settlement agreement with the SEC and New York State Attorney General, as amended, a Federated
investment advisory subsidiary may not serve as investment advisor to any registered investment company unless: (1) at least
75% of the fund's directors are independent of Federated; (2) the chairman of each such fund is independent of Federated; and
(3) no action may be taken by the fund's board of directors or trustees or any committee thereof unless approved by a majority
of the independent board members of the fund or committee, respectively.
Potential Adverse Effects of Unpredictable Events or Consequences. Unpredictable events, such as a natural disaster,
pandemic (e.g., the coronavirus outbreak), war, terrorist attack or other business continuity event, or unexpected market,
economic or political developments, could adversely impact Federated's, its products', its customers' and their respective service
providers' (or vendors') ability to conduct business. Such events or consequences could cause disruptions in economic
conditions and financial markets, governmental processes, system interruption, loss of life, unavailability of personnel, an
inability to provide information or services, either at all or in accordance with applicable requirements, standards, or
restrictions, and/or additional costs. For example, the current outbreak of the coronavirus, which was impossible to predict, has
affected travel to China and led to global economic uncertainty which has impacted markets negatively. Given that the region is
an important component of Federated's global distribution strategy, any scenario whereby the current situation persists for any
significant period of time may adversely affect the potential business and, in turn, returns of Federated. Among other effects,
market disruptions and the other events can cause a decline in the value of investments and a decline in the value of Federated's
AUM, which tends to result in lower revenue for Federated. There also may be times when industry databases or other third
parties publish or distribute information regarding Federated, or its products or services (including Federated Fund asset levels),
that may be inaccurate or incomplete, and there can be no assurance that a third party will interpret or report information
accurately. Unpredictable consequences, or side effects, of certain known or planned events, such as the planned phase-out of
the LIBOR to SOFR, SONIA or another alternative interest rate expected to occur in 2021, also could adversely impact
Federated's, its products', its customers', and their respective service providers' (or vendors') ability to conduct business. The
SEC staff has indicated that the expected discontinuation of LIBOR could have a significant impact on the financial markets
and may present a material risk for certain market participants, including public companies, investment advisers, investment
companies and broker dealers. The phase-out of LIBOR may cause the renegotiation or re-pricing of certain credit facilities,
derivatives or other financial transactions to which Federated, its products, customers or service providers are parties, alter the
accounting treatment of certain instruments or transactions, or have other unintended consequences, which, among other
effects, could require additional internal and external resources to address these effects thereby increasing operating expenses.
While it is expected that market participants will amend financial instruments referencing LIBOR to include fallback provisions
and/or other measures that contemplate the discontinuation of LIBOR or other similar market disruption events, neither the
effect of the transition process nor the viability of such measures is known. While market participants have begun transitioning
away from LIBOR, there are obstacles to converting certain longer term securities and transactions to a new benchmark or
benchmarks. The effectiveness of multiple alternative reference rates as opposed to one primary reference rate has not been
determined, nor has the effectiveness of alternative reference rates used in new or existing financial instruments and products.
As market participants transition away from LIBOR, LIBOR's usefulness may deteriorate, which could occur prior to the end of
2021. The transition process may lead to increased volatility and illiquidity in markets that currently rely on LIBOR to
determine interest rates. LIBOR's deterioration may adversely affect the liquidity and/or market value of securities that use
LIBOR as a benchmark interest rate, including securities and other financial instruments held by Federated or the Federated
30
Funds. Further, the utilization of an alternative reference rate, or the transition process to an alternative reference rate, may
adversely affect Federated's or the Federated Funds' performance. As such, there can be no assurance that unpredictable or
unexpected events, reports or consequences, or the costs to address such events, inaccurate reports or consequences, would not
have a material adverse effect on Federated's business (including, but not limited to, business prospects), results of operations,
financial condition and/or cash flows.
Risks Related to Auditor Independence. Public companies, such as Federated, utilize the audit services of a registered public
accounting firm (Accounting Firm) to audit or review their financial statements included in certain public filings, such as their
Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q. The Accounting Firm is required to make a determination
that such firm satisfies certain independence requirements under the federal securities laws. Like other public companies, there
is a risk that activities or relationships of the Accounting Firm engaged by Federated, or such firm's partners or employees, can
prevent a determination from being made that such firm satisfies such independence requirements with respect to Federated,
which could render such firm ineligible to serve as Federated's independent Accounting Firm. Since Federated's independent
Accounting Firm, like the Accounting Firms of many other public companies that sponsor and advise investment funds, acts in
a similar capacity to several Federated Funds sponsored and advised by Federated, if a determination cannot be made that the
Accounting Firm satisfies the independence requirements with respect to an applicable Federated Fund, the Accounting Firm
also could be prevented from making a determination that it satisfies the independence requirements with respect to Federated,
since Federated is an affiliate (i.e., the ultimate parent company) of the investment advisor to the relevant Federated Fund.
For example, Rule 2-01(c)(1)(ii)(A) of Regulation S-X (Loan Rule) prohibits Accounting Firms, or covered person
professionals within the firms, from having certain financial relationships with their audit clients and affiliated entities.
Federated's independent Accounting Firm, Ernst & Young LLP (EY), has advised Federated that under the then existing version
of the Loan Rule (and may in the future advise Federated that under the amended Loan Rule discussed below) EY or covered
person professionals within the firm have lending relationships with certain lenders where the lenders, or their affiliates that
control them, own beneficially or of record greater than 10% of the equity securities of certain Federated Funds which could
prevent a determination that the firm satisfies the independence requirements.
On June 18, 2019, the SEC adopted amendments to the Loan Rule relating to the analysis that must be conducted to determine
whether an Accounting Firm is independent when the Accounting Firm (or covered person professionals within the firm) has a
lending relationship with certain shareholders of an audit client, such as Federated or the Federated Funds. The amendments
focus the analysis on beneficial ownership rather than on both record and beneficial ownership; replace the existing 10% bright-
line shareholder ownership test with a significant influence test; add a known-through-reasonable-inquiry standard with respect
to identifying beneficial owners of the audit client's equity securities; and exclude from the definition of audit client, for a fund
under audit, any other funds that otherwise would be considered affiliates of the audit client under the rules for certain lending
relationships. Under the Loan Rule amendments, a beneficial owner with whom an Accounting Firm (or a covered person
professional within the firm) has a lending relationship would only have significant influence with respect to Federated or a
Federated Fund (when Federated or the Federated Fund is an audit client of the Accounting Firm) if the beneficial owner has
the ability to exert significant influence over Federated's or the Federated Fund's operating and financial policies, based on the
totality of the facts and circumstances. In the case of a Federated Fund, the beneficial owner would have to have the ability to
influence the Federated Fund's investment policies and day-to-day portfolio management processes, including those governing
the selection, purchase and sale, and valuation of investments, and the distribution of income and capital gains (collectively,
investment processes). Given Federated's dual-class structure, under which the entire voting power of Federated is generally
vested in the holder of the outstanding shares of the Class A Common Stock and its publicly listed Class B Common Stock
generally do not have voting power except in limited circumstances, the Loan Rule amendments make it less likely that a
beneficial owner of its publicly traded Class B Common Stock would have significant influence over its operating and financial
policies. Given that a majority of the members of the Federated Funds' Board of Directors/Trustees are independent and the
Federated Funds delegate investment discretion over their portfolios to registered advisory subsidiaries of Federated which act
as the primary investment advisers to the Federated Funds, the Loan Rule amendments make it less likely that a beneficial
owner of a Federated Funds' equity securities would have significant influence over a Federated Fund's investment processes.
Federated believes the Loan Rule amendments are an improvement on the Loan Rule and mitigate (but not entirely eliminate)
the risk that Federated's or the Federated Funds' auditors will inadvertently implicate the auditor independence rules.
Among other sources of potential violations of the auditor independence requirements, Rule 2-01(c)(1)(i)(A) of Regulation S-X
(Investment Rule) prohibits the Accounting Firm, or covered person professionals and their immediate family members, from
having certain direct investments in audit clients and affiliated entities. Due to acquisitions that result in inadvertent
investments in the auditing client or funds or other products that it or its affiliates manage, or other circumstances, an
Accounting Firm may violate the Investment Rule and be required to timely and appropriately remedy such violation such that
the audit client can make a determination that it continues to believe that the Accounting Firm has the ability to exercise
objective and impartial judgment on all issues encompassed within the Accounting Firm's audit and review services.
31
There can be no assurance that the circumstances in any particular case will satisfy applicable independence requirements under
the federal securities laws such that EY will remain eligible to serve as the independent Accounting Firm to Federated. If it
were to be determined that the independence requirements under the federal securities laws were not complied with regarding
Federated, its previously filed Annual Reports on Form 10-K (including financial statements audited by EY) and Quarterly
Reports on Form 10-Q (including financial statements reviewed by EY) may not be considered compliant with the applicable
federal securities laws. If it were to be determined that EY did not comply with the independence requirements, among other
things, the financial statements audited by EY and the interim financial statements reviewed by EY may have to be audited and
reviewed, respectively, by another independent Accounting Firm, Federated's eligibility to issue securities under its existing
registration statements may be impacted and certain financial reporting and/or other covenants with, and representations and
warranties to, Federated's lenders may be impacted. Similar issues would arise for a Federated Fund for which EY (or another
Accounting Firm) serves as such Federated Fund's independent Accounting Firm if it were to be determined that EY (or such
other Accounting Firm) was not in compliance with the independence requirements under the federal securities laws, with
respect to such Federated Fund. In either case, such events could have a material adverse effect on Federated's business, results
of operations, financial condition and/or cash flows.
Potential Adverse Effects of Litigation, Investigations, Proceedings and Other Claims. Federated and the Federated Funds
can be subject to routine, sweep and other examinations, inquiries, investigations, proceedings (administrative, regulatory, civil
or otherwise) and other claims by its regulators (regulatory claims). Federated and the Federated Funds also can be subject to
employee, former employee, customer, and other third-party, complaints, proceedings (such as civil litigation) and other claims
(business-related claims). Among other factors, as Federated's business grows (whether organically or through acquisition or
whether through new products, strategies or services being offered or through growth of existing products, strategies and
services, or otherwise), the attention and resources devoted to compliance, and the possibility of noncompliance, also can
increase. The attention and resources devoted to compliance, and the possibility of noncompliance, also can increase when
Federated expands its use of ESG, sustainability, stewardship or other data inputs or investment techniques in providing its
investment products, strategies and services, enters new countries or markets, and financial products and other investments, as
well as when markets and technology increase in complexity. Federated has business-related claims asserted and threatened
against it, and Federated and the Federated Funds are subject to certain regulatory claims (such as routine and sweep
examinations and other inquiries), in the ordinary course of business. In addition, Federated and the Federated Funds may be
subject to business-related claims, claims related to Federated sponsorship or management of, or inclusion of proprietary
Federated Funds in, its 401(k) plan or other benefit plans, and administrative, regulatory or civil investigations and proceedings
or other regulatory claims, outside of the ordinary course of business. Federated cannot assess or predict whether, when or what
types of business-related claims, fiduciary claims or regulatory claims (collectively, claims) may be threatened or asserted, the
types or amounts of damages or other remedies that may be sought (which may be material when threatened or asserted),
whether claims that have been threatened will become formal asserted pending investigations, proceedings or litigation, or
whether claims ultimately may be successful (whether through settlement or adjudication), entirely or in part, whether or not
any such claims are threatened or asserted in or outside the ordinary course of business. Federated may be initially unable to
accurately assess a claim's impact. Given that the outcome of any claim is inherently unpredictable and uncertain, a result may
arise from time to time that adversely impacts, potentially in a material way, Federated's business, results of operations,
financial condition and/or cash flows. In certain circumstances, insurance coverage may not be available or deductible amounts
may not be exceeded, and Federated, the Federated Funds or Separate Accounts managed by Federated may have to bear the
costs related to claims or any losses or other liabilities resulting from any such matters, or from the operation of Federated's
business, products and services.
Federated's Status as a Controlled Company. Federated has two classes of common stock: Class A Common Stock, which
has voting power, and Class B Common Stock, which is non-voting except in certain limited circumstances. All of the
outstanding shares of Class A Common Stock are held by the Voting Shares Irrevocable Trust for the benefit of certain members
of the Donahue family. The three trustees of this trust are Federated's President and Chief Executive Officer and Chairman of
the Board, J. Christopher Donahue, his brother, Thomas R. Donahue, Federated's Vice President, Treasurer and Chief Financial
Officer and a director, and their mother, Rhodora J. Donahue. Accordingly, Federated qualifies as a "controlled company" under
Section 303A of the NYSE Listed Company Manual. As a controlled company, Federated qualifies for and relies upon
exemptions from several NYSE corporate governance requirements, including requirements that: (1) a majority of the board of
directors consists of independent directors; and (2) the entity maintains a nominating/corporate governance committee that is
composed entirely of independent directors with a written charter addressing the committee's purpose and responsibilities. As a
result, Federated's board does not have a majority of independent directors nor does it maintain a nominating/corporate
governance committee. Federated is also exempt as a "controlled company" from certain additional independence requirements
and responsibilities regarding compensation advisors applicable to Compensation Committee members. While Federated
believes its dual-class structure is appropriate and benefits its shareholders, and should be a factor taken into account by
32
shareholders when investing in Federated, as a company with a dual-class structure, Federated may be excluded from certain
financial indexes, which may result in decreased investments in its Class B Common Stock and adversely affect its stock price.
ITEM 1B – UNRESOLVED STAFF COMMENTS
None.
ITEM 2 – PROPERTIES
Federated has material operating leases related to its corporate headquarters where it occupies approximately 259,000 square
feet in Pittsburgh, Pennsylvania. Federated's leased office space is used for its investment management business.
ITEM 3 – LEGAL PROCEEDINGS
The information required by this item is included in Note (21) to the Consolidated Financial Statements.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
Part II
ITEM 5 – MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Federated's Class B common stock was traded on the NYSE under the symbol FII. Effective February 3, 2020, Class B
common stock began trading under the ticker symbol FHI.
The approximate number of beneficial shareholders of Class A and Class B common stock as of February 7, 2020, was 1 and
23,435, respectively. See Item 1A - Risk Factors under the caption Federated's Status as a Controlled Company for additional
information on its Class A common stock.
The following table summarizes stock repurchases under Federated's share repurchase program during the fourth quarter
of 2019.
October2
November2
December2
Total
Total Number
of Shares
Purchased
93,650
161,453
165,949
421,052
Average
Price Paid
Per Share
$ 28.89
31.39
23.58
$ 27.75
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs1
85,000
150,000
112,646
347,646
Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans or Programs1
809,401
659,401
546,755
546,755
1
2
In October 2016, the board of directors authorized a share repurchase program with no stated expiration date that allows the buy back
of up to 4.0 million shares of Class B common stock. No other programs existed as of December 31, 2019. See Note (15) to the
Consolidated Financial Statements for additional information on this program.
In October, November and December 2019, 8,650, 11,453 and 53,303 shares, respectively, of Class B common stock with a weighted-
average price of $3.00, $2.74 and $2.96 per share, respectively, were repurchased as certain employees forfeited restricted stock.
See Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters for
information on Federated's securities authorized for issuance under equity compensation plans.
33
Stock Performance Graph
The following performance graph compares the total shareholder return of an investment in Federated's Class B Common Stock
to that of the Standard and Poor's MidCap 400® Index (S&P MidCap 400 Index) and to the S&P 1500 Asset Management &
Custody Banks Index for the five-year period ended on December 31, 2019.
The graph assumes that the value of the investment in Class B Common Stock and each index was $100 on December 31, 2014.
Total return includes reinvestment of all dividends. As a member of the S&P MidCap 400 Index as of December 31, 2019,
Federated is required to include this comparison. The historical information set forth below is not necessarily indicative of
future performance. Federated does not make or endorse any predictions as to future stock performance.
Federated
S&P MidCap 400 Index
S&P 1500 Asset Management & Custody Banks Index
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
$
$
$
89.69
97.82
90.23
$
$
$
95.50
118.11
100.12
$
$
$
126.31
137.30
129.56
$
$
$
96.83
122.08
97.00
$
$
$
123.04
154.07
122.45
34
ITEM 6 – SELECTED FINANCIAL DATA
The selected consolidated financial data in this item should be read in conjunction with Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations and Item 8 - Financial Statements and Supplementary Data. The
selected consolidated financial data (except managed assets) of Federated for the five years ended December 31, 2019 have
been derived from Federated's audited Consolidated Financial Statements.
(in thousands, except per share data and managed assets)
Statement of Income Data1,2
Total Revenue
Operating Income
Net Income Including the Noncontrolling
Interests in Subsidiaries3,4
Net Income Attributable to Federated Hermes, Inc.3,4
Share Data Attributable to Federated Hermes, Inc.
Earnings Per Share – Basic and Diluted1,5
Cash Dividends Per Share6
Weighted-average Shares Outstanding – Basic
Weighted-average Shares Outstanding – Diluted
Balance Sheet Data at Period End1
Intangible Assets, net and Goodwill
Total Assets7
Long-Term Debt
Long-Term Deferred Tax Liability, net
Other Long-Term Liabilities7
Redeemable Noncontrolling Interest in Subsidiaries1
Federated Hermes, Inc. Shareholders' Equity6
Managed Assets1 (in millions)
As of Period End
Average for the Period
2019
2018
2017
2016
2015
$1,326,894
347,927
$1,135,677
330,280
$1,102,924
341,508
$1,143,371
335,683
$ 926,609
279,446
277,125
272,339
222,299
220,297
294,901
291,341
221,514
208,919
171,986
169,807
$
$
$
$
2.69
1.08
97,259
97,259
2.18
1.06
96,949
96,949
$
$
$
$
2.87
1.00
97,411
97,412
2.03
2.00
99,116
99,117
$
$
1.62
1.00
100,475
100,477
$1,220,762
1,880,131
100,000
165,382
130,670
212,086
1,041,280
$1,149,247
1,543,683
135,000
148,164
39,705
182,513
857,121
$ 736,915
1,231,410
170,000
117,620
23,563
30,163
761,215
$ 733,137
1,155,107
165,750
176,686
22,987
31,362
594,826
$ 734,492
1,187,203
191,250
158,895
20,144
8,734
647,816
$ 575,874
509,180
$ 459,860
415,388
$ 397,570
366,421
$ 365,908
362,938
$ 361,112
353,493
1 On July 2, 2018, Federated completed the Hermes Acquisition, effective as of July 1, 2018. See Note (3) to the Consolidated Financial
Statements for additional information.
3
2 During 2016 and 2015, voluntary yield-related fee waivers totaled $87.9 million and $333.6 million, respectively. These fee waivers were
partially offset by related reductions in distribution expenses of $65.8 million and $240.6 million for 2016 and 2015, respectively, and
net income attributable to noncontrolling interests of $7.1 million for 2015, such that the net negative pretax impact to Federated was
$22.0 million and $85.9 million for 2016 and 2015, respectively. See Item 1A - Risk Factors under the caption Potential Adverse Effects
of Low Short-Term Interest Rates for additional information on Voluntary Yield-related Fee Waivers.
2018 includes a $29.0 million loss related to two derivative financial instruments associated with the Hermes Acquisition. See Note (9) to
the Consolidated Financial Statements for additional information.
2017 includes a $70.4 million reduction to the income tax provision resulting from the revaluation of the net deferred tax liability due to
the enactment of the Tax Act, thereby increasing net income.
2017 includes a $0.69 increase to earnings per share resulting from the revaluation of the net deferred tax liability due to the enactment
of the Tax Act.
2016 includes a special dividend paid to shareholders of $1.00 per share or $102.2 million.
Total Assets for 2019 include Right-of-Use Assets of $100.5 million and Other Long-Term Liabilities for 2019 include Long-Term Lease
Liabilities of $107.5 million. See Note (2) to the Consolidated Financial Statements for additional information.
6
7
4
5
35
ITEM 7 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with
Item 1- Business, Item 1A - Risk Factors, Item 6 - Selected Financial Data and Item 8 - Financial Statements and
Supplementary Data.
General
Federated is one of the largest investment managers in the U.S. with $575.9 billion in managed assets as of December 31, 2019.
The majority of Federated's revenue is derived from advising Federated Funds and Separate Accounts in both domestic and
international markets. Federated also derives revenue from providing administrative and other fund-related services (including
distribution and shareholder servicing) and stewardship services. For additional information on Federated's markets, see Item 1
- Business under the caption Distribution Channels and Product Markets.
Investment advisory fees, administrative service fees and certain fees for other services, such as distribution and shareholder
service fees, are contract-based fees that are generally calculated as a percentage of the average net assets of managed
investment portfolios. Federated's revenue is primarily dependent upon factors that affect the value of managed assets including
market conditions and the ability to attract and retain assets. Generally, managed assets in Federated's investment products and
strategies can be redeemed or withdrawn at any time with no advance notice requirement. Fee rates for Federated's services
generally vary by asset and service type and may vary based on changes in asset levels. Generally, management-fee rates
charged for advisory services provided to equity and multi-asset products and strategies are higher than management-fee rates
charged to fixed-income and alternative/private markets products and strategies, which in turn are higher than management-fee
rates charged to money market products and strategies. Likewise, Federated Funds typically have a higher management-fee rate
than Separate Accounts. Similarly, revenue is also dependent upon the relative composition of average AUM across both asset
and product types. Federated may implement Fee Waivers for competitive reasons such as to maintain certain fund expense
ratios, to meet regulatory requirements or to meet contractual requirements. Since Federated's products are largely distributed
and serviced through financial intermediaries, Federated pays a portion of fees earned from sponsored products to the financial
intermediaries that sell these products and strategies. These payments are generally calculated as a percentage of net assets
attributable to the applicable financial intermediary and represent the vast majority of Distribution expense on the Consolidated
Statements of Income. Certain components of Distribution expense can vary depending upon the asset type, distribution
channel and/or the size of the customer relationship. Federated generally pays out a larger portion of the revenue earned from
managed assets in money market and multi-asset funds than the revenue earned from managed assets in equity, fixed-income
and alternative/private markets funds.
Federated's most significant operating expenses are Compensation and Related expense and Distribution expense.
Compensation and Related expense includes base salary and wages, incentive compensation and other employee expenses
including payroll taxes and benefits. Incentive compensation, which includes stock-based compensation, can vary depending on
various factors including, but not limited to, the overall results of operations of Federated, investment management performance
and sales performance.
The discussion and analysis of Federated's financial condition and results of operations are based on Federated's Consolidated
Financial Statements. Management evaluates Federated's performance at the consolidated level. Therefore, Federated operates
in one operating segment, the investment management business. Management analyzes all expected revenue and expenses and
considers market demands in determining an overall fee structure for services provided and in evaluating the addition of new
business. Federated's growth and profitability are dependent upon its ability to attract and retain AUM and upon the profitability
of those assets, which is impacted, in part, by Fee Waivers. Fees for mutual fund-related services are ultimately subject to the
approval of the independent directors or trustees of the mutual funds. Management believes that meaningful indicators of
Federated's financial performance include AUM, gross and net product sales, total revenue and net income, both in total and per
diluted share.
36
Business Developments
Current Regulatory Environment
Federated and its investment management business are subject to extensive regulation both in and outside the U.S. Federated
and its products, such as the Federated Funds, and strategies are subject to: federal securities laws, principally the 1933 Act, the
1934 Act, the 1940 Act and the Advisers Act; state laws regarding securities fraud and registration; regulations or other rules
promulgated by various regulatory authorities, self-regulatory organizations or exchanges; and foreign laws, regulations or
other rules promulgated by foreign regulatory or other authorities. See Item 1 - Business under the caption Regulatory Matters
and Item 1A - Risk Factors under the caption Potential Adverse Effects of Changes in Laws, Regulations and Other Rules on
Federated's Investment Management Business for additional information.
Asset Highlights
Managed Assets at Period End
in millions as of December 31,
By Asset Class
Equity
Fixed-Income
Alternative / Private Markets1
Multi-Asset
Total Long-Term Assets
Money Market
Total Managed Assets
By Product Type
Funds:
Equity
Fixed-Income
Alternative / Private Markets1
Multi-Asset
Total Long-Term Assets
Money Market
Total Fund Assets
Separate Accounts:
Equity
Fixed-Income
Alternative / Private Markets
Multi-Asset
Total Long-Term Assets
Money Market
Total Separate Account Assets
Total Managed Assets
2019
2018
2019
vs. 2018
$
89,011
69,023
18,102
4,199
180,335
395,539
$ 575,874
$
72,497
63,158
18,318
4,093
158,066
301,794
$ 459,860
$
48,112
44,223
11,389
4,000
107,724
286,612
394,336
40,899
24,800
6,713
199
72,611
108,927
181,538
$ 575,874
$
36,584
40,490
11,365
3,920
92,359
208,480
300,839
35,913
22,668
6,953
173
65,707
93,314
159,021
$ 459,860
23%
9
(1)
3
14
31
25%
32%
9
0
2
17
37
31
14
9
(3)
15
11
17
14
25%
1 The balance at December 31, 2019 and 2018 includes $8.2 billion and $8.3 billion, respectively, of fund assets managed by a non-
consolidated entity, Hermes GPE LLP, in which Hermes holds an equity method investment.
37
Average Managed Assets
in millions for the years ended December 31,
By Asset Class
Equity
Fixed-Income
Alternative / Private Markets1
Multi-Asset
Total Long-Term Assets
Money Market
Total Average Managed Assets
By Product Type
Funds:
Equity
Fixed-Income
Alternative / Private Markets1
Multi-Asset
Total Long-Term Assets
Money Market
Total Average Fund Assets
Separate Accounts:
Equity
Fixed-Income
Alternative / Private Markets
Multi-Asset
Total Long-Term Assets
Money Market
Total Average Separate Account Assets
Total Average Managed Assets
2019
2018
2017
2019
vs. 2018
2018
vs. 2017
$
81,212
65,375
17,896
4,192
168,675
340,505
$ 509,180
$
70,680
63,454
9,397
4,764
148,295
267,093
$ 415,388
$
60,255
55,204
441
5,062
120,962
245,459
$ 366,421
$
42,712
41,938
11,317
4,003
99,970
238,876
338,846
38,500
23,437
6,579
189
68,705
101,629
170,334
$ 509,180
$
36,984
40,952
5,784
4,554
88,274
182,828
271,102
33,696
22,502
3,613
210
60,021
84,265
144,286
$ 415,388
$
32,160
40,676
441
4,841
78,118
176,580
254,698
28,095
14,528
0
221
42,844
68,879
111,723
$ 366,421
15%
3
90
(12)
14
27
23%
15%
2
96
(12)
13
31
25
14
4
82
(10)
14
21
18
23%
17%
15
NM
(6)
23
9
13%
15%
1
NM
(6)
13
4
6
20
55
0
(5)
40
22
29
13%
1
The average for the years ended December 31, 2019 and 2018 includes $8.2 billion and $4.1 billion, respectively, of average fund assets
managed by a non-consolidated entity, Hermes GPE LLP, in which Hermes holds an equity method investment.
38
Changes in Equity Fund and Separate Account Assets
in millions for the years ended December 31,
Equity Funds
Beginning Assets
Sales
Redemptions
Net Sales (Redemptions)
Net Exchanges
Acquisition-Related
Impact of Foreign Exchange1
Market Gains and (Losses)2
Ending Assets
Equity Separate Accounts
Beginning Assets
Sales3
Redemptions3
Net Sales (Redemptions)3
Net Exchanges
Acquisition-Related
Impact of Foreign Exchange1
Market Gains and (Losses)2
Ending Assets
Total Equity
Beginning Assets
Sales3
Redemptions3
Net Sales (Redemptions)3
Net Exchanges
Acquisition-Related
Impact of Foreign Exchange1
Market Gains and (Losses)2
Ending Assets
2019
2018
$
$
$
$
$
$
36,584
12,380
(11,757)
623
181
2,191
54
8,479
48,112
35,913
7,842
(10,037)
(2,195)
0
53
(82)
7,210
40,899
72,497
20,222
(21,794)
(1,572)
181
2,244
(28)
15,689
89,011
$
$
$
$
$
$
33,008
8,408
(12,192)
(3,784)
(115)
11,131
0
(3,656)
36,584
29,808
5,547
(10,209)
(4,662)
(1)
13,569
0
(2,801)
35,913
62,816
13,955
(22,401)
(8,446)
(116)
24,700
0
(6,457)
72,497
1
2
3
Reflects the impact of translating non-U.S. dollar denominated AUM into U.S. dollars for reporting purposes. Reporting only contains
foreign exchange separately beginning in 2019, previously included in Market Gains and (Losses).
Reflects the approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends,
distributions, net investment income and the impact of changes in foreign exchange rates for 2018.
For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the
calculation of total investment return.
39
Changes in Fixed-Income Fund and Separate Account Assets
in millions for the years ended December 31,
Fixed-Income Funds
Beginning Assets
Sales
Redemptions
Net Sales (Redemptions)
Net Exchanges
Acquisition-Related
Impact of Foreign Exchange1
Market Gains and (Losses)2
Ending Assets
Fixed-Income Separate Accounts
Beginning Assets
Sales3
Redemptions3
Net Sales (Redemptions)3
Net Exchanges
Acquisition-Related
Impact of Foreign Exchange1
Market Gains and (Losses)2
Ending Assets
Total Fixed-Income
Beginning Assets
Sales3
Redemptions3
Net Sales (Redemptions)3
Net Exchanges
Acquisition-Related
Impact of Foreign Exchange1
Market Gains and (Losses)2
Ending Assets
2019
2018
$
$
$
$
$
$
40,490
16,730
(16,311)
419
(98)
450
72
2,890
44,223
22,668
4,694
(5,232)
(538)
(110)
0
(12)
2,792
24,800
63,158
21,424
(21,543)
(119)
(208)
450
60
5,682
69,023
$
$
$
$
$
$
41,144
16,594
(18,366)
(1,772)
138
1,565
0
(585)
40,490
23,016
3,562
(5,004)
(1,442)
(2)
1,167
0
(71)
22,668
64,160
20,156
(23,370)
(3,214)
136
2,732
0
(656)
63,158
1
2
3
Reflects the impact of translating non-U.S. dollar denominated AUM into U.S. dollars for reporting purposes. Reporting only contains
foreign exchange separately beginning in 2019, previously included in Market Gains and (Losses).
Reflects the approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends,
distributions, net investment income and the impact of changes in foreign exchange rates for 2018.
For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the
calculation of total investment return.
40
Changes in Alternative / Private Markets Fund and Separate Account Assets
in millions for the years ended December 31,
Alternative / Private Markets Funds1
Beginning Assets
Sales
Redemptions
Net Sales (Redemptions)
Net Exchanges
Acquisition-Related
Impact of Foreign Exchange2
Market Gains and (Losses)3
Ending Assets
Alternative / Private Markets Separate Accounts
Beginning Assets
Sales4
Redemptions4
Net Sales (Redemptions)4
Acquisition-Related
Impact of Foreign Exchange2
Market Gains and (Losses)3
Ending Assets
Total Alternative / Private Markets1
Beginning Assets
Sales4
Redemptions4
Net Sales (Redemptions)4
Net Exchanges
Acquisition-Related
Impact of Foreign Exchange2
Market Gains and (Losses)3
Ending Assets
2019
2018
$
$
$
$
$
$
11,365
1,062
(1,721)
(659)
(65)
0
430
318
11,389
6,953
381
(738)
(357)
0
264
(147)
6,713
18,318
1,443
(2,459)
(1,016)
(65)
0
694
171
18,102
$
$
$
$
$
$
366
1,127
(790)
337
(2)
10,823
0
(159)
11,365
0
123
(525)
(402)
7,686
0
(331)
6,953
366
1,250
(1,315)
(65)
(2)
18,509
0
(490)
18,318
1
2
3
4
The balance at December 31, 2019 and 2018 includes $8.2 billion and $8.3 billion, respectively, of fund assets managed by a non-
consolidated entity, Hermes GPE LLP, in which Hermes holds an equity method investment.
Reflects the impact of translating non-U.S. dollar denominated AUM into U.S. dollars for reporting purposes. Reporting only contains
foreign exchange separately beginning in 2019, previously included in Market Gains and (Losses).
Reflects the approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends,
distributions, net investment income and the impact of changes in foreign exchange rates for 2018.
For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the
calculation of total investment return.
41
Changes in Multi-Asset Fund and Separate Account Assets
in millions for the years ended December 31,
Multi-Asset Funds
Beginning Assets
Sales
Redemptions
Net Sales (Redemptions)
Net Exchanges
Acquisition-Related
Market Gains and (Losses)1
Ending Assets
Multi-Asset Separate Accounts
Beginning Assets
Sales2
Redemptions2
Net Sales (Redemptions)2
Market Gains and (Losses)1
Ending Assets
Total Multi-Asset
Beginning Assets
Sales2
Redemptions2
Net Sales (Redemptions)2
Net Exchanges
Acquisition-Related
Market Gains and (Losses)1
Ending Assets
2019
2018
3,920
317
(864)
(547)
55
11
561
4,000
173
15
(29)
(14)
40
199
4,093
332
(893)
(561)
55
11
601
4,199
$
$
$
$
$
$
4,783
472
(1,013)
(541)
(21)
45
(346)
3,920
231
21
(31)
(10)
(48)
173
5,014
493
(1,044)
(551)
(21)
45
(394)
4,093
$
$
$
$
$
$
1
2
Reflects the approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends,
distributions and net investment income.
For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the
calculation of total investment return.
42
Changes in Total Long-Term Assets
in millions for the years ended December 31,
Total Long-Term Fund Assets1
Beginning Assets
Sales
Redemptions
Net Sales (Redemptions)
Net Exchanges
Acquisition-Related
Impact of Foreign Exchange2
Market Gains and (Losses)3
Ending Assets
Total Long-Term Separate Accounts Assets
Beginning Assets
Sales4
Redemptions4
Net Sales (Redemptions)4
Net Exchanges
Acquisition-Related
Impact of Foreign Exchange2
Market Gains and (Losses)3
Ending Assets
Total Long-Term Assets1
Beginning Assets
Sales4
Redemptions4
Net Sales (Redemptions)4
Net Exchanges
Acquisition-Related
Impact of Foreign Exchange2
Market Gains and (Losses)3
Ending Assets
2019
2018
$
92,359
30,489
(30,653)
(164)
73
2,652
556
12,248
$ 107,724
$
$
65,707
12,932
(16,036)
(3,104)
(110)
53
170
9,895
72,611
$ 158,066
43,421
(46,689)
(3,268)
(37)
2,705
726
22,143
$ 180,335
$
$
$
$
79,301
26,601
(32,361)
(5,760)
0
23,564
0
(4,746)
92,359
53,055
9,253
(15,769)
(6,516)
(3)
22,422
0
(3,251)
65,707
$ 132,356
35,854
(48,130)
(12,276)
(3)
45,986
0
(7,997)
$ 158,066
1
2
3
4
The balance at December 31, 2019 and 2018 includes $8.2 billion and $8.3 billion, respectively, of fund assets managed by a non-
consolidated entity, Hermes GPE LLP, in which Hermes holds an equity method investment.
Reflects the impact of translating non-U.S. dollar denominated AUM into U.S. dollars for reporting purposes. Reporting only contains
foreign exchange separately beginning in 2019, previously included in Market Gains and (Losses).
Reflects the approximate changes in the fair value of the securities held by the portfolios and, to a lesser extent, reinvested dividends,
distributions, net investment income and the impact of changes in foreign exchange rates for 2018.
For certain accounts, Sales and Redemptions are calculated as the remaining difference between beginning and ending assets after the
calculation of total investment return.
43
Changes in Federated's average asset mix year-over-year across both asset classes and product types have a direct impact on
Federated's operating income. Asset mix impacts Federated's total revenue due to the difference in the fee rates earned on each
asset class and product type per invested dollar and certain components of distribution expense can vary depending upon the
asset class, distribution channel and/or the size of the customer relationship. The following table presents the relative
composition of average managed assets and the percent of total revenue derived from each asset class and product type over the
last three years:
Percent of Total Average Managed Assets
2017
2019
2018
Percent of Total Revenue
2019
2018
2017
By Asset Class
Money Market
Equity
Fixed-Income
Alternative / Private Markets
Multi-Asset
Other
By Product Type
Funds:
Money Market
Equity
Fixed-Income
Alternative / Private Markets
Multi-Asset
Other
Separate Accounts:
Money Market
Equity
Fixed-Income
Alternative / Private Markets
Multi-Asset
Other
67%
16%
13%
3%
1%
0%
47%
8%
8%
2%
1%
0%
20%
8%
5%
1%
0%
0%
64%
17%
16%
2%
1%
0%
44%
9%
10%
1%
1%
0%
20%
8%
6%
1%
0%
0%
67%
17%
15%
0%
1%
0%
48%
9%
11%
0%
1%
0%
19%
8%
4%
0%
0%
0%
40%
40%
14%
3%
2%
1%
37%
30%
12%
1%
2%
0%
3%
10%
2%
2%
0%
1%
37%
41%
16%
2%
3%
1%
34%
31%
14%
1%
3%
0%
3%
10%
2%
1%
0%
1%
41%
38%
17%
0%
4%
0%
38%
30%
15%
0%
4%
0%
3%
8%
2%
0%
0%
0%
Total managed assets represent the balance of AUM at a point in time. By contrast, total average managed assets represent the
average balance of AUM during a period of time. Because substantially all revenue and certain components of distribution
expense are generally calculated daily based on AUM, changes in average managed assets are typically a key indicator of
changes in revenue earned and asset-based expenses incurred during the same period.
Average managed assets increased 23% for 2019 as compared to 2018. Period-end managed assets increased 25% at
December 31, 2019 as compared to December 31, 2018 primarily due to an increase in money market and equity assets.
Average money market assets increased 27% for 2019 compared to 2018. Period-end money market assets increased 31% at
December 31, 2019 as compared to December 31, 2018. Average equity assets increased 15% for 2019 as compared to 2018.
Period-end equity assets increased 23% at December 31, 2019 as compared to December 31, 2018 primarily due to market
appreciation. Average fixed income assets increased 3% for 2019 as compared to 2018. Period-end fixed-income assets
increased 9% at December 31, 2019 as compared to December 31, 2018, primarily due to market appreciation. During 2019,
the combination of fading recession fears, easing trade tensions and Federal Reserve easing helped push equity markets to new
highs, with the S&P 500 increasing 31.5% on a total return basis for its best year since 2013. Muted inflation pressures and
three 0.25% reductions in the Federal Reserve's target funds rate in the second half of the year also helped drive bond yields
down over the course of the year, with the 10-year Treasury yield declining from 2.69% at the end of 2018 to 1.92% at the end
of 2019. For all of 2019, the Bloomberg Barclays U.S. Aggregate Bond Index returned 8.7%, its best year since 2002.
For an explanation of the changes in managed assets at December 31, 2018 compared to December 31, 2017 and changes in
average managed assets for 2018 as compared to 2017, see Federated's Annual Report on Form 10-K for the year ended
December 31, 2018, Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations under the
caption Asset Highlights.
44
Results of Operations
For an explanation of changes for 2018 as compared to 2017, see Federated's Annual Report on Form 10-K for the year ended
December 31, 2018, Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations under the
caption Results of Operations.
Revenue. Revenue increased $191.2 million in 2019 as compared to 2018 primarily due to (1) an increase in money market
revenue of $114.6 million primarily due to higher average money market assets and (2) $96.4 million of Hermes activity being
included in the Consolidated Financial Statements for two additional quarters in 2019 as compared to 2018 (Hermes Full Year
Impact). These increases in revenue were partially offset by decreases of $6.5 million and $5.1 million from lower average
equity and multi-asset assets (excluding the Hermes Full Year Impact), respectively.
Federated's ratio of revenue to average managed assets for 2019 was 0.26% as compared to 0.27% for 2018.
Operating Expenses. Total operating expenses for 2019 increased $173.6 million compared to 2018. Compensation and
Related expense increased $87.4 million in 2019 as compared to 2018 primarily related to the Hermes Full Year Impact of
$61.4 million and an increase in incentive compensation of $15.5 million driven primarily by international efforts and
investment management performance. Distribution expense increased $53.1 million in 2019 as compared to 2018 primarily due
to higher average money market fund assets. Systems and Communications expense increased $13.1 million in 2019 compared
to 2018 primarily related to $8.3 million resulting from the Hermes Full Year Impact and $4.2 million due to increased market
data services. The remaining operating expenses for 2019 increased $20.0 million compared to 2018 primarily due to the
Hermes Full Year Impact.
Nonoperating Income (Expenses). Nonoperating Income (Expenses), net, increased $51.5 million in 2019 as compared to
2018. The increase is primarily due to (1) a $29.0 million loss, recorded in Other, net in 2018, related to two derivative financial
instruments associated with the Hermes Acquisition and (2) an increase of $9.1 million of private equity carried interest income
on assets managed by a nonconsolidated entity, recorded in Other, net on the Consolidated Statements of Income. In addition,
Gain (Loss) on Securities, net increased $9.3 million due primarily to an increase in the market value of investments primarily
held by consolidated investment companies.
Income Taxes. The income tax provision for 2019 and 2018 was $88.1 million and $73.9 million, respectively. The provision
for 2019 increased $14.2 million as compared to 2018 primarily due to higher income before income taxes as a result of the
changes in revenues, operating expenses and nonoperating income (expenses) noted above. The effective tax rate was 24.1% for
2019 and 24.9% for 2018. See Note (16) to the Consolidated Financial Statements for additional information on the effective
tax rate, as well as other tax disclosures.
Net Income Attributable to Federated Hermes, Inc. Net income increased $52.0 million in 2019 as compared to 2018
primarily as a result of the changes in revenues, operating expenses, nonoperating income (expenses) and income taxes noted
above. Diluted earnings per share for 2019 increased $0.51 as compared to 2018 primarily due to increased net income.
Liquidity and Capital Resources
Liquid Assets. At December 31, 2019, liquid assets, net of noncontrolling interests, consisting of cash and cash equivalents,
investments and receivables, totaled $359.1 million as compared to $222.1 million at December 31, 2018. The change in liquid
assets is discussed below.
At December 31, 2019, Federated's liquid assets included investments in certain money market and fluctuating-value Federated
Funds that may have direct and/or indirect exposures to international sovereign debt and currency risks. Federated continues to
actively monitor its investment portfolios to manage sovereign debt and currency risks with respect to certain European
countries (such as the UK in light of Brexit), China and certain other countries subject to economic sanctions. Federated's
experienced portfolio managers and analysts work to evaluate credit risk through quantitative and fundamental analysis.
Further, regarding international exposure, certain money market funds (approximately $212 million), that meet the requirement
of Rule 2a-7 or operate in accordance with requirements similar to those in Rule 2a-7, include holdings with indirect short-term
exposures invested primarily in high-quality international bank names that are subject to Federated's credit analysis process.
Cash Provided by Operating Activities. Net cash provided by operating activities totaled $334.9 million for 2019 as
compared to $206.3 million for 2018. The increase of $128.6 million was primarily due to (1) an increase in cash received
related to the $191.2 million increase in revenue previously discussed, (2) a decrease of $65.0 million in cash paid for incentive
compensation (primarily related to Hermes employees in the third quarter of 2018) and (3) a decrease of $29.0 million in cash
paid due to the settlement of two derivative financial instruments associated with the Hermes Acquisition in 2018. These were
partially offset by (1) a decrease due to additional cash paid related to the $53.1 million increase in distribution related expenses
previously discussed, (2) an increase of $43.1 million in cash paid for net purchases of investments by consolidated Federated
45
Funds, (3) an increase of $25.9 million in cash paid for compensation (excluding incentive compensation) primarily related to
the Hermes Full Year Impact and (4) an increase of $11.0 million in cash paid for taxes primarily due to an increase in pretax
book income.
Cash Used by Investing Activities. In 2019, net cash used by investing activities was $94.7 million which primarily
represented (1) $103.4 million in cash paid for purchases of investments, (2) $58.0 million in cash paid for indefinite-lived
rights to manage fund assets acquired in connection with the acquisition of certain components of the PNC Capital Advisors
LLC investment management business and (3) $15.0 million in cash paid for property and equipment, partially offset by $81.1
million in proceeds from the redemption of investments.
Cash Used by Financing Activities. In 2019, net cash used by financing activities was $152.7 million. Of this amount,
Federated paid $109.1 million or $1.08 per share in dividends to holders of its common shares, paid $43.8 million in connection
with its debt obligations and paid $15.7 million to repurchase shares of Class B common stock primarily in connection with its
stock repurchase program (see Note (15) to the Consolidated Financial Statements for additional information). This activity was
partially offset by $8.8 million borrowed from Federated's revolving credit facility.
Borrowings. In 2017, Federated entered into an unsecured Third Amended and Restated Credit Agreement by and among
Federated, certain of its subsidiaries as guarantors party thereto, a syndicate of ten banks as Lenders party thereto, PNC Bank,
National Association as administrative agent, PNC Capital Markets LLC, as sole bookrunner and joint lead arranger, Citigroup
Global Markets, Inc., as joint lead arranger, Citibank, N.A. as syndication agent, and TD Bank, N.A. as documentation agent
(Credit Agreement). The Credit Agreement consists of a $375 million revolving credit facility with an additional $200 million
available via an optional increase (or accordion) feature. The original proceeds were used for general corporate purposes
including cash payments related to acquisitions, dividends, investments and share repurchases. As of December 31, 2019,
Federated has $275 million available to borrow under the Credit Agreement. See Note (12) to the Consolidated Financial
Statements for additional information.
The Credit Agreement includes an interest coverage ratio covenant (consolidated earnings before interest, taxes, depreciation
and amortization (EBITDA) to consolidated interest expense) and a leverage ratio covenant (consolidated debt to consolidated
EBITDA) as well as other customary terms and conditions. Federated was in compliance with all of its covenants, including its
interest coverage and leverage ratios at and during the year ended December 31, 2019. An interest coverage ratio of at least 4
to 1 is required and, as of December 31, 2019, Federated's interest coverage ratio was 94 to 1. A leverage ratio of no more
than 3 to 1 is required and, as of December 31, 2019, Federated's leverage ratio was 0.2 to 1. The Credit Agreement also has
certain stated events of default and cross default provisions which would permit the lenders/counterparties to accelerate the
repayment of debt outstanding if not cured within the applicable grace periods. The events of default generally include breaches
of contract, failure to make required loan payments, insolvency, cessation of business, notice of lien or assessment, and other
proceedings, whether voluntary or involuntary, that would require the repayment of amounts borrowed.
Dividends. Cash dividends of $109.1 million, $106.9 million and $101.5 million were paid in 2019, 2018 and 2017
respectively, to holders of Federated common stock. All dividends were considered ordinary dividends for tax purposes.
Future Cash Needs. In addition to the contractual obligations described below, management expects that principal uses of cash
will include funding business acquisitions and global expansion, funding distribution expenditures, paying incentive and base
compensation, paying shareholder dividends, repaying debt obligations, paying taxes, repurchasing company stock, developing
and seeding new products and strategies, modifying existing products, strategies and relationships, and funding property and
equipment (including technology). Any number of factors may cause Federated's future cash needs to increase. As a result of
the highly regulated nature of the investment management business, management anticipates that aggregate expenditures for
compliance and investment management personnel, compliance systems and technology and related professional and consulting
fees may continue to increase.
On January 30, 2020, the board of directors declared a $0.27 per share dividend. The dividend was payable to shareholders of
record as of February 7, 2020, resulting in $27.3 million being paid on February 14, 2020.
After evaluating Federated's existing liquid assets, expected continuing cash flow from operations, its borrowing capacity under
the Credit Agreement and its ability to obtain additional financing arrangements and issue debt or stock, management believes it
will have sufficient liquidity to meet its present and reasonably foreseeable cash needs.
46
Financial Position
The following discussion summarizes significant changes in assets and liabilities that are not discussed elsewhere in
Management's Discussion and Analysis of Financial Condition and Results of Operations.
Goodwill at December 31, 2019 decreased $35.1 million from December 31, 2018 primarily due to the final purchase price
adjustment related to the Hermes Acquisition (see Note (3) to the Consolidated Financial Statements).
Intangible Assets, net at December 31, 2019 increased $106.6 million from December 31, 2018 primarily due to $58.0 million
of indefinite-lived rights to manage fund assets acquired in connection with the acquisition of certain components of the PNC
Capital Advisors LLC investment management business. The remaining difference primarily related to the final purchase price
adjustment related to the Hermes Acquisition (see Note (3) to the Consolidated Financial Statements).
The following line items increased as a result of the adoption of the new lease guidance effective January 1, 2019: (1) Right-of-
Use Assets, net ($100.5 million), (2) Lease Liabilities ($13.6 million) and (3) Long-Term Lease Liabilities ($107.5 million). In
addition, Other Long-Term Liabilities at December 31, 2019 decreased $16.6 million from December 31, 2018 primarily due to
the reclassification of certain lease-related liabilities into the right-of-use (ROU) asset in accordance with this adoption. See
Note (2) and Note (18) to the Consolidated Financial Statements for additional information.
Accrued Compensation and Benefits at December 31, 2019 increased $23.6 million from December 31, 2018 primarily due to
2019 incentive compensation accruals recorded at December 31, 2019 ($117.3 million), partially offset by the 2018 accrued
annual incentive compensation being paid in the first quarter of 2019 ($99.0 million).
Off-Balance Sheet Arrangements
As of December 31, 2019 and 2018, Federated did not have any material off-balance sheet arrangements.
Contractual Obligations
The following table presents, as of December 31, 2019, Federated's significant minimum noncancelable contractual obligations
by payment date. The payments represent amounts contractually due to the recipient and do not include any carrying value
adjustments. Further discussion of the nature of each obligation is included below the table.
in millions
Long-Term Debt Obligations
Operating Lease Obligations
Purchase Obligations
Other Obligations
Total
Payments Due in
2020
0.0
17.9
31.9
2.7
52.5
2021-2022
100.0
$
35.8
15.4
0.5
151.7
$
2023-2024
0.0
$
36.3
9.1
0.0
45.4
$
$
$
After 2024
0.0
$
53.1
8.6
0.0
61.7
$
$
$
Total
100.0
143.1
65.0
3.2
311.3
Long-Term Debt Obligations. Outstanding principal is to be paid no later than the expiration date of the Credit Agreement.
Amount includes principal only. The interest is variable, based on LIBOR plus a 112.5 basis point spread, in accordance with
the Credit Agreement. Assuming management's current plan for repayment of the Credit Agreement and LIBOR as of
December 31, 2019, Federated's interest payments are estimated to be $2.6 million and $2.3 million for 2020 and 2021-2022,
respectively. Any changes in future cash needs can impact the projected repayment schedule. As such, management's repayment
plan is subject to change at management's discretion, which may impact the estimated interest payments. See Note (12) to the
Consolidated Financial Statements for additional information.
Operating Lease Obligations. See Note (18) to the Consolidated Financial Statements for additional information.
Purchase Obligations. Federated is a party to various contracts pursuant to which it receives certain services, including services
for marketing and information technology, access to various fund-related information systems and research databases, trade
order transmission and recovery services as well as other services. These contracts contain certain minimum noncancelable
payments, cancellation provisions and renewal terms. The contracts require payments through the year 2027. Costs for such
services are expensed as incurred.
47
Variable Interest Entities
Federated is involved with various entities in the normal course of business that may be deemed to be variable interest entities
(VIEs). Federated determined that it was the primary beneficiary of certain Federated Fund VIEs and, as a result, consolidated
the assets, liabilities and operations of these VIEs in its Consolidated Financial Statements. See Note (6) to the Consolidated
Financial Statements for more information.
Recent Accounting Pronouncements
For a complete list of new accounting standards applicable to Federated, see Note (2) to the Consolidated Financial Statements.
Critical Accounting Policies
Federated's Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting
principles (GAAP). In preparing the financial statements, management is required to make estimates and assumptions that
affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Management continually
evaluates the accounting policies and estimates it uses to prepare the Consolidated Financial Statements. In general,
management's estimates are based on historical experience, information from third-party professionals and various other
assumptions that are believed to be reasonable under the facts and circumstances. Actual results may differ from those estimates
made by management and those differences may be material.
Of the significant accounting policies described in Note (1) to the Consolidated Financial Statements, management believes that
its policies regarding accounting for asset acquisitions and business combinations, goodwill and intangible assets and Hermes
redeemable noncontrolling interest involves a higher degree of judgment and complexity.
Asset Acquisitions and Business Combinations. Federated performs an analysis to determine whether a transaction meets the
definition of a business under U.S. GAAP. When determining whether a set of assets and activities constitute a business,
management considers whether substantially all of the fair value of the gross assets acquired is concentrated in a single
identifiable asset or a group of similar identifiable assets. If this threshold is met, these assets and activities do not meet the
definition of a business and the transaction is accounted for as an asset acquisition. If it is not met, management then evaluates
whether these assets and activities meet the requirement of a business including, at a minimum, an input and a substantive
process that together significantly contribute to the ability to create outputs. If these assets and activities do not meet these
requirements, the transaction is accounted for as an asset acquisition.
A transaction that does not meet this definition of a business is accounted for as an asset acquisition. Asset acquisitions are
accounted for using a cost accumulation and allocation method where the cost of the transaction is allocated on a relative fair
value basis to the qualifying assets acquired and liabilities assumed on the acquisition date. The cost of the transaction includes
both the consideration transferred to the seller and any direct transaction costs incurred. The primary asset acquired in previous
asset acquisitions has been the rights to manage fund assets. The rights to manage fund assets is an intangible asset valued using
the excess earnings method, under the income approach, which estimates fair value by quantifying the amount of discounted
cash flows generated by the asset. No goodwill is recognized in an asset acquisition.
A transaction that meets this definition of a business is accounted for as a business combination under the acquisition method of
accounting. The consideration transferred to the seller in a business combination is measured at fair value and calculated as the
sum of the acquisition date fair values of the assets transferred by Federated, the liabilities incurred by Federated to the acquirer
and any equity interests issued by Federated. Direct transaction costs are expensed as incurred in a business combination.
Results of operations of an acquired business are included in Federated's results from the date of acquisition.
Rights to manage fund assets and trade names acquired in a business combination are recorded at fair value. The fair value of
the rights to manage fund assets is determined using the excess earnings method, under the income approach. The fair value of
the trade name is determined using the relief from royalty method, under the income approach. Each method considers various
factors to project future cash flows expected to be generated from the asset. After the fair values of all separately identifiable
assets and liabilities have been estimated, goodwill is recorded to the extent that the consideration paid exceeds the sum of the
fair values of the separately identifiable acquired assets, net of assumed liabilities.
For both asset acquisitions and business combinations, the significant assumptions used in the valuation of the intangible assets
acquired typically include: (1) the asset's estimated useful life; (2) projected AUM; (3) projected revenue growth rates;
(4) projected pre-tax profit margins; (5) tax rates; (6) discount rates and (7) in the case of a trade name valuation, a royalty rate.
Federated has determined that certain acquired assets, primarily certain rights to manage fund assets and trade names, have
indefinite useful lives. In reaching this conclusion, management considered the acquired assets' legal, regulatory and agreed-
upon provisions, the highest and best use of the asset, the level of cost and effort required in agreed-upon renewals, and the
48
effects of obsolescence, demand, competition and other economic factors that could impact the assets' fair value. Management
estimates a rate of change for underlying managed assets based on a combination of an estimated rate of market appreciation or
depreciation and an estimated net redemption or sales rate. Expected revenue per managed asset and incremental operating
expenses of the acquired asset are generally based on agreed-upon terms, average market participant data and historical
experience. The assumptions for tax rates are based on current and projected rates. The discount rates are estimated at the
current market rate of return. The royalty rate is estimated after consideration of comparable third-party royalty rate licensing
agreements, pre-tax profit margins and the age and importance of the trade name. Given the complexity and judgment involved
in accounting for asset acquisitions and business combinations, management may utilize the services of an independent
valuation expert to assist in this process.
Goodwill and Intangible Assets. The process of determining the amount of goodwill and the fair value of identifiable
intangible assets at the date of acquisition requires significant management estimates and judgment. If subsequent changes in
these assumptions differ significantly from those used in the initial valuation, the goodwill and/or intangible asset amounts
recorded in the financial statements could be subject to possible impairment. In addition, finite-lived intangible assets could
require an acceleration in amortization expense. These adjustments could have a material adverse effect on Federated's
business, results of operations and financial condition.
Goodwill is reviewed for impairment annually as of June 30, or when indicators of a potential impairment exist. Federated has a
single reporting unit, consistent with Federated's single operating segment, to which all goodwill has been assigned. Federated
first performs a qualitative analysis and considers various factors including macroeconomic and entity-specific considerations,
industry and market conditions, and overall financial performance. A quantitative impairment test is performed if there are
indications that it is more likely than not that the fair value of the reporting unit is less than its carrying value. At December 31,
2019, Federated had $774.5 million in goodwill recorded on its Consolidated Balance Sheets. No impairments were recorded
during the years ended December 31, 2019, 2018 or 2017.
Indefinite-lived intangible assets are reviewed for impairment at the accounting unit level annually as of October 1, or when
indicators of a potential impairment exist. Management may use a qualitative or quantitative approach which requires the
weighting of positive and negative evidence collected through the consideration of various factors to determine whether it is
more likely than not that an indefinite-lived intangible asset or asset group is impaired. In 2019, management used a
quantitative approach. Management considers macroeconomic and entity-specific factors, including projected AUM, projected
revenue growth rates, projected pre-tax profit margins, tax rates, discount rates and, in the case of a trade name valuation, a
royalty rate. In addition, management reconsiders on a quarterly basis whether events or circumstances indicate that a change in
the useful life may have occurred. Indicators of a possible change in useful life monitored by management generally include
changes in the expected use of the asset, a significant decline in the level of managed assets, changes to legal, regulatory or
contractual provisions of the rights to manage fund assets, the effects of obsolescence, demand, competition and other economic
factors that could impact the funds' projected performance and existence, and significant reductions in underlying operating
cash flows.
Finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives. Finite-lived intangible
assets are reviewed for impairment at least annually, or when indicators of a potential impairment exist.
If actual changes in the underlying managed assets or other conditions indicate that it is more likely than not that the asset is
impaired, or if the estimated useful life is reduced, management estimates the fair value of the intangible asset using an income
approach where future cash flows are discounted. Impairment is indicated when the carrying value of the intangible asset
exceeds its fair value.
At December 31, 2019, Federated had $446.2 million in intangible assets recorded on its Consolidated Balance Sheets. No
impairments were recorded during the years ended December 31, 2019, 2018 or 2017.
Hermes Redeemable Noncontrolling Interest. The Hermes noncontrolling interest represents equity which is subject to the
terms of a Put and Call Option Deed, redeemable at the option of either the noncontrolling party or Federated at future
predetermined dates and, therefore, not entirely within Federated's control. The subsidiary's net income or loss and related
dividends are allocated to Federated and the noncontrolling interest holder based on their relative ownership percentages.
The Hermes noncontrolling interest carrying value is adjusted on a quarterly basis to the higher of the carrying value or current
redemption value (fair value), as of the balance sheet date, through a corresponding adjustment to retained earnings.
Management may use an independent valuation expert to assist in estimating the current redemption value (fair value) using
three methodologies: (1) the discounted cash flow methodology under the income approach, (2) the guideline public company
methodology under the market approach and (3) the guideline public transaction methodology under the market approach. The
estimated current redemption value is derived from equally weighting the result of each of the three methodologies. The
estimation of the current redemption value includes significant assumptions concerning: (1) projected AUM; (2) projected
49
revenue growth rates; (3) projected pre-tax profit margins; (4) tax rates and (5) discount rates. Management estimates a rate of
change for underlying managed assets based on a combination of an estimated rate of market appreciation or depreciation and
an estimated net redemption or sales rate. Expected revenue per managed asset and incremental operating expenses of the
acquired asset are generally based on agreed-upon terms, average market participant data and historical experience. The
assumptions for tax rates are based on current and projected rates. The discount rate is estimated at the current market rate of
return. At December 31, 2019, Federated had $192.2 million in Redeemable Noncontrolling Interest in Subsidiaries related to
Hermes recorded on its Consolidated Balance Sheets.
ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of its business, Federated is exposed to fluctuations in the securities markets and general economy. As an
investment manager, Federated's business requires that it continuously identify, assess, monitor and manage market and other
risks including those risks affecting its own investment portfolio. Federated invests in Federated Funds for the primary purpose
of generating returns from capital appreciation, investment income, or both, or in the case of newly launched Federated Funds
or new Separate Account strategies, to provide the product or strategy with investable cash to establish a performance history.
These investments expose Federated to various market risks. A single investment can expose Federated to multiple risks arising
from changes in interest rates, credit ratings, equity prices and foreign currency exchange rates. Federated manages its exposure
to market risk by diversifying its investments among different asset classes and by altering its investment holdings from time to
time in response to changes in market risks and other factors. In addition, in certain cases, Federated enters into derivative
instruments for purposes of hedging certain market risks.
Interest-rate risk is the risk that unplanned fluctuations in earnings will result from interest-rate volatility, while credit risk is the
risk that an issuer of debt securities may default on its obligations. At December 31, 2019, Federated was exposed to interest-
rate risk as a result of investments in debt securities held by certain consolidated investment companies and strategies ($27.6
million) and holding investments in fixed-income Federated Funds ($5.8 million). At December 31, 2019, management
considered a hypothetical 200-basis-point fluctuation in interest rates. Management determined that the impact of such a
fluctuation on these investments would not have a material effect on Federated's financial condition or results of operations. At
December 31, 2019, these investments and additional investments in money market accounts ($211.6 million) exposed
Federated to credit risk. At December 31, 2019, management considered a hypothetical 200-basis-point fluctuation in credit
spreads. Management determined that the impact of such a fluctuation on these investments would not have a material effect on
Federated's financial condition or results of operations.
Federated was also exposed to interest-rate risk in connection with the Credit Agreement. The Credit Agreement bears interest
based on LIBOR plus a 112.5 basis point spread. At December 31, 2019, the balance of the Credit Agreement was $100.0
million. Management considered a hypothetical 200-basis-point fluctuation in LIBOR interest rates. Management determined
that the impact of such a fluctuation would not have a material effect on Federated's financial condition or results of operations.
The Credit Agreement exposed Federated to credit risk at December 31, 2019. If Federated's credit rating were to be
downgraded, Federated would be subject to an increase in both the interest rate spread and commitment fee, in accordance with
the Credit Agreement. Management determined that the impact of such a downgrade would not have a material effect on
Federated's financial condition or results of operations.
Price risk is the risk that the market price of an investment will decline and ultimately result in the recognition of a loss.
Federated was exposed to price risk as a result of its $42.8 million investment in equity Federated Funds and Separate Accounts
at December 31, 2019. Federated's investment in these products and strategies represents its maximum exposure to loss. At
December 31, 2019, management considered a hypothetical 20% fluctuation in fair value and determined that the impact of
such a fluctuation on these investments would not have a material effect on Federated's financial condition or results of
operations.
Foreign exchange risk is the risk that an investment's value will change due to changes in currency exchange rates. As of
December 31, 2019, Federated was exposed to foreign exchange risk as a result of its investments in Federated Funds holding
non-U.S. dollar securities as well as non-U.S. dollar operating cash accounts and receivables held by certain foreign operating
subsidiaries of Federated ($41.6 million). Of these investments and cash accounts held at December 31, 2019, management
considered a hypothetical 20% fluctuation in all applicable currency exchange rates and determined that the impact of such a
fluctuation on these investments and cash accounts would not have a material effect on Federated's financial condition or results
of operations.
Federated also has certain investments in foreign operations, whose net assets and results of operations are exposed to foreign
currency risk when translated into U.S. dollars upon consolidation. During 2019, a British Pound Sterling-denominated,
majority-owned subsidiary of Federated entered into foreign currency forward transactions in order to hedge against foreign
exchange rate fluctuations in the U.S. Dollar (combined notional amount of £53.0 million). This subsidiary is exposed to
50
foreign currency exchange risk as a result of a portion of its revenue being earned in U.S. Dollars. Management considered a
hypothetical 20% fluctuation in the currency exchange rate and determined that the impact of such a fluctuation would not have
a material effect on Federated's financial condition or results of operations.
In addition to market risks attributable to Federated's investments, nearly all of Federated's revenue is calculated based on
AUM. Accordingly, changes in the market value of managed assets have a direct impact on Federated's revenue. Declines in the
fair values of these assets as a result of changes in the market or other conditions will negatively impact revenue and net
income. Assuming the ratio of revenue from managed assets to average AUM for 2019 remained unchanged, a 20% decline in
the average AUM for either period would result in a corresponding 20% decline in revenue. Certain expenses, including
distribution and compensation and related expenses, may not vary in proportion with changes in the market value of managed
assets. As such, the impact on net income from a decline in the market values of managed assets may be greater or less than the
percentage decline in the market value of managed assets. For further discussion of managed assets and factors that impact
Federated's revenue, see Item 1A - Risk Factors and sections included in Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations under the captions General and Asset Highlights.
51
ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
Federated Hermes, Inc.'s (including its consolidated subsidiaries, Federated) management is responsible for the preparation,
integrity and fair presentation of the consolidated financial statements in this annual report. These consolidated financial
statements and notes have been prepared in conformity with U.S. generally accepted accounting principles from accounting
records which management believes fairly and accurately reflect Federated's operations and financial position. The consolidated
financial statements include amounts based on management's best estimates and judgments considering currently available
information and management's view of current conditions and circumstances.
Management is responsible for establishing and maintaining adequate internal control over financial reporting that is designed
to provide reasonable assurance of the reliability of financial reporting and the preparation of financial statements in accordance
with U.S. generally accepted accounting principles. The system of internal control over financial reporting as it relates to the
financial statements is evaluated for effectiveness by management and tested for reliability. Actions are taken to correct
potential deficiencies as they are identified. Any system of internal control, no matter how well designed, has inherent
limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud
may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time.
Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial
statement preparation.
Management assessed the effectiveness of Federated's internal control over financial reporting as of December 31, 2019, in
relation to criteria for effective internal control over financial reporting as described in Internal Control – Integrated
Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on
this assessment, management concluded that, as of December 31, 2019, Federated's internal controls over financial reporting
were effective. Ernst & Young LLP, independent registered public accounting firm, has audited the consolidated financial
statements included in this annual report and has audited the effectiveness of the internal control over financial reporting.
Federated Hermes, Inc.
/s/ J. Christopher Donahue
J. Christopher Donahue
President and Chief Executive Officer
February 21, 2020
/s/ Thomas R. Donahue
Thomas R. Donahue
Chief Financial Officer
52
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Federated Hermes, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Federated Hermes, Inc. (the Company) as of December 31,
2019 and 2018, the related consolidated statements of income, comprehensive income, changes in equity and cash flows for
each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the
"consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects,
the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in
Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework) and our report dated February 21, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that
were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that
are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as
a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit
matters or on the accounts or disclosures to which they relate.
Description of
the Matter
Valuation of Indefinite-Lived Intangible Assets
At December 31, 2019, the Company had $387.2 million in indefinite-lived intangible assets, excluding
goodwill, consisting of $335.2 million of rights to manage fund assets and $52.0 million of trade names. As
described in Note 1(j) to the consolidated financial statements, indefinite-lived intangible assets are tested at
the accounting unit level for impairment annually, or when indicators of a potential impairment exist, to
determine whether it is more likely than not that the accounting unit is impaired. In addition, management
reconsiders on a quarterly basis whether events or circumstances indicate that a change in the useful life may
have occurred. If the Company's carrying value of its accounting unit exceeds its fair value, an impairment
loss would be recognized in an amount equal to the excess of the carrying value over the fair value.
Auditing the Company's annual impairment test of the indefinite-lived intangible assets, which included the
reconsideration of the estimated useful lives, was complex and judgmental due to the significant estimation
uncertainty in determining the fair value of the indefinite-lived intangible assets. The significant assumptions
used to estimate the fair value of the indefinite-lived intangible assets included discount rates and certain
assumptions that form the basis of the forecasted results, such as projected revenue growth rates, projected
pre-tax profit margins and additionally, in the case of the trade name, the royalty rate. These significant
assumptions are forward-looking and could be materially affected by future economic and market conditions.
53
How We
Addressed the
Matter in Our
Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the
Company's impairment testing process for indefinite-lived intangible assets, including controls over
management's review of the estimated useful lives and the significant assumptions described above.
Our audit procedures to test the estimated fair value of the Company's indefinite-lived intangible assets
included, among others, involving our valuation specialists to assist in assessing the fair value methodologies
utilized, evaluating management's significant assumptions described above, and testing the completeness and
accuracy of the underlying data. For example, we compared significant assumptions to current industry,
market and economic trends, historical results and other relevant factors. We also assessed other factors, such
as changes to legal, regulatory or contractual provisions impacting the useful lives of the indefinite-lived
intangible assets. Additionally, for each accounting unit of indefinite-lived intangible assets, we involved our
valuation specialists to assist in evaluating the discount rates, which included comparison of the selected
discount rate to the Company's weighted average cost of capital and the risk associated with the projected cash
flows, and the royalty rate, which included assessing comparable royalty rates and determining the
reasonableness of the selected rate. We assessed the accuracy of the Company's historical projected cash flows
and performed sensitivity analyses of certain significant assumptions described above to evaluate the changes
in the fair value of the indefinite-lived intangible assets that would result from changes in the significant
assumptions. In addition, we assessed the adequacy of the disclosures in the consolidated financial statements.
Accounting for the Asset Acquisition
Description of
the Matter
On November 18, 2019, the Company completed the acquisition of certain components of the PNC Capital
Advisors LLC investment management business for a total acquisition cost of $58.0 million. As described in
Note 10(a) to the consolidated financial statements, the transaction was accounted for as an asset acquisition,
as substantially all of the fair value of the gross assets acquired was concentrated in a single identifiable asset,
which consisted of the rights to manage fund assets.
Auditing the Company's accounting for the asset acquisition was complex due to the significant judgment
involved in determining whether the transaction should be accounted for as an asset acquisition or a business
combination, and determining the useful life and the fair value of the acquired rights to manage fund assets.
Evaluating whether a set of acquired assets and activities constitutes an asset acquisition required judgment to
determine whether substantially all of the fair value of the gross assets acquired was concentrated in a single
identifiable asset, while the determination of the useful life of the acquired rights to manage fund assets was
judgmental due to considerations over the legal, regulatory or contractual provisions of the rights. There was
significant estimation uncertainty in determining the fair value of the rights to manage fund assets primarily
due to the sensitivity of the estimated fair value to the significant assumptions used in the excess earnings
method, under the income approach, which included the discount rate and certain assumptions that form the
basis of the forecasted results, such as projected revenue growth rates and projected pre-tax profit margins.
These significant assumptions are forward-looking and could be materially affected by future economic and
market conditions.
How We
Addressed the
Matter in Our
Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the
Company's accounting over the asset acquisition process, including controls over management's review of the
useful life of the acquired rights and the significant assumptions described above.
Our audit procedures to evaluate whether the transaction should be accounted for as an asset acquisition or a
business combination involved, among others, assessing whether the Company's acquired rights to manage
fund assets represented substantially all of the fair value of the gross assets acquired. Our audit procedures to
test the estimated fair value of the Company's acquired rights to manage fund assets included, among others,
involving our valuation specialists to assist in assessing the fair value methodology utilized, evaluating
management's significant assumptions described above, and testing the completeness and accuracy of the
underlying data. Specifically, we compared the significant assumptions to current and historical industry,
market and economic trends. We also evaluated the reasonableness of management's assessment of the useful
life of the acquired rights with respect to the factors described above. Additionally, we involved our valuation
specialists to assist in evaluating the discount rate, which included comparison to the Company's weighted
average cost of capital and the risk associated with the projected cash flows. We performed sensitivity
54
Description of
the Matter
analyses of certain significant assumptions described above to evaluate the changes in the fair value of the
acquired rights to manage fund assets that would result from changes in the significant assumptions. In
addition, we assessed the adequacy of the disclosures in the consolidated financial statements.
Valuation of Hermes Redeemable Noncontrolling Interest
At December 31, 2019, the redeemable noncontrolling interest in Hermes Fund Managers Limited (Hermes), a
nonpublic company, was $192.2 million. As further described in Note 1(p) and Note 3 to the consolidated
financial statements, the redeemable noncontrolling interest in Hermes represents temporary equity which is
subject to put and call options that are exercisable by the respective parties at future predetermined dates,
subject to certain contingencies, at the then-current fair value. As further described in Note 1(p) to the
consolidated financial statements, the carrying value of the redeemable noncontrolling interest in Hermes is
adjusted on a quarterly basis to the higher of the current book value or current redemption value (fair value).
The Company estimates the current redemption value through equally weighting the results of the discounted
cash flow fair value methodology under the income approach, the guideline public company methodology
under the market approach and the guideline public transaction methodology under the market approach.
Auditing the Company's measurement of the current redemption value of the redeemable noncontrolling
interest in Hermes was complex and judgmental because the inputs to the discounted cash flow fair value
calculation involved subjective assumptions with significant estimation uncertainty. The significant estimation
uncertainty was primarily due to the sensitivity of the current redemption value to the discount rate and certain
other underlying significant assumptions about future performance used in the discounted cash flow fair value
method, such as projected revenue growth rates and projected pre-tax profit margins. These significant
assumptions are forward-looking and could be materially affected by future economic and market conditions.
How We
Addressed the
Matter in Our
Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the
Company's measurement of the current redemption value of the redeemable noncontrolling interest in Hermes,
including controls over management's review of the significant assumptions described above.
To test the current redemption value of the redeemable noncontrolling interest in Hermes, our audit
procedures included, among others, involving our valuation specialists to assist in assessing the use of the
discounted cash flow methodology in the Company's fair value measurement, evaluating management's
significant assumptions described above and testing the completeness and accuracy of the underlying data. For
example, we evaluated the reasonableness of the projected revenue growth rates and the projected pre-tax
profit margins by comparing these significant assumptions to current industry, market and economic trends, to
the historical results of Hermes and to other relevant factors. We also assessed the historical accuracy of the
Company's projected cash flows. Additionally, we involved our valuation specialists to assist in evaluating the
discount rate, which included comparison of the selected discount rate to the entity's weighted average cost of
capital and the risk associated with the projected cash flows. We also performed sensitivity analyses of certain
significant assumptions described above to evaluate the changes in the fair value of the redeemable
noncontrolling interest in Hermes that would result from changes in the significant assumptions. In addition,
we assessed the adequacy of the disclosures in the consolidated financial statements.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 1996.
Pittsburgh, Pennsylvania
February 21, 2020
55
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Federated Hermes, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Federated Hermes, Inc.'s internal control over financial reporting as of December 31, 2019, based on criteria
established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the COSO criteria). In our opinion, Federated Hermes, Inc. (the Company) maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated
statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended
December 31, 2019, and the related notes and our report dated February 21, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's
Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal
control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
February 21, 2020
56
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
December 31,
ASSETS
Current Assets
Cash and Cash Equivalents
Investments—Consolidated Investment Companies
Investments—Affiliates and Other
Receivables, net of reserve of $14 and $50, respectively
Receivables—Affiliates
Prepaid Expenses
Other Current Assets
Total Current Assets
Long-Term Assets
Goodwill
Intangible Assets, net
Property and Equipment, net
Right-of-Use Assets, net
Other Long-Term Assets
Total Long-Term Assets
Total Assets
LIABILITIES
Current Liabilities
Accounts Payable and Accrued Expenses
Accrued Compensation and Benefits
Lease Liabilities
Other Current Liabilities
Total Current Liabilities
Long-Term Liabilities
Long-Term Debt
Long-Term Deferred Tax Liability, net
Long-Term Lease Liabilities
Other Long-Term Liabilities
Total Long-Term Liabilities
Total Liabilities
Commitments and Contingencies (Note (21))
TEMPORARY EQUITY
Redeemable Noncontrolling Interest in Subsidiaries
PERMANENT EQUITY
Federated Hermes, Inc. Shareholders' Equity
Common Stock:
2019
2018
$ 249,174
64,526
26,935
64,492
37,589
16,748
1,820
461,284
774,534
446,228
51,725
100,514
45,846
1,418,847
$ 1,880,131
$
69,014
137,445
13,575
10,679
230,713
100,000
165,382
107,543
23,127
396,052
626,765
$ 156,832
22,798
10,860
60,094
34,985
16,513
2,019
304,101
809,608
339,639
53,229
0
37,106
1,239,582
$ 1,543,683
$
56,110
113,865
0
11,205
181,180
135,000
148,164
0
39,705
322,869
504,049
212,086
182,513
Class A, No Par Value, 20,000 Shares Authorized, 9,000 Shares Issued and Outstanding
Class B, No Par Value, 900,000,000 Shares Authorized, 109,505,456 Shares Issued
Retained Earnings
Treasury Stock, at Cost, 8,375,077 and 8,702,074 Shares Class B Common Stock, respectively
Accumulated Other Comprehensive Income (Loss), net of tax
Total Permanent Equity
Total Liabilities, Temporary Equity and Permanent Equity
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
189
392,021
930,351
(281,032)
(249)
1,041,280
$ 1,880,131
189
367,063
791,823
(287,337)
(14,617)
857,121
$ 1,543,683
57
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
Years Ended December 31,
Revenue
Investment Advisory Fees, net—Affiliates
Investment Advisory Fees, net—Other
Administrative Service Fees, net—Affiliates
Other Service Fees, net—Affiliates
Other Service Fees, net—Other
Total Revenue
Operating Expenses
Compensation and Related
Distribution
Systems and Communications
Office and Occupancy
Professional Service Fees
Advertising and Promotional
Travel and Related
Other
Total Operating Expenses
Operating Income
Nonoperating Income (Expenses)
Investment Income, net
Gain (Loss) on Securities, net
Debt Expense
Other, net
Total Nonoperating Income (Expenses), net
Income Before Income Taxes
Income Tax Provision
Net Income Including the Noncontrolling Interests in Subsidiaries
Less: Net Income (Loss) Attributable to the Noncontrolling Interests in
Subsidiaries
Net Income
Amounts Attributable to Federated Hermes, Inc.
Earnings Per Common Share—Basic and Diluted
Cash Dividends Per Share
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
2019
2018
2017
$ 685,849
221,756
245,887
161,421
11,981
1,326,894
$ 585,832
187,586
199,269
156,935
6,055
1,135,677
$ 591,112
140,558
188,814
176,397
6,043
1,102,924
442,147
340,663
52,988
44,926
43,714
17,774
16,645
20,110
978,967
347,927
4,450
4,966
(5,037)
12,965
17,344
365,271
88,146
277,125
354,765
287,580
39,925
34,622
42,903
16,141
15,594
13,867
805,397
330,280
5,985
(4,357)
(5,885)
(29,849)
(34,106)
296,174
73,875
222,299
289,215
342,779
31,971
29,258
29,064
11,166
12,646
15,317
761,416
341,508
7,236
8,072
(4,772)
(42)
10,494
352,002
57,101
294,901
4,786
$ 272,339
2,002
$ 220,297
3,560
$ 291,341
$
$
2.69
1.08
$
$
2.18
1.06
$
$
2.87
1.00
58
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
Years Ended December 31,
Net Income Including the Noncontrolling Interests in Subsidiaries
2019
$ 277,125
2018
$ 222,299
2017
$ 294,901
Other Comprehensive Income (Loss), net of tax
Permanent Equity
Foreign Currency Translation Gain (Loss)
Reclassification Adjustment Related to Foreign Currency Items
Unrealized Gain (Loss) on Equity Securities
Reclassification Adjustment Related to Equity Securities
Temporary Equity
Foreign Currency Translation Gain (Loss)
Other Comprehensive Income (Loss), net of tax
Comprehensive Income Including the Noncontrolling Interests in Subsidiaries
Less: Comprehensive Income (Loss) Attributable to Redeemable
Noncontrolling Interest in Subsidiaries
Less: Comprehensive Income (Loss) Attributable to Nonredeemable
Noncontrolling Interest in Subsidiary
Comprehensive Income Attributable to Federated Hermes, Inc.
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
14,368
0
0
0
6,907
21,275
298,400
(13,607)
(191)
0
(29)
(6,009)
(19,836)
202,463
612
0
1,642
(2,521)
0
(267)
294,634
11,693
(4,007)
3,084
0
$ 286,707
0
$ 206,470
476
$ 291,074
59
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(dollars in thousands)
Balance at January 1, 2017
Net Income
Other Comprehensive Income (Loss), net of tax
Subscriptions – Redeemable Noncontrolling Interest Holders
Consolidation/(Deconsolidation)
Stock Award Activity
Dividends Declared
Distributions to Noncontrolling Interest in Subsidiaries
Purchase of Treasury Stock
Balance at December 31, 2017
Adoption of New Accounting Pronouncements
Net Income
Other Comprehensive Income (Loss), net of tax
Subscriptions – Redeemable Noncontrolling Interest Holders
Consolidation/(Deconsolidation)
Stock Award Activity
Dividends Declared
Distributions to Noncontrolling Interest in Subsidiaries
Business Acquisition
Purchase of Treasury Stock
Balance at December 31, 2018
Net Income
Other Comprehensive Income (Loss), net of tax
Subscriptions – Redeemable Noncontrolling Interest Holders
Consolidation/(Deconsolidation)
Stock Award Activity
Dividends Declared
Distributions to Noncontrolling Interest in Subsidiaries
Business Acquisition
Change in Estimated Redemption Value of Redeemable Noncontrolling Interests
Purchase of Treasury Stock
Balance at December 31, 2019
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
Class A
9,000
0
0
0
0
0
0
0
0
9,000
0
0
0
0
0
0
0
0
0
0
9,000
0
0
0
0
0
0
0
0
0
0
9,000
Shares
Class B
101,989,683
0
0
0
0
952,570
0
0
(1,841,800)
101,100,453
0
0
0
0
0
908,719
0
0
0
(1,205,790)
100,803,382
0
0
0
0
941,074
0
0
0
0
(614,077)
101,130,379
Treasury
7,515,773
0
0
0
0
(952,570)
0
0
1,841,800
8,405,003
0
0
0
0
0
(908,719)
0
0
0
1,205,790
8,702,074
0
0
0
0
(941,074)
0
0
0
0
614,077
8,375,077
60
Federated Hermes, Inc. Shareholders' Equity
Common
Stock
$ 320,982
0
0
0
0
22,396
0
0
0
343,378
0
0
0
0
0
23,874
0
0
0
0
367,252
0
0
0
0
24,958
0
0
0
0
0
$ 392,210
Retained
Earnings
$ 529,749
291,341
0
0
0
(22,308)
(101,423)
0
0
697,359
125
220,297
0
0
0
(19,051)
(106,907)
0
0
0
791,823
272,339
0
0
0
(20,614)
(109,049)
0
0
(4,148)
0
$ 930,351
Treasury Stock
$ (255,382)
0
0
0
0
23,607
0
0
(46,957)
(278,732)
0
0
0
0
0
20,495
0
0
0
(29,100)
(287,337)
0
0
0
0
22,045
0
0
0
0
(15,740)
$ (281,032)
Accumulated
Other
Comprehensive
Loss,
Net of Tax
$
$
(523)
0
(267)
0
0
0
0
0
0
(790)
(254)
0
(13,573)
0
0
0
0
0
0
0
(14,617)
0
14,368
0
0
0
0
0
0
0
0
(249)
Total
Shareholders'
Equity
$ 594,826
291,341
(267)
0
0
23,695
(101,423)
0
(46,957)
761,215
(129)
220,297
(13,573)
0
0
25,318
(106,907)
0
0
(29,100)
857,121
272,339
14,368
0
0
26,389
(109,049)
0
0
(4,148)
(15,740)
$ 1,041,280
Nonredeemable
Noncontrolling
Interest in
Subsidiary
$
$
958
476
0
0
0
0
0
(1,434)
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Total
Permanent
Equity
$ 595,784
291,817
(267)
0
0
23,695
(101,423)
(1,434)
(46,957)
761,215
(129)
220,297
(13,573)
0
0
25,318
(106,907)
0
0
(29,100)
857,121
272,339
14,368
0
0
26,389
(109,049)
0
0
(4,148)
(15,740)
$ 1,041,280
$
Redeemable
Noncontrolling
Interest in
Subsidiaries/
Temporary
Equity
31,362
3,084
0
4,687
(67)
0
0
(8,903)
0
30,163
0
2,002
(6,009)
2,801
(1,751)
4,239
0
(18,492)
169,560
0
182,513
4,786
6,907
9,356
454
7,888
0
(3,580)
(386)
4,148
0
$ 212,086
61
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Years Ended December 31,
Operating Activities
Net Income Including the Noncontrolling Interests in Subsidiaries
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Amortization of Deferred Sales Commissions
Depreciation and Other Amortization
Share-Based Compensation Expense
Subsidiary Share-Based Compensation Expense
(Gain) Loss on Disposal of Assets
Provision (Benefit) for Deferred Income Taxes
Net Unrealized (Gain) Loss on Investments
Net Sales (Purchases) of Investments—Consolidated Investment Companies
Other Changes in Assets and Liabilities:
(Increase) Decrease in Receivables, net
(Increase) Decrease in Prepaid Expenses and Other Assets
Increase (Decrease) in Accounts Payable and Accrued Expenses
Increase (Decrease) in Other Liabilities
Net Cash Provided (Used) by Operating Activities
Investing Activities
Purchases of Investments—Affiliates and Other
Cash Paid for Business Acquisitions, net of Cash Acquired
Cash Paid for Asset Acquisitions
Proceeds from Redemptions of Investments—Affiliates and Other
Cash Paid for Property and Equipment
Other Investing Activities
Net Cash Provided (Used) by Investing Activities
Financing Activities
Dividends Paid
Purchases of Treasury Stock
Distributions to Noncontrolling Interests in Subsidiaries
Contributions from Noncontrolling Interests in Subsidiaries
Proceeds from Shareholders for Share-Based Compensation
Proceeds from New Borrowings
Payments on Debt
Other Financing Activities
Net Cash Provided (Used) by Financing Activities
Effect of Exchange Rates on Cash, Cash Equivalents, Restricted Cash, and
Restricted Cash Equivalents
Net Increase (Decrease) in Cash, Cash Equivalents, Restricted Cash and Restricted
Cash Equivalents
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents, Beginning
of Period
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents, End of
Period
Less: Restricted Cash and Restricted Cash Equivalents Recorded in Other Long-Term
Assets
Cash and Cash Equivalents
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Income taxes
Interest
(The accompanying notes are an integral part of these Consolidated Financial Statements.)
62
2019
2018
2017
$ 277,125
$ 222,299
$ 294,901
2,967
17,087
23,893
4,239
298
12,257
4,322
16,696
(9,907)
(210)
(96,231)
8,572
206,282
(7,267)
(168,430)
(1,962)
20,283
(17,274)
211
(174,439)
(106,943)
(29,247)
(18,492)
2,801
1,444
87,650
(122,650)
(678)
(186,115)
8,025
10,637
22,508
0
(7,193)
(59,272)
(889)
133,992
(6,129)
(115)
(13,875)
4,785
387,375
(5,779)
(4,352)
0
20,930
(9,799)
0
1,000
(101,511)
(48,642)
(10,337)
4,687
1,299
0
(21,250)
(1,167)
(176,921)
2,077
25,922
25,057
7,888
(1,085)
7,452
(6,915)
(26,434)
(7,250)
7,411
30,912
(7,220)
334,940
(103,445)
785
(58,046)
81,068
(15,045)
0
(94,683)
(109,147)
(15,740)
(3,580)
9,356
1,431
8,800
(43,800)
0
(152,680)
4,508
(5,111)
0
92,085
(159,383)
211,454
157,426
316,809
105,355
249,511
157,426
316,809
337
$ 249,174
594
$ 156,832
545
$ 316,264
$
$
72,612
4,606
$
$
61,573
5,320
$ 118,412
4,109
$
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(December 31, 2019, 2018 and 2017)
(1) Summary of Significant Accounting Policies
(a) Nature of Operations
Federated provides investment advisory, administrative, distribution and other services to the Federated Funds and Separate
Accounts in both domestic and international markets, as well as stewardship services to various companies. For presentation
purposes in the Consolidated Financial Statements, the Federated Funds are considered to be affiliates of Federated.
The majority of Federated's revenue is derived from investment advisory services provided to the Federated Funds and Separate
Accounts through various subsidiaries pursuant to investment advisory contracts. These advisory subsidiaries are registered as
investment advisors under the Advisers Act or operate in similar capacities under applicable jurisdictional law.
U.S.-domiciled Federated Funds are generally distributed by a wholly owned subsidiary registered as a broker/dealer under the
1934 Act and under applicable state laws. Non-U.S.-domiciled Federated Funds are generally distributed by subsidiaries and
third-party distribution firms which are registered under applicable jurisdictional law. Federated's investment products are
distributed within the U.S. financial intermediary, U.S. institutional and international markets.
(b) Basis of Presentation
The Consolidated Financial Statements have been prepared in accordance with U.S. GAAP. In preparing the financial
statements, management is required to make estimates and assumptions that affect the amounts reported in the Consolidated
Financial Statements and accompanying notes. Actual results may differ from those estimates, and such differences may be
material to the Consolidated Financial Statements.
(c) Reclassification of Prior Period Financial Statements
Certain items previously reported have been reclassified to conform to the current year's presentation.
(d) Revenue Recognition
All of Federated's revenue is earned from contracts with customers, which are generally terminable upon no more than 60 days'
notice. Revenue is measured as the consideration to which Federated expects to be entitled in exchange for providing its
services. This amount may be reduced by Fee Waivers. See Note (6) for information about current period Fee Waivers.
Revenue from providing investment advisory, administrative and the majority of other services is recognized when a
performance obligation is satisfied, which occurs when control of the services is transferred to customers. For these revenue
streams, control is transferred over time as the customer simultaneously consumes the benefit of the service as it is provided.
Federated utilizes a time-based measure of progress for which each day is a distinct service period over the life of the contract.
Investment advisory, administrative and certain other service fees are generally calculated as a percentage of average net assets
of the investment portfolios managed by Federated. Based on the nature of the calculation, the revenue for these services is
accounted for as variable consideration, and is subject to factors outside of Federated's control, including investor activity and
market volatility, and is recognized as these uncertainties are resolved. Certain other service fees are earned on fixed-rate
contracts which are recorded over the life of the contract as services are performed. See Note (4) for information about expected
future revenue.
For the distribution performance obligation, control is transferred to the customer at a point in time upon investor subscription
and/or redemption. Based on the nature of the calculation, the revenue for these services is accounted for as variable
consideration, and is subject to factors outside of Federated's control, including investor activity and preferences and market
volatility, and is recognized as these uncertainties are resolved. For certain revenue, primarily related to distribution and
performance fees, Federated may recognize revenue in the current period that pertains to performance obligations satisfied in
prior periods, as it represents variable consideration and is recognized as uncertainties are resolved.
The fair value of the investment portfolios managed by Federated is primarily determined using quoted market prices,
independent third-party pricing services and broker/dealer price quotes or the NAV Practical Expedient. In limited
circumstances, a quotation or price determination is not readily available from an independent pricing source. In these cases,
pricing is determined by management based on a prescribed valuation process that has been approved by the directors/trustees
of the Federated Funds. For the periods presented, an immaterial amount of AUM was priced in this manner. For Separate
Accounts that are not registered investment companies under the 1940 Act, the fair value of portfolio investments is primarily
63
determined as specified in applicable customer agreements, including in agreements between the customer and the customer's
third-party custodian. For Separate Accounts that are registered investment companies under the 1940 Act (e.g., sub-advised
mutual funds), the fair value of portfolio investments is determined based on a prescribed valuation process approved by the
board of directors/trustees of the sub-advised fund.
Federated has contractual arrangements with third parties to provide certain fund-related services. Management considers
whether Federated is acting as the principal service provider or as an agent to determine whether its revenue should be recorded
based on the gross amount received from the funds or net of Federated's payments to third-party service providers. Federated is
considered a principal service provider if it controls the service that is transferred to the customer. Alternatively, it would be
considered an agent when it does not control the service, but rather arranges for the service to be provided by another party.
Generally, the less the customer is directly involved with or participates in making decisions regarding the ultimate third-party
service provider, the more supportive the facts are that Federated is acting as the principal in these transactions and should
therefore report revenues on a gross basis. All of Federated's revenue is recorded gross of payments made to third parties.
Management judgments are used when reviewing newly-created contracts and/or materially-modified contracts to determine
whether: (1) Federated is the principal or agent; (2) a contract has multiple performance obligations when Federated is paid a
single fee; and (3) two or more contracts should be combined. A change in the conclusion of whether Federated is the principal
or agent would result in a change in the revenue being recorded gross or net of payments made to third parties. Different
conclusions for the remaining two judgments may change the line items to which revenue is being recorded. There are no
significant judgments that would impact the timing of revenue recognition.
(e) Principles of Consolidation
Federated performs an analysis for each Federated Fund or other entity in which Federated holds a financial interest to
determine if it is a VIE or voting rights entity (VRE). Factors considered in this analysis include, but are not limited to, whether
(1) it is a legal entity, (2) a scope exception applies, (3) a variable interest exists and (4) shareholders have the power to direct
the activities that most significantly impact the economic performance, as well as the equity ownership, and any related party or
de facto agent implications of Federated's involvement with the entity. Entities that are determined to be VIEs are consolidated
if Federated is deemed to be the primary beneficiary. Entities that are determined to be VREs are generally consolidated if
Federated holds the majority voting interest. Federated's conclusion to consolidate a Federated Fund may vary from period to
period, most commonly as a result of changes in its percentage interest in the entity. All intercompany accounts and transactions
have been eliminated.
Consolidation of Variable Interest Entities
Federated has a controlling financial interest in a VIE and is, therefore, deemed to be the primary beneficiary of a VIE if it has
(1) the power to direct the activities of a VIE that most significantly impact the VIE's economic performance and (2) the
obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.
Consolidation of Voting Rights Entities
Federated has a controlling financial interest in a VRE if it can exert control over the financial and operating policies of the
VRE, which generally occurs when Federated holds the majority voting interest (i.e., greater than 50% of the voting equity
interest).
(f) Cash and Cash Equivalents
Cash and Cash Equivalents consist of investments in money market funds and deposits with banks. Cash equivalents are highly
liquid investments that are readily convertible to cash with original maturities of 90 days or less at the date of acquisition.
(g) Investments
Federated's investments are categorized as Investments—Consolidated Investment Companies or Investments—Affiliates and
Other on the Consolidated Balance Sheets. Investments—Consolidated Investment Companies represent securities held by
Federated as a result of consolidating certain Federated Funds. Investments—Affiliates and Other represent Federated's
investments in fluctuating-value Federated Funds and investments held in Separate Accounts for which Federated owns the
underlying debt and equity securities. All investments are carried at fair value with unrealized gains or losses on these securities
recognized in Gain (Loss) on Securities, net on the Consolidated Statements of Income. Realized gains and losses on these
securities are computed on a specific-identification basis and recognized in Gain (Loss) on Securities, net on the Consolidated
Statements of Income.
64
The fair value of Federated's investments is generally based on quoted market prices in active markets for identical instruments.
If quoted market prices are not available, fair value is generally based upon quoted prices for similar instruments in active
markets, quoted prices for identical or similar instruments in markets that are not active, or model-derived valuations in which
all significant inputs and significant value drivers are observable in active markets. In the absence of observable market data
inputs and/or value drivers, internally generated valuation techniques may be utilized in which one or more significant inputs or
significant value drivers are unobservable in the market place. See Note (8) for additional information regarding the fair value
of investments held as of December 31, 2019 and 2018.
(h) Derivatives and Hedging Instruments
From time to time, Federated may consolidate an investment product that holds freestanding derivative financial instruments for
trading purposes. Federated reports such derivative instruments at fair value and records the changes in fair value in Gain
(Loss) on Securities, net on the Consolidated Statements of Income.
From time to time, Federated may also enter into derivative financial instruments to hedge against the risk of movement in
foreign exchange rates. Federated records all derivative financial instruments as either assets or liabilities on its Consolidated
Balance Sheets and measures these instruments at fair value. Federated has not designated any derivative financial instrument
as a hedging instrument for accounting purposes. In 2019, the gain or loss on these derivative instruments is recognized in
Operating Expenses – Other on the Consolidated Statements of Income.
(i) Asset Acquisitions and Business Combinations
Federated performs an analysis to determine whether a transaction should be accounted for as an asset acquisition or a business
combination.
A transaction that does not meet the definition of a business under U.S. GAAP is accounted for as an asset acquisition. Asset
acquisitions are accounted for using a cost accumulation and allocation method where the cost of the transaction is allocated on
a relative fair value basis to the qualifying assets acquired and liabilities assumed on the acquisition date. The cost of the
transaction includes both the consideration transferred to the seller and any direct transaction costs incurred. The primary asset
acquired in previous asset acquisitions has been the rights to manage fund assets. The rights to manage fund assets is an
intangible asset valued using the excess earnings method, under the income approach, which estimates fair value by quantifying
the amount of discounted cash flows generated by the asset. No goodwill is recognized in an asset acquisition.
A transaction that meets the definition of a business is accounted for as a business combination under the acquisition method of
accounting. The consideration transferred to the seller in a business combination is measured at fair value and calculated as the
sum of the acquisition date fair values of the assets transferred by Federated, the liabilities incurred by Federated to the acquirer
and any equity interests issued by Federated. Direct transaction costs are expensed as incurred in a business combination.
Results of operations of an acquired business are included in Federated's results from the date of acquisition.
Rights to manage fund assets and trade names acquired in a business combination are recorded at fair value. The fair value of
the rights to manage fund assets is determined using the excess earnings method, under the income approach. The fair value of
the trade names is determined using the relief from royalty method, under the income approach. Each method considers various
factors to project future cash flows expected to be generated from the asset. After the fair values of all separately identifiable
assets and liabilities have been estimated, goodwill is recorded to the extent that the consideration paid exceeds the sum of the
fair values of the separately identifiable acquired assets, net of assumed liabilities.
For both asset acquisitions and business combinations, the significant assumptions used in the valuation of the intangible assets
acquired typically include: (1) the asset's estimated useful life; (2) projected AUM; (3) projected revenue growth rates;
(4) projected pre-tax profit margins; (5) tax rates; (6) discount rates and (7) in the case of a trade name valuation, a royalty rate.
(j) Goodwill and Intangible Assets
Intangible assets consist primarily of rights to manage fund assets and trade names acquired in connection with various asset
acquisitions and business combinations. Goodwill represents the excess cost of a business acquisition over the fair value of the
net assets acquired. Certain portions of goodwill and intangible assets are denominated in foreign currency and, as such, include
the effects of foreign currency fluctuations.
Federated tests goodwill for impairment at least annually or when indicators of potential impairment exist. Goodwill is
evaluated at the reporting unit level. Federated has determined that it has a single reporting unit consistent with its single
operating segment based on the management of Federated's operations as a single business: investment management. Federated
uses a qualitative approach to test for potential impairment of goodwill. If, after considering various factors, management
determines that it is more likely than not that goodwill is impaired, a quantitative goodwill impairment test is performed which
65
compares the fair value of its reporting unit, including consideration of Federated's market capitalization, with its carrying
amount. If the carrying amount of its reporting unit exceeds its fair value, an impairment loss would be recognized in an amount
equal to that excess, limited to the total amount of goodwill allocated to the reporting unit.
Federated has determined that certain acquired assets, primarily certain rights to manage fund assets and trade names, have
indefinite useful lives. In reaching this conclusion, management considered the acquired assets' legal, regulatory and agreed-
upon provisions, the highest and best use of the asset, the level of cost and effort required in agreed-upon renewals, and the
effects of obsolescence, demand, competition and other economic factors that could impact the assets' fair value. The fair value
of the rights to manage fund assets is determined using the excess earnings method, under the income approach. The fair value
of the trade name is determined using the relief from royalty method, under the income approach. Federated has aggregated
multiple indefinite-lived assets into three units of accounting for purposes of indefinite-lived intangible impairment testing. The
determination to group indefinite-lived intangible assets into three units of accounting is not a one-time evaluation. Rather, it is
subject to reconsideration and may change depending on the facts and circumstances. On a quarterly basis, indefinite-lived
intangible assets are reviewed for potential changes in useful life. In addition, an annual impairment test is performed at the
accounting unit level, or when indicators of a potential impairment exist. Management may use a qualitative or quantitative
approach which requires the weighting of positive and negative evidence collected through the consideration of various factors
to determine whether it is more likely than not that an indefinite-lived intangible asset or asset group is impaired. In 2019,
management used a quantitative approach. Management considers macroeconomic and entity-specific factors, including the
asset's estimated useful life, projected AUM, projected revenue growth rates, projected pre-tax profit margins, tax rates,
discount rates and, in the case of a trade name valuation, a royalty rate. If Federated's carrying amount of its accounting unit
exceeds its fair value, an impairment loss would be recognized in an amount equal to the excess of the carrying value over the
fair value.
Federated amortizes finite-lived identifiable intangible assets on a straight-line basis over their estimated useful lives.
Management periodically evaluates the remaining useful lives and carrying values of the intangible assets to determine whether
events and circumstances indicate that a change in the useful life or impairment in value may have occurred. Indicators of a
potential impairment monitored by management include a significant decline in the level of managed assets, changes to
contractual provisions underlying certain intangible assets and significant reductions in underlying operating cash flows. Should
there be an indication of a change in the useful life or impairment in value of the finite-lived intangible assets, Federated
compares the carrying value of the asset to the projected undiscounted cash flows expected to be generated from the underlying
asset over its remaining useful life to determine whether impairment has occurred. If the carrying value of the asset exceeds the
undiscounted cash flows, the asset is written down to its fair value determined using discounted cash flows. Federated writes-
off the cost and accumulated amortization balances for all fully amortized intangible assets.
(k) Property and Equipment
Property and equipment are initially recorded at cost and are depreciated using the straight-line method over their estimated
useful lives ranging from 1 to 15 years. Leasehold improvements are amortized using the straight-line method over the shorter
of their estimated useful lives or their respective lease terms. Depreciation and amortization expense is recorded in Office and
Occupancy on the Consolidated Statements of Income. As property and equipment are taken out of service, the cost and related
accumulated depreciation and amortization are removed. The write-off of any residual net book value is reflected as a loss in
Operating Expenses – Other on the Consolidated Statements of Income.
Management reviews the remaining useful lives and carrying values of property and equipment to determine whether events
and circumstances indicate that a change in the useful life or impairment in value may have occurred. Indicators of impairment
monitored by management include a decrease in the market price of the asset, an accumulation of costs significantly in excess
of the amount originally expected in the acquisition or development of the asset, historical and projected cash flows associated
with the asset and an expectation that the asset will be sold or otherwise disposed of significantly before the end of its
previously estimated useful life. Should there be an indication of a change in the useful life or an impairment in value,
Federated compares the carrying value of the asset to the probability-weighted undiscounted cash flows expected to be
generated from the underlying asset over its remaining useful life to determine whether an impairment has occurred. If the
carrying value of the asset exceeds the undiscounted cash flows, the asset is written down to fair value which is determined
based on prices of similar assets if available or discounted cash flows. Impairment adjustments are recognized in Operating
Expenses – Other on the Consolidated Statements of Income.
(l) Costs of Computer Software Developed or Obtained for Internal Use
Certain internal and external costs incurred in connection with developing or obtaining software for internal use, including
software licenses in a cloud computing arrangement, are capitalized in accordance with the applicable accounting guidance
66
relating to Intangibles - Goodwill and Other - Internal-Use Software. These capitalized costs are included in Property and
Equipment, net on the Consolidated Balance Sheets and are amortized using the straight-line method over the estimated useful
life of the software, typically four years, or over the term of the software license. These assets are subject to the impairment test
used for property and equipment described above.
(m) Leases
Prior to the adoption of the new lease guidance effective January 1, 2019, Federated classified leases as either capital or
operating. All leases for the periods presented prior to January 1, 2019 were classified as operating leases. Rent expense under
noncancelable operating leases with scheduled rent increases or rent holidays was accounted for on a straight-line basis over the
lease term, beginning on the date of initial possession or the effective date of the lease agreement. The amount of the excess of
straight-line rent expense over scheduled payments was recorded as a deferred liability. The liability was then reduced when
scheduled payments were in excess of the straight-line rent expense. Build-out allowances and other such lease incentives were
recorded as deferred credits, and were amortized on a straight-line basis as a reduction of rent expense beginning in the period
they were deemed to have been earned, which generally coincided with the effective date of the lease. The current portion of
remaining deferred lease costs and unamortized build-out allowances was included in Other Current Liabilities and the long-
term portion was included in Other Long-Term Liabilities on the Consolidated Balance Sheets as of and prior to December 31,
2018.
Following the adoption of the new lease guidance effective January 1, 2019, Federated classifies leases as either operating or
financing, and records a ROU asset and a lease liability on the Consolidated Balance Sheets. The lease liability is initially
measured at the present value of the unpaid lease payments remaining at the lease commencement date. The ROU asset is
initially measured as the lease liability, adjusted for lease payments made prior to the lease commencement date and lease
incentives received. ROU assets are reviewed for impairment when events or circumstances indicate that the carrying amount
may not be recoverable. In determining the present value of the lease liability, a lessee must use the interest rate implicit in the
lease or, if that rate is not readily determinable, its incremental borrowing rate (IBR). All leases for the periods presented are
classified as operating leases. Management has made the following accounting policy elections: (1) not to separate lease
components from non-lease components for all asset classes and (2) to apply the short-term lease exception, which does not
require the capitalization of leases with terms of 12 months or less. Rent expense is recorded on a straight-line basis over the
lease term, beginning on the earlier of the effective date of the lease or the date Federated obtains control of the asset. The lease
term may include options to extend the lease when they are reasonably certain of being exercised.
Management judgments are used when reviewing new and/or materially-modified contracts to determine (1) whether the
contract is, or contains, a lease, and (2) the IBR. Management was unable to determine the rates implicit in Federated's leases
based on the information available at the commencement date, therefore, management calculated an IBR for each lease. In
order to calculate the IBR, management began with readily observable unsecured rates, and adjusted for the following
assumptions: (1) collateralization, (2) remaining lease term and (3) the type of ROU asset.
(n) Equity Method Investments
The equity method of accounting is used to account for equity investments in which Federated does not control the investee and
is not the primary beneficiary of a VIE, but has the ability to exercise significant influence over the financial and operating
policies of the investee. Significant influence is generally considered to exist when Federated's ownership interest is between
20% and 50%. Equity method investments are initially recorded at cost in Other Long-Term Assets on the Consolidated
Balance Sheets. Federated's proportionate share of the investee's net income or loss is recorded in Other, net - Nonoperating
Income (Expenses) on the Consolidated Statements of Income. The investments are reviewed for impairment if events or
changes in circumstance indicate that the carrying amount exceeds its fair value. If the carrying amount of an investment
exceeds fair value and the decline in fair value is deemed to be other-than-temporary, the equity method investment will be
adjusted to fair value and an impairment loss recorded equal to the difference.
(o) Loss Contingencies
Federated accrues for estimated costs, including legal costs related to existing lawsuits, claims and proceedings, if any, when it
is probable that a loss has been incurred and the costs can be reasonably estimated. Accruals are reviewed at least quarterly and
are adjusted to reflect the impact and status of settlements, rulings, advice of counsel and other information pertinent to a
particular matter. Significant differences could exist between the actual cost required to investigate, litigate and/or settle a claim
or the ultimate outcome of a lawsuit, claim or proceeding and management's estimate. These differences could have a material
impact on Federated's results of operations, financial position and/or cash flows. Recoveries of losses are recognized on the
67
Consolidated Statements of Income when receipt is deemed probable, or when final approval is received by the insurance
carrier.
(p) Noncontrolling Interests
To the extent Federated's interest in a consolidated entity represents less than 100% of the entity's equity, Federated recognizes
noncontrolling interests in subsidiaries. These noncontrolling interests are deemed to represent temporary equity and are
classified as Redeemable Noncontrolling Interest in Subsidiaries in the mezzanine section of the Consolidated Balance Sheets.
In the case of consolidated investment companies, the noncontrolling interests represent equity which is redeemable or
convertible for cash at the option of the equity holder.
In the case of Hermes, the noncontrolling interest represents equity which is subject to the terms of a Put and Call Option Deed,
redeemable at the option of either the noncontrolling party or Federated at future predetermined dates, and therefore, not
entirely within Federated's control. The subsidiary's net income or loss and related dividends are allocated to Federated and the
noncontrolling interest holder based on their relative ownership percentages. The noncontrolling interest carrying value is
adjusted on a quarterly basis to the higher of the carrying value or current redemption value (fair value), as of the balance sheet
date, through a corresponding adjustment to retained earnings. Management may use an independent valuation expert to assist
in estimating the current redemption value (fair value) using three methodologies: (1) the discounted cash flow methodology
under the income approach, (2) the guideline public company methodology under the market approach and (3) the guideline
public transaction methodology under the market approach. The estimated current redemption value is derived from equally
weighting the result of each of the three methodologies. The estimation of the current redemption value includes significant
assumptions concerning: (1) projected AUM; (2) projected revenue growth rates; (3) projected pre-tax profit margins; (4) tax
rates and (5) discount rates.
(q) Treasury Stock
Federated accounts for acquisitions of treasury stock at cost and reports total treasury stock held as a deduction from Federated
Hermes, Inc. shareholders' equity on the Consolidated Balance Sheets. At the date of subsequent reissue, the treasury stock
account is reduced by the cost of such stock on a specific-identification basis. Additional Paid-in Capital from Treasury Stock
Transactions is increased as Federated reissues treasury stock for more than the cost of the shares. If Federated issues treasury
stock for less than its cost, Additional Paid-in Capital from Treasury Stock Transactions is reduced to no less than zero and any
further required reductions are recorded to Retained Earnings on the Consolidated Balance Sheets.
(r) Accumulated Other Comprehensive Income (Loss)
Accumulated Other Comprehensive Income (Loss), net of tax is reported on the Consolidated Balance Sheets and the
Consolidated Statements of Changes in Equity and includes unrealized gains and losses on foreign currency translation
adjustments. Prior to January 1, 2018, Accumulated Other Comprehensive Income (Loss), net of tax included unrealized gains
and losses on equity securities available for sale. Following the adoption of the new financial instruments guidance effective
January 1, 2018, unrealized gains and losses on these securities are recognized in Gain (Loss) on Securities, net on the
Consolidated Statements of Income.
(s) Foreign Currency Translation
The balance sheets of certain foreign subsidiaries of Federated, certain consolidated foreign-denominated investment products
and all other foreign-denominated cash or investment balances are translated at the current exchange rate as of the end of the
reporting period and the related income or loss is translated at the average exchange rate in effect during the period. Net
exchange gains and losses resulting from these translations are excluded from income and are recorded in Accumulated Other
Comprehensive Income (Loss), net of tax on the Consolidated Balance Sheets. Foreign currency transaction gains and losses
are reflected in Operating Expenses – Other on the Consolidated Statements of Income.
(t) Share-Based Compensation
Federated issues shares for share-based awards from treasury stock. Federated recognizes compensation costs based on grant-
date fair value for all share-based awards. For restricted stock awards, the grant-date fair value of the award is calculated as the
difference between the closing fair value of Federated's Class B common stock on the date of grant and the purchase price paid
by the employee, if any. Federated's awards are generally subject to graded vesting schedules. Compensation and Related
expense is generally recognized on a straight-line basis over the requisite service period of the award and is adjusted for actual
forfeitures as they occur. For awards with provisions that allow for accelerated vesting upon retirement, Federated recognizes
68
expense over the shorter of the vesting period or the period between grant date and the date on which the employee meets the
minimum required age for retirement. Compensation and Related expense also includes dividends paid on forfeited awards.
Excess tax benefits and deficiencies (including tax benefits from dividends paid on unvested restricted stock awards) are
recognized in the Income Tax Provision in the Consolidated Statements of Income.
Effective July 2, 2018, Federated established a non-public subsidiary share-based compensation plan for certain employees of
that subsidiary. The subsidiary grants equity awards in the form of restricted nonpublic subsidiary stock to certain members of
the subsidiary's management and other key employees. The grant date fair value of the awards is recognized as Compensation
and Related expense in the Consolidated Statements of Income on a straight-line basis over the requisite service period of the
awards and is adjusted for actual forfeitures as they occur, with a corresponding adjustment to Redeemable Noncontrolling
Interest in Subsidiaries in the Consolidated Balance Sheets. As a result of the grant of the equity awards in a nonpublic
consolidated subsidiary, the shares are not included in the attribution of the subsidiary's income and losses to noncontrolling
interest holders until the awards vest. Therefore, Federated initially recognized the fair value of 33 percent of Hermes as
Redeemable Noncontrolling Interest in Subsidiaries on the Consolidated Balance Sheets. The attribution of the subsidiary's
income and loss is recognized in Net Income (Loss) Attributable to the Noncontrolling Interests in Subsidiaries on the
Consolidated Statements of Income and is expected to fluctuate as the these awards vest and put/call options are exercised.
(u) Advertising Costs
Federated generally expenses the cost of all advertising and promotional activities as incurred. Certain printed matter, however,
such as sales brochures, are accounted for as prepaid supplies and are included in Other Current Assets on the Consolidated
Balance Sheets until they are distributed or are no longer expected to be used, at which time their costs are expensed.
(v) Income Taxes
Federated accounts for income taxes under the liability method, which requires the recognition of deferred tax assets and
liabilities for the future tax consequences attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. Federated recognizes a valuation allowance if, based on the weight of available evidence regarding future
taxable income, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Federated has elected to account for taxes related to temporary basis differences expected to reverse as Global Intangible Low-
Taxed Income (GILTI) as tax expense in the period incurred, rather than factoring it into the measurement of deferred taxes.
(w) Earnings Per Share
Basic and diluted earnings per share are calculated under the two-class method. Pursuant to the two-class method, unvested
restricted shares of Federated's Class B common stock with nonforfeitable rights to dividends are considered participating
securities and are required to be considered in the computation of earnings per share. These unvested restricted shares, as well
as the related dividends paid and their proportionate share of undistributed earnings, if any, are excluded from the computation
of basic earnings per share. In addition to the amounts excluded from the basic earnings per share calculation, net income
available to unvested shareholders of a nonpublic consolidated subsidiary is excluded from the computation of diluted earnings
per share.
(x) Business Segments
Business or operating segments are defined as a component of an enterprise that engages in activities from which it may earn
revenue and incur expenses for which discrete financial information is available and is regularly evaluated by Federated's Chief
Executive Officer (CEO), who is the chief operating decision maker, in deciding how to allocate resources and assess
performance. Federated operates in one operating segment, the investment management business, which is primarily conducted
within the U.S. Federated's CEO utilizes a consolidated approach to assess performance and allocate resources.
69
(2) Recent Accounting Pronouncements
Recently Adopted Accounting Guidance
(a) Leases
On February 25, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
2016-02, Leases (Topic 842). Its core principle is that a lessee should recognize the assets and liabilities that arise from leases
on the balance sheet, while retaining a distinction between financing and operating leases. In the third quarter of 2018, the
FASB issued ASU 2018-10, which provides improvements to narrow aspects of the guidance and ASU 2018-11, which provides
an optional alternative transition method to initially apply the new leases standard at the adoption date (collectively, with ASU
2016-02, Topic 842).
Effective January 1, 2019, Federated adopted Topic 842 using the alternative transition method, which did not require the
restatement of prior years. In connection with the adoption of Topic 842, management has elected the package of practical
expedients, which allows entities to not reassess (1) whether contracts are or contain leases, (2) lease classification and
(3) initial direct costs. Management did not elect the hindsight practical expedient to determine the lease term. Upon adoption,
Federated recorded $133.7 million as a lease liability and, after the reclassification of certain lease-related liabilities into the
ROU asset, $112.2 million as a ROU asset on the Consolidated Balance Sheets, which consists primarily of Federated's
operating real estate leases. The adoption did not have a material impact on Federated's results of operations or cash flows.
(b) Goodwill Impairment
During the second quarter of 2019, Federated adopted ASU 2017-04, Intangibles - Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment, effective January 1, 2019. Under this ASU, an entity should perform its annual
or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and recognize an
impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. However, the loss
recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, the ASU retains the
option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.
The ASU required the prospective adoption method. The adoption did not have an impact to Federated's Consolidated Financial
Statements.
Recently Issued Accounting Guidance Not Yet Adopted
(c) Credit Losses
On June 16, 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments. The amendments in this update replace the incurred loss impairment methodology with a
current expected credit loss (CECL) model. CECL requires an entity to estimate lifetime expected credit losses based on
relevant information about historical events, current conditions and reasonable and supportable forecasts. The update is
effective for Federated on January 1, 2020. The update requires the modified retrospective adoption method. The adoption will
not have a material impact to Federated's Consolidated Financial Statements.
(d) Fair Value Measurement
On August 28, 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to
the Disclosure Requirements for Fair Value Measurement. The amendments in this update remove, modify or add disclosure
requirements for fair value measurements to improve the effectiveness of disclosures. The update is effective for Federated on
January 1, 2020, and requires either the prospective or retrospective adoption method, depending on the amendment. The
adoption will not have a material impact to Federated's Consolidated Financial Statements.
(e) Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement
On August 29, 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40):
Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a
consensus of the FASB Emerging Issues Task Force). The amendments in this update align the requirements for capitalizing
implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing
implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use
software license). The update is effective for Federated on January 1, 2020, and allows for either the prospective or
retrospective adoption method. Management plans to elect the prospective adoption approach, which does not require the
restatement of prior years. The adoption will not have a material impact to Federated's Consolidated Financial Statements.
70
(3) Business Combinations
On July 2, 2018, Federated completed, effective as of July 1, 2018, the Hermes Acquisition. The addition of London-based
Hermes provides the opportunity to further accelerate Federated's growth in markets outside of the U.S. BT Pension Scheme
(BTPS) retained a 29.5 percent interest in Hermes and contributed the remaining 10.5 percent interest into an Employee Benefit
Trust for the benefit of certain members of Hermes' management and other key employees under a long-term incentive plan.
Federated paid $343.5 million (which consists of $344.3 million paid in 2018 offset by $0.8 million returned in the second
quarter of 2019). Federated funded the transaction through a combination of cash and an $18.0 million drawdown from its
existing revolving credit facility (see Note (12) for additional information).
Federated and BTPS entered into a Put and Call Option Deed pursuant to which Federated has a call option to acquire BTPS'
remaining 29.5 percent interest in Hermes at fair value and BTPS has a put option to sell its remaining interest in Hermes to
Federated at fair value, after the third, fourth or fifth anniversaries, and subject to certain contingencies, the sixth anniversary,
of the date of the purchase agreement. Federated does not consider BTPS' 29.5 percent noncontrolling interest in Hermes to be
permanent equity, due to it being redeemable at the option of either BTPS or Federated and, therefore, not entirely within
Federated's control.
Federated expensed $13.3 million in transaction costs directly attributable to the Hermes Acquisition in 2018, primarily
recorded in Professional Service Fees on the Consolidated Statements of Income. The transaction costs exclude a $29.0 million
derivative loss (see Note (9) for additional information) and a $1.7 million foreign exchange gain recognized in 2018 as a result
of holding British pound sterling immediately prior to the Hermes Acquisition.
Federated performed a valuation of the fair market value of the Hermes Acquisition. Provisional amounts must be finalized
within a one-year measurement period. During the second quarter 2019, provisional amounts recognized for certain Intangible
Assets and Other Long-Term Assets were adjusted to reflect facts and circumstances that existed as of the acquisition date. The
adjustments were primarily the result of changes to the forecast revenue allocated to certain acquired assets based on review of
actual fund and separate account revenue rates. Intangible Assets and Other Long-Term Assets increased $43.8 million and $5.0
million, respectively. Primarily as a result of these adjustments, the Long-Term Deferred Tax Liability increased by $8.2 million
and Goodwill decreased by $41.8 million. There was no material change to the Consolidated Statements of Income for the year
ended December 31, 2019 as a result of these adjustments.
The following table summarizes the final purchase price allocation determined as of the purchase date:
$
$
175.8
53.7
114.1
320.0
40.1
(28.7)
(162.3)
(169.2)
343.5
(in millions)
Cash and Cash Equivalents
Other Current Assets1
Goodwill2
Intangible Assets3
Other Long-Term Assets4
Less: Long-Term Deferred Tax Liability, net
Less: Liabilities Acquired5
Less: Fair Value of Redeemable Noncontrolling Interest in Subsidiary6
Total Purchase Price Consideration
1
2
Includes $31.9 million of receivables, all of which has been collected.
The goodwill recognized is attributable to enhanced revenue and AUM growth opportunities from future investors and the assembled
workforce of Hermes. In this instance, goodwill is not deductible for tax purposes.
Includes $71.6 million for customer relationships with a weighted-average useful life of 8.5 years, $198.5 million for indefinite-lived
rights to manage fund assets and $49.9 million for an indefinite-lived trade name, all of which are recorded in Intangible Assets, net on
the Consolidated Balance Sheets.
Includes $11.2 million of Property and Equipment, net.
Includes $130.3 million related to Accrued Compensation and Benefits.
The fair value of the noncontrolling interest was determined utilizing the market approach and consideration of the overall business
enterprise value.
3
4
5
6
The financial results of Hermes have been included in Federated's Consolidated Financial Statements from the July 1, 2018
effective date of the Hermes Acquisition. For the year ended December 31, 2019, Hermes earned revenue of $198.3 million and
net income of $10.4 million (which excludes acquisition-related intangible amortization and amounts attributable to the
noncontrolling interests). For the six months ended December 31, 2018, Hermes earned revenue of $100.8 million and net
71
income of $9.6 million (which excludes acquisition-related intangible amortization and amounts attributable to the
noncontrolling interests).
The following table summarizes unaudited pro forma financial information assuming the Hermes Acquisition occurred at the
beginning of the year presented. This pro forma financial information is for informational purposes only and is not indicative of
actual results that would have occurred had the Hermes Acquisition been completed on the assumed date and it is not indicative
of future results. In addition, the following pro forma financial information does not reflect the realization of any cost savings
(nor does management expect to realize any cost savings) or other synergies from the Hermes Acquisition. The pro forma
results include adjustments for the effect of acquisition-related expenses (including compensation and related expense, income
tax expense and amortization related to newly acquired intangibles) as well as adjustments to conform to Federated's U.S.
GAAP accounting policies.
2018
1,230.5
241.4
$
$
(in millions)
Revenue
Net Income1
1
Excludes a $29.0 million loss on foreign currency forward transactions entered into in order to hedge against foreign exchange rate
fluctuations associated with the payment for the Hermes Acquisition.
(4) Revenue from Contracts with Customers
The following table presents Federated's revenue disaggregated by asset class:
(in thousands)
Equity
Money Market
Fixed-Income
Other1
Total Revenue
2019
$ 533,749
529,340
179,102
84,703
$ 1,326,894
2018
$ 470,436
414,746
180,152
70,343
$ 1,135,677
1
Includes Alternative / Private Markets (including but not limited to private equity, real estate and infrastructure), Multi-Asset and,
beginning in the third quarter of 2018, stewardship services revenue.
The following table presents Federated's revenue disaggregated by performance obligation:
(in thousands)
Asset Management1
Administrative Services
Distribution2
Other3
Total Revenue
2019
$ 907,605
245,887
151,106
22,296
$ 1,326,894
2018
$ 773,418
199,269
146,595
16,395
$ 1,135,677
1
2
3
The performance obligation may include administrative, distribution and other services recorded as a single asset management fee
under Topic 606, as it is part of a unitary fee arrangement with a single performance obligation.
The performance obligation is satisfied at a point in time. A portion of this revenue relates to a performance obligation that has been
satisfied in a prior period.
Includes shareholder service fees and, beginning in the third quarter of 2018, stewardship services revenue.
The following table presents Federated's revenue disaggregated by product type:
(in thousands)
Federated Funds
Separate Accounts
Other1
Total Revenue
2019
$ 1,093,157
221,756
11,981
$ 1,326,894
2018
$ 942,037
187,585
6,055
$ 1,135,677
1
Includes stewardship services revenue beginning in the third quarter of 2018.
Federated is not required to disclose certain estimates of revenue expected to be recorded in future periods as a result of
applying the following exemptions: (1) contract terms are short-term in nature (i.e., expected duration of one year or less due to
termination provisions) and (2) the expected variable consideration would be allocated entirely to future service periods.
72
Federated expects to recognize revenue in the future related to the unsatisfied portion of the stewardship services performance
obligations at December 31, 2019. Generally, contracts are billed in arrears on a quarterly basis and have a three year duration,
after which the customer can terminate the agreement with a three to twelve month notice. Based on existing contracts and the
exchange rates as of December 31, 2019, Federated may recognize future fixed revenue from stewardship services as presented
in the following table:
(in thousands)
2020
2021
2022
2023 and Thereafter
Total Remaining Unsatisfied Performance Obligations
(5) Concentration Risk
$
$
7,777
3,315
1,625
1,035
13,752
The following information summarizes Federated's revenue concentrations. See additional information on the risks related to
such concentrations in Item 1A - Risk Factors.
(a) Revenue Concentration by Asset Class
The following table presents Federated's revenue concentration by asset class over the last three years:
Equity Assets
Money Market Assets
Fixed-Income Assets
2019
40%
40%
14%
2018
41%
37%
16%
2017
38%
41%
17%
The change in the relative proportion of Federated's revenue attributable to money market assets in 2019, as compared to the
same period in 2018, was primarily the result of higher average money market assets in 2019.
The change in the relative proportion of Federated's revenue attributable to equity assets in 2018, as compared to the same
period in 2017, was primarily the result of higher average equity assets mostly as a result of the Hermes Acquisition. Because
the Hermes Acquisition was primarily comprised of equity assets and alternative/private markets assets, the relative proportion
of Federated's revenue attributable to money market assets decreased in 2018 as compared to 2017. Furthermore, Federated's
revenue attributable to money market assets decreased as a result of a change in the mix of average money market assets.
(b) Revenue Concentration by Investment Strategy/Fund
The following table presents Federated's revenue concentration by investment strategy/fund over the last three years:
Federated Strategic Value Dividend strategy1
Federated Government Obligations Fund
Federated Kaufmann Mid-Cap Growth strategy2
1
2
Strategy includes Federated Funds and Separate Accounts.
Strategy includes Federated Funds.
2019
11%
10%
9%
2018
15%
9%
10%
2017
18%
10%
9%
A significant and prolonged decline in the AUM in these strategies/fund could have a material adverse effect on Federated's
future revenues and, to a lesser extent, net income, due to a related reduction in distribution expenses associated with the
Federated Funds managed in accordance with these strategies.
(c) Revenue Concentration by Intermediary
Approximately 11%, 13% and 16% of Federated's total revenue for 2019, 2018 and 2017, respectively, was derived from
services provided to one intermediary, The Bank of New York Mellon Corporation, including its Pershing subsidiary.
Significant negative changes in Federated's relationship with this intermediary could have a material adverse effect on
Federated's future revenues and, to a lesser extent, net income, due to a related reduction in distribution expenses associated
with this intermediary.
73
(6) Consolidation
The Consolidated Financial Statements include the accounts of Federated, certain Federated Funds and other entities in which
Federated holds a controlling financial interest. Federated is involved with various entities in the normal course of business that
may be deemed to be VREs or VIEs. From time to time, Federated invests in Federated Funds for general corporate investment
purposes or, in the case of newly launched products, in order to provide investable cash to establish a performance history.
Federated's investment in, and/or receivables from, these Federated Funds represents its maximum exposure to loss. The assets
of each consolidated Federated Fund are restricted for use by the respective Federated Fund. Generally, neither creditors of, nor
equity investors in, the Federated Funds have any recourse to Federated's general credit. Given that the entities follow
investment company accounting, which prescribes fair-value accounting, a deconsolidation generally does not result in gains or
losses for Federated. Receivables from all Federated Funds for advisory and other services totaled $37.6 million and $35.0
million at December 31, 2019 and 2018, respectively.
In the ordinary course of business, Federated may implement Fee Waivers for various Federated Funds for competitive,
regulatory or contractual reasons. For the years ended December 31, 2019, 2018 and 2017, Fee Waivers totaled $427.3 million,
$358.2 million and $345.5 million, respectively, of which $311.6 million, $242.9 million and $222.1 million, respectively,
related to money market funds which meet the scope exception of the consolidation guidance.
Like other sponsors of investment companies, Federated in the ordinary course of business may make capital contributions to
certain money market Federated Funds in connection with the reorganization of such funds into certain affiliated money market
Federated Funds or in connection with the liquidation of a money market Federated Fund. In these instances, such capital
contributions typically are intended to either offset realized losses or other permanent impairments to a fund's NAV, increase the
market-based NAV per share of the fund's portfolio that is being reorganized to equal the market-based NAV per share of the
acquiring fund or to bear a portion of expenses relating to a fund liquidation. Under current money fund regulations and SEC
guidance, Federated is required to report these types of capital contributions to U.S. money market mutual funds to the SEC as
financial support to the investment company that is being reorganized or liquidated. There were no contributions for the years
ended December 31, 2019 and 2018, and no material contributions for the year ended December 31, 2017.
In accordance with Federated's consolidation accounting policy, Federated first determines whether the entity being evaluated is
a VRE or a VIE. Once this determination is made, Federated proceeds with its evaluation of whether to consolidate the entity.
The disclosures below represent the results of such evaluations as of December 31, 2019 and 2018.
(a) Consolidated Voting Rights Entities
Most of the Federated Funds meet the definition of a VRE. Federated consolidates VREs when it is deemed to have control.
Consolidated VREs are reported on Federated's Consolidated Balance Sheets primarily in Investments—Consolidated
Investment Companies and Redeemable Noncontrolling Interest in Subsidiaries.
(b) Consolidated Variable Interest Entities
As of December 31, 2019 and 2018, Federated was deemed to be the primary beneficiary of, and therefore consolidated, certain
Federated Funds as a result of its controlling financial interest. The following table presents the balances related to the
consolidated Federated Fund VIEs that were included on the Consolidated Balance Sheets as well as Federated's net interest in
the consolidated Federated Fund VIEs at December 31:
(in millions)
Investments—Consolidated Investment Companies
Receivables
Less: Liabilities
Less: Redeemable Noncontrolling Interest in Subsidiaries
Federated's Net Interest in Federated Fund VIEs
2019
13.3
0.3
0.1
9.3
4.2
$
$
2018
21.2
0.4
0.3
11.2
10.1
$
$
Federated's net interest in the consolidated Federated Fund VIEs represents the value of Federated's economic ownership
interest in these Federated Funds.
During the year ended December 31, 2019, Federated liquidated its investment in one consolidated VIE in which it was the
only remaining shareholder. Accordingly, Federated redeemed $6.2 million from Investments—Consolidated Investment
Companies on the Consolidated Balance Sheets as of the date of the liquidation. There was no impact to the Consolidated
Statements of Income as a result of this liquidation. There were no other consolidations or deconsolidations of VIEs during the
year ended December 31, 2019.
74
(c) Non-Consolidated Variable Interest Entities
Federated's involvement with certain Federated Funds that are deemed to be VIEs includes serving as the investment manager,
or at times, holding a minority interest or both. Federated's variable interest is not deemed to absorb losses or receive benefits
that could potentially be significant to the VIE. Therefore, Federated is not the primary beneficiary of these VIEs and has not
consolidated these entities.
At December 31, 2019, Federated's variable interest in non-consolidated VIEs was $111.9 million (primarily recorded in Cash
and Cash Equivalents on the Consolidated Balance Sheets) and was entirely related to Federated Funds. AUM for these non-
consolidated Federated Funds totaled $9.6 billion at December 31, 2019. At December 31, 2018, Federated did not have a
variable interest in a non-consolidated VIE. Of the Receivables—Affiliates at December 31, 2019 and December 31, 2018,
$15.4 million and $16.2 million, respectively, related to non-consolidated VIEs and represented Federated's maximum risk of
loss from non-consolidated VIE receivables.
(7) Investments
At December 31, 2019 and 2018, Federated held investments in fluctuating-value Federated Funds of $20.1 million and $4.1
million, respectively, primarily in mutual funds which invest in equity securities. Federated held investments in Separate
Accounts of $6.8 million at both December 31, 2019 and 2018, that were included in Investments—Affiliates and Other on the
Consolidated Balance Sheets. Federated's investments held in Separate Accounts as of December 31, 2019 and 2018, were
primarily composed of stocks of large U.S. and international companies ($3.0 million and $2.7 million, respectively) and
domestic debt securities ($2.6 million and $3.5 million, respectively).
Federated consolidates certain Federated Funds into its Consolidated Financial Statements as a result of Federated's controlling
financial interest in these Federated Funds (see Note (6)). All investments held by these consolidated Federated Funds were
included in Investments—Consolidated Investment Companies on Federated's Consolidated Balance Sheets.
Federated's investments held by consolidated Federated Funds as of December 31, 2019 and 2018, were primarily composed of
domestic and foreign debt securities ($38.9 million and $20.9 million, respectively) and stocks of large U.S. and international
companies ($22.6 million and $1.6 million, respectively).
The following table presents gains and losses recognized in Gain (Loss) on Securities, net on the Consolidated Statements of
Income in connection with Federated's investments:
(in thousands)
Investments—Consolidated Investment Companies
Unrealized Gains (Losses)
Net Realized Gains (Losses)1
Net Gains (Losses) on Investments—Consolidated Investment Companies
Investments—Affiliates and Other
Unrealized Gains (Losses)
Net Realized Gains (Losses)1
Net Gains (Losses) on Investments—Affiliates and Other
Gain (Loss) on Securities, net
1
Realized gains and losses are computed on a specific-identification basis.
2019
2018
$
$
4,759
(1,243)
3,516
2,156
(706)
1,450
4,966
$
$
(3,142)
(374)
(3,516)
(1,180)
339
(841)
(4,357)
$
$
2017
771
2,245
3,016
118
4,938
5,056
8,072
(8) Fair Value Measurements
Fair value is the price that would be received to sell an asset or the price that would be paid to transfer a liability as of the
measurement date. A fair-value reporting hierarchy exists for disclosure of fair value measurements based on the observability
of the inputs to the valuation of financial assets and liabilities. The levels are:
Level 1 – Quoted prices for identical instruments in active markets. Level 1 assets may include equity and debt securities that
are traded in an active exchange market, including shares of mutual funds.
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in
markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are
observable in active markets. Level 2 assets and liabilities may include debt and equity securities, purchased loans and over-
75
the-counter derivative contracts whose fair value is determined using a pricing model without significant unobservable
market data inputs.
Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers
are unobservable in active markets.
NAV Practical Expedient – Investments that calculate NAV per share (or its equivalent) as a practical expedient. These
investments have been excluded from the fair value hierarchy.
(a) Fair Value Measurements on a Recurring Basis
The following table presents fair value measurements for classes of Federated's financial assets and liabilities measured at fair
value on a recurring basis at December 31:
(in thousands)
2019
Financial Assets
Cash and Cash Equivalents
Investments—Consolidated Investment Companies
Equity Securities
Debt Securities
Investments—Affiliates and Other
Equity Securities
Debt Securities
Other1
Total Financial Assets
Total Financial Liabilities2
2018
Financial Assets
Cash and Cash Equivalents
Investments—Consolidated Investment Companies
Equity Securities
Debt Securities
Investments—Affiliates and Other
Equity Securities
Debt Securities
Other
Total Financial Assets
Level 1
Level 2
Level 3
Total
$ 249,174
$
0
$
7,245
0
23,667
0
2,901
$ 282,987
$
6
18,383
38,898
335
2,610
3,177
63,403
0
$
$
$
$
0
0
0
12
311
0
323
$ 249,174
25,628
38,898
24,014
2,921
6,078
$ 346,713
2,081
$
2,087
$ 156,832
$
0
$
1,269
0
6,963
0
597
$ 165,661
$
53
633
20,896
403
3,456
0
25,388
3,852
$
$
$
$
0
0
0
38
0
70
108
385
$ 156,832
1,902
20,896
7,404
3,456
667
$ 191,157
$
4,290
Total Financial Liabilities2
1
2
Amounts primarily consist of a derivative asset and security deposits.
Amounts primarily consist of acquisition-related future contingent consideration liabilities and derivative liabilities.
The following is a description of the valuation methodologies used for financial assets and liabilities measured at fair value on a
recurring basis. Federated did not hold any nonfinancial assets or liabilities measured at fair value on a recurring basis at
December 31, 2019 or 2018.
Cash and Cash Equivalents
Cash and Cash Equivalents include deposits with banks and investments in money market funds. Investments in money market
funds totaled $222.1 million and $135.7 million at December 31, 2019 and 2018, respectively. Cash investments in publicly
available money market funds are valued under the market approach through the use of quoted market prices in an active
market, which is the NAV of the funds, and are classified within Level 1 of the valuation hierarchy.
Investments—Consolidated Investment Companies—Equity Securities
Investments—Consolidated Investment Companies—Equity Securities represent equity securities held by consolidated
Federated Funds. For publicly traded equity securities available in an active market, the fair value of these securities is
76
classified as Level 1 when the fair value is based on quoted market prices. The fair value of certain equity securities traded
principally in foreign markets and held by consolidated Federated Funds are determined by a third-party pricing service
(Level 2).
Investments—Consolidated Investment Companies—Debt Securities
Investments—Consolidated Investment Companies—Debt Securities primarily represent domestic and foreign bonds held by
consolidated Federated Funds. The fair value of these securities may include observable market data such as valuations
provided by independent pricing services after considering factors such as the yields or prices of investments of comparable
quality, coupon, maturity, call rights and other potential prepayments, terms and type, reported transactions, indications as to
values from dealers and general market conditions (Level 2).
Investments—Affiliates and Other—Equity Securities
Investments—Affiliates and Other—Equity Securities primarily represent equity investments in fluctuating-value Federated
Funds, as well as investments held in Separate Accounts. For publicly traded equity securities available in an active market, the
fair value of these securities is classified as Level 1 when the fair value is based on quoted market prices. For investments in
fluctuating-value Federated Funds that are publicly available, the securities are valued under the market approach through the
use of quoted market prices available in an active market, which is the NAV of the funds, and are classified within Level 1 of
the valuation hierarchy. The fair value of certain equity securities traded principally in foreign markets are determined by third-
party pricing services (Level 2).
Investments—Affiliates and Other—Debt Securities
Investments—Affiliates and Other—Debt Securities primarily represent domestic bonds held in Separate Accounts. The fair
value of these securities may include observable market data such as valuations provided by independent pricing services after
considering factors such as the yields or prices of investments of comparable quality, coupon, maturity, call rights and other
potential prepayments, terms and type, reported transactions, indications as to values from dealers and general market
conditions (Level 2).
Other Financial Assets
For an investment in a mutual fund that is not publicly available but for which the NAV is calculated monthly and for which
there are redemption restrictions, the security is valued using NAV as a practical expedient and is excluded from the fair value
hierarchy. As of December 31, 2019, this investment was $3.7 million and was recorded in Other Long-Term Assets.
(b) Fair Value Measurements on a Nonrecurring Basis
Federated did not hold any assets or liabilities measured at fair value on a nonrecurring basis at December 31, 2019.
(c) Fair Value Measurements of Other Financial Instruments
The fair value of Federated's debt is estimated by management using observable market data (Level 2). Based on this fair value
estimate, the carrying value of debt appearing on the Consolidated Balance Sheets approximates fair value.
(9) Derivatives
Hermes, a British Pound Sterling-denominated, majority-owned subsidiary of Federated, enters into foreign currency forward
transactions in order to hedge against foreign exchange rate fluctuations in the U.S. Dollar. None of the forwards have been
designated as hedging instruments for accounting purposes. As of December 31, 2019, this subsidiary held foreign currency
forward derivative instruments with a combined notional amount of £53.0 million and expiration dates ranging from March
2020 through September 2020. As a result of the change in fair value of these derivative instruments, Federated recorded $3.1
million in Receivables on the Consolidated Balance Sheets as of December 31, 2019.
As of December 31, 2018, this subsidiary held foreign currency forward derivative instruments with a combined notional
amount of £46.0 million and expiration dates ranging from March 2019 through September 2019. As of December 31, 2018,
Federated recorded $3.8 million in Other Current Liabilities on the Consolidated Balance Sheets as a result of the change in fair
value of these derivative instruments.
In 2018, Federated entered into two foreign currency forward transactions in order to hedge against foreign exchange rate
fluctuations associated with the payment for the Hermes Acquisition. Neither forward was designated as a hedging instrument
for accounting purposes. Federated recorded $29.0 million as nonoperating expense in Other, net on the Consolidated
Statements of Income as a result of the change in fair value of these derivatives in 2018.
77
(10) Intangible Assets
(a) Indefinite-lived intangible assets
Indefinite-lived intangible assets are recorded in Intangible Assets, net on the Consolidated Balance Sheets and include rights to
manage fund assets ($335.2 million and $204.1 million at December 31, 2019 and 2018, respectively) and trade names ($52.0
million and $50.1 million at December 31, 2019 and 2018, respectively).
On November 18, 2019, Federated completed the acquisition of certain components of the PNC Capital Advisors LLC
investment management business. As a result, Federated recorded $58.0 million of indefinite-lived rights to manage fund assets.
The transaction was accounted for as an asset acquisition as substantially all of the fair value of the gross assets acquired was
concentrated in a single identifiable asset.
The remaining increase in indefinite-lived rights to manage fund assets during 2019 primarily related to a final purchase price
adjustment of $65.8 million related to the Hermes Acquisition (see Note (3) for additional information).
(b) Finite-lived intangible assets
Finite-lived intangible assets represent customer relationships and consist of the following at December 31:
(in thousands)
Cost
Accumulated Amortization
Carrying Value
2019
71,853
(12,856)
58,997
$
$
2018
96,598
(11,203)
85,395
$
$
The decrease in the cost of the finite-lived intangible assets at December 31, 2019 as compared to December 31, 2018 primarily
relates to a final purchase price adjustment related to the finite-lived customer relationship asset acquired in connection with the
Hermes Acquisition. See Note (3) for additional information.
Amortization expense for finite-lived intangible assets was $7.5 million, $6.2 million and $0.6 million in 2019, 2018 and 2017,
respectively, and was recorded as operating expense in Other expense on the Consolidated Statements of Income.
Expected aggregate annual amortization expense for finite-lived intangible assets in each of the five succeeding years assuming
no new acquisitions or impairments will be $8.6 million.
(11) Property and Equipment
Property and equipment consisted of the following at December 31:
(in thousands)
Computer Software and Hardware
Leasehold Improvements
Transportation Equipment
Office Furniture and Equipment
Total Cost
Accumulated Depreciation
Property and Equipment, net
Estimated Useful Life
1
to
7 years
Up to term of lease
12 years
15 years
to
to
3
4
2019
87,443
35,348
17,851
5,849
146,491
(94,766)
51,725
$
$
2018
85,894
33,379
17,851
6,042
143,166
(89,937)
53,229
$
$
Depreciation expense was $16.5 million, $12.9 million and $11.1 million for the years ended December 31, 2019, 2018 and
2017, respectively, and was recorded in Office and Occupancy expense on the Consolidated Statements of Income.
78
(12) Debt
On June 5, 2017, Federated entered into the Credit Agreement, which consists of a $375 million revolving credit facility with an
additional $200 million available via an optional increase (or accordion) feature. The interest on the revolving credit facility is
calculated at the monthly LIBOR plus a spread. The borrowings under the revolving credit facility may include up to $25
million for which interest is calculated at the daily LIBOR plus a spread (Swing Line). On July 1, 2018, Federated entered into
an amendment to the Credit Agreement to add certain definitions and to amend certain negative covenants relating to
indebtedness, guarantees, and restrictions on dividends, related to the Hermes Acquisition. This amendment contains other
customary conditions, representations, warranties and covenants.
The Credit Agreement, which expires on June 5, 2022, has no principal payment schedule, but instead requires that any
outstanding principal be repaid by the expiration date. Federated, however, may elect to make discretionary principal payments.
As of December 31, 2019 and 2018, the amounts outstanding under the revolving credit facility were $100 million and $135
million, respectively, and were recorded as Long-Term Debt on the Consolidated Balance Sheets. The interest rate was 2.816%
and 3.474% as of December 31, 2019 and 2018, respectively, which was calculated at LIBOR plus a spread. The commitment
fee under the Credit Agreement currently is 0.125% per annum on the daily unused portion of each Lender's commitment. As of
December 31, 2019, Federated has $275 million available for borrowings.
The Credit Agreement includes representations and warranties, affirmative and negative financial covenants, including an
interest coverage ratio covenant and a leverage ratio covenant, reporting requirements and other non-financial covenants.
Federated was in compliance with all covenants at and during the year ended December 31, 2019 (see the Liquidity and Capital
Resources section of Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations for
additional information). The Credit Agreement also has certain stated events of default and cross default provisions which
would permit the lenders/counterparties to accelerate the repayment of debt outstanding if not cured within the applicable grace
periods. The events of default generally include breaches of contract, failure to make required loan payments, insolvency,
cessation of business, notice of lien or assessment, and other proceedings, whether voluntary or involuntary, that would require
the repayment of amounts borrowed. The Credit Agreement also requires certain subsidiaries to enter into a Second Amended
and Restated Continuing Agreement of Guaranty and Suretyship to guarantee payment of all obligations incurred through the
Credit Agreement.
(13) Employee Benefit Plans
(a) 401(k) Plan
Federated offers defined contribution plans to its employees. Its 401(k) plan covers domestic employees. Under the 401(k) plan,
employees can make salary deferral contributions at a rate of 1% to 50% of their annual compensation (as defined in the 401(k)
plan), subject to Internal Revenue Code (IRC) limitations. Prior to January 1, 2018, Federated's matching contribution was
100% of the first 2% of compensation contributed by an employee and 50% of the next 4% for a total possible match of 4%,
subject to IRC compensation limits. For 2018, Federated's matching contribution was 100% of the first 3% of compensation
contributed by an employee and 50% of the next 3% for a total possible match of 4.5%, subject to IRC compensation limits.
Effective January 1, 2019, Federated's matching contribution is 100% of the first 4% of compensation contributed by an
employee and 50% of the next 2% for a total possible match of 5%, subject to IRC limitations. Forfeitures of unvested
matching contributions are used to offset future matching contributions. Matching contributions to the 401(k) plan recognized
in Compensation and Related expense amounted to $6.6 million, $5.7 million and $5.0 million for 2019, 2018 and 2017,
respectively.
Vesting in Federated's matching contributions commences once a participant in the 401(k) plan has worked at least 1,000 hours
per year for two years. Upon completion of this initial service, 20% of Federated's contribution included in a participant's
account vests and 20% vests for each of the following four years if the participant works at least 1,000 hours per year.
Employees are immediately vested in their 401(k) salary deferral contributions.
(b) Employee Stock Purchase Plan
Federated offers an employee stock purchase plan that allows employees to purchase a maximum of 750,000 shares of Class B
common stock. Employees may contribute up to 10% of their salary to purchase shares of Federated's Class B common stock
on a quarterly basis at the market price. The shares purchased under this plan may be newly issued shares, treasury shares or
shares purchased on the open market. During 2019, 7,611 shares were purchased by employees in this plan and, as of
December 31, 2019, a total of 201,835 shares were purchased by employees in this plan on the open market since its inception
in 1998.
79
(14) Share-Based Compensation
(a) Restricted Stock
Federated's long-term stock-incentive compensation is provided under the Stock Incentive Plan (the Plan), as amended and
subsequently approved by shareholders from time to time. Share-based awards are granted to reward Federated's employees and
non-management directors who have contributed to the success of Federated and to provide incentive to increase their efforts on
behalf of Federated. Since the Plan's inception, a total of 30.6 million shares of Class B common stock have been authorized for
granting share-based awards in the form of restricted stock, stock options or other share-based awards. As of December 31,
2019, 3.5 million shares are available under the Plan.
Share-based compensation expense was $25.1 million, $23.9 million and $22.5 million for the years ended December 31, 2019,
2018 and 2017, respectively. The associated tax benefits recorded in connection with share-based compensation expense were
$6.0 million, $5.6 million and $8.4 million for the years ended December 31, 2019, 2018 and 2017, respectively. At
December 31, 2019, the maximum remaining unrecognized compensation expense related to share-based awards approximated
$75 million which is expected to be recognized over a weighted-average period of approximately 6 years.
Federated's restricted stock awards represent shares of Federated Class B common stock that may be sold by the awardee only
once the restrictions lapse, as dictated by the terms of the award. The awards are generally subject to graded vesting schedules
that vary in length from three to 10 years with a portion of the award vesting each year, as dictated by the terms of the award.
For an award with a ten-year vesting period, the restrictions on the vested portion of the award typically lapse on the award's
fifth- and tenth-year anniversaries. Certain restricted stock awards granted pursuant to a key employee bonus program have a
three-year graded vesting schedule with restrictions lapsing at each vesting date. During these restriction periods, the recipient
receives dividends on all shares awarded, regardless of their vesting status.
The following table summarizes activity of non-vested restricted stock awards for the year ended December 31, 2019:
Non-vested at January 1, 2019
Granted1
Vested
Forfeited
Non-vested at December 31, 2019
Restricted
Shares
3,960,560
928,324
(966,258)
(141,431)
3,781,195
$
Weighted-
Average Grant-
Date Fair Value
25.59
30.10
26.73
23.91
26.47
$
1 During 2019, Federated awarded 498,324 shares of restricted Class B common stock in connection with a bonus program in which
certain key employees received a portion of their bonus in the form of restricted stock under the Plan. This restricted stock, which was
granted on the bonus payment date and issued out of treasury, generally vests over a three-year period. Also during 2019, Federated
awarded 430,000 shares of restricted Class B common stock to certain key employees. These restricted stock awards generally vest over
a ten-year period.
Federated awarded 928,324 shares of restricted Class B common stock with a weighted-average grant-date fair value of $30.10
to employees during 2019; awarded 899,269 shares of restricted Class B common stock with a weighted-average grant-date fair
value of $28.30 to employees during 2018; and awarded 946,570 shares of restricted Class B common stock with a weighted-
average grant-date fair value of $27.20 to employees during 2017.
The total fair value of restricted stock vested during 2019, 2018 and 2017 was $28.4 million, $24.0 million and $23.9 million,
respectively.
(b) Subsidiary Stock Plan
Effective July 2, 2018, Federated established a non-public subsidiary share-based compensation plan for certain employees of
that subsidiary. These awards, which are subject to continued service vesting requirements, vest over a period of three to five
years. At various predetermined dates, but no earlier than 9 months after vesting, award holders have a right to exercise a put
option to sell shares to Federated at fair value and Federated has a right to exercise a call option to acquire shares at fair value.
Federated recognized compensation expense for this plan of $7.9 million and $4.2 million in Compensation and Related
expense on the Consolidated Statements of Income for the years ended December 31, 2019 and 2018, respectively. At
December 31, 2019, the remaining unrecognized compensation expense related to these plan awards approximated $30 million
which is expected to be recognized over a weighted-average period of approximately 4 years.
80
(15) Common Stock
The Class A common stockholder has the entire voting rights of Federated; however, without the consent of the majority of the
holders of Class B common stock, the Class A common stockholder cannot alter Federated's structure, dispose of all or
substantially all of its assets, amend its Articles of Incorporation or Bylaws to adversely affect the Class B common
stockholders, or liquidate or dissolve Federated. With respect to dividends, distributions and liquidation rights, the Class A
common stock and Class B common stock have equal preferences and rights.
(a) Dividends
Cash dividends of $109.1 million, $106.9 million and $101.5 million were paid in 2019, 2018 and 2017, respectively, to holders
of Federated common stock. All dividends were considered ordinary dividends for tax purposes.
(b) Treasury Stock
In October 2016, the board of directors authorized a share repurchase program with no stated expiration date that allows the buy
back of up to 4 million shares of Class B common stock. No other programs existed as of December 31, 2019. The program
authorizes executive management to determine the timing and the amount of shares for each purchase. The repurchased stock is
to be held in treasury for employee share-based compensation plans, potential acquisitions and other corporate activities, unless
Federated's board of directors subsequently determines to retire the repurchased stock and restore the shares to authorized but
unissued status (rather than holding the shares in treasury). During the year ended December 31, 2019, Federated repurchased
614 thousand shares of its Class B common stock for $15.7 million, most of which were repurchased in the open market. At
December 31, 2019, 547 thousand shares remained available to be purchased under this buyback program.
(16) Income Taxes
Federated files a consolidated federal income tax return. Financial statement tax expense is determined under the liability
method.
Income Tax Provision consisted of the following expense/(benefit) components for the years ended December 31:
(in thousands)
Current:
Federal
State
Foreign
Total Current
Deferred:
Federal
State
Foreign
Total Deferred
Total
2019
2018
2017
$
$
67,745
10,158
2,791
80,694
6,395
1,427
(370)
7,452
88,146
$
$
54,447
7,359
(188)
61,618
7,616
1,750
2,891
12,257
73,875
$ 106,710
9,446
217
116,373
(59,517)
638
(393)
(59,272)
57,101
$
The reconciliation between the statutory income tax rate and the effective tax rate consisted of the following for the years ended
December 31:
Expected Federal Statutory Income Tax Rate
Increase/(Decrease):
State and Local Income Taxes, net of Federal Benefit
Non-Deductible Executive Compensation
Federal Rate Adjustment to Deferred Taxes1
Other
Effective Tax Rate
2019
21.0%
2.4
0.9
0.0
(0.2)
24.1%
2018
21.0%
2.4
1.1
0.0
0.4
24.9%
2017
35.0%
1.9
0.0
(20.2)
(0.5)
16.2%
1
Represents the impact of revaluing the net deferred tax liability due to the enactment of the Tax Act, and includes the federal tax benefit
of any state and local deferred taxes.
81
The effective tax rate for 2018 increased to 24.9% as compared to 2017's rate of 16.2% primarily due to the 2017 recording of a
$70.4 million reduction in Federated's net deferred tax liability due to the Tax Act, partially offset by the reduction of the
federal statutory income tax rate to a flat 21.0% effective January 1, 2018.
The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities consisted of
the following at December 31:
(in thousands)
Deferred Tax Assets
Tax Net Operating Loss Carryforwards
Compensation Related
Other
Total Deferred Tax Assets
Valuation Allowance
Total Deferred Tax Asset, net of Valuation Allowance
Deferred Tax Liabilities
Intangible Assets
Property and Equipment
Other
Total Gross Deferred Tax Liability
Net Deferred Tax Liability
2019
2018
$
$
71,724
15,994
2,897
90,615
(57,790)
32,825
$ 191,595
5,493
1,119
$ 198,207
$ 165,382
$
$
74,213
12,514
2,553
89,280
(56,925)
32,355
$ 174,812
4,646
1,061
$ 180,519
$ 148,164
Long-Term Deferred Tax Liability, net at December 31, 2019 increased $17.2 million from December 31, 2018 primarily due to
an increase in intangible assets (see Note (10) for additional information) and the resulting tax amortization deduction being in
excess of book amortization.
At December 31, 2019, Federated had deferred tax assets related to state and foreign tax net operating loss carryforwards in
certain taxing jurisdictions in the aggregate of $71.7 million. The state net operating losses will expire through 2039, while
most foreign net operating losses do not expire. A valuation allowance has been recognized for $49.4 million (or 100%) of the
deferred tax asset for state tax net operating losses, and for $8.4 million (or 38%) of the deferred tax asset for foreign tax net
operating losses. The valuation allowances were recorded due to management's belief that it is more likely than not that
Federated will not realize the full benefit of these net operating losses. For the deferred tax asset, net of valuation allowance
related to foreign net operating losses, management believes that it is more likely than not that it will realize the benefit of these
net operating losses based on projections of future taxable income for the entities to which these relate.
At December 31, 2018, Federated had deferred tax assets related to state and foreign tax net operating loss carryforwards in
certain taxing jurisdictions in the aggregate of $74.2 million. The state net operating losses will expire through 2038, while
most foreign net operating losses do not expire. A valuation allowance has been recognized for $49.1 million (or 100%) of the
deferred tax asset for state tax net operating losses, and for $7.8 million (or 31%) of the deferred tax asset for foreign tax net
operating losses. The valuation allowances were recorded due to management's belief that it is more likely than not that
Federated will not realize the full benefit of these net operating losses. For the deferred tax asset, net of valuation allowance
related to foreign net operating losses, management believes that it is more likely than not that it will realize the benefit of these
net operating losses based on projections of future taxable income for the entities to which these relate.
Federated's remaining deferred tax assets as of December 31, 2019 and 2018 primarily related to compensation-related
expenses that have been recognized for book purposes but are not yet deductible for tax purposes. Management believes that it
is more likely than not that Federated will receive the full benefit of these deferred tax assets due to the expectation that
Federated will generate taxable income well in excess of these amounts in the years they become deductible.
Federated and its subsidiaries file annual income tax returns in the U.S. federal jurisdiction, various U.S. state and local
jurisdictions, and in certain foreign jurisdictions. Based upon its review of these filings, there were no material unrecognized
tax benefits as of December 31, 2019 or 2018. Therefore, there were no material changes during 2019, and no reasonable
possibility of a significant increase or decrease in unrecognized tax benefits within the next twelve months.
82
(17) Earnings Per Share Attributable to Federated Hermes, Inc. Shareholders
The following table sets forth the computation of basic and diluted earnings per share using the two-class method for amounts
attributable to Federated for the years ended December 31:
(in thousands, except per share data)
Numerator
Net Income Attributable to Federated Hermes, Inc.1
Less: Total Net Income Available to Participating Unvested Restricted
Shareholders2
Total Net Income Attributable to Federated Common Stock - Basic1
Less: Total Net Income Available to Unvested Restricted Shareholders of a
Nonpublic Consolidated Subsidiary
Total Net Income Attributable to Federated Common Stock - Diluted1
Denominator
Basic Weighted-Average Federated Common Stock3
Dilutive Potential Shares from Stock Options
Diluted Weighted-Average Federated Common Stock3
Earnings Per Share
Net Income Attributable to Federated Common Stock - Basic and Diluted3,4
1
2019
2018
2017
$ 272,339
$ 220,297
$ 291,341
(10,234)
$ 262,105
(8,555)
$ 211,742
(11,420)
$ 279,921
(872)
$ 261,233
(794)
$ 210,948
0
$ 279,921
97,259
0
97,259
96,949
0
96,949
97,411
1
97,412
$
2.69
$
2.18
$
2.87
2017 includes a $70.4 million reduction to the income tax provision resulting from the revaluation of the net deferred tax liability due to
the enactment of the Tax Act, thereby increasing net income.
Includes dividends paid on unvested restricted Federated Class B Common shares and their proportionate share of undistributed
earnings attributable to Federated shareholders.
Federated Common Stock excludes unvested restricted stock which are deemed participating securities in accordance with the two-class
method of computing earnings per share.
2017 includes a $0.69 increase to earnings per share resulting from the revaluation of the net deferred tax liability due to the enactment
of the Tax Act.
2
3
4
(18) Leases
Federated has material operating leases related to its corporate headquarters in Pittsburgh, Pennsylvania. These leases expire in
2030 and have renewal options for additional periods through 2040. These leases include provisions for leasehold improvement
incentives, rent escalation and certain penalties for early termination. In addition, Federated has various other operating lease
agreements primarily for additional facilities. These leases are noncancelable and expire on various dates through the year
2027. Most leases include renewal options for additional rental periods that would end on various dates through 2037 and, in
certain cases, escalation clauses. The value of the ROU assets and lease liabilities recognized do not include the consideration
of any renewal options, as they are not yet reasonably certain to be exercised.
During the years ended December 31, 2019, 2018, and 2017, Federated recorded $17.7 million, $14.7 million and $13.8
million, respectively, in operating lease costs to Office and Occupancy expense on the Consolidated Statements of Income.
The following table reconciles future minimum undiscounted payments to the operating lease liabilities recorded on the
Consolidated Balance Sheets as of December 31, 2019:
(in millions)
2020
2021
2022
2023
2024
2025 and Thereafter
Total Undiscounted Lease Payments
Present Value Adjustment1
Net Operating Lease Liabilities
1 Calculated using the IBR for each lease.
83
$
$
$
17.9
17.5
18.3
18.5
17.8
53.1
143.1
(22.0)
121.1
The following information relates to the operating leases recorded on the Consolidated Balance Sheets as of December 31,
2019:
Weighted-average remaining lease term (in years)
Weighted-average discount rate (IBR)
8.6
3.8%
Year-to-date cash paid for the amounts included in the measurement of lease liabilities (in millions)
$
18.2
(19) Accumulated Other Comprehensive Income (Loss) Attributable to Federated Hermes, Inc. Shareholders
The components of Accumulated Other Comprehensive Income (Loss), net of tax attributable to Federated shareholders are
as follows:
$
$
$
(in thousands)
Balance at December 31, 2016
Other Comprehensive Income (Loss) Before Reclassifications and Tax
Tax Impact
Reclassification Adjustment, before tax
Tax Impact
Net Current-Period Other Comprehensive Income (Loss)
Balance at December 31, 2017
Other Comprehensive Income (Loss) Before Reclassifications and Tax
Reclassification Adjustment, before tax2
Tax Impact2
Net Current-Period Other Comprehensive Income (Loss)
Balance at December 31, 2018
Other Comprehensive Income (Loss) Before Reclassifications and Tax
Net Current-Period Other Comprehensive Income (Loss)
Balance at December 31, 2019
1 Other than described in note two below, amounts reclassified from Accumulated Other Comprehensive Income (Loss), net of tax were
Total
(523)
3,321
(1,067)
(3,854)
1,333
(267)
(790)
(13,607)
(322)
102
(13,827)
(14,617)
14,368
14,368
(249)
$
$
$
$
$
$
$
$
$
Unrealized
Gain (Loss)
on Equity
Securities1
908
2,546
(904)
(3,854)
1,333
(879)
29
0
(80)
51
(29)
0
0
0
0
Foreign
Currency
Translation
(Loss) Gain
(1,431)
775
(163)
0
0
612
(819)
(13,607)
(242)
51
(13,798)
(14,617)
14,368
14,368
(249)
2
recorded in Gain (Loss) on Securities, net on the Consolidated Statements of Income.
Amount represents the reclassification from Accumulated Other Comprehensive Income (Loss), net of tax to Retained Earnings on the
Consolidated Balance Sheets as a result of the adoption of new accounting guidance in 2018.
84
(20) Redeemable Noncontrolling Interest in Subsidiaries
The following table presents the changes in Redeemable Noncontrolling Interest in Subsidiaries:
(in thousands)
Balance at January 1, 2017
Net Income (Loss)
Subscriptions—Redeemable Noncontrolling Interest Holders
Consolidation/(Deconsolidation)
Distributions to Noncontrolling Interest in Subsidiaries
Balance at December 31, 2017
Net Income (Loss)
Other Comprehensive Income (Loss), net of tax
Subscriptions—Redeemable Noncontrolling Interest Holders
Consolidation/(Deconsolidation)
Stock Award Activity
Distributions to Noncontrolling Interest in Subsidiaries
Business Acquisition
Balance at December 31, 2018
Net Income (Loss)
Other Comprehensive Income (Loss), net of tax
Subscriptions—Redeemable Noncontrolling Interest Holders
Consolidation/(Deconsolidation)
Stock Award Activity
Distributions to Noncontrolling Interest in Subsidiaries
Business Acquisition
Change in Estimated Redemption Value of Redeemable Noncontrolling
Interests
Balance at December 31, 2019
$
$
Consolidated
Investment
Companies
31,362
3,084
4,687
(67)
(8,903)
30,163
(1,095)
0
2,801
(1,751)
0
(18,492)
0
11,626
2,016
0
9,356
454
0
(3,580)
0
$
$
$
Hermes
0
0
0
0
0
0
3,097
(6,009)
0
0
4,239
0
169,560
$ 170,887
2,770
6,907
0
0
7,888
0
(386)
$
$
Total
31,362
3,084
4,687
(67)
(8,903)
30,163
2,002
(6,009)
2,801
(1,751)
4,239
(18,492)
169,560
$ 182,513
4,786
6,907
9,356
454
7,888
(3,580)
(386)
0
19,872
$
4,148
$ 192,214
4,148
$ 212,086
During 2019, the Hermes Redeemable Noncontrolling Interest in Subsidiaries carrying value was adjusted by $4.1 million to
the current redemption value, assuming the Hermes noncontrolling interest was redeemable at the balance sheet date. The
noncontrolling interest was adjusted through a corresponding adjustment to retained earnings.
(21) Commitments and Contingencies
(a) Contractual
Federated is obligated to make certain future payments under various agreements to which it is a party. The following table
summarizes minimum noncancelable payments contractually due under Federated's significant service contracts:
Payments due in
$
(in millions)
Purchase Obligations1
Other Obligations
Total
1
Total
65.0
3.2
68.2
Federated is a party to various contracts pursuant to which it receives certain services, including services for marketing and information
technology, access to various fund-related information systems and research databases, trade order transmission and recovery services
as well as other services. These contracts contain certain minimum noncancelable payments, cancellation provisions and renewal terms.
The contracts require payments through the year 2027. Costs for such services are expensed as incurred.
2022
5.8
0.0
5.8
2020
31.9
2.7
34.6
2021
9.6
0.5
10.1
2023
5.4
0.0
5.4
2024
3.7
0.0
3.7
$
$
$
$
$
$
$
$
$
$
$
$
$
After
2024
8.6
0.0
8.6
(b) Guarantees and Indemnifications
On an intercompany basis, various subsidiaries of Federated guarantee certain financial obligations of Federated Hermes, Inc.,
and Federated Hermes, Inc. guarantees certain financial and performance-related obligations of various wholly owned
85
subsidiaries. In addition, in the normal course of business, Federated has entered into contracts that provide a variety of
indemnifications. Typically, obligations to indemnify third parties arise in the context of contracts entered into by Federated,
under which Federated agrees to hold the other party harmless against losses arising out of the contract, provided the other
party's actions are not deemed to have breached an agreed upon standard of care. In each of these circumstances, payment by
Federated is contingent on the other party making a claim for indemnity, subject to Federated's right to challenge the claim.
Further, Federated's obligations under these agreements may be limited in terms of time and/or amount. It is not possible to
predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of
Federated's obligations and the unique facts and circumstances involved in each particular agreement. As of December 31,
2019, management does not believe that a material loss related to any of these matters is reasonably possible.
(c) Legal Proceedings
Like other companies, Federated has claims asserted and threatened against it in the ordinary course of business. As of
December 31, 2019, Federated does not believe that a material loss related to these claims is reasonably possible.
(22) Segment and Geographic Information
Federated operates in one operating segment, the investment management business.
Federated's revenues from U.S. and non-U.S. operations were as follows for the years ended December 31:
(in thousands)
U.S.
Non-U.S.1
Total Revenue
2019
$ 1,098,975
227,919
$ 1,326,894
2018
$ 1,005,948
129,729
$ 1,135,677
2017
$ 1,069,567
33,357
$ 1,102,924
1
This represents revenue earned by non-U.S. domiciled subsidiaries, primarily in the UK.
Federated's Right-of-Use Assets, net and Property and Equipment, net for U.S. and non-U.S. operations was as follows at
December 31:
(in thousands)
U.S.1
Non-U.S.1,2
Total Right-of-Use Assets, net and Property and Equipment, net1
1
2
Amounts for 2019 include Right-of-Use Assets recorded in connection with the adoption of Topic 842.
This represents net assets of non-U.S. domiciled subsidiaries, primarily in the UK.
2019
$ 129,322
22,917
$ 152,239
2018
42,666
10,563
53,229
$
$
(23) Subsequent Events
On January 30, 2020, the board of directors declared a $0.27 per share dividend. The dividend was payable to shareholders of
record as of February 7, 2020, resulting in $27.3 million being paid on February 14, 2020.
Effective January 31, 2020, Federated changed its name to Federated Hermes, Inc. In addition, Federated changed its NYSE
ticker symbol to FHI and shares of Federated stock began trading on the NYSE under the new ticker symbol on February 3,
2020.
86
(24) Supplementary Quarterly Financial Data (Unaudited)
(in thousands, except per share data, for the quarters ended)
20191
Revenue
Operating Income
Net Income Including the Noncontrolling Interests in
Subsidiaries
Amounts Attributable to Federated Hermes, Inc.
Net Income
Earnings Per Common Share – Basic and Diluted
20181
Revenue
Operating Income
Net Income Including the Noncontrolling Interests in
Subsidiaries2
Amounts Attributable to Federated Hermes, Inc.
Net Income2
Earnings Per Common Share – Basic and Diluted
March 31
June 30
September 30
December 31
$ 307,050
$ 321,479
$
$
$
$
70,889
54,611
54,546
0.54
$
$
$
$
84,940
63,840
62,724
0.62
$ 263,852
$ 255,993
$
$
$
$
79,671
60,006
60,331
0.60
$
$
$
$
80,757
38,667
38,822
0.38
$
$
$
$
$
$
$
$
$
$
340,340
89,307
73,585
72,962
0.72
308,616
81,898
61,994
59,608
0.59
$
$
$
$
$
$
$
$
$
$
358,025
102,791
85,089
82,107
0.81
307,216
87,954
61,632
61,536
0.61
1
2
The financial results of Hermes have been included in Federated's Consolidated Financial Statements from the July 1, 2018 effective
date of the acquisition.
The quarter ended June 30, 2018 includes a $29.0 million loss related to two derivative financial instruments associated with the
Hermes Acquisition (see Note (9) for additional information).
87
ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A – CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Federated carried out an evaluation, under the supervision and with the participation of management, including Federated's
President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of Federated's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2019. Based upon that evaluation,
the President and Chief Executive Officer and the Chief Financial Officer concluded that Federated's disclosure controls and
procedures were effective at December 31, 2019.
Management's Report on Internal Control Over Financial Reporting
See Item 8 – Financial Statements and Supplementary Data – under the caption Management's Assessment of Internal Control
Over Financial Reporting for information required by this item, which is incorporated herein.
Attestation Report of Independent Registered Public Accounting Firm
See Item 8 – Financial Statements and Supplementary Data – under the caption Report of Independent Registered Public
Accounting Firm for information required by this item, which is incorporated herein.
Changes in Internal Control Over Financial Reporting
There has been no change in Federated's internal control over financial reporting that occurred during the fourth quarter ended
December 31, 2019 that has materially affected, or is reasonably likely to materially affect, Federated's internal control over
financial reporting.
ITEM 9B – OTHER INFORMATION
None.
88
PART III
ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item (other than the information set forth below) is contained in Federated's Information
Statement for the 2020 Annual Meeting of Shareholders under the captions Board of Directors and Election of Directors and
Security Ownership – Delinquent Section 16(a) Reports, and is incorporated herein by reference.
Executive Officers
The information required by this Item with respect to Federated's executive officers is contained in Item 1 of Part I of this Form
10-K under the caption Information about our Executive Officers.
Code of Ethics
In October 2003, Federated adopted a code of ethics for its senior financial officers. This code, updated in January 2020, meets
the requirements provided by Item 406 of Regulation S-K and is incorporated by reference in Part IV, Item 15(a)(3) of this
Form 10-K as Exhibit 14.03. The code of ethics is available at www.FederatedHermes.com. In the event that Federated amends
or waives a provision of this code and such amendment or waiver relates to any element of the code of ethics definition
enumerated in paragraph (b) of Item 406 of Regulation S-K, Federated would post such information on its website.
ITEM 11 – EXECUTIVE COMPENSATION
The information required by this Item is contained in Federated's Information Statement for the 2020 Annual Meeting of
Shareholders under the captions Board of Directors and Election of Directors and Executive Compensation and is incorporated
herein by reference.
ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
See Note (14)(a) to the Consolidated Financial Statements for information regarding Federated's share-based compensation plan
as of December 31, 2019. Federated had no other plans to grant shares of Class B common stock not approved by shareholders.
All other information required by this Item is contained in Federated's Information Statement for the 2020 Annual Meeting of
Shareholders under the caption Security Ownership and is incorporated herein by reference.
ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is contained in Federated's Information Statement for the 2020 Annual Meeting of
Shareholders under the captions Executive Compensation – Transactions with Related Persons, Executive Compensation –
Conflict of Interest Policies and Procedures and Board of Directors and Election of Directors and is incorporated herein by
reference.
ITEM 14 – PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is contained in Federated's Information Statement for the 2020 Annual Meeting of
Shareholders under the caption Independent Registered Public Accounting Firm and is incorporated herein by reference.
89
PART IV
ITEM 15 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report:
(1) Financial Statements
The information required by this item is included in Item 8 – Financial Statements and Supplementary Data,
which is incorporated herein.
(2) Financial Statement Schedules
All schedules for which provisions are made in the applicable accounting regulations of the SEC have been
omitted because such schedules are not required under the related instructions, are inapplicable, or the required
information is included in the financial statements or notes thereto included in this Form 10-K.
(b) Exhibits:
The following exhibits are filed or incorporated as part of this Form 10-K:
Exhibit
Number
Description
2.01
2.02
2.03
2.09
2.10
3.01
3.02
3.03
3.04
3.05
4.01
4.02
Agreement and Plan of Merger, dated as of February 20, 1998, between Federated Investors and Federated
(incorporated by reference to Exhibit 2.01 to the Registration Statement on Form S-4 (File No. 333-48361))
Asset Purchase Agreement dated as of October 20, 2000, by and among Federated Investors, Inc., Edgemont
Asset Management Corporation, Lawrence Auriana and Hans P. Utsch (incorporated by reference to Exhibit 2.1
of Amendment No. 2 to the Current Report on Form 8-K dated April 20, 2001, filed with the Securities and
Exchange Commission on July 3, 2001 (File No. 001-14818))
Amendment No. 1, dated April 11, 2001, to the Asset Purchase Agreement dated as of October 20, 2000, by and
among Federated Investors, Inc., Edgemont Asset Management Corporation, Lawrence Auriana and Hans P.
Utsch (incorporated by reference to Exhibit 2.2 of Amendment No. 2 to the Current Report on Form 8-K dated
April 20, 2001, filed with the Securities and Exchange Commission on July 3, 2001 (File No. 001-14818))
Share Sale Agreement, dated April 12, 2018, among BT Pension Scheme Trustees Limited, as trustee for and on
behalf of the BT Pension Scheme, and Federated Holdings (UK) II Limited and Federated Investors, Inc.
(incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K dated April 13, 2018 (File No.
001-14818))
Management Warranty Deed, dated April 12, 2018, among certain members of management of Hermes Fund
Managers Limited, Federated Holdings (UK) II Limited and Federated Investors, Inc. (incorporated by reference
to Exhibit 2.2 of the Current Report on Form 8-K dated April 13, 2018 (File No. 001-14818))
Restated Articles of Incorporation of Federated (incorporated by reference to Exhibit 3.01 to the Registration
Statement on Form S-4 (File No. 333-48361))
Restated By-Laws of Federated (incorporated by reference to Exhibit 3.02 to the Registration Statement on Form
S-4 (File No. 333-48361))
Restated Bylaws of Federated Investors, Inc.(incorporated by reference to Exhibit 3.1 to the June 30, 2018
Quarterly Report on Form 10-Q (File No. 001-14818))
Restated Articles of Incorporation of Federated Hermes, Inc. (incorporated by reference to Exhibit 3.1 to the
Form 8-K dated February 3, 2020 (File No. 001-14818))
Restated Bylaws of Federated Hermes, Inc. (incorporated by reference to Exhibit 3.2 to the Form 8-K dated
February 3, 2020 (File No. 001-14818))
Form of Class A Common Stock certificate (incorporated by reference to Exhibit 4.01 to the Registration
Statement on Form S-4 (File No. 333-48361))
Form of Class B Common Stock certificate (incorporated by reference to Exhibit 4.02 to the Registration
Statement on Form S-4 (File No. 333-48361))
90
4.05
4.06
4.07
4.08
9.01
10.15
10.16
10.19
10.34
10.41
10.58
10.65
10.67
10.68
10.69
10.70
10.72
10.75
Shareholder Rights Agreement, dated August 1, 1989, between Federated and The Standard Fire Insurance
Company, as amended January 31, 1996 (incorporated by reference to Exhibit 4.06 to the Registration Statement
on Form S-4 (File No. 333-48361))
Form of Federated Hermes, Inc. Class A Common Stock certificate, as amended January 31, 2020 (filed herewith)
Form of Federated Hermes, Inc. Class B Common Stock certificate, as amended January 31, 2020 (filed
herewith)
Description of Federated Hermes, Inc. Securities (filed herewith)
Voting Shares Irrevocable Trust dated May 31, 1989 (incorporated by reference to Exhibit 9.01 to the Registration
Statement on Form S-4 (File No. 333-48361))
Federated Investors Tower Lease dated January 1, 1993 (incorporated by reference to Exhibit 10.03 to the
Registration Statement on Form S-4 (File No. 333-48361))
Federated Investors Tower Lease dated February 1, 1994 (incorporated by reference to Exhibit 10.04 to the
Registration Statement on Form S-4 (File No. 333-48361))
Employment Agreement, dated December 28, 1990, between Federated Investors and an executive officer
(incorporated by reference to Exhibit 10.08 to the Registration Statement on Form S-4 (File No. 333-48361))
Annual Stock Option Agreement dated April 24, 2002, between Federated Investors, Inc. and the independent
directors (incorporated by reference to Exhibit 10.1 to the June 30, 2002 Quarterly Report on Form 10-Q (File
No. 001-14818))
Amendments No. 6, 5, 4, 3 and 2 to Federated Investors Tower Lease dated as of December 31, 2003;
November 10, 2000; June 30, 2000; February 10, 1999; and September 19, 1996 (incorporated by reference to
Exhibit 10.41 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2003 (File No.
001-14818))
Federated Investors, Inc. Employee Stock Purchase Plan, amended as of October 26, 2006 (incorporated by
reference to Exhibit 10.2 to the September 30, 2006 Quarterly Report on Form 10-Q (File No. 001-14818))
Form of Restricted Stock Program Award Agreement (incorporated by reference to Exhibit 10.65 to the Annual
Report on Form 10-K for the fiscal year ended December 31, 2008 (File No. 001-14818))
ISDA Master Agreement and schedule between Federated Investors, Inc. and PNC Bank National Association
related to the $425,000,000 forward-starting interest rate swap, entered into on March 30, 2010 and effective
April 9, 2010 (incorporated by reference to Exhibit 10.2 to the June 30, 2010 Quarterly Report on Form 10-Q
(File No. 001-14818))
ISDA Master Agreement and schedule between Federated Investors, Inc. and Citibank, N.A. related to the
$425,000,000 forward-starting interest rate swap, entered into on March 30, 2010 and effective April 9, 2010
(incorporated by reference to Exhibit 10.3 to the June 30, 2010 Quarterly Report on Form 10-Q (File No.
001-14818))
Employment Agreement, dated July 6, 1983, between Federated Investors and an executive officer (incorporated
by reference to Exhibit 10.69 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2010
(File No. 001-14818))
Federated Investors, Inc. Stock Incentive Plan, amended as of April 28, 2011 (incorporated by reference to
Exhibit 10.1 to the March 31, 2011 Quarterly Report on Form 10-Q (File No. 001-14818))
Amendments No. 8 and 7 to Federated Investors Tower Lease dated as of September 9, 2011 and August 15, 2007
(incorporated by reference to Exhibit 10.1 to the September 30, 2011 Quarterly Report on Form 10-Q (File No.
001-14818))
The Second Amended and Restated Credit Agreement, dated as of June 24, 2014, by and among Federated
Investors, Inc. certain subsidiaries as guarantors party thereto, the banks as lenders party thereto, and PNC Bank,
National Association, PNC Bank Capital Markets LLC, Citigroup Global Markets, Inc., Citibank, N.A. and TD
Bank, N.A. (incorporated by reference to Exhibit 10.1 to the June 30, 2014 Quarterly Report on Form 10-Q (File
No. 001-14818))
10.76
Form of Restricted Stock Program Award Agreement (incorporated by reference to Exhibit 10.1 to the
September 30, 2014 Quarterly Report on Form 10-Q (File No. 001-14818))
91
10.77
10.78
10.79
10.80
10.81
10.82
10.83
10.84
10.85
10.86
10.87
10.88
10.89
10.90
10.91
10.92
Form of Bonus Restricted Stock Program Award Agreement (incorporated by reference to Exhibit 10.77 to the
Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (File No. 001-14818))
Federated Investors, Inc. Employee Stock Purchase Plan, amended as of January 1, 2016 (incorporated by
reference to Exhibit 10.78 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (File
No. 001-14818))
Agreement by and among Federated Investment Management Company, Passport Research Ltd., The Jones
Financial Companies, L.L.L.P. for itself and on behalf of Edward D. Jones & Co., L.P., and Passport Holdings
LLC, dated as of April 27, 2016 (incorporated by reference to Exhibit 10.1 to the March 31, 2016 Quarterly
Report on Form 10-Q (File No. 001-14818))
Amendment No. 9 to Federated Investors Tower Lease dated as of September 9, 2016 (incorporated by reference
to Exhibit 10.1 to the September 30, 2016 Quarterly Report on Form 10-Q (File No. 001-14818))
Amendment No. 1 to Agreement by and among Federated Investment Management Company, Passport Research
Ltd., The Jones Financial Companies, L.L.L.P. for itself and on behalf of Edward D. Jones & Co., L.P., and
Passport Holdings LLC, dated January 27, 2017 (incorporated by reference to Exhibit 10.81 to the Annual Report
on Form 10-K for the fiscal year ended December 31, 2016 (File No. 001-14818))
Employment Agreement, dated October 22, 1990, between Federated Securities Corp. and an executive officer
(incorporated by reference to Exhibit 10.82 to the Annual Report on Form 10-K for the fiscal year ended
December 31, 2016 (File No. 001-14818))
2016 Restricted Stock Award Agreement, dated June 15, 2016, by and between Federated Investors, Inc. and an
executive officer (incorporated by reference to Exhibit 10.83 to the Annual Report on Form 10-K for the fiscal
year ended December 31, 2016 (File No. 001-14818))
Form of Bonus Restricted Stock Program Award Agreement (incorporated by reference to Exhibit 10.84 to the
Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (File No. 001-14818))
The Third Amended and Restated Credit Agreement, dated as of June 5, 2017, by and among Federated Investors,
Inc. certain subsidiaries as guarantors party thereto, the banks as lenders party thereto, and PNC Bank, National
Association, PNC Capital Markets LLC, Citigroup Global Markets, Inc., Citibank, N.A. and TD Bank, N.A.
(incorporated by reference to Exhibit 10.1 to the June 30, 2017 Quarterly Report on Form 10-Q (File No.
001-14818))
Federated Investors, Inc. Stock Incentive Plan, as amended, as approved by shareholders on April 26, 2018
(incorporated by reference to Exhibit 10.1 to the March 31, 2018 Quarterly Report on Form 10-Q (File No.
001-14818))
Shareholders' Agreement, dated July 2, 2018, among Hermes Fund Managers Limited, BT Pension Scheme
Trustees Limited, in its capacity as trustee for and on behalf of the BT Pension Scheme, Federated Holdings (UK)
II Limited, and Federated Investors, Inc. (incorporated by reference to Exhibit 10.1 of the Current Report on
Form 8-K dated July 2, 2018 (File No. 001-14818))
Put and Call Option Deed, dated July 2, 2018, among BT Pension Scheme Trustees Limited, in its capacity as
trustee for and on behalf of the BT Pension Scheme, Federated Holdings (UK) II Limited, and Federated
Investors, Inc.(incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated July 2, 2018
(File No. 001-14818))
Amendment No. 1 to Third Amended and Restated Credit Agreement, dated July 1, 2018, by and among
Federated Investors, Inc., each of the guarantors (as defined in the Third Amended and Restated Credit
Agreement, the lenders (as defined in the Third Amended and Restated Credit Agreement, and PNC BANK,
NATIONAL ASSOCIATION, as administrative agent for the lenders. (incorporated by reference to Exhibit 10.3
of the Current Report on Form 8-K dated July 2, 2018 (File No. 001-14818))
UK Sub-Plan to the Federated Investors, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to
the September 30, 2018 Quarterly Report on Form 10-Q (File No. 001-14818))
Form of Restricted Stock Award Agreement for UK Sub-Plan (incorporated by reference to Exhibit 10.2 to the
September 30, 2018 Quarterly Report on Form 10-Q (File No. 001-14818))
Amendment No. 2 to Third Amended and Restated Credit Agreement, dated October 26, 2018, by and among
Federated Investors, Inc., each of the guarantors (as defined in the Third Amended and Restated Credit
Agreement), the lenders (as defined in the Third Amended and Restated Credit Agreement), and PNC BANK,
NATIONAL ASSOCIATION, as administrative agent for the lenders (incorporated by reference to Exhibit 10.3 to
the September 30, 2018 Quarterly Report on Form 10-Q (File No. 001-14818))
92
10.93
10.94
10.95
10.96
10.97
10.98
10.99
10.100
10.101
10.102
10.103
10.104
10.105
10.106
Form of Bonus Restricted Stock Program Award Agreement for Awards to Employees in the United Kingdom
(incorporated by reference to Exhibit 10.93 to the Annual Report on Form 10-K for the fiscal year ended
December 31, 2018 (File No. 001-14818))
ISDA Master Agreement and schedule between Hermes Investment Management Limited and HSBC Bank PLC
dated as of January 9, 2008 (incorporated by reference to Exhibit 10.1 to the March 31, 2019 Quarterly Report on
Form 10-Q (File No. 001-14818))
ISDA Credit Support Annex to the schedule to the ISDA Master Agreement and schedule between Hermes
Investment Management Limited and HSBC Bank PLC dated as of January 9, 2008 (incorporated by reference to
Exhibit 10.2 to the March 31, 2019 Quarterly Report on Form 10-Q (File No. 001-14818))
First Amendment Agreement dated April 23, 2009, supplemental to the ISDA Master Agreement and schedule
between Hermes Investment Management Limited and HSBC Bank PLC dated as of January 9, 2008
(incorporated by reference to Exhibit 10.3 to the March 31, 2019 Quarterly Report on Form 10-Q (File No.
001-14818))
Second Amendment Agreement dated September 16, 2009, supplemental to the ISDA Master Agreement and
schedule between Hermes Investment Management Limited and HSBC Bank PLC dated as of January 9, 2008
(incorporated by reference to Exhibit 10.4 to the March 31, 2019 Quarterly Report on Form 10-Q (File No.
001-14818))
Third Amendment Agreement dated October 12, 2009, supplemental to the ISDA Master Agreement and schedule
between Hermes Investment Management Limited and HSBC Bank PLC dated as of January 9, 2008
(incorporated by reference to Exhibit 10.5 to the March 31, 2019 Quarterly Report on Form 10-Q (File No.
001-14818))
Fourth Amendment Agreement dated November 3, 2009, supplemental to the ISDA Master Agreement and
schedule between Hermes Investment Management Limited and HSBC Bank PLC dated as of January 9, 2008
(incorporated by reference to Exhibit 10.6 to the March 31, 2019 Quarterly Report on Form 10-Q (File No.
001-14818))
Fifth Amendment Agreement dated February 1, 2010, supplemental to the ISDA Master Agreement and schedule
between Hermes Investment Management Limited and HSBC Bank PLC dated as of January 9, 2008
(incorporated by reference to Exhibit 10.7 to the March 31, 2019 Quarterly Report on Form 10-Q (File No.
001-14818))
Sixth Amendment Agreement dated April 6, 2010, supplemental to the ISDA Master Agreement and schedule
between Hermes Investment Management Limited and HSBC Bank PLC dated as of January 9, 2008
(incorporated by reference to Exhibit 10.8 to the March 31, 2019 Quarterly Report on Form 10-Q (File No.
001-14818))
Seventh Amendment dated as of May 13, 2010 to the Credit Support Annex to the schedule to the ISDA Master
Agreement and schedule between Hermes Investment Management Limited and HSBC Bank PLC dated as of
January 9, 2008 (incorporated by reference to Exhibit 10.9 to the March 31, 2019 Quarterly Report on Form 10-Q
(File No. 001-14818))
Eighth Amendment Agreement dated March 29, 2012, supplemental to the ISDA Master Agreement and schedule
between Hermes Investment Management Limited and HSBC Bank PLC dated as of January 9, 2008
(incorporated by reference to Exhibit 10.10 to the March 31, 2019 Quarterly Report on Form 10-Q (File No.
001-14818))
Ninth Amendment Agreement dated June 7, 2012, supplemental to the ISDA Master Agreement and schedule
between Hermes Investment Management Limited and HSBC Bank PLC dated as of January 9, 2008
(incorporated by reference to Exhibit 10.11 to the March 31, 2019 Quarterly Report on Form 10-Q (File No.
001-14818))
Tenth Amendment Agreement dated January 17, 2013, supplemental to the ISDA Master Agreement and schedule
between Hermes Investment Management Limited and HSBC Bank PLC dated as of January 9, 2008
(incorporated by reference to Exhibit 10.12 to the March 31, 2019 Quarterly Report on Form 10-Q (File No.
001-14818))
Eleventh Amendment Agreement dated May 1, 2014, supplemental to the ISDA Master Agreement and schedule
between Hermes Investment Management Limited and HSBC Bank PLC dated as of January 9, 2008
(incorporated by reference to Exhibit 10.13 to the March 31, 2019 Quarterly Report on Form 10-Q (File No.
001-14818))
93
10.107
10.108
10.109
10.110
10.111
10.112
10.113
10.114
10.115
10.116
10.117
10.118
10.119
10.120
10.121
10.122
Twelfth Amendment Agreement dated November 3, 2014, supplemental to the ISDA Master Agreement and
schedule between Hermes Investment Management Limited and HSBC Bank PLC dated as of January 9, 2008
(incorporated by reference to Exhibit 10.14 to the March 31, 2019 Quarterly Report on Form 10-Q (File No.
001-14818))
Thirteenth Amendment Agreement dated May 18, 2015, supplemental to the ISDA Master Agreement and
schedule between Hermes Investment Management Limited and HSBC Bank PLC dated as of January 9, 2008
(incorporated by reference to Exhibit 10.15 to the March 31, 2019 Quarterly Report on Form 10-Q (File No.
001-14818))
Fourteenth Amendment Agreement dated November 17, 2015, supplemental to the ISDA Master Agreement and
schedule between Hermes Investment Management Limited and HSBC Bank PLC dated as of January 9, 2008
(incorporated by reference to Exhibit 10.16 to the March 31, 2019 Quarterly Report on Form 10-Q (File No.
001-14818))
Fifteenth Amendment Agreement dated April 12, 2016, supplemental to the ISDA Master Agreement and
schedule between Hermes Investment Management Limited and HSBC Bank PLC dated as of January 9, 2008
(incorporated by reference to Exhibit 10.17 to the March 31, 2019 Quarterly Report on Form 10-Q (File No.
001-14818))
Sixteenth Amendment Agreement dated September 7, 2016, supplemental to the ISDA Master Agreement and
schedule between Hermes Investment Management Limited and HSBC Bank PLC dated as of January 9, 2008
(incorporated by reference to Exhibit 10.18 to the March 31, 2019 Quarterly Report on Form 10-Q (File No.
001-14818))
Seventeenth Amendment Agreement dated September 20, 2016, supplemental to the ISDA Master Agreement and
schedule between Hermes Investment Management Limited and HSBC Bank PLC dated as of January 9, 2008
(incorporated by reference to Exhibit 10.19 to the March 31, 2019 Quarterly Report on Form 10-Q (File No.
001-14818))
Eighteenth Amendment Agreement dated December 21, 2016, supplemental to the ISDA Master Agreement and
schedule between Hermes Investment Management Limited and HSBC Bank PLC dated as of January 9, 2008
(incorporated by reference to Exhibit 10.20 to the March 31, 2019 Quarterly Report on Form 10-Q (File No.
001-14818))
Nineteenth Amendment Agreement dated February 12, 2018, supplemental to the ISDA Master Agreement and
schedule between Hermes Investment Management Limited and HSBC Bank PLC dated as of January 9, 2008
(incorporated by reference to Exhibit 10.21 to the March 31, 2019 Quarterly Report on Form 10-Q (File No.
001-14818))
Twentieth Amendment Agreement dated January 28, 2019, supplemental to the ISDA Master Agreement and
schedule between Hermes Investment Management Limited and HSBC Bank PLC dated as of January 9, 2008
(incorporated by reference to Exhibit 10.22 to the March 31, 2019 Quarterly Report on Form 10-Q (File No.
001-14818))
Form of Hermes Long-Term Incentive Plan Award Agreement (incorporated by reference to Exhibit 10.23 to the
March 31, 2019 Quarterly Report on Form 10-Q (File No. 001-14818))
Employment Contract dated June 25, 2018 between Hermes Fund Managers Limited and an executive officer
(incorporated by reference to Exhibit 10.24 to the March 31, 2019 Quarterly Report on Form 10-Q (File No.
001-14818))
Hermes Fund Managers Limited Long Term Incentive Plan adopted on July 2, 2018 (incorporated by reference to
Exhibit 10.25 to the March 31, 2019 Quarterly Report on Form 10-Q (File No. 001-14818))
Hermes Fund Managers Limited Co-investment Scheme Rules 2018 (incorporated by reference to Exhibit 10.26
to the March 31, 2019 Quarterly Report on Form 10-Q (File No. 001-14818))
Transaction Agreement, dated as of May 6, 2019, by and between Federated Investors, Inc. and PNC Capital
Advisors, LLC (incorporated by reference to Exhibit 10.1 to the June 30, 2019 Quarterly Report on Form 10-Q
(File No. 001-14818))
Form of Restricted Stock Program Award Agreement (incorporated by reference to Exhibit 10.1 to the
September 30, 2019 Quarterly Report on Form 10-Q (File No. 001-14818))
Form of Restricted Stock Program Award Agreement for Awards to Employees in the United Kingdom
(incorporated by reference to Exhibit 10.2 to the September 30, 2019 Quarterly Report on Form 10-Q (File No.
001-14818))
94
10.123
Federated Hermes, Inc. Employee Stock Purchase Plan, amended as of January 31, 2020 (filed herewith)
10.124
Form of Restricted Stock Program Award Agreement (filed herewith)
10.125
Form of Restricted Stock Award Agreement for UK Sub-Plan (filed herewith)
10.126
Form of Bonus Restricted Stock Program Award Agreement (filed herewith)
10.127
Form of Bonus Restricted Stock Program Award Agreement for Awards to Employees in the United Kingdom
(filed herewith)
10.128
Federated Hermes, Inc. Annual Incentive Plan, as amended as of January 31, 2020 (filed herewith)
10.129
Federated Hermes, Inc. Stock Incentive Plan, as amended as of January 31, 2020 (filed herewith)
10.130
UK Sub-Plan to the Federated Hermes, Inc. Stock Incentive Plan (filed herewith)
10.131
Amendment No. 10 to Federated Hermes Tower Lease dated as of February 21, 2020 (filed herewith)
14.01
14.02
14.03
21.01
23.01
31.01
31.02
32.01
Federated Investors, Inc. Code of Ethics for Senior Financial Officers (incorporated by reference to Exhibit 14.01
to the Annual Report on Form 10-K for the fiscal year ended December 31, 2003 (File No. 001-14818))
Federated Investors, Inc. Code of Ethics for Senior Financial Officers, as amended July 1, 2018 (incorporated by
reference to Exhibit 14.02 to the Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (File
No. 001-14818))
Federated Hermes, Inc. Code of Ethics for Senior Financial Officers, as amended as of January 31, 2020 (filed
herewith)
Subsidiaries of the Registrant (filed herewith)
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm (filed herewith)
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (filed herewith)
The following XBRL documents are filed herewith:
101.INS
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101.CAL
101.DEF
101.LAB
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Inline XBRL Taxonomy Extension Calculation Linkbase Document
Inline XBRL Taxonomy Extension Definition Linkbase Document
Inline XBRL Taxonomy Extension Label Linkbase Document
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
95
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
FEDERATED HERMES, INC.
By:
/s/ J. Christopher Donahue
J. Christopher Donahue
President and Chief Executive Officer
Date:
February 21, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ J. Christopher Donahue
J. Christopher Donahue
President, Chief Executive Officer, Chairman
and Director (Principal Executive Officer)
/s/ Thomas R. Donahue
Thomas R. Donahue
Chief Financial Officer and Director
(Principal Financial Officer)
February 21, 2020
February 21, 2020
/s/ Richard A. Novak
Richard A. Novak
/s/ Joseph C. Bartolacci
Joseph C. Bartolacci
/s/ Michael J. Farrell
Michael J. Farrell
/s/ John B. Fisher
John B. Fisher
/s/ Marie Milie Jones
Marie Milie Jones
Principal Accounting Officer
February 21, 2020
February 21, 2020
February 21, 2020
February 21, 2020
February 21, 2020
Director
Director
Director
Director
96
EXHIBIT INDEX
Exhibit
Number
4.06
4.07
4.08
10.123
10.124
Description
Form of Federated Hermes, Inc. Class A Common Stock certificate, as amended January 31, 2020 (filed
herewith)
Form of Federated Hermes, Inc. Class B Common Stock certificate, as amended January 31, 2020 (filed
herewith)
Description of Federated Hermes, Inc. Securities (filed herewith)
Federated Hermes, Inc. Employee Stock Purchase Plan, amended as of January 31, 2020 (filed herewith)
Form of Restricted Stock Program Award Agreement (filed herewith)
10.125
Form of Restricted Stock Award Agreement for UK Sub-Plan (filed herewith)
10.126
10.127
10.128
10.129
10.130
10.131
14.03
21.01
23.01
31.01
31.02
32.01
Form of Bonus Restricted Stock Program Award Agreement (filed herewith)
Form of Bonus Restricted Stock Program Award Agreement for Awards to Employees in the United Kingdom
(filed herewith)
Federated Hermes, Inc. Annual Incentive Plan, as amended as of January 31, 2020 (filed herewith)
Federated Hermes, Inc. Stock Incentive Plan, as amended as of January 31, 2020 (filed herewith)
UK Sub-Plan to the Federated Hermes, Inc. Stock Incentive Plan (filed herewith)
Amendment No. 10 to Federated Hermes Tower Lease dated as of February 21, 2020 (filed herewith)
Federated Hermes, Inc. Code of Ethics for Senior Financial Officers, as amended as of January 31, 2020
(filed herewith)
Subsidiaries of the Registrant
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
101.INS
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because
its XBRL tags are embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
97
Corporate Information
Corporate Offi ces
Federated Hermes, Inc.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Telephone: 412-288-1900
Email: investors@federatedinv.com
FederatedHermes.com
Worldwide Operations
London, U.K.
Boston, Mass.
Cleveland, Ohio
Denmark
Dublin, Ireland
Frankfurt, Germany
Houston, Texas
New York, N.Y.
Tokyo, Japan
Toronto, Canada
Singapore
Warrendale, Pa.
Contact Information
Investor Relations: 412-288-1934
Analyst Inquiries: 412-288-1920
Corporate Communications: 412-288-7538
Customer Service: 800-341-7400
Email: services@federatedinvestors.com
Form 10-K and
Shareholder Publications
Federated Hermes makes available, free of
charge, on its website, FederatedHermes.com,
its annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K,
annual information statements and amendments
to those reports, including those fi led or furnished
pursuant to Section 13(a) or 15(d) of the 1934 Act,
as soon as reasonably practicable after such
information is electronically fi led with or furnished
to the SEC.
Annual Meeting
Federated Hermes’ Annual Shareholder Meeting
will be held in the Liberty Center 5-Star Conference
Room, Suite 200, 1001 Liberty Avenue,
Pittsburgh, PA 15222 at 4 p.m. local time
on Thursday, April 30, 2020.
Transfer Agent
Shareholders of record with questions concerning
account information, certifi cates, transferring
securities, dividend payments, requesting direct
deposit information or processing a change of
address should contact:
Computershare Investor Services
P.O. Box 505000
Louisville, KY 40233-5000
Or by courier service:
Computershare Investor Services
462 South 4th Street, Suite 1600
Louisville, KY 40202
Dividend Payments
Subject to approval of the board of directors,
dividends are paid on Federated Hermes’
common stock typically during the months of
February, May, August and November.
Market Listing
Federated Hermes, Inc. Class B Common Stock
is traded on the New York Stock Exchange under
the trading symbol FHI.
Independent Registered Public
Accounting Firm
Ernst & Young LLP, Pittsburgh, Pa.
0030705_cover_FINAL_REV.indd 4
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2019 Federated Hermes Annual Report
Federated Hermes, Inc.
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Contact us at FederatedHermes.com
or call 1-800-341-7400.
0030705 (3/20)
© 2020 Federated Hermes, Inc.
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